<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
PROSPECTUS
4,000,000 SHARES
INTERSTATE HOTELS COMPANY [Logo]
COMMON STOCK
------------------------
All of the shares of Common Stock of Interstate Hotels Company (the
"Company") are being offered by the Company. Of the 4,000,000 shares of Common
Stock offered, 3,400,000 shares are being offered hereby in the United States
and Canada by the U.S. Underwriters and 600,000 shares are being offered in a
concurrent offering outside the United States and Canada by the International
Underwriters. The offering price and aggregate underwriting discount per share
are identical for both offerings (the "Offering"). The Common Stock is listed on
the New York Stock Exchange (the "NYSE") under the trading symbol "IHC." On
December 10, 1996, the last reported sale price of the Common Stock on the NYSE
was $25.00 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT 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.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................... $25.00 $1.19 $23.81
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Total(3).................................... $100,000,000 $4,760,000 $95,240,000
- -----------------------------------------------------------------------------------------------------------
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,520,000.
(3) The Company has granted the several U.S. Underwriters and the several
International Underwriters 30-day options to purchase up to an additional
510,000 and 90,000 shares of Common Stock, respectively, to cover
over-allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$115,000,000, $5,474,000 and $109,526,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel to the Underwriters. The Underwriters
reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made in New York City on or about December 16, 1996.
------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
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The date of this Prospectus is December 10, 1996.
<PAGE> 2
PORTFOLIO OF HOTELS
- ------------------------------------------------------------------------------
(AS OF OCTOBER 15, 1996)
Map of the continental United States, Mexico and the Caribbean denoting the
Company's headquarters, hotels owned at IPO, hotels acquired since the IPO and
managed/serviced hotels.
Map of Central America denoting a Managed/Serviced Hotel of the Company
Map of Russia denoting a Managed/Serviced Hotel of the Company
Map of Israel denoting a Managed/Serviced Hotel of the Company
Map of Thailand denoting a Managed/Serviced Hotel of the Company
Map of Hawaii denoting seven Managed/Serviced Hotels of the Company
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
PHOTO
EMBASSY SUITES PHOENIX NORTH
PHOENIX, ARIZONA (OWNED)
PHOTO PHOTO
THE CHARLES HOTEL HOTEL TVERSKAYA
CAMBRIDGE, MASSACHUSETTS (MANAGED) MOSCOW, RUSSIA (MANAGED)
PHOTO
DON CESAR BEACH RESORT
ST. PETERSBURG BEACH, FLORIDA
(MANAGED WITH A MINORITY INTEREST)
<PAGE> 4
PHOTO
COLORADO SPRINGS, COLORADO (OWNED)
PHOTO PHOTO
DENVER HILTON SOUTH WESTIN RESORT MIAMI BEACH
GREENWOOD VILLAGE, COLORADO (OWNED) MIAMI BEACH, FLORIDA (OWNED)
PHOTO
RADISSON PLAZA HOTEL SAN JOSE AIRPORT
SAN JOSE, CALIFORNIA (OWNED)
PHOTO
WARNER CENTER AIRPORT
WOODLAND HILLS, CALIFORNIA (OWNED)
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. In this Prospectus, except as otherwise specified herein,
(i) the term the "Company" refers to Interstate Hotels Company, a Pennsylvania
corporation, its subsidiaries and its predecessors and certain of their
affiliates, (ii) all information assumes that the Underwriters' over-allotment
options will not be exercised, (iii) all statistics relating to the Company's
portfolio hotels are as of October 15, 1996, and (iv) all lodging industry
statistics (other than Company statistics) are from, or derived from,
information published or provided by Smith Travel Research, an independent
industry research organization. Smith Travel Research has not provided any form
of consultation, advice or counsel regarding the Offering contemplated hereby,
and Smith Travel Research is in no way associated with the Offering.
THE COMPANY
The Company is the largest independent hotel management company in the
United States based on total portfolio hotel revenues and number of guestrooms
and properties managed. The Company manages or performs related services for 161
hotels, with 36,631 rooms, located in 28 states in the United States and in the
District of Columbia, Canada, Mexico, Israel, the Caribbean, Thailand, Panama
and Russia. The Company owns or has a controlling interest in 23 of these
properties (the "Owned Hotels"), all of which are upscale or luxury hotels.
The Company completed its initial public offering (the "IPO") in June 1996
and acquired 14 Owned Hotels in connection therewith (the "IPO Acquisitions").
Since the IPO the Company has aggressively pursued acquisitions of new hotels
and management contracts, acquiring nine full service upscale or luxury hotels
containing a total of 2,223 rooms for a total acquisition cost, including
estimated closing costs, capital expenditures and initial working capital
("Total Acquisition Cost"), of $198.2 million (the "Post-IPO Acquisitions") and
entering into agreements to acquire two additional full service upscale hotels
containing a total of 655 rooms for a Total Acquisition Cost of $66.0 million.
The Company has also acquired a hotel management business consisting of
management contracts and leases covering 56 mid-scale and upper economy hotels
containing a total of 6,587 rooms. The Company believes that its competitive
advantages, including its ability to source acquisition opportunities, its
flexible branding strategy, the strength and depth of its management team, and
its ability to access additional capital, position it to take advantage of
continued growth opportunities as the lodging industry in the United States
continues to consolidate.
For the nine months ended September 30, 1996, 83.8% of the Company's net
management revenues were derived from upscale or luxury hotels and resorts,
including the Owned Hotels. The Company is the largest franchisee of upscale
hotels in the Marriott(R) system, owning, managing or providing services to 39
hotels, with 13,517 rooms, bearing the Marriott(R) flag. Consistent with the
Company's multiple branding strategy, the Company also manages hotels under many
other major full service brand names, including Doubletree(TM), Embassy
Suites(R), Hilton(TM), Holiday Inn(R), Radisson(TM), Sheraton(TM) and
Westin(TM), as well as under the Company's own Colony(R) trade name. Among the
well-known hotels managed by the Company are: The Charles Hotel at Harvard
Square in Cambridge, Massachusetts; the Don CeSar Beach Resort in St. Petersburg
Beach, Florida; the Hay-Adams Hotel in Washington, D.C.; the Westin Bonaventure
in Los Angeles, California; Marriott's Casa Marina Resort in Key West, Florida;
the Marriott at Sawgrass Resort in Ponte Vedra Beach, Florida; and the Westin
Resort Miami Beach (formerly the Doral Ocean Beach Resort) in Miami Beach,
Florida. The Company also operates in the mid-scale, upper economy and budget
segments of the lodging industry.
Since its founding in 1961 to own and operate a single motor lodge in
northwestern Pennsylvania, the Company has achieved consistent annual growth,
even through industry downturns. The total revenues of the hotels to which the
Company provided management or related services increased from $514 million in
1991 to almost $1.1 billion in 1995, an average annual compound growth rate of
19.7%, and were $982.5 million for the first nine months of 1996 as compared to
$779.2 million for the first nine months of 1995. Since 1991, the Company's
portfolio of hotels has increased from 49 to 161. The Company's management and
related revenues grew from $17.6 million in 1991 to $45.0 million in 1995, an
average annual compound growth rate of 26.5%, and were $35.8 million for the
first nine months of 1996 as compared to $32.9 million for the first nine months
of 1995. Pro forma total revenues for the Company's 23 Owned Hotels were $201.4
million for the first nine months of 1996 as compared to $184.4 million for the
first nine months of 1995. The Company's net
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income before income tax and extraordinary and non-recurring items increased at
an average annual compound growth rate of 69.8% from $1.9 million in 1991 to
$15.8 million in 1995, and was $22.3 million for the first nine months of 1996
as compared to $12.5 million for the first nine months of 1995.
The Company attributes its steady growth to the disciplined pursuit of four
core strategies: (i) adding new hotels to the Company's portfolio of upscale and
luxury properties through acquisitions; (ii) adding new management contracts and
selectively acquiring hotel management businesses; (iii) maximizing the
profitability of the Company's acquired hotels by repositioning them within
their local markets and applying to them the Company's proven management
techniques; and (iv) providing superior, innovative hotel management services,
resulting in increased investment value for the hotel owner.
The Company believes that its prospects for continuing sustainable growth
are enhanced by a number of competitive advantages, including: (i) a proven
ability to source management contract and property acquisition opportunities
resulting from the Company's large and geographically diverse hotel portfolio;
(ii) excellent relationships with hotel investors and owners due to the
Company's disciplined management techniques and its track record of improving
the profitability of the hotels it manages; (iii) the Company's flexible
branding strategy, which permits the Company to own and operate multiple hotels
under different brands within the same geographic market and to operate more
opportunistically within existing and new markets than hotel companies committed
to particular flags; (iv) the Company's corporate infrastructure and the
operational synergies resulting therefrom, which permit the Company to lower the
unit costs of its services and assure the implementation of quality management
systems on a Company-wide basis; (v) the strength and depth of its management
team, the senior members of which have an average tenure of 23 years in the
lodging industry and 12 years with the Company; (vi) the stability of the
Company's cash flow resulting from the Company's large portfolio of hotel
contracts and the Owned Hotels; and (vii) the Company's conservative
capitalization and ability to access additional equity and debt capital to
finance future growth on a cost-effective basis.
The Company's Owned Hotels consist of 23 geographically diverse upscale
hotels, containing an aggregate of 6,621 rooms and operating under the Embassy
Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R), Radisson(TM) and Westin(TM)
trade names principally in major metropolitan markets such as Atlanta, Boston,
Chicago, Denver, Fort Lauderdale, Houston, Los Angeles, Miami, Philadelphia,
Phoenix and Washington, D.C. The Owned Hotels produced superior operating
results in the first nine months of 1996, achieving an average occupancy rate of
74.9%, an average daily rate ("ADR") of $93.79, and room revenue per available
room ("REVPAR") of $70.23, as compared to an average occupancy rate of 74.1%,
ADR of $86.25 and REVPAR of $63.90 for the first nine months of 1995. The
Company expects further improvement in the results of operations of the Owned
Hotels as the effects of the repositioning of certain of them, and the
application of the Company's practices to all of them, are realized.
The Company's principal executive offices are located at Foster Plaza Ten,
680 Andersen Drive, Pittsburgh, Pennsylvania 15220, and its telephone number is
(412) 937-0600.
RECENT DEVELOPMENTS
In June 1996, the Company completed its IPO, which included the sale of
approximately 12.5 million shares of Common Stock at $21.00 per share. The net
proceeds of the IPO of $240.5 million, together with the net proceeds of a new
term loan, were used to acquire the IPO Acquisitions and two Post-IPO
Acquisitions, to repay existing indebtedness and for general corporate purposes.
Since the IPO, significant developments have included the following:
Post-IPO Acquisitions. The Company has acquired nine full service upscale
or luxury hotels containing 2,223 total rooms. The Total Acquisition Cost of the
Post-IPO Acquisitions was $198.2 million. These hotels are operated under
franchise affiliations with Embassy Suites(R), Hilton(TM), Holiday Inn(R),
Marriott(R), Radisson(TM) and Westin(TM). The Company expects the operating
results of the Post-IPO Acquisitions to benefit from renovations, capital
expenditures and market repositionings, the estimated cost of which is included
in the Total Acquisition Cost. The Company believes that all of the Post-IPO
Acquisitions represent attractive investments because they (i) are located in
major metropolitan or growing secondary markets and are well located within
these markets, (ii) were acquired at an average cost of $88,235 per room
excluding initial working capital, which the Company believes represents at
least a 30% discount to replacement cost, and (iii) have attractive current
returns and potential for significant revenue and cash flow growth through
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<PAGE> 7
rebranding, rehabilitating and/or repositioning of the hotels and application of
the Company's disciplined management techniques.
Pending Acquisitions. The Company has entered into agreements to purchase
the Burlington Radisson in Burlington, Vermont and the Washington Vista in
Washington, D.C. for a Total Acquisition Cost of $66.0 million (the "Pending
Acquisitions"). The Burlington Radisson is an upscale hotel containing 255 rooms
located in downtown Burlington on the waterfront of Lake Champlain. The
Washington Vista is an upscale hotel containing 400 rooms located in the heart
of Washington, D.C. The Company plans to reflag the hotel as a Westin(TM) as
part of its repositioning strategy for the hotel. The Company expects to
complete both of the Pending Acquisitions in the fourth quarter of this year. A
portion of the net proceeds of the Offering will be used to consummate the
Pending Acquisitions. The Company also has other acquisitions under letters of
intent which are subject to the satisfaction of due diligence and other
conditions to closing and is evaluating other hotels for acquisition.
Equity Inns Transaction. On November 15, 1996, the Company acquired for
1,957,895 shares of Common Stock the hotel management business affiliated with
Equity Inns, Inc., a publicly traded real estate investment trust ("Equity
Inns"). This business, which consists of management contracts for eight
mid-scale and upper economy hotels containing 776 rooms, and long-term leases
for 48 mid-scale and upper economy hotels containing 5,811 rooms owned by an
affiliate of Equity Inns, was conducted by Trust Management, Inc. ("Trust
Management") and Trust Leasing, Inc. ("Trust Leasing") prior to the closing of
the transaction (the "Equity Inns Transaction"). Of these hotels, 14 were
acquired or opened by Equity Inns in 1995 and 11 were acquired or opened by
Equity Inns in 1996. The pro forma statement of income data included herein give
effect to the results of operations of these hotels only from the date of
acquisition or opening by Equity Inns and not as of January 1, 1995. Equity Inns
is obligated through November 15, 2001 generally to offer the Company the right
to lease and manage any hotel acquired or developed by Equity Inns. Many of the
hotels managed and leased by the Company as a result of the Equity Inns
Transaction are quality mid-scale and upper economy service and extended stay
hotels. The hotels are operated under premium franchise brands including Hampton
Inns(TM), Residence Inn(TM), Holiday Inn(R), Comfort Inn(TM) and Homewood
Suites(TM). Upon consummation of the Equity Inns Transaction, the Company became
the largest franchisee and independent manager in the Hampton Inns(R) system,
providing services to 39 hotels, with 4,624 rooms, bearing the Hampton Inns(TM)
flag.
Financing Activities. In October 1996, the Company's existing bank credit
facilities were amended to (i) increase the acquisition facility (the
"Acquisition Facility") from $100 million to $200 million, (ii) increase the
term loan from $195 million to $295 million, and (iii) increase the Company's
permitted nonrecourse and subordinated indebtedness to fund acquisitions from
$50 million to $250 million.
THE OFFERING
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<S> <C>
Common Stock Offered by the Company
U.S. Offering............................. 3,400,000 shares
International Offering.................... 600,000 shares
Total................................ 4,000,000 shares (1)
Common Stock to be Outstanding after the
Offering.................................... 34,639,296 shares (1)(2)
Use of Proceeds............................... The net proceeds of the Offering, together
with cash on hand, will be used to finance the
Pending Acquisitions, to repay existing
indebtedness, to finance other possible
acquisitions and for general corporate purposes.
New York Stock Exchange symbol................ IHC
</TABLE>
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(1) Does not include up to 600,000 shares of Common Stock subject to
over-allotment options granted to the Underwriters. See "Underwriting."
(2) Does not include 2,370,449 shares of Common Stock reserved for issuance
under the Company's equity incentive plans and 850,000 shares reserved for
issuance under other compensation plans. See "Management--Director
Compensation," "--Stock Option Grants" and "--Compensation Plans and
Arrangements."
3
<PAGE> 8
SUMMARY FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
The following table sets forth summary historical financial data of the
Company as of and for each of the years ended December 31, 1991, 1992, 1993,
1994 and 1995 and as of and for the nine months ended September 30, 1995 and
1996, summary pro forma financial data for the Company for the year ended
December 31, 1995 and as of and for the nine months ended September 30, 1996,
and certain other data. The summary financial data of the Company as of December
31, 1994 and 1995 and for each of the years ended December 31, 1993, 1994 and
1995 have been derived from audited combined financial statements of the Company
included elsewhere in this Prospectus. The summary financial data of the Company
as of December 31, 1991, 1992 and 1993 and for each of the years ended December
31, 1991 and 1992 have been derived from audited combined financial statements
of the Company which are not required to be included in this Prospectus. The
summary historical financial data of the Company as of and for the nine months
ended September 30, 1995 and 1996 have been derived from unaudited financial
statements of the Company and, in the opinion of the Company, reflect all
adjustments (which include normal recurring adjustments) necessary to present
fairly the information set forth therein. The interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations. The summary financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the pro forma financial information and the
combined financial statements and notes thereto included elsewhere in this
Prospectus. See "Index to Financial Statements."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- --------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
-------- -------- -------- -------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Lodging revenues..... $ -- $ -- $ -- $ -- $ -- $ 332,003 $ -- $ 57,983 $ 286,338
Management and
related fees (2)... 17,645 19,873 25,564 36,726 45,018 41,295 32,888 35,788 32,954
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
Total revenues..... 17,645 19,873 25,564 36,726 45,018 373,298 32,888 93,771 319,292
Expenses:
Lodging expenses..... -- -- -- -- -- 233,641 -- 38,875 185,965
Operating expenses
and other (3)...... 12,350 12,999 15,384 20,708 25,077 33,229 17,587 31,371 27,561
Lease expense........ -- -- -- -- -- 24,101 -- -- 28,883
Depreciation and
amortization....... 3,286 3,352 3,282 3,659 4,201 29,835 2,963 7,762 22,264
Interest, net........ 101 (98) (12) (30) (99) 27,640 (191) 5,315 19,607
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
Income before income
tax expense.......... 1,908 3,620 6,910 12,389 15,839 24,852 12,529 10,448 35,012
Income tax expense
(4).................. -- -- -- -- -- 9,444 -- 11,145 13,305
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
Income (loss) before
extraordinary item... 1,908 3,620 6,910 12,389 15,839 15,408 12,529 (697) 21,707
Extraordinary item
(5).................. -- -- -- -- -- -- -- (7,643) --
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
Net income (loss)...... $ 1,908 $ 3,620 $ 6,910 $ 12,389 $ 15,839 $ 15,408 $ 12,529 $ (8,340) $ 21,707
======== ======== ======== ======== ========= ========= ======== ======== =========
Pro forma net income
per common share
(6).................. $ 0.45 $ 0.63
========= =========
Pro forma common shares
outstanding (6)...... 34,265,584 34,265,584
========== ==========
BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash
equivalents............ $ 2,997 $ 4,461 $ 4,520 $ 6,702 $ 14,035 $ 8,356 $ 24,300 $ 18,702
Total assets............. 25,146 24,270 24,436 30,741 61,401 37,571 591,817 750,732
Current portion of
long-term debt......... 2,092 576 600 673 363 362 6,421 9,021
Long-term debt, excluding
current portion........ 76 1,500 1,209 3,217 35,907 2,906 287,870 314,520
Total equity............. 18,360 16,685 16,627 18,858 9,256 20,805 248,053 377,718
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- --------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
-------- -------- -------- -------- ---------- ---------- -------- -------- ----------
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OTHER FINANCIAL DATA:
EBITDA (7)............... $ 5,295 $ 6,874 $ 10,180 $ 16,018 $ 19,930 $ 82,731 $ 15,301 $ 23,419 $ 78,279
Net cash provided by
operating activities... 3,668 7,332 10,389 15,318 25,328 16,652 14,710 23,048
Net cash (used in)
investing activities... (726) (481) (3,088) (3,852) (22,858) (3,794) (246,071) (364,464)
Net cash (used in)
provided by financing
activities............. (2,571) (5,387) (7,242) (9,285) 4,863 (11,204) 241,626 330,296
TOTAL PORTFOLIO HOTEL DATA: (8)
Total portfolio hotel
revenues............... $513,907 $584,344 $760,766 $858,986 $1,056,279 $779,242 $982,538
Number of hotels (9)..... 49 53 82 136 150 140 159
Number of rooms (9)...... 17,386 18,985 24,202 31,502 35,044 31,960 36,037
COMPARABLE HOTEL
OPERATING DATA: (10)
Occupancy percentage
(11)................... 74.9% 75.4% 76.6% 78.1% 79.2%
ADR (12)................. $83.73 $86.96 $91.78 $92.00 $98.72
REVPAR (13).............. $62.74 $65.60 $70.31 $71.87 $78.16
Gross operating profit
margin (14)............ 28.2% 30.0% 31.5% 32.3% 33.9%
</TABLE>
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(1) The pro forma financial data give effect to all issuances of Common Stock
prior to and in connection with the IPO, the IPO Acquisitions, the Post-IPO
Acquisitions, the Pending Acquisitions, the Equity Inns Transaction and the
issuance of 3,534,880 of the 4,000,000 shares of Common Stock offered in
this Offering, which represents the portion of the Offering that results in
sufficient net proceeds, together with cash on hand, to finance the Pending
Acquisitions and to repay $19,100 of indebtedness, as if all such
transactions had occurred as of January 1, 1995, except that (i) the pro
forma balance sheet data give effect to the acquisition of the two Owned
Hotels acquired since September 30, 1996, the Pending Acquisitions and the
assumed issuance of 3,534,880 shares of Common Stock as if each had
occurred on September 30, 1996 and (ii) the pro forma statement of income
data give effect to the results of operations of the 25 hotels acquired or
opened by Equity Inns after January 1, 1995 as of their respective dates of
acquisition or opening and not as of January 1, 1995. The pro forma
financial data presented is not necessarily indicative of what the actual
financial position and results of operations of the Company would have been
as of and for the periods indicated, nor does it purport to represent the
Company's future financial position and results of operations.
(2) Pro forma management and related fees are adjusted to reflect consolidation
of the Owned Hotels and the resultant pro forma elimination of $4,544 and
$3,438 of management and related fees actually derived from the Owned
Hotels in 1995 and the nine months ended September 30, 1996, respectively.
(3) Includes non-recurring, non-cash compensation of $11,896 for the nine
months ended September 30, 1996.
(4) Until immediately prior to the consummation of the IPO, the Company
operated as an S corporation and, accordingly, was not subject to federal
and certain state income taxes. The Company recorded income tax expense of
$6,261 to establish deferred income taxes as of the date of the Company's
change in tax status from an S corporation to a C corporation. The pro
forma statement of income data have been computed as if the Company had
been subject to federal and state income taxes, based on the applicable
statutory tax rates then in effect.
(5) Represents an extraordinary loss resulting from the early extinguishment of
indebtedness, net of a deferred tax benefit of $3,937.
(6) Based on 34,174,176 shares of Common Stock outstanding on a pro forma basis
after the Offering plus an additional 91,408 shares of Common Stock to
reflect the dilutive effect of outstanding options.
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<PAGE> 10
(7) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, minority interests and extraordinary item. Management
believes that EBITDA is a useful measure of operating performance because
it is industry practice to evaluate hotel properties based on operating
income before interest, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity
structure of the property owner. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles ("GAAP"),
is not necessarily indicative of cash available to fund all cash flow needs
and should not be considered as an alternative to net income under GAAP for
purposes of evaluating the Company's results of operations.
(8) Represents all hotels, including the Owned Hotels, to which the Company
provides management or related services.
(9) As of the end of the periods presented.
(10) The comparable hotel data set consists of all of the hotels (35 hotels
containing a total of 12,771 rooms) managed continuously by the Company
from January 1, 1993 through September 30, 1996.
(11) Represents total rooms occupied by hotel guests on a paid basis divided by
total available rooms. Total available rooms represents the number of rooms
available for rent multiplied by the number of days in the reported period.
(12) Represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(13) Represents room revenues divided by total available rooms.
(14) Represents gross operating profit divided by total revenues. "Gross
operating profit" represents total revenues less departmental expenses and
undistributed operating expenses, excluding management fees.
6
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risks and investment considerations should be carefully considered
before purchasing shares of Common Stock offered hereby. Each of the following
factors may have a material adverse effect on the Company's operations,
financial results, financial condition, liquidity, market valuation or market
liquidity in future periods.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The Company is subject to the risks inherent in the lodging industry. In
addition to the specific risks discussed below, these risks include changes in
general, regional and local economic conditions, overbuilding, varying levels of
demand for rooms and related services, changes in travel patterns, the recurring
need for renovation, refurbishment and improvement of hotel properties, changes
in governmental regulations that influence or determine wages, prices and
construction and maintenance costs, changes in interest rates, the availability
of financing and changes in real estate taxes and operating expenses.
COMPETITION FOR GUESTS
The lodging industry is highly competitive, and the Company's hotels
generally are located in areas that contain numerous competitive properties.
Competitive factors in the lodging industry include room rates, quality of
accommodations, name recognition, service levels and convenience of location
and, to a lesser extent, the quality and scope of other amenities, including
food and beverage facilities. Many of the properties with which the Company's
hotels compete for guests are part of or owned by entities that have
substantially greater financial or other resources than the Company.
RISKS ASSOCIATED WITH RAPID EXPANSION
Growth Risks. The Company's revenues and net income have grown
substantially during the past several years. Since consummation of the IPO, the
Company's portfolio of Owned Hotels has increased from 14 hotels to 23 hotels,
and the Company intends to continue to pursue a growth-oriented strategy for the
foreseeable future, but there can be no assurance that the Company will achieve
its growth objectives. The Company is subject to a variety of business risks
generally associated with growing companies. 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 growth
opportunities, finance acquisitions and integrate new hotels into its
operations, as well as the competitive climate and the availability and cost of
capital. While the Company believes that it will have sufficient resources to
pursue its strategy, this belief is premised in part on adequate cash being
generated from operations. The Company may in the future seek an additional
increase in the capital available to it under its Acquisition Facility or
otherwise obtain additional debt or equity financing, depending upon the amount
of capital required to pursue future growth opportunities or address other
needs, conditions in the capital markets and other factors. There can be no
assurance that such increase or additional financing will be available to the
Company on acceptable terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
In addition, there can be no assurance that the Company will be able to
successfully integrate new hotels into its operations or that new hotels will
achieve revenue and profitability levels comparable to the Company's existing
portfolio hotels. Furthermore, the Company's expansion within its existing
markets could adversely affect the financial performance of its existing
portfolio hotels and 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 can be no assurance that the Company will
anticipate all of the changing demands that expanding operations will impose on
the Company.
Acquisition and Development Risks. The Company expects to acquire
additional hotels in the future. Acquisitions entail the risk that investments
will fail to perform in accordance with expectations. In addition, the Company
intends to selectively develop new mid-scale and upper economy hotels in the
future. New project development is subject to a number of risks, including
market or site deterioration after acquisition and the possibility of
construction delays or cost overruns due to regulatory approvals, inclement
weather, labor or material shortages, work stoppages and the continued
availability of construction and permanent financing.
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CERTAIN EFFECTS OF ACQUISITIONS
Since its IPO, the Company has acquired nine hotels. Under the purchase
method of accounting, the assets, liabilities and results of operations
associated with such acquisitions have been included in the Company's financial
position and results of operations since the respective dates thereof.
Accordingly, the financial position and results of operations of the Company as
of and for the nine months ended September 30, 1996 and subsequent dates and
periods are not comparable to the financial position and results of operations
of the Company as of and for prior dates and periods.
The pro forma financial information presented gives effect to the IPO, the
IPO Acquisitions, the Post-IPO Acquisitions, the Pending Acquisitions, the
Equity Inns Transaction, the issuance of 3,534,880 shares of Common Stock in
this Offering and certain other adjustments described herein as if such
transactions had been completed on prior dates. The pro forma information
presented is not necessarily indicative of what the actual financial position
and results of operations of the Company would have been as of and for the
periods indicated.
RISKS ASSOCIATED WITH OWNING OR LEASING REAL ESTATE
At October 15, 1996, the Company owned fee title or controlling partnership
interests in 23 of the 161 hotels it managed and operated 17 hotels under
leases, ten of which are long-term leases (not including hotels the Company
currently manages or leases as a result of the Equity Inns Transaction). In
addition, the Company's business strategy includes the acquisition of additional
hotels. Accordingly, the Company will be subject to varying degrees of risk
generally related to owning or leasing real estate. These risks include, among
others, changes in national, regional and local economic conditions, local real
estate market conditions, changes in interest rates and in the availability,
costs and terms of financing, liability for long-term 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, many of which are beyond
the control of the Company. In addition, real estate investments are relatively
illiquid; therefore, the ability of the Company to vary its portfolio of owned
hotels in response to changes in economic and other conditions may be limited.
TERMS OF MANAGEMENT AGREEMENTS
On a pro forma basis net management revenues, including the Owned Hotels,
represented 6.9% of the Company's total revenues for the nine months ended
September 30, 1996. Hotel management agreements expire or are acquired,
terminated or renegotiated in the ordinary course of the Company's business.
Typically, the Company's hotel management agreements may be terminated for
various reasons, including default by the Company or sale of or foreclosure on
the underlying property. In addition, approximately one-third of the Company's
management agreements allow for termination without cause upon 30 to 90 days
notice. An additional 21 management agreements allow for termination without
cause upon 30 to 90 days notice with the payment of a termination fee. As of
October 15, 1996, the Company had management agreements with remaining terms of
less than five years for 103 of its 161 managed hotels. These 103 management
agreements accounted for $10.7 million, or 3.4%, of the Company's total pro
forma revenues for the nine months ended September 30, 1996. Sixteen of these
management agreements (which generated $2.4 million, or 0.8%, of the Company's
total pro forma revenues for the nine months ended September 30, 1996) are
subject to termination in 1997. Although the net number of hotel management
agreements to which the Company is a party has increased every year since 1987,
there can be no assurance that the Company will continue to obtain new
management agreements or that it will be able to renew or replace terminated or
expired management agreements, or that the terms of new or renegotiated
management agreements will be as favorable to the Company as the terms of prior
agreements.
In addition to the services called for under its management agreements, the
Company often provides purchasing services, equipment leasing services,
insurance and risk management services and other ancillary services to
third-party hotel owners. On a pro forma basis, 4.4% of the Company's total
revenues for the nine months ended September 30, 1996 were comprised of such
services. The costs for these management services are typically subject to
prospective approval by the hotel owners on an annual basis. Although the
Company believes that its charges for these services are generally competitive
with those provided by unrelated third
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parties, there can be no assurance that third-party hotel owners will not choose
to obtain such services from other providers.
COMPETITION FOR MANAGEMENT AGREEMENTS
The Company competes in the lodging industry with international, national,
regional and local hotel management companies, some of which have greater
financial or other resources than the Company. Competitive factors include
relationships with hotel owners and investors, the availability of capital,
financial performance, contract terms, brand name recognition, marketing
support, reservation system capacity and the willingness to provide funds in
connection with new management arrangements. In order for the Company to expand
its business by acquiring additional management agreements, the Company may be
required to offer more attractive terms to hotel owners than it has had to make
in the past or to make equity investments in hotel properties. Hotel owners in
many cases have been requesting lower base fees coupled with greater incentive
fees or seeking capital contributions from independent hotel management
companies in the form of loans or equity investments.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The lodging industry is seasonal in nature, with the second and third
calendar quarters generally accounting for a greater portion of annual revenues
than the first and fourth calendar quarters. Quarterly earnings may be adversely
affected by events beyond the Company's control, such as poor weather
conditions, economic factors and other considerations affecting travel. In
addition, the loss of one or several management agreements (which could involve
the write-off of capitalized acquisition costs in addition to the loss of future
revenues), the timing of achieving incremental revenues from additional hotels
and the realization of a gain or loss upon the sale of a hotel also may
adversely impact earnings comparisons.
RISK OF INCREASING LEVERAGE; RESTRICTIVE COVENANTS
Since its IPO, the Company has financed its acquisitions largely with
indebtedness obtained pursuant to the Company's Acquisition Facility, and
intends to finance future acquisitions with the proceeds of this Offering, the
Acquisition Facility or with other credit facilities obtained by the Company in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The credit agreement
with respect to the Acquisition Facility contains restrictive covenants,
including covenants limiting capital expenditures, incurrence of debt and sales
of assets and requiring the Company to achieve certain financial ratios, some of
which will become more restrictive over time. See "Indebtedness of the Company."
The Company's existing indebtedness incurred under the Acquisition Facility, as
well as its term indebtedness, is secured by mortgages on the Company's hotel
properties as well as other assets of the Company. Among other consequences, the
leverage of the Company and such restrictive covenants and other terms of the
Company's debt instruments could impair the Company's ability to obtain
additional financing in the future, to make acquisitions and to take advantage
of significant business opportunities that may arise. In addition, the Company's
leverage may increase its vulnerability to adverse general economic and lodging
industry conditions and to increased competitive pressures.
DIVIDEND POLICIES; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has not paid any dividends on the Common Stock since the IPO
and does not anticipate that it will pay any dividends in the foreseeable
future. The Acquisition Facility prohibits payment of dividends or other
distributions to shareholders. See "Dividend Policy."
CONFLICTS OF INTEREST
Milton Fine, the co-founder of the Company and its Chairman of the Board,
and individuals and entities affiliated with Mr. Fine (collectively, the "Fine
Family Shareholders") will beneficially own approximately 36.9% of the
outstanding Common Stock following consummation of the Offering. See "Principal
Shareholders." Certain of the Fine Family Shareholders also have ownership
interests in 12 hotels that are managed or leased but not owned by the Company.
Each of the Fine Family Shareholders has agreed not to transfer any of its
interests in any of these hotels (subject to certain permitted transfers)
without first complying with a right
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of first offer and a right of first refusal procedure in favor of the Company.
See "Certain Relationships and Related Transactions--Transactions with the Fine
Family Shareholders." Except for one management agreement pursuant to which the
Company waived its management fee for a period ending no later than November 30,
1998, the Company believes that its management agreements and leases for these
hotels are on terms no less favorable to the Company than those that could have
been obtained from unaffiliated third parties. These relationships, however,
coupled with the ownership of Common Stock by the Fine Family Shareholders and
representation on the Company's Board of Directors (the "Board") by certain of
the Fine Family Shareholders, could give rise to potential conflicts of
interest. The Company has implemented a policy requiring transactions between
the Company and related parties to be approved by a majority of disinterested
directors upon such disinterested directors' determination that the terms of the
transaction are no less favorable to the Company than those that could have been
obtained from unrelated third parties. There can be no assurance, however, that
this policy will always be successful in eliminating the influence of such
potential conflicts of interest. See "Management--Directors and Executive
Officers."
CONTROL BY PRINCIPAL SHAREHOLDERS
The Fine Family Shareholders are able to exert substantial influence over
the election of directors and the management and affairs of the Company and over
the outcome of any corporate transactions or other matters submitted to the
shareholders for approval, including mergers, consolidations and the sale of all
or substantially all of the Company's assets. Affiliates of Blackstone Real
Estate Advisors L.P. (collectively, "Blackstone") may also be able to exert
influence over these matters. Pursuant to a stockholders agreement (the
"Interstone Stockholders Agreement") between the Company and Blackstone, dated
June 25, 1996, so long as Blackstone owns 25% or more of the shares of Common
Stock issued to it on the date of the Interstone Stockholders Agreement, the
Fine Family Shareholders have agreed that they will vote all of their shares of
Common Stock for the election of a director candidate nominated by Blackstone,
and Blackstone has agreed to vote all of its shares of Common Stock for the
election of the director candidates nominated by the Board.
SUBSTANTIAL RELIANCE ON SENIOR MANAGEMENT
The Company will place substantial reliance on the lodging industry
knowledge and experience and the continued services of its senior management.
The Company's future success and its ability to manage future growth depends in
large part upon the efforts of these persons and on the Company's ability to
attract and retain these key executives and 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.
GOVERNMENT REGULATION
The Company is subject to numerous foreign and U.S. federal, state and
local government laws, including those relating to the preparation and sale of
food and beverages (such as health and liquor license laws), accessibility for
disabled persons and general building and zoning requirements. Managers of
hotels are also subject to laws governing their relationship with hotel
employees, including minimum wage requirements, overtime, working conditions and
work permit requirements. Compliance with, or changes in, these laws, including
liquor license laws or increases in minimum wage rate requirements, reduces
revenues and profits of hotels owned, leased and managed by the Company and
could otherwise adversely affect the Company's operations. Although third-party
hotel owners are generally responsible for all costs, expenses and liabilities
incurred in connection with operating the hotels under the Company's management
agreements, including compliance with government laws, the Company may be
contingently liable for certain liabilities for which it does not maintain
insurance, including certain employment liabilities, environmental liabilities
and, in respect of properties in the United States, claims arising under the
Americans with Disabilities Act. The Company also is subject to various foreign
and U.S. federal, state and local environmental laws and regulations relating to
the environment and the handling of hazardous substances which may impose or
create significant potential environmental liabilities. Under the Company's
hotel management agreements, third-party hotel owners are generally responsible
for any environmental liabilities. However, under certain countries' laws,
including those of the United States, the Company also may be exposed to
environmental liabilities whether or not the third-party hotel owner is able to
satisfy such liabilities. In addition, the Company will be subject to any
environmental liabilities arising with respect to its owned hotels.
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ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and By-Laws, and Pennsylvania law,
include various provisions that could have the effect of making it more
difficult for a third party to acquire control of the Company. See "Description
of Capital Stock--Certain Corporate Governance Matters." In addition, the
Company's Articles of Incorporation grant the Board authority to issue up to
25,000,000 shares of preferred stock having such rights, preferences and
privileges as designated by the Board without shareholder approval. See
"Description of Capital Stock--Preferred Stock." The rights of holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of such preferred stock that may be issued in the future.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock (including shares issuable upon the exercise of stock
options), or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock. Upon consummation of the
Offering, the Company will have outstanding 34,639,296 shares of Common Stock.
Of these shares, 18,190,946 are "restricted securities" under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). The holders of
18,071,441 of these shares have registration rights with respect to future
registrations of the Common Stock beneficially owned by them. In connection with
this Offering, the Company, each of its directors and executive officers who is
a holder of restricted securities, the Fine Family Shareholders and Blackstone
have agreed, subject to certain exceptions, not to offer, sell, contract to sell
or otherwise dispose of any such shares of Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). Trust Leasing and
Trust Management have agreed with the Company not to sell any of the Common
Stock acquired in connection with the Equity Inns Transaction until June 30,
1997 and not to sell more than 50% of such Common Stock until December 31, 1997.
See "Principal Shareholders," "Shares Eligible for Future Sale" and
"Underwriting."
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THE COMPANY
The Company is the largest independent hotel management company in the
United States based on total portfolio hotel revenues and number of guestrooms
and properties managed. The Company manages or performs related services for 161
hotels, with 36,631 rooms, located in 28 states in the United States and in the
District of Columbia, Canada, Mexico, Israel, the Caribbean, Thailand, Panama
and Russia. The Company owns or has a controlling interest in 23 of these
properties, all of which are upscale or luxury hotels.
The Company completed its IPO in June 1996 and acquired 14 Owned Hotels in
connection therewith. Since the IPO the Company has aggressively pursued
acquisitions of new hotels and management contracts, acquiring nine full service
upscale or luxury hotels containing a total of 2,223 rooms for a Total
Acquisition Cost of $198.2 million and entering into agreements to acquire two
additional full service upscale hotels containing a total of 655 rooms for a
Total Acquisition Cost of $66.0 million. The Company has also acquired a hotel
management business consisting of management contracts and leases covering 56
mid-scale and upper economy hotels containing a total of 6,587 rooms. The
Company believes that its competitive advantages, including its ability to
source acquisition opportunities, its flexible branding strategy, the strength
and depth of its management team, and its ability to access additional capital,
position it to take advantage of continued growth opportunities as the lodging
industry in the United States continues to consolidate.
For the nine months ended September 30, 1996, 83.8% of the Company's net
management revenues were derived from upscale or luxury hotels and resorts,
including the Owned Hotels. The Company is the largest franchisee of upscale
hotels in the Marriott(R) system, owning, managing or providing services to 39
hotels, with 13,517 rooms, bearing the Marriott(R) flag. Consistent with the
Company's multiple branding strategy, the Company also manages hotels under many
other major full service brand names, including Doubletree(TM), Embassy
Suites(R), Hilton(TM), Holiday Inn(R), Radisson(TM), Sheraton(TM) and
Westin(TM), as well as under the Company's own Colony(R) trade name. Among the
well-known hotels managed by the Company are: The Charles Hotel at Harvard
Square in Cambridge, Massachusetts; the Don CeSar Beach Resort in St. Petersburg
Beach, Florida; the Hay-Adams Hotel in Washington, D.C.; the Westin Bonaventure
in Los Angeles, California; Marriott's Casa Marina Resort in Key West, Florida;
the Marriott at Sawgrass Resort in Ponte Vedra Beach, Florida; and the Westin
Resort Miami Beach (formerly the Doral Ocean Beach Resort) in Miami Beach,
Florida. The Company also operates in the mid-scale, upper economy and budget
segments of the lodging industry.
Since its founding in 1961 to own and operate a single motor lodge in
northwestern Pennsylvania, the Company has achieved consistent annual growth,
even through industry downturns. The total revenues of the hotels to which the
Company provided management or related services increased from $514 million in
1991 to almost $1.1 billion in 1995, an average annual compound growth rate of
19.7%, and were $982.5 million for the first nine months of 1996 as compared to
$779.2 million for the first nine months of 1995. Since 1991, the Company's
portfolio of hotels has increased from 49 to 161. The Company's management and
related revenues grew from $17.6 million in 1991 to $45.0 million in 1995, an
average annual compound growth rate of 26.5%, and were $35.8 million for the
first nine months of 1996 as compared to $32.9 million for the first nine months
of 1995. Pro forma total revenues for the Company's 23 Owned Hotels were $201.4
million for the first nine months of 1996 as compared to $184.4 million for the
first nine months of 1995. The Company's net income before income tax and
extraordinary and non-recurring items increased at an average annual compound
growth rate of 69.8% from $1.9 million in 1991 to $15.8 million in 1995, and was
$22.3 million for the first nine months of 1996 as compared to $12.5 million for
the first nine months of 1995.
The Company attributes its steady growth to the disciplined pursuit of four
core strategies: (i) adding new hotels to the Company's portfolio of upscale and
luxury properties through acquisitions; (ii) adding new management contracts and
selectively acquiring hotel management businesses; (iii) maximizing the
profitability of the Company's acquired hotels by repositioning them within
their local markets and applying to them the Company's proven management
techniques; and (iv) providing superior, innovative hotel management services,
resulting in increased investment value for the hotel owner. See "Business and
Properties-- Business Strategy."
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The Company believes that its prospects for continuing sustainable growth
are enhanced by a number of competitive advantages, including: (i) a proven
ability to source management contract and property acquisition opportunities
resulting from the Company's large and geographically diverse hotel portfolio;
(ii) excellent relationships with hotel investors and owners due to the
Company's disciplined management techniques and its track record of improving
the profitability of the hotels it manages; (iii) the Company's flexible
branding strategy, which permits the Company to own and operate multiple hotels
under different brands within the same geographic market and to operate more
opportunistically within existing and new markets than hotel companies committed
to particular flags; (iv) the Company's corporate infrastructure and the
operational synergies resulting therefrom, which permit the Company to lower the
unit costs of its services and assure the implementation of quality management
systems on a Company-wide basis; (v) the strength and depth of its management
team, the senior members of which have an average tenure of 23 years in the
lodging industry and 12 years with the Company; (vi) the stability of the
Company's cash flow resulting from the Company's large portfolio of hotel
contracts and the Owned Hotels; and (vii) the Company's conservative
capitalization and ability to access additional equity and debt capital to
finance future growth on a cost-effective basis. See "Business and
Properties--Growth Strategy."
RECENT DEVELOPMENTS
INITIAL PUBLIC OFFERING
In June 1996, the Company completed its IPO, which included the sale of
approximately 12.5 million shares of Common Stock at $21.00 per share. The net
proceeds of the IPO of $240.5 million, together with the net proceeds of a new
term loan, were used to acquire the IPO Acquisitions and two Post-IPO
Acquisitions, to repay existing indebtedness and for general corporate purposes.
POST-IPO ACQUISITIONS
Since its IPO, the Company has acquired nine full service upscale or luxury
Owned Hotels containing 2,223 total rooms. The Total Acquisition Cost of these
hotels was $198.2 million. These hotels are operated under franchise
affiliations with Embassy Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R),
Radisson(TM) and Westin(TM). The Company expects the operating results of the
Post-IPO Acquisitions to benefit from renovations, capital expenditures and
market repositionings, the cost of which is included in the Total Acquisition
Cost. The Company believes that all of the Post-IPO Acquisitions represent
attractive investments because they (i) are located in major metropolitan or
growing secondary markets and are well-located within their markets, (ii) were
acquired at an average cost of $88,235 per room excluding initial working
capital, which the Company believes represents at least a 30% discount to
replacement cost, and (iii) have attractive current returns and potential for
significant revenue and cash flow growth through rebranding, rehabilitating,
and/or repositioning of the hotels and application of the Company's disciplined
management techniques. The following is a description of each of the Post-IPO
Acquisitions:
Boston Marriott Westborough. This four story, 223 room hotel, located
in Westborough, Massachusetts, was acquired for a Total Acquisition Cost of
$20.2 million, using proceeds from the IPO. The hotel, located at the
junction of Interstate 495 and U.S. Route 9, was built in 1985, and the
Company has managed the hotel since 1991.
Brentwood Holiday Inn. This nine story, 247 room hotel, located in
Brentwood, Tennessee, which is eight miles from Nashville, was acquired for
a Total Acquisition Cost of $20.9 million, using proceeds from the IPO. The
property was built in 1989 as a prototype Holiday Inn hotel and has
received the Holiday Inn Excellence Award in each of the past four years.
Roanoke Airport Marriott. This eight story, 320 room hotel, located
near the airport in Roanoke, Virginia, was acquired by the Company for a
Total Acquisition Cost of $25.3 million. The hotel was built in 1983 and
features one of the area's largest private meeting facilities, including a
high-tech conference theater.
Blacksburg Marriott. This two story, 148 room hotel, located across
the street from the Virginia Polytechnic Institute and State University in
Blacksburg, Virginia, was acquired by the Company for a Total Acquisition
Cost of $8.8 million. The Blacksburg Marriott was built in 1971, and the
Company
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plans to fully renovate every room in the hotel in 1997. The Company is
evaluating the branding strategy for this hotel and may reflag it in the
near future.
Embassy Suites Phoenix North. This hotel (formerly the Fountain
Suites), located in Phoenix, Arizona, consists of seven three-story
buildings and six two-story buildings containing a total of 314 two-room
suites. The hotel was built in 1985 and was acquired by the Company as an
independent hotel for a Total Acquisition Cost of $27.7 million. The
Company reflagged the hotel as an Embassy Suites(R) as part of its
repositioning strategy for the hotel.
Englewood Radisson. This nine story, 192 room hotel is located in
Englewood, New Jersey, which is four miles west of New York City near the
Meadowlands Sports Complex. The Englewood Radisson was acquired by the
Company for a Total Acquisition Cost of $13.5 million. The hotel was opened
in 1989 and has land available for future room expansion. The land on which
the Englewood Radisson is located is subject to a ground lease with a
remaining term of 90 years.
Radisson Plaza Hotel San Jose Airport. This five story, 185 room hotel
is located less than two miles from the San Jose, California International
Airport in the heart of Silicon Valley and was acquired by the Company for
a Total Acquisition Cost of $17.3 million. The hotel was built in 1985, and
the Company has managed it since December 1995.
Columbus Hilton. This four story, 177 room hotel is located in
Columbus, Georgia. The hotel was acquired by the Company for a Total
Acquisition Cost of $9.1 million. The hotel is located across the street
from the convention center and is regarded as the premier hotel in its
market. The Columbus Hilton was built around the original Empire Woodruff
Grist Mill, a red brick mill that began operations in 1861. A national
landmark, the original brick mill was restored and converted into part of
the hotel in 1982.
Westin Resort Miami Beach. This 18 story, 417 room hotel (formerly the
Doral Ocean Beach Resort) is located on three oceanfront acres in the
"Mid-Beach" portion of Miami Beach, Florida. The Company acquired the hotel
for a Total Acquisition Cost of $55.4 million. The Company is considering
converting existing ancillary space into additional guest rooms which has
been included in the Total Acquisition Cost. The Company reflagged this
hotel, which was built in 1963, as a Westin(TM) as part of its
repositioning strategy for the hotel.
PENDING ACQUISITIONS
The Company has entered into agreements to purchase the Burlington Radisson
in Burlington, Vermont and the Washington Vista in Washington, D.C. for a Total
Acquisition Cost of $66.0 million. Both of the Pending Acquisitions meet the
acquisition criteria applied to the Post-IPO Acquisitions.
Burlington Radisson. This eight story, 255 room upscale hotel is
located in Burlington, Vermont. The Burlington Radisson is the only hotel
that is located in downtown Burlington on the waterfront of Lake Champlain.
The Company has signed an agreement to acquire the hotel, which was built
in 1975, for a Total Acquisition Cost of $15.3 million.
Washington Vista. This 14 story, 400 room hotel is located in the
heart of Washington, D.C., within walking distance of many of the city's
famous landmarks and close to the national headquarters of many trade and
professional organizations. The Company has signed an agreement to acquire
the hotel, which was built in 1982, for a Total Acquisition Cost of $50.7
million. The Company plans to reflag the hotel as a Westin(TM) as part of
its repositioning strategy for the hotel.
The Company expects to complete both of the Pending Acquisitions in the
fourth quarter of this year. A portion of the net proceeds of the Offering will
be used to consummate the Pending Acquisitions. The Company also has other
acquisitions under letters of intent which are subject to the satisfaction of a
number of conditions to closing and is evaluating other hotels for acquisition.
EQUITY INNS TRANSACTION
On November 15, 1996, the Company acquired for 1,957,895 shares of Common
Stock the hotel management business affiliated with Equity Inns. This business,
which consists of management contracts for
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eight mid-scale and upper economy hotels containing 776 rooms, and long-term
leases for 48 mid-scale and upper economy hotels containing 5,811 rooms, was
conducted by Trust Management and Trust Leasing prior to the consummation of the
Equity Inns Transactions. Of these hotels, 14 were acquired or opened by Equity
Inns in 1995 and 11 were acquired or opened by Equity Inns in 1996. The pro
forma statement of income data included herein give effect to the results of
operations of these hotels only from the date of acquisition or opening by
Equity Inns and not as of January 1, 1995. In connection with the Equity Inns
Transaction, the Company assumed management of all of the leased hotels except
four hotels which were developed and will continue to be managed by Promus
Hotels, Inc. As described more fully below, the Company also acquired a right of
first offer under which it generally has the right through November 15, 2001 to
lease and manage any hotel acquired or developed by Equity Inns. Many of the
hotels managed and leased by the Company as a result of the Equity Inns
Transaction are quality mid-scale and upper economy hotels. These hotels are
operated under premium franchise brands including Hampton Inns(TM), Residence
Inn(TM), Holiday Inn(R), Comfort Inn(TM) and Homewood Suites(TM). Upon
consummation of the Equity Inns Transaction, the Company became the largest
franchisee and independent manager in the Hampton Inns(TM) system, providing
services to 39 hotels, with 4,624 rooms, bearing the Hampton Inns(TM) flag.
In connection with the Equity Inns Transaction, the Company and Equity Inns
granted to each other certain options and rights of first offer with respect to
future hotel opportunities over the five-year period following the closing.
Through November 15, 2001, Equity Inns is obligated generally to offer to the
Company the right to lease and manage any hotel property which is acquired or
developed by Equity Inns, except that Promus Hotels, Inc. has the right to
manage any future hotels which it sells to Equity Inns. During the same
five-year period, the Company is obligated generally to grant Equity Inns the
option to acquire all mid-scale, upper economy, economy or budget hotels which
the Company plans to develop and sell (excluding developments subject to a joint
venture or partnership agreement). All hotel properties so acquired by Equity
Inns would be leased back to a subsidiary of the Company on terms substantially
the same as those set forth below. In addition, through November 15, 2001, the
Company is obligated to offer to Equity Inns the right to acquire all limited
service, extended stay, upper economy and mid-scale hotels which the Company or
any wholly owned subsidiary owns as of the closing or subsequently acquires or
develops, in the event that the Company determines to sell such hotels. Any such
sale will be conditioned on Equity Inns' entering into a lease with a subsidiary
of the Company on terms substantially the same as set forth below. Finally, the
Company has agreed to refer to Equity Inns, through November 15, 2001, any
opportunities which are presented to the Company to acquire hotels in the
foregoing categories.
The Equity Inns Transaction was consummated initially through a new
partnership, Crossroads/ Memphis Partnership, L.P. ("Crossroads/Memphis"). Trust
Leasing and Trust Management contributed to Crossroads/Memphis all of the leases
with Equity Inns and the management contracts in exchange for a 50% limited
partnership interest in Crossroads/Memphis. Subsidiaries of the Company
contributed to Crossroads/ Memphis 1,957,895 newly issued shares of Common Stock
of the Company (the "Contributed Shares") in exchange for a 50% general and
limited partnership interest in Crossroads/Memphis. The Company's subsidiary
that serves as general partner has the sole right to manage and control
Crossroads/Memphis. Crossroads/Memphis has engaged affiliates of the Company to
manage the leased properties and perform the management contracts held by
Crossroads/Memphis. The leases with Equity Inns have a 15-year term, and
Crossroads/Memphis has an option to renew each lease for an additional five-year
term if certain performance standards are met. Crossroads/Memphis is required to
pay fixed monthly base rent together with quarterly percentage rent. The rent
formulas are fixed for the first ten years of the term and will be adjusted
thereafter. The Company has guaranteed Crossroads/Memphis' lease obligations to
Equity Inns.
Trust Leasing and Trust Management have the right to exchange their
partnership interests in Crossroads/Memphis at any time for Contributed Shares.
Upon exchange of all of the partnership interests, the Company will own 100% of
Crossroads/Memphis and Trust Leasing and Trust Management will own all of the
Contributed Shares. Upon exchange, the Contributed Shares will be subject to a
registration rights and shareholders agreement which, among other things, will
(i) grant demand and piggyback registration rights to Trust Management and Trust
Leasing and (ii) prohibit the holders from selling any of the Contributed Shares
until June 30, 1997 and from selling 50% or more of the Contributed Shares until
December 31, 1997.
15
<PAGE> 20
FINANCING ACTIVITIES
In October 1996, the Company's existing bank credit facilities were amended
to (i) increase the Acquisition Facility from $100 million to $200 million, (ii)
increase the term loan from $195 million to $295 million, and (iii) increase the
Company's permitted nonrecourse and subordinated indebtedness to fund
acquisitions from $50 million to $250 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Indebtedness of the Company."
PRICE RANGE OF COMMON STOCK
The Common Stock has traded on the NYSE since June 20, 1996 under the
symbol "IHC." The following table sets forth, for the periods indicated, the
high and low sales prices per share of Common Stock on the NYSE.
<TABLE>
<CAPTION>
PRICE
-------------
PERIOD HIGH LOW
---- ----
<S> <C> <C>
June 20, 1996 through June 30, 1996................................ $23 3/8 $ 21
Quarter ended September 30, 1996................................... 27 3/4 22 1/8
October 1, 1996 through December 10, 1996.......................... 29 5/8 24 1/8
</TABLE>
The last reported sale price per share on the NYSE on December 10, 1996 was
$25.00. As of December 10, 1996, there were approximately 100 holders of record
of the Common Stock.
DIVIDEND POLICY
The Company has not paid any dividends on the Common Stock since its IPO
and does not anticipate paying any dividends following consummation of this
Offering. The Company intends to retain earnings to provide funds for the
continued growth and development of the Company's business. Further, the terms
of the Acquisition Facility prohibit the payment of dividends on the Common
Stock. Any determination to pay cash dividends in the future will be at the
discretion of the Board and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $93.7 million (approximately $108.0 million if the over-allotment
options are exercised in full), after giving effect to estimated underwriting
discounts and commissions and offering expenses payable by the Company. The net
proceeds from the Offering, together with cash on hand, will be used to finance
the Pending Acquisitions, to repay $19.1 million of indebtedness incurred to
finance one of the Post-IPO Acquisitions, to finance other possible acquisitions
and for general corporate purposes. The indebtedness to be repaid matures in
2003 and bears interest at a rate that varies, at the Company's option, in
relation to LIBOR. At November 1, 1996, the interest rate on such indebtedness
was approximately 7.5%. Pending final application of the net proceeds, the
Company will invest such proceeds in interest-bearing accounts and short-term,
interest-bearing securities.
16
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to give effect to, among other things, the
acquisition of the two Owned Hotels acquired since September 30, 1996, the
Pending Acquisitions and the Offering. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the pro forma financial information and the
combined financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total short-term borrowings and current portion of long-term
debt........................................................... $ 6,421 $ 9,021(1)
Total long-term debt, excluding current portion.................. 287,870 314,520(1)
Minority interests............................................... 5,756 5,756
Shareholders' equity:
Preferred Stock ($.01 par value, 25,000,000 shares
authorized, no shares issued and outstanding at September
30, 1996 and as adjusted)................................. -- --
Common Stock ($.01 par value, 75,000,000 shares authorized,
28,671,401 shares issued and outstanding at September 30,
1996; 34,639,296 shares issued and outstanding, as
adjusted)................................................. 287 346(2)
Additional paid-in capital.................................. 253,058 393,219(2)
Retained deficit............................................ (5,292) (5,292)
--------- ---------
Total shareholders' equity............................. 248,053 388,273
--------- ---------
Total capitalization.............................. $ 548,100 $ 717,570
========= =========
</TABLE>
- ------------------
(1) The difference between the historical and the as adjusted debt represents
indebtedness incurred to finance the two Post-IPO Acquisitions consummated
after September 30, 1996 that will continue to be outstanding following the
Offering.
(2) Includes 1,957,895 shares of Common Stock issued in connection with the
Equity Inns Transaction and 10,000 shares of restricted stock issued in
October 1996 pursuant to the Company's 1996 Equity Incentive Plan.
17
<PAGE> 22
SELECTED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
The following table sets forth selected historical financial data of the
Company as of and for each of the years ended December 31, 1991, 1992, 1993,
1994 and 1995 and as of and for the nine months ended September 30, 1995 and
1996, selected pro forma financial data of the Company for the year ended
December 31, 1995 and as of and for the nine months ended September 30, 1996,
and certain other data. The selected financial data of the Company as of
December 31, 1994 and 1995 and for each of the years ended December 31, 1993,
1994 and 1995 have been derived from audited combined financial statements of
the Company included elsewhere in this Prospectus. The selected financial data
of the Company as of December 31, 1991, 1992 and 1993 and for each of the years
ended December 31, 1991 and 1992 have been derived from audited combined
financial statements of the Company which are not required to be included in
this Prospectus. The selected historical financial data of the Company as of and
for the nine months ended September 30, 1995 and 1996 have been derived from
unaudited financial statements of the Company and, in the opinion of the
Company, reflect all adjustments (which include normal recurring adjustments)
necessary to present fairly the information set forth therein. The interim
results are not necessarily indicative of fiscal year performance because of the
impact of seasonal and short-term variations. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma financial information and
the combined financial statements and notes thereto included elsewhere in this
Prospectus. See "Index to Financial Statements."
18
<PAGE> 23
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------------------ -------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms.................... $ -- $ -- $ -- $ -- $ -- $221,372 $ -- $ 37,351 $201,696
Food and beverage........ -- -- -- -- -- 91,696 -- 16,792 68,467
Other departmental....... -- -- -- -- -- 18,935 -- 3,840 16,175
Management and related
fees (2)................. 17,645 19,873 25,564 36,726 45,018 41,295 32,888 35,788 32,954
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Total revenues......... 17,645 19,873 25,564 36,726 45,018 373,298 32,888 93,771 319,292
Lodging expenses:
Rooms.................... -- -- -- -- -- 55,574 -- 8,064 47,473
Food and beverage........ -- -- -- -- -- 69,285 -- 12,513 52,212
Other departmental....... -- -- -- -- -- 8,909 -- 1,680 6,061
Property costs........... -- -- -- -- -- 99,873 -- 16,618 80,219
General and
administrative........... 3,063 4,096 5,057 8,302 9,811 15,710 6,464 7,240 12,443
Payroll and related
benefits................. 8,856 8,803 10,321 12,420 15,469 17,115 11,123 12,564 13,734
Non-cash compensation
(3)...................... -- -- -- -- -- -- -- 11,896 --
Lease expense............. -- -- -- -- -- 24,101 -- -- 28,883
Depreciation and
amortization............. 3,286 3,352 3,282 3,659 4,201 29,835 2,963 7,762 22,264
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Operating income.......... 2,440 3,622 6,904 12,345 15,537 52,896 12,338 15,434 56,003
Other (expense) income:
Interest, net............ (101) 98 12 30 99 (27,640) 191 (5,315) (19,607)
Other, net............... (431) (100) (6) 14 203 (404) -- 329 (1,384)
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Income before income tax
expense.................. 1,908 3,620 6,910 12,389 15,839 24,852 12,529 10,448 35,012
Income tax expense (4).... -- -- -- -- -- 9,444 -- 11,145 13,305
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Income (loss) before
extraordinary item....... 1,908 3,620 6,910 12,389 15,839 15,408 12,529 (697) 21,707
Extraordinary item (5).... -- -- -- -- -- -- -- (7,643) --
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Net income (loss)......... $ 1,908 $ 3,620 $ 6,910 $ 12,389 $ 15,839 $ 15,408 $ 12,529 $ (8,340) $ 21,707
======== ======== ======== ======== ========== ======== ======== ======== ========
Pro forma net income per
common share (6)......... $ 0.45 $ 0.63
======== ========
Pro forma common
shares outstanding (6).. 34,265,584 34,265,584
========== ===========
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents.............. $ 2,997 $ 4,461 $ 4,520 $ 6,702 $ 14,035 $ 8,356 $ 24,300 $ 18,702
Total assets.............. 25,146 24,270 24,436 30,741 61,401 37,571 591,817 750,732
Current portion of
long-term debt........... 2,092 576 600 673 363 362 6,421 9,021
Long-term debt, excluding
current portion.......... 76 1,500 1,209 3,217 35,907 2,906 287,870 314,520
Total equity.............. 18,360 16,685 16,627 18,858 9,256 20,805 248,053 377,718
OTHER FINANCIAL DATA:
EBITDA (7)................ $ 5,295 $ 6,874 $ 10,180 $ 16,018 $ 19,930 $ 82,731 $ 15,301 $ 23,419 $ 78,279
Net cash provided by
operating activities..... 3,668 7,332 10,389 15,318 25,328 16,652 14,710 23,048
Net cash (used in)
investing activities..... (726) (481) (3,088) (3,852) (22,858) (3,794) (246,071) (364,464)
Net cash (used in)
provided by financing
activities............... (2,571) (5,387) (7,242) (9,285) 4,863 (11,204) 241,626 330,296
TOTAL PORTFOLIO HOTEL
DATA: (8)
Total portfolio hotel
revenues................. $513,907 $584,344 $760,766 $858,986 $1,056,279 $779,242 $982,538
Number of hotels (9)...... 49 53 82 136 150 140 159
Number of rooms (9)....... 17,386 18,985 24,202 31,502 35,044 31,960 36,037
COMPARABLE HOTEL
OPERATING DATA: (10)
Occupancy percentage
(11)..................... 74.9% 75.4% 76.6% 78.1% 79.2%
ADR (12).................. $83.73 $86.96 $91.78 $92.00 $98.72
REVPAR (13)............... $62.74 $65.60 $70.31 $71.87 $78.16
Gross operating profit
margin (14).............. 28.2% 30.0% 31.5% 32.3% 33.9%
</TABLE>
19
<PAGE> 24
- ------------------
(1) The pro forma financial data give effect to all issuances of Common Stock
prior to or in connection with the IPO, the IPO Acquisitions, the Post-IPO
Acquisitions, the Pending Acquisitions, the Equity Inns Transaction and the
issuance of 3,534,880 of the 4,000,000 shares of Common Stock offered in
this Offering, which represents the portion of the Offering that results in
sufficient net proceeds, together with cash on hand, to finance the Pending
Acquisitions and to repay $19,100 of indebtedness, as if all such
transactions had occurred as of January 1, 1995, except that (i) the pro
forma balance sheet data give effect to the acquisition of the two Owned
Hotels acquired since September 30, 1996, the Pending Acquisitions and the
assumed issuance of the 3,534,880 shares of Common Stock as if each had
occurred on September 30, 1996 and (ii) the pro forma statement of income
data give effect to the results of operations of the 25 hotels acquired or
opened by Equity Inns after January 1, 1995 as of their respective dates of
acquisition or opening and not as of January 1, 1995. The pro forma
financial data presented is not necessarily indicative of what the actual
financial position and results of operations of the Company would have been
as of and for the periods indicated, nor does it purport to represent the
Company's future financial position and results of operations.
(2) Pro forma management and related fees are adjusted to reflect consolidation
of the Owned Hotels and the resultant pro forma elimination of $4,544 and
$3,438 of management and related fees actually derived from the Owned
Hotels in 1995 and the nine months ended September 30, 1996, respectively.
(3) Represents a non-recurring expense.
(4) Until immediately prior to the consummation of the IPO, the Company
operated as an S corporation and, accordingly, was not subject to federal
and certain state income taxes. The Company recorded income tax expense of
$6,261 to establish deferred income taxes as of the date of the Company's
change of status from an S corporation to a C corporation. The pro forma
statement of income data have been computed as if the Company had been
subject to federal and state income taxes, based on the applicable
statutory tax rates then in effect.
(5) Represents an extraordinary loss resulting from the early extinguishment of
indebtedness, net of a deferred tax benefit of $3,937.
(6) Based on 34,174,176 shares of Common Stock outstanding on a pro forma basis
after the Offering plus an additional 91,408 shares of Common Stock to
reflect the dilutive effect of outstanding options.
(7) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, minority interests and extraordinary item. Management
believes that EBITDA is a useful measure of operating performance because
it is industry practice to evaluate hotel properties based on operating
income before interest, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity
structure of the property owner. EBITDA does not represent cash flow from
operations as defined by GAAP, is not necessarily indicative of cash
available to fund all cash flow needs and should not be considered as an
alternative to net income under GAAP for purposes of evaluating the
Company's results of operations.
(8) Represents all hotels, including the Owned Hotels, to which the Company
provides management or related services.
(9) As of the end of the periods presented.
(10) The comparable hotel data set consists of all of the hotels (35 hotels
containing a total of 12,771 rooms) managed continuously by the Company
from January 1, 1993 through September 30, 1996.
(11) Represents total rooms occupied by hotel guests on a paid basis divided by
total available rooms. Total available rooms represents the number of rooms
available for rent multiplied by the number of days in the reported period.
(12) Represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(13) Represents room revenues divided by total available rooms.
(14) Represents gross operating profit divided by total revenues. "Gross
operating profit" represents total revenues less departmental expenses and
undistributed operating expenses, excluding management fees.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein and elsewhere in this Prospectus which
are not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, the risks detailed in "Risk
Factors" and referenced elsewhere in this Prospectus. See "Forward-Looking
Information."
GENERAL
The following is management's discussion and analysis of the Company's
financial position and results of operations. In light of the transactions
referred to in "Certain Relationships and Related Transactions--The Organization
and Initial Public Offering," the assumed issuance of 3,534,880 of the 4,000,000
shares of Common Stock and the application of the net proceeds therefrom,
together with cash on hand, to finance the purchase of the Pending Acquisitions
and to repay $19.1 million of indebtedness, and the fact that the Owned Hotels
were purchased on varying dates, the following discussion and analysis includes
discussion and analysis of the Company's pro forma financial position and
results of operations in addition to historical data and should be read in
conjunction with the pro forma financial information included elsewhere in this
Prospectus. See "Index to Financial Statements."
The following table sets forth selected items from the statements of income
as a percent of total revenues and certain other selected data:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- --------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1995 1995 1996 1996
----- ----- ----- -------- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Lodging expenses................. -- -- -- 62.6 -- 41.4 58.3
General and administrative....... 19.8 22.6 21.8 4.2 19.7 7.7 3.9
Payroll and related benefits..... 40.4 33.8 34.4 4.6 33.8 13.4 4.3
Non-cash compensation............ -- -- -- -- -- 12.7 --
Lease expense.................... -- -- -- 6.5 -- -- 9.0
Depreciation and amortization.... 12.8 10.0 9.3 8.0 9.0 8.3 7.0
----- ----- ----- ------ ----- ----- ------
Operating income............... 27.0 33.6 34.5 14.1 37.5 16.5 17.5
Other income (expense):
Interest, net.................. -- 0.1 0.2 (7.4) 0.6 (5.7) (6.1)
Other, net..................... -- -- 0.5 (0.1) -- 0.4 (0.4)
----- ----- ----- ------ ----- ----- ------
Income before income tax
expense........................ 27.0 33.7 35.2 6.6 38.1 11.2 11.0
Income tax expense............... -- -- -- 2.5 -- 11.9 4.2
----- ----- ----- ------ ----- ----- ------
Income (loss) before
extraordinary item.......... 27.0 33.7 35.2 4.1 38.1 (0.7) 6.8
Extraordinary item (1)......... -- -- -- -- -- (8.2) --
----- ----- ----- ------ ----- ----- ------
Net income (loss)........... 27.0% 33.7% 35.2% 4.1% 38.1% (8.9)% 6.8%
===== ===== ===== ====== ===== ===== ======
</TABLE>
- ------------------
(1) Represents an extraordinary loss resulting from the early extinguishment of
indebtedness, net of a deferred tax benefit.
The pro forma adjustments described below under "Pro Forma Nine Months
Ended September 30, 1996 Compared to Combined Nine Months Ended September 30,
1995" result primarily from the acquisition of the Owned Hotels, the Pending
Acquisitions and the Equity Inns Transaction (collectively, the "Pro Forma
Hotels"). The Owned Hotels consist of 23 geographically diverse upscale hotels,
containing an aggregate of 6,621 rooms and operating under the Embassy
Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R), Radisson(TM), and Westin(TM)
trade names principally in major metropolitan markets such as Atlanta, Boston,
Chicago, Denver, Fort Lauderdale, Houston, Los Angeles, Miami, Philadelphia,
Phoenix and Washington, D.C. The Owned Hotels produced superior operating
results in the first nine months of 1996, achieving an average occupancy
21
<PAGE> 26
rate of 74.9%, ADR of $93.79, and REVPAR of $70.23, as compared to an average
occupancy rate of 74.1%, ADR of $86.25 and REVPAR of $63.90 for the first nine
months of 1995. The following is a list of the Owned Hotels as of October 15,
1996:
<TABLE>
<CAPTION>
NUMBER
HOTEL LOCATION OF ROOMS
----- -------- --------
<S> <C> <C>
Embassy Suites Phoenix North (formerly Phoenix, AZ 314
Fountain Suites) (1)
Radisson Plaza Hotel San Jose Airport (1) San Jose, CA 185
Warner Center Marriott Woodland Hills, CA 463
Colorado Springs Marriott Colorado Springs, CO 310
Denver Hilton South Greenwood Village, CO 305
Ft. Lauderdale Airport Hilton Dania, FL 388
Westin Resort Miami Beach (formerly the Miami Beach, FL 417
Doral Ocean Beach Resort) (1)
Atlanta Marriott North Central Atlanta, GA 287
Columbus Hilton (1) Columbus, GA 177
Lisle Radisson Lisle, IL 242
Schaumburg Embassy Suites Schaumburg, IL 209
Boston Marriott Andover Andover, MA 293
Boston Marriott Westborough (1) Westborough, MA 223
Englewood Radisson Hotel (1) Englewood, NJ 192
Huntington Hilton Melville, NY 302
Marriott Suites at Valley Forge Valley Forge, PA 229
Philadelphia Marriott West West Conshohocken, PA 286
Brentwood Holiday Inn (1) Brentwood, TN 247
Houston Marriott North at Greenspoint Houston, TX 391
Blacksburg Marriott (1) Blacksburg, VA 148
Roanoke Airport Marriott (1) Roanoke, VA 320
Tysons Corner Marriott Tysons Corner, VA 390
Fort Magruder Inn and Conference Center Williamsburg, VA 303
------
6,621
======
</TABLE>
- ------------------
(1) Denotes a Post-IPO Acquisition.
The amounts referred to below as combined financial information
("combined") represent the historical financial results of operations of the
Company combined with the historical financial results of operations of the
Owned Hotels, with intercompany eliminations and without any pro forma
adjustments.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO COMBINED NINE MONTHS
ENDED SEPTEMBER 30, 1995
Pro forma total revenues increased by $46.1 million, or 16.9%, from $273.2
million in the nine months ended September 30, 1995 to $319.3 million in the
nine months ended September 30, 1996. The most significant portion of this
increase related to pro forma lodging revenues, which consists of rooms, food
and beverage and other departmental revenues. Pro forma lodging revenues
increased by $43.1 million, or 17.7%, from $243.2 million in the nine months
ended September 30, 1995 to $286.3 million in the nine months ended September
30, 1996. The increase was due to the overall improvement in the operating
performance of the Pro Forma Hotels, which was attributed to a change in
franchise affiliations for certain of the Owned Hotels, fewer hotel renovations
in 1996 than in 1995 and an overall improvement in economic conditions in
certain geographic regions. This increase in lodging revenues was consistent
with the increase in the Pro Forma Hotels' room revenues of $37.0 million, or
22.5%, to $201.7 million in the nine months ended September 30, 1996. For the
Owned Hotels, the average room rate increased by 8.7%, from $86.25 during the
nine months ended September 30, 1995 to $93.79 during the nine months ended
September 30, 1996, and occupancy
22
<PAGE> 27
increased from 74.1% to 74.9%, respectively. This resulted in a 9.9% increase in
REVPAR to $70.23 during the nine months ended September 30, 1996. The Atlanta,
Chicago, Colorado Springs, Denver and the Philadelphia markets had the most
significant impact on average rate and occupancy growth. Pro forma management
and related fees increased by $3.0 million, or 9.8%, from $30.0 million in the
nine months ended September 30, 1995 to $33.0 million in the nine months ended
September 30, 1996 due primarily to the performance improvement of existing
managed hotels and incremental revenues associated with the net addition of new
hotels, many of which provide for incentive management fees and utilize the
Company's other contractual services. Such contractual services include
insurance services, purchasing and renovation services, MIS support, central
accounting, leasing, and training and relocation programs.
Pro forma lodging expenses, which consist of rooms, food and beverage,
property costs and other departmental expenses, increased by $15.8 million, or
9.3%, from $170.2 million in the nine months ended September 30, 1995 to $186.0
million in the nine months ended September 30, 1996. The pro forma operating
margin for the Pro Forma Hotels increased from 30.0% during the nine months
ended September 30, 1995 to 35.1% during the nine months ended September 30,
1996. The increase was attributed to the increase in revenues and the overall
improvement in operating performance and operating efficiencies of the Pro Forma
Hotels.
General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel support
services, as well as general corporate expenses. Pro forma general and
administrative expenses increased by $1.2 million, or 10.8%, from $11.2 million
in the nine months ended September 30, 1995 to $12.4 million in the nine months
ended September 30, 1996. Pro forma general and administrative expenses as a
percentage of pro forma revenues decreased slightly to 3.9% during the nine
months ended September 30, 1996 compared to 4.1% during the nine months ended
September 30, 1995 as a result of operating leverage.
Pro forma payroll and related benefits expenses increased by $1.0 million,
or 8,6%, from $12.7 million in the nine months ended September 30, 1995 to $13.7
million in the nine months ended September 30, 1996. The increase was due
primarily to the addition of new employees related to the growth of the
Company's hotel management business. Pro forma payroll and related benefits
expenses as a percentage of pro forma revenues decreased to 4.3% during the nine
months ended September 30, 1996 compared to 4.6% in the nine months ended
September 30, 1995.
Pro forma depreciation and amortization increased by $2.6 million, or
13.0%, from $19.7 million in the nine months ended September 30, 1995 to $22.3
million in the nine months ended September 30, 1996.
Pro forma operating income increased by $14.5 million, or 35.1%, from $41.5
million in the nine months ended September 30, 1995 to $56.0 million in the nine
months ended September 30, 1996. Accordingly, pro forma operating margin
increased from 15.2% during the nine months ended September 30, 1995 to 17.5%
during the nine months ended September 30, 1996. As discussed above, the
improvement in the pro forma operating margin was attributed to the increase in
pro forma revenues and the overall decrease in pro forma operating expenses as a
percentage of pro forma revenues.
The pro forma income tax expense of $13.3 million in the nine months ended
September 30, 1996 and $7.4 million in the nine months ended September 30, 1995
was computed as if the Company were subject to federal and state income taxes
for the entire period, based on an effective tax rate of 38%.
As a result of the changes noted above, pro forma net income increased by
$7.4 million, or 51.9%, from $14.3 million in the nine months ended September
30, 1995 to $21.7 million in the nine months ended September 30, 1996.
Accordingly, pro forma net income margin increased from 5.2% during the nine
months ended September 30, 1995 to 6.8% during the nine months ended September
30, 1996.
HISTORICAL NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO HISTORICAL NINE
MONTHS ENDED SEPTEMBER 30, 1995
Total revenues increased by $60.9 million, or 185.1%, from $32.9 million in
the nine months ended September 30, 1995 to $93.8 million in the nine months
ended September 30, 1996. The most significant portion of this increase related
to lodging revenues, which increased by $58.0 million due to the operations of
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<PAGE> 28
the Owned Hotels acquired through September 30, 1996. Net management fees
increased by $2.5 million, or 13.0%, from $19.4 million in the nine months ended
September 30, 1995 to $21.9 million in the nine months ended September 30, 1996
due to the addition of 35 new management contracts and increased revenues
associated with the performance improvement of existing managed hotels. The
increase in net management fees was partially offset by the loss of 28
management contracts primarily due to the divestiture of hotels by third-party
hotel owners. Other management-related fees increased slightly from $13.5
million in the nine months ended September 30, 1995 to $13.9 million in the nine
months ended September 30, 1996.
Lodging expenses were $38.9 million in the nine months ended September 30,
1996 due to the operations of the Owned Hotels acquired through September 30,
1996. The operating margin of the Owned Hotels acquired through September 30,
1996 was 33.0% during the nine months ended September 30, 1996.
General and administrative expenses increased by $0.7 million, or 12.0%,
from $6.5 million in the nine months ended September 30, 1995 to $7.2 million in
the nine months ended September 30, 1996. The increase was due primarily to
incremental expenses associated with the growth of the Company's business and
the acquisitions of the Owned Hotels. General and administrative expenses as a
percentage of revenues decreased to 7.7% during the nine months ended September
30, 1996 compared to 19.7% during the nine months ended September 30, 1995 as a
result of the operations of the Owned Hotels acquired through September 30,
1996.
Payroll and related benefit expenses increased by $1.5 million, or 13.0%,
from $11.1 million in the nine months ended September 30, 1995 to $12.6 million
in the nine months ended September 30, 1996. The increase was related to the
addition of corporate management and staff personnel as the Company's portfolio
of hotels for which it provides management and other services grew. Payroll and
related benefits expenses as a percentage of revenues decreased to 13.4% during
the nine months ended September 30, 1996 compared to 33.8% during the nine
months ended September 30, 1995 as a result of the operations of the Owned
Hotels acquired through September 30, 1996.
Non-cash compensation of $11.9 million in the nine months ended September
30, 1996 resulted from the issuance of 785,533 shares of restricted stock to
certain executives and key employees of the Company in consideration of the
cancellation of options issued by the Company's predecessor, Interstate Hotels
Corporation ("IHC"), in 1995.
Depreciation and amortization increased by $4.8 million, or 162.0%, from
$3.0 million in the nine months ended September 30, 1995 to $7.8 million in the
nine months ended September 30, 1996 due to the acquisitions of the Owned Hotels
through September 30, 1996.
Operating income (exclusive of non-cash compensation) increased by $15.0
million, or 121.5%, from $12.3 million in the nine months ended September 30,
1995 to $27.3 million in the nine months ended September 30, 1996. Operating
margin decreased from 37.5% during the nine month ended September 30, 1995 to
29.1% during the nine months ended September 30, 1996. This decrease in the
operating margin reflects the inclusion of the operating expenses of the Owned
Hotels acquired through September 30, 1996 which were not reflected in the
Company's results prior to their respective acquisition dates in 1996.
The Company had $0.2 million of interest income in the nine months ended
September 30, 1995 compared to $5.3 million of interest expense in the nine
months ended September 30, 1996 due primarily to additional borrowings related
to the Acquisition (as defined in "Certain Relationships and Related
Transactions--The Organization and Initial Public Offering").
Other, net of $0.3 million in the nine months ended September 30, 1996,
consisted primarily of minority interests.
Income tax expense of $11.1 million in the nine months ended September 30,
1996 was computed based on an effective tax rate of 38% and includes deferred
tax expense of $6.3 million which was recorded in June, 1996, coinciding with
the date IHC changed its tax status from a pass-through entity for tax purposes
to a C corporation.
An extraordinary loss of $7.6 million, net of a deferred tax benefit of
$3.9 million, in the nine months ended September 30, 1996 resulted from the
early extinguishment of certain indebtedness and was related to the write-off of
deferred financing fees, prepayment penalties and loan commitment fees.
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<PAGE> 29
As a result of the changes noted above, a net loss of $8.3 million was
recorded in the nine months ended September 30, 1996 compared to net income of
$12.5 million in the nine months ended September 30, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEARS DECEMBER 31, 1994 AND 1993
Total revenues increased by $11.1 million, or 43.7%, from $36.7 million in
1993 to $45.0 million in 1994 and by $8.3 million, or 22.6%, from 1994 to $45.0
million in 1995. Net management fees increased by $3.1 million from 1993 to 1994
and $4.7 million from 1994 to 1995 due to the addition of 83 new management
contracts in 1994 and 43 new management contracts in 1995 and increased revenues
associated with existing managed hotels. These increases were partially offset
by the loss of 29 management contracts in each of 1994 and 1995 due primarily to
the divestiture of hotels by third-party owners. In 1994, $1.3 million, or 42%,
of the increase in net management fees resulted from increases in base
management fees, and $1.8 million, or 58%, of the increase resulted from
increases in incentive management fees due to performance improvement of
existing contracts and the increase in the number of new contracts that provide
for incentive management fees. In 1995, $3.1 million, or 66%, of the increase in
net management fees resulted from increases in base management fees, and $1.6
million, or 34%, of the increase resulted from increases in incentive management
fees. Purchasing and other fees increased by $4.0 million, or 115.0%, from 1993
to 1994 and $2.8 million, or 38.0%, from 1994 to 1995 due primarily to
incremental revenues related to additional franchise/marketing representation
fees related to the acquisition of the Colony portfolio in May 1994 ($0.8
million in 1994 and $0.7 million in 1995) (see "Business and Properties--The
Company's Portfolios") and incremental revenues related to the net addition of
new hotels, many of which utilize the Company's purchasing, project management
and other contractual services ($1.2 million in 1994 and $2.1 million in 1995).
Additionally, an increase of $2.0 million from 1993 to 1994 was associated with
the creation of training and relocation programs for managed hotels. Insurance
income increased by $4.1 million from 1993 to 1994 and by $0.7 million from 1994
to 1995 due partially to the net addition of new managed hotels that elected to
participate in the Company's insurance program and the addition in mid-1994 of a
health care financial indemnity policy to the coverage of the Company's
subsidiary, Northridge Insurance Company ("Northridge").
General and administrative expenses increased by $3.2 million, or 64.2%,
from $5.1 million in 1993 to $8.3 million in 1994 and by $1.5 million, or 18.2%,
from 1994 to $9.8 million in 1995. These increases were due primarily to
incremental expenses associated with the acquisition of the Colony portfolio
($0.8 million in 1994 and $1.3 million in 1995). Additionally, an increase of
$1.3 million from 1993 to 1994 was associated with the creation of training and
relocation programs for managed hotels. The remaining increases were attributed
to incremental expenses related to the growth of the Company's hotel management
business. General and administrative expenses as a percentage of revenues
decreased to 21.8% during 1995 compared to 22.6% in 1994. During 1993, general
and administrative expenses as a percentage of revenues were 19.8%.
Payroll and related benefits expenses increased by $2.1 million, or 20.3%,
from $10.3 million in 1993 to $12.4 million in 1994 and by $3.1 million, or
24.5%, from 1994 to $15.5 million in 1995. These increases were due primarily to
incremental expenses associated with the acquisition of the Colony portfolio and
the growth of the Crossroads portfolio ($0.9 million in 1994 and $1.5 million in
1995). See "Business and Properties-- The Company's Portfolios." An increase of
$1.3 million in 1995 related to an increase in incentive bonuses paid to certain
executive officers and development staff. The remaining increases were
attributed to incremental expenses related to the growth of the Company's hotel
management business and the new training and relocation programs. Payroll and
related benefits expenses as a percentage of revenues increased to 34.4% during
1995 compared to 33.8% in 1994. During 1993, payroll and related benefits
expenses as a percentage of revenues were 40.4%.
Operating income increased by $5.4 million, or 78.8%, from $6.9 million in
1993 to $12.3 million in 1994 and by $3.2 million, or 25.9%, from 1994 to $15.5
million in 1995. Operating margins were 27.0%, 33.6% and 34.5% in 1993, 1994 and
1995, respectively. The improvement in the operating margins was attributed to
the overall increase in revenues and improvements in operating expenses as
percentages of revenues.
As a result of the changes noted above, net income (exclusive of income tax
expense) was $6.9 million, $12.4 million and $15.8 million in 1993, 1994 and
1995, respectively, which represent increases of $5.5 million,
25
<PAGE> 30
or 79.3%, from 1993 to 1994 and $3.4 million, or 27.8%, from 1994 to 1995. Net
income margins were 27.0%, 33.7% and 35.2% in 1993, 1994 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash from operations and
borrowings under its credit facilities. Net cash provided by operations was
$14.7 million in the nine months ended September 30, 1996, compared to $16.7
million in the nine months ended September 30, 1995. The Company's cash and cash
equivalent assets were $24.3 million and $8.4 million at September 30, 1996 and
1995, respectively.
At September 30, 1996, the Company's total indebtedness was $294.3 million,
comprised of $193.8 million of term loans, $70.7 million of borrowings under the
Acquisition Facility, $29.3 million of mortgage indebtedness encumbering six
Owned Hotels owned by a partnership in which the Company owns a 75% interest and
representing the other partner's portion of such indebtedness, and $0.5 million
of notes payable in connection with the acquisition of Colony Hotels and
Resorts. In October 1996, $53.4 million of additional indebtedness was incurred
and the Company's credit facilities were amended by converting $100 million of
outstanding borrowings (including $29.3 million of the indebtedness incurred in
October 1996), which were incurred primarily to finance hotel acquisitions, to
term loans under the Company's credit facilities and increasing the Company's
revolving loan capacity under the Acquisition Facility from $100 million to $200
million. The Company also modified its credit facilities to increase the
Company's permitted nonrecourse indebtedness to fund acquisitions from $50
million to $100 million and to permit the Company to incur up to $150 million of
subordinated indebtedness. For a discussion of the Company's credit facilities
and other indebtedness, see "Indebtedness of the Company."
Management of the Company believes that, with respect to its current
operations, the Company's cash on hand and funds from operations will be
sufficient to cover its reasonably foreseeable working capital, ongoing capital
expenditure and debt service requirements. In the nine months ended September
30, 1996, the Company spent $2.7 million on capital expenditures at the Owned
Hotels. The Company's capital expenditure budget (before acquisitions) for 1997
is $12.3 million, which includes capital expenditures related to the Post-IPO
Acquisitions.
The Company intends to pursue a growth-oriented strategy involving, among
other things, the acquisition of interests in additional hotel properties and
hotel management companies, as well as the acquisition of additional management
contracts (which may from time to time require capital expenditures by the
Company). See "Business and Properties--Growth Strategy." The net proceeds of
this Offering will be used to finance the Pending Acquisitions, to repay
existing indebtedness, for other possible acquisitions and for general corporate
purposes. See "Use of Proceeds." Management believes that the net proceeds of
the Offering, the Acquisition Facility and cash provided by operations will be
sufficient to pursue the Company's acquisition strategy and to fund its other
presently foreseeable capital requirements. However, the Company believes that,
absent a presently unforeseen change, additional acquisition opportunities will
continue to exist for the foreseeable future and depending upon conditions in
the capital and other financial markets and other factors, the Company may from
time to time consider the issuance of debt or other securities, the proceeds of
which could be used to finance acquisitions, to refinance debt or for other
general corporate purposes.
SEASONALITY
The lodging industry is affected by normally recurring seasonal patterns.
At most of the Company's hotels, demand is higher in the second and third
quarters than during the remainder of the year. Demand also changes on different
days of the week, with Sunday having the lowest occupancy.
INFLATION
The effects of inflation, as measured by fluctuations in the consumer price
index, have not had a material impact on the Company's revenues or net income in
recent years.
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<PAGE> 31
INDEBTEDNESS OF THE COMPANY
As of September 30, 1996, on a pro forma basis after giving effect to the
Pending Acquisitions, the acquisition of the two Owned Hotels acquired since
September 30, 1996 and the Offering, the Company had outstanding indebtedness of
$323.5 million consisting of $293.7 million outstanding under its seven-year
term loan facility (the "Term Loan," and together with the Acquisition Facility,
the "Credit Facilities") with Credit Lyonnais, New York branch ("Credit
Lyonnais"), $29.3 million of mortgage indebtedness encumbering six Owned Hotels
owned by a partnership in which the Company owns a 75% interest and representing
the other partner's portion of such indebtedness (the Company's portion of such
indebtedness being included in the Term Loan) and $0.5 million outstanding under
a note relating to the acquisition of Colony Hotels and Resorts. As of September
30, 1996, on a pro forma basis, there was $200 million of borrowing capacity
under the Acquisition Facility and there were no outstanding borrowings under
the Acquisition Facility.
In connection with the IPO, the Company entered into a credit agreement
with Credit Lyonnais pursuant to which Credit Lyonnais provided a total of $295
million of financing, consisting of the seven-year, $100 million Acquisition
Facility and the $195 million Term Loan. In October 1996, the Acquisition
Facility was increased by converting the borrowings outstanding under the
Acquisition Facility ($100 million) to a term loan (together with the Term Loan,
the "Term Loans") and increasing the revolving loan capacity from $100 million
to $200 million. The Company also modified the Credit Facilities to increase the
Company's permitted nonrecourse indebtedness to fund acquisitions from $50
million to $100 million and to permit the Company to incur an additional $150
million of subordinated indebtedness from third-party lenders.
Amounts outstanding under the Credit Facilities bear interest, at the
Company's option, at the Base Rate (as defined) plus 1% or at a reserve-adjusted
Eurodollar rate for periods of one, two, three or six months, plus 2%. The Base
Rate is the higher of (i) the rate which Credit Lyonnais establishes from time
to time as its reference rate for short-term commercial loans in U.S. dollars
and (ii) the rate which is 0.5% in excess of the overnight cost of funds of
Credit Lyonnais. The Company is required to have in effect interest rate
protection agreements for $135 million of indebtedness under the Credit
Facilities. The Company presently has in effect interest rate protection
agreements for varying terms for the entire amount of the Term Loan and $100
million of the $200 million Acquisition Facility. These agreements cap the
Eurodollar rate at 6% on all the indebtedness subject to these agreements except
for $54 million of such indebtedness which is subject to an interest rate swap
agreement that fixes the Eurodollar rate at 5.8%
The Term Loans mature in 2003 and require scheduled quarterly principal
amortization payments over the seven-year term. The Acquisition Facility matures
in 2003 and will be reduced by quarterly commitment reductions totalling $10
million per quarter after the first five years.
The Credit Facilities contain customary covenants and certain financial
covenants, including, without limitation, the following: (a) the Company must
maintain, on a quarterly basis, a minimum annual EBITDA of $65 million in 1996,
$70 million in each of 1997 and 1998 and $75 million each year thereafter; (b)
the Company must maintain, on a quarterly basis, a consolidated net worth of (x)
$190 million plus (y) the aggregate of 80% of its consolidated net income, if
positive, for each fiscal quarter ending after the initial borrowing date (which
percentage reduces to 70% for each fiscal quarter after 1998) plus (z) 60% of
each increase to consolidated net worth resulting from each public offering of
Common Stock; (c) the Company must not permit its modified senior total
indebtedness leverage ratio (defined as the ratio of the Company's total
indebtedness (excluding up to $30 million in certain nonrecourse indebtedness
and $150 million in permitted subordinated indebtedness) to the Company's
EBITDA) to be greater than 4.50 to 1 at the end of each fiscal quarter of 1996
and 1997, 4.25 to 1 at the end of each fiscal quarter of 1998 and 1999, 4.00 to
1 at the end of each fiscal quarter of 2000 and 2001, 3.75 to 1 at the end of
each fiscal quarter of 2002, or 3.50 to 1 at the end of each fiscal quarter of
2003; (d) the Company must not permit its modified total indebtedness ratio
(defined as the ratio of the Company's total indebtedness (excluding up to $30
million in certain non-recourse indebtedness) to the Company's EBITDA) to be
greater than 5.25 to 1 at the end of the fourth quarter of 1996 and at the end
of each quarter of 1997, 5.00 to 1 at the end of each quarter of 1998 and 1999,
4.75 to 1 at the end of each quarter of 2000 and 2001, 4.50 to 1 at the end of
each quarter of 2002, and 4.25 to 1 at the end of each quarter until maturity;
(e) the Company must not permit its interest coverage ratio (defined as the
ratio of the Company's EBITDA to the Company's total interest expense on its
outstanding
27
<PAGE> 32
indebtedness) to be less than 2.50 to 1 at the end of each fiscal quarter of
1996 and 1997, or 2.75 to 1 at the end of each fiscal quarter thereafter; (f)
the Company must not permit its debt service coverage ratio (defined as the
ratio of the Company's EBITDA to the Company's total interest expense plus
scheduled principal payments on its outstanding indebtedness) to be less than
2.00 to 1 at the end of each fiscal quarter of 1996 and 1997, or 2.25 to 1 at
the end of each fiscal quarter thereafter; and (g) the Company must not permit
its adjusted debt service coverage ratio (defined as the ratio of the Company's
EBITDA plus lease expense to the Company's total interest expense, scheduled
principal payments on its outstanding indebtedness plus lease expense) to be
less than 1.50 to 1 at the end of any quarter. All of the foregoing tests are to
be made using data from the four consecutive fiscal quarters then last ended.
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<PAGE> 33
BUSINESS AND PROPERTIES
GROWTH STRATEGY
The Company believes that its prospects for continuing sustainable growth
are enhanced by a number of competitive advantages, including: (i) a proven
ability to source management contract and property acquisition opportunities
resulting from the Company's large and geographically diverse hotel portfolio;
(ii) excellent relationships with hotel investors and owners due to the
Company's disciplined management techniques and its track record of improving
the profitability of the hotels it manages; (iii) the Company's flexible
branding strategy, which permits the Company to own and operate multiple hotels
under different brands within the same geographic market and to operate more
opportunistically within existing and new markets than hotel companies committed
to particular flags; (iv) the Company's corporate infrastructure and the
operational synergies resulting therefrom, which permit the Company to lower the
unit costs of its services and assure the implementation of quality management
systems on a Company-wide basis; (v) the strength and depth of its management
team, the senior members of which have an average tenure of 23 years in the
lodging industry and 12 years with the Company; (vi) the stability of the
Company's cash flow resulting from the Company's large portfolio of hotel
contracts and the Owned Hotels; and (vii) the Company's conservative
capitalization and ability to access additional equity and debt capital to
finance future growth on a cost-effective basis.
Proven Ability to Source Acquisitions. As a result of its experienced
management and the size and geographic diversity of its hotel portfolio, as well
as an in-depth knowledge of individual markets, the Company has access to
acquisition opportunities not available to all its competitors. Information
about acquisition opportunities is obtained through contacts at every level of
the Company, including hotel general managers, regional managers and senior
management. Industry association contacts also provide information about
potential acquisitions. In addition, management's knowledge of existing hotels
throughout the United States and personal relationships with numerous hotel
owners and operators provide the Company with extensive information regarding
acquisition opportunities. Of the nine Post-IPO Acquisitions, all but one of
such acquisition opportunities were identified through the Company's own
contacts and not through third-party brokers.
Relationships with Hotel Owners. The Company enjoys excellent
relationships with hotel investors and owners due to its disciplined management
techniques and track record of improving profitability of the hotels it manages.
These relationships provide a source of management contract and property
acquisition opportunities and help the Company to renew its management
contracts.
Flexibility Afforded by Multiple Branding. The Company is able to own and
operate hotels under a variety of brand names. This flexibility allows the
Company to own and operate multiple hotels under different brands within the
same geographic market and provides the Company with competitive and economic
advantages such as the ability optimally to position hotels within their local
markets, to provide a broad base of national reservation and marketing systems
and to pursue acquisitions within both its existing and new markets more freely
than hotel operating companies that are committed to particular flags. The
Company currently operates hotels under 21 different brand names, and the nine
Post-IPO Acquisitions bear six different flags.
Corporate Infrastructure and Operational Synergies. By virtue of providing
management and related services to 161 hotels, the Company achieves significant
synergies and economies of scale not available to many of its competitors. The
Company's management seeks to maintain a blend of centralized control over
strategic issues while encouraging decentralized decision-making with respect to
appropriate operational issues. All personnel, marketing, cash management and
other policies are formulated at the Company's central corporate offices and are
provided to its hotels. The Company's corporate offices also provide accounting,
legal, insurance and finance functions, institute management information systems
and coordinate the preparation of budgets. This centralization of control over
strategic matters allows the Company's hotels to be operated with fewer
employees and frees hotel management personnel to focus on matters having the
greatest impact on the performance of the particular hotel and on the quality of
its guests' hotel stays.
Strong Management Team. Collectively, the Company's senior management has
an average of 23 years of experience in the lodging industry and an average of
12 years with the Company. Following consummation
29
<PAGE> 34
of the Offering, the nine members of the Company's senior management will
beneficially own an aggregate of 20.4% of the outstanding shares of Common
Stock. As a result, the interests of the Company's senior management will be
closely aligned with the interests of the Company's shareholders. See
"Management-- Compensation Plans and Arrangements."
Stable Cash Flow. The Company believes that it will have long-term
financial stability and significant sources of internal financing for future
growth as a result of its ownership of the Owned Hotels, its substantial
portfolio of hotel management agreements and its expected growth in its hotel
portfolio. On a pro forma basis, 68.8% of the Company's total revenues in the
nine months ended September 30, 1996 were generated from the Owned Hotels. The
Company also expects to generate stable cash flow from net management fees. As
of October 15, 1996, the Company had 35 management agreements (not including
management contracts with respect to the Owned Hotels) with remaining terms of
five years or more. These agreements generated net management fees of $7.6
million, constituting 2.4% of the Company's total pro forma revenues in the nine
months ended September 30, 1996. In addition, the Company has a favorable
renewal record for its management agreements, which has contributed to the
stability of the Company's cash flow. Since 1990, over 90% of the Company's
management agreements for upscale hotels have been renewed at expiration,
excluding management agreements covering properties that have been sold to
unaffiliated parties.
Access to Capital. The Company believes that in order to continue to
maximize the value of its shareholders' equity and to execute its growth
strategy, it is essential to implement and periodically review a diversified
financing strategy that (i) incorporates long-term, secured and unsecured
corporate debt, (ii) minimizes exposure to fluctuations of interest rates and
(iii) maintains maximum flexibility to manage the Company's short-term cash
needs. The Company believes that its capital structure will be conducive to and
will allow flexibility for the growth which the Company seeks to achieve. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Indebtedness of the Company."
BUSINESS STRATEGY
The Company attributes its steady growth to the disciplined pursuit of four
core strategies: (i) adding new hotels to the Company's portfolio of upscale and
luxury properties through acquisitions; (ii) adding new management contracts and
selectively acquiring hotel management businesses; (iii) maximizing the
profitability of the Company's acquired hotels by repositioning them within
their local markets and applying to them the Company's proven management
techniques; and (iv) providing superior, innovative hotel management services,
resulting in increased investment value for the hotel owner. As a result of
these strategies, the Company believes that it is well-positioned to take
advantage of strong industry trends. The Company believes that the United States
lodging industry will continue to experience an excess of demand growth over
supply growth in the upscale and luxury segments, which are the segments in
which the Company primarily operates.
Hotel Acquisitions and Selective New Construction. The Company anticipates
that it will be able to grow through the acquisition of hotels having attractive
economic prospects that are suitable for application of the Company's operating
strategies. The Company has acquired nine Owned Hotels since its IPO, and it
anticipates consummating the Pending Acquisitions in the fourth quarter of this
year. See "Recent Developments--Pending Acquisitions." The Company will continue
to seek to acquire well-located and constructed hotels at significant discounts
to replacement cost and at attractive returns with potential for cash flow
growth and long-term capital appreciation. In addition, the Company anticipates
that it may make partial investments in hotel properties through joint ventures
with strategic business partners or through equity contributions or secured
loans. The Company also believes that its extensive real estate and finance
industry contacts will continue to facilitate the Company's ability to identify,
evaluate and negotiate potential acquisition opportunities.
The Company intends to selectively develop new mid-scale and upper economy
hotels in the future. In particular, the Company will evaluate the competitive
environment, including market room and occupancy rates, site location and
marketing, financial and operating issues, as well as the opportunity to realize
operating efficiencies from the ownership of multiple hotels, in any market
under consideration for new development. The Company has entered into a
partnership agreement with a property developer to construct a 121 room
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<PAGE> 35
Courtyard by Marriott(R) near New Haven, Connecticut. Construction of the hotel
is expected to commence in November 1996 and be completed by September 1997. The
Company expects to acquire an approximate 54% interest in the partnership in
exchange for a contribution estimated to be approximately $2.4 million.
Addition of New Hotel Management Agreements. The increasing profitability
of the Company's hotel management business has been enhanced by its ability to
win new hotel management agreements and by the operating leverage inherent in
the hotel management business. Through the application of its proven operating
principles, the Company has achieved consistent annual growth, even through
industry downturns. Since 1990, over 90% of the Company's management agreements
for upscale hotels have been renewed at expiration, excluding management
agreements covering properties that have been sold to unaffiliated parties. The
Company has increased the net number of hotel management agreements in its
portfolio every year since 1987.
The following table demonstrates the significant growth since 1990 in the
net number of hotels under management of the Company:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996*
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Hotels under management at beginning of year.... 30 39 49 53 82 136 150
Hotels added:
Interstate portfolio....................... 4 12 12 15 18 16 10
Crossroads portfolio....................... 5 3 2 28 33 21 18
Colony portfolio........................... -- -- -- -- 32 6 3
Hotels lost:
Interstate portfolio....................... -- (3) (6) (4) (10) (7) (2)
Crossroads portfolio....................... -- (2) (4) (10) (10) (17) (14)
Colony portfolio........................... -- -- -- -- (9) (5) (4)
---- ---- ---- ---- ---- ---- -----
Hotels under management at end of year.......... 39 49 53 82 136 150 161
==== ==== ==== ==== ==== ==== ====
</TABLE>
- ------------------
* Through October 15, 1996. Does not include hotels the Company manages as a
result of the Equity Inns Transaction. Includes the Owned Hotels.
Since its IPO, the Company has increased the net number of hotels under its
management from 154 at June 20, 1996 to 161 (including the Owned Hotels) at
October 15, 1996. Upon consummation of the Equity Inns Transaction, an
additional 52 management contracts were added to the Company's portfolio. See
"Recent Developments--Equity Inns Transaction." Through the efforts of its
internal business development staff, comprised of ten salespeople, the Company
will continue to seek to acquire new hotel management agreements and hotel
management companies that operate hotels suitable for integration into the
Company's portfolios. These individuals will continue to identify new business
by conducting comprehensive market studies, developing extensive call lists,
employing direct solicitation techniques and seeking referrals from third-party
owners of the Company's managed hotels.
The Company believes that it will continue to win new hotel management
agreements as a result of its reputation for integrity, its track record of
delivering superior financial returns for hotel owners and investors and its
willingness to structure key terms of hotel management agreements to satisfy
hotel owner objectives. In particular, the Company believes that its stable
relationships with institutional hotel investors will facilitate the Company's
growth by generating new hotel management agreements within the institutions'
existing hotel portfolios, as well as for hotels newly acquired by them.
The Company also believes that the operation of hotels in the United States
is highly fragmented, with many hotels being operated by managers who lack the
experience and expertise to operate, market and maintain such hotels profitably.
The Company believes that the industry will experience consolidation as existing
owners and operators continue to experience financial and operating difficulties
and sell or lease hotels to professional management companies such as the
Company.
31
<PAGE> 36
By operating hotels in multiple segments of the lodging industry, the
Company increases its opportunities to compete for new hotel management
agreements. Although the Company remains committed to participating in each
segment of the lodging industry and, accordingly, will seek to add hotel
management agreements to each of its three portfolios as opportunities arise,
the Company believes that the greatest opportunities for expansion exist in the
luxury and upscale segments of the lodging industry. Many luxury and upscale
hotels have been underperforming and could greatly benefit from the Company's
strong management and proven operating strategies, without compromising the
quality and service expectations of the hotels' guests.
Improvement of Performance of Owned Hotels. The Company operates its
portfolio hotels efficiently by utilizing regional and centralized support
services to control costs, efficiently allocating resources and maintaining
consistently high quality services to guests. In addition, the Company believes
that significant opportunities exist to enhance the value of some of the Owned
Hotels, either through modest upgrading or through major renovation.
Improving Value for Hotel Owners. The Company has consistently generated
operating results superior to the hotel industry through a business philosophy
emphasizing the creation and enhancement of investment value for the hotel owner
and the employment of innovative management strategies designed to maximize
owner value. The Company's operating strategies involve specific procedures and
services designed to achieve revenue and asset value enhancement, cost control
and guest and employee satisfaction. After entering into a new hotel management
agreement or acquiring a new hotel, the Company implements an operating plan
based on a comprehensive operations and market-position study which identifies
key areas requiring immediate attention to ensure that resources are devoted to
the most critical areas first. Key areas may include such departments as rooms,
food and beverage, sales and marketing, general and administrative and
maintenance. The Company then develops a detailed action plan to implement the
new standards of operation. If necessary, certain departments are quickly and
aggressively streamlined to maximize efficiencies and reduce costs. The
Company's system of investigation, prioritization and immediate action is
designed to ensure that the hotel will achieve optimal performance as rapidly as
possible.
After implementation of initial improvements, the Company continues to seek
methods to increase revenue and operating cash flow from the hotels. Quality of
facilities and customer service is continually reviewed and emphasized by
management. As the Company gains experience with the operations of a particular
hotel, the marketing plan and budget for the hotel are refined to increase the
occupancy rate and ADR at the hotel, while maintaining effective cost controls.
In addition, regional and general managers are provided incentives through cash
bonuses to achieve revenue and operating goals.
OPERATIONS
The Company provides a wide variety of services to its portfolio hotels.
Such services include those traditionally provided by major hotel operating
companies, such as sales and marketing support, financial planning and
reporting, rooms, food and beverage and engineering services, human resources
and training programs and legal support, as well as certain specialized support
services, such as purchasing, project management, leasing and risk management.
The Company's services are provided by hotel personnel who are employed,
trained and supported by the Company's experienced corporate personnel. Most of
these services are provided by the Company in consideration of the management
fees payable to the Company, which are based upon a percentage of gross revenues
and/or operating profits. The Company's management agreements generally provide
for payment to the Company of a base fee equal to a specific percentage of the
hotel's gross revenues. The Company's base fees range from 1% to 6% of gross
revenues, with an average of approximately 2.4%. In addition, some of the
Company's contracts provide for payment of an incentive fee based on operating
profits or net operating cash flow if certain operating profit or cash flow
levels are achieved. The Company's incentive fees generally range from 10% to
20% of operating profits or net operating cash flow. For the nine months ended
September 30, 1996, on a pro forma basis, base fees represented approximately
84.5% of the Company's net management fees, and incentive fees represented the
remaining 15.5% of net management fees. Hotel owners are responsible for all
operating expenses, capital expenditures and working capital requirements
related to the managed hotels. The Company charges the third-party owners
incremental fees for providing purchasing,
32
<PAGE> 37
project management and equipment leasing services. The following is a brief
description of each of the services generally provided by the Company to its
managed hotels:
Purchasing. The Company assists its portfolio hotels with purchases of a
wide variety of goods and services, including perishable food, consumable
supplies, dry goods, linens, cable television systems, telephone systems,
advertising agency services, independent marketing services, consulting
services, printing services, furniture, fixtures and equipment. The Company's
purchasing service is a key element of its operating system and its ability to
improve the profitability of its portfolio hotels. As the largest independent
hotel management company in the United States, the Company has significant
leverage to negotiate competitive prices on goods and services from both local
and national vendors. As a result, the Company is able to pass along substantial
savings to its hotels. The purchasing services provided by the Company are
offered at a fee based on merchandise value.
Project Management. The Company assists and advises its portfolio hotels on
all aspects of renovation and reconstruction projects, including design,
budgeting, scheduling, purchasing, systems, materials and contracting. The
Company is actively involved in each stage of a project, from planning through
completion of construction. The project management services provided are offered
on a contracted fee basis.
Leasing. The Company offers equipment leasing services to its portfolio
hotels for furniture and office equipment such as computers, telephone equipment
and photocopiers. The Company generally leases such items for a term of three to
six years. The Company also provides some shorter-term rentals. The Company
offers equipment leasing services primarily as a convenience for its hotels. As
of October 15, 1996, the Company provided leasing services to 29 of the hotels
in the Company's portfolio.
Risk Management. Through its subsidiary, Northridge, the Company offers its
portfolio hotels reinsurance and risk management services. The Company purchases
insurance from major insurance carriers at attractive rates due to the Company's
high volume purchasing and exceptional claims history. The Company then provides
its hotels the opportunity to participate in the policy at prices and coverages
more advantageous than third-party hotel owners could otherwise obtain. As of
October 15, 1996, over 72.3% of the Company's managed properties participated in
its insurance program, which currently covers over $2.8 billion in insurable
values. In conjunction with its risk management services and in order to
minimize its operating liabilities, the Company sets policies regarding the
standards of operation to which all of its portfolio hotels and their employees
must adhere.
Sales and Marketing Support. The Company provides its portfolio hotels with
traditional sales and marketing support, as well as customized assistance, to
identify and attract potential business, leisure and convention guests.
Rooms Services. The Company assists its portfolio hotels in developing
quality standards and operating procedures for room operations, while focusing
on controlling expenses and maximizing profits. Such assistance includes:
- Developing the concept, design and staffing requirements for the front
office, housekeeping, property maintenance, laundry, valet,
telecommunications, garage and other guest services departments;
- Establishing quality standards for products and services and evaluating
performance against these standards;
- Conducting training conferences and workshops for rooms department
employees at all levels;
- Creating operating procedures, training manuals, reference guides and
training programs;
- Developing, maintaining and auditing front office software applications
and training staff in their proper usage; and
- Selecting equipment and supplies such as linens, guest room amenities and
uniforms.
Food and Beverage Services. The Company assists its portfolio hotels in
developing high quality, profitable food and beverage operations as well as
innovative approaches to food and beverage concepts and designs. Such assistance
includes:
- Providing educational and technical training materials and seminars on
how to improve the technical skills of employees;
33
<PAGE> 38
- Establishing quality levels and management guidelines for new and
existing food and beverage facilities in accordance with area market
expectations;
- Providing ongoing research and development of systems and equipment;
- Creating and implementing system-wide promotional programs to enhance
hotel revenues;
- Conducting business audits that analyze current financial performance
against industry norms, providing a detailed review of existing
procedures and programs and setting a plan for achieving goals in
business growth and cost containment; and
- Providing low cost access to the freshest and highest quality food
products and beverages available in the market.
Human Resources and Training Programs. The Company's human resources
department is responsible for designing the employee selection process, creating
competitive compensation programs and developing appropriate training programs
at all levels. The Company's human resources department has developed 26
training programs to introduce new employees to the Company's methods of
operation and to augment their skills. The training programs focus on such areas
as supervisory development, middle management training, career planning,
technical training and executive development. In addition, Company employees are
required to attend outside courses developed by a variety of managerial and
technical organizations both within and outside the industry.
Financial Planning and Reporting. The Company provides its portfolio hotels
with a wide variety of accounting, financial reporting and financial planning
services that assist the hotel owners in making informed decisions.
Management Information Systems. The Company provides its portfolio hotels
with access to key operating information and technologies as well as on-going
systems support. Access to key information enables the Company's hotels to set
operating objectives and measure their operating performance on a daily basis.
Engineering Services. The Company provides its portfolio hotels with
expertise in physical plant systems such as mechanical, plumbing, electrical,
fire and life safety and swimming pools.
Legal Support. The Company's in-house legal department provides its
portfolio hotels with legal support with respect to employment law issues,
liquor licensing and various vendor and service contract negotiations.
THE COMPANY'S PORTFOLIOS
The Company has achieved superior operating results as compared to other
hotel operating companies as a result of its ability to successfully manage a
highly diverse group of hotels and other properties, both in terms of their
geographic location and the segment of the lodging industry they serve. The
Company operates hotels throughout the United States and in Canada, Mexico,
Israel, the Caribbean, Thailand, Panama and Russia. The Company also manages
hotels in each segment of the lodging industry--luxury, upscale, mid-scale,
economy and budget. In addition, the Company operates hotels in diverse
geographic locations and market segments which makes the Company less
susceptible to unfavorable general and regional economic conditions.
To facilitate the management of its diverse portfolio of hotels, the
Company has divided its hotels among three separate portfolios--Interstate
(luxury and upscale), Crossroads (mid-scale, upper economy and budget) and
Colony (hotels and resorts, including condominium and timeshares)--as indicated
in the following table and as described more fully below.
<TABLE>
<CAPTION>
NUMBER NUMBER % OF 1996 NET
THE COMPANY'S PORTFOLIOS OF HOTELS OF ROOMS MANAGEMENT FEES(1)
---------------------------------- --------- -------- ------------------
<S> <C> <C> <C>
Interstate........................ 84 27,240 84%
Crossroads........................ 54 7,038 11
Colony............................ 23 2,353 5
--- ------ ---
Total........................ 161 36,631 100%
=== ====== ===
</TABLE>
- ------------------
(1) For the nine months ended September 30, 1996.
34
<PAGE> 39
Interstate Portfolio. Interstate, the original and largest of the Company's
three hotel management portfolios and the core of its hotel management business,
consists of luxury and upscale hotels, suites and resorts, comprised of 84
hotels with a total of 27,240 rooms at October 15, 1996. Among Interstate's top
performing hotels are the 20 Owned Hotels contained in this portfolio. These
Owned Hotels, which contain an aggregate of 6,049 rooms, produced superior
operating results in 1995 and the first nine months of 1996, achieving an
average occupancy rate of 73.4% and 75.1%, respectively, ADR of $87.39 and
$95.97, respectively, and REVPAR of $64.16 and $72.07, respectively, compared to
industry averages for upscale hotels of a 68.5% occupancy rate, ADR of $80.38,
and REVPAR of $55.06, for 1995. The Company expects further improvement in the
results of operations of the Owned Hotels as the effects of the repositioning of
certain of them are realized.
The Company manages many of the Interstate portfolio hotels under brand
names such as Colony(R), Doubletree(TM), Embassy Suites(R), Hilton(TM), Holiday
Inn(R), Marriott(R), Radisson(TM), Sheraton(TM) and Westin(TM). Among the
well-known hotels in the Interstate portfolio are: The Charles Hotel at Harvard
Square in Cambridge, Massachusetts; the Don CeSar Beach Resort in St. Petersburg
Beach, Florida; the Hay-Adams Hotel in Washington, D.C.; the Westin Bonaventure
in Los Angeles, California; Marriott's Casa Marina Resort in Key West, Florida;
the Marriott at Sawgrass Resort in Ponte Vedra Beach, Florida; and the Westin
Resort Miami Beach (formerly the Doral Ocean Beach Resort) in Miami Beach,
Florida. Interstate's hotels are geographically diversified, located in 23
states throughout the United States and in Canada.
Interstate's hotels serve a diverse customer base comprised of travelers
involved in business, leisure and convention and meeting activities. Business
travelers, which represent the largest and most profitable customer group for
Interstate's hotels, have increased as a proportion of total customers since
1991 due to the Company's strategic efforts to attract more business travelers
and the general improvement in the economy.
Interstate's hotels are typically large upscale hotels or resorts with high
volume food, catering and beverage operations and ample meeting space. These
hotels provide guests with high quality rooms, facilities and guest services
such as concierge services, room service, health clubs, business centers, voice
mail, in-room movies and other amenities. Many of the hotels in the Interstate
portfolio also provide quality leisure activities. For example, the Marriott at
Sawgrass Resort offers golfing privileges at the famous TPC Stadium golf course.
35
<PAGE> 40
The following table provides a complete listing of the hotels in the
Interstate portfolio as of October 15, 1996:
INTERSTATE PORTFOLIO HOTELS
<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ----- ----
<S> <C> <C> <C>
Colony
Toronto Colony Hotel Toronto, Ontario 717 Dec. 93
Delta
Toronto Delta Meadowvale Mississauga, Ontario 374 Feb. 96
Doubletree
Doubletree Resort Surfside Clearwater Beach, FL 428 Dec. 94
Embassy Suites
Schaumburg Embassy Suites (1) Schaumburg, IL 209 Dec. 95
Embassy Suites Phoenix North (formerly
Fountain Suites) (1)(2) Phoenix, AZ 314 Aug. 96
Hilton
Denver Hilton South (1) Greenwood Village, CO 305 Dec. 94
Ft. Lauderdale Airport Hilton (1) Dania, FL 388 Dec. 95
Gaithersburg Hilton Gaithersburg, MD 301 June 93
Newark Hilton Gateway Newark, NJ 253 Sep. 95
Parsippany Hilton Parsippany, NJ 508 Sep. 91
Huntington Hilton (1) Melville, NY 302 Dec. 95
Holiday Inn and Crowne Plaza
San Francisco Holiday Inn Golden Gateway San Francisco, CA 498 Aug. 92
Seattle Crowne Plaza Seattle, WA 415 Dec. 92
Marriott
Marriott's Laguna Cliffs Resort Dana Point, CA 346 Oct. 94
San Diego Marriott Suites Downtown San Diego, CA 264 Jan. 90
San Diego Marriott Mission Valley (3) San Diego, CA 350 Dec. 88
San Francisco Marriott Fisherman's Wharf San Francisco, CA 255 Oct. 88
Warner Center Marriott (1) Woodland Hills, CA 463 Feb. 94
Colorado Springs Marriott (1) Colorado Springs, CO 310 Feb. 89
Trumbull Marriott (3) Trumbull, CT 321 Dec. 85
Boca Raton Marriott Boca Raton, FL 256 Aug. 87
Ft. Lauderdale Marriott North (3) Ft. Lauderdale, FL 321 Dec. 86
Marriott's Casa Marina Resort Key West, FL 312 Dec. 78
Marriott's Reach Resort (3) Key West, FL 149 Dec. 93
Orlando Airport Marriott Orlando, FL 484 Nov. 88
Orlando Marriott Orlando, FL 1,064 Nov. 88
Marriott at Sawgrass Resort Ponte Vedra Beach, FL 516 Aug. 88
Atlanta Marriott North Central (1) Atlanta, GA 287 Feb. 95
Boston Marriott Andover (1) Andover, MA 293 Dec. 95
Boston Marriott Westborough (1)(2) Westborough, MA 223 July 91
Minneapolis Marriott Southwest (3) Minnetonka, MN 320 Nov. 88
St. Louis Marriott West (3) St. Louis, MO 300 Jan. 92
Charlotte Marriott Executive Park Charlotte, NC 298 Sep. 83
Albany Marriott (3) Albany, NY 360 July 85
Syracuse Marriott East Syracuse, NY 250 July 77
</TABLE>
36
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
<S> <C> <C> <C>
Cincinnati Marriott (3) Cincinnati, OH 352 Mar. 86
Harrisburg Marriott (3) Harrisburg, PA 348 June 80
Pittsburgh Marriott City Center (4) Pittsburgh, PA 400 July 96
Pittsburgh Airport Marriott (3) Pittsburgh, PA 314 Nov. 87
Pittsburgh Green Tree Marriott (3) Pittsburgh, PA 467 Nov. 72
Marriott Suites at Valley Forge (1) Valley Forge, PA 229 Dec. 95
Philadelphia Marriott West (1) West Conshohocken, PA 286 Oct. 91
Providence Marriott (3) Providence, RI 345 Nov. 75
Chattanooga Marriott Chattanooga, TN 343 Jan. 88
Memphis Marriott Memphis, TN 320 Oct. 87
Arlington Dallas Marriott Arlington, TX 310 Dec. 92
Houston Marriott North at Greenspoint (1) Houston, TX 391 May 88
Roanoke Airport Marriott (1)(2) Roanoke, VA 320 Aug. 96
Radisson
Manhattan Beach Radisson Plaza Hotel Manhattan Beach, CA 380 Jan. 91
Radisson Plaza Hotel San Jose Airport
(1)(2) San Jose, CA 185 Dec. 95
Lisle Radisson (1)(5) Lisle, IL 242 Nov. 93
Englewood Radisson Hotel (1)(2) Englewood, NJ 192 Sept. 96
Sheraton
Sheraton Biscayne Bay Miami, FL 598 Oct. 86
Westin
Westin Bonaventure Los Angeles, CA 1,369 Dec. 95
Westin Resort Miami Beach (formerly the
Doral Ocean Beach Resort) (1)(2) Miami Beach, FL 417 Oct. 96
Independent
Lexington Hotel Phoenix, AZ 180 Nov. 93
Pala Mesa Resort Fallbrook, CA 133 June 93
Colonial Inn La Jolla, CA 75 Sep. 94
Cliffs at Shell Beach Resort Shell Beach, CA 165 Oct. 94
Goodwin Hotel Hartford, CT 124 Jan. 92
Hay-Adams Hotel Washington, DC 143 June 95
Don CeSar Beach Resort (6) St. Petersburg Beach, FL 275 Dec. 92
The Charles Hotel at Harvard Square Cambridge, MA 296 Feb. 85
Harbor View Hotel Edgartown, MA 124 July 94
Kelley House Edgartown, MA 59 July 94
Harbor House Hotel Nantucket, MA 112 July 94
Wharf Cottages and Marina Nantucket, MA 23 July 94
White Elephant Inn Nantucket, MA 96 July 94
Mission Point Resort Mackinac, MI 235 July 94
The Inn at Great Neck Great Neck, NY 85 May 96
Waterford Hotel Oklahoma City, OK 197 Dec. 94
The Bellevue Hotel Philadelphia, PA 170 Dec. 94
Founders Inn and Conference Center Virginia Beach, VA 240 Nov. 95
Fort Magruder Inn and Conference Center
(1) Williamsburg, VA 303 Oct. 95
</TABLE>
37
<PAGE> 42
<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
---- -------- ------- ------------
<S> <C> <C> <C>
Other Contracts (7)
Ritz Carlton Phoenix Phoenix, AZ 280 July 96
Hyatt Regency Burlingame San Francisco, CA 793 Jan. 96
Hartford Marriott Farmington Farmington, CT 381 Jan. 95
Crowne Plaza Westshore Tampa, FL 272 Jan. 93
Hyatt Charlotte South Park Charlotte, NC 262 Jan. 93
Charlotte Marriott City Center Charlotte, NC 431 Jan. 93
The Mayfair New York New York, NY 201 July 96
Hyatt Fairlakes Fairfax, VA 316 Jan. 93
Hyatt Dulles Herndon, VA 317 Jan. 93
Tysons Corner Marriott (1) Tysons Corner, VA 390 Dec. 95
------
Total Interstate Rooms 27,240
Total Interstate Hotels 84
</TABLE>
- ------------------
(1) Denotes an Owned Hotel.
(2) Denotes a Post-IPO Acquisition.
(3) An affiliate of Milton Fine (but not the Company) owns a minority interest
in this hotel.
(4) The Company owns an approximate 5% limited partnership interest in this
hotel.
(5) Includes an office center containing approximately 150,000 square feet.
(6) The Company owns an approximate 13% limited partnership interest in this
hotel.
(7) The Company provides certain services, such as asset management or
consulting services but not property management services, to these hotels.
Crossroads Portfolio. The Company's Crossroads portfolio consists primarily
of mid-scale, upper economy and budget hotels, motels and inns comprised of 54
hotels with a total of 7,038 rooms at October 15, 1996, excluding 48 hotels and
motels with a total of 5,811 rooms in which the Company acquired a 15-year
leasehold interest and management contracts for eight hotels with a total of 776
rooms in connection with the Equity Inns Transaction. See "Recent
Developments--Equity Inns Transaction." The Company established the Crossroads
portfolio in 1990 to broaden the scope of its hotel management business beyond
upscale hotels. In the nine months ended September 30, 1996, the Crossroads
portfolio accounted for approximately $2.7 million, or 11.4%, of the Company's
net management fees.
Crossroads manages hotels under brand names such as Best Western(TM),
Comfort Inn(TM), Courtyard by Marriott(R), Days Inn(TM), Fairfield Inn(TM),
Hilton(TM), Holiday Inn(R), Howard Johnson(TM), Marriott(R), Radisson(TM),
Ramada(TM), Sleep Inn(TM) and Super 8(TM) and also manages several independent
hotels. Crossroads' hotels are located in 18 states, primarily on the east and
west coasts. The hotels in the Crossroads portfolio appeal to value-oriented
business and leisure travelers. They are typically mid-scale and upper economy
hotels with limited food, catering and beverage operations and little or no
meeting space. Crossroads' hotels provide guests with modest rooms, facilities
and guest services. Amenities may include complimentary continental breakfasts,
pool facilities, facsimile services and cable television.
38
<PAGE> 43
The following table provides a complete listing of the hotels in the
Crossroads portfolio as of October 15, 1996 and does not include the hotels the
Company manages or leases as a result of the Equity Inns Transaction:
CROSSROADS PORTFOLIO HOTELS
<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
<S> <C> <C> <C>
Best Western
Canton Best Western University Inn Canton, NY 102 Apr. 95
Comfort Inn
Comfort Inn Murray Hill Murray Hill, NY 128 Nov. 95
Courtyard by Marriott
Marina Del Rey Courtyard by Marriott Marina Del Rey, CA 276 May 95
Albany Courtyard by Marriott Albany, NY 78 Jan. 96
Days Inn
College Park Days Inn College Park, MD 68 Feb. 95
Chambersburg Days Inn Chambersburg, PA 107 May 94
Virginia Beach Days Inn Airport Virginia Beach, VA 148 Nov. 94
Fairfield Inn
Vicksburg Fairfield Inn Vicksburg, MS 81 July 95
Chambersburg Fairfield Inn Chambersburg, PA 74 Aug. 96
Hilton
Meadowlands Hilton Secaucus, NJ 295 Aug. 91
Columbus Hilton (1)(2) Columbus, GA 177 Oct. 96
Holiday Inn
Walnut Creek Holiday Inn Walnut Creek, CA 148 May 95
Ft. Lauderdale Beach Galleria Holiday Inn Ft. Lauderdale, FL 240 Dec. 94
Madeira Beach Holiday Inn Madeira Beach, FL 149 Dec. 94
Fort Wayne Holiday Inn Ft. Wayne, IN 147 Sep. 93
Brentwood Holiday Inn (1)(2) Brentwood, TN 247 July 96
Richmond Holiday Inn Richmond, VA 280 Aug. 94
Howard Johnson
Greenwich Howard Johnson Greenwich, CT 103 Sep. 93
Clearwater Central Howard Johnson Clearwater Beach, FL 193 Dec. 94
Ithaca Howard Johnson Ithaca, NY 72 Sep. 93
Latham Howard Johnson Latham, NY 146 Sep. 93
Utica Howard Johnson Utica, NY 147 Sep. 93
Marriott
Blacksburg Marriott (1)(2) Blacksburg, VA 148 Aug. 96
Radisson
Rochester Radisson Inn Rochester, NY 171 Sep. 93
Ramada
Santa Ana Ramada Grand Avenue Hotel Santa Ana, CA 182 Nov. 94
Ramada Inn Gulfview Clearwater Beach, FL 289 Dec. 94
Ft. Lauderdale Airport Ramada Inn Ft. Lauderdale, FL 298 Dec. 94
Niles Ramada Inn Niles, MI 127 Feb. 95
Bordentown Ramada Inn Bordentown, NJ 95 Feb. 95
</TABLE>
39
<PAGE> 44
<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
<S> <C> <C> <C>
Super 8
Flagstaff Super 8 Motel Flagstaff, AZ 86 Dec. 94
Arcata Super 8 Motel Arcata, CA 62 Dec. 94
Indio Super 8 Motel Indio, CA 70 Dec. 94
Red Bluff Super 8 Motel Red Bluff, CA 72 Dec. 94
Mission Bay Super 8 Motel San Diego, CA 117 Apr. 96
Selma Super 8 Motel Selma, CA 40 Dec. 94
Willows Super 8 Motel Willows, CA 41 Dec. 94
Yucca Valley Super 8 Motel Yucca Valley, CA 48 Dec. 94
Rock Falls Super 8 Motel Rock Falls, IL 63 Apr. 94
Somerset Super 8 Motel Somerset, KY 63 Apr. 96
Poplar Bluff Super 8 Motel Poplar Bluff, MO 63 Apr. 96
Miner/Sikeston Super 8 Motel Sikeston, MO 63 Apr. 96
Sleep Inn
Destin Sleep Inn Destin, FL 77 Sep. 96
Sarasota Sleep Inn Sarasota, FL 80 Sep. 96
Tallahassee Sleep Inn Tallahassee, FL 79 Sep. 96
Ocean Springs Sleep Inn Ocean Springs, MS 78 Sep. 96
Independent
Mirage Springs Hotel and Casino Desert Hot Springs, CA 110 Mar. 96
Azure Tides Inn Sarasota-Lido Key, FL 59 Dec. 95
Mears Great Oak Landing Chestertown, MD 28 June 95
College Park Royal Pine Inn College Park, MD 114 Feb. 95
Government Hotel Charlotte, NC 195 Dec. 95
Brookstown Inn Winston-Salem, NC 71 July 94
Plainview Plaza Hotel Plainview, NY 182 Sep. 93
Virginia Beach Pavilion Towers Virginia Beach, VA 292 Dec. 95
Other Contracts (3)
Greensboro Ramada Inn Airport Greensboro, NC 169 Oct. 94
------
Total Crossroads Rooms 7,038
Total Crossroads Hotels 54
</TABLE>
- ------------------
(1) Denotes an Owned Hotel.
(2) Denotes a Post-IPO Acquisition.
(3) The Company provides certain services, such as accounting or consulting
services but not property management services, to this hotel.
Colony Portfolio. The Company's Colony portfolio consists of upscale and
mid-scale leisure hotels and resorts, condominiums and timeshares, comprised of
23 properties with a total of 2,353 rooms at October 15, 1996. The Company
purchased the assets of Colony Hotel and Resorts in May 1994 for $1 million,
payable in five equal annual installments through 1999. The portfolio of resorts
enabled the Company to expand its presence in the resort market and establish a
presence in the global market. In the nine months ended September 30, 1996, the
Colony portfolio accounted for approximately $1.1 million, or 4.8%, of the
Company's net management fees.
Colony operates most of its properties under the brand name "A Colony Hotel
and Resort." Colony's managed hotels and other properties are located in six
states (including vacation destinations such as Hawaii, Colorado and Vermont) as
well as Mexico, Israel, the Caribbean, Thailand, Panama and Russia.
40
<PAGE> 45
The properties in the Colony portfolio appeal primarily to leisure
travelers. They include upscale and mid-scale properties with a wide range of
room types, facilities and guest services. Most of Colony's properties provide
amenities such as golf, tennis, beach facilities and/or water or snow skiing,
depending on the location.
The following table provides a complete listing of the properties in the
Colony portfolio as of October 15, 1996:
COLONY PORTFOLIO PROPERTIES
<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------- ------------
<S> <C> <C> <C>
Hotels and Resorts
Hawaii Polo Inn (1) Honolulu, HI 72 June 94
Lawaii Beach Resort Koloa, Kauai, HI 171 June 94
Maui El Dorado Resort Lahaina, HI 102 June 96
Banyan Harbor Lihue, Kauai, HI 148 June 95
Alana Waikiki Hotel Waikiki Beach, HI 313 Feb. 96
Lake Lure Golf Resort Lake Lure, NC 47 June 94
Montauk Yacht Club Resort and Marina Montauk, NY 107 June 94
Stratton Village Lodge Stratton Mountain, VT 91 June 94
Stratton Mountain Inn Stratton Mountain, VT 119 June 94
Hotel Tverskaya Moscow, Russia 122 Sep. 95
Hotel Suites Central Park Panama City, Panama 68 July 96
Kamala Bay Terrace Phuket, Thailand 117 June 94
Vacation Villa Resorts
Ocotillo Lodge Palm Springs, CA 124 Nov. 95
Mountainside at Silvercreek Silvercreek, CO 120 June 94
Kona Bali Kai Resort Kailua-Kona, HI 66 June 94
Poipu Kai Resort Koloa, Kauai, HI 85 June 94
Golden Eagle Resort (1) Stowe, VT 89 June 94
Colony Tel Aviv Resort (1) Tel Aviv, Israel 80 June 94
San Felipe Marina and Spa (1) Baja, Mexico 52 June 94
Puerto Aventuras Beach Hotel Cancun, Mexico 30 Sep. 95
Point Pleasant St. Thomas, Virgin Islands 110 Sep. 95
Timothy Beach Resort St. Kitts, West Indies 60 June 94
Caribees Resort St. Lucia, West Indies 60 Oct. 95
------
Total Colony Rooms 2,353
Total Colony Properties 23
</TABLE>
- ------------------
(1) Denotes a property for which the Company provides only franchise and/or
marketing services.
41
<PAGE> 46
GEOGRAPHIC DIVERSIFICATION
The geographic distribution of the Company's hotel portfolio reflects the
Company's belief that geographic diversification helps to insulate its portfolio
from local market fluctuations that are typical for the lodging industry. The
following table summarizes certain information with respect to the distribution
of the Company's hotel portfolio as of October 15, 1996:
<TABLE>
<CAPTION>
% OF PRO FORMA 1996 % OF PRO FORMA
NUMBER NUMBER % OF MANAGEMENT 1996 OWNED
STATE/COUNTRY OF HOTELS OF ROOMS TOTAL ROOMS REVENUES (1) HOTEL REVENUES
- ----------------------------- --------- -------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
Florida (2) 22 6,944 19.0% 24.0% 12.5%
California (3) 25 6,566 17.9 16.8 11.0
Pennsylvania (4) 9 2,395 6.5 6.8 10.3
Massachusetts (5) 8 1,226 3.3 6.4 9.0
New York (6) 14 2,331 6.4 5.8 6.8
New Jersey (7) 5 1,343 3.7 4.1 2.7
Tennessee (8) 3 910 2.5 4.1 2.3
Canada 2 1,091 3.0 3.1 --
North Carolina 7 1,473 4.0 3.0 --
Missouri 3 426 1.2 2.6 --
Connecticut 4 929 2.5 2.5 --
Rhode Island 1 345 0.9 2.3 --
Washington 1 415 1.1 2.0 --
Virginia (9) 10 2,754 7.5 1.9 14.2
Russia 1 122 0.3 1.8 --
Ohio 1 352 1.0 1.7 --
Texas (10) 2 701 1.9 1.6 4.6
Hawaii 7 957 2.6 1.4 --
Maryland 4 511 1.4 1.4 --
Minnesota 1 320 0.9 1.2 --
Oklahoma 1 197 0.5 0.9 --
Arizona (11) 4 860 2.3 0.8 3.9
Michigan 2 362 1.0 0.7 --
Colorado (12) 3 735 2.0 0.5 9.1
District of Columbia 1 143 0.4 0.5 --
Vermont 3 299 0.8 0.4 --
Israel 1 80 0.2 0.3 --
Virgin Islands 1 110 0.3 0.3 --
Indiana 1 147 0.4 0.3 --
Mississippi 2 159 0.4 0.2 --
West Indies 2 120 0.3 0.2 --
Illinois (13) 3 514 1.4 0.2 7.3
Kentucky 1 63 0.2 0.1 --
Georgia (14) 2 464 1.3 -- 6.3
Thailand 1 117 0.3 * --
Mexico 2 82 0.2 * --
Panama 1 68 0.2 * --
--- ------ ----- ----- -----
Totals 161 36,631 100.0% 100.0% 100.0%
=== ====== ===== ===== =====
</TABLE>
- ------------------
* Less than 0.1%
(1) Represents the percentage of the Company's net management fees and asset
management fees for the nine months ended September 30, 1996, including the
Owned Hotels.
(2) Includes two Owned Hotels, containing 805 rooms.
(3) Includes two Owned Hotels, containing 648 rooms.
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<PAGE> 47
(4) Includes two Owned Hotels, containing 515 rooms.
(5) Includes two Owned Hotels, containing 516 rooms.
(6) Includes one Owned Hotel, containing 302 rooms.
(7) Includes one Owned Hotel, containing 192 rooms.
(8) Includes one Owned Hotel, containing 247 rooms.
(9) Includes four Owned Hotels, containing 1,161 rooms.
(10) Includes one Owned Hotel, containing 391 rooms.
(11) Includes one Owned Hotel, containing 314 rooms.
(12) Includes two Owned Hotels, containing 615 rooms.
(13) Includes two Owned Hotels, containing 451 rooms.
(14) All hotels in this state are Owned Hotels, and management fees relating
thereto are eliminated on a pro forma basis.
NATIONAL FRANCHISE AFFILIATIONS
As an independent hotel operating company, the Company can choose the
franchises that will provide the greatest benefits to the hotels it manages.
Factors considered when selecting a franchise include brand recognition, access
to national reservations systems, national direct sales efforts, volume
purchasing agreements, and technical and business assistance. As of October 15,
1996, 134 hotels were operated under a national or regional franchise system.
Operating under multiple franchise systems provides the Company with further
diversification, less dependence on the continued popularity of one brand and
less vulnerability to new requirements of any individual franchise system. The
following chart summarizes certain information with respect to the franchise
affiliations of the hotels in the Company's portfolio as of October 15, 1996:
<TABLE>
<CAPTION>
NUMBER NUMBER % OF
FRANCHISE OF HOTELS OF ROOMS TOTAL ROOMS
- --------------------------------- --------- -------- ------------
<S> <C> <C> <C>
Marriott (1) 39 13,517 36.9%
Colony 24 3,070 8.4
Hilton (2) 8 2,529 6.9
Holiday Inn and Crowne Plaza (3) 9 2,396 6.5
Westin (4) 2 1,786 4.9
Hyatt 4 1,688 4.6
Radisson (5) 5 1,170 3.2
Ramada 6 1,160 3.2
Super 8 12 788 2.2
Howard Johnson 5 661 1.8
Sheraton 1 598 1.6
Embassy Suites (6) 2 523 1.4
Doubletree 1 428 1.2
Delta 1 374 1.0
Courtyard by Marriott 2 354 1.0
Days Inn 3 323 0.9
Sleep Inn 4 314 0.9
Ritz Carlton 1 280 0.8
Fairfield Inn 2 155 0.4
Comfort Inn 1 128 0.3
Best Western 1 102 0.3
Independent (7) 28 4,287 11.6
--- ------ -----
Totals 161 36,631 100.0%
=== ====== =====
</TABLE>
- ------------------
(1) Includes 11 Owned Hotels, containing 3,340 rooms.
(2) Includes four Owned Hotels, containing 1,172 rooms.
43
<PAGE> 48
(3) Includes one Owned Hotel, containing 247 rooms.
(4) Includes one Owned Hotel, containing 417 rooms.
(5) Includes three Owned Hotels, containing 619 rooms.
(6) Includes two Owned Hotels, containing 523 rooms.
(7) Includes one Owned Hotel, containing 303 rooms.
MANAGEMENT
The Company has a distinct corporate culture and management style, which
has evolved over the Company's 35 years of operation. The Company's management
seeks to maintain a blend of centralized control over strategic issues while
encouraging decentralized decision-making with respect to operational issues.
The Company believes that the operational details which determine the quality of
a guest's hotel stay are best managed by on-site hotel personnel.
The Company has a human resources department dedicated to designing the
employee selection process, creating competitive compensation programs and
developing appropriate training programs at all levels. The Company's human
resources department has developed 26 training programs to introduce new
employees to the Company's method of operation and to augment their managerial
skills. The training programs focus on such areas as supervisory development,
middle management training, career planning, technical training and executive
development. In addition, Company employees are required to attend outside
courses developed by a variety of managerial and technical organizations both
within and outside the industry.
The Company's executive officers supervise core departments such as
accounting, management information systems, marketing, central purchasing and
human resources. The corporate office utilizes information systems that track
each hotel's daily occupancy, average room rate and revenues from rooms and food
and beverage operations. By having the latest information available at all
times, management believes it is better able to respond to changes in each
market and control variable expenses to maximize the profitability of each
hotel. The Company's senior management has been with the Company for an average
of 12 years and has an average of 23 years of experience in the lodging
industry. See "Risk Factors--Substantial Reliance on Senior Management."
Following consummation of the Offering, the senior management will beneficially
own 20.4% of the outstanding shares of Common Stock. As a result, the interests
of the Company's senior management will be closely aligned with the interests of
the Company's shareholders. See "Management--Stock Option Grants" and
"--Compensation Plans and Arrangements."
The Company's hotel management business is organized generally around
geographic regions to ensure a close working relationship among individuals at
the Company's hotels and at its corporate offices. Each region is headed by a
Regional Vice President or a Regional Director of Operations who is responsible
for overseeing and monitoring the hotels in his or her respective region to
ensure that they are operating under the specific guidelines established by the
Company. Each Regional Vice President and Regional Director of Operations heads
a team that specializes in sales and marketing, operations and accounting. The
regional teams are responsible for ensuring that the on-site management
personnel adhere to the Company's policies, take full advantage of the Company's
corporate resources and achieve financial and operating targets. The Company's
five Regional Vice Presidents and eight Regional Directors of Operations have
been with the Company an average of seven years.
Each of the Company's hotels is managed by a General Manager and an
Executive Committee, which is comprised of the hotel department heads. In
addition to conducting the day-to-day operations of the hotel, the General
Manager and Executive Committee are responsible for developing and implementing
an accurate, timely and detailed annual budget, comprehensive marketing plan,
capital improvement program, human resources development program and short- and
long-term operating strategies. The General Manager and the Executive Committee
regularly review current activity and discuss overall performance and direction
of key areas of the hotel. The Company's 66 General Managers in the Company's
Interstate division have been with the Company an average of eight years.
44
<PAGE> 49
COMPETITION
The hotel management business is highly competitive. Some of the Company's
competitors may have substantially greater marketing and financial resources
than the Company. Competition among independent hotel management companies has
intensified in the past few years, and, as a result, hotel owners in many cases
have been requesting lower base fees coupled with greater incentive fees or
seeking capital contributions from independent hotel management companies in the
form of loans or equity investments. See "Risk Factors-- Competition for
Management Agreements."
PROPERTIES
The principal executive offices of the Company are located in Pittsburgh,
Pennsylvania and are occupied pursuant to a lease that expires December 31,
1997. The Company is currently renegotiating the term of this lease. In addition
to its executive offices, the Company leases office space in Scottsdale,
Arizona, Honolulu, Hawaii and Orlando, Florida. The Company believes that such
properties are sufficient to meet its present needs and does not anticipate any
difficulty in securing additional space, as needed, on terms acceptable to the
Company.
EMPLOYEES
The Company employs most of the employees at its owned, leased and managed
hotels as well as those at its corporate offices; however, third-party hotel
owners pay the wages and benefits for all the employees in their hotels. As of
October 15, 1996, the Company had approximately 19,500 employees, approximately
19,300 of whom were employees of specific hotels.
Eleven of the properties under the Company's management, employing
approximately 2,300 workers, are subject to labor union contracts. The Company
has not experienced any union strikes or other material labor disruptions.
GOVERNMENT REGULATION
The lodging industry in general, and the Company in particular, is subject
to extensive foreign and U.S. federal, state and local government regulations.
See "Risk Factors--Government Regulation." There are currently no material legal
or administrative proceedings pending against the Company with respect to any
regulatory matters, and the Company believes that it is in compliance in all
material respects with statutory and administrative regulations with respect to
its business.
ENVIRONMENTAL MATTERS
Under various foreign and U.S. 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 certain jurisdictions,
liability may be imposed upon owners or operators of real properties for
personal injury associated with exposure to asbestos containing materials.
Environmental laws also may impose restrictions on the manner in which property
may be used or businesses may be operated, and these restrictions may result in
expenditures and require interruption of such businesses. In connection with its
current or previous operations or previous ownership of hotels, the Company may
be potentially liable for any of these costs under environmental laws and
related common law principles. The Company seeks to reduce its environmental
liability when it acquires hotels by conducting environmental audits of the
subject property. Although the Company currently is not aware of any material
environmental claims pending or threatened against it or any of its managed,
leased, owned or previously owned hotels, no assurance can be given that a
material environmental claim will not be asserted against, and ultimately result
in liability for, the Company. The cost of defending against, and ultimately
paying or settling, claims of liability or of remediating a contaminated
property could have a material adverse effect on the financial condition and
results of operations of the Company. See "Risk Factors--Government Regulation."
All of the Owned Hotels have undergone Phase I environmental assessments
(which generally provide a physical inspection and database search but not soil
or groundwater analyses) within the last 30 months. Phase
45
<PAGE> 50
I environmental assessments were conducted at some but not all of the hotels
that the Company leases as a result of the Equity Inns Transaction. Equity Inns
has agreed to indemnify the Company with respect to environmental liabilities
relating to the leased hotels. In addition, most of the Company's currently
owned, leased and managed hotels have been inspected to determine the presence
of asbestos containing materials ("ACMs"). While ACMs are present in certain of
the properties, operations and maintenance programs for maintaining such ACMs
have been or are in the process of being designed and implemented, or the ACMs
have been scheduled to be or have been abated, at such hotels. The Company
believes that the presence of ACMs in its owned, leased and managed hotels will
not have a material adverse effect on its financial condition and results of
operations; however, there can be no assurance that this will be the case.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is named as defendant
in legal proceedings resulting from incidents at its hotels. The Company
maintains comprehensive liability insurance and also requires hotel owners to
maintain adequate insurance coverage. The Company believes such coverage to be
of a nature and amount sufficient to ensure that it is adequately protected from
any material financial loss as a result of such claims. In addition, the Company
generally is indemnified by third-party hotel owners for lawsuits and damages
against it in its capacity as hotel manager. The Company currently is not the
subject of any legal actions for which it is neither insured nor indemnified and
which the Company believes will individually or in the aggregate have a material
adverse effect on the Company's financial condition or results of operations,
nor to the Company's knowledge is any such litigation threatened.
INTELLECTUAL PROPERTY
Generally, the third-party owners of the Company's portfolio hotels, rather
than the Company, are parties to the franchise agreements to use the trade names
under which the hotels are operated. The Company is a party, however, to
franchise agreements with Marriott International, Inc., Hilton Inns, Inc.,
Promus Hotels, Inc., Radisson Hotels International, Inc., Holiday Inns, Inc. and
Westin Hotel Company. The Company's franchise agreements to use the Marriott(R),
Hilton(TM), Embassy Suites(R), Radisson(TM) and Westin(TM) trade names expire at
varying times generally ranging from 2000 to 2015. The Company has registered,
or has applied with the United States Patent Office for registration of, a
number of trademarks and service marks incorporating the word "Colony," as well
as many other trademarks and service marks used in the Company's business.
Below are trade names utilized by the Company's portfolio hotels pursuant
to license arrangements with national franchisors. Other hotels in the Company's
portfolio operate pursuant to license agreements with these and other
franchisors.
EMBASSY SUITES(R), HILTON(TM), HOLIDAY INN(R), MARRIOTT(R), RADISSON(TM)
AND WESTIN(TM) ARE TRADEMARKS OF THIRD PARTIES, EXCEPT AS DESCRIBED HEREIN NONE
OF WHICH IS AFFILIATED WITH THE COMPANY, WHICH HAVE NOT ENDORSED OR APPROVED THE
OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS
PROSPECTUS. A GRANT OF ANY SUCH FRANCHISE LICENSE FOR CERTAIN OF THE COMPANY'S
PORTFOLIO HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY ANY SUCH FRANCHISOR OR LICENSOR
(OR ANY OF THEIR RESPECTIVE AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE
COMPANY OR THE COMMON STOCK OFFERED HEREBY.
46
<PAGE> 51
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers, and their ages and
positions with the Company as of the date of this Prospectus, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Milton Fine 70 Chairman of the Board
W. Thomas Parrington, Jr. 51 President, Chief Executive Officer and Director
J. William Richardson 49 Chief Financial Officer and Executive Vice
President, Finance and Administration
Robert L. Froman 50 Executive Vice President, Development
Thomas D. Reese 51 Executive Vice President, Operations
Marvin I. Droz 41 Senior Vice President and General Counsel
David J. Fine 32 Director
Michael J. Aranson 52 Director
R. Michael McCullough 57 Director
Thomas J. Saylak 36 Director
Steven J. Smith 56 Director
</TABLE>
Milton Fine co-founded the Company in 1961 and served as its Chief
Executive Officer until April 1996. Mr. Fine is a life trustee of the Carnegie
Institute and Chairman of the Board of the Carnegie Museum of Art. He is also a
member of the Board of Directors of the Andy Warhol Museum in Pittsburgh,
Pennsylvania.
W. Thomas Parrington, Jr. has been with the Company since 1981, serving as
Chief Executive Officer since April 1996, President and Director since 1994 and
as Chief Financial Officer prior thereto.
J. William Richardson has served as the Company's Chief Financial Officer
and Executive Vice President of Finance and Administration since 1994. Mr.
Richardson previously served as Controller and Treasurer of the Company since
1988.
Robert L. Froman has been with the Company since 1984, serving as Executive
Vice President of Development since 1986.
Thomas D. Reese has served as Executive Vice President of Operations since
joining the Company in October 1996. Prior to joining the Company, Mr. Reese was
Vice President of Marriott Hotels, Resorts and Suites from August 1992 to
October 1996 and general manager of the New York Marriott Marquis Hotel prior
thereto.
Marvin I. Droz has served as Senior Vice President and General Counsel
since joining the Company in 1990.
David J. Fine has been a Director of the Company since 1991. Mr. Fine is a
lawyer specializing in the areas of real estate finance and property
acquisition, development and disposition. From 1991 to 1996, Mr. Fine was an
attorney with Eckert, Seamans, Cherin & Mellott, and from 1990 to 1991, he was
an attorney with Gaston and Snow. David J. Fine is the son of Milton Fine.
Michael J. Aranson has been a Director of the Company since 1991 and is an
Officer and Director of Resource Investments, Inc., which functioned as a
private broker-dealer and investment advisory firm, which he co-founded, from
1975 through 1986. Mr. Aranson and his affiliated entities serve as a general
partner of 67 investment partnerships which own commercial real estate in 33
states.
R. Michael McCullough has been a Director of the Company since 1991. Mr.
McCullough is Senior Chairman of Booz, Allen & Hamilton, Inc., an international
management and technology consulting firm.
Thomas J. Saylak has been a Director of the Company since December 1995.
Mr. Saylak is a Senior Managing Director of The Blackstone Group L.P. Prior to
joining Blackstone in 1993, Mr. Saylak was a principal in Trammell Crow
Ventures, the real estate investment, banking and investment management unit of
the Trammell Crow Company, from 1987 to 1993.
47
<PAGE> 52
Steven J. Smith has been a Director of the Company since 1991 and has been
a management consultant since 1989.
Board Committees. The Board has established two directorate committees--a
compensation committee (the "Compensation Committee") and an audit review
committee (the "Audit Review Committee"). The Compensation Committee is
comprised of persons who are not full-time employees of the Company and are not
eligible to receive options or other rights under any employee stock or other
benefit plan (other than plans in which only directors may participate). The
Compensation Committee reviews executive salaries, administers the bonus,
incentive compensation and stock option plans of the Company and approves the
salaries and other benefits of the executive officers of the Company. In
addition, the Compensation Committee consults with the Company's management
regarding pension and other benefit plans and compensation policies and
practices of the Company. The Audit Review Committee reviews the professional
services provided by the Company's independent auditors and the independence of
such auditors from the management of the Company. The Audit Review Committee
also reviews the scope of the audit by the Company's independent auditors, the
annual financial statements of the Company, the Company's system of internal
accounting controls and such other matters with respect to the accounting,
auditing and financial reporting practices and procedures of the Company as it
finds appropriate or as are brought to its attention, and meets from time to
time with members of the Company's internal audit staff. All of the members of
the Audit Review Committee are directors who are not employed by the Company or
any of its affiliates.
Director Nomination Procedures. Nominations for election of directors by
the shareholders may be made by the Board or by any shareholder entitled to vote
in the election of directors generally. The Company's By-Laws require that
shareholders intending to nominate candidates for election as directors deliver
written notice thereof to the Secretary of the Company not later than 60 days in
advance of the meeting of shareholders; provided, however, that in the event
that the date of the meeting is not publicly announced by the Company by
inclusion in a report filed with the Securities and Exchange Commission (the
"Commission") or furnished to shareholders, or by mail, press release or
otherwise more than 75 days prior to the meeting, notice by the shareholders to
be timely must be delivered to the Secretary of the Company not later than the
close of business on the tenth day following the day on which such announcement
of the date of the meeting was so communicated. The Company's By-Laws further
require that the notice by the shareholder set forth certain information
concerning such shareholder and the shareholder's nominees, including their
names and addresses, 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, the class and number of
shares of the Company's stock owned or beneficially owned by such shareholder, a
description of all arrangements or understandings between the shareholder and
each nominee, such other information as would be required to be included in a
proxy statement soliciting proxies for the election of the nominees of such
shareholder and the consent of each nominee to serve as a director of the
Company if so elected. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with these requirements.
Pursuant to the Interstone Stockholders Agreement, the Fine Family Shareholders
have agreed to vote their shares of Common Stock for a director designee
selected by Blackstone. See "Certain Relationships and Transactions--The
Organization and Initial Public Offering."
DIRECTOR COMPENSATION
Directors who are not also officers or employees of the Company ("Outside
Directors") are paid an annual retainer of $15,000 plus $750 for each Board
meeting attended. In addition, members of each directorate committee are paid
$500 ($650 in the case of the committee chairperson) for each committee meeting
attended on days on which the Board does not also meet. Outside Directors are
also be entitled to participate in the Company's Stock Option Plan for
Non-Employee Directors (the "Director Plan").
The Director Plan is administered by a committee (the "Director Plan
Committee") of the Board to be comprised of not less than two directors. The
Director Plan Committee has the power to interpret the Director Plan, to
determine all questions thereunder and to adopt and amend rules and regulations
for the administration of the Director Plan, except that the Director Plan
Committee has no authority, discretion or power to determine the terms or timing
of options to be granted under the Director Plan.
48
<PAGE> 53
Subject to adjustment as described below, the number of shares of Common
Stock issued or transferred, plus the number of shares covered by outstanding
options, under the Director Plan may not exceed 100,000. Shares of Common Stock
covered by an option which is cancelled or terminated will again be available to
be issued or to be the subject of a stock option granted under the Director
Plan. The Director Plan Committee will make or provide for adjustments to the
maximum number of shares issuable pursuant to the Director Plan, the number and
kind of shares of Common Stock or other securities that are covered by
outstanding options and the exercise price applicable to outstanding options as
the Director Plan Committee determines to be equitably required to prevent
dilution or expansion of the rights of optionees which would otherwise result
from any stock dividend, stock split, combination of shares, recapitalization or
other change in the capital structure of the Company, any merger, consolidation,
spin-off, split-off, spin-out, split-up, reorganization, partial or complete
liquidation or other distribution of assets, issuance of warrants or other
rights to purchase securities or any other corporate transaction or event (any
such transaction or event, an "Antidilution Event") which the Director Plan
Committee determines has or may have an effect similar to any of the foregoing.
Any person who becomes an Outside Director will automatically receive at
such time an option to purchase 5,000 shares of Common Stock at an exercise
price per share equal to the market value of a share of Common Stock on the date
the individual first becomes a director (the options described in this sentence
are hereinafter referred to as "Initial Options"). For purposes of the Director
Plan and the Company's Equity Incentive Plan, "fair market value" is the closing
sale price of the shares of Common Stock as reported on the Composite
Transactions Tape of the New York Stock Exchange on the date an Option is
granted or, if there were no sales on such date, on the most recent preceding
date on which sales occurred. Initial Options will become exercisable to the
extent of 34% of the shares covered thereby after the optionee continuously has
served as a director through the next annual shareholders' meeting immediately
following such grant date, and to the extent of an additional 33% of the shares
covered thereby in each of the next two successive years if the optionee has
continuously served as a director in such years. Notwithstanding the foregoing,
if an optionee dies or becomes disabled, all Initial Options held by such
optionee will become immediately exercisable to the extent the Initial Options
would have been exercisable had the optionee remained a director through the
date of the Company's next annual shareholders' meeting. To the extent
exercisable, each Initial Option will be exercisable in whole or in part.
On the date of the annual meeting of the Company's shareholders in each
year, commencing with the 1997 annual meeting, each Outside Director elected at
or continuing his or her term after such meeting automatically will be granted a
non-qualified option to purchase 5,000 shares of Common Stock at an exercise
price per share equal to the fair market value of a share of Common Stock on
such date ("Annual Option"). Annual Options become exercisable on the same basis
as Initial Options.
The exercise price of stock options granted under the Director Plan may be
paid in cash, shares of Common Stock held by the optionee for at least six
months or a combination thereof. The requirement of payment in cash will be
deemed to be satisfied if the optionee provides for a broker who is a member of
the National Association of Securities Dealers, Inc. ("NASD") to sell a
sufficient number of shares of Common Stock being purchased so that the net
sales proceeds equal, at least, the exercise price, and such broker agrees to
deliver the exercise price to the Company not later than the settlement date of
the sale. Shares of Common Stock issued pursuant to the Director Plan may be
authorized but unissued shares or treasury stock. Fractional shares will not be
issued in connection with the exercise of a stock option, and cash in lieu
thereof will be paid by the Company. Each Initial Option and Annual Option (each
an "Option") will terminate on the earliest to occur of (i) three months after
the optionee ceases to serve as a director of the Company for a reason other
than the optionee's death or disability, (ii) one year following the optionee's
death or disability, or (iii) five years from the date the Option becomes
exercisable. Options are not be transferable other than by will or the laws of
descent or distribution and are exercisable during the lifetime of the Optionee
only by the Optionee or, in the event of the Optionee's incapacity, by the
Optionee's guardian or legal representative acting in a fiduciary capacity.
The Board may at any time amend or terminate the Director Plan.
Notwithstanding the foregoing, (i) except for the adjustments described above,
without the approval of the shareholders of the Company, no such amendment will
increase the maximum number of shares covered by the Director Plan, materially
49
<PAGE> 54
modify the requirements as to eligibility for participation in the Director Plan
or otherwise cause the Director Plan or any grant made pursuant thereto to cease
to satisfy any applicable condition of Rule 16b-3 ("Rule 16b-3") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); (ii) no such
amendment will cause any Director to fail to qualify as a "non-employee
director" within the meaning of Rule 16b-3; (iii) provisions relating to the
amount and price of securities to be awarded and the timing of awards under the
Director Plan will not be amended more than once every six months, other than to
comport with changes in the Code, the Employment Retirement Income Security Act
or the rules promulgated thereunder; and (iv) no amendment or termination will
adversely affect any outstanding award without the consent of the director
holding such award.
In general, (i) no income will be recognized by an Optionee at the time an
Option is granted and (ii) at the time of exercise of an Option, ordinary income
will be recognized by the Optionee in an amount equal to the difference between
the Option price paid for the shares and the fair market value of the shares on
the date of exercise. To the extent that an Optionee recognizes ordinary income
in the circumstances described above, the Company will be entitled to a
corresponding deduction provided that, among other things, the income meets the
test of reasonableness, is an ordinary and necessary business expense and is not
an "excess parachute payment" within the meaning of Section 280G of the Code.
Options under the Director Plan will be granted automatically. The number
of Initial Options and Annual Options to be granted will depend on the number of
Outside Directors elected to the Board and the timing of any such election. In
connection with the IPO, each of Messrs. Aranson, McCullough and Smith were
granted Initial Options to purchase 5,000 shares of Common Stock at an exercise
price of $21.00 per share. No Options may be granted under the Director Plan
after April 2006.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid to Milton Fine, who served as Chairman of the Board and Chief
Executive Officer in 1995 but is presently Chairman of the Board, and each of
the four other most highly compensated executive officers of the Company in 1995
(collectively, the "Named Executive Officers"). The information in the table
gives effect to the ratio applied to the exchange of shares of common stock of
the Company's predecessor, IHC, for shares of Common Stock of the Company in the
Organization (as defined in "Certain Relationships and Transactions--The
Organization and Initial Public Offering").
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS PAYOUTS COMPENSATION(1)
- ------------------------------ -------- -------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Milton Fine................... $159,896 $ -- -- $ -- $50,000
Chairman of the Board
W. Thomas Parrington, Jr...... 313,781 378,000 227,906 2,600 18,000
President and Chief
Executive
Officer (2)
J. William Richardson......... 216,608 259,929 136,744 3,250 15,000
Chief Financial Officer and
Executive Vice President,
Finance and Administration
Robert L. Froman.............. 225,163 181,666 136,744 -- --
Executive Vice President,
Development
Marvin I. Droz................ 174,720 200,928 91,163 -- --
Senior Vice President and
General Counsel
</TABLE>
- ------------------
(1) Consists entirely of fees paid for services as a director of the Company's
subsidiary, Northridge.
(2) Mr. Parrington was President and Chief Operating Officer during 1995.
STOCK OPTION GRANTS
The following table sets forth certain information with respect to the
options granted to the Named Executive Officers during 1995 (the "Prior
Options"), all of which were cancelled prior to and in anticipation of the IPO
as described below. The information gives effect to the ratio applied to the
exchange of shares of common stock of IHC for shares of Common Stock of the
Company in the Organization.
OPTION GRANTS IN FISCAL YEAR 1995
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK PRICE
UNDERLYING EMPLOYEES IN MARKET PRICE APPRECIATION FOR OPTION TERM
OPTIONS 1995 FISCAL EXERCISE OR AT DATE OF EXPIRATION -------------------------------------
NAME GRANTED YEAR BASE PRICE GRANT(1) DATE 0% 5% 10%
- ------------------- ---------- ------------ ----------- ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Fine........... -- -- -- -- -- -- -- --
Mr. Parrington..... 227,906 25.5% $ 3.18 $10.65 2013 $1,702,458 $5,116,490 $12,769,573
Mr. Richardson..... 136,744 15.3 5.52 10.65 2013 701,497 2,749,922 7,341,785
Mr. Froman......... 136,744 15.3 4.39 10.65 2013 856,017 2,904,443 7,496,306
Mr. Droz........... 91,163 10.2 10.65 10.65 2013 -- 1,365,622 4,426,875
</TABLE>
- ------------------
(1) Market price has been determined based upon a valuation performed in 1995.
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<PAGE> 56
The following table sets forth information regarding the values of the
Prior Options at December 31, 1995. The information gives effect to the ratio
applied to the exchange of shares of common stock of IHC for shares of Common
Stock of the Company in the Organization.
OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT IN-THE-MONEY OPTIONS
NAME DECEMBER 31, 1995(1) AT DECEMBER 31, 1995(1)(2)
---- -------------------- --------------------------
<S> <C> <C>
Milton Fine............................... -- --
W. Thomas Parrington, Jr. ................ 227,906 $1,702,458
J. William Richardson..................... 136,744 701,497
Robert L. Froman.......................... 136,744 856,017
Marvin I. Droz............................ 91,163 --
</TABLE>
- ------------------
(1) All Prior Options held by the Named Executive Officers at December 31, 1995
were unexercisable.
(2) Market price has been determined based upon a valuation performed in 1995.
Prior to and in anticipation of the IPO, the Prior Options were cancelled
in consideration of the issuance to the Named Executive Officers and certain
other employees of restricted stock of IHC that was exchanged for a total of
785,533 shares of Common Stock, as follows: Mr. Droz: 75,037 shares; Mr. Fine: 0
shares; Mr. Froman: 155,579 shares; Mr. Parrington: 264,034 shares; Mr.
Richardson: 143,286 shares; and all other employees: 147,597 shares.
Outstanding Options. Pursuant to the Company's Equity Incentive Plan, the
Company has granted stock options to purchase an aggregate of 1,043,000 shares
of Common Stock at exercise prices ranging from $21.00 to $26.75 per share. Each
of the options has a ten-year term and becomes exercisable as to one-third of
the shares covered thereby on each of the first three annual anniversaries of
the date of grant so long as the holder thereof remains a full-time employee of
the Company, except that the options become immediately exercisable in the event
of the holder's death, disability or termination of employment by the Company
for Cause (as defined) or in the event that any person or group (other than the
Fine Family) becomes the beneficial owner of more than 30% of the outstanding
shares of capital stock of the Company entitled generally to vote in the
election of directors ("Voting Stock") and, within 12 months after such
acquisition, there is a change in a majority of the members of the Board (any
such event, a "Change in Control"). Unexercised options terminate 30 calendar
days after the holder's termination of employment by the Company, except that
such period is 180 days in the event of disability and 360 days in the event of
death.
Decisions as to the awarding of stock options or other awards are within
the discretion of the Compensation Committee. In connection with year-end
compensation reviews, the Compensation Committee is presently considering
granting stock options to purchase, or other awards with respect to, up to
500,000 shares of Common Stock.
Set forth in the table below are the numbers of shares of Common Stock
underlying the stock options granted under the Equity Incentive Plan to (i) the
Named Executive Officers, (ii) all current executive
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<PAGE> 57
officers as a group, (iii) all current directors who are not executive officers
as a group, and (iv) all employees, including all current officers who are not
executive officers, as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
----------------- ------------------
<S> <C>
Milton Fine................................................. 150,000
Chairman of the Board
W. Thomas Parrington, Jr.................................... 200,000
President and Chief Executive Officer
J. William Richardson....................................... 93,750
Chief Financial Officer and
Executive Vice President,
Finance and Administration
Robert L. Froman............................................ 62,500
Executive Vice President,
Development
Marvin I. Droz.............................................. 62,500
Senior Vice President and
General Counsel
All executive officers, as a group.......................... 643,750
All directors who are not executive officers, as a group.... --
All employees, including officers who are not executive
officers, as a group........................................ 399,250
</TABLE>
COMPENSATION PLANS AND ARRANGEMENTS
Management Bonus Plan. The Company has established a Management Bonus Plan
under which all key management employees who are directly involved in the growth
and success of the Company and its subsidiaries, including the Named Executive
Officers, are eligible to receive bonuses based upon achievement of specified
targets and goals for the Company and the individual employee. Bonus awards may
not exceed 50% to 120% of the executive's annual base salary and 20% of each
executive's bonus award will be payable in the form of shares of Common Stock,
which will be subject to restrictions and forfeiture provisions similar to those
applicable to the Outstanding Restricted Stock. Subject to adjustment as
provided in the Management Bonus Plan, the number of shares that may be issued
or transferred under the Management Bonus Plan may not in the aggregate exceed
250,000 shares, which may be shares of original issuance or treasury shares or a
combination thereof. The Management Bonus Plan is administered by the
Compensation Committee or such other committee of the Board as the Board may
appoint.
Executive Loans. In 1996, the Company loaned $2.0 million and $1.0 million
to, respectively, Messrs. Parrington and Richardson (the "Executive Loans"). The
Executive Loans are fully recourse to the borrowers thereunder, mature on June
30, 2006 and bear interest at the adjusted federal rate. If the executive's
employment is terminated by the Company for cause or by the executive for any
reason other than death, disability or circumstances that would entitle the
executive to benefits under his or her change in control agreement (described
below), then the executive's loan would become due and payable in three equal
annual installments commencing with the first anniversary of the date of such
termination. If the executive's employment is terminated for any other reason,
the loan plus accrued interest would be forgiven. If the executive remains
employed by the Company, one-tenth of the principal amount of the Executive
Loans plus the interest for that year will be forgiven on June 30, 1997 and each
of the next nine annual anniversaries thereof.
Deferred Compensation Agreements. In connection with the termination of
certain prior benefit arrangements, each of Messrs. Parrington and Richardson
entered into a deferred compensation agreement. Pursuant to the deferred
compensation agreements, $561,000 and $702,000 will be deposited into a grantor
trust established by the Company for the benefit of, respectively, Messrs.
Parrington and Richardson. Such amounts plus accumulated earnings will be paid
out in ten semiannual payments beginning at the earlier of the
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<PAGE> 58
date of approved retirement from the Company or the attainment of age 60,
provided that the beneficiary thereof performs consulting services to the
Company and does not engage in any competitive activity. See "Certain
Relationships and Related Transactions--Transaction with Officers and Directors"
for a discussion of certain other loans by the Company.
Executive Retirement Plan. Each of the General Managers of the Company's
hotels which are employees of the Company and other employees of the Company
holding job classifications of Vice President or above, including the Named
Executive Officers (collectively, the "Participants"), is eligible to
participate in the Company's executive retirement plan (the "ERP"). The ERP is
intended to be a non-qualified and unfunded plan maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees. Actual participation in the ERP is determined by
the ERP's administrative committee, which is appointed by the Board.
The Company annually contributes 8% of the Participant's base salary and
may make discretionary contributions of up to an additional 5% of the
Participant's base salary. These discretionary contributions are based on the
Company's net increase in earnings per share in a given year. In addition,
Participants are eligible to designate a portion (specified annually by the
Board or the Compensation Committee) of their cash bonus to be contributed to
the ERP.
The funds contributed by the Company or participants are held in a grantor
trust established by the Company. Unless the administrative committee determines
that the amounts contributed to the ERP on behalf of a participant ("Plan
Benefits") are payable earlier, in general a Participant receives his ERP Plan
Benefits one year after his retirement or termination of employment. Plan
Benefits are paid out in a lump sum and are taxable to the Participant as
ordinary income upon receipt.
Stock Purchase Plan. Each full-time employee who has completed 12
consecutive months of employment with the Company, including the Named Executive
Officers but excluding any employee whose customary employment is not for more
than 20 hours per week or more than five months per calendar year, is eligible
to participate in the Company's stock purchase plan (the "Stock Purchase Plan").
The Stock Purchase Plan is intended to satisfy the requirements of Section 423
of the Code. Under the Stock Purchase Plan, participating employees may elect to
authorize the Company to withhold a maximum of 8% of the participating
employee's salary, which amounts will be held in the participating employee's
account and used to purchase Common Stock on a semi-annual basis at a price
equal to a designated percentage from 85% to 100% of the average closing sales
price for Common Stock as reported on the Composite Transactions Tape of the New
York Stock Exchange (except as described below). The designated percentage will
be established semi-annually by the Compensation Committee, which is responsible
for the administration of the Stock Purchase Plan, except that for the period
ending December 31, 1996 the price will be the IPO price (subject to the
limitations described below).
The price paid by a participating employee under the Stock Purchase Plan
for shares of Common Stock may not be less than the lesser of (i) 85% of the
fair market value of such shares on the date of the regular offering of the
right to participate in such plan (the "offering date") and (ii) 85% of the fair
market price of such shares on the date the shares are purchased (the "purchase
date"). The fair market value of the shares available for purchase by a
participating employee (determined as of the offering date) generally may not
exceed $25,000 per calendar year.
Amounts withheld from a participating employee's salary in order to
purchase shares of Common Stock under the Stock Purchase Plan will be taxable as
part of the employee's compensation. However, the purchase of shares under the
Stock Purchase Plan will not itself be a taxable event even if the purchase
price for the shares is less than the fair market value of the shares on either
the offering date or the purchase date. (The difference between the fair market
value, on either the offering date or the purchase date, and the purchase price
is not taxable on the offering date or the purchase date.)
If a participating employee disposes of shares that were purchased under
the Stock Purchase Plan, and the purchase price was less than 100% of the fair
market value of the shares at the offering date, and such disposition is neither
within two years after the offering date nor within one year after the purchase
date (the "holding period"), then the employee will realize ordinary income to
the extent of the lesser of (i) the amount
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<PAGE> 59
by which the fair market value of the shares on the offering date exceeded the
purchase price and (ii) the amount by which the fair market value of the shares
at the time of disposition exceeds the price paid for the shares. Any further
gain, upon a sale of such shares, is taxed as a long-term capital gain. To the
extent the purchase price exceeded the amount realized by an employee upon the
sale of the shares, the employee will have a long-term capital loss.
If, during the holding period, an employee disposes of shares that were
purchased under the Stock Purchase Plan, and the purchase price was less than
100% of the fair market value of the shares at the offering date, then the full
amount of the excess of the fair market value of the shares on the purchase date
over the purchase price will be taxable as ordinary income in the year of sale
(regardless of the market price of the shares at the time of disposition), and
any profit above the amount of such excess upon a disposition by sale will be
taxable as a longterm or short-term capital gain (depending upon how long the
employee has held the shares). Any loss, after including the amount of the
excess of the fair market value of the shares on the purchase date over the
purchase price as ordinary income, will be treated as a capital loss.
If, during the holding period, a participating employee sells or disposes
of shares purchased under the Stock Purchase Plan, the Company will be entitled
to a deduction against ordinary income for the full amount of the compensation
that the employee must report as ordinary income. The Company will not be
entitled to any deduction if the employee sells the shares after the holding
period or dies while owning such shares.
If a participating employee dies prior to disposing of shares purchased
under the Stock Purchase Plan, the employee's tax return for the year of death
must include as ordinary income the lesser of (i) the amount by which the fair
market value of the shares on the offering date exceeded the purchase price or
(ii) the amount by which the fair market value of the shares at the time of
death exceeded the purchase price. If such an amount is required to be included
on the employee's tax return for the year of death, an estate tax deduction may
be available to the estate of the deceased employee.
Any dividends paid on shares purchased under the Stock Purchase Plan must
be reported as ordinary income in the year received.
Employees may resell Common Stock acquired under the Stock Purchase Plan
without restrictions; however, any "affiliate" who acquires Common Stock under
the Stock Purchase Plan may resell only upon compliance with Rule 144 under the
Securities Act, except that the two-year holding period requirement of Rule 144
will not apply. For this purpose, the term "affiliate" includes any
participating employee who directly, or through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Company.
The Stock Purchase Plan reserves 500,000 shares of authorized but unissued
or reacquired Common Stock for purchase thereunder. The Stock Purchase Plan will
remain in effect until terminated at any time by the Board, except that such
termination will be subject to employees' rights to purchase shares in any
outstanding semi-annual offering period.
The Stock Purchase Plan may be amended from time to time by the Board. No
amendment will increase the aggregate number of shares of Common Stock that may
be issued and sold under the Stock Purchase Plan (except for authorizations
pursuant to the antidilution provisions of the Stock Purchase Plan) without
further approval by the Company's shareholders. Furthermore, no amendment that
would cause the Stock Purchase Plan to fail to meet the requirements of Section
423 of the Code will be adopted without shareholder approval.
Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the
"Equity Incentive Plan") is designed to attract and retain qualified officers
and other key employees of the Company. The Equity Incentive Plan authorizes the
grant of options to purchase shares of Common Stock ("Option Rights"), stock
appreciation rights ("Appreciation Rights"), restricted shares ("Restricted
Shares"), deferred shares ("Deferred Shares"), performance shares ("Performance
Shares") and performance units ("Performance Units"). The Compensation Committee
administers the Equity Incentive Plan and determines to whom Option Rights,
Appreciation Rights, Restricted Shares, Deferred Shares, Performance Shares and
Performance Units are to be granted and the terms and conditions, including the
number of shares and the period of exercisability, thereof.
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<PAGE> 60
Subject to adjustment as provided in the Equity Incentive Plan, the number
of shares of Common Stock that may be issued or transferred and covered by
outstanding awards granted under the Equity Incentive Plan may not in the
aggregate exceed 2,400,000 shares, which may be shares of original issuance or
treasury shares or a combination thereof. Officers, including officers who are
members of the Board, and other key employees of and consultants to the Company
and its subsidiaries may be selected by the Compensation Committee to receive
benefits under the Equity Incentive Plan.
The Compensation Committee may grant Option Rights that entitle the
optionee to purchase shares of Common Stock at a price equal to or greater or
less than market value on the date of grant, and the Option Rights may be
conditioned on the achievement of specified performance objectives ("Management
Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted Option Rights and Appreciation Rights, in the
aggregate, for more than 100,000 shares during any calendar year. The
Compensation Committee may provide that the option price is payable at the time
of exercise (i) in cash, (ii) by the transfer to the Company of nonforfeitable,
nonrestricted shares of Common Stock that are already owned by the optionee,
(iii) with any other legal consideration the Compensation Committee may deem
appropriate, or (iv) by any combination of the foregoing methods of payment. Any
grant may provide for deferred payment of the option price from the proceeds of
sale through a broker on the date of exercise of some or all of the shares of
Common Stock to which the exercise relates. Any grant may provide for automatic
grant of reload option rights upon the exercise of Option Rights, including
reload option rights, for shares of Common Stock or any other noncash
consideration authorized under the Equity Incentive Plan, except that the term
of any reload option right shall not extend beyond the term of the Option Right
originally exercised. The Compensation Committee has the authority to specify at
the time Option Rights are granted that shares of Common Stock will not be
accepted in payment of the option price until they have been owned by the
optionee for a specified period; however, the Equity Incentive Plan does not
require any such holding period and would permit immediate sequential exchanges
of shares of Common Stock at the time of exercise of Option Rights. Option
Rights granted under the Equity Incentive Plan may be Option Rights that are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Code, or Option Rights that are not intended to so qualify. Any grant
may provide for the payment of dividend equivalents to the optionee on a
current, deferred or contingent basis or may provide that dividend equivalents
be credited against the option price. No Option Right may be exercised more than
ten years from the date of grant. Each grant must specify the period of
continuous employment with, or continuous engagement of consulting services by,
the Company or any subsidiary that is necessary before the Option Rights will
become exercisable and may provide for the earlier exercise of the Option Rights
in the event of a change of control of the Company or other similar transaction
or event. Successive grants may be made to the same optionee regardless of
whether Option Rights previously granted to him or her remain unexercised.
Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Option Rights. An Appreciation Right represents the right to receive
from the Company the difference (the "Spread"), or a percentage thereof not in
excess of 100%, between the base price per share of Common Stock in the case of
a free-standing Appreciation Right, or the option price of the related Option
Right in the case of a tandem Appreciation Right, and the market value of the
Common Stock on the date of exercise of the Appreciation Right. Tandem
Appreciation Rights may only be exercised at a time when the related Option
Right is exercisable and the Spread is positive, and the exercise of a tandem
Appreciation Right requires the surrender of the related Option Right for
cancellation. A free-standing Appreciation Right must specify a base price,
which may be equal to or greater or less than the fair market value of a share
of Common Stock on the date of grant, must specify the period of continuous
employment, or continuous engagement of consulting services, that is necessary
before the Appreciation Right becomes exercisable (except that it may provide
for its earlier exercise in the event of a change in control of the Company or
other similar transaction or event) and may not be exercised more than ten years
from the date of grant. Any grant of Appreciation Rights may specify that the
amount payable by the Company upon exercise may be paid in cash, Common Stock or
a combination thereof and may either (i) grant to the recipient or retain in the
Compensation Committee the right to elect among those alternatives or (ii)
preclude the right of the participant to receive, and the Company to issue,
Common Stock or other equity securities in lieu of cash. In addition, any grant
may specify that the
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<PAGE> 61
Appreciation Right may be exercised only in the event of a change in control of
the Company. Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted Option Rights and Appreciation Rights, in the
aggregate, for more than 100,000 shares during any calendar year. The
Compensation Committee may condition the award of Appreciation Rights on the
achievement of one or more Management Objectives and may provide with respect to
any grant of Appreciation Rights for the payment of dividend equivalents thereon
in cash or Common Stock on a current, deferred or contingent basis.
An award of Restricted Shares involves the immediate transfer by the
Company to a participant of ownership of a specific number of shares of Common
Stock in consideration of the performance of services. The participant is
entitled immediately to voting, dividend and other ownership rights in the
shares. The transfer may be made without additional consideration or for
consideration in an amount that is less than the market value of the shares on
the date of grant, as the Compensation Committee may determine. The Compensation
Committee may condition the award on the achievement of specified Management
Objectives. Restricted Shares must be subject to a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code for a period to be
determined by the Compensation Committee. An example would be a provision that
the Restricted Shares would be forfeited if the participant ceased to serve the
Company as an officer or other salaried employee during a specified period of
years. In order to enforce these forfeiture provisions, the transferability of
Restricted Shares will be prohibited or restricted in a manner and to the extent
prescribed by the Compensation Committee for the period during which the
forfeiture provisions are to continue. The Compensation Committee may provide
for a shorter period during which the forfeiture provisions are to apply in the
event of a change in control of the Company or other similar transaction or
event.
An award of Deferred Shares constitutes an agreement by the Company to
deliver shares of Common Stock to the participant in the future in consideration
of the performance of services, subject to the fulfillment of such conditions
during the Deferral Period (as defined in the Equity Incentive Plan) as the
Compensation Committee may specify. During the Deferral Period, the participant
has no right to transfer any rights covered by the award and no right to vote
the shares covered by the award. On or after the date of any grant of Deferred
Shares, the Compensation Committee may authorize the payment of dividend
equivalents thereon on a current, deferred or contingent basis in either cash or
additional shares of Common Stock. Grants of Deferred Shares may be made without
additional consideration or for consideration in an amount that is less than the
market value of the shares on the date of grant. Deferred Shares must be subject
to a Deferral Period, as determined by the Compensation Committee on the date of
grant, except that the Compensation Committee may provide for a shorter Deferral
Period in the event of a change in control of the Company or other similar
transaction or event. The Compensation Committee may condition the award of
Deferred Shares on the achievement of one or more Management Objectives.
A Performance Share is the equivalent of one share of Common Stock, and a
Performance Unit is the equivalent of $1.00. A participant may be granted any
number of Performance Shares or Performance Units, which shall be specified in
any such grant. The participant will be given one or more Management Objectives
to meet within a specified period (the "Performance Period"). The specified
Performance Period may be subject to earlier termination in the event of a
change in control of the Company or other similar transaction or event. A
minimum level of acceptable achievement will also be established by the
Compensation Committee. If by the end of the Performance Period the participant
has achieved the specified Management Objectives, the participant will be deemed
to have fully earned the Performance Shares or Performance Units. If the
participant has not achieved the Management Objectives but has attained or
exceeded the predetermined minimum level of acceptable achievement, the
participant will be deemed to have partly earned the Performance Shares or
Performance Units in accordance with a predetermined formula. To the extent
earned, the Performance Shares or Performance Units will be paid to the
participant at the time and in the manner determined by the Compensation
Committee in cash, shares of Common Stock or any combination thereof. Management
Objectives may be described in terms of either Company-wide objectives or
objectives that are related to the performance of the division, subsidiary,
department or function within the Company or a subsidiary in which the
participant is employed or with respect to which the participant provides
consulting services. The Compensation Committee may adjust any Management
Objectives and the related minimum level of acceptable achievement if, in its
judgment, transactions or events have occurred after the date of grant
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<PAGE> 62
that are unrelated to the participant's performance and result in distortion of
the Management Objectives or the related minimum level of acceptable
achievement.
No Option Right, Appreciation Right or other "derivative security" within
the meaning of Rule 16b-3 is transferable by a participant except by will or the
laws of descent and distribution. Option Rights and Appreciation Rights may not
be exercised during a participant's lifetime except by the participant or, in
the event of the participant's incapacity, by the participant's guardian or
legal representative acting in a fiduciary capacity on behalf of the participant
under state law and court supervision. Notwithstanding the foregoing, the
Compensation Committee, in its sole discretion, may provide for the
transferability of the particular awards under the Equity Incentive Plan so long
as such provisions will not disqualify the exemption for other awards under Rule
16b-3, if such rule is then applicable to awards under the plan. The
Compensation Committee may specify at the date of grant that all or any part of
the shares of Common Stock that are to be issued or transferred by the Company
upon the exercise of Option Rights or Appreciation Rights, upon the termination
of the Deferral Period applicable to Deferred Shares or upon payment under any
grant of Performance Shares or Performance Units, or are to be no longer subject
to the substantial risk of forfeiture and restrictions on transfer referred to
in the Equity Incentive Plan with respect to Restricted Shares, are subject to
further restrictions on transfer.
The maximum number of shares that may be issued or transferred under the
Equity Incentive Plan, the number of shares covered by outstanding Option Rights
or Appreciation Rights and the option prices or base prices per share applicable
thereto, and the number of shares covered by outstanding grants of Deferred
Shares and Performance Shares, are subject to adjustment in the event of stock
dividends, stock splits, combinations of shares, recapitalizations, mergers,
consolidations, spin-offs, reorganizations, liquidations, issuances of rights or
warrants, and similar transactions or events. In the event of any such
transaction or event, the Compensation Committee may in its discretion provide
in substitution for any or all outstanding awards under the Equity Incentive
Plan such alternative consideration as it may in good faith determine to be
equitable in the circumstances and may require the surrender of all awards so
replaced. The Compensation Committee may also, as it determines to be
appropriate in order to reflect any such transaction or event, make or provide
for such adjustments in the number of shares that may be issued or transferred
and covered by outstanding awards granted under the Equity Incentive Plan and
the number of shares permitted to be covered by Option Rights and Appreciation
Rights, granted to any one participant during any calendar year.
The Compensation Committee must consist of not less than two nonemployee
directors who are "non-employee directors" within the meaning of Rule 16b-3. In
connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan and
related agreements and other documents. The Compensation Committee may make
grants to participants under any or a combination of all of the various
categories of awards that are authorized under the Equity Incentive Plan and may
condition the grant of awards on the surrender or deferral by the participant of
the participant's right to receive a cash bonus or other compensation otherwise
payable by the Company or a subsidiary to the participant. The Equity Incentive
Plan may be amended from time to time by the Compensation Committee but, without
further approval by the shareholders of the Company, no such amendment may (i)
increase the aggregate number of shares of Common Stock that may be issued or
transferred and covered by outstanding awards or increase the number of shares
which may be granted to any participant in any calendar year or (ii) otherwise
cause Rule 16b-3 to cease to be applicable to the Equity Incentive Plan.
The following is a brief summary of certain of the federal income tax
consequences of certain transactions under the Equity Incentive Plan based on
federal income tax laws in effect on the date of this Prospectus. This summary
is not intended to be exhaustive and does not describe state or local tax
consequences.
In general: (i) no income will be recognized by an optionee at the time a
nonqualified Option Right is granted; (ii) at the time of exercise of a
nonqualified Option Right, ordinary income will be recognized by the optionee in
an amount equal to the difference between the option price paid for the shares
and the fair market value of the shares if they are nonrestricted on the date of
exercise; and (iii) at the time of sale of shares acquired pursuant to the
exercise of a nonqualified Option Right, any appreciation (or depreciation) in
the value of the shares after the date of exercise will be treated as either
short-term or long-term capital gain (or loss) depending on how long the shares
have been held. No income generally will be recognized by an
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optionee upon the grant or qualifying exercise of an incentive stock option.
However, for purposes of calculating the Optionee's alternative minimum tax, if
any, the difference between the fair market value of the shares of Common Stock
at exercise and the option exercise price constitutes an item of adjustment. If
shares of Common Stock are issued to an optionee pursuant to the exercise of an
incentive stock option and no disqualifying disposition of the shares is made by
the optionee within two years after the date of grant or within one year after
the transfer of the shares to the optionee, then upon the sale of the shares any
amount realized in excess of the option price will be taxed to the optionee as
long-term capital gain and any loss sustained will be a longterm capital loss.
If shares of Common Stock acquired upon the exercise of an incentive stock
option are disposed of prior to the expiration of either holding period
described above, the optionee generally will recognize ordinary income in the
year of disposition in an amount equal to any excess of the fair market value of
the shares at the time of exercise (or, if less, the amount realized on the
disposition of the shares in a sale or exchange) over the option price paid for
the shares. Any further gain (or loss) realized by the optionee generally will
be taxed as short-term or long-term gain (or loss) depending on the holding
period. No income will be recognized by a participant in connection with the
grant of an Appreciation Right. When the Appreciation Right is exercised, the
participant normally will be required to include as taxable ordinary income in
the year of exercise an amount equal to the amount of any cash, and the fair
market value of any nonrestricted shares of Common Stock, received pursuant to
the exercise. A recipient of Restricted Shares generally will be subject to tax
at ordinary income rates on the fair market value of the Restricted Shares
reduced by any amount paid by the recipient at such time as the shares are no
longer subject to a substantial risk of forfeiture or restrictions on transfer
for purposes of Section 83 of the Code. However, a recipient who so elects under
Section 83(b) of the Code within 30 days of the date of transfer of the shares
will have taxable ordinary income on the date of transfer of the shares equal to
the excess of the fair market value of the shares (determined without regard to
the risk of forfeiture or restrictions on transfer) over any purchase price paid
for the shares. If a Section 83(b) election has not been made, any dividends
received with respect to Restricted Shares that are subject at that time to a
substantial risk of forfeiture and restrictions on transfer generally will be
treated as compensation that is taxable as ordinary income to the recipient. No
income generally will be recognized upon the grant of Deferred Shares. The
recipient of a grant of Deferred Shares generally will be subject to tax at
ordinary income rates on the fair market value of nonrestricted shares of Common
Stock on the date that the Deferred Shares are transferred to him or her,
reduced by any amount paid by him or her, and the capital gains or loss holding
period for the Deferred Shares will also commence on that date. No income
generally will be recognized upon the grant of Performance Shares or Performance
Units. Upon payment in respect of the earn-out of Performance Shares or
Performance Units, the recipient generally will be required to include as
taxable ordinary income in the year of receipt an amount equal to the amount of
cash received and the fair market value of any nonrestricted shares of Common
Stock received.
To the extent that a participant recognizes ordinary income in the
circumstances described above, the Company or subsidiary for which the
participant performs services will be entitled to a corresponding deduction
provided that, among other things, (i) the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 280G of the Code and is
not disallowed by the $1.0 million limitation on certain executive compensation
and (ii) any applicable reporting obligations are satisfied.
The total number of stock options or other awards that will be granted
under the Equity Incentive Plan in the future is not determinable at this time.
The Equity Incentive Plan is not intended to be the exclusive means by which the
Company may grant equity-based incentive awards, and the adoption thereof will
in no way limit the ability of the Company to grant equity-based awards outside
the Equity Incentive Plan.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
Each of the Named Executive Officers is a party to an employment agreement
with the Company. Pursuant to the employment agreements, the Named Executive
Officer party thereto is entitled to the greater of either (i) the Named
Executive Officer's salary and bonus for the prior fiscal year or (ii) the
monthly payments which the Named Executive Officer is entitled to under the
executive's employment agreement for the remainder of the term of the agreement,
plus the continuation of health and other welfare benefits for the greater of
one year or the remainder of the term of the agreement, in the event that the
Named Executive
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Officer is terminated by the Company without Cause (as defined). In addition,
each of the Named Executive Officers is a party to a change-in-control agreement
that provides for the payment of such severance benefits and the provision of
such health and other benefits if the Named Executive's employment is terminated
by the Company, or by the Executive, following a Change in Control (as defined),
except that the severance benefits payable thereunder are based upon three times
the highest salary and bonus that the Executive received during any of the three
years preceding the year in which the Change in Control occurred and are reduced
dollar-for-dollar for salary and bonus payments made by the Company during any
period of continuation of employment following the Change in Control. In
addition, the amounts payable under the change-in-control agreements are
increased to compensate the Named Executive Officer for any excise tax payable
by the Company pursuant to Section 280G of the Code. The Named Executive
Officers are not obligated under the employment agreements or the
change-in-control agreements to mitigate damages by seeking alternative
employment; however, the Company's obligations to provide health and other
welfare benefits thereunder terminates if the Named Executive Officer obtains
other full-time employment within three years of such termination. Each Named
Executive Officer's employment agreement will terminate without further action
immediately prior to the payment of any severance benefits under the Named
Executive Officer's change-in-control agreement. The employment agreements and
the change-in-control agreements include provisions prohibiting the Named
Executive Officers from engaging in any Competitive Activity (as defined) for
two year after termination of employment and providing for the payment of legal
fees and expenses incurred in enforcing or defending such agreements.
All of the foregoing plans and agreements were approved by the Company's
shareholders and the Board prior to the IPO.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was formed in June 1996 and currently is
composed of R. Michael McCullough (Chairman), Michael J. Aranson and Steven J.
Smith. Prior thereto, decisions regarding the compensation of officers were made
by the Board.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock on the date hereof and as adjusted to reflect the sale
of the shares of Common Stock offered hereby by (i) each person known by the
Company to own beneficially more than 5% of the Common Stock, (ii) each director
and Named Executive Officer of the Company, and (iii) all directors and
executive officers of the Company as a group. Unless indicated otherwise, the
address for each of the shareholders named in the table is Foster Plaza Ten, 680
Andersen Drive, Pittsburgh, Pennsylvania 15220. For purposes of the table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of a given date which such person has the right to acquire within 60
days after such date.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNED
NUMBER --------------------
OF SHARES PRIOR TO AFTER
OWNED OFFERING OFFERING
----------- -------- --------
<S> <C> <C> <C>
Milton Fine (1)...................................... 6,218,640 20.3% 17.9%
Fine Family Trusts (2)............................... 12,782,940 41.7 36.9
Blackstone (3)....................................... 2,528,571 8.2 7.3
David J. Fine (4).................................... 6,571,800 21.4 19.0
W. Thomas Parrington, Jr. (5)........................ 305,660 1.0 *
J. William Richardson (6)............................ 170,403 * *
Robert L. Froman..................................... 196,072 * *
Marvin I. Droz (7)................................... 100,454 * *
Michael J. Aranson................................... 5,000 * *
R. Michael McCullough................................ 10,000 * *
Thomas J. Saylak..................................... -- -- --
Steven J. Smith...................................... 4,300 * *
Trust Leasing and Trust Management (8)............... 1,957,895 6.4 5.7
All directors and executive officers as a group (11
persons) (9)....................................... 13,592,329 44.3 39.2
</TABLE>
- ------------------
* Less than 1%.
(1) Includes 5,000 shares owned by Mr. Fine's wife, 2,500 shares owned by Mr.
Fine's wife in trust for her children and 6,211,140 of the 12,782,940 shares
beneficially owned by the Fine Family Trusts. Milton Fine disclaims
beneficial ownership of all of such shares.
(2) The "Fine Family Trusts" are comprised of five trusts: one of which Milton
Fine is the trustee and four of which David Fine is the trustee.
(3) Blackstone's address is 345 Park Avenue, New York, New York 10154.
(4) David Fine may be deemed to beneficially own 6,571,800 of the 12,782,940
shares beneficially owned by the Fine Family Trusts. David J. Fine disclaims
beneficial ownership of such shares.
(5) Includes 1,500 shares owned by Mr. Parrington's daughters.
(6) Includes 200 shares owned by Mr. Richardson's daughters.
(7) Includes 1,000 shares owned by Mr. Droz's wife.
(8) The address of Trust Leasing and Trust Management is 4735 Spottswood #102,
Memphis, Tennessee 38117.
(9) Includes 10,000 Restricted Shares, which are subject to certain risks of
forfeiture as described in "Management--Compensation Plans and
Arrangements--Equity Incentive Plan."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1995 REORGANIZATION
The Company was incorporated in April 1996 as a Pennsylvania corporation.
In 1995, the Company's predecessors consummated a series of transactions to
aggregate the hotel management businesses owned by the Fine Family Shareholders
into a single entity (the "1995 Reorganization"). As a result of the 1995
Reorganization, 59 separate corporations that were wholly owned by the Fine
Family Shareholders were merged with and into the Company's predecessor, IHC,
effective November 1, 1995, with IHC being the surviving corporation. Pursuant
to the Agreement and Plan of Merger entered into in connection with the 1995
Reorganization, IHC assumed liabilities aggregated approximately $7.4 million
incurred by Milton Fine and a $5.6 million liability incurred by the Fine Family
Trusts to purchase stock owned by a deceased shareholder of IHC. These
liabilities were satisfied in December 1995.
THE ORGANIZATION AND INITIAL PUBLIC OFFERING
The Company consummated its initial public offering of 11,000,000 shares of
its Common Stock on June 25, 1996 and of an additional 1,448,350 shares to cover
over-allotments on July 9, 1996. Prior to consummation of the IPO, the Fine
Family Shareholders owned all of the voting stock and approximately 92% of the
non-voting stock of IHC, with the remaining approximately 8% of the non-voting
stock in IHC owned by certain of IHC's officers (excluding Milton Fine). In
addition, the Fine Family Shareholders owned direct and indirect interests in
certain of the subsidiaries and affiliated companies of IHC including its
Crossroads, Colony and Northridge subsidiaries. The Fine Family Shareholders and
certain officers (excluding Milton Fine) and former employees of IHC also owned
interests in the Interstone partnerships with Blackstone (as described below),
which owned 14 Owned Hotels. Prior to consummation of the IPO, all of the
foregoing interests were contributed to the Company in exchange for Common Stock
of the Company. In addition, prior to the consummation of the IPO, the Company
and its affiliates effected the following transactions (collectively with the
foregoing transactions, the "Organization"): (i) all of the outstanding shares
of common stock of IHC were contributed to the Company by the Fine Family
Shareholders in exchange for Common Stock of the Company and (ii) the Company
issued shares of Common Stock to certain officers and employees of the Company
in exchange for restricted stock in IHC previously issued to them (see
"Management--Stock Option Grants"). As a result of the foregoing and the
Acquisition from Blackstone described below, the Company currently owns 100% of
IHC and its subsidiaries and all of the equity interests in the 14 Owned Hotels
acquired in partnership with Blackstone (excluding minority interests owned by
third parties in seven hotels). The Company issued 13,689,929 shares of Common
Stock in the Organization to the Fine Family Shareholders and certain officers
and current and former employees of the Company, all of which are restricted
securities under the Securities Act. See "Shares Eligible for Future Sale." In
addition, the Company entered into a registration rights agreement with each of
the existing shareholders of the Company prior to the IPO (collectively, the
"Original Shareholders") pursuant to which the Original Shareholders were
granted demand and piggyback registration rights. The Company has agreed to
indemnify the Original Shareholders against certain liabilities, including
liabilities under the Securities Act, incident to any such registration.
In March 1994, Milton Fine, as trustee, and certain officers and former
employees of IHC formed a partnership ("IHC/Interstone") which in turn formed a
series of partnerships (collectively, "Interstone I") with Blackstone to pursue
acquisitions of hotel properties. Interstone I acquired title to seven hotels
and a controlling interest in another hotel. IHC/Interstone contributed all of
its interests in Interstone I to the Company prior to consummation of the IPO,
and the Company purchased the equity interests of Blackstone in Interstone I in
connection with the IPO.
Following the completion of the Interstone I investment program, in
December 1995 IHC, the Fine Family Shareholders and certain officers of IHC
formed a partnership ("IHC/Interstone II"), which in turn formed another series
of partnerships with Blackstone (collectively, "Interstone II") to acquire a 75%
interest in a portfolio of six hotels owned by an institutional investor. Under
the Interstone II partnership agreements, certain major decisions may not be
taken without the prior consent of the institutional investor. The Fine Family
Shareholders and the officers of IHC contributed all of their interests in
Interstone II to the Company
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prior to consummation of the IPO, and the Company purchased the interest of
Blackstone in Interstone II in connection with the IPO.
In connection with the formation of Interstone II, IHC and Blackstone
entered into an Option Agreement (the "Option Agreement") pursuant to which IHC
granted to Blackstone an option (the "Blackstone Option") to purchase a 20%
equity interest in a new company to be formed upon exercise of the Blackstone
Option to succeed the Company and upon payment by Blackstone of the exercise
price of $23.3 million. In connection with the IPO, Blackstone exercised the
Blackstone Option and paid the Company the $23.3 million exercise price.
Blackstone received $44.8 million of Common Stock based on the IPO price and the
Company paid one of the Blackstone entities a $233,000 arrangement fee for
services in negotiating and arranging the Blackstone Option.
Simultaneously with the completion of the Interstone II investment program,
in December 1995, IHC/ Interstone II and Blackstone formed a third series of
partnerships (collectively, "Interstone III") to acquire additional hotel
properties. IHC/Interstone II has committed up to $30.6 million for a 51%
interest therein, and Blackstone has committed up to $29.4 million for a 49%
interest therein. The capital commitments expire on December 31, 1997. All hotel
acquisition opportunities that meet the investment parameters for Interstone III
which come to the attention of the Company or Blackstone must be presented to
Interstone III unless the party identifying the acquisition opportunity
certifies that in its judgment the acquisition by Interstone III would not be
feasible, appropriate or practical. The Company made the foregoing certification
with respect to each of the Post-IPO Acquisitions and the Pending Acquisitions,
and no acquisitions have been made by Interstone III as of the date of this
Prospectus. All major decisions involving Interstone III are made jointly by the
Company and Blackstone. The Company and Blackstone each have a buy-sell option
commencing in December 1997. Interstone III will pay a 1% acquisition fee to the
partner introducing each hotel acquisition made by such partnerships.
IHC/Interstone II contributed all of its interests in Interstone III to the
Company in connection with the IPO.
In March 1996, the Company entered into an Agreement of Purchase and Sale
(the "Acquisition Agreement") to acquire all of Blackstone's interests in
Interstone I (excluding one Interstone I hotel, the Fort Magruder Hotel and
Conference Center) and Interstone II (collectively, the "Acquisition") for a
cash purchase price of approximately $125 million. Closing of the Acquisition
occurred immediately following the consummation of the IPO on June 25, 1996.
In connection with the execution of the Acquisition Agreement, the Company
also entered into a Contribution Agreement (the "Blackstone Contribution
Agreement") with certain affiliates of the Company and Blackstone pursuant to
which such affiliates agreed to contribute to the Company their interests in the
partnership (the "Fort Magruder Partnership") that owned the Fort Magruder Inn
and Conference Center in consideration of the issuance of $8.3 million of Common
Stock at the IPO price (the "Contribution"). Closing of the Contribution
occurred immediately prior to the closing of the Acquisition.
Pursuant to the Blackstone Contribution Agreement, the Company, Blackstone
and the Fine Family Shareholders executed the Interstone Stockholders Agreement
at the closing of the Acquisition and Contribution. Under the Interstone
Stockholders Agreement (i) Blackstone was granted tag along rights with respect
to certain shares of Common Stock by the Fine Family Shareholders, (ii)
Blackstone granted to the Fine Family Shareholders a right of first offer with
respect to certain sales of shares of Common Stock by Blackstone, (iii)
Blackstone was granted demand and piggyback registration rights, (iv) the Fine
Family Shareholders agreed to vote their shares of Common Stock for a director
designee of Blackstone, (v) Blackstone agreed to vote its shares of Common Stock
for the election of the director candidates nominated by the Board, and (vi)
Blackstone agreed not to sell or transfer its shares, subject to certain
exceptions, for a period of 180 days following the IPO.
TRANSACTIONS WITH THE FINE FAMILY SHAREHOLDERS
During 1993, 1994 and 1995, the Company received payments in the aggregate
amounts of approximately $5.8 million, $6.7 million and $7.9 million,
respectively, for management services provided to 13, 18 and 27 hotels,
respectively, in which the Fine Family Trusts had an ownership interest.
Accounts receivable of
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approximately $0.7 million, $0.9 million and $1.0 million were due from these
hotels at December 31, 1993, 1994 and 1995, respectively.
During 1993, 1994 and 1995, the Company advanced funds from time to time to
its shareholders, and received repayments of a portion of such advances. At
December 31, 1995, the outstanding amount of such advances to shareholders was
$1.6 million.
In March 1996, the Company made a distribution to its existing shareholders
in the aggregate amount of $30 million. The distribution was paid with
promissory notes payable on September 28, 1997 and bearing interest at 5% per
annum. These notes were repaid in connection with the IPO.
Certain of the Fine Family Shareholders own minority interests in 12 hotels
that are managed but not owned by the Company. Except for one management
agreement pursuant to which the Company waived its management fee for a period
ending no later than November 30, 1998, the Company believes that in each case
the terms on which these hotels are managed are at least as favorable to the
Company as those it could have obtained from unaffiliated persons. The Fine
Family Shareholders have granted to the Company a right of first offer and a
right of first refusal in connection with any proposed transfer of their
interests (subject to certain permitted transfers) in these hotels in
consideration of the Company's agreeing to continue to provide at no cost to the
Fine Family Shareholders certain accounting and administrative services of the
type which the Company is currently providing to the Fine Family Shareholders in
connection therewith.
TRANSACTIONS WITH OFFICERS AND DIRECTORS
See "Management--Compensation Plans and Arrangements--Executive Loans" for
a description of loans from the Company to Messrs. Parrington and Richardson.
The Company has made loans from time to time to its senior executives, including
each of the Named Executive Officers other than Mr. Fine. The maximum amount of
such loans to any executive was $210,000 during the three-year period since
January 1, 1993. Such loans are payable upon demand and, in general, do not bear
interest until such demand is made. The loans made to Messrs. Parrington and
Richardson are forgiven over time provided certain conditions are satisfied.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Articles of Incorporation provide that the authorized capital
stock of the Company consists of 75,000,000 shares of Common Stock, par value
$.01 per share, and 25,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock"). Upon consummation of the Offering, 34,639,296 shares
of Common Stock will be issued and outstanding (35,239,296 shares if the
over-allotment options are exercised in full), and no shares of Preferred Stock
will be issued or outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per each share owned
of record on all matters voted upon by shareholders. Subject to preferential
rights that may be applicable to any Preferred Stock outstanding, holders of
Common Stock are entitled to receive dividends if, as and when declared by the
Board out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding-up of the Company, holders of
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all liabilities of the Company
and the liquidation preferences of any outstanding Preferred Stock. Holders of
the Common Stock have no preemptive rights and no rights to convert their Common
Stock to any other securities, and there are no redemption or sinking fund
provisions with respect to the Common Stock. The Company is subject to
provisions of the Pennsylvania Business Corporation Law (the "BCL") which
provide for cumulative voting.
PREFERRED STOCK
The Board has the authority to issue the authorized shares of Preferred
Stock in one or more series and to fix the designations, relative powers,
preferences, rights, qualifications, limitations and restrictions of all shares
of each such series, including without limitation dividend rates, conversion
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences and the number of shares constituting each such series,
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without any further vote or action by the shareholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock or adversely affect the rights and
powers, including voting rights, of the holders of Common Stock. The issuance of
Preferred Stock also could have the effect of delaying, deferring or preventing
a change in control of the Company.
CERTAIN CORPORATE GOVERNANCE MATTERS
The Company's Articles of Incorporation and By-Laws provide, in general,
that (i) the number of directors of the Company will be fixed, within a
specified range, by a majority of the total number of the directors of the
Company(assuming no vacancies) or by the holders of at least 80% of the
Company's voting stock, (ii) shareholder action can be taken only at an annual
or special meeting of shareholders and not by written consent in lieu of a
meeting, (iii) except as described below, special meetings of shareholders may
be called only by the Chairman of the Board or by 80% of the total number of
directors of the Company (assuming no vacancies) and the business permitted to
be conducted at any such meeting is limited to that brought before the meeting
by the Company's Chairman of the Board or his specific designee or by 80% of the
total number of directors of the Company (assuming no vacancies), (iv) the
Chairman of the Board may be removed only by the holders of at least 80% of the
Company's voting stock, (v) directors of the Company may be removed only for
cause and (vi) the Board or the Chairman of the Board may postpone and
reschedule any previously scheduled annual or special meeting of shareholders.
The Company's By-Laws also require that shareholders desiring to bring any
business before an annual meeting of shareholders deliver written notice thereof
to the Secretary of the Company not later than 60 days in advance of the meeting
of shareholders; provided, however, that in the event that the date of the
meeting is not publicly announced by the Company by press release or inclusion
in a report filed with the Commission or furnished to shareholders more than 75
days prior to the meeting, notice by the shareholder to be timely must be
delivered to the Secretary of the Company not later than the close of business
on the tenth day following the day on which such announcement of the date of the
meeting was so communicated. The Company's By-Laws further require that the
notice by the shareholder set forth a description of the business to be brought
before the meeting and the reasons for conducting such business at the meeting
and certain information concerning the shareholder proposing such business and
the beneficial owner, if any, on whose behalf the proposal is made, including
their names and addresses, the class and number of shares of the Company that
are owned beneficially and of record by each of them and any material interest
of either of them in the business proposed to be brought before the meeting.
Upon the written request of the holders of not less than 25% of the Company's
voting stock or upon the request of the Chairman of the Board, the Board will be
required to call a meeting of shareholders for the purpose specified in such
written request and fix a record date for the determination of shareholders
entitled to notice of and to vote at such meeting (which record date may not be
later than 60 days after the date of receipt of notice of such meeting),
provided that (i) in the event that the Board calls an annual or special meeting
of shareholders to be held not later than 90 days after receipt of any such
written request, no separate special meeting of shareholder as so requested will
be required to be convened provided that the purposes of such annual or special
meeting called by the Board include (among others) the purposes specified in
such written request of the shareholders and (ii) unless otherwise determined by
the Chairman of the Board or vote of a majority of the members of the Board then
in office, action may not be taken at a special meeting of the shareholders in
respect of the removal of directors other than for cause, any change in the
number of directors or any other matter affecting the composition of the Board
or any directorate committee.
Under applicable provisions of Pennsylvania law, the approval of a
Pennsylvania company's board of directors, in addition to shareholder approval,
is required to adopt any amendment to the company's articles of incorporation,
but a company's by-laws may be amended either by action of its shareholders or,
if the company's articles of incorporation so provide, its board of directors.
The Company's Articles of Incorporation and By-Laws provide that except as
described below, the provisions summarized above and the provisions relating to
nomination procedures may not be amended by the shareholders, nor may any
provision inconsistent therewith be adopted by the shareholders, without the
affirmative vote of the holders of at least 80% of the Company's voting stock,
voting together as a single class, except that if any such action (other than
any direct or indirect amendments to the provision requiring that shareholder
action be taken at a meeting of shareholders rather than by written consent in
lieu of a meeting) is approved by the holders of a majority, but
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less than 80%, of the then-outstanding voting stock (in addition to any other
approvals required by law, including approval by the Board with respect to any
amendment to the Company's Articles of Incorporation), such action will be
effective as of one year from the date of adoption.
The foregoing provisions of the Company's Articles of Incorporation and
By-Laws may discourage or make more difficult the acquisition of control of the
Company by means of a tender offer, open market purchase, proxy contest or
otherwise. These provisions may have the effect of discouraging certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company first to negotiate with the
Company. The Company's management believes that the foregoing measures provide
benefits to the Company and its shareholders by enhancing the Company's ability
to negotiate with the proponent of any unfriendly or unsolicited proposal to
take over or restructure the Company and that such benefits outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
The Company is subject to provisions of the BCL which require that a
merger, consolidation, share exchange or sale of assets between a public
corporation, or a subsidiary thereof, and a shareholder be approved by a
majority of voting shares outstanding other than those held by the "interested
shareholder" (which includes a shareholder who is a party to the proposed
transaction or who is treated differently from other shareholders) unless (i)
the transaction has been approved by a majority of the corporation's directors
who are not affiliated with the interested shareholder and first elected to the
board within 24 months of the vote to approve such transaction, or (ii) the
transaction results in the payment to all other shareholders of an amount not
less than the highest amount paid for the same class of shares by the interested
shareholder. In addition, subject to certain exceptions, a "business
combination" with a shareholder or group of shareholders beneficially owning
more than 20% of the voting power of a public corporation (excluding certain
shares) is prohibited for a five-year period following the date on which the
holder acquired the 20% or greater voting power and, unless certain other
conditions are satisfied, requires approval of a majority of voting shares
outstanding other than those held by such interested shareholder. Moreover, the
BCL provides that any profit realized from the disposition of an equity security
of a corporation by a shareholder who disposes of such security within 18 months
after obtaining control must be returned to the corporation. These and other
related BCL provisions may discourage open market purchases of a corporation's
stock or a non-negotiated tender or exchange offer for such stock and,
accordingly, may limit a shareholder's ability to realize a premium over the
market price of the Common Stock in connection with any such transaction.
Because of the length of time that the Fine Family Trusts have held
controlling interests in the Company, these statutory restrictions are not
applicable to such shareholders.
TRANSFER AGENT AND REGISTRAR
The Company has appointed ChaseMellon Shareholder Services as the transfer
agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering (assuming the over-allotment options are
not exercised), the Company will have 34,639,296 shares of Common Stock
outstanding. Of these shares, all of the shares of Common Stock sold in the IPO
are, and all of the Shares 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 18,190,946 shares are "restricted
securities" within the meaning of Rule 144 under the Securities Act ("Restricted
Securities") and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including the
exemption contained in Rule 144.
In general, under Rule 144, if two years have elapsed since the later of
the date of acquisition of Restricted Securities 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 Common Stock then outstanding or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. Sales under Rule 144 are also subject
to certain manner
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<PAGE> 71
of sale provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of Restricted Securities 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(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements. In
connection with this Offering, the Company, each of its directors and executive
officers who is a holder of Common Stock, the Fine Family Shareholders and
Blackstone have agreed, subject to certain exceptions, not to offer, sell,
contract to sell or otherwise dispose of any such shares of Common Stock for a
period of 90 days after the date of this Prospectus without the prior written
consent of Merrill Lynch. Trust Leasing and Trust Management have agreed not to
sell any of the Common Stock acquired in connection with the Equity Inns
Transaction until June 30, 1997 and not to sell more than 50% of such Common
Stock until December 31, 1997.
The Company can make no predictions as to the effect, if any, that future
sales of Restricted Securities, or the availability of such Restricted
Securities for sale, or the issuance of shares of Common Stock upon the exercise
of options or otherwise, or the perception that such sales or exercises could
occur, will have on the market price prevailing from time to time. Sales of
substantial amounts of Restricted Securities in the public market could have an
adverse effect on the market price of the Common Stock.
In connection with the Acquisition, the Organization, and the Equity Inns
Transaction, the Company granted Blackstone, the Original Shareholders, and
Trust Leasing and Trust Management, respectively, certain registration rights
with respect to the Common Stock. See "Certain Relationships and Transactions--
The Organization and Initial Public Offering" and "Recent Developments--Equity
Inns Transaction."
TAXATION
The following is a general discussion of certain material U.S. federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a "Non-U.S. Holder." A "Non-U.S. Holder" is any person other than (i) a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state thereof or (iii) an estate or trust whose income is includable
in gross income for U.S. federal income tax purposes regardless of its source.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date hereof, all of
which may be changed either retroactively or prospectively. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant to Non-U.S. Holders and, in particular, does not address consequences
that may apply in light of their particular circumstances. In addition, the
discussion does not address any tax consequences arising under the laws of any
state, local or foreign taxing jurisdiction.
Prospective investors should consult their tax advisors with respect to the
particular tax consequences to them of owning and disposing of Common Stock.
DIVIDENDS
Subject to the discussion below, dividends paid to a Non-U.S. Holder of
Common Stock generally will be subject to withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. For purposes
of determining whether tax is to be withheld at a 30% rate or at a reduced
treaty rate, the Company ordinarily will presume that dividends paid to an
address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted.
There will be no withholding tax on dividends that are effectively
connected with the Non-U.S. Holder's conduct of a trade or business within the
United States provided such holder provides a valid Internal Revenue Service
(the "IRS") Form 4224 to the payor. Instead, the effectively connected dividends
will be subject to regular U.S. income tax generally in the same manner as if
the Non-U.S. Holder were a U.S. resident. A non-U.S. corporation receiving
effectively connected dividends also may be subject to an additional "branch
profits tax" which is imposed, under certain circumstances, at a rate of 30% (or
such lower rate as may be specified
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<PAGE> 72
by an applicable treaty) of the non-U.S. corporation's effectively connected
earnings and profits, subject to certain adjustments.
Proposed regulations were issued by the IRS in April 1996 that would, if
and when finalized, substantially modify the existing rules for withholding of
tax on payments of certain types of income (including dividends) to foreign
persons. These proposals ("Proposed Regulations") would, subject to certain
exceptions and transition rules, be effective for payments made after December
31, 1997, regardless of the date of issuance of the instrument with respect to
which those payments are made. There can be no assurance that the Proposed
Regulations will be finalized (whether before or after their proposed effective
date) or, if they are finalized, that they will not be materially modified from
their current form.
Among the provisions of the Proposed Regulations is a proposal that would
require a Non-U.S. Holder of common stock to certify its residence in a country
with which the United States has an income tax treaty in order to claim the
benefit of a reduced rate of withholding tax under such treaty on dividends paid
with respect to such common stock. In addition, the Proposed Regulations would,
if finalized in their current form, make other changes to the existing
procedures relating to withholding of tax on dividends. Prospective investors
are urged to consult their tax advisors with respect to the possible impact of
the Proposed Regulations on their particular situations.
In addition, under a 1984 proposed regulation (which never entered into
force), in order to claim the benefits of a tax treaty, a Non-U.S. Holder of
Common Stock would have been required to demonstrate entitlement to such
benefits by filing certain forms including a statement from a designated
governmental body of the treaty country. The administrative document whereby the
IRS issued the Proposed Regulations also removes that 1984 proposed regulation.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will be subject to U.S. federal income tax with
respect to gain realized on a sale or other disposition of Common Stock only if
(i) the gain is effectively connected with a trade or business of such holder in
the United States, (ii) in the case of certain Non-U.S. Holders who are
non-resident alien individuals and hold the Common Stock as a capital asset,
such individuals are present in the United States for 183 or more days in the
taxable year of the disposition or (iii) subject to the exception below, the
Company is or has been a "United States real property holding corporation"
within the meaning of Section 897(c)(2) of the Code at any time within the
shorter of the five-year period preceding such disposition or such holder's
holding period. The Company believes it currently is and will likely remain a
U.S. real property holding corporation. However, gain realized on a disposition
of Common Stock by a Non-U.S. Holder that is not deemed to own more than five
percent of the Common Stock during such period will not be subject to U.S.
federal income tax under the rule described in clause (iii) of this paragraph,
provided that the Common Stock is "regularly traded" (within the meaning of
Section 897(c)(3) of the Code) on an established securities market located in
the United States at the time of disposition. If a Non-U.S. Holder is deemed to
own more than five percent of the Common Stock at any time during the shorter of
the five-year period preceding such disposition or such holder's holding period,
such Non-U.S. Holder may be subject to U.S. federal income tax upon a
disposition of shares of such stock and is urged to consult its tax advisor.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, each Non-U.S.
Holder. These reporting requirements apply regardless of whether withholding was
reduced or eliminated by an applicable income tax treaty. Copies of this
information also may be made available under the provisions of a specific treaty
or agreement with the tax authorities in the country in which the Non-U.S.
Holder resides or is established.
United States backup withholding (which generally is imposed at the rate of
31% on certain payments to persons that fail to furnish the information required
under the United States information reporting requirements) and information
reporting generally will not apply to dividends paid on Common Stock to a
Non-U.S. Holder at an address outside the United States.
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<PAGE> 73
The payment of proceeds from the disposition of Common Stock to or through
a United States office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of proceeds from the disposition of Common Stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting, except as noted below. In the case
of proceeds from a disposition of Common Stock paid to or through a non-United
States office of a broker that is (i) a United States person, (ii) a "controlled
foreign corporation" for United States federal income tax purposes or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a United States trade or business, (a) backup
withholding will not apply unless such broker has actual knowledge that the
owner is not a Non-U.S. Holder, and (b) information reporting will apply unless
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder (and the broker has no actual knowledge to the contrary).
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
In addition, the Proposed Regulations would, if finalized in their current
form, modify the foregoing rules to conform them to the rules proposed therein
with respect to withholding tax on dividends. Prospective investors are urged to
consult their tax advisors with respect to the possible impact of these
provisions of the Proposed Regulations on their particular situations.
FEDERAL ESTATE TAX
An individual who is not a citizen or resident (as defined for U.S. federal
estate tax purposes) of the United States at the time of death and who is
treated as the owner of Common Stock, or that has made certain lifetime
transfers of an interest in the Common Stock, will be required to include the
value thereof in his or her gross estate for U.S. federal estate tax purposes
and may be subject to U.S. federal estate tax unless an applicable estate tax
treaty provides otherwise.
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<PAGE> 74
UNDERWRITING
The U.S. Underwriters named below (the "U.S. Underwriters"), acting through
their U.S. representatives, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Montgomery Securities, Morgan Stanley & Co. Incorporated,
Smith Barney Inc. and Credit Lyonnais Securities (USA) Inc. (the "U.S.
Representatives"), have severally agreed, subject to the terms and conditions of
a U.S. Purchase Agreement with the Company (the "U.S. Purchase Agreement"), to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names. The U.S. Underwriters are committed to purchase
all of such shares if any are purchased. Under certain circumstances, the
commitments of non-defaulting U.S. Underwriters may be increased as set forth in
the U.S. Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
------------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................ 435,000
Montgomery Securities.................................................... 435,000
Morgan Stanley & Co. Incorporated........................................ 435,000
Smith Barney Inc. ....................................................... 435,000
Credit Lyonnais Securities (USA) Inc. ................................... 435,000
Alex. Brown & Sons Incorporated.......................................... 50,000
BT Securities Corporation................................................ 50,000
Dean Witter Reynolds Inc................................................. 50,000
Donaldson, Lufkin & Jenrette Securities Corporation...................... 50,000
Oppenneimer & Co., Inc................................................... 50,000
PaineWebber Incorporated................................................. 50,000
Prudential Securities Incorporated....................................... 50,000
Salomon Brothers Inc..................................................... 50,000
Schroder Wertheim & Co. Incorporated..................................... 50,000
Wasserstein Perella Securities, Inc...................................... 50,000
CIBC Wood Gundy Securities Corp.......................................... 50,000
Advest, Inc.............................................................. 25,000
J.C. Bradford & Co....................................................... 25,000
JW Charles Securities, Inc............................................... 25,000
Crowell, Weedon & Co..................................................... 25,000
Davenport & Co. of Virginia, Inc......................................... 25,000
Doft & Co., Inc.......................................................... 25,000
Dominick & Dominick, Incorporated........................................ 25,000
First Albany Corporation................................................. 25,000
Furman Selz LLC.......................................................... 25,000
Genesis Merchant Group Securities........................................ 25,000
Interstate/Johnson Lane Corporation...................................... 25,000
Janney Montgomery Scott Inc.............................................. 25,000
Legg Mason Wood Walker, Incorporated..................................... 25,000
McDonald & Company Securities, Inc....................................... 25,000
Morgan Keegan & Company, Inc............................................. 25,000
Parker/Hunter Incorporated............................................... 25,000
Pennsylvania Merchant Group Ltd.......................................... 25,000
Ragen Mackenzie Incorporated............................................. 25,000
Raymond James & Associates, Inc.......................................... 25,000
The Robinson-Humphrey Company, Inc....................................... 25,000
The Seidler Companies Incorporated....................................... 25,000
Muriel Siebert & Co., Inc................................................ 25,000
Sutro & Co. Incorporated................................................. 25,000
</TABLE>
70
<PAGE> 75
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Tucker Anthony Incorporated.............................................. 25,000
Utendahl Capital Partners, L.P........................................... 25,000
Van Kasper & Company..................................................... 25,000
Wheat, First Securities, Inc............................................. 25,000
---------
Total....................................................... 3,400,000
=========
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States (the
"International Underwriters" and, together with the U.S. Underwriters, the
"Underwriters") for whom Merrill Lynch International, Credit Lyonnais
Securities, Montgomery Securities, Morgan Stanley & Co. International Limited
and Smith Barney Inc. are acting as International representatives (the
"International Representatives"). Subject to the terms and conditions set forth
in the International Purchase Agreement, and concurrently with the sale of
3,400,000 shares of Common Stock to the U.S. Underwriters pursuant to the U.S.
Purchase Agreement, the Company has agreed to sell to the International
Underwriters, and the International Underwriters have severally agreed to
purchase, an aggregate of 600,000 shares of Common Stock. Under certain
circumstances under the International Purchase Agreement, the commitments of
non-defaulting International Underwriters may be increased. The public offering
price per share and the total underwriting discount per share will be identical
under the U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
each such agreement are purchased. Sales of Common Stock to be purchased by the
U.S. Underwriters in the U.S. Offering and the International Underwriters in the
International Offering are conditioned upon one another.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date hereof to purchase up to an additional 510,000 shares at the
public offering price per share, less the underwriting discount, solely to cover
over-allotments, if any. To the extent that the U.S. Underwriters exercise this
option, each U.S. Underwriter will be obligated, subject to certain conditions,
to purchase the number of additional shares of Common Stock proportionate to
such U.S. Underwriter's initial amount reflected in the foregoing table.
Additionally, the Company has granted the International Underwriters an option
exercisable for 30 days after the date hereof to purchase up to an additional
90,000 shares at the public offering price per share, less the underwriting
discount, solely to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.
The U.S. Underwriters propose initially to offer the shares to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not in excess of
$.70 per share, and the U.S. Underwriters may allow, and such dealers may
reallow, a discount not in excess of $.10 per share to certain other dealers.
After the completion of the Offering, the offering price, concession and
discount may be changed.
The U.S. Underwriters and the International Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the International Underwriters and the U.S.
Underwriters of such number of shares of Common Stock as may be mutually agreed.
The price of any Common Stock so sold shall be the public offering price, less
an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell Common Stock will not offer to
sell or sell Common Stock to persons who are U.S. or Canadian persons or to
persons they believe intend to resell to persons who are U.S. or Canadian
persons, and the U.S. Underwriters and any dealer to whom they sell Common Stock
will not offer to sell or sell Common Stock to non-U.S. or non-Canadian persons
or to persons they believe intend to resell to non-U.S. or non-Canadian persons,
except, in each case, for transactions pursuant to such agreement.
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<PAGE> 76
The U.S. Representatives and the International Representatives acted as
representatives of the Underwriters in the IPO and received customary
underwriting compensation in connection therewith.
The Company, each of its directors and executive officers who is a holder
of Common Stock, the Fine Family Shareholders and Blackstone have agreed not to
sell or otherwise dispose of any shares of Common Stock (other than shares
purchased pursuant to the Offering or in the open market) or securities
convertible into or exercisable for Common Stock without the prior written
consent of Merrill Lynch for a period of 90 days after the date of this
Prospectus. See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
If requested by the Company, the Underwriters will reserve up to 100,000
shares of Common Stock for sale at the public offering price to certain
employees, customers, vendors and business associates of the Company who have
expressed an interest in purchasing shares of Common Stock. The number of shares
of Common Stock available to the general public will be reduced to the extent
these persons purchase the reserved shares of Common Stock. Any reserved shares
of Common Stock that are not so purchased by such persons at the closing of the
Offering will be offered by the Underwriters to the general public on the same
terms as the other Common Stock offered by this Prospectus.
Each International Underwriter has represented and agreed that (i) it has
not offered or sold, and will not offer or sell, in the United Kingdom by means
of any document, any shares of the Common Stock other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent (except under circumstances which do not constitute an offer
to the public within the meaning of the Public Offers of Securities Regulations
1995), (ii) it has complied and will comply with all applicable provisions of
the Financial Services Act of 1986 with respect to anything done by it in
relation to the Common Stock in, from or otherwise involving the United Kingdom,
and (iii) it has only issued or passed on, and will only issue or pass on in the
United Kingdom, any document received by it in connection with the issue of the
Common Stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Jones, Day, Reavis & Pogue, New York, New
York. Certain legal matters in connection with this Offering will be passed upon
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.
EXPERTS
The Consolidated Financial Statements of Interstate Hotels Company and
Predecessor Entity as of December 31, 1994 and 1995 and for the years ended
December 31, 1993, 1994 and 1995; the Combined Financial Statements of
Interstone I Property Partnerships and Predecessor Entities as of December 31,
1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995; the
Combined Financial Statements of Interstone/CGL Partners, L.P. and Predecessor
Entity as of December 31, 1994, December 14, 1995 and December 31, 1995 and for
the years ended December 31, 1993 and 1994, for the period from January 1, 1995
to December 14, 1995 and for the period from December 15, 1995 to December 31,
1995; the Financial Statements of Boston Marriott Westborough Hotel as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and
1995; the Combined Financial Statements of Carter Associates and Carter
72
<PAGE> 77
Associates, Inc. as of December 31, 1995 and for the year ended December 31,
1995; the Financial Statements of OBR Limited, L.P. as of December 31, 1995 and
for the year ended December 31, 1995; and the Combined Financial Statements of
Trust Management, Inc. and Trust Leasing, Inc. as of December 31, 1995 and for
the year ended December 31, 1995 included in this Prospectus have been included
herein in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on their authority as experts in accounting and auditing.
The Financial Statements of Fountain Suites Hotel as of December 31, 1995
and for the year ended December 31, 1995 included in this Prospectus have been
included herein in reliance on the reports of Pannell Kerr Forster, independent
accountants, given on their authority as experts in accounting and auditing.
FORWARD-LOOKING INFORMATION
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this Prospectus, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, relating to the operations and results of
operations of the Company, the Company's rapid expansion, the ownership and
leasing of real estate, competition from other hospitality companies, changes in
economic cycles, as well as the other factors described in this Prospectus.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is a part of the Registration Statement, omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement and the exhibits thereto for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. The Registration Statement,
including exhibits filed therewith, may be inspected and copied at the public
reference facilities maintained by the 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 Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed
by the Commission. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission and that is located at
http://www.sec.gov. The Common Stock is listed on the New York Stock Exchange.
Reports and other information concerning the Company may be inspected and copied
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
The Company is required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. The Company intends
to furnish its shareholders annual reports containing consolidated financial
statements certified by its independent accountants and quarterly reports
containing unaudited condensed consolidated financial statements for each of the
first three quarters of each fiscal year.
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<PAGE> 79
INTERSTATE HOTELS COMPANY
INDEX TO PRO FORMA FINANCIAL DATA AND FINANCIAL STATEMENTS
------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA FINANCIAL DATA
Pro Forma Financial Data Summary.................................................. F-3
Pro Forma Balance Sheet as of September 30, 1996 (unaudited)...................... F-4
Pro Forma Statement of Income for the year ended December 31, 1995 (unaudited).... F-5
Pro Forma Statement of Income for the nine months ended September 30, 1996
(unaudited).................................................................... F-6
Notes to Pro Forma Financial Data................................................. F-7
INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY
Report of Independent Accountants................................................. F-13
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30,
1996 (unaudited)............................................................... F-14
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995 and the nine months ended September 30, 1995 and 1996 (unaudited)......... F-15
Consolidated Statements of Changes in Equity for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1996 (unaudited)... F-16
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and the nine months ended September 30, 1995 and 1996 (unaudited)..... F-17
Notes to Consolidated Financial Statements........................................ F-18
INTERSTONE I PROPERTY PARTNERSHIPS AND PREDECESSOR ENTITIES
Report of Independent Accountants................................................. F-34
Combined Balance Sheets as of December 31, 1994 and 1995.......................... F-35
Combined Statements of Operations and Owners' Equity for the years ended December
31, 1993, 1994 and 1995 and for the nine months ended September 30, 1995 and
for the period from January 1, 1996 through June 24, 1996 (unaudited).......... F-36
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1995 and for the period from
January 1, 1996 through June 24, 1996 (unaudited).............................. F-37
Notes to Combined Financial Statements............................................ F-38
INTERSTONE/CGL PARTNERS, L.P. AND PREDECESSOR ENTITY
Report of Independent Accountants................................................. F-48
Combined Balance Sheets as of December 31, 1994, December 14, 1995 and December
31, 1995....................................................................... F-49
Combined Statements of Operations and Predecessor's Equity and Partners' Capital
for the years ended December 31, 1993 and 1994, for the period from January 1,
1995 to December 14, 1995, for the period from December 15, 1995 to December
31, 1995 and for the nine months ended September 30, 1995 and for the period
from January 1, 1996 through June 24, 1996 (unaudited)......................... F-50
Combined Statements of Cash Flows for the years ended December 31, 1993 and 1994,
for the period from January 1, 1995 to December 14, 1995 and for the period
from December 15, 1995 to December 31, 1995 and for the nine months ended
September 30, 1995 and for the period from January 1, 1996 through June 24,
1996 (unaudited)............................................................... F-51
Notes to Combined Financial Statements............................................ F-52
BOSTON MARRIOTT WESTBOROUGH HOTEL
Report of Independent Accountants................................................. F-60
Balance Sheets as of December 31, 1994 and 1995................................... F-61
</TABLE>
F-1
<PAGE> 80
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statements of Operations and Equity for the years ended December 31, 1993, 1994
and 1995 and for the nine months ended September 30, 1995 and for the period
from January 1, 1996 through July 1, 1996 (unaudited).......................... F-62
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
for the nine months ended September 30, 1995 and for the period from January 1,
1996 through July 1, 1996 (unaudited).......................................... F-63
Notes to Financial Statements..................................................... F-64
CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.
Report of Independent Accountants................................................. F-68
Combined Balance Sheet as of December 31, 1995.................................... F-69
Combined Statements of Operations and Partners' Deficit for the year ended
December 31, 1995, for the nine months ended September 30, 1995 and for the
seven months ended July 31, 1996 (unaudited)................................... F-70
Combined Statements of Cash Flows for the year ended December 31, 1995, for the
nine months ended September 30, 1995 and for the seven months ended July 31,
1996 (unaudited)............................................................... F-71
Notes to Financial Statements..................................................... F-72
OBR LIMITED, L.P. D/B/A DORAL OCEAN BEACH RESORT
Report of Independent Accountants................................................. F-77
Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited)......... F-78
Statements of Operations and Owners' Equity for the year ended December 31, 1995
and for the nine months ended September 30, 1995 and 1996 (unaudited).......... F-79
Statements of Cash Flows for the year ended December 31, 1995 and for the nine
months ended September 30, 1995 and 1996 (unaudited)........................... F-80
Notes to Financial Statements..................................................... F-81
TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.
Report of Independent Accountants................................................. F-87
Combined Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited).................................................................... F-88
Combined Statements of Operations for the year ended December 31, 1995 and for the
nine months ended September 30, 1995 and 1996 (unaudited)...................... F-89
Combined Statements of Shareholder's Equity for the year ended December 31, 1995
and for the nine months ended September 30, 1996 (unaudited)................... F-90
Combined Statements of Cash Flows for the year ended December 31, 1996 and for the
nine months ended September 30, 1995 and 1996 (unaudited)...................... F-91
Notes to Combined Financial Statements............................................ F-92
FOUNTAIN SUITES HOTEL
Independent Auditor's Report...................................................... F-98
Hotel Balance Sheet for the year ended December 31, 1995.......................... F-99
Statements of Hotel Operations and Hotel Equity for the year ended December 31,
1995, for the nine months ended September 30, 1995 and for the period from
January 1, 1996 to August 29, 1996 (unaudited)................................. F-100
Statements of Hotel Cash Flows for the year ended December 31, 1995, for the nine
months ended September 30, 1995 and for the period from January 1, 1996 to
August 29, 1996 (unaudited).................................................... F-101
Notes to Financial Statements..................................................... F-102
</TABLE>
F-2
<PAGE> 81
PRO FORMA FINANCIAL DATA
The following unaudited Pro Forma Balance Sheet of the Company as of
September 30, 1996 presents, in "The Company Pro Forma" column, the financial
position of the Company as if a portion of the Offering, as described in "Note
1 -- Basis of Presentation," and the acquisitions of the two Owned Hotels
acquired since September 30, 1996, the Pending Acquisitions and the Equity Inns
Transaction had occurred as of September 30, 1996. The unaudited Pro Forma
Statements of Income of the Company for the year ended December 31, 1995 and the
nine months ended September 30, 1996 present, in "The Company Pro Forma" column,
the results of operations of the Company as if a portion of the Offering, as
described in "Note 1 -- Basis of Presentation," all issuances of Common Stock
prior to or in connection with the IPO, the IPO Acquisitions, the Post-IPO
Acquisitions, the Pending Acquisitions and the Equity Inns Transaction had
occurred as of January 1, 1995, except that the Pro Forma Statements of Income
data give effect to the results of operations of hotels acquired or opened by
Equity Inns after January 1, 1995 as of their respective dates of acquisition or
opening and not as of January 1, 1995. The adjustments required to reflect such
transactions are set forth in the "Pro Forma Adjustments" columns and are
discussed in the accompanying notes.
The unaudited Pro Forma Balance Sheet and Statements of Income of the
Company are presented for informational purposes only and may not reflect the
future results of operations and financial position or what the results of
operations and financial position of the Company would have been had such
transactions occurred as of the dates indicated. The unaudited pro forma
financial data and notes thereto should be read in conjunction with the
financial statements and notes thereto contained elsewhere in this Prospectus.
See "Index to Financial Statements."
F-3
<PAGE> 82
INTERSTATE HOTELS COMPANY
PRO FORMA BALANCE SHEET(2)
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
---------
ASSETS
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
THE FINANCING, THE
COMPANY OFFERING COMPANY
HISTORICAL ACQUISITIONS AND OTHER PRO FORMA
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 24,300 $(112,420)(a) $106,822(g) $ 18,702
Accounts receivable.......................... 23,582 -- -- 23,582
Net investment in direct financing leases.... 657 -- -- 657
Deferred income taxes........................ 5,076 -- -- 5,076
Prepaid expenses and other assets............ 4,117 (1,250)(b) -- 2,867
-------- --------- -------- --------
Total current assets...................... 57,732 (113,670) 106,822 50,884
Restricted cash................................ 10,532 -- -- 10,532
Property and equipment, net.................... 496,723 113,670(c) -- 610,393
Investments in contracts....................... 3,154 -- -- 3,154
Investments in hotel real estate............... 5,222 -- -- 5,222
Officers and employees notes receivable........ 4,509 -- -- 4,509
Net investment in direct financing leases...... 1,572 -- -- 1,572
Other assets................................... 12,373 46,500(d) 5,593(h) 64,466
-------- --------- -------- --------
Total assets.............................. $591,817 $ 46,500 $112,415 $750,732
======== ========= ======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable -- trade.................... 6,184 -- -- 6,184
Accounts payable -- health trust............. 3,116 -- -- 3,116
Accrued payroll and related costs............ 9,444 -- -- 9,444
Income taxes payable......................... 2,373 -- -- 2,373
Other accrued liabilities.................... 19,116 -- -- 19,116
Current portion of long term debt............ 6,421 -- 2,600(i) 9,021
-------- --------- -------- --------
Total current liabilities................. 46,654 -- 2,600 49,254
Long-term debt................................. 287,870 -- 26,650(j) 314,520
Deferred income taxes.......................... 2,271 -- -- 2,271
Other liabilities.............................. 1,213 -- -- 1,213
-------- --------- -------- --------
Total liabilities......................... 338,008 -- 29,250 367,258
Minority interests............................. 5,756 -- -- 5,756
Equity:
Common Stock................................. 287 19(e) 35(k) 341
Paid-in capital.............................. 253,058 46,481(f) 83,130(l) 382,669
Accumulated deficit.......................... (5,292) -- -- (5,292)
-------- --------- -------- --------
Total equity.............................. 248,053 46,500 83,165 377,718
-------- --------- -------- --------
Total liabilities and equity.............. $591,817 $ 46,500 $112,415 $750,732
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of this Pro Forma Balance Sheet
F-4
<PAGE> 83
INTERSTATE HOTELS COMPANY
PRO FORMA STATEMENT OF INCOME (3)
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
THE FINANCING, THE
COMPANY INTERSTONE I INTERSTONE/CGL OFFERING COMPANY
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS AND OTHER PRO FORMA
---------- ------------ -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms............................... $ -- $ 53,451 $ 48,203 $119,718(a) $ -- $ 221,372
Food and beverage................... -- 35,352 24,746 31,598(a) -- 91,696
Other departmental.................. -- 7,141 4,138 7,656(a) -- 18,935
Management and related fees........... 45,018 -- -- 821(a) (4,544)(e) 41,295
-------- -------- -------- -------- --------- ----------
Total revenues.................... 45,018 95,944 77,087 159,793 (4,544) 373,298
Lodging expenses:
Rooms............................... -- 13,160 11,367 31,047(b) -- 55,574
Food and beverage................... -- 26,046 18,261 24,978(b) -- 69,285
Other departmental.................. -- 3,042 2,257 3,610(b) -- 8,909
Property costs...................... -- 33,574 28,370 47,749(b) (9,820)(f) 99,873
General and administrative............ 9,811 686 654 4,458(b) 101(g) 15,710
Payroll and related benefits.......... 15,469 -- -- 2,296(b) (650)(h) 17,115
Non-cash compensation................. -- -- -- -- --(i) --
Lease expense......................... -- -- -- 24,101(c) -- 24,101
Depreciation and amortization......... 4,201 10,251 7,455 12,121(d) (4,193)(j) 29,835
-------- -------- -------- -------- --------- ----------
29,481 86,759 68,364 150,360 (14,562) 320,402
-------- -------- -------- -------- --------- ----------
Operating income.................. 15,537 9,185 8,723 9,433 10,018 52,896
Other (income) expense:
Interest, net....................... (99) 9,605 460 -- 17,674(k) 27,640
Other, net.......................... (203) 589 -- -- 18(l) 404
-------- -------- -------- -------- --------- ----------
(302) 10,194 460 -- 17,692 28,044
-------- -------- -------- -------- --------- ----------
Income (loss) before income tax
expense......................... 15,839 (1,009) 8,263 9,433 (7,674) 24,852
Income tax expense.................... -- -- 3,607 -- 5,837(m) 9,444
-------- -------- -------- -------- --------- ----------
Net income (loss)................. $ 15,839 $ (1,009) $ 4,656 $ 9,433 $ (13,511) $ 15,408
======== ======== ======== ======== ========= ==========
Pro forma net income per common
share............................... $ 0.45
==========
Pro forma common shares outstanding... 34,265,584
==========
</TABLE>
The accompanying notes are an integral part of this Pro Forma Statement of
Income.
F-5
<PAGE> 84
INTERSTATE HOTELS COMPANY
PRO FORMA STATEMENT OF INCOME (3)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
THE FINANCING, THE
COMPANY INTERSTONE I INTERSTONE/CGL OFFERING COMPANY
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS AND OTHER PRO FORMA
---------- ------------ -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms................................ $37,351 $ 27,926 $ 25,355 $111,064(a) $ -- $ 201,696
Food and beverage.................... 16,792 18,372 12,273 21,030(a) -- 68,467
Other departmental................... 3,840 3,619 2,235 6,481(a) -- 16,175
Management and related fees............ 35,788 -- -- 604(a) (3,438)(e) 32,954
------ -------- -------- -------- --------- ----------
Total revenues.................... 93,771 49,917 39,863 139,179 (3,438) 319,292
Lodging expenses:
Rooms................................ 8,064 6,524 5,606 27,279(b) -- 47,473
Food and beverage.................... 12,513 13,066 8,907 17,726(b) -- 52,212
Other departmental................... 1,680 1,631 1,129 1,621(b) -- 6,061
Property costs....................... 16,618 16,869 13,150 38,675(b) (5,093)(f) 80,219
General and administrative............. 7,240 558 759 4,556(b) (670)(g) 12,443
Payroll and related benefits........... 12,564 -- -- 1,872(b) (702)(h) 13,734
Non cash compensation.................. 11,896 -- -- -- (11,896)(i) --
Lease expense.......................... -- -- -- 28,883(c) -- 28,883
Depreciation and amortization.......... 7,762 5,283 4,256 8,428(d) (3,465)(j) 22,264
------ -------- -------- -------- --------- ----------
78,337 43,931 33,807 129,040 (21,826) 263,289
------ -------- -------- -------- --------- ----------
Operating income................... 15,434 5,986 6,056 10,139 18,388 56,003
Other (income) expense:
Interest, net........................ 5,315 4,737 4,965 -- 4,590(k) 19,607
Other, net........................... (329) -- -- -- 1,713(l) 1,384
------ -------- -------- -------- --------- ----------
4,986 4,737 4,965 -- 6,303 20,991
------ -------- -------- -------- --------- ----------
Income before income tax expense... 10,448 1,249 1,091 10,139 12,085 35,012
Income tax expense..................... 11,145 -- -- -- 2,160(m) 13,305
------ -------- -------- -------- --------- ----------
Net income (loss).................. $ (697) $ 1,249 $ 1,091 $ 10,139 $ 9,925 $ 21,707
======= ======== ======== ======== ========= ==========
Pro forma net income per common
share................................ $ 0.63
==========
Pro forma common shares outstanding.... 34,265,584
==========
</TABLE>
The accompanying notes are an integral part of this Pro Forma Statement of
Income.
F-6
<PAGE> 85
INTERSTATE HOTELS COMPANY
NOTES TO PRO FORMA FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1. BASIS OF PRESENTATION
The pro forma financial statements reflect the issuance of 3,534,880 shares
of Common Stock at an offering price of $25.00 per share, which, net of
estimated underwriting discounts and offering expenses payable by the Company,
results in sufficient net proceeds, together with cash on hand, to finance the
Pending Acquisitions and to repay $19,100 of acquisition draws. These shares are
assumed to have been issued, the hotels acquired, and the debt repaid, at the
beginning of the periods presented, and thus interest expense attributable to
such debt has been eliminated. The acquisitions of the Columbus Hilton, Westin
Resort Miami Beach, Burlington Radisson, Washington Vista and assets related to
the Equity Inns Transaction have been accounted for using the purchase method of
accounting.
NOTE 2. PRO FORMA BALANCE SHEET ADJUSTMENTS
ACQUISITIONS
<TABLE>
<S> <C> <C>
(a) Adjustments to reflect the net decrease in cash and cash equivalents:
Purchase of Columbus Hilton from an unrelated third party............... $ (8,200)(1)
Purchase of Westin Resort Miami Beach, net of $1,000 deposit paid in
September, 1996, from an unrelated third party..................... (43,000)(1)
Purchase of Burlington Radisson, net of $250 deposit paid in September,
1996, from an unrelated third party................................ (13,750)(1)
Purchase of Washington Vista from an unrelated third party.............. (47,470)(1)
$(112,420)
(b) Adjustment to reflect the net decrease in other current assets:
Elimination of $1,000 deposit paid in September, 1996 for the Westin
Resort Miami Beach................................................. $ (1,000)(1)
Elimination of $250 deposit paid in September, 1996 for the Burlington
Radisson........................................................... (250)(1)
$ (1,250)
(c) Adjustment to reflect the net increase in fixed assets:
Purchase of Columbus Hilton from an unrelated third party............... $ 8,200(1)
Purchase of Westin Resort Miami Beach from an unrelated third party..... 44,000(1)
Purchase of Burlington Radisson from an unrelated third party........... 14,000(1)
Purchase of Washington Vista from an unrelated third party.............. 47,470(1)
$ 113,670
(d) Adjustment to reflect the net increase in other assets:
Intangible assets related to the purchase of leases, management
contracts and goodwill related to the Equity Inns Transaction...... $ 46,500(2)
(e) Adjustment to reflect increase in Common Stock outstanding for shares
issued pursuant to the Equity Inns Transaction..................... $ 19(2)
</TABLE>
F-7
<PAGE> 86
NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------
NOTE 2. PRO FORMA BALANCE SHEET ADJUSTMENTS--CONTINUED
<TABLE>
<S> <C> <C>
(f) Adjustments to reflect the net increase in paid-in capital:
Acquisition of leases, management contracts and goodwill related to the
Equity Inns Transaction in exchange for 1,957,895 shares of Common
Stock.............................................................. $ 46,500(2)
Increase in Common Stock outstanding for shares issued pursuant to the
Equity Inns Transaction............................................ (19)(2)
$ 46,481
</TABLE>
FINANCING, OFFERING AND OTHER
<TABLE>
<S> <C> <C>
(g) Adjustments to reflect the net increase in cash and cash equivalents:
Proceeds from issuance of 3,534,880 shares of Common Stock
at $25.00 per share................................................. $ 88,372(3)
Proceeds from borrowings under the amended Term Loan..................... 29,250(4)
Payment of underwriting discounts, estimated fees and expenses related to
the issuance of Common Stock........................................ (5,207)(3)
Payment of estimated fees and expenses related to borrowings from the
amended Term Loan, the amended Acquisition Facility and the new debt
rate hedge.......................................................... (5,593)(4)
$106,822
(h) Adjustment to reflect the net increase in other assets:
Deferred loan costs paid for the amended Term Loan and the amended
Acquisition Facility................................................ $ 5,593(4)
(i) Adjustment to reflect the net increase in the current portion of
long-term debt as a
result of debt restructuring............................................. $ 2,600(4)
(j) Adjustments to reflect the net increase in long-term debt as a result of
debt
restructuring............................................................ $ 26,650(4)
(k) Adjustment to reflect increase in Common Stock outstanding related to the
Offering............................................................ $ 35(3)
(l) Adjustments to reflect the net increase in paid in capital:
Proceeds from issuance of 3,534,880 shares Common Stock at $25.00 per
share............................................................... $ 88,372(3)
Payment of estimated fees and expenses related to the issuance of
Common Stock........................................................ (5,207)(3)
Increase in Common Stock outstanding related to the Offering............. (35)(3)
$ 83,130
</TABLE>
The detail supporting the pro forma balance sheet as of September 30, 1996
reflect four self-balancing entries which are identified in (1) through (4)
below and reflect the following:
(1) Record purchase of four hotels from unrelated third parties, net of deposits
paid.
(2) Issuance of 1,957,895 shares of Common Stock in connection with the Equity
Inns Transaction. The stock price assumed was $23.75 per share, representing
the approximate trading price at the date the Company reached an agreement
with the seller and announced the purchase.
F-8
<PAGE> 87
NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------
NOTE 2. PRO FORMA BALANCE SHEET ADJUSTMENTS--CONTINUED
(3) Record issuance of 3,534,880 shares of Common Stock at $25.00 per share, net
of related estimated expenses.
(4) Record debt financing from the amended Term Loan, net of payment of
estimated fees and expenses related to the amended Term Loan and the amended
Acquisition Facility.
NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS
ACQUISITIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -----------------
<C> <S> <C> <C>
(a) Adjustments to reflect the addition of pro forma revenues
for the Post-IPO Acquisitions, Pending Acquisitions and
the Equity Inns Transaction for the period prior to
ownership by the Company:
Lodging revenues:
Rooms....................................................... $119,718 $ 111,064
Food and beverage........................................... 31,598 21,030
Other departmental.......................................... 7,656 6,481
Management and related fees................................. 821 604
-------- ---------
$159,793 $ 139,179
======== =========
(b) Adjustments to reflect addition of pro forma operating
expenses for the Post-IPO Acquisitions, Pending
Acquisitions and the Equity Inns Transaction for the
period prior to ownership by the Company:
Lodging expenses:
Rooms....................................................... $ 31,047 $ 27,279
Food and beverage........................................... 24,978 17,726
Other departmental.......................................... 3,610 1,621
Property costs.............................................. 47,749 38,675
General and administrative.................................. 4,458 4,556
Payroll..................................................... 2,296 1,872
-------- ---------
$114,138 $ 91,729
======== =========
(c) Adjustment to reflect the pro forma lease expense related to
the acquisition of leases related to the Equity Inns
Transaction............................................... $ 24,101 $ 28,883
======== =========
(d) Adjustment to reflect the pro forma depreciation and
amortization expense related to the Post-IPO Acquisitions,
Pending Acquisitions and the Equity Inns Transaction for
the period prior to ownership by the Company*............. $ 12,121 $ 8,428
======== =========
FINANCING, OFFERING AND OTHER
(e) Adjustments to reflect net decrease in management and
related fee revenues:
Pro forma adjustment to reflect management of the Owned
Hotels
for the period prior to ownership by the Company........ $ 4,209 $ 1,758
Elimination of pro forma management fees for the Owned
Hotels
for the period prior to ownership by the Company........ (7,486) (4,443)
</TABLE>
F-9
<PAGE> 88
NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------- --------
<C> <S> <C> <C>
NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS--CONTINUED
Elimination of purchasing fees capitalized by the Owned
Hotels
for the period prior to ownership by the Company........ (360) (103)
Elimination of purchasing fees expensed by the Owned Hotels
for
the period prior to ownership by the Company............ (61) (17)
Elimination of insurance premiums paid to the Company from
the Owned Hotels for the period prior to ownership by
the Company............................................. (846) (633)
-------- ---------
$ (4,544) $ (3,438)
======== =========
(f) Adjustments to reflect net decrease in property costs of the
Owned Hotels:
Pro forma net increase in management fee expense for
Interstone I properties as a result of new management
contracts.............................................. $ 490 $ --
Pro forma net decrease in management fee expense for
Interstone/CGL properties as a result of new management
contracts.............................................. (1,917) --
Elimination of pro forma management fees for the Owned
Hotels for the period prior to ownership............... (7,486) (4,443)
Elimination of insurance premiums paid by the Owned Hotels
to IHC for the period prior to ownership............... (846) (633)
Elimination of purchasing fees expensed by the Owned
Hotels for the period prior to ownership............... (61) (17)
-------- ---------
$ (9,820) $ (5,093)
======== =========
(g) Adjustment to reflect net increase (decrease) in general and
administrative expense:
Increase in general and administrative expenses related to
managing and administering a publicly held company..... $ 1,000 $ 500
Elimination of corporate overhead allocations from the
prior owner of the Interstone/CGL properties........... (622) --
Elimination of asset management fees of Interstone/CGL
Partners, L.P. to an unrelated partner................. -- (262)
Elimination of relocation costs of management funded by
the previous partners of the Owned Hotels.............. (277) (908)
-------- ---------
$ 101 $ (670)
======== =========
(h) Adjustment to reflect the decrease in compensation paid to
seller/ principal in the Equity Inns Transaction**........ $ (650) $ (702)
======== =========
(i) Adjustment to reflect the elimination of non-recurring,
non-cash compensation associated with the IPO............. $ -- $ (11,896)
======== =========
(j) Adjustment to reflect the net decrease in depreciation and
amortization:
Pro forma depreciation and amortization expense of the
Interstone I properties for the period prior to
ownership*............................................. $ 7,535 $ 3,759
Pro forma depreciation and amortization expense of the
Interstone/CGL properties for the period prior to
ownership*............................................. 6,026 2,976
Elimination of amortization of loan costs of the original
Term Loan and Acquisition Facility..................... -- (501)
</TABLE>
F-10
<PAGE> 89
NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------- --------
NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS--CONTINUED
<C> <S> <C> <C>
Elimination of historical depreciation and amortization
expense of the Interstone I properties................. (10,251) (5,283)
Elimination of historical depreciation and amortization
expense of the Interstone/CGL properties............... (7,455) (4,256)
Elimination of amortization of loan costs of the Company
related to indebtedness repaid......................... (36) (152)
Elimination of depreciation expense related to purchasing
fees capitalized prior to ownership.................... (12) (8)
-------- ---------
$ (4,193) $ (3,465)
======== =========
(k) Adjustments to reflect the net increase in interest expense:
Pro forma interest expense related to amended Term
Loan***................................................... $ 22,066 $ 11,862
Pro forma interest expense related to the unused commitment
fee
on the amended Acquisition Facility****................. 750 477
Pro forma interest expense related to the Interstone/CGL
Loan*****............................................... 2,248 1,122
Pro forma amortization of loan costs related to the amended
Term
Loan and amended Acquisition Facility................... 3,239 2,433
Elimination of interest expense of the Company related to
indebtedness repaid..................................... (564) (1,602)
Elimination of interest expense of the Interstone I
properties
related to indebtedness repaid.......................... (9,605) (4,737)
Elimination of interest expense of the Interstone/CGL
properties
related to indebtedness repaid.......................... (460) (4,965)
-------- ---------
$ 17,674 $ 4,590
======== =========
(l) Adjustment to reflect the net increase in other expenses:
Elimination of equity earnings in Interstone/CGL
Partners, L.P. for the period prior to the IPO.......... $ (154) $ 210
Pro forma adjustment to minority interest in earnings of
Interstone/CGL Partners, L.P............................ 404 1,517
Elimination of minority interest acquired by the Company.... 11 (14)
Elimination of gain on settlement of debt obligations
assumed
by the Company in connection with the 1995
reorganization............................................ 346 --
Elimination of losses recognized by the Interstone I
properties
related to a 1995 debt refinancing...................... (589) --
-------- ---------
$ 18 $ 1,713
======== =========
</TABLE>
F-11
<PAGE> 90
NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------
NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS--CONTINUED
<TABLE>
<C> <S> <C> <C>
(m) Adjustment to record the income tax expense associated with
operating corporation using an effective income tax rate
of 38%. The pro forma consolidated statement of income
does not include the initial recording of deferred income
tax expense related to the change in tax status. This
amount was recorded by the Company subsequent to the
closing of the IPO.
Elimination of historical income tax expense................ $ -- $ (11,145)
Income tax expense at an effective rate of 38%.............. 9,444 13,305
Elimination of income tax expense recorded by previous
corporate owner of the Interstone/CGL properties..... (3,607) --
-------- ---------
$ 5,837 $ 2,160
======== =========
</TABLE>
- ------------------
* Pro forma depreciation expense is calculated on the straight-line method
over the estimated useful life of the asset. (Pro forma depreciation
expense for buildings and improvements is calculated over a period of 10
to 40 years, and pro forma depreciation expense for furniture and
fixtures is calculated over a period of 5 to 10 years.) Pro forma
amortization of deferred expenses is calculated on the straight-line
method over the estimated useful life of the asset. (Pro forma
amortization for franchise fees is calculated over a period of 8 to 25
years, and a non-compete agreement is calculated over a period of 5
years. Amortization of intangibles related to the Equity Inns transaction
are amortized over periods ranging from 5 to 25 years).
** Prior to the transaction, a portion of earnings were distributed to the
seller/principal in the form of compensation. Subsequent to the
transaction, the compensation will no longer be paid.
*** Interest on the $293,750 Term Loan is assumed in two tranches: $54 million
swapped at 7.8% and the remainder floating at LIBOR (5.5%) plus 2%.
Principal amortizes at $1,250/quarter after the first quarter.
Principal amortizes at $1,900/quarter after the second and third quarters.
Principal amortizes at $3,800/quarter after the fourth quarter.
Also assumed is a $50 agency fee.
**** The interest for the unused commitment fee is 3/8 of 1% on the available
debt remaining on the new acquisition line.
***** Interest on the $29,250 Interstone/CGL loan is assumed in two tranches:
$18,000 is swapped at 7.8% and the remainder is floating at LIBOR (5.5%)
plus 2%.
F-12
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Interstate Hotels Company:
We have audited the accompanying consolidated balance sheets of Interstate
Hotels Company and Predecessor Entity (the Company) as of December 31, 1994 and
1995, and the related consolidated statements of income, changes in equity and
cash flows for the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1994 and 1995, and the consolidated results of
their operations, changes in equity and cash flows for the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
April 10, 1996, except for the
third paragraph of Note 9,
as to which the date is
April 22, 1996, except for the first
paragraph of Note 1, as to which the
date is June 25, 1996 and except for
Note 17, as to which the date is
November 15, 1996
F-13
<PAGE> 92
INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY
CONSOLIDATED BALANCE SHEETS
---------
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 6,701,518 $ 14,034,622 $ 24,299,981
Accounts receivable (Note 13)........................ 8,276,693 10,653,952 23,581,853
Net investment in direct financing leases (Note 4)... 242,818 399,266 657,104
Deferred income taxes................................ -- -- 5,076,316
Prepaid expenses and other assets.................... 55,182 312,642 4,117,467
----------- ------------ -------------
Total current assets............................ 15,276,211 25,400,482 57,732,721
Restricted cash (Notes 14 and 15)...................... 1,285,674 2,096,213 10,532,251
Property and equipment, net (Note 5)................... 1,913,704 1,894,149 496,722,523
Investments in contracts, net of accumulated
amortization of $13,790,408 and $16,933,107 at
December 31, 1994 and 1995, respectively, and
$19,321,011 at September 30, 1996.................... 8,752,174 5,860,972 3,153,690
Investments in hotel real estate (Note 6).............. -- 12,884,150 5,221,563
Officers and employees notes receivable................ 1,370,537 1,219,313 4,508,529
Affiliates notes receivable............................ 879,944 8,717,662 --
Net investment in direct financing leases (Note 4)..... 681,611 836,010 1,571,619
Other assets........................................... 581,228 2,492,041 12,374,143
----------- ------------ -------------
Total assets.................................. $30,741,083 $ 61,400,992 $ 591,817,039
=========== ============ ============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade.............................................. 1,116,329 925,085 6,183,647
Health Trust (Note 11)............................. 539,436 5,505,207 3,115,907
Affiliates (Note 3)................................ 1,220,000 -- --
Accrued payroll and related benefits................. 2,757,565 3,026,235 9,444,115
Income taxes payable................................. -- -- 2,372,844
Other accrued liabilities............................ 2,359,074 5,546,201 19,116,413
Current portion of long-term debt.................... 672,792 362,735 6,421,003
----------- ------------ -------------
Total current liabilities....................... 8,665,196 15,365,463 46,653,929
Long-term debt (Note 7)................................ 3,217,436 35,907,225 287,869,994
Deferred income taxes.................................. -- -- 2,271,496
Other liabilities...................................... -- -- 1,212,968
----------- ------------ -------------
Total liabilities............................... 11,882,632 51,272,688 338,008,387
----------- ------------ -------------
Minority interests (Note 6)............................ -- 871,910 5,755,875
Commitments and contingencies (Note 14)
Equity:
Common stock (Note 8)................................ 41,600 2,780 286,714
Paid-in capital...................................... 17,880,302 26,883,017 253,058,067
Partners' capital.................................... 3,878,442 -- --
Unearned compensation (Note 9)....................... -- (3,262,853) --
Accumulated deficit.................................. (738,739) (12,736,889) (5,292,004)
Receivable from stockholders (Note 13)............... (2,203,154) (1,629,661) --
----------- ------------ -------------
Total equity.................................... 18,858,451 9,256,394 248,052,777
----------- ------------ -------------
Total liabilities and equity.................. $30,741,083 $ 61,400,992 $ 591,817,039
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE> 93
INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY
CONSOLIDATED STATEMENTS OF INCOME
---------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms......................... $ -- $ -- $ -- $ -- $37,350,457
Food and beverage............. -- -- -- -- 16,792,039
Other departmental............ -- -- -- -- 3,840,427
Net management fees............. 19,229,463 22,284,511 27,022,051 19,356,440 21,871,786
Other management-related fees... 6,334,512 14,441,550 17,996,293 13,531,948 13,916,397
----------- ----------- ----------- ----------- -----------
25,563,975 36,726,061 45,018,344 32,888,388 93,771,106
----------- ----------- ----------- ----------- -----------
Lodging expenses:
Rooms......................... -- -- -- -- 8,063,904
Food and beverage............. -- -- -- -- 12,512,715
Other departmental............ -- -- -- -- 1,680,237
Property costs................ -- -- -- -- 16,617,693
General and administrative...... 5,056,803 8,301,244 9,811,303 6,464,273 7,239,883
Payroll and related benefits.... 10,320,729 12,420,248 15,468,422 11,122,732 12,564,277
Non-cash compensation........... -- -- -- -- 11,895,970
Depreciation and amortization... 3,282,044 3,659,132 4,201,266 2,963,351 7,762,073
----------- ----------- ----------- ----------- -----------
18,659,576 24,380,624 29,480,991 20,550,356 78,336,752
----------- ----------- ----------- ----------- -----------
Operating income........... 6,904,399 12,345,437 15,537,353 12,338,032 15,434,354
Other income (expense):
Interest, net................. 11,794 30,459 99,160 190,849 (5,314,858)
Other, net.................... (5,761) 13,547 202,801 -- 328,773
----------- ----------- ----------- ----------- -----------
Income before income tax
expense.................. 6,910,432 12,389,443 15,839,314 12,528,881 10,448,269
Income tax expense (Note 17).... -- -- -- -- 11,145,061
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary items...... 6,910,432 12,389,443 15,839,314 12,528,881 (696,792)
Extraordinary loss from early
extinguishment of debt, net of
deferred tax benefit of
$3,937,118.................... -- -- -- -- (7,642,641)
----------- ----------- ----------- ----------- -----------
Net income (loss).......... $ 6,910,432 $12,389,443 $15,839,314 $12,528,881 $(8,339,433)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
<PAGE> 94
INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
---------
<TABLE>
<CAPTION>
RECEIVABLE
COMMON PAID-IN PARTNERS' UNEARNED ACCUMULATED FROM
STOCK CAPITAL CAPITAL COMPENSATION DEFICIT STOCKHOLDERS TOTAL
-------- ------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ $ 34,000 $ 17,756,802 $ 1,009,680 $ -- $ (269,403 ) $(1,846,080 ) $ 16,684,999
Common stock of newly
established entities...... 22,700 -- -- -- -- -- 22,700
Additional capital
contributions............. -- 99,400 -- -- -- -- 99,400
Partners' capital
contributions............. -- -- 1,000 -- -- -- 1,000
Net increase in receivable
from stockholders......... -- -- -- -- -- (1,133,320 ) (1,133,320)
Distributions paid.......... -- -- (1,690,000) -- (4,268,646 ) -- (5,958,646)
Net income.................. -- -- 2,641,353 -- 4,269,079 -- 6,910,432
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at December 31,
1993........................ 56,700 17,856,202 1,962,033 -- (268,970 ) (2,979,400 ) 16,626,565
Effect of
recapitalization.......... (21,500) 21,500 -- -- -- -- --
Common stock of newly
established entities...... 6,400 -- -- -- -- -- 6,400
Additional capital
contributions............. -- 2,600 -- -- -- -- 2,600
Net decrease in receivable
from stockholders......... -- -- -- -- -- 776,246 776,246
Distributions paid.......... -- -- (4,955,600) -- (5,987,203 ) -- (10,942,803)
Net income.................. -- -- 6,872,009 -- 5,517,434 -- 12,389,443
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at December 31,
1994........................ 41,600 17,880,302 3,878,442 -- (738,739 ) (2,203,154 ) 18,858,451
Effect of Reorganization.... (41,583) 4,520,025 (4,478,442) -- -- -- --
Assumption of liability by
principal stockholder..... -- 1,220,000 -- -- -- -- 1,220,000
Common stock of newly
established entities...... 2,600 -- -- -- -- -- 2,600
Partners' capital
contributions............. -- -- 600,000 -- -- -- 600,000
Stock options granted....... 163 3,262,690 -- (3,262,853 ) -- -- --
Assumption of stockholders'
liability................. -- -- -- -- (12,994,923 ) -- (12,994,923)
Net decrease in receivable
from stockholders......... -- -- -- -- -- 573,493 573,493
Distributions paid.......... -- -- -- -- (14,842,541 ) -- (14,842,541)
Net income.................. -- -- -- -- 15,839,314 -- 15,839,314
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at December 31,
1995........................ 2,780 26,883,017 -- (3,262,853 ) (12,736,889 ) (1,629,661 ) 9,256,394
Unearned compensation
recognized................ -- -- -- -- 93,420 -- 93,420
Return of stock options
issued in 1995............ (163) (3,262,690) -- 3,262,853 -- -- --
Restricted stock issued..... 7,855 11,775,140 -- -- -- -- 11,782,995
Net decrease in receivable
from stockholders......... -- -- -- -- -- 1,629,661 1,629,661
Dividends and capital
distributions............. -- (35,395,467) -- -- (4,334,263 ) -- (39,729,730)
Contribution of Predecessor
Entity net assets for
common stock.............. 126,474 (20,151,635) -- -- 20,025,161 -- --
Issuance of common stock to
purchase hotel............ 3,952 9,602,724 -- -- -- -- 9,606,676
Issuance of common stock,
net of offering
expenses.................. 145,816 263,606,978 -- -- -- -- 263,752,794
Net loss.................... -- -- -- -- (8,339,433 ) -- (8,339,433)
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at September 30, 1996
(unaudited)................. $286,714 $253,058,067 $ -- $ -- $(5,292,004 ) $ -- $248,052,777
======== ============ =========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE> 95
INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 6,910,432 $ 12,389,443 $ 15,839,314 $ 12,528,881 $ (8,339,433)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 3,282,044 3,659,132 4,201,266 2,963,351 7,762,073
Minority interests' share of equity loss from
investment in hotel real estate............. -- -- (10,421) -- (106,023)
Write-off of deferred financing fees.......... -- -- -- -- 6,231,264
Non-cash compensation......................... -- -- -- -- 11,895,970
Deferred income taxes......................... -- -- -- -- 1,835,099
Other......................................... (5,710) (53,771) (297,923) (68,250) (340,463)
Cash (used) provided by assets and liabilities:
Accounts receivable........................... (489,170) (2,652,129) (2,377,259) (3,712,604) (3,348,043)
Prepaid expenses and other assets............. 48,989 (16,878) (257,460) (564,251) (3,486,813)
Accounts payable.............................. 108,806 915,261 4,774,527 3,170,284 (2,565,532)
Income taxes payable.......................... -- -- -- -- 2,372,844
Accrued liabilities........................... 533,892 1,076,703 3,455,797 2,334,793 2,799,196
----------- ------------ ------------ ------------ -------------
Net cash provided by operating activities... 10,389,283 15,317,761 25,327,841 16,652,204 14,710,139
----------- ------------ ------------ ------------ -------------
Cash flows from investing activities:
Investments in contracts........................ (352,000) (2,138,921) (941,817) (245,895) (80,623)
Investments in hotel real estate................ -- -- (13,038,153) -- (5,146,563)
Change in notes receivable, net................. (1,478,595) 528,694 (7,686,494) (1,915,068) (3,289,216)
Acquisition of hotels, net of cash received..... -- -- -- -- (236,672,875)
Purchase of property and equipment, net......... (716,007) (607,354) (438,165) (364,795) (1,147,860)
Purchase of assets to be leased................. (236,380) (874,697) (606,115) (565,386) (1,446,698)
Payments received under capital leases.......... 26,759 204,688 387,807 260,388 563,278
Change in restricted cash....................... (205,308) (813,572) (810,539) (994,776) (1,987,351)
Other........................................... (126,558) (150,364) 275,658 31,775 3,136,875
----------- ------------ ------------ ------------ -------------
Net cash used in investing activities....... (3,088,089) (3,851,526) (22,857,818) (3,793,757) (246,071,033)
----------- ------------ ------------ ------------ -------------
Cash flows from financing activities:
Proceeds from long-term debt.................... 1,625,000 3,548,000 35,000,000 -- 265,750,000
Repayment of long-term debt..................... (1,892,739) (2,641,990) (15,265,191) (622,268) (241,689,127)
Financing costs paid............................ (5,000) (33,518) (2,087,611) -- (9,348,804)
Proceeds from issuance of common stock, net..... -- -- -- -- 263,752,794
Minority interests.............................. -- -- 882,331 -- (1,735,818)
Capital contributions........................... 123,100 9,000 602,600 600,000 --
Funds advanced to stockholders.................. (1,704,136) (1,688,754) (3,244,661) (7,950,158) (6,422,834)
Repayment of funds advanced to stockholders..... 570,816 2,465,000 3,818,154 2,493,154 8,052,495
Repayment of notes payable to stockholders...... -- -- -- -- (30,000,000)
Dividends and capital distributions paid........ (5,958,646) (10,942,803) (14,842,541) (5,725,190) (6,732,453)
----------- ------------ ------------ ------------ -------------
Net cash (used in) provided by financing
activities................................ (7,241,605) (9,285,065) 4,863,081 (11,204,462) 241,626,253
----------- ------------ ------------ ------------ -------------
Net increase in cash and cash equivalents......... 59,589 2,181,170 7,333,104 1,653,985 10,265,359
Cash and cash equivalents at beginning of
period.......................................... 4,460,759 4,520,348 6,701,518 6,701,518 14,034,622
----------- ------------ ------------ ------------ -------------
Cash and cash equivalents at end of period........ $ 4,520,348 $ 6,701,518 $ 14,034,622 $ 8,355,503 $ 24,299,981
=========== ============ ============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 240,136 $ 261,151 $ 507,398 $ 244,032 $ 5,956,745
=========== ============ ============ ============ =============
Supplemental disclosure of non-cash investing and
financing activities:
Notes payable issued to acquire contracts....... -- $ 1,175,568 -- -- --
=========== ============ ============ ============ =============
Assumption of liability by principal
stockholder................................... -- -- $ 1,220,000 -- --
=========== ============ ============ ============ =============
Assumption of stockholders' liability........... -- -- $ 12,994,923 -- --
=========== ============ ============ ============ =============
Unearned compensation related to stock
options....................................... -- -- $ 3,262,853 -- $ (3,262,853)
=========== ============ ============ ============ =============
Notes payable issued to stockholders............ -- -- -- -- $ 30,000,000
=========== ============ ============ ============ =============
Issuance of common stock to purchase hotel...... -- -- -- -- $ 9,606,676
=========== ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
<PAGE> 96
INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Interstate Hotels Company was formed on April 19, 1996 pursuant to a plan
to pursue an initial public offering (the Initial Offering) of common stock
(refer to Note 17). On June 25, 1996, Interstate Hotels Company's predecessor,
Interstate Hotels Corporation and Affiliates (IHC or the Predecessor Entity),
contributed all of the outstanding shares of common stock of IHC to Interstate
Hotels Company in exchange for equal shares of common stock of Interstate Hotels
Company. Also in conjunction with the Initial Offering, certain other affiliates
which owned interests in 13 hotels (the Owned Hotels) and certain executives of
IHC, who also owned interests in the Owned Hotels, contributed their interests
to Interstate Hotels Company in exchange for common stock. As a result,
Interstate Hotels Company owns 100% of its subsidiaries (consisting of the
Predecessor Entity) and all of the interests in the Owned Hotels (excluding
minority equity interests in seven of the hotels), all of which is herein
defined as the Company. The contributions of common stock of IHC and other
interests to Interstate Hotels Company were accounted for in a manner similar to
that used in pooling-of-interests accounting. The accompanying financial
statements of Interstate Hotels Company include the results of operations for
the Predecessor Entity for the period prior to the consummation of the Initial
Offering and the results of operations for the Company, which includes the
results of operations for the Owned Hotels for the period subsequent to June 25,
1996.
The Company provides management and other services principally to hotels.
The Predecessor Entity's financial statements combine the accounts of IHC and
IHC Member Corporation (IHC Member), which were under common control and
ownership prior to the Initial Offering. The Predecessor Entity's combined
financial statements also include the following wholly-owned subsidiaries:
Crossroads Hospitality Company, L.L.C. (Crossroads), Colony Hotels and Resorts
Company (Colony), Continental Design and Supplies Company, L.L.C. (CDS), Hilltop
Equipment Leasing Company, L.P. (Hilltop), Northridge Insurance Company
(Northridge) and the majority-owned consolidated investment in IHC/Interstone
Partnership II, L.P. (IHC/IPII).
IHC, Crossroads and Colony operate properties and collect management fees
pursuant to management agreements with the respective owners of the hotels. It
is the responsibility of IHC, Crossroads and Colony to manage the assets,
collect the revenues and pay the operating expenses and other liabilities of the
respective properties in accordance with the management agreements. In addition,
franchise, accounting and other operating fees are earned for certain properties
as stipulated in the respective agreements. These fees are included in other
management-related fees in the Company's consolidated statements of income. The
consolidated statements of income include only the income earned by the Company
from the operation of the respective properties (refer to Note 10). The
properties' operating assets, liabilities, income and expenses are included in
the owners' financial statements.
CDS, Hilltop and Northridge provide various services to properties operated
by IHC, Crossroads and Colony. CDS provides the hotels with certain purchasing
and project management services and earns fees based on a percentage of the
price of equipment purchased and hotel gift shop revenues. Fees earned by CDS
are included in other management-related fees in the Company's consolidated
statements of income.
Hilltop provides office, computer and telephone equipment under capital and
operating leases to certain hotels with noncancelable terms ranging from one to
sixty months. Rental income earned by Hilltop is included in other
management-related fees in the Company's consolidated statements of income.
Northridge provides reinsurance to major insurance carriers solely in
connection with the insurance that those carriers provide to the properties
managed by the Company. Northridge also provides direct insurance coverage to
the Company in connection with its self-insured health care program. Income
earned by Northridge is included in other management-related fees in the
Company's consolidated statements of income.
F-18
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
1. BASIS OF PRESENTATION--CONTINUED
IHC/IPII owns an interest in an affiliated partnership that owns six
hotels, five of which are managed by the Company (refer to Note 6).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination and Consolidation:
The consolidated financial statements of the Company include the accounts
of the entities described in Note 1. All transactions and intercompany balances
among the entities are eliminated.
The principal stockholder of the Company has an ownership interest in
certain hotels and related entities managed by the Company (refer to Note 13).
These entities are not included in the Company's consolidated financial
statements.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. They may also affect the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents:
For purposes of the consolidated statements of cash flows, all
unrestricted, highly liquid investments purchased with a remaining maturity of
three months or less are considered to be cash equivalents. Substantially all
cash and cash equivalents are maintained at a limited number of financial
institutions. No collateral or other security is provided on cash deposits,
other than $100,000 of deposits for each financial institution insured by the
Federal Deposit Insurance Corporation.
Leases:
Assets acquired and subsequently leased to hotels under capital leases are
recorded at the net investment in direct financing leases, which represents the
total future minimum lease payments receivable net of unearned income. When
payments are received, the receivable is reduced and the unearned income is
recognized on a pro-rata basis over the life of the lease.
Property and Equipment:
Property and equipment are recorded at cost and are depreciated on the
straight-line method over their estimated useful lives. Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service or sold are
eliminated from the accounts and any gain or loss thereon is included in
operations.
Investments in Contracts:
Investments in contracts consists of the allocated costs arising from the
purchase and change in control of the Company in 1989 and amounts paid to obtain
management and other contracts. Investments in contracts are being amortized
over the average life of the contracts ranging from three to ten years.
F-19
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Investments in Hotel Real Estate:
The Company accounts for investments in hotel real estate as follows:
- Majority-owned hotels: The Company consolidates all majority-owned
interests in hotels.
- Less than majority-owned: The Company accounts for investments in less
than 50% but greater than 20% owned entities in which it can exert
significant influence on the equity method of accounting. The Company
accounts for all other investments on the cost method.
Other Assets:
Other assets in 1995 include financing fees of approximately $2,075,000,
which are being amortized over the term of the related indebtedness of 84
months. Other assets as of September 30, 1996 include approximately $8,714,000
of financing fees.
Revenue Recognition:
The Owned Hotels recognize revenue from their rooms, catering, gift shop
and restaurant facilities as earned on the close of each business day. Net
management fees and other management-related fees are recognized when earned.
Hotels managed under short-term operating leases with certain lessee and lessor
cancellation clauses are treated as management contracts, with the fees earned
from these leases recognized when earned.
Reimbursable Expenses:
The Company is reimbursed for costs associated with providing data
processing, sales and marketing and employee training services to managed
hotels. These revenues are included in other management-related fees and the
corresponding costs are included in general and administrative and payroll and
related benefits on the consolidated statements of income.
Insurance:
Insurance premiums are recorded as income on a pro-rata basis over the life
of the related policies, as appropriate, with the portion applicable to the
unexpired terms of the policies in force recorded as unearned premium reserves.
Losses are provided for reported claims, claims incurred but not reported and
claim settlement expense at each balance sheet date. Such losses are based on
management's best estimate of the ultimate cost of settlement of claims. Actual
liabilities may differ from estimated amounts. Any changes in estimates are
reflected in current earnings.
Income Tax Status:
Prior to the Reorganization on November 1, 1995 discussed in Note 3, the
entities that comprise the Predecessor Entity elected to be treated as either S
Corporations or limited partnerships. Similar elections were made, where
possible, for state income tax purposes.
After the Reorganization, the S Corporation status of Colony was terminated
and for the period subsequent to November 29, 1995 Colony is treated as a C
Corporation for federal and state income tax purposes. All of the other entities
included in IHC were S Corporations, limited liability companies or partnerships
until the Initial Offering, which were generally all treated as pass-through
entities for tax purposes.
F-20
<PAGE> 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Accordingly, the majority of all federal and state income tax liabilities
and benefits are borne by the respective stockholders or partners. State and
local income tax liabilities and benefits borne by IHC are not significant and
are included in the consolidated statements of income for the three years in the
period ended December 31, 1995.
Pursuant to the Initial Offering, IHC terminated its status as an S
Corporation (refer to Note 17). Accordingly, the Company is subject to federal
and state income taxes. Deferred income taxes are recorded using the liability
method. Under this method, deferred tax liabilities and assets are provided for
the differences between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
Reclassifications:
Certain amounts in the 1993, 1994 and 1995 consolidated financial
statements have been reclassified to conform to the presentation adopted in the
September 30, 1996 unaudited consolidated financial statements.
Unaudited Financial Statements:
The unaudited consolidated balance sheet as of September 30, 1996 and the
unaudited consolidated statements of income, changes in equity and cash flows
for the nine months ended September 30, 1995 and 1996, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and include all significant adjustments (consisting
primarily of normal recurring adjustments) considered necessary for a fair
presentation of the results of these interim periods. The data disclosed in
these notes to the consolidated financial statements for these periods are also
unaudited. Operating results for the nine-month period ended September 30, 1996
is not necessarily indicative of the results for the entire year.
3. REORGANIZATION:
On November 1, 1995, IHC underwent a capital restructuring (the
Reorganization) in order to eliminate duplicative administrative and accounting
expenses, among other things. Pursuant to the Reorganization, IHC merged a
number of companies and created subsidiaries for certain other entities which
were all under common control. The Reorganization was accounted for in a manner
similar to that used in pooling-of-interests accounting. Additionally,
concurrent with the Reorganization, IHC assumed a $12,995,000 obligation of its
principal stockholder that was accounted for as a distribution of capital. IHC
also recorded a contribution of capital when indebtedness in the amount of
$1,220,000 that was owed to an affiliate was assumed by the principal
stockholder.
4. NET INVESTMENT IN DIRECT FINANCING LEASES:
Hilltop leases office, computer and telephone equipment to hotels under
capital leases. The following represents the components of the net investment in
direct financing leases:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Total future minimum lease payments
receivable.................................... $1,212,082 $1,611,815 $ 2,946,402
Less unearned income............................ 287,653 376,539 717,679
----------- ----------- -----------
924,429 1,235,276 2,228,723
Less current portion............................ 242,818 399,266 657,104
---------- ---------- -----------
$ 681,611 $ 836,010 $ 1,571,619
========== ========== ===========
</TABLE>
F-21
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
4. NET INVESTMENT IN DIRECT FINANCING LEASES--CONTINUED
Future minimum lease payments to be received under these leases for each of
the years ending December 31 are as follows:
<TABLE>
<S> <C>
1996..................................................................... $ 508,798
1997..................................................................... 430,278
1998..................................................................... 382,245
1999..................................................................... 240,477
2000..................................................................... 50,017
----------
$1,611,815
==========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................... $ -- $ -- $ 43,384,731
Buildings and improvements..................... 656,590 678,142 403,677,499
Furniture, fixtures and equipment.............. 3,367,231 3,775,677 89,591,710
---------- ---------- -------------
4,023,821 4,453,819 536,653,940
Less accumulated depreciation.................. 2,110,117 2,559,670 39,931,417
---------- ---------- -------------
$1,913,704 $1,894,149 $ 496,722,523
========== ========== =============
</TABLE>
6. INVESTMENTS IN HOTEL REAL ESTATE:
As of December 31, 1995, IHC/IPII is owned 93.23% by the Company, with the
remaining 6.77% owned by a limited partnership consisting of certain officers of
the Company. This minority partnership contributed $882,331 to IHC/IPII for
their interest, which is reflected as minority interests in the Company's
consolidated balance sheets. IHC/IPII made a $13,038,000 investment on December
15, 1995 for a 20.45% interest in Interstone/CGL Partners, L.P. (CGL). The
following represents the summarized financial information of CGL:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Assets:
Current............................................................ $ 7,822,863
Noncurrent......................................................... 171,741,811
------------
Total assets............................................... 179,564,674
Liabilities:
Current............................................................ 4,636,254
Other long-term liabilities........................................ 1,212,968
Long-term debt, including current portion.......................... 120,000,000
------------
Total liabilities.......................................... 125,849,222
------------
Net assets................................................. 53,715,452
Less ownership interest of others.................................... 40,831,302
------------
Investments in hotel real estate..................................... $ 12,884,150
============
</TABLE>
F-22
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
6. INVESTMENTS IN HOTEL REAL ESTATE--CONTINUED
<TABLE>
<CAPTION>
DECEMBER 15
(INCEPTION) TO
DECEMBER 31, 1995
-----------------
<S> <C>
Hotel operations:
Operating revenues......................................................... $ 2,484,498
Operating costs and expenses............................................... 1,386,137
-----------
Operating profit........................................................... 1,098,361
Other expenses............................................................. 1,025,197
-----------
Hotel income before partnership expenses..................................... 73,164
Partnership expenses:
Depreciation and amortization.............................................. 366,181
Interest................................................................... 460,000
-----------
826,181
-----------
Net loss..................................................................... (753,017)
-----------
Ownership interest of others................................................. (599,014)
-----------
Equity loss of investment in hotel real estate............................... $ (154,003)
===========
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
---------- ----------- -------------
(UNAUDITED)
REFER TO NOTE 17
<S> <C> <C> <C>
Term Loan and Revolving Credit Facility................ $ -- $ -- $264,500,000
CGL Loan............................................... -- -- 29,250,000
IHC 1995 revolving credit and term loan facility....... -- 35,000,000 --
IHC 1994 revolving credit and term loan facility....... 1,948,000 -- --
Colony note payable.................................... 875,568 703,300 540,997
Bank notes payable..................................... 766,660 566,660 --
Note payable........................................... 300,000 -- --
---------- ----------- ------------
3,890,228 36,269,960 294,290,997
Less current portion................................... 672,792 362,735 6,421,003
---------- ----------- ------------
$3,217,436 $35,907,225 $287,869,994
========== =========== ============
</TABLE>
On December 13, 1995, IHC entered into a $35,000,000 Term Loan agreement
and a $15,000,000 Revolving Credit Facility (collectively, the Loan Agreement).
The Term Loan is separated into four seven-year notes and one six-year note. The
notes are payable in four quarterly installments of $1,750,000 beginning March
13, 2000, four quarterly installments of $2,625,000 beginning March 13, 2001 and
four quarterly installments of $4,375,000 beginning March 13, 2002. The Loan
Agreement provides for a 1% prepayment penalty in the first year. The Loan
Agreement also provides for mandatory prepayments to be made commencing with the
year ending December 31, 1998 based on excess cash flow, as defined in the
agreement.
Interest is payable subject to IHC's election of the Base Rate Option or
the Eurodollar Rate Option. The Base Rate Option is the lender's prime rate plus
1.75% for the seven-year notes and prime plus 1.5% for the six-year note. The
Euro Rate Option is LIBOR plus 3.25% for the seven-year notes and LIBOR plus 3%
for
F-23
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT--CONTINUED
the six-year note. IHC elected the Eurodollar Rate Option to be in effect at
December 31, 1995, which was equal to 9.125% and 8.875% for the seven-year notes
and the six-year note, respectively.
A portion of the proceeds from the Term Loan was used to repay the
outstanding balance of the IHC 1994 revolving credit and term loan facility. The
proceeds were also used to retire the $12,995,000 obligation assumed pursuant to
the Reorganization (Note 3), fund the $13,038,000 equity investment in hotel
real estate (Note 6) and lend $7,380,000 to an uncombined affiliate (Note 13).
Included in other income on the Company's consolidated statements of income is a
$350,000 gain resulting from the settlement of the $12,995,000 obligation
assumed from the principal stockholder.
On December 13, 1998, the outstanding balance under the Revolving Credit
Facility will convert to a term loan and will be payable in eight equal
quarterly installments beginning March 13, 1999. No amounts were outstanding
under the Revolving Credit Facility at December 31, 1995. Interest is payable
subject to IHC's election of the Base Rate Option (prime plus 1%) or the
Eurodollar Rate Option (LIBOR plus 2.5%). The available borrowings under the
Revolving Credit Facility are reduced by the letters of credit outstanding (Note
14), which at no time may exceed $2,500,000. At December 31, 1995, the
borrowings available amounted to approximately $14,513,000. A nonrefundable
commitment fee equal to .375% of the unused portion of the Revolving Credit
Facility is payable quarterly. Additionally, letter of credit fees equal to
2.25% of the outstanding letters of credit and an annual agent's fee of $40,000
are payable quarterly.
The Loan Agreement contains certain restrictive covenants, including the
maintenance of certain financial ratios, restrictions on the payment of
dividends, limitations on additional indebtedness and certain other reporting
requirements. The stockholders have pledged all of the stock and substantially
all of the assets of the Company as collateral for the Loan Agreement.
In 1993, the Company entered into a loan agreement with a bank. The
agreement provided for aggregate borrowings of $1,000,000 in the form of two
separate notes. One note for $500,000 was borrowed in 1993 and is payable in 60
equal monthly installments plus interest at 7.77%. The second note for $500,000
was borrowed in 1994 and is payable in 60 equal monthly installments plus
interest at 9.08%.
On May 31, 1994, Colony entered into a $1,000,000 non-interest bearing note
with Radisson Hotels International, Inc. in connection with the acquisition of
management and other service contracts. The note is payable in five annual
installments of $200,000 beginning January 1, 1995. At December 31, 1995, the
present value of the interest-free note was $703,300.
On July 12, 1994, IHC entered into a $300,000 7% note payable in connection
with the acquisition of management contracts. The note was paid on July 8, 1995.
Statement of Financial Accounting Standards No. 107 requires disclosure
about the fair value of financial instruments. Based on interest rates currently
available, management believes that the carrying amount of all long-term debt is
a reasonable estimation of fair value.
Aggregate scheduled maturities of long-term debt for each of the five years
ending December 31 and thereafter are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 362,735
1997............................................................ 371,344
1998............................................................ 297,068
1999............................................................ 238,813
2000............................................................ 7,000,000
Thereafter...................................................... 28,000,000
-----------
$36,269,960
===========
</TABLE>
F-24
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
8. COMMON STOCK:
Common stock at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
CLASS "A" CLASS "B"
NUMBER OF SHARES NUMBER OF SHARES
------------------------ ------------------------
PAR ISSUED AND ISSUED AND TOTAL
COMPANY VALUE AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING AMOUNT
------- ----- ---------- ----------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
IHC..................... $ .01 5,000 1,471 495,000 164,326 $1,658
IHC Member.............. .01 1,000 100 49,000 12,075 122
Other entities.......... .01 - 1.00 11,000 1,000 49,000 39,600 1,000
------ ----- ------- ------- ------
17,000 2,571 593,000 216,001 $2,780
====== ===== ======= ======= ======
</TABLE>
The Reorganization discussed in Note 3 resulted in the reclassification of
$41,583 between common stock and paid-in capital and the reclassification of
$4,478,442 between partners' capital and paid-in capital. The above changes have
been reflected in the 1995 consolidated financial statements.
In 1994, IHC recapitalized certain companies and created two classes of
common stock. Both classes are identical in all respects, including a ratable
share of all dividends and other distributions, except for voting rights.
Holders of Class "A" Common Stock are entitled to one vote per share, while
Class "B" Common Stock is non-voting. The recapitalization resulted in the
reclassification of $21,500 between common stock and paid-in capital, which was
reflected in the 1994 consolidated financial statements.
The Blackstone Option:
In October 1995, IHC and Blackstone Real Estate Partners, L.P. (Blackstone)
entered into an Option Agreement (the Option Agreement) pursuant to which IHC
granted to Blackstone an option (the Blackstone Option) to purchase a 20% equity
interest in a new company to be formed to succeed IHC and certain of its
affiliates and upon payment by Blackstone of the exercise price of $23.3
million. The Blackstone Option was exercisable upon the occurrence of certain
events, including the filing by the Company with the Securities and Exchange
Commission of a registration statement relating to an underwritten initial
public offering of shares of its common stock. In connection with the execution
of the Blackstone Acquisition Agreement discussed in Note 17, Blackstone
exercised the Blackstone Option conditioned upon the consummation of the
proposed Initial Offering. Upon the closing of the Blackstone Option, Blackstone
will receive $44.8 million of common stock based on the Initial Offering price,
and the Company will pay Blackstone a $233,000 arrangement fee.
9. STOCK OPTIONS:
In December 1995, IHC granted stock options pursuant to a Stock Option Plan
adopted on the same date to certain officers to purchase shares of common stock.
The exercise price for 7,143 of the options was determined based on an
independent market valuation to be fair market value of the stock on the date of
the grant and the exercise price for 9,137 of the options was below fair market
value. The Stock Option Plan also provides for a reserve for future issuance of
332 options. The options are exercisable in installments over an eight-year
period commencing on the earlier of the optionee's attaining age 60 or 10 years
from the date of the grant. No options were exercisable at December 31, 1995.
The officers must continue in the employment of the Company or serve as
consultants to the Company and not compete against the Company in order for the
options to vest. The unearned compensation related to the stock options granted
is being charged to expense over the vesting period using the market value at
the issuance date.
F-25
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
9. STOCK OPTIONS--CONTINUED
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
RANGE OF
OPTION PRICE
OPTION PRICE GRANTED AT
NUMBER OF GRANTED AT BELOW FAIR
OPTIONS FAIR VALUE VALUE
--------- ------------ ------------
<S> <C> <C> <C>
Outstanding, December 31, 1994....................... -- -- --
Granted.............................................. 16,280 $585 $174 - 303
Exercised............................................ -- -- --
Canceled............................................. -- -- --
------
Outstanding, December 31, 1995....................... 16,280
======
</TABLE>
On April 22, 1996, IHC agreed to cancel the stock options granted under the
Stock Option Plan adopted in December 1995 in consideration of the Company's
agreement to issue to the option holders an aggregate of 8,492 shares of
restricted stock of the Company. The restricted stock will be subject to
restrictions on transfer and rights of repurchase in the event of the employee's
death, disability or termination of employment prior to the consummation of the
Company's initial public offering (refer to Note 17). As a result of the
cancellation of the stock options and issuance of the restricted stock at no
cost to the recipients, the Company will reverse the amortized unearned
compensation related to the stock options and record compensation expense of
approximately $9.5 million, based on a fair value of $1,123 per share for the
Company's common stock (refer to Note 17).
10. NET MANAGEMENT FEES:
The Company's management agreements have initial terms that range from one
month to 50 years, expire through the year 2044 and generally are cancelable
under certain conditions. In addition, certain agreements are renewable for
successive terms of one to ten years.
The management agreements specify the base fees to be earned, which are
generally based on percentages of gross revenues. In certain cases, incentive
fees are earned based on profitability as defined by the management agreements.
The net management fees earned were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Base management fees............ $17,621,678 $19,704,733 $22,792,054 $17,253,945 $19,098,303
Incentive management fees....... 1,347,634 3,118,482 4,752,936 2,440,302 3,133,942
Receivership fees............... 757,991 34,519 -- -- --
----------- ----------- ----------- ----------- -----------
19,727,303 22,857,734 27,544,990 19,694,247 22,232,245
Less:
Administrative fees (Note
13)........................ 497,840 487,997 438,805 329,397 345,107
Write-off of uncollectible
base management fees....... -- 85,226 84,134 8,410 15,352
----------- ----------- ----------- ----------- -----------
$19,229,463 $22,284,511 $27,022,051 $19,356,440 $21,871,786
=========== =========== =========== =========== ===========
</TABLE>
F-26
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
11. EMPLOYEE BENEFITS:
The Company participates in the following employee benefit plans:
The IHC Employee Health and Welfare Plan (and related Health Trust)
provides employees of the Company, including hotels under management, with
group health insurance benefits. The Company is self-insured for certain
benefits, subject to certain individual claim and aggregate maximum
liability limits. For the period January 1, 1993 through July 31, 1994, the
Company and each Company-covered hotel paid premiums to the Health Trust
based on the estimated conventional premiums. Effective August 1, 1994,
each Company-covered hotel pays the premiums directly to the Company and
the Company funds the Health Trust. The Company is responsible for any
underfunding of the Health Trust and receives an insurance premium as
discussed in Note 15. The employee portion of the premiums continues to be
paid directly to the Health Trust. These premiums may be prospectively
adjusted to consider actual claims experience. The Company paid and
expensed amounts to the Health Trust related to coverage for employees at
its corporate offices of approximately $346,000 in 1993 and $217,000 in
1994. Amounts paid to the Health Trust since August 1, 1994 have been
eliminated against the insurance income recorded by the Company as
discussed in Note 15. Premiums for employees at the hotels managed by the
Company are borne by the respective hotels. The Health Trust is exempt from
federal income tax under Section 501(c)(9) of the Internal Revenue Code as
a voluntary employees' beneficiary association.
The Company maintains defined contribution savings plans for all
employees of the Company. Eligibility for participation in the plans is
based on the employee's attainment of 21 years of age and on the completion
of one year of service with the Company. Employer contributions are based
on a percentage of employee contributions. Participants may make voluntary
contributions to the plans of up to 6% of their compensation, as defined.
The Company incurred expenses related to employees at its corporate offices
of approximately $99,000 in 1993, $110,000 in 1994 and $124,000 in 1995.
12. DEFERRED COMPENSATION AGREEMENTS:
In December 1995, the Company entered into deferred compensation agreements
with two officers. The agreements provide for the officers to receive certain
future annual payments for an eight year period commencing the earlier of age 60
or 10 years from the date of the agreement. The officers must continue in the
employment of the Company or serve as consultants to the Company and not compete
against the Company in order for the future payments to be earned.
Certain key employees are awarded other deferred compensation based on
performance. Expense recorded for these awards amounted to approximately
$257,000 in 1993, $259,000 in 1994 and $224,000 in 1995.
13. RELATED PARTY TRANSACTIONS:
Income and Accounts Receivable:
Of the total income from managed hotels, approximately $5,793,000 in 1993,
$6,678,000 in 1994 and $7,886,000 in 1995, respectively, were earned from hotels
in which the principal stockholder of the Company has an ownership interest.
Accounts receivable of approximately $946,000 and $1,028,000 at December 31,
1994 and 1995, respectively were due from these hotels.
Notes Receivable:
Included in notes receivable from affiliates is a note to IHC/Interstone
Partnership, L.P. (IHC/IPLP), an uncombined affiliate of IHC. On December 13,
1995, IHC/IPLP borrowed $7,380,000 from IHC. The note is payable in four
quarterly installments of $369,000 beginning March 13, 2000, four quarterly
F-27
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
13. RELATED PARTY TRANSACTIONS--CONTINUED
installments of $400,000 beginning March 13, 2001 and four quarterly
installments of $1,076,000 beginning March 13, 2002. The note bears interest at
the rate in effect selected by IHC for the Loan Agreement discussed in Note 7.
Receivable from Stockholders:
The Company advanced approximately $1,133,000 (net of repayments of
approximately $571,000) in 1993, received approximately $776,000 (net of
advances of approximately $1,689,000) in 1994 and received approximately
$573,000 (net of advances of approximately $3,245,000) in 1995 from the
stockholders of the Company. Such advances have no specific repayment terms and
have been classified as a reduction of equity in the consolidated balance
sheets.
Principal Stockholder's Obligation:
In 1989, the principal stockholder purchased the remaining ownership
interest in the Company from a deceased stockholder's estate for approximately
$20,388,000. The purchase was financed through a cash payment of $1,010,064 and
the issuance of two notes in the amount of $17,078,158 and $2,300,000,
respectively. The notes accrued interest at 8.5% and were payable in quarterly
principal and interest payments through 2002. Pursuant to the Reorganization
discussed in Note 3, the Company assumed the remaining obligation under the
notes of approximately $12,995,000, which was accounted for as a capital
distribution. The remaining balance on the notes was paid in December 1995
(refer to Note 7).
Administrative Fee Agreements:
Certain management contracts provide for the payment of administrative fees
to related parties for services rendered and to be rendered in connection with
the development and management of the various hotel facilities. The fees are
based on a percentage of the management fees earned from the operation of the
respective hotel properties.
Administrative fee expenses to related parties included in Note 10 amounted
to $430,000 in 1993, $398,000 in 1994 and $439,000 in 1995. Amounts payable on
these fees are included in accounts payable in the consolidated balance sheets
and amounted to $59,000 and $111,000 at December 31, 1994 and 1995,
respectively.
14. COMMITMENTS AND CONTINGENCIES:
The Company accounts for the leases of office space (the office leases
expire through 1999) and certain office equipment (the equipment leases expire
through 1998) as operating leases. Total rental expense amounted to
approximately $685,000 in 1993, $739,000 in 1994 and $912,000 in 1995. The
following is a schedule of future minimum lease payments under these leases:
<TABLE>
<S> <C>
1996............................................................. $1,014,000
1997............................................................. 916,000
1998............................................................. 76,000
1999............................................................. 41,000
----------
$2,047,000
==========
</TABLE>
The Company is required to pay a proportional share of real estate taxes
and operating expenses based on terms specified in one of the office space
leases. This additional rental payment amounted to $110,000 in 1993, $117,000 in
1994 and $132,000 in 1995.
F-28
<PAGE> 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
14. COMMITMENTS AND CONTINGENCIES--CONTINUED
The Company has made guarantees through the issuance of letters of credit
for affiliated entities regarding the payment of certain liabilities of:
Interstate/Ft. Lauderdale Associates, Ltd., the owner of the Ft. Lauderdale
Marriott North Hotel, in the amount of $77,000, IHC in the amount of $400,000
and CDS in the amount of $10,000. The Company also entered into two formal
agreements in 1995 that guarantee the obligation under a letter of credit issued
by affiliated partnerships (Interstone/Atlanta Partnership, L.P.,
Interstone/Colorado Springs Partnership, L.P., Interstone/Conshohocken
Partnership, L.P., Interstone/Denver Partnership, L.P. and Interstone/Lisle
Partnership, L.P.) that have ownership interests in five hotels managed by IHC
in the amount of $1,250,000, as well as IHC's obligation to the owner of the
Dana Point Resort for certain financial performance thresholds as defined in the
management agreement in the amount of $1,000,000. The obligation to the owner of
the Dana Point Resort also requires IHC to maintain $500,000 in escrow, which is
included in restricted cash in the Company's consolidated balance sheets. The
Company also provides certain financial guarantees to the lessors of hotels
managed under lease agreements which operate in a manner similar to management
agreements. Presently, management does not expect to incur any claims against
these letters of credit and guarantees.
As discussed in Note 8, the exercise of the Blackstone Option is
conditioned upon the consummation of the proposed Initial Offering. On November
27, 1996, if the Initial Offering is not consummated, the Company has the right
to call the Blackstone Option, and Blackstone has the right to require the
Company to purchase the Blackstone Option for a cash payment to Blackstone of
$10,500,000. If the Initial Offering is not consummated, the Company will record
an expense no later than November 27, 1996 for any cash payment required to
purchase the Blackstone Option.
Additionally, the Company has employment contracts with five executives
which provide for payments of two times the individual's salary and bonus for
the prior fiscal year or the remaining salary due under the terms of the
contracts in the event the employee is terminated without cause or if there is a
change-in-control of the Company.
In the ordinary course of business various lawsuits, claims and proceedings
have been or may be instituted or asserted against the Company. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
15. INSURANCE:
The Company provides certain insurance coverage to hotels under terms of
the various management contracts. This insurance is generally arranged through a
third party carrier. Northridge reinsures a portion of the coverage from this
third party primary insurer. The policies provide for layers of coverage with
minimum deductibles and annual aggregate limits. The policies are for coverage
relating to innkeepers' losses (general/comprehensive liability), wrongful
employment practices, garage keeper's legal liability, replacement cost
automobile losses, and real and personal property and business interruption
insurance. All policies are short-duration contracts and expire through August
1, 1996.
The Company is liable for any deficiencies in the IHC Employee Health and
Welfare Plan (and related Health Trust), which provides employees of the Company
with group health insurance benefits (Note 11). The Company has a Financial
Indemnity Liability Policy with Northridge which indemnifies the Company for its
obligations for the deficiency in the related Health Trust from between $900,000
and $4,000,000. The premiums for this coverage received from the properties
managed by the Company, net of intercompany amounts paid for employees at the
Company's corporate offices, are recorded as direct premiums written. There was
no deficiency in the related Health Trust at December 31, 1995.
F-29
<PAGE> 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
15. INSURANCE--CONTINUED
Included in partners' capital is $1,285,674 and $1,596,213 at December 31,
1994 and 1995, respectively, of capital restricted under applicable government
insurance regulations. The corresponding asset associated with restricted
capital is included in restricted cash in the consolidated balance sheets. All
other accounts of Northridge are classified with assets and liabilities of a
similar nature in the consolidated balance sheets.
The consolidated statements of income include the insurance income earned
and related insurance expenses incurred by Northridge. The insurance expenses
incurred by Northridge totaled approximately $344,000, $617,000 and $1,089,000
for the years ended December 31, 1993, 1994 and 1995, respectively. The
insurance income earned has been included in other management-related fees in
the accompanying consolidated statements of income and is comprised of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Reinsurance premiums written......................... $2,360,509 $3,428,371 $4,981,063
Direct premiums written.............................. -- 2,581,100 2,477,150
Reinsurance premiums ceded........................... -- -- (422,136)
Change in unearned premiums reserve.................. (235,998) 41,511 (61,693)
Loss sharing premiums................................ 731,233 910,044 697,713
---------- ---------- ----------
Insurance income..................................... $2,855,744 $6,961,026 $7,672,097
========== ========== ==========
</TABLE>
16. CONCENTRATION OF OPERATIONS:
The Company provides services principally to hotels. These hotels are
located in 28 states, the District of Columbia, Canada, Mexico, Israel, the
Caribbean, Thailand, Panama and Russia, with the largest concentration of hotels
in the states of Florida and California. These hotels are operated under a
number of franchisers, most predominantly, Marriott International, Inc.
17. SUBSEQUENT EVENTS:
In June 1996, the Company completed the Initial Offering of 11,000,000
shares of its common stock at a price of $21 per share. In July 1996, the
underwriters of the Company's Initial Offering exercised their over-allotment
options and purchased an additional 1,448,350 shares of common stock at $21 per
share from the Company. After underwriting discounts, commissions and other
Initial Offering expenses, net proceeds to the Company were $211,850,865 from
the Initial Offering and $28,601,929 from the exercise of the over-allotment
options. The Company used a significant portion of the proceeds of the Initial
Offering to repay certain debt obligations and to fund hotel acquisitions. The
number of shares of common stock, outstanding at September 30, 1996 was
28,671,401.
In October 1996, the Company's Board of Directors authorized management to
pursue an offering of additional shares of common stock.
The following transactions were consummated prior to or concurrently with
the consummation of the Initial Offering:
Exercise of the Blackstone Option: In October 1995, IHC granted
Blackstone the Blackstone Option to purchase an equity interest in a new
company to be formed to succeed IHC for an exercise price of $23,300,000.
In connection with the Initial Offering, Blackstone exercised the
Blackstone Option and received 2,133,333 shares of common stock of the
Company.
Acquisition of the Blackstone Hotel Interests: In March 1996, a
subsidiary of the Company entered into a purchase and sale agreement to
acquire all of Blackstone's interests in thirteen of the Owned
F-30
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
17. SUBSEQUENT EVENTS--CONTINUED
Hotels (the Blackstone Acquisition). In connection with the Initial
Offering, the Blackstone Acquisition was consummated for a cash purchase
price of $124,400,000. In addition to the Blackstone Acquisition,
Blackstone also contributed their interest in one hotel in consideration
for $8,300,000 of common stock of the Company. Additionally, the principal
stockholders of IHC contributed their equity interests in the Owned Hotels
to the Company in exchange for common stock of the Company concurrent with
the Initial Offering. The Blackstone Acquisition has been accounted for
using the purchase method of accounting except that carryover basis was
used for 9.3% of the acquired interests. The contributions of interests in
the Owned Hotels in exchange for common stock of the Company have been
accounted for using carryover basis.
Host Funding Transaction: In April 1996, Crossroads purchased 60,000
shares of common stock of Host Funding, Inc. (Host), a hotel real estate
investment trust, in connection with Host's initial public offering. In
connection therewith, Crossroads entered into long-term leases with Host to
lease five Super 8 Motels owned by Host, which are cancelable under certain
conditions specified in the lease agreements. Rental payments under each
lease consist of base rent, payable quarterly, which is based upon revenues
received from the operation of the leased hotels, plus a payment based on
gross revenues of the hotel after required rental payments. The annual
total base rent for each hotel varies from $112,000 to $265,000. Crossroads
will receive a base management fee of 6% of gross revenues for each hotel.
Additionally, Crossroads has agreed to pledge all of its shares of Host
common stock to collateralize their performance under the leases during the
first three years of their term. Thereafter, the number of shares required
to be pledged declines during the remaining term of the leases.
Long-Term Debt:
Effective June 25, 1996, the Company entered into a $195,000,000 Term Loan
and a $100,000,000 Revolving Credit Facility (collectively, the Credit
Facilities). The Term Loan is payable over seven years in accelerating quarterly
installments beginning September 26, 1996 and includes certain mandatory
prepayment provisions. All remaining unpaid accrued interest and principal on
the Term Loan will be due June 26, 2003. The Revolving Credit Facility provides
for borrowings under letters of credit, revolving loans for working capital and
acquisition loans to be used to finance additional hotel acquisitions. As of
September 30, 1996, the Company had used $70,750,000 of the Revolving Credit
Facility.
The proceeds from the Term Loan were used to refinance certain indebtedness
of the Company and to pay fees and expenses incurred in connection with the
Credit Facilities. Proceeds from the Term Loan in the amount of $90,000,000 were
used to purchase a subordinated participation interest in the $119,250,000
mortgage indebtedness of Interstone/CGL, a subsidiary of the Company (CGL Loan).
As of September 30, 1996, on a consolidated basis, the Company had outstanding,
in addition to the Term Loan, $29,250,000 of the CGL Loan. The CGL Loan requires
no principal payments until the indebtedness matures on June 25, 2003. All other
terms of the CGL Loan, including interest and covenants, are identical to the
Credit Facilities.
In October 1996, the Company entered into an amendment to the Credit
Facilities that converts the outstanding borrowings under $100,000,000 Revolving
Credit Facility to the Term Loan. Additionally, the Company extended the
Revolving Credit Facility to provide for a total borrowing capacity of up to
$200,000,000.
Non-Cash Compensation:
Prior to the Initial Offering, the Company issued 785,533 shares of
restricted stock to certain executives and employees to replace certain prior
options issued by IHC in 1995 (refer to Note 9). The restricted shares were
valued based on the estimated value of the common stock of the Company at the
time the restricted stock was issued. The issuance of the restricted stock
resulted in a one-time charge of $11,895,970 which is
F-31
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
17. SUBSEQUENT EVENTS--CONTINUED
classified as non-cash compensation expense in the accompanying unaudited
consolidated statements of operations as of September 30, 1996.
Income Taxes:
IHC was organized as S corporations, partnerships and limited liability
companies for federal and state income tax purposes until the Initial Offering.
Accordingly, IHC was not subject to income tax, as all taxable income or loss of
IHC was reported on the tax return of its shareholders or owners. As a result of
the change in IHC's tax status to a C corporation effective with the
consummation of the Initial Offering, the Company recorded income tax expense
amounting to $6,261,483 to establish deferred taxes existing as of the date of
the change in tax status. The difference between the Company's effective income
tax rate and statutory federal income tax rate for the nine-month period ended
September 30, 1996 results mainly from the change in tax entity and from state
income taxes.
Extraordinary Items:
In June 1996, the Company recorded an extraordinary loss amounting to
$7,642,641, net of a deferred tax benefit of $3,937,118, as a result of the
early extinguishment of certain debt. The extraordinary loss related principally
to the write-off of deferred financing fees, prepayment penalties and loan
commitment fees.
Acquisition of Additional Hotels:
In February 1996, the Company signed a letter of intent to purchase an
approximately 13% partnership interest in the Don CeSar Beach Resort, a resort
currently managed by the Company. The purchase was consummated in June 1996. The
Company also acquired a 5% partnership interest in the Pittsburgh City Center
Marriott in June 1996. Both acquisitions have been accounted for under the cost
method of accounting and are included in investments in hotel real estate in the
Company's consolidated balance sheet as of September 30, 1996.
As of November 15, 1996, the Company has acquired nine additional hotels
since the Initial Offering for an aggregate purchase price of approximately
$176,200,000. These separate acquisitions include: The Boston Marriott
Westborough, the Brentwood Holiday Inn, the Blacksburg Marriott, the Roanoke
Airport Marriott, the Embassy Suites Phoenix North (formerly Fountain Suites),
the Englewood Radisson Hotel, the Radisson Plaza Hotel San Jose Airport, the
Westin Resort Miami Beach (formerly Doral Ocean Beach Resort) and the Columbus
Hilton.
On November 15, 1996, the Company acquired for 1,957,895 shares of Common
Stock the hotel management business affiliated with Equity Inns. This business
consists of eight management contracts and 48 long-term leases. The Company is
currently in the process of finalizing plans to purchase two additional hotels.
The aggregate purchase price for these two purchases is $62,000,000.
Capital Distribution:
In March 1996, the Company made a capital distribution by issuing notes
payable to the Stockholders of IHC in the aggregate amount of $30,000,000. Such
notes were repaid in June 1996 with proceeds from the Initial Offering.
18. NEW ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The
new standard is effective for fiscal year 1996. Management believes that the
implementation of the standard will not have a material effect on its
consolidated financial statements.
F-32
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------
18. NEW ACCOUNTING PRONOUNCEMENTS--CONTINUED
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." The new standard, which is effective for fiscal year 1996,
requires the Company to adopt either a recognition method or a disclosure-only
approach of accounting for stock based employee compensation plans. Management
intends to adopt the disclosure-only approach and, as such, does not believe
that the implementation of the standard will have a material effect on its
consolidated financial statements.
F-33
<PAGE> 112
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Interstone I Property Partnerships:
We have audited the accompanying combined balance sheets of Interstone I
Property Partnerships (the Partnerships) and Predecessor Entities (as defined in
Note 1) as of December 31, 1994 and 1995 and the related combined statements of
operations and owners' equity and cash flows for each of the three years in the
period ended December 31, 1995. These combined financial statements are the
responsibility of the Partnerships' and Predecessor Entities' management. Our
responsibility is to express an opinion on these combined 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.
As discussed in Note 1, the combined financial statements of the
Predecessor Entities have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a Registration Statement of Interstate Hotels Company and are not intended to be
a complete presentation of the Predecessor Entities.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Interstone
I Property Partnerships and Predecessor Entities as of December 31, 1994 and
1995 and the combined results of their operations and cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
April 10, 1996 except for paragraph 2 of Note 1,
as to which the date is June 25, 1996
F-34
<PAGE> 113
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED BALANCE SHEETS
---------
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995
ASSETS ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 7,547,516 $ 9,659,554
Restricted cash (Note 2)...................................... 685,149 508,459
Accounts receivable........................................... 3,725,508 4,341,929
Due from affiliates........................................... 626,387 --
Inventories (Note 4).......................................... 715,673 651,548
Prepaid expenses and other assets............................. 546,563 644,209
------------ ------------
Total current assets..................................... 13,846,796 15,805,699
Restricted cash (Note 2)
Property and equipment........................................ 3,724,731 1,337,293
Renovations................................................... 758,396 3,347,593
Property and equipment, net (Notes 1, 5 and 7).................. 139,535,123 150,597,558
Deferred expenses (Note 6)...................................... 934,857 3,108,961
------------ ------------
Total assets............................................. $158,799,903 $174,197,104
============ ============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.............................................. 3,940,977 3,033,068
Accrued liabilities:
Real estate taxes.......................................... 1,308,662 1,948,622
Salaries and benefits...................................... 2,199,684 2,716,995
Royalties and fees (Note 3)................................ 136,236 337,430
Management fees (Note 3)................................... 103,157 207,013
Other...................................................... 3,205,713 2,865,170
Customer deposits............................................. 535,858 504,171
Interest payable.............................................. 649,425 1,022,845
Due to affiliates............................................. 648,437 --
Current portion of long-term debt (Note 7).................... 44,766,516 1,417,217
------------ ------------
Total current liabilities................................ 57,494,665 14,052,531
Long-term debt (Note 7)......................................... 74,381,625 113,719,504
Deferred taxes.................................................. 126,500 --
------------ ------------
Total liabilities........................................ 132,002,790 127,772,035
Commitments and contingencies (Note 14)
Owners' equity.................................................. 26,797,113 46,425,069
------------ ------------
Total liabilities and owners' equity.................. $158,799,903 $174,197,104
============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-35
<PAGE> 114
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
---------
<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
----------------------------------------- SEPTEMBER 30, JUNE 24,
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------- ------------
(NOTE 1)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms......................... $29,965,305 $ 40,612,704 $ 53,450,530 $ 40,676,193 $ 27,926,526
Food and beverage............. 22,298,100 28,314,060 35,351,678 25,081,020 18,371,706
Telephone..................... 1,390,266 1,790,750 2,501,378 1,902,524 957,847
Gift shop and other........... 1,323,639 1,739,119 2,089,690 1,446,081 1,257,958
Office building lease......... -- 1,163,712 2,550,325 1,832,203 1,403,415
----------- ------------ ------------ ------------- ------------
54,977,310 73,620,345 95,943,601 70,938,021 49,917,452
Departmental costs and
expenses...................... 28,026,057 34,481,202 42,247,524 30,572,669 21,221,268
----------- ------------ ------------ ------------- ------------
Departmental income
(Note 8)................. 26,951,253 39,139,143 53,696,077 40,365,352 28,696,184
----------- ------------ ------------ ------------- ------------
Other expenses (Note 3):
Administration and general.... 4,649,691 6,481,683 9,210,839 6,078,954 4,536,844
Management fees............... 1,031,121 1,506,734 2,234,306 1,640,237 1,375,096
Royalties..................... 1,455,729 2,124,273 2,551,021 1,904,727 1,426,785
Advertising and sales......... 3,398,061 4,413,912 6,079,721 4,640,791 3,222,426
Repairs and maintenance....... 2,734,284 3,580,133 4,545,730 3,428,428 2,013,727
Heat, power and light......... 2,901,874 3,742,593 4,549,014 3,399,997 2,104,178
Insurance and taxes........... 2,236,296 2,797,763 4,403,629 6,003,872 2,189,893
Depreciation and
amortization............... 6,877,251 7,840,428 10,250,714 7,294,841 5,282,514
Other......................... 231,023 288,489 1,275,986 317,490 558,446
----------- ------------ ------------ ------------- ------------
25,515,330 32,776,008 45,100,960 34,709,337 22,709,909
----------- ------------ ------------ ------------- ------------
1,435,923 6,363,135 8,595,117 5,656,015 5,986,275
Interest expense (Note 7)....... 6,381,912 7,852,173 9,605,070 5,249,295 4,737,465
----------- ------------ ------------ ------------- ------------
(Loss) income before
extraordinary items...... (4,945,989) (1,489,038) (1,009,953) 406,720 1,248,810
Extraordinary
items-extinguishments of debt
(Note 7)...................... 25,795,725 18,381,077 -- -- --
----------- ------------ ------------ ------------- ------------
Net income (loss).......... 20,849,736 16,892,039 (1,009,953) 406,720 1,248,810
Owners' equity:
Beginning of year............. (22,131,943) (1,192,017) 26,797,113 26,797,113 46,425,069
Capital contributions......... 156,386 40,431,885 45,273,069 34,102,046 555,521
Capital distributions......... (66,196) (17,901) (29,486,579) (27,151,601) (5,377,009)
Elimination of predecessor
entities' equity........... -- (29,316,893) 4,851,419 (13,313,338) --
Transfer of Partnership
interest................... -- -- -- -- (42,852,391)
----------- ------------ ------------ ------------- ------------
End of period......... $(1,192,017) $ 26,797,113 $ 46,425,069 $ 20,840,940 $ --
=========== ============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-36
<PAGE> 115
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
---------
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JANUARY 1
YEAR ENDED DECEMBER 31, SEPTEMBER TO
------------------------------------------ 30, JUNE 24,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 20,849,736 $ 16,892,039 $ (1,009,953) $ 406,720 $ 1,248,810
Adjustments to reconcile net income
(loss) to
cash provided by operations
Gain on extinguishments of debt...... (25,795,725) (18,381,077) -- -- --
Interest expense financed by term
debt............................... 422,197 -- -- -- --
Depreciation and amortization........ 6,877,251 7,840,428 10,250,714 7,294,841 5,282,514
Loss on disposal of assets........... 318,191 227,927 167,103 623,539 --
Deferred interest on mortgages....... 943,400 938,495 1,070,260 -- --
Change in deferred income taxes...... (11,700) (22,100) 14,400 -- --
Changes in assets and liabilities:
Accounts receivable.................. 374,838 (1,202,856) (1,042,981) (2,207,916) (2,416,814)
Inventories.......................... (151,830) 53,451 46,924 23,396 124,174
Prepaid expenses and other assets.... 278,031 213,266 (221,975) (656,744) (812,841)
Due from affiliates.................. -- -- -- 364,267 (555,521)
Accounts payable..................... (582,208) 1,760,765 (483,874) 281,215 1,250,178
Accrued liabilities.................. 573,382 747,324 2,963,723 (367,226) (558,441)
Customer deposits.................... 64,218 101,483 (31,687) 41,379 (64,671)
------------ ------------ ------------ ------------ -----------
Net cash flows provided by
operating activities............ 4,159,781 9,169,145 11,722,654 5,803,471 3,497,388
------------ ------------ ------------ ------------ -----------
Cash flows from investing activities:
Step-up in basis........................ -- -- -- (9,333,031) --
Funds restricted for future acquisition
of furniture, fixtures and
equipment............................ (887,040) (3,905,387) (4,533,117) (3,112,385) (3,540,489)
Acquisition of property and equipment... (2,471,662) (2,234,879) (6,402,351) (6,377,072) (4,046,287)
Restricted funds used to purchase
property and equipment............... 181,509 451,022 3,964,646 241,798 4,422,103
Cash paid for deferred expenses......... (112,092) -- (1,242,300) -- --
Proceeds from sale of assets............ 125,849 19,772 1,006,937 -- --
Acquisitions, net of cash acquired...... -- (56,210,897) (52,887,935) -- --
------------ ------------ ------------ ------------ -----------
Net cash used in investing
activities...................... (3,163,436) (61,880,369) (60,094,120) (18,580,690) (3,164,673)
------------ ------------ ------------ ------------ -----------
Cash flows from financing activities:
Step-up in basis........................ -- -- -- 20,697,266 --
Proceeds from long-term debt............ 20,116,368 54,418,832 100,983,134 31,175,202 --
Payments on long-term debt (21,056,662) (5,126,112) (70,482,677) (22,759,380) (426,557)
Cash paid for financing fees............ -- (533,483) (786,708) (2,057,674) --
Change in funds restricted for escrow
reserve.............................. (53,055) (364,386) (894,541) 349,151 --
Advances from partners.................. -- -- 400,000 -- --
Transfer of Partnership interest........ -- -- -- -- (4,744,222)
Capital contributions................... 156,386 9,357,372 45,899,456 8,027,687 555,521
Capital distributions................... (66,196) (17,901) (24,635,160) (15,206,472) (5,377,011)
Elimination of Predecessor Entity....... -- -- -- (6,879,380) --
------------ ------------ ------------ ------------ -----------
Net cash (used in) provided by
financing activities............... (903,159) 57,734,322 50,483,504 13,346,400 (9,992,269)
------------ ------------ ------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents............................. 93,186 5,023,098 2,112,038 569,181 (9,659,554)
Cash and cash equivalents at beginning of
period.................................. 2,431,232 2,524,418 7,547,516 7,547,516 9,659,554
------------ ------------ ------------ ------------ -----------
Cash and cash equivalents at end of
period.................................. $ 2,524,418 $ 7,547,516 $ 9,659,554 $ 8,116,697 $ --
============ ============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-37
<PAGE> 116
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
---------
1. BASIS OF PRESENTATION:
The accompanying combined financial statements are comprised of nine
limited partnerships (Interstone I or Partnerships) and Predecessor Entities,
which at December 31, 1995, are affiliates through common ownership. At December
31, 1995, the Partnerships are owned, either directly or indirectly, 75% by
Blackstone Real Estate Partners L.P. (Blackstone) and 25% by Milt Fine, the
principal stockholder of Interstate Hotels Corporation (IHC), and other IHC
executives. The Partnerships' assets consist of eight full-service operating
hotel properties, (collectively, the Hotels).
In conjunction with the Initial Public Offering (IPO) of Interstate Hotels
Company (the Company), interest in the above partnerships was acquired by IHC
Member Corporation (an affiliate of the partners and the Company) on June 25,
1996. Therefore these financial statements include the unaudited results of
operations for the Partnerships from January 1, 1996 through June 24, 1996.
The following details the Partnerships and Predecessor Entities and the
respective properties included in the combined financial statements:
Interstone/Houston Partnership, L.P. (Houston) was formed effective
March 4, 1994. Effective March 7, 1994, Houston acquired the Houston
Marriott North at Greenspoint for $21,000,000.
Interstone/Lisle Partnership, L.P. (Lisle) was formed effective July
8, 1994, when it acquired the Radisson Hotel Lisle and the Lisle Executive
Center in Lisle, Illinois for $23,201,000. The executive center consists of
150,437 square feet and is managed by Blackstone Real Estate Advisors
(BREA), an affiliate of Blackstone.
Interstone/Colorado Springs Partnership, L.P. (Colorado) was formed
effective September 15, 1994. An option agreement exercised on September
27, 1994 resulted in the contribution of the Colorado Springs Marriott and
$792,379 in cash and all of the associated assets and liabilities to
Colorado. The predecessor owner of the hotel was controlled by the owner of
IHC.
Interstone/Denver Partnership, L.P. (Denver) was formed effective
November 7, 1994 and acquired the Denver Hilton South for $12,500,000
effective December 14, 1994.
Interstone/Atlanta Partnership, L.P. (Atlanta) was formed effective
February 1, 1995. Effective February 15, 1995, Atlanta acquired
substantially all of the assets and liabilities, except for the land, of
the Atlanta Marriott Northeast. The purchase price was $14,025,000 and the
land is being leased through an operating lease. See Note 12.
Interstone/Conshohocken Partnership, L.P. (Conshohocken) was formed
March 15, 1995 and on that date acquired all of the partnership interests
in WCB Eleven Limited Partnership, the owner of the Philadelphia Marriott
West for $23,744,000.
Interstone/Williamsburg Partnership, L.P. (Williamsburg), formed
effective July 6, 1995, purchased the Fort Magruder Inn and Conference
Center on October 10, 1995. The purchase price was $12,800,000, which
included $2,192,000 to acquire the land previously leased by the seller. In
addition to the purchase price, $1,200,000 was paid for a noncompete
agreement with the seller for a five year period.
Interstone/Huntington Partnership, L.P. (IHPLP) and Huntington Hotel
Partners, L.P. (HHPLP) (collectively, Huntington) own the Huntington Hilton
Hotel, effective December 7, 1995, located in Melville, New York and the
first and second mortgages encumbering the hotel, respectively. The hotel
was acquired through the acquisition of the first and second mortgages on
the hotel for $21,212,306 and a settlement agreement with 110 Huntington
Associates (HA), the former owner of the hotel.
F-38
<PAGE> 117
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
1. BASIS OF PRESENTATION--CONTINUED
With the exception of Lisle, Houston and Denver, the accompanying combined
financial statements include all transactions of the Partnerships and the
Predecessor Entities from January 1, 1993 to December 31, 1995 and are presented
on the basis of the predecessors' historical cost basis up to the date that the
property was acquired. From the date of acquisition, the accompanying combined
financial statements are presented based on the Partnerships' new basis. Lisle,
Houston and Denver are included from their respective date of acquisition.
The terms of the Partnerships expire December 31, 2044 or 2045; however,
dissolution will occur earlier in the event of the sale of the Partnerships'
assets or a disabling event, as defined by the agreements. In accordance with
the terms of the partnership agreements, subsequent capital contributions from
the partners may be required in instances where cash from operations is
insufficient to meet debt service requirements and other partnership expenses.
Such additional capital contributions are to be made at the discretion of the
general partner and are to be paid by the partners in proportion to their
respective partnership interests.
The combined financial statements of the Predecessor Entities have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotels' operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
The Partnerships consider all unrestricted, highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
Restricted Cash:
The management and franchise agreements discussed in Note 3 and the
long-term debt discussed in Note 7 provide that certain cash from operations be
restricted for the future acquisition of or for the replacement of property and
equipment each year based on a percentage of gross hotel revenues. The
requirements range from 3% to 4%. In addition, certain of the loan agreements
described in Note 7 also required an amount to be deposited into a renovation
reserve for certain capital improvements and require monthly deposits to be made
into an escrow account for real estate taxes.
Inventories:
Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.
Property and Equipment:
Property and equipment are recorded at cost which includes the allocated
purchase price for the acquisitions described in Note 1. Property and equipment
are depreciated primarily on the straight-line method over their estimated
useful lives (buildings and improvements over 28 to 35 years and furniture,
fixtures and equipment over 5 to 7 years). Expenditures for maintenance and
repairs are expensed as incurred. The cost and related accumulated depreciation
applicable to property no longer in service are eliminated from the accounts and
any gain or loss thereon is included in operations. A hotel's initial
expenditures for the purchase of china, glassware, silverware and linens are
capitalized as furniture, fixtures and equipment and amortized on a
straight-line basis over a five year life. Costs for replacement of those items
are charged to operations in the period the items are placed in service.
F-39
<PAGE> 118
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Deferred Expenses:
Generally the deferred financing costs and franchise fees are being
amortized on the straight-line basis over periods ranging from 3 to 5 years. The
non-compete agreement is being amortized over its 5 year term.
Concentration of Credit Risk:
The Partnerships maintain cash and cash equivalents accounts with various
financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Partnership has not experienced any losses in such
accounts.
Use of 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 period. Actual results could differ from those estimates.
Revenue Recognition:
The Hotels recognize revenue from their rooms, catering, gift shop and
restaurant facilities as earned on the close of each business day.
Income Tax Status:
The entities included in the combined financial statement are non-tax
paying entities (partnerships) with the exception of one predecessor entity. For
the tax paying predecessor entity, income taxes were accrued and recorded in the
combined financial statements. Partnerships are not subject to state and federal
income taxes. Accordingly, net income or loss and any available tax credits are
allocated to the individual partners in proportion to their income and loss
rates of participation. Should loss allocations cause the adjusted capital
account of the limited partners to be reduced to zero, any additional losses are
allocated to the general partners.
Acquisitions:
The acquisitions from third parties have been accounted for by the purchase
method. Accordingly, the purchase price has been allocated to assets acquired
and liabilities assumed based on their estimated fair values, as determined by
real estate tax assessments and other fair market valuations. The acquisitions
were financed through the issuance of debt and capital contributions.
Unaudited Financial Statements:
The unaudited combined statements of operations and owners' equity and cash
flows for the nine-month period ended September 30, 1995 and the period from
January 1, 1996 to June 24, 1996, in the opinion of management, have been
prepared on the same basis as the audited combined financial statements and
include all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. The data disclosed in these notes to the combined
financial statements for these periods are also unaudited. Operating results for
the nine-month period ended September 30, 1995 and for the period from January
1, 1996 through June 24, 1996 are not necessarily indicative of the results for
the entire year.
F-40
<PAGE> 119
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
3. RELATED PARTY TRANSACTIONS:
Since their acquisition by the Partnerships, the Hotels have generally been
operated pursuant to franchise agreements between IHC, as franchisee, and
various franchisers. Prior to their acquisition by the Partnerships, the
Predecessor Entities generally were also party to franchise arrangements. The
terms of the franchise agreements range from 10 to 25 years and can be extended
by the mutual consent of the parties. The agreements require ongoing fees, which
comprise royalty expense in the combined statement of operations, generally
ranging from 3% to 6% of room revenues and 2% to 3% of certain food and beverage
revenues. In addition, other fees paid to the franchisers include a national
advertising campaign fee of approximately 1% of room revenues, as well as fees
for a national reservation system, networking, honored guest awards and other
promotional programs.
Since their acquisition by the Partnerships, the Hotels have been operated
under a management agreement with IHC which provides for a management fee of
2.8% of gross operating revenue. The terms of the agreements extend through
December 31, 2044. The agreements can be terminated earlier by either party upon
the occurrence of certain conditions as specified in the agreements. In
addition, Colorado and Conshohocken were managed by IHC prior to their
acquisition by the Partnerships. Generally, the Hotels not managed by IHC prior
to their acquisition by the Partnerships were party to similar management
arrangements. The management fees earned by IHC were approximately $726,000 in
1993, $1,062,000 in 1994 and $1,900,000 in 1995.
An affiliate of IHC provides reinsurance to major insurance carriers solely
in connection with the insurance coverage that those carriers provide to the
Hotels. IHC also provides certain accounting and bookkeeping assistance to the
Partnerships, of which no amounts were paid by the Partnerships for these
services.
4. INVENTORIES:
The components of inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Food............................................................. $263,244 $248,327
Beverage......................................................... 281,752 308,976
Gift shop and other.............................................. 170,677 94,245
-------- --------
$715,673 $651,548
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
------------ ------------
<S> <C> <C>
Land...................................................... $ 14,975,971 $ 18,357,867
Buildings and improvements................................ 124,326,343 114,315,868
Furniture, fixtures and equipment......................... 30,679,335 33,600,537
------------ ------------
169,981,649 166,274,272
Less accumulated depreciation............................. 30,446,526 15,676,714
------------ ------------
$139,535,123 $150,597,558
============ ============
</TABLE>
F-41
<PAGE> 120
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
5. PROPERTY AND EQUIPMENT--CONTINUED
When assets were acquired from Predecessor Entities, a new basis was
determined and accumulated depreciation was reduced to zero.
6. DEFERRED EXPENSES:
The components of deferred expenses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Deferred financing costs...................................... $1,548,043 $2,069,941
Franchise fees................................................ 77,500 119,800
Non-compete agreement......................................... -- 1,200,000
---------- ----------
1,625,543 3,389,741
Less accumulated amortization................................. 690,686 280,780
---------- ----------
$ 934,857 $3,108,961
========== ==========
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
PROPERTY 1994 1995
-------- ------------ ------------
<S> <C> <C>
Lisle:
5.98% note payable due 1999............................. $15,425,000 --
Pooled loan agreement (A)............................... -- $22,436,016
Houston:
8.0% note payable due 2001 (B).......................... 16,250,000 16,250,000
Colorado:
5.98% note payable due 1999............................. 8,000,000 --
Pooled loan agreement (A)............................... -- 10,220,852
Denver:
10.69% note payable due 1998............................ 9,500,000 --
Pooled loan agreement (A)............................... -- 11,467,297
Atlanta:
Notes payable (average rate of 8.75%)................... 7,381,432 --
Capital lease obligations............................... 250,662 --
Pooled loan agreement (A)............................... -- 12,713,743
Conshohocken:
9.50% note payable due 1996............................. 14,598,203 --
Pooled loan agreement (A)............................... -- 17,948,813
Williamsburg:
6.75% note payable due 2003............................. 4,533,200 --
Capital lease obligations............................... 148,042 --
Variable rate note payable due 1999 (C)................. -- 11,000,000
</TABLE>
F-42
<PAGE> 121
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT--CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
PROPERTY 1994 1995
-------- ------------ ------------
<S> <C> <C>
Huntington:
7.5% note payable due 1996.............................. 43,061,602 --
Variable rate note payable due 1998 (D)................. -- 13,100,000
------------ ------------
119,148,141 115,136,721
Less current portion............................ 44,766,516 1,417,217
------------ ------------
$ 74,381,625 $113,719,504
============ ============
</TABLE>
(A) Effective August 31, 1995, Lisle, Denver, Atlanta, Conshohocken and
Colorado entered into a pooled loan agreement. The total amount borrowed under
the pooled loan agreement was $75,000,000. The proceeds were used to retire debt
and acquire certain properties. The pooled loan agreement provides for joint and
several liability to the Partnerships for the full amount of the outstanding
loan. Substantially all of the assets and the management agreement of the
Partnerships collateralize the borrowings. Principal is payable in varying
monthly payments with interest at LIBOR plus 3%. The interest rate in effect at
December 31, 1995 was 8.91%. The varying monthly principal payments are based on
an annual calculation using a percentage of the outstanding principal balance,
net income and cash flows, as defined by the agreement. All remaining unpaid
accrued interest and principal will be due August 31, 1999. The loan agreement
provides for a 2% prepayment penalty in the first year and a 1% penalty in the
second year. The Partnerships purchased an interest rate cap that limits LIBOR
to 7.5% through August 31, 1998. The carrying value of the interest rate cap at
December 31, 1995 was approximately $443,000.
The pooled loan agreement contains certain restrictive covenants including
limitations on the assumption of additional indebtedness, changes in the
Partnerships' agreements and changes to the franchiser and the managing agents
of the Hotels (IHC and BREA). Additionally, an entity affiliated with the
managing general partner issued a letter of credit in the amount of $5,000,000
on behalf of the Partnerships. The letter of credit provides for principal
repayment upon the occurrence of a default or if certain financial terms are not
met by the Partnerships between March 31, 1996 and April 25, 1998.
(B) The Houston partnership borrowed $16,250,000 under a note payable
agreement, the proceeds of which, combined with capital contributions, were used
to acquire the Hotel. The note accrues interest at the contract rate of 8% and
is payable in monthly interest only payments at the pay rate of 7% through March
1995, 7.5% from April 1995 through March 1996 and 8% thereafter. Interest due in
excess of the pay rate accrues interest at the contract rate. At December 31,
1995, such amount was $246,895 and was included in accrued interest on the
accompanying combined balance sheets. Beginning April 1996, the note is payable
in equal monthly installments of principal and interest of $121,208 through
March 2001, at which time all remaining unpaid accrued interest and principal
will be due.
(C) Effective October 10, 1995, the Williamsburg partnership entered into a
loan agreement which provides for $13,000,000, of which $11,000,000 was drawn on
the date of the agreement (the initial disbursement). The proceeds of the
initial disbursement, combined with capital contributions, were used to acquire
the hotel. The agreement also includes a provision that allows for an additional
draw of up to $2,000,000 within 12 to 18 months after the initial disbursement
if certain financial conditions are met, as defined by the agreement (the second
disbursement). Interest is payable monthly at the rate of LIBOR plus 3.5%. The
interest rate in effect at December 31, 1995 was 9.44%. Beginning at the time of
the second disbursement or 18 months after the initial disbursement, whichever
is earlier, equal monthly principal payments will be due based on the then
outstanding principal balance amortized at the current interest rate in effect
over a 25 year period. The note payable matures October, 1999 at which time all
remaining unpaid
F-43
<PAGE> 122
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT--CONTINUED
accrued interest and principal will be due. The agreement provides for a 2%
prepayment penalty for the first two years after the initial disbursement and a
1% penalty in the third year.
(D) Huntington borrowed $13,100,000, the proceeds of which, combined with
capital contributions, were used to complete the acquisition described in Note
1. Interest is payable at the rate of LIBOR plus 4.0%. The interest rate in
effect at December 31, 1995 was 9.66%. The partnership has the option to request
a fixed interest rate based on quoted rates from the borrower for portions of
the outstanding balance not to exceed $4,000,000 for various periods as provided
in the note agreement. Interest is payable monthly commencing July 1, 1995.
Commencing March 1, 1997, equal monthly principal payments will be due based on
a 25 year amortization period. The note payable matures June 1998, at which time
all remaining unpaid principal and accrued interest will be due.
The management of the Partnerships estimate that based on projected net
income and cash flows, approximately $1,417,000 of principal payments will be
due during 1996 and, accordingly, this amount has been classified as a current
liability on the accompanying combined balance sheets.
Based on interest rates currently available to the Partnerships for the
issuance of debt with similar terms and remaining maturities, management
believes that the carrying amount of debt and the interest rate cap is a
reasonable estimation of fair value.
Aggregate scheduled maturities of the notes for each of the five years
ending December 31 are as follows:
<TABLE>
<S> <C>
1996..................................................... $ 1,417,217
1997..................................................... 3,229,342
1998..................................................... 16,597,473
1999..................................................... 88,712,876
2000..................................................... 4,102,144
Thereafter............................................... 1,077,669
------------
$115,136,721
============
</TABLE>
A predecessor entity obtained a first mortgage note in the amount of
$14,000,000, the proceeds of which were used to satisfy an existing mortgage and
letter of credit note plus accrued interest, pursuant to a binding letter of
intent. The predecessor entity also entered into a subordinated mortgage note
with the lender and, in exchange for entering into the agreement, in addition to
payment of $600,000 proceeds from the first mortgage, the lender sold the
promissory note to the predecessor entity. The extinguishment of the mortgage
and letter of credit notes and the promissory note resulted in a gain of
$25,795,725, which is presented as an extraordinary item in the 1993 combined
statements of operations.
Pursuant to the terms of the commitment letter dated March 8, 1994, IHC
paid $100,000 to the holder of the term loan as an option for the purchase of a
predecessor entity's loan for $11,000,000. The extinguishment of the predecessor
entity's loan resulted in an $18,381,077 gain, which is presented as an
extraordinary item in the 1994 combined statements of operations.
F-44
<PAGE> 123
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
8. DEPARTMENTAL INCOME:
Combined departmental income is as follows:
<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
--------------------------------------- SEPTEMBER 30, JUNE 24,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rooms........................... $21,637,770 $28,813,329 $40,291,221 $31,125,679 $21,402,669
Food and beverage............... 4,367,048 7,676,644 9,305,887 6,648,224 5,306,094
Telephone....................... 603,939 836,275 1,132,807 949,233 690,115
Gift shop and other............. 342,496 772,157 692,895 376,275 247,962
Office.......................... -- 1,040,738 2,273,267 1,265,941 1,049,344
----------- ----------- ----------- ----------- -----------
$26,951,253 $39,139,143 $53,696,077 $40,365,352 $28,696,184
=========== =========== =========== =========== ===========
</TABLE>
9. EMPLOYEE BENEFITS:
The Hotels participate in the following employee benefit plans which are
sponsored by IHC:
The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Health Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby IHC is
self-insured for certain benefits, subject to certain individual claim and
aggregate maximum liability limits. The Hotels pay, directly to IHC, the
employer portion of the premiums, which is based on the estimated conventional
premium. Premiums may be prospectively adjusted to consider actual claims
experience. The Hotels incurred expenses of approximately $573,000 in 1994 and
$1,007,000 in 1995, related to the plan. The Health Trust is exempt from federal
income tax under Section 501(c)(9) of the Internal Revenue Code as a voluntary
employees' beneficiary association.
IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's attainment
of 21 years of age and on the completion of one year of service with IHC.
Employer contributions are based on a percentage of employee contributions.
Participants may make voluntary contributions to the plan of up to 6% of their
compensation, as defined. The Hotels incurred expenses of approximately $87,000
in 1994 and $175,000 in 1995 related to the plan.
Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotels. These compensation
awards are dependent on the Hotel's performance and other established criteria.
The Hotels incurred expenses amounting to approximately $96,000 in 1994,
$607,000 in 1995 related to these plans.
Predecessor entities generally did not provide any health and welfare,
retirement benefit or bonus and deferred compensation plans.
10. INCOME TAXES:
The provision for taxes of a predecessor entity was approximately $85,000,
$142,000 and $89,000 in 1993, 1994 and 1995, respectively, and consists
primarily of current federal and state taxes. These amounts are included in
other expenses in the accompanying combined statements of operations. The net
deferred tax liability primarily relates to depreciation.
F-45
<PAGE> 124
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
11. LEASE INCOME:
The following is a schedule of future minimum rental income for the Lisle
Executive Center under noncancelable operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996...................................................... $ 2,680,000
1997...................................................... 2,451,000
1998...................................................... 1,789,000
1999...................................................... 1,572,000
2000...................................................... 1,018,000
Thereafter................................................ 658,000
-----------
$10,168,000
===========
</TABLE>
12. OPERATING LEASES:
The Hotels have various land and equipment operating leases. Total rental
expense amounted to approximately $247,000 in 1993, $294,000 in 1994 and
$685,000 in 1995. The following is a schedule of future minimum lease payments
under these leases:
<TABLE>
<S> <C>
1996....................................................... $ 655,000
1997....................................................... 377,000
1998....................................................... 193,000
1999....................................................... 43,000
2000....................................................... 29,000
Thereafter................................................. 1,823,000
----------
$3,120,000
==========
</TABLE>
13. CASH FLOW INFORMATION:
Cash payments for interest were $1,788,652, $11,866,008 and $9,231,650 in
1993, 1994 and 1995, respectively.
Cash payments for taxes were $103,345, $79,978 and $4,184 in 1993, 1994,
and 1995, respectively.
Non-cash investing and financing activities were as follows:
<TABLE>
<S> <C>
1994:
Elimination of Predecessor Entities' equity................. $29,316,893
===========
1995:
Elimination of Predecessor Entities' equity................. $ 4,851,419
===========
</TABLE>
On June 25, 1996 all other non-cash assets, liabilities and equity were
transferred to IHC.
F-46
<PAGE> 125
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
14. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business various lawsuits, claims and proceedings
have been or may be instituted or asserted against the Partnerships. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operations or liquidity of the Partnerships.
15. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for fiscal year 1996. Management believes that the implementation of
the standard will not have a material effect on these combined financial
statements.
F-47
<PAGE> 126
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Interstone/CGL Partners, L.P.:
We have audited the accompanying combined balance sheet of Interstone/CGL
Partners, L.P. (the Partnership) as of December 31, 1995 and the related
combined statements of operations and partners' capital and cash flows for the
period from December 15, 1995 (inception) to December 31, 1995 and the
accompanying combined balance sheets of Predecessor Entity (as defined in Note
1) as of December 31, 1994 and December 14, 1995 and the related combined
statements of operations and predecessor equity and cash flows for the years
ended December 31, 1993 and 1994 and for the period from January 1, 1995 to
December 14, 1995. These combined financial statements are the responsibility of
the Partnership's and Predecessor Entity's management. Our responsibility is to
express an opinion on these combined 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.
As discussed in Note 2, the combined financial statements of the
Predecessor Entity have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a Registration Statement of Interstate Hotels Company and are not intended to be
a complete presentation of the Predecessor Entity.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Interstone/CGL
Partners, L.P. as of December 31, 1995 and the combined results of its
operations and cash flows for the period from December 15, 1995 (inception) to
December 31, 1995 and the financial position of the Predecessor Entity as of
December 31, 1994 and December 14, 1995 and the combined results of its
operations and cash flows for the years ended December 31, 1993 and 1994 and for
the period from January 1, 1995 to December 14, 1995, in conformity with
generally accepted accounting principles.
/s/COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
April 10, 1996, except for paragraph 2 of Note 1,
as to which the date is June 25, 1996
F-48
<PAGE> 127
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
COMBINED BALANCE SHEETS
---------
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR ENTITY PARTNERSHIP
---------------------------- ------------
DECEMBER 31, DECEMBER 14, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 3,198,348 $ 198,922 $ 6,126,483
Accounts receivable.............................. 3,700,112 4,470,676 1,231,348
Inventories (Note 6)............................. 1,525,754 1,367,815 350,229
Prepaid expenses and other....................... 1,024,352 763,053 114,803
------------ ------------ ------------
Total current assets........................ 9,448,566 6,800,466 7,822,863
------------ ------------ ------------
Restricted cash (Note 3)........................... 884,364 992,337 2,771,814
Property and equipment, net (Notes 3, 7 and 10).... 127,839,673 123,341,620 166,041,651
Deferred expenses (Note 8)......................... -- -- 2,928,346
------------ ------------ ------------
Total assets................................ $138,172,603 $131,134,423 $179,564,674
============ ============ ============
LIABILITIES, EQUITY AND CAPITAL
Current liabilities:
Accounts payable................................. 1,433,882 622,800 1,561,280
Due to CIGNA (Note 3)............................ 1,592,863 1,848,384 --
Accrued liabilities:
Real estate taxes............................. 721,912 623,778 595,053
Salaries and benefits......................... 1,157,502 698,812 1,230,178
Royalties and fees (Note 5)................... 123,010 48,037 103,523
Management fees (Note 5)...................... 594,871 512,588 57,037
Other......................................... 979,274 1,589,552 714,682
Customer deposits................................ 326,955 458,108 374,501
Current portion of long-term debt (Note 10)...... -- -- 3,000,000
------------ ------------ ------------
Total current liabilities................... 6,930,269 6,402,059 7,636,254
------------ ------------ ------------
Other liabilities (Note 9)......................... -- -- 1,212,968
Long-term debt (Note 10)........................... -- -- 117,000,000
------------ ------------ ------------
Total liabilities........................... 6,930,269 6,402,059 125,849,222
------------ ------------ ------------
Commitments and contingencies (Notes 9 and 13)
Predecessor equity................................. 131,242,334 124,732,364 --
Partners' capital.................................. -- -- 53,715,452
------------ ------------ ------------
Total liabilities, equity and capital......... $138,172,603 $131,134,423 $179,564,674
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-49
<PAGE> 128
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
COMBINED STATEMENTS OF OPERATIONS AND PREDECESSOR'S
EQUITY AND PARTNERS' CAPITAL
---------
<TABLE>
<CAPTION>
PREDECESSOR
ENTITY
PREDECESSOR ENTITY PARTNERSHIP ------------ PARTNERSHIP
----------------------------------------- -------------- NINE MONTHS ------------
JANUARY 1 DECEMBER 15 ENDED JANUARY 1
YEAR ENDED DECEMBER 31, TO (INCEPTION) TO SEPTEMBER TO
-------------------------- DECEMBER 14, DECEMBER 31, 30, JUNE 24,
1993 1994 1995 1995 1995 1996
----------- ------------ ------------ -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rooms............................... $29,689,872 $ 44,368,711 $ 47,005,616 $1,197,237 $ 35,288,880 $ 25,354,896
Food and beverage................... 14,377,451 22,211,752 23,571,905 1,174,170 17,149,631 12,272,711
Telephone........................... 1,472,886 2,051,051 2,369,874 59,208 1,777,276 1,380,253
Gift shop........................... 269,430 491,778 381,200 19,760 286,544 181,616
Other............................... 457,579 1,082,302 1,274,314 34,123 962,950 673,506
----------- ------------ ------------ ---------- ------------ ------------
46,267,218 70,205,594 74,602,909 2,484,498 55,465,281 39,862,982
Departmental costs and expenses....... 20,128,137 29,295,928 30,499,098 1,386,137 22,615,896 15,641,860
----------- ------------ ------------ ---------- ------------ ------------
Departmental income (Note 11)..... 26,139,081 40,909,666 44,103,811 1,098,361 32,849,385 24,221,122
Other expenses (Note 5):
Administration and general.......... 5,007,565 7,733,793 7,624,794 292,393 6,218,156 3,543,300
Management fee...................... 1,868,102 3,268,802 4,034,540 80,896 2,243,629 1,131,561
Royalties........................... 673,762 1,120,609 1,272,321 55,255 1,230,680 963,856
Advertising and sales............... 2,864,140 4,113,422 4,636,739 168,934 3,409,427 2,432,806
Repairs and maintenance............. 2,406,479 3,358,253 3,469,537 152,470 2,652,742 1,727,645
Heat, power and light............... 2,081,933 2,784,810 2,833,376 146,171 2,143,343 1,372,855
Insurance and taxes................. 2,100,483 3,023,493 3,505,079 97,478 2,757,816 1,977,464
Depreciation and amortization....... 4,885,249 7,124,855 7,088,752 366,181 5,514,919 4,256,078
Other, net.......................... 239,405 (198,437) 622,125 31,600 (139,173) 759,390
----------- ------------ ------------ ----------- ------------ ------------
22,127,118 32,329,600 35,087,263 1,391,378 26,031,539 18,164,955
----------- ------------ ------------ ----------- ------------ ------------
4,011,963 8,580,066 9,016,548 (293,017) 6,817,846 6,056,167
Interest expense (Note 10)............ -- -- -- (460,000) -- (4,964,750)
----------- ------------ ------------ ----------- ------------ ------------
Income (loss) before income
tax expense....................... 4,011,963 8,580,066 9,016,548 (753,017) 6,817,846 1,091,417
Income tax expense (Note 3)........... 1,605,000 3,432,000 3,607,000 -- 2,727,000 --
----------- ------------ ------------ ----------- ------------ ------------
Net income (loss)................... 2,406,963 5,148,066 5,409,548 (753,017) 4,090,846 1,091,417
----------- ------------ ------------ ----------- ------------ ------------
Predecessor's equity and partners'
capital:
Beginning of period................. 75,519,277 91,875,901 131,242,334 -- 131,242,334 53,715,452
Increase (decrease) in predecessor's
equity............................ 13,949,661 34,218,367 (11,919,518) -- -- --
Capital contributions............... -- -- -- 54,468,469 -- --
Transfer of Partnership interest.... -- -- -- -- -- (54,057,658)
Distributions....................... -- -- -- -- (9,982,028) (749,211)
----------- ------------ ------------ ----------- ------------ ------------
End of period....................... $91,875,901 $131,242,334 $124,732,364 $53,715,452 $125,351,152 $ --
=========== ============ ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-50
<PAGE> 129
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
COMBINED STATEMENTS OF CASH FLOWS
---------
<TABLE>
<CAPTION>
PREDECESSOR
PARTNERSHIP ENTITY PARTNERSHIP
PREDECESSOR ENTITY ------------- ------------- -----------
------------------------------------------- DECEMBER 15
JANUARY 1 (INCEPTION) NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, TO TO ENDED TO
--------------------------- DECEMBER 14, DECEMBER 31, SEPTEMBER 30, JUNE 24,
1993 1994 1995 1995 1995 1996
----------- ------------ ------------ ------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............... $ 2,406,963 $ 5,148,066 $ 5,409,548 $ (753,017) $ 4,090,846 $ 1,091,417
Adjustments to reconcile net
income (loss) to cash provided
by operations:
Depreciation and
amortization................ 4,885,249 7,124,855 7,088,752 366,181 5,514,919 4,256,078
Changes in assets and
liabilities:
Accounts receivable........... (694,952) 355,572 (770,564) (823,798) 261,561 (4,303,414)
Inventories................... (234,024) 29,445 157,939 (6,085) (44,491) 63,384
Prepaid expenses and other.... (79,904) (242,593) 261,299 64,234 (71,112) (675,277)
Accounts payable.............. (15,025) 505,177 (811,082) 752,999 113,597 125,795
Accrued liabilities........... 527,007 1,685,986 (103,802) 1,468,004 906,085 4,369,538
Customer deposits............. 136,001 (42,124) 131,153 (170,307) 105,327 (86,330)
----------- ------------ ----------- ------------- ----------- ----------
Net cash provided by
operating activities...... 6,931,315 14,564,384 11,363,243 898,211 10,876,732 4,841,191
----------- ------------ ----------- ------------- ----------- ----------
Cash flows from investing
activities:
Funds restricted for future
acquisition of furniture,
fixtures and equipment........ (374,721) (569,691) (489,594) (2,771,814) (463,233) (2,808,054)
Restricted funds used to
purchase furniture, fixtures
and equipment................. 366,224 936,768 381,621 -- 289,459 1,053,522
Cash paid for deferred franchise
fees.......................... -- -- -- (107,045) -- --
Cash received on foreclosure.... 351,384 2,247,262 -- -- -- --
Acquisition of Hotels, net of
cash acquired of $144,650..... -- -- -- (159,994,406) -- --
Acquisition of property and
equipment, net................ (1,280,646) (2,883,340) (2,590,699) -- (2,236,116) (1,053,522)
----------- ------------ ----------- ------------- ----------- ----------
Net cash used in investing
activities................ (937,759) (269,001) (2,698,672 ) (162,873,265) (2,409,890) (2,808,054)
----------- ------------ ------------ ------------- ----------- ----------
Cash flows from financing
activities:
Proceeds from long-term debt.... -- -- -- 120,000,000 -- --
Repayment of long-term debt..... -- -- -- -- -- (750,000)
Cash paid for financing fees.... -- -- -- (2,650,000) -- --
Distributions to
predecessor/partnership....... (7,846,423) (12,446,117) (11,919,518 ) -- (9,982,028) (749,211)
Transfer of Partnership
interest...................... -- -- -- -- -- (6,660,409)
Change in due to CIGNA.......... 378,496 72,963 255,521 -- 60,774 --
Partner capital contributions... -- -- -- 50,751,537 -- --
----------- ------------ ------------ ------------- ----------- ----------
Net cash (used in) provided
by financing activities... (7,467,927) (12,373,154) (11,663,997 ) 168,101,537 (9,921,254) (8,159,620)
----------- ------------ ------------ ------------- ----------- ----------
Net (decrease) increase in cash
and cash equivalents............ (1,474,371) 1,922,229 (2,999,426 ) 6,126,483 (1,454,412) (6,126,483)
Cash and cash equivalents at
beginning of period............. 2,750,490 1,276,119 3,198,348 -- 3,198,348 6,126,483
----------- ------------ ------------ ------------- ----------- ----------
Cash and cash equivalents at end
of period....................... $ 1,276,119 $ 3,198,348 $ 198,922 $ 6,126,483 $ 1,743,936 $ --
=========== ============ ============ ============= =========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-51
<PAGE> 130
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION:
Interstone/CGL Partners, L.P.:
Interstone/CGL Partners, L.P. (the Partnership), a limited partnership, was
formed effective November 2, 1995 by Interstone/CGL Management Associates (as
general partner) and Interstone Two Partners I, L.P., Interstone Two Partners
II, L.P., Interstone Two Partners III, L.P. and Interstone Two Partners IV, L.P.
(as limited partners, collectively the Interstone Partners). A Purchase, Sale
and Contribution Agreement (the Sale Agreement) was entered into between the
Partnership, CGI Partners L.P. (CGI), Quebec Street Investments Inc. (QSI) and
Connecticut General Life Insurance Company (CIGNA) on November 20, 1995. CGI and
QSI are affiliates of CIGNA, the then current owner of six hotels (the Hotels).
Pursuant to the Sale Agreement, CGI and QSI were admitted as 25% limited
partners of the Partnership in exchange for a 25% interest in the Hotels. On the
closing date, December 15, 1995, the Interstone Partners purchased the remaining
75% interest in the Hotels from CGI and QSI. Immediately following the purchase,
CGI and QSI distributed their limited partnership interests in the Partnership
to CIGNA. The transaction was accounted for as a purchase with CIGNA's
contributed basis in the Hotels recorded at CIGNA's historical cost.
In conjunction with the Initial Public Offering (IPO) of Interstate Hotels
Company (the Company), interest in the Partnership was acquired by IHC Member
Corporation (an affiliate of the partners and the Company) on June 25, 1996.
Therefore, these financial statements include the unaudited results of
operations for the Partnership from January 1, 1996 through June 24, 1996.
Predecessor Entity:
CIGNA (Predecessor Entity) acquired the Hotels through foreclosure or
deed-in-lieu-of foreclosure. Four of the Hotels were acquired prior to January
1, 1993 and are included in these financial statements beginning January 1,
1993. Valley Forge Doubletree Guest Suites Hotel and Warner Center Marriott
Hotel are included in the accompanying combined financial statements beginning
on May 20, 1993 and February 25, 1994, respectively, since records prior to such
dates are not available. The Predecessor Entity recorded the assets acquired at
the lower of cost or fair value.
Hotels:
The properties included in the combined financial statements include the
following full-service hotels (collectively, the Hotels):
<TABLE>
<CAPTION>
HOTEL LOCATION
----- --------
<S> <C>
Tysons Corner Marriott Hotel (Tysons) Tysons Corner, VA
Marriott Suites at Valley Forge,
formerly Valley Forge Doubletree
Guest Suites Hotel through January
15, 1995 (collectively, Valley
Forge) Wayne, PA
Embassy Suites Schaumburg Hotel
(Schaumburg)Embassy Suites
Schaumburg Schaumburg, IL
Fort Lauderdale Airport Hilton (Ft.
Lauderdale) Fort Lauderdale, FL
Boston Marriott Andover (Andover) Andover, MA
Warner Center Marriott Hotel (Warner) Woodland Hills, CA
</TABLE>
F-52
<PAGE> 131
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
2. BASIS OF PRESENTATION:
The above entities are affiliates through common ownership, and accordingly
are presented in a combined presentation. All significant intercompany balances
and transactions have been eliminated in combination.
The term of the Partnership expires December 31, 2045; however, dissolution
will occur earlier in the event of the sale of the Partnership's assets or a
disabling event, as defined by the agreement. In accordance with the terms of
the partnership agreement, subsequent capital contributions from the partners
may be required in instances where cash from operations is insufficient to meet
debt service requirements and other partnership expenses. Such additional
capital contributions are to be made at the discretion of the general partner
and are to be paid by the partners in proportion to their respective partnership
interests. The partnership agreement also provides for the exchange of
partnership interests in the event of the failure of a partner to make
subsequent capital contributions.
The Partnership does not have access to certain books and records of CIGNA
for the period prior to December 15, 1995 and, therefore, the financial
statements for the Predecessor Entity include only those transactions recorded
in the books and records of the Hotels, except that income tax expense has been
provided for in the statements of operations based on applicable statutory
rates. Transactions recorded by CIGNA that related to the Hotels, principally
interest on intercompany borrowings, are excluded from these combined financial
statements since they were not recorded on the Hotels' records.
The combined financial statements of the Predecessor Entity have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotels' operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
The Partnership considers all unrestricted, highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
Restricted Cash:
The management and franchise agreements discussed in Note 5 and the
long-term debt discussed in Note 10 provide that certain cash from operations be
restricted based on a percentage of gross hotel revenues for the future
acquisition or for the replacement of property and equipment each year.
Inventories:
Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting. Upon the acquisition of the Hotels by the
Partnership, china, glass, silver and linen were no longer inventoried but
included in furniture, fixtures and equipment as discussed below.
Property and Equipment:
Property and equipment are recorded at cost which includes the allocated
purchase price for the acquisition described in Note 4 or the lower of cost or
fair value at the date of acquisition for the Predecessor Entity. Property and
equipment are depreciated primarily on the straight-line method over their
estimated useful lives (buildings and improvements over 28 to 35 years and
furniture, fixtures and equipment over 5 to 7 years). Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service are
eliminated from the accounts and any gain or loss thereon is included in
operations. Upon the formation of the Partnership, the Hotels' allocation of the
purchase price of china, glassware, silverware and linens were capitalized as
furniture, fixtures and equipment
F-53
<PAGE> 132
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
and are being amortized on a straight-line basis over a five year life. Costs
for replacement of these items are charged to operations in the period the items
are placed in service.
Deferred Expenses:
Deferred expenses at December 31,1995 consist of deferred financing costs
and franchise fees related to the formation of the Partnership on December 15,
1995. The deferred financing costs and franchise fees are being amortized on the
straight-line basis over periods ranging from 5 to 12 years.
Due to CIGNA:
Prior to December 15, 1995, the Hotels participated in a centralized cash
management system with CIGNA. Cash advanced to the Hotels under this system is
presented as a current liability due to CIGNA in the accompanying combined
balance sheets.
Concentrations of Credit Risk:
The Partnership maintains cash and cash equivalents accounts with various
financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Partnership has not experienced any losses in such
accounts.
Financial Instruments:
Derivative financial instruments are used by the Partnership in the
management of its interest rate exposures and are accounted for on the accrual
basis. Cost of interest rate swap agreements are amortized over the life of the
contract.
Use of 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 period. Actual results could differ from those estimates.
Revenue Recognition:
The Hotels recognize revenue from their rooms, catering, gift shop and
restaurant facilities as earned on the close of each business day.
Income Tax Status:
Partnerships are not subject to state and federal income taxes.
Accordingly, net income or loss and any available tax credits are allocated to
the individual partners in proportion to their income and loss rates of
participation. Should loss allocations cause the adjusted capital account of the
limited partners to be reduced to zero, any additional losses are allocated
instead to the general partners. As discussed in Note 1, for the period prior to
December 15, CIGNA was a taxable entity and an income tax expense was provided
based on applicable statutory rates.
Unaudited Financial Statements:
The unaudited combined statements of operations and equity and partners'
capital and cash flows for the nine-month period ended September 30, 1995 and
the period from January 1, 1996 to June 24, 1996, in the
F-54
<PAGE> 133
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
opinion of management, have been prepared on the same basis as the audited
combined financial statements and include all significant adjustments
(consisting primarily of normal recurring adjustments) considered necessary for
a fair presentation of the results of these interim periods. The data disclosed
in these notes to the combined financial statements for these periods are also
unaudited. Operating results for the period from January 1, 1996 to June 24,
1996 are not necessarily indicative of the results for the entire year.
4. ACQUISITION OF PROPERTY:
Effective December 15, 1995, the Partnership acquired the Hotels and
substantially all of the associated assets and liabilities. The purchase price
of $172,000,000, which was financed through the issuance of $120,000,000 in
long-term debt and contributed cash, was allocated to assets and liabilities of
each hotel based on their estimated fair values, as determined by certain fair
market valuations. In addition, an acquisition fee of $500,000 was paid to an
affiliate of the managing general partner.
5. FRANCHISE, MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS:
The Hotel franchise agreements are as follows:
<TABLE>
<CAPTION>
HOTEL FRANCHISEE FRANCHISER
----- ---------- ----------
<S> <C> <C>
Valley Forge Interstone/CGL Partners, L.P. Marriott International, Inc.
Schaumburg Interstone/CGL Partners, L.P. Promus Hotels, Inc.
Ft. Lauderdale Connecticut General Life Insurance Co. Hilton Inns, Inc.
and Interstone/CGL Partners, L.P.
Andover Interstate Hotels Corporation Marriott International, Inc.
Warner Interstate Hotels Corporation Marriott International, Inc.
</TABLE>
The terms of the agreements range from 30 days to 20 years. The agreements,
except for Tysons, require ongoing fees ranging from 2% to 5% of room revenue.
Such fees comprise royalty expense in the combined statements of operations. In
addition, other fees paid to the various franchisers include national
reservation system fees, national advertising campaign fees, honored guest
awards, and other promotional program fees.
Management agreements with Interstate Hotels Corporation (IHC) provide for
a management fee of 2.8% of gross revenues, 1.4% of which is subordinated to
debt service. The terms of the agreements extend through December 31, 2044. The
agreements can be terminated earlier by either party upon the occurrence of
certain conditions as specified in the agreement. The management agreement for
Tysons with Marriott International, Inc. provides for a management fee of 3% of
gross revenues in lieu of any franchise fees. The term of the agreement expired
March 12, 1996 and has been extended on a month to month basis by mutual consent
of the parties on the then current terms of the management agreement. With the
exception of Warner, each Hotel was managed by a management company other than
IHC for the period prior to December 15, 1995. Management fee expense for Warner
amounted to approximately $812,000 for the year ended December 31, 1994 and
$830,000 for the period from January 1,1995 to December 14, 1995.
The Partnership also has an asset management agreement with an affiliate of
CIGNA which provides for fees of $500,000 per year. Additionally, the asset
management agreement provides for a termination fee payable to CIGNA in the
amount of $2,500,000, less aggregate management asset fees paid, in the event
that CIGNA no longer holds an interest in the Partnership.
An affiliate of IHC provides reinsurance to major insurance carriers solely
in connection with the insurance coverages that those carriers provide to the
Hotels. IHC also provides certain accounting and bookkeeping assistance to the
Partnership, of which no amounts were paid by the Partnership for these services
in 1995.
F-55
<PAGE> 134
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
5. FRANCHISE, MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS--CONTINUED
Rent expense approximating $627,000 and $500,000 for the periods ending
December 31, 1994 and December 14, 1995, respectively, was paid to affiliates of
the Predecessor Entity for Warner land rent. The land was acquired by the
Partnership on December 15, 1995.
6. INVENTORIES:
The components of inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 14, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
China, glass, silver and linen................ $1,109,711 $ 791,217 $ --
Food.......................................... 156,148 142,865 113,782
Beverage...................................... 158,454 138,395 163,012
Gift shop and other........................... 101,441 295,338 73,435
---------- ---------- --------
$1,525,754 $1,367,815 $350,229
========== ========== ========
</TABLE>
7. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 14, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Land......................................... $ 19,546,363 $ 19,570,133 $ 19,489,864
Buildings and improvements................... 100,123,030 100,148,647 125,222,411
Furniture, fixtures and equipment............ 33,453,013 35,994,325 21,671,427
------------ ------------ ------------
153,122,406 155,713,105 166,383,702
Less accumulated depreciation................ 25,282,733 32,371,485 342,051
------------ ------------ ------------
$127,839,673 $123,341,620 $166,041,651
============ ============ ============
</TABLE>
8. DEFERRED EXPENSES:
The components of deferred expenses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred financing costs................................................ $2,825,000
Franchise fees.......................................................... 127,475
----------
2,952,475
Less accumulated amortization........................................... 24,129
----------
$2,928,346
==========
</TABLE>
9. OTHER LIABILITIES:
Pursuant to an agreement dated December 15, 1995 between the Partnership
and Marriott Hotel Services, Inc. and in connection with the Sale Agreement
discussed in Note 1, the Partnership assumed a liability payable to Marriott
Hotel Services, Inc. upon the termination of certain franchise agreements. The
agreement stipulates a payment varying between $1,212,968 and $2,425,936
depending upon when termination of the franchise agreements occurs. It is the
intent of management to maintain the franchise agreements for the full term. As
such, management accrued $1,212,968 as of December 31, 1995, which represents
the minimum liability under the agreement.
F-56
<PAGE> 135
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
10. LONG-TERM DEBT:
Effective December 15, 1995, the Partnership entered into a loan agreement
(the Agreement). The Agreement consisted of two notes payable in the aggregate
principal amount of $120,000,000 made pursuant to a loan (the MultiState Loan)
and a California loan (the California Loan). The MultiState Loan's and the
California Loan's portions of the total were $100,000,000 and $20,000,000,
respectively.
The notes are payable in quarterly principal payments of $750,000 with
monthly interest at LIBOR plus 2.75%. The interest rate in effect at December
31, 1995 was 8.63%. In addition, the Agreement provides for supplemental
amortization payments beginning in January 1997 based on cash flow, as defined
by the Agreement. All remaining unpaid interest and principal will be due
December 14, 2000. The Partnership entered into an interest rate swap that
provides for a fixed interest rate of 8.55% on principal of $72,000,000
effective January 31, 1996 and expiring December 15, 2000.
The Agreement provides that no distributions, dividends or repayments are
permitted during the first loan year. Thereafter, distributions, dividends or
repayments to partners will be made based on cash flow as defined in the
Agreement. The monthly asset management fee payment to CIGNA, pursuant to a
separate agreement (Note 5), is also subject to cash flow. The notes payable
contain certain other restrictive covenants including limitations on the
assumption of additional indebtedness, changes in the partnership agreement and
changes in the franchiser and the managing agent of the Hotel (IHC). The notes
are collateralized by the management agreements.
The Agreement also provides for joint and several liability to the borrower
for the full amount of the outstanding loan. The California Loan is
collateralized by substantially all of the assets of Warner and the MultiState
Loan is collateralized by all of the assets of the other Hotels. The Agreement
also provides for the release of a hotel from the collateral requirements upon
the payment of a release price, as defined in the loan agreement, to be applied
to the total outstanding principal balance under the Agreement for all Hotels.
Additionally, the monthly principal payments are increased upon the collateral
release of each Hotel.
Based on interest rates currently available, management believes that the
carrying amount of the notes payable and the interest rate swap are a reasonable
estimation of fair value.
Aggregate scheduled maturities of the notes for each of the five years
ending December 31, are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 3,000,000
1997........................................................... 3,000,000
1998........................................................... 3,000,000
1999........................................................... 3,000,000
2000........................................................... 108,000,000
------------
$120,000,000
============
</TABLE>
F-57
<PAGE> 136
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
11. DEPARTMENTAL INCOME:
Combined departmental income was as follows:
<TABLE>
<CAPTION>
DECEMBER 15 NINE MONTHS
YEAR ENDED DECEMBER 31, JANUARY 1 TO (INCEPTION) TO ENDED JANUARY 1
------------------------- DECEMBER 14, DECEMBER 31, SEPTEMBER 30, TO JUNE 24
1993 1994 1995 1995 1995 1996
----------- ----------- ------------ -------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Rooms............... $22,022,998 $33,954,095 $ 36,056,686 $ 778,989 $27,067,731 $19,748,635
Food and beverage... 3,420,603 5,703,848 6,205,118 279,568 4,434,067 3,365,260
Telephone........... 733,229 972,971 1,413,475 2,482 1,017,610 814,793
Gift shop........... 46,351 54,248 68,799 4,275 9,724 10,845
Other............... (84,100) 224,504 359,733 33,047 320,253 281,589
----------- ----------- ----------- ---------- ----------- -----------
$26,139,081 $40,909,666 $ 44,103,811 $1,098,361 $32,849,385 $24,221,122
=========== =========== =========== ========== =========== ===========
</TABLE>
12. EMPLOYEE BENEFITS:
Effective December 15, 1995, the Hotels participate in the following
employee benefit plans which are sponsored by IHC:
The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Health Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby IHC is
self-insured for certain benefits, subject to certain individual claim and
aggregate maximum liability limits. The Hotels pay, directly to IHC, the
employer portion of the premiums, which is based on the estimated conventional
premium. Premiums may be prospectively adjusted to consider actual claims
experience. The Hotels incurred expenses of approximately $4,300 for the period
from December 15, 1995 to December 31, 1995 related to the plan. The Health
Trust is exempt from federal income tax under Section 501(c)(9) of the Internal
Revenue Code as a voluntary employees' beneficiary association.
IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's attainment
of 21 years of age and on the completion of one year of service with IHC.
Employer contributions are based on a percentage of employee contributions.
Participants may make voluntary contributions to the plan of up to 6% of their
compensation, as defined. The Hotels incurred expenses of approximately $2,400
for the period from December 15, 1995 to December 31, 1995 related to the plan.
Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotels. These compensation
awards are dependent on the Hotel's performance and other established criteria.
The Hotels incurred expenses amounting to approximately $10,000 for the period
from December 15, 1995 to December 31, 1995 related to these plans.
13. COMMITMENTS AND CONTINGENCIES:
Earthquake Insurance:
Warner participates in a pooled earthquake insurance program that includes
all Company-managed properties in California. The program provides a total
aggregate coverage of $35,000,000 with each hotel paying a deductible equal to
5% of its then current fair market value.
F-58
<PAGE> 137
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
13. COMMITMENTS AND CONTINGENCIES--CONTINUED
The Partnership's investment in the property and equipment of Warner as of
December 31, 1995 was as follows:
<TABLE>
<S> <C>
Land........................................................ $ 6,250,000
Building and improvements................................... 43,613,883
Furniture, fixtures and equipment........................... 6,707,068
-----------
$56,570,951
===========
</TABLE>
In the ordinary course of business, various lawsuits, claims or proceedings
have been or may be instituted or asserted against the Partnership. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operation or liquidity of the Partnership.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing for foreclosed or contributed properties
activities consisted of the following:
<TABLE>
<S> <C>
1993:
Land...................................................... $ 4,548,000
Building.................................................. 14,357,084
Furniture, fixtures and equipment......................... 2,891,000
-----------
$21,796,084
===========
1994:
Building.................................................. $34,359,250
Furniture, fixtures and equipment......................... 7,248,950
Accounts receivable....................................... 1,791,127
Inventory................................................. 721,052
Prepaid expenses.......................................... 337,778
Liabilities............................................... (40,935)
-----------
$44,417,222
===========
DECEMBER 15 TO DECEMBER 31, 1995:
CIGNA 25% capital contribution of the Hotels.............. $ 3,716,932
Acquisition costs incurred by CIGNA....................... 613,281
Deferred expenses......................................... 195,000
-----------
$ 4,525,213
===========
</TABLE>
On June 25, 1996, all other non-cash assets, liabilities and equity were
transferred to IHC.
15. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these combined
financial statements.
F-59
<PAGE> 138
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Interstate Hotels Corporation:
We have audited the accompanying balance sheets of Boston Marriott
Westborough Hotel (the Hotel) as of December 31, 1994 and 1995, and the related
statements of operations and equity and cash flows for the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Hotel'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.
As discussed in Note 1, the financial statements of the Hotel have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotel.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boston Marriott Westborough
Hotel as of December 31, 1994 and 1995, and its operations and cash flows for
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
May 2, 1996, except for paragraph 3 of Note 1,
as to which the date is July 1, 1996
F-60
<PAGE> 139
BOSTON MARRIOTT WESTBOROUGH HOTEL
BALANCE SHEETS
---------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 110,616 $ 1,049,549
Accounts receivable............................................ 962,699 870,685
Inventories (Note 4)........................................... 259,882 275,039
Prepaid expenses and other..................................... 138,677 129,074
----------- -----------
Total current assets................................. 1,471,874 2,324,347
Property and equipment, net (Note 5)................................ 12,024,769 11,438,422
----------- -----------
Total assets................................................... $13,496,643 $13,762,769
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............................................... 269,670 134,779
Accrued liabilities:
Salaries and benefits........................................ 248,415 294,890
Compensated absences......................................... 187,175 179,552
Royalties and fees (Note 3).................................. 31,764 56,253
Management fees (Note 3)..................................... 98,442 89,592
Other........................................................ 228,792 195,930
Customer deposits.............................................. 25,548 19,788
----------- -----------
Total liabilities.................................... 1,089,806 970,784
Commitments and contingencies (Notes 8 and 9).......................
Equity.............................................................. 12,406,837 12,791,985
----------- -----------
Total liabilities and equity......................... $13,496,643 $13,762,769
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE> 140
BOSTON MARRIOTT WESTBOROUGH HOTEL
STATEMENTS OF OPERATIONS AND EQUITY
---------
<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
--------------------------------------- SEPTEMBER 30, JULY 1,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms........................ $ 5,011,439 $ 5,501,954 $ 5,997,813 $ 4,430,714 $ 3,168,223
Food and beverage............ 3,683,959 4,016,093 4,218,510 2,928,133 2,196,953
Telephone.................... 322,211 318,707 358,571 269,223 191,352
Gift shop.................... 91,115 92,761 91,381 68,845 13,328
Other........................ 104,851 120,947 144,350 97,837 106,336
----------- ----------- ----------- ----------- ------------
9,213,575 10,050,462 10,810,625 7,794,752 5,676,192
Departmental costs and expenses
(Note 3)..................... 4,087,048 4,419,216 4,680,309 3,372,228 2,373,735
----------- ----------- ----------- ----------- ------------
Departmental income
(Note 7)........... 5,126,527 5,631,246 6,130,316 4,422,524 3,302,457
Other expenses (Note 3):
Administration and general... 1,020,695 996,806 1,082,227 792,120 652,684
Management fee............... 414,355 479,286 528,631 364,444 270,047
Royalties.................... 394,229 434,731 464,945 339,752 240,776
Advertising and sales........ 625,127 599,276 640,302 470,989 312,289
Repairs and maintenance...... 344,957 418,660 474,837 350,552 280,559
Heat, power and light........ 323,592 343,711 385,730 296,246 210,402
Insurance and taxes.......... 230,773 275,270 258,503 194,663 139,794
Depreciation................. 775,388 808,323 830,760 623,070 415,380
----------- ----------- ----------- ----------- ------------
4,129,116 4,356,063 4,665,935 3,431,836 2,521,931
----------- ----------- ----------- ----------- ------------
Income before income
tax expense........ 997,411 1,275,183 1,464,381 990,688 780,526
Income tax expense............. 399,000 510,000 586,000 396,000 312,000
----------- ----------- ----------- ----------- ------------
Net income........... 598,411 765,183 878,381 594,688 468,526
Equity:
Beginning of period.......... 13,810,649 12,271,929 12,406,837 12,406,837 12,791,985
Decrease in equity........... (2,137,131) (630,275) (493,233) (674,025) (13,260,511)
----------- ----------- ----------- ----------- ------------
End of period................ $12,271,929 $12,406,837 $12,791,985 $12,327,500 $ --
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE> 141
BOSTON MARRIOTT WESTBOROUGH HOTEL
STATEMENTS OF CASH FLOWS
---------
<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
------------------------------------ SEPTEMBER 30, JULY 1,
1993 1994 1995 1995 1996
----------- --------- ---------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income...................... $ 598,411 $ 765,183 $ 878,381 $ 594,688 $ 468,526
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation................. 775,388 808,323 830,760 623,070 415,380
Changes in assets and
liabilities:
Accounts receivable.......... (116,944) (94,839) 92,014 393,838 279,832
Inventories.................. 9,350 11,685 (15,157) 13,184 23,397
Prepaid expenses and other... (10,559) (47,842) 9,603 (12,783) 25,721
Accounts payable............. 68,179 70,941 (134,891) (91,309) (126,331)
Accrued liabilities.......... 150,564 206,429 21,629 (194,611) 2,043
Customer deposits............ 838,769 (852,557) (5,760) 5,118 (374)
----------- --------- ---------- ---------- -----------
Net cash provided by
operating activities....... 2,313,158 867,323 1,676,579 1,331,195 1,088,194
----------- --------- ---------- ---------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment.................... (148,734) (451,052) (244,413) (218,441) (147,676)
----------- --------- ---------- ---------- -----------
Net cash used in investing
activities................. (148,734) (451,052) (244,413) (218,441) (147,676)
Cash flows from financing
activities:
Net (distributions)
contributions from owners.... (2,137,131) (630,275) (493,233) (674,025) (1,990,067)
----------- --------- ---------- ---------- -----------
Net cash (used in) provided
by financing activities.... (2,137,131) (630,275) (493,233) (674,025) (1,990,067)
Net increase (decrease) in cash
and cash equivalents............ 27,293 (214,004) 938,933 438,729 (1,049,549)
Cash and cash equivalents at
beginning of period............. 297,327 324,620 110,616 110,616 1,049,549
----------- --------- ---------- ---------- -----------
Cash and cash equivalents at end
of period....................... $ 324,620 $ 110,616 $1,049,549 $ 549,345 $ --
=========== ========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-63
<PAGE> 142
BOSTON MARRIOTT WESTBOROUGH HOTEL
NOTES TO FINANCIAL STATEMENTS
---------
1. BASIS OF PRESENTATION:
The Boston Marriott Westborough Hotel (Hotel) is a full service property
operated under a management agreement (Agreement) with Interstate Hotels
Corporation (IHC) and the owner of the Hotel, State Mutual Life Insurance
Company of America (SMLIC). The initial term of the Agreement ends on December
31, 2001 and can be extended, by mutual consent of the parties, on the then
current terms of the Agreement for annual periods. SMLIC obtained the Hotel on
January 2, 1991 through a deed-in-lieu of foreclosure and recorded the assets
acquired at the lower of cost or fair value based on certain fair market
valuations.
IHC does not have access to certain books and records of SMLIC, and
therefore, the financial statements include only those transactions recorded in
the books and records of the Hotel except that income tax expense has been
provided for in the statement of operations based on applicable statutory rates.
Transactions recorded by SMLIC that relate to the Hotel, principally interest on
intercompany borrowings, are excluded from these financial statements since they
are not recorded on the Hotel's records.
IHC Member Corporation (an affiliate of IHC) purchased the Hotel from SMLIC
on July 1, 1996 . As a result, these financial statements include the unaudited
results of operations for the Hotel through July 1, 1996.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in a Registration Statement of Interstate Hotels Company and are not
intended to be a complete presentation of the Hotel's operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
The Hotel considers all unrestricted, highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
Inventories:
Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.
Property and Equipment:
Property and equipment are recorded at cost (or the allocated lower of cost
or fair value at the date of foreclosure as described in Note 1). Property and
equipment are depreciated primarily on the straight-line method over their
useful lives (building and improvements over 25 years and furniture, fixtures
and equipment over 7 years). Expenditures for maintenance and repairs are
expensed as incurred. The cost and the related accumulated depreciation
applicable to property no longer in service or fully depreciated are eliminated
from the accounts, and any gain or loss thereon is included in operations.
Concentration of Credit Risk:
The Hotel maintains cash and cash equivalents with two financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. The Hotel has not experienced any losses in such amounts.
F-64
<PAGE> 143
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Use of 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
The Hotel recognizes revenue from its rooms, gift shop, catering and
restaurant facilities as earned on the close of each business day.
Unaudited Financial Statements:
The unaudited balance sheet as of September 30, 1996 and the unaudited
statements of operations and equity and cash flows for the nine-month period
ended September 30, 1995 and for the period from January 1, 1996 through July 1,
1996, in the opinion of management, have been prepared on the same basis as the
audited financial statements and include all significant adjustments (consisting
primarily of normal recurring adjustments) considered necessary for a fair
presentation of the results of these interim periods. The data disclosed in
these notes to the financial statements for these periods are also unaudited.
Operating results for the period ended period from January 1, 1996 through July
1, 1996 is not necessarily indicative of the results for the entire year.
3. RELATED PARTY TRANSACTIONS:
The Hotel is operated as a Marriott Hotel pursuant to a franchise agreement
(Agreement) dated July 13, 1991 between Interstate Hotels Corporation as
franchisee, and Marriott Corporation, as franchiser. The initial term of the
Agreement extends through July 12, 2001 and can be extended, by the mutual
consent of the parties and on the then current terms of Marriott International
franchise agreements, for five successive five-year terms. The Agreement
requires ongoing fees, which comprise royalty expense in the statements of
operations and equity amounting to 6% of room revenues and 3% of certain food
and beverage revenues. In addition, other fees paid to Marriott Corporation
include a national advertising campaign fee of .8% of room revenues, as well as
fees for a national reservation system, networking, honored guest awards and
other promotional programs. These other fees amounted to approximately $433,000
in 1993, $475,000 in 1994 and $513,000 in 1995.
The management agreement referred to in Note 1 provides for a base
management fee of 3.5% of gross revenues and an incentive fee equal to 20% of
cash available for distribution, as defined, in the management agreement. The
management fees earned by IHC were approximately $323,000 in 1993, $352,000 in
1994 and $378,000 in 1995. The incentive fees earned by IHC approximated $92,000
in 1993, $128,000 in 1994 and $150,000 in 1995.
An affiliate of IHC provides reinsurance to major insurance carriers for
certain insurance coverages that the carriers provide to the Hotel. IHC also
provides certain accounting and bookkeeping assistance to the Hotel, of which no
amounts were paid by the Hotel for these services.
F-65
<PAGE> 144
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
4. INVENTORIES:
The components of inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
China, glass, silver and linen................................... $175,233 $196,611
Food............................................................. 34,363 32,394
Beverage......................................................... 40,668 37,300
Gift shop and other.............................................. 9,618 8,734
-------- --------
$259,882 $275,039
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
Land........................................................ $ 1,020,646 $ 1,050,646
Building and improvements................................... 11,465,695 11,457,392
Furniture, fixtures and equipment........................... 2,354,638 2,577,354
----------- -----------
14,840,979 15,085,392
Less accumulated depreciation............................... 2,816,210 3,646,970
----------- -----------
$12,024,769 $11,438,422
=========== ===========
</TABLE>
6. DEPARTMENTAL INCOME:
Departmental income was as follows:
<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
------------------------------------ SEPTEMBER 30, JULY 1,
1993 1994 1995 1995 1996
---------- ---------- ---------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rooms....................... $3,858,285 $4,232,332 $4,686,660 $3,453,042 $2,436,269
Food and beverage........... 1,069,955 1,200,047 1,185,742 785,306 678,771
Telephone................... 190,143 198,935 237,011 176,936 131,906
Gift shop................... (9,223) (15,979) (13,168) (8,994) (3,356)
Other....................... 17,367 15,911 34,071 16,234 58,867
---------- ---------- ---------- ---------- ----------
$5,126,527 $5,631,246 $6,130,316 $4,422,524 $3,302,457
========== ========== ========== ========== ==========
</TABLE>
7. EMPLOYEE BENEFITS:
The Hotel participates in the following employee benefit plans which are
sponsored by IHC:
The Interstate Hotels Corporation Employee Health and Welfare Plan
(and related Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby
IHC is self-insured for certain benefits, subject to certain individual
claim and aggregate maximum liability limits. The Hotel pays, directly to
IHC, the employer portion of the premium, which is based on the estimated
conventional premium. Premiums may be prospectively adjusted to consider
actual claims experience. The Hotel incurred expenses of approximately
$147,000,
F-66
<PAGE> 145
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
7. EMPLOYEE BENEFITS--CONTINUED
$188,000 and $154,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. The Trust is exempt from federal income tax under Section
501(c)(9) of the Internal Revenue Code as a voluntary employees'
beneficiary association.
IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's
attainment of 21 years of age and on the completion of one year of service
with IHC. Employer contributions are based on a percentage of employee
contributions. Participants may make voluntary contributions to the plan of
up to 6% of their compensation, as defined. The Hotel incurred expenses of
approximately $32,000 in 1993, $40,000 in 1994 and $44,000 in 1995 related
to the plan.
Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotel. These
compensation awards are dependent on the Hotel's performance and other
established criteria. The Hotel incurred expenses amounting to
approximately $159,000 in 1993, $100,000 in 1994 and $109,000 in 1995
related to these plans.
8. OPERATING LEASES:
The Hotel accounts for various equipment leases as operating leases. Total
rental expense amounted to approximately $136,000 in 1993, $121,000 in 1994 and
$129,000 in 1995. The following is a schedule of future minimum lease payments
under these leases:
<TABLE>
<S> <C>
1996.............................................................. $129,000
1997.............................................................. 65,000
1998.............................................................. 5,000
1999.............................................................. 2,000
--------
$201,000
========
</TABLE>
9. COMMITMENT AND CONTINGENCIES:
Pursuant to the management agreement referred to in Note 1, SMLIC is
required to deposit in the Hotel's account additional funds necessary to
maintain operating funds on hand of $300,000.
In the ordinary course of business, various lawsuits, claims or proceedings
have been or may be instituted or asserted against the Hotel. Based on currently
available facts, management believes that the disposition of matters that are
pending or asserted will not have a material adverse effect on the financial
position, results of operation or liquidity of the Hotel.
10. SIGNIFICANT CUSTOMERS:
The Hotel's largest customer represented approximately 13%, 16% and 18% of
revenues for the years ended December 31, 1993, 1994 and 1995 and 15% for the
nine-month period ended September 30, 1995 and 17% for the period from January
1, 1996 through July 1, 1996, respectively.
11. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these
financial statements.
F-67
<PAGE> 146
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Interstate Hotels Company:
We have audited the accompanying combined balance sheet of Carter
Associates and Carter Associates, Inc. (collectively, Carter) as of December 31,
1995 and the related combined statements of operations and partners' deficit and
cash flows for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Carter as
of December 31, 1995, and the combined results of their operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
November 20, 1996
F-68
<PAGE> 147
CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1995
---------
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents.................................................... $ 12,280
Restricted cash (Note 2)
Property and equipment.................................................... 21,425
Escrow.................................................................... 174,309
Accounts receivable.......................................................... 332,823
Inventories (Note 4)......................................................... 185,421
Prepaid expenses and other................................................... 34,194
-----------
Total current assets...................................................... 760,452
Deferred expenses, net of amortization of $128,032............................. 325,515
Property and equipment, net (Note 5)........................................... 18,051,277
-----------
Total assets.............................................................. $19,137,244
===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Bank overdraft............................................................... 57,786
Accounts payable............................................................. 303,770
Accrued liabilities:
Salaries and benefits..................................................... 94,692
Compensated absences...................................................... 187,635
Royalties and fees (Note 3)............................................... 127,396
Other..................................................................... 133,109
Customer deposits............................................................ 20,695
Current portion of long-term debt (Note 7)................................... 647,361
-----------
Total current liabilities................................................. 1,572,444
Long-term debt (Note 7)........................................................ 22,954,674
-----------
Total liabilities......................................................... 24,527,118
Commitments and contingencies (Notes 9 and 10)................................. --
Partners' deficit.............................................................. (5,389,874)
-----------
Total liabilities and partners' deficit................................... $19,137,244
===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-69
<PAGE> 148
CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT
---------
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JULY 31,
1995 1995 1996
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rooms............................................ $ 6,553,232 $ 5,042,582 $ 3,870,206
Food and beverage................................ 3,511,795 2,538,224 1,935,390
Telephone........................................ 170,015 123,853 101,326
Gift shop........................................ 164,610 121,579 97,214
Other............................................ 125,652 97,510 74,984
------------ ------------- ------------
10,525,304 7,923,748 6,079,120
Departmental costs and expenses (Note 3)........... 4,712,794 3,486,279 2,706,292
------------ ------------- ------------
Departmental income (Note 7).................. 5,812,510 4,437,469 3,372,828
Other expenses (Note 3):
Administration and general....................... 978,946 737,499 534,583
Management fee................................... 65,132 46,591 39,894
Royalties........................................ 344,329 262,588 204,648
Advertising and sales............................ 763,831 570,159 424,444
Repairs and maintenance.......................... 491,921 402,341 311,468
Heat, power and light............................ 385,372 291,207 242,439
Insurance and taxes.............................. 423,691 317,572 242,069
Depreciation and amortization.................... 617,203 461,930 433,954
Other............................................ 27,911 28,288 10,989
------------ ------------- ------------
4,098,336 3,118,175 2,444,488
------------ ------------- ------------
1,714,174 1,319,294 928,340
Interest expense................................... 2,096,786 1,538,685 1,177,476
------------ ------------- ------------
Net loss...................................... (382,612) (219,391) (249,136)
Partners' deficit:
Beginning of period.............................. (5,449,007) (5,449,007) (5,389,874)
Contributions.................................... 489,795 489,795 --
Distributions.................................... (48,050) (15,000) --
------------ ------------- ------------
End of period.................................... $ (5,389,874) $(5,193,603) $ (5,639,010)
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-70
<PAGE> 149
CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.
COMBINED STATEMENTS OF CASH FLOWS
---------
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JULY 31,
1995 1995 1996
------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss............................................ $ (382,612) $ (219,391) $ (249,136)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................. 617,203 461,930 433,954
Changes in assets and liabilities:
Accounts receivable............................ 60,933 25,260 60,493
Due from partners.............................. -- (62,423) (118,373)
Inventories.................................... 7,044 7,488 9,348
Prepaid expenses and other..................... (27,966) (109,640) (18)
Accounts payable............................... 39,837 13,310 (38,618)
Accrued liabilities............................ 109,746 781,432 550,569
Customer deposits.............................. (1,305) 559 1,771
----------- ------------ ----------
Net cash provided by operating activities.... 422,880 898,525 649,990
----------- ------------ ----------
Cash flows from investing activities:
Funds restricted for property and equipment....... (9,808) -- (1,536)
Purchase of property and equipment................ (170,638) (81,905) (62,570)
----------- ------------ ----------
Net cash used in investing activities........ (180,446) (81,905) (64,106)
----------- ------------ ----------
Cash flows from financing activities:
Bank overdraft.................................... (87,838) (75,774) 26,138
Proceeds from issuance of debt.................... 335,979 251,984 195,988
Repayment of long-term debt....................... (889,689) (1,492,631) (806,120)
Decrease in escrow reserve........................ 6,531 72,848 19,076
Cash paid for financing fees...................... (48,100) (48,100) (21,666)
Capital contributions............................. 489,795 489,795 --
Capital distributions............................. (48,050) (15,000) --
----------- ------------ ----------
Net cash used in financing activities........ (241,372) (816,878) (586,584)
----------- ------------ ----------
Net increase (decrease) in cash and cash
equivalents....................................... 1,062 (258) (700)
Cash and cash equivalents at beginning of period.... 11,218 11,218 12,280
----------- ------------ ----------
Cash and cash equivalents at end of period.......... $ 12,280 $ 10,960 $ 11,580
=========== ============ ==========
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 2,097,133 $ 1,538,685 $1,177,476
=========== ============ ==========
</TABLE>
The accompanying notes are an integral part of the combined financial statements
F-71
<PAGE> 150
CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
---------
1. BASIS OF PRESENTATION:
Carter Associates (a limited partnership) owns the full service 300 room
hotel in Roanoke, Virginia (the Hotel). Carter Associates, Inc. (an S
Corporation) is employed as an independent contractor to supervise, direct and
control the management and operations of the Hotel pursuant to a management
agreement dated May 30, 1985 with Carter Associates. The initial term of the
agreement ends on December 31, 2001 and can be extended, by mutual consent of
the parties, on the then current terms of the agreement for annual periods. The
sole shareholder of Carter Associates, Inc. is T.A. Carter. T.A. Carter is also
a limited partner in Carter Associates. The accompanying combined financial
statements of Carter Associates and Carter Associates, Inc. (collectively,
Carter) have been presented on a combined basis due to common ownership and
management. All significant intercompany transactions have been eliminated.
The Hotel was acquired by Interstate Hotels Corporation, an affiliate of
Interstate Hotels Company, on August 1, 1996. Therefore, these financial
statements include the unaudited results of operations for Carter for the period
from January 1, 1996 through July 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
The Hotel considers all unrestricted, highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
Restricted Cash:
The franchise agreement with Marriott Corporation (Marriott) discussed in
Note 3 provides that cash from operations be restricted for the future
acquisition or for the replacement of property and equipment each year based on
a percentage of gross hotel revenues (3% in 1995).
Inventories:
Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.
Income Tax Status:
Partnerships and S corporations are not subject to state and federal income
taxes. Accordingly, net income or loss and any available tax credits are
allocated to the individual partners in proportion to their income and loss
rates of participation.
Property and Equipment:
Property and equipment are recorded at cost . Property and equipment are
depreciated primarily on the straight-line method over their useful lives
(building and improvements over 40 years and furniture, fixtures and equipment
over 5 years). Expenditures for maintenance and repairs are expensed as
incurred. The cost and the related accumulated depreciation applicable to
property no longer in service or fully depreciated are eliminated from the
accounts, and any gain or loss thereon is included in operations.
Deferred Expenses:
Deferred expenses consist of loan costs and franchise fees which are being
amortized on the straight-line basis over a 10 year period.
F-72
<PAGE> 151
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Use of 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
The Hotel recognizes revenue from its rooms, gift shop, catering and
restaurant facilities as earned on the close of each business day.
Unaudited Financial Statements:
The unaudited combined statements of operations and partners' deficit and
cash flows for the nine-month period ended September 30, 1995 and the period
from January 1, 1996 to July 31, 1996, in the opinion of management, have been
prepared on the same basis as the audited combined financial statements and
include all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. The data disclosed in these notes to the combined
financial statements for these periods are also unaudited. Operating results for
the period from January 1, 1996 to July 31, 1996 are not necessarily indicative
of the results for the entire year.
3. RELATED PARTY TRANSACTIONS:
The Hotel is operated as a Marriott Hotel pursuant to a franchise agreement
(Agreement) dated September 20, 1983 between Carter Associates as franchisee,
and Marriott as franchiser. The initial term of the Agreement extends through
July 12, 2001 and can be extended, by the mutual consent of the parties, on the
then current terms of Marriott International franchise agreements, for five
successive five-year terms. The Agreement requires ongoing fees, which comprise
royalty expense in the combined statements of operations and partners' deficit,
amounting to 6% of room revenues and 3% of certain food and beverage and gift
shop revenues. In addition, other fees paid to Marriott include a national
advertising campaign fee of .8% of room revenues, as well as fees for a national
reservation system, networking, honored guest awards and other promotional
programs. These other fees amounted to approximately $52,200 in 1995.
Pursuant to an agreement dated December 16, 1993, Marriott agreed to allow
the Hotel to defer 1.5% of the current franchise fees on room sales and on food
and beverage sales (refer to Note 8). The deferred amounts are to be repaid over
a period of five years or less. Amounts paid to Marriott for deferred franchise
fees were approximately $135,600 in 1995. The full amount of deferred fees and
any interest thereon is immediately payable upon the sale of the Hotel.
The Hotel pays management fees to T.A. Carter, part-owner of the hotel. The
management agreement referred to in Note 1 provides for a base management fee of
$60,000 plus payroll taxes to be paid to T.A. Carter. The management fees paid
by the Hotel were approximately $65,100 in 1995. Additionally, the Hotel pays
Downtown East Realty Company (another entity owned by T.A. Carter), for
accounting services provided during the year. Amounts paid for such services
approximated $64,800 in 1995.
The Hotel obtained a loan from the NCH Corporation, which is also owned in
part by T.A. Carter (refer to Note 8). Amounts paid to the NCH Corporation
amounted to approximately $125,500 in 1995 for payments made on the loan.
F-73
<PAGE> 152
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
4. INVENTORIES:
The components of inventories at December 31, 1995 are as follows:
<TABLE>
<S> <C>
China, glass, silver and linen.................................... $ 62,464
Food.............................................................. 34,918
Beverage.......................................................... 26,214
Gift shop and other............................................... 61,825
--------
$185,421
========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Land........................................................... $ 2,501,326
Building and improvements...................................... 20,192,376
Furniture, fixtures and equipment.............................. 3,562,480
-----------
26,256,182
Less accumulated depreciation.................................. 8,204,905
-----------
$18,051,277
===========
</TABLE>
6. DEPARTMENTAL INCOME:
Departmental income was as follows:
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JULY 31,
1995 1995 1996
------------ ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Rooms............................... $4,676,686 $ 3,627,244 $2,811,379
Food and beverage................... 978,780 694,399 464,584
Telephone........................... 92,877 67,028 58,662
Gift shop........................... 33,495 25,377 16,186
Other............................... 30,672 23,421 22,017
---------- ----------- ----------
$5,812,510 $ 4,437,469 $3,372,828
========== =========== ==========
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
First mortgage (A)............................................. $19,963,372
Second mortgage (B)............................................ 1,995,651
Installment note payable (C)................................... 455,198
Installment note payable (D)................................... 548,833
Installment note payable (E)................................... 618,770
Installment note payable (F)................................... 20,211
-----------
$23,602,035
===========
</TABLE>
(A) The Hotel has a first mortgage to Aetna Life insurance Company. The first
mortgage accrues interest at the contract rate of 9.125% and is payable at
the pay rate of 8.5% in monthly installments of principal and interest of
$138,626 for the period from September 1, 1992 through August 1, 1997. The
difference
F-74
<PAGE> 153
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT--CONTINUED
between the pay rate and the contract rate is deferred and added to the
principal balance of the mortgage. Beginning September 1, 1997 and
continuing on the first day of each month thereafter to and including
maturity, the monthly payment will include interest on the accrued balance
at the contract rate together with amortization sufficient to reduce the
outstanding principal and accrued interest thereon to $17,102,000. The
maturity date is August 31, 2002 at which time all principal and accrued
interest thereon is due. Two of the partners of Carter Associates have
guaranteed 15% of the outstanding principal and interest of the first
mortgage.
The first mortgage is subject to a prepayment penalty equal to the greater
of 1% of the outstanding loan balances or an amount calculated based on the
present value of the remaining mortgage payments as defined by the
agreement.
(B) The second mortgage is payable to the Federal Deposit Insurance Corporation
(FDIC) and is subordinated to the first mortgage above. The principal
balance of the note was increased to include all accrued but unpaid interest
outstanding as of December 31, 1993. For repayment terms, the principal was
divided into two parts. The two parts bear interest at a rate between 7% and
9%. Both parts require varying principal payments until they mature on
December 1, 1998, at which time all unpaid principal and accrued interest is
due. The second mortgage is guaranteed by two of the partners of Carter
Associates.
(C) The installment note payable is payable to Marriott for deferred franchise
fees. The note bears interest at a rate of 7% per annum and is payable in
monthly payments of $15,417 that are first applied to interest with the
balance applied to principal.
(D) The installment note is payable to Marriott for franchise fees that are
deferred for the period September 1, 1992 through December 31, 1996
amounting to one and one-half of current franchise fees on room and food and
beverage sales. The notes bears interest at a rate of 7% per annum and on
the same terms and conditions stated in (C) with payments to begin on the
earlier of January 1, 1999 or the repayment of all amounts under (C).
(E) The installment note payable to NCH Corporation, a related party, bears
interest at a rate of 8% per annum. The note is payable in monthly principal
and interest payments of $15,961.
(F) The installment note payable to Ford Motor credit contains add-on interest
at a rate of 9.5%. The note is payable in monthly principal and interest
payments with a final payment of $10,766 due on September 15, 1997.
Collateral on this obligation includes a vehicle with a book value of
$16,478 at December 31, 1995.
The first and second mortgages are collateralized by substantially all of the
assets of the Hotel.
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value of financial instruments. Based on interest rates currently
available, management believes that the carrying amount of the notes payable are
a reasonable estimation of fair value.
Aggregate scheduled maturities of long-term debt for each of the next five years
ending December 31, are as follows:
<TABLE>
<S> <C>
1996........................................... $ 647,361
1997........................................... 508,392
1998........................................... 2,734,776
1999........................................... 715,123
2000........................................... 630,922
Thereafter..................................... 18,365,461
-----------
$23,602,035
===========
</TABLE>
F-75
<PAGE> 154
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
8. OPERATING LEASES:
The Hotel accounts for various equipment leases as operating leases. Total
rental expense amounted to approximately $6,886 in 1995. The following is a
schedule of future minimum lease payments under these leases:
<TABLE>
<S> <C>
1996............................................... $ 6,651
1997............................................... 7,203
1998............................................... 7,127
-------
$20,981
=======
</TABLE>
9. COMMITMENT AND CONTINGENCIES:
In the ordinary course of business, various lawsuits, claims or proceedings
have been or may be instituted or asserted against the Hotel. Based on currently
available facts, management believes that the disposition of matters that are
pending or asserted will not have a material adverse effect on the financial
position, results of operation or liquidity of the Hotel.
10. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these
financial statements.
F-76
<PAGE> 155
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
OBR Limited, L.P.:
We have audited the accompanying balance sheet of OBR Limited, L.P. d/b/a
Doral Ocean Beach Resort ("the Partnership") as of December 31, 1995 and the
related statements of operations and owners' equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OBR Limited, L.P. as of
December 31, 1995 and the results of its operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Miami, Florida
April 12, 1996, except for Note 12
as to which the date is October 12, 1996
F-77
<PAGE> 156
OBR LIMITED, L.P.
D/B/A DORAL OCEAN BEACH RESORT
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 155,813 $ 682,259
Accounts receivable........................................... 1,418,111 624,508
Inventories................................................... 1,134,355 1,160,600
Prepaid expenses and other assets............................. 357,562 260,396
------------ ------------
Total current assets..................................... 3,065,841 2,727,763
Property and equipment, net..................................... 28,718,629 28,984,447
Deposits........................................................ 203,341 200,955
Deferred expenses............................................... 501,311 538,123
------------ ------------
Total assets............................................. $ 32,489,122 $ 32,451,288
============ ============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.............................................. 1,451,041 1,055,605
Accrued liabilities:
Salaries and benefits...................................... 578,073 508,070
Other...................................................... 422,183 271,215
Customer deposits............................................. 353,442 272,651
Due to affiliates............................................. 1,016,149 1,069,510
Current portion of long-term debt............................. 295,258 13,950,593
Current portion of capital lease obligation................... 124,941 120,067
------------ ------------
Total current liabilities................................ 4,241,087 17,247,711
Long-term debt.................................................. 19,018,433 5,190,914
Capital lease obligation........................................ 85,129 650,802
------------ ------------
Total liabilities........................................ 23,344,649 23,089,427
Commitments and contingencies (Notes 6 and 8)
Owners' equity.................................................. 9,144,473 9,361,861
------------ ------------
Total liabilities and owners' equity..................... $ 32,489,122 $ 32,451,288
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE> 157
OBR LIMITED, L.P.
D/B/A DORAL OCEAN BEACH RESORT
STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1995 1995 1996
------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rooms.......................................... $ 13,183,288 $ 9,677,694 $ 9,980,754
Food and beverage.............................. 6,734,335 4,724,336 4,348,412
Telephone...................................... 1,026,704 761,845 760,976
Other.......................................... 514,132 415,233 494,114
------------ ------------ ------------
21,458,459 15,579,108 15,584,256
Departmental costs and expenses.................. 10,084,554 7,117,781 6,951,360
------------ ------------ ------------
Departmental income......................... 11,373,905 8,461,327 8,632,896
------------ ------------ ------------
Other expenses:
Administration and general..................... 2,167,225 1,698,805 1,816,943
Management fees................................ 422,228 316,672 375,476
Advertising and sales.......................... 1,445,097 1,087,612 1,074,648
Repairs and maintenance........................ 1,209.917 952,749 959,453
Heat, power and light.......................... 1,130,320 806,663 718,321
Rent, taxes and insurance...................... 1,065,004 779,777 754,502
Depreciation and amortization.................. 1,548,903 1,190,224 1,279,699
Other.......................................... 335,062 303,854 77,759
------------ ------------ ------------
9,323,756 7,136,356 7,056,801
------------ ------------ ------------
2,050,149 1,324,971 1,576,095
Interest expense................................. 1,944,771 1,482,866 1,358,707
------------ ------------ ------------
Net income (loss)........................... 105,378 (157,895) 217,388
Owner's equity:
Beginning of period............................ 8,739,095 8,739,095 9,144,473
Capital contributions.......................... 300,000 300,000 --
------------ ------------ ------------
End of period.................................. $ 9,144,473 $ 8,881,200 $ 9,361,861
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 158
OBR LIMITED, L.P.
D/B/A DORAL OCEAN BEACH RESORT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1995 1995 1996
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 105,378 $ (157,895) $ 217,388
Adjustments to reconcile net income (loss) to
cash provided by operations:
Depreciation and amortization expense....... 1,548,903 1,190,224 1,279,699
Changes in assets and liabilities:
Accounts receivable........................... 246,091 515,196 793,603
Inventories................................... (208,247) (171,752) (26,245)
Prepaid expenses and other assets............. 22,647 76,220 99,552
Accounts payable.............................. (904,332) (1,039,563) (395,436)
Accrued liabilities........................... (74,462) (95,633) (220,971)
Customer deposits............................. (289,014) (307,054) (80,791)
------------ ------------ ----------
Net cash flows provided by
operating activities................... 446,964 9,743 1,666,799
------------ ------------ ----------
Cash flows from investing activities:
Acquisition of property and equipment............ (1,069,085) (714,263) (774,619)
Land development costs........................... (8,835) (8,835) (95,475)
------------ ------------ ----------
Net cash used in investing activities.... (1,077,920) (723,098) (870,094)
------------ ------------ ----------
Cash flows from financing activities:
Deferred loan costs.............................. (44,824) (44,824) --
Proceeds from long-term debt..................... 400,000 400,000 47,000
Payments on long-term debt and
capital lease obligations..................... (394,219) (291,892) (370,620)
Advances from partners and affiliates............ 419,420 531,882 53,361
Capital contributions............................ 300,000 300,000 --
------------ ------------ ----------
Net cash flows provided by (used in)
financing activities................... 680,377 895,166 (270,259)
------------ ------------ ----------
Net increase in cash and cash equivalents.......... 49,421 181,811 526,446
Cash and cash equivalents, beginning of period..... 106,392 106,392 155,813
------------ ------------ ----------
Cash and cash equivalents, end of period........... $ 155,813 $ 288,203 $ 682,259
============ ============ ==========
Supplemental disclosure of cash flow information:
Cash paid for interest........................ $ 1,802,091 $ 1,340,186 $1,358,707
============ ============ ==========
Noncash investing activities:
Property and equipment acquired with
capital lease............................... $ -- $ -- $ 712,235
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 159
OBR LIMITED, L.P.
D/B/A DORAL OCEAN BEACH RESORT
NOTES TO FINANCIAL STATEMENTS
---------
1. BASIS OF PRESENTATION:
OBR Limited, L.P. d/b/a Doral Ocean Beach Resort (the "Partnership"), a
Delaware limited partnership, was formed effective October 21, 1993 by OBR
Management, L.C. (as general partner) and OBR Holdings, Inc. and Reserve Hugo,
Inc. (as limited partners). On October 28, 1993, the Partnership purchased the
Doral Ocean Beach Resort (the "Hotel"), a 420 room full-service ocean front
resort hotel including water sport facilities, for $27,250,000.
In accordance with the terms of the partnership agreement, subsequent
capital contributions from the general partner may be required upon dissolution
of the Partnership and liquidation of its assets. Limited partners have no
personal liability with respect to any liabilities or obligations of the
Partnership except to the extent that such limited partner assumes or guarantees
any of the debts of the Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
The Partnership considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Inventories:
Inventories consist principally of food, beverages, supplies, china,
glassware and linen and are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment:
Property and equipment are stated at cost which includes the allocated
purchase price for the acquisition described in Note 1. Property and equipment
are depreciated primarily on the straight-line method over their estimated
useful lives (buildings and improvements over 25 to 35 years and furniture,
fixtures and equipment over 5 to 7 years). Expenditures for maintenance and
repairs are expensed as incurred; major renewals and betterments are
capitalized. The carrying amount and accumulated depreciation of assets which
are sold or retired are removed from the accounts in the year of disposal and
any resultant gain or loss is included in the results of operations.
Deferred Expenses:
Deferred expenses consist of loan costs, land development and other costs.
Loan costs are being amortized on the straight-line basis over the five year
life of the loan. The Partnership is considering the development of property
located adjacent to the hotel in the near future. Land development costs (i.e.,
engineering surveys, permits and architectural drawings) related to this project
will be capitalized to the project once it is deemed feasible by the
Partnership. If the project is not deemed feasible, these development costs will
be written-off in the period such determination is made.
Concentration of Credit Risk:
From time to time the Partnership maintains cash balances with financial
institutions in excess of federally insured limits. The Partnership has not
experienced any losses in such accounts.
F-81
<PAGE> 160
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Use of 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 period. Actual results could differ from those estimates.
Revenue Recognition:
The Partnership recognizes revenues from their rooms, catering, gift shop
and restaurant facilities as earned on the close of each business day.
Income Taxes:
OBR Limited, L.P. is a Delaware limited partnership. Accordingly, Federal
or State income taxes, if any, are the responsibility of the individual
partners. The terms of the limited partnership agreement provide, among other
things, that profits and losses be shared 99% by the limited partners and 1% by
the general partner.
Unaudited Financial Statements:
The unaudited balance sheet as of September 30, 1996 and the unaudited
statements of operations and owners' equity and cash flows for the nine months
ended September 30, 1995 and 1996, in the opinion of management, have been
prepared on the same basis as the audited financial statements and include all
significant adjustments (consisting primarily of normal recurring adjustments)
considered necessary for a fair presentation of the results of these interim
periods. The data disclosed in these notes to the financial statements for these
periods are also unaudited. Operating results for the nine month period ended
September 30, 1996 is not necessarily indicative of the results for the entire
year.
3. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
Food and beverage.................................... $ 280,170 $ 217,683
Supplies............................................. 162,645 212,137
China, glassware, silver and linen................... 691,540 730,780
----------- ----------
Total.............................................. $ 1,134,355 $1,160,600
=========== ==========
</TABLE>
F-82
<PAGE> 161
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
Land and improvements................................ $ 12,448,839 $ 12,448,839
Buildings and improvements........................... 12,218,295 12,706,380
Furniture, fixtures and equipment.................... 6,297,270 7,287,988
Telephone and computer equipment..................... 600,725 608,776
------------ ------------
31,565,129 33,051,983
Less accumulated depreciation and amortization....... 2,846,500 4,067,536
------------ ------------
$ 28,718,629 $ 28,984,447
============ ============
</TABLE>
5. DEFERRED EXPENSES:
Deferred costs consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
Mortgage loan costs.................................. $ 186,994 $186,994
Land development costs............................... 263,442 358,917
Other deferred expenses.............................. 192,917 192,917
--------- --------
643,353 738,828
Less accumulated amortization........................ 142,042 200,705
--------- --------
Deferred expenses, net............................... $ 501,311 $538,123
========= ========
</TABLE>
F-83
<PAGE> 162
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
6. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
$14,500,000 first mortgage note payable, interest at
10% annually; monthly payments of principal and
interest of $139,928 through January 2, 1997 at
which time a balloon payment is due; collateralized
by substantially all property and equipment of the
hotel. ............................................ $ 13,971,697 $ 13,753,013
$4,500,000 second mortgage note payable, interest at
7% annually; monthly payments of interest only of
$26,250; balloon payment due October 29, 1998;
collateralized by property and equipment. ......... 4,500,000 4,500,000
$1,250,000 third mortgage note payable, interest at
prime annually; monthly payments of interest only
through December 15, 1996, then monthly payments of
principal and interest; balloon payment due
November 8, 1998; collateralized by substantially
all property and equipment. ....................... 841,994 888,494
------------ ------------
19,313,691 19,141,507
Less current portion................................. 295,298 13,950,593
------------ ------------
$ 19,018,433 $ 5,190,914
============ ============
</TABLE>
The proceeds of the first and second mortgage notes were used to purchase
the Hotel. The terms of the first mortgage note provide for the Partnership to
remit escrow payments of $52,379 for real estate taxes on a monthly basis. The
proceeds of the third mortgage note were used for renovations to the Hotel. As
of December 31, 1995, approximately $379,752 of this note was utilized for
outstanding letters of credit.
Principal payments due on the above debt in the years subsequent to
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996............................................ $ 295,258
1997............................................ 18,442,780
1998............................................ 575,653
-----------
$19,313,691
===========
</TABLE>
F-84
<PAGE> 163
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
7. DEPARTMENTAL INCOME:
Departmental income was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1995 1995 1996
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Rooms.................................... $ 9,712,833 $7,086,313 $7,338,062
Food and beverage........................ 901,728 755,865 443,245
Telephone................................ 515,378 368,863 484,775
Other.................................... 243,966 250,286 366,814
------------ ---------- ----------
$ 11,373,905 $8,461,327 $8,632,896
============ ========== ==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Lease Commitments:
The Partnership leases certain equipment under capital lease agreements.
The present value of future minimum lease payments as of December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996....................................................... $136,434
1997....................................................... 36,984
1998....................................................... 36,984
1999....................................................... 31,951
--------
Total minimum lease payments............................... 242,353
Less amount representing interest.......................... 32,283
--------
Present value of net minimum lease payments................ 210,070
Less current portion....................................... 124,941
--------
$ 85,129
========
</TABLE>
Pension Plan:
The Partnership makes contributions along with other employers to
union-sponsored multiemployer pension plans based on the number of hours worked
by employees covered under union contracts. The Multiemployer Pension Plan
Amendments Act of 1989 imposes certain liabilities upon employers associated
with multiemployer plans who withdraw from such a plan or upon termination of
said plan. The Partnership has not received information from the plans'
administrator to determine its share of unfunded vested benefits, if any. The
Partnership has not undertaken to terminate, withdraw or partially withdraw from
the plans. Amounts charged to income as a contribution to the multiemployer
plans were approximately $74,000 for the year ended December 31, 1995.
License Agreement:
The Partnership entered into a five year license agreement for the use of
the name "Doral Ocean Beach Resort" and certain logos. The agreement provides
for a monthly fee of .5% of gross revenues.
Litigation:
In March 1995, claims of lien of approximately $296,000 were filed by
contractors in connection with costs incurred for room renovations at the Hotel.
Management challenged these liens because the renovations
F-85
<PAGE> 164
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
8. COMMITMENTS AND CONTINGENCIES--CONTINUED
were not completed and subcontractors and materialmen were not paid by the
general contractor. During 1995, the Partnership obtained a payment bond for the
above mentioned liens in order to cover any losses resulting therefrom. The
payment bond is collateralized by a letter of credit in the amount of
approximately $380,000 which has been issued as part of the third mortgage note
(see Note 5).
The parties have reached a settlement whereby all claims will be dismissed
and the claims of lien will be discharged and released. The Partnership expects
to pay approximately $50,000 as part of this settlement, which amounts will be
capitalized upon payment.
9. LEASE INCOME:
The Partnership is a lessor of retail space at the Hotel. The aggregate
amount of minimum rental payments to be received under non-cancelable operating
leases consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996............................................... $ 81,000
1997............................................... 93,000
1998............................................... 82,000
1999............................................... 84,000
Thereafter......................................... 84,000
--------
$424,000
========
</TABLE>
10. TRANSACTIONS WITH PARTNERS AND AFFILIATES:
In August 1995, the Partnership received a $700,000 loan from its limited
partners. The loan bears no interest and is due from the Partnership upon
demand. As of December 31, 1995 and September 30, 1996, amounts due to partners
and affiliates totaled $1,016,149 and $1,069,510, respectively. Such amounts are
non-interest bearing and due on demand. In September 1995, the Partnership
received a $300,000 capital contribution from its limited partners.
The Partnership has entered into a five year management agreement with an
affiliate of the general partner to operate the Hotel. The agreement provides
for a monthly fee of $33,334 or 11% of gross operating profit, whichever is
greater, and reimbursement of all reasonable out-of-pocket costs and expenses
incurred by the manager. For 1995, the affiliate limited its management fee to
approximately $422,000.
11. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for fiscal year 1996. Management believes that the implementation of
the standard will not have a material effect on these financial statements.
12. SUBSEQUENT EVENT:
On October 12, 1996, the Partnership sold substantially all of the assets
associated with the Hotel to Interstate Hotels Corporation for $43,000,000.
F-86
<PAGE> 165
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder
Trust Leasing, Inc. and Trust Management, Inc.:
We have audited the accompanying combined balance sheet of Trust
Management, Inc. and Trust Leasing, Inc. (formerly McNeill Hospitality
Corporation and McNeill Hotel Company) as of December 31, 1995 and the related
combined statement of operations, shareholder's equity, and cash flows for the
year then ended. These combined financial statements are the responsibility of
the management of Trust Management, Inc. and Trust Leasing, Inc. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Trust
Management, Inc. and Trust Leasing, Inc. as of December 31, 1995 and the
combined results of their operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
October 14, 1996, except
for Note 9, as to which
the date is November 15, 1996
F-87
<PAGE> 166
TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.
COMBINED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $5,554 $11,672
Accounts receivable:
Trade........................................................ 1,245 2,699
Affiliate.................................................... 328 674
Inventories..................................................... 168 273
Prepaid expenses................................................ 597 782
------ -------
Total current assets.................................... 7,892 16,100
Furniture and equipment, net.................................... 216 205
Investments (Note 7)............................................ 277 3,148
------ -------
Total assets............................................ $8,385 $19,453
====== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable--current.......................................... 508 360
Accounts payable................................................ 1,482 1,912
Accrued lease payable........................................... 2,280 6,956
Accrued expenses--other......................................... 2,340 3,550
------ -------
Total current liabilities............................... 6,610 12,778
------ -------
Notes payable--long-term.......................................... 90 72
------ -------
Commitments and contingencies (Note 6)
Shareholder's equity:
Common stock.................................................... 1 1
Additional paid-in capital...................................... -- 2,875
Advances to shareholder......................................... (866) (772)
Retained earnings............................................... 2,550 4,499
------ -------
Total shareholder's equity.............................. 1,685 6,603
------ -------
Total liabilities and shareholder's equity.............. $8,385 $19,453
====== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-88
<PAGE> 167
TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.
COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Lodging revenues:
Room revenue........................................... $ 52,585 $38,397 $62,040
Food and beverage revenue.............................. 1,543 1,046 1,846
Other revenue.......................................... 2,440 1,765 2,581
Management and related fees.............................. 821 628 604
-------- ------- -------
57,389 41,836 67,071
-------- ------- -------
Lodging expenses:
Hotel operating costs and expenses..................... 12,713 9,090 14,645
Food and beverage expense.............................. 1,216 811 1,507
Franchise costs........................................ 4,122 3,012 4,858
Advertising and promotion.............................. 1,619 1,102 1,942
Utilities.............................................. 2,777 1,956 3,440
Repairs and maintenance................................ 2,208 1,572 2,626
Taxes and insurance.................................... 848 521 757
Lease expense............................................ 24,101 17,996 28,883
General and administrative............................... 4,458 3,133 4,555
Salaries and benefits.................................... 2,296 1,528 1,872
Depreciation and amortization............................ 20 15 23
-------- ------- -------
56,378 40,736 65,108
-------- ------- -------
Operating income.................................... 1,011 1,100 1,963
-------- ------- -------
Other income (expense):
Investment income (loss)............................... 37 23 25
Interest expense....................................... (79) (53) (39)
-------- ------- -------
Net income............................................... $ 969 $ 1,070 $ 1,949
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-89
<PAGE> 168
TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
ADVANCES ADDITIONAL TOTAL
COMMON TO PAID-IN RETAINED SHAREHOLDER'S
STOCK SHAREHOLDER CAPITAL EARNINGS EQUITY
------ ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... $ 1 $(343) $ -- $1,581 $ 1,239
Net income.......................... -- -- -- 969 969
Increase in advances to
shareholder...................... -- (523) -- -- (523)
----- ----- ------ ------ -------
Balance at December 31, 1995.......... 1 (866) -- 2,550 1,685
Net income (unaudited).............. -- -- -- 1,949 1,949
Decrease in advances to shareholder
(unaudited)...................... -- 94 -- -- 94
Capital contribution (unaudited).... -- -- 2,875 -- 2,875
----- ----- ------ ------ -------
Balance at September 30, 1996
(unaudited)......................... $ 1 $(772) $2,875 $4,499 $ 6,603
===== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-90
<PAGE> 169
TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.
COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1995 1995 1996
------------ ------ -------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 969 $1,070 $ 1,949
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 20 15 23
Changes in assets and liabilities:
Accounts and note receivable...................... (39) (411) (1,800)
Inventories....................................... (67) (38) (105)
Prepaid expenses.................................. (196) (234) (185)
Accounts payable.................................. 421 194 430
Accrued expenses.................................. 1,307 3,640 5,886
Equity in earnings of limited partnership......... (10) (8) (7)
Other assets...................................... -- (25) --
------ ------ -------
Net cash provided by operating activities....... 2,405 4,203 6,191
------ ------ -------
Cash flows from investing activities:
Purchase of units in Equity Inns Partnership, L.P......... -- -- (2,875)
Purchase of common stock in Equity Inns, Inc.............. (269) (269) --
Dividends received........................................ 13 10 11
Purchase of furniture and equipment....................... (54) (20) (12)
------ ------ -------
Net cash used in investing activities........... (310) (279) (2,876)
------ ------ -------
Cash flows from financing activities:
Payments on capital lease obligations..................... (13) (8) (16)
Payments on lines of credit............................... (202) (177) (150)
Capital contribution...................................... -- -- 2,875
(Increase) decrease in advances to shareholder............ (523) 23 94
------ ------ -------
Net cash provided by (used in) financing
activities................................... (738) (162) 2,803
------ ------ -------
Net change in cash and cash equivalents..................... 1,357 3,762 6,118
Cash and cash equivalents at beginning of period............ 4,197 4,197 5,554
------ ------ -------
Cash and cash equivalents at end of period.................. $5,554 $7,959 $11,672
====== ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 68 $ 46 $ 30
====== ====== =======
Cash paid during the year for taxes....................... $ 68 $ 66 $ 67
====== ====== =======
Noncash investing activities:
During 1995, Trust Management entered into capital
leases for computer equipment of $120.
In February, 1994, Trust Management exchanged an
interest in hotel property (held through a limited
partnership interest) for units in the Partnership.
The exchange was recorded on a historical cost basis
(see Note 7).
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-91
<PAGE> 170
TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
---------
1. BASIS OF PRESENTATION AND ORGANIZATION:
Basis of Presentation:
The accompanying financial statements of Trust Leasing, Inc. and Trust
Management, Inc. (formerly McNeill Hotel Company and McNeill Hospitality
Corporation) have been presented on a combined basis due to common ownership and
management and because each of the entities are expected to be the subject of a
business combination with Interstate Hotel Corporation ("IHC"), a publicly held
hotel management company. All significant interhotel and intercompany balances
and transactions have been eliminated.
Organization:
Trust Leasing, Inc. ("Trust Leasing") began operations on March 1, 1994 and
is wholly owned by Mr. Phillip H. McNeill, Sr. ("McNeill"). Trust Leasing has
elected status as a Subchapter S corporation under the Internal Revenue Code.
Trust Leasing was formed to operate and lease hotels owned by Equity Inns
Partnership, L.P. (the "Partnership") pursuant to separate percentage lease
agreements. Approximately 97% of the Partnership is owned by Equity Inns, Inc.
("ENNS"), its sole general partner, a company in which McNeill is also chief
executive officer and chairman of the board of directors.
As of December 31, 1995, Trust Leasing leases thirty-seven hotels from the
Partnership with a total of 4,444 rooms in twenty-one states (46 hotels at
September 30, 1996, see Note 9). Twenty-seven of the hotels are operated as
Hampton Inn hotels under franchise agreements with Promus Companies, Inc. Three
of the hotels are operated as Residence Inn hotels under franchise agreements
with Marriott, Inc. Three of the hotels are operated as Comfort Inn hotels under
a franchise agreement with Choice Hotels International, Inc. Four of the hotels
are operated as Holiday Inn Hotels or Holiday Inn Express Hotels under franchise
agreements with Holiday Inn, Inc. Thirty-one of the hotels are limited service
hotels, three of the hotels are full service hotels and three of the hotels are
extended stay hotels.
Each hotel is separately leased by the Partnership to Trust Leasing under a
percentage lease agreement ("Percentage Leases") that includes a non-cancelable
term of ten years, subject to earlier termination upon certain events and is
accounted for as an operating lease. The leases require a base rental payment to
be made to the Partnership on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue, beverage revenue and
food revenue, if applicable, of the hotels. Trust Leasing will not be considered
in default for non-payment of the percentage rent as long as such payment is
made within ninety days of the end of the calendar year.
Trust Management, Inc. ("Trust Management") began operations on May 20,
1991 and is also wholly owned by McNeill. Trust Management has elected status as
a Subchapter S corporation under the Internal Revenue Code. Trust Management
operates and manages hotel properties pursuant to management agreements with the
respective owners of the hotels. Several of the managed hotels are owned by
entities in which McNeill has an ownership interest. Trust Management does not
manage any of the hotels owned by the Partnership. The accompanying combined
statements of operations include only the income earned from the management of
such properties while the actual hotel property operating assets, liabilities,
income and expenses are included in the owners' financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents:
All highly liquid investments with maturity of three months or less when
purchased are considered to be cash equivalents.
F-92
<PAGE> 171
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Inventories:
Inventories, consisting primarily of linens and food and beverage, are
stated at the lower of cost (generally, first-in, first-out) or market.
Furniture and Equipment:
Furniture and equipment is stated at cost net of accumulated depreciation
of $30 at December 31, 1995, of which $10 represents accumulated amortization on
capitalized leases. Depreciation is based on the straight-line method over the
estimated useful life. Expenditures for maintenance, repairs and minor renewals
are expensed as incurred. When furniture and equipment are sold, the related
cost and accumulated depreciation are removed from the respective accounts and
any gain or loss is credited or charged to operations.
Investments:
Investments include approximately 264,000 units of limited partnership
interest in the Partnership ("Partnership Units") and 25,000 shares of common
stock of Equity Inns, Inc.
Pursuant to FASB Statement No. 115, Trust Leasing has classified its
readily marketable equity securities of Equity Inns, Inc. as available for sale,
and, therefore, these securities are carried at market value which equals cost
at December 31, 1995. Unrealized gains or losses, if applicable, will be
reflected in shareholder's equity. The investment in Partnership Units
represents an approximate .11% interest in Equity Inns, L.P. and is accounted
for using the equity method, as a result of McNeill's influence over the
Partnership's operating and financial policies.
Revenue Recognition:
Hotel revenues and management and related fees are recognized as earned.
Ongoing credit evaluations are performed, and an allowance for potential credit
losses is provided against the portion of accounts receivable which is estimated
to be uncollectible. Such losses have been within management's expectations.
Franchise Costs:
The cost of obtaining the franchise licenses for the leased hotels is paid
by the Partnership, and the ongoing franchise fees are paid by Trust Leasing.
Franchise licenses and the related franchise fees for managed hotels are paid by
the respective owners. These fees are generally computed as a percentage of room
revenue for each hotel in accordance with franchise agreements.
Income Taxes:
No provision for federal income taxes is required for Trust Leasing and
Trust Management as the companies are both S corporations as defined by the
Internal Revenue Code. State and local income tax expense and benefits
recognized by Trust Leasing and Trust Management are not significant and are
included in the combined statements of operations.
Concentration of Credit Risk:
Trust Management and Trust Leasing place cash deposits at a major bank.
Bank account balances exceeded Federal Depository Insurance limits by $4.3
million at December 31, 1995. Management believes the credit risk related to
these deposits is minimal.
F-93
<PAGE> 172
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Use of 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Financial Statements:
The unaudited interim combined balance sheet as of September 30, 1996 and
the unaudited combined statements of operations, changes in shareholder's
equity, and cash flows for the nine months ended September 30, 1995 and 1996
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim combined financial statements. All such adjustments
are of a normal and recurring nature. The data disclosed in Notes 1 and 6 to the
combined financial statements for these periods is also unaudited.
3. CAPITAL LEASES:
Trust Management leases computer equipment under agreements which are
classified as capital leases. Leased capital assets included in property, plant
and equipment at December 31, 1995 totaled $125.
Future minimum payments, by year, under noncancelable capital leases with
remaining terms of one year or more consist of the following at December 31,
1995:
<TABLE>
<S> <C>
1996....................................................... $ 34
1997....................................................... 34
1998....................................................... 32
1999....................................................... 32
2000....................................................... 11
----
Total minimum lease payments............................... 143
Amounts representing interest.............................. 30
----
Present value of net minimum payments...................... 113
Current portion............................................ (23)
----
Long-term capitalized lease obligations.................... $ 90
====
</TABLE>
4. NOTES PAYABLE:
Trust Management has use of two lines of credit totaling $800. Outstanding
borrowings under these lines of credit totaled $486 as of December 31, 1995. The
weighted average interest rate on these borrowings was 9.83% at December 31,
1995 which represents the bank's weighted average prime rate plus 1%. Both lines
of credit are reviewed annually for renewal. The outstanding borrowings against
these lines of credit are personally guaranteed by McNeill.
5. EMPLOYEE BENEFITS:
In 1995, Trust Leasing and Trust Management became self-insured for
employee health and workers' compensation claims. Stop loss insurance policies
are maintained for employee health and workers' compensation to limit Trust
Leasing's and Trust Management's per occurrence and aggregate liability in any
given year. Actual claims and premiums on stop loss insurance are paid through a
combination of employer and employee contributions. Included in the 1995
combined statement of operations is $691 related to these benefits.
F-94
<PAGE> 173
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(dollars in thousands, except per share data)
6. COMMITMENTS:
Leasing Operations:
At December 31, 1995, Trust Leasing has future lease commitments to the
Partnership under the Percentage Leases which expire in 2004 (25 hotels) and
2005 (12 hotels). Minimum future rental payments are computed based on the base
rent as defined under these noncancelable operating leases and is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1996.......................................... $ 16,967
1997.......................................... 16,967
1998.......................................... 16,967
1999.......................................... 16,967
2000.......................................... 16,967
2001 and thereafter........................... 66,354
---------
$ 151,189
=========
</TABLE>
Trust Leasing paid base rents of approximately $12.6 million and percentage
rents in excess of base rents of approximately $11.5 million for the year ended
December 31, 1995. The percentage rents are based on a percentage of gross room
revenue, beverage revenue and food revenue, if applicable, of the hotels. Both
the base rent and the threshold room revenue amount in each percentage rent
formula is adjusted for changes in the CPI. The adjustment is calculated at the
beginning of each year, provided the lease has been in effect for a complete
calendar year, based upon the average change in the CPI during the prior 24
months. The adjustment in any lease year may not exceed 7%. Effective January 1,
1996, twenty-five of the leases were adjusted, resulting in a 2.8% increase in
both base rent and threshold room revenue.
At December 31, 1995 and September 30, 1996, Trust Leasing owed the
Partnership $2.3 million and $7.0 million, respectively, primarily representing
the previous quarter's percentage rents which were paid to the Partnership by
March 31, 1996 and October 30, 1996, respectively.
Other than real estate and personal property taxes and maintenance of
underground utilities and structural elements, which are obligations of the
Partnership, the Percentage Leases require Trust Leasing to pay rent, insurance,
all costs and expenses and all utility and other charges incurred in the
operation of the Hotels.
Trust Leasing is also obligated to indemnify and hold harmless the
Partnership from and against all liabilities, costs and expenses incurred by or
asserted against the Partnership in the normal course of operating the Hotels.
Trust Leasing is not permitted to sublet all or any part of the Hotels or
assign its interest under any of the Percentage Leases without the prior written
consent of the Partnership.
In the event the Partnership enters into an agreement to sell or otherwise
transfer a hotel, the Partnership has the right to terminate the Percentage
Lease agreement with Trust Leasing. Upon termination the Partnership must either
pay Trust Leasing the fair market value of their leasehold interest in the
remaining term of the Percentage Lease agreement to be terminated or offer to
Trust Leasing a substitute hotel lease on terms that would create a leasehold
interest in the new hotel with a fair market value equal to or greater than the
fair market value of the remaining leasehold interest under the terminated
Percentage Lease agreement.
Trust Leasing has agreed that during the term of the Percentage Leases it
will maintain a ratio of total debt to consolidated net worth (as defined in the
Percentage Leases, net worth of Trust Leasing, Inc.) of less than or equal to
50%, exclusive of capitalized leases. Debt is construed to mean any indebtedness
incurred in excess of normal trade payables (i.e., operating trade payables and
percentage leases payable).
F-95
<PAGE> 174
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(dollars in thousands, except per share data)
6. COMMITMENTS--CONTINUED
Hotel Management Operations:
At December 31, 1995, Trust Management had 10 management contracts with
terms ranging from 4 to 10 years which expire through the year 2005, of which 7
of these agreements are with hotels in which McNeill has an ownership interest.
Under the terms of the agreement, Trust Management is responsible for the
operations of such hotels, including the collection of revenues and payment of
operating expenses. The management agreements generally provide for a basic
management fee based on a percentage (ranging from 3% to 5%) of adjusted gross
revenues as defined in the agreement. Additionally, the agreements provide for
fees related to accounting and payroll-related services provided to the hotels.
The management agreements are subject to certain cancellation provisions.
7. RELATED PARTY TRANSACTIONS:
Trust Leasing and Trust Management lease office space from a limited
partnership wholly owned by McNeill and his family. Under this arrangement Trust
Leasing and Trust Management are charged a monthly fee of approximately $6.
Included in management and related fee income are amounts earned on
management contracts for hotels in which McNeill has an ownership interest. In
1995 these amounts totaled $492. Affiliated accounts receivable include amounts
related to management fees or other miscellaneous items due from hotels owned by
the Partnership or managed hotels in which McNeill has an ownership interest.
Included in salaries and benefits in 1995 is approximately $1,300 related
to McNeill's compensation.
During 1995, Trust Leasing purchased 25,000 shares of ENNS' common stock.
The stock is pledged as collateral for personal indebtedness of McNeill.
During 1994, Trust Leasing loaned McNeill $171 in exchange for a note
receivable. The note, which was included in advances to shareholder, was due on
demand and carried an interest rate of 7.25%. The note and accrued interest were
paid in 1995. Interest income earned on the note was $7 in 1995.
Other shareholder's advances have no specific repayment terms and have been
classified as a reduction of shareholder's equity in the combined balance
sheets.
In 1994, upon completion of its initial public offering ("IPO"), Equity
Inns, Inc. contributed substantially all of the net assets of the IPO to the
Partnership in exchange for an approximate 86.5% sole general partnership
interest in the Partnership. The Partnership used the proceeds to acquire eight
hotels from various selling partnerships ("Selling Partnerships"). Rather than
receiving cash for their interest in the Selling Partnerships upon the sale of
such hotels, certain partners in the Selling Partnerships, including affiliates
of Equity Inns, Inc., elected to receive limited partnership interests in the
Partnership ("Units"). Such affiliates were considered to be promoters of Equity
Inns, Inc. and accordingly, the assets transferred in exchange for Units were
recorded on a historical cost basis. One of the affiliates was Trust Management,
Inc. which exchanged an interest in a hotel property for Units.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Company reports the carrying amount of cash and
cash equivalents, accounts receivable, notes payable, accounts payable and
accrued expenses at cost which approximates fair value due to the short maturity
of these instruments.
F-96
<PAGE> 175
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(dollars in thousands, except per share data)
9. SUBSEQUENT EVENTS:
During 1996, outstanding borrowings under Trust Management's $300 line of
credit were repaid.
Since December 31, 1995, Trust Management has acquired four additional
management contracts, three of which are for hotels that have not yet opened.
Additionally, the Partnership has acquired the following hotels which are leased
and operated by Trust Leasing pursuant to Percentage Leases which expire in
2006:
<TABLE>
<CAPTION>
ANNUAL BASE
HOTEL ACQUISITION DATE RENT
----- ---------------- -----------
<S> <C> <C>
Hampton Inn--Knoxville, TN (118 rooms) February 21, 1996 $ 351
Hampton Inn--Baltimore, MD (116 rooms) March 14, 1996 538
Hampton Inn--Detroit, MI (125 rooms) May 31, 1996 624
Homewood Suites--Hartford, CT (132 rooms) May 31, 1996 880
Residence Inn--Madison, WI (80 rooms) June 25, 1996 357
Holiday Inn--Winston-Salem, NC (160 rooms) June 28, 1996 423
Hampton Inn--Scottsdale, AZ (126 rooms) July 16, 1996 780
Hampton Inn--Chattanooga, TN (167 rooms) July 22, 1996 690
Homewood Suites--San Antonio, TX (124 rooms) September 27, 1996 854
Residence Inn--Burlington, VT (96 rooms) October 1, 1996 651
Homewood Suites--Phoenix, AZ (124 rooms) November 5, 1996 1,032
</TABLE>
In January 1996, Trust Leasing and Trust Management implemented a 401(k)
profit sharing plan available to all eligible employees. The amount of matching
company contributions equals 1/4% for every 1% contributed by the employee up
to a maximum of 6% of each employee's contributions. In connection with the
proposed transaction with IHC as further described below, the 401(k) profit
sharing plan will be terminated.
On April 16, 1996, Trust Leasing purchased 250,000 Partnership Units in a
private placement. The Units were purchased at $11.50 per Unit, resulting in a
total cost of $2,875,000. In connection with this transaction, Phillip H.
McNeill, Sr. made a capital contribution of $2,875,000 to Trust Leasing. On
October 18, 1996, in connection with terms of the transaction with
Crossroads/Memphis as discussed herein, Trust Leasing distributed its investment
of 250,000 Partnership Units and 25,000 shares of Common Stock of Equity Inns,
Inc. to Phillip H. McNeill, Sr.
On October 4, 1996, Phillip H. McNeill, Sr. entered into an agreement,
subject to certain conditions, to contribute substantially all of the assets of
Trust Leasing and of Trust Management, including the leases between Trust
Leasing and the Partnership, to Crossroads/Memphis Partnership, L.P.
("Crossroads/ Memphis"), an affiliate of IHC which is a company not presently
affiliated with Trust Leasing, Trust Management or Mr. McNeill, in exchange for
partnership interests in Crossroads/Memphis. The transaction was completed on
November 15, 1996. As a result of the transaction, the terms of the Percentage
Leases were extended to 15 years.
F-97
<PAGE> 176
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Fountain Suites Hotel
We have audited the accompanying hotel balance sheet of Fountain Suites
Hotel as of December 31, 1995, and the related statements of hotel operations
and hotel equity and hotel cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1, the financial statements of the Hotel have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotel's operations.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fountain Suites Hotel at
December 31, 1995, and the results of its hotel operations and the hotel cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ PANNELL KERR FORSTER
February 16, 1996, except for paragraphs 1 and 4 of
Note 1, as to which the date is November 25, 1996.
F-98
<PAGE> 177
FOUNTAIN SUITES HOTEL
HOTEL BALANCE SHEET
---------
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
Current assets
Cash......................................................................... $ 126,903
Accounts receivable, trade................................................... 209,076
Inventories.................................................................. 30,943
Prepaid expenses............................................................. 43,431
------------
Total current assets...................................................... 410,353
------------
Net property and equipment..................................................... 13,420,059
Deposits....................................................................... 91,327
------------
Total assets................................................................... $ 13,921,739
============
LIABILITIES AND EQUITY
Current liabilities
Accounts payable............................................................... $ 227,221
Accrued liabilities:
Salaries and benefits..................................................... 241,934
Property and sales tax.................................................... 324,596
Other..................................................................... 60,467
Advance deposits............................................................. 153,511
------------
Total current liabilities................................................. 1,007,729
Commitments and contingencies (Note 4)
Equity......................................................................... 12,914,010
------------
Total liabilities and equity................................................... $ 13,921,739
============
</TABLE>
The accompanying notes are an integral part of these statements
F-99
<PAGE> 178
FOUNTAIN SUITES HOTEL
STATEMENTS OF HOTEL OPERATIONS AND HOTEL EQUITY
---------
<TABLE>
<CAPTION>
UNAUDITED
----------------------------
NINE MONTHS
YEAR ENDED ENDED JANUARY 1
DECEMBER SEPTEMBER TO
31, 30, AUGUST 29,
1995 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenues
Rooms (Note 5).................................. $ 6,483,658 $ 4,978,039 $ 5,074,456
Food............................................ 2,021,260 1,478,883 1,365,706
Beverage........................................ 312,276 223,188 210,075
Telephone....................................... 349,258 277,601 238,425
Other........................................... 56,139 36,766 87,267
----------- ----------- ------------
Total revenues............................... 9,222,591 6,994,477 6,975,929
----------- ----------- ------------
Departmental costs and expenses
Rooms........................................... 1,490,485 1,121,896 978,477
Food............................................ 1,663,713.. 1,229,281 1,017,342
Beverage........................................ 179,317 134,016 97,375
Telephone....................................... 164,653 131,428 90,001
----------- ----------- ------------
Total departmental costs and expenses........ 3,498,168 2,616,621 2,183,195
----------- ----------- ------------
Total operating departmental income............... 5,724,423 4,377,856 4,792,734
----------- ----------- ------------
Other expenses
Administrative and general...................... 999,888 747,293 797,932
Advertising and sales........................... 716,073 556,821 470,972
Repairs and maintenance......................... 657,718 496,385 396,993
Heat, power and light........................... 468,658 366,406 302,666
Management and incentive fees................... 387,352 306,763 374,637
Insurance and taxes............................. 564,217 428,656 352,764
Depreciation.................................... 1,026,708 770,031 338,490
----------- ----------- ------------
Total other expenses......................... 4,820,614 3,672,355 3,034,454
----------- ----------- ------------
Income before income tax expense.................. 903,809 705,501 1,758,280
Income tax expense................................ 361,522 282,200 703,312
----------- ----------- ------------
Excess of hotel operating revenue over expenses... 542,287 423,301 1,054,968
Equity, beginning of period....................... 12,153,851 12,153,851 12,914,010
Net increase (decrease) in equity (Note 1)........ 217,872 506,144 (13,968,978)
----------- ----------- ------------
Equity, end of period............................. $12,914,010 $13,083,296 $ --
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-100
<PAGE> 179
FOUNTAIN SUITES HOTEL
STATEMENTS OF HOTEL CASH FLOWS
---------
<TABLE>
<CAPTION>
UNAUDITED
---------------------------
NINE MONTHS
YEAR ENDED ENDED JANUARY 1
DECEMBER SEPTEMBER TO
31, 30, AUGUST 29,
1995 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Excess of hotel operating revenue over
expenses...................................... $ 542,287 $ 423,301 $ 1,054,968
Adjustments to reconcile to net cash provided by
operating activities
Depreciation................................ 1,026,708 770,031 338,490
(Increase) decrease in operating assets
Accounts receivable, trade............... 154,048 173,912 6,363
Inventories.............................. 10,386 20,600 13,335
Prepaid expenses......................... 15,302 24,573 19,734
Deposits................................. (10,975) (7,475) (4,471)
Increase (decrease) in operating liabilities
Accounts payable......................... (139,500) (176,334) (214,221)
Accrued liabilities...................... (40,097) 144,618 181,233
Advance deposits......................... 107,405 (20,756) (148,383)
----------- ----------- ------------
Net cash provided by operating
activities.......................... 1,665,564 1,352,470 1,247,048
----------- ----------- ------------
Net cash used in investing activities
Purchases of property and equipment.............. (190,903) (145,957) (115,640)
----------- ----------- ------------
Cash flows from financing activities
Net distributions to owner....................... (1,545,680) (1,259,722) (1,258,311)
Payments on long term debt....................... (24,845) (24,845) --
----------- ----------- ------------
Net cash used in financing
activities.......................... (1,570,525) (1,284,567) (1,258,311)
----------- ----------- ------------
Net decrease in cash............................... (95,864) (78,054) (126,903)
Cash, beginning of period.......................... 222,767 227,767 126,903
----------- ----------- ------------
Cash, end of period................................ $ 126,903 $ 149,713 $ --
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-101
<PAGE> 180
FOUNTAIN SUITES HOTEL
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
History and Operations:
The Fountain Suites Hotel (Hotel) is a full service property located in
Phoenix, Arizona, which was owned by FSH Investment Corp. (FSH) as of December
31, 1995. The Hotel was subsequently acquired by Interstate Hotels Corporation,
an affiliate of Interstate Hotels Company (IHC), on August 29, 1996 (the
Acquisition). As a result, these financial statements include the unaudited
results of hotel operations for the Hotel for the period from January 1, 1996
through August 29, 1996.
IHC does not have access to certain books and records of FSH, and
therefore, the financial statements include only those transactions recorded in
the operating accounts of the Hotel except that income tax expense has been
provided based upon the applicable statutory rates. Transactions recorded by FSH
that relate to the Hotel, principally loan advances, interest and payments on
long-term debt, are excluded from these financial statements since they are not
included in the operating accounts acquired by IHC.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in a Registration Statement of Interstate Hotels Company and are not
intended to be a complete presentation of the Hotel's operations.
Basis of Accounting:
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. Previously, the Hotel's financial
statements were prepared on the basis of accounting FSH used for income tax
purposes, which is a comprehensive basis of accounting other than generally
accepted accounting principles (GAAP). All tax to GAAP adjustments have been
recorded to opening period equity.
Inventories:
Inventories of food and beverages are carried at the lower of cost or
market, cost being determined on a first-in, first-out basis.
Property and Equipment:
Property and equipment are stated at cost. The cost of assets retired,
together with related accumulated depreciation are eliminated from the accounts
in the year of disposition.
Maintenance and repairs are charged to operating expense as incurred. The
cost of renewals and betterments which materially extend the useful lives of the
assets or increase their productivity are capitalized.
The Hotel provides for depreciation using the straight-line method over the
useful lives as follows:
<TABLE>
<S> <C>
Buildings....................................... 31.5 Years
Furniture, fixtures and equipment............... 7 Years
</TABLE>
Use of 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-102
<PAGE> 181
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1995
---------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Revenue Recognition:
The Hotel recognizes revenue from its rooms and restaurant facilities as
earned on the close of each business day.
Unaudited Financial Statements:
The unaudited statements of hotel operations and hotel equity and hotel
cash flows for the nine-month period ended September 30, 1995 and for the period
from January 1, 1996 through August 29, 1996, in the opinion of management, have
been prepared on the same basis as the audited financial statements and include
all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. The data disclosed in these notes to the financial
statements for these periods are also unaudited. Operating results for the
period from January 1, 1996 through August 29, 1996 is not necessarily
indicative of the results for the entire year.
NOTE 2. MANAGEMENT AGREEMENT:
Prior to the Acquisition, the Hotel was managed by an affiliated
corporation, pursuant to a management agreement which had been in effect since
1988.
The agreement had an initial term of 20 years, with options to extend for
four additional periods of five years each. The agreement provided for a basic
management fee equal to 2% of gross revenues plus an incentive management fee
equal to 10% of net cash flow before debt service. In addition, the Hotel
reimbursed the affiliate management company for its allocable share of certain
corporate, sales and marketing expenses.
The accompanying financial statements include management and incentive fees
of approximately $387,000 for the year ended December 31, 1995 and $307,000 for
the nine month period ended September 30, 1995 and $375,000 for the period from
January 1, 1996 through August 29, 1996.
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Land.................................................. $ 4,197,262
Buildings............................................. 10,655,985
Furniture, fixtures and equipment..................... 9,445,830
------------
24,299,077
Less accumulated depreciation......................... (10,879,018)
------------
Net property and equipment............................ $ 13,420,059
============
</TABLE>
F-103
<PAGE> 182
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1995
---------
NOTE 4. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Hotel has operating leases for office and hotel equipment expiring in
2000. Rent expense under these leases for the year ended December 31, 1995 was
approximately $69,000. Future annual lease payments related to the leases as of
December 31, 1995 are:
<TABLE>
<S> <C>
1996.............................................. $ 96,999
1997.............................................. 83,369
1998.............................................. 83,369
1999.............................................. 83,034
2000.............................................. 72,725
--------
$419,496
========
</TABLE>
401(k) Retirement Plan:
Effective January 1, 1996, the Hotel became a participant in a 401(k)
defined contribution retirement plan established by the affiliated management
company. The Hotel matched 25% of each participating employee's contribution (up
to a total match equal to 1% of the employee's annual compensation), and such
employer contributions became fully vested as a result of the acquisition.
NOTE 5. REVENUES FROM SIGNIFICANT CUSTOMERS:
The Hotel had one significant customer who provided approximately 16
percent of the gross room revenues for the year ended December 31, 1995 and 16
percent for the nine month period ended September 30, 1995 and 19 percent for
the period from January 1, 1996 through August 29, 1996.
F-104
<PAGE> 183
PHOTO PHOTO
ROANOKE AIRPORT MARRIOTT FORT MAGRUDER INN
ROANOKE, VIRGINIA (MANAGED) WILLIAMSBURG, VIRGINIA (OWNED)
PHOTO PHOTO
LOS ANGELES WESTIN BONAVENTURE MARRIOTT'S CASA MARINA RESORT
LOS ANGELES, CALIFORNIA (MANAGED) KEY WEST, FLORIDA (MANAGED)
PHOTO
MARRIOTT AT SAWGRASS RESORT
PONTE VEDRA BEACH, FLORIDA (MANAGED)
<PAGE> 184
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 7
The Company......................... 12
Recent Developments................. 13
Price Range of Common Stock......... 16
Dividend Policy..................... 16
Use of Proceeds..................... 16
Capitalization...................... 17
Selected Financial and Other Data... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Indebtedness of the Company......... 27
Business and Properties............. 29
Management.......................... 47
Principal Shareholders.............. 61
Certain Relationships and Related
Transactions...................... 62
Description of Capital Stock........ 64
Shares Eligible for Future Sale..... 66
Taxation............................ 67
Underwriting........................ 70
Legal Matters....................... 72
Experts............................. 72
Forward-Looking Information......... 73
Available Information............... 73
Index to Financial Statements....... F-1
</TABLE>
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4,000,000 SHARES
LOGO
INTERSTATE HOTELS
COMPANY
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES
(USA) INC.
DECEMBER 10, 1996
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