<PAGE> 1
As filed with the Securities and Exchange Commission on November 10, 1998
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERSTATE HOTELS MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
MARYLAND 7011 75-2767215
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(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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680 ANDERSEN DRIVE, FOSTER PLAZA TEN
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------
W. Thomas Parrington, Jr.
Interstate Hotels Management, Inc.
680 Andersen Drive, Foster Plaza Ten
Pittsburgh, Pennsylvania 15220
(412) 937-0600
(Name, address including zip code, and telephone number, including area code,
of agent for service)
--------------------
COPIES TO:
CARLA S. MORELAND, ESQ.
JOHN P. BOHLMANN, ESQ.
c/o Patriot American Hospitality, Inc.
1950 Stemmons Freeway
Suite 6001
Dallas, Texas 75207
(214) 863-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
--------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Proposed Proposed
Title of Each Class of Amount to Maximum Maximum Amount of
Securities to Be be Offering Price Aggregate Registration
Registered Registered(1) Per Share(2) Offering Price(2) Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 9,221,743 shares $5.23 $48,229,716 $13,408
- -----------------------------------------------------------------------------------------------------------------------
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(1) Estimated maximum number of shares which may be issued.
(2) The registration fee has been calculated pursuant to Rule
457(f)(2) under the Securities Act and is based upon
the book value of the Common Stock computed as of June 30, 1998.
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
The information in this Information Statement/Prospectus is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Information Statement/Prospectus is not an offer to sell these securities and it
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED __________, 1999
9,221,743 SHARES
INTERSTATE HOTELS MANAGEMENT, INC.
DISTRIBUTION BY PATRIOT AMERICAN HOSPITALITY, INC.
TO ITS SHAREHOLDERS OF UP TO
9,221,743 SHARES OF COMMON STOCK
OF INTERSTATE HOTELS MANAGEMENT, INC.
-------------------
We are sending you this Information Statement/Prospectus to describe
the spin-off of 92% of Interstate Hotels Management, Inc. (the "Company" or
"Interstate Management") from Patriot American Hospitality, Inc. ("Patriot"),
and the business and financial condition of the Company following the spin-off.
Patriot will consummate the spin-off if it does not complete the sale of 92% of
the Company to affiliates of Paine Webber Real Estate Securities Inc. ("Paine
Webber") pursuant to a letter of intent Patriot signed with Paine Webber on
November 9, 1998. If the spin-off is accomplished, you will receive one share of
common stock of the Company for every 19.57 shares of common stock or certain
other securities of Patriot and Wyndham International, Inc. ("Wyndham") you own.
Patriot agreed to complete the spin-off as part of the settlement
agreement it reached with Marriott International, Inc. ("Marriott") and
Interstate Hotels Company ("IHC") in connection with the merger of IHC into
Patriot, which occurred on June 2, 1998. The Company operates and has a 47.5%
economic interest in the third-party hotel management business Patriot acquired
from IHC. The spin-off achieves two goals: you will continue to own an equity
stake in IHC's third-party hotel management business, but Wyndham, shares of
which are paired and trade together as a single unit with Patriot's shares and
which is a major competitor of Marriott's, will not have a direct relationship
with Marriott or any Marriott hotels. If you are a holder of record of Patriot
securities on ____________, 1999, you will receive your Company shares
automatically. You do not need to take any further action. We intend to apply to
have the Company shares listed on the New York Stock Exchange under the trading
symbol "___."
---------------
WE URGE YOU TO READ THIS INFORMATION STATEMENT/PROSPECTUS CAREFULLY
SINCE IT CONTAINS INFORMATION THAT IS IMPORTANT TO YOU. PLEASE
PAY PARTICULAR ATTENTION TO THE "RISK FACTORS" BEGINNING
ON PAGE 9.
---------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS INFORMATION STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES.
---------------
The date of this Information Statement/Prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF AND THE COMPANY.......................1
KEY TERMS OF THE SPIN-OFF......................................................4
SUMMARY .......................................................................5
SUMMARY FINANCIAL AND OTHER DATA...............................................7
RISK FACTORS...................................................................9
THE SPIN-OFF..................................................................14
BUSINESS......................................................................17
SELECTED FINANCIAL AND OTHER DATA.............................................26
PRO FORMA FINANCIAL DATA......................................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................35
MANAGEMENT....................................................................44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................49
DESCRIPTION OF CAPITAL STOCK..................................................50
WHERE YOU CAN FIND MORE INFORMATION...........................................53
INDEX TO COMBINED FINANCIAL INFORMATION......................................F-1
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS TRADEMARKS AND TRADE NAMES OF
COMPANIES OTHER THAN INTERSTATE HOTELS MANAGEMENT, INC.
<PAGE> 4
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF AND THE COMPANY
These questions and answers are qualified by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Information Statement/Prospectus. References to "we," "us," the
"Company" and "Interstate Management" mean Interstate Hotels Management, Inc.
and its subsidiaries, references to "Interstate Hotels, LLC" mean Interstate
Hotels, LLC and its subsidiaries, references to "Patriot" mean Patriot American
Hospitality, Inc. and its subsidiaries, references to "Wyndham" mean Wyndham
International, Inc. and its subsidiaries, references to the "Patriot Companies"
mean Patriot and its subsidiaries together with Wyndham and its subsidiaries,
references to "IHC" mean Interstate Hotels Company, references to "Company
stock" and "Company shares" mean the common stock of the Company, and references
to "Patriot securities" mean common stock and Series A Preferred Stock of
Patriot, Series A and Series B Preferred Stock of Wyndham and Class A and Class
C Preferred limited partnership units of Wyndham International Operating
Partnership, L.P. In addition, all statistics relate to the Company's portfolio
of hotels for which management contracts or leases were in place as of September
30, 1998 and which, if the spin-off had occurred on that date, would be operated
by the Company.
Q: WHY ARE THE PATRIOT COMPANIES SPINNING OFF THE THIRD-PARTY HOTEL MANAGEMENT
BUSINESS THEY ACQUIRED FROM IHC?
A: The spin-off is a major component of the settlement agreement reached
among the Patriot Companies, IHC and Marriott in connection with the
merger of IHC into Patriot. The spin-off achieves two goals: you will
continue to own an equity stake in IHC's third-party hotel management
business, but Wyndham will not have a direct relationship with Marriott or
any Marriott hotels. ("Third-party hotel management business" refers to the
management, leasing and related services we perform for hotels that we do
not own.)
Q: WHAT WILL HAPPEN IN THE SPIN-OFF?
A: In the spin-off, the Patriot Companies will separate from their
diversified hotel business the third-party hotel management business
which they acquired from IHC through Patriot's merger with IHC to create
a separate publicly traded company.
Q: WHAT WILL I RECEIVE IN THE SPIN-OFF?
A: You will receive one Company share for every 19.57 Patriot securities you
own on ___________, 1999, the record date for the spin-off. We will not
issue any fractional shares. Instead, you will receive cash based on the
market value of any fractional shares.
EXAMPLE: If you own 101 Patriot securities, then after the spin-off you
will receive five Company shares and a check for the market value of the
fractional interest.
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE SPIN-OFF?
A: Nothing. No proxy or vote is necessary for the spin-off. If you own Patriot
securities as of the close of business on ____________, 1999, Company
shares will be mailed to you or credited to your brokerage account. You do
not need to mail in any stock certificates.
Q: IS 100% OF THE COMPANY BEING SPUN-OFF?
A: No. The spin-off is being designed so that immediately after the spin-off
and certain other transactions (which are described in more detail on page
5) are completed, holders of Patriot securities will own 92% of the
Company shares. At the time of the spin-off, Marriott will purchase four
percent of the Company shares. The Patriot Companies will continue to own
four percent of the Company shares.
<PAGE> 5
Q: WHAT WILL THE COMPANY DO AND OWN?
A: The Company is the sole manager of Interstate Hotels, LLC, the entity
which, either directly or through subsidiaries, actually owns the
third-party hotel management business the Patriot Companies acquired when
IHC merged into Patriot. The Company owns a 47.5% economic interest in
Interstate Hotels, LLC, meaning the Company is entitled to 47.5% of the
income and losses arising from the operation of the third-party hotel
management business the Patriot Companies acquired from IHC. This business
consists of managing, leasing, and performing related services for 173
hotels on behalf of the third parties that own them. In addition to
operating IHC's former third-party hotel management business, the Company
intends to develop and expand its own hotel management and leasing business
in the future. The Company may also engage in other businesses, such as
hotel investments and development. The Patriot Companies have the right to
consent to our acquisition of any new real property interests, including
leaseholds. The Patriot Companies expect that they would give their consent
to our acquisition of new real property interests unless any such
acquisition would have adverse tax consequences to Patriot, including
jeopardizing its status as a real estate investment trust ("REIT"). Any
new management contracts and leases and other hotel business acquired by
the Company will be held by the Company rather than Interstate Hotels, LLC,
and the Company's stockholders will thus be entitled to 100% of the benefit
of this new business. Interstate Hotels, LLC has agreed that it will not
seek additional third-party hotel management contracts on its own behalf.
Q: WHAT WILL THE RELATIONSHIP BE BETWEEN THE COMPANY AND THE PATRIOT COMPANIES
AFTER THE SPIN-OFF?
A: The Patriot Companies will continue to own four percent of the Company
shares immediately after the spin-off and will have the right to elect two
of the Company's nine directors. The officers of the Company will not be
officers or employees of the Patriot Companies.
In addition, a subsidiary of the Patriot Companies owns a 52.5% non-voting
interest in Interstate Hotels, LLC. Accordingly, the Patriot Companies are
entitled to 52.5% of the income and losses arising from the operation of
the Company's existing business. The Patriot Companies will not be entitled
to any of the income and losses from any new business developed by the
Company (except by virtue of their four percent ownership of the Company
shares).
The Company shares will not be "clipped" to or "paired" with the shares of
Patriot or Wyndham. They will not trade together with shares of Patriot or
Wyndham or any other entity.
Q: WHAT WILL MY SPIN-OFF SHARES BE WORTH?
A: We have estimated the value of the Company shares to be ______ per share.
The actual trading value of the Company shares may be higher or lower than
the estimated value and will depend on many factors. Until an orderly
trading market develops, the market price for the Company shares may
fluctuate significantly. Please obtain current quotations prior to deciding
whether to purchase or sell Company shares.
Q: WILL I HAVE TO PAY TAXES ON THE SHARES I RECEIVE IN THE SPIN-OFF?
A: Yes. The fair market value of the Company shares you receive in the
spin-off (and the cash you receive in lieu of fractional shares) will be
taxable to you. The distribution will be treated as a dividend and taxable
as ordinary income if it is paid out of Patriot's earnings and profits. Any
amount of the distribution in excess of earnings and profits will first
reduce your tax basis in your Patriot securities and then will be taxable
to you as capital gain. We have assigned an estimated value of ______ per
share to the Company shares, but the actual value of the spin-off
distribution could be between ______ and ______ per share. The final value
of the spin-off distribution cannot be determined until after the
distribution is completed. We will make a public announcement of the amount
of the distribution promptly after it is determined and will furnish to you
the required IRS information as promptly as we can. For a more detailed
description of the tax consequences to you of the spin-off, see page 15.
2
<PAGE> 6
Q: WHEN WILL I RECEIVE MY COMPANY SHARES?
A: Patriot will deliver the Company shares to which you are entitled as
promptly as it can following the spin-off. Patriot will either mail a stock
certificate to you or arrange for your shares to be credited electronically
to your brokerage account.
Q: WHEN WILL I BE ABLE TO BUY AND SELL COMPANY SHARES?
A: You may buy and sell Company shares once the spin-off occurs.
Q: WHERE WILL THE COMPANY SHARES TRADE?
A: The Company intends to apply to have the Company shares listed on the New
York Stock Exchange under the trading symbol "_____."
Q: WILL DIVIDENDS BE PAID ON THE COMPANY SHARES?
A: We do not plan to pay dividends on the Company shares in the foreseeable
future. Unlike Patriot, we are not a REIT and thus are not required to pay
any dividends. We plan to retain our earnings to fund the development of
our business.
Q: WHOM SHOULD I CALL WITH QUESTIONS ABOUT THE SPIN-OFF AND THE COMPANY?
A: If you have questions about the spin-off or the Company or if you would
like additional copies of this Information Statement/Prospectus or any
document we refer to in this Information Statement/Prospectus, you should
contact Paul Keung at Patriot at (214) 863-1000. After the effective date
of the spin-off, you should contact Lisa O'Connor at the Company at (412)
937-0600.
3
<PAGE> 7
KEY TERMS OF THE SPIN-OFF
NO STOCKHOLDER ACTION
REQUIRED You do not need to take any action in
order to receive Company shares in the
spin-off. You do not need to surrender
Patriot securities to receive Company
shares in the spin-off. The number of
Patriot securities you own will not
change as a result of the spin-off.
RECORD DATE You need to own Patriot securities as
of the close of business on _________,
1999 to receive Company shares in the
spin-off.
DISTRIBUTION RATIO You will receive one Company share for
every 19.57 Patriot securities you own
as of the close of business on
________, 1999.
SHARES TO BE DISTRIBUTED Immediately after the spin-off and
certain related transactions, holders of
Patriot securities will own 92%
(8,973,358 shares) of the outstanding
Company shares. The Patriot Companies
will continue to own four percent of
the Company shares. Marriot will own the
remaining four percent.
MAILING DATE The distribution agent will mail
certificates for Company shares and cash
in lieu of fractional shares to holders
of Patriot shares on or about
___________, 1999. Electronic credits to
brokerage accounts will be made on the
same date.
NO FRACTIONAL SHARES Fractional shares will not be
distributed. Instead, you will receive a
cash payment in lieu of any fractional
interest to which you are entitled in
the spin-off.
4
<PAGE> 8
SUMMARY
This summary highlights selected information from this Information
Statement/Prospectus and does not contain all of the information that may be
important to you. For a more complete description of the spin-off, you should
read this entire Information Statement/Prospectus as well as the additional
documents we refer to under the heading "Where You Can Find More Information."
THE SPIN-OFF
Patriot will consummate the spin-off if it does not complete the sale of
92% of the Company to affiliates of Paine Webber pursuant to a letter of intent
Patriot signed with Paine Webber on November 9, 1998. If the spin-off is
consummated, Patriot will distribute one Company share for every 19.57 Patriot
securities you own on _______, 1999, the record date for the spin-off. At the
time of the spin-off, Marriott will also purchase four percent of the
outstanding Company shares for approximately $2.0 million. We expect the
spin-off to occur on __________, 1999.
REDEMPTION OF COMPANY SHARES DISTRIBUTED TO CERTAIN SECURITYHOLDERS
Following the spin-off, we will redeem a total of 248,385 Company shares
from certain of our stockholders who are affiliated with the Patriot Companies.
The purchase price for the shares to be redeemed will be the average trading
price of the Company shares over their first five trading days. We are redeeming
these shares in order to reduce the level of ownership of Company shares by
affiliates of the Patriot Companies, as the Patriot Companies agreed to do as
part of the Marriott settlement. We have calculated these redemptions so that
immediately following the spin-off, the purchase of Company shares by Marriott
and the redemptions, holders of Patriot securities will own 92% of the Company
shares, Marriott will own four percent of the Company shares and the Patriot
Companies will own four percent of the Company shares. In addition, limited
partners in Patriot's operating partnership will receive an equivalent cash
payment in lieu of receiving Company shares.
BUSINESS AND STRATEGY OF THE COMPANY
Following the spin-off, we will control and have a 47.5% economic
interest in Interstate Hotels, LLC, the successor to the third-party hotel
management business conducted by IHC prior to the IHC merger. As the manager of
Interstate Hotels, LLC, we will operate 173 hotels containing approximately
31,200 rooms. The hotels are located in 38 states in the United States, Canada,
the Caribbean and Russia. We will manage, lease or perform related services for
independent hotels, as well as hotels under a variety of major brand names,
including Colony(R), Comfort Inn(R), Courtyard by Marriott(R), Fairfield Inn by
Marriott(R), Hampton Inn(R), Hilton(TM), Holiday Inn(R), Homewood Suites(R),
Marriott(R), Radisson(TM), Residence Inn by Marriott(R), Sheraton(TM) and
Westin(TM). To facilitate the management of our diverse portfolio of hotels, we
have divided the hotels between two separate portfolios - Interstate (luxury and
upscale), which are managed by Interstate Hotels, LLC, and Crossroads
(mid-scale, upper economy and budget), which are managed by Crossroads
Hospitality Company, L.L.C. ("Crossroads Hospitality"), a subsidiary of
Interstate Hotels, LLC. Substantially all of IHC's employees who were a part of
IHC's third-party hotel management business will be employees of Interstate
Hotels, LLC or Crossroads Hospitality.
In addition to conducting IHC's former third-party hotel management
business through Interstate Hotels, LLC, we will pursue future opportunities to
manage or lease hotels on behalf of third-party owners. We may also pursue other
business opportunities, such as hotel investment and development projects. The
Patriot Companies have the right to consent to our acquisition of any new real
property interests, including leaseholds. The Patriot Companies expect that they
would give their consent to our acquisition of new real property interests
unless any such acquisition would have adverse tax consequences to Patriot,
including jeopardizing its REIT status. Any new business we acquire will be
managed or leased directly by us, not through Interstate Hotels, LLC. Because we
have an agreement with Interstate Hotels, LLC that prohibits it from expanding
its business beyond its existing contracts, you will have the full benefit of
any new business we acquire, even business we acquire through relationships with
the owners of hotels managed by Interstate Hotels, LLC. We intend to attract
future business both through our existing relationships with third-party hotel
owners and through the development of relationships with additional third-party
owners.
5
<PAGE> 9
MANAGEMENT
There initially will be nine persons on our Board of Directors, two of
whom (_______ and _______) were selected by the Patriot Companies and two of
whom (___________ and ________) were selected by Marriott. Presently, W. Thomas
Parrington, Jr. is our Chief Executive Officer.
STRUCTURE OF THE COMPANY
We will initially have two principal subsidiaries, Interstate Hotels,
LLC and IHC II, LLC. We will own a 47.5% interest in Interstate Hotels, LLC and
a 99.99% interest in IHC II, LLC. Interstate Hotels, LLC is the entity that will
operate the third-party hotel management business that the Patriot Companies
acquired from IHC. IHC II, LLC will enter into arrangements under which Marriott
will submanage ten Marriott hotels acquired by the Patriot Companies from IHC.
IHC II, LLC is not expected to make a profit on these arrangements, but rather
will serve to insulate the Patriot Companies and Marriott from having a direct
contractual relationship with each other. A summary diagram of our structure
immediately following the spin-off is set forth below.
[CHART]
Included here in the printed version of this Information
Statement/Prospectus is a graphic which depicts, using boxes to represent
entities and arrows to represent ownership interests, the ownership structure of
the Company. The graphic shows that:
o Marriott will own four percent of the Company, the holders of Patriot
securities will own 92% of the Company, Patriot will own three
percent of the Company and PAH-Interstate Holdings, Inc., a
subsidiary company owned 99% by Patriot and one percent by Wyndham
Operating Partnership (itself a subsidiary of which Wyndham owns at
least 85%), will own one percent of the Company;
o The Company will own 99.99% of IHC II, LLC and Marriott will own .01%
of IHC II, LLC;
o The Company will own 47.5% of Interstate Hotels, LLC and
PAH-Interstate Holdings, Inc. will own 52.5% of Interstate Hotels,
LLC;
o Interstate Hotels, LLC will own 99% of Crossroads Hospitality
Company, L.L.C. and PAH-Interstate Member, Inc., a wholly-owned
subsidiary of PAH-Interstate Holding, Inc., will own 1% of
Crossroads Hospitality Company, L.L.C.; and
o Patriot owns 81% of Patriot Operating Partnership.
Our principal executive offices are located at 680 Andersen Drive,
Foster Plaza Ten, Pittsburgh, Pennsylvania 15220. Our telephone number is (412)
937-0600.
6
<PAGE> 10
SUMMARY FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------------ ------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(1)
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STATEMENT OF INCOME DATA:
Revenues:
Lodging revenues -- -- -- $ 9,979 $ 167,854 $ 145,099 $ 65,968 $ 93,290 $ 77,921
Management and related fees $ 25,379 $ 36,581 $ 44,832 53,487 61,950 42,327 29,876 33,454 21,732
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Total revenues 25,379 36,581 44,832 63,466 229,804 187,426 95,844 126,744 99,653
Expenses:
Lodging expenses -- -- -- 6,126 85,630 74,463 33,733 46,849 39,514
Operating expenses and other (2) 15,384 20,708 24,921 39,889 35,014 27,996 15,930 19,184 16,080
Lease expense -- -- -- 3,476 73,283 62,550 28,499 41,140 34,018
Depreciation and amortization 3,191 3,632 4,166 4,358 4,820 18,320 2,365 4,019 9,600
Interest, net (39) (81) (204) (523) (435) (435) (48) (226) (226)
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Income before income tax expense 6,843 12,322 15,949 10,140 31,492 4,532 15,365 15,778 667
Income tax expense (3) -- -- -- 4,056 12,597 1,813 6,146 6,311 267
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Income before minority interest 6,843 12,322 15,949 6,084 18,895 2,719 9,219 9,467 400
Minority interest -- -- -- -- -- 1,428 -- -- 210
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Net income $ 6,843 $ 12,322 $ 15,949 $ 6,084 $ 18,895 $ 1,291 $ 9,219 $ 9,467 $ 190
======== ======== ========== ========== ========== ========== ======== ======== ========
Pro forma net income per common share(4):
Basic $ 0.13 $ 0.02
Diluted $ 0.13 $ 0.02
BALANCE SHEET DATA (AT YEAR END):
Cash and cash equivalents $ 13,950 $ 10,969 $ 2,331 $ 3,334 $ 4,261 $ 19,881
Total assets 36,966 84,544 95,856 91,577 173,556 187,654
Long-term debt 703 541 370 370 190 190
Total equity 23,470 61,860 59,248 58,429 91,090 51,036
OTHER FINANCIAL DATA:
EBITDA (5) $ 9,995 $ 15,873 $ 19,911 $ 13,975 $ 35,877 $ 22,417 $ 17,682 $ 19,571 $ 10,041
Net cash provided by
operating activities 23,646 16,630 30,596 10,914 14,642
Net cash (used in) provided by
investing activities (632) (4,337) (17,556) (5,728) 14,934
Net cash used in
financing activities (15,766) (15,274) (21,678) (12,821) (27,646)
TOTAL HOTEL DATA (6):
Total hotel revenues $760,766 $858,986 $1,056,279 $1,326,581 $1,600,958 $1,058,613 $743,321 $773,133 $480,105
Number of hotels (7) 82 136 150 212 223 184 230 207 168
Number of rooms (7) 24,202 31,502 35,044 43,178 45,329 33,620 45,499 42,444 30,735
</TABLE>
7
<PAGE> 11
- --------------
(1) Reflects the spin-off and other adjustments described in "Pro Forma
Financial Data."
(2) Includes a non-recurring expense of $11,896 for the year ended December
31, 1996, relating to the issuance of 785,533 shares of common stock to
certain executives and key employees of IHC in consideration for the
cancellation of stock options issued by one of IHC's predecessors,
Interstate Hotels Corporation, in 1995.
(3) Prior to 1996, IHC and its predecessors were organized as S
corporations, partnerships and limited liability companies and,
accordingly, were not subject to federal and certain state income
taxes.
(4) Based on 10,002,035 shares of Common Stock outstanding on a pro forma
basis on the spin-off date.
(5) EBITDA represents earnings before interest, income tax expense,
depreciation and amortization and minority interest. 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.
(6) Represents all hotels, including the leased hotels, for which the
Company provides management or related services.
(7) As of the end of the periods presented.
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RISK FACTORS
You should carefully read and evaluate the risk factors listed below as
well as the other information contained in this Information
Statement/Prospectus.
TERMS OF OUR MANAGEMENT AGREEMENTS
Almost all of our revenues for the foreseeable future will come from the
operation of hotels for third-party owners. Hotel management agreements will
expire and be acquired, terminated and renegotiated in the ordinary course of
our business. Typically, our hotel management agreements may be terminated for
many reasons, including default by us or sale of or foreclosure on the
underlying property. In addition, approximately 27 of our management agreements
may be terminated without cause and without the payment of a penalty by either
party upon ten to ninety days' notice. An additional 16 management agreements
may be terminated without cause upon thirty to ninety days' notice with the
payment of a termination fee.
We have been notified by third-party owners of three hotels that such
hotels are currently for sale. These three hotels generated $2.1 million, or
16.2%, of our pro forma net management fees for the six months ended June 30,
1998. We have also been notified by third-party owners of two hotels (which
generated approximately $100,000, or 0.8%, of our pro forma net management fees
for the six months ended June 30, 1998) that our management agreements for such
hotels will be terminated no later than January 1, 1999. Additionally, 20 of our
management agreements (which generated $1.9 million, or 15.1%, of our pro forma
net management fees for the six months ended June 30, 1998) expire by the end of
1998, eight agreements (which generated $1.7 million, or 13.0%, of our pro forma
net management fees for the six months ended June 30, 1998) expire by the end of
1999 and 11 agreements (which generated $1.2 million, or 9.5%, of our pro forma
net management fees for the six months ended June 30, 1998) expire by the end of
2000. In aggregate, we estimate the average remaining life of our hotel
management agreements to be approximately five years. We cannot be sure that any
of these management agreements will be renewed or extended or that the terms of
any renewals or extensions will be as favorable to us as the terms of the
existing agreements. We also cannot be sure that we will be able to obtain new
third-party hotel management agreements or that the terms of any new management
agreements will be as favorable to us as the typical terms of our existing
agreements.
COMPETITION FOR THIRD-PARTY HOTEL MANAGEMENT AGREEMENTS AND RELATED BUSINESS
We compete for third-party hotel management agreements with
international, national, regional and local hotel management and franchise
companies. We compete with these companies on factors such as relationships with
hotel owners and investors, access to capital, financial performance, contract
terms, name recognition, marketing support and the willingness to provide funds
in connection with new management arrangements. Many of our competitors have
substantially greater financial resources than we do. In order for us to expand
our hotel management business by acquiring additional management agreements, we
may be required to offer more attractive terms to hotel owners than those
contained in our existing management agreements and we may be required to make
investments (in the form of equity or debt) in hotel properties. We do not
currently have capital available to make such investments and, therefore, would
be required to obtain financing to provide the necessary funds. We cannot assure
you that we could obtain such financing on commercially reasonable terms. In
addition, the Patriot Companies have the right to consent to any investment we
make in real property interests. The Patriot Companies expect that they will
give their consent to our acquisition of real property interests unless any such
acquisition would have adverse tax consequences to Patriot, including
jeopardizing its REIT status.
In addition to the services provided under the terms of our management
agreements, we often provide certain ancillary services to third-party hotel
owners such as insurance and risk management and centralized purchasing. The
costs for these services are typically subject to prospective approval by the
hotel owners on an annual basis. Although we believe that the fees we charge for
these services are generally competitive with those charged by unrelated third
parties, we cannot be sure that third-party hotel owners will not choose to
obtain such services from such unrelated third parties in the future.
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RISKS RELATED TO DISPUTE OVER LEASED HOTEL PORTFOLIO
We are engaged in a dispute with Equity Inns Partnership, L.P. ("Equity
Inns") regarding the status of leases for 80 hotels we lease from Equity Inns or
its affiliates. The principal issue in the dispute is whether we or Equity Inns
are responsible for funding product improvement plans ("PIPs") which were issued
by certain franchisors under whose brand names we operate the leased hotels. The
PIPs were issued at the time of Patriot's application for new franchise
agreements in connection with Patriot's merger with IHC. The total amount
required to be funded under the PIPs is approximately $6.0 million.
Generally, the leases require Equity Inns to satisfy any capital
obligations relating to the leased hotels, including any PIPs issued from time
to time by franchisors. In this case, however, Equity Inns is claiming that
certain franchisors issued new PIPs as a result of the new franchise
applications Patriot has been required to submit as a result of its merger with
IHC and, therefore, that Patriot should be responsible for paying the costs
necessary to satisfy them. In addition, Equity Inns claims that it had the right
to consent in advance to Patriot's application for new franchise agreements and
has demanded that we pay the costs necessary to satisfy the PIPs as a condition
to continuation of the leases. We are vigorously disputing Equity Inns' claims,
but we cannot be sure that we will prevail. The Equity Inns leaseholds represent
a significant portion of our current business and if we are not able to resolve
this dispute with Equity Inns and the leases are terminated, our results will be
negatively affected.
RISKS RELATED TO THE STATUS OF CERTAIN MANAGEMENT ASSETS
We and Patriot are conducting negotiations with a general partner in the
partnership which owns the Don CeSar Resort Hotel and Beach Club in St. Pete's
Beach, Florida concerning the continuation of our management of the hotel in
light of the changes resulting from IHC's merger with Patriot. In addition, we
and Patriot are negotiating with a limited partner in the partnership that
manages The Charles Hotel in Cambridge, Massachusetts regarding the transfer of
IHC's interest in the partnership to an affiliate of Patriot in connection with
the merger and, ultimately, the transfer of that interest to Interstate Hotels,
LLC in connection with the spin-off. While we believe that we will resolve these
negotiations favorably, we cannot assure you of that, and it is possible that we
will lose the right to manage these hotels (which generated $1.6 million, or
12.6%, of our pro forma net management fees for the six months ended June 30,
1998).
RISKS RELATED TO THE SALE OF LEASED HOTELS
Equity Inns, the owner of substantially all of our 82 leased hotels, has
the right under our lease agreements to sell any or all of the leased hotels
from time to time without our consent. Our leases and management agreements with
respect to these hotels could be terminated upon such a sale. If Equity Inns
were to sell a substantial number of the leased hotels and the new owners did
not continue our management agreements, our results would be negatively
affected.
HOTEL INDUSTRY RISKS
Operating Risks
The hotels we manage and lease are subject to all of the operating risks
common to the hotel industry. These risks could adversely affect our results of
operations and generally include:
o overbuilding of hotels in a particular geographic area;
o changes in travel patterns due to increases in travel expenses and
other factors;
o changes in general, regional and local economic conditions; and
o the recurring need for renovation, refurbishment and improvement of
hotel properties.
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Competition
Each of the hotels that we manage or lease competes with the other
hotels in its geographic area. Additional hotel rooms have been or may be built
in many of the geographic areas in which we manage or lease hotels, which could
adversely affect our average occupancy and average daily room rate ("ADR") in
these areas. In addition, the overall supply of hotel rooms in the United States
as a whole has increased substantially over the past several years. All of the
hotels that we manage or lease face competition on factors such as room rates,
quality of accommodations, name recognition, service levels, convenience of
location and the quality and scope of other amenities including food and
beverage facilities.
Seasonality and Quarterly Fluctuations in Operating Results
The hotel industry is seasonal in nature, with the second and third
quarters generally accounting for higher revenues than the first and fourth
quarters of the calendar year. This seasonality will cause quarterly
fluctuations in our revenue. We may also experience quarterly fluctuations in
revenue due to factors such as poor weather conditions, economic factors and
other considerations affecting travel generally. If we were to lose one or more
management agreements or leases, we might have to write-off capitalized
acquisition costs (in addition to losing future potential revenue), which could
also cause quarterly earnings fluctuations.
Government Regulation
As a hotel management company, we are subject to extensive governmental
regulation, including laws which relate to the licensing of hotels and
restaurants, the preparation and sale of food and beverages, the adaptation of
public accommodations for use by the disabled, general building and zoning
requirements and the disposal of hazardous waste. We are also subject to laws
relating to our relationship with our employees, including minimum wage,
overtime, working conditions and work permit requirements. Although third-party
hotel owners are generally responsible for paying all costs, expenses and
liabilities incurred in the operation of the hotels we manage, including
compliance with laws (including environmental laws), we may be contingently
liable for certain liabilities for which we do not maintain insurance, including
certain claims arising under the Americans With Disabilities Act of 1990 (the
"ADA").
RISKS ASSOCIATED WITH FOREIGN HOTELS
Some of the hotels we manage are located in foreign countries, such as
Canada and Russia. We cannot be certain of the effect that changing political
climates and economic conditions could have on hotel operations in such
countries.
DEPENDENCE ON FRANCHISORS
Most of the hotels for which we manage, lease or perform related
services are operated under franchise licenses, including franchise licenses for
the Colony, Comfort Inn, Courtyard by Marriott, Fairfield Inn by Marriott,
Hampton Inn, Hilton, Holiday Inn, Homewood Suites, Marriott, Radisson, Residence
Inn by Marriott, Sheraton and Westin brands. Any significant decline in the
reputation of any of our franchisors could adversely affect our results of
operations.
CONCENTRATION IN SINGLE INDUSTRY
Our entire business is hotel related. In the event of a general downturn
in the hotel industry, the adverse effect on us may be greater than on a more
diversified company with assets or activities outside of the hotel industry.
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LIMITED FINANCIAL RESOURCES
Following the spin-off, we may have difficulty obtaining financing on
favorable terms because our asset base will be smaller than IHC's was prior to
its merger into Patriot and we will not initially own any hotels that could be
used as collateral. Accordingly, we will not necessarily be able to rely on
IHC's or Patriot's prior relationships with lenders.
RESTRICTIONS ON CERTAIN ACTIVITIES BY THE COMPANY
Our Articles of Incorporation generally prohibit us from directly or
indirectly owning or leasing any interest in real property without the Patriot
Companies' consent. The Patriot Companies expect that they will give their
consent to our acquisition of new real property interests unless any such
acquisition would have adverse tax consequences to Patriot, including
jeopardizing its REIT status. In addition, the operating agreement of Interstate
Hotels, LLC, the Company's subsidiary which owns IHC's former third-party hotel
management business, generally prohibits Interstate Hotels, LLC from (i) selling
or otherwise disposing of any of its existing contractual rights or other
assets, (ii) merging with or being acquired by any other entity, (iii) knowingly
causing Patriot to recognize any of its "built-in-gain" with respect to its
interest in Interstate Hotels, LLC, (iv) acquiring any real property or other
interests in real estate (including leasehold interests) or any interests in (or
substantially all of the assets of) any other person or entity, and (v) changing
the nature of its business, in each case without Patriot's consent.
SUBSTANTIAL RELIANCE ON KEY PERSONNEL
We will be dependent on the efforts of our executive management team
consisting of six key individuals, W. Thomas Parrington, Jr., J. William
Richardson, Kevin P. Kilkeary, Henry L. Ciaffone, Charles R. Tomb and Timothy Q.
Hudak. Although we believe we could find replacements for these key personnel,
the loss of their services could have an adverse affect on our operations. Mr.
Parrington is currently serving as our President and Chief Executive Officer
under the terms of an employment agreement which expires on December 31, 1998.
We are currently discussing with Mr. Parrington the possibility of extending the
term of his employment. If we do not reach an agreement with Mr. Parrington, we
will conduct an executive search for a qualified replacement. The loss of Mr.
Parrington's services could have an adverse effect on our operations. The
Company has entered or plans to enter into employment agreements with each of
its other executive officers providing for salary, bonus and other standard
terms, including non-competition provisions.
HOTEL INVESTMENT, DEVELOPMENT AND GROWTH RISKS
We expect to make investments in hotels in the future, and these hotels
may fail to perform in accordance with our expectations. We also intend to
develop new hotels selectively. We will need to obtain Patriot's consent in
order to acquire any real property interests, including leaseholds. The Patriot
Companies expect that they will give their consent to our acquisition of new
real property interests unless any such acquisition would have adverse tax
consequences to Patriot, including jeopardizing its REIT status. In addition,
new project development is subject to risks such as market or site deterioration
after acquisition and the possibility that regulatory approvals, inclement
weather, labor or material shortages, work stoppages and the lack of continued
availability of construction or permanent financing may lead to construction
delays or cost overruns. We cannot be sure that we will be able to successfully
integrate these new hotels into our existing operations or that these new hotels
will achieve revenue and profitability levels comparable to our existing hotels.
Further, expansion within our existing markets could adversely affect the
financial performance of our existing hotels and, when we expand into new
markets, we may face operating and marketing challenges different from those we
face in our existing markets. We cannot be sure that we will anticipate and
effectively address all of the changing demands that will result from expansion.
RISKS ASSOCIATED WITH OWNING AND LEASING REAL ESTATE
At September 30, 1998, we operated 82 hotels under leases, 80 of which
are long-term leases. We also intend to make investments in hotels, which will
subject us to risks generally related to owning or leasing real estate, such as
changes in national, regional and local economic conditions, local real estate
market conditions, changes in interest rates and in the availability, cost and
terms of financing, liability for long-term lease obligations, the potential for
uninsured casualty and other losses, the impact of environmental legislation and
compliance with environmental laws and adverse changes in zoning laws and other
regulations.
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Most of these risks are beyond our control. In addition, real estate investments
in general are relatively illiquid, which could limit our ability to vary our
portfolio of owned hotels in response to changes in economic and other
conditions.
ABSENCE OF PRIOR TRADING MARKET FOR OUR SHARES; POTENTIAL VOLATILITY
There is currently no public trading market for our shares. We cannot
predict what the market price for our shares might be. Until an orderly trading
market develops, the market price for our shares may fluctuate significantly.
You should not view historical trading prices of shares of IHC's (or the Patriot
Companies') stock as a reflection of what the trading price of our shares might
be. Following the spin-off, we will be significantly smaller than IHC was prior
to its merger with Patriot.
Some of the Patriot securityholders who receive Company shares in the
spin-off may decide that they do not want to own these shares, and may sell
their shares. Some of our larger stockholders will be contractually bound, under
a Voting Agreement, to sell portions of their Company shares within one year
after the spin-off in an attempt to reduce the holdings of Company shares by
affiliates of the Patriot Companies to less than 9.9% of the outstanding Company
shares by the first anniversary of the spin-off. These mandatory sales may
depress the trading price of Company shares. The Voting Agreement is discussed
in more detail on page 48.
DIVIDEND POLICY
Unlike Patriot, we are not a REIT and thus are not required to pay any
dividends. We do not plan to pay any dividends on our shares in the foreseeable
future. We plan to retain our earnings to fund the development of our business.
ANTI-TAKEOVER PROVISIONS
Our Articles of Incorporation and Bylaws contain provisions that might
make it more difficult for someone to obtain control of us or replace our
management team without the approval of our Board. These include provisions that
provide for a staggered Board, that prohibit stockholders from owning more than
9.9% of our outstanding shares, and that permit our Board to issue undesignated
preferred stock without your approval. We also intend to adopt a shareholder
rights plan that would, in effect, prevent any person or group from acquiring
more than 10% of our shares without the approval of our Board. Each of these
provisions could delay or prevent a change in control of our Board or a
transaction in which you could receive a price for your shares that is greater
than the then current market price or is otherwise in your best interest.
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THE SPIN-OFF
BACKGROUND OF THE SPIN-OFF
On December 2, 1997, the Patriot Companies and IHC entered into a merger
agreement providing for the acquisition of IHC by the Patriot Companies. Before
signing the IHC merger agreement, Patriot negotiated with Marriott a non-binding
letter of intent which outlined the terms of a proposed agreement which was
intended to address Marriott's concerns regarding the acquisition of their
largest franchisee by a competitor, the Patriot Companies. Despite intensive
negotiations, the Patriot Companies and Marriott were unable to come to terms on
a definitive agreement prior to the planned closing of the IHC merger and
Marriott filed suit seeking to block the merger. Marriott obtained a preliminary
injunction against the merger pending a trial on its claims.
Following entry of the preliminary injunction against the IHC merger,
the parties began simultaneously to prepare for trial and to negotiate a
settlement. An agreement for settlement was reached on May 27, 1998, allowing
the IHC merger to close on June 2, 1998.
The principal focus of the settlement agreement is a set of arrangements
designed to prevent the Patriot Companies from having a direct relationship with
Marriott or any Marriott hotels. So, for example, the settlement agreement
provides that ten of the Marriott hotels which were owned by IHC will be
converted to the Wyndham brand and ten other IHC Marriotts will convert to
Marriott management. The other major component of the settlement agreement is
the spin-off, which addresses the Marriott and other hotels which were managed
or leased by IHC on behalf of their third-party owners. The Patriot Companies
agreed to separate this business from the rest of IHC's hotel operations and
spin it off as a new, publicly traded company. The Patriot Companies agreed with
Marriott that each would initially own four percent of the outstanding shares of
the new company and that the remaining 92% would be distributed to Patriot's
shareholders.
The settlement agreement, including the terms of the spin-off, was
approved by special committees of the Boards of Directors of the Patriot
Companies. The special committees recognized that the spin-off would be taxable
to you based on the fair market value of the Company shares distributed to you
on the date of the spin-off. However, the special committees believed that the
benefits of the spin-off, and the related closing of the IHC merger, outweighed
any negative tax consequences to you from the spin-off.
We have estimated the value of the Company shares you will receive in
the spin-off to be _____ per share. The final value of the spin-off distribution
cannot be determined until after the distribution is completed. We will make a
public announcement of the amount of the distribution promptly after it is
determined and will furnish you the required IRS information as early as we can
so that you can complete your tax returns.
The actual trading value of the Company shares may be higher or lower
than the estimated value and will depend on many factors. Until an orderly
trading market develops, the market price for the Company shares may fluctuate
significantly. Please obtain current market quotations prior to deciding whether
to purchase or sell Company shares.
THE SPIN-OFF
Each holder of Patriot securities as of the close of business on
_________, 1999 will receive one Company share for every 19.57 Patriot
securities he or she owns.
In anticipation of the spin-off, immediately following the IHC merger
the Patriot Companies contributed to the Company a 35% interest in Interstate
Hotels, LLC, the entity holding IHC's third-party hotel management business. The
remaining 65% interest was contributed to a subsidiary owned 99% by Patriot and
1% by Wyndham. Patriot and the Company have since adjusted their respective
ownership percentages to the current 52.5% and 47.5% levels to comply with a
provision of the settlement agreement requiring the Company to have a specified
minimum initial capitalization.
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As of September 30, 1998, Patriot's preferred stockholders owned
approximately 3.3% of Patriot's shares and these stockholders will participate
proportionately in the spin-off. Following the spin-off, we will redeem for cash
all of the Company shares which are distributed to Patriot's preferred
stockholders. The purchase price for the redemption will be the average closing
price of the Company shares for the first five days on which they are traded. In
addition, limited partners in Patriot's operating partnership will receive an
equivalent cash payment in lieu of receiving Company shares.
We will not issue fractional shares in the spin-off. The distribution
agent will distribute cash to you in lieu of such fractional shares.
DISTRIBUTION AGREEMENT
We intend to enter into a Distribution Agreement with Patriot on or
before the date of the spin-off. The Distribution Agreement is intended to
allocate certain assets and liabilities between the Company and Patriot and to
ease our transition from a subsidiary of Patriot to an independent publicly
traded company.
The Distribution Agreement will outline the principal corporate
transactions required to effect the spin-off and provide for certain other
arrangements between the Company and Patriot related to the spin-off. The
Distribution Agreement will obligate us to indemnify Patriot for liabilities
arising out of or related to our assets (including assets to be contributed to
us by Patriot). This indemnification will apply to liabilities arising both
before and after the spin-off. Patriot will provide similar indemnification to
us in respect of liabilities arising out of the assets which it retains.
The Distribution Agreement will also contain provisions allocating
certain assets and liabilities relating to employee benefits between Patriot's
employee benefit plans and the Company's employee benefit plans, and will
provide that Patriot will generally be responsible for the tax liabilities and
be the beneficiary of the tax benefits arising out of our operations prior to
the spin-off. Each of the Company and Patriot will be responsible for the tax
liabilities and the beneficiary of the tax benefits arising out of their
respective operations after the spin-off.
DISTRIBUTION AGENT
The distribution agent for the spin-off will be American Stock Transfer
& Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005
(Telephone: (800) 937-5449). You may contact them if you have any questions
regarding delivery of your Company shares and cash in lieu of fractional shares
in the spin-off.
FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF
The following discussion summarizes the material United States federal
income tax consequences of the spin-off to you. We have not attempted to comment
on all United States federal income tax consequences of the spin-off that may be
relevant to you. We based this summary upon current provisions of the tax code,
existing temporary and final treasury regulations, and current administrative
rulings and court decisions, all of which are subject to change, possibly on a
retroactive basis. The IRS could disagree with our summary of these provisions.
We do not intend to obtain a private letter ruling regarding the spin-off from
the IRS or any other taxing authority.
Our discussion below is for general information only, and is not
intended to provide legal or tax advice to any particular holder of Company
shares. The discussion may not apply to particular stockholders who are subject
to special treatment under the tax code, such as insurance companies, financial
institutions, broker-dealers, tax-exempt organizations and non-U.S.
stockholders. You should consult your personal tax advisor to determine the
specific tax consequences to you of the spin-off, including any state, local or
other tax consequences, in light of your particular investment circumstances.
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Tax Consequences of the Spin-off to Patriot. Upon consummation of the
spin-off, Patriot will recognize taxable gain equal to the difference between
the fair market value of the Company shares distributed and Patriot's tax basis
in such shares. We currently estimate that the amount of gain will be
approximately $__ million, based on our estimate that the fair market value of
the Company shares distributed will be $___ per share, or $___ million in the
aggregate. However, the final value of the Company shares cannot be determined
until after the spin-off is completed. In addition, the determination of the
amount of gain is a factual issue that is subject to challenge by the IRS.
Patriot has evaluated the consequences of the spin-off to it in light of
the special rules applicable to a corporation that intends to qualify as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"). Because the
assets of the Company were acquired on a tax-free basis by a REIT from a C
Corporation, Patriot will be subject to tax at the highest regular corporate
rate applicable, pursuant to Treasury Regulations not yet promulgated, to the
extent of the "built-in-gain" of the Company's assets at the time of the IHC
merger. In determining the amount Patriot must distribute annually to
shareholders in order to maintain REIT qualification, Patriot will take into
account the excess of the amount of recognized built-in-gain over the amount of
tax paid. The value of the Company shares distributed to Patriot shareholders
will apply towards the annual distribution requirement.
Receipt of Company Shares. The spin-off will be taxable to you for
federal income tax purposes based on the fair market value of the Company shares
(and cash in lieu of fractional shares) you receive as of the date of the
spin-off. You will acquire an initial tax basis in your Company shares equal to
their value on the date of the spin-off, and your holding period for such
shares will begin on such date.
Assuming that Patriot qualifies as a REIT, distributions such as the
spin-off made to Patriot's shareholders out of Patriot's current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account as ordinary income and, for corporate shareholders, will not
be eligible for the dividends received deduction. Any amount of the distribution
in excess of earnings and profits will first reduce your tax basis in your
Patriot securities and then will be taxable to you as capital gain. The
characterization of the distribution as a dividend will depend on the amount of
Patriot's current and accumulated earnings and profits allocable to the
distribution, which cannot be determined with certainty at this time. However,
we expect that a portion of the distribution may be in excess of earnings and
profits. Patriot's ability to designate the distribution of Company shares as a
capital gain distribution may be limited and will depend on a variety of
factors, and we cannot be sure that the distribution will be so designated.
After the spin-off, Patriot will determine the fair market value of the
shares distributed based on a number of factors. Patriot will provide to you the
information necessary to determine the amount and character of the distribution
to you, and Patriot will report the amount received by you to the IRS. We cannot
be sure that the IRS or any court will agree that the amount received by you is
equal to the amount determined by Patriot. If the IRS were to challenge the
value or character of the distribution reportable by you on your federal income
tax return, you would have to bear the expense and effort of defending against
or otherwise resolving such challenge.
Backup Withholding. Patriot generally will be required to withhold 31%
of the Company shares to be distributed to you if (i) you fail to furnish or
certify a taxpayer identification number to Patriot, (ii) the IRS notifies
Patriot that the taxpayer identification number furnished by you is incorrect,
(iii) the IRS notifies Patriot that you have underreported interest and/or
dividend income, or (iv) you fail to certify to Patriot that you are not subject
to withholding for underreporting interest or dividend income. Any amounts
withheld from you under these backup withholding rules will be allowed as a
credit against your federal income tax liability or as a refund.
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BUSINESS
GENERAL
Following the spin-off, we will control and have a 47.5% economic
interest in Interstate Hotels, LLC, the successor to the third-party hotel
management business conducted by IHC prior to its merger into Patriot. As the
manager of Interstate Hotels, LLC, we will operate 173 hotels containing
approximately 31,200 rooms. The hotels are located in 38 states in the United
States, Canada, the Caribbean and Russia. We will manage, lease or perform
related services for hotels under a variety of major brand names, including
Colony, Comfort Inn, Courtyard by Marriott, Fairfield Inn by Marriott, Hampton
Inn, Hilton, Holiday Inn, Homewood Suites, Marriott, Radisson, Residence Inn by
Marriott, Sheraton and Westin. Substantially all of IHC's employees who were a
part of IHC's third-party hotel management business will be employees of
Interstate Hotels, LLC or Crossroads Hospitality.
In addition to conducting IHC's former third-party hotel management
business through Interstate Hotels, LLC, we will pursue future opportunities to
manage or lease hotels on behalf of third-party owners. We may also pursue other
business opportunities, such as hotel investment and development projects. The
Patriot Companies have the right to consent to our acquisition of any new real
property interests, including leaseholds. The Patriot Companies expect that they
will give their consent to our acquisition of new real property interests unless
any such acquisition would have adverse tax consequences to Patriot, including
jeopardizing its REIT status. Any new business we acquire will be managed or
leased directly by us, not through Interstate Hotels, LLC. Because we have an
agreement with Interstate Hotels, LLC that prevents it from expanding its
business beyond its existing contracts, you will have the full benefit of any
new business we acquire, even business we acquire through relationships with the
owners of hotels managed by Interstate Hotels, LLC. We intend to attract future
business both through our existing relationships with third-party owners and
through the development of relationships with additional third-party owners.
Our management team consists of former IHC executive officers who have
an average of 23 years of experience in the hospitality industry. We intend to
capitalize on this experience, together with the substantial portfolio of hotels
which we will manage following the spin-off, to develop future third-party hotel
management opportunities and other hotel-related business.
GROWTH STRATEGY
During the past several years, IHC pursued a growth strategy focused
largely on acquiring and investing in hotels and hotel leaseholds as a result of
management's belief that the real estate market was appreciating rapidly and
that significant value could be created through the ownership of hotel assets.
This strategy represented a shift from IHC's strategy of the late 1980's and
early 1990's of aggressively pursuing third-party hotel management opportunities
at a time when there was financial distress within the hotel industry. By
providing experienced hotel management to financial institutions which had
assumed ownership of hotels through foreclosure, IHC was able to rapidly expand
its management portfolio during this time period. We believe there are current
trends in the industry, including significant new hotel construction activity,
particularly by institutions and entrepreneurs who lack hotel management
expertise, that will provide us with new third-party hotel management
opportunities. We expect initially to be focused on pursuing these opportunities
and, as the real estate cycle evolves, to pursue hotel investment and
development opportunities.
We believe that our prospects for growth are enhanced by a number of
competitive advantages, including (i) our ability to capitalize on the excellent
relationships with hotel investors and owners that IHC developed through its
disciplined management techniques and its track record of improving the
profitability of the hotels it managed or leased; (ii) our ability to source
management contract and investment opportunities resulting from our large and
geographically diverse hotel portfolio; (iii) our flexible branding strategy,
which permits us to 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) our
corporate infrastructure and the operational synergies it creates, which permit
us to lower the unit costs of our services and assure the implementation of
quality management systems on a company-wide basis; and (v) the
17
<PAGE> 21
strength and depth of our management team, the executive officers of which have
an average tenure of 23 years in the lodging industry and 14 years with the
Company and its predecessors.
Relationships with Hotel Investors and Owners. We intend to foster and
capitalize on the excellent relationships that IHC developed through its history
with hotel investors and owners due to its disciplined management techniques and
track record of improving the profitability of the hotels it managed or leased.
We intend to maintain these relationships and utilize them as a source of
management contract and investment opportunities and to help us to renew our
existing management contracts.
Ability to Source Management Contracts and Investments. As a result of
the size and geographic diversity of our hotel portfolio and the experience and
talents of our management team, as well as our in-depth knowledge of individual
markets, we believe we will have access to management and investment
opportunities not available to all of our competitors. We obtain information
about management and investment opportunities through contacts at every level of
the Company, including hotel general managers, regional managers and members of
senior management. Industry association contacts also provide us with
information about potential management and investment opportunities. In
addition, our management's knowledge of existing hotels throughout the United
States and personal relationships with numerous hotel owners and operators
provide us with extensive information regarding management and investment
opportunities.
Flexibility Afforded by Multiple Branding. We operate hotels under a
variety of brand names which affords us the flexibility to operate multiple
hotels under different brands within the same geographic market. It also
provides us with competitive and economic advantages, such as the ability to
position hotels optimally within their local markets, to provide access to a
broad base of national reservation and marketing systems and to pursue
acquisitions within both our existing and new markets more freely than hotel
operating companies that are committed to particular flags. We currently operate
hotels under more than 20 different brand names.
Corporate Infrastructure and Operational Synergies. By virtue of
providing management and related services to 173 hotels, we believe we can
achieve significant synergies and economies of scale not available to all of our
competitors. Our 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 our central corporate offices
and are provided to our hotels. Our 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 our hotels to be operated with fewer employees and
enables 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 experiences.
Strong Management Team. Collectively, our executive officers have an
average of 23 years of experience in the lodging industry and 14 years with the
Company and its predecessors. These executive officers were instrumental in
developing or maintaining IHC's relationships with hotel investors and owners.
We believe their continued efforts will help us maintain and capitalize on these
valuable contacts.
BUSINESS STRATEGY
We intend to pursue three core business strategies: (i) adding new
management contracts and long-term hotel operating leases; (ii) investing in
hotels to obtain management contracts and selective development projects; and
(iii) providing superior, innovative hotel management services, resulting in
increased investment value for hotel owners. We believe that if we successfully
implement these strategies we will be well-positioned to take advantage of
opportunities in the industry.
Addition of New Hotel Management Agreements and Long-Term Operating
Leases. Through the efforts of our internal business development staff, we will
seek to add new hotel management agreements and long-term hotel operating leases
that are suitable for integration into our portfolios. Our staff will continue
to identify new
18
<PAGE> 22
business by conducting comprehensive market studies, developing extensive call
lists, employing direct solicitation techniques and seeking referrals from
third-party owners of our managed and leased hotels.
We believe that we will continue to win new hotel management agreements
and long-term hotel operating leases by capitalizing on IHC's historic
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 and leases to satisfy hotel owner
objectives. In particular, we believe that IHC's historic relationships with
institutional hotel investors will facilitate our growth by generating new hotel
management agreements and long-term hotel operating leases within the
institutions' existing hotel portfolios, as well as for hotels newly acquired or
developed by them.
We also believe 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.
We believe that the industry will consolidate 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.
By operating hotels in multiple segments of the lodging industry, we
believe we will increase our opportunities to compete for new hotel management
agreements and long-term operating leases. Although we are committed to
participating in each segment of the lodging industry and, accordingly, will
seek to add hotel management agreements and long-term operating leases to each
of our two portfolios as opportunities arise, we believe that the greatest
opportunities for expansion exist in the luxury and upscale segment of the
lodging industry. Many luxury and upscale hotels have underperformed and could
greatly benefit from our strong management and operating strategies without
compromising the quality and service expectations of the hotels' guests.
Hotel Investments and Selective New Construction. We intend to make
strategic investments in hotel properties with business partners or through
equity contributions or secured loans. We believe that our extensive hotel, real
estate and finance industry contacts will facilitate our ability to identify,
evaluate and negotiate potential hotel investment opportunities. We also intend
to selectively develop new hotels in the future. We will evaluate the
competitive environment of any market under consideration for new development,
including average occupancy and ADR, site location and marketing and financial
and operating issues, as well as the opportunity to realize operating
efficiencies from the ownership of multiple hotels. We will need to obtain the
consent of the Patriot Companies before we acquire any interests (including
leasehold interests) in real property. The Patriot Companies expect that they
will give their consent to our acquisition of new real property interests unless
any such acquisition would have adverse tax consequences to Patriot (including
jeopardizing its REIT status).
Improving Value for Hotel Owners. We will strive to generate operating
results superior to those achieved by our competitors in 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. Our 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 hotel operating lease, we implement 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. We then develop a detailed action plan to
implement the new standards of operation. If necessary, we quickly and
aggressively streamline certain departments to maximize efficiencies and reduce
costs. Our system of investigation, prioritization and immediate action is
designed to ensure that the hotel will achieve optimal performance as rapidly as
possible.
After we implement the initial improvements, we continue to seek
methods to increase revenue and operating cash flow from the hotels. We
continually review and emphasize the quality of facilities and customer service.
As we gain experience with the operations of a particular hotel, we refine the
marketing plan and budget for the hotel to increase the average occupancy and
ADR at the hotel, while maintaining effective cost controls. In addition, we
provide incentives, through cash bonuses, to regional and general managers to
achieve revenue and operating goals.
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<PAGE> 23
OPERATIONS
We provide a wide variety of services to our hotels. We offer certain
specialized support services, such as purchasing, project management and
insurance and risk management services as well as those services traditionally
provided by major hotel operating companies, such as sales and marketing
support, rooms services, food and beverage services, human resources and
training programs, financial planning and reporting, management information
systems, engineering services and legal support.
Our services are provided by hotel personnel who are employed, trained
and supported by our experienced corporate personnel. We provide most of these
services in consideration of the management fees payable to us, which are based
upon a percentage of gross revenues and/or operating profits. Our management
agreements generally provide for payment to us of a base fee equal to a specific
percentage of the hotel's gross revenues. Our base fees range from 1% to 5% of
gross revenues. In addition, some of our 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. Our incentive fees generally
range from 10% to 20% of the excess of operating profits or net operating cash
flow over a threshold level. Hotel owners are responsible for all operating
expenses, capital expenditures and working capital requirements related to the
hotels we manage. We charge the third-party owners incremental fees for
providing purchasing, project management and insurance and risk management
services. The following is a brief description of the services we generally
provide to our hotels:
Purchasing. We assist our hotels with purchases of a wide variety of
goods and services, including perishable food, consumable supplies, dry goods,
linens, cable television systems, audio-visual services, telephone systems,
advertising agency services, independent marketing services, consulting
services, printing services, furniture, fixtures and equipment. Our purchasing
service is a key element of our operating system and our ability to improve the
profitability of our hotels. As one of the largest independent hotel management
companies in the United States, we have significant leverage to negotiate
competitive prices on goods and services from both local and national vendors.
As a result, we are able to pass along substantial savings to our hotels. We
offer our purchasing services at a fee based on merchandise value.
Project Management. We assist and advise our hotels on all aspects of
renovation and reconstruction projects, including design, budgeting, scheduling,
purchasing, systems, materials and contracting. We are actively involved in each
stage of a project, from planning through completion of construction. The
project management services we provide are offered on a contracted fee basis.
Insurance and Risk Management. Through our subsidiary, Northridge
Insurance Company ("Northridge"), we offer our hotels reinsurance and risk
management services. We purchase insurance from major insurance carriers at
attractive rates due to our high volume purchasing and the exceptional claims
history we inherited from IHC. We then provide our hotels the opportunity to
participate in the policy at prices and coverages more advantageous than
third-party hotel owners could otherwise obtain. Northridge also provides direct
insurance coverage to the Company in connection with its self-insured health
care program. In conjunction with our risk management services and in order to
minimize our operating liabilities, we set policies regarding the standards of
operation to which all of our hotels and their employees must adhere. In 1997
and 1996, Northridge generated revenues of $9.1 million and $8.1 million,
respectively, incurred claims expenses of $1.2 million and $0.9 million,
respectively, and recorded net income of $8.9 million and $7.9 million,
respectively.
Sales and Marketing Support. We provide our hotels with traditional
sales and marketing support, as well as customized assistance, to identify and
attract potential business, leisure and convention guests.
Rooms Services. We assist our hotels in developing quality standard and
operating procedures for room operations, while focusing on controlling expenses
and maximizing profits. Such assistance includes:
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<PAGE> 24
o Developing the concept, design and staffing requirements for the
front office, housekeeping, property maintenance, laundry, valet,
telecommunications, garage and other guest services departments;
o Establishing quality standards for products and services and
evaluating performance against these standards;
o Conducting training conferences and workshops for rooms
department employees at all levels;
o Creating operating procedures, training manuals, reference guides
and training programs;
o Developing, maintaining and auditing front office software
applications and training staff in their proper usage; and
o Selecting equipment and supplies such as linens, guest room
amenities and uniforms.
Food and Beverage Services. We assist our 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:
o Providing educational and technical training materials and
seminars on how to improve the technical skills of employees;
o Establishing quality levels and management guidelines for new and
existing food and beverage facilities in accordance with area
market expectations;
o Providing ongoing research and development of systems and
equipment;
o Creating and implementing system-wide promotional programs to
enhance hotel revenues;
o 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
o Providing low cost access to the freshest and highest quality
food products and beverages available in the market.
Human Resources and Training Programs. Our human resources department is
responsible for designing the employee selection process, creating competitive
compensation programs and developing appropriate training programs at all
levels. Our human resources department has developed approximately 25 training
programs to introduce new employees to our 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, our 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. We provide to our hotels a wide
variety of accounting, financial reporting and financial planning services that
assist the hotel owners in making informed decisions.
Management Information Systems. We provide to our hotels access to key
operating information and technologies as well as on-going systems support.
Access to key information enables our hotels to set operating objectives and
measure their operating performance on a daily basis.
Engineering Services. We provide to our hotels expertise in physical
plant systems such as mechanical, plumbing, electrical, fire and life safety and
swimming pools.
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<PAGE> 25
Legal Support. Our in-house legal department provides to our hotels
legal support with respect to employment law issues, liquor licensing and
various vendor and service contract negotiations.
MANAGED PROPERTIES
The following table sets forth certain information with respect to the
hotels for which management contracts or leases were in place as of September
30, 1998 and which, if the spin-off had occurred on that date, would be managed
by the Company:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE AVERAGE
HOTEL BRAND HOTELS NUMBER OF ROOMS OCCUPANCY ADR REVPAR(1)
- ----------- ------ --------------- --------- --- ---------
<S> <C> <C> <C> <C> <C>
Hampton Inn (2) 63 7,808 69.8% $70.36 $49.08
Independent (3) 21 3,611 71.3% $143.36 $102.20
Marriott (4) (5) 19 7,269 75.6% $117.51 $88.89
Residence Inn by Marriott (6) 13 1,643 76.5% $87.88 $67.19
Holiday Inn 8 1,598 70.5% $78.06 $55.05
Colony 8 1,466 76.7% $99.60 $76.40
Courtyard by Marriott (7) (8) 7 868 72.1% $96.25 $69.37
Homewood Suites 7 808 75.0% $88.78 $66.61
Comfort Inn 4 487 78.1% $84.24 $65.82
Fairfield Inn by Marriott (9) 4 355 78.5% $54.85 $43.07
Radisson (10) 3 604 70.3% $65.77 $46.22
Super 8 3 272 67.9% $48.57 $32.98
Sheraton 2 793 79.2% $84.02 $66.56
Hilton (11) 2 658 54.9% $89.03 $48.89
Westin 1 1,354 70.4% $93.67 $65.95
Crowne Plaza 1 415 86.3% $113.73 $98.19
Delta 1 374 77.7% $119.98 $93.25
Embassy Suites 1 220 70.0% $117.77 $82.47
Doubletree 1 155 58.7% $85.52 $50.23
Days Inn 1 148 61.9% $42.57 $26.37
Country Inn and Suites (12) 1 120 0.0% $0.00 $0.00
Best Western 1 102 71.5% $58.00 $41.46
Sleep Inn 1 80 59.1% $54.08 $31.98
-- ----- ----- ------- -------
TOTAL 173 31,208 72.8% $97.89 $71.27
=== ====== ===== ====== ======
<FN>
(1) Room revenue per available room ("REVPAR") represents total room revenues
divided by total available rooms.
(2) Includes 1 hotel under construction with a scheduled opening of November 1,
1999.
(3) Includes 1 hotel under construction with a scheduled opening of November
16, 1998.
(4) Includes 1 hotel currently managed by Wyndham.
(5) Includes 1 hotel under construction with a scheduled opening of January 1,
1999.
(6) Includes 1 hotel under construction with a scheduled opening of November 1,
1999.
(7) Includes 2 hotels under construction with scheduled openings of November
15, 1998 and November 24, 1998.
(8) Includes 1 hotel currently managed by Wyndham.
(9) Includes 2 hotels under construction with scheduled openings of January 4,
1999 and January 15, 1999.
(10) Includes 2 hotels under construction with scheduled openings of February 1,
1999 and October 31, 1999.
(11) Includes 1 hotel under construction with a scheduled opening of November 1,
1999.
(12) Includes 1 hotel under construction with a scheduled opening of June 1,
1999.
</FN>
</TABLE>
EMPLOYEES
Most of the employees at our leased and managed hotels, as well as those
at our corporate offices, will be employed by either Interstate Hotels, LLC or
Crossroads Hospitality; however, third-party hotel owners pay the wages and
benefits for all the employees in their hotels. As of September 30, 1998, we had
approximately 13,900 employees, approximately 13,700 of whom were employees of
specific hotels.
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<PAGE> 26
Seven of the properties under our management, employing approximately
2,300 workers, are subject to labor union contracts. We have not experienced any
union strikes or other material labor disruptions.
COMPETITION
The hotel management industry is highly competitive. We compete for
third-party hotel management agreements with international, national, regional
and local hotel management and franchise companies. We compete with these
companies on factors such as relationships with hotel owners and investors,
access to capital, financial performance, contract terms, brand name
recognition, marketing support and the willingness to provide funds in
connection with new management arrangements.
In addition, each of our hotels competes with other hotels in its
geographic area. Like the hotel management business, the lodging industry in
general is highly competitive. The supply of hotel rooms in the United States
has increased substantially over the past several years, and we expect that it
will continue to grow. The hotels we operate will compete with their competitors
on factors such as room rates, quality of accommodations, name recognition,
service levels, convenience of location and the quality and scope of other
amenities including food and beverage facilities.
GOVERNMENT REGULATION
The lodging industry is subject to extensive government regulation,
including laws which regulate the licensing of hotels and restaurants, the sale
of food and liquor and the disposal of hazardous waste. We are also subject to
laws regarding our relationship with our employees, including minimum wage,
overtime, working conditions and work permit requirements. Under the ADA, all
public accommodations are required to meet certain federal requirements relating
to access and use by disabled persons. We believe that our hotels are
substantially in compliance with the requirements of the ADA. However, a
determination that our hotels are not in compliance with the ADA could result in
liability for fines and damages. Third-party hotel owners are generally
responsible for paying all costs, expenses and liabilities incurred in the
operation of our managed hotels, including compliance with laws (including
environmental laws), although we could be contingently liable for certain
liabilities for which we do not maintain insurance, including certain claims
arising under the ADA.
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<PAGE> 27
ENVIRONMENTAL MATTERS
Various laws impose liability for the costs of removal or remediation of
hazardous or toxic substances on the properties we operate, regardless of
whether or not we knew of or were responsible for the presence of such hazardous
or toxic substances. Depending on the circumstances, we could also be liable for
personal injury associated with exposure to asbestos-containing materials
("ACMs"). Environmental laws also may restrict 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. Equity Inns, the owner
of substantially all of our leased hotels, has agreed to indemnify us from
environmental liabilities relating to the leased hotels. In addition, most of
our currently leased and managed hotels have been inspected to determine the
presence of 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. We believe that the presence
of ACMs in our leased and managed hotels will not have a material adverse effect
on our financial condition or results of operations, but we cannot be sure that
this will be the case.
LEGAL PROCEEDINGS
In the ordinary course of our business, we are named as a defendant in
legal proceedings resulting from incidents at the hotels we operate. In order to
limit our exposure in such matters, we maintain liability insurance, require
hotel owners to maintain adequate insurance coverage and are generally entitled
to indemnity from third-party hotel owners for lawsuits and damages against us
in our capacity as a hotel manager.
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<PAGE> 28
FACILITIES
Our principal executive offices in Pittsburgh, Pennsylvania are under a
lease expiring December 31, 2003. In addition, we maintain offices in Orlando,
Florida under a lease expiring July 31, 2005 and Scottsdale, Arizona under a
lease expiring July 31, 2000.
INTELLECTUAL PROPERTY
Generally, the third-party owners of our hotels, rather than the
Company, are parties to the franchise agreements to use the trade names under
which the hotels are operated. We are a party, however, to franchise agreements
with Bass Hotels & Resorts, Inc., Choice Hotels International, Inc., Marriott
and Promus Hotels, Inc. Our franchise agreements to use these trade names expire
at varying times generally ranging from 2000 to 2015. We have registered, or
have 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 our business.
The franchisors under whose brand names we operate hotels have not
endorsed or approved the spin-off or any of the financial results of the hotels
set forth in this Information Statement/Prospectus. A grant of franchise
licenses for our 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 its stock.
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<PAGE> 29
SELECTED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------------ ------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(1)
-------- -------- ---------- ---------- ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms -- -- -- $ 9,258 $ 158,342 $ 136,341 $ 61,916 $ 87,985 $ 73,198
Other departmental -- -- -- 721 9,512 8,758 4,052 5,305 4,723
Net management fees $ 19,229 $ 22,284 $ 27,022 33,023 37,828 22,531 18,078 20,783 12,695
Other fees 6,150 14,297 17,810 20,464 24,122 19,796 11,798 12,671 9,037
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Total revenues 25,379 36,581 44,832 63,466 229,804 187,426 95,844 126,744 99,653
Lodging expenses:
Rooms -- -- -- 2,334 36,918 31,907 14,028 20,244 17,008
Other departmental -- -- -- 591 5,487 5,104 2,389 3,170 2,866
Property costs -- -- -- 3,201 43,225 37,452 17,316 23,435 19,640
General and administrative 5,057 8,287 9,798 10,327 13,195 13,195 5,681 6,781 6,781
Payroll and related benefits 10,321 12,420 15,469 17,666 21,892 14,874 10,258 12,394 9,290
Non-cash compensation (2) -- -- -- 11,896 -- -- -- -- --
Lease expense -- -- -- 3,476 73,283 62,550 28,499 41,140 34,018
Depreciation and amortization 3,191 3,632 4,166 4,358 4,820 18,320 2,365 4,019 9,600
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Operating income 6,810 12,242 15,399 9,617 30,984 4,024 15,308 15,561 450
Other income (expense):
Interest, net 39 81 204 523 435 435 48 226 226
Other, net (6) (1) 346 -- 73 73 9 (9) (9)
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Income before income tax expense 6,843 12,322 15,949 10,140 31,492 4,532 15,365 15,778 667
Income tax expense (3) -- -- -- 4,056 12,597 1,813 6,146 6,311 267
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Income before minority interest 6,843 12,322 15,949 6,084 18,895 2,719 9,219 9,467 400
Minority interest -- -- -- -- -- 1,428 -- -- 210
-------- -------- ---------- ---------- ---------- ---------- -------- -------- --------
Net income $ 6,843 $ 12,322 $ 15,949 $ 6,084 $ 18,895 $ 1,291 $ 9,219 $ 9,467 $ 190
======== ======== ========== ========== ========== ========== ======== ======== ========
Pro forma net income per common share(4):
Basic $ 0.13 $ 0.02
Diluted $ 0.13 $ 0.02
BALANCE SHEET DATA (AT YEAR END):
Cash and cash equivalents $ 13,950 $ 10,969 $ 2,331 $ 3,334 $ 4,261 $ 19,881
Total assets 36,966 84,544 95,856 91,577 173,556 187,654
Long-term debt 703 541 370 370 190 190
Total equity 23,470 61,860 59,248 58,429 91,090 51,036
OTHER FINANCIAL DATA:
EBITDA (5) $ 9,995 $ 15,873 $ 19,911 $ 13,975 $ 35,877 $ 22,417 $ 17,682 $ 19,571 $ 10,041
Net cash provided by
operating activities 23,646 16,630 30,596 10,914 14,642
Net cash (used in) provided by
investing activities (632) (4,337) (17,556) (5,728) 14,934
Net cash used in financing
activities (15,766) (15,274) (21,678) (12,821) (27,646)
TOTAL HOTEL DATA (6):
Total hotel revenues $760,766 $858,986 $1,056,279 $1,326,581 $1,600,958 $1,058,613 $743,321 $773,133 $480,105
Number of hotels (7) 82 136 150 212 223 184 230 207 168
Number of rooms (7) 24,202 31,502 35,044 43,178 45,329 33,620 45,499 42,444 30,735
</TABLE>
26
<PAGE> 30
- ----------
(1) Reflects the spin-off and other adjustments described in "Pro Forma
Financial Data."
(2) Represents a non-recurring expense relating to the issuance of 785,533
shares of common stock to certain executives and key employees of IHC
in consideration for the cancellation of stock options issued by one of
IHC's predecessors, Interstate Hotels Corporation, in 1995.
(3) Prior to 1996, IHC and its predecessors were organized as S
corporations, partnerships and limited liability companies and,
accordingly, were not subject to federal and certain state income
taxes.
(4) Based on 10,002,035 shares of Common Stock outstanding on a pro forma
basis on the spin-off date.
(5) EBITDA represents earnings before interest, income tax expense,
depreciation and amortization and minority interest. 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.
(6) Represents all hotels, including the leased hotels, for which the
Company provides management or related services.
(7) As of the end of the periods presented.
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<PAGE> 31
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of the Company assumes
that the Patriot Companies have separated the third-party hotel management
business they acquired through the merger of IHC into Patriot to create the
Company. The Unaudited Pro Forma Combined Balance Sheet as of June 30, 1998, is
presented as if this spin-off had occurred on that date. The Unaudited Pro Forma
Combined Statements of Operations for the six months ended June 30, 1998, and
for the year ended December 31, 1997, are presented as if the spin-off had
occurred on January 1, 1997. The adjustments required to reflect the spin-off
and related transactions are discussed in the accompanying notes. In
management's opinion, all material adjustments necessary to reflect the effect
of these transactions have been made.
The following unaudited pro forma financial data and notes thereto of
the Company have been derived from and should be read in conjunction with the
historical combined financial statements and notes thereto of the Company
contained elsewhere in this Information Statement/Prospectus. The historical
combined financial statements of the Company have been carved out of IHC and
Patriot and principally include those historical assets, liabilities, revenues
and expenses directly attributable to the third-party hotel management business
of IHC that will succeed to the Company. The unaudited pro forma financial data
is presented for informational purposes only and may not reflect the future
results of operations and financial position, or be necessarily indicative of
what the actual results of operations and financial position of the Company
would have been had the spin-off occurred as of the dates indicated.
28
<PAGE> 32
<TABLE>
INTERSTATE HOTELS MANAGEMENT, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 1998
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Pro Forma
Historical (A) Adjustments Pro Forma
-------------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 4,261 $ 15,620 (B) $ 19,881
Accounts receivable, net .................................. 18,115 -- 18,115
Deferred income taxes ..................................... 2,551 -- 2,551
Prepaid expenses and other assets ......................... 3,552 -- 3,552
Related party receivables - management contracts .......... 1,522 (1,522)(C) --
Related party receivables - Patriot ....................... 22,446 -- 22,446
-------- -------- --------
Total current assets ................................ 52,447 14,098 66,545
Restricted cash .............................................. 2,360 -- 2,360
Property and equipment, net .................................. 3,592 -- 3,592
Officers and employees notes receivable ...................... 2,205 -- 2,205
Affiliate receivables ........................................ 2,844 -- 2,844
Intangibles and other assets ................................. 110,108 -- 110,108
-------- -------- --------
Total assets ........................................ $173,556 $ 14,098 $187,654
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable - trade .................................. 2,370 -- 2,370
Accounts payable - health trust ........................... 3,884 -- 3,884
Accounts payable - related parties ........................ 8,355 -- 8,355
Accrued payroll and related benefits ...................... 5,187 -- 5,187
Accrued rent ............................................. 11,541 -- 11,541
Accrued merger costs ..................................... 22,446 -- 22,446
Other accrued liabilities ................................. 10,531 -- 10,531
Current portion of long-term debt ......................... 190 -- 190
-------- -------- --------
Total current liabilities ........................... 64,504 -- 64,504
Deferred income taxes ........................................ 17,962 -- 17,962
-------- -------- --------
Total liabilities ................................... 82,466 -- 82,466
-------- -------- --------
Minority interest ............................................ -- 54,152 (D) 54,152
Commitments and contingencies ................................ -- -- --
Owners' equity:
Common stock, $0.01 par value ............................. -- 100 (E) 100
Paid-in capital ........................................... -- 50,936 (E) 50,936
Owners' equity ............................................ 91,090 (91,090)(E) --
-------- -------- --------
Total owners' equity .................................. 91,090 (40,054) 51,036
-------- -------- --------
Total liabilities and owners' equity .................. $173,556 $ 14,098 $187,654
======== ======== ========
</TABLE>
See notes on following page.
29
<PAGE> 33
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 1998
(dollars in thousands)
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS:
(A) Reflects the unaudited historical combined balance sheet of the Company as
of June 30, 1998.
(B) Represents cash proceeds of Marriott's purchase of its 4% ownership
interest in the Company of $2,041 and cash contribution to Interstate
Hotels, LLC to fund working capital from Patriot of $13,579.
(C) Represents adjustments to eliminate management fees and other fee income
receivables related to management contracts for the hotels formerly owned
by IHC. The Company will not hold the management contracts for these
hotels subsequent to the spin-off.
(D) Represents Patriot's 52.5% non-controlling ownership interest in Interstate
Hotels, LLC, calculated as 52.5% of the estimated fair market value of the
net assets and liabilities to be owned by Interstate Hotels, LLC.
Subsequent to the spin-off, the Company will have two principal
subsidiaries. Interstate Hotels, LLC, the successor to the third-party
hotel management business conducted by IHC prior to its merger into
Patriot, will own substantially all of the assets of the Company
immediately after the spin-off. The Company will own an approximate 47.5%
managing interest in Interstate Hotels, LLC. The Company's second
subsidiary, IHC II, LLC, will contract with Wyndham to manage ten Marriott
franchise hotels that were owned and managed by IHC prior to the merger
with Patriot. Marriott will submanage these hotels for IHC II, LLC.
<TABLE>
<CAPTION>
<S> <C>
Historical book value of owners' equity .................................. $ 91,090
Adjustment to eliminate management fees and other fee income receivable
related to management contracts formerly owned by IHC that will not be
held by Interstate Hotels, LLC (see Note (C))........................... (1,522)
Funding of working capital by Patriot..................................... 13,579
-------
103,147
Minority interest ownership percentage.................................... 52.5%
-------
Minority interest......................................................... $ 54,152
========
</TABLE>
(E) Represents adjustments to reflect the issuance of shares of common stock,
par value $0.01, of the Company in connection with the spin-off as follows:
<TABLE>
<CAPTION>
Number of Common Paid-in Owners'
Shares Stock Capital Equity
---------- ------ ------- --------
<S> <C> <C> <C> <C>
Shares distributed to Patriot's shareholders... 9,221,743 $ 92 $46,862 $ --
Shares issued to Patriot....................... 390,146 4 2,037 --
Shares purchased by Marriott................... 390,146 4 2,037 --
Eliminate historical owners' equity............ -- -- -- (91,090)
---------- ---- ------- --------
Total........................................ 10,002,035 $100 $50,936 $(91,090)
========== ==== ======= ========
</TABLE>
In connection with the merger of IHC into Patriot, certain operations,
principally, the third-party hotel management business, along with certain
assets and liabilities will be transferred to the Company. Ninety-two percent of
the shares of the Company will be distributed to Patriot's shareholders. Patriot
will retain a 4% ownership interest in the Company's common stock after the
redemption discussed in Note 2.
In connection with the spin-off of the Company from Patriot, Marriott will
purchase a 4% ownership interest in the Company's common stock, after the
redemption discussed in Note 2, for $2,041 in cash.
NOTE 2 -- STOCK REDEMPTION:
Following the spin-off, the Company will redeem a total of 248,385 Company
shares from certain stockholders who are affiliated with the Patriot Companies.
The purchase price for the shares to be redeemed will be the average trading
price of the Company shares over their first five trading days. Since this
transaction will occur subsequent to the spin-off, it has been excluded from
the Unaudited Pro Forma Combined Balance Sheet. If this transaction had been
included in the Unaudited Pro Forma Combined Balance Sheet, assuming a $5.23
per share redemption price, the effect would have been to decrease the pro
forma amounts to the following balances:
Cash $ 18,582
Total current assets 65,246
Total assets 186,355
Paid-in capital 49,637
Total owners' equity 49,737
Total liabilities and owners' equity 186,355
30
<PAGE> 34
<TABLE>
INTERSTATE HOTELS MANAGEMENT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Historical Pro Forma
(A) Adjustments Pro Forma
---------- ------------- ---------
<S> <C> <C> <C>
Lodging revenues:
Rooms ............................................. $ 87,985 $(14,787)(B) $ 73,198
Other departmental ................................ 5,305 (582)(B) 4,723
Net management fees .................................. 20,783 (8,088)(C) 12,695
Other fees ........................................... 12,671 (3,634)(D) 9,037
--------- -------- --------
126,744 (27,091) 99,653
--------- -------- --------
Lodging expenses:
Rooms ............................................. 20,244 (3,236)(E) 17,008
Other departmental ................................ 3,170 (304)(E) 2,866
Property Costs .................................... 23,435 (3,795)(E) 19,640
General and administrative ........................... 6,781 -- 6,781
Payroll and related benefits ......................... 12,394 (3,104)(F) 9,290
Lease expense ........................................ 41,140 (7,122)(G) 34,018
Depreciation and amortization ........................ 4,019 5,581 (H) 9,600
--------- -------- --------
111,183 (11,980) 99,203
--------- -------- --------
Operating income ..................................... 15,561 (15,111) 450
Other income (expense):
Interest, net ..................................... 226 -- 226
Other, net ........................................ (9) -- (9)
--------- -------- --------
Income before income tax expense and minority interest 15,778 (15,111) 667
Income tax expense ................................ 6,311 (6,044)(I) 267
--------- -------- --------
Income before minority interest ...................... 9,467 (9,067) 400
Minority interest ................................. -- 210 (J) 210
--------- -------- --------
Net income ........................................... $ 9,467 $ (9,277) $ 190
========= ======== ========
Basic net income per common share .................... $ .02(K)
========
Diluted net income per common share .................. $ .02(K)
========
</TABLE>
See notes on pages 33 and 34.
31
<PAGE> 35
<TABLE>
INTERSTATE HOTELS MANAGEMENT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Historical Pro Forma
(A) Adjustments Pro Forma
---------- ------------- ---------
<S> <C> <C> <C>
Lodging revenues:
Rooms ............................................. $ 158,342 $ (22,001)(B) $ 136,341
Other departmental ................................ 9,512 (754)(B) 8,758
Net management fees .................................. 37,828 (15,297)(C) 22,531
Other fees ........................................... 24,122 (4,326)(D) 19,796
--------- --------- --------
229,804 (42,378) 187,426
--------- --------- --------
Lodging expenses:
Rooms ............................................. 36,918 (5,011)(E) 31,907
Other departmental ................................ 5,487 (383)(E) 5,104
Property costs .................................... 43,225 (5,773)(E) 37,452
General and administrative ........................... 13,195 -- 13,195
Payroll and related benefits ......................... 21,892 (7,018)(F) 14,874
Lease expense ........................................ 73,283 (10,733)(G) 62,550
Depreciation and amortization ........................ 4,820 13,500 (H) 18,320
--------- --------- --------
198,820 (15,418) 183,402
--------- --------- --------
Operating income ..................................... 30,984 (26,960) 4,024
Other income:
Interest, net ..................................... 435 -- 435
Other, net ........................................ 73 -- 73
--------- --------- --------
Income before income tax expense and minority interest 31,492 (26,960) 4,532
Income tax expense ................................ 12,597 (10,784)(I) 1,813
--------- --------- --------
Income before minority interest ...................... 18,895 (16,176) 2,719
Minority interest ................................. -- 1,428 (J) 1,428
--------- --------- --------
Net income ........................................... $ 18,895 $ (17,604) $ 1,291
========= ========= ========
Basic net income per common share .................... $ .13(K)
========
Diluted net income per common share .................. $ .13(K)
========
</TABLE>
See notes on the following page.
32
<PAGE> 36
<TABLE>
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
For the Six Months ended June 30, 1998 and the
Year Ended December 31, 1997 (dollars in
thousands, except per share amounts)
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
1998 1997
NOTE 3 - PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS: ---------- ------------
<S> <C> <C>
(A) Reflects the unaudited historical combined statement of operations of the
Company for the indicated period.
(B) Adjustments to lodging revenues to reflect the elimination of operating
revenues associated with 15 hotel leases that are being retained by
Patriot. Prior to the merger of IHC into Patriot on June 2, 1998, these
leasehold interests were held by a subsidiary of IHC.
Lodging revenues:
Rooms $ (14,787) $ (22,001)
Other departmental (582) (754)
--------- ---------
$ (15,369) $ (22,755)
========= =========
(C) Adjustments to reflect the net decrease in net management fees:
The elimination of management fee revenues related to ten Patriot-owned
hotels that will be submanaged by Marriott pursuant to an arrangement
with IHC II, LLC, to ten hotels that will be leased to Wyndham, converted
to the Wyndham brand and managed by Wyndham, and to other hotels that
will be leased by Patriot to Wyndham and will be managed by Wyndham.
Prior to the merger of IHC into Patriot, these hotels were owned and
managed by subsidiaries of IHC. $ (8,395) $ (15,751)
The addition of a 2% management fee earned on the 15 leasehold
interests that are being retained by Patriot, as discussed in
Note (B) above, and will continue to be managed by the Company. 307 454
--------- ---------
$ (8,088) $ (15,297)
========= =========
(D) Adjustments to other fees to reflect the elimination of fees for insurance
services, purchasing and other services that the Company provided to the
hotels that were owned and managed by subsidiaries of IHC and are currently
owned by Patriot, as discussed in Note (B) above. The Company will not
provide such services to these hotels subsequent to the spin-off. $ (3,634) $ (4,326)
========= =========
(E) Adjustments to lodging expenses to reflect the elimination of operating
expenses associated with the 15 leasehold interests that are being retained
by Patriot, as discussed in Note (B) above.
Lodging expenses:
Rooms $ (3,236) $ (5,011)
Other departmental (304) (383)
Property costs (3,795) (5,773)
--------- ---------
$ (7,335) $ (11,167)
========= =========
(F) Adjustment to payroll and related benefits to reflect the elimination of
salaries and related benefits of employees who were terminated subsequent
to the merger of IHC into Patriot and whose positions the Company
does not expect to fill. The reduction in employees relates principally
to the reduction in the size of the Company subsequent to the merger. $ (3,104) $ (7,018)
========= =========
(G) Adjustment to lease expense to reflect the elimination of base and
participating rent relating to the 15 leasehold interests that are being
retained by Patriot, as discussed in Note (B) above. $ (7,122) $ (10,733)
========= =========
</TABLE>
33
<PAGE> 37
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
1998 1997
NOTE 3 (continued): ---------- -----------
<S> <C> <C>
(H) Adjustments to depreciation and amortization to reflect the net increase in
amortization of management and lease contract costs associated with a
step-up in basis arising from the allocation of purchase price resulting
from the merger of IHC into Patriot. The management and lease contract
costs have been stated at their estimated fair market values and are
being amortized using the straight-line method over five and
13.5 years, respectively. $ 5,581 $ 13,500
======== ========
(I) Adjustment reflects the provision for income tax expense based on
the Company's estimated effective income tax rate of 40%. $ (6,044) $ (10,784)
======== =========
(J) Adjustment to minority interest to reflect Patriot's 52.5%
non-controlling interest in Interstate Hotels, LLC. $ 210 $ 1,428
======== =========
(K) Pro forma basic and diluted net income per common share has been calculated
using 10,002,035 shares of Common Stock. The historical combined financial
statements of the Company have been carved out of IHC and Patriot, and
principally include those historical assets, liabilities, revenues and
expenses directly attributable to the third-party hotel management business
to be conducted by the Company. Historical earnings per share information
for the carved out Company has not been presented because management
believes it is not meaningful.
</TABLE>
34
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Information
Statement/Prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and information based on
our current views of our business and our assumptions concerning future events.
The words or phrases "will likely result," "are expected to," "will continue,"
"is anticipated," "believes," "estimates," "projects" or similar expressions are
intended to identify these forward-looking statements. These statements are
subject to risks and uncertainties that could cause our actual operations and
results of operations to differ materially from those reflected in our
forward-looking statements.
Forward-looking statements are not guarantees of future performance.
They are subject to the Company successfully implementing its business strategy,
limiting the costs and realizing the expected benefits of that strategy and
generating sufficient cash flow to fund its lease payments, debt service
requirements, working capital needs and other significant expenditures. Our
forward-looking statements are based on certain trends which we anticipate in
the lodging industry and the effect on those trends of such factors as industry
capacity, the seasonal nature of the lodging industry, product demand and
pricing and the other matters referred to in the "Risk Factors" section of this
document. Accordingly, you are cautioned not to place undue reliance on our
forward-looking statements.
BACKGROUND AND GENERAL
The Company provides a wide variety of management and other services to
hotels that the Company manages on behalf of third-party owners. Additionally,
the Company holds leasehold interests of certain hotels which are primarily
owned by Equity Inns. The management agreements generally provide for payment of
a base management fee which ranges from 1% to 5% of the hotel's gross revenues.
In addition, some of the management agreements provide for payment of an
incentive management fee, which generally ranges from 10% to 20% of the excess
of operating profits or net operating cash flow over a defined threshold level.
The Company also earns other incremental fees from third-party owners for
providing other contractual services such as purchasing, project management,
centralized accounting and insurance and risk management services. The Company's
management agreements have initial terms that range from one month to 22 years
expiring through 2019, and the Company's lease agreements have initial terms of
10 to 15 years expiring through 2012. At June 30, 1998, the Company managed,
leased or performed related services for 207 hotels with 42,444 rooms, compared
to 223 hotels with 45,329 rooms at December 31, 1997. The Company entered into
long-term operating leases for 84 of these hotels with 10,144 rooms at June 30,
1998, compared to 89 hotels with 10,258 rooms at December 31, 1997.
The historical combined financial statements of the Company presented
elsewhere in this Information Statement/Prospectus have been carved out of the
historical consolidated financial statements of IHC and its subsidiaries and
predecessors, and include only those historical assets, liabilities, revenues
and expenses directly attributable to the third-party hotel management business
and the operations of the leased hotels. The working capital and operating
results of the leased hotels are included in the historical combined financial
statements because the operating performance associated with such hotels is
guaranteed by the Company. These financial statements have been prepared as if
the Company had operated as a free-standing entity for all periods presented.
All investments in, associated debt and results of operations of the hotels that
were owned by subsidiaries of IHC prior to the merger of IHC into Patriot, as
well as certain other operating subsidiaries that are not included in the
continuing business of the Company have been carved out of the historical
combined financial statements of the Company.
The following discussion and analysis includes discussion and analysis
of the Company's pro forma financial position and results of operations in
addition to its historical data, and should be read in conjunction with the pro
forma financial information included elsewhere in this Information
Statement/Prospectus. The pro forma adjustments described below result primarily
from the merger of IHC into Patriot on June 2, 1998 and the spin-off of the
Company, and consist primarily of the
35
<PAGE> 39
elimination of costs and revenues associated with the hotels that were owned and
managed by IHC and the elimination of certain leased hotels that will be
retained by Patriot, and therefore will not be included in the Company after the
spin-off. In connection with the merger, an intangible asset related to the
estimated fair market value of management contract costs of $67.7 million and a
deferred tax liability of $17.9 million were recorded, as of June 2, 1998, and
will be amortized over five years.
RESULTS OF OPERATIONS
Pro Forma Six Months Ended June 30, 1998 Compared to Historical Six Months Ended
June 30, 1998
Pro forma lodging revenues and lodging expenses include adjustments to
eliminate $15.4 million of operating revenues and $7.3 million of operating
expenses associated with 15 hotel leases that are being retained by Patriot.
Prior to the merger of IHC into Patriot on June 2, 1998, these leasehold
interests were held by a subsidiary of IHC.
Pro forma net management fees includes adjustments to eliminate $5.1
million of net management fee revenues related to ten Patriot-owned hotels that
will be submanaged by Marriott pursuant to an arrangement with the Company and
to ten hotels that will be leased to Wyndham, converted to the Wyndham brand and
managed by Wyndham. Prior to the merger of IHC into Patriot, these hotels were
owned and managed by subsidiaries of IHC. The remaining hotels that were owned
and managed by subsidiaries of IHC prior to the merger have also been leased by
Patriot to Wyndham and will be managed by Wyndham, resulting in an elimination
of $3.3 million of net management revenues. In addition, pro forma net
management fees include an adjustment of $0.3 million to record a 2% management
fee on the 15 leasehold interests that are being retained by Patriot which will
continue to be managed by the Company.
Pro forma other fees include adjustments to eliminate $2.9 million of
fees for insurance services and $0.7 million of fees for purchasing and other
services that the Company provided to the hotels that were owned and managed by
subsidiaries of IHC and are currently owned by Patriot. The Company will not
provide such services to these hotels subsequent to the spin-off.
Pro forma payroll and related benefits expense includes an adjustment
to eliminate $3.1 million of salaries and related benefits of employees who were
terminated subsequent to the merger of IHC into Patriot and whose positions the
Company does not expect to fill.
Pro forma lease expense includes an adjustment to eliminate $7.1
million of base and participating rent relating to 15 leasehold interests that
are being retained by Patriot.
Pro forma depreciation and amortization primarily represents $8.4
million of amortization of management and lease contract costs associated with a
step-up in basis arising from the allocation of purchase price resulting from
the merger of IHC into Patriot. The management and lease contract costs have
been stated at their
36
<PAGE> 40
estimated fair market values and are being amortized using the straight-line
method over five and 13.5 years, respectively.
Pro forma income tax expense was computed based on the Company's
estimated effective tax rate of 40%.
Pro forma minority interest reflects Patriot's 52.5% non-controlling
interest, or $0.2 million, in Interstate Hotels, LLC, the successor to the
third-party hotel management business conducted by IHC prior to the merger of
IHC into Patriot.
Historical Six Months Ended June 30, 1998 Compared to Historical Six Months
Ended June 30, 1997
Total revenues increased by $30.9 million, or 32.2%, from $95.8 million
in the six months ended June 30, 1997 (the "1997 Six Months") to $126.7 million
in the six months ended June 30, 1998 (the "1998 Six Months"). The most
significant portion of this increase related to lodging revenues, which consist
of rooms, food and beverage and other departmental revenues. Lodging revenues
increased by $27.3 million, or 41.4%, from $66.0 million in the 1997 Six Months
to $93.3 million in the 1998 Six Months. This increase was due to the addition
of the operations of the leased hotels since their respective inception dates.
The ADR for the leased hotels increased by 8.1%, from $66.92 during the
1997 Six Months to $72.32 during the 1998 Six Months, and the average occupancy
rate decreased slightly to 68.9% during the 1998 Six Months from 71.3% during
the 1997 Six Months. This resulted in an increase in REVPAR of 4.5% to $49.85
during the 1998 Six Months.
Net management fees increased by $2.7 million, or 15.0%, from $18.1
million in the 1997 Six Months to $20.8 million in the 1998 Six Months due to
increased revenues associated with the performance improvement of certain
existing managed hotels. Many of the Company's hotel management agreements
provide for incentive management fees. Other fees increased by $0.9 million, or
7.4%, from $11.8 million in the 1997 Six Months to $12.7 million in the 1998 Six
Months due to incremental revenues associated with the net addition of new
hotels, many of which utilize the Company's other services.
Lodging expenses, which consist of rooms, food and beverage, property
costs and other departmental expenses, increased by $13.1 million, or 38.9%,
from $33.7 million in the 1997 Six Months to $46.8 million in the 1998 Six
Months. This increase was due to the addition of the operations of the leased
hotels since their respective inception dates. The operating margin of the
leased hotels increased from 48.9% during the 1997 Six Months to 49.8% during
the 1998 Six Months. This increase was attributable to the overall improvement
in operating performance and operating efficiencies of the leased 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
37
<PAGE> 41
marketing, finance and other hotel support services, as well as general
corporate expenses. General and administrative expenses increased by $1.1
million, or 19.4%, from $5.7 million in the 1997 Six Months to $6.8 million in
the 1998 Six Months. This increase was primarily due to increased legal and
accounting costs of $0.6 million associated with the growth of the Company.
General and administrative expenses as a percentage of revenues decreased to
5.4% during the 1998 Six Months compared to 5.9% during the 1997 Six Months.
Payroll and related benefits expenses increased by $2.1 million, or
20.8%, from $10.3 million in the 1997 Six Months to $12.4 million in the 1998
Six Months. Approximately $0.9 million of this 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, primarily
resulting from the addition of the leased hotels for which the Company provides
centralized accounting services. The remaining increase was attributable to
increases in incentive bonuses for certain executive officers and key personnel.
Payroll and related benefits expenses as a percentage of revenues decreased to
9.8% during the 1998 Six Months compared to 10.7% during the 1997 Six Months.
Lease expense represents base rent and participating rent that is based
on a percentage of rooms and food and beverage revenues from the leased hotels.
Lease expense increased by $12.6 million, or 44.4%, from $28.5 million in the
1997 Six Months to $41.1 million in the 1998 Six Months. This increase was due
to the addition of the operations of the leased hotels since their respective
inception dates.
Depreciation and amortization increased by $1.6 million, or 69.9%, from
$2.4 million in the 1997 Six Months to $4.0 million in the 1998 Six Months due
to incremental amortization associated with a step-up in basis of management
contract costs to their estimated fair market value resulting from the merger of
IHC into Patriot.
Operating income increased by $0.3 million, or 1.7%, from $15.3 million
in the 1997 Six Months to $15.6 million in the 1998 Six Months. The operating
margin decreased from 16.0% during the 1997 Six Months to 12.3% during the 1998
Six Months. This increase in operating income and decrease in the operating
margin reflects the inclusion of the operating results of the leased hotels
since their respective inception dates and the increase in general and
administrative and payroll and related benefits expenses.
Income tax expense in the 1997 and 1998 six-month periods was computed
based on an effective tax rate of 40%.
As a result of the changes noted above, net income increased by $0.3
million, or 2.7%, from $9.2 million in the 1997 Six Months to $9.5 million in
the 1998 Six Months. The net income margin decreased from 9.6% during the 1997
Six Months to 7.5% during the 1998 Six Months, reflecting the inclusion of the
operating results of the leased hotels since their respective inception dates.
38
<PAGE> 42
Pro Forma Year Ended December 31, 1997 Compared to Historical Year Ended
December 31, 1997
Pro forma lodging revenues and lodging expenses include adjustments to
eliminate $22.8 million of operating revenues and $11.2 million of operating
expenses associated with 15 hotel leases interests that are being retained by
Patriot. Prior to the merger of IHC into Patriot on June 2, 1998, these
leasehold interests were held by a subsidiary of IHC.
Pro forma net management fees includes adjustments to eliminate $9.5
million of net management fee revenues related to ten Patriot-owned hotels that
will be submanaged by Marriott pursuant to an arrangement with the Company and
to ten hotels that will be leased to Wyndham, converted to the Wyndham brand and
managed by Wyndham. Prior to the merger of IHC into Patriot, these hotels were
owned and managed by subsidiaries of IHC. The remaining hotels that were owned
and managed by subsidiaries of IHC prior to the merger have also been leased by
Patriot to Wyndham and will be managed by Wyndham, resulting in an elimination
of $6.3 million of net management revenues. In addition, pro forma net
management fees include an adjustment of $0.5 million to record a 2% management
fee on the 15 leasehold interests that are being retained by Patriot which will
continue to be managed by the Company.
Pro forma other fees include adjustments to eliminate $2.8 million of
fees for insurance services and $1.5 million of fees for purchasing and other
services that the Company provided to the hotels that were owned and managed by
subsidiaries of IHC and are currently owned by Patriot. The Company will not
provide such services to these hotels subsequent to the spin-off.
Pro forma payroll and related benefits expense includes an adjustment
to eliminate $7.0 million of salaries and related benefits of employees who were
terminated subsequent to the merger of IHC into Patriot and whose positions the
Company does not expect to fill.
Pro forma lease expense includes an adjustment to eliminate $10.7
million of base and participating rent relating to 15 leasehold interests that
are being retained by Patriot.
Pro forma depreciation and amortization primarily represents $16.7
million of amortization of management and lease contract costs associated with a
step-up in basis arising from the allocation of purchase price resulting from
the merger of IHC into Patriot. The management and lease contract costs have
been stated at their estimated fair market values and are being amortized using
the straight-line method over five and 13.5 years, respectively.
Pro forma income tax expense was computed based on the Company's
estimated effective tax rate of 40%.
Pro forma minority interest reflects Patriot's 52.5% non-controlling
interest, or $1.4 million, in Interstate Hotels, LLC, the successor to the
third-party hotel management business conducted by IHC prior the merger of IHC
into Patriot.
39
<PAGE> 43
Historical Year Ended December 31, 1997 Compared to Historical Year Ended
December 31, 1996
Total revenues increased by $166.3 million, or 262.1%, from $63.5
million in 1996 to $229.8 million in 1997. The most significant portion of this
increase related to lodging revenues which increased by $157.9 million during
1997. This increase was due to the addition of the operations of 89 leased
hotels commencing in November 1996 and continuing during 1997. The ADR for the
leased hotels increased by 23.7%, from $54.93 during 1996 to $67.93 during 1997,
and the average occupancy rate increased to 71.1% during 1997 from 58.4% during
1996. This resulted in an increase in REVPAR of 50.5% to $48.27 during 1997.
Net management fees increased by $4.8 million, or 14.6%, from $33.0
million in 1996 to $37.8 million in 1997 due to the net addition of 11 new
management contracts and increased revenues associated with the performance
improvement of certain existing managed hotels, which resulted in increased
incentive management fees. Other fees increased by $3.6 million, or 17.9%, from
$20.5 million in 1996 to $24.1 million in 1997 due to incremental revenues
associated with the net addition of new hotels during 1996 and 1997, many of
which utilize the Company's other services.
Lodging expenses increased by $79.5 million from $6.1 million in 1996
to $85.6 million in 1997 due to the addition of the operations of 89 leased
hotels commencing in November 1996 and continuing during 1997. The operating
margin of the leased hotels increased from 38.6% during 1996 to 49.0% during
1997.
General and administrative expenses increased by $2.9 million, or
27.8%, from $10.3 million in 1996 to $13.2 million in 1997. This increase was
primarily due to incremental expenses associated with the growth of the
Company's business. General and administrative expenses as a percentage of
revenues decreased to 5.7% during 1997 compared to 16.3% during 1996 as a result
of the addition of the operations of 89 leased hotels commencing in November
1996 and continuing during 1997.
Payroll and related benefits increased by $4.2 million, or 23.9%, from
$17.7 million in 1996 to $21.9 million in 1997. This increase was related to the
addition of corporate management and staff personnel as the Company's hotels for
which it provides management and other services grew, primarily resulting from
the addition of the leased hotels for which the Company provides centralized
accounting services. Payroll and related benefits as a percentage of revenues
decreased to 9.5% during 1997 compared to 27.8% during 1996 as a result of the
addition of the operations of 89 leased hotels commencing in November 1996 and
continuing during 1997.
Non-cash compensation of $11.9 million in 1996 resulted from the
issuance of 785,533 shares of common stock to certain executives and key
employees of IHC in consideration for the cancellation of stock options issued
by one of IHC's predecessors, Interstate Hotels Corporation, in 1995.
40
<PAGE> 44
Lease expense increased by $69.8 million from $3.5 million in 1996 to
$73.3 million in 1997 due to the addition of 89 leased hotels commencing in
November 1996 and continuing during 1997.
Depreciation and amortization increased by $0.4 million, or 10.6%, from
$4.4 million in 1996 to $4.8 million in 1997. This increase is due to
incremental amortization of $2.7 million during 1997 related to goodwill and the
cost of lease contracts associated with the Company's acquisition of the
management and leasing businesses affiliated with Equity Inns in November 1996.
This increase was offset by decreased amortization of $2.5 million associated
with investments in management contracts that became fully amortized during
1996.
Operating income (exclusive of non-cash compensation) increased by $9.5
million, or 44.0%, from $21.5 million in 1996 to $31.0 million in 1997. The
operating margin decreased from 33.9% during 1996 to 13.5% during 1997. This
increase in operating income and decrease in the operating margin reflects the
inclusion of the operating results of the leased hotels commencing in November
1996 and continuing during 1997, and the increase in general and administrative
and payroll and related benefits expenses.
Income tax expense in 1996 and 1997 was computed based on an effective
tax rate of 40%.
As a result of the changes noted above, net income increased by $12.8
million from $6.1 million in 1996 to $18.9 million in 1996.
Historical Year Ended December 31, 1996 Compared to Historical Year Ended
December 31, 1995
Total revenues increased by $18.7 million, or 41.6%, from $44.8 million
in 1995 to $63.5 million in 1996. The most significant portion of this increase
related to lodging revenues which increased by $10.0 million. This increase was
due to the addition of the operations of 57 leased hotels in November 1996.
Prior to 1996, the Company had not entered into any hotel leases. During 1996,
the ADR for the leased hotels was $54.93 and the average occupancy rate was
58.4%, which resulted in REVPAR of $32.08.
Net management fees increased by $6.0 million, or 22.2%, from $27.0
million in 1995 to $33.0 million in 1996 due to the addition of 90 new
management contracts and increased revenues associated with the performance
improvement of certain 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 owners. Other fees increased by $2.7
million, or 14.9%, from $17.8 million in 1995 to $20.5 million in 1996 due to
incremental revenues associated with the net addition of new hotels, many of
which utilize the Company's other services.
The Company had lodging expenses of $6.1 million in 1996 due to the
addition of the
41
<PAGE> 45
operations of 57 leased hotels in November 1996. The operating margin of the
leased hotels was 38.6% during 1996.
General and administrative expenses in 1996 and 1995 remained
relatively consistent due to the nonvariable nature of these expenses. General
and administrative expenses as a percentage of revenues decreased to 16.3%
during 1996 compared to 21.9% during 1995 as a result of the addition of the
operations of 57 leased hotels in November 1996.
Payroll and related benefits increased by $2.2 million, or 14.2%, from
$15.5 million in 1995 to $17.7 million in 1996. This increase was related to the
addition of corporate management and staff personnel as the Company's managed
and leased hotels for which it provides management and other services grew.
Payroll and related benefits as a percentage of revenues decreased to 27.8%
during 1996 compared to 34.5% during 1995 as a result of the addition of the
operations of 57 leased hotels in November 1996.
Non-cash compensation of $11.9 million in 1996 resulted from the
issuance of 785,533 shares of common stock to certain executives and key
employees of IHC in consideration for the cancellation of stock options issued
by one of IHC's predecessors, Interstate Hotels Corporation, in 1995.
The Company had lease expense of $3.5 million in 1996 due to the
addition of 57 leased hotels in November 1996.
Operating income (exclusive of non-cash compensation) increased by $6.1
million, or 39.7%, from $15.4 million in 1995 to $21.5 million in 1996. The
operating margin decreased from 34.3% during 1995 to 33.8% during 1996. This
increase in operating income and decrease in the operating margin reflects the
inclusion of the operating results of the leased hotels during 1996.
Income tax expense of $4.1 million was recorded in 1996. Prior to 1996,
IHC and its predecessors were organized as S corporations, partnerships and
limited liability companies and, accordingly, were not subject to federal and
certain state income taxes.
As a result of the changes noted above, net income decreased by $9.8
million, or 61.9%, from $15.9 million in 1995 to $6.1 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent assets were $4.3 million at June
30, 1998 compared to $2.3 million at December 31, 1997. At June 30, 1998,
current liabilities exceeded current assets by $12.1 million partially as a
result of $8.4 million of amounts owed to related parties to meet short-term
cash requirements. As part of the spin-off, Patriot has agreed to contribute
cash to the Company to increase the Company's current ratio to 1:1.
42
<PAGE> 46
The Company's principal sources of liquidity during the 1998 Six Months
were cash from operations. Net cash provided by operations was $14.6 million in
the 1998 Six Months compared to $10.9 million in the 1997 Six Months. The
increase was primarily related to lower growth in accounts receivable during
1998 compared to 1997. The Company had cash provided from investing activities
of $14.9 million in the 1998 Six Months, which principally related to
collections on notes and affiliate receivables of $12.0 million. The 1997 Six
Months resulted in cash used in investing activities of $5.7 million due to
increases in affiliate receivables and investments related to the acquisition of
leased hotels. The Company's capital expenditure budget through December 31,
1999 related to current operations is approximately $2.1 million, consisting
primarily of computer and related equipment. The Company intends to fund these
expenditures through separate lease financing arrangements. Net cash used in
financing activities in the amount of $27.6 million and $12.8 million in the
1998 Six Months and 1997 Six Months, respectively, was primarily used for
distributions to owners.
The Company intends to pursue a business strategy involving, among
other things, entering into new management contracts and long-term hotel
operating leases (which may from time to time require capital expenditures by
the Company), investing in hotel properties and selectively developing hotels.
The Company believes that cash provided from operations will be insufficient to
fully fund its pursuit of its business strategy and expects to be required to
obtain debt or equity financing to achieve its business plan. The Company
cannot assure you, however, that such financing will be available to the Company
on commercially reasonable terms, or at all. If the Company does not obtain
additional financing, its pursuit of its business strategy will be impaired.
YEAR 2000 COMPLIANCE
The year 2000 issue relates to computer programs written using two
digits rather than four to define the applicable year. Computer programs written
this way may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in systems failures or miscalculations causing
disruptions of hotel operations or a temporary inability to process
transactions, prepare financial statements or engage in similar normal business
activities.
We have developed and begun implementing a comprehensive plan to address
potential year 2000 problems at the hotels we manage and lease, as well as at
our corporate offices, and to minimize the impact on operations to the extent
possible. Our plan, which is designed to identify and address potential problems
in the most critical operational systems first in order to minimize any
disruption in service to hotel guests, consists of the following four steps:
Step 1 - Inventory: Conduct an inventory to identify (a) all
- ------------------ computer hardware and software systems
and building systems in use and (b) any
potential year 2000 problems that may exist
in such systems.
Step 2 - Vendor Survey: Identify and contact third-party vendors to
- ---------------------- determine whether their systems or services
are or will be made year 2000 compliant. We
are conducting Step 2 simultaneously with
Step 1.
Step 3 - Planning
and Cost Estimation: Prepare a prioritized year 2000 compliance
- ------------------- plan for remediation or replacement of
non-compliant systems. Step 3 will be
performed through a joint effort between
management representatives and a year 2000
consultant.
Step 4 - Implementation
and Testing: Implement the year 2000 compliance
- ----------- plan prepared in Step 3 and test all systems
to ensure maximum possible compliance and
develop contingency plans for continuing
operations in the event problems arise.
We have engaged a consultant to complete Steps 1 and 2, at an estimated
cost of $13,500 per hotel for upscale hotels and $7,500 for midscale and economy
hotels. We have instructed the hotels that we manage and lease to increase their
capital budgets for 1998 to accommodate this cost. The end product of Steps 1
and 2 will be a written assessment, which will identify the potential problems
and estimate the costs of remediating such problems. The inventories at the
hotels and our corporate offices have already begun and we expect that each
assessment will be delivered approximately three months after the corresponding
inventory is begun.
At this time, we cannot identify the costs that will be incurred to
complete Steps 3 and 4. However, once each written assessment described above is
delivered, we will be able to provide an estimate of those costs. We have
instructed all hotels that we manage and lease to include in their 1999 capital
budgets a minimal amount (ranging from $10,000 to $50,000, depending on the size
of the hotel) to be utilized for these purposes. As specific costs become known,
our budgets will be adjusted as necessary.
We believe that the expenses incurred to complete the year 2000
compliance program at each managed hotel are operational expenses which are the
responsibility of the hotel owner, and we believe that the terms of our
management contracts provide adequate basis for this position. Nonetheless, it
is possible that some third-party hotel owners may challenge this position. With
respect to the hotels leased by us, we expect that we, as tenant, to the extent
such expense is not considered a capital expenditure, may be expected to incur
the expense associated with year 2000 compliance. Further, we will be
responsible for funding the year 2000 compliance expenses for corporate
operations. These expenses will be funded through operating cash flow. The costs
incurred to date have not been material. We've provided for approximately $2.1
million in capital expenditures in our 1999 capital budget. Approximately $1.7
million of this amount is expected to be spent addressing our year 2000 issues.
Our time and cost estimates for year 2000 compliance are based on
currently available information. These estimates could be affected by unforeseen
developments including, but not limited to, the availability and cost of trained
personnel; the ability to locate and correct problems in all relevant systems;
and the year 2000 compliance efforts of our third-party vendors.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The new
standard requires that all public business enterprises report information about
operating segments, as well as specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. The new standard, which is effective for the fiscal year ending
December 31, 1998, will require additional disclosure by the Company but will
not have a financial impact on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The new standard requires
additional information to facilitate financial analysis and eliminates certain
disclosures which are no longer useful. To the extent practicable, the standard
also standardizes disclosures for retiree benefits. The new standard, which is
effective for the fiscal year ending December 31, 1998, will require additional
disclosure by the Company but will not have a financial impact on the Company.
43
<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our
directors and executive officers. The Board will in general be classified into
three classes, with the initial members to serve for the periods identified
below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
W. Thomas Parrington, Jr. 53 President, Chief Executive Officer
and Director (term as Director expiring_____)
J. William Richardson 51 Chief Financial Officer, Executive Vice President,
Finance and Administration
Kevin P. Kilkeary 46 Executive Vice President, and President and
Chief Operating Officer, Crossroads Hospitality
Henry L. Ciaffone 57 Senior Vice President and Treasurer
Charles R. Tomb 43 Senior Vice President, Development
Timothy Q. Hudak 36 Senior Vice President and General Counsel
Thomas W. Lattin 52 Director (term expiring_____)
_____________________ __ Director (term expiring_____)
_____________________ __ Director (term expiring_____)
_____________________ __ Director (term expiring_____)
_____________________ __ Director (term expiring_____)
_____________________ __ Director (term expiring_____)
_____________________ __ Director (term expiring_____)
_____________________ __ Director (term expiring_____)
</TABLE>
W. THOMAS PARRINGTON, JR. was with IHC from 1981 until its merger with Patriot,
serving as Chief Executive Officer since 1996, President since 1994 and as Chief
Financial Officer prior thereto. Prior to joining IHC, Mr. Parrington held
positions with Arthur Andersen & Company, Marriott International, Inc., Ramada
Inns Inc., and Westmount International Hotels. Mr. Parrington has more than 30
years of experience in the hospitality industry. In addition to serving on our
Board of Directors, Mr. Parrington is currently serving as our President and
Chief Executive Officer under an employment agreement which expires on December
31, 1998. We are currently discussing with Mr. Parrington the possibility of
extending the term of his employment. If we do not reach an agreement with Mr.
Parrington, we will conduct an executive search for a qualified replacement.
44
<PAGE> 48
J. WILLIAM RICHARDSON was IHC's Chief Financial Officer and Executive Vice
President of Finance and Administration from 1994 until its merger with Patriot.
Mr. Richardson previously served as Controller and Treasurer of IHC since 1988.
Previously, Mr. Richardson was Vice President and a partner in an Atlanta based
hotel management and development company and worked with Marriott Corporation
prior thereto. His experience in the hospitality industry spans over a period of
approximately 28 years. He serves as our Chief Financial Officer and Executive
Vice President of Finance and Administration.
KEVIN P. KILKEARY joined IHC in 1972 and held a variety of positions in hotels
and at the corporate office. Mr. Kilkeary serves as our Executive Vice
President, and as President and Chief Operating Officer, Crossroads Hospitality
and oversees the daily operations of more than 110 limited and full-service
hotels across the country.
HENRY L. CIAFFONE is our Senior Vice President and Treasurer. In addition to his
responsibilities as Treasurer, he directs our international development
activities. Prior to joining IHC in 1989, Mr. Ciaffone held positions in hotel
finance and real estate development during his tenure at Koala Inns of America,
Sheraton Corporation and the Howard Johnson Company.
CHARLES R. TOMB is our Senior Vice President of Development. He joined IHC in
1992, and most recently, he oversaw the development of IHC in the Western Region
as Vice President of Development. Mr. Tomb has approximately 20 years of
experience in the hotel industry, including prior positions with Holiday Inns
Worldwide, Americana Hotels & Resorts and Hyatt Hotels.
TIMOTHY Q. HUDAK joined IHC in 1992 as Assistant General Counsel and is serving
as our Senior Vice President and General Counsel. Prior to joining IHC, Mr.
Hudak held the position of Associate General Counsel for Cyclops Industries,
Inc. and, prior to that, practiced law at the firm of Tucker Arensberg.
THOMAS W. LATTIN joined our Board of Directors in June of 1998. Mr. Lattin has
been an Executive Vice President of Wyndham since January 1998. Prior to that,
he served as President and Chief Operating Officer of Patriot (and subsequently
Wyndham) since April 1995. From 1994 to 1995, Mr. Lattin worked with the
Hospitality Group of Kidder, Peabody & Co. Incorporated and served as a Senior
Vice President and then with PaineWebber Incorporated as a Senior Vice
President. From 1987 to 1994, Mr. Lattin served as the National Partner of the
hospitality industry consulting practice of Laventhol & Horwath and subsequently
as a partner in the national hospitality consulting group of Coopers & Lybrand
L.L.P.
EXECUTIVE COMPENSATION
The Company was incorporated in May 1998. None of our executive
officers received compensation from the Company during 1997. The following table
sets forth certain information regarding the compensation paid or accrued by IHC
to IHC's (and the Company's) Chief Executive Officer and each of the four other
most highly compensated executive officers of IHC who are expected to be
executive officers of the Company and who earned at least $100,000 in total
salary and bonus from IHC in 1997. The executive officers listed in the table
below are sometimes referred to elsewhere in this Information
Statement/Prospectus as the "Named Executive Officers."
45
<PAGE> 49
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS PAYOUTS COMPENSATION
- --------------------------- ---- ------ ----- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
W. Thomas Parrington, Jr. 1997 $370,845(1) $430,000(1) -- $84,053(2) $2,544,470(3)
President and Chief Executive
Officer
J. William Richardson 1997 258,287(4) 300,000(4) -- 79,300(5) 1,714,051(6)
Chief Financial Officer and
Executive Vice President, Finance and
Administration
Kevin P. Kilkeary 1997 221,779(7) 220,000(7) -- 25,254(8) --
Executive Vice President,
President and Chief Operating Officer of
Crossroads Hospitality
Henry L. Ciaffone 1997 198,016(9) 150,000(9) -- 24,789(8) --
Senior Vice President and Treasurer
Charles R. Tomb 1997 119,149(10) 214,584(10) -- 15,489(8) 14,125(11)
Senior Vice President, Development
<FN>
(1) Mr. Parrington's salary from the Company for 1998 is expected to be $380,000 plus a discretionary bonus of up to $760,000.
(2) Consists of $46,589 of compensation under IHC's Executive Retirement Plan (the "ERP") and $37,464 of compensation under IHC's
Supplemental Deferred Compensation Plan ("SDCP").
(3) Consists of $18,000 of compensation for services as a director of Northridge, amortization of loan forgiveness (principal and
interest) in the amount of $334,185 and a severance payment in the amount of $2,192,285 provided for under a change-in-control
agreement.
(4) Mr. Richardson's salary from the Company for 1998 is expected to be $265,000 plus a discretionary bonus of up to $530,000.
(5) Consists of $32,500 of compensation under the ERP and $46,800 of compensation under the SDCP.
(6) Consists of $15,000 of compensation for services as a director of Northridge, amortization of loan forgiveness (principal and
interest) in the amount of $170,800 and a severance payment in the amount of $1,528,251 provided for under a change-in-control
agreement.
(7) Mr. Kilkeary's salary from the Company for 1998 is expected to be $250,000 plus a discretionary bonus of up to $375,000.
(8) Consists entirely of compensation under the ERP.
(9) Mr. Ciaffone's salary from the Company for 1998 is expected to be $200,000 plus a discretionary bonus of up to $250,000.
(10) Mr. Tomb's salary from the Company for 1998 is expected to be $190,000 plus a discretionary bonus of up to $237,500.
(11) Consists of restricted stock compensation under IHC's Equity Incentive Plan.
</FN>
</TABLE>
46
<PAGE> 50
IHC STOCK OPTION VALUES
The following table sets forth information regarding the values of the
IHC options held by the Named Executive Officers at December 31, 1997. None of
the Named Executive Officers exercised any IHC options during 1997.
<TABLE>
<CAPTION>
IHC OPTION VALUES AT DECEMBER 31, 1997
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
IHC OPTIONS IN-THE-MONEY IHC OPTIONS
AT DECEMBER 31, 1997(1) AT DECEMBER 31, 1997
------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
W. Thomas Parrington, Jr................ 80,000 160,000 $1,071,668 $2,143,332
J. William Richardson................... 41,250 82,500 540,078 1,080,156
Kevin P. Kilkeary....................... 8,333 66,667 117,183 770,130
Henry L. Ciaffone....................... 8,333 16,667 117,183 234,380
Charles R. Tomb......................... 2,500 7,500 35,156 95,469
</TABLE>
- ------------------------------
(1) Each of the IHC options had a ten-year term and generally became exercisable
as to one-third of the shares covered thereby on each of the first three
anniversaries of the date of grant so long as the holder thereof remained a
full-time employee of IHC. Each of these options became exercisable in full and
was subsequently cashed out in connection with the merger of IHC into Patriot.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
We have entered into an employment agreement with Mr. Tomb. Pursuant to
the terms of the employment agreement, Mr. Tomb has received (i) 50% of the
severance compensation he was entitled to receive, under his severance agreement
with IHC in place at the time of the merger of IHC into Patriot, as a result of
the change in control triggered by that merger and (ii) a loan in an amount
equal to the remaining 50% of such severance compensation, which amortizes over
a 30-month period. At any time prior to March 2, 1999, Mr. Tomb may elect to
terminate his employment with or without cause, and the entire loan will be
forgiven. After March 2, 1999, if Mr. Tomb terminates his employment for reasons
other than a Change in Control (as defined) or a material change in his job
responsibilities, he is required to repay the unamortized portion of the loan.
During the initial three-year term of his employment, in the event we terminate
Mr. Tomb without Cause (as defined), or either Mr. Tomb or we terminate his
employment as the result of a Change in Control (as defined) or a material
change in his job responsibilities, he is entitled to (i) have the loan forgiven
and (ii) continue health and other welfare benefits for the greater of 18 months
or the remainder of the term of the agreement. In addition, after the expiration
of the initial three-year term, if we terminate Mr. Tomb without Cause or he
terminates his employment as a result of a Change in Control or a material
change in his job responsibilities, he is entitled to an amount equal to his
salary and bonus for up to a maximum of six months. Mr. Tomb is not obligated
under the employment agreement to mitigate damages by seeking alternative
employment. Mr. Tomb's employment agreement will terminate without further
action immediately prior to the payment of any severance benefits under the
agreement. The employment agreement also includes provisions prohibiting Mr.
Tomb from engaging in any Competitive Activity (as defined) for six months after
termination of employment and providing for the payment of legal fees and
expenses incurred in enforcing or defending such agreements.
We are currently negotiating the terms of employment agreements with
the other Named Executive Officers.
47
<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXECUTIVE LOANS
In 1996, the Company's predecessor loaned $2.0 million and $1.0 million
to Messrs. Parrington and Richardson, respectively. These loans, along with
additional loans in the amount of $165,850 and $120,000 to Messrs. Parrington
and Richardson, respectively, were forgiven as of June 2, 1998 in connection
with IHC's merger into Patriot. The Company has loaned an additional $100,000
and $357,317 to Messrs. Parrington and Richardson, respectively, as advances
against their 1998 bonuses.
On June 2, 1998, in connection with IHC's merger into Patriot, the
Company forgave loans in the amount of $90,000 and $170,000 to Messrs. Kilkeary
and Ciaffone, respectively. The Company loaned Mr. Ciaffone an additional
$232,200, which was repaid in full on October 29, 1998.
The Company has also loaned $238,000 to Mr. Tomb to cover expenses
incurred in his relocation to Pittsburgh, as well as $29,774 as an advance
against his 1998 bonus.
VOTING AGREEMENT
General. Upon consummation of the spin-off, three directors and/or
executive officers of the Patriot Companies and certain entities with which the
directors and/or officers are affiliated (with such directors, officers and
affiliated entities being referred to in this section as the "Shareholders")
will enter into a Voting Agreement with the Company.
Voting Provisions. The Voting Agreement will provide that on all
shareholder votes taken at any time when the Shareholders, together with the
Patriot Companies and certain other directors and executive officers of the
Patriot Companies (collectively referred to in this section as the "Affiliated
Shareholders"), collectively own greater than 9.9% of the outstanding Company
shares, the Shareholders will vote their Company shares in proportion with the
results of voting on the particular matter by all Company shareholders other
than the Shareholders and the Affiliated Shareholders. This will have the effect
of nullifying the impact of voting by the Shareholders on the particular matter
and reducing the impact of voting by the Affiliated Shareholders on such matter.
Divestiture Provisions. The Voting Agreement will also provide that the
Shareholders will use reasonable efforts to sell or otherwise dispose of the
number of Company shares necessary so that the Shareholders and the Affiliated
Shareholders will collectively own 9.9% or less of the outstanding Company
shares by the first anniversary of the spin-off. Based on their holdings of
Patriot securities on ____________, 1999, we currently estimate that the
Shareholders and the Affiliated Shareholders will collectively own ____ Company
shares, or __% of the outstanding Company shares, upon consummation of the
spin-off. The Shareholders will thus be obligated under the Voting Agreement to
sell an aggregate of ____ Company shares, or __% of the outstanding Company
shares, by the first anniversary of the spin-off. Thereafter, the Shareholders'
selling obligations will become effective again at any time within five years
after the spin-off that the Shareholders are informed by the Company that the
Shareholders and the Affiliated Shareholders collectively own greater than 9.9%
of the outstanding Company shares.
Company Call Right. In the event that the Shareholders fail to comply
with their obligations to sell Company shares as described above within five
years after the spin-off, the Company will have a call right to purchase from
the Shareholders for fair market value the number of Company shares the
Shareholders were obligated to sell. Marriott will have the right to compel the
Company to exercise its call right if the Company fails to do so.
48
<PAGE> 52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of Company shares that will
be beneficially owned immediately following the spin-off and the related
redemption transactions by each person or "group" known to us to be the
beneficial owner of more than 5% of the Company shares, each of our directors
and Named Executive Officers and all of our directors and executive officers as
a group. Unless indicated otherwise, the address for each of the persons named
in the table is c/o Interstate Hotels Management, Inc., 680 Andersen Drive,
Foster Plaza Ten, 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
Number of of
Name Shares Owned Shares Owned
---- ------------ ------------
<S> <C> <C>
W. Thomas Parrington, Jr......................... 3,779 *%
J. William Richardson............................ 826 (1) *%
Kevin P. Kilkeary................................ 1,029 *%
Henry L. Ciaffone................................ 0 *%
Charles R. Tomb.................................. 176 *%
Thomas W. Lattin................................. 785 *%
Director......................................... %
Director......................................... %
Director......................................... %
Director......................................... %
Director......................................... %
Director......................................... %
Director......................................... %
All directors and executive officers
as a group (15 persons)......................... %
</TABLE>
- -----------
* Less than 1%
(1) Includes 7 shares held by Mr. Richardson's daughter.
49
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
We have summarized below the material provisions of the Company's
Articles of Incorporation and Bylaws as they are contemplated to be in effect at
the time of the spin-off. Our summary may not contain all of the information
that is important to you. See "Where You Can Find More Information" for
information about how to obtain a copy of the documents we refer to in this
section.
CAPITAL STOCK
Under the Articles of Incorporation, we are authorized to issue up to
_____ million shares of stock, consisting of _____ million shares of Class A
common stock, _____ million shares of Class B common stock, _____ million shares
of Class C common stock, _____ million shares of Excess Stock (as described
below) and _____ million shares of preferred stock.
Common Stock. Each holder of Class A shares, Class B shares and Class C
shares shall be entitled to one vote for each share held by such holder. The
three classes shall vote separately for the election of the Company's Board of
Directors as follows: holders of Class A shares shall elect five of the
Company's directors; holders of Class B shares shall elect two of the Company's
directors; and holders of Class C shares shall elect two of the Company's
directors. The Company is prohibited from entering into certain types of
transactions unless the holders of Class B shares or Class C shares, voting as
separate classes, give their approval. Except as required by law, the holders of
common stock shall vote together as a single class on all other matters
submitted to stockholders for a vote. In all respects other than those mentioned
above, each class of common stock shall be identical and shall entitle its
holders to identical rights and privileges. We will be distributing Class A
shares in the spin-off. The Class B shares will be held by Marriott and the
Class C shares will be held by the Patriot Companies.
Holders of shares of common stock have no preemptive, subscription or
redemption rights. Holders of Class B and Class C shares may, at their
discretion, convert their respective shares into Class A shares, and the Class B
shares and Class C shares will automatically convert into Class A shares upon
the occurrence of certain events (including, among other things, upon the
transfer of Class B or Class C shares from Marriott or the Patriot Companies, as
the case may be, to an unaffiliated entity).
Holders of shares of common stock are entitled to receive such dividends
as may be declared by our Board out of funds legally available for the payment
of dividends. Upon the liquidation, dissolution or winding up of the Company,
holders of shares of common stock share ratably in the assets of the Company
available for distribution to stockholders generally, subject to the
preferential rights of any then outstanding shares of preferred stock. No shares
of preferred stock are currently outstanding.
Preferred Stock. The preferred shares may be issued in one or more
series, with such rights and qualifications as our Board may determine before
such shares are issued. Our Board could, without the approval of stockholders,
issue preferred shares having voting or conversion rights that could adversely
affect the voting power of the holders of common stock and the issuance of
preferred shares could be used, under certain circumstances, to render more
difficult or discourage a hostile takeover of the Company.
Ownership Limit. The Articles of Incorporation prohibit any person from
owning more than 9.9% of the outstanding shares of any class of our capital
stock. We have the right to take any lawful action that we believe is necessary
or advisable to ensure compliance with the ownership limit, including refusing
to recognize or record any transfer of shares in violation of these limitations.
The ownership limit may have the effect of discouraging or preventing a
third party from attempting to gain control of the Company without the approval
of our Board. The existence of the ownership limit thus makes it less likely
that a change in control, even if beneficial to stockholders, could be effected
without the approval of our Board.
50
<PAGE> 54
Subject to certain exceptions enumerated in the Articles of
Incorporation, any shares acquired or held by a stockholder in excess of 9.9% of
the total outstanding number of shares of such class shall be converted into
shares of Excess Stock and transferred automatically and by operation of law to
a charitable trust for the benefit of a charitable beneficiary. The trustee
shall be entitled to receive all dividends on and exercise all voting rights of
the shares of Excess Stock. The record owner shall have no right or interest in
such shares, except the right to receive from the trustee, following the sale or
other disposition of such shares of Excess Stock, the lesser of: (i) the amount
the record owner paid for the shares of Excess Stock (or the market value of the
shares of Excess Stock, determined in accordance with our Articles of
Incorporation, if the record owner received them by gift, bequest or otherwise
without payment) and (ii) the amount received by the trustee from a sale of such
shares of Excess Stock. Accordingly, the record owner of any shares of Excess
Stock may suffer a financial loss if the price at which such Excess Shares are
sold by the trustee is less than what the record owner paid for them.
STOCK EXCHANGE LISTING
We intend to apply to list our common stock for trading on the New York
Stock Exchange.
There is currently no trading market for our shares. Prices at which our
shares will trade after the spin-off cannot be predicted. Until our shares are
fully distributed and an orderly market develops, the prices at which trading in
our shares occurs may fluctuate significantly. The prices at which our stock
trades will be determined by the marketplace and may be influenced by many
factors, including, among other things, the depth and liquidity of the market
for our stock, investor perception of the Company and our business, our dividend
policy, interest rates, and general economic and market conditions.
SHARES AVAILABLE FOR RESALE
Company shares distributed to you in the spin-off may be traded freely
and without restriction if you are not deemed to be an "affiliate" of the
Company under the rules of the SEC. Persons who may be deemed to be affiliates
of the Company after the spin-off include individuals or entities that control,
are controlled by or are under common control with the Company, and may include
certain officers and directors of the Company as well as certain principal
stockholders of the Company. Persons who are affiliates of the Company will be
permitted to sell their Company shares only pursuant to an effective
registration statement or an exemption from the registration requirements of the
securities laws.
ADDITIONAL CORPORATE GOVERNANCE AND TAKEOVER-RELATED MATTERS
The Articles of Incorporation and Bylaws provide for the following:
Actions of Stockholders. Subject to certain exceptions for holders of
Class B shares and Class C shares, our Articles of Incorporation do not permit
actions to be taken by written consent. Stockholder actions may only be taken at
annual or special meetings of the stockholders called in accordance with our
Articles of Incorporation and Bylaws. Special meetings of stockholders may only
be called by (i) the vote of a majority of directors then in office, (ii) by the
Chairman of the Board, if one is elected, or by the Chief Executive Officer or,
if none, the President and (iii) by the Secretary of the Company upon the
written request of the holders of a majority of all shares entitled to vote at
such meeting. Only business that is specified in the notice of the annual or
special meeting or properly brought before the meeting may be discussed at any
meeting. The first annual meeting of our stockholders will be held in 1999, on a
date and at a time designated by the Board.
Board of Directors. Our business and affairs are managed under the
direction of our Board, which initially shall consist of nine members. The
holders of Class A shares will be entitled to elect five directors, the holders
of Class B shares will be entitled to elect two directors and the holders of
Class C shares will be entitled to elect two directors. After September 30,
2003, or prior to such date upon the occurrence of certain events, the size of
the Board may be fixed by a resolution adopted by the Board.
51
<PAGE> 55
Class A directors are elected by the holders of the outstanding Class A
shares. Class A directors are classified into three classes, as nearly equal in
number as possible, designated Class A-I, Class A-II and Class A-III. The term
of the director(s) first appointed to Class A-I will expire at the annual
meeting of stockholders to be held in 1999. The term of the director(s) first
appointed to Class A-II will expire at the annual meeting of stockholders to be
held in 2000. The term of the director(s) first appointed to Class A-III will
expire at the annual meeting of stockholders to be held in 2001. Class A
directors are elected for three-year terms by a plurality of votes cast by
holders of Class A shares at each annual meeting.
The Class B directors will be elected by the holders of Class B shares
(Marriott) within ten days after the initial issuance of Class B shares. The
term for the initial Class B directors will expire at the annual meeting of
stockholders to be held in 2001. Thereafter, the Class B directors will serve
one-year terms expiring at each subsequent annual meeting of stockholders. Class
B directors are elected by a plurality of all votes cast by holders of Class B
shares at such annual meeting or by unanimous written consent. If each of the
Class B shares automatically convert into Class A shares, which will happen upon
the occurrence of certain events, the Class B directors then in office will be
removed, the number of Class A directors will automatically be increased by two
and the resulting vacancies will be filled by either the remaining directors or
the holders of Class A shares.
The Class C directors will be elected by the holders of Class C shares
(the Patriot Companies) within ten days after the initial issuance of Class C
shares. The term for the initial Class C directors will expire at the annual
meeting of stockholders to be held in 2001. Thereafter, the Class C directors
will serve one-year terms expiring at each subsequent annual meeting of
stockholders. Class C directors are elected by a plurality of all votes cast by
holders of Class C shares at such annual meeting or by unanimous written
consent. If each of the Class C shares automatically convert into Class A
shares, which will happen upon the occurrence of certain events, the Class C
directors then in office will be removed, the number of Class A directors will
automatically be increased by two and the resulting vacancies will be filled by
either the remaining directors or the holders of Class A shares.
The Bylaws provide that directors may only be nominated by the Board or
by any stockholder who has delivered notice of his or her nominees not less than
75 days nor more than 120 days prior to any annual meeting. The stockholder's
notice must contain certain information concerning the stockholder and the
stockholder's nominees, including their names and addresses, proof that the
stockholder is a stockholder of record and plans to appear in person at the
annual meeting, the class and number of shares of Company stock owned by such
stockholder and the stockholder's nominees, any agreements between the relevant
parties pursuant to which the nomination is to be made and the signed consent of
each nominee to serve as a director of the Company, if elected. The presiding
officer of the annual meeting may refuse to acknowledge the nomination of any
person not made in compliance with these requirements or the requirements of the
securities laws.
Any vacancy that occurs on the Board will be filled by first giving
effect to the respective rights of holders of Class B shares and Class C shares
to replace Class B directors and Class C directors. Otherwise a majority of the
votes cast by the holders of Class A shares will fill vacancies due to removal
for cause and the majority vote of the remaining directors will generally fill
vacancies which occur for any other reason.
Any director may be removed from office for cause by the affirmative
vote of the holders of at least 75% of the shares then entitled to vote at a
meeting of stockholders called for that purpose. Additionally, any Class B
director or Class C director may be removed from office with or without cause by
the affirmative vote of a majority of the holders of Class B shares or the
holders of Class C shares, respectively, at a meeting of such stockholders
called for the purpose. Class B and Class C directors may also be removed by
unanimous written consent of their respective class of stockholders.
Indemnification of Officers and Directors. We have agreed to indemnify
our officers and directors to the maximum extent authorized or permitted under
applicable law. Maryland's corporation law generally permits the liability of
directors and officers to a corporation for monetary damages to be limited,
unless it is proven that (i)(a) the director or officer actually received an
improper personal benefit in money, property or services,
52
<PAGE> 56
(b) the director or officer acted in bad faith, or (c) the director's or
officer's act or omission was the result of active and deliberate dishonesty,
and (ii) the director's or officer's act or omission was material to the matter
giving rise to the proceeding. However, in the case of a suit by or in the right
of the Company, a director or officer may not be indemnified in respect of any
proceeding in which he shall have been adjudged liable to the Company, unless
and only to the extent that a court of appropriate jurisdiction determines that
such person is fairly and reasonably entitled to indemnity for such expenses as
such court may deem proper. Any amendment or repeal of our Articles of
Incorporation may not adversely affect the rights of any person entitled to
indemnification for any event occurring prior to such amendment or repeal.
Amendment of the Bylaws. Except as provided by law, the Board has the
exclusive power to alter or repeal the Bylaws by the affirmative vote of a
majority of the directors then in office. In certain limited circumstances, as
more fully described in the Bylaws, a bylaw may only be amended by (i) the
affirmative vote of a majority of the directors than in office and each of the
Class B and Class C directors or (ii) by the holders of a majority of the
outstanding shares entitled to vote on the matter.
SHAREHOLDER RIGHTS PLAN
We intend to adopt a shareholder rights plan. In connection with the
adoption of the rights plan, we will declare a dividend distribution of one
preferred stock purchase right (a "Right") for each outstanding Company share to
stockholders of record as of a specified date. Each Right will entitle its
holder to purchase from the Company a unit consisting of a specified number of
shares of Preferred Stock of the Company at a specified cash exercise price per
unit, subject to adjustment.
Initially, the Rights will not be exercisable and will attach to and
trade with all Company shares outstanding as of, or issued subsequent to, the
record date. The Rights will separate from the Company shares and will become
exercisable upon the earlier of (i) the close of business on the tenth calendar
day following the first public announcement that a person or group of affiliated
or associated persons has acquired beneficial ownership of 10% or more of the
outstanding Company shares (an "Acquiring Person"), or (ii) the close of
business on the tenth business day following the commencement of a tender offer
or exchange offer that would result upon its consummation in a person or group
becoming the beneficial owner of 10% or more of the outstanding Company shares.
In the case of certain stockholders of the Company who beneficially own
10% or more of the outstanding Company shares as of a specified date, (such
stockholders are referred to in the rights agreement as "grandfathered
persons"), the Rights generally will be distributed only if any such stockholder
acquires or proposes to acquire additional Company shares. In addition, a
"grandfathered person" generally will become an Acquiring Person only if such
person acquires additional Company shares.
The shareholder rights agreement will effectively prevent any person or
group from acquiring more than 10% of our shares without our Board's approval.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 in
connection with the spin-off. As permitted by SEC rules, this Information
Statement/Prospectus does not contain all of the information contained in the
registration statement or in the exhibits to the registration statement. For
further information you may read and copy documents at the public reference room
of the SEC at 450 5th Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC at 7 World Trade Center, Suite 1300, New York, New York 10048
and at Citicorp Center, Suite 1400 and 500 West Madison Street, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. The SEC charges a fee for copies. Copies of this
material should also be available through the Internet at the SEC EDGAR Archive,
the address
53
<PAGE> 57
of which is http://www.sec.gov. In addition, our filings may be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
Following the spin-off, we will be required to file annual, quarterly
and other reports with the SEC. We will also be subject to the proxy rules and,
accordingly, will furnish audited financial statements to you in connection with
our annual meetings of stockholders.
No person is authorized by Patriot or the Company to give any
information or to make any representations other than those contained in this
Information Statement/Prospectus, and, if given or made, you should not rely
upon such information.
54
<PAGE> 58
INTERSTATE HOTELS MANAGEMENT, INC.
INDEX TO COMBINED FINANCIAL INFORMATION
-------
Page
Report of Independent Accountants F-2
Combined Balance Sheets as of December 31, 1996, 1997
and June 30, 1998 (unaudited) F-3
Combined Statements of Operations and Owners' Equity for
the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1997 and 1998 (unaudited) F-4
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1997 and 1998 (unaudited) F-5
Notes to Combined Financial Statements F-6-18
F-1
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Patriot American Hospitality, Inc.:
We have audited the accompanying combined balance sheets of Interstate Hotels
Management, Inc. (the Company), comprised of businesses of Interstate Hotels
Company, which was acquired by Patriot American Hospitality, Inc., as described
in Note 1 of the combined financial statements, as of December 31, 1996 and
1997, 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, 1997.
These combined financial statements are the responsibility of the Company'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 1, the Company was not a separate legal entity during the
periods presented. The accompanying combined financial statements have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of the combined financial statements of Interstate Hotels Company
or its affiliates.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
as of December 31, 1996 and 1997, and the combined results of its operations,
owners' equity and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania
October 29, 1998
F-2
<PAGE> 60
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED BALANCE SHEETS
(In thousands)
-------
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1996 1997 1998
----------- ---------- -----------
(unaudited)
(Note 14)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,969 $ 2,331 $ 4,261
Accounts receivable, net 7,526 15,957 18,115
Deferred income taxes 1,986 1,869 2,551
Prepaid expenses and other assets 3,346 2,111 3,552
Related party receivables - management contracts 1,125 1,260 1,522
Related party receivables - Patriot - - 22,446
---------- ---------- -----------
Total current assets 24,952 23,528 52,447
Restricted cash 2,105 2,324 2,360
Property and equipment, net 2,042 3,589 3,592
Officers and employees notes receivable 4,603 12,157 2,205
Affiliate receivables 1,040 4,933 2,844
Intangible and other assets 49,802 49,325 110,108
---------- ---------- -----------
Total assets $ 84,544 $ 95,856 $ 173,556
========== ========== ===========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable - trade 7,354 3,473 2,370
Accounts payable - health trust 2,021 1,382 3,884
Accounts payable - related parties - 9,183 8,355
Accrued payroll and related benefits 7,950 9,586 5,187
Accrued rent 853 5,875 11,541
Accrued merger costs - - 22,446
Other accrued liabilities 3,713 6,502 10,531
Current portion of long-term debt 171 180 190
---------- ---------- -----------
Total current liabilities 22,062 36,181 64,504
Long-term debt 370 190 -
Deferred income taxes 252 237 17,962
---------- ---------- -----------
Total liabilities 22,684 36,608 82,466
---------- ---------- -----------
Commitments and contingencies - - -
Owners' equity 61,860 59,248 91,090
---------- ---------- -----------
Total liabilities and owners' equity $ 84,544 $ 95,856 $ 173,556
========== ========== ===========
</TABLE>
The accompanying notes are an integral
part of the combined financial statements.
F-3
<PAGE> 61
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
(In thousands)
-------
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ---------- ------------ ------------ ------------
(unaudited)
(Note 14)
<S> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms $ - $ 9,258 $ 158,342 $ 61,916 $ 87,985
Other departmental - 721 9,512 4,052 5,305
Net management fees 27,022 33,023 37,828 18,078 20,783
Other fees (Note 11) 17,810 20,464 24,122 11,798 12,671
---------- ---------- ----------- ----------- -----------
44,832 63,466 229,804 95,844 126,744
---------- ---------- ----------- ----------- -----------
Lodging expenses:
Rooms - 2,334 36,918 14,028 20,244
Other departmental - 591 5,487 2,389 3,170
Property costs - 3,201 43,225 17,316 23,435
General and administrative 9,798 10,327 13,195 5,681 6,781
Payroll and related benefits 15,469 17,666 21,892 10,258 12,394
Non-cash compensation - 11,896 - - -
Lease expense - 3,476 73,283 28,499 41,140
Depreciation and amortization 4,166 4,358 4,820 2,365 4,019
---------- ---------- ----------- ----------- -----------
29,433 53,849 198,820 80,536 111,183
---------- ---------- ----------- ----------- -----------
Operating income 15,399 9,617 30,984 15,308 15,561
Other income (expense):
Interest, net 204 523 435 48 226
Other, net 346 - 73 9 (9)
---------- ---------- ----------- ----------- -----------
Income before income tax expense 15,949 10,140 31,492 15,365 15,778
Income tax expense - 4,056 12,597 6,146 6,311
---------- ---------- ----------- ----------- -----------
Net income $ 15,949 $ 6,084 $ 18,895 $ 9,219 $ 9,467
========== ========== =========== =========== ===========
Owners' equity:
Beginning of period 23,287 23,470 61,860 61,860 59,248
Net income 15,949 6,084 18,895 9,219 9,467
Net capital distributions (15,766) (15,111) (21,507) (12,650) (27,466)
Change in basis (Note 14) - - - - 49,841
Acquisition of hotel leases for stock - 47,417 - - -
---------- ---------- ----------- ----------- -----------
End of period $ 23,470 $ 61,860 $ 59,248 $ 58,429 $ 91,090
========== ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the combined financial statements.
F-4
<PAGE> 62
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
-------
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- --------- ---------
(unaudited)
(Note 14)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,949 $ 6,084 $ 18,895 $ 9,219 $ 9,467
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,166 4,358 4,820 2,365 4,019
Deferred income taxes - (1,734) 102 (811) (850)
Cash (used) provided by assets and liabilities:
Accounts receivable, net (2,085) 2,835 (8,431) (10,884) (2,158)
Prepaid expenses and other assets (244) (3,047) 1,235 294 (1,441)
Related party receivables (161) (964) (135) 17 (262)
Accounts payable 4,229 8,683 6,299 (3,072) (3,828)
Accrued liabilities 1,792 415 7,811 13,786 9,695
--------- --------- --------- --------- ---------
Net cash provided by operating
activities 23,646 16,630 30,596 10,914 14,642
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Change in restricted cash (810) (9) (219) (194) (36)
Purchase of property and equipment, net (336) (718) (2,191) (243) (723)
Change in notes receivable, net 151 (3,384) (7,554) (285) 9,952
Change in affiliate receivables 87 (248) (3,893) (1,209) 2,089
Other 276 22 (3,699) (3,797) 3,652
--------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities (632) (4,337) (17,556) (5,728) 14,934
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt - (163) (171) (171) (180)
Net distributions to owners (15,766) (15,111) (21,507) (12,650) (27,466)
--------- ---------- ---------- ---------- ----------
Net cash used in financing activities (15,766) (15,274) (21,678) (12,821) (27,646)
--------- ---------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 7,248 (2,981) (8,638) (7,635) 1,930
Cash and cash equivalents at beginning of
period 6,702 13,950 10,969 10,969 2,331
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 13,950 $ 10,969 $ 2,331 $ 3,334 $ 4,261
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral
part of the combined financial statements.
F-5
<PAGE> 63
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(In thousands)
-------
1. Organization and Basis of Presentation:
Interstate Hotels Company and Subsidiaries (Interstate) owned 23 hotels
and had a controlling interest in 17 other hotels (collectively, the
Owned Hotels), held long-term leasehold interests in 89 hotels (the
Leased Hotels), and provided management and other related services to
94 hotels (the Managed Hotels) owned by third parties as of December
31, 1997. The Owned Hotels, the Leased Hotels and the Managed Hotels
(collectively, the Hotels) were located in 35 states, the District of
Columbia, Canada, the Caribbean, and Russia, with the largest
concentration in the states of Florida and California. The Hotels were
operated under a number of franchise agreements, with the largest
franchisors being Marriott International, Inc. (Marriott) and Promus
Hotels, Inc. The Hotels were all subject to management agreements with
Interstate Hotels Corporation (IHC), Crossroads Hospitality Company,
L.L.C. (Crossroads) or Colony Hotels and Resorts Company (Colony), all
wholly-owned subsidiaries of Interstate.
Interstate was merged into Patriot American Hospitality, Inc. (Patriot)
on June 2, 1998. Prior to the consummation of the merger of Interstate
into Patriot, Marriott filed a lawsuit to stop the closing of the
transaction as a result of a dispute over certain franchise agreements
Marriott had with Interstate. On May 27, 1998, and pursuant to a
settlement agreement with Marriott, Patriot and Interstate announced a
plan to transfer certain operations, principally the third-party hotel
management business and the Leased Hotels, and certain assets and
liabilities of Interstate to a new entity, Interstate Hotels
Management, Inc. (the Company). The Company is expected to be spun-off
from Patriot (the Spin-off) prior to January 31, 1999, and will result
in the Company operating as an independent entity with publicly traded
common stock. Ninety-two percent of the shares of the Company will be
distributed to Patriot's shareholders. Patriot and Marriott will each
hold a 4% ownership interest in the Company's common stock after the
Spin-off.
The Company will have two principal subsidiaries. One subsidiary will
assume management of the Managed Hotels and will hold the leasehold
interests of the Leased Hotels as well as provide other services
previously provided by Interstate, primarily centralized purchasing and
insurance services. In addition, the subsidiary will provide management
services to the Leased Hotels. The Company will own a 47.5% managing
interest in this subsidiary and Patriot will retain a 52.5%
non-controlling ownership interest. The other subsidiary will enter
into management contracts to manage ten Owned Hotels with the tenant of
such Owned Hotels, Wyndham International Operating Partnership, L.P.,
and will then subcontract the management to Marriott. The Company will
retain a controlling 99.99% interest in this subsidiary and Marriott
will own a .01% interest in this subsidiary. The remaining Owned Hotels
will be managed by Wyndham International, Inc.
F-6
<PAGE> 64
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
1. Organization and Basis of Presentation, continued:
The Company was not a separate legal entity during the periods
presented in these financial statements. The accompanying combined
financial statements of the Company have been carved out of Interstate
and Patriot, and include only those historical assets, liabilities,
revenues and expenses directly attributable to the third-party hotel
management business, the Leased Hotels and other services described in
the paragraph above which will succeed to the Company. These activities
were conducted primarily by IHC, Crossroads and Colony. These combined
financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange
Commission, and as if the Company had operated as a free-standing
entity for all periods presented. All investments in, associated debt,
and results of operations of the Owned Hotels, as well as certain other
operating subsidiaries (see Note 13) that will not be included in the
continuing business of the Company, have been carved out of the
historical combined financial statements.
2. Summary of Significant Accounting Policies:
Principles of Combination and Consolidation:
The combined financial statements include the accounts of the
entities described in Note 1. All significant intercompany
transactions and balances have been eliminated.
Cash and Cash Equivalents:
All unrestricted, highly liquid investments purchased with a
remaining maturity of three months or less are considered to be
cash equivalents. The Company maintains cash and cash equivalents
with various financial institutions in excess of the amount insured
by the Federal Deposit Insurance Corporation. Management believes
the credit risk related to these cash and cash equivalents is
minimal. Beginning in 1997, certain cash of the Company was swept
from individual accounts and combined with Interstate's cash in a
central account.
Amounts owed to related entities to meet short-term cash
requirements in connection with Interstate's centralized cash
account are recorded as Accounts payable - related parties.
Restricted Cash:
Capital restricted under applicable government insurance
regulations is included in restricted cash, and represents 20% of
the annual insurance premiums written by the Company (See Note 11).
F-7
<PAGE> 65
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
2. Summary of Significant Accounting Policies, continued:
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 repairs and maintenance are expensed as incurred.
Expenditures for major renewals and betterments that significantly
extend the useful life of existing property and equipment are
capitalized and depreciated. The cost and the 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.
Officers and Employees Notes Receivable:
Officers notes receivable consist principally of the advances on
expected severance payments and notes from two executives. The
notes from the two executives bear interest, are fully recourse to
the borrowers and are forgiven and expensed ratably, if certain
conditions are met, until the notes mature in June 2006. The
Company also makes loans from time to time to other employees,
which are payable upon demand and generally do not bear interest
until such demand is made. Certain notes may be forgiven and
expensed provided certain conditions are satisfied. Officers and
employees notes receivable also include a note with a former
officer and significant shareholder of Interstate (see Note 13).
Intangible and Other Assets:
Intangible and other assets consist of the amounts paid to obtain
management and lease contracts including the allocation of the
Interstate purchase price paid by Patriot (see Note 14). Goodwill
is also included in intangible and other assets, and represents the
excess of the purchase price over the book value of the net assets
of businesses acquired. Intangibles and other assets are amortized
on the straight-line method over the life of the underlying
contracts or estimated useful lives.
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of:
The carrying values of long-lived assets, which include property
and equipment and all intangible assets, are evaluated periodically
in relation to the operating performance and future undiscounted
cash flows of the underlying assets. Adjustments are made if the
sum of expected future net cash flows is less than book value. No
adjustments to the carrying values of long-lived assets have been
recorded to date.
Deferred Income Taxes:
Deferred income taxes are recorded in the combined financial
statements of the Company using the liability method. Under this
method, deferred tax assets and liabilities 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.
F-8
<PAGE> 66
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
2. Summary of Significant Accounting Policies, continued:
Income Tax Status:
Prior to 1996, substantially all the entities that comprised the
Company were organized as S corporations, partnerships or limited
liability companies. Similar elections were made, where possible,
for state income tax purposes. Accordingly, the majority of all
federal and state income tax liabilities and benefits were borne by
the respective stockholders, partners or members, and no provision
for income taxes has been recorded for the period prior to 1996 in
the accompanying combined financial statements.
During 1996, the entities that comprised the Company were included
in the consolidated federal income tax return of Interstate and all
tax liabilities were paid by Interstate. The income tax provision
for each period presented in these combined financial statements
has been calculated as if the Company had prepared and filed a
separate income tax return for those periods. Accordingly, the
effective tax rate for the Company in future years could vary from
historical effective rates depending on the Company's future legal
and tax elections. The income tax liability for all current income
taxes for purposes of these combined financial statements have been
settled with Interstate through owners' equity.
Insurance:
Insurance premiums are recorded as income on a pro-rata basis over
the life of the related policies, 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 claims settlement expense at each
balance sheet date. Such losses are based on management's 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.
Owners' Equity:
Owners' equity represents the net equity of Interstate in the
Company. Net contributions/distributions from owners represent
non-operating transfers to and from Interstate, including transfers
to and from the central cash account.
Revenue Recognition:
The Leased Hotels recognize revenue from their rooms, food and
beverage and other departments as earned on the close of each
business day. Management and other related fees are recognized when
earned.
Reimbursable Expenses:
The Company is reimbursed for costs associated with providing
certain insurance and risk management services, purchasing and
project management services, MIS and legal support, centralized
accounting, training and relocation programs to the Managed and
Leased Hotels. These revenues are included in other fees and the
corresponding costs are included in general and administrative and
payroll and related benefits in the combined statements of
operations and owners' equity.
F-9
<PAGE> 67
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
2. Summary of Significant Accounting Policies, continued:
Financial Instruments:
As a policy, the Company does not engage in speculative or
leveraged transactions, nor does the Company hold or issue
financial instruments for trading purposes.
Earnings Per Share:
Because the accompanying combined financial statements have been
carved out of Interstate and certain of its subsidiaries, some of
which are/were corporations and some of which are/were
partnerships, the Company believes that the earnings per share
calculations required to be presented are not meaningful for
periods presented herein and, therefore, have not been provided.
New Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." The new standard requires that all public business
enterprises report information about operating segments, as well
as specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information
to be disclosed. The new standard, which is effective for the
fiscal year ending December 31, 1998, will require additional
disclosure by the Company but will not have a financial impact on
the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
new standard requires additional information to facilitate
financial analysis and eliminates certain disclosures which are no
longer useful. To the extent practicable, the standard also
standardizes disclosures for retiree benefits. The new standard,
which is effective for the fiscal year ending December 31, 1998,
will require additional disclosure by the Company but will not
have a financial impact on the Company.
Use of Estimates:
The preparation of the combined 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 the disclosure of contingent
assets and liabilities at the date of the combined financial
statements. They may also affect the reported amounts of revenues
and expenses during the reporting periods. Actual results could
differ from those estimates.
F-10
<PAGE> 68
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
3. Property and Equipment:
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Leasehold improvements (10 years) $ 699 $ 1,345
Furniture, fixtures and equipment (5 to 20 years) 4,379 5,924
--------- ---------
5,078 7,269
Less accumulated depreciation (3,036) (3,680)
--------- ---------
$ 2,042 $ 3,589
========= =========
</TABLE>
Depreciation expense was approximately $437, $500 and $644 for the
years ended December 31, 1995, 1996 and 1997, respectively.
4. Intangible and Other Assets:
Intangible and other assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Management contracts (3 to 10 years) $ 8,090 $ 5,795
Lease contracts (10 to 15 years) 22,600 24,950
Goodwill (25 years) 21,691 21,725
Other 1,279 1,030
--------- ---------
53,660 53,500
Less accumulated amortization (3,858) (4,175)
--------- ---------
$ 49,802 $ 49,325
========= =========
</TABLE>
F-11
<PAGE> 69
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
5. Long-Term Debt:
On May 31, 1994, Colony entered into a $1,000 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 beginning January 1, 1995.
At December 31, 1996 and 1997, the present value of the note was $541
and $370, respectively.
6. Commitments and Contingencies:
The Company provides financial guarantees to the owners of the Leased
Hotels for certain minimum operating performance levels, which are
increased annually by the consumer price index. These leases have
initial terms of 10 to 15 years expiring through 2012, and provide for
fixed base rate and variable components based on a percentage of hotel
revenues. Presently, management does not expect to incur any claims
against these lease guarantees. Future minimum lease payments are
computed based on the base rent of each lease, as defined, and are as
follows:
<TABLE>
<S> <C>
1998 $ 52,682
1999 52,682
2000 52,682
2001 52,682
2002 52,682
Thereafter 423,421
---------
$ 686,831
=========
</TABLE>
The Company accounts for the leases of office space (the office leases
expire at varying times through 2005) and certain office equipment (the
equipment leases expire at varying times through 2003) as operating
leases. Total rent expense amounted to approximately $816, $1,020 and
$1,571 for the years ended December 31, 1995, 1996 and 1997,
respectively. The following is a schedule of future minimum lease
payments under these leases:
<TABLE>
<S> <C>
1998 $ 2,797
1999 2,596
2000 2,102
2001 1,657
2002 1,255
Thereafter 1,049
---------
$ 11,456
=========
</TABLE>
In the ordinary course of business, various lawsuits, claims and
proceedings have been or may be instituted or asserted against
Interstate. The Company will be held liable for certain of the
lawsuits, claims and proceedings instituted or asserted against
Interstate to the extent that the claim relates to operations of the
Company. Based on currently available facts, management believes that
the disposition of matters that are pending or asserted against the
Company will not have a material adverse effect on the combined
financial position, results of operations or liquidity of the Company.
F-12
<PAGE> 70
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
6. Commitments and Contingencies, continued:
Risk Related to Dispute Over Leased Hotel Portfolio:
The Company is engaged in a dispute with Equity Inns Partnership, L.P.
(Equity Inns) regarding the status of leases for 80 hotels the Company
leases from Equity Inns or its affiliates. The principal issue in the
dispute is whether the Company or Equity Inns are responsible for
funding product improvement plans (PIPs) which were issued by certain
franchisors under whose brand names the Company operates the Leased
Hotels. The PIPs were issued at the time of Patriot's application for
new franchise agreements in connection with Patriot's merger with IHC.
The total amount required to be funded under the PIPs is approximately
$6.0 million.
Generally, the leases require Equity Inns to satisfy any capital
obligations relating to the Leased Hotels, including any PIPs issued
from time to time by franchisors. In this case, however, Equity Inns is
claiming that certain franchisors issued new PIPs as a result of the
new franchise applications Patriot has been required to submit as a
result of its merger with Interstate and, therefore, that Patriot
should be responsible for paying the costs necessary to satisfy them.
In addition, Equity Inns claims that it had the right to consent in
advance to Patriot's application for new franchise agreements and has
demanded that the Company pay the costs necessary to satisfy the PIPs
as a condition to continuation of the leases. Management is vigorously
disputing Equity Inns' claims, but they cannot be sure that they will
prevail. The Equity Inns leaseholds represent a significant portion of
the Company's current business and if management is not able to resolve
this dispute with Equity Inn and the leases are terminated, the
Company's results will be negatively affected.
7. Net Management Fees:
The Company's management agreements have initial terms that range from
one month to 22 years, expire through the year 2019 and are generally
cancelable under certain conditions, including the sale of the hotel.
In addition, certain agreements are renewable for successive terms of
one to ten years.
The management agreements specify the base management fees to be
earned, which are generally based on percentages of gross revenues. In
certain cases, incentive management fees are earned based on the
hotels' profitability as defined by the management agreements. The net
management fees earned for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Base management fees $ 22,792 $ 27,802 $ 31,649
Incentive management fees 4,753 5,766 6,409
-------- -------- --------
27,545 33,568 38,058
Less:
Administrative fees 439 545 230
Write-off of uncollectible base management fees 84 - -
-------- -------- --------
$ 27,022 $ 33,023 $ 37,828
======== ======== ========
</TABLE>
F-13
<PAGE> 71
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
8. Non-Cash Compensation:
Prior to an initial public offering of Interstate's common stock in
1996, Interstate issued 785,533 shares of common stock to certain
employees in consideration for the cancellation of certain stock
options issued by IHC in 1995. The shares were valued based on the
estimated value of the common stock at the time the shares were issued.
As a result of the cancellation of the stock options issued by IHC in
1995 and the issuance of the common stock at no cost to the recipients,
the Company recorded non-cash compensation expense of $11,896.
9. Income Taxes:
Income tax expense consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current:
Federal $ 5,066 $ 10,933
State 724 1,562
--------- ---------
5,790 12,495
--------- ---------
Deferred:
Federal (1,517) 89
State (217) 13
--------- ---------
(1,734) 102
--------- ---------
Income tax expense $ 4,056 $ 12,597
========= =========
</TABLE>
The provision for income tax was recorded based on the federal
statutory rate of 35% plus the state tax rate, net of federal income
tax benefit of 5%. These rates approximate Interstate's historical
rates.
The components of net deferred tax assets and liabilities consisted
of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
----------------------- ------------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Depreciation and amortization $ - $ 252 $ - $ 237
Payroll and related benefits 84 - 121 -
Self-insured health trust 976 - 36 -
Retirement plan 681 - 1,356 -
Reserves and other 245 - 356 -
-------- --------- --------- -----------
$ 1,986 $ 252 $ 1,869 $ 237
========= ========== ========= ===========
</TABLE>
As discussed in Note 2, prior to 1996, the Company was organized as S
corporations, partnerships or limited liability companies and,
therefore, the majority of all federal and state income tax liabilities
and benefits were borne by the respective stockholders, partners or
members. Pro forma income tax expense, assuming the Company was a C
corporation for 1995, based on a combined federal and state effective
income tax rate of 40%, would be $6,380.
F-14
<PAGE> 72
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
10. Supplemental Cash Flow Information:
Cash paid for interest amounted to $436, $248, and $29 for the years
ended December 31, 1995, 1996, and 1997, respectively. Non-cash,
equity-related compensation of $11,896 was excluded from the combined
statement of cash flows in 1996. Additionally, stock valued at $47,417
was used to purchase certain hotel leases and was also excluded from
the combined statement of cash flows in 1996.
11. Insurance:
The Company provides certain insurance coverage to hotels under the
terms of the various management and lease contracts. This insurance is
generally arranged through third-party carriers. Northridge Insurance
Company (Northridge), a subsidiary of the Company, reinsures a portion
of the coverage from these third-party primary insurers. 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, garagekeeper's legal liability, replacement cost automobile
losses and real and personal property insurance.
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. The Company has a
financial indemnity liability policy with Northridge which indemnifies
the Company for certain obligations for the deficiency in the related
Health Trust. 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 and Leased Hotels, are
recorded as direct premiums written. There was a deficiency of $1,292
in the related Health Trust as of December 31, 1997, which was recorded
as a liability of the Company on the accompanying combined balance
sheet. There was no deficiency in the related Health Trust as of
December 31, 1996.
All accounts of Northridge are classified with assets and liabilities
of a similar nature in the combined balance sheets. The combined
statements of operations and owners' equity include the insurance
income earned and related insurance expenses incurred. The insurance
income earned has been included in other fees in the consolidated
statements of operations and owners' equity and is comprised of the
following for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
Reinsurance premiums written $ 4,981 $ 5,245 $ 5,811
Direct premiums written 2,477 2,032 2,221
Reinsurance premiums ceded (422) (414) (544)
Change in unearned premiums reserve (62) 158 (55)
Loss sharing premiums 698 1,101 1,687
--------- -------- --------
Insurance income $ 7,672 $ 8,122 $ 9,120
========= ======== ========
</TABLE>
F-15
<PAGE> 73
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
12. Financial Instruments:
The carrying values and fair values of the Company's financial
instruments consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------------------------ -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 10,969 $ 10,969 2,331 $ 2,331
Restricted cash 2,105 2,105 2,324 2,324
Officers and employees
notes receivable 4,603 4,603 12,157 12,157
Long-term debt, including current portion 541 541 370 370
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents and restricted cash: The carrying amounts
approximate fair value because of the short maturity of these
investments.
Officers and employees notes receivable: The fair value of officers and
employees notes receivable is based on anticipated cash flows and
approximates carrying value.
Long-term debt: The fair value of long-term debt is based on interest
rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities.
13. Related Party Transactions:
Transactions with Significant Related Parties:
Included in net management fees are management fees earned pursuant
to management agreements between the Company and the affiliates of
Interstate that owned the Owned Hotels. In addition, certain of the
Owned Hotels were subject to management agreements between the
Company and the third-party owners of these hotels prior to their
acquisition by Interstate. Included in net management fee revenue
in the accompanying combined statements of operations are fees
related to the Owned Hotels (including periods prior to their
acquisition by Interstate, if applicable) amounting to $9,079,
$11,726, and $15,816 for the years ended December 31, 1995, 1996
and 1997, respectively. Receivables from management fee revenues
from the Owned Hotels comprise the Related Party Receivables -
management contracts in the accompanying combined balance sheets
and amount to $1,125, $1,260, and $1,522 at December 31, 1995,
1996, and 1997, respectively.
Revenues from other fees include primarily insurance revenues and
purchasing fees. Insurance revenues, which are described in Note
11, from Owned Hotels amounted to $397 and $2,842 for the years
ended December 31, 1996 and 1997, respectively. Purchasing fees
from Owned Hotels amounted to $338 and $1,574 for the years ended
December 31, 1996 and 1997, respectively.
F-16
<PAGE> 74
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
13. Related Party Transactions, continued:
Transactions with Significant Related Parties, continued:
Included in accounts receivable is approximately $1,028 and $302 at
December 31, 1996 and 1997, respectively, due from hotels that
Milton Fine, former Chairman of the Interstate Board of Directors
and significant shareholder of Interstate, has an ownership
interest. The Company has waived the management fees for one of
these hotels through November 1998.
In October 1997, the Company entered into a note receivable with
Mr. Fine that permits up to $1,000 of borrowings. The note
receivable bears interest at 6.3%. Semi-annual interest-only
payments are due until it matures in December 2002, at which time
all unpaid interest and principal is due. As of December 31, 1997,
there was $405 outstanding on the note receivable.
Affiliate Receivables:
Affiliate receivables consist principally of short-term interest
bearing loans to third-party owners. Included in this balance is a
loan to a hotel in which Mr. Fine has a controlling interest. The
recorded balance of this loan was $487 at December 31, 1997.
Concentration of Risk:
The Company manages three hotels located in Russia, one of which
opens in December 1998. As of December 31, 1996 and 1997,
receivables from these hotels amounted to $158 and $4,692,
respectively. The Company currently estimates the receivables as
collectable, however, actual collections could differ from current
estimates.
14. Interim Financial Statements (Unaudited):
The unaudited combined balance sheet as of June 30, 1998, and the
unaudited combined statements of income and owners' equity and cash
flows for the six months ended June 30, 1997 and 1998, 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, in all material respects, of the
results of these interim periods. Operating results for the interim
periods are not necessarily indicative of the results for the entire
year.
In connection with the merger of Interstate into Patriot on June 2,
1998, as discussed in Note 1, Patriot allocated the purchase price to
the estimated fair market value of the assets of the Company. As a
result, on June 2, 1998, the Company recorded an intangible asset
related to management contracts of $67,734 and a deferred tax liability
of $17,893, resulting in a net increase to owners' equity of $49,841.
The intangible asset and related deferred tax liability will amortize
over five years beginning on June 2, 1998. This non-cash investing and
financing transaction was excluded from the combined statement of cash
flows for the period ended June 30, 1998. Amortization for the period
from June 2, 1998 to June 30, 1998 amounted to $1,129.
F-17
<PAGE> 75
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(In thousands)
-------
14. Interim Financial Statements (Unaudited), continued:
The allocation of the purchase price paid by Patriot to the Company is
preliminary and is based on an estimate using facts and circumstances
known at the time and is subject to change in the near term.
Prior to the merger of Interstate into Patriot on June 2, 1998,
merger-related costs were incurred and expensed by Interstate and were
carved out of and not reflected in the accompanying combined statement
of operations for the six-month period ended June 30, 1998. Subsequent
to the merger of Interstate into Patriot, severance payments and other
merger-related costs were incurred by Patriot. These remaining
merger-related costs, amounting to $22,446 at June 30, 1998, have been
accrued by the Company, with an associated receivable due from Patriot
recorded in the same amount. The aforementioned amounts paid and
accrued were capitalized by Patriot as part of the purchase price of
Interstate and, accordingly, no expenses related to these amounts have
been recorded in the accompanying unaudited combined financial
statements for the six-month period ended June 30, 1998.
F-18
<PAGE> 76
<TABLE>
<S> <C>
We have not authorized anyone to give any information or make any
representations in connection with the spin-off. If anyone gives you any such
information or makes any such representations, you should not rely on it or them 9,221,743 Shares
as having been authorized by the Company. The affairs of the Company may change
and you should not assume that the information in this Information
Statement/Prospectus is correct as of any time subsequent to this date. This
Information Statement/Prospectus is not an offer to sell these securities and it Interstate Hotels Management, Inc.
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
----------------
TABLE OF CONTENTS Common Stock
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF AND THE COMPANY.......................1
KEY TERMS OF THE SPIN-OFF......................................................4 --------------------------------
SUMMARY .......................................................................5 Information Statement/Prospectus
SUMMARY FINANCIAL AND OTHER DATA...............................................7 --------------------------------
RISK FACTORS...................................................................9
THE SPIN-OFF..................................................................14
BUSINESS......................................................................17 , 1999
SELECTED FINANCIAL AND OTHER DATA.............................................26
PRO FORMA FINANCIAL DATA......................................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................35
MANAGEMENT....................................................................44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................49
DESCRIPTION OF CAPITAL STOCK..................................................50
WHERE YOU CAN FIND MORE INFORMATION...........................................53
INDEX TO COMBINED FINANCIAL INFORMATION......................................F-1
----------------
Until , 1999, all dealers that effect transactions in these
securities may be required to deliver this Information Statement/Prospectus.
</TABLE>
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
The following table sets forth the estimated expenses payable by the
Company in connection with the spin-off:
NATURE OF EXPENSE AMOUNT
----------------- ------
SEC Registration Fee.......................................... $13,408
New York Stock Exchange Filing Fee............................ *
Accounting Fees and Expenses.................................. *
Legal Fees and Expenses....................................... *
Printing Expenses............................................. *
Blue Sky Qualification Fees and Expenses...................... *
Distribution Agent's Fee...................................... *
Miscellaneous................................................. *
TOTAL.............................................. $ *
- --------------
(1) The amounts set forth above, except for the SEC and New York Stock
Exchange fees, are in each case estimated.
* To be completed by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are indemnified to the maximum
extent authorized or permitted under applicable law. Maryland's corporation law
generally permits the liability of directors and officers to a corporation for
monetary damages to be limited, unless it is proven that (i)(a) the director or
officer actually received an improper personal benefit in money, property or
services, (b) the director or officer acted in bad faith, or (c) the director's
or officer's act or omission was the result of active and deliberate dishonesty,
and (ii) the director's or officer's act or omission was material to the matter
giving rise to the proceeding. However, in the case of a suit by or in the right
of the Company, a director or officer may not be indemnified in respect of any
proceeding in which he shall have been adjudged liable to the Company, unless
and only to the extent a court of appropriate jurisdiction determines that such
person is fairly and reasonably entitled to indemnity for such expenses as such
court may deem proper. Any amendment or repeal of the Company's Articles of
Incorporation may not adversely affect the rights of any person entitled to
indemnification for any event occurring prior to such amendment or repeal.
The Company's Bylaws provide for indemnification by the Company of its
officers and certain non-officer employees under certain circumstances against
expenses (including attorneys' fees, judgments, fines and amounts paid in
settlement) reasonably incurred in connection with the defense or settlement of
any threatened, pending or completed legal proceeding in which any such person
is involved by reason of the fact that such person is or was an officer or
employee of the Company if such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to criminal actions or proceedings, if such person
had no reasonable cause to believe his or her conduct was unlawful.
Patriot has entered into an agreement with W. Thomas Parrington, Jr.
pursuant to which Patriot has agreed to indemnify Mr. Parrington from and
against expenses (including attorneys' fees, judgments, fines and
II-1
<PAGE> 78
amounts paid in settlement) reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding arising
out of this Registration Statement in which Mr. Parrington is involved if Mr.
Parrington acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company, and, with respect to
criminal actions or proceedings, if Mr. Parrington had no reasonable cause to
believe his conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued unregistered securities to a limited number of
persons, as described below. No underwriters or underwriting discounts or
commissions were involved. There was no public offering in any such transaction,
and the Company believes that each transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended, by reason of Section
4(2) thereof, based on the private nature of the transactions and the financial
sophistication of the purchasers, all of whom had access to complete information
concerning the Company and acquired the securities for investment and not with a
view to the distribution thereof.
(1) On June 2, 1998, the Company issued an aggregate of 9,900
shares of the Company's Class B Non-Voting Common Stock to Patriot
American Hospitality, Inc. in exchange for (i) a 35% managing membership
interest in Interstate Hotels, LLC; (ii) Patriot's rights under its
contract with Interstate Hotels, LLC pursuant to which Interstate
Hotels, LLC agreed not to pursue or conduct any third-party hotel
management business other than that in existence on June 2, 1998
(including any renewals or extensions of management contracts in
existence on such date); and (iii) Patriot's rights under its contract
with Interstate Hotels, LLC pursuant to which Interstate Hotels, LLC
agreed that it would cease to manage certain identified hotels upon
consummation of the spin-off.
(2) On June 2, 1998, the Company issued an aggregate of 100
shares of the Company's Class A Voting Common Stock to PAH-Interstate
Holdings, Inc. for an aggregate purchase price of $478,836.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a complete list of Exhibits filed as part
of this Registration Statement.
2.1* Form of Distribution Agreement by and among Patriot American
Hospitality, Inc. and Interstate Hotels Management, Inc.
3.1 Form of Articles of Amendment and Restatement of the Company
3.2 Form of Amended and Restated Bylaws of the Company
3.3* Form of Shareholder Rights Plan of the Company
5.1* Opinion of Goodwin, Procter & Hoar LLP
10.1 Form of Limited Liability Company Agreement of IHC II, LLC
10.2 Form of Amended and Restated Limited Liability Company Agreement of
Interstate Hotels, LLC
10.3 Form of Voting Agreement among the Company and the identified
stockholders of the Company
10.4* Form of Owner Agreement by and between Patriot American Hospitality
Partnership, L.P., Wyndham International Operating Partnership, L.P.,
IHC II, LLC and [Marriott International, Inc./Marriott Hotel Services,
Inc.]
II-2
<PAGE> 79
10.5* Form of Lease Agreement
10.6* Form of Management Agreement by and between Wyndham International
Operating Partnership, L.P. and IHC II, LLC
10.7* Form of Submanagement Agreement by and between [Marriott International,
Inc./Marriott Hotel Services, Inc.] and IHC II, LLC
10.8* Form of Interstate Hotels Management, Inc. Guaranty
21.1* List of Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers, LLC
23.2* Consent of Goodwin, Procter & Hoar LLP (to be included in Exhibit 5.1)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
- ---------------
* To be filed by amendment.
(b) All applicable required schedules are included in the Information
Statement/Prospectus and are therefore omitted from this section.
ITEM 17. UNDERTAKINGS
(a) - (g) Not applicable.
(h) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(i) - (j) Not applicable.
II-3
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh,
Commonwealth of Pennsylvania, on November 10, 1998.
INTERSTATE HOTELS MANAGEMENT, INC.
By: /s/ W. THOMAS PARRINGTON, JR.
-------------------------------------
W. Thomas Parrington, Jr.
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints W. Thomas Parrington, Jr. such person's
true and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or any substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ W. THOMAS PARRINGTON, JR. President and Chief Executive November 10, 1998
- ------------------------------------- Officer (Principal Executive Officer)
W. Thomas Parrington, Jr. and Director
/s/ J. WILLIAM RICHARDSON Chief Financial Officer and November 10, 1998
- ------------------------------------- Executive Vice President,
J. William Richardson Finance and Administration
(Principal Financial Officer
and Principal Accounting Officer)
/s/ THOMAS W. LATTIN
- ------------------------------------- Director November 10, 1998
Thomas W. Lattin
</TABLE>
II-4
<PAGE> 1
EXHIBIT 3.1
FORM OF
ARTICLES OF
AMENDMENT AND RESTATEMENT
OF
INTERSTATE HOTELS MANAGEMENT, INC.
<PAGE> 2
THIS IS TO CERTIFY THAT:
FIRST: Interstate Hotels Management, Inc., a Maryland corporation with
its principal office in the State of Maryland, and its resident agent, as set
forth below in ARTICLES IV and V, respectively, of these Articles of Amendment
and Restatement desires to amend and restate its charter as filed with the State
Department of Assessments and Taxation on ________, 1998, as set forth in these
Articles of Amendment and Restatement.
SECOND: The following provisions are all of the provisions of the
charter currently in effect as hereinafter amended:
ARTICLE I
INCORPORATION
-------------
The undersigned, Michael J. O'Connor, whose post office address is c/o
Goodwin, Procter & Hoar LLP, 53 State Street, Boston, Massachusetts, 02109,
being at least eighteen (18) years of age, does hereby form a corporation under
the Maryland General Corporation Law (the "MGCL").
ARTICLE II
NAME
----
The name of the corporation (the "Corporation") is:
INTERSTATE HOTELS MANAGEMENT, INC.
ARTICLE III
PURPOSES
--------
The Corporation is being formed to operate and manage hotels and to
engage in any lawful act or activity for which a corporation may be organized
under the MGCL. The foregoing purposes shall be in no way limited or restricted
by reference to, or inference from, the terms of any other clause of these
Articles of Incorporation, as amended from time to time, and each shall be
regarded as independent. The foregoing purposes are also to be construed as
powers of the Corporation, and shall be in addition to and not in limitation of
the general powers of corporations under the laws of the State of Maryland.
<PAGE> 3
ARTICLE IV
PRINCIPAL OFFICE ADDRESS
------------------------
The address of the principal office of the Corporation in Maryland is
c/o The Corporation Trust, Inc., 300 East Lombard Street, Suite 1400, Baltimore,
Maryland 21202.
ARTICLE V
THE RESIDENT AGENT
------------------
The resident agent of the Corporation in Maryland is The Corporation
Trust, Inc., whose address is 300 East Lombard Street, Suite 1400, Baltimore,
Maryland 21202.
ARTICLE VI
BOARD OF DIRECTORS
------------------
6.1 General Powers; Action by Committee. The business and affairs of
the Corporation shall be managed under the direction of the Board of Directors
and, except as otherwise expressly provided by law, these Articles or the
bylaws, as amended from time to time (the "Bylaws"), of the Corporation, all of
the powers of the Corporation shall be vested in such Board of Directors. Any
action which the Board of Directors is empowered to take may be taken on behalf
of the Board of Directors by a duly authorized committee thereof except (i) to
the extent limited by Maryland law, these Articles or the Bylaws and (ii) for
any action which requires the affirmative vote or approval of a majority of all
Directors then in office (unless, in such case, these Articles or the Bylaws
specifically provide that a duly authorized committee can take such action on
behalf of the Board of Directors). A majority of the Board of Directors shall
constitute a quorum and, except as otherwise specifically provided in these
Articles, the affirmative vote of a majority of the Directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
6.2 Number. Until the earliest to occur of (i) such time that there are
no shares of Class B Common Stock outstanding, (ii) such time that there are no
shares of Class C Common Stock outstanding and (iii) September 30, 2003, the
number of Directors of the Corporation shall be fixed at nine. After the
earliest to occur of (A) such time that there are no shares of Class B Common
Stock outstanding, (B) such time that there are no shares of Class C Common
Stock outstanding, and (c) September 30, 2003, the number of Directors of the
Corporation shall be fixed from time to time by a resolution duly adopted by the
Board of Directors; provided, however, that the total number of Directors shall
not be increased above nine prior to September 30, 2003 without the consent of
each Class B Director, if any, or Class C Director, if any, then serving on the
Board of Directors; and provided, further, that
2
<PAGE> 4
the total number of Directors shall be not fewer than three unless there are
fewer than three stockholders at the time. No reduction in the number of
Directors shall cause the removal of any Director from office prior to the
expiration of his or her term.
6.3 Initial Board; Term; Election. The initial Directors of the
Corporation (hereinafter referred to, together with their direct and indirect
successors, as the "Class A Directors") shall be _________________________,
__________, ___________, ___________ and __________. The Class A Directors shall
be further classified, with respect to the term for which they severally hold
office, into three classes, as nearly equal in number as possible. The initial
Class A-I Director of the Corporation, who shall serve a term expiring at the
annual meeting of stockholders to be held in 1999, shall be ; the initial Class
A-II Directors of the Corporation, who shall serve terms expiring at the annual
meeting of stockholders to be held in 2000, shall be and ____________; and the
initial Class A-III Directors of the Corporation, who shall serve terms expiring
at the annual meeting of stockholders to be held in 2001, shall be and
_________. At each annual meeting of stockholders, the successor or successors
of the group of Class A Directors whose term expires at that meeting shall be
elected by the vote of holders of a plurality of the shares of Class A Common
Stock present in person or represented by proxy at such meeting and entitled to
vote on the election of Class A Directors, and shall hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of his or their election. Two Directors of the Corporation (hereinafter
referred to, together with their respective direct and indirect successors, as
the "Class B Directors") shall, in accordance with and subject to Section 7.5
hereof, be elected by the holders of shares of Class B Common Stock. The initial
Class B Directors of the Corporation shall be elected at either a meeting of
holders of shares of Class B Common Stock or by the unanimous written consent of
such holders, within ten days after the initial issuance of shares of Class B
Common Stock, and shall serve terms expiring at the annual meeting of
stockholders to be held in 2001. Thereafter, the Class B Directors shall serve
one-year terms expiring at each subsequent annual meeting of stockholders. At
each meeting of stockholders at which Class B Directors are to be elected, each
Class B Director shall be elected by the vote of holders of a plurality of the
shares of Class B Common Stock present in person or represented by proxy at such
meeting and entitled to vote on the election of Class B Directors. Two Directors
of the Corporation (hereinafter referred to, together with their respective
direct and indirect successors, as the "Class C Directors") shall, in accordance
with and subject to Section 7.6 hereof, be elected by the holders of shares of
Class C Common Stock. The initial Class C Directors of the Corporation shall be
elected at either a meeting of holders of shares of Class C Common Stock or by
the unanimous written consent of such holders, within ten days after the initial
issuance of shares of Class C Common Stock, and shall serve terms expiring at
the annual meeting of stockholders to be held in 2001. Thereafter, the Class C
Directors shall serve one-year terms expiring at each subsequent annual meeting
of stockholders. At each meeting of stockholders at which Class C Directors are
to be elected, each Class C Director shall be elected by the vote of holders of
a plurality of the shares of Class C Common Stock present in person or
represented by proxy at such meeting and entitled to vote on the election of
Class C Directors.
3
<PAGE> 5
The Directors shall hold office until their successors are duly elected and
qualified or until their earlier death, disqualification, resignation or
removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
these Articles or any articles supplementary thereto, the holders of any one or
more series of Stock shall have the right, voting separately as a series or
together with holders of other such series, to elect Directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of such provisions and any articles supplementary applicable thereto, to
the extent applicable, and, except for Class A Directors, such Directors so
elected shall not be divided into classes pursuant to this Section 6.3.
During any period when the holders of any series of Stock have the
right to elect additional Directors as provided for or fixed pursuant to the
provisions of these Articles or any articles supplementary thereto, then upon
commencement and for the duration of the period during which such right
continues: (a) the then otherwise total authorized number of Directors of the
Corporation shall automatically be increased by such specified number of
Directors, and the holders of such Stock shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions and
(b) each such additional Director shall serve until such Director's successor
shall have been duly elected and qualified, or until such Director's right to
hold such office terminates pursuant to said provisions, whichever occurs
earlier, subject to such Director's earlier death, disqualification, resignation
or removal. Except as otherwise provided by the Board of Directors in the
resolution or resolutions establishing such series, whenever the holders of any
series of Stock having such right to elect additional Directors are divested of
such right pursuant to the provisions of such Stock, the terms of office of all
such additional Directors elected by the holders of such Stock, or elected to
fill any vacancies resulting from the death, resignation, disqualification or
removal of such additional Directors, shall forthwith terminate and the total
authorized number of Directors of the Corporation shall be reduced accordingly.
6.4 Resignation or Removal of Directors. Any Director may resign from
the Board of Directors or any committee thereof at any time by written notice to
the Board of Directors, effective upon execution and delivery to the Corporation
of such notice or upon any future date specified in the notice. Subject to the
rights, if any, of the holders of any class or series of Stock to elect
Directors and to remove any Director whom such holders have the right to elect,
and except as otherwise provided in Sections 7.5.1 and 7.6.1, any Director
(including persons elected by Directors to fill vacancies in the Board of
Directors) may be removed from office (a) only with cause and (b) only by the
affirmative vote of the holders of at least 75% of the shares then entitled to
vote at a meeting of the stockholders called for that purpose. At least 30 days
prior to any meeting of stockholders at which it is proposed that any Director
be removed from office, written notice of such proposed removal shall be sent to
the Director whose removal will be considered at the meeting. For purposes of
these Articles, "cause," with respect to the removal of any Director, shall mean
only (i) conviction of a felony, (ii) declaration of unsound mind by order of a
court, (iii) gross dereliction of duty, (iv)
4
<PAGE> 6
commission of any act involving moral turpitude or (v) commission of an act that
constitutes intentional misconduct or a knowing violation of law if such action
in either event results both in an improper substantial personal benefit to such
Director and a material injury to the Corporation.
6.5 Vacancies. Subject to the rights, if any, of the holders of any
class or series of Stock to elect Directors and to fill vacancies on the Board
of Directors relating thereto, (i) any vacancy on the Board of Directors which
results from the removal of a Director for cause may be filled by the
affirmative vote of a majority of votes cast by the holders of Class A Common
Stock, (ii) any vacancy occurring on the Board of Directors for any reason,
except as a result of an increase in the number of Directors, may be filled by a
majority vote of the remaining Directors, notwithstanding that such majority is
less than a quorum, and (iii) any vacancy occurring on the Board of Directors as
a result of an increase in the number of Directors may be filled by a majority
vote of the entire Board of Directors. A Director elected by the Board of
Directors to fill a vacancy shall hold office until the next annual meeting of
stockholders and until his or her successor is elected and qualified. A Director
elected by the stockholders to fill a vacancy which results from the removal of
a Director shall hold office for the balance of the term of the removed
Director. In the event of a vacancy in the Board of Directors, the remaining
Directors, except as otherwise provided by law or by these Articles or by the
Bylaws, may exercise the powers of the full Board of Directors until such
vacancy is filled.
6.6 Powers. These Articles, as amended or supplemented from time to
time, shall be construed with a presumption in favor of the grant of power and
authority to the Directors. The determination as to any of the following
matters, made in good faith by or pursuant to the direction of the Board of
Directors consistent with these Articles and in the absence of actual receipt of
an improper benefit in money, property or services or active and deliberate
dishonesty established by a court, shall be final and conclusive and shall be
binding upon the Corporation and every holder of shares of its Stock: the amount
of the net income of the Corporation for any period and the amount of assets at
any time legally available for the payment of dividends, redemption of its Stock
or the payment of other distributions on its Stock; the amount of paid-in
surplus, net assets, other surplus, annual or other net profit, net assets in
excess of capital, undivided profits or excess of profits over losses on sales
of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which such reserves or charges
shall have been created shall have been paid or discharged); the fair value, or
any sale, bid or asked price to be applied in determining the fair value, of any
asset owned or held by the Corporation; any matter relating to the acquisition,
holding and disposition of any assets by the Corporation; or any other matter
relating to the business and affairs of the Corporation.
5
<PAGE> 7
ARTICLE VII
STOCK
-----
7.1 Authorized Stock. The total number of shares of stock ("Stock")
which the Corporation has authority to issue is ________________ million
(____________) shares, initially consisting of (i) ______ million (____________)
shares of Preferred Stock, par value $.01 per share; (ii) ______ million
(____________) shares of Class A Common Stock, par value $.01 per share ("Class
A Common Stock"); (iii) ________ (_______) shares of Class B Common Stock, par
value $.01 per share ("Class B Common Stock"); (iv) _________ (________) shares
of Class C Common Stock, par value $.01 per share ("Class C Common Stock" and,
together with the Class A Common Stock and the Class B Common Stock, the "Common
Stock"); and (v) ______ million (____________) shares of Excess Stock, par value
$.01 per share. The aggregate par value of all the shares of all classes of
Stock is $__________. If shares of one class of Stock are classified or
reclassified into shares of another class of Stock pursuant to this Article VII,
the number of authorized shares of the former class shall be automatically
decreased and the number of shares of the latter class shall be automatically
increased, in each case by the number of shares so classified or reclassified,
so that the aggregate number of shares of Stock of all classes that the
Corporation has authority to issue shall not be more than the total number of
shares of Stock set forth in the first sentence of this paragraph.
7.2 Preferred Stock. Subject to any limitations prescribed by law, the
Board of Directors is expressly authorized to classify any unissued shares of
Preferred Stock and reclassify any previously classified but unissued shares of
Preferred Stock of any series from time to time, in one or more classes or
series of such Stock and, by filing articles supplementary with the State
Department of Assessments and Taxation of the State of Maryland, to establish or
change from time to time the number of shares to be included in each such class
or series, and to fix the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of each class or series.
Any action by the Board of Directors under this Section 7.2 shall require the
affirmative vote of a majority of the Directors then in office; provided,
however, that by the affirmative vote of a majority of the Directors then in
office, the Board of Directors may appoint a committee to act on behalf of the
Board of Directors under this Section 7.2, and in such event the affirmative
vote of a majority of the members of such committee then in office shall be
required for any action under this Section 7.2.
7.3 Common Stock. Except as otherwise expressly provided herein, all
shares of Common Stock shall be identical and shall entitle the holders thereof
to the same rights and privileges. Subject to all of the rights, powers and
preferences of the Preferred Stock and except as provided by law or in these
Articles (or in any articles supplementary regarding any class or series of
Preferred Stock):
6
<PAGE> 8
7.3.1 Voting Rights. Except as otherwise provided herein, the
holders of shares of Common Stock shall be entitled to vote on all
matters requiring stockholder action, and each holder of shares of
Common Stock shall be entitled to one vote for each share of Common
Stock held by such stockholder. Except as required by law or as set
forth herein, the holders of Common Stock shall vote together as a
single class on all matters submitted to stockholders for a vote.
7.3.2 Dividend Rights. Holders of Common Stock shall be
entitled to receive such dividends and other distributions in cash,
Stock or property of the Corporation as may be authorized and declared
by the Board of Directors upon the Common Stock and, if any Excess
Stock resulting from the conversion of Common Stock is then
outstanding, such Excess Stock, out of any assets or funds of the
Corporation legally available therefor, but only when and as authorized
by the Board of Directors or any authorized committee thereof from time
to time, and shall share ratably with the holders of such Excess Stock
resulting from the conversion of Common Stock in any such dividend or
distribution.
Before payment of any dividends or other distributions, there
may be set aside out of any assets of the Corporation available for
dividends or other distributions such sum or sums as the Board of
Directors may from to time, in its absolute discretion, think proper as
a reserve fund for contingencies, for equalizing dividends or other
distributions, for repairing or maintaining any property of the
Corporation or for such other purpose as the Board of Directors shall
determine to be in the best interests of the Corporation, and the Board
of Directors may modify or abolish any such reserve in the manner in
which it was created.
Notwithstanding any other provision of these Articles, no
dividend or other distribution may be declared or paid upon any class
of Common Stock, whether payable in cash or in shares of such class or
any other class of Common Stock or otherwise, unless a comparable
dividend shall be declared and paid upon each other class of Common
Stock then outstanding. If a dividend declared upon Class A Common
Stock is payable in shares of Class A Common Stock, the comparable
dividend declared upon Class B Common Stock shall be payable in shares
of Class B Common Stock and the comparable dividend declared upon Class
C Common Stock shall be payable in shares of Class C Common Stock, and
vice versa.
7.3.3 Rights Upon Liquidation. Upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
subject to the rights of holders of any shares of Preferred Stock and
Excess Stock resulting from the conversion of Preferred Stock, the net
assets of the Corporation available for distribution to the holders of
Common Stock, and, if any Excess Stock resulting from the conversion of
Common Stock is then outstanding, such Excess Stock, shall be
distributed pro rata to such holders in proportion to the number of
shares of Common Stock and such Excess Stock held by each.
7
<PAGE> 9
7.4 Class A Common Stock. The holders of the outstanding shares of
Class A Common Stock shall be entitled, as a class, to elect three Class A
Directors of the Corporation. At each annual meeting of stockholders, the
presence in person or by proxy of the holders of a majority of the outstanding
shares of Class A Common Stock shall be required and be sufficient to constitute
a quorum of such class for the election of Directors by such class. Class A
Directors may be removed from office in accordance with Section 6.4. In
addition, the holders of the outstanding shares of Class A Common Stock shall be
entitled, as a class, to elect additional Class A Directors of the Corporation
if so permitted by these Articles, including, without limitation, as permitted
by Section 7.5 and Section 7.6.
7.5 Class B Common Stock.
7.5.1 Voting Rights.
(a) The holders of the outstanding shares of Class B
Common Stock shall be entitled, as a class, to elect two Class
B Directors of the Corporation. A Class B Director shall be
removed from office (i) with or without cause only by the
affirmative vote of the holders of a majority of the shares of
Class B Common Stock then entitled to vote at a meeting of
such stockholders called for the purpose or by the unanimous
written consent of holders of shares of Class B Common Stock,
(ii) automatically upon the occurrence of a Class B Conversion
Event (as defined below) (in which case each Class B Director
then serving shall be removed from office) or (iii) in
accordance with Section 6.4. Upon the occurrence of a Class B
Conversion Event, the number of Class A Directors shall be
automatically increased by two and the vacancies created
thereby may be filled in accordance with Section 6.5 either by
the remaining Directors or by the holders of Class A Common
Stock. If such vacancies are filled by the remaining
Directors, such remaining Directors shall classify the new
Directors into the class of Directors whose terms expire at
the next annual meeting of stockholders. If such vacancies are
filled by the holders of Class A Common Stock, the remaining
Directors shall classify the new Directors into appropriate
classes so that the classes of the Board of Directors will
thereafter be as nearly equal in number as possible. Any Class
B Director who dies, resigns, is removed in accordance with
Section 6.4 or otherwise ceases to be a Director for any
reason other than a Class B Conversion Event shall be replaced
by the vote of holders of a plurality of the shares of Class B
Common Stock then entitled to vote at a meeting of such
stockholders called for the purpose or by the unanimous
written consent of holders of Class B Common Stock.
(b) So long as any shares of Class B Common Stock are
outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of
Class B Common Stock then entitled to vote, voting as a class,
at a meeting of such stockholders called for the purpose or by
the unanimous written consent of holders of shares of Class B
Common Stock, enter
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<PAGE> 10
into a definitive agreement with respect to, or authorize the
corporate action necessary to carry out, a Patriot Related
Transaction (as defined below), if at the time of the vote of
the Board of Directors authorizing the entry into such
agreement or the effectuation of such corporate action Patriot
American Hospitality, Inc., a Delaware corporation
("Patriot"), and Wyndham International, Inc., a Delaware
corporation ("Wyndham"), together with the respective
Affiliates (as defined below) of Patriot and Wyndham, own in
the aggregate at least 10% of the outstanding Common Stock.
For purposes of this Article VII, "Patriot Related
Transaction" shall mean (i) a merger, consolidation, or share
exchange with Patriot or Wyndham or any Affiliate of Patriot
or Wyndham; (ii) the sale, lease, transfer or other
disposition of a substantial portion of the Corporation's
assets to Patriot or Wyndham or any Affiliate of Patriot or
Wyndham in one transaction or a series of transactions within
a 12 month period; (iii) the issuance or transfer by the
Corporation, in one transaction or a series of transactions,
of any equity securities of the Corporation which have an
aggregate market value of 10% or more of the total market
value of the outstanding Stock of the Corporation to Patriot
or Wyndham or any Affiliate of Patriot or Wyndham; (iv) the
adoption of any plan or proposal for the liquidation or
dissolution of the Corporation in which anything other than
cash or a pro rata distribution of assets will be received by
Patriot or Wyndham or any Affiliate of Patriot or Wyndham; or
(v) a reverse stock split which has the effect, directly or
indirectly, in one transaction or a series of transactions, of
increasing by 5% or more the proportionate amount of the
outstanding shares of Common Stock owned by Patriot or Wyndham
or any Affiliate of Patriot or Wyndham. For purposes of this
Article VII, an "Affiliate" of a specified individual or
entity is an individual or entity that directly, or indirectly
through one or more intermediaries, controls or is controlled
by, or is under common control with, such specified individual
or entity.
(c) For the purposes of taking the actions specified
in this Section 7.5.1, special meetings of holders of Class B
Common Stock shall be called by the Secretary of the
Corporation upon the written request of the holders of not
less than a majority of the shares of Class B Common Stock
then outstanding. Any such request shall state the purpose of
such meeting and the matters proposed to be acted upon at such
meeting. The Secretary shall inform such holders of Class B
Common Stock of the reasonably estimated cost of preparing and
mailing notice of the meeting and, upon payment to the
Corporation by such stockholders of such costs, the Secretary
shall give notice to each holder of Class B Common Stock
entitled to notice of the meeting. At any such meeting, the
presence in person or by proxy of holders of a majority of the
outstanding shares of Class B Common Stock shall be required
and be sufficient to constitute a quorum for the taking of
action at such meeting. Holders of Class B Common Stock shall
also be entitled to take any action specified in this Section
7.5.1
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<PAGE> 11
without a meeting upon the unanimous written consent of
holders of Class B Common Stock.
7.5.2 Voluntary Conversion into Class A Common Stock. Subject
to and upon compliance with the provisions of Section 7.7, each share
of Class B Common Stock shall be convertible, at the option of the
holder thereof, into one fully paid and non-assessable share of Class A
Common Stock. Each holder of Class B Common Stock shall be entitled to
convert shares of Class B Common Stock if such holder provides a
written request for conversion to the Corporation at least ten business
days prior to the date on which such holder desires to convert his
Class B Common Stock stating the date on which such holder desires to
convert his Class B Common Stock, which notice shall be binding and
irrevocable on the holder and, to the extent the holder otherwise
complies with the provisions of Section 7.7, the Corporation.
7.5.3 Automatic Conversion into Class A Common Stock. Each
share of Class B Common Stock shall automatically be converted into one
fully paid and non-assessable share of Class A Common Stock upon the
sale or other transfer, whether by operation of law or otherwise, of
such share of Class B Common Stock to any individual or entity other
than an Affiliate of Marriott International, Inc., a Delaware
corporation ("Marriott"), or any successor of Marriott or of any
Affiliate of Marriott. In addition, each share of Class B Common Stock
then outstanding shall automatically be converted into one fully paid
and non-assessable share of Class A Common Stock upon the occurrence of
a Class B Conversion Event. A "Class B Conversion Event" shall mean the
earlier to occur of (a) such time that Marriott, together with its
Affiliates, shall cease to own at least _____% [50% of the percentage
owned upon divestiture] of the outstanding Common Stock and (b)
[additional test specified in Section 5.1 of the Settlement Agreement].
Each owner of record of shares of Class B Common Stock shall provide to
the Corporation, as promptly as practicable, a written statement or
affidavit stating such information as the Corporation may request in
order to determine whether a Class B Conversion Event has occurred
(including, if requested by the Corporation, information relating to
the level of Beneficial Ownership (as defined in Section 9.1) of any
class of Common Stock by such owner of record and such other party or
parties necessary to determine whether a Class B Conversion Event has
occurred (to the extent such information is known to such owner of
record)).
7.5.4 Record Ownership. All shares of Class B Common Stock
outstanding shall be owned of record at all times by Marriott, an
Affiliate of Marriott, or a successor of Marriott or of an Affiliate of
Marriott. The direct Beneficial Owner (as defined in Section 9.1) of
shares of Class B Common Stock shall at all times be the owner of
record of such shares.
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<PAGE> 12
7.6 Class C Common Stock.
7.6.1 Voting Rights.
(a) The holders of the outstanding shares of Class C
Common Stock shall be entitled, as a class, to elect two Class
C Directors of the Corporation. A Class C Director shall be
removed from office (a) with or without cause only by the
affirmative vote of the holders of a majority of the shares of
Class C Common Stock then entitled to vote at a meeting of
such stockholders called for the purpose or by the unanimous
written consent of holders of shares of Class C Common Stock,
(b) automatically upon the occurrence of a Class C Conversion
Event (as defined below) (in which case each Class C Director
then serving shall be removed from office) or (c) in
accordance with Section 6.4. Upon the occurrence of a Class C
Conversion Event, the number of Class A Directors shall be
automatically increased by two and the vacancies created
thereby may be filled in accordance with Section 6.5 either by
the remaining Directors or by the holders of Class A Common
Stock. If such vacancies are filled by the remaining
Directors, such remaining Directors shall classify the new
Directors into the class of Directors whose terms expire at
the next annual meeting of stockholders. If such vacancies are
filled by the holders of Class A Common Stock, the remaining
Directors shall classify the new Directors into appropriate
classes so that the classes of the Board of Directors will
thereafter be as nearly equal in number as possible. Any Class
C Director who dies, resigns, is removed in accordance with
Section 6.4 or otherwise ceases to be a Director for any
reason other than a Class C Conversion Event shall be replaced
by the vote of holders of a plurality of the shares of Class C
Common Stock then entitled to vote at a meeting of such
stockholders called for the purpose or by the unanimous
written consent of holders of Class C Common Stock.
(b) Notwithstanding any provision in Article III
hereof to the contrary, so long as any shares of Class C
Common Stock are outstanding, the Corporation shall not,
without the affirmative vote of the holders of a majority of
the shares of Class C Common Stock then entitled to vote,
voting as a class, at a meeting of such stockholders called
for the purpose or by the unanimous written consent of holders
of shares of Class C Common Stock, (i) directly or indirectly
own or lease any interest in real property that could
(including under proposed legislation not currently in effect
on the date hereof) cause a "real estate investment trust"
(within the meaning of Section 856 of the Internal Revenue
Code of 1986, as amended (the "Code")) (a "REIT"), that is
exempt from the provisions of Section 269B of the Code to
recognize income attributable or allocable to such real
property as a result of the direct or indirect ownership of
the Class C Common Stock by the REIT or any of its Affiliates
(including, for these purposes, a corporation whose stock is
"stapled" to the REIT within the meaning of Section 269B of
the Code) or (ii) enter into a
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<PAGE> 13
definitive agreement with respect to, or authorize the
corporate action necessary to carry out, a Marriott Related
Transaction (as defined below), if at the time of the vote of
the Board of Directors authorizing the entry into such
agreement or the effectuation of such corporate action
Marriott, together with its Affiliates, owns in the aggregate
at least 10% of the outstanding Common Stock. For purposes of
this Article VII, "Marriott Related Transaction" shall mean
(i) a merger, consolidation, or share exchange with Marriott
or any Affiliate of Marriott; (ii) the sale, lease, transfer
or other disposition of a substantial portion of the
Corporation's assets to Marriott or any Affiliate of Marriott
in one transaction or a series of transactions within a 12
month period; (iii) the issuance or transfer by the
Corporation, in one transaction or a series of transactions,
of any equity securities of the Corporation which have an
aggregate market value of 10% or more of the total market
value of the outstanding Stock of the Corporation to Marriott
or any Affiliate of Marriott; (iv) the adoption of any plan or
proposal for the liquidation or dissolution of the Corporation
in which anything other than cash or a pro rata distribution
of assets will be received by Marriott or any Affiliate of
Marriott; or (v) a reverse stock split which has the effect,
directly or indirectly, in one transaction or a series of
transactions, of increasing by 5% or more the proportionate
amount of the outstanding shares of Common Stock owned by
Marriott or any Affiliate of Marriott.
(c) For the purposes of taking the actions specified
in this Section 7.6.1, special meetings of holders of Class C
Common Stock shall be called by the Secretary of the
Corporation upon the written request of the holders of not
less than a majority of the shares of Class C Common Stock
then outstanding. Any such request shall state the purpose of
such meeting and the matters proposed to be acted upon at such
meeting. The Secretary shall inform such holders of Class C
Common Stock of the reasonably estimated cost of preparing and
mailing notice of the meeting and, upon payment to the
Corporation by such stockholders of such costs, the Secretary
shall give notice to each holder of Class C Common Stock
entitled to notice of the meeting. At any such meeting, the
presence in person or by proxy of holders of a majority of the
outstanding shares of Class C Common Stock shall be required
and be sufficient to constitute a quorum for the taking of
action at such meeting. Holders of Class C Common Stock shall
also be entitled to take any action specified in this Section
7.6.1 without a meeting upon the unanimous written consent of
holders of Class C Common Stock.
7.6.2 Voluntary Conversion into Class A Common Stock. Subject
to and upon compliance with the provisions of Section 7.7, each share
of Class C Common Stock shall be convertible, at the option of the
holder thereof, into one fully paid and non-assessable share of Class A
Common Stock. Each holder of Class C Common Stock shall be entitled to
convert shares of Class C Common Stock if such holder
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<PAGE> 14
provides a written request for conversion to the Corporation at least
ten business days prior to the date on which such holder desires to
convert his Class C Common Stock stating the date on which such holder
desires to convert his Class C Common Stock, which notice shall be
binding and irrevocable on the holder and, to the extent the holder
otherwise complies with the provisions of Section 7.7, the Corporation.
7.6.3 Automatic Conversion into Class A Common Stock. Each
share of Class C Common Stock shall automatically be converted into one
fully paid and non-assessable share of Class A Common Stock upon the
sale or other transfer, whether by operation of law or otherwise, of
such share of Class C Common Stock to any individual or entity other
than Patriot, Wyndham, any Affiliate of Patriot or Wyndham, or any
successor of Patriot or Wyndham or of any Affiliate of Patriot or
Wyndham. In addition, each share of Class C Common Stock then
outstanding shall automatically be converted into one fully paid and
non-assessable share of Class A Common Stock upon the occurrence of a
Class C Conversion Event. A "Class C Conversion Event" shall mean the
earlier to occur of (a) such time that Patriot and Wyndham, together
with their respective Affiliates and the successors of Patriot and
Wyndham and their respective Affiliates, shall cease to own at least
_____ % [50% of the percentage owned upon divestiture] of the
outstanding Common Stock and (b) [additional test specified in Section
5.1 of the Settlement Agreement]. Each owner of record of shares of
Class C Common Stock shall provide to the Corporation, as promptly as
practicable, a written statement or affidavit stating such information
as the Corporation may request in order to determine whether a Class C
Conversion Event has occurred (including, if requested by the
Corporation, information relating to the level of Beneficial Ownership
of any class of Common Stock by such owner of record and such other
party or parties necessary to determine whether a Class C Conversion
Event has occurred (to the extent such information is known to such
owner of record)).
7.6.4 Record Ownership. All shares of Class C Common Stock
outstanding shall be owned of record at all times by Patriot, Wyndham,
an Affiliate of Patriot or Wyndham, or a successor of Patriot or
Wyndham or of an Affiliate of Patriot or Wyndham. The direct Beneficial
Owner (as defined in Section 9.1) of shares of Class C Common Stock
shall at all times be the owner of record of such shares.
7.7 Voluntary Conversion Procedures.
7.7.1 Surrender of Certificates. Each conversion of shares of
Class B or Class C Common Stock into shares of Class A Common Stock
pursuant to Section 7.5.2 or Section 7.6.2 shall be effected by the
surrender of the certificate or certificates representing the shares of
Class B or Class C Common Stock to be converted, duly assigned or
endorsed for transfer to the Corporation (or accompanied by duly
executed stock powers relating thereto), at the principal executive
office of the Corporation or the offices of the transfer agent for the
Common Stock or such office or offices in the continental United States
of an agent for conversion as may from time to time be
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<PAGE> 15
designated by notice to the holders of the Class B and/or Class C
Common Stock by the Corporation, together with written notice by the
holder of such Class B or Class C Common Stock stating that such holder
desires to convert the shares, or a stated number of the shares, of
Class B or Class C Common Stock represented by such certificate(s) into
Class A Common Stock, which notice shall also state the name or names
(with addresses) and denominations in which the certificate or
certificates for Class A Common Stock shall be issued and shall include
instructions for delivery thereof. Upon surrender of a certificate
representing Class B or Class C Common Stock for conversion, the
Corporation shall issue and send by hand delivery, by courier or by
first class mail (postage prepaid) to the holder thereof or to such
holder's designee, at the address designated by such holder, a
certificate or certificates for the number of shares of Class A Common
Stock to which such holder shall be entitled upon conversion. In the
event that there shall have been surrendered a certificate or
certificates representing Class B or Class C Common Stock, only part of
which are to be converted, the Corporation shall issue and send to such
holder or such holder's designee, in the manner set forth in the
preceding sentence, a new certificate or certificates representing the
number of shares of Class B or Class C Common Stock which shall not
have been converted. If the certificate or certificates for Class A
Common Stock are to be issued in a name other than the name of the
registered holder of the stock surrendered for conversion, the
Corporation shall not be obligated to issue or deliver any certificate
unless and until the holder of the stock surrendered has paid to the
Corporation the amount of any tax that may be payable in respect of any
transfer involved in such issuance or shall establish to the
satisfaction of the Corporation that such tax has been paid.
7.7.2 Date of Conversion. Such conversion shall be deemed to
have been effected as of the later of (i) the close of business on the
date on which such certificate or certificates shall have been
surrendered or (ii) the date on which the holder shall have fully
complied with the provisions of this Section 7.7, and at such time the
rights of the holder of such Class B or Class C Common Stock (or
specified portion thereof) as to such converted shares shall cease and
the person or persons in whose name or names any certificate or
certificates for shares of Class A Common Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of
record of the shares of Class A Common Stock represented thereby.
7.7.3 Reservation of Class A Common Stock. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Class A Common Stock, solely for the purpose of
issuance upon the conversion of the Class B and Class C Common Stock,
such number of shares of Class A Common Stock as are issuable upon the
conversion of all outstanding shares of Class B and Class C Common
Stock.
7.7.4 No Reissuance. No share or shares of the Class B or
Class C Common Stock acquired by the Corporation by reason of
conversion or otherwise shall be
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<PAGE> 16
reissued, and all such shares shall be canceled, retired and eliminated
from the shares which the Corporation shall be authorized to issue. The
Corporation may from time to time take such appropriate corporate
action as may be necessary to reduce the authorized number of shares of
the Class B or Class C Common Stock accordingly.
7.7.5 No Limitation of Automatic Conversion. Nothing in this
Section 7.7 or otherwise shall in any way limit the right of the
Corporation to effect the automatic conversion of shares of Class B or
Class C Common Stock in accordance with the provisions of Sections
7.5.3 and 7.6.3 hereof, and all of such shares shall be deemed
automatically converted into shares of Class A Common Stock in
accordance with such Sections regardless of whether any holder of Class
B or Class C Common Stock to be converted surrenders his or her stock
certificates or otherwise complies with this Section 7.7.
7.8 Excess Stock. For the purposes of this Section 7.8, terms not
otherwise defined shall have the meanings set forth in Article IX.
7.8.1 Conversion into Excess Stock.
(a) If, notwithstanding the other provisions
contained in these Articles, there is a purported Transfer or
Non-Transfer Event such that any Person (other than a
Look-Through Entity) would Beneficially Own shares of Equity
Stock in excess of the Ownership Limit, or such that any
Person that is a Look-Through Entity would Beneficially Own
shares of Equity Stock in excess of the Look-Through Limit,
then (i) except as otherwise provided in Section 9.4 of
Article IX, the purported transferee shall be deemed to be a
Prohibited Owner and shall acquire no right or interest (or,
in the case of a Non-Transfer Event, the Person holding record
title to the shares of Equity Stock Beneficially Owned by such
Beneficial Owner shall cease to own any right or interest) in
such number of shares of Equity Stock which would cause such
Beneficial Owner to Beneficially Own shares of Equity Stock in
excess of the Ownership Limit or the Look-Through Limit, as
the case may be, (ii) such number of shares of Equity Stock in
excess of the Ownership Limit or the Look-Through Limit, as
the case may be (rounded up to the nearest whole share), shall
be automatically converted into an equal number of shares of
Excess Stock and transferred to a Trust in accordance with
Section 7.8.4 of this Article VII and (iii) the Prohibited
Owner shall submit the certificates representing such number
of shares of Equity Stock to the Corporation, accompanied by
all requisite and duly executed assignments of transfer
thereof, for registration in the name of the Trustee of the
Trust. If the shares of Equity Stock that are converted into
Excess Stock are not shares of Class A Common Stock, then the
Excess Stock into which they are converted shall be deemed to
be a separate series of Excess Stock with a designation and
title corresponding to the designation and title of the shares
that have been converted into the Excess Stock. Such
conversion into
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<PAGE> 17
Excess Stock and transfer to a Trust shall be effective as of
the close of trading on the Trading Day prior to the date of
the purported Transfer or Non-Transfer Event, as the case may
be, even though the certificates representing the shares of
Equity Stock so converted may be submitted to the Corporation
at a later date or may never be so submitted.
(b) Upon the occurrence of such a conversion of
shares of Equity Stock into an equal number of shares of
Excess Stock, such shares of Equity Stock shall be
automatically retired and canceled, without any action
required by the Board of Directors of the Corporation, and
shall thereupon be restored to the status of authorized but
unissued shares of the particular class or series of Equity
Stock from which such Excess Stock was converted and may be
reissued by the Corporation as that particular class or series
of Equity Stock.
7.8.2 Remedies for Breach. If the Corporation, or its
designees, shall at any time determine in good faith that a Transfer
has taken place in violation of Section 9.2 of Article IX or that a
Person intends to acquire or has attempted to acquire Beneficial
Ownership or Constructive Ownership of any shares of Equity Stock in
violation of Section 9.2 of Article IX, the Corporation shall take such
action as it deems advisable to refuse to give effect to or to prevent
such Transfer or acquisition, including, but not limited to, refusing
to give effect to such Transfer on the stock transfer books of the
Corporation or instituting proceedings to enjoin such Transfer or
acquisition, but the failure to take any such action shall not affect
the automatic conversion of shares of Equity Stock into Excess Stock
and their transfer to a Trust in accordance with Section 7.8.4.
7.8.3 Notice of Restricted Transfer. Any Person who acquires
or attempts to acquire shares of Equity Stock in violation of Section
9.2 of Article IX, or any Person who owns shares of Equity Stock that
were converted into shares of Excess Stock and transferred to a Trust
pursuant to Sections 7.8.1 and 7.8.4 of this Article VII, shall
immediately give written notice to the Corporation of such event.
7.8.4 Ownership in Trust. Upon any purported Transfer or
Non-Transfer Event that results in Excess Stock pursuant to Section
7.8.1 of this Article VII, (i) the Corporation shall create, or cause
to be created, a Trust, and shall designate a Trustee and name a
Beneficiary thereof and (ii) such Excess Stock shall be automatically
transferred to such Trust to be held for the exclusive benefit of the
Beneficiary. Any conversion of shares of Equity Stock into shares of
Excess Stock and transfer to a Trust shall be effective as of the close
of trading on the Trading Day prior to the date of the purported
Transfer or Non-Transfer Event that results in the conversion. Shares
of Excess Stock so held in trust shall remain issued and outstanding
shares of Stock of the Corporation.
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<PAGE> 18
7.8.5 Dividend Rights. Each share of Excess Stock shall be
entitled to the same dividends and distributions (as to both timing and
amount) as may be authorized by the Board of Directors with respect to
shares of the same class and series as the shares of Equity Stock that
were converted into such Excess Stock. The Trustee, as record holder of
the shares of Excess Stock, shall be entitled to receive all dividends
and distributions and shall hold all such dividends or distributions in
trust for the benefit of the Beneficiary. The Prohibited Owner with
respect to such shares of Excess Stock shall repay to the Trust the
amount of any dividends or distributions received by it that are (i)
attributable to any shares of Equity Stock that have been converted
into shares of Excess Stock and (ii) dividends or distributions which
were distributed by the Corporation to stockholders of record on a
record date which was on or after the date that such shares were
converted into shares of Excess Stock. The Corporation shall take all
measures that it determines reasonably necessary to recover the amount
of any such dividend or distribution paid to a Prohibited Owner,
including, if necessary, withholding any portion of future dividends or
distributions payable on shares of Equity Stock Beneficially Owned by
the Person who, but for the provisions of Articles VII and IX, would
Constructively Own or Beneficially Own the shares of Equity Stock that
were converted into shares of Excess Stock, and, as soon as reasonably
practicable following the Corporation's receipt or withholding thereof,
shall pay over to the Trust for the benefit of the Beneficiary the
dividends so received or withheld, as the case may be.
7.8.6 Rights upon Liquidation. In the event of any voluntary
or involuntary liquidation of, dissolution or winding up of, or any
distribution of the assets of, the Corporation, each holder of shares
of Excess Stock shall be entitled to receive, ratably with each other
holder of shares of Equity Stock of the same class and series as the
shares which were converted into such Excess Stock and other holders of
such Excess Stock, that portion of the assets of the Corporation that
is available for distribution to the holders of shares of such class
and series of Equity Stock and such Excess Stock. The Trust shall
distribute to the Prohibited Owner the amounts received upon such
liquidation, dissolution or winding up, or distribution; provided,
however, that the Prohibited Owner shall not be entitled to receive
amounts in excess of, in the case of a purported Transfer in which the
Prohibited Owner gave value for shares of Equity Stock and which
Transfer resulted in the conversion of the shares into shares of Excess
Stock, the product of (x) the price per share, if any, such Prohibited
Owner paid for the shares of Equity Stock and (y) the number of shares
of Equity Stock which were so converted into Excess Stock, and, in the
case of a Non-Transfer Event or purported Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which Non-Transfer
Event or purported Transfer, as the case may be, resulted in the
conversion of the shares into shares of Excess Stock, the product of
(x) the price per share equal to the Market Price on the date of such
Non-Transfer Event or purported Transfer and (y) the number of shares
of Equity Stock which were so converted into Excess Stock. Any
remaining amount in such Trust shall be distributed to the Beneficiary.
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7.8.7 Voting Rights. Each share of Excess Stock shall entitle
the holder to no voting rights other than those voting rights which
must accompany a class of Stock under Maryland law. The Trustee, as
record holder of the Excess Stock, shall be entitled to vote all shares
of Excess Stock in the event voting rights are mandated by Maryland
law. Any vote by a Prohibited Owner as a purported holder of shares of
Equity Stock prior to the discovery by the Corporation that such shares
of Equity Stock have been converted into shares of Excess Stock may,
subject to applicable law, (i) be rescinded by the Trustee and shall be
void ab initio with respect to such shares of Excess Stock and (ii) be
recast in accordance with the desires of the Trustee acting for the
benefit of the Beneficiary; provided, however, that if the Corporation
has already taken irreversible corporate action, then the Trustee shall
not have the authority to rescind and recast such vote.
7.8.8 Designation of Permitted Transferee.
(a) As soon as practicable after the Trustee acquires
Excess Stock, but in an orderly fashion so as not to
materially adversely affect the trading price of Common Stock,
the Trustee shall designate one or more Persons as Permitted
Transferees and sell to such Permitted Transferees any shares
of Excess Stock held by the Trustee; provided, however, that
(i) any Permitted Transferee so designated purchases for
valuable consideration (whether in a public or private sale)
the shares of Excess Stock and (ii) any Permitted Transferee
so designated may acquire such shares of Excess Stock without
violating any of the restrictions set forth in Section 9.2 of
Article IX and without such acquisition resulting in the
conversion of the shares of Equity Stock so acquired into
shares of Excess Stock and the transfer of such shares to a
Trust pursuant to Sections 7.8.1 and 7.8.4 of this Article
VII. The Trustee shall have the exclusive and absolute right
to designate Permitted Transferees of any and all shares of
Excess Stock in accordance with the provisions of this Section
7.8.8. Prior to any transfer by the Trustee of shares of
Excess Stock to a Permitted Transferee, the Trustee shall give
not less than five Trading Days' prior written notice to the
Corporation of such intended transfer and the Corporation must
have waived in writing its purchase rights, if any, under
Section 7.8.10 of this Article VII.
(b) Subject to this Section 7.8.8, upon the
designation by the Trustee of a Permitted Transferee in
accordance with the provisions of this Section 7.8.8, the
Trustee shall cause to be transferred to the Permitted
Transferee shares of Excess Stock acquired by the Trustee
pursuant to Section 7.8.4 of this Article VII. Upon such
transfer of shares of Excess Stock to the Permitted
Transferee, such shares of Excess Stock shall be automatically
converted into an equal number of shares of Equity Stock of
the same class and series which was converted into such Excess
Stock. Upon the occurrence of such a conversion of shares of
Excess Stock into an equal number of shares of Equity Stock,
such
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shares of Excess Stock shall be automatically retired and
canceled, without any action required by the Board of
Directors of the Corporation, and shall thereupon be restored
to the status of authorized but unissued shares of Excess
Stock and may be reissued by the Corporation as Excess Stock.
The Trustee shall (i) cause to be recorded on the stock
transfer books of the Corporation that the Permitted
Transferee is the holder of record of such number of shares of
Equity Stock, and (ii) distribute to the Beneficiary any and
all amounts held with respect to such shares of Excess Stock
after making payment to the Prohibited Owner pursuant to
Section 7.8.9 of this Article VII.
(c) If the Transfer of shares of Excess Stock to a
purported Permitted Transferee would or does violate any of
the transfer restrictions set forth in Section 9.2 of Article
IX, such Transfer shall be void ab initio as to that number of
shares of Excess Stock that cause the violation of any such
restriction when such shares are converted into shares of
Equity Stock (as described in clause (b) above) and the
purported Permitted Transferee shall be deemed to be a
Prohibited Owner and shall acquire no rights in such shares of
Excess Stock or Equity Stock. Such shares of Equity Stock
shall be automatically re-converted into Excess Stock and
transferred to the Trust from which they were originally
Transferred. Such conversion and transfer to the Trust shall
be effective as of the close of trading on the Trading Day
prior to the date of the Transfer to the purported Permitted
Transferee and the provisions of this Article VII shall apply
to such shares, including, without limitation, the provisions
of Sections 7.8.8 through 7.8.10 with respect to any future
Transfer of such shares by the Trust.
7.8.9 Compensation to Record Holder of Shares of Equity Stock
That Are Converted into Shares of Excess Stock. Any Prohibited Owner
shall be entitled (following acquisition of the shares of Excess Stock
and subsequent designation of and sale of Excess Stock to a Permitted
Transferee in accordance with Section 7.8.8 of this Article VII or
following the purchase of such shares in accordance with Section 7.8.10
of this Article VII) to receive from the Trustee following the sale or
other disposition of such shares of Excess Stock the lesser of (i) (a)
in the case of a purported Transfer in which the Prohibited Owner gave
value for shares of Equity Stock and which Transfer resulted in the
conversion of such shares into shares of Excess Stock, the product of
(x) the price per share, if any, such Prohibited Owner paid for the
shares of Equity Stock and (y) the number of shares of Equity Stock
which were so converted into Excess Stock and (b) in the case of a
Non-Transfer Event or purported Transfer in which the Prohibited Owner
did not give value for such shares (e.g., if the shares were received
through a gift or devise) and which Non-Transfer Event or purported
Transfer, as the case may be, resulted in the conversion of such shares
into shares of Excess Stock, the product of (x) the price per share
equal to the Market Price on the date of such Non-Transfer Event or
purported Transfer and (y) the number of shares of Equity Stock which
were so converted into Excess Stock or (ii) the proceeds received by
the Trustee from the sale or other disposition of such shares of Excess
Stock in accordance with
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<PAGE> 21
Section 7.8.8 or Section 7.8.10 of this Article VII. Any amounts
received by the Trustee in respect of such shares of Excess Stock and
in excess of such amounts to be paid to the Prohibited Owner pursuant
to this Section 7.8.9 shall be distributed to the Beneficiary in
accordance with the provisions of Section 7.8.8 of this Article VII.
Each Beneficiary and Prohibited Owner shall be deemed to have waived
any and all claims that it may have against the Trustee and the Trust
arising out of the disposition of shares of Excess Stock, except for
claims arising out of the gross negligence or willful misconduct of, or
any failure to make payments in accordance with this Section 7.8 of
this Article VII by, such Trustee.
7.8.10 Purchase Right in Excess Stock. Shares of Excess Stock
shall be deemed to be offered for sale to the Corporation or its
designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such shares of Excess Stock (or,
in the case of a Non-Transfer Event or Transfer in which the Prohibited
Owner did not give value for the shares (e.g., if the shares were
received through a gift or devise), the Market Price on the date of
such Non-Transfer Event or Transfer in which the Prohibited Owner did
not give value for the shares) or (ii) the Market Price on the date the
Corporation, or its designee, accepts such offer. The Corporation shall
have the right to accept such offer for a period of 90 days following
the later of (a) the date of the Non-Transfer Event or purported
Transfer which results in such shares of Excess Stock or (b) the date
the Board of Directors first determines that a Transfer or Non-Transfer
Event resulting in shares of Excess Stock has occurred, if the
Corporation does not receive a notice of such Transfer or Non-Transfer
Event pursuant to Section 7.8.3 of this Article VII.
7.9 Classification of Stock. The Board of Directors may classify or
reclassify any unissued shares of Stock from time to time by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications, and terms
and conditions of redemption for each class or series, including, but not
limited to, the reclassification of unissued shares of Common Stock to shares of
Preferred Stock or unissued shares of Preferred Stock to shares of Common Stock
or the issuance of any rights plan or similar plan.
7.10 Issuance of Stock. The Board of Directors may authorize the
issuance from time to time of shares of Stock of any class or series, whether
now or hereafter authorized, or securities or rights convertible into shares of
Stock, for such consideration as the Board of Directors may deem advisable (or
without consideration in the case of a share split or dividend), subject to such
restrictions or limitations, if any, as may be set forth in these Articles or
the Bylaws of the Corporation.
7.11 Dividends or Distributions. The Directors may from time to time
authorize and declare and pay to stockholders such dividends or distributions in
cash, property or other assets of the Corporation or in securities of the
Corporation or any other entity or from any other source as the Directors in
their discretion shall determine.
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<PAGE> 22
7.12 Ambiguity. In the case of an ambiguity in the application of any
of the provisions of this Article VII, the Board of Directors shall have the
power to determine the application of the provisions of this Article VII with
respect to any situation based on the facts known to it.
7.13 Legend. Except as otherwise determined by the Board of Directors,
each certificate for shares of Equity Stock shall bear substantially the
following legend:
"The shares of Interstate Hotels Management, Inc. (the
"Corporation") represented by this certificate are subject to
restrictions set forth in the Corporation's charter, as the same
may be amended from time to time, which prohibit in general (a)
any Person (other than a Look-Through Entity) from Beneficially
Owning shares of Equity Stock in excess of the Ownership Limit,
(b) any Look-Through Entity from Beneficially Owning shares of
Equity Stock in excess of the Look-Through Ownership Limit and (c)
any Person from acquiring or maintaining any ownership interest in
the stock of the Corporation that is inconsistent with the charter
of the Corporation, and the holder of this certificate by his, her
or its acceptance hereof consents to be bound by such
restrictions. Capitalized terms used in this paragraph and not
defined herein are defined in the Corporation's charter, as the
same may be amended from time to time.
The Corporation will furnish without charge, to each stockholder
who so requests, a copy of the relevant provisions of the charter
and the bylaws, each as amended, of the Corporation, a copy of the
provisions setting forth the designations, preferences, privileges
and rights of each class of stock or series thereof that the
Corporation is authorized to issue and the qualifications,
limitations and restrictions of such preferences and/or rights.
Any such request may be addressed to the Secretary of the
Corporation or to the transfer agent named on the face hereof."
7.14 Severability. Each provision of this Article VII shall be
severable and an adverse determination as to any such provision shall in no way
affect the validity of any other provision of this Article VII or any other
Article.
7.15 Articles and Bylaws. All persons who shall acquire Stock in the
Corporation shall acquire the same subject to the provisions of these Articles
and the Bylaws.
21
<PAGE> 23
ARTICLE VIII
LIMITATION ON PREEMPTIVE RIGHTS
-------------------------------
No holder of any Stock or any other securities of the Corporation,
whether now or hereafter authorized, shall have any preferential or preemptive
rights to subscribe for or purchase any Stock or any other securities of the
Corporation other than such rights, if any, as the Board of Directors, in its
sole discretion, may fix by articles supplementary, by contract or otherwise;
and any Stock or other securities which the Board of Directors may determine to
offer for subscription may, within the Board of Directors' sole discretion, be
offered to one or more of the holders of any class, series or type of Stock or
other securities at the time outstanding to the exclusion of other holders of
such class, series or type of Stock or other securities or the holders of any or
all other classes, series or types of Stock or other securities at the time
outstanding.
ARTICLE IX
LIMITATIONS ON TRANSFER AND OWNERSHIP OF EQUITY STOCK
-----------------------------------------------------
9.1 Definitions. For purposes of this Article IX, the following terms
shall have the meanings set forth below:
"Beneficial Ownership," when used with respect to ownership of
shares of Equity Stock by any Person, shall mean all shares of Equity Stock
which are (i) directly owned by such Person or (ii) beneficially owned by such
Person pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); provided, however, that in determining the number
of shares Beneficially Owned by a Person or group, no share shall be counted
more than once although applicable to both clauses (i) and (ii) of this
definition or (in the case of a group) although Beneficially Owned by more than
one Person in such group. If a Person Beneficially Owns shares of Equity Stock
that are not actually outstanding (e.g., shares issuable upon the exercise of an
option or convertible security) ("Option Shares"), then, whenever these Articles
require a determination of the percentage of outstanding shares of a class of
Equity Stock Beneficially Owned by that Person, the Option Shares Beneficially
Owned by that Person shall also be deemed to be outstanding.
"Beneficiary" shall mean, with respect to any Trust, one or
more organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by
the Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section 7.8.4 of Article VII.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
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<PAGE> 24
"Equity Stock" shall mean a particular class (other than
Excess Stock) or series of stock of the Corporation. The use of the term "Equity
Stock" or any term defined by reference to the term "Equity Stock" shall refer
to the particular class or series of stock which is appropriate under the
context.
"Look-Through Entity" shall mean a Person that is either (i) a
trust described in Section 401(a) of the Code and exempt from tax under Section
501(a) of the Code as modified by Section 856(h)(3) of the Code or (ii)
registered under the Investment Company Act of 1940.
"Look-Through Ownership Limit" shall mean, with respect to a
class or series of Equity Stock, 15% of the number of outstanding shares of such
Equity Stock.
"Market Price" of Equity Stock on any date shall mean the
average of the Closing Price for shares of such Equity Stock for the five
consecutive Trading Days ending on such date. The "Closing Price" on any date
shall mean (A) where there exists a public market for the Corporation's Equity
Stock, the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the shares of Equity Stock are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the shares of Equity Stock
are listed or admitted to trading or, if the shares of Equity Stock are not
listed or admitted to trading on any national securities exchange, the last
quoted price, or if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the Nasdaq Stock Market,
Inc. or, if such system is no longer in use, the principal other automated
quotation system that may then be in use or (B) if no public market for the
Equity Stock exists, the Closing Price will be determined by a single,
independent appraiser selected by the Board of Directors, which appraiser shall
appraise the Market Price for such Equity Stock within such guidelines as shall
be determined by the Board of Directors.
"Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause (a) any Person (other than a Look-Through
Entity) to Beneficially Own shares of Equity Stock in excess of the Ownership
Limit or (b) any Look-Through Entity to Beneficially Own shares of Equity Stock
in excess of the Look-Through Ownership Limit. Non-Transfer Events include but
are not limited to (i) the granting of any option or entering into any agreement
for the sale, transfer or other disposition of shares (or of Beneficial
Ownership of shares) of Equity Stock or (ii) the sale, transfer, assignment or
other disposition of interests in any Person or of any securities or rights
convertible into or exchangeable for shares of Equity Stock or for interests in
any Person that results in changes in Beneficial Ownership of shares of Equity
Stock.
"Ownership Limit" shall mean, with respect to a class or
series of Equity Stock, 9.9% of the number of outstanding shares of such Equity
Stock.
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<PAGE> 25
"Permitted Transferee" shall mean any Person designated as a
Permitted Transferee in accordance with the provisions of Section 7.8.8 of
Article VII.
"Person" shall mean (a) an individual or any corporation,
partnership, estate, trust, association, private foundation, joint stock company
or any other entity and (b) a "group" as that term is used for purposes of
Section 13(d)(3) of the Exchange Act, but shall exclude an underwriter that
participates in a public offering of Equity Stock, such exclusion to be in
effect for the period of 90 days immediately following purchase by such
underwriter of such Equity Stock.
"Prohibited Owner" shall mean, with respect to any purported
Transfer or Non-Transfer Event, any Person who is prevented from becoming or
remaining the owner of record title to shares of Equity Stock by the provisions
of Section 7.8.1 of Article VII.
"Trading Day" shall mean a day on which the principal national
securities exchange on which any of the shares of Equity Stock are listed or
admitted to trading is open for the transaction of business or, if none of the
shares of Equity Stock are listed or admitted to trading on any national
securities exchange, any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of shares (or of Beneficial Ownership of
shares) of Equity Stock, whether voluntary or involuntary, whether of record,
constructively or beneficially and whether by operation of law or otherwise.
"Transfer" (as a verb) shall have the correlative meaning.
"Trust" shall mean any separate trust created and administered
in accordance with the terms of Section 7.8 of Article VII, for the exclusive
benefit of any Beneficiary.
"Trustee" shall mean any Person or entity, unaffiliated with
both the Corporation and any Prohibited Owner (and, if different than the
Prohibited Owner, the Person who would have had Beneficial Ownership of the
Shares that would have been owned of record by the Prohibited Owner), designated
by the Corporation to act as trustee of any Trust, or any successor trustee
thereof.
9.2 Restriction on Ownership and Transfer.
(a) Except as provided in Section 9.4 of this Article IX, (i)
no Person (other than a Look-Through Entity) shall Beneficially Own shares of
Equity Stock in excess of the Ownership Limit and (ii) no Look-Through Entity
shall Beneficially Own shares of Equity Stock in excess of the Look-Through
Ownership Limit.
(b) Except as provided in Section 9.4 of this Article IX, any
purported Transfer (whether or not the result of a transaction entered into
through the facilities of the
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<PAGE> 26
New York Stock Exchange or any other national securities exchange or the Nasdaq
Stock Market, Inc. or any other automated quotation system) that, if effective,
would result in any Person (but not including a Look-Through Entity)
Beneficially Owning shares of Equity Stock in excess of the Ownership Limit
shall be void ab initio as to the Transfer of that number of shares of Equity
Stock which would be otherwise Beneficially Owned by such Person in excess of
the Ownership Limit, and the intended transferee shall acquire no rights in such
shares of Equity Stock.
(c) Except as provided in Section 9.4 of this Article IX, any
purported Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange or any other national
securities exchange or the Nasdaq Stock Market, Inc. or any other automated
quotation system) that, if effective, would result in any Look-Through Entity
Beneficially Owning shares of Equity Stock in excess of the Look-Through
Ownership Limit shall be void ab initio as to the Transfer of that number of
shares of Equity Stock which would be otherwise Beneficially Owned by such
Look-Through Ownership Entity in excess of the Look-Through Ownership Limit, and
the intended transferee Look-Through Entity shall acquire no rights in such
shares of Equity Stock.
9.3 Owners Required to Provide Information. Each Person who is a
Beneficial Owner of shares of Equity Stock and each Person (including the
stockholder of record) who is holding shares of Equity Stock for a Beneficial
Owner shall provide to the Corporation a written statement or affidavit stating
such information as the Corporation may request in order to ensure compliance
with the Ownership Limit.
9.4. Exception. The Board of Directors may, in its sole discretion,
waive the application of the Ownership Limit or the Look-Through Ownership Limit
to a Person (other than Marriott or Patriot or any entity directly or indirectly
controlled by either of them) subject, as the case may be, to any such limit and
may, in connection with or as a condition to granting any such waiver, require
such Person and one or more other Persons to make such representations and
warranties and enter into such agreements as the Board of Directors in its sole
discretion determines to be appropriate or advisable.
9.5 New York Stock Exchange Transactions. Notwithstanding any provision
contained herein to the contrary, nothing in these Articles shall preclude the
settlement of any transaction entered into through the facilities of the New
York Stock Exchange or any other national securities exchange or the Nasdaq
Stock Market, Inc. or any other automated quotation system. In no event shall
the existence or application of the preceding sentence have the effect of
deterring or preventing the conversion of Equity Stock into Excess Stock as
contemplated herein.
9.6 Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Article IX, including any definition contained in Section
9.1 of this Article IX, the Board of Directors shall have the power to determine
the application of the provisions of this Article IX with respect to any
situation based on the facts known to it.
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<PAGE> 27
9.7 Remedies Not Limited. Except as set forth in Section 9.5 of this
Article IX, nothing contained in this Article IX or Article VII shall limit the
authority of the Corporation to take such other action as it deems necessary or
advisable to protect the Corporation and the interests of its stockholders and
to ensure compliance with the Ownership Limit or the Look-Through Ownership
Limit.
ARTICLE X
RIGHTS AND POWERS OF CORPORATION,
BOARD OF DIRECTORS AND OFFICERS
-------------------------------
In carrying on its business, or for the purpose of attaining or
furthering any of its objects, the Corporation shall have all of the rights,
powers and privileges granted to corporations by the laws of the State of
Maryland, as well as the power to do any and all acts and things that a natural
person or partnership could do as now or hereafter authorized by law, either
alone or in partnership or conjunction with others. In furtherance and not in
limitation of the powers conferred by statute, the powers of the Corporation and
of the Directors and stockholders shall include the following:
10.1 Conflicts of Interest. Any Director or officer individually, or
any firm of which any Director or officer may be a member, or any corporation or
association of which any Director or officer may be a director or officer or in
which any Director or officer may be interested as the holder of any amount of
its Stock or otherwise, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation, and, in the
absence of fraud, no contract or other transaction shall be thereby affected or
invalidated; provided, however, that (a) such fact shall have been disclosed or
shall have been known to the Board of Directors or the committee thereof that
approved such contract or transaction and such contract or transaction shall
have been approved or ratified by the affirmative vote of a majority of the
disinterested Directors, or (b) such fact shall have been disclosed or shall
have been known to the stockholders entitled to vote, and such contract or
transaction shall have been approved or ratified by a majority of the votes cast
by the stockholders entitled to vote, other than the votes of shares owned of
record or beneficially by the interested Director or officer or corporation,
firm or other entity, or (c) the contract or transaction is fair and reasonable
to the Corporation. Any Director of the Corporation who is also a director or
officer of or interested in such other corporation or association, or who, or
the firm of which he is a member, is so interested, may be counted in
determining the existence of a quorum at any meeting of the Board of Directors
of the Corporation which shall authorize any such contract or transaction, with
like force and effect as if he were not such director or officer of such other
corporation or association or were not so interested or were not a member of a
firm so interested.
10.2 Amendment of Articles. The Corporation reserves the right, from
time to time, to make any amendment of its Articles, now or hereafter authorized
by law, including any
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<PAGE> 28
amendment which alters the contract rights, as expressly set forth in its
Articles, of any outstanding Stock.
No amendment or repeal of these Articles shall be made unless the same
is first approved by the Board of Directors pursuant to a resolution adopted by
the Board of Directors in accordance with the MGCL, and, except as otherwise
provided by law, thereafter approved by the stockholders.
Whenever any vote of the holders of voting stock is required to amend
or repeal any provision of these Articles, then in addition to any other vote of
the holders of voting stock that is required by these Articles, the affirmative
vote of the holders of a majority of the outstanding shares of Stock of the
Corporation entitled to vote on such amendment or repeal, voting together as a
single class, and the affirmative vote of the holders of a majority of the
outstanding shares of each class entitled to vote thereon as a class, shall be
required to amend or repeal any provision of these Articles; provided, however,
that the affirmative vote of the holders of not less than two-thirds of the
outstanding shares entitled to vote on such amendment or repeal, voting together
as a single class, and the affirmative vote of the holders of not less than
two-thirds of the outstanding shares of Class B Common Stock, voting as a single
class, and Class C Common Stock, voting as a single class, shall be required to
amend or repeal any of the provisions of Sections 6.2, 6.3, 6.4 or 6.5 of
Article VI, Sections 7.3, 7.5, 7.6, 7.7 or 7.8 of Article VII, Article IX,
Article X or Article XII of these Articles.
ARTICLE XI
INDEMNIFICATION
---------------
The Corporation (which for the purpose of this Article XI shall include
predecessor entities of the Corporation as set forth in Section 2-418 of the
MGCL) shall have the power to the maximum extent permitted by Maryland law in
effect from time to time, to obligate itself to indemnify, and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to, (a) any individual who is a present or former Director or officer of the
Corporation or (b) any individual who, while a Director of the Corporation and
at the request of the Corporation, serves or has served as a director, officer,
partner or trustee of another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or any other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his status as a present or former
Director or officer of the Corporation. The Corporation shall have the power,
with the approval of the Board of Directors, to provide such indemnification and
advancement of expenses to a person who served a predecessor of the Corporation
in any of the capacities described in (a) or (b) above and to any employee or
agent of the Corporation or a predecessor of the Corporation.
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<PAGE> 29
ARTICLE XII
LIMITATION OF LIABILITY
-----------------------
To the fullest extent permitted under the MGCL as in effect on the date
of filing these Articles or as the MGCL is thereafter amended from time to time,
no Director or officer shall be liable to the Corporation or its stockholders
for money damages. Neither the amendment or the repeal of this Article, nor the
adoption of any other provision in the Corporation's Articles inconsistent with
this Article, shall eliminate or reduce the protection afforded by this Article
to a Director or officer of the Corporation with respect to any matter which
occurred, or any cause of action, suit or claim which but for this Article would
have accrued or arisen, prior to such amendment, repeal or adoption.
ARTICLE XIII
EXEMPTION FROM BUSINESS COMBINATION STATUTE
-------------------------------------------
Pursuant to Section 3-603(e)(1)(iii) of the MGCL, the Corporation
expressly elects not to be governed by the provisions of Section 3-602 of the
MGCL with respect to any business combination (as defined in Section 3-601 of
the MGCL).
ARTICLE XIV
MISCELLANEOUS
-------------
14.1 Provisions in Conflict with Law or Regulations.
(a) The provisions of these Articles are severable, and if the
Board of Directors shall determine that any one or more of such provisions are
in conflict with applicable federal or state laws, the conflicting provisions
shall be deemed never to have constituted a part of these Articles, even without
any amendment of these Articles pursuant to Section 10.2 hereof; provided,
however, that such determination by the Directors shall not affect or impair any
of the remaining provisions of these Articles or render invalid or improper any
action taken or omitted prior to such determination. No Director shall be liable
for making or failing to make such a determination.
(b) If any provision of these Articles or any application of
such provision shall be held invalid or unenforceable by any federal or state
court having jurisdiction, such holding shall not in any manner affect or render
invalid or unenforceable such provision in any other jurisdiction, and the
validity of the remaining provisions of these Articles shall not be affected.
Other applications of such provision shall be affected only to the extent
necessary to comply with the determination of such court.
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<PAGE> 30
THIRD: The amendment to and restatement of the Charter as hereinabove
set forth has been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation
is as set forth in Article IV of the foregoing amendment and restatement of the
charter.
FIFTH: The name and address of the Corporation's current resident agent
is as set forth in Article V of the foregoing amendment and restatement of the
charter.
SIXTH: The number of directors of the Corporation and the names of
those currently in office are as set forth in Article VI of the foregoing
amendment and restatement of the Charter.
SEVENTH: The undersigned President acknowledges these Articles of
Amendment and Restatement to be the corporate act of the Corporation and as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested to by its Secretary on this _____ day of _____________,
1998.
ATTEST: INTERSTATE HOTELS
MANAGEMENT, INC.
________________________________ By:_______________________________
Secretary President
[SEAL]
29
<PAGE> 1
EXHIBIT 3.2
FORM OF
AMENDED AND RESTATED
BYLAWS
OF
INTERSTATE HOTELS MANAGEMENT, INC.
ARTICLE I
---------
Definitions and Offices
-----------------------
1.1 Definitions For purposes of these Bylaws, the following words shall
have the meanings set forth below:
(a) "Articles" shall mean the Articles of Incorporation of the
Corporation, as amended from time to time.
(b) "Corporation" shall mean Interstate Hotels Management,
Inc.
(c) "Public Announcement" shall mean: (i) disclosure in a
press release reported by the Dow Jones News Service, Associated Press or other
similar national news service, (ii) a report or other document filed publicly
with the Securities and Exchange Commission (including, without limitation, a
Form 8-K) or (iii) a letter or report sent to stockholders of record of the
Corporation at the time of the mailing of such letter or report.
(d) "MGCL" shall mean the Maryland General Corporation Law, as
amended from time to time.
1.2 Principal Executive Office. The principal executive office of the
Corporation shall be located at such place or places as the Board of Directors
may designate.
1.3 Additional Offices. The Corporation may have additional offices at
such places as the Board of Directors may from time to time determine or the
business of the Corporation may require.
<PAGE> 2
ARTICLE II
----------
Meetings of Stockholders
------------------------
2.1 Places of Meetings. All meetings of stockholders shall be held at
such place, either within or without the State of Maryland but within the United
States, as from time to time may be fixed by the majority of the Board of
Directors, the Chairman of the Board, if one is elected, or the Chief Executive
Officer, or if no such Chief Executive Officer is then in office, the President,
which place may subsequently be changed at any time by vote of the Board of
Directors.
2.2 Annual Meeting. The annual meeting of stockholders, for the
election of Directors and the transaction of such other business as may come
properly before the meeting, shall be held each year during the month of May at
such date and time as shall be determined by a majority of the Board of
Directors, the Chairman of the Board, if one is elected, or the Chief Executive
Officer, or if no Chief Executive Officer is then in office, the President,
which date and time may subsequently be changed at any time by vote of the Board
of Directors. If no annual meeting has been held for a period of thirteen months
after the Corporation's last annual meeting of stockholders, a special meeting
in lieu thereof may be held, and such special meeting shall have, for the
purposes of these Bylaws or otherwise, all the force and effect of an annual
meeting. Any and all references hereafter in these Bylaws to an annual meeting
or annual meetings also shall be deemed to refer to any special meeting(s) in
lieu thereof.
At any annual meeting of stockholders or any special meeting in lieu of
an annual meeting of stockholders, only such business shall be conducted, and
only such proposals shall be acted upon, as shall have been properly brought
before such annual meeting. To be considered as properly brought before an
annual meeting, business must be: (a) specified in the notice of meeting, (b)
otherwise properly brought before the meeting by, or at the direction of, the
Board of Directors, or (c) otherwise properly brought before the meeting by any
holder of record (both as of the time notice of such proposal is given by the
stockholder as set forth below and as of the record date for the annual meeting
in question) of any shares of stock of the Corporation entitled to vote at such
annual meeting who complies with the requirements set forth in Section 2.9.
2.3 Special Meetings. Except as otherwise required by law or by the
Articles and subject to the rights, if any, of the holders of any class or
series of stock of the Corporation, special meetings of the stockholders may be
called only by the Board of Directors pursuant to a resolution approved by the
affirmative vote of a majority of the Directors then in office, by the Chairman
of the Board, if one is elected, or by the Chief Executive Officer, or if no
Chief Executive Officer is then in office, the President. Only those matters set
forth in the notice of the special meeting may be considered or acted upon at a
special meeting of stockholders of the Corporation, unless otherwise provided by
law. Special meetings of stockholders shall also be
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called by the Secretary of the Corporation upon the written request of the
holders of shares entitled to cast not less than a majority of all the votes
entitled to be cast at such meeting. Such request shall state the purpose of
such meeting and the matters proposed to be acted on at such meeting. The
secretary shall inform such stockholders of the reasonably estimated cost of
preparing and mailing notice of the meeting and, upon payment to the Corporation
by such stockholders of such costs, the secretary shall give notice to each
stockholder entitled to notice of the meeting.
2.4 Notice of Meetings; Adjournments. A written notice of each annual
meeting stating the hour, date and place of such annual meeting shall be given
by the Secretary or an Assistant Secretary of the Corporation (or other person
authorized by these Bylaws or by law), not less than 10 days nor more than 90
days before the annual meeting, to each stockholder entitled to vote thereat and
to each stockholder who, by law or under the Articles or under these Bylaws, is
entitled to such notice, by personally delivering such notice to him or her, by
leaving such notice at his or her residence or usual place of business or by
mail, postage prepaid, addressed to such stockholder at the address of such
stockholder as it appears on the stock transfer books of the Corporation. Such
notice shall be deemed to be delivered when hand-delivered to such address or
deposited in the mail so addressed, with postage prepaid.
Notice of all special meetings of stockholders shall be given in the
same manner as provided for annual meetings, except that the written notice of
all special meetings shall state the purpose or purposes for which the meeting
has been called.
Notice of an annual meeting or special meeting of stockholders need not
be given to a stockholder if a written waiver of notice is signed before or
after such meeting by such stockholder or if such stockholder attends such
meeting, unless such attendance was for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any annual meeting or special meeting of stockholders need
be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled annual meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to this Section 2.4
or otherwise. In no event shall the Public Announcement of an adjournment,
postponement or rescheduling of any previously scheduled meeting of stockholders
commence a new time period for the giving of a stockholder's notice under
Section 2.9 of these Bylaws.
When any meeting is convened, the presiding officer of the meeting may
adjourn the meeting if (a) no quorum is present for the transaction of business,
(b) the Board of Directors determines that adjournment is necessary or
appropriate to enable the stockholders to consider fully information that the
Board of Directors determines has not been made sufficiently or timely available
to stockholders or (c) the Board of Directors determines that adjournment is
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otherwise in the best interests of the Corporation. When any annual meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting, other than an announcement at
the meeting at which the adjournment is taken, of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who, by
law or under the Articles or under these Bylaws, is entitled to such notice.
2.5 Quorum. Except as otherwise required by law or by the Articles, any
number of stockholders together holding at least a majority of the outstanding
shares of capital stock entitled to vote with respect to the business to be
transacted, who shall be present in person or represented by proxy at any
meeting duly called, shall constitute a quorum for the transaction of business
at such meeting. Where a separate vote by a class or classes is required, a
majority of the outstanding shares of such class or classes, present in person
or represented by proxy, shall constitute a quorum entitled to take action with
respect to that matter. If, however, such quorum shall not be present at any
meeting of the stockholders, the stockholders entitled to vote at such meeting,
present in person or by proxy, shall have the power to adjourn the meeting from
time to time to a date not more than 120 days after the original record date
without notice other than announcement at the meeting. At such adjourned meeting
at which a quorum is present, any business may be transacted which might have
been transacted at the meeting as originally noticed. The stockholders present
at a duly constituted meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum.
2.6 Voting and Proxies. Stockholders shall have one vote for each share
of stock entitled to vote owned by them of record according to the stock
transfer books of the Corporation, unless otherwise provided by law or by the
Articles. A stockholder may cast the votes entitled to be cast by the shares of
stock owned of record by him either in person or by proxy executed in writing by
the stockholder or by his duly authorized agent. Such proxy shall be filed with
the Secretary of the Corporation before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy. Proxies shall be filed with the Secretary of
the Corporation before being voted. Except as otherwise limited therein or as
otherwise provided by law, proxies authorizing a person to vote at a specific
meeting shall entitle the persons authorized thereby to vote at any adjournment
of such meeting, but they shall not be valid after final adjournment of such
meeting. A proxy with respect to stock held in the name of two or more persons
shall be valid if executed by or on behalf of any one of them unless at or prior
to the exercise of the proxy the Corporation receives specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a stockholder shall be deemed valid, and the burden of proving
invalidity shall rest on the challenger.
2.7 Action at Meeting. When a quorum is present, any matter before any
meeting of stockholders (other than the election of Directors) shall be decided
by the affirmative vote of
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the majority of shares present in person or represented by proxy at such meeting
and entitled to vote on such matter, except where a larger vote is required by
law, by the Articles or by these Bylaws. Where a separate vote by a class or
classes is required, the affirmative vote of the majority of shares of such
class or classes present in person or represented by proxy at the meeting shall
be the act of such class. Any election or Directors by stockholders shall be
determined by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
Directors, except where a larger vote is required by law, by the Articles or by
these Bylaws. The Corporation shall not directly or indirectly vote any shares
of its own stock; provided, however, that the Corporation may vote shares which
it holds in a fiduciary capacity to the extent permitted by law.
2.8 Stockholder List. The officer or agent having charge of the stock
transfer books of the Corporation shall make, at least 10 days before every
annual meeting or special meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting or any adjournment thereof, in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the hour, date and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
2.9 Stockholder Proposals. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder of record (both as of the time notice of such proposal is given by
the stockholder as set forth below and as of the record date for the annual
meeting in question) of any shares of capital stock entitled to vote at such
annual meeting, such stockholder shall: (i) give timely written notice as
required by this Section 2.9 to the Secretary of the Corporation and (ii) be
present at such meeting, either in person or by a representative. For the first
annual meeting following the initial registration of the Common Stock of the
Corporation under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), a stockholder's notice shall be timely if delivered to, or mailed to and
received by, the Corporation at its principal executive office not later than
the close of business on the later of (x) the 15th day following the day on
which the Public Announcement of the date of such annual meeting is first made
by the Corporation or (y) the 75th day prior to the scheduled date of such
annual meeting as set forth in the Public Announcement. For all subsequent
annual meetings, a stockholder's notice shall be timely if delivered to, or
mailed to and received by, the Corporation at its principal executive office not
less than 75 days nor more than 120 days prior to the anniversary date of the
immediately preceding annual meeting (the "Anniversary Date"); provided,
however, that in the event the annual meeting is scheduled to be held on a date
more than 30 days before the Anniversary Date or more than 60 days after the
Anniversary Date, a stockholder's notice shall be timely if delivered to, or
mailed to and received by, the Corporation at its principal executive office not
later than the close of business on the later of (1) the 15th day following the
day on which Public
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Announcement of the date of such annual meeting is first made by the Corporation
or (2) the 75th day prior to the scheduled date of such annual meeting as set
forth in the Public Announcement.
A stockholder's notice to the Secretary of the Corporation shall set
forth as to each matter proposed to be brought before an annual meeting: (i) a
brief description of the business the stockholder desires to bring before such
annual meeting and the reasons for conducting such business at such annual
meeting, (ii) the name and address, as they appear on the stock transfer books
of the Corporation, of the stockholder proposing such business, (iii) the class
and number of shares of the capital stock of the Corporation beneficially owned
by the stockholder proposing such business, (iv) the names and addresses of the
beneficial owners, if any, of any capital stock of the Corporation registered in
such stockholder's name on such books, and the class and number of shares of the
capital stock of the Corporation beneficially owned by such beneficial owners,
(v) the names and addresses of other stockholders known by the stockholder
proposing such business to support such proposal, and the class and number of
shares of the capital stock of the Corporation beneficially owned by such other
stockholders and (vi) any material interest of the stockholder proposing to
bring such business before such meeting (or any other stockholders known to be
supporting such proposal) in such proposal.
If the Board of Directors or a designated committee thereof determines
that any stockholder proposal was not made in a timely fashion in accordance
with the provisions of this Section 2.9 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2.9 in any material respect, such proposal shall not be presented for
action at the annual meeting in question. If neither the Board of Directors nor
such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the annual
meeting shall determine whether the stockholder proposal was made in accordance
with the terms of this Section 2.9. If the presiding officer determines that any
stockholder proposal was not made in a timely fashion in accordance with the
provisions of this Section 2.9 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2.9 in any material respect, such proposal shall not be presented for
action at the annual meeting in question. If the Board of Directors, a
designated committee thereof or the presiding officer determines that a
stockholder proposal was made in accordance with the requirements of this
Section 2.9, the presiding officer shall so declare at the annual meeting and
ballots shall be provided for use at the meeting with respect to such proposal.
Notwithstanding the foregoing provisions of this Section 2.9, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 2.9, and nothing in this Section 2.9 shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act (or
any successor provision thereof).
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2.10 Voting Procedures and Inspectors of Elections. The Corporation
shall, in advance of any meeting of stockholders, appoint one or more inspectors
to act at the meeting and make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the presiding officer shall appoint one or more inspectors to act
at the meeting. Any inspector may, but need not, be an officer, employee or
agent of the Corporation. Each inspector, before entering upon the discharge of
his or her duties, shall take and sign an oath faithfully to execute the duties
of inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall perform such duties as are required by the MGCL,
including the counting of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors. The presiding officer may review all
determinations made by the inspectors, and in so doing the presiding officer
shall be entitled to exercise his or her sole judgment and discretion and he or
she shall not be bound by any determinations made by the inspectors. All
determinations by the inspectors and, if applicable, the presiding officer,
shall be subject to further review by any court of competent jurisdiction.
2.11 Presiding Officer. The Chairman of the Board, if one is elected,
or if not elected or in his or her absence, the Chief Executive Officer, or if
no Chief Executive Officer is then in office, the President, shall preside at
all annual meetings or special meetings of stockholders and shall have the
power, among other things, to adjourn such meetings at any time and from time to
time, subject to Sections 2.4 and 2.5 of this Article II. The order of business
and all other matters of procedure at any meeting of the stockholders shall be
determined by the presiding officer.
ARTICLE III
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Directors
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3.1 General Powers. The business and affairs of the Corporation shall
be managed under the direction of the Board of Directors and, except as
otherwise expressly provided by law, the Articles or these Bylaws, all of the
powers of the Corporation shall be vested in such Board.
3.2 Number of Directors. The number of Directors shall be determined as
provided in the Articles. The Directors shall hold office in the manner provided
in the Articles.
3.3 Election and Removal of Directors; Quorum.
(a) Directors shall be elected and removed in the manner
provided for in the Articles.
(b) Vacancies in the Board of Directors shall be filled in the
manner provided for in the Articles.
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(c) At any meeting of the Board of Directors, a majority of
the number of Directors then in office shall constitute a quorum for the
transaction of business. However, if less than a quorum is present at a meeting,
a majority of the Directors present may adjourn the meeting from time to time,
and the meeting may be held as adjourned without further notice, except as
provided in Section 3.6 of this Article III. Any business which might have been
transacted at the meeting as originally noticed may be transacted at such
adjourned meeting at which a quorum is present.
(d) No Director need be a stockholder of the Corporation.
(e) A Director may resign in the manner provided for in the
Articles.
3.4 Regular Meetings. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Section 3.4, on the same
date and at the same place as the annual meeting of stockholders following the
close of such meeting of stockholders. Other regular meetings of the Board of
Directors may be held at such hour, date and place as the Board of Directors may
by resolution from time to time determine without notice other than such
resolution.
3.5 Special Meetings. Special meetings of the Board of Directors may be
called, orally or in writing, by or at the request of a majority of the
Directors, the Chairman of the Board, if one is elected, or the Chief Executive
Officer, or if no Chief Executive Officer is then in office, the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
3.6 Notice of Meetings. Notice of the hour, date and place of all
special meetings of the Board of Directors shall be given to each Director by
the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the Chief Executive Officer, or if no Chief Executive Officer is
then in office, the President or such other officer designated by the Chairman
of the Board, if one is elected, or the Chief Executive Officer, or if no Chief
Executive Officer is then in office, the President. Notice of any special
meeting of the Board of Directors shall be given to each Director in person, by
telephone, or by facsimile, telex, telecopy, telegram, or other written form of
electronic communication, sent to his or her business or home address at least
three business days in advance of the meeting, or by written notice mailed to
his or her business or home address at least three business days in advance of
the meeting. Such notice shall be deemed to be delivered when hand delivered to
such address, read to such Director by telephone, deposited in the mail so
addressed, with postage thereon prepaid if mailed, dispatched or transmitted if
faxed, telexed or telecopied, or when delivered to the telegraph company if sent
by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting
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adjourned for less than 30 days or of the business to be transacted thereat,
other than an announcement at the meeting at which such adjournment is taken of
the hour, date and place to which the meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
Director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a Director at a meeting
shall constitute a waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Articles or by
these Bylaws, neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Directors need be specified in the notice or waiver of
notice of such meeting.
3.7 Nominations. Except as otherwise provided in the Articles,
nominations of candidates for election as Directors of the Corporation at any
annual meeting may be made only (a) by, or at the direction of, a majority of
the Board of Directors or (b) by any stockholder of record (both as of the time
notice of such nomination is given by the stockholder as set forth below and as
of the record date for the annual meeting in question) of any shares of the
stock of the Corporation entitled to vote at such annual meeting who complies
with the timing, informational and other requirements set forth in this Section
3.7. Any stockholder who has complied with the timing, informational and other
requirements set forth in this Section 3.7 and who seeks to make such a
nomination must be, or his, her or its representative must be, present in person
at the annual meeting. Only persons nominated in accordance with the procedures
set forth in this Section 3.7 shall be eligible for election as Directors at an
annual meeting.
Nominations, other than those made by, or at the direction of, the
Board of Directors shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 3.7. For the first
annual meeting following the initial registration of the Common Stock of the
Corporation under the Exchange Act, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the later of (i) the
15th day following the day on which the Public Announcement of the date of such
annual meeting is first made by the Corporation or (ii) the 75th day prior to
the scheduled date of such annual meeting as set forth in the Public
Announcement. For all subsequent annual meetings, a stockholder's notice shall
be timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not less than 75 days nor more than 120 days prior to
the Anniversary Date; provided, however, that in the event the annual meeting is
scheduled to be held on a date more than 30 days before the Anniversary Date or
more than 60 days after the Anniversary Date, a stockholder's notice shall be
timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not later than the close of business on the later of
(x) the 15th day following the day on which Public Announcement of the date of
such annual meeting is first made by the Corporation or (y) the 75th day prior
to the scheduled date of such annual meeting as set forth in the Public
Announcement.
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A stockholder's notice to the Secretary of the Corporation shall set
forth as to each person whom the stockholder proposes to nominate for election
or re-election as a Director: (1) the name, age, business address and residence
address of such person; (2) the principal occupation or employment of such
person; (3) the class and number of shares of the capital stock of the
Corporation which are beneficially owned by such person on the date of such
stockholder notice; and (4) the consent of each nominee to serve as a Director
if elected. A stockholder's notice to the Secretary of the Corporation shall
further set forth as to the stockholder giving such notice: (a) the name and
address, as they appear on the stock transfer books of the Corporation, of such
stockholder and of the beneficial owners (if any) of the capital stock of the
Corporation registered in such stockholder's name and the name and address of
other stockholders known by such stockholder to be supporting such nominee(s);
(b) the class and number of shares of the capital stock of the Corporation which
are held of record, beneficially owned or represented by proxy by such
stockholder and by any other stockholders known by such stockholder to be
supporting such nominee(s) on the record date for the annual meeting in question
(if such date shall then have been made publicly available and shall be earlier
than the date of such stockholder notice) and on the date of such stockholder's
notice; and (c) a description of all arrangements or understandings between such
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
such stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not made in accordance with the terms of
this Section 3.7 or that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 3.7 in any material
respect, then such nomination shall not be considered at the annual meeting in
question. If neither the Board of Directors nor such committee makes a
determination as to whether a nomination was made in accordance with the
provisions of this Section 3.7, the presiding officer of the annual meeting
shall determine whether a nomination was made in accordance with such
provisions. If the presiding officer determines that any stockholder nomination
was not made in accordance with the terms of this Section 3.7 or that the
information provided in a stockholder's notice does not satisfy the
informational requirements of this Section 3.7 in any material respect, then
such nomination shall not be considered at the annual meeting in question. If
the Board of Directors, a designated committee thereof or the presiding officer
determines that a nomination was made in accordance with the terms of this
Section 3.7, the presiding officer shall so declare at the annual meeting and
ballots shall be provided for use at the meeting with respect to such nominee.
Notwithstanding anything to the contrary in the second paragraph of
this Section 3.7, in the event that the number of Directors to be elected to the
Board of Directors is increased and there is no Public Announcement by the
Corporation naming all of the nominees for Director or specifying the size of
the increased Board of Directors at least 75 days prior to the Anniversary Date,
a stockholder's notice required by this Section 3.7 shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if such notice shall be delivered to, or mailed to and received by,
the Corporation at its principal
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executive office not later than the close of business on the 15th day following
the day on which such Public Announcement is first made by the Corporation.
Except as otherwise provided in the Articles, no person shall be
elected by the stockholders as a Director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 3.7. Election of
Directors at an annual meeting need not be by written ballot, unless otherwise
provided by the Board of Directors or presiding officer at such annual meeting.
If written ballots are to be used, ballots bearing the names of all the persons
who have been nominated for election as Directors at the annual meeting in
accordance with the procedures set forth in this Section 3.7 shall be provided
for use at the annual meeting.
3.8 Action at Meeting and by Consent.
(a) At any meeting of the Board of Directors at which a quorum
is present, a majority of the Directors present may take any action on behalf of
the Board of Directors, unless otherwise required by law, by the Articles or by
these Bylaws.
(b) Except as expressly provided in Section 3.9 hereof and
except as may be provided elsewhere herein, any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a meeting
if all members of the Board of Directors consent thereto in writing. Such
written consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
3.9 Certain Matters. The Board of Directors shall, on a quarterly
basis, review a report prepared by management of the Corporation summarizing for
each hotel in which the Corporation holds an interest (i) the status of
renovations and maintenance projects being conducted, (ii) the level of guest
satisfaction, (iii) quality scores, and (iv) financial performance.
In addition, and notwithstanding anything to the contrary in
these Bylaws, the following actions by the Corporation shall require the
approval of (i) a majority of the Board of Directors and (ii) a majority of the
Class A Directors (as defined in the Articles) who vote on the action, which
approvals shall be obtained at a meeting of the Board of Directors at which a
quorum is present (and shall not be obtained by written consent in lieu
thereof):
(a) The entry by the Corporation into any transaction, or
series of related transactions, in which the amount involved is expected to
exceed one hundred thousand dollars ($100,000), with either Marriott
International, Inc., a Delaware corporation ("Marriott"), Patriot American
Hospitality, Inc., a Delaware corporation ("Patriot"), Wyndham International,
Inc., a Delaware corporation ("Wyndham"), or any entity controlled by Marriott,
Patriot or Wyndham. In addition, to the extent the Corporation serves as the
managing member of Interstate Hotels, LLC, a Delaware limited liability company
("Interstate
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LLC"), or IHC II, LLC, a Delaware limited liability company ("IHC LLC" and,
together with Interstate LLC, the "LLCs"), any transaction or series of related
transactions proposed to be entered into by either LLC that would, if such
transaction or transactions were to be entered into by the Corporation, require
the approval of the Board of Directors under this Section 3.9(a), shall, as a
condition to the Corporation's approving such transaction or transactions in its
capacity as managing member of such LLC, require the approval of the Board of
Directors under this Section 3.9(a) as if such transaction or transactions were
proposed to be entered into by the Corporation.
(b) The modification or termination by the Corporation of any
franchise agreement relating to a Marriott-branded hotel.
(c) The commencement by the Corporation of any legal action,
whether in a court of law, arbitration tribunal or otherwise, or the filing of a
claim or counterclaim by the Corporation in any such legal action, against
Marriott, Patriot or Wyndham or any entity controlled by Marriott, Patriot or
Wyndham or any officer or director of Marriott, Patriot or Wyndham or of any
entity controlled by Marriott, Patriot or Wyndham.
3.10 Manner of Participation. Directors may participate in meetings of
the Board of Directors by means of conference telephone or similar
communications equipment by means of which all Directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these Bylaws.
3.11 Compensation of Directors. By resolution of the Board of
Directors, Directors may be allowed a fee or other compensation for serving as a
Director and/or for serving on any committee of the Board of Directors and a fee
or other compensation and expenses for attendance at a meeting of the Board
and/or any committee thereof, but nothing herein shall preclude Directors from
serving the Corporation in other capacities and receiving compensation for such
other services.
3.12 Reliance. Each Director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a Director.
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ARTICLE IV
----------
Committees
----------
4.1 Number, Tenure and Qualifications. The Board of Directors may
appoint from among its members committees, composed of two or more Directors, to
serve at the pleasure of the Board of Directors; provided, however, that no
committee shall be created by the Board of Directors, nor shall any member be
appointed to or removed from any committee, without the approval of each Class B
and Class C Director (as defined in the Articles) then serving on the Board of
Directors.
4.2 Powers. The Board of Directors may delegate to committees appointed
under Section 4.1 of this Article any of the powers of the Board of Directors,
except for the matters specified in Section 3.9 hereof as requiring Board
approval at a Board meeting and except as prohibited by law, by the Articles or
by these Bylaws.
4.3 Meetings. Notice of committee meetings shall be given in the same
manner as notice for special meetings of the Board of Directors. A majority of
the members of the committee shall constitute a quorum for the transaction of
business at any meeting of the committee. The act of a majority of the committee
members present at a meeting shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any
two members of any committee may fix the time and place of its meeting unless
the Board shall otherwise provide. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another Director to act in the place of such
absent member. Each committee shall keep minutes of its proceedings.
4.4 Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
4.5 Informal Action by Committees. Any action required or permitted to
be taken at any meeting of a committee of the Board of Directors may be taken
without a meeting, if consent in writing to such action is signed by each member
of the committee and such written consent is filed with the minutes of
proceedings of such committee.
4.6 Vacancies. Subject to the provisions hereof, the Board of Directors
shall have the power at any time to change the membership of any committee, to
fill all vacancies, to designate alternate members, to replace any absent or
disqualified member or to dissolve any such committee.
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ARTICLE V
---------
Officers
--------
5.1 Enumeration. The officers of the Corporation shall consist of a
President, a Treasurer, a Secretary and such other officers, including, without
limitation, a Chairman of the Board of Directors, a Chief Executive Officer, a
Chief Operating Officer and one or more Vice Presidents (including Executive
Vice Presidents or Senior Vice Presidents), Assistant Vice Presidents, Assistant
Treasurers and Assistant Secretaries, and such other officers as the Board of
Directors may determine.
5.2 Election. At the regular annual meeting of the Board following the
annual meeting of stockholders, the Board of Directors shall elect the
President, the Treasurer and the Secretary. Other officers may be elected by the
Board of Directors in accordance with this Article V at such regular annual
meeting of the Board of Directors or at any other regular or special meeting.
5.3 Qualification. No officer need be a stockholder or a Director. Any
person may occupy more than one office of the Corporation at any time; provided,
that such officer does not serve concurrently as both President and Vice
President. Any officer may be required by the Board of Directors to give bond
for the faithful performance of his or her duties in such amount and with such
sureties as the Board of Directors may determine.
5.4 Tenure. Except as otherwise provided by the Articles or by these
Bylaws, each of the officers of the Corporation shall hold office until the
regular annual meeting of the Board of Directors following the next annual
meeting of stockholders and until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
5.5 Resignation. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
5.6 Removal. Except as otherwise provided by law, if the Board of
Directors in its judgement finds that the best interests of the Corporation will
be served, it may remove any officer by the affirmative vote of a majority of
the Directors then in office; provided however, that such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
5.7 Absence or Disability. In the event of the absence or disability of
any officer, the Board of Directors may designate another officer to act
temporarily in place of such absent or disabled officer.
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5.8 Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
5.9 President. The President shall, subject to the direction of the
Board of Directors, have general supervision and control of the Corporation's
business. If there is no Chairman of the Board or if he or she is absent, the
President shall preside, when present, at all meetings of stockholders and of
the Board of Directors. The President shall have such other powers and perform
such other duties as the Board of Directors may from time to time designate.
5.10 Chairman of the Board. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
5.11 Chief Executive Officer.
(a) The Chief Executive Officer, if one is elected, shall have
such powers and shall perform such duties as the Board of Directors may from
time to time designate. If there shall be a Chief Executive Officer at any time,
such officer shall have authority to take any action that the President is
authorized to take by these Bylaws (other than the execution of stock
certificates).
(b) The initial Chief Executive Officer shall be
_____________, who shall serve a one-year term commencing on ____________,
subject to his earlier resignation or removal in accordance with these Bylaws.
Any renewal of the initial term of such initial Chief Executive Officer, and any
removal or replacement of such initial Chief Executive Officer prior to the
expiration of the initial term, shall require the approval of a majority of the
Board of Directors, which majority must include the approval of all Class B and
Class C Directors (as defined in the Articles) then serving on the Board of
Directors. Thereafter, the Chief Executive Officer shall be selected by vote of
the full Board of Directors. Until September 30, 2003, all candidates for Chief
Executive Officer shall be identified for the full Board by a special committee
(the "Search Committee") of the Board comprised of all Class B and Class C
Directors.
5.12 Chief Operating Officer.
(a) The Chief Operating Officer, if one is elected, shall have
such powers and shall perform such duties as the Board of Directors may from
time to time designate.
(b) The President and Chief Operating Officer, if any is in
office on the date hereof, is hereby removed and the first person appointed to
these offices after the date hereof shall be selected by vote of the full Board
of Directors. Until September 30, 2003, all candidates for President and Chief
Operating Officer (including the first President and Chief
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<PAGE> 16
Operating Officer after the date hereof) shall be identified for the full Board
by the Search Committee. The Search Committee will use its reasonable best
efforts to identify a candidate to be the first President and Chief Operating
Officer after the date hereof by February 27, 1999.
5.13 Vice Presidents and Assistant Vice Presidents. Any Vice President
(including any Executive Vice President or Senior Vice President) and any
Assistant Vice President shall have such powers and shall perform such duties as
the Board of Directors or the Chief Executive Officer, or if no Chief Executive
Officer is then in office, the President, may from time to time designate.
5.14 Treasurer and Assistant Treasurers. The Treasurer shall, subject
to the direction of the Board of Directors and except as the Board of Directors,
the Chief Executive Officer or, if no Chief Executive Officer is then in office,
the President may otherwise provide, have general charge of the financial
affairs of the Corporation and shall cause to be kept accurate books of account.
The Treasurer shall have custody of all funds, securities, and valuable
documents of the Corporation. He or she shall have such other duties and powers
as may be designated from time to time by the Board of Directors or the Chief
Executive Officer, or if no Chief Executive Officer is then in office, the
President.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer, or if no Chief
Executive Officer is then in office, the President may from time to time
designate.
5.15 Secretary and Assistant Secretaries. The Secretary shall record
all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof. The Secretary shall have charge of
the stock ledger (which may, however, be kept by any transfer or other agent of
the Corporation). The Secretary shall have custody of the seal of the
Corporation, and the Secretary, or an Assistant Secretary, shall have authority
to affix it to any instrument requiring it, and, when so affixed, the seal may
be attested by his or her signature or that of an Assistant Secretary. The
Secretary shall have such other duties and powers as may be designated from time
to time by the Board of Directors or the Chief Executive Officer, or if no Chief
Executive Officer is then in office, the President. In the absence of the
Secretary, any Assistant Secretary may perform his or her duties and
responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer, or if no Chief
Executive Officer is then in office, the President may from time to time
designate.
5.16 Other Powers and Duties. Subject to these Bylaws and to such
limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such
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<PAGE> 17
powers and duties as from time to time may be conferred by the Board of
Directors. Except as otherwise provided in these Bylaws, the Chief Executive
Officer, if one is then serving in office, shall report to the Board of
Directors, the President shall report to the Board of Directors and the Chief
Executive Officer (at any time one is serving in office), and the Chief
Operating Officer shall report to the Board of Directors and the Chief Executive
Officer (at any time one is serving in office).
5.17 No Right to Employment. No provision of these Bylaws shall confer
upon any officer or other employee of the Corporation any right with respect to
the continuance of employment by the Corporation, nor shall any provision of
these Bylaws interfere in any way with the right of the Corporation to terminate
the employment of any officer or other employee at any time.
ARTICLE VI
----------
Stock
-----
6.1 Certificates. Each stockholder shall be entitled to a certificate
of the stock of the Corporation, which shall represent and certify the number of
shares of each class held by such stockholder in the Corporation, in such form
as may from time to time be prescribed by the Board of Directors. Such
certificate shall be signed by the Chairman of the Board, the President or a
Vice President and countersigned by the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary. The Corporation seal and the signatures
by the Corporation's officers, the transfer agent or the registrar may be either
manual or facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed on such certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, the certificate may be issued by the Corporation with the
same effect as if he or she were such officer, transfer agent or registrar at
the time of its issue. Each certificate representing shares which are restricted
as to their transferability or voting powers, which are preferred or limited as
to their dividends or as to their allocable portion of the assets upon
liquidation or which are redeemable at the option of the Corporation, shall have
a statement of such restriction, limitation, preference or redemption provision,
or a summary thereof, plainly stated on the certificate. If the Corporation has
authority to issue stock of more than one class, the certificate shall contain
on the face or back a full statement or summary of the designations and any
preferences, conversion on other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms
and conditions of redemption of each class of stock and, if the Corporation is
authorized to issue any preferred or special class in series, the differences in
the relative rights and preferences between the shares of each series to the
extent they have been set and the authority of the Board of Directors to set the
relative rights and preferences of subsequent series. In lieu of such statement
or summary, the certificate may state that the Corporation will furnish a full
statement of such information to any stockholder upon request and without
charge. If any class of stock is restricted by the Corporation as to
transferability, the certificate shall contain a full statement of the
restriction or state that the Corporation will furnish information about the
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restrictions to the stockholder on request and without charge. Every certificate
for shares of stock which are subject to a restriction on transfer (as provided
in Article IX of the Articles) and every certificate issued when the Corporation
is authorized to issue more than one class or series of stock shall contain such
legend (as provided in Article VII of the Articles) with respect thereto as is
required by law.
6.2 Lost, Destroyed and Mutilated Certificates. Holders of the shares
of the stock of the Corporation shall immediately notify the Corporation of any
loss, destruction or mutilation of the certificate therefor, and the Board of
Directors may in its discretion cause one or more new certificates for the same
number of shares in the aggregate to be issued to such stockholder upon the
surrender of the mutilated certificate or upon satisfactory proof of such loss
or destruction, and the deposit of a bond in such form and amount and with such
surety as the Board of Directors may require.
6.3 Transfer of Stock. Subject to the restrictions on the transfer of
stock described in Article IX of the Articles, shares of stock of the
Corporation shall be transferable or assignable only on the stock transfer books
of the Corporation by the holder in person or by attorney upon surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or, if sought to be transferred by attorney, accompanied by a written
assignment or power of attorney properly executed, with transfer stamps (if
necessary) affixed, and with such proof of the authenticity of signatures as the
Corporation or its transfer agent may reasonably require.
6.4 Record Holders. Except as may otherwise be required by law, by the
Articles or by these Bylaws, the Corporation shall be entitled to treat the
record holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
thereto, regardless of any transfer, pledge or other disposition of such stock,
until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these Bylaws.
It shall be the duty of each stockholder to notify the Corporation of
his or her postal address and any changes thereto.
6.5 Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (a) in the case of
determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless otherwise required by law, not be more than 90 nor less than 10
days before the date of such meeting and (b) in the case of any other action,
shall not be more than 90 days prior to such other action. If no record date is
fixed: (i) the record date for determining stockholders entitled to notice of or
to
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vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is held
and (ii) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
ARTICLE VII
-----------
Indemnification
---------------
7.1 Indemnification to the Extent Permitted by Law. The Corporation
shall indemnify, to the full extent authorized or permitted by Maryland
statutory or decisional law or any other applicable law, any person made, or
threatened to be made, a party to any action or proceeding (whether civil or
criminal or otherwise) by reason of the fact he, his testator or intestate is or
was a Director or officer of the Corporation or any predecessor of the
Corporation, or is or was serving at the request of the Corporation or any
predecessor of the Corporation as a director or officer of, or in any other
capacity with respect to, any other corporation, partnership, joint venture,
trust, employee benefit plan, or other enterprise (an "Indemnified Person"),
including the advancement of expenses under procedures provided under such law.
The Corporation shall indemnify any Indemnified Person's spouse (whether by
statute or at common law and without regard to the location of the governing
jurisdiction) and children to the same extent and subject to the same
limitations applicable to any Indemnified Person hereunder for claims arising
out of the status of such person as a spouse or child of such Indemnified
Person, including claims seeking damages from marital property (including
community property) or property held by such Indemnified Person and such spouse
or property transferred to such spouse or child, but such indemnity shall not
otherwise extend to protect the spouse or child against liabilities caused by
the spouse's or child's own acts. The provisions of this Section 7.1 shall
constitute a contract with each Indemnified Person who serves at any time while
these provisions are in effect and may be modified adversely only with the
consent of affected Indemnified Persons and each such Indemnified Person shall
be deemed to be serving as such in reliance on these provisions.
7.2 Indemnification of Employees and Agents of the Corporation. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article VII with respect to the indemnification of and
advancement of expenses to Directors and officers of the Corporation.
7.3 Insurance. The Corporation shall have the power to purchase and
maintain insurance to protect itself and any Indemnified Person, employee or
agent of the Corporation against any liability, whether or not the Corporation
would have the power to indemnify him or her against such liability.
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7.4 Non-Exclusive Rights to Indemnify; Heirs and Personal
Representatives. The rights to indemnification set forth in this Article VII are
in addition to all rights which any Indemnified Person may be entitled as a
matter of law or by contract, and shall inure to the benefit of the heirs and
personal representatives of each Indemnified Person.
7.5 No Limitation. In addition to any indemnification permitted by
these Bylaws, the Board of Directors shall, in its sole discretion, have the
power to grant such indemnification to such persons as it deems in the interest
of the Corporation to the full extent permitted by law. This Article shall not
limit the Corporation's power to indemnify against liabilities other than those
arising from a person's serving the Corporation as a Director or officer.
7.6 Amendment, Repeal or Modification. Any amendment, repeal or
modification of any provision of this Article VII by the stockholders or the
Directors of the Corporation is effective on a prospective basis only and
neither repeal nor modification of such provisions shall adversely affect any
right or protection of a Director or officer of the Corporation under this
Article VII existing at the time of such amendment, repeal or modification.
7.7 Right of Claimant to Bring Suit. If a claim under Section 7.1 of
this Article VII is not paid in full by the Corporation within ninety (90) days
after a written claim has been received by the Corporation, the claimant may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the MGCL for the Corporation to indemnify the claimant for
the amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the MGCL, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that claimant has not met the applicable standard of conduct.
7.8 Partial Indemnification. If any Indemnified Person is entitled
under any provision of these Bylaws to indemnification by the Company for some
or a portion of the expenses, judgments, fines or penalties actually or
reasonably incurred by him or her in the investigation, defense, appeal or
settlement of any civil or criminal action or proceeding, but not, however, for
the total amount thereof, the Corporation shall nevertheless indemnify such
Indemnified Person for the portion of such expenses, judgments, fines or
penalties to which such Indemnified Person is entitled.
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ARTICLE VIII
------------
Miscellaneous Provisions
------------------------
8.1 Exemption From Control Share Acquisition Statute. Subject to
amendment or repeal of this Section 8.1, pursuant to Section 3-702 of the MGCL,
the provisions of Title 3, Subtitle 7 of the MGCL, which relates to voting
rights of certain control shares, shall not apply to any share of stock of the
corporation now or hereafter issued.
8.2 Seal. The seal of the Corporation shall consist of a flat-faced
circular die, of which there may be any number of counterparts, on which there
shall be engraved the word "Seal" and the name of the Corporation. The Board of
Directors shall have the power to adopt and alter the seal of the Corporation.
8.3 Fiscal Year. The fiscal year of the Corporation shall be a calendar
year or as may otherwise be fixed by the Board of Directors.
8.4 Checks, Notes and Drafts. Checks, notes, drafts and other orders
for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize. When the Board of Directors so
authorizes, however, the signature of any such person may be a facsimile.
8.5 Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations to be entered into by the Corporation in the
ordinary course of its business without Director action may be executed on
behalf of the Corporation by the Chairman of the Board, if one is elected, the
Chief Executive Officer, or if no Chief Executive Officer is then in office, the
President or the Treasurer or any other officer, employee or agent of the
Corporation as the Board of Directors may authorize.
8.6 Resident Agent. The Board of Directors may appoint a resident agent
upon whom legal process may be served in any action or proceeding against the
Corporation.
8.7 Corporate Records. The original or attested copies of the Articles,
Bylaws and records of all meetings of the incorporators, stockholders and the
Board of Directors and the stock transfer books, which shall contain the names
of all stockholders, their record addresses and the amount of stock held by
each, may be kept outside the State of Maryland and shall be kept at the
principal office of the Corporation, at the office of its counsel or at an
office of its transfer agent or at such other place or places as may be
designated from time to time by the Board of Directors.
8.8 Amendment of Bylaws. Except as provided otherwise by law, these
Bylaws may be amended or repealed solely by the Board of Directors by the
affirmative vote of a majority of the Directors then in office; provided,
however, that the amendment or repeal of any of the provisions of Section 3.9 or
Section 4.1 of these Bylaws shall require (a) if at the
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time such amendment or repeal is proposed there is both a Class B and Class C
Director (as defined in the Articles) in office, the affirmative vote of a
majority of the Directors then in office, including the affirmative vote of each
of the Class B and Class C Directors, or (b) the affirmative vote of the holders
of a majority of the outstanding shares entitled to vote on such matter.
8.9 Voting of Stock Held. Unless otherwise provided by resolution of
the Board of Directors, the Chairman of the Board, if one is elected, the Chief
Executive Officer, the President or the Treasurer may from time to time waive
notice of and act on behalf of this Corporation, or appoint an attorney or
attorneys or agent or agents of the Corporation, in the name and on behalf of
the Corporation, to cast the vote that the Corporation may be entitled to cast
as a stockholder or otherwise in any other corporation, any of whose securities
may be held by the Corporation, at meetings of the holders of the shares or
other securities of such other corporation, or to consent in writing to any
action by any such other corporation; and the Chairman of the Board, if one is
elected, the Chief Executive Officer, the President or the Treasurer shall
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent and may execute or cause to be executed on behalf
of the Corporation, and under its corporate seal or otherwise, such written
proxies, consents, waivers or other instruments as may be necessary or proper in
the premises. In lieu of such appointment, the Chairman of the Board, if one is
elected, the Chief Executive Officer, the President or the Treasurer may himself
or herself attend any meetings of the holders of shares or other securities of
any such other corporation and there vote or exercise any or all power of the
Corporation as the holder of such shares or other securities of such other
corporation.
Adopted and effective as of ____________, 1998.
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EXHIBIT 10.1
FORM OF
LIMITED LIABILITY COMPANY AGREEMENT
OF
IHC II, LLC
Dated as of ________, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
DEFINITIONS..............................................................................................1
ARTICLE 2
FORMATION, DURATION AND PURPOSES.........................................................................7
Section 2.1 Formation.....................................................................7
Section 2.2 Name; Registered Agent and Registered Office..................................7
Section 2.3 Principal Office..............................................................7
Section 2.5 Purposes and Business.........................................................8
ARTICLE 3
RIGHTS AND OBLIGATIONS OF MEMBERS........................................................................8
Section 3.1 Limited Liability.............................................................9
Section 3.2 Admission of Members..........................................................9
Section 3.3 Bankruptcy of a Member........................................................9
Section 3.4 No Withdrawal.................................................................9
Section 3.5 Remuneration To Members.......................................................9
Section 3.6 Duties and Conflicts..........................................................9
ARTICLE 4
MANAGEMENT..............................................................................................10
Section 4.1 Management by the Class A Member; Members....................................10
Section 4.2 Bank Accounts................................................................12
Section 4.3 Liability; Indemnification...................................................12
Section 4.4 Limitation on Sale of Assets.................................................12
ARTICLE 5
BOOKS AND RECORDS.......................................................................................13
Section 5.1 Books and Records............................................................13
Section 5.2 Accounting and Fiscal Year...................................................13
Section 5.3 Reports......................................................................13
Section 5.4 The Company Accountant.......................................................14
ARTICLE 6
CONTRIBUTIONS...........................................................................................15
Section 6.1 Initial Capital Contributions................................................15
Section 6.2 Additional Capital Contributions.............................................15
Section 6.3 No Third Party Beneficiary...................................................15
Section 6.5 Withdrawal of Capital........................................................16
Section 6.6 Negative Capital Accounts....................................................16
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 7
ALLOCATION OF PROFITS AND LOSSES; TAX MATTERS
.......................................................................................................16
Section 7.1 Profits and Losses...........................................................16
Section 7.2 Regulatory Allocations.......................................................16
Section 7.3 Tax Allocations..............................................................17
Section 7.4 Tax Matters Member...........................................................17
Section 7.5 Tax Elections................................................................17
Section 7.6 Intention of the Members.....................................................17
ARTICLE 8
DISTRIBUTIONS...........................................................................................17
Section 8.1 Cash Available for Distributions.............................................17
ARTICLE 9
TRANSFER................................................................................................18
Section 9.1 No Transfer of Interests.....................................................18
Section 9.2 [Reserved]...................................................................18
Section 9.3 Transferees..................................................................18
Section 9.4 Admission of Additional Members..............................................19
ARTICLE 10
TERMINATION.............................................................................................19
Section 10.1 Dissolution..................................................................19
Section 10.2 Termination..................................................................20
Section 10.3 Acts in Furtherance of Liquidation...........................................21
ARTICLE 11
INTENTIONALLY RESERVED..................................................................................21
ARTICLE 12
GENERAL PROVISIONS......................................................................................21
Section 12.1 Covenants, Representations and Warranties of the Members.....................21
Section 12.2 Notices......................................................................22
Section 12.3 Governing Laws; Jurisdiction; Venue..........................................23
Section 12.4 Entire Agreement.............................................................24
Section 12.5 Waiver.......................................................................24
Section 12.6 Severability.................................................................24
Section 12.7 Terminology..................................................................24
Section 12.8 Action by the Members........................................................25
Section 12.9 Amendments...................................................................25
Section 12.10 Binding Agreement............................................................25
Section 12.11 Further Assurances...........................................................25
</TABLE>
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<PAGE> 4
SCHEDULES & EXHIBITS:
Schedule 1.1 - Initial Capital Account of Class Member
Schedule 1.3 - List of Submanagement Agreements
Schedule 2.4.1 - List of Management Agreements
iii
<PAGE> 5
FORM OF
LIMITED LIABILITY COMPANY AGREEMENT
-----------------------------------
THIS LIMITED LIABILITY COMPANY AGREEMENT (this "AGREEMENT"),
made and entered into as of this _____ day of May ___, 1998 by and among
INTERSTATE HOTELS MANAGEMENT, INC., a Maryland corporation (together with its
permitted successors and assigns hereunder "INTERSTATE MANAGEMENT"), and
[MARRIOTT MEMBER], a [Delaware ] corporation (together with its permitted
successors and assigns hereunder "MM"). Interstate Management and MM are each
sometimes referred to herein individually as a "MEMBER" and collectively as the
"MEMBERS."
R E C I T A L S
WHEREAS, the Members have formed a limited liability company with the
name "IHC II, LLC" (the "COMPANY") under the Act (as defined below) by the
filing of a Certificate of Formation (the "CERTIFICATE OF FORMATION") with the
Delaware Secretary of State as of __________, __, 1998; and
WHEREAS, the Members now desire to enter into this Agreement in order
to govern the operations of the Company and the rights and obligations of the
Members.
NOW, THEREFORE, in consideration of the recitals and the covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Members hereby
agree as follows:
ARTICLE 1
DEFINITIONS
-----------
For purposes of this Agreement, initially capitalized terms used herein
shall have the following meanings:
"ACT" as defined in Section 2.1.
"ADDITIONAL MEMBER" as defined in subsection 9.4.2.
"AFFILIATE" means, when used with respect to any Person, any other
Person controlling or controlled by or under common control with such Person.
For purposes of this definition, the term "CONTROL," with respect to any Person,
means possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or of other beneficial interests or by contract
or otherwise.
"AGREEMENT" as defined in the Preamble.
<PAGE> 6
"BANKRUPTCY" means, with respect to any Person, (I) the commencement by
such Person of a proceeding seeking relief under any provision or chapter of the
Bankruptcy Code or any other federal or state law relating to insolvency,
bankruptcy or reorganization; (ii) an adjudication that such Person is insolvent
or bankrupt; (iii) the entry of an order for relief under the Bankruptcy Code
with respect to such Person; (iv) the filing of any such petition or the
commencement of any such case or proceeding against such Person, unless such
petition and the case or proceeding initiated thereby are dismissed within
seventy-five (75) days from the date of such filing; (v) the filing of an answer
by such Person admitting the material allegations of any such petition; (vi) the
appointment of a trustee, receiver or custodian for all or substantially all of
the assets of such Person unless such appointment is vacated or dismissed within
seventy-five (75) days from the date of such appointment but not less than five
(5) days before the proposed sale of any assets of such Person; (vii) the
insolvency of such Person or the execution by such Person of a general
assignment for the benefit of creditors; (viii) the convening by such Person of
a meeting of its creditors, or any class thereof, for purposes of effecting a
moratorium upon or composition of its debts or an extension of its debts; (ix)
the failure of such Person to pay its debts generally as they mature; (x) the
levy, attachment, execution or other seizure of substantially all of the assets
of such Person where such seizure is not discharged within ten (10) days
thereafter; or (xi) the admission by such Person in writing of its inability to
pay its debts generally as they mature or that it is generally not paying its
debts as they become due.
"BANKRUPTCY CODE" means Title 11 of the United States Code entitled
"Bankruptcy," as now and hereafter in effect, or any successor statute.
"BOOK DEPRECIATION" means, for each fiscal year, an amount equal to the
depreciation, amortization or other cost recovery deduction allowable with
respect to an asset for such year, except that if the Book Value of an asset
differs from its adjusted basis for federal income tax purposes at the beginning
of such year, Book Depreciation shall be an amount which bears the same ratio to
such beginning Book Value as the federal income tax depreciation, amortization
or other cost recovery deduction for such year bears to such beginning adjusted
tax basis; provided, however, that if the adjusted basis for federal income tax
purposes of an asset at the beginning of such year is zero, Book Depreciation
shall be determined with reference to such beginning Book Value using a method
reasonably selected by the Managing Member.
"BOOK VALUE" means, with respect to any asset of the Company, the
asset's adjusted basis for federal income tax purposes, except as follows:
(i) the initial Book Value of any asset contributed by a Member to the
Company shall be the gross fair market value of such assets;
(ii) the Book Values of all Company assets shall be adjusted to equal
their respective fair market values as permitted pursuant to Section
1.704-1(b)(2)(iv)(f) of the Treasury Regulations;
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<PAGE> 7
(iii) the Book Value of any asset of the Company distributed to any
Member shall be adjusted to equal the gross fair market value of such asset as
of the date of distribution; and
(iv) the Book Value of Company assets shall be increased (or decreased)
to reflect any adjustments to the adjusted basis of such assets pursuant to Code
Section 734(b) or 743(b) to the extent such adjustments are taken into account
in determining Capital Accounts and are not otherwise reflected in an adjustment
made pursuant to this definition of "Book Value."
If the Book Value of an asset has been determined or adjusted pursuant
to this definition of Book Value, then such Book Value shall thereafter be
adjusted by Book Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL ACCOUNT" means, with respect to any Member, the separate
"book" account which the Company shall establish and maintain for such Member in
accordance with Section 704(b) of the Code and Regulations Section
1.704-1(b)(2)(iv) and such other provisions of Section 1.704-1(b) of the
Regulations as must be complied with in order for the Capital Accounts to be
determined in accordance with the provisions of said Regulations. In furtherance
of the foregoing, the Capital Accounts shall be maintained in compliance with
Section 1.704-1(b)(2)(iv) of the Regulations, and the provisions hereof shall be
interpreted and applied in a manner consistent therewith.
"CAPITAL CALL DUE DATE" as defined in subsection 6.2.2.
"CAPITAL CALL NOTICE" as defined in subsection 6.2.2.
"CAPITAL CONTRIBUTIONS" as defined in subsection 6.2.1.
"CERTIFICATE OF FORMATION" as defined in the Preamble.
"CLASS A MEMBER" means Interstate Management, and any successor to
Interstate Management appointed as Class A Member in accordance with the
provisions of this Agreement.
"CLASS B MEMBER" means MM, and any successor to MM as permitted in
accordance with the terms of this Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
successor provision of the Code.
"COMPANY" as defined in the Preamble.
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<PAGE> 8
"COMPANY ACCOUNTANT" as defined in Section 5.4.
"CONTRACTS" means collectively, the Management Agreements and the
Submanagement Agreements and the Marriott franchise agreements assumed by the
Company as franchisee in connection with the Management Agreements.
"HOTELS" means those hotels listed on Schedule 1.1 hereto.
"INITIAL CAPITAL CONTRIBUTIONS" as defined in Section 6.1.
"INTEREST" means, with respect to any Member at any time, the interest
of such Member in the Company at such time, including the right of such Member
to any and all of the benefits to which such Member may be entitled as provided
in this Agreement, together with the obligations of such Member to comply with
all of the terms and provisions of this Agreement.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York are authorized by law, regulation or
executive order to remain closed. If a date is a Legal Holiday, the date set for
any action hereunder shall be the next succeeding day that is not a Legal
Holiday.
"LIQUIDATING MEMBER" means the Class A Member; provided, however, if
the Class A Member's bankruptcy, withdrawal or liquidation shall have preceded
the liquidation of the Company, the Class B Member shall be the Liquidating
Member.
"MANAGEMENT AGREEMENTS" means those certain Management Agreements
entered into by and among the Company and [WYNDHAM] as more fully described
therein, as the same may be amended, modified, restated or otherwise modified
from time to time.
"MEMBER" or "MEMBERS" means, initially, the Persons identified as
Members in the preamble to this Agreement, and thereafter shall include any
Person admitted as Substitute Member or an Additional Member.
"NECESSARY COSTS" as defined in subsection 6.2.3.
"NET CAPITAL PROCEEDS" means (I) the net cash proceeds arising out of
the refinancing or refunding of any Company indebtedness or any additional
indebtedness, and (ii) gross receipts (including condemnation and casualty
insurance proceeds) from the sale, exchange or other disposition (excluding
leasing in the ordinary course of business) of any Company assets, less (A) any
indebtedness relating to or secured by such assets which is paid out of such
gross receipts, (B) the costs and expenses of the sale, exchange or disposition
including brokerage commissions, and (C) in the case of condemnation or
casualty, the cost of any collection, repair or restoration.
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<PAGE> 9
"NET OPERATING CASH FLOW" means, for any period, the excess of cash
receipts of all kinds for that period (including disbursements from reserves
previously established by the Managing Member) over cash disbursements of all
kinds for that period (including reasonable reserves established by the Managing
Member), but excluding Net Capital Proceeds.
"PERCENTAGE INTEREST" means, with respect to each Member, the
percentage set forth below opposite its name, in each case, subject to
adjustment as provided in this Agreement:
Interstate Management 99.99%
MM .01%
"PERMITTED TRANSFER" means any Transfer expressly permitted by the
terms of this Agreement.
"PERSON" means any individual, partnership, limited partnership, trust,
estate, association, corporation, limited liability company, or other entity
whether domestic or foreign.
"PROFITS"and "LOSSES" means, for each fiscal year or other period, an
amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) any depreciation, amortization and/or cost recovery
deductions with respect to any asset shall be deemed to be equal to the
Book Depreciation available with respect to such asset;
(b) any income or gain of the Company that is exempt from
federal income tax and not otherwise taken into account in computing
Profits or Losses shall be added to such taxable income or loss;
(c) any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(I), and not otherwise
taken into account in computing Profits or Losses, shall be subtracted
from such taxable income or loss;
(d) to the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Section 734(b) or 743(b) of the Code is
required to be taken into account in determining Capital Accounts as a
result of a distribution other than in liquidation of a Member's
Interest, the amount of such adjustment shall be treated as an
5
<PAGE> 10
item of gain (if the adjustment increases the basis of the asset) or
loss (if the adjustment decreases the basis of the asset) from the
disposition of the asset and shall be taken into account for purposes
of computing Profits or Losses;
(e) in the event the Book Value of any Company asset is
adjusted pursuant to the definition of Book Value, the amount of such
adjustment shall be taken into account as gain or loss from the
disposition of such asset for purposes of computing Profits or Losses;
(f) gain or loss resulting from any disposition of property
with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Book Value of the
property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Book Value; and
(g) any items of income, gain, loss or deduction which are
allocated individually specially pursuant to the provisions of Section
7.2 shall not be taken into account in computing Profits and Losses for
any taxable year.
"REMAINING MEMBERS" as defined in subsection 10.1.1.
"REQUIRED FUNDS" as defined in subsection 6.2.2.
"SECURITIES ACT" as defined in subsection 12.1.6.
"SECURITIES LAWS" as defined in subsection 12.1.6.
"SPECIAL TAX EVENT" means a sale or transfer of all or part of a
Member's Percentage Interest that would cause Interstate Management to recognize
any of the "built-in gain" with respect to its interests in the Company.
"SUBMANAGEMENT AGREEMENTS" means those certain Submanagement Agreements
entered into by and among the Company and the Submanager with respect to the
Hotels, as the same may be amended, modified, restated or supplemented from time
to time.
"SUBSTITUTE MEMBER" as defined in Section 9.3.
"SUBMANAGER" MEANS [MARRIOTT OR MARRIOTT WHOLLY OWNED ENTITY].
"TAX MATTERS MEMBER" as defined in Section 7.4.
"TRANSFER" as defined in subsection 9.1.1.
"TREASURY REGULATIONS" means the income tax regulations promulgated
under the Code, whether temporary, proposed or finalized, as such regulations
may be amended from time to time (including corresponding provisions of
succeeding regulations).
6
<PAGE> 11
ARTICLE 2
FORMATION, DURATION AND PURPOSES
--------------------------------
SECTION 2.1 FORMATION. Pursuant to the Delaware Limited Liability
Company Act, codified in the Delaware Code Annotated, Title 6, Sections 18-101
to 18-1109, as the same may be amended from time to time (the "ACT"), the
Members have formed a limited liability company by filing the Certificate of
Formation with the Secretary of State of the State of Delaware. The rights and
liabilities of the Members, and the operation of the Company, shall be governed
by and determined pursuant to the Act and this Agreement. To the extent the
rights and obligations of any Member are different by reason of any provision of
this Agreement than they would be in the absence of such provision, this
Agreement, to the extent permitted by the Act, shall control.
SECTION 2.2 NAME; REGISTERED AGENT AND REGISTERED OFFICE. The name of
the Company, and the name under which the business of the Company shall be
conducted shall be IHC II, LLC or such other name as hereafter may be adopted by
the Class A Member. The Registered Agent of the Company shall be [Corporation
Service Company], or such other Person as may be selected from time to time by
the Class A Member. The registered office of the Company shall be at [1013
Centre Road, Wilmington, Delaware 19805].
SECTION 2.3 PRINCIPAL OFFICE. The principal place of business and
office of the Company shall be located c/o [________________________________ ],
or at such other place as may be determined by the Class A Member.
SECTION 2.4 PURPOSES AND BUSINESS.
2.4.1 The purpose and nature of the business of the Company shall be:
(i) to directly or indirectly own, hold, manage,
terminate, extend, amend, amend and restate or
otherwise modify, or renew or replace (provided such
renewal or replacement relates solely to the hotels
referenced in the Contracts) the Contracts;
(ii) to exercise the rights and perform the
obligations of the Company under and pursuant to the
Contracts, including to act as managers and
franchisees under such Contracts or any renewals or
replacements thereof with respect to the hotels
referenced in such Contracts; and
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<PAGE> 12
(iv) to conduct all activities necessary or desirable
to accomplish the foregoing purposes.
2.4.2 For so long as the Management Agreement remains in
place, the Company shall not:
(i) employ any individual other than as an
independent contractor;
(ii) enter into any contract or agreement other
than as permitted under subsection 2.4.1;
(iii) enter into or conduct any business other
than as set forth subsection 2.4.1;
(iv) fail to correct any known misunderstanding
regarding its separate identity;
(v) commingle its funds or other assets with
those of any other Person (except as
specifically contemplated in the Contracts);
(vi) guarantee or become obligated for the debts
of any other person or hold its credit as
being available to satisfy the obligations
of any other person;
(vii) pledge any of its assets for the benefit of
any other Person other than in connection
with the Management Agreement; or
(viii) make any loans to any other person;
SECTION 2.5 PURPOSES AND BUSINESS. The Members acknowledge and agree
that they intend for all management and franchise activities, other than
franchise or management activities permitted under subsection 2.4.1 or relating
to the hotels currently managed under the Contracts, to be conducted by
Interstate Management, as opposed to the Company, and neither the Class A Member
or the Class B Member shall have any obligation, fiduciary or otherwise, to
offer or bring to the Company any opportunities relating to any business
activities not contemplated in subsection 2.4.1. It is anticipated that all such
opportunities not contemplated by subsection 2.4.1 shall be transferred to
Interstate Management.
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<PAGE> 13
ARTICLE 3
RIGHTS AND OBLIGATIONS OF MEMBERS
---------------------------------
SECTION 3.1 LIMITED LIABILITY. Except as required under the Act or as
expressly set forth in this Agreement, the debts, obligations and liabilities of
the Company, whether arising in contract, tort or otherwise, will be solely the
debts, obligations and liabilities of the Company, and no Member will be
obligated personally for any debt, obligation or liability of the Company solely
by reason of being a member of the Company.
SECTION 3.2 ADMISSION OF MEMBERS. Interstate Management is the sole
Class A Member and MM is the sole Class B Member of the Company and shall be
shown as such on the books and records of the Company. Except as expressly
permitted by this Agreement, no other Person will be admitted as a member of the
Company, and no additional Interests will be issued, without the approval of
Interstate Management and MM.
SECTION 3.3 BANKRUPTCY OF A MEMBER. Except as provided in Section 10.1,
the Bankruptcy of any Member shall not cause a dissolution of the Company, and
the rights of such Member to share in the profits or losses of the Company and
to receive distributions of Company funds shall, on the happening of such event,
devolve on its successors or assigns, subject to the terms and conditions of
this Agreement, and the Company shall continue as a limited liability company.
However, in no event shall any such assignee become a substitute Member or
succeed to any right to vote or participate in the management of the business,
property and affairs of the Company or to exercise any rights of a Member,
unless such assignee shall otherwise be entitled to become a Substitute Member
under the terms of this Agreement.
SECTION 3.4 NO WITHDRAWAL. No Member may withdraw from the Company
without the prior consent of the other Members (which may be granted or withheld
in the sole discretion of such Members), other than as expressly provided in
this Agreement.
SECTION 3.5 REMUNERATION TO MEMBERS. Except as expressly otherwise
authorized in, or pursuant to, this Agreement, no Member shall be entitled to
remuneration for acting in the Company business.
SECTION 3.6 DUTIES AND CONFLICTS. Notwithstanding anything to the
contrary contained in this Agreement, (i) each Member recognizes that the other
Member and its Affiliates have or may have other business interests, activities
and investments, some of which may be in conflict or competition with the
business of the Company, and that such Persons are entitled to carry on such
other business interests, activities and investments; (ii) the Members and their
Affiliates may engage in or possess an interest in any other business or venture
of any kind, independently or with others, on their own behalf or on behalf of
other entities with which they are affiliated or associated, and such Persons
may engage in any activities, whether or not competitive with the Company,
without any obligation to offer any interest in such activities to the Company
or to any Member; and (iii) neither the Company nor any Member shall have any
right, by virtue of this Agreement, in or to such activities, or the income or
profits derived therefrom, and the pursuit of such activities, even if
competitive with the business of the Company, shall not be deemed wrongful or
improper.
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<PAGE> 14
ARTICLE 4
MANAGEMENT
----------
SECTION 4.1 MANAGEMENT BY THE CLASS A MEMBER; MEMBERS.
4.1.1 MANAGEMENT BY THE CLASS A MEMBER. Subject to the
limitations contained in subsection 4.1.3, the overall management and
control of the business and affairs of the Company shall be overseen by
the Class A Member, in the form and manner described below. Except as
otherwise expressly provided in this Agreement, the Class A Member
shall have the exclusive power and authority to take such action for
and on behalf of the Company as the Class A Member shall from time to
time deem necessary or appropriate to carry on the Company business and
to carry out the purposes for which the Company was organized.
4.1.2 INVOLVEMENT IN COMPANY BUSINESS. The Class A Member
shall devote such time to the Company business as it deems to be
necessary or desirable in connection with its respective duties and
responsibilities hereunder.
4.1.3 ACTIONS REQUIRING THE CONSENT OF THE CLASS B MEMBER.
Notwithstanding any other provision hereof to the contrary, for so long
as the Submanagement Agreements remain in effect, the Company shall
not, without the prior written consent of both the Class A Member and
the Class B Member:
(a) dissolve, liquidate, consolidate or merge or sell all or
substantially all of its assets;
(b) engage in any business other than that specified in Section
2.4;
(c) acquire any assets or incur any liabilities not reasonably
related to the conduct of the business specified in Section
2.4;
(d) institute proceedings to have the Company adjudicated as
bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or file a
petition with respect to the Company or consent to a petition
with respect to the Company seeking reorganization or relief
under any applicable Federal or state laws relating to
bankruptcy or insolvency, or consent to the appointment of
receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or a substantial
portion of its assets, or make any assignment for the benefit
of creditors by the Company, or except as required by law,
admit in writing the inability of the Company to pay its debts
generally as they become due, or take any action as a limited
liability company
10
<PAGE> 15
in furtherance of any such action;
(e) terminate (or assert, either directly to the Submanager or in
any judicial or administrative proceeding involving the
Submanagement Agreements, the right to terminate) the
Submanagement Agreement except (A) as a result of a breach by
the Submanager of any of the Submanager's duties or
obligations under the Submanagement Agreements (subject to the
conditions and limitations set forth in the Submanagement
Agreements); or (B) pursuant to the exercise of an express
termination right set forth in the Submanagement Agreement;
(f) assert, either directly to the Submanager or in any judicial
or administrative proceeding involving the Submanagement
Agreement, (A) that the status of the Submanager with respect
to the Company under the Submanagement Agreements is other
than that of an "independent contractor" with the rights and
obligations expressly set forth in the Submanagement
Agreement, or (B) that the Submanager is not entitled to
injunctive relief preventing a termination of the
Submanagement Agreements (except in accordance with the
express terms thereof or as a result of a breach by the
Submanager of any of the Submanager's duties or obligations
under the Submanagement Agreement (subject to the conditions
and limitations set forth in the Submanagement Agreement)) by
reason of the fact that the Submanager would have an adequate
remedy at law for money damages by reason of such wrongful
termination; or
(g) assert, either directly to the Class B Member or in any
judicial or administrative proceeding, that the provisions of
this Section are invalid or otherwise not enforceable strictly
in accordance with their express terms.
If either Member shall at any time violate, or attempt to violate, any
of the provisions of this subsection 4.1.3 and any rights hereby granted, then
the other Member shall, in addition to all rights and remedies at law and in
equity, be entitled to a decree or order restraining such violation.
4.1.4 In exercising voting and other management rights under this LLC
Agreement (including, those set forth in Subsection 4.1.4), no Member,
(i) shall have any fiduciary duty to the Company or the other Member or
(ii) shall be liable for (or otherwise prevented from) exercising such
rights in a manner that solely benefits its economic and business
interests, without regard to the interests of the Company or the other
Member.
4.1.5 Notwithstanding the foregoing provisions of this Section 4.1 or
any other provision of this Agreement to the contrary, the Members
shall not be empowered to, and shall not (i) undertake any act in
violation of this Agreement; (ii) possess or take title to any assets
of the Company; or (iii) take any action that makes it illegal or
impossible for the Company to carry on its business.
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<PAGE> 16
SECTION 4.2 BANK ACCOUNTS. The Class A Member shall open and thereafter
maintain, for the Company, a commercial checking account and such other accounts
at one or more banks or trust companies organized and existing under the laws of
the United States or any state thereof, each having combined capital and surplus
aggregating at least $500,000,000 and none of which is an Affiliate of any
Member, which accounts shall be interest bearing to the extent practicable. All
funds of the Company shall be promptly deposited in said accounts.
SECTION 4.3 LIABILITY; INDEMNIFICATION. Except as set forth in Section
4.4, no Member (including the Class A Member) shall be liable to the Company or
any Member for any act or omission by it in the conduct of its duties as a Class
A Member or Member, as the case may be, which is within the scope of such
Person's authority hereunder and which is performed or omitted in good faith and
without gross negligence or willful misconduct on its part. The Company shall
indemnify, defend and hold harmless each such Person and their respective
Affiliates and agents from and against any personal liability, claim, loss,
damage, cost or expenses, including attorneys' fees and expenses, incurred or
sustained by such Person or such Affiliate or agent by reason of any act or
omission by it which is within the scope of its authority hereunder and which is
performed or omitted in good faith and without gross negligence or willful
misconduct on its part. The indemnification provided under this Section 4.3
shall be in addition to, and shall not limit or diminish, the coverage of any
such Person or Affiliate or agent under any insurance covering the Company. The
provisions of this Section 4.3 shall survive any termination of the Company or
this Agreement.
SECTION 4.4 LIMITATION ON SALE OF ASSETS. The Members acknowledge that
a portion of the stock of Interstate Management is held by PAH Interstate
Holdings, Inc. ("PAH"), an entity that is a "real estate investment trust" for
Federal income tax purposes (a "REIT") that must comply with certain
requirements to continue to qualify as a REIT, including proposed legislation
affecting the operations and activities of "stapled" REITs entitled to
grandfathering relief under Section 269B of the Code. Accordingly, without the
prior written consent of Interstate Management, the Company shall not, and the
Managing Member shall cause the Company not to, (I) acquire any real property or
other interests in real estate (including leasehold interests), or acquire
interests in, or substantially all of the assets of, any other person or entity
or (ii) change the nature of the Company's business in a manner not contemplated
by this Agreement.
SECTION 4.5 ALLOCATION OF COSTS AND EXPENSES. The Company and
Interstate Management acknowledge that certain services may be provided by
Interstate Management for the benefit of the Company. All costs and expenses
relating to services provided by Interstate Management for, in whole or in part,
the benefit of Company (the "SHARED EXPENSES") shall be allocated between the
Company and Interstate Management, based on generally accepted accounting
principles consistently applied, on the basis of which party benefited from the
expenditure of such Shared Expenses. To the extent the allocation of any Shared
Expenses cannot be fairly or equitably apportioned (including general and
administrative expenses), the Company and Interstate Management shall allocate
Shared Expenses based on respective gross
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<PAGE> 17
revenues so that each party's profit margins are substantially the same for
similar services. The Managing Member and the Non-Managing Member may mutually
agree to apportion Shared Expenses between the Company and Interstate Management
other than as set forth above.
ARTICLE 5
BOOKS AND RECORDS
-----------------
SECTION 5.1 BOOKS AND RECORDS. The Class A Member shall maintain or
cause to be maintained, at the expense of the Company, in a manner customary and
consistent with good accounting principles, practices and procedures, a
comprehensive system of office records, books and accounts (which records, books
and accounts shall be and remain the property of the Company) in which shall be
entered fully and accurately each and every financial transaction with respect
to the operations of the Company. Bills, receipts and vouchers shall be
maintained on file by the Company. The Class A Member shall maintain or caused
to be maintained said books and accounts in a safe manner and separate from any
records not having to do directly with the Company. The Class A Member shall
cause audits to be performed and audited financial statements and income tax
returns to be prepared as it deems necessary. Such books and records of account
shall be prepared and maintained by the Class A Member at a location or
locations designated by the Class A Member. Each Member or its duly authorized
representative shall have the right to inspect, examine and copy such books and
records of account at the Company's office during reasonable business hours.
SECTION 5.2 ACCOUNTING AND FISCAL YEAR. The books of the Company shall
be kept on the accrual basis and the Company shall report its operations for tax
purposes on the accrual method. The taxable year of the Company shall end on
December 31 of each year, unless a different taxable year shall be required by
the Code.
SECTION 5.3 REPORTS.
5.3.1 The Class A Member shall prepare, or cause to be
prepared, at Company expense, the financial reports and other
information, including, without limitation, audited financial
statements, that the Class A Member may determine are appropriate. The
Class A Member shall prepare or cause to be prepared at the expense of
the Company and furnished to each of the Members the following:
5.3.1.1 Within sixty (60) calendar days after the
close of each calendar year of the Company, audited financial
statements, including, without limitation, related notes to financial
statements, a balance sheet of the Company dated as of the end of the
calendar year, a related statement of income and expense, a statement
of cash flow and a statement of changes in Members' capital for the
Company for the calendar year and information for the calendar year as
to the balance in each Member's Capital Account, and all other
information deemed reasonably necessary by
13
<PAGE> 18
the Class A Member, certified to by an independent accounting firm as,
to the best of its knowledge, true and correct and prepared in
accordance with generally accepted accounting principles applied on a
consistent basis, and all of which shall otherwise be certified in such
manner as is customary;
5.3.1.2 Within twenty (20) calendar days after the
close of each calendar quarter of the Company (other than the last
calendar quarter in any calendar year), a balance sheet of the Company
dated as of the end of the calendar quarter, a related statement of
income and expense, a statement of cash flow and a statement of changes
in Members' capital for the calendar quarter and information for the
calendar quarter as to the balance in each Member's Capital Account,
and all other information, including a market update, as is deemed
reasonable by the Class A Member, all of which shall be certified to by
the Person preparing or responsible for preparing such statements as
being, to the best of its knowledge, true and correct;
5.3.1.3 Within twenty (20) calendar days after the
end of each calendar month, an income statement (with budget variance
explanations) and statement of cash flow; and
5.3.1.4 Promptly after the end of each calendar
year the Class A Member will use its best efforts to have the Company
Accountant prepare and deliver to each Member a report setting forth in
sufficient detail all such information and data with respect to
business transactions effected by or involving the Company during the
calendar year as will enable the Company and each Member to timely
prepare its federal, state and local income tax returns in accordance
with the laws, rules and regulations then prevailing. The Class A
Member will use its reasonable efforts to have the Company Accountant
also prepare federal, state and local tax returns required of the
Company, submit those returns to the Company for its approval no later
than 30 calendar days prior to the date required for the filing thereof
(including any extensions granted) and will file the tax returns after
they have been approved by the Class A Member. In the event the Class A
Member shall not desire or be able to approve any such tax return prior
to the date required for the filing thereof (including any extensions
granted), the Company will timely obtain an extension of such date if
such extension is available under applicable law. In all cases, tax
returns shall be prepared and filed in accordance with applicable law.
5.3.2 All decisions as to accounting principles shall be made
by the Class A Member subject to the provisions of this Agreement.
SECTION 5.4 THE COMPANY ACCOUNTANT. The Company shall retain as the
regular accountant and auditor for the Company (the "COMPANY ACCOUNTANT") a
nationally-recognized accounting firm or any other accounting firm acceptable to
the Class A Member in its sole discretion. The fees and expenses of the Company
Accountant shall be a Company expense.
14
<PAGE> 19
ARTICLE 6
CONTRIBUTIONS
-------------
SECTION 6.1 INITIAL CAPITAL CONTRIBUTIONS. The "INITIAL CAPITAL
CONTRIBUTIONS" of the Class A Member and initial Capital Account balance for the
Class A Member shall be as described on Schedule 1.1 attached hereto.
SECTION 6.2 ADDITIONAL CAPITAL CONTRIBUTIONS.
6.2.1 No Member shall be obligated to make any additional
contributions of capital (all contributions of capital to the Company,
including the Initial Capital Contributions, "CAPITAL CONTRIBUTIONS")
to the Company (including upon dissolution and liquidation of the
Company).
6.2.2 The Class A Member shall monitor the finances of the
Company in an attempt to determine whether or not, and when, the cash
receipts of the Company are insufficient to pay all costs and expenses
of the Company (such costs and expenses, the "NECESSARY COSTS"). The
Class A Member shall have the right, but not the obligation, to
contribute capital to the Company to cover Necessary Costs. If the
Class A Member makes such additional contributions of capital, its
Capital Account shall be adjusted accordingly.
6.2.3 [Reserved]
SECTION 6.3 NO THIRD PARTY BENEFICIARY. The provisions hereof are
intended for the benefit of the Members and the Company only and shall not
confer any right or claim upon, or otherwise inure to the benefit of, any
officer or creditor of, or other third party having dealings with, the Company.
SECTION 6.4 CAPITAL ACCOUNTS. A Capital Account shall be maintained for
the Class A Member. Initially, the Capital Account of the Class A Member shall
be credited with the amounts referred to in Schedule 1.1. Thereafter, the Class
A Member's Capital Account shall be credited with the Profits, any individual
items of income and gain allocated to such Member pursuant to the provisions of
Article 7, the amount of additional cash, and the Book Value of any asset (net
of any liabilities assumed by the Company and liabilities to which the asset is
subject), contributed to the Company by such Member (an "ADDITIONAL CAPITAL
CONTRIBUTION"), and shall be debited with the Losses, any individual items of
deduction and loss allocated to such Member pursuant to the provisions of
Article 7, the amount of any cash distributed to such Member and the Book Value
of any asset distributed to such Member (net of any liabilities assumed by the
Member and liabilities to which the asset is subject). In the event that all or
a portion of an interest in the Company is transferred in accordance with the
15
<PAGE> 20
terms of this Agreement, the transferee shall succeed to the Capital Account of
the transferor to the extent it relates to the transferred interest.
It is the intention of the Members that the Class B Member
have no economic interest in the assets of the Company, but rather has the
consent rights specifically set forth herein. Accordingly, no Capital Account
shall be maintained for the Class B Member.
SECTION 6.5 WITHDRAWAL OF CAPITAL. Except as provided herein, (i) no
Member shall be entitled to withdraw any part of its Capital Account, (ii) no
Member shall be entitled to receive any interest on its Capital Account or
distributions from the Company, and (iii) no Member shall be entitled to demand
or receive any property from the Company other than cash.
SECTION 6.6 NEGATIVE CAPITAL ACCOUNTS. In no event shall the Class A
Member be obligated to make any capital contribution to the Company solely as a
result of the existence at any time of a negative Capital Account balance.
ARTICLE 7
ALLOCATION OF PROFITS AND LOSSES; TAX MATTERS
---------------------------------------------
SECTION 7.1 PROFITS AND LOSSES. Profits and Losses for each fiscal year
of the Company shall be allocated to the Class A Member.
SECTION 7.2 REGULATORY ALLOCATIONS.
7.2.1 Notwithstanding subsection 7.1, the following special
allocations shall be made each taxable year, to the extent required, in the
following order:
(i) Minimum Gain Chargebacks and Qualified Income Offset.
Items of Company income and gain shall be allocated
to the extent of, and in an amount sufficient to
satisfy, the "minimum gain chargeback" requirements
of Treasury Regulations Section 1.704-2(f) and (i)(4)
and the "qualified income offset" requirement of
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(3).
(ii) Nonrecourse and Partner Nonrecourse Deductions.
"Nonrecourse deductions" of the Company (within the
meaning of Treasury Regulations Section
1.704-2(b)(1)) shall be allocated among the Members
in proportion to their respective Capital
Contributions. "Partner nonrecourse deductions"
(within the meaning of Treasury Regulations Section
1.704-2(i)) shall be allocated to the Member who
16
<PAGE> 21
bears the economic risk of loss associated with such
deductions, in accordance with Treasury Regulations
Section 1.704-2(i).
(iii) Any Other Allocations of Items Which Cannot Have
Economic Effect. Unless otherwise required by Code
Section 704(b) or the Treasury Regulations
promulgated thereunder or otherwise provided in this
subsection 7.2.2, any allocations of Company items of
income, gain, loss, deduction or credit that cannot
have "economic effect" (within the meaning of
Treasury Regulations Section 1.704-1 and 1.704-2)
shall be allocated among the Members in proportion to
their respective Percentage Interests.
SECTION 7.3 TAX ALLOCATIONS. The Company's ordinary income and losses
and capital gain as determined for tax purposes (and each item of income, gain,
loss or deduction entering into the computation thereof) shall be allocated to
the Members in the same proportions as the corresponding "book" items are
allocated pursuant to Sections 7.1 and 7.2 of this Agreement. Notwithstanding
the foregoing, tax items relating to property with an adjusted tax basis that is
different from its Book Value shall be allocated among the Members in accordance
with Section 704(c) of the Code and the Treasury Regulations issued thereunder.
Items described in this Section 7.3 shall neither be credited nor charged to the
Member's Capital Accounts.
SECTION 7.4 TAX MATTERS MEMBER. The Class A Member is hereby designated
as the "TAX MATTERS MEMBER" for the Company (as such term is defined in Section
6231(a)(7) of the Code), and all federal, state and local tax audits and
litigation shall be conducted under the direction of the Tax Matters Member.
SECTION 7.5 TAX ELECTIONS. All elections required or permitted to be
made by the Code or other applicable tax laws, and all material decisions with
respect to the calculation of taxable income or tax loss under the Code or any
other applicable tax laws, shall be made by the Tax Matters Member.
SECTION 7.6 INTENTION OF THE MEMBERS. It is the intention of the
Members that the Class A Member is the sole member of the Company for Federal,
state and local income tax purposes, the Tax Matters Member shall perform its
duties consistent with such intent and the Members agree to take no action
inconsistent with that intent.
ARTICLE 8
DISTRIBUTIONS
-------------
SECTION 8.1 CASH AVAILABLE FOR DISTRIBUTIONS.
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8.1.1 At such times as are determined by the Class A Member
(but no less frequently than quarterly), the Company shall make a
distribution of Net Operating Cash Flow of the Company (to the extent
positive). Net Operating Cash Flow distributions shall be made to the
Class A Member.
8.1.2 Except upon the liquidation of the Company (in which
event Net Capital Proceeds shall be distributed pursuant to Section
10.2) any Net Capital Proceeds shall be distributed within thirty (30)
days following receipt by the Company to the Class A Member.
8.1.3 Except as provided in subsection 8.1.1 and subsection
8.1.2 above, no portion of any capital contribution made by any Member
to the Company may be withdrawn or distributed at any time.
ARTICLE 9
TRANSFER
--------
SECTION 9.1 NO TRANSFER OF INTERESTS.
9.1.1 Except as expressly permitted or contemplated by this
Agreement: no Member may sell, assign, give, hypothecate, pledge,
encumber or otherwise transfer ("TRANSFER") all or any portion of its
Interest, whether directly or indirectly without the written consent of
the other Members of the Company.
9.1.2 Any Transfer by a Member of its Interest in
contravention of this Article 9 shall be null and void. No Member shall
withdraw from the Company except in connection with a Permitted
Transfer or in accordance with Section 3.4.
SECTION 9.2 [RESERVED]
SECTION 9.3 TRANSFEREES. Notwithstanding anything to the contrary
contained in this Agreement, no transfer of all or any part of any Interest
shall be made if, as a result thereof, any income of the Company will be subject
to corporate federal income tax. No transferee of all or any portion of any
Interest shall be admitted as a Member unless such Interest is transferred in
compliance with the applicable provisions of this Agreement, such transferee
shall have furnished evidence of satisfaction of the requirements of Section 9.2
reasonably satisfactory to the remaining Members, and such transferee shall have
executed and delivered to the Company such instruments necessary to effectuate
the admission of such transferee as a Member and to confirm the agreement of
such transferee to be bound by all of the terms and provisions of this Agreement
with respect to such Interest. At the request of the remaining Members prior to
such transfer, each such transferee shall also cause to be delivered to the
Company, at the transferee's sole cost and expense, a favorable opinion of legal
counsel
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<PAGE> 23
reasonably acceptable to the Company, to the effect that such transferee has the
legal right, power and capacity to own the Interest proposed to be transferred.
As promptly as practicable after the admission of any Person as a Member, the
books and records of the Company shall be changed to reflect such admission.
Upon satisfaction of the requirements of this Section 9.3 and any other
applicable provisions of this Agreement), such transferee shall be a substitute
Member (a "SUBSTITUTE MEMBER") of the Company. All reasonable costs and expenses
incurred by the Company in connection with any Transfer of any Interest and, if
applicable, the admission of any transferee as a Member shall be paid by such
transferee.
SECTION 9.4 ADMISSION OF ADDITIONAL MEMBERS.
9.4.1 No person may be admitted as an additional Member of the
Company (in contrast with admission as a Substitute Member in
connection with a Permitted Transfer) without the prior written consent
of the Members.
9.4.2 Any additional Member admitted to the Company shall
execute and deliver documentation in form satisfactory to the Class A
Member or the Members, as the case may be, accepting and agreeing to be
bound by this Agreement, and such other documentation as the Class A
Member or the Members, as the case may be, shall require in order to
effect such person's admission as an additional Member. The admission
of any person as an additional Member (an "ADDITIONAL MEMBER") shall
become effective as of the date upon which the name of such person is
recorded on the books and records of the Company following the consent
of the Class A Member or the Members, as the case may be, to such
admission.
SECTION 9.5 MANDATORY REDEMPTION OF CLASS B INTERESTS. Promptly
following the termination of the last Submanagement Agreement, the Class A
Member shall be required to purchase the Interest of the Class B Member (and the
Class B Member shall be required to sell its Interest to the Class A Member) in
the Company for One Dollar ($1.00).
ARTICLE 10
TERMINATION
-----------
SECTION 10.1 DISSOLUTION. The Company shall be dissolved and its
business wound up upon the happening of any of the following events, whichever
shall first occur:
10.1.1 the Bankruptcy of any Member, if within ninety (90)
days thereafter, a majority in interest of the remaining Members (the
"REMAINING MEMBERS") shall not have elected to continue the Company,
which right of election is hereby granted to them; or
10.1.2 entry of a decree of judicial dissolution of the
Company.
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In no event shall the Company dissolve prior to the occurrence of one of the
events set forth above.
SECTION 10.2 TERMINATION. In cases of dissolution of the Company, the
business of the Company shall be wound up and the Company terminated as promptly
as practicable thereafter, and each of the following shall be accomplished:
10.2.1 The Liquidating Member shall cause to be prepared a
statement setting forth the assets and liabilities of the Company as of
the date of dissolution, a copy of which statement shall be furnished
to all of the Members.
10.2.2 The property and assets of the Company shall be
liquidated by the Liquidating Member as promptly as possible, but in an
orderly and businesslike and commercially reasonable manner. The
Liquidating Member may, in the exercise of its business judgment and if
commercially reasonable, determine not to sell all or any portion of
the property and assets of the Company, in which event such property
and assets shall be distributed in kind pursuant to subsection 10.2.4
below.
10.2.3 Any income, gain, profit or loss realized by the
Company upon the sale or other disposition of its property pursuant to
subsection 10.2.2 shall be allocated to the Class A Member as and to
the extent required by Article 7 hereof.
10.2.4 The proceeds of sale and all other assets of the
Company shall be applied and distributed as follows and in the
following order of priority:
(i) To the payment of the Company's outstanding
liabilities, which shall be set forth on a statement
as provided in subsection 10.2.1.
(ii) To the setting up of any reserves which the
Liquidating Member shall determine to be reasonably
necessary for contingent, unliquidated or unforseen
liabilities or obligations of the Company or the
Members arising out of or in connection with the
Company. Such reserves, may, in the discretion of the
Liquidating Member, be paid over to a national bank
or national title with the Company as escrowee for
the purposes of disbursing such reserves to satisfy
the liabilities and obligations described above, and
at the expiration of such period as the Liquidating
Member may reasonably deem advisable, distribute any
remaining balance in the manner set forth below.
(iii) To the Class A Member.
No payment or distribution in any of the foregoing categories shall be
made until all payments in each prior category shall have been made in
full. If the payments due to be made in any of the foregoing categories
exceed the remaining assets available for such
20
<PAGE> 25
purpose, such payment shall be made to the Persons entitled to receive
the same pro rata in accordance with the respective amount due to each
such Person. Payments described in clause (ii) above may be made in
cash or in assets of the Company in kind. Any asset distributed in kind
shall be valued at its fair market value and for all purposes of this
Agreement shall be treated as if such asset had been sold at such value
and the net cash proceeds therefrom distributed to the Class A Member.
Without limiting the foregoing, with respect to any assets distributed
in kind, there shall be a calculation of the amount of Profit or Loss
that would have been realized by the Company with respect to such
assets if such assets had been sold at fair market value.
SECTION 10.3 ACTS IN FURTHERANCE OF LIQUIDATION. Each Member, upon the
request of the Liquidating Member, shall promptly execute, acknowledge and
deliver all documents and other instruments as the Liquidating Member shall
reasonably request to effectuate the proper dissolution and termination of the
Company, including the winding up of the business of the Company.
ARTICLE 11
INTENTIONALLY RESERVED
----------------------
[Reserved]
ARTICLE 12
GENERAL PROVISIONS
------------------
SECTION 12.1 COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE MEMBERS.
Each Member represents and warrants to the other Members as follows:
12.1.1 It is duly organized, validly existing and in good
standing under the laws of its jurisdiction of formation with all
requisite power and authority to enter into this Agreement.
12.1.2 This Agreement constitutes the legal, valid and binding
obligation of the Member enforceable in accordance with its terms,
subject to the application of principles of equity and laws governing
insolvency and creditors' rights generally.
12.1.3 No consents or approvals are required from any
governmental authority or other Person for the Member to enter into
this Agreement. All limited liability company, corporate or partnership
action on the part of the Member necessary for the authorization,
execution and delivery of this Agreement, and the consummation of the
transactions contemplated under this Agreement, have been duly taken.
21
<PAGE> 26
12.1.4 The execution and delivery of this Agreement by the
Member, and the consummation of the transactions contemplated under
this Agreement, do not conflict with or contravene the provision of the
Member's organizational documents or any agreement or instrument by
which it or its properties are bound or any law, rule, regulations,
order or decree to which it or its properties are subject.
12.1.5 No Member has retained any broker, finder or other
commission or fee agent, and no such person has acted on its behalf in
connection with the execution and delivery of this Agreement.
12.1.6 Each Member is acquiring its interest in the Company
for investment, solely for its own account, with the intention of
holding such interest for investment and not with a view to, or for
resale in connection with, any distribution or public offering or
resale of any portion of such interest within the meaning of the
Securities Act of 1933 (the "SECURITIES ACT") or any other applicable
federal or state securities law, rule or regulation ("SECURITIES
LAWS").
12.1.7 Each Member acknowledges that it is aware that its
interest in the Company has not been registered under the Securities
Act or under any other Securities Law in reliance upon exemption
contained therein. Each Member understands and acknowledges that its
representations and warranties contained herein are being relied upon
by the Company, the other Members and the constituent owners of such
other Members as the basis for exemption of the issuance of interest in
the Company from registration requirements of the Securities Act and
other Securities Laws. Each Member acknowledges that the Company will
not and has no obligation to register any interest in the Company under
the Securities Act or other Securities Laws.
12.1.8 Each Member acknowledges that prior to its execution of
this Agreement, it received a copy of this Agreement and that it
examined this document or caused this document to be examined by its
representative or attorney. Each Member further acknowledges that it or
its representative or attorney is familiar with this Agreement, and
with the business and affairs of the Company, and that except as
otherwise specifically provided in this Agreement, it does not desire
any further information or data relating to the Company, the Assets or
the other Members. Each Member acknowledges that it understand that the
acquisition of its interest in the Company is a speculative investment
involving a high degree of risks and represents that it has a net worth
sufficient to bear the economic risk of its investment in the Company
and to justify its investing in a highly speculative Company of this
type.
SECTION 12.2 NOTICES. All notices, demands, approvals, consents or
requests provided for or permitted to be given pursuant to this Agreement must
be in writing.
12.2.1 All notices, demands, approvals, consents and requests
to be sent to the Company pursuant to the terms hereof shall be deemed
to have been properly given or
22
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served by personal delivery or by a nationally recognized overnight
courier or by registered or certified mail, return receipt requested,
postage prepaid and addressed as follows:
If to the Company:
c/o Interstate Management
With a copy to:
Interstate Management
With a copy to:
[MM]
If to Interstate Management:
Interstate Management
If to MM:
[MM]
12.2.2 All notices, demands and requests shall be effective
upon personal delivery or upon the date of receipt by the addressee as
shown on the return receipt or upon the date of acknowledgment or
confirmation of receipt with respect to delivery by or nationally
recognized overnight courier. Rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice
was given shall be deemed to be receipt of the notice, demand or
request sent.
12.2.3 By giving to the other parties at least ten (10) days
prior written notice thereof, the parties hereto and their respective
successors and assigns shall have the right from time to time and at
any time during the term of this Agreement to change their respective
addresses.
23
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SECTION 12.3 GOVERNING LAWS; JURISDICTION; VENUE.
12.3.1 GOVERNING LAWS. This Agreement and the obligations of
the Members hereunder shall be interpreted, construed and enforced in
accordance with the laws of the State of Delaware without regard to
conflicts of law principles.
12.3.2 JURISDICTION; VENUE. Each of the Members hereby
irrevocably submits to the exclusive jurisdiction of any state court
located in the City of Wilmington, Delaware and any federal court in
the State of Delaware and any other court with jurisdiction to hear
appeals from such courts for the purposes of any suit, action or other
proceeding of any type whatsoever arising out of this Agreement or the
subject matter hereof, and to the extent permitted by applicable law,
hereby waives, and agrees not to assert, by way of motion, as a
defense, or otherwise, in any such suit, action or proceeding any claim
that it is not personally subject to the jurisdiction of the
above-named courts, that the suit, action or proceeding is brought in
an inconvenient forum, that the venue of the suit, action or proceeding
is improper or that this Agreement or the subject matter hereof may not
be enforced in or by such court.
SECTION 12.4 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto relative to the formation and operation of
the Company. No variations, modifications, or changes herein or hereof shall be
binding upon any party hereto unless set forth in a document duly executed by or
on behalf of such party.
SECTION 12.5 WAIVER. No consent or waiver, express or implied, by any
Member to or of any breach or default by any other Member in the performance by
the other Member of its obligations hereunder shall be deemed or construed to be
a consent or waiver to or of any other breach or default in the performance by
such other Member of the same or any other obligations of such other Member
hereunder. Failure on the part of any Member to complain of any act or failure
to act of any of the other Members or to declare any of the other Members in
default, irrespective of how long such failure continues, shall not constitute a
waiver by such Member of its rights hereunder.
SECTION 12.6 SEVERABILITY. If any provision of this Agreement or the
application thereof to any Person or circumstance shall be invalid or
enforceable to any extent, the remainder of this Agreement and the application
of such provisions to other Persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
SECTION 12.7 TERMINOLOGY. All personal pronouns used in this Agreement,
whether used in the masculine, feminine, or neuter gender, shall include all
other genders; the singular shall include the plural, and vice versa and shall
refer solely to the parties signatory thereto except where otherwise
specifically provided. Titles of Articles and Sections are for convenience only,
and neither limit nor amplify the provisions of the Agreement itself, and all
references herein to Articles, Sections or subdivisions thereof shall refer to
the corresponding
24
<PAGE> 29
Articles, Sections or subdivisions thereof of this Agreement unless specific
reference is made to such Articles, Sections or subdivisions of another document
or instrument. Any use of the word "INCLUDING" herein shall, unless the context
clearly requires otherwise, be deemed to mean "INCLUDING WITHOUT LIMITATION."
SECTION 12.8 ACTION BY THE MEMBERS. No approval, consent, designation
or other action by a Member shall be binding upon such Member unless the same is
in writing and executed on behalf of such Member by a duly authorized
representative of such Member.
SECTION 12.9 AMENDMENTS. No change, modification or amendment of this
Agreement shall be valid or binding unless such change, modification or
amendment shall be in writing and duly executed by all of the Members.
SECTION 12.10 BINDING AGREEMENT. Subject to the restrictions on
transfers and encumbrances set forth herein, this Agreement shall inure to the
benefit of and be binding upon the undersigned Members and their respective
heirs, executors, legal representatives, successors and assigns. Whenever, in
this instrument, a reference to any party or Member is made, such reference
shall be deemed to include a reference to the heirs, executors, legal
representatives, successors and assigns of such party or Member.
SECTION 12.11 FURTHER ASSURANCES. Each of the Members shall hereafter
execute and deliver such further instruments and do such further acts and things
as may be reasonably necessary to carry out the intent and purpose of this
Agreement and as are not inconsistent with the terms hereof.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
25
<PAGE> 30
IN WITNESS WHEREOF, this Agreement is executed effective as of the date
first set forth above.
INTERSTATE HOTELS MANAGEMENT, INC.
a Maryland corporation
By: _______________________________
Name:
Title:
MARRIOTT MEMBER
a [** Delaware **] corporation
By: _______________________________
Name:
Title:
26
<PAGE> 31
SCHEDULE 1.1
------------
INITIAL CAPITAL ACCOUNT OF CLASS A MEMBER
-----------------------------------------
<PAGE> 32
SCHEDULE 1.3
------------
LIST OF SUBMANAGEMENT AGREEMENTS
--------------------------------
<PAGE> 33
SCHEDULE 2.4.1
--------------
LIST OF MANAGEMENT CONTRACTS
<PAGE> 1
EXHIBIT 10.2
FORM OF AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
INTERSTATE HOTELS, LLC
Dated as of ______, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
DEFINITIONS..............................................................................................2
ARTICLE 2
FORMATION, DURATION AND PURPOSES.........................................................................7
Section 2.1 Formation.....................................................................7
Section 2.2 Name; Registered Agent and Registered Office..................................7
Section 2.3 Principal Office..............................................................7
Section 2.4 Purposes and Business.........................................................8
Section 2.5 Future Business...............................................................8
ARTICLE 3
RIGHTS AND OBLIGATIONS OF MEMBERS........................................................................9
Section 3.1 Limited Liability.............................................................9
Section 3.2 Admission of Members..........................................................9
Section 3.3 Bankruptcy of a Member........................................................9
Section 3.4 No Withdrawal.................................................................9
Section 3.5 Remuneration To Members.......................................................9
Section 3.6 Duties and Conflicts..........................................................9
ARTICLE 4
MANAGEMENT..............................................................................................10
Section 4.1 Management by the Managing Member; Members...................................10
Section 4.2 Bank Accounts................................................................10
Section 4.3 Liability; Indemnification...................................................11
Section 4.4 Limitations on Sale of Assets; Indemnification...............................11
ARTICLE 5
BOOKS AND RECORDS.......................................................................................12
Section 5.1 Books and Records............................................................12
Section 5.2 Accounting and Fiscal Year...................................................13
Section 5.3 Reports......................................................................13
Section 5.4 The Company Accountant.......................................................14
ARTICLE 6
CONTRIBUTIONS...........................................................................................14
Section 6.1 Initial Capital Contributions................................................14
Section 6.2 Additional Capital Contributions.............................................14
Section 6.3 No Third Party Beneficiary...................................................15
Section 6.5 Withdrawal of Capital........................................................16
Section 6.6 Negative Capital Accounts....................................................16
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 7
ALLOCATION OF PROFITS AND LOSSES; TAX MATTERS...........................................................16
Section 7.1 Profits and Losses...........................................................16
Section 7.2 Regulatory Allocations.......................................................16
Section 7.3 Tax Allocations..............................................................17
Section 7.4 Tax Matters Member...........................................................17
Section 7.5 Tax Elections................................................................17
ARTICLE 8
DISTRIBUTIONS...........................................................................................17
Section 8.1 Cash Available for Distributions.............................................17
ARTICLE 9
TRANSFER................................................................................................18
Section 9.1 No Transfer of Interests.....................................................18
Section 9.2 Permitted Transfers of Interests; Right of First Offer.......................19
Section 9.3 Transferees..................................................................20
Section 9.4 Admission of Additional Members..............................................20
ARTICLE 10
TERMINATION.............................................................................................21
Section 10.1 Dissolution..................................................................21
Section 10.2 Termination..................................................................21
Section 10.3 Acts in Furtherance of Liquidation...........................................22
ARTICLE 11
INTENTIONALLY RESERVED..................................................................................23
ARTICLE 12
GENERAL PROVISIONS......................................................................................23
Section 12.1 Covenants, Representations and Warranties of the Members.....................23
Section 12.2 Notices......................................................................24
Section 12.3 Governing Laws; Jurisdiction; Venue..........................................25
Section 12.4 Entire Agreement.............................................................26
Section 12.5 Waiver.......................................................................26
Section 12.6 Severability.................................................................26
Section 12.7 Terminology..................................................................26
Section 12.8 Action by the Members........................................................26
Section 12.9 Amendments...................................................................26
Section 12.10 Binding Agreement............................................................27
Section 12.11 Further Assurances...........................................................27
</TABLE>
ii
<PAGE> 4
SCHEDULES & EXHIBITS:
Schedule 1.1 - Initial Capital Contributions, Capital Account Balances
Schedule 1.2 - Existing Subsidiaries
Schedule 2.4.1 - List of Existing Contracts
iii
<PAGE> 5
FORM OF AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
-----------------------------------
THIS LIMITED LIABILITY COMPANY AGREEMENT (this "AGREEMENT"), made and
entered into as of this _____ day of _____, 1999 by and among INTERSTATE HOTELS
MANAGEMENT, INC., a Maryland corporation (together with its permitted successors
and assigns hereunder "INTERSTATE MANAGEMENT"), and PAH-INTERSTATE HOLDINGS,
INC., a Delaware corporation (together with its permitted successors and assigns
hereunder "PAH"). Newco and PAH are each sometimes referred to herein
individually as a "MEMBER" and collectively as the "MEMBERS".
R E C I T A L S
WHEREAS, [Patriot American Hospitality, Inc. ("Patriot REIT")] has
formed a limited liability company with the name "INTERSTATE HOTELS, LLC" (the
"COMPANY") under the Act (as defined below) by the filing of a Certificate of
Formation (the "CERTIFICATE OF FORMATION") with the Delaware Secretary of State
as of March __, 1999; and
WHEREAS, Patriot REIT and Interstate Hotels Company, a Pennsylvania
corporation ("Interstate"), have entered into an Agreement and Plan of Merger
dated as of December 2, 1997, pursuant to which Interstate will merge with and
into Patriot REIT (the "Interstate Merger");
WHEREAS, following the Interstate Merger and certain internal
restructuring transactions, Patriot REIT intends to cause Interstate Hotels
Corporation, a Pennsylvania corporation and a wholly owned subsidiary of
Interstate, to merge with and into the Company;
WHEREAS, Patriot REIT intends to make capital contributions to PAH and
Interstate Management, who will become the sole Members of the Company, such
that PAH will own [65%- SUBJECT TO THE TERMS OF THE SETTLEMENT AGREEMENT] of the
interests in the Company and Interstate Management will own [approximately 35%-
SUBJECT TO THE TERMS OF THE SETTLEMENT AGREEMENT] of the interests in the
Company;
WHEREAS, the Members now desire to enter into this Agreement in order
to govern the operations of the Company and the rights and obligations of the
Members.
NOW, THEREFORE, in consideration of the recitals and the covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Members hereby
agree as follows:
<PAGE> 6
ARTICLE 1
DEFINITIONS
-----------
For purposes of this Agreement, initially capitalized terms used herein
shall have the following meanings:
"ACT" as defined in Section 2.1.
"ADDITIONAL MEMBER" as defined in subsection 9.4.2.
"AFFILIATE" means, when used with respect to any Person, any other
Person controlling or controlled by or under common control with such Person.
For purposes of this definition, the term "CONTROL", with respect to any Person,
means possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or of other beneficial interests or by contract
or otherwise.
"AGREEMENT" as defined in the Preamble.
"BANKRUPTCY" means, with respect to any Person, (i) the commencement by
such Person of a proceeding seeking relief under any provision or chapter of the
Bankruptcy Code or any other federal or state law relating to insolvency,
bankruptcy or reorganization; (ii) an adjudication that such Person is insolvent
or bankrupt; (iii) the entry of an order for relief under the Bankruptcy Code
with respect to such Person; (iv) the filing of any such petition or the
commencement of any such case or proceeding against such Person, unless such
petition and the case or proceeding initiated thereby are dismissed within
seventy-five (75) days from the date of such filing; (v) the filing of an answer
by such Person admitting the material allegations of any such petition; (vi) the
appointment of a trustee, receiver or custodian for all or substantially all of
the assets of such Person unless such appointment is vacated or dismissed within
seventy-five (75) days from the date of such appointment but not less than five
(5) days before the proposed sale of any assets of such Person; (vii) the
insolvency of such Person or the execution by such Person of a general
assignment for the benefit of creditors; (viii) the convening by such Person of
a meeting of its creditors, or any class thereof, for purposes of effecting a
moratorium upon or composition of its debts or an extension of its debts; (ix)
the failure of such Person to pay its debts generally as they mature; (x) the
levy, attachment, execution or other seizure of substantially all of the assets
of such Person where such seizure is not discharged within ten (10) days
thereafter; or (xi) the admission by such Person in writing of its inability to
pay its debts generally as they mature or that it is generally not paying its
debts as they become due.
"BANKRUPTCY CODE" means Title 11 of the United States Code entitled
"Bankruptcy", as now and hereafter in effect, or any successor statute.
2
<PAGE> 7
"BOOK DEPRECIATION" means, for each fiscal year, an amount equal to the
depreciation, amortization or other cost recovery deduction allowable with
respect to an asset for such year, except that if the Book Value of an asset
differs from its adjusted basis for federal income tax purposes at the beginning
of such year, Book Depreciation shall be an amount which bears the same ratio to
such beginning Book Value as the federal income tax depreciation, amortization
or other cost recovery deduction for such year bears to such beginning adjusted
tax basis; provided, however, that if the adjusted basis for federal income tax
purposes of an asset at the beginning of such year is zero, Book Depreciation
shall be determined with reference to such beginning Book Value using a method
reasonably selected by the Managing Member.
"BOOK VALUE" means, with respect to any asset of the Company, the
asset's adjusted basis for federal income tax purposes, except as follows:
(i) the initial Book Value of any asset contributed by a Member to the
Company shall be the gross fair market value of such assets;
(ii) the Book Values of all Company assets shall be adjusted to equal
their respective fair market values as permitted pursuant to Section
1.704-1(b)(2)(iv)(f) of the Treasury Regulations;
(iii) the Book Value of any asset of the Company distributed to any
Member shall be adjusted to equal the gross fair market value of such asset as
of the date of distribution; and
(iv) the Book Value of Company assets shall be increased (or decreased)
to reflect any adjustments to the adjusted basis of such assets pursuant to Code
Section 734(b) or 743(b) to the extent such adjustments are taken into account
in determining Capital Accounts and are not otherwise reflected in an adjustment
made pursuant to this definition of "Book Value".
If the Book Value of an asset has been determined or adjusted pursuant
to this definition of Book Value, then such Book Value shall thereafter be
adjusted by Book Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL ACCOUNT" means, with respect to any Member, the separate
"book" account which the Company shall establish and maintain for such Member in
accordance with Section 704(b) of the Code and Regulations Section
1.704-1(b)(2)(iv) and such other provisions of Section 1.704-1(b) of the
Regulations as must be complied with in order for the Capital Accounts to be
determined in accordance with the provisions of said Regulations. In furtherance
of the foregoing, the Capital Accounts shall be maintained in compliance with
Section 1.704-1(b)(2)(iv) of the Regulations, and the provisions hereof shall be
interpreted and applied in a manner consistent therewith.
"CAPITAL CALL DUE DATE" as defined in subsection 6.2.2.
3
<PAGE> 8
"CAPITAL CALL NOTICE" as defined in subsection 6.2.2.
"CAPITAL CONTRIBUTIONS" as defined in subsection 6.2.1.
"CERTIFICATE OF FORMATION" as defined in the Preamble.
"CODE" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
successor provision of the Code.
"COMPANY" as defined in the Preamble.
"COMPANY ACCOUNTANT" as defined in Section 5.4.
"EXISTING CONTRACTS" means those agreements held by the Company or the
Existing Subsidiaries, each as more fully identified on Schedule 2.4.1 hereto.
"EXISTING SUBSIDIARY CONTRACTS" means those agreements held by the
Existing Subsidiaries, each as more fully identified on Schedule 2.4.1 hereto.
"EXISTING SUBSIDIARIES" means those entities listed on Schedule 1.2
hereto.
"FIRST OFFER NOTICE" as defined in subsection 9.2.2.1.
"FIRST OFFER PRICE" as defined in subsection 9.2.2.1.
"INITIAL CAPITAL CONTRIBUTIONS" as defined in Section 6.1.
"INTEREST" means, with respect to any Member at any time, the interest
of such Member in the Company at such time, including the right of such Member
to any and all of the benefits to which such Member may be entitled as provided
in this Agreement, together with the obligations of such Member to comply with
all of the terms and provisions of this Agreement.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York are authorized by law, regulation or
executive order to remain closed. If a date is a Legal Holiday, the date set for
any action hereunder shall be the next succeeding day that is not a Legal
Holiday.
"LIQUIDATING MEMBER" means the Managing Member; provided, however, if
the Managing Member's bankruptcy, withdrawal or liquidation shall have preceded
the liquidation of the Company, the Non-Managing Member shall be the Liquidating
Member.
4
<PAGE> 9
"MANAGING MEMBER" means Interstate Management, and any successor to
Interstate Management appointed as Managing Member in accordance with the
provisions of this Agreement.
"MEMBER" or "MEMBERS" means, initially, the Persons identified as
Members in the preamble to this Agreement, and thereafter shall include any
Person admitted as a Substitute Member or an Additional Member.
"NECESSARY COSTS" as defined in subsection 6.2.3.
"NET CAPITAL PROCEEDS" means (i) the net cash proceeds arising out of
the refinancing or refunding of any Company indebtedness or any additional
indebtedness, and (ii) gross receipts (including condemnation and casualty
insurance proceeds) from the sale, exchange or other disposition (excluding
leasing in the ordinary course of business) of any Company assets, less (A) any
indebtedness relating to or secured by such assets which is paid out of such
gross receipts, (B) the costs and expenses of the sale, exchange or disposition
including brokerage commissions, and (C) in the case of condemnation or
casualty, the cost of any collection, repair or restoration.
"NET OPERATING CASH FLOW" means, for any period, the excess of cash
receipts of all kinds for that period (including disbursements from reserves
previously established by the Managing Member) over cash disbursements of all
kinds for that period (including reasonable reserves established by the Managing
Member), but excluding Net Capital Proceeds.
"NON-MANAGING MEMBER" means PAH, and any successor to PAH as permitted
in accordance with the terms of this Agreement.
"OFFERED PERCENTAGE INTEREST" as defined in subsection 9.2.2.1.
"PERCENTAGE INTEREST" means, with respect to each Member, the
percentage set forth below opposite its name, in each case, subject to
adjustment as provided in this Agreement:
Interstate Management [ ]
PAH [the difference between 100% and
Interstate Management's interest]
Upon the making of any additional Capital Contribution each Member's Percentage
Interest shall thereafter be adjusted in accordance with Section 6.2.
"PERMITTED TRANSFER" means any Transfer expressly permitted by the
terms of this Agreement.
"PERSON" means any individual, partnership, limited partnership, trust,
estate, association, corporation, limited liability company, or other entity
whether domestic or foreign.
5
<PAGE> 10
"PROFITS"and "LOSSES" means, for each fiscal year or other period, an
amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) any depreciation, amortization and/or cost recovery
deductions with respect to any asset shall be deemed to be equal to the
Book Depreciation available with respect to such asset;
(b) any income or gain of the Company that is exempt from
federal income tax and not otherwise taken into account in computing
Profits or Losses shall be added to such taxable income or loss;
(c) any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses, shall be subtracted
from such taxable income or loss;
(d) to the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Section 734(b) or 743(b) of the Code is
required to be taken into account in determining Capital Accounts as a
result of a distribution other than in liquidation of a Member's
Interest, the amount of such adjustment shall be treated as an item of
gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases the basis of the asset) from the disposition
of the asset and shall be taken into account for purposes of computing
Profits or Losses;
(e) in the event the Book Value of any Company asset is
adjusted pursuant to the definition of Book Value, the amount of such
adjustment shall be taken into account as gain or loss from the
disposition of such asset for purposes of computing Profits or Losses;
(f) gain or loss resulting from any disposition of property
with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Book Value of the
property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Book Value; and
(g) any items of income, gain, loss or deduction which are
individually specially allocated pursuant to the provisions of Section
7.2 shall not be taken into account in computing Profits and Losses for
any taxable year.
"REMAINING MEMBERS" as defined in subsection 10.1.1.
6
<PAGE> 11
"REQUIRED FUNDS" as defined in subsection 6.2.2.
"SECURITIES ACT" as defined in subsection 12.1.6.
"SECURITIES LAWS" as defined in subsection 12.1.6.
"SPECIAL TAX EVENT" means a sale or transfer of all or part of a
Member's Percentage Interest that would cause PAH to recognize any of
the "built-in gain" with respect to its interests in the Company or the
assets of the Company.
"SUBSTITUTE MEMBER" as defined in Section 9.3.
"TAX MATTERS MEMBER" as defined in Section 7.4.
"TRANSFER" as defined in subsection 9.1.1.
"TREASURY REGULATIONS" means the income tax regulations promulgated
under the Code, whether temporary, proposed or finalized, as such regulations
may be amended from time to time (including corresponding provisions of
succeeding regulations).
ARTICLE 2
FORMATION, DURATION AND PURPOSES
--------------------------------
SECTION 2.1 FORMATION. Pursuant to the Delaware Limited Liability
Company Act, codified in the Delaware Code Annotated, Title 6, Sections 18-101
to 18-1109, as the same may be amended from time to time (the "ACT"), the
Members have formed a limited liability company by filing the Certificate of
Formation with the Secretary of State of the State of Delaware. The rights and
liabilities of the Members, and the operation of the Company, shall be governed
by and determined pursuant to the Act and this Agreement. To the extent the
rights and obligations of any Member are different by reason of any provision of
this Agreement than they would be in the absence of such provision, this
Agreement, to the extent permitted by the Act, shall control.
SECTION 2.2 NAME; REGISTERED AGENT AND REGISTERED OFFICE. The name of
the Company, and the name under which the business of the Company shall be
conducted shall be Interstate Hotels, LLC or such other name as hereafter may be
adopted by the Managing Member. The Registered Agent of the Company shall be
[Corporation Service Company], or such other Person as may be selected from time
to time by the Managing Member. The registered office of the Company shall be at
[1013 Centre Road, Wilmington, Delaware 19805].
SECTION 2.3 PRINCIPAL OFFICE. The principal place of business and
office of the
7
<PAGE> 12
Company shall be located c/o [ ___________________________ ], or at such other
place as may be determined by the Managing Member.
SECTION 2.4 PURPOSES AND BUSINESS.
2.4.1 The purpose and nature of the business of the Company
shall be:
(i) to directly or indirectly own, hold, manage,
terminate, extend, amend, amend and restate or
otherwise modify, or renew or replace (provided such
renewal or replacement relates solely to the hotels
referenced in the Existing Contracts) the Existing
Contracts;
(ii) to own and hold ownership interests in the
Existing Subsidiaries of the Company for the purpose
of causing said subsidiaries to own, hold, manage,
terminate, extend, amend, amend and restate or
otherwise modify, or renew or replace (provided such
renewal or replacement relates solely to the hotels
referenced in the Existing Subsidiary Contracts) the
Existing Subsidiary Contracts to which they are a
party;
(iii) to exercise the rights and perform the
obligations of the Company and to cause the Existing
Subsidiaries to exercise their respective rights and
perform their respective obligations under and
pursuant to the Existing Contracts, including to act
as managers and franchisees under such Existing
Contracts or any renewals or replacements thereof
with respect to the hotels referenced in such
Existing Contracts; and
(iv) to conduct all activities necessary or desirable
to accomplish the foregoing purposes, including,
without limitation, retaining such employees as the
Managing Member deems reasonably necessary.
2.4.2 The Company shall not:
(i) enter into or permit any Existing Subsidiary
to enter into any contract or agreement
other than as permitted under subsection
2.4.1;
(ii) enter into or permit any Existing Subsidiary
to enter into or conduct any business, other
than as set forth subsection 2.4.1;
(iii) create, acquire or retain any equity
interest in any legal entity, other than the
Existing Subsidiaries; or
(iv) permit any Person other than the Company to
have any ownership interest in any Existing
Subsidiary.
8
<PAGE> 13
SECTION 2.5 FUTURE BUSINESS. The Members acknowledge and agree that
they intend for all management and franchise activities, other than franchise or
management activities permitted under subsection 2.4.1 or relating to the hotels
currently managed under the Existing Contracts, to be conducted by Interstate
Management, as opposed to the Company, and neither the Managing Member or the
Non-Managing Member shall have any obligation, fiduciary or otherwise, to offer
or bring to the Company any opportunities relating to any business activities
not contemplated in subsection 2.4.1. It is anticipated that all such
opportunities not contemplated by subsection 2.4.1 shall be transferred to
Interstate Management.
ARTICLE 3
RIGHTS AND OBLIGATIONS OF MEMBERS
---------------------------------
SECTION 3.1 LIMITED LIABILITY. Except as required under the Act or as
expressly set forth in this Agreement, the debts, obligations and liabilities of
the Company, whether arising in contract, tort or otherwise, will be solely the
debts, obligations and liabilities of the Company, and no Member will be
obligated personally for any debt, obligation or liability of the Company solely
by reason of being a member of the Company.
SECTION 3.2 ADMISSION OF MEMBERS. Interstate Management and PAH are
Members of the Company and shall be shown as such on the books and records of
the Company. Except as expressly permitted by this Agreement, no other Person
will be admitted as a member of the Company, and no additional Interests will be
issued, without the approval of Interstate Management and PAH.
SECTION 3.3 BANKRUPTCY OF A MEMBER. Except as provided in Section 10.1,
the Bankruptcy of any Member shall not cause a dissolution of the Company, and
the rights of such Member to share in the profits or losses of the Company and
to receive distributions of Company funds shall, on the happening of such event,
devolve on its successors or assigns, subject to the terms and conditions of
this Agreement, and the Company shall continue as a limited liability company.
However, in no event shall any such assignee become a substitute Member or
succeed to any right to vote or participate in the management of the business,
property and affairs of the Company or to exercise any rights of a Member,
unless such assignee shall otherwise be entitled to become a Substitute Member
under the terms of this Agreement..
SECTION 3.4 NO WITHDRAWAL. No Member may withdraw from the Company
without the prior consent of the other Members (which may be granted or withheld
in the sole discretion of such Members), other than as expressly provided in
this Agreement.
SECTION 3.5 REMUNERATION TO MEMBERS. Except as expressly otherwise
authorized in, or pursuant to, this Agreement, no Member shall be entitled to
remuneration for acting in the Company business.
9
<PAGE> 14
SECTION 3.6 DUTIES AND CONFLICTS. Notwithstanding anything to the
contrary contained in this Agreement, (i) each Member recognizes that the other
Member and its Affiliates have or may have other business interests, activities
and investments, some of which may be in conflict or competition with the
business of the Company, and that such Persons are entitled to carry on such
other business interests, activities and investments; (ii) the Members and their
Affiliates may engage in or possess an interest in any other business or venture
of any kind, independently or with others, on their own behalf or on behalf of
other entities with which they are affiliated or associated, and such Persons
may engage in any activities, whether or not competitive with the Company,
without any obligation to offer any interest in such activities to the Company
or to any Member; and (iii) neither the Company nor any Member shall have any
right, by virtue of this Agreement, in or to such activities, or the income or
profits derived therefrom, and the pursuit of such activities, even if
competitive with the business of the Company, shall not be deemed wrongful or
improper.
ARTICLE 4
MANAGEMENT
----------
SECTION 4.1 MANAGEMENT BY THE MANAGING MEMBER; MEMBERS.
4.1.1 MANAGEMENT BY THE MANAGING MEMBER. The overall
management and control of the business and affairs of the Company shall
be overseen by the Managing Member, in the form and manner described
below. Except as otherwise expressly provided in this Agreement, the
Managing Member shall have the exclusive power and authority to take
such action for and on behalf of the Company as the Managing Member
shall from time to time deem necessary or appropriate to carry on the
Company business and to carry out the purposes for which the Company
was organized. The Managing Member shall in good faith use reasonable
efforts to extend or renew the Existing Contracts with the respective
third party owners and shall cause the Existing Subsidiaries to use
good faith efforts to extend or renew the Existing Subsidiary Contracts
with the respective third party owners, in each case upon the
expiration thereof, and shall not allow or cause, directly or
indirectly, Interstate Management or any other affiliate of Interstate
Management (other than the Company) to become the Manager of the hotels
currently managed under the Existing Contracts.
4.1.2 INVOLVEMENT IN COMPANY BUSINESS. The Managing Member
shall devote such time to the Company business as it deems to be
necessary or desirable in connection with its respective duties and
responsibilities hereunder.
4.1.3 LIMITATIONS ON POWERS OF THE MEMBERS. Notwithstanding
the foregoing provisions of this Section 4.1 or any other provision of
this Agreement to the contrary, the Members shall not be empowered to,
and shall not (i) undertake any act in violation of this Agreement;
(ii) possess or take title to any assets of the Company; or
10
<PAGE> 15
(iii) take any action that makes it illegal or impossible for the
Company to carry on its business.
SECTION 4.2 BANK ACCOUNTS. The Managing Member shall open and
thereafter maintain, for the Company, a commercial checking account and such
other accounts at one or more banks or trust companies organized and existing
under the laws of the United States or any state thereof, each having combined
capital and surplus aggregating at least $500,000,000 and none of which is an
Affiliate of any Member, which accounts shall be interest bearing to the extent
practicable. All funds of the Company shall be promptly deposited in said
accounts.
SECTION 4.3 LIABILITY; INDEMNIFICATION. Except as set forth in Section
4.4, no Member (including the Managing Member) shall be liable to the Company or
any Member for any act or omission by it in the conduct of its duties as a
Managing Member or Member, as the case may be, which is within the scope of such
Person's authority hereunder and which is performed or omitted in good faith and
without gross negligence or willful misconduct on its part. The Company shall
indemnify, defend and hold harmless each such Person and their respective
Affiliates and agents from and against any personal liability, claim, loss,
damage, cost or expenses, including attorneys' fees and expenses, incurred or
sustained by such Person or such Affiliate or agent by reason of any act or
omission by it which is within the scope of its authority hereunder and which is
performed or omitted in good faith and without gross negligence or willful
misconduct on its part. The indemnification provided under this Section 4.3
shall be in addition to, and shall not limit or diminish, the coverage of any
such Person or Affiliate or agent under any insurance covering the Company. The
provisions of this Section 4.3 shall survive any termination of the Company or
this Agreement.
SECTION 4.4 LIMITATIONS ON SALE OF ASSETS; INDEMNIFICATION.
4.4.1 The Members acknowledge that if any or all of the Existing
Contracts or other assets of the Company were sold or
otherwise transferred or disposed of by the Company, or if the
Company were merged with or acquired by another entity or
otherwise engaged in a corporate transaction in which taxable
gain could be recognized in whole or in part, PAH would suffer
significant adverse tax consequences. The Members also
acknowledge that the stock of PAH is held by an entity that is
a "real estate investment trust" for Federal income tax
purposes (a "REIT") that must comply with certain requirements
to continue to qualify as a REIT, including proposed
legislation affecting the operations and activities of
"stapled" REITs entitled to grandfathering relief under
Section 269B of the Code. Accordingly, without the prior
written consent of PAH, the Company shall not, and the
Managing Member shall cause the Company not to, (i) sell or
otherwise dispose of any of the Existing Contracts or other
assets of the Company or the Existing Subsidiaries (except for
sale or disposals of the Existing Contracts or other assets
pursuant to the performance of obligations of the Company
which are required (as distinguished from permitted) under the
Existing Contracts), (ii) merge with, be acquired by or enter
into a corporate
11
<PAGE> 16
acquisition or reorganization transaction with any other
person or entity, or to allow any of the Existing Subsidiaries
to merge with, be acquired by or enter into a corporate
acquisition or reorganization transaction with any other
person or entity, (iii) knowingly cause PAH to recognize any
of the "built-in gain" with respect to its interest in the
Company or the Company's assets, (iv) acquire any real
property or other interests in real estate (including
leasehold interests), or acquire interests in, or
substantially all of the assets of, any other person or entity
(other than the Existing Subsidiaries), or to allow any of the
Existing Subsidiaries to acquire any real property or other
interests in real estate, or acquire interests in, or
substantially all of the assets of, any other person or entity
(including leasehold interests) or (v) change the nature of
the Company's business, or allow any of the Existing
Subsidiaries to change the nature of any of the Existing
Subsidiaries' business, in a manner not contemplated by this
Agreement.
4.4.2 The Company and the Managing Member, jointly and severally,
hereby indemnify and hold harmless PAH, its shareholders,
officers, directors, agents and other indirect owners from and
against any personal liability, claim, loss, damage, cost or
expenses, including attorneys' fees and expenses, incurred or
sustained by any breach of the obligations set forth in
subsections 4.4.1(i) through 4.4.1(iii), including the amount
of any such adverse tax consequences.
SECTION 4.5 ALLOCATION OF COSTS AND EXPENSES. The Company and
Interstate Management acknowledge that certain employees, equipment and services
may be provided by the Company for the benefit of Interstate Management
(including any subsidiary of Interstate Management, other than the Company), or
vice versa. All costs and expenses relating to services provided by one party
for, in whole or in part, the benefit of the other (the "SHARED EXPENSES") shall
be allocated between the Company and Interstate Management, based on generally
accepted accounting principles consistently applied, on the basis of which party
benefited from the expenditure of such Shared Expenses. To the extent the
allocation of any Shared Expenses cannot be fairly or equitably apportioned
(including general and administrative expenses), the Company and Interstate
Management shall allocate Shared Expenses based on respective gross revenues so
that each party's profit margins are substantially the same for similar
services. The Managing Member and the Non-Managing Member may mutually agree to
apportion Shared Expenses between the Company and Interstate Management other
than as set forth above.
ARTICLE 5
BOOKS AND RECORDS
-----------------
SECTION 5.1 BOOKS AND RECORDS. The Managing Member shall maintain or
cause to be maintained, at the expense of the Company, in a manner customary and
consistent with good accounting principles, practices and procedures, a
comprehensive system of office
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<PAGE> 17
records, books and accounts (which records, books and accounts shall be and
remain the property of the Company) in which shall be entered fully and
accurately each and every financial transaction with respect to the operations
of the Company. Bills, receipts and vouchers shall be maintained on file by the
Company. The Managing Member shall maintain or caused to be maintained said
books and accounts in a safe manner and separate from any records not having to
do directly with the Company. The Managing Member shall cause audits to be
performed and audited financial statements and income tax returns to be prepared
as it deems necessary. Such books and records of account shall be prepared and
maintained by the Managing Member at a location or locations designated by the
Managing Member. Each Member or its duly authorized representative shall have
the right to inspect, examine and copy such books and records of account at the
Company's office during reasonable business hours.
SECTION 5.2 ACCOUNTING AND FISCAL YEAR. The books of the Company shall
be kept on the accrual basis and the Company shall report its operations for tax
purposes on the accrual method. The taxable year of the Company shall end on
December 31 of each year, unless a different taxable year shall be required by
the Code.
SECTION 5.3 REPORTS.
5.3.1 The Managing Member shall prepare, or cause to be
prepared, at Company expense, the financial reports and other
information, including, without limitation, audited financial
statements, that the Managing Member may determine are appropriate. The
Managing Member shall prepare or cause to be prepared at the expense of
the Company and furnished to each of the Members the following:
5.3.1.1 Within sixty (60) calendar days after the
close of each calendar year of the Company, audited financial
statements, including, without limitation, related notes to financial
statements, a balance sheet of the Company dated as of the end of the
calendar year, a related statement of income and expense, a statement
of cash flow and a statement of changes in Members' capital for the
Company for the calendar year and information for the calendar year as
to the balance in each Member's Capital Account, and all other
information deemed reasonably necessary by the Managing Member,
certified to by the an independent accounting firm as being, to the
best of its knowledge, true and correct and prepared in accordance with
generally accepted accounting principles applied on a consistent basis,
and all of which shall otherwise be certified in such manner as is
customary;
5.3.1.2 Within twenty (20) calendar days after the
close of each calendar quarter of the Company (other than the last
calendar quarter in any calendar year), a balance sheet of the Company
dated as of the end of the calendar quarter, a related statement of
income and expense, a statement of cash flow and a statement of changes
in Members' capital for the calendar quarter and information for the
calendar quarter as to the balance in each Member's Capital Account,
and all other information, including a market update, as is deemed
reasonable by the Managing Member, all of
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<PAGE> 18
which shall be certified to by the Person preparing or responsible for
preparing such statements as being, to the best of its knowledge, true
and correct;
5.3.1.3 Within twenty (20) calendar days after the
end of each calendar month, an income statement (with budget variance
explanations) and statement of cash flow; and
5.3.1.4 Promptly after the end of each calendar
year the Managing Member will use its best efforts to have the Company
Accountant prepare and deliver to each Member a report setting forth in
sufficient detail all such information and data with respect to
business transactions effected by or involving the Company during the
calendar year as will enable the Company and each Member to timely
prepare its federal, state and local income tax returns in accordance
with the laws, rules and regulations then prevailing. The Managing
Member will use its reasonable efforts to have the Company Accountant
also prepare federal, state and local tax returns required of the
Company and submit those returns to the Company for its approval no
later than 30 calendar days prior to the date required for the filing
thereof (including any extensions granted) and will file the tax
returns after they have been approved by the Managing Member. In the
event the Managing Member shall not desire or be able to approve any
such tax return prior to the date required for the filing thereof
(including any extensions granted), the Company will timely obtain an
extension of such date if such extension is available under applicable
law. In all cases, tax returns shall be prepared and filed in
accordance with applicable law.
5.3.2 All decisions as to accounting principles shall be made
by the Managing Member subject to the provisions of this Agreement.
SECTION 5.4 THE COMPANY ACCOUNTANT. The Company shall retain as the
regular accountant and auditor for the Company (the "COMPANY ACCOUNTANT") a
nationally-recognized accounting firm or any other accounting firm acceptable to
the Managing Member in its sole discretion. The fees and expenses of the Company
Accountant shall be a Company expense.
ARTICLE 6
CONTRIBUTIONS
-------------
SECTION 6.1 INITIAL CAPITAL CONTRIBUTIONS. The "INITIAL CAPITAL
CONTRIBUTIONS" of the Members and initial Capital Account balances shall be as
described on Schedule 1.1 attached hereto.
SECTION 6.2 ADDITIONAL CAPITAL CONTRIBUTIONS.
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<PAGE> 19
6.2.1 Except as otherwise provided herein, no Member shall be
obligated to make any additional contributions of capital (all
contributions of capital to the Company, including the Initial Capital
Contributions, "CAPITAL CONTRIBUTIONS") to the Company (including upon
dissolution and liquidation of the Company). Upon the making of any
additional Capital Contributions, each Member's Percentage Interest
shall thereafter be equal to the ratio, expressed as a percentage,
equal to the aggregate Capital Contributions made by such Member
divided by the aggregate Capital Contributions made by all Members to
the Company.
6.2.2 The Managing Member shall monitor the finances of the
Company in an attempt to determine whether or not, and when, the cash
receipts of the Company are insufficient to pay all costs and expenses
of the Company (such costs and expenses, the "NECESSARY COSTS"). Prior
to the Managing Member contributing any capital to the Company (other
than the Managing Member's Initial Capital Contribution), the Managing
Member shall issue capital calls to the Members to fund shortfalls
related to the Company (the "CAPITAL CALL NOTICE"). Such Capital Call
Notice shall set forth the amount of the required funds (the "REQUIRED
FUNDS") and a list of Necessary Costs, and shall specify a date (the
"CAPITAL CALL DUE DATE") for contribution of such funds. Upon receipt
of the Capital Call Notice, the Non-Managing Member shall have the
right, but not the obligation, be required to fund its proportionate
share (based on its respective Percentage Interest) of the total funds
specified in the Capital Call Notice. The Capital Call Due Date shall
be at least thirty (30) days after receipt of the Capital Call Notice
unless a shorter time is agreed to by the Non-Managing Member. All
additional Capital Contributions shall be made by wire transfer of
immediately available funds to an account of the Company.
6.2.3 To the extent the Non-Managing Member elects not to fund
its proportional share of the Required Funds, the Managing Member shall
have the right, but not the obligation, to contribute the unfunded
amount to the Company. Should the Managing Member elect to fund such
amount, then the Members' Percentage Interests will be adjusted as
described in subsection 6.2.1.
SECTION 6.3 NO THIRD PARTY BENEFICIARY. The provisions hereof are
intended for the benefit of the Members and the Company only and shall not
confer any right or claim upon, or otherwise inure to the benefit of, any
officer or creditor of, or other third party having dealings with, the Company.
SECTION 6.4 CAPITAL ACCOUNTS. A Capital Account shall be maintained for
each Member. Initially, the Capital Account of each Member shall be credited
with the amounts referred to in Schedule 1.1. Thereafter, each Member's Capital
Account shall be credited with such Member's share of Profits, any individual
items of income and gain allocated to such Member pursuant to the provisions of
Article 7, the amount of additional cash, and the Book Value of any asset (net
of any liabilities assumed by the Company and liabilities to which the asset is
subject), contributed to the Company by such Member (an "ADDITIONAL CAPITAL
15
<PAGE> 20
CONTRIBUTION"), and shall be debited with the Member's share of Losses, any
individual items of deduction and loss allocated to such Member pursuant to the
provisions of Article 7, the amount of any cash distributed to such Member and
the Book Value of any asset distributed to such Member (net of any liabilities
assumed by the Member and liabilities to which the asset is subject). In the
event that all or a portion of an interest in the Company is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it related to the transferred
interest.
SECTION 6.5 WITHDRAWAL OF CAPITAL. Except as provided herein, (i) no
Member shall be entitled to withdraw any part of its Capital Account, (ii) no
Member shall be entitled to receive any interest on its Capital Account or
distributions from the Company, and (iii) no Member shall be entitled to demand
or receive any property from the Company other than cash.
SECTION 6.6 NEGATIVE CAPITAL ACCOUNTS. In no event shall any Member be
obligated to make any capital contribution to the Company solely as a result of
the existence at any time of a negative Capital Account balance for such Member.
ARTICLE 7
ALLOCATION OF PROFITS AND LOSSES; TAX MATTERS
---------------------------------------------
SECTION 7.1 PROFITS AND LOSSES. Profits and Losses for each fiscal year
of the Company shall allocated to the Members in accordance with their
respective Percentage Interests as determined from time to time. The Percentage
Interests of the Members shall be appropriately adjusted to reflect any
disproportionate contribution made by one or more of the Members.
SECTION 7.2 REGULATORY ALLOCATIONS.
7.2.1 Notwithstanding subsection 7.1, the following special
allocations shall be made each taxable year, to the extent required, in the
following order:
(i) Minimum Gain Chargebacks and Qualified Income Offset.
Items of Company income and gain shall be allocated
to the extent of, and in an amount sufficient to
satisfy, the "minimum gain chargeback" requirements
of Treasury Regulations Section 1.704-2(f) and (i)(4)
and the "qualified income offset" requirement of
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(3).
(ii) Nonrecourse and Partner Nonrecourse Deductions.
"Nonrecourse deductions" of the Company (within the
meaning of Treasury
16
<PAGE> 21
Regulations Section 1.704-2(b)(1)) shall be allocated
among the Members in proportion to their respective
Percentage Interests. "Partner nonrecourse
deductions" (within the meaning of Treasury
Regulations Section 1.704-2(i)) shall be allocated to
the Member who bears the economic risk of loss
associated with such deductions, in accordance with
Treasury Regulations Section 1.704-2(i).
(iii) Any Other Allocations of Items Which Cannot Have
Economic Effect. Unless otherwise required by Code
Section 704(b) or the Treasury Regulations
promulgated thereunder or otherwise provided in this
subsection 7.2.2, any allocations of Company items of
income, gain, ---------------- loss, deduction or
credit that cannot have "economic effect" (within the
meaning of Treasury Regulations Section 1.704-1 and
1.704-2) shall be allocated among the Members in
proportion to their respective Percentage Interests.
SECTION 7.3 TAX ALLOCATIONS. The Company's ordinary income and losses
and capital gain as determined for tax purposes (and each item of income, gain,
loss or deduction entering into the computation thereof) shall be allocated to
the Members in the same proportions as the corresponding "book" items are
allocated pursuant to Sections 7.1 and 7.2 of this Agreement. Notwithstanding
the foregoing, tax items relating to property with an adjusted tax basis that is
different from its Book Value shall be allocated among the Members in accordance
with Section 704(c) of the Code and the Treasury Regulations issued thereunder.
Items described in this Section 7.3 shall neither be credited nor charged to the
Member's Capital Accounts.
SECTION 7.4 TAX MATTERS MEMBER. The Managing Member is hereby
designated as the "TAX MATTERS MEMBER" for the Company (as such term is defined
in Section 6231(a)(7) of the Code), and all federal, state and local tax audits
and litigation shall be conducted under the direction of the Tax Matters Member.
Any action taken by the Tax Matters Member shall be made as a fiduciary with
respect to the interests of all Members notwithstanding any other provision
contained herein.
SECTION 7.5 TAX ELECTIONS. All elections required or permitted to be
made by the Code or other applicable tax laws, and all material decisions with
respect to the calculation of taxable income or tax loss under the Code or any
other applicable tax laws, shall be made by the Tax Matters Member; provided
that the Tax Matters Member shall consult with and obtain the consent of the
other Member(s) (such consent not to be unreasonably withheld) to the extent
that any such election or decision could adversely impact the other Member(s).
17
<PAGE> 22
ARTICLE 8
DISTRIBUTIONS
-------------
SECTION 8.1 CASH AVAILABLE FOR DISTRIBUTIONS.
8.1.1 At such times as are determined by the Managing Member
(but no less frequently than quarterly), the Company shall make a
distribution of Net Operating Cash Flow of the Company (to the extent
positive). Net Operating Cash Flow distributions shall be made pro rata
to the Members, in accordance with their Percentage Interests.
8.1.2 Except upon the liquidation of the Company (in which
event Net Capital Proceeds shall be distributed pursuant to Section
10.2) any Net Capital Proceeds shall be distributed within thirty (30)
days following receipt by the Company to the Members pro rata to the
Members, in accordance with their Percentage Interests.
8.1.3 Except as provided in subsection 8.1.1 and subsection
8.1.2 above, no portion of any capital contribution made by any Member
to the Company may be withdrawn or distributed at any time.
8.1.4 If the Percentage Interests of the Members are adjusted
effective at any time or times during any fiscal year of the Company,
all distributions of cash made to the Members during such fiscal year
(without regard to the actual timing of such distributions) shall be
allocated to each portion of such fiscal year during which different
Percentage Interests are in effect in the proportion that the number of
days in such portion bears to the total number of days in such fiscal
year except with respect to Net Capital Proceeds, in which case such
proceeds shall be distributed in accordance with the Percentage
Interests on the date of the applicable transaction. The amounts so
allocated to each such portion of said fiscal year shall be divided
among the Members in proportion to their respective Percentage
Interests in effect during each such portion of the fiscal year in
question. Such allocations to such portions of a fiscal year, and the
adjustments, if any, of such cash distributions made during such year,
shall be determined with reasonable promptness after the close of each
such fiscal year by the Company's accountant. The Members will promptly
make any adjusting payments between them as may be required in order to
effect any adjustments of such cash distributions as determined by the
Company Accountant.
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ARTICLE 9
TRANSFER
--------
SECTION 9.1 NO TRANSFER OF INTERESTS.
9.1.1 Except as expressly permitted or contemplated by this
Agreement, no Member may sell, assign, give, hypothecate, pledge,
encumber or otherwise transfer ("TRANSFER") all or any portion of its
Interest, whether directly or indirectly, without the written consent
of the other Members.
9.1.2 Any Transfer by a Member of its Interest in
contravention of this Article 9 shall be null and void. No Member shall
withdraw from the Company except in connection with a Permitted
Transfer or in accordance with Section 3.4.
SECTION 9.2 PERMITTED TRANSFERS OF INTERESTS; RIGHT OF FIRST OFFER.
9.2.1 The Non-Managing Member, from time to time and in its
sole discretion, without the consent of the Managing Member, may
Transfer its Interest in whole, or in part, to any party, provided such
transferee agrees to be bound by all the terms, conditions and
provisions of this Agreement (including the provisions of this Article
9). Any Transfer of the Non-Managing Member's Interest to a third party
shall be deemed a Permitted Transfer, and if such transferee acquires
all of the Non-Managing Member's Interest, such transferee shall be
admitted as a Substitute Member pursuant to Section 9.3. If the
Non-Managing Member elects to sell its interest to the Managing
9.2.2 Notwithstanding the foregoing, if a transfer of all or
part of the Non-Managing Member's Interest would result in a Special
Tax Event, the following procedures shall apply:
9.2.2.1 The Non-Managing Member shall, prior to any
transfer permitted under subsection 9.2.1, offer in writing
(the "FIRST OFFER NOTICE") to sell to the Managing Member all
or any part of its Percentage Interest (the "OFFERED
PERCENTAGE INTEREST"). The Managing Member shall notify the
Non-Managing Member within fifteen (15) Business Days of
receipt of the First Offer Notice that the Managing Member
either: a) is willing to purchase the Offered Percentage
Interest at a given price (the "FIRST OFFER PRICE"), or b) is
unwilling to purchase the Offered Percentage Interest. A
failure to respond to a First Offer Notice within such fifteen
(15) Business Day period shall be deemed to be an election not
to purchase the Percentage Interest.
9.2.2.2 If the Managing Member has timely offered
elected to purchase the Percentage Interest specified in the
First Offer Notice, then the Non-Managing Member may: a) sell
the Offered Percentage Interest to the Managing
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<PAGE> 24
Member at the First Offer Price (which, the sale shall be without
recourse, representation or warranty, except that the Non-Managing
Member shall represent and warrant that it has authority to sell, and
owns the Interest free and clear of liens or claims of third parties)
or b) elect to market and sell the Offered Percentage Interest to third
parties within 180 days of receiving the First Offer Price at a price
not less than ninety-eight percent (98%) of the First Offer Price. If
the Non-Managing Member does not transfer its interest within such 180
day period, then prior to any transfer which would result in a Special
Tax Event, the Non-Managing Member shall again comply with the terms of
this subsection 9.2.2.
9.2.3 Any Permitted Transfer shall not relieve the transferor
of any of its obligations prior to such Transfer. Nothing contained in
this Article 9 shall prohibit a Transfer indirectly of a Member's
Interest in the Company if a direct Transfer would otherwise be
permitted under this Section 9.2. Subject to Section 9.3, any
transferee of a direct Interest pursuant to this Section 9.2 shall
become a Substitute Member of the Company. Each Member and its
permitted transferees shall be treated as one Member for all purposes
of this Agreement. The provisions of this Section 9.2 will not apply to
or be deemed to authorize or permit any collateral transfer of, or
grant of a security interest in, a Member's interest in the Company or
in any asset of the Company (which transfer or grant shall be subject
to the other provisions of this Agreement).
SECTION 9.3 TRANSFEREES. Notwithstanding anything to the contrary
contained in this Agreement, no transfer of all or any part of any Interest
shall be made if, as a result thereof, any income of the Company will be subject
to corporate federal income tax. No transferee of all or any portion of any
Interest shall be admitted as a Member unless such Interest is transferred in
compliance with the applicable provisions of this Agreement, such transferee
shall have furnished evidence of satisfaction of the requirements of Section 9.2
reasonably satisfactory to the remaining Members, and such transferee shall have
executed and delivered to the Company such instruments necessary to effectuate
the admission of such transferee as a Member and to confirm the agreement of
such transferee to be bound by all of the terms and provisions of this Agreement
with respect to such Interest. At the request of the remaining Members prior to
such transfer, each such transferee shall also cause to be delivered to the
Company, at the transferee's sole cost and expense, a favorable opinion of legal
counsel reasonably acceptable to the Company, to the effect that such transferee
has the legal right, power and capacity to own the Interest proposed to be
transferred. As promptly as practicable after the admission of any Person as a
Member, the books and records of the Company shall be changed to reflect such
admission. Upon satisfaction of the requirements of this Section 9.3 and any
other applicable provisions of this Agreement), such transferee shall be a
substitute Member (a "SUBSTITUTE MEMBER") of the Company. All reasonable costs
and expenses incurred by the Company in connection with any Transfer of any
Interest and, if applicable, the admission of any transferee as a Member shall
be paid by such transferee.
20
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SECTION 9.4 ADMISSION OF ADDITIONAL MEMBERS.
9.4.1 No person may be admitted as an additional Member of the
Company (in contrast with admission as a Substitute Member in
connection with a Permitted Transfer) without the prior written consent
of the Members.
9.4.2 Any additional Member admitted to the Company shall
execute and deliver documentation in form satisfactory to the Managing
Member or the Members, as the case may be, accepting and agreeing to be
bound by this Agreement, and such other documentation as the Managing
Member or the Members, as the case may be, shall require in order to
effect such person's admission as an additional Member. The admission
of any person as an additional Member (an "ADDITIONAL MEMBER") shall
become effective as of the date upon which the name of such person is
recorded on the books and records of the Company following the consent
of the Managing Member or the Members, as the case may be, to such
admission.
ARTICLE 10
TERMINATION
-----------
SECTION 10.1 DISSOLUTION. The Company shall be dissolved and its
business wound up upon the happening of any of the following events, whichever
shall first occur:
10.1.1 the Bankruptcy of any Member, if within ninety (90)
days thereafter a majority in interest of the remaining Members (the
"REMAINING MEMBERS") shall not have elected to continue the Company,
which right of election is hereby granted to them;
10.1.2 entry of a decree of judicial dissolution of the
Company; or
10.1.3 the termination of all of the Existing Contracts and
any renewals or replacements thereof entered into in
accordance with subsection 2.4.1.
In no event shall the Company dissolve prior to the occurrence of one of the
events set forth above.
SECTION 10.2 TERMINATION. In cases of dissolution of the Company, the
business of the Company shall be wound up and the Company terminated (and the
Company shall cause the Existing Subsidiaries to be wound up and the business of
the Existing Subsidiaries to be terminated) as promptly as practicable
thereafter, and each of the following shall be accomplished:
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<PAGE> 26
10.2.1 The Liquidating Member shall cause to be prepared a
statement setting forth the assets and liabilities of the Company (as
consolidated with the Existing Subsidiaries) as of the date of
dissolution, a copy of which statement shall be furnished to all of the
Members.
10.2.2 The property and assets of the Company (including those
held by the Existing Subsidiaries) shall be liquidated by the
Liquidating Member as promptly as possible, but in an orderly and
businesslike and commercially reasonable manner. The Liquidating Member
may, in the exercise of its business judgment and if commercially
reasonable, determine not to sell all or any portion of the property
and assets of the Company, in which event such property and assets
shall be distributed in kind pursuant to subsection 10.2.4 below.
10.2.3 Any income, gain, profit or loss realized by the
Company upon the sale or other disposition of its property pursuant to
subsection 10.2.2 shall be allocated to the Members as and to the
extent required by Article 7 hereof.
10.2.4 The proceeds of sale and all other assets of the
Company shall be applied and distributed as follows and in the
following order of priority:
(i) To the payment of the Company's outstanding
liabilities, which shall be set forth on a statement
as provided in subsection 10.2.1.
(ii) To the setting up of any reserves which the
Liquidating Member shall determine to be reasonably
necessary for contingent, unliquidated or unforseen
liabilities or obligations of the Company or the
Members arising out of or in connection with the
Company. Such reserves, may, in the discretion of the
Liquidating Member, be paid over to a national bank
or national title with the Company as escrowee for
the purposes of disbursing such reserves to satisfy
the liabilities and obligations described above, and
at the expiration of such period as the Liquidating
Member may reasonably deem advisable, distribute any
remaining balance in the manner set forth below.
(iii) To each Member in accordance with their respective
capital account balances.
No payment or distribution in any of the foregoing categories shall be
made until all payments in each prior category shall have been made in
full. If the payments due to be made in any of the foregoing categories
exceed the remaining assets available for such purpose, such payment
shall be made to the Persons entitled to receive the same pro rata in
accordance with the respective amount due to each such Person. Payments
described in clause (ii) above may be made in cash or in assets of the
Company in kind. Any asset distributed in kind shall be distributed
pro-rata unless the Members
22
<PAGE> 27
otherwise agree in writing and shall be valued at its fair market value
and for all purposes of this Agreement shall be treated as if such
asset had been sold at such value and the net cash proceeds therefrom
distributed to the Members. Without limiting the foregoing, with
respect to any assets distributed in kind, there shall be a calculation
of the amount of income, gain, profit or loss that would have been
realized by the Company with respect to such assets if such assets had
been sold at fair market value.
SECTION 10.3 ACTS IN FURTHERANCE OF LIQUIDATION. Each Member, upon the
request of the Liquidating Member, shall promptly execute, acknowledge and
deliver all documents and other instruments as the Liquidating Member shall
reasonably request to effectuate the proper dissolution and termination of the
Company, including the winding up of the business of the Company.
ARTICLE 11
INTENTIONALLY RESERVED
----------------------
[Reserved]
ARTICLE 12
GENERAL PROVISIONS
------------------
SECTION 12.1 COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE MEMBERS.
Each Member represents and warrants to the other Members as follows:
12.1.1 It is duly organized, validly existing and in good
standing under the laws of its jurisdiction of formation with all
requisite power and authority to enter into this Agreement.
12.1.2 This Agreement constitutes the legal, valid and binding
obligation of the Member enforceable in accordance with its terms,
subject to the application of principles of equity and laws governing
insolvency and creditors' rights generally.
12.1.3 No consents or approvals are required from any
governmental authority or other Person for the Member to enter into
this Agreement. All limited liability company, corporate or partnership
action on the part of the Member necessary for the authorization,
execution and delivery of this Agreement, and the consummation of the
transactions contemplated under this Agreement, have been duly taken.
12.1.4 The execution and delivery of this Agreement by the
Member, and the consummation of the transactions contemplated under
this Agreement, do not conflict with or contravene the provision of the
Member's organizational documents or any
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<PAGE> 28
agreement or instrument by which it or its properties are bound or any
law, rule, regulations, order or decree to which it or its properties
are subject.
12.1.5 No Member has retained any broker, finder or other
commission or fee agent, and no such person has acted on its behalf in
connection with the execution and delivery of this Agreement.
12.1.6 Each Member is acquiring its interest in the Company
for investment, solely for its own account, with the intention of
holding such interest for investment and not with a view to, or for
resale in connection with, any distribution or public offering or
resale of any portion of such interest within the meaning of the
Securities Act of 1933 (the "SECURITIES ACT") or any other applicable
federal or state securities law, rule or regulation ("SECURITIES
LAWS").
12.1.7 Each Member acknowledges that it is aware that its
interest in the Company has not been registered under the Securities
Act or under any other Securities Law in reliance upon exemption
contained therein. Each Member understands and acknowledges that its
representations and warranties contained herein are being relied upon
by the Company, the other Members and the constituent owners of such
other Members as the basis for exemption of the issuance of interest in
the Company from registration requirements of the Securities Act and
other Securities Laws. Each Member acknowledges that the Company will
not and has no obligation to register any interest in the Company under
the Securities Act or other Securities Laws.
12.1.8 Each Member acknowledges that prior to its execution of
this Agreement, it received a copy of this Agreement and that it
examined this document or caused this document to be examined by its
representative or attorney. Each Member further acknowledges that it or
its representative or attorney is familiar with this Agreement, and
with the business and affairs of the Company, and that except as
otherwise specifically provided in this Agreement, it does not desire
any further information or data relating to the Company, the Assets or
the other Members. Each Member acknowledges that it understand that the
acquisition of its interest in the Company is a speculative investment
involving a high degree of risks and represents that it has a net worth
sufficient to bear the economic risk of its investment in the Company
and to justify its investing in a highly speculative Company of this
type.
SECTION 12.2 NOTICES. All notices, demands, approvals, consents or
requests provided for or permitted to be given pursuant to this Agreement must
be in writing.
12.2.1 All notices, demands, approvals, consents and requests
to be sent to the Company pursuant to the terms hereof shall be deemed
to have been properly given or served by personal delivery or by a
nationally recognized overnight courier or by registered or certified
mail, return receipt requested, postage prepaid and addressed as
follows:
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If to the Company:
[c/o Interstate Management]
With a copy to:
[Interstate Management]
With a copy to:
[PAH]
If to INTERSTATE MANAGEMENT:
[Interstate Management]
If to PAH:
[PAH]
12.2.2 All notices, demands and requests shall be effective
upon personal delivery or upon the date of receipt by the addressee as
shown on the return receipt or upon the date of acknowledgment or
confirmation of receipt with respect to delivery by or nationally
recognized overnight courier. Rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice
was given shall be deemed to be receipt of the notice, demand or
request sent.
12.2.3 By giving to the other parties at least ten (10) days
prior written notice thereof, the parties hereto and their respective
successors and assigns shall have the right from time to time and at
any time during the term of this Agreement to change their respective
addresses.
SECTION 12.3 GOVERNING LAWS; JURISDICTION; VENUE.
12.3.1 GOVERNING LAWS. This Agreement and the obligations of
the Members hereunder shall be interpreted, construed and enforced in
accordance with the laws of the State of Delaware without regard to
conflicts of law principles.
25
<PAGE> 30
12.3.2 JURISDICTION; VENUE. Each of the Members hereby
irrevocably submits to the exclusive jurisdiction of any state court
located in the City of Wilmington, Delaware and any federal court in
the State of Delaware and any other court with jurisdiction to hear
appeals from such courts for the purposes of any suit, action or other
proceeding of any type whatsoever arising out of this Agreement or the
subject matter hereof, and to the extent permitted by applicable law,
hereby waives, and agrees not to assert, by way of motion, as a
defense, or otherwise, in any such suit, action or proceeding any claim
that it is not personally subject to the jurisdiction of the
above-named courts, that the suit, action or proceeding is brought in
an inconvenient forum, that the venue of the suit, action or proceeding
is improper or that this Agreement or the subject matter hereof may not
be enforced in or by such court.
SECTION 12.4 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto relative to the formation and operation of
the Company. No variations, modifications, or changes herein or hereof shall be
binding upon any party hereto unless set forth in a document duly executed by or
on behalf of such party.
SECTION 12.5 WAIVER. No consent or waiver, express or implied, by any
Member to or of any breach or default by any other Member in the performance by
the other Member of its obligations hereunder shall be deemed or construed to be
a consent or waiver to or of any other breach or default in the performance by
such other Member of the same or any other obligations of such other Member
hereunder. Failure on the part of any Member to complain of any act or failure
to act of any of the other Members or to declare any of the other Members in
default, irrespective of how long such failure continues, shall not constitute a
waiver by such Member of its rights hereunder.
SECTION 12.6 SEVERABILITY. If any provision of this Agreement or the
application thereof to any Person or circumstance shall be invalid or
enforceable to any extent, the remainder of this Agreement and the application
of such provisions to other Persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
SECTION 12.7 TERMINOLOGY. All personal pronouns used in this Agreement,
whether used in the masculine, feminine, or neuter gender, shall include all
other genders; the singular shall include the plural, and vice versa and shall
refer solely to the parties signatory thereto except where otherwise
specifically provided. Titles of Articles and Sections are for convenience only,
and neither limit nor amplify the provisions of the Agreement itself, and all
references herein to Articles, Sections or subdivisions thereof shall refer to
the corresponding Articles, Sections or subdivisions thereof of this Agreement
unless specific reference is made to such Articles, Sections or subdivisions of
another document or instrument. Any use of the word "INCLUDING" herein shall,
unless the context clearly requires otherwise, be deemed to mean "INCLUDING
WITHOUT LIMITATION."
26
<PAGE> 31
SECTION 12.8 ACTION BY THE MEMBERS. No approval, consent, designation
or other action by a Member shall be binding upon such Member unless the same is
in writing and executed on behalf of such Member by a duly authorized
representative of such Member.
SECTION 12.9 AMENDMENTS. No change, modification or amendment of this
Agreement shall be valid or binding unless such change, modification or
amendment shall be in writing and duly executed by all of the Members.
SECTION 12.10 BINDING AGREEMENT. Subject to the restrictions on
transfers and encumbrances set forth herein, this Agreement shall inure to the
benefit of and be binding upon the undersigned Members and their respective
heirs, executors, legal representatives, successors and assigns. Whenever, in
this instrument, a reference to any party or Member is made, such reference
shall be deemed to include a reference to the heirs, executors, legal
representatives, successors and assigns of such party or Member.
SECTION 12.11 FURTHER ASSURANCES. Each of the Members shall hereafter
execute and deliver such further instruments and do such further acts and things
as may be reasonably necessary to carry out the intent and purpose of this
Agreement and as are not inconsistent with the terms hereof.
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<PAGE> 32
IN WITNESS WHEREOF, this Agreement is executed effective as of the date
first set forth above.
INTERSTATE HOTELS MANAGEMENT, INC.
a Maryland corporation
By: ________________________
Name:
Title:
PAH-INTERSTATE HOLDINGS, INC.
a Delaware corporation
By: ________________________
Name:
Title:
28
<PAGE> 33
SCHEDULE 1.1
------------
INITIAL CAPITAL ACCOUNTS
------------------------
Sch. 1.1
<PAGE> 34
SCHEDULE 1.2
------------
EXISTING SUBSIDIARIES
---------------------
Sch. 1.2
<PAGE> 35
SCHEDULE 2.4.1
--------------
LIST OF EXISTING CONTRACTS
(INCLUDING EXISTING SUBSIDIARY CONTRACTS)
Sch. 2.4.1
<PAGE> 1
EXHIBIT 10.3
FORM OF
VOTING AGREEMENT
This Voting Agreement, dated as of ___________, 1999 (this
"Agreement"), is among Interstate Hotels Management, Inc., a Maryland
corporation ("Interstate Management"), and the shareholders of Interstate
Management named on the signature pages hereto (individually, a "Shareholder"
and collectively, the "Shareholders").
RECITALS:
A. On the date hereof, Patriot American Hospitality, Inc., a Delaware
corporation ("Patriot"), has distributed shares of Common Stock, par value $0.01
per share ("Interstate Management Stock"), of Interstate Management to its
stockholders; and
B. Upon consummation of such distribution, each Shareholder owns the
number of shares (the "Shares") of Interstate Management Stock set forth on
Exhibit A hereto.
NOW, THEREFORE, the parties hereto agree as follows:
I. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each of the Shareholders hereby represents and warrants to Interstate
Management with respect to himself but not the other Shareholders as follows:
1.1 Due Authority. The Shareholder has full power and authority to
execute and deliver this Agreement and to perform his obligations hereunder.
This Agreement has been duly executed and delivered by or on behalf of such
Shareholder and, assuming its due authorization, execution and delivery by
Interstate Management and the other Shareholders, constitutes a legal, valid and
binding obligation of such Shareholder.
1.2 No Conflict; Consents. (a) The execution and delivery of this
Agreement by the Shareholder do not, and the performance by such Shareholder of
his obligations under this Agreement and the compliance by such Shareholder with
any provisions hereof do not and will not, (i) conflict with or violate any law,
statute, rule, regulation, order, writ, judgment or decree applicable to such
Shareholder or the Shares owned by such Shareholder, or (ii) result in any
breach of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the Shares owned by such Shareholder
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which such
Shareholder is a party or by which such Shareholder or any of the Shares owned
by such Shareholder are bound.
(b) The execution and delivery of this Agreement by the Shareholder do
not, and the performance of this Agreement by such Shareholder will not, require
any consent, approval,
<PAGE> 2
authorization or permit of, or filing with (except for applicable requirements,
if any, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
or notification to, any government or regulatory authority by such Shareholder.
1.3 Title to Shares. The Shareholder is the record or beneficial owner
of the Shares as listed on Exhibit A free and clear of any proxy or voting
restriction other than pursuant to this Agreement.
II. REPRESENTATIONS AND WARRANTIES OF INTERSTATE MANAGEMENT
Interstate Management hereby represents and warrants to the
Shareholders as follows:
2.1 Due Authority. Interstate Management has full power, corporate or
otherwise, and authority to execute and deliver this Agreement and to perform
its obligations hereunder. This Agreement has been duly executed and delivered
by or on behalf of Interstate Management and, assuming its due authorization,
execution and delivery by the Shareholders, constitutes a legal, valid and
binding obligation of Interstate Management, enforceable against Interstate
Management in accordance with its terms.
2.2 No Conflict; Consents. (a) The execution and delivery of this
Agreement by Interstate Management do not, and the performance by Interstate
Management of its obligations contemplated by this Agreement and the compliance
by Interstate Management with any provisions hereof do not and will not, (i)
conflict with or violate any law, statute, rule, regulation, order, writ,
judgment or decree applicable to Interstate Management, (ii) conflict with or
violate Interstate Management's charter or bylaws, or (iii) result in any breach
of or constitute a default (or an event that with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Interstate Management is a party or by which Interstate
Management is bound.
(b) The execution and delivery of this Agreement by Interstate
Management do not, and the performance of this Agreement by Interstate
Management will not, require any consent, approval, authorization or permit of,
or filing with (except for applicable requirements, if any, of the Exchange Act)
or notification to, any governmental or regulatory authority by Interstate
Management.
III. CERTAIN COVENANTS OF THE SHAREHOLDERS
Each of the Shareholders hereby covenants and agrees with Interstate
Management as follows:
2
<PAGE> 3
3.1 Voting. (a) Each Shareholder hereby agrees, if as of the record
date for any meeting of shareholders of Interstate Management the Shareholders
and those individuals and entities (the "Affiliated Shareholders") identified on
Exhibit C hereto own in the aggregate more than 9.9% of the outstanding
Interstate Management Stock, to vote, or to use all practicable efforts to
direct the record owner thereof to vote, each of the Shares owned by such
Shareholder at such meeting or any adjournment thereof in accordance with
Paragraph 3.1(b) below, and in connection therewith, at Interstate Management's
written request, to execute, if necessary, proxies to effectuate the foregoing.
(b) Immediately prior to the closing of the polls on a particular
proposal, the inspector of elections for the meeting of Interstate Management
shareholders at which such proposal is being voted upon or, if no such inspector
has been appointed, such other individual as may be designated by Interstate
Management, shall (i) determine the number of shares of Interstate Management
Stock as to which votes were cast (including abstentions) with respect to such
proposal (other than votes cast by the Shareholders or the Affiliated
Shareholders), (ii) count such votes, and (iii) submit to each Shareholder (A) a
fraction (the "Affirmative Multiple"), the numerator of which is the total
number of votes cast in favor of such proposal (other than votes cast by the
Shareholders or the Affiliated Shareholders) and the denominator of which is the
total number of votes cast, including abstentions, with respect to such proposal
(other than votes cast, including abstentions, by the Shareholders or the
Affiliated Shareholders), and (B) a fraction (the "Abstention Multiple"), the
numerator of which is the total number of shares of Interstate Management Stock
which the holders of the Interstate Management Stock voted to abstain with
respect to such proposal (other than those made by the Shareholders or the
Affiliated Shareholders) and the denominator of which is the total number of
votes cast, including abstentions (other than votes cast, including abstentions,
by the Shareholders or the Affiliated Shareholders), with respect to such
proposal. Each Shareholder agrees that he shall then (a) multiply the number of
Shares owned by him as of the applicable record date by the Affirmative Multiple
and vote, or use all practicable efforts to direct the record owner thereof to
vote, the resulting number (rounded up to the nearest whole share) of Shares of
Interstate Management Stock in favor of such proposal, (b) multiply the number
of Shares owned by him as of the applicable record date by the Abstention
Multiple and abstain, or use all practicable efforts to direct the record owner
thereof to abstain, with respect to the resulting number (rounded up to the
nearest whole share) of Shares of Interstate Management Stock, and (c) vote, or
use all practicable efforts to direct the record owner thereof to vote, the
remaining number of Shares of Interstate Management Stock owned by him as of the
applicable record date, if any, against such proposal. "Broker non-votes" shall
not be considered votes "cast" for the purposes of this Agreement.
3.2 Disposition of Shares. (a) Each Shareholder hereby agrees to use
reasonable efforts to sell or otherwise dispose of the number of shares of
Interstate Management Stock necessary so that on or prior to the first
anniversary of the date hereof (such anniversary being the "Disposition Date"),
the percentage of the outstanding shares of Interstate Management Stock owned in
the aggregate by the Shareholders and the Affiliated Shareholders shall be equal
to or
3
<PAGE> 4
less than 9.9% of the then outstanding shares of Interstate Management Stock;
provided, however, that no Shareholder shall be required hereby to sell or
otherwise dispose of, on or prior to the Disposition Date, a number of shares of
Interstate Management Stock greater than the product of (x) the sum of the total
number of shares of Interstate Management Stock distributed to the Shareholders
and the Affiliated Shareholders on the date hereof minus the number of shares
that equals 9.9% of the total number of shares of Interstate Management Stock
outstanding after such distribution multiplied by (y) such Shareholder's
"Ownership Percentage," as set forth on Exhibit B hereto. From and after the
Disposition Date, each Shareholder hereby agrees that, upon the written request
of Interstate Management after a determination by Interstate Management pursuant
to Section 3.3(b) below that, as of the last day of the most recent fiscal
quarter, such Shareholders and the Affiliated Shareholders own more than 9.9% of
the outstanding shares of Interstate Management Stock (any such date a
"Measurement Date"), he shall use reasonable efforts to sell the number of
shares of Interstate Management Stock necessary so that on or prior to the last
day of the following fiscal quarter, the percentage of the outstanding shares of
Interstate Management Stock owned in the aggregate by the Shareholders and the
Affiliated Shareholders shall be equal to or less than 9.9% of the then
outstanding shares of Interstate Management Stock; provided, however, that no
Shareholder shall be required hereby to sell, on or prior to the last day of the
fiscal quarter following any Measurement Date, a number of shares of Interstate
Management Stock greater than the product of (x) the sum of the total number of
shares of Interstate Management Stock owned by the Shareholders and the
Affiliated Shareholders on such Measurement Date minus the number of shares that
equals 9.9% of the total number of shares of Interstate Management Stock
outstanding on such Measurement Date multiplied by (y) such Shareholder's
Ownership Percentage.
(b) Each Shareholder's obligations under this Section 3.2 are
individual and no Shareholder shall be liable for the failure of any other
Shareholder to use reasonable efforts to sell or otherwise dispose of such
Shareholder's Shares.
(c) Notwithstanding any other provision of this Agreement, no
Shareholder shall be obligated (i) to sell any Share which such Shareholder does
not have the authority to dispose of at that time, or (ii) to sell any Shares at
any time when such sale could reasonably be expected to (A) violate any federal
or state statute or other law, rule or regulation or (B) subject such
Shareholder to any liability to Interstate Management, any governmental entity
or any other entity or individual under any such statute, law, rule or
regulation, including, without limitation, liability under Section 16(b) of the
Exchange Act and the rules promulgated thereunder (collectively, "Section
16(b)") (and no other Shareholder shall be required to sell any additional
shares of Interstate Management Stock as a result of either clause (i) or clause
(ii) of this Section 3.2(c)). Each Shareholder hereby agrees, on each date when
it is reasonably foreseeable that such Shareholder will have the obligation to
use reasonable efforts to sell Shares pursuant to Section 3.2(a) during the six
months following such date, to use reasonable good faith efforts to refrain from
making any purchases of Interstate Management Stock if the reasonably
foreseeable result of any such purchase would be that any sale of Shares by such
Shareholder during the six months following such purchase would result in the
incurrence of liability under Section 16(b).
4
<PAGE> 5
(d) No provision of this Section 3.2 shall be deemed to limit
Interstate Management's rights under Section 3.3 below.
3.3 Call Right. (a) If the Shareholders do not satisfy their
obligations pursuant to Section 3.2, Interstate Management shall have the right
(the "Call Right") (in addition to any other remedies available under Section
4.6 hereof) to purchase from the Shareholders from time to time after the
Disposition Date all or any portion of the Callable Shares (as defined below),
subject to the terms set forth below.
(b) Interstate Management shall determine after the Disposition Date
and after the last day of each fiscal quarter after the Disposition Date (i) the
percentage of the outstanding shares of Interstate Management Stock owned by the
Affiliated Shareholders (the "Affiliate Percentage") on such date by dividing
the number of shares of Interstate Management Stock owned by the Affiliated
Shareholders on such date by the total number of shares of Interstate Management
Stock outstanding on such date; and (ii) the percentage of the outstanding
shares of Interstate Management Stock owned by the Shareholders on such date
(the "Shareholder Percentage") by dividing the number of shares of Interstate
Management Stock owned by the Shareholders on such date by the total number of
shares of Interstate Management Stock outstanding on such date. Each Shareholder
agrees that he shall provide to Interstate Management, as promptly as
practicable upon the written request of Interstate Management, such information
regarding such Shareholder's ownership of Interstate Management Stock as
Interstate Management may reasonably request in order to make the determinations
contemplated by this Section 3.3(b).
(c) "Callable Shares" shall mean (i) in the event that the Affiliate
Percentage as determined pursuant to subparagraph (b) above exceeds 9.9%, all
Shares owned by the Shareholders, (ii) in the event that the Affiliate
Percentage as so determined is less than 9.9% but the sum of the Affiliate
Percentage plus the Shareholder Percentage exceeds 9.9%, the lesser of (x) the
sum of the total number of shares of Interstate Management Stock owned by all
Shareholders and all Affiliated Shareholders on the Disposition Date and any
Measurement Date minus the number of shares of Interstate Management Stock
(rounded to the nearest whole number) that equals 9.9% of the total number of
shares of Interstate Management Stock outstanding on such date and (y) the sum
of the total number of shares of Interstate Management Stock owned by all
Shareholders and all Affiliated Shareholders on the date notice of the exercise
of the Call Right is sent by Interstate Management to the Shareholders (the
"Call Notice Date") minus the number of shares of Interstate Management Stock
(rounded to the nearest whole number) that equals 9.9% of the total number of
shares of Interstate Management Stock outstanding on the Call Notice Date, and
(iii) in the event that the sum of the Affiliate Percentage plus the Shareholder
Percentage is equal to or less than 9.9%, zero Shares.
(d) Upon exercise of the Call Right, Interstate Management shall
determine the number of Callable Shares to be purchased from each Shareholder by
multiplying the number of Shares as to which the Call Right is being exercised
(the "Called Shares") by such Shareholder's
5
<PAGE> 6
Ownership Percentage, as set forth on Exhibit B hereto. In the event the
aggregate number of Shares to be purchased by Interstate Management from all
Shareholders after operation of the previous sentence (the "Initial Shares") is
less than the number of Called Shares, Interstate Management shall purchase an
additional number of Shares equal to the difference between the Called Shares
and the Initial Shares by allocating such purchases among the Shareholders in
proportion to the Ownership Percentage of each Shareholder who continues to own
Shares after operation of the previous sentence.
(e) The per share price to be paid to each Shareholder upon exercise of
the Call Right shall be the average of the Closing Price of Interstate
Management Stock for the ten consecutive Trading Days ending with the Trading
Day immediately preceding the Call Notice Date. The "Closing Price" on any date
shall mean (A) where there exists a public market for the Interstate Management
Stock, the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the shares of Interstate Management Stock are not listed
or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Interstate Management Stock are listed or admitted to trading or, if the shares
of Interstate Management Stock are not listed or admitted to trading on any
national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the Nasdaq Stock Market, Inc. or, if such system is no longer in
use, the principal other automated quotation system that may then be in use or
(B) if no public market for the Interstate Management Stock exists, the Closing
Price will be determined by a single, independent appraiser selected by
Interstate Management's Board of Directors, which appraiser shall appraise the
fair value for such Interstate Management Stock within such guidelines as shall
be determined by the Board of Directors. "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Interstate
Management Stock are listed or admitted to trading is open for the transaction
of business or, if the shares of Interstate Management Stock are not listed or
admitted to trading on any national securities exchange, any day other than a
Saturday, a Sunday or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close.
(f) The Call Right may be exercised by Interstate Management at any
time within 60 days after the Disposition Date and each Measurement Date, on no
more than one occasion with respect to each such date, by written notice to each
Shareholder, which notice shall be delivered via facsimile to the number and by
mail to the address set forth for each Shareholder on Exhibit A hereto (or such
other facsimile number or address as such Shareholder may notify Interstate
Management of) and which notice shall specify (i) evidence of the calculations
made by Interstate Management pursuant to subparagraphs (b) and (c) of this
Section 3.3, (ii) the total number of Shares as to which the Call Right is being
exercised, (iii) the number of Shares
6
<PAGE> 7
being purchased from such Shareholder (including evidence of the calculation
made by Interstate Management pursuant to subparagraph (d) of this Section 3.3),
and (iv) the per share price to be paid to such Shareholder, including
notification of the particular clause of subparagraph (e) of this Section 3.3
pursuant to which such price was determined.
(g) Each Shareholder shall, within ten days of the Call Notice Date,
deliver to Interstate Management a stock certificate or stock certificates, duly
assigned or endorsed for transfer to Interstate Management (or accompanied by
duly executed stock powers relating thereto), representing the Shares being sold
to Interstate Management pursuant to the exercise of the Call Right. Interstate
Management shall, not later than one business day after receipt of such stock
certificate or stock certificates, mail via first class mail to such Shareholder
a certified check in the amount equal to the purchase price of such Shares. In
the event a Shareholder delivers to Interstate Management a stock certificate or
stock certificates in a denomination or denominations exceeding the number of
Shares being sold by such Shareholder to Interstate Management, Interstate
Management shall, within ten days of receipt of such stock certificate, deliver
to such Shareholder a new stock certificate or new stock certificates
representing the number of shares of Interstate Management Stock represented by
such delivered stock certificate or stock certificates which are not being sold
to Interstate Management pursuant to the Call Right.
(h) If, upon the expiration of the 45-day period after the Disposition
Date or any Measurement Date, Interstate Management shall have failed to
exercise the Call Right, Marriott International, Inc., a Delaware corporation,
shall have the right to deliver, within ten days after the expiration of such
45-day period, written notice (the "Marriott Notice") to Interstate Management
indicating its desire for Interstate Management to exercise the Call Right and
specifying the total number of Shares as to which the Call Right should be
exercised. Upon receipt of the Marriott Notice, Interstate Management shall be
obligated, within five days after the receipt of such notice, to exercise the
Call Right pursuant to Section 3.3(f) above for the number of Shares specified
in the Marriott Notice.
3.4 Certain Events. This Agreement and the obligations hereunder will
terminate with respect to each Share sold, transferred or otherwise disposed of
by any means by any Shareholder; provided, that the provisions and obligations
of this Agreement shall continue to attach to any Shares sold or otherwise
transferred by a Shareholder to another Shareholder or to an Affiliated
Shareholder and such Shareholder or Affiliated Shareholder will be bound by such
provisions and obligations with respect to such Shares. Each Shareholder shall
cease to be a Shareholder under this Agreement and each Affiliated Shareholder
shall cease to be an Affiliated Shareholder under this Agreement (including,
without limitation in either such case, for the purposes of making all
computations under this Agreement) at such time that such Shareholder or
Affiliated Shareholder is no longer an officer, director or 10% shareholder of
Patriot, Wyndham International, Inc., a Delaware corporation ("Wyndham"), or any
entity controlled by Patriot or Wyndham. This Agreement and the obligations
hereunder shall be suspended at any time that the percentage of the outstanding
shares of Interstate Management Stock owned in the
7
<PAGE> 8
aggregate by the Shareholders and the Affiliated Shareholders is less than 9.9%;
and this Agreement and the obligations hereunder shall in any event terminate on
the fifth anniversary of the date of this Agreement.
3.5 Absence of Group. Interstate Management and the Shareholders hereby
agree that neither the execution nor the performance of this Agreement by the
Shareholders shall mean (or be used as evidence) that any Shareholder is a
member of a group (as that term is used for any purpose) with any other
Shareholder or Affiliated Shareholder or that any Affiliated Shareholder is a
member of any group with a Shareholder or any other Affiliated Shareholder.
IV. MISCELLANEOUS; GENERAL PROVISIONS
4.1 Severability. If any term or other provision of this Agreement is
determined to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
will negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
4.2 Entire Agreement. This Agreement constitutes the entire agreement
of the parties and supersedes all prior agreements and undertakings, both
written and oral, between the parties with respect to the subject matter hereof.
4.3 Amendments. This Agreement may not be modified, amended, waived,
altered or supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
4.4 Assignment. This Agreement may not be assigned by operation of law
or otherwise.
4.5 Parties in Interest. Except as provided in Section 3.3(h) hereof,
this Agreement is binding upon, and shall inure solely to the benefit of, each
party hereto and nothing in this Agreement, express or implied, is intended to
or will confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
4.6 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof or was otherwise breached. It is
accordingly agreed that the parties will be entitled to specific relief
hereunder, including, without limitation, an injunction or injunctions to
prevent and enjoin breaches of the provisions of this Agreement and to enforce
specifically the terms and
8
<PAGE> 9
provisions hereof, in any state or federal court in the State of Maryland, in
addition to any other remedy to which they may be entitled at law or in equity.
Any requirements for the securing or posting of any bond with respect to any
such remedy are hereby waived.
4.7 Governing Law; Jurisdiction and Venue. This Agreement will be
governed by, and construed in accordance with, the internal laws of the State of
Maryland without regard to its rules of conflict of laws. The parties hereto
hereby irrevocably and unconditionally consent to and submit to the exclusive
jurisdiction of the courts of the State of Maryland for any litigation arising
out of or relating to this Agreement and the transactions contemplated hereby
(and agrees not to commence any litigation relating thereto except in such
courts), waives any objection to the laying of venue of any such litigation in
the State of Maryland and agrees not to plead or claim in any court in the State
of Maryland that such litigation brought therein has been brought in any
inconvenient forum.
4.8 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed will be deemed to be an original but all of which taken
together will constitute one and the same agreement.
4.9 Directors and Officers. Notwithstanding anything herein to the
contrary, the covenants and agreements set forth herein shall not prevent any
Shareholder who is serving on the Board of Directors of Interstate Management or
who is an officer of Interstate Management from taking any action in his or her
capacity as a director or officer of Interstate Management.
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9
<PAGE> 10
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first written above.
INTERSTATE HOTELS MANAGEMENT, INC.
By: ____________________________
Name:
Title:
________________________________
Paul A. Nussbaum*
________________________________
James D. Carreker*
________________________________
[Fine Entities]*
* No individual shall execute this Agreement and become a Shareholder
hereunder unless, on the execution date of this Agreement, such
individual is an officer, director or 10% shareholder of Patriot,
Wyndham or any entity controlled by Patriot or Wyndham (an "Affiliated
Person"). The Fine Entities shall execute this Agreement if Milton Fine
is an Affiliated Person on such date.
10
<PAGE> 11
EXHIBIT A
---------
Number of Shares of Percentage of
Interstate Management Interstate Management
Name and Address* Stock Owned Outstanding
of Shareholder by Shareholder on Date Hereof
- -------------- -------------- --------------
Paul A. Nussbaum
James D. Carreker
[Fine Entities]**
Total
*to include facsimile number
**will include some or all of the following individuals and entities: Milton
Fine; David J. Fine; Milton Fine, Trustee U/A dated 11/11/94 FBO Milton Fine;
Milton Fine, Trustee under the Milton Fine 1997 Charitable Remainder Unitrust;
David Fine, Trustee for the Milton Fine Grantor Annuity Trust U/A dated 3/31/96;
David Fine, Trustee U/A dated 12/15/89 FBO David J. Fine; David Fine, Trustee
U/A dated 12/15/89 FBO Carolyn Fine Friedman; David Fine, Trustee U/A dated
12/15/89 FBO Sibyl Fine King; FFC Partnership, L.P.; FCT-C DelCo 1 Trust; FCT-C
DelCo 2 Trust; FCT-C DelCo 3 Trust; FCT-D DelCo 1 Trust; FCT-D DelCo 2 Trust;
FCT-D DelCo 3 Trust; FCT-S DelCo 1 Trust; FCT-S DelCo 2 Trust; and FCT-S DelCo 3
Trust
11
<PAGE> 12
EXHIBIT B
---------
SHAREHOLDER OWNERSHIP PERCENTAGES
---------------------------------
Shareholder Ownership Percentage
----------- --------------------
Paul A. Nussbaum
James D. Carreker
[Fine Entities]
-------------
Total 100%
12
<PAGE> 13
EXHIBIT C
---------
AFFILIATED SHAREHOLDERS
-----------------------
Number of Shares of Percentage of
Interstate Management Interstate Management
Stock Owned by Stock Outstanding
Name Affiliated Shareholder on Date Hereof
- ---- ---------------------- --------------
Karim Alibhai
Leslie V. Bentley
John P. Bohlmann
Leonard Boxer
Harlan R. Crow
John H. Daniels
John C. Deterding
Gregory R. Dillon
Burton C. Einspruch, M.D.
William W. Evans III
Susan T. Groenteman
Michael Grossman
Arch K. Jacobson
Lawrence S. Jones
Stanley M. Koonce, Jr.
Thomas W. Lattin
James C. Leslie
Carla S. Moreland
Leslie Ng
Paul Novak
Anne L. Raymond
Philip J. Ward
Patriot American Hospitality, Inc.
Wyndham International, Inc.
Total
*less than 0.01%
13
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated October 29, 1998, on our audits of the combined financial
statements as of December 31, 1996 and 1997 and for the three years in the
period ended December 31, 1997 of Interstate Hotels Management, Inc.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
November 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE COMBINED STATEMENTS OF OPERATIONS
AND OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,331
<SECURITIES> 0
<RECEIVABLES> 17,217
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,528
<PP&E> 7,269
<DEPRECIATION> (3,680)
<TOTAL-ASSETS> 95,856
<CURRENT-LIABILITIES> 36,181
<BONDS> 370
0
0
<COMMON> 0
<OTHER-SE> 59,248
<TOTAL-LIABILITY-AND-EQUITY> 95,856
<SALES> 0
<TOTAL-REVENUES> 229,804
<CGS> 0
<TOTAL-COSTS> 198,820
<OTHER-EXPENSES> (73)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (435)
<INCOME-PRETAX> 31,492
<INCOME-TAX> 12,597
<INCOME-CONTINUING> 18,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,895
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THE ACCOMPANYING COMBINED FINANCIAL STATEMENTS HAVE BEEN CARVED OUT OF
FINANCIAL STATEMENTS OF THE COMPANY'S PREDECESSORS. THEREFORE, THE COMPANY
BELIEVES THAT EARNINGS PER SHARE CALCULATIONS REQUIRED TO BE PRESENTED ARE NOT
MEANINGFUL FOR THE PERIOD PRESENTED AND HAVE NOT BEEN PROVIDED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED COMBINED BALANCE SHEET AS OF JUNE 30, 1998 AND THE UNAUDITED COMBINED
STATEMENTS OF OPERATIONS AND OWNERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,261
<SECURITIES> 0
<RECEIVABLES> 42,083
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,447
<PP&E> 7,992
<DEPRECIATION> (4,400)
<TOTAL-ASSETS> 173,556
<CURRENT-LIABILITIES> 64,504
<BONDS> 190
0
0
<COMMON> 0
<OTHER-SE> 91,090
<TOTAL-LIABILITY-AND-EQUITY> 173,556
<SALES> 0
<TOTAL-REVENUES> 126,744
<CGS> 0
<TOTAL-COSTS> 111,183
<OTHER-EXPENSES> 9
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (226)
<INCOME-PRETAX> 15,778
<INCOME-TAX> 6,311
<INCOME-CONTINUING> 9,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,467
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THE ACCOMPANYING COMBINED FINANCIAL STATEMENTS HAVE BEEN CARVED OUT OF
FINANCIAL STATEMENTS OF THE COMPANY'S PREDECESSORS. THEREFORE, THE COMPANY
BELIEVES THAT EARNINGS PER SHARE CALCULATIONS REQUIRED TO BE PRESENTED ARE NOT
MEANINGFUL FOR THE PERIOD PRESENTED AND HAVE NOT BEEN PROVIDED.
</FN>
</TABLE>
