<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1999
REGISTRATION STATEMENT NO. 333-67065
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERSTATE HOTELS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MARYLAND 7011 75-2767215
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
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)
THOMAS F. HEWITT
INTERSTATE HOTELS CORPORATION
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
TIMOTHY Q. HUDAK, ESQ.
INTERSTATE HOTELS CORPORATION
680 ANDERSEN DRIVE, FOSTER PLAZA TEN
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
-------------------------
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. [ ]
-------------------------
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 MAY 27, 1999
8,817,968 SHARES
INTERSTATE HOTELS CORPORATION
LOGO
DISTRIBUTION BY
PATRIOT AMERICAN HOSPITALITY, INC.
TO ITS SHAREHOLDERS OF UP TO
8,817,968 SHARES OF COMMON STOCK
OF INTERSTATE HOTELS CORPORATION
-------------------------
We are sending you this Information Statement/Prospectus to describe the
spin-off of 92% of Interstate Hotels Corporation from Patriot American
Hospitality, Inc., and the business and financial condition of Interstate
following the spin-off. Patriot agreed to effect the spin-off of Interstate as
part of a settlement with Marriott International, Inc. of claims which Marriott
asserted in connection with the proposed merger of Patriot and Interstate Hotels
Company, the predecessor of Interstate. Following the settlement, Patriot's
merger with Interstate Hotels Company closed on June 2, 1998. Interstate has
been a subsidiary of Patriot since the merger.
In the spin-off, you will receive one share of common stock of Interstate
for every 30 shares of Patriot common stock, Patriot Series A Preferred Stock,
Wyndham International, Inc. Series A and Series B Preferred Stock, Patriot
American Hospitality Partnership, L.P. common and preferred limited partnership
units, and Wyndham International Operating Partnership, L.P. Class A and Class C
preferred limited partnership units you own.
If you are a holder of record of Patriot securities on June 7, 1999, you
will receive your Interstate shares automatically. You do not need to take any
further action. We have applied to have the Interstate shares listed on The
Nasdaq National Market under the trading symbol "IHCO."
-------------------------
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 10.
-------------------------
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 June , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers about the Spin-off and Interstate..... 1
Summary..................................................... 3
Summary Financial and Other Data............................ 8
Risk Factors................................................ 10
Recent Developments......................................... 18
The Spin-off................................................ 20
Business.................................................... 25
Selected Financial and Other Data........................... 36
Pro Forma Financial Data.................................... 38
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 50
Management.................................................. 61
Certain Relationships and Related Transactions.............. 71
Security Ownership of Certain Beneficial Owners and
Management................................................ 72
Description of Capital Stock................................ 72
Where You Can Find More Information......................... 78
Index to Combined Financial Information..................... F-1
</TABLE>
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 business and results of operations to
differ materially from those reflected in our forward-looking statements.
Forward-looking statements are not guarantees of future performance. Our
forward-looking statements are based on 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. In addition, such forward-looking statements are subject to
Interstate's reversing the current negative trend in its business and financial
results. Accordingly, you are cautioned not to place undue reliance on our
forward-looking statements.
This Information Statement/Prospectus contains trademarks and trade names of
companies other than Interstate Hotels Corporation.
<PAGE> 4
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF AND INTERSTATE
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," and "Interstate"
mean Interstate Hotels Corporation 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 "Patriot/Wyndham" mean Patriot and its subsidiaries
together with Wyndham and its subsidiaries, references to "Old Interstate" mean
Interstate Hotels Company, references to "Interstate stock" and "Interstate
shares" mean the common stock of Interstate, and references to "Patriot
securities" mean common stock and Series A Preferred Stock of Patriot, Series A
and Series B Preferred Stock of Wyndham, common and preferred limited
partnership units of Patriot American Hospitality Partnership, L.P. and Class A
and Class C Preferred limited partnership units of Wyndham International
Operating Partnership, L.P. All statistics are as of March 31, 1999, unless
otherwise noted, and relate to Interstate's portfolio of hotels for which
management contracts or leases were in place as of May 15, 1999 and/or which we
expect to be operated by Interstate following the spin-off.
Q: WHAT WILL HAPPEN IN THE SPIN-OFF?
A: In the spin-off, Patriot/Wyndham will distribute to its shareholders 92% of
the shares of Interstate, forming a separate, publicly-traded company. We
operate and have a 45% managing member interest in the third-party hotel
management business which Patriot acquired in its merger with Old Interstate.
"Third-party hotel management business" refers to the management, leasing,
and related services which we perform for hotels we do not own. After the
spin-off, we will also manage several hotels owned by Patriot. In addition,
we will own the equity interests in The Charles Hotel Complex, a hotel,
retail, and office complex located in Cambridge, Massachusetts, which
Patriot/Wyndham acquired in its merger with Old Interstate. Patriot/Wyndham
has entered into a contract to sell these equity interests (other than an
interest in the manager of The Charles Hotel) shortly following the spin-off,
and will assign its rights under this contract to us in connection with the
spin-off.
Q: WHAT WILL I RECEIVE IN THE SPIN-OFF?
A: You will receive one Interstate share for every 30 Patriot securities you own
on June 7, 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 100 Patriot securities, then after the spin-off you will
receive three Interstate 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 June 7, 1999, Interstate shares
will be mailed to you or credited to your brokerage account. You do not need
to mail in any stock certificates.
Q: WHAT WILL MY SPIN-OFF SHARES BE WORTH?
A: Based on information we have received from Patriot, we have estimated the
initial value of the Interstate shares upon completion of the spin-off to be
$7.05 per share. The actual trading value of the Interstate 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 Interstate
shares may fluctuate significantly. Please obtain current quotations prior to
deciding whether to purchase or sell Interstate shares.
1
<PAGE> 5
Q: WILL I HAVE TO PAY TAXES ON THE SHARES I RECEIVE IN THE SPIN-OFF?
A: Yes. The fair market value at the time of the spin-off of the Interstate
shares you receive in the spin-off and the cash you receive in lieu of
fractional shares with respect to your shares of Patriot stock (or your
shares of Wyndham stock in the case of holders of Wyndham Series A and B
Preferred Stock) will be taxable to you. The distribution will be treated as
a dividend and taxable as ordinary income if it is paid out of earnings and
profits. Any amount of the distribution in excess of earnings and profits
will first reduce your tax basis in your Patriot stock (or Wyndham preferred
stock) and then will be taxable to you as capital gain. We have assigned an
estimated value of $7.05 per share to the Interstate shares, but 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 22.
If you receive a distribution of Interstate shares with respect to Patriot
securities other than Patriot or Wyndham stock, different rules will apply.
These rules are summarized on page 23.
Q: WHEN WILL I RECEIVE MY INTERSTATE SHARES?
A: Patriot will deliver the Interstate 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 INTERSTATE SHARES?
A: You may buy and sell Interstate shares once the spin-off occurs.
Q: WHERE WILL THE INTERSTATE SHARES TRADE?
A: Interstate has applied to have its shares listed on The Nasdaq National
Market under the trading symbol "IHCO."
Q: WILL DIVIDENDS BE PAID ON THE INTERSTATE SHARES?
A: We do not plan to pay dividends on the Interstate shares in the foreseeable
future. 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 INTERSTATE?
A: If you have questions about the spin-off or Interstate 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 Lisa
O'Connor at Interstate at (412) 937-0600.
2
<PAGE> 6
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
When the spin-off is consummated, Patriot will distribute to you one Interstate
share for every 30 Patriot securities you own on June 7, 1999, the record date
for the spin-off. At the time of the spin-off, Marriott will also purchase four
percent of the outstanding Interstate shares for approximately $2.1 million. We
expect the spin-off to occur on June 10, 1999.
REASONS FOR THE SPIN-OFF
Before Patriot/Wyndham agreed to acquire Old Interstate in December 1997,
Patriot/Wyndham negotiated a non-binding letter of intent with Marriott to
address Marriott's concerns regarding the acquisition of Old Interstate, their
largest franchisee, by a competitor, Patriot/Wyndham. Despite lengthy and
intensive negotiations, Patriot/Wyndham and Marriott were unable to reach a
definitive agreement prior to the planned closing of the Old Interstate merger
and Marriott filed suit in March 1998 seeking to block the merger.
Patriot/Wyndham, Old Interstate and Marriott reached a settlement on May 27,
1998 which allowed the Old Interstate merger to close on June 2, 1998. A major
component of the settlement agreement was the transfer of operations consisting
principally of Old Interstate's third-party hotel management business to a newly
created subsidiary of Patriot/Wyndham, Interstate, and the subsequent spin-off
of Interstate from Patriot/Wyndham.
OWNERSHIP OF INTERSTATE FOLLOWING THE SPIN-OFF
At the time of the spin-off, Marriott will purchase four percent of our
outstanding shares for approximately $2.1 million. In the spin-off, Interstate
shares will initially be distributed to the counterparties to forward equity
contracts into which Patriot/Wyndham has entered. However, the Interstate shares
distributed to the counterparties will be returned to Patriot/Wyndham
immediately following the spin-off in exchange for adjustments to the forward
equity contract arrangements, and immediately thereafter these Interstate shares
will be cancelled.
Based on the number of Patriot securities held as of May 15, 1999 by and on
behalf of the counterparties to the forward equity contracts, we expect that
such counterparties will initially receive 3,239,200 Interstate shares in the
spin-off. The table below indicates the effect we expect these transactions to
have on the outstanding shares of Interstate.
<TABLE>
<S> <C>
Total shares to be issued initially (including 242,555
shares owned by Patriot/Wyndham and 242,555 shares to be
purchased by Marriott).................................... 9,303,078
Shares expected to be immediately returned by the forward
equity counterparties and cancelled....................... 3,239,200
---------
Total shares expected to be outstanding immediately
following the cancellation................................ 6,063,878
</TABLE>
Following the spin-off and these transactions, holders of Patriot securities
will own 92% of our shares, Marriott will own four percent of our shares and
Patriot/Wyndham will own four percent of our shares. This ownership structure
was a negotiated part of the settlement agreement reached with Marriott and will
allow each of Patriot/Wyndham and Marriott to maintain an equal interest in
Interstate. This structure, in
3
<PAGE> 7
addition to rights to elect directors held by Wyndham and Marriott, will allow
both Patriot/Wyndham and Marriott to have an influence on the management of our
affairs.
OUR CORPORATE STRUCTURE
After the spin-off, we will initially have two principal subsidiaries,
Interstate Hotels, LLC and IHC II, LLC. A wholly owned subsidiary of ours will
own a 45% managing member interest in Interstate Hotels, LLC and we will own a
99.99% interest in IHC II, LLC. Patriot will retain a 55% non-controlling
ownership interest in Interstate Hotels, LLC and Marriott will own the remaining
.01% interest in IHC II, LLC. Interstate Hotels, LLC is the entity that will
operate the third-party hotel management business that Patriot/ Wyndham acquired
from Old Interstate, as well as own equity interests representing in the
aggregate an approximate 50.3% non-controlling interest in The Charles Hotel
Complex. Patriot/Wyndham has entered into a contract to sell our interests in
The Charles Hotel Complex (other than our interest in the manager of The Charles
Hotel) shortly following the spin-off. Patriot/Wyndham will assign its rights
under this contract to us in connection with the spin-off.
Upon consummation of the spin-off, substantially all of our assets will be held
through our two principal subsidiaries. Because we own only 45% of Interstate
Hotels, LLC, our shareholders will benefit from only 45% of the revenues
deriving from these assets. IHC II, LLC will enter into arrangements under which
Marriott will submanage eleven Marriott hotels acquired by Patriot/Wyndham from
Old Interstate. IHC II, LLC is not expected to make a profit on these
arrangements, but rather will serve to insulate Patriot/ Wyndham and Marriott
from having a direct operational relationship with each other. Interstate
Hotels, LLC's operating agreement provides that, in the event of a change of
control of Interstate, Patriot is entitled to require the buyer (or us) to
purchase, or we are entitled to require Patriot to sell, Patriot's 55% non-
controlling interest in Interstate Hotels, LLC.
Summary diagrams of our structure both prior to and immediately following the
spin-off are set forth below.
4
<PAGE> 8
Included here in the printed version of this Information Statement/Prospectus
are two graphics which depict, using boxes to represent entities and arrows to
represent ownership interests, the ownership structure of Interstate immediately
prior to and immediately following the spin-off.
The first graphic, which depicts the ownership structure of Interstate
immediately prior to the spin-off, shows that:
o Patriot will own 99% of Interstate and PAH-Interstate Holdings, Inc.,
a subsidiary 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 Interstate;
o Interstate will own 100% of IHC II, LLC;
o Interstate will own 45% of Interstate Hotels, LLC (held indirectly
through a wholly-owned subsidiary) and PAH-Interstate Holdings, Inc.
will own 55% of Interstate Hotels, LLC;
o Interstate Hotels, LLC will own 99% of Crossroads Hospitality Company,
L.L.C., Hilltop Equipment Leasing Company, L.P., Continental Design &
Supplies Company, L.L.C., IHC Services Company, L.L.C. and several
entities owning interests in leaseholds, and PAH-Interstate Member,
Inc., a wholly-owned subsidiary of Interstate, will own one percent of
Crossroads Hospitality Company, L.L.C., Hilltop Equipment Leasing
Company, L.P., Continental Design & Supplies Company, L.L.C., IHC
Services Company, L.L.C. and several entities owning interests in
leaseholds;
o Interstate Hotels, LLC will own 100% of Colony Hotels and Resorts
Company, Northridge Insurance Company, PAH-Cambridge Holdings, LLC
and IHC/Moscow Corporation;
o PAH-Cambridge Holdings, LLC will own a 25% general partnership
ownership interest and a 87.5% general partnership economic interest
in Cambridge Hotel Associates; and
o Interstate Hotels, LLC will own 50.3% in the aggregate of several
entities owning equity interests in The Charles Hotel Complex.
5
<PAGE> 9
The second graphic, which depicts the ownership structure of Interstate
immediately following the spin-off, shows that:
o Marriott will own four percent of Interstate, the holders of Patriot
securities will own 92% of Interstate, Wyndham will own three percent
of Interstate, and PAH-Interstate Holdings, Inc., a subsidiary 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 Interstate;
o Interstate will own 99.99% of IHC II, LLC and Marriott will own .01%
of IHC II, LLC;
o Interstate will own 45% of Interstate Hotels, LLC (held indirectly
through a wholly-owned subsidiary) and PAH-Interstate Holdings, Inc.
will own 55% of Interstate Hotels, LLC;
o Interstate Hotels, LLC will own 99% of Crossroads Hospitality Company,
L.L.C., Hilltop Equipment Leasing Company, L.P., Continental Design &
Supplies Company, L.L.C., IHC Services Company, L.L.C. and several
entities owning interests in leaseholds, and PAH-Interstate Member,
Inc., a wholly-owned subsidiary of Interstate, will own one percent of
Crossroads Hospitality Company, L.L.C., Hilltop Equipment Leasing
Company, L.P., Continental Design & Supplies Company, L.L.C., IHC
Services Company, L.L.C. and several entities owning interests in
leaseholds;
o Interstate Hotels, LLC will own 100% of Colony Hotels and Resorts
Company, Northridge Insurance Company, PAH-Cambridge Holdings, LLC
and IHC/Moscow Corporation;
o PAH-Cambridge Holdings, LLC will own a 25% general partnership
ownership interest and a 87.5% general partnership economic interest
in Cambridge Hotel Associates; and
o Interstate Hotels, LLC will own 50.3% in the aggregate of several
entities owning equity interests in The Charles Hotel Complex.
6
<PAGE> 10
MANAGEMENT
There initially will be six persons on our Board of Directors. Thomas F. Hewitt
is our Chief Executive Officer and the Chairman of our Board of Directors.
Our principal executive offices are located at 680 Andersen Drive, Foster Plaza
Ten, Pittsburgh, Pennsylvania 15220. Our telephone number is (412) 937-0600.
7
<PAGE> 11
SUMMARY FINANCIAL AND OTHER DATA
We are providing the following summary financial information to aid you in your
analysis of the financial aspects of the spin-off. The table sets forth summary
historical financial data for Interstate, prior to the merger of Old Interstate
with Patriot, as the predecessor, as of and for the years ended December 31,
1994, 1995, 1996 and 1997, for the three months ended March 31, 1998, and for
the period from January 1, 1998 to June 1, 1998, and for Interstate, subsequent
to the merger of Old Interstate with Patriot, as the successor, as of December
31, 1998 and March 31, 1999 and for the period from June 2, 1998 to December 31,
1998 and for the three months ended March 31, 1999. In addition, we have
provided a combined 1998 column which combines the predecessor for the period
from January 1, 1998 to June 1, 1998 and the successor for the period from June
2, 1998 to December 31, 1998. We believe that this presentation is informative
to the reader. In addition, summary pro forma financial data for the year ended
December 31, 1998 and as of and for the three months ended March 31, 1999 is
presented.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------------- -------------
YEAR ENDED DECEMBER 31, JAN. 1, 1998 JUNE 2, 1998
----------------------------------------------- THROUGH THROUGH
1994 1995 1996 1997 JUNE 1, 1998 DEC. 31, 1998
-------- ---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Lodging revenues............ -- -- $ 9,979 $ 167,855 $ 78,769 $ 115,153
Management and related
fees...................... $ 36,726 $ 45,018 53,733 62,562 27,994 33,241
-------- ---------- ---------- ---------- ---------- ----------
Total revenues.......... 36,726 45,018 63,712 230,417 106,763 148,394
Expenses:
Lodging expenses............ -- -- 6,126 85,631 39,834 60,790
Operating expenses and other
(3)....................... 20,708 24,934 39,931 34,673 16,623 14,870
Lease expense............... -- -- 3,477 73,283 34,515 51,165
Depreciation and
amortization.............. 3,659 4,188 4,385 4,845 2,152 10,659
Interest, net............... (30) (146) (501) (498) (204) (390)
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
tax expense (benefit)....... 12,389 16,042 10,294 32,483 13,843 11,300
Income tax expense (benefit)
(4)......................... -- -- 4,117 12,986 5,528 4,436
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest.................... 12,389 16,042 6,177 19,497 8,315 6,864
Minority interest............ -- -- -- 18 24 209
-------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 12,389 $ 16,042 $ 6,177 $ 19,479 $ 8,291 $ 6,655
======== ========== ========== ========== ========== ==========
Pro forma net income (loss)
per common share (5):
Basic.......................
Diluted.....................
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents.... $ 6,702 $ 14,035 $ 11,168 $ 2,432 $ 1,652
Total assets................. 30,741 38,420 88,204 118,185 161,157
Long-term debt............... 3,890 1,270 541 370 --
Total equity................. 18,858 24,345 56,886 80,730 92,607
OTHER FINANCIAL DATA:
EBITDA (6)................... $ 14,178 $ 36,812 $ 15,767 $ 21,360
Net cash provided by (used
in) operating activities.... 15,331 12,517 18,359 9,593
Net cash (used in) provided
by investing activities..... (4,338) (35,707) 2,674 (27,707)
Net cash (used in) provided
by financing activities..... (13,860) 14,454 (19,298) 15,599
TOTAL HOTEL DATA (7)
Total hotel revenues......... $858,986 $1,056,279 $1,326,581 $1,600,958
Number of hotels (8)......... 136 150 212 223
Number of rooms (8).......... 31,502 35,044 43,178 45,329
<CAPTION>
PREDECESSOR SUCCESSOR
----------- --------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------- ----------------------------------
COMBINED PRO FORMA PRO FORMA
1998(1) 1998(2) 1998 1999 1999(2)
---------- ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Lodging revenues............ $ 193,922 $ 193,922 $ 43,892 $ 42,595 $ 42,595
Management and related
fees...................... 61,235 46,736 15,868 11,549 9,462
---------- ----------- -------- -------- --------
Total revenues.......... 255,157 240,658 59,760 54,144 52,057
Expenses:
Lodging expenses............ 100,624 100,624 22,832 24,058 24,058
Operating expenses and other
(3)....................... 31,493 31,400 10,451 8,604 9,330
Lease expense............... 85,680 85,680 18,771 20,897 18,897
Depreciation and
amortization.............. 12,811 18,184 1,311 4,658 4,658
Interest, net............... (594) (1,169) (124) (59) (203)
---------- ----------- -------- -------- --------
Income (loss) before income
tax expense (benefit)....... 25,143 5,939 6,519 (4,014) (4,683)
Income tax expense (benefit)
(4)......................... 9,964 1,195 2,602 (1,625) (811)
---------- ----------- -------- -------- --------
Income (loss) before minority
interest.................... 15,179 4,744 3,917 (2,389) (3,872)
Minority interest............ 233 2,950 14 49 (2,655)
---------- ----------- -------- -------- --------
Net income (loss)............ $ 14,946 $ 1,794 $ 3,903 $ (2,438) $ (1,217)
========== =========== ======== ======== ========
Pro forma net income (loss)
per common share (5):
Basic....................... $ 0.29 $ (0.19)
Diluted..................... $ 0.29 $ (0.19)
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents.... $ 1,652 $ 1,730 $ 2,658 $ 25,263
Total assets................. 161,157 126,507 163,754 168,915
Long-term debt............... -- -- -- --
Total equity................. 92,607 90,884 83,289 69,256
OTHER FINANCIAL DATA:
EBITDA (6)................... $ 37,127 $ 10,330 $ 7,692 $ 536 $ (102)
Net cash provided by (used
in) operating activities.... 27,952 23,665 (1,710) 3,408 1,108
Net cash (used in) provided
by investing activities..... (25,033) (25,033) 781 (555) (555)
Net cash (used in) provided
by financing activities..... (3,699) (16,673) 227 (1,847) (2,456)
TOTAL HOTEL DATA (7)
Total hotel revenues......... $1,490,132 $1,042,488 $400,197 $320,770 $258,820
Number of hotels (8)......... 176 155 214 176 158
Number of rooms (8).......... 35,214 29,174 43,447 34,427 29,654
</TABLE>
8
<PAGE> 12
- -------------------------
(1) Represents the summation of the balances from the predecessor for the period
from January 1, 1998 to June 1, 1998 and the successor for the period from
June 2, 1998 to December 31, 1998.
(2) Reflects the spin-off and other adjustments described in "Pro Forma
Financial Data."
(3) 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
executives and key employees of Old Interstate in consideration for the
cancellation of stock options issued by one of Old Interstate's predecessors
in 1995.
(4) Prior to 1996, Old Interstate and its predecessors were organized as S
corporations, partnerships and limited liability companies and, accordingly,
were not subject to federal or significant state income taxes.
(5) Based on 6,245,795 shares of common stock outstanding on a pro forma basis
on the spin-off date, which represents 6,063,878 shares expected to be
outstanding immediately following the spin-off plus 181,917 restricted
shares that will be issued to Mr. Hewitt.
(6) EBITDA represents earnings (losses) before interest, income tax expense
(benefit), depreciation and amortization. The 1998 and the three months
ended March 31, 1999 pro forma EBITDA represents Interstate's 45% share of
total EBITDA. 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, taxes, depreciation
and amortization, which is generally equivalent to EBITDA, and EBITDA is
unaffected by the debt and equity structure of the property owner. EBITDA,
as calculated by Interstate, may not be consistent with computations of
EBITDA by other companies. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles, 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 generally
accepted accounting principles for purposes of evaluating Interstate's
results of operations.
(7) Represents all hotels, including the leased hotels, which Interstate
operated.
(8) As of the end of the periods presented. The 1998 pro forma number of hotels
and number of rooms excludes 14 hotels with 2,363 rooms that have opened in
1999 or that are scheduled to open in 1999 and that are currently or are
expected to be managed by Interstate Hotels, LLC. The three months ended
March 31, 1999 pro forma number of hotels and number of rooms excludes 11
hotels with 1,883 rooms that have opened or that are scheduled to open after
March 31, 1999 and that are currently or are expected to be managed by
Interstate Hotels, LLC.
9
<PAGE> 13
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.
PATRIOT WILL INCUR PENALTIES IF THE SPIN-OFF IS NOT COMPLETED BY JUNE 14, 1999
If Patriot does not complete the spin-off by June 14, 1999, Marriott will be
entitled to receive liquidated damages from Patriot. Patriot will also be
subject to Marriott's right to purchase, subject to third-party consents, the
hotels to be submanaged by Marriott and six additional Marriott hotels owned by
Patriot at their then appraised values. Additionally, we anticipate that
Marriott would require third-party owners of Marriott-branded hotels that we
manage to replace us as manager of their hotels. As a result, each respective
hotel would either: (1) lose the Marriott brand, at which time we would have to
compensate Marriott for any lost franchise fees or (2) terminate the management
contract with us and enter into a contract with another manager. Patriot would
owe additional liquidated damages on any third-party Marriott-franchised hotel
which chooses to convert its brand. The total amount of liquidated damages
Patriot could pay to Marriott under the circumstances described above is
approximately $194 million.
OUR MANAGEMENT AGREEMENTS MAY EXPIRE OR BE TERMINATED
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 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.
- - Twenty-three of our management agreements (which generated 16.2% of our 1998
pro forma net management fees and 17.0% of our three months ended March 31,
1999 pro forma net management fees) may be terminated without cause and
without the payment of a penalty by either party upon 30 to 90 days' notice.
- - An additional 19 management agreements (which generated 14.2% of our 1998 pro
forma net management fees and 12.3% of our three months ended March 31, 1999
pro forma net management fees) 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 five hotels (which generated
13.5% of our 1998 pro forma net management fees and 12.1% of our three months
ended March 31, 1999 pro forma net management fees) that such hotels are
currently for sale.
- - Sixteen of our management agreements (which generated 22.1% of our 1998 pro
forma net management fees and 26.8% of our three months ended March 31, 1999
pro forma net management fees) expire by the end of 1999, 18 agreements (which
generated 13.7% of our 1998 pro forma net management fees and 11.2% of our
three months ended March 31, 1999 pro forma net management fees) expire by the
end of 2000, and eight agreements (which generated 7.3% of our 1998 pro forma
net management fees and 16.5% of our three months ended March 31, 1999 pro
forma net management fees) expire by the end of 2001.
- - Since the closing of the Patriot/Old Interstate merger, 39 of our management
agreements and hotel operating leases have been terminated (excluding
management agreements that were transferred to Wyndham in connection with the
Patriot/Old Interstate merger) and we have added 14 new management agreements
and hotel operating leases, for a net loss of 25 management agreements and
hotel operating leases. We currently anticipate that a number of our remaining
management contracts may be terminated during 1999.
10
<PAGE> 14
- - In the event that:
-- all of our management agreements which may be terminated without cause upon
30 to 90 days' notice are so terminated;
-- all of the hotels that we have been informed are for sale are in fact sold;
and
-- all of our management agreements which expire by the end of 2001 are
terminated upon their expiration dates;
the result would be a loss of an aggregate of 60 management contracts (which
generated 58.7% of our 1998 pro forma net management fees and 68.6% of our
three months ended March 31, 1999 pro forma net management fees).
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. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Background and General" for a more detailed
discussion.
OUR BUSINESS HAS BEEN DISRUPTED BY THE OLD INTERSTATE MERGER AND PLANS FOR THE
SPIN-OFF
There has been significant disruption to our business caused by the Old
Interstate merger with Patriot, the lengthy and intensive negotiations regarding
the Marriott settlement, the consideration of possible alternatives to the
spin-off including the private sale of Interstate to a third party, and the
preparations for the spin-off. In addition, Old Interstate's operations were
required to be divided between those to be retained by Patriot/Wyndham and those
which would be contributed to us in connection with the spin-off. We were
required to expend a substantial amount of resources, particularly the time and
attention of senior management, in order to achieve that division of operations.
The diversion of senior management's attention and the uncertainty with respect
to our future operations caused by these distractions has disrupted our
relationships with hotel owners and adversely affected our financial results.
Since the closing of the Patriot/Old Interstate merger, there has been a net
reduction in our business of 25 management agreements and hotel operating
leases. In addition, the disruption to our business has reduced employee morale,
increased employee turnover and caused us to be unable to actively pursue new
business. If, following the spin-off, we cannot rectify the disruption in our
relationships with hotel owners and successfully address the other issues
described above, the current negative trend in our business and financial
results will continue. We have described the current negative trend in our
financial results more specifically below.
WE HAVE EXPERIENCED A NEGATIVE TREND IN OUR RECENT FINANCIAL RESULTS
Our financial results have been negatively affected by a number of factors since
the merger of Old Interstate with Patriot and, recently, that negative trend has
worsened. Specifically, based in part on our results from the three months ended
March 31, 1999, we expect that our revenues, operating income and net income for
1999 will be significantly less than those for the pro forma year ended December
31, 1998. The recent decline in our financial performance is primarily
attributable to three factors. First, we have lost, on a net basis, 25 of our
management contracts and hotel operating leases since the closing of the
Patriot/Old Interstate merger. In addition to the loss of management fee revenue
related to those contracts, we also no longer provide ancillary services to the
hotels that we managed under those contracts, which was a significant source of
revenue. Second, due primarily to a lack of investment capital and the diversion
of senior management's focus as a result of attention to the spin-off, we have
been generally unable to generate new business to replace the lost contracts and
operating leases. Third, we have experienced significantly
11
<PAGE> 15
decreased revenue from our portfolio of leased hotels due to increased
competition, disruption of the leased hotels arising from scheduled improvements
to the properties and general negative trends in the limited-service hotel
sector. We have also incurred a $2.0 million one-time payment to Equity Inns for
additional 1999 incentive rent and estimate that we will incur approximately
$1.0 million during 1999 with respect to year 2000 costs. These factors,
together with the general disruption to our business described above, have led
to our poor recent financial performance. We cannot assure you that we will be
able to successfully address these issues and that our financial results will
not continue to decline. As discussed above, we also anticipate the termination
of a number of our management contracts during 1999. If we fail to replace these
contracts with new contracts and address the other issues discussed above, we
expect that our 1999 results will be below 1998 pro forma levels.
OUR MANAGEMENT CONTRACTS ON LEASED HOTELS MAY BE TERMINATED IF THE LEASED HOTELS
ARE SOLD
Equity Inns, the owner of substantially all of our 78 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. Equity Inns has advised us that it is currently marketing 12 of the
leased hotels for sale.
WE MAY BE OBLIGATED TO PURCHASE OUR JOINT VENTURE PARTNER'S INTEREST IN THE
MANAGER OF THE GROUND LESSEE OF THE CHARLES HOTEL COMPLEX
Patriot/Wyndham and we have reached an agreement under which all of our equity
interests in The Charles Hotel Complex, with the exception of our general
partnership interest in the entity which manages The Charles Hotel, will be
sold. For a more detailed discussion of the proposed sale transaction, see page
19. Should Patriot/Wyndham and we fail to complete the sale of our equity
interests in The Charles Hotel Complex for any reason, we would continue to own
the interests in The Charles Hotel Complex which we will own at the spin-off,
and we will remain obligated under the existing agreements with respect thereto.
Under the existing agreement governing our general partnership interest in the
entity which manages the ground lessee of The Charles Hotel Complex, our joint
venture partner has the right to require us to purchase its 45% interest after
October 2, 1999 or earlier upon the occurrence of circumstances set forth in our
joint venture agreement. If our joint venture partner exercises this right, we
would be obligated to (i) purchase its interest for approximately $11.5 million
or (ii) dissolve the ground lessee (and its general partner) and sell its assets
to a third party. Either of such developments could adversely affect our
financial condition or results of operations.
OUR NET INCOME WILL BE NEGATIVELY AFFECTED BY SIGNIFICANT DEPRECIATION AND
AMORTIZATION EXPENSE
A portion of the purchase price of the Patriot/Old Interstate merger was
allocated to the management and lease contracts for hotels that Interstate
Hotels, LLC is expected to operate following the spin-off. The costs allocated
to these contracts have been stated at their estimated fair market values and
are being amortized using the straight-line method over five years for
management contracts and 11 and 13.5 years for lease contracts. As of March 31,
1999, the management contracts had a book value, net of accumulated
amortization, of $59.2 million, and the lease contracts had a book value, net of
accumulated amortization, of $34.3 million. The resulting amortization expense
will have a significant impact on our net income for the foreseeable future.
Depreciation and amortization expense was $18.2 million and $4.7 million on a
pro forma basis for the year ended December 31, 1998 and the three months ended
March 31, 1999, respectively, ($17.1 million and $4.3 million of which was
attributable to amortization of these management and lease contracts).
12
<PAGE> 16
WE COMPETE 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 and better name recognition than we
do. In order for us to expand our hotel management business, 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 debt or equity
investments in hotel properties. We currently have limited capital available to
make such investments and, therefore, we may be required to obtain financing to
provide the necessary funds. We cannot assure you that we will be able to obtain
such financing on commercially reasonable terms.
THIRD-PARTY HOTEL OWNERS ARE NOT REQUIRED TO USE THE ANCILLARY SERVICES WE
PROVIDE
In addition to traditional hotel management services, we offer to third-party
hotel owners several ancillary services such as purchasing, project management,
insurance and risk management. We received approximately 33.7% and 29.3% of our
1998 and three months ended March 31, 1999 pro forma management and related
fees, respectively, from the provision of these services. Our management
contracts do not obligate third-party hotel owners to utilize these services,
and the failure of a substantial number of third-party hotel owners to utilize
these services could adversely affect our overall revenues.
OUR LEASE ARRANGEMENTS SUBJECT US TO RISKS
PAYMENT OF RENT IS UNCONDITIONAL. We lease 78 hotels, including 77 which are
leased from Equity Inns Partnership, L.P. Rent payments under the leases are
comprised of minimum base rent, which is fixed, and incentive rent, which
fluctuates in relation to the leased hotels' revenues. In some cases, income
from operations from a particular hotel may be insufficient to pay the rent on
the hotel. In such an event we would be obligated to provide the difference from
other sources of cash. During 1998, nine of the hotels were unable to generate
sufficient income to make rent payments, and we expended approximately $781,000
in rent in respect of such hotels. During the three months ended March 31, 1999,
36 of the hotels were unable to generate sufficient income to make rent
payments, and we expended approximately $1.7 million in rent in respect of such
hotels.
PERFORMANCE STANDARDS. We are subject to performance standards with respect to
the leased hotels, including requirements to maintain (i) room revenue per
available room and expenditures to within specified percentages of the amounts
targeted in the hotels' operating budgets and (ii) continuity in management
personnel at the hotels. If we fail to meet the performance standards, we would
be in default under the leases, and the leases could be terminated by either
party.
PLEDGE OF OUR EQUITY INTEREST IN A LESSEE. We must obtain the consent of third
parties to release Patriot/ Wyndham and substitute Interstate as a guarantor of
25 of the Equity Inns leases. If we cannot obtain such consent, Patriot/Wyndham
will remain the guarantor of such leases. We have agreed to indemnify Patriot/
Wyndham in the event that Patriot/Wyndham is required to make any payments in
respect of its guarantees of these leases. In order to secure our
indemnification obligation, we have agreed to pledge to Patriot/ Wyndham our
equity interests in the entity which is the tenant under 23 of the leases. If we
fail to make any required indemnity payments, Patriot/Wyndham could foreclose on
our pledge and assume the lease position for these 23 hotels and potentially
terminate us as manager.
NET WORTH COVENANT. We guarantee the 52 leases in respect of which
Patriot/Wyndham is not the guarantor, and will become the guarantor of the
remaining 25 leases if we obtain the third parties' consents to release
Patriot/Wyndham. As guarantor, we are subject to a minimum net worth covenant.
In the event
13
<PAGE> 17
that we are unable to maintain the required minimum net worth, we would be
forced to either obtain a letter of credit or other third-party obligation in
order to comply with the covenant. If we are unable to obtain credit upon such
an event, we would be in breach of our guaranty of the leases and we would be
prohibited from paying dividends or making other distributions to our
shareholders.
WE DEPEND ON A SMALL NUMBER OF HOTEL OWNERS
We derived 49.9% of our 1998 pro forma net management fees and 60.0% of our
three months ended March 31, 1999 pro forma net management fees from hotels
owned by seven owners, none of which contributed more than 15% individually.
Should any of these owners decide to terminate their relationship with us, our
financial results would be negatively affected.
PATRIOT/WYNDHAM MUST OBTAIN THE CONSENT OF THIRD-PARTIES TO EFFECT THE SPIN-OFF
The franchisor of three of the hotels we lease and manage has the right to
consent to the spin-off. Neither we nor Patriot/Wyndham has yet obtained this
franchisors consent. If this consent is not obtained, the spin-off would
constitute a breach of these three franchise agreements, and we could lose the
right to lease and manage these three hotels.
OUR ABILITY TO EFFECT A CHANGE OF CONTROL IS LIMITED
The terms of the franchise agreements under which we operate most of our hotels
contain provisions that may restrict, or require franchisor consent for,
transactions resulting in a change of control of Interstate. In addition,
Interstate Hotels, LLC's operating agreement provides that, in the event of a
change of control of Interstate, Patriot is entitled to force the buyer (or us)
to purchase, or we are entitled to force Patriot to sell, Patriot's 55% interest
in Interstate Hotels, LLC. These provisions, together with our shareholder
rights plan and the provisions of our charter providing for the staggering of
the terms of the Class A Directors and the ability of our Board of Directors to
issue preferred stock without stockholder consent, may discourage acquisition
proposals, delay or prevent a change of control, and hinder the removal of
incumbent directors. This may limit the price that investors might be willing to
pay in the future for Interstate shares. See "Description of Capital Stock" for
a more complete description of these charter and bylaw provisions.
WE ARE OBLIGATED TO SATISFY UNFUNDED CLAIMS UNDER OUR HEALTH AND WELFARE PLAN
AND RELATED TRUST
We provide group insurance benefits to our employees under a self-insured health
and welfare plan and related trust. Based on actuarial valuation studies, we
attempt to estimate the amount of claims that will be incurred but not reported
during a particular period and charge premiums in amounts sufficient to fund the
anticipated claims. We are obligated to make up any deficiency between actual
claims and the amount of premiums received.
In connection with the spin-off and the related transfer of hotels to either
Patriot/Wyndham or Marriott, many of our current employees will become employees
of Patriot/Wyndham or Marriott. Once such employees terminate their employment
with us, they will no longer be included in our actuarial valuation studies. As
such, the premiums we charge after their termination will not account for claims
which may have been incurred by these employees while employed by Interstate but
not reported until after they become employees of Patriot/Wyndham or Marriott.
In such case, we will be responsible for satisfying the claims when reported. We
have estimated the amount of these claims and included them in the financial
statements contained in this Information Statement/Prospectus. We cannot assure
you, however, that our estimates will be accurate, and we may be obligated to
satisfy claims in amounts which exceed our estimates.
14
<PAGE> 18
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY
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 Old Interstate's (or
Patriot/ Wyndham's) stock as a reflection of what the trading price of our
shares might be. Following the spin-off, we will be significantly smaller than
Old Interstate was prior to its merger with Patriot.
Some of the Patriot securityholders who receive Interstate shares in the
spin-off may decide that they do not want to own these shares, and may sell
their shares. We believe that some Patriot securityholders may not be interested
in owning the stock of a comparatively smaller company which does not own a
substantial amount of real estate. Additionally, we believe that a number of
Patriot's current stockholders may be arbitrageurs or other short-term investors
who do not intend to hold shares of a lodging company for the long term. Under
the terms of the Marriott settlement, some of our larger stockholders will be
contractually bound, under a Voting Agreement, to sell portions of their
Interstate shares within one year after the spin-off in an attempt to reduce the
holdings of Interstate shares by affiliates of Patriot/Wyndham to less than 9.9%
of the outstanding Interstate shares by the first anniversary of the spin-off.
These mandatory sales may depress the trading price of Interstate shares. The
Voting Agreement is discussed in more detail on page 71.
THE HOTEL INDUSTRY INVOLVES RISKS
OPERATING RISKS. The hotels we operate are subject to all of the operating
risks common to the hotel industry, such as:
- overbuilding of hotels, and the corresponding oversupply of hotel rooms,
in a particular geographic area. In Florida, for example, where 12.4% of
the hotel rooms which we manage are located, there was a 3.8% increase in
the supply of hotel rooms during 1998 with no change in demand for hotel
rooms over the same period. In California, where 13.8% of the hotel rooms
which we manage are located, there was a 1.4% increase in the supply of
hotel rooms during 1998 but only a corresponding 0.9% increase in demand
for hotel rooms over the same period;
- changes in travel patterns due to increases in travel expenses and other
factors; and
- changes in national, regional and local economic conditions.
All of these risks could adversely affect our average occupancy and average
daily room rates. Such effects on average occupancy and average daily room rates
could reduce our revenues since our management fees are calculated as a
percentage of revenues and profits of hotels.
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 rates 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 operate 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.
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
15
<PAGE> 19
environmental laws), we may be contingently liable for liabilities for which we
do not maintain insurance, including claims arising under the Americans With
Disabilities Act of 1990.
OUR FOREIGN HOTELS EXPOSE US TO RISKS
Five of the hotels we manage are located in Canada and Russia. These hotels
accounted for 10.7% of our 1998 pro forma net management fees and 9.3% of our
three months ended March 31, 1999 pro forma net management fees. Interstate
Hotels, LLC is amortizing, over a five year period, costs incurred in obtaining
the management contracts on the three hotels located in Russia. Current
unamortized costs amount to $1.7 million. If our contracts are terminated, the
unamortized costs would become due from the owner of these hotels. In addition,
pursuant to the management contracts for the three hotels located in Russia,
Interstate Hotels, LLC agreed to fund loans to the hotel owners. Interstate
Hotels, LLC has loans outstanding in the amount of $3.5 million to these owners
and currently is obligated to fund up to an additional $186,000 in aggregate. We
cannot be certain of the effect that changing political climates and economic
conditions could have on hotel operations in such countries and on our ability
to collect on our loans to third-party owners in Russia.
WE DEPEND ON FRANCHISORS
Most of the hotels we manage, lease or for which we perform related services are
operated under franchise licenses, including franchise licenses for the
AmeriSuites, Colony, Comfort Inn, Courtyard by Marriott, Embassy Suites,
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.
OUR BUSINESS IS CONCENTRATED IN A SINGLE INDUSTRY
Our business is almost entirely 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.
WE WILL INITIALLY HAVE LIMITED FINANCIAL RESOURCES
Following the spin-off, we may have difficulty obtaining financing on favorable
terms because our asset base will be smaller than Old Interstate's was prior to
its merger into Patriot and we will not initially own any hotels to provide
collateral for such financing. Accordingly, we will not necessarily be able to
rely on Old Interstate's or Patriot's prior relationships with lenders.
WE RELY ON KEY PERSONNEL
We will be dependent on the efforts of our senior management team. Our future
success and our ability to manage future growth depends in large part on the
efforts of our senior management and on our ability to attract and retain these
key executives and other qualified personnel. Competition for such personnel is
intense, and we cannot assure you that we will succeed in attracting and
retaining such personnel.
HOTEL INVESTMENT AND DEVELOPMENT ACTIVITIES INVOLVE 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 may develop new hotels
selectively. 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.
16
<PAGE> 20
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR PLAN FOR GROWTH
We intend to pursue a growth-oriented business strategy focusing primarily on
adding significantly to our hotel portfolio. Our ability to pursue new growth
opportunities successfully will depend on a number of factors, including our
ability to:
- identify suitable growth opportunities;
- finance acquisitions;
- integrate new contracts into our operations;
- adapt to competition; and
- access sufficient capital on commercially reasonable terms.
We cannot assure you that our systems, procedures and controls, and management,
financial and other resources will be adequate to support such expansion.
OUR REAL ESTATE OWNERSHIP, LEASING AND INVESTMENT ACTIVITIES EXPOSE US TO RISKS
At May 15, 1999, we operated 78 hotels under leases, 77 of which were long-term
leases. As of the spin-off, we will own equity interests representing in the
aggregate an approximate 50.3% non-controlling interest in The Charles Hotel
Complex, although Patriot/Wyndham has entered into an agreement to sell those
interests. 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.
In addition, real estate investments in general are relatively illiquid, which
could limit our ability to adapt the portfolio of hotels we may own or lease in
response to changes in economic and other conditions.
17
<PAGE> 21
RECENT DEVELOPMENTS
SETTLEMENT OF EQUITY INNS DISPUTE
We were engaged in a dispute with Equity Inns Partnership, L.P. regarding, among
other matters, the status of leases for 77 hotels we lease from Equity Inns or
its affiliates. The principal issue in the dispute was whether we or Equity Inns
were responsible for funding capital improvements required under the property
improvement plans which were issued, as a result of Patriot's merger with Old
Interstate, by franchisors under whose brand names we operate the leased hotels.
We recently settled this dispute and entered into a consolidated amendment to
our lease agreements and master agreement with Equity Inns. Under the terms of
the consolidated amendment:
- We have agreed to nominate and recommend one appointee of Equity Inns to
our initial Board of Directors.
- Equity Inns acknowledged that we are not responsible for funding the
capital improvements required under the property improvement plans issued
as a result of the Patriot/Old Interstate merger.
- Equity Inns' obligation to offer us the right to lease and manage any
hotel property acquired or developed by Equity Inns prior to November
2001 has been extinguished with the exception of two listed hotels.
- Our obligation to offer Equity Inns the option to acquire all mid-scale,
upper economy, economy or budget hotels which we develop and sell prior
to November 2001 has been extinguished.
- We have granted to Equity Inns a right of first offer in the event we
desire to sell all of the leases or 75% or more of the direct equity
interests in all of the lessees.
- Patriot/Wyndham, which had guaranteed all of the leases, has been
released from its guarantees on a majority of the leases and, upon
receipt of third-party consents, will be released from the remainder of
its guarantees.
- We have agreed to indemnify Patriot/Wyndham in the event Patriot/Wyndham
is required to make any payments in respect of the lease guarantees under
which it remains liable and, in order to secure our indemnification
obligation, we will pledge to Patriot/Wyndham our equity interests in one
of the lessees.
- As guarantor of the leases, we are subject to a minimum net worth
covenant.
- We are subject to performance standards with respect to the leased
hotels, including requirements to maintain (i) room revenue per available
room and expenditures to within specified percentages of the amounts
targeted in the hotels' operating budgets and (ii) continuity in
management personnel at the hotels. In the event that we fail to meet
these performance standards, either we or Equity Inns may terminate the
applicable lease without penalty.
- Equity Inns agreed to enter into a long-term lease for a hotel we
currently operate under a short-term management contract, and we agreed
to terminate a short-term management contract for a separate Equity Inns
hotel.
- We made a one-time additional incentive rent payment (funded by
Patriot/Wyndham) for the 1999 lease year in the amount of $2.0 million to
Equity Inns.
- As guarantor of the leases, we agreed that, so long as either we fail to
meet the minimum net worth covenant or there is a monetary default under
any lease, we will not be permitted to declare or pay dividends or other
distributions.
18
<PAGE> 22
PROPOSED SALE OF EQUITY INTERESTS IN THE CHARLES HOTEL
In connection with the spin-off, Patriot/Wyndham intends to contribute to us
several equity interests relating to The Charles Hotel Complex in Cambridge,
Massachusetts, consisting of:
- - A general partnership interest in the manager of The Charles Hotel; and
- - The general partnership interest and a limited partnership interest in
Intercarp Limited Partnership, which is a general partner in the managing
general partner of the ground lessee of The Charles Hotel Complex.
Patriot/Wyndham and we have reached an agreement under which the partnership
interests in Intercarp Limited Partnership will be sold to another limited
partner in Intercarp Limited Partnership or its assignee. Interstate Hotels, LLC
will receive an aggregate purchase price for this sale of $19.25 million,
consisting of $13.5 million in cash and $5.75 million in the form of a secured
non-recourse promissory note. The $5.75 million secured promissory note is a
three year note which pays interest only (at a rate of 10% annually) until the
maturity date. All proceeds from this promissory note, including interest
payments and repayments of principal, will be distributed by Interstate Hotels,
LLC to us. Patriot/Wyndham will not receive any distributions from Interstate
Hotels, LLC in respect of this promissory note.
After the spin-off and the sale, Interstate Hotels, LLC will continue to manage
The Charles Hotel through Cambridge Hotel Associates, the manager of The Charles
Hotel, in which it has a general partnership interest. In connection with the
sale, however, the management agreement under which Cambridge Hotel Associates
manages The Charles Hotel will be amended to include terms generally similar to
the existing agreement, but for a new ten year term. In exchange for the
extension of the term to ten years, Interstate Hotels, LLC will receive a lower
portion of the management fees payable to Cambridge Hotel Associates. On a pro
forma basis for the year ended December 31, 1998, the management fees would
equal $1.2 million (rather than the $1.5 million Interstate Hotels, LLC earned
in 1998 under the existing arrangements). Also in connection with the extension
of the management agreement term, Interstate has agreed to make a $2.5 million
unsecured loan to the owner of The Charles Hotel. This loan will bear interest
at 10% and mature in three years. We expect that these transactions will be
consummated in the third quarter of 1999.
The sale of the partnership interests in Intercarp Limited Partnership and the
amendment to the management agreement are subject to the receipt of the consent
of the existing lender to The Charles Hotel Complex. This required consent has
not yet been obtained, and we cannot assure you that we will be able to obtain
such consent. In addition, we cannot assure you that the proposed sale will be
consummated. In the event that the proposed sale of The Charles Hotel Complex is
not consummated, Patriot would be required to contribute to Interstate Hotels,
LLC $11.3 million, less any amounts received by Interstate from the buyer, such
as liquidated damages. If we subsequently agree to sell The Charles Hotel
Complex within one year of the spin-off date, we would be required to remit the
proceeds to Patriot up to the amount Patriot paid to us.
19
<PAGE> 23
THE SPIN-OFF
BACKGROUND OF THE SPIN-OFF
On December 2, 1997, Patriot/Wyndham and Old Interstate entered into a merger
agreement providing for the acquisition of Old Interstate by Patriot/Wyndham.
Before signing the Old Interstate 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, Patriot/Wyndham.
Despite lengthy and intensive negotiations, Patriot/Wyndham and Marriott were
not able to reach a definitive agreement prior to the planned closing of the Old
Interstate 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 Old Interstate 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 Old Interstate merger to close on June 2, 1998.
The principal focus of the settlement agreement is a set of arrangements
designed to prevent Patriot/ Wyndham from having a direct operational
relationship with Marriott or any Marriott branded hotels. For example, the
settlement agreement provides that nine of the Marriott hotels which were owned
by Old Interstate will be converted to the Wyndham brand and ten other Marriotts
previously owned by Old Interstate will convert to Marriott management. The
other major component of the settlement agreement is the spin-off, which
addresses the Marriott hotels and other hotels which were managed or leased by
Old Interstate on behalf of their third-party owners. Patriot/Wyndham agreed to
separate this business from the rest of Old Interstate's hotel operations and
spin it off as a new, publicly traded company. Patriot/Wyndham 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 Patriot and Wyndham. The
special committees recognized that the spin-off would be taxable to you based on
the fair market value of the Interstate shares distributed to you on the date of
the spin-off with respect to your Patriot common stock. However, the special
committees believed that the benefits of the spin-off, and the related closing
of the Old Interstate merger, outweighed any negative tax consequences to you
from the spin-off.
Based on information we have received from Patriot, we have estimated the value
of the Interstate shares you will receive in the spin-off to be $7.05 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 early as we can so that you can complete your tax
returns.
The actual trading value of the Interstate 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 Interstate shares may fluctuate
significantly. Please obtain current market quotations prior to deciding whether
to purchase or sell Interstate shares.
DISTRIBUTION OF INTERSTATE SHARES
Each holder of Patriot securities as of the close of business on June 7, 1999
will receive one Interstate share for every 30 Patriot securities he or she
owns.
In anticipation of the spin-off, immediately following the Old Interstate merger
Patriot/Wyndham contributed to Interstate a 35% interest in Interstate Hotels,
LLC, the entity holding Old Interstate's third-party
20
<PAGE> 24
hotel management business. The remaining 65% interest was contributed to a
subsidiary owned 99% by Patriot and 1% by Wyndham. Patriot and Interstate have
since adjusted their respective ownership percentages to the current 55% and 45%
levels.
Patriot/Wyndham has entered into forward equity contracts with three
counterparties. Patriot/Wyndham is required to settle these forward equity
contracts either in cash or by issuing to the counterparties additional paired
shares of their common stock in lieu of cash. As of May 15, 1999, the
counterparties held 13,520,764 paired shares of Patriot/Wyndham. In addition,
Patriot/Wyndham has issued an additional 83,655,233 of their paired shares as
collateral in connection with the forward equity contracts.
In the spin-off, Interstate shares will be distributed in respect of both the
paired shares held by the counterparties and those shares issued by
Patriot/Wyndham as collateral. The counterparties have agreed to return to
Patriot/Wyndham all shares of Interstate that they receive in the spin-off,
however, in exchange for adjustments to the forward equity contract
arrangements. Patriot/Wyndham will immediately return all such shares to
Interstate for cancellation.
Thus, while 8,817,968 shares are being registered with the Commission in
connection with the spin-off, we anticipate that 3,239,200 of these shares
(based on the number of Patriot securities held as of May 15, 1999 by and on
behalf of the counterparties) will immediately be returned by the counterparties
and cancelled. As a result, we expect that only 6,063,878 Interstate shares
(including 242,555 shares owned by Patriot/ Wyndham and 242,555 shares to be
purchased by Marriott) will remain outstanding after giving effect to these
transactions.
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 assets
and liabilities between Interstate 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 arrangements between
Interstate 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 contributed and 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 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.
ALLOCATION OF SHARED EXPENSES
The amended and restated limited liability company agreement of Interstate
Hotels, LLC contains provisions designed to allocate between Interstate Hotels,
LLC and Interstate those costs and expenses relating to services provided by one
party in whole or in part for the benefit of the other. Such costs and expenses
will be allocated between Interstate Hotels, LLC and Interstate based on
generally accepted accounting principles, on the basis of which party benefited
from the expenditure. To the extent that the allocation of any such costs and
expenses, including general and administrative expenses, cannot be fairly
apportioned, Interstate Hotels, LLC and Interstate will allocate such costs and
expenses based upon their respective gross revenues, so that each party's profit
margins are substantially the same for similar services.
21
<PAGE> 25
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 Interstate 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 Interstate 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.
PATRIOT'S STATUS AS A REIT. Patriot has conducted business and continues to
conduct business in a manner designed to permit it to qualify as a REIT under
the Internal Revenue Code of 1986, as amended. On March 1, 1999, Patriot
announced that it had signed an agreement with an investor group, including
affiliates of Thomas H. Lee Equity Fund IV, L.P., Apollo Real Estate Management
III, L.P., Apollo Management IV, L.P., Beacon Capital Partners, L.P., and Rosen
Consulting Group, providing for an equity investment of up to $1 billion in
Wyndham. In connection with this investment, Patriot would become a subsidiary
of Wyndham, and convert from a REIT to a C corporation. The consummation of this
investment is subject to numerous conditions, including approval by Patriot
shareholders. If this investment is consummated in 1999 following the spin-off,
Patriot's REIT status would be retroactively terminated effective January 1,
1999. Therefore, the following discussion describes the federal income tax
consequences of the spin-off assuming that Patriot is a C corporation at the
time of the spin-off and, in the event that the equity investment does not occur
and Patriot retains its REIT status, assuming that Patriot qualifies as a REIT
at the time of the spin-off.
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 Interstate shares distributed and Patriot's tax basis in
such shares. Based on information provided by Patriot, we currently estimate
that the amount of gain will be less than $5.0 million. This amount is based on
an estimate that the fair market value of the Interstate shares that Patriot
will distribute will be $39.3 million in the aggregate. However, the final value
of the Interstate 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 will recognize this taxable gain regardless of whether it is a C
corporation or a REIT as of the date of the spin-off. If Patriot qualifies as a
REIT as of such date, 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 Interstate's assets at the time of the
Old Interstate merger. Such tax will apply to Patriot as a REIT because the
assets of Interstate were acquired on a tax-free basis by a REIT from a C
corporation. In determining the amount Patriot must distribute annually to
shareholders in order to
22
<PAGE> 26
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
Interstate shares distributed to Patriot shareholders will apply towards the
annual distribution requirement.
RECEIPT OF INTERSTATE SHARES. If you receive Interstate shares with respect to
your shares of Patriot common or preferred stock, or your shares of Wyndham
preferred stock, the spin-off will be taxable to you for federal income tax
purposes based on the fair market value of the Interstate shares (and cash in
lieu of fractional shares) you receive as of the date of the spin-off to the
extent paid out of earnings and profits, as described below. You will acquire an
initial tax basis in your Interstate shares equal to their value on the date of
the spin-off, and your holding period for such shares will begin on such date.
With respect to distributions to holders of Patriot stock, 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. If Patriot is a C corporation as of the date of the spin-off, these
distributions made to Patriot's corporate shareholders may be eligible for the
dividends-received deduction. However, if Patriot qualifies as a REIT as of such
date, such distributions made to Patriot's corporate shareholders will not be
eligible for the dividends-received deduction. Regardless of whether Patriot is
a C corporation or a REIT as of the date of the spin-off, any amount of the
distribution in excess of earnings and profits will first reduce your tax basis
in your Patriot stock 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. If Patriot qualifies as a REIT as of the date of the spin-off,
Patriot's ability to designate the distribution of Interstate 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.
Based on information we have received from Patriot, we have assigned an
estimated value of $7.05 per share to the Interstate shares, but the final value
of the spin-off distribution cannot be determined until after the distribution
is completed. 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.
Different rules will apply if you receive Interstate shares with respect to
Wyndham preferred stock or interests in the Patriot or Wyndham operating
partnerships. A distribution of Interstate shares with respect to your Wyndham
stock will be taxable as a dividend to the extent made out of Wyndham's current
or accumulated earnings and profits, and will generally be eligible for the
dividends-received deduction for corporations. A distribution in excess of
Wyndham's current and accumulated earnings and profits will first reduce the tax
basis of your Wyndham stock and then will be taxable to you as capital gain.
If you receive a distribution of Interstate shares with respect to your interest
in the Patriot or Wyndham operating partnership, then under the rules applicable
to distributions by partnerships of marketable securities, you will generally be
treated as if you received a cash distribution equal to the value of the
Interstate shares distributed, and you will recognize gain to the extent that
the value of the distributed shares, plus any cash received in lieu of
fractional shares, exceeds your basis in your partnership interest immediately
before the distribution. Your basis in the Interstate shares will be equal to
their fair market value on the date of the distribution, and your basis in your
partnership interest will generally be reduced, but not below zero, by the fair
market value of the Interstate shares.
23
<PAGE> 27
BACKUP WITHHOLDING. Patriot generally will be required to withhold 31% of the
Interstate shares to be distributed to you with respect to Patriot or Wyndham
stock 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.
24
<PAGE> 28
BUSINESS
GENERAL
We are one of the largest independent hotel management companies in the United
States based on total portfolio hotel revenues, number of guestrooms and number
of properties managed. Following the spin-off, we will control and have a 45%
economic interest in Interstate Hotels, LLC, the successor to the third-party
hotel management business conducted by Old Interstate prior to its merger into
Patriot. Since all of the assets being contributed to us by Patriot/Wyndham in
connection with the spin-off will be owned by Interstate Hotels, LLC, our
shareholders will only be entitled to 45% of any economic benefit deriving from
this business. Interstate Hotels, LLC will operate 169 hotels containing
approximately 31,500 rooms. Interstate Hotels, LLC will manage, lease or perform
related services for hotels in all market segments. Its hotels are
geographically dispersed in 37 states in the United States, and in Canada, the
Caribbean and Russia. Interstate Hotels, LLC will operate these hotels under a
variety of major brand names, including AmeriSuites, Colony, Comfort Inn,
Courtyard by Marriott, Embassy Suites, Fairfield Inn by Marriott, Hampton Inn,
Hilton, Holiday Inn, Homewood Suites, Marriott, Radisson, Residence Inn by
Marriott, Sheraton and Westin. Following the spin-off, in addition to conducting
Old Interstate's former third-party hotel management business through our 45%
interest in Interstate Hotels, LLC, we will own equity interests in The Charles
Hotel Complex. Patriot/Wyndham has entered into a contract to sell our equity
interests in The Charles Hotel Complex (other than our general partnership
interest in the manager of The Charles Hotel) shortly after the spin-off.
Patriot/Wyndham will assign its rights under this contract to us in connection
with the spin-off. To facilitate the management of our diverse portfolio of
hotels, we have divided the hotels into two separate operating
divisions--Interstate, which operates luxury and upscale hotels, and Crossroads,
which operates mid-scale, upper economy and budget hotels.
As part of our business strategy, we plan to pursue future opportunities to
manage or lease hotels on behalf of third-party owners as well as other business
opportunities, such as selective hotel investments and the formation of
strategic alliances. Any new business will be managed, leased or owned 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 economic benefit of any new business
we acquire, even business we obtain through relationships with the owners of
hotels currently 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 senior management team consists of our Chief Executive Officer, Thomas F.
Hewitt, who has more than 30 years of experience in the hospitality industry,
and former Old Interstate executive officers who, together with Mr. Hewitt, have
an average of 24 years of experience in the hospitality industry. In addition,
we employ substantially all of Old Interstate's employees who were a part of Old
Interstate's third-party hotel management business. We intend to capitalize on
this extensive experience, together with our corporate infrastructure and the
diversity of our portfolio of hotels, to obtain future third-party hotel
management contracts and take advantage of other hotel-related opportunities.
BACKGROUND
Old Interstate was founded in 1961 to own and operate a single motor lodge in
northwestern Pennsylvania. Throughout the 1960s and 1970s, Old Interstate built
a portfolio of hotel management contracts and developed its reputation as an
experienced hotel management company. In the late 1980s and early 1990s, Old
Interstate continued to aggressively pursue third-party hotel management
opportunities at a time when financial distress existed within the hotel
industry. By providing experienced hotel management to hotel owners, many of
which were financial institutions which had assumed ownership of hotels through
25
<PAGE> 29
foreclosure, Old Interstate was able to rapidly expand its portfolio of managed
hotels during this time period. During the five years prior to Old Interstate's
merger with Patriot, Old Interstate continued to expand its management portfolio
while it 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. During this time period, Old
Interstate completed an initial public offering, the acquisition of controlling
interests in 40 hotels, the development and construction of four limited-service
hotels and the acquisition of the hotel management and leasing business
affiliated with Equity Inns, Inc.
BUSINESS AND GROWTH STRATEGY
We intend to pursue two core business strategies to take advantage of
opportunities in the lodging industry: (i) improving investment value for hotel
owners by increasing the revenues and the profitability of the hotels we operate
for them; and (ii) expanding our hotel portfolio by adding new management
contracts and long-term hotel operating leases, selectively investing in hotels
and forming strategic alliances with real estate partners to increase the range
of hotel investment and management opportunities available to us.
IMPROVING INVESTMENT VALUE FOR HOTEL OWNERS. Because our profits from hotel
management contracts and leases are generally based on the revenues and
profitability of our hotels, our financial interests are aligned with those of
the owners of the hotels we operate. Our ongoing system of investigation,
prioritization and immediate action is designed to ensure that we maintain high
quality facilities and customer service at the hotels we operate while
implementing effective cost controls. In addition, we provide incentives to
regional and general managers to achieve revenue and operating goals at the
hotels for which they are responsible. We believe these measures, in turn, will
provide greater value for our hotel owners.
EXPANDING HOTEL PORTFOLIO. We plan to expand our hotel portfolio through
implementing the following principal strategies:
ADDITION OF NEW HOTEL MANAGEMENT AGREEMENTS AND LONG-TERM OPERATING
LEASES. Through the efforts of our business development staff, we seek to add
new hotel management agreements and long-term hotel operating leases that are
suitable for integration into our portfolios. We intend to capitalize on Old
Interstate's historical relationships with institutional hotel investors and
franchisors and its reputation for integrity, its track record of delivering
superior financial returns for hotel owners and investors and its willingness to
structure key terms of hotel management agreements and leases to satisfy hotel
owner objectives.
There has been a recent increase in new hotel construction activity which we
hope will provide us with third-party hotel management opportunities. New hotels
are often built by developers and institutional investors who do so for purposes
of real estate investment and who often lack hotel management expertise. These
types of developers typically look to third-party management companies such as
Interstate to manage their hotels.
We intend to continue to operate hotels in multiple segments of the lodging
industry, which we believe will increase our opportunities to compete for new
hotel management agreements and long-term operating leases. While we will
participate in each segment of the lodging industry, we believe that the
greatest opportunities for expansion exist in the luxury and upscale segment.
We hope that our existing relationships with owners outside the United States
and our experience in managing their hotels will lead to other international
management opportunities. We believe that our international management
experience will position us to take advantage of growing opportunities in the
international hotel market and enhance our reputation both internationally and
domestically.
26
<PAGE> 30
SELECTIVE HOTEL INVESTMENTS. We intend to make strategic investments in
hotel properties with business partners or through equity contributions or
secured loans. We may selectively make strategic investments in order to achieve
high returns on capital and to secure new management contracts. We believe that
our in-house management expertise, as well as our extensive hotel, real estate
and finance industry contacts, will facilitate our ability to identify, evaluate
and negotiate potential hotel investment opportunities. We may selectively
participate in the development of new hotels in the future when we believe the
competitive environment favors such development.
STRATEGIC ALLIANCES. In the past, Old Interstate aligned itself with
institutional investors, such as Blackstone Real Estate Advisors, L.P., and
REITs, such as Equity Inns. These strategic alliances provided to Old Interstate
opportunities to acquire and invest in hotels and hotel leaseholds, obtain new
management contracts and acquire small hotel management companies with
proportionally smaller capital investments. In light of Old Interstate's success
with these alliances and our belief that we can significantly grow our
management business through hotel and real estate investments, we will seek to
form these types of alliances in the future.
COMPETITION
The hotel management industry is highly competitive. We compete for both
limited-service and full-service third-party hotel management contracts and
leaseholds with several hundred companies, including international, national,
regional and local franchise companies and independent hotel management
companies. Within the highly fragmented limited-service hotel management
industry, we compete with a large and diverse group of competitors including
hotel franchise companies, owner-operators, and a number of independent
operators. Within the full-service hotel management industry we compete with a
smaller number of more experienced competitors, primarily consisting of
franchise companies and independent full-service operators. In both industry
segments, we compete on such factors as relationships with hotel owners and
investors, access to capital, financial performance, contract terms, brand name
recognition, marketing support and the willingness to make debt or equity
investments in connection with new management arrangements. In addition,
strategic alliances between hotel owners, including REITs, and our competitors
within the hotel management industry limit the number of management contracts
available to us.
Each of the hotels we operate 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 other hotels 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.
In addition to the factors on which we compete discussed above, we encounter
competitive disadvantages, including the facts that
- our relationships with hotel owners have been disrupted by Old
Interstate's merger with Patriot, the lengthy and intensive negotiations
regarding the Marriott settlement, the consideration of possible
alternatives to the spin-off including the private sale of Interstate to
a third party, and the preparations for the spin-off;
- unlike hotels operated by many of the franchisors with whom we compete,
the branded hotels we operate must pay a franchise fee in addition to our
management fee; and
- we generally will have less access to capital than larger companies and
companies that own a substantial amount of real estate.
27
<PAGE> 31
OPERATIONS
We provide a wide variety of services to our hotels. We offer specialized
support services, such as purchasing, project management and insurance and risk
management services as well as those services traditionally provided by other
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 associates who we employ and who are 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. Hotel owners are
generally responsible for all operating expenses, capital expenditures and
working capital requirements related to the hotels we manage. We earn
incremental revenues from third-party owners for services such as 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. 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 construction 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, 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 excellent claims history we inherited from Old
Interstate. We then provide our hotels the opportunity to participate in the
policy at prices and coverages that we believe are more advantageous than
third-party hotel owners could otherwise obtain. Northridge also provides direct
insurance coverage to Interstate 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.
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. We employ a systematic
approach toward identifying and targeting segments of demand for our hotels in
order to maximize market penetration. We support the local sales efforts of our
hotels with corporate sales executives who develop new marketing concepts and
monitor and respond to specific market needs and preferences. We employ revenue
yield management systems to manage our hotels' use of the various distribution
channels in the lodging industry.
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:
- Developing the concept, design and staffing requirements for the front
office, housekeeping, property maintenance, laundry, valet,
telecommunications, garage and other guest services departments;
- Establishing quality standards for products and services and evaluating
performance against these standards;
28
<PAGE> 32
- Conducting training conferences and workshops for rooms department
employees at all levels;
- Creating operating procedures, training manuals, training programs and
reference guides;
- Developing, maintaining and auditing front office software applications
and training staff in their proper usage; and
- Selecting equipment and supplies such as linens, guest room amenities and
uniforms.
FOOD AND BEVERAGE SERVICES. 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:
- Providing educational and technical training materials and seminars to
improve the skills of our employees;
- Establishing quality levels and management guidelines for new and
existing food and beverage facilities in accordance with area market
expectations;
- Providing ongoing research and development of systems and equipment;
- Creating and implementing system-wide promotional programs to enhance
hotel revenues;
- Conducting business audits that analyze current financial performance
against industry norms, providing a detailed review of existing
procedures and programs and setting a plan for achieving goals in
business growth and cost containment; and
- Providing low cost access to the freshest and highest quality food
products and beverages available in the market through contracts with
national and regional vendors.
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 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.
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.
LODGING INDUSTRY
The hotel industry has experienced profitability gains over the past several
years following a strong recovery from the industry slowdown in the late 1980s
and early 1990s. Moderate growth in the national economy, increased travel and
tourism, a low interest rate environment and improved hotel operating
efficiencies have contributed to increased profitability. According to Smith
Travel Research, 1998 is estimated to have surpassed 1997 as the hotel
industry's most profitable year with an estimated range of aggregate industry
pre-tax income of $20.0 to $22.0 billion.
Hotel industry profits have resulted, in part, from increased room revenue per
available room over the last several years. According to Smith Travel Research,
room revenue per available room for the industry grew
29
<PAGE> 33
3.6%, 5.1% and 6.4% in 1998, 1997 and 1996, respectively. Smith Travel Research
estimates that room revenue per available room will continue to grow through
2000, but at a slower rate due to slower growth in average daily room rates and
a continued decline in average occupancy. According to Smith Travel Research,
average daily room rates increased 4.4%, 6.2% and 6.4% in 1998, 1997 and 1996,
respectively. Smith Travel Research predicts that average daily room rates will
increase 3.8% and 4.0% in 1999 and 2000, respectively. Despite the trend in
average daily room rates, average occupancy rates have declined each year since
achieving a peak of 65.2% in 1995. According to Smith Travel Research, occupancy
percentage declined 0.8%, 0.9% and 0.2% in 1998, 1997 and 1996, respectively.
Smith Travel Research predicts that the occupancy rate will decline 1.1% in 1999
while remaining steady at 63.3% in 2000. This decline is largely attributed to
an increase in new construction projects during the period from 1997 to 1999.
30
<PAGE> 34
HOTEL PORTFOLIO
The following tables set forth statistical information for the three months
ended March 31, 1999 with respect to management contracts and leases of the two
operating divisions of Interstate Hotels, LLC in effect as of May 15, 1999
and/or expected to be operated by Interstate Hotels, LLC following the spin-off.
INTERSTATE DIVISION
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
HOTEL BRAND HOTELS NUMBER OF ROOMS OCCUPANCY(1) ADR(1) REVPAR(1)(2)
----------- --------- --------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Marriott(3)(4) 19 6,365 70.1% $129.91 $ 91.11
Independent(5) 10 2,452 71.2% $149.71 $106.57
Westin 1 1,354 68.0% $100.07 $ 68.04
Embassy Suites(6) 4 1,101 74.7% $129.05 $ 96.35
Hilton(7) 2 815 63.9% $117.58 $ 75.09
Radisson(7) 3 795 66.5% $ 94.33 $ 62.70
Colony 1 717 61.8% $ 77.64 $ 48.01
Sheraton 1 598 94.5% $111.52 $105.39
Holiday Inn 1 498 76.3% $ 89.42 $ 68.19
Crowne Plaza 1 415 77.7% $104.70 $ 81.39
Delta 1 374 69.8% $125.92 $ 87.90
AmeriSuites 1 128 69.4% $ 75.65 $ 52.47
-- ------ ---- ------- -------
Total/Average 45 15,612 70.9% $122.55 $ 86.64
== ======
</TABLE>
- -------------------------
(1) Statistics are based on results for the three months ended March 31, 1999
for the hotels that were open in 1999.
(2) Room revenue per available room ("REVPAR") represents total room revenues
divided by total available rooms.
(3) Includes four hotels which the owner have notified us are for sale.
(4) Includes one hotel currently managed by Wyndham.
(5) Includes one hotel which the owner has notified us is for sale.
(6) Includes three hotels currently managed by Wyndham.
(7) Includes two hotels currently managed by Wyndham.
31
<PAGE> 35
CROSSROADS DIVISION
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
HOTEL BRAND HOTELS NUMBER OF ROOMS OCCUPANCY(1) ADR(1) REVPAR(1)(2)
----------- --------- --------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Hampton Inn(3) 63 7,879 59.3% $ 68.48 $40.60
Residence Inn by
Marriott(4) 13 1,643 72.4% $ 90.51 $65.50
Homewood Suites(5) 9 1,293 64.9% $101.94 $66.19
Holiday Inn 6 956 62.1% $ 69.89 $43.37
Courtyard by Marriott 7 867 69.9% $116.36 $81.32
Independent 5 703 48.3% $ 74.73 $36.13
Hilton Garden Inn(6) 2 511 8.0% $ 71.57 $ 5.69
Colony 4 409 42.0% $112.33 $47.17
Comfort Inn 3 409 75.0% $ 87.18 $65.38
Fairfield Inn by
Marriott 4 328 57.5% $ 55.80 $32.09
Radisson(7) 2 236 66.9% $108.07 $72.29
Doubletree 1 155 66.0% $ 83.78 $55.29
Days Inn 1 148 45.1% $ 34.40 $15.50
Country Inn and
Suites(8) 1 120 --% $ -- $ --
Best Western 1 102 60.4% $ 54.92 $33.15
Super 8 1 86 56.6% $ 43.55 $24.67
Sleep Inn 1 80 58.8% $ 57.15 $33.60
--- ------ ---- ------- ------
Total/Average 124 15,925 60.5% $ 79.10 $47.84
=== ======
</TABLE>
- -------------------------
(1) Statistics are based on results for the three months ended March 31, 1999
for the hotels that were open in 1999.
(2) Room revenue per available room ("REVPAR") represents total room revenues
divided by total available rooms.
(3) Includes three hotels, two with scheduled opening of June 1, 1999 and one
with a scheduled opening of July 1, 1999.
(4) Includes one hotel with a scheduled opening of November 1, 1999.
(5) Includes two hotels with a scheduled opening of June 1, 1999.
(6) Includes one hotel with a scheduled opening of November 15, 1999.
(7) Includes one hotel with a scheduled opening of July 1, 1999.
(8) Includes one hotel with a scheduled opening of December 1, 1999.
32
<PAGE> 36
The geographic diversification of our hotel portfolio reflects our belief that
such diversification helps to insulate the portfolio from local market
fluctuations that are typical for the lodging industry. The following table sets
forth the geographic distribution of our hotel portfolio.
<TABLE>
<CAPTION>
NUMBER OF NUMBER
LOCATION HOTELS OF ROOMS
-------- --------- --------
<S> <C> <C>
California(1)(2)(3) 13 4,357
Florida(4)(5) 15 3,898
New York 10 2,236
Pennsylvania(3)(6) 10 2,012
Illinois(7)(8) 7 1,663
Texas 10 1,384
Tennessee 10 1,326
Canada 2 1,091
North Carolina 7 982
Arizona(1) 6 958
Connecticut(3) 6 925
Ohio 6 883
Michigan(1) 5 876
Colorado(1) 5 815
New Jersey(1) 3 814
Russia 3 746
Vermont 6 595
Washington 2 576
Massachusetts 4 571
Missouri 3 544
West Virginia 4 455
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER
LOCATION HOTELS OF ROOMS
-------- --------- --------
<S> <C> <C>
Georgia 4 443
South Carolina 3 404
Alabama 3 346
Mississippi 4 334
Oklahoma 2 332
Virginia 2 267
Kansas 2 254
Hawaii 1 171
Oregon 1 168
New Mexico(9) 1 131
Indiana 1 129
Arkansas 1 123
Minnesota 1 120
Kentucky 1 119
Maryland 1 115
Virgin Islands 1 110
Idaho 1 104
Nebraska 1 80
Wisconsin 1 80
--- ------
Total 169 31,537
=== ======
</TABLE>
- -------------------------
(1) Includes one hotel currently managed by Wyndham.
(2) Includes two hotels scheduled to open June 1, 1999.
(3) Includes one hotel which the owner has notified us is for sale.
(4) Includes three hotels with scheduled openings of June 1, 1999, July 1, 1999
and December 1, 1999.
(5) Includes two hotels which the owners have notified us are for sale.
(6) Includes one hotel with a scheduled opening of November 1, 1999.
(7) Includes three hotels currently managed by Wyndham.
(8) Includes two hotels with scheduled openings of June 1, 1999 and November 15,
1999.
(9) Includes one hotel with a scheduled opening of July 1, 1999.
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. Third-party hotel owners, however, reimburse us or incur
the expense for all of the wages and benefits for all the employees in their
hotels. Following the spin-off, we will have approximately 13,500 employees,
approximately 13,300 of whom will be employees of specific hotels.
33
<PAGE> 37
Following the spin-off, 13 of the properties in our hotel portfolio will employ
approximately 2,000 workers in the aggregate who are subject to labor union
contracts. We have not experienced any union strikes or other material labor
disruptions.
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 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 such as the ADA and environmental laws. We could
be contingently liable, however, for liabilities for which we do not maintain
insurance, including claims arising under the ADA.
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 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.
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, except to the extent
caused by our gross negligence. In addition, most of our currently leased and
managed hotels have been inspected to determine the presence of
asbestos-containing materials. While asbestos-containing materials could be
present in our properties, operations and maintenance programs for maintaining
such asbestos-containing materials have been or are in the process of being
designed and implemented, or the asbestos-containing materials have been
scheduled to be or have been abated at such hotels. We believe that the presence
of asbestos-containing materials 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 coverages; and
- - are generally entitled to indemnification from third-party hotel owners for
lawsuits and damages against us in our capacity as a hotel manager.
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.
34
<PAGE> 38
INTELLECTUAL PROPERTY
Generally, the third-party owners of our hotels, rather than Interstate, 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. 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 Interstate or its stock.
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. While we utilize our trademarks and service marks (including "Colony"
marks) in connection with managing and leasing hotels, we do not believe that
the loss or expiration of any or all of our marks would have a material adverse
effect on our business. The registrations for our marks expire at varying times,
generally ranging from 2000 to 2011.
35
<PAGE> 39
SELECTED FINANCIAL AND OTHER DATA
We are providing the following selected financial information to aid you in your
analysis of the financial aspects of the spin-off. The table sets forth selected
historical financial data for Interstate, prior to the merger of Old Interstate
with Patriot, as the predecessor, as of and for the years ended December 31,
1994, 1995, 1996 and 1997 for the three months ended March 31, 1998 and for the
period from January 1, 1998 to June 1, 1998, and for Interstate, subsequent to
the merger of Old Interstate with Patriot, as the successor, as of December 31,
1998 and March 31, 1999 and for the period from June 2, 1998 to December 31,
1998 and for the three months ended March 31, 1999. In addition, we have
provided a combined 1998 column which combines the predecessor for the period
from January 1, 1998 to June 1, 1998 and the successor for the period from June
2, 1998 to December 31, 1998. We believe that this presentation is informative
to the reader. In addition, selected pro forma financial data for the year ended
December 31, 1998 and as of and for the three months ended March 31, 1999 is
presented.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR YEAR ENDED
-------------------------------------------------------------- ------------- DECEMBER 31,
YEAR ENDED DECEMBER 31, JAN. 1, 1998 JUNE 2, 1998 -----------------------
----------------------------------------------- THROUGH THROUGH COMBINED PRO FORMA
1994 1995 1996 1997 JUNE 1, 1998 DEC. 31, 1998 1998(1) 1998(2)
-------- ---------- ---------- ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms................... -- -- $ 9,258 $ 158,343 $ 74,265 $ 108,698 $ 182,963 $ 182,963
Other departmental...... -- -- 721 9,512 4,504 6,455 10,959 10,959
Net management fees...... $ 22,284 $ 27,022 33,023 39,136 18,018 22,763 40,781 30,995
Other fees............... 14,442 17,996 20,710 23,426 9,976 10,478 20,454 15,741
-------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Total revenues...... 36,726 45,018 63,712 230,417 106,763 148,394 255,157 240,658
Lodging expenses:
Rooms................... -- -- 2,334 36,919 17,173 26,567 43,740 43,740
Other departmental...... -- -- 591 5,487 2,674 3,962 6,636 6,636
Property costs.......... -- -- 3,201 43,225 19,987 30,261 50,248 50,248
General and
administrative.......... 8,302 9,811 10,369 13,212 6,115 5,822 11,937 12,399
Payroll and related
benefits................ 12,420 15,469 17,666 21,892 10,982 10,439 21,421 18,827
Non-cash compensation
(3)..................... -- -- 11,896 -- -- -- -- --
Lease expense............ -- -- 3,477 73,283 34,515 51,165 85,680 85,680
Depreciation and
amortization............ 3,659 4,188 4,385 4,845 2,152 10,659 12,811 18,184
-------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Operating income
(loss).................. 12,345 15,550 9,793 31,554 13,165 9,519 22,684 4,944
Other income (expense):
Interest, net........... 30 146 501 498 204 390 594 1,169
Other, net.............. 14 346 -- 431 474 1,391 1,865 (174)
-------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss) before
income tax expense
(benefit)............... 12,389 16,042 10,294 32,483 13,843 11,300 25,143 5,939
Income tax expense
(benefit) (4)........... -- -- 4,117 12,986 5,528 4,436 9,964 1,195
-------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss) before
minority interest....... 12,389 16,042 6,177 19,497 8,315 6,864 15,179 4,744
Minority interest........ -- -- -- 18 24 209 233 2,950
-------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Net income (loss)........ $ 12,389 $ 16,042 $ 6,177 $ 19,479 $ 8,291 $ 6,655 $ 14,946 $ 1,794
======== ========== ========== ========== ========== ========== =========== ===========
Pro forma net income
(loss) per common share
(5):
Basic................... $ 0.29
Diluted................. $ 0.29
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash
equivalents............. $ 6,702 $ 14,035 $ 11,168 $ 2,432 $ 1,652 $ 1,652
Total assets............. 30,741 38,420 88,204 118,185 161,157 161,157
Long-term debt........... 3,890 1,270 541 370 -- --
Total equity............. 18,858 24,345 56,886 80,730 92,607 92,607
OTHER FINANCIAL DATA:
EBITDA (6)............... $ 14,178 $ 36,812 $ 15,767 $ 21,360 $ 37,127 $ 10,330
Net cash provided by
(used in) operating
activities.............. 15,331 12,517 18,359 9,593 27,952 23,665
Net cash (used in)
provided by investing
activities.............. (4,338) (35,707) 2,674 (27,707) (25,033) (25,033)
Net cash (used in)
provided by financing
activities.............. (13,860) 14,454 (19,298) 15,599 (3,699) (16,673)
TOTAL HOTEL DATA (7)
Total hotel revenues..... $858,986 $1,056,279 $1,326,581 $1,600,958 $1,490,132 $1,042,488
Number of hotels (8)..... 136 150 212 223 176 155
Number of rooms (8)...... 31,502 35,044 43,178 45,329 35,214 29,174
<CAPTION>
PREDECESSOR SUCCESSOR
----------- --------------------
THREE MONTHS
ENDED MARCH 31,
----------------------------------
PRO FORMA
1998 1999 1999(2)
----------- -------- ---------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms................... $ 41,369 $ 40,270 $ 40,270
Other departmental...... 2,523 2,325 2,325
Net management fees...... 10,334 8,569 6,688
Other fees............... 5,534 2,980 2,774
-------- -------- --------
Total revenues...... 59,760 54,144 52,057
Lodging expenses:
Rooms................... 9,738 9,735 9,735
Other departmental...... 1,478 1,506 1,506
Property costs.......... 11,616 12,817 12,817
General and
administrative.......... 4,010 4,078 4,328
Payroll and related
benefits................ 6,743 4,908 5,002
Non-cash compensation
(3)..................... -- -- --
Lease expense............ 18,771 20,897 18,897
Depreciation and
amortization............ 1,311 4,658 4,658
-------- -------- --------
Operating income
(loss).................. 6,093 (4,455) (4,886)
Other income (expense):
Interest, net........... 124 59 203
Other, net.............. 302 382 --
-------- -------- --------
Income (loss) before
income tax expense
(benefit)............... 6,519 (4,014) (4,683)
Income tax expense
(benefit) (4)........... 2,602 (1,625) (811)
-------- -------- --------
Income (loss) before
minority interest....... 3,917 (2,389) (3,872)
Minority interest........ 14 49 (2,655)
-------- -------- --------
Net income (loss)........ $ 3,903 $ (2,438) $ (1,217)
======== ======== ========
Pro forma net income
(loss) per common share
(5):
Basic................... $ (0.19)
Diluted................. $ (0.19)
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash
equivalents............. $ 1,730 $ 2,658 $ 25,263
Total assets............. 126,507 163,754 168,915
Long-term debt........... -- -- --
Total equity............. 90,884 83,289 69,256
OTHER FINANCIAL DATA:
EBITDA (6)............... $ 7,692 $ 536 $ (102)
Net cash provided by
(used in) operating
activities.............. (1,710) 3,408 1,108
Net cash (used in)
provided by investing
activities.............. 781 (555) (555)
Net cash (used in)
provided by financing
activities.............. 227 (1,847) (2,456)
TOTAL HOTEL DATA (7)
Total hotel revenues..... $400,197 $320,770 $258,820
Number of hotels (8)..... 214 176 158
Number of rooms (8)...... 43,447 34,427 29,654
</TABLE>
36
<PAGE> 40
- -------------------------
(1) Represents the summation of the balances from the predecessor for the period
from January 1, 1998 to June 1, 1998 and the successor for the period from
June 2, 1998 to December 31, 1998.
(2) Reflects the spin-off and other adjustments described in "Pro Forma
Financial Data."
(3) Represents a non-recurring expense relating to the issuance of 785,533
shares of common stock to executives and key employees of Old Interstate in
consideration for the cancellation of stock options issued by one of Old
Interstate's predecessors in 1995.
(4) Prior to 1996, Old Interstate and its predecessors were organized as S
corporations, partnerships and limited liability companies and, accordingly,
were not subject to federal or significant state income taxes.
(5) Based on 6,245,795 shares of Common Stock outstanding on a pro forma basis
on the spin-off date, which represents 6,063,878 shares expected to be
outstanding immediately following the spin-off plus 181,917 restricted
shares that will be issued to Mr. Hewitt.
(6) EBITDA represents earnings (losses) before interest, income tax expense
(benefit), depreciation and amortization. The 1998 and the three months
ended March 31, 1999 pro forma EBITDA represents Interstate's 45% share of
total EBITDA. 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, taxes, depreciation
and amortization, which is generally equivalent to EBITDA, and EBITDA is
unaffected by the debt and equity structure of the property owner. EBITDA,
as calculated by Interstate, may not be consistent with computations of
EBITDA by other companies. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles, 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 generally
accepted accounting principles for purposes of evaluating Interstate's
results of operations.
(7) Represents all hotels, including the leased hotels, which Interstate
operated.
(8) As of the end of the periods presented. The 1998 pro forma number of hotels
and number of rooms excludes 14 hotels with 2,363 rooms that have opened in
1999 or are scheduled to open in 1999 and that are currently or are expected
to be managed by Interstate Hotels, LLC. The three months ended March 31,
1999 pro forma number of hotels and number of rooms excludes 11 hotels with
1,883 rooms that have opened or that are scheduled to open after March 31,
1999 and that are currently or are expected to be managed by Interstate
Hotels, LLC.
37
<PAGE> 41
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of Interstate assumes that
Patriot/Wyndham has separated the third-party hotel management business they
acquired through the merger of Old Interstate into Patriot on June 2, 1998 to
create Interstate. The Unaudited Pro Forma Combined Balance Sheet as of March
31, 1999, is presented as if this spin-off and the sale of the ownership
interest in The Charles Hotel Complex had occurred on that date. The Unaudited
Pro Forma Combined Statement of Operations for the year ended December 31, 1998
and for the three months ended March 31, 1999 is presented as if the spin-off
and the proposed sale of the ownership interest in The Charles Hotel Complex had
occurred on January 1, 1998. 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 Interstate
have been derived from and should be read in conjunction with the historical
combined financial statements and notes thereto of Interstate contained
elsewhere in this Information Statement/Prospectus. The historical combined
financial statements of Interstate have been carved out of Old Interstate and
Patriot and principally include those historical assets, liabilities, revenues
and expenses directly attributable to the third-party hotel management business
of Old Interstate that will succeed to Interstate. The unaudited pro forma
financial data is presented for informational purposes only. The data may not
reflect the future results of operations and financial position of Interstate,
or be necessarily indicative of what the actual results of operations and
financial position of Interstate would have been had the spin-off occurred as of
the dates indicated.
38
<PAGE> 42
INTERSTATE HOTELS CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (A) ADJUSTMENTS PRO FORMA
-------------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,658 $ 22,605(B) $ 25,263
Accounts receivable, net........................... 18,930 -- 18,930
Deferred income taxes.............................. 3,451 -- 3,451
Net investment in direct financing leases.......... 740 -- 740
Prepaid expenses and other assets.................. 1,364 -- 1,364
Related party receivables -- management
contracts....................................... 1,239 (1,239)(C) --
-------- -------- --------
Total current assets....................... 28,382 21,366 49,748
Restricted cash...................................... 1,247 -- 1,247
Marketable securities................................ 2,863 -- 2,863
Property and equipment, net.......................... 3,887 -- 3,887
Officers and employees notes receivable.............. 3,080 -- 3,080
Affiliate receivables................................ 4,370 -- 4,370
Net investment in direct financing leases............ 1,437 -- 1,437
Investment in hotel real estate...................... 22,370 (21,955)(D) 415
Intangibles and other assets......................... 96,118 5,750(D) 101,868
-------- -------- --------
Total assets............................... $163,754 $ 5,161 $168,915
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable -- trade.......................... 2,493 -- 2,493
Accounts payable -- health trust................... 5,000 (2,681)(E) 2,319
Accounts payable -- related parties................ 25,829 (25,829)(E) --
Accrued payroll and related benefits............... 3,817 -- 3,817
Accrued rent....................................... 7,900 -- 7,900
Accrued merger costs............................... 6,585 (4,213)(B) 2,372
Other accrued liabilities.......................... 12,414 -- 12,414
-------- -------- --------
Total current liabilities.................. 64,038 (32,723) 31,315
Deferred income taxes................................ 11,201 (875)(F) 10,326
Deferred compensation................................ 2,863 -- 2,863
-------- -------- --------
Total liabilities.......................... 78,102 (33,598) 44,504
-------- -------- --------
Minority interest.................................... 2,363 52,792(F) 55,155
Commitments and contingencies........................ -- -- --
Owners' equity:
Common stock, $0.01 par value...................... -- 61(G) 61
Paid-in capital.................................... -- 69,195(G) 69,195
Owners' equity..................................... 83,289 (83,289)(G) --
-------- -------- --------
Total owners' equity....................... 83,289 (14,033) 69,256
-------- -------- --------
Total liabilities and owners' equity....... $163,754 $ 5,161 $168,915
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this Pro Forma Combined Balance
Sheet.
39
<PAGE> 43
INTERSTATE HOTELS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
(A) ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Lodging revenues:
Rooms.................................................... $40,270 -- $40,270
Other departmental....................................... 2,325 -- 2,325
Net management fees........................................ 8,569 $(1,881)(B) 6,688
Other fees................................................. 2,980 (206)(C) 2,774
------- ------- -------
54,144 (2,087) 52,057
Lodging expenses:
Rooms.................................................... 9,735 -- 9,735
Other departmental....................................... 1,506 -- 1,506
Property costs........................................... 12,817 -- 12,817
General and administrative................................. 4,078 250(D) 4,328
Payroll and related benefits............................... 4,908 94(E) 5,002
Lease expense.............................................. 20,897 (2,000)(F) 18,897
Depreciation and amortization.............................. 4,658 -- 4,658
------- ------- -------
Operating loss............................................. (4,455) (431) (4,886)
Other income:
Interest, net............................................ 59 144(H) 203
Other, net............................................... 382 (382)(I) --
------- ------- -------
Loss before income tax benefit............................. (4,014) (669) (4,683)
Income tax benefit......................................... (1,625) 814(J) (811)
------- ------- -------
Loss before minority interest.............................. (2,389) (1,483) (3,872)
Minority interest.......................................... 49 (2,704)(K) (2,655)
------- ------- -------
Net loss................................................... $(2,438) $ 1,221 $(1,217)
======= ======= =======
Basic net loss per common share............................ $ (0.19)(L)
=======
Diluted net loss per common share.......................... $ (0.19)(L)
=======
</TABLE>
- -------------------------
The accompanying notes are an integral part of this Pro Forma Combined Statement
of Operations.
40
<PAGE> 44
INTERSTATE HOTELS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
----------------------------
JAN. 1, 1998 JUNE 2, 1998 COMBINED
TO TO YEAR ENDED
JUNE 1, 1998 DEC. 31, 1998 DECEMBER 31, PRO FORMA
(A) (A) 1998 ADJUSTMENTS PRO FORMA
------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms....................... $ 74,265 $108,698 $182,963 -- $182,963
Other departmental.......... 4,504 6,455 10,959 -- 10,959
Net management fees........... 18,018 22,763 40,781 $ (9,786)(B) 30,995
Other fees.................... 9,976 10,478 20,454 (4,713)(C) 15,741
-------- -------- -------- -------- --------
106,763 148,394 255,157 (14,499) 240,658
Lodging expenses:
Rooms....................... 17,173 26,567 43,740 -- 43,740
Other departmental.......... 2,674 3,962 6,636 -- 6,636
Property costs.............. 19,987 30,261 50,248 -- 50,248
General and administrative.... 6,115 5,822 11,937 462(D) 12,399
Payroll and related
benefits.................... 10,982 10,439 21,421 (2,594)(E) 18,827
Lease expense................. 34,515 51,165 85,680 -- 85,680
Depreciation and
amortization................ 2,152 10,659 12,811 5,373(G) 18,184
-------- -------- -------- -------- --------
Operating income.............. 13,165 9,519 22,684 (17,740) 4,944
Other income (expense):
Interest, net............... 204 390 594 575(H) 1,169
Other, net.................. 474 1,391 1,865 (2,039)(I) (174)
-------- -------- -------- -------- --------
Income before income tax
expense..................... 13,843 11,300 25,143 (19,204) 5,939
Income tax expense............ 5,528 4,436 9,964 (8,769)(J) 1,195
-------- -------- -------- -------- --------
Income before minority
interest.................... 8,315 6,864 15,179 (10,435) 4,744
Minority interest............. 24 209 233 2,717(K) 2,950
-------- -------- -------- -------- --------
Net income.................... $ 8,291 $ 6,655 $ 14,946 $(13,152) $ 1,794
======== ======== ======== ======== ========
Basic net income per common
share....................... $ 0.29(L)
========
Diluted net income per common
share....................... $ 0.29(L)
========
</TABLE>
- -------------------------
The accompanying notes are an integral part of this Pro Forma Combined Statement
of Operations.
41
<PAGE> 45
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS:
(A) Reflects the historical unaudited combined balance sheet of Interstate as of
March 31, 1999. The historical balance sheet reflects the historical
carrying amounts recorded on the books of Patriot.
(B) In accordance with the settlement agreement reached with Marriott, Patriot
has agreed to ensure that Interstate Hotels, LLC does not have a working
capital deficit as of April 30, 1999. In addition, Patriot has agreed to
provide working capital to Interstate in the amount of $16.26 million, less
positive working capital, if any, of Interstate Hotels, LLC. The adjustments
set forth below reflect Patriot's obligations as of the spin-off date,
including the working capital contribution to Interstate and the funding of
any Interstate Hotels, LLC working capital deficit as of March 31, 1999. Any
subsequent adjustments to the working capital of Interstate Hotels, LLC
between March 31, 1999 and April 30, 1999, either positive or negative, will
be settled between the parties on August 2, 1999.
<TABLE>
<S> <C>
Interstate Hotels, LLC working capital reconciliation:
Historical current assets............................ $ 28,382
Historical current liabilities....................... 64,038
--------
Historical working capital deficit to be funded by
Patriot............................................. (35,656)
Adjustments to working capital deficit to be funded
by Patriot:
Elimination of related party receivables (as
discussed in Note (C) below).................... (1,239)
Cash received by Interstate Hotels, LLC for the
sale of the ownership interest in the Charles
Hotel Complex (as discussed in Note (D)
below).......................................... 13,500
Accrued liability for benefit plans............... 2,319
Additional funding due from Patriot for payment of
accrued merger costs............................ (2,372)
Contribution of capital from Patriot for payment
of accrued merger costs that were assumed by
Patriot......................................... 4,213
Contribution of capital from Patriot for
liabilities classified as accounts payable
related parties (as discussed in Note (E)
below).......................................... 28,510
--------
Excess Interstate Hotels, LLC working capital to
be contributed to Interstate.................... $ 9,275
========
Adjustments to reflect the net increase in cash and
cash equivalents:
Cash capital contributions to Interstate:
Cash proceeds of Marriott's purchase of a 4% interest
in Interstate....................................... 2,120
Cash contributions from Patriot to Interstate to
provide working capital at the spin-off date, net of
excess working capital of Interstate Hotels, LLC of
$9,275 contributed to Interstate from the above
reconciliation...................................... 6,985
--------
Total cash capital contributions..................... 9,105
Other adjustments:
Cash received by Interstate Hotels, LLC for the sale
of the ownership interest in The Charles Hotel
Complex (as discussed in Note (D)
below)............................................ 13,500
--------
$ 22,605
========
</TABLE>
42
<PAGE> 46
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS--(CONTINUED)
(C) Represents adjustments in the aggregate amount of $1,239 to eliminate
management fees and other fee income receivables related to hotels formerly
owned and managed by Old Interstate. Interstate will not manage these hotels
subsequent to the spin-off.
(D) Adjustments to reflect the net decrease in investment in hotel real estate
due to proceeds from the sale of the ownership interest in The Charles Hotel
Complex:
<TABLE>
<S> <C>
Reduction in investment for cash received by Interstate
Hotels, LLC............................................... $(13,500)
Reduction in investment for a promissory note received by
Interstate Hotels, LLC in lieu of cash. The note is a
three year note and pays interest only at a rate of 10%
annually until the maturity date.......................... (5,750)
Elimination of third-party minority interest associated with
the ownership interest in The Charles Hotel Complex. The
third-party minority interest partners will be transferred
to the purchaser.......................................... (2,363)
Loss recognized on sale..................................... (342)
--------
$(21,955)
========
</TABLE>
(E) Adjustments to reflect the net decrease in accounts payable-related parties:
<TABLE>
<S> <C>
Reclassification to accounts payable--health trust for
amounts held on deposit and funded into the health
trust..................................................... 2,681
Capital contributions from Patriot for liabilities
classified as accounts payable-related parties............ (28,510)
--------
$(25,829)
========
</TABLE>
(F) Represents Patriot's 55% non-controlling ownership interest in Interstate
Hotels, LLC, based on 55% of the historical recorded carrying amount of
Interstate on the books of Patriot. Subsequent to the spin-off, Interstate
will have two principal subsidiaries. Interstate Hotels, LLC, the successor
to the third-party hotel management business conducted by Old Interstate
prior to its merger into Patriot, will own substantially all of the assets
of Interstate immediately after the spin-off, as well as own equity
interests representing in the aggregate an approximate 50.3% non-controlling
interest in The Charles Hotel Complex. Interstate will own a 45% managing
member interest in Interstate Hotels, LLC, and therefore will control
Interstate Hotels, LLC. Interstate's second subsidiary, IHC II, LLC, will
contract with Wyndham to manage ten Marriott franchise hotels that were
owned and managed by Old Interstate, and one hotel that was owned by Old
Interstate and managed by Marriott, prior to the merger with Patriot.
Marriott will submanage these hotels for IHC II, LLC.
Patriot/Wyndham and Interstate have reached an agreement under which all of
the equity interests in The Charles Hotel Complex, with the exception of our
general partnership interest in Cambridge Hotel Associates, the manager of
The Charles Hotel, will be sold to an existing joint venture partner in
several of these equity interests. Interstate Hotels, LLC will receive an
aggregate purchase price for this sale of $19.25 million, consisting of
$13.5 million in cash and $5.75 million in the form of a secured promissory
note. The $5.75 million secured promissory note is a three year note which
pays interest only (at a rate of 10% annually) until the maturity date. In
accordance with the amended and restated
43
<PAGE> 47
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS--(CONTINUED)
limited liability company agreement, proceeds from the $5.75 million secured
promissory note will be distributed from Interstate Hotels, LLC to
Interstate Hotels Corporation, and Patriot, as a member of Interstate
Hotels, LLC, will not share in the distribution or the proceeds from the
note.
After the spin-off and the sale, Interstate Hotels, LLC will continue to
manage The Charles Hotel. In connection with the sale, however, Interstate
Hotels, LLC will amend the management agreement to include terms generally
similar to the existing agreement, but for a new ten year term. In exchange
for the extension of the term to ten years, Interstate Hotels, LLC will
receive a lower portion of the management fees payable to Cambridge Hotel
Associates.
<TABLE>
<S> <C>
Historical book value of owners' equity..................... $ 83,289
Adjustments to eliminate management fees and other fee
income receivables related to hotels formerly owned and
managed by
Old Interstate that will not be managed by Interstate
Hotels, LLC,
(as discussed in Note (C) above).......................... (1,239)
Loss on the sale of the ownership interest in The Charles
Hotel Complex allocated to Interstate Hotels, LLC (as
discussed in Note (D) above).............................. (342)
Elimination of deferred tax liability related to the
investment in The Charles Hotel Complex................... 875
Required distribution of the proceeds from the $5.75 million
secured promissory note from Interstate Hotels, LLC to
Interstate Hotels Corporation............................. (5,750)
Contribution of capital from Patriot for liabilities
classified as accounts payable-related parties (as
discussed in Note (E) above).............................. 28,510
Contribution of capital from Patriot for the payment of
accrued merger costs that were assumed by Patriot (as
discussed in Note (B) above).............................. 4,213
Excess working capital of Interstate Hotels, LLC contributed
to Interstate (as discussed in Note (B) above)............ (9,275)
--------
100,281
Patriot's minority interest ownership percentage............ 55%
--------
Patriot's minority interest................................. 55,155
Elimination of third-party minority interest associated with
the ownership interest in The Charles Hotel Complex. The
third-party minority interest partners will be transferred
to the purchaser (as discussed in Note (D) above)......... (2,363)
--------
$ 52,792
========
</TABLE>
44
<PAGE> 48
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS--(CONTINUED)
(G) Represents adjustments to reflect the issuance of shares of common stock,
par value $0.01, of Interstate in connection with the spin-off, net of the
effect of the sale of the ownership interest in The Charles Hotel Complex,
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..... 5,578,768 $57 $64,394 $ --
Shares retained by Patriot... 242,555 2 2,683 --
Shares purchased by
Marriott................... 242,555 2 2,118 --
Eliminate historical owners'
equity..................... -- -- -- (83,289)
--------- --- ------- --------
Total.............. 6,063,878 $61 $69,195 $(83,289)
========= === ======= ========
</TABLE>
In connection with the merger of Old Interstate into Patriot, operations
consisting principally of the third-party hotel management business, along
with other assets and liabilities, will be transferred to Interstate.
Ninety-two percent of the shares of Interstate will be distributed to
Patriot's shareholders. Patriot will retain a 4% ownership interest in
Interstate's common stock.
The number of shares above excludes 181,917 restricted Interstate shares
that will be issued to Mr. Hewitt.
In connection with the spin-off of Interstate from Patriot, Marriott will
purchase a 4% ownership interest in Interstate's common stock for $2,120 in
cash.
45
<PAGE> 49
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 2 -- PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(A) Reflects the historical unaudited statement of
operations of Interstate for the three months ended
March 31, 1999 and the combined statement of operations
of Interstate for the year ended December 31, 1998.
(B) 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
nine 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 Old
Interstate into Patriot, these hotels were owned and
managed by subsidiaries of Old Interstate............... $ (2,343) $(11,794)
The addition of management fee revenues related to seven
Patriot-owned hotels that will be managed by
Interstate.............................................. 530 2,322
The reduction of management fee revenues resulting from
the sale of the ownership interest in The Charles Hotel
Complex................................................. (68) (314)
-------- --------
$ (1,881) $ (9,786)
======== ========
(C) Adjustments to reflect the net decrease in other fees:
The elimination of fees for insurance services,
purchasing, leasing and other ancillary services that
Interstate provided to the hotels that were owned and
managed by subsidiaries of Old Interstate and are
currently owned by Patriot, as discussed in Note (B)
above. Interstate will not provide such services to
these hotels subsequent to the spin-off................. $ (427) $ (5,598)
The addition of fees for insurance services, purchasing
and other ancillary services that Interstate will
provide to seven Patriot-owned hotels, as discussed in
Note (B) above.......................................... 221 885
-------- --------
$ (206) $ (4,713)
======== ========
</TABLE>
46
<PAGE> 50
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 2 -- PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(D) Adjustments to reflect the net increase in general and
administrative expense:
The increase in expense to reflect costs related to
managing and administering a publicly held company...... $ 250 $ 500
The decrease in expense resulting from the sale of the
ownership interest in The Charles Hotel Complex......... -- (38)
-------- --------
$ 250 $ 462
======== ========
(E) Adjustments to reflect the net increase (decrease) in
payroll and related benefits expense:
The elimination of salaries and related benefits to
reflect employees who were terminated subsequent to the
merger of Old Interstate into Patriot and whose
positions have been eliminated. The reduction in
employees relates principally to the reduction in the
size of Interstate subsequent to the merger............. $ -- $ (2,969)
The increase in expense to reflect the issuance of
181,917 restricted Interstate shares to Mr. Hewitt in
accordance with his employment agreement. These
restricted shares will vest over four years at an
assumed fair market value of $7.05 per share............ 94 375
-------- --------
$ 94 $ (2,594)
======== ========
(F) Adjustment to eliminate a one-time charge for additional
incentive lease expense for the 1999 year resulting from
the settlement of the dispute with Equity Inns arising
pursuant to the merger of Old Interstate into
Patriot................................................. $ (2,000) $ --
======== ========
</TABLE>
47
<PAGE> 51
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 2 -- PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(G) Adjustments to depreciation and amortization to reflect
the net increase in amortization of management and lease
contract costs associated with the step-up in basis
arising from the allocation of purchase price resulting
from the merger of Old Interstate 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 years
for the management contracts and 11 and 13.5 years for
the lease contracts. The management contracts'
amortization period was determined using the average
remaining life of the original contract terms, and the
amortization period of the lease contracts is based on
the remaining original lease life....................... $ -- $ 5,373
======== ========
(H) Adjustment to interest, net to reflect interest earned
on a $5,750 promissory note at a rate of 10% annually
with a three year term arising from the proceeds from
the sale of the ownership interest in The Charles Hotel
Complex................................................. $ 144 $ 575
======== ========
(I) Adjustment to other income to reflect the elimination
of equity in earnings resulting from the sale of the
ownership interest in The Charles Hotel Complex......... $ (382) $ (2,039)
======== ========
(J) Adjustment to reflect the provision for income tax
expense (benefit) based on Interstate's estimated
effective income tax rate of 40% after reduction of
minority interest....................................... $ 814 $ (8,769)
======== ========
(K) Adjustments to reflect the net (decrease) increase in
minority interest:
The elimination of minority interest resulting from the
sale of the ownership interest in The Charles Hotel
Complex................................................. $ (49) $ (233)
The (decrease) increase in minority interest to reflect
Patriot's 55% non-controlling interest in Interstate
Hotels, LLC............................................. (2,655) 2,950
-------- --------
$ (2,704) $ 2,717
======== ========
</TABLE>
48
<PAGE> 52
INTERSTATE HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 2 -- PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
(L) Pro forma basic and diluted net income (loss) per common
share has been calculated using 6,245,795 shares of
common stock, which represents 6,063,878 shares expected
to be outstanding immediately following the spin-off
plus 181,917 restricted shares that will be issued to
Mr. Hewitt. The historical combined financial statements
of Interstate have been carved out of Old Interstate 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 Interstate. Historical
earnings per share information for the carved out
company has not been presented because management
believes it is not meaningful.
</TABLE>
49
<PAGE> 53
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 business 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 Interstate:
- reversing the current negative trend in Interstate's business and
financial results;
- 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 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.
The historical combined financial statements of Interstate presented elsewhere
in this Information Statement/Prospectus have been carved out of the historical
consolidated financial statements of Old Interstate and its subsidiaries and
predecessors. The historical combined financial statements include only those
historical assets, liabilities, revenues and expenses directly attributable to
the third-party hotel management business. "Third-party hotel management
business" refers to the management, leasing and related services we perform for
hotels that we do not own. 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
Interstate. These financial statements have been prepared as if Interstate had
operated as a free-standing entity for all periods presented. The following
items have been carved out of the historical combined financial statements of
Interstate:
- the results of operations of the hotels that were owned by subsidiaries
of Old Interstate prior to the merger of Old Interstate into Patriot, as
well as other operating subsidiaries that are not included in the
continuing business of Interstate;
- the investments in such hotels; and
- the debt associated with such investments.
The following discussion and analysis includes discussion and analysis of
Interstate'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 Old Interstate into Patriot on June 2, 1998, the spin-off of
Interstate and the proposed sale of the ownership interest in The Charles Hotel
Complex. The pro forma adjustments consist primarily of the elimination of costs
and revenues associated with the hotels that were once owned and managed by Old
Interstate but will be retained by Patriot, and therefore will not be included
in Interstate, after the spin-off. In connection with the merger, an intangible
50
<PAGE> 54
asset related to the estimated fair market value of management contracts of
$69.9 million and a deferred tax liability of $5.5 million were recorded, as of
June 2, 1998, and will be amortized over five years.
BACKGROUND AND GENERAL
Interstate provides a wide variety of management and other services to hotels
that Interstate operates on behalf of third-party owners. Additionally,
Interstate holds leasehold interests of 78 hotels, 77 of which are owned by
Equity Inns. The management agreements generally provide for payment of a base
management fee which ranges from 1% to 4% 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.
Interstate also earns incremental revenues from third-party owners for ancillary
services, such as purchasing, project management and insurance and risk
management services. At March 31, 1999, Interstate managed, leased or performed
related services for 176 hotels with 34,427 rooms, compared to 214 hotels with
43,447 rooms at March 31, 1998. Interstate's management agreements have initial
terms that range from one month to 49 years expiring through 2044, and
Interstate's lease agreements have initial terms of 10 to 15 years expiring
through 2013.
The following table sets forth the expiration dates and corresponding
percentages of pro forma net management fees for the year ended December 31,
1998 and the three months ended March 31, 1999 for the hotels expected to be
managed (excluding the leaseholds) by Interstate Hotels, LLC following the
spin-off:
MANAGED HOTELS
<TABLE>
<CAPTION>
PERCENTAGE OF PRO FORMA
NET MANAGEMENT FEES
-----------------------------------
THREE MONTHS
YEAR ENDED ENDED
YEAR OF EXPIRATION NO. OF HOTELS DECEMBER 31, 1998 MARCH 31, 1999
------------------ ------------- ----------------- --------------
<S> <C> <C> <C>
1999................... 16 22.1% 26.8%
2000................... 18 13.7% 11.2%
2001................... 8 7.3% 16.5%
2002................... 8 3.8% 4.0%
2003................... 8 7.4% 4.5%
Thereafter............. 33 33.2% 29.1%
</TABLE>
We have been notified by third-party owners of five of our managed hotels that
such hotels are currently for sale. These five hotels generated $4.2 million, or
13.5%, of our pro forma net management fees for the year ended December 31, 1998
and $0.8 million, or 12.1% of our pro forma net management fees for the three
months ended March 31, 1999.
In addition, Interstate was a party to long-term operating leases for 81 of its
hotels with 9,929 rooms at March 31, 1999.
There has been significant disruption to Interstate's business caused by the Old
Interstate merger with Patriot, the lengthy and intensive negotiations regarding
the Marriott settlement, the consideration of possible alternatives to the
spin-off including the private sale of Interstate to a third party, and the
preparations for the spin-off. In addition, Old Interstate's operations were
required to be divided between those to be retained by Patriot/Wyndham and those
which would be contributed to Interstate in connection with the spin-off.
Interstate was required to expend a substantial amount of resources,
particularly the time and attention of senior management, in order to achieve
that division of operations. The diversion of senior management's attention and
the uncertainty with respect to Interstate's future operations caused by these
51
<PAGE> 55
distractions has disrupted Interstate's relationships with hotel owners and
adversely affected Interstate's financial results. Since the closing of the
Patriot/Old Interstate merger, there has been a net reduction in Interstate's
business of 25 management agreements. In addition, the disruption to
Interstate's business has reduced employee morale, increased employee turnover
and caused Interstate to be unable to actively pursue new business. If,
following the spin-off, Interstate cannot rectify the disruption in its
relationships with hotel owners and successfully address the other issues
described above, the current negative trend in its business and financial
results will continue. We have described the current negative trend in our
financial results more specifically under "Risk Factors--We Have Experienced a
Negative Trend in Our Recent Financial Results."
In addition, Interstate currently believes its fiscal 1999 results will be
negatively affected by the $2.0 million one-time payment to Equity Inns for
additional 1999 incentive rent paid in the three months ended March 31, 1999,
disruption at the leased hotels arising from scheduled improvements to the
properties and anticipated terminations of management contracts during 1999.
Interstate also estimates that it will incur approximately $1.0 million during
1999 with respect to year 2000 costs. As a result, 1999 results are expected to
be below 1998 pro forma levels.
RESULTS OF OPERATIONS
Pro Forma Three Months Ended March 31, 1999 Compared to Historical Three Months
Ended March 31, 1999
Pro forma net management fees include adjustments to eliminate $2.3 million of
management fee revenues related to ten Patriot-owned hotels that will be
submanaged by Marriott pursuant to an arrangement with IHC II, LLC and nine
hotels that will be leased to Wyndham, converted to the Wyndham brand and
managed by Wyndham. Prior to the merger of Old Interstate into Patriot, these
hotels were owned and managed by subsidiaries of Old Interstate. In addition,
pro forma net management fees include an adjustment to eliminate $0.1 million of
management fee revenues resulting from the sale of the ownership interest in The
Charles Hotel Complex. These elimination adjustments are offset by the addition
of $0.5 million of management fee revenues related to seven Patriot-owned hotels
that will be managed by Interstate.
Pro forma other fees include adjustments to eliminate $0.2 million of fees for
insurance services and $0.2 million of fees for purchasing and other ancillary
services that Interstate provided to the hotels that were owned and managed by
subsidiaries of Old Interstate and are currently owned by Patriot. Interstate
will not provide such services to these hotels subsequent to the spin-off. These
elimination adjustments are offset by the addition of $0.2 million of other fee
revenues related to seven Patriot-owned hotels that will be managed by
Interstate.
Pro forma payroll and related benefits expense includes an adjustment of $0.1
million to reflect the issuance of 181,917 restricted Interstate shares to Mr.
Hewitt, which will vest over four years at an assumed fair market value of $7.05
per share.
Pro forma general and administrative expense includes an adjustment to reflect
costs of $0.3 million of costs related to managing and administering a publicly
held company.
Pro forma lease expense includes an adjustment to eliminate a $2.0 million
one-time charge for additional incentive lease expense for the 1999 year
resulting from the settlement of the dispute with Equity Inns arising pursuant
to the merger of Old Interstate into Patriot.
Pro forma and historical depreciation and amortization primarily represents $4.3
million of amortization of management and lease contract costs associated with
the step-up in basis arising from the allocation of purchase price resulting
from the merger of Old Interstate 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
52
<PAGE> 56
method over five years for the management contracts and 11 and 13.5 years for
the lease contracts. The management contracts' amortization period was
determined using the average remaining life of the original contract terms, and
the amortization period of the lease contracts is based on the remaining
original lease life.
Pro forma interest, net includes an adjustment to reflect $0.1 million of
interest earned on a $5.8 million promissory note arising from the proceeds from
the sale of the ownership interest in The Charles Hotel Complex.
Pro forma other, net includes an adjustment to eliminate $0.4 million of equity
in earnings of unconsolidated subsidiaries, which resulted from the sale of the
ownership interest in The Charles Hotel Complex.
Pro forma income tax benefit was computed based on Interstate's estimated
effective tax rate of 40% after the addition of minority interest.
Pro forma minority interest primarily reflects Patriot's 55% non-controlling
interest, or $2.7 million, in Interstate Hotels, LLC, the successor to the
third-party hotel management business conducted by Old Interstate prior the
merger of Old Interstate into Patriot.
Historical Three Months Ended March 31, 1999 Compared to Historical Three Months
Ended March 31, 1998
Total revenues decreased by $5.7 million, or 9.4%, from $59.8 million in the
three months ended March 31, 1998 (the "1998 Three Months") to $54.1 million in
the three months ended March 31, 1999 (the "1999 Three Months"). A portion of
this decrease related to lodging revenues, which consist of rooms, food and
beverage and other departmental revenues from leased hotels. Lodging revenues
decreased by $1.3 million, or 3.0%, from $43.9 million in the 1998 Three Months
to $42.6 million in the 1999 Three Months. This decrease was due to the net loss
of eight hotel operating leases, increased competition and the general negative
trends in the limited-service hotel sector. In addition, there has been
disruption at the leased hotels arising from scheduled improvements to the
properties.
The average daily room rate for the leased hotels increased by 5.6%, from $69.90
during the 1998 Three Months to $73.83 during the 1999 Three Months, and the
average occupancy rate decreased to 61.3% during the 1999 Three Months from
64.3% during the 1998 Three Months. This resulted in an increase in room revenue
per available room of 0.7% to $45.24 during the 1999 Three Months. The
statistical results of our leased hotels reflect the current trends within the
lodging industry, as reported by Smith Travel Research. As such, the increase in
average daily room rate resulted from inflation and improvement resulting from
our management expertise. The decrease in the average occupancy rate resulted
from an increase of new supply within the lodging industry.
Net management fees decreased by $1.7 million, or 17.1%, from $10.3 million in
the 1998 Three Months to $8.6 million in the 1999 Three Months. This decrease
was due to the net loss of 30 management contracts, which includes 18 hotels
whose management was transferred to a subsidiary of Patriot subsequent to the
merger of Old Interstate into Patriot. Other fees decreased by $2.5 million, or
46.2%, from $5.5 million in the 1998 Three Months to $3.0 million in the 1999
Three Months due to a decrease in the total number of hotels operated in the
1999 Three Months as compared to the 1998 Three Months. Other fees also include
insurance revenues of $1.0 million in the 1999 Three Months compared to $2.4
million in the 1998 Three Months.
Lodging expenses, which consist of rooms, food and beverage, property costs and
other departmental expenses from leased hotels, increased by $1.3 million, or
5.4%, from $22.8 million in the 1998 Three Months to $24.1 million in the 1999
Three Months. This increase was partially due to increased costs
53
<PAGE> 57
associated with the third-party reservation system for many of the leased
hotels. The operating margin of the leased hotels decreased from 49.1% during
the 1998 Three Months to 43.5% during the 1999 Three Months.
General and administrative expenses are associated with the management of hotels
and consist primarily of centralized management expenses such as operations
management, sales and marketing, finance and other hotel support services, as
well as general corporate expenses. General and administrative expenses in the
three-month periods remained consistent. During the 1999 Three Months,
reductions in development activities and legal and accounting costs were offset
by increased costs associated with a deficiency between actual claims and the
amount of premiums received under Interstate's self-insured health and welfare
plan. General and administrative expenses as a percentage of revenues increased
to 7.5% during the 1999 Three Months compared to 6.7% during the 1998 Three
Months. This increase was primarily due to the decrease in total revenues with
relatively no change in general and administrative expenses.
Payroll and related benefits decreased by $1.8 million, or 27.2%, from $6.7
million in the 1998 Three Months to $4.9 million in the 1999 Three Months. This
decrease was due to the elimination of salaries and related benefits of
employees who were terminated subsequent to the merger of Old Interstate into
Patriot and whose positions have been eliminated. Payroll and related benefits
as a percentage of revenues decreased to 9.1% during the 1999 Three Months
compared to 11.3% during the 1998 Three 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 $2.1 million, or 11.3%, from $18.8 million in the 1998
Three Months to $20.9 million in the 1999 Three Months. This increase resulted
from a $2.0 million one-time charge for additional incentive lease expense for
the 1999 year resulting from the settlement of the dispute with Equity Inns
arising pursuant to the merger of Old Interstate into Patriot.
Depreciation and amortization increased by $3.4 million from $1.3 million in the
1998 Three Months to $4.7 million in the 1999 Three Months. This increase was
due to incremental amortization of management contract costs associated with the
step-up in basis arising from the allocation of purchase price resulting from
the merger of Old Interstate into Patriot. The management contract costs have
been stated at their estimated fair market values and are being amortized using
the straight-line method over five years.
Operating income decreased by $10.6 million from operating income of $6.1
million in the 1998 Three Months to an operating loss of $4.5 million in the
1999 Three Months due. This decrease is primarily due to the decrease in total
revenues and the increase in depreciation and amortization during the 1999 Three
Months.
Income tax expense (benefit) in the three-month periods was computed based on an
effective tax rate of 40% after reduction of minority interest.
As a result of the changes noted above, a net loss of $2.4 million was recorded
in the 1999 Three Months compared to net income of $3.9 million in the 1998
Three Months.
Pro Forma Year Ended December 31, 1998 Compared to Historical Year Ended
December 31, 1998
Pro forma net management fees include adjustments to eliminate $8.4 million of
management fee revenues related to ten Patriot-owned hotels that will be
submanaged by Marriott pursuant to an arrangement with IHC II, LLC and nine
hotels that will be leased to Wyndham, converted to the Wyndham brand and
managed by Wyndham. Prior to the merger of Old Interstate into Patriot, these
hotels were owned and managed by subsidiaries of Old Interstate. The remaining
hotels that were owned and managed by subsidiaries of Old Interstate prior to
the merger have also been leased by Patriot to Wyndham and will be managed by
Wyndham, resulting in an elimination of $3.4 million of management fee revenues.
In
54
<PAGE> 58
addition, pro forma net management fees include an adjustment to eliminate $0.3
million of management fee revenues resulting from the sale of the ownership
interest in The Charles Hotel Complex. These elimination adjustments are offset
by the addition of $2.3 million of management fee revenues related to seven
Patriot-owned hotels that will be managed by Interstate.
Pro forma other fees include adjustments to eliminate $3.3 million of fees for
insurance services and $2.3 million of fees for purchasing and other ancillary
services that Interstate provided to the hotels that were owned and managed by
subsidiaries of Old Interstate and are currently owned by Patriot. Interstate
will not provide such services to these hotels subsequent to the spin-off. These
elimination adjustments are offset by the addition of $0.9 million of other fee
revenues related to seven Patriot-owned hotels that will be managed by
Interstate.
Pro forma general and administrative expense includes an adjustment to reflect
costs of $0.5 million of costs related to managing and administering a publicly
held company.
Pro forma payroll and related benefits expense includes an adjustment to
eliminate $3.0 million of salaries and related benefits of employees who were
terminated subsequent to the merger of Old Interstate into Patriot and whose
positions have been eliminated. This elimination is offset by an increase to pro
forma payroll and related benefits expense of $0.4 million to reflect the
issuance of 181,917 restricted Interstate shares to Mr. Hewitt, which will vest
over four years at an assumed fair market value of $7.05 per share.
Pro forma depreciation and amortization primarily represents $17.1 million of
amortization of management and lease contract costs associated with the step-up
in basis arising from the allocation of purchase price resulting from the merger
of Old Interstate 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 years for the management contracts and 11 and
13.5 years for the lease contracts. The management contracts' amortization
period was determined using the average remaining life of the original contract
terms, and the amortization period of the lease contracts is based on the
remaining original lease life.
Pro forma interest, net includes an adjustment to reflect $0.6 million of
interest earned on a $5.8 million promissory note arising from the proceeds from
the sale of the ownership interest in The Charles Hotel Complex.
Pro forma other, net includes an adjustment to eliminate $2.0 million of equity
in earnings of unconsolidated subsidiaries, which resulted from the sale of the
ownership interest in The Charles Hotel Complex.
Pro forma income tax expense was computed based on Interstate's estimated
effective tax rate of 40% after reduction of minority interest.
Pro forma minority interest primarily reflects Patriot's 55% non-controlling
interest, or $3.0 million, in Interstate Hotels, LLC, the successor to the
third-party hotel management business conducted by Old Interstate prior to the
merger of Old Interstate into Patriot.
Historical Year Ended December 31, 1998 Compared to Historical Year Ended
December 31, 1997
Total revenues increased by $24.8 million, or 10.7%, from $230.4 million in 1997
to $255.2 million in 1998. The most significant portion of this increase related
to lodging revenues which increased by $26.0 million, or 15.5%, from $167.9
million in 1997 to $193.9 million in 1998. This increase was due to the
operations of the leased hotels since their respective inception dates.
The average daily room rate for the leased hotels increased by 6.0%, from $67.93
during 1997 to $71.98 during 1998, and the average occupancy rate decreased to
68.2% during 1998 from 71.1% during 1997. This resulted in an increase in room
revenue per available room of 1.7% to $49.08 during 1998. The statistical
results of our leased hotels reflect the current trends within the lodging
industry, as reported by
55
<PAGE> 59
Smith Travel Research. As such, the increase in average daily room rate resulted
from inflation and improvement resulting from our management expertise. The
decrease in the average occupancy rate resulted from an increase of new supply
within the lodging industry.
Net management fees increased by $1.7 million, or 4.2%, from $39.1 million in
1997 to $40.8 million in 1998. This increase was due to increased revenues
associated with incentive management fees earned as a result of the performance
improvement of existing managed hotels. Other fees decreased by $2.9 million, or
12.7%, from $23.4 million in 1997 to $20.5 million in 1998 due to a decrease in
the total number of hotels operated in 1998 as compared to 1997. Other fees also
include insurance revenues of $8.4 million in 1998 compared to $9.1 million in
1997.
Lodging expenses increased by $15.0 million, or 17.5%, from $85.6 million in
1997 to $100.6 million in 1998. 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 decreased from 49.0% during 1997 to 48.1%
during 1998.
General and administrative expenses decreased by $1.3 million, or 9.7%, from
$13.2 million in 1997 to $11.9 million in 1998. This decrease was primarily due
to a reduction in development activities and legal and accounting costs. General
and administrative expenses as a percentage of revenues decreased to 4.7% during
1998 compared to 5.7% during 1997. This decrease was primarily due to the
increase in lodging revenues resulting from the inclusion of the operations of
the leased hotels since their respective inception dates.
Payroll and related benefits decreased slightly by $0.5 million, or 2.2%, from
$21.9 million in 1997 to $21.4 million in 1998. Payroll and related benefits as
a percentage of revenues decreased to 8.4% during 1998 compared to 9.5% during
1997, primarily due to the increase in lodging revenues resulting from the
inclusion of the operations of the leased hotels since their respective
inception dates.
Lease expense increased by $12.4 million, or 16.9%, from $73.3 million in 1997
to $85.7 million in 1998. This increase was due to the addition of the
operations of the leased hotels since their respective inception dates.
Depreciation and amortization increased by $8.0 million from $4.8 million in
1997 to $12.8 million in 1998. This increase was due to incremental amortization
of management contract costs associated with the step-up in basis arising from
the allocation of purchase price resulting from the merger of Old Interstate
into Patriot. The management contract costs have been stated at their estimated
fair market values and are being amortized using the straight-line method over
five years.
Operating income decreased by $8.9 million, or 28.1%, from $31.6 million in 1997
to $22.7 million in 1998. The operating margin decreased from 13.7% during 1997
to 8.9% during 1998. This decrease in operating income and in the operating
margin reflects the inclusion of the operating results of the leased hotels
since their respective inception dates and the increase in depreciation and
amortization during 1998.
Other income increased by $1.5 million from $0.4 million in 1997 to $1.9 million
in 1998 primarily due to an increase in equity in earnings from The Charles
Hotel Complex, which resulted from Interstate's acquisition of additional
interests in The Charles Hotel Complex.
Income tax expense in 1997 and 1998 was computed based on an effective tax rate
of 40%.
As a result of the changes noted above, net income decreased by $4.6 million, or
23.3%, from $19.5 million in 1997 to $14.9 million in 1998. The net income
margin decreased from 8.5% during 1997 to 5.9% during 1998, reflecting the
inclusion of the operating results of the leased hotels since their respective
inception dates and the increase in depreciation and amortization during 1998.
56
<PAGE> 60
Historical Year Ended December 31, 1997 Compared to Historical Year Ended
December 31, 1996
Total revenues increased by $166.7 million from $63.7 million in 1996 to $230.4
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 average daily room rate 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 room revenue per available room of 50.5%
to $48.27 during 1997. The variance of the operating results is primarily due to
the leased hotels being operated by Interstate for only two months in 1996 as
compared to the entire year of 1997.
Net management fees increased by $6.1 million, or 18.5%, from $33.0 million in
1996 to $39.1 million in 1997 due to the net addition of 11 new management
contracts and increased revenues associated with the performance improvement of
existing managed hotels, which resulted in increased incentive management fees.
Other fees increased by $2.7 million, or 13.1%, from $20.7 million in 1996 to
$23.4 million in 1997 due to incremental revenues associated with the net
addition of new hotels during 1996 and 1997, many of which utilize Interstate's
ancillary services. Other fees also include insurance revenues of $9.1 million
in 1997 compared to $8.1 million in 1996.
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. This
increase in operating margin is primarily due to the leased hotels being
operated by Interstate for only two months in 1996 as compared to the entire
year of 1997.
General and administrative expenses increased by $2.8 million, or 27.4%, from
$10.4 million in 1996 to $13.2 million in 1997. This increase was primarily due
to incremental expenses associated with the growth of Interstate'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 number of hotels for
which Interstate provides management and other services grew, primarily
resulting from the addition of the leased hotels for which Interstate provides
centralized accounting services. Payroll and related benefits as a percentage of
revenues decreased to 9.5% during 1997 compared to 27.7% 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 executives and key employees of Old Interstate
in consideration for the cancellation of stock options issued by one of Old
Interstate's predecessors in 1995.
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 10.5%, from $4.4
million in 1996 to $4.8 million in 1997. This increase is due to incremental
amortization of $3.2 million during 1997 related to goodwill and the cost of
lease contracts associated with Interstate'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.
57
<PAGE> 61
Operating income, exclusive of non-cash compensation, increased by $9.9 million,
or 45.5%, from $21.7 million in 1996 to $31.6 million in 1997. The operating
margin decreased from 34.0% during 1996 to 13.7% 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 $13.3 million
from $6.2 million in 1996 to $19.5 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Interstate's cash and cash equivalent assets were $2.7 million at March 31, 1999
compared to $1.7 million at December 31, 1998. At March 31, 1999, current
liabilities exceeded current assets by $35.7 million partially as a result of
$28.5 million of amounts owed to Wyndham to meet short-term cash requirements.
As part of the spin-off, Patriot has agreed to ensure that Interstate Hotels,
LLC does not have a working capital deficit as of April 30, 1999. In addition,
Patriot has agreed to provide working capital to Interstate in the amount of
$16.26 million, less positive working capital, if any, of Interstate Hotels,
LLC. Interstate's pro forma cash and cash equivalents after giving effect to
such capital infusions were $25.3 million at March 31, 1999. In addition, in
connection with approximately $5.7 million of potential expenditures arising
from such issues as year 2000 compliance, loan forgiveness and pending
litigation, Patriot has agreed to fund 50% of these potential expenditures into
an escrow account and indemnify Interstate against the remaining 50%. Patriot
has also agreed to fund the payment of cash in lieu of fractional shares in the
spin-off.
Interstate's principal source of liquidity during the 1999 Three Months was cash
from operations. Net cash provided by operating activities was $3.4 million
during the 1999 Three Months compared to net cash used in operating activities
of $1.7 million during the 1998 Three Months. The increase was primarily related
to a $7.4 million decrease in accounts receivable during the 1999 Three Months
compared to the 1998 Three Months. This increase was offset by a decrease in
income from operations during the 1999 Three Months compared to the 1998 Three
Months. Interstate used cash of $0.6 million in investing activities during the
1999 Three Months, which primarily related to amounts paid in connection with
the merger of Old Interstate into Patriot. During the 1998 Three Months, $0.8
million of cash was provided by investing activities, consisting primarily of
$1.0 million of distributions from The Charles Hotel Complex. Interstate's
capital expenditure budget through December 31, 1999 relating to current
operations is approximately $2.7 million, consisting primarily of expenditures
for computer and related equipment. Interstate intends to fund these
expenditures from its pro forma cash and cash equivalents and from the escrow
account and indemnity from Patriot, as discussed above. Net cash of $1.8 million
was used in financing activities during the 1999 Three Months compared to $0.2
million of cash provided by financing activities during the 1998 Three Months.
During the 1999 Three Months, $9.0 million of cash was used for net
distributions to Patriot, offset by $7.2 million of amounts borrowed from
related entities to meet short-term cash requirements.
After the spin-off, Interstate will be required to distribute 55% of Interstate
Hotels, LLC's cash flows from operations to Patriot/Wyndham under the terms of
the amended and restated limited liability company agreement. The amended and
restated limited liability company agreement of Interstate Hotels, LLC contains
provisions designed to allocate between Interstate Hotels, LLC and Interstate
those costs and expenses relating to services provided by one party in whole or
in part for the benefit of the other. Such costs and expenses will be allocated
between Interstate Hotels, LLC and Interstate based on generally accepted
accounting principles, on the basis of which party benefited from the
expenditure. To the extent
58
<PAGE> 62
that the allocation of any such costs and expenses, including general and
administrative expenses, cannot be fairly apportioned, Interstate Hotels, LLC
and Interstate will allocate such costs and expenses based upon their respective
gross revenues, so that each party's profit margins are substantially the same
for similar services.
Interstate intends to pursue future opportunities to manage or lease hotels on
behalf of third-party owners, as well as pursue other business opportunities,
such as selective hotel investments and the formation of strategic alliances.
Interstate believes that the cash provided by Patriot at the time of the
spin-off and future cash flow provided by operations may be insufficient to
fully fund the execution of its business and growth strategy. As a result,
Interstate may be required to obtain debt or equity financing to achieve its
business plan. Interstate plans to obtain a line of credit from a lending
institution in order to partially finance its business and growth strategy.
Negotiations to obtain such line of credit have not commenced at this time,
however, and are not expected to be completed by the time of the spin-off.
Additionally, there is no assurance that the line of credit or any other form of
financing will be available to Interstate on commercially reasonable terms, or
at all. If Interstate does not obtain additional financing, its pursuit of its
business strategy and growth may 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 (i) to address
potential year 2000 problems both at our corporate offices and at the hotels we
manage and lease, and (ii) 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 and hotel owner 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 operate to increase their capital budgets
for 1999 to accommodate this cost. The inventories at the hotels and our
59
<PAGE> 63
corporate offices have been substantially completed. In addition, we are
currently determining the year 2000 readiness of the third-party vendors
identified by our consultant during these inventories.
At this time, we cannot identify the total costs that will be incurred to
complete Steps 3 and 4. Our management and information systems department is in
the process of completing initial written assessments, however, which prioritize
the corporate and hotel year 2000 compliance plans for remediation and estimate
the costs of such remediation. Once each written assessment is finalized, 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 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 also
believe that the expenses associated with year 2000 compliance with respect to
our leased hotels are the responsibility of the hotel owner. To the extent that
such expense is not considered a capital expenditure, however, it may be deemed
to be our responsibility. Further, we will be responsible for funding the year
2000 compliance expenses for corporate operations. These expenses, which will
cover both updating and replacing system components, will be funded through
operating cash flow. The costs incurred to date have not been material. We have
provided for approximately $2.7 million in capital expenditures in our 1999
management and information systems capital budget, approximately $2.4 million of
which 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 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. We believe the most likely
"worst-case" scenario is that our third-party vendors may not be year 2000
compliant, which could potentially cause disruptions in operations at hotels
which use the services of such third-party vendors. In addition, operations at
our hotels outside the United States may be adversely affected by failures of
businesses in those countries to take adequate steps to address the year 2000
problem. While such failures could affect critical operations at our hotels in a
significant manner, we cannot at present estimate either the likelihood or the
potential cost of such failures. The contingency plans for continuing operations
referenced in Step 4 described above are being developed to address these
failures, using existing disaster contingency plans in place at our hotels. In
addition, while we believe the indemnification provisions in our management
contracts and leases provide adequate protection from liability that may arise
from a failure to be year 2000 compliant, such failure could result in lower
hotel revenues (and, as a result, lower management fee revenues) because of
general adverse economic conditions and lower profits caused by expenses
incurred with contingency plans.
60
<PAGE> 64
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth 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>
Thomas F. Hewitt 55 Chief Executive Officer and Chairman of the
Board of Directors (term on Board of Directors
expiring 2002)
J. William Richardson 51 Chief Financial Officer and Executive Vice
President, Finance and Administration
Kevin P. Kilkeary 47 President and Chief Operating Officer
Henry L. Ciaffone 58 Executive Vice President, International
Operations and Development
Charles R. Tomb 44 Senior Vice President, Development
Timothy Q. Hudak 36 Senior Vice President and General Counsel
Michael L. Ashner 46 Director (term expiring 2001)
Benjamin D. Holloway 74 Director (term expiring 2001)
Stephen P. Joyce 39 Director (term expiring 2001)
Phillip H. McNeill, Sr. 60 Director (term expiring 2002)
Anne L. Raymond 40 Director (term expiring 2000)
</TABLE>
THOMAS F. HEWITT became our Chief Executive Officer and the Chairman of our
Board of Directors in March 1999. Mr. Hewitt previously was President and Chief
Operating Officer of Carnival Resorts & Casinos, where he headed all hotel and
resort operations. At Carnival Resorts & Casinos, Mr. Hewitt was responsible for
over 80 hotels and 17,000 employees in the United States, South America, the
Caribbean and Mexico. Mr. Hewitt joined Carnival Resorts & Casinos in 1985 (when
it was known as The Continental Companies) after a career spanning more than 20
years with Sheraton Corporation, most recently as the President of its North
American division from 1983 to 1985.
J. WILLIAM RICHARDSON was Old Interstate's Chief Financial Officer and Executive
Vice President, Finance and Administration from 1994 until its merger with
Patriot, and has served in the same capacities for us since the merger. Mr.
Richardson previously served as Controller and Treasurer of Old Interstate 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 served as our acting President and Chief
Executive Officer from January to March of 1999.
KEVIN P. KILKEARY became our President and Chief Operating Officer in April
1999. Mr. Kilkeary previously served as our Executive Vice President, and as our
Senior Vice President and President and Chief Operating Officer, Crossroads
Hospitality. Mr. Kilkeary joined Old Interstate in 1972 and held a variety of
positions in hotels and at the corporate office, including executive positions
as General Manager, Regional Vice President of Operations, Vice President of
Sales and Marketing and Vice President of Staff Operations.
HENRY L. CIAFFONE is our Executive Vice President, International Operations and
Development, a position he has held since January 1999. Mr. Ciaffone, who joined
Old Interstate in 1989, previously served as our Senior Vice President and
Treasurer. Prior to joining Old Interstate, Mr. Ciaffone held positions in hotel
61
<PAGE> 65
finance and real estate development at Koala Inns of America, Sheraton
Corporation and the Howard Johnson Company.
CHARLES R. TOMB is our Senior Vice President of Development. He joined Old
Interstate in 1992, and most recently, he oversaw Old Interstate's development
activities 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 Old Interstate in 1992 as Assistant General Counsel and
now serves as our Senior Vice President and General Counsel. Prior to joining
Old Interstate, 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.
MICHAEL L. ASHNER joined our Board of Directors in May 1999. Mr. Ashner
presently serves as President and Chief Executive Officer of Winthrop Financial
Associates, a real estate investment banking firm which owns and manages
approximately 6 million square feet of office and commercial space and 300 hotel
rooms, a general partner of Cecil Associates, which owns 20 Days Inns hotels,
and Chief Executive Officer of Newkirk Associates, which owns and manages more
than 40 million square feet of office and retail space. Mr. Ashner also serves
as President of Exeter Capital Corporation and from 1984 to 1994 served as
President and Chief Executive Officer of National Property Investors, Inc., a
real estate investment banking firm which owned and managed in excess of 40,000
apartments, 5 million square feet of office and commercial space and 4,500 hotel
rooms. Mr. Ashner also serves as a member of the Boards of Directors of
Nexthealth, Inc. and NBTY, Inc.
BENJAMIN D. HOLLOWAY joined our Board of Directors in May 1999. Mr. Holloway is
presently a financial consultant who serves as a member of the Board of
Directors of Alliance Capital Management L.P. Mr. Holloway served in numerous
capacities over a nearly forty year career with Equitable Life Assurance
Society, where he most recently served as Vice Chairman of the Board (and
Director) from 1987 to 1990. Mr. Holloway also served as a director or trustee
of many charitable and educational organizations, including Duke University, The
American Academy in Rome and the Cathedral Church of St. John the Divine.
STEPHEN P. JOYCE joined our Board of Directors in May 1999. Mr. Joyce is Senior
Vice President of Franchising for Marriott International's full-service brands,
Marriott Hotels, Resorts and Suites, and Renaissance Hotels. Mr. Joyce is a 17
year veteran of Marriott. Before joining Marriott Lodging in 1988, Mr. Joyce was
the senior manager of Marriott's Corporate Finance Group and Partnership and
Syndication Group, and has also served as a financial and operational
consultant. He also served on committees with the International Franchise
Association and the Clothes Closet, Inc.
PHILLIP H. MCNEILL, SR. joined our Board of Directors in May 1999. Mr. McNeill
is Chairman of the Board and Chief Executive Officer of Equity Inns, Inc. and
has been Chairman and President of McNeill Investment Company, Inc. since 1977.
From 1963 to 1977, he served in various capacities, including President and
Chief Executive Officer, with Schumacher Mortgage Company, Inc., a mortgage
banking firm and subsidiary of Time, Inc. Mr. McNeill has served as President
and Director of the Memphis Mortgage Bankers Association and the Tennessee State
Mortgage Bankers Association. He is currently serving as a member of the Board
of Directors of National Commerce Bancorporation, a trustee of Rhodes College
and board member of the Society of Entrepreneurs and Memphis Museum System.
ANNE L. RAYMOND joined our Board of Directors in May 1999. Ms. Raymond serves as
Executive Vice President and Chief Investment Officer of Patriot/Wyndham. Ms.
Raymond joined Patriot/Wyndham in January 1998 in connection with the closing of
Patriot's merger with Wyndham's predecessor. Prior to
62
<PAGE> 66
Patriot's merger with Wyndham's predecessor, Ms. Raymond served as Executive
Vice President and Chief Financial Officer and director of Wyndham's
predecessor.
DIRECTOR COMPENSATION
Directors who are not employees of Interstate are paid an annual retainer fee of
$15,000 in quarterly installments of $3,750. In addition, each such director
will be paid $1,000 for attendance at each meeting of our Board of Directors and
$750 for attendance at each meeting of a committee of our Board of Directors of
which such director is a member held on a date other than a date on which a full
Board of Directors meeting is held. The annual retainer fee and meeting fees
will be paid in cash, but the directors will be entitled to elect in advance to
receive all or part of the fees in the form of Interstate shares. Directors who
are employees of ours will not receive any fees for their service on the Board
of Directors or a committee thereof. In addition, we will reimburse directors
for their out-of-pocket expenses incurred in connection with their service on
the Board of Directors.
63
<PAGE> 67
EXECUTIVE COMPENSATION
Interstate was incorporated in May 1998. The following table sets forth
information regarding (i) the compensation paid or accrued in 1998 by Old
Interstate and Interstate, as well as (ii) the expected compensation to be paid
in 1999 by Interstate to Old Interstate's (and Interstate's) former Chief
Executive Officer, Interstate's new Chief Executive Officer and each of the four
other most highly compensated executive officers of Old Interstate and
Interstate who are expected to be executive officers of Interstate during 1999
and who earned at least $100,000 in total salary and bonus from Old Interstate
and Interstate in 1998. The executive officers listed in the table below (other
than Mr. Parrington, who resigned effective December 31, 1998) are sometimes
referred to elsewhere in this Information Statement/Prospectus as the "Named
Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
EXPECTED 1999
1998 COMPENSATION LONG-TERM COMPENSATION COMPENSATION(1)
------------------- ----------------------- -------------------
SECURITIES
UNDERLYING LTIP ALL OTHER 1998
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS PAYOUTS COMPENSATION SALARY BONUS
- --------------------------- -------- -------- ------------ -------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Hewitt(2)......... -- -- -- -- -- $333,333(2) $666,667(2)
Chief Executive Officer and
Chairman of the Board
W. Thomas Parrington,
Jr. ...................... $380,173 $565,000 -- -- $6,994,688(3) -- --
Former President and Chief
Executive Officer
J. William Richardson....... 265,123 397,684 -- -- 4,145,690(4) 285,000 570,000
Chief Financial Officer and
Executive Vice President,
Finance and Administration
Kevin P. Kilkeary........... 242,844 273,199 -- -- 2,346,519(5) 270,000 472,500
President and Chief
Operating Officer
Henry L. Ciaffone........... 181,610 187,567 -- -- 2,016,934(6) 218,750 262,500
Executive Vice President,
International Operations
and Development
Charles R. Tomb............. 160,284 75,000 -- -- 1,113,663(7) 190,000 237,500
Senior Vice President,
Development
</TABLE>
- -------------------------
(1) The amounts listed under "Expected 1999 Compensation" represent the expected
salary and the maximum bonus possible.
(2) Mr. Hewitt became our Chief Executive Officer and the Chairman of our Board
of Directors in March 1999. Mr. Hewitt's expected 1999 compensation is for
the period from March 1, 1999 to December 31, 1999.
(3) Consists of a change in control payment of $12,561, stock option proceeds of
$3,800,000, special bonus of $430,000, loan forgiveness of $2,048,436,
Executive Retirement Plan contribution of $49,400, and deferred compensation
payment of $654,291.
(4) Consists of a change in control payment of $9,690, stock option proceeds of
$1,921,875, special bonus of $300,000, loan forgiveness of $1,060,920,
Executive Retirement Plan contribution of $34,466, and deferred compensation
payment of $818,739.
(5) Consists of stock option proceeds of $1,070,125, loan forgiveness of
$90,000, and a change in control payment of $1,186,394.
(6) Consists of stock option proceeds of $412,500, loan forgiveness of $170,000,
and a change in control payment of $955,314 with a tax gross up of $479,120.
(7) Consists of stock option proceeds of $155,000, deal commission of $11,134,
relocation expenses of $111,212, restricted stock of $79,844, a change in
control payment of $747,713, and a car allowance of $8,760.
COMPENSATION PLANS AND ARRANGEMENTS
MANAGEMENT BONUS PLAN. We have established a Management Bonus Plan under which
all key management employees who are directly involved in our growth and success
(other than Messrs. Hewitt, Richardson and Kilkeary, whose bonuses are to be
determined pursuant to their employment agreements)
64
<PAGE> 68
are eligible to receive bonuses based upon the achievement of specified targets
and goals for Interstate and the individual employee. Awards under the
Management Bonus Plan are made by the Compensation Committee of the Board of
Directors and range from zero to specified levels depending on the position of
the individual. Currently, approximately 80 corporate employees are eligible for
awards under the Management Bonus Plan, with approximately 40 of such employees
eligible to receive up to 45% of their base salaries, approximately ten of such
employees eligible to receive up to 55% of their base salaries and four of such
employees eligible to receive up to 125% of their base salaries.
EXECUTIVE RETIREMENT PLAN. Our employees holding job classifications of Vice
President or above, including the Named Executive Officers, will be eligible to
participate in our Executive Retirement Plan. The plan is intended to be a
non-qualified and unfunded plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees. Actual participation in the plan will be determined by
the Board or a committee of the Board.
We plan to contribute 8.0% of each participant's base salary to the plan and we
may make discretionary contributions of up to an additional 5.0% of each
participant's base salary. These discretionary contributions will be based on
our net increase in earnings per share in a given year. In addition, plan
participants will be eligible to designate a portion (to be specified by the
Board or the committee administering the plan) of their cash bonus to be
contributed to the plan.
The funds contributed by Interstate or participants will be held in a grantor
trust established by Interstate. Unless the Board or the committee administering
the plan determines that the amounts contributed to the plan on behalf of a
participant are payable earlier, in general, a participant in the plan will
receive his plan benefits one year after his retirement or termination of
employment. Plan benefits are paid out in a lump sum and are deductible by
Interstate and taxable to the plan participant as ordinary income upon receipt
by the participant.
STOCK PURCHASE PLAN. We plan to establish a Stock Purchase Plan. Under the
Stock Purchase Plan, each full-time employee who has completed 12 consecutive
months of employment with Interstate or a predecessor, excluding any employee
whose customary employment is not for more than 20 hours per week or more than
five months per calendar year, is eligible to participate. A participating
employee may elect to authorize us to withhold a maximum of 8.0% of such
employee's salary. The withheld amount will be held in the participating
employee's account and used to purchase Interstate shares on a semi-annual basis
at a price equal to a designated percentage, established semi-annually by the
Board or the administrator of the plan, from 85% to 100% of the average closing
sale price for Interstate shares as reported by The Nasdaq National Market on
the date the shares are purchased. Such sale price may not be less than the
lesser of (i) 85% of the fair market value of such shares on the date of the
regular offering of the right to participate in such plan and (ii) 85% of the
fair market value of such shares on the date the shares are purchased. The fair
market value of the shares available for purchase by a participating employee
(determined as of the offering date) generally may not exceed $25,000 per
calendar year.
Employees may generally resell Interstate shares acquired under the Stock
Purchase Plan without restrictions. Any "affiliate" who acquires Interstate
shares under the Stock Purchase Plan, however, may resell only upon compliance
with Rule 144 under the Securities Act, except that the one-year holding period
requirement of Rule 144 will not apply. For this purpose, the term "affiliate"
includes any participating employee who directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, Interstate.
We expect to reserve 400,000 authorized but unissued Interstate shares for
purchase under the Stock Purchase Plan. The Stock Purchase Plan will remain in
effect until terminated at any time by the Board, except that such termination
will be subject to employees' rights to purchase shares in any outstanding
semi-annual offering period.
65
<PAGE> 69
The Stock Purchase Plan may be amended from time to time by the Board. No
amendment will increase the aggregate number of Interstate shares that may be
issued and sold under the Stock Purchase Plan (except for authorizations
pursuant to the antidilution provisions of the Stock Purchase Plan) without
further approval by our shareholders. Furthermore, no amendment that would cause
the Stock Purchase Plan to fail to meet the requirements of Section 423 of the
Code will be adopted without shareholder approval.
EQUITY INCENTIVE PLAN. Our Equity Incentive Plan is designed to attract and
retain qualified officers and other key employees. The Equity Incentive Plan
authorizes the grant of:
- - options to purchase Interstate shares;
- - restricted shares;
- - unrestricted shares; and
- - deferred shares.
The Board or a committee of the Board will administer the Equity Incentive Plan
and determine to whom grants will be made and the terms and conditions thereof.
The number of Interstate shares that may be issued or transferred and covered by
outstanding awards granted under the Equity Incentive Plan shall initially equal
2,300,000 shares. As of December 31, 1999 and each June 30 and December 31
thereafter, an additional positive number equal to 20% of the additional shares
of common stock issued during that six-month period will be added to the total
number of Interstate shares subject to the plan. Officers, Directors, and our
key employees and consultants and those of our subsidiaries may be selected to
receive benefits under the Equity Incentive Plan. Shortly after the spin-off,
181,917 restricted Interstate shares and options to purchase approximately 1.75
million Interstate shares will be granted to Interstate employees, and
approximately 370,000 shares will be available for additional awards under the
Equity Incentive Plan.
The Board or the committee administering the plan may grant stock options that
entitle the optionee to purchase Interstate shares at a price equal to or
greater or less than market value on the date of grant. The exercisability of
such stock options may be conditioned on the achievement of specified
performance objectives. Subject to adjustment as provided in the Equity
Incentive Plan, no participant shall be granted stock options, in the aggregate,
for more than 400,000 shares during any calendar year.
An award of restricted shares involves the immediate transfer by us to a
participant of ownership of a specific number of Interstate shares in
consideration of the performance of services. The participant is entitled
immediately to voting, dividend and other ownership rights in the shares. The
transfer may be made without additional consideration or for consideration in an
amount that is less than the market value of the shares on the date of grant, as
the Board or the committee administering the plan may determine. Restricted
shares must be subject to a "substantial risk of forfeiture" within the meaning
of Section 83 of the Code, for a period to be determined by the Board or the
committee administering the plan. The Board or the committee administering the
plan could provide, for example, that the restricted shares would be forfeited
if the participant failed to serve as an officer or other salaried employee of
Interstate for a specified number of years. The Board or the committee
administering the plan may provide for a shorter period during which the
forfeiture provisions are to apply in the event of a change in control of
Interstate or other similar transaction or event.
Like restricted shares, an award of unrestricted shares:
- - involves the immediate transfer by us to a participant of ownership of a
specific number of Interstate shares in consideration of the performance of
services;
- - entitles the participant immediately to voting, dividend and other ownership
rights in the shares; and
66
<PAGE> 70
- - may be made without additional consideration or for consideration in an amount
that is less than the market value of the shares on the date of grant.
Unlike restricted shares, however, unrestricted shares are not subject to
forfeiture.
An award of deferred shares constitutes an agreement by us to deliver Interstate
shares to the participant in the future in consideration of the performance of
services, subject to the fulfillment of such conditions during a deferral period
as the Board or the committee administering the plan may specify. During the
deferral period, the participant has no right to transfer any rights covered by
the award and no right to vote the shares covered by the award. On or after the
date of any grant of deferred shares, the Board or the committee administering
the plan may authorize the payment of dividend equivalents thereon on a current,
deferred or contingent basis in either cash or additional Interstate shares.
Grants of deferred shares may be made without additional consideration or for
consideration in an amount that is less than the market value of the shares on
the date of grant. Deferred shares must be subject to a deferral period, as
determined on the date of grant by the Board or the committee administering the
plan. The Board or the committee administering the plan, however, may provide
for a shorter deferral period in the event of a change in control of Interstate
or other similar transaction or event.
With limited exceptions, no stock option or other "derivative security" within
the meaning of Rule 16b-3 under the Exchange Act is transferable by a
participant except by will or the laws of descent and distribution. Stock
options generally may not be exercised during a participant's lifetime except by
the participant or, in the event of the participant's incapacity, by the
participant's guardian or legal representative acting in a fiduciary capacity on
behalf of the participant under state law and court supervision. Notwithstanding
the foregoing, the Board or the committee administering the plan, in its sole
discretion, may provide for the transferability of the particular awards under
the Equity Incentive Plan so long as such provisions will not disqualify the
exemption for other awards under Rule 16b-3 under the Exchange Act if such rule
is then applicable to awards under the plan.
The maximum number of shares that may be issued or transferred under the Equity
Incentive Plan, the number of shares covered by outstanding stock options, and
the option prices or base prices per share applicable thereto, are subject to
adjustment in the event of stock dividends, stock splits, combinations of
shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations,
liquidations, issuances of rights or warrants and similar transactions or
events. In the event of any such transaction or event, the Board or the
committee administering the plan may provide in substitution for any or all
outstanding awards under the Equity Incentive Plan such alternative
consideration as it may in good faith determine to be equitable in the
circumstances, and may require the surrender of all awards so replaced. The
Board or the committee administering the plan may also, in order to reflect any
such transaction or event, make or provide for adjustments in the number of
shares that may be issued or transferred and covered by outstanding awards
granted under the Equity Incentive Plan and the number of shares permitted to be
covered by stock options granted to any one participant during any calendar
year.
The Equity Incentive Plan may be amended from time to time by the Board or the
committee administering the plan. Without further approval by shareholders,
however, no such amendment may (i) increase the aggregate number of Interstate
shares that may be issued or transferred and covered by outstanding awards or
increase the number of shares which may be granted to any participant in any
calendar year or (ii) otherwise cause Rule 16b-3 under the Exchange Act to cease
to be applicable to the Equity Incentive Plan.
To the extent that a participant in any of our plans recognizes ordinary income
by virtue of his participation in such plan, we or the subsidiary for which the
participant performs services will be entitled to a corresponding deduction
provided that, among other things, any applicable reporting obligations are
satisfied and the income:
67
<PAGE> 71
- - meets the test of reasonableness;
- - is an ordinary and necessary business expense;
- - is not an "excess parachute payment" within the meaning of Section 280G of the
Code; and
- - is not disallowed by the $1.0 million limitation on compensation paid to each
of our Chief Executive Officer and our four other most highly compensated
executive officers during any fiscal year.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
We have entered into an employment agreement with Mr. Hewitt pursuant to which:
- - He shall serve as Chief Executive Officer and Chairman of the Board of
Interstate.
- - He shall be employed for a term beginning March 1, 1999 and ending February
28, 2003 subject to, on the second anniversary of the date of his employment
and every even-numbered anniversary thereafter, automatic two year extensions,
unless either party gives 90 days prior written notice otherwise.
- - With respect to termination of Mr. Hewitt's employment, he shall be entitled
to receive:
- his minimum bonus, if he is terminated for cause or resigns without good
reason;
- his minimum bonus, an amount equal to twice his base pay and minimum
bonus, continuation for 24 months of his employee benefits, and
acceleration of his restricted stock grant, if his employment is
terminated for any reason other than cause or disability; and
- his minimum bonus for the year of termination of his employment, his base
pay and minimum bonus for a period of 12 months following the termination
of his employment, and acceleration of his restricted stock grant, if his
employment is terminated as a result of his death or disability.
- - In the event of a change in control of Interstate, Mr. Hewitt shall be
entitled to:
- a $2 million cash payment, acceleration of his restricted stock grant,
and benefits continuation, in the event that his employment is terminated
without cause or he resigns for good reason within 36 months of the
change in control;
- a $2 million cash payment, acceleration of his restricted stock grant,
and benefits continuation, in the event that he terminates his employment
for any reason within the first 24 months immediately following the
change in control; and
- a gross-up of his compensation under this section if he incurs the tax on
"excess parachute payments" under the Code.
- - Mr. Hewitt has agreed to non-compete and non-solicitation provisions.
- - Mr. Hewitt is obligated to keep in strict confidence any trade secrets and
confidential business and technical information of Interstate.
- - Mr. Hewitt is entitled to have his legal fees and related expenses paid by us
in connection with interpretation, enforcement or defense of his rights under
the employment agreement.
- - Mr. Hewitt will be issued 181,917 restricted Interstate shares which shall
vest over four years. If Mr. Hewitt decides to file an election pursuant to
Section 83 of the Code, we shall provide Mr. Hewitt a personal loan to cover
his income tax and employment tax liabilities associated with the restricted
stock grant. If, on the earlier of February 28, 2003 or the date Mr. Hewitt's
employment is terminated other than for cause, the market value of the stock
granted to Mr. Hewitt is less than $1.5 million, we shall
68
<PAGE> 72
forgive such loan in proportion to the amount by which the market value of the
stock granted to Mr. Hewitt is less than $1.5 million.
- - Additionally, we shall provide Mr. Hewitt with a loan of $400,000 which will
be due in either six years or 30 days after the termination of Mr. Hewitt's
employment, whichever is earlier. If Mr. Hewitt's employment is terminated
other than for cause, however, such loan shall be forgiven.
We have also entered into employment agreements with Mr. Ciaffone and Mr. Tomb,
and a letter agreement with Mr. Kilkeary.
Pursuant to the terms of Mr. Ciaffone's employment agreement:
- - The term of Mr. Ciaffone's employment is three years ending November 30, 2001,
which shall be automatically extended for additional one-year terms unless
terminated by either party giving written notice to the other party 90 days
prior to a scheduled term expiration date.
- - In the event of the termination of Mr. Ciaffone's employment for any reason
other than cause or disability, he shall be entitled to (i) the greater of
either his salary and bonus for the immediately preceding six months or his
salary and bonus for the remainder of the term of the agreement, and (ii) the
continuation of health and other welfare benefits for six months following
termination of employment.
- - Mr. Ciaffone has agreed to non-compete and non-solicitation provisions.
- - Mr. Ciaffone is obligated to keep in strict confidence any trade secrets and
confidential business and technical information of Interstate.
- - Mr. Ciaffone is entitled to have his legal fees and related expenses paid by
us in connection with enforcing or defending his rights under the employment
agreement.
Pursuant to the terms of Mr. Tomb's employment agreement:
- - The term of Mr. Tomb's employment is three years ending June 1, 2001, which
shall be automatically extended for additional one-year terms unless otherwise
terminated by either party giving written notice to the other party 90 days
prior to a scheduled term expiration date.
- - As a result of the change in control triggered by the merger of Old Interstate
into Patriot, Mr. Tomb has received 50% of the severance compensation he was
entitled to receive under his severance agreement with Old Interstate in place
at the time of the merger.
- - Mr. Tomb has received 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 the date that is 30 days following the effective date of
the spin-off, Mr. Tomb may elect to terminate his employment with or without
cause, and the entire severance loan will be forgiven.
- - After such date, if Mr. Tomb terminates his employment for reasons other than
a change in control or a material change in his job responsibilities, he is
required to repay the unamortized portion of the severance loan.
- - In the event we terminate Mr. Tomb without cause or either Mr. Tomb or we
terminate his employment as the result of a change in control or a material
change in his job responsibilities during the initial three year term of his
employment, he is entitled both to forgiveness of the severance loan and
continuation of health and other welfare benefits for the greater of 18 months
or the remainder of the term of the agreement.
- - 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
after the expiration of the initial three year term of
69
<PAGE> 73
his employment, he is entitled to an amount equal to his salary and bonus for
up to a maximum of six months.
- - Mr. Tomb has agreed to non-compete and non-solicitation provisions.
- - Mr. Tomb is obligated to keep in strict confidence any trade secrets and
confidential business and technical information of Interstate.
- - Mr. Tomb is entitled to have his legal fees and related expenses paid by us in
connection with interpretation, enforcement or defense of his rights under the
employment agreement.
Pursuant to the terms of the letter agreement regarding the terms of Mr.
Kilkeary's employment:
- - The term of Mr. Kilkeary's employment shall be three years.
- - Mr. Kilkeary shall serve as President and Chief Operating Officer of
Interstate upon completion of the spin-off.
- - Mr. Kilkeary shall receive options to purchase up to 150,000 Interstate
shares.
- - Mr. Kilkeary shall receive a $300,000 loan, of which 50% will be forgiven over
three years.
- - Mr. Kilkeary and Interstate have agreed to include in Mr. Kilkeary's
employment agreement mutually acceptable terms with respect to a change in
control of the company taking place during the term of Mr. Kilkeary's
contract.
We are currently negotiating the terms of employment agreements with the other
Named Executive Officers.
70
<PAGE> 74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXECUTIVE LOANS
In 1996, Interstate's predecessor loaned $2.0 million and $1.0 million to
Messrs. Parrington and Richardson, respectively. The remaining unpaid balances
of these loans, along with additional loans of $134,062 and $96,000,
respectively, were forgiven as of June 2, 1998 in connection with Old
Interstate's merger into Patriot and in accordance with the change of control
provisions of their respective severance agreements with Old Interstate.
Interstate also loaned an additional $100,000 and $357,317 to Messrs. Parrington
and Richardson, respectively, as advances against their 1998 bonuses. Mr.
Parrington repaid his loan with a portion of his 1998 bonus upon his
resignation. Mr. Richardson's loan remains outstanding and we have agreed to
forgive the loan if Mr. Richardson remains with Interstate at least 90 days
following the spin-off.
On June 2, 1998, in connection with Old Interstate's merger into Patriot and in
accordance with the change of control provisions of their respective severance
agreements with Old Interstate, Interstate forgave loans in the amount of
$90,000 and $170,000 to Messrs. Kilkeary and Ciaffone, respectively. Interstate
loaned Mr. Ciaffone an additional $232,200, which was repaid in full on October
29, 1998.
Interstate 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 Patriot/ Wyndham and entities with which the directors and/or
officers are affiliated will enter into a Voting Agreement with Interstate. Such
directors, officers, and affiliated entities shall be referred to in the section
as the "Shareholders."
VOTING PROVISIONS. The Voting Agreement will apply to all shareholder votes
taken at any time when the Shareholders, together with Patriot/Wyndham and other
identified directors and executive officers of Patriot/Wyndham (collectively
referred to in this section as the "Affiliated Shareholders"), own greater than
9.9% of the outstanding Interstate shares. The Voting Agreement will provide
that, in such circumstances, the Shareholders will vote their Interstate shares
in proportion with the results of voting on the particular matter by all
Interstate shareholders other than the Shareholders and the Affiliated
Shareholders. This proportional voting 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 a
number of Interstate shares such that the Shareholders and the Affiliated
Shareholders will collectively own 9.9% or less of the outstanding Interstate
shares by the first anniversary of the spin-off. Based on their holdings of
Patriot securities on May 21, 1999, we estimate that the Shareholders and the
Affiliated Shareholders will collectively own approximately 933,000 Interstate
shares, or 14.9% of the outstanding Interstate shares, upon consummation of the
spin-off. The Shareholders will thus be obligated under the Voting Agreement to
sell an aggregate of approximately 315,000 Interstate shares, or 5.0% of the
outstanding Interstate 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 Interstate that the Shareholders and the Affiliated Shareholders collectively
own greater than 9.9% of the outstanding Interstate shares.
INTERSTATE CALL RIGHT. In the event that the Shareholders fail to comply with
their obligations to sell Interstate shares as described above within five years
after the spin-off, Interstate will have a call right to purchase from the
Shareholders for fair market value the number of Interstate shares the
Shareholders were obligated to sell. Marriott will have the right to compel
Interstate to exercise its call right if Interstate fails to do so.
71
<PAGE> 75
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of Interstate shares that will be
beneficially owned immediately following the spin-off and the related
transactions by each person or "group" known to us to be the beneficial owner of
more than 5% of Interstate 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 Corporation, 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" as of a given date of any
shares which such person has the right to acquire within 60 days after such
date.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME SHARES OWNED SHARES OWNED(1)
- ---- ------------ ----------------
<S> <C> <C>
Thomas F. Hewitt......................................... 189,586(2) 3.0%
J. William Richardson.................................... 538(3) *
Kevin P. Kilkeary........................................ 671 *
Henry L. Ciaffone........................................ -- --
Charles R. Tomb.......................................... 114 *
Michael L. Ashner........................................ 3,528 *
Benjamin D. Holloway..................................... -- --
Stephen P. Joyce......................................... -- --
Phillip H. McNeill, Sr................................... 36,230 *
Anne L. Raymond.......................................... 20,177 *
All directors and executive officers as a group (10
persons)............................................... 250,844 4.0
</TABLE>
- -------------------------
* Less than 1%
(1) Calculated after giving effect to the cancellation of the shares issued to
the counterparties to the forward equity contracts with Patriot.
(2) Includes 181,917 restricted Interstate shares, 25% of which will vest on
March 1, 2000, March 1, 2001, March 1, 2002 and February 28, 2003,
respectively.
(3) Includes four shares held by Mr. Richardson's daughter.
DESCRIPTION OF CAPITAL STOCK
We have summarized below the material provisions of our 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 20 million
shares of stock, consisting of:
- 14 million shares of Class A common stock;
- 500,000 shares of Class B common stock;
- 500,000 shares of Class C common stock; and
- 5 million shares of preferred stock.
72
<PAGE> 76
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 and no
shareholders shall have cumulative voting rights. The three classes shall vote
separately for the election of Interstate's Board of Directors as explained in
detail under "Additional Corporate Governance and Takeover-related
Matters -- Board of Directors."
If Marriott and its affiliates own in the aggregate at least two percent of our
outstanding stock, then we are prohibited from entering into various
transactions with any of Patriot/Wyndham or its affiliates unless the holders of
the Class B shares (Marriott) give their approval. If Patriot/Wyndham and its
affiliates own in the aggregate at least two percent of our outstanding stock,
then we are prohibited from entering into various transactions with any of
Marriott or its affiliates unless the holders of the Class C shares (Wyndham)
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 controlled by Wyndham.
Holders of shares of common stock have no preemptive, subscription or redemption
rights, and no liability exists for further calls or assessments. Holders of
Class B and Class C shares may, at their discretion, convert their respective
shares into Class A shares. The Class B shares and Class C shares will
automatically convert into Class A shares upon the occurrence of events
specified in the bylaws, including the transfer of Class B or Class C shares
from Marriott or Wyndham, 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 Interstate,
holders of shares of common stock share ratably in those assets of Interstate
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. In addition, the issuance of preferred
shares could be used to render more difficult or discourage a hostile takeover
of Interstate.
STOCK EXCHANGE LISTING
We have applied to list our common stock for trading on The Nasdaq National
Market.
There is currently no trading market for our shares. The price 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 price at which our stock
trades will be determined by the marketplace and may be influenced by many
factors, including:
- the depth and liquidity of the market for our stock;
- investor perception of Interstate and our business;
- our dividend policy;
- interest rates; and
- general economic and market conditions.
73
<PAGE> 77
SHARES AVAILABLE FOR RESALE
Interstate 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 Interstate
under the rules of the SEC. Persons who may be deemed to be affiliates of
Interstate after the spin-off include individuals or entities that control, are
controlled by or are under common control with Interstate, and may include
officers and directors of Interstate as well as principal stockholders of
Interstate. Persons who are affiliates of Interstate will be permitted to sell
their Interstate 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 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:
- the vote of a majority of directors then in office;
- by the Chairman of the Board or, if none is elected, by the Chief
Executive Officer or, if none, the President; and
- by the Secretary of Interstate 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 2000, 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 shall consist of six members until the first annual meeting of
stockholders, expected to be held in 2000. Of the six initial directors, the
holders of Class A shares will be entitled to elect five directors and the
holders of Class B shares (Marriott) will be entitled to elect one director.
Should a voting deadlock occur at any time while the Board consists of six
members, Mr. Hewitt shall recuse himself from voting on the deadlocked issue in
order to break the deadlock. The Board of Directors shall have a nominating
committee and a compensation committee, each of which shall initially be
composed of Messrs. Holloway and Ashner and Ms. Raymond. The Board of Directors
will also have an audit committee, which shall initially be composed of Messrs.
Holloway and Ashner.
At the first annual meeting of stockholders, the holders of Class C shares
(Wyndham) shall be entitled to elect one director to the Board. If at the time
of this election Patriot is no longer a REIT, the size of the Board shall be
fixed at seven, and the number of directors which the holders of Class A shares
are entitled to elect shall remain at five. If at the time of this election
Patriot is still a REIT, the size of the Board shall be fixed at eleven, and the
number of directors which the holders of Class A shares are entitled to elect
shall be increased to nine. On March 1, 1999, Patriot/Wyndham publicly announced
that, in connection with a proposed equity investment in Wyndham (the
consummation of which is subject to numerous conditions), it plans to merge
Patriot into a subsidiary of Wyndham and, in so doing, relinquish its REIT
status. After September 30, 2003, or prior to such date upon the occurrence of
events specified in our Articles of Incorporation, the size of the Board may be
fixed by a resolution adopted by the Board.
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
74
<PAGE> 78
stockholders to be held in 2000. The term of the director(s) first appointed to
Class A-II will expire at the annual meeting of stockholders to be held in 2001.
The term of the director(s) first appointed to Class A-III will expire at the
annual meeting of stockholders to be held in 2002. 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 director 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 director will expire at the annual meeting of stockholders to be
held in 2001. Thereafter, the Class B director 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. Upon the occurrence of
events specified in the bylaws, the Class B shares will automatically convert
into Class A shares. In connection with this conversion:
- the Class B director then in office will be removed;
- the number of Class A directors will automatically be increased by one;
and
- the resulting vacancy will be filled by either the remaining directors or
the holders of Class A shares.
The Class C director will be elected by the holders of Class C shares (Wyndham)
as provided above. The term for the initial Class C director will expire at the
annual meeting of stockholders to be held in 2001. Thereafter, the Class C
director 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. Upon the occurrence of events specified in the bylaws, the Class C
shares will automatically convert into Class A shares. In connection with this
conversion:
- the Class C director then in office will be removed;
- the number of Class A directors will automatically be increased by one;
and
- the resulting vacancy 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 specific 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 Interstate 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
Interstate, 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, (i) any vacancy on the Board
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 shares,
(ii) any vacancy occurring on the Board for any reason, except as a result of an
increase in the number of directors, may be filled by a
75
<PAGE> 79
majority vote of the remaining directors, notwithstanding that such majority is
less than a quorum, and (iii) any vacancy occurring on the Board as a result of
an increase in the number of directors may be filled by a majority vote of the
entire Board.
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:
- the director or officer actually received an improper personal benefit in
money, property or services;
- the director or officer acted in bad faith; or
- the director's or officer's act or omission was the result of active and
deliberate dishonesty.
In addition, it must be proven that the director's or officer's act or omission
was material to the matter giving rise to the proceeding. In the case of a suit
by or in the right of Interstate, however, a director or officer may not be
indemnified in respect of any proceeding in which he shall have been adjudged
liable to Interstate unless 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 limited circumstances, 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 Interstate share to stockholders
of record as of a specified date. Each Right will entitle its holder to purchase
from Interstate a unit consisting of a specified number of shares of Preferred
Stock of Interstate 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 Interstate shares outstanding as of, or issued subsequent to, the record
date. The Rights will separate from Interstate shares and will become
exercisable upon the earlier of:
- - 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 Interstate
shares (an "Acquiring Person"); or
- - 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 Interstate shares.
76
<PAGE> 80
Grandfathered persons are defined in the rights agreement as stockholders of
Interstate who beneficially own 10% or more of outstanding Interstate shares as
of a specified date. Rights generally will be distributed to a grandfathered
person only if such stockholder acquires or proposes to acquire additional
Interstate shares. In addition, a grandfathered person generally will become an
Acquiring Person only if such person acquires additional Interstate 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.
VALIDITY OF SECURITIES
The validity of the Interstate shares being distributed in the spin-off is being
passed upon for Interstate by Goodwin, Procter & Hoar LLP.
77
<PAGE> 81
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 of which is http://www.sec.gov.
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 Interstate 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.
78
<PAGE> 82
INTERSTATE HOTELS CORPORATION
INDEX TO COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Accountants........................... F-2
Combined Balance Sheets as of December 31, 1997, 1998 and
March 31, 1999 (unaudited)................................ F-3
Combined Statements of Operations and Owners' Equity for the
years ended December 31, 1996 and 1997, for the period
from January 1, 1998 to June 1, 1998 and for the period
from June 2, 1998 to December 31, 1998 and the three
months ended March 31, 1998 and 1999 (unaudited).......... F-4
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1997, for the period from January 1,
1998 to June 1, 1998 and for the period from June 2, 1998
to December 31, 1998 and the three months ended March 31,
1998 and 1999 (unaudited)................................. F-5
Notes to Combined Financial Statements...................... F-6 - F-20
</TABLE>
F-1
<PAGE> 83
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
Corporation (Interstate), 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, 1998 and 1997, and the
related combined statements of operations and owners' equity and cash flows for
the period from January 1, 1998 to June 1, 1998 and for the period from June 2,
1998 to December 31, 1998 and for each of the two years in the period ended
December 31, 1997. These combined financial statements are the responsibility of
Interstate'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, Interstate 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 Interstate
as of December 31, 1998 and 1997, and the combined results of its operations,
owners' equity and cash flows for the period from January 1, 1998 to June 1,
1998 and for the period from June 2, 1998 to December 31, 1998 and for each of
the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 3, Interstate adopted the provisions of Emerging Issues
Task Force Issue 97-14 effective September 30, 1998.
/s/ PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania
March 5, 1999, except for the last two paragraphs of Note 8,
as to which the date is March 31, 1999, and
Note 18, as to which the date is May 3, 1999.
F-2
<PAGE> 84
INTERSTATE HOTELS CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ------------------------
DECEMBER 31, MARCH 31,
------------------------ -----------
1997 1998 1999
----------- --------- -----------
(UNAUDITED)
(NOTE 19)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 2,432 $ 1,652 $ 2,658
Accounts receivable, net......................... 15,707 16,816 18,930
Deferred income taxes............................ 1,151 615 3,451
Net investment in direct financing leases........ 751 827 740
Prepaid expenses and other assets................ 3,613 741 1,364
Related party receivables -- management
contracts..................................... 1,761 1,085 1,239
-------- -------- --------
Total current assets........................ 25,415 21,736 28,382
Restricted cash.................................... 2,324 2,201 1,247
Marketable securities.............................. -- 2,609 2,863
Property and equipment, net........................ 3,639 4,076 3,887
Officers and employees notes receivable............ 12,157 2,803 3,080
Affiliate receivables.............................. 5,113 3,381 4,370
Net investment in direct financing leases.......... 1,524 1,680 1,437
Investment in hotel real estate.................... 17,042 22,150 22,370
Deferred income taxes.............................. 660 -- --
Intangible and other assets........................ 50,311 100,521 96,118
-------- -------- --------
Total assets................................ $118,185 $161,157 $163,754
======== ======== ========
Current liabilities:
Accounts payable -- trade........................ 3,478 2,413 2,493
Accounts payable -- health trust................. 1,382 1,785 5,000
Accounts payable -- related parties.............. 10,260 18,597 25,829
Accrued payroll and related benefits............. 9,586 6,120 3,817
Accrued rent..................................... 5,875 5,043 7,900
Accrued merger costs............................. -- 9,344 6,585
Other accrued liabilities........................ 6,501 9,236 12,414
Current portion of long-term debt................ 180 -- --
-------- -------- --------
Total current liabilities................... 37,262 52,538 64,038
Long-term debt..................................... 190 -- --
Deferred income taxes.............................. -- 11,053 11,201
Deferred compensation.............................. -- 2,609 2,863
-------- -------- --------
Total liabilities........................... 37,452 66,200 78,102
Minority interest.................................. 3 2,350 2,363
Commitments and contingencies...................... -- -- --
Owners' equity..................................... 80,730 92,607 83,289
-------- -------- --------
Total liabilities and owners' equity........ $118,185 $161,157 $163,754
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE> 85
INTERSTATE HOTELS CORPORATION
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
------------------------------------- ----------------- ----------- -----------
YEAR ENDED PERIOD FROM THREE MONTHS ENDED
DECEMBER 31, ----------------------------------- MARCH 31,
------------------- JANUARY 1, 1998 JUNE 2, 1998 -------------------------
TO TO
1996 1997 JUNE 1, 1998 DECEMBER 31, 1998 1998 1999
-------- -------- --------------- ----------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 19) (NOTE 19)
<S> <C> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms.................. $ 9,258 $158,343 $ 74,265 $108,698 $ 41,369 $ 40,270
Other departmental..... 721 9,512 4,504 6,455 2,523 2,325
Net management fees...... 33,023 39,136 18,018 22,763 10,334 8,569
Other fees (Note 13)..... 20,710 23,426 9,976 10,478 5,534 2,980
-------- -------- -------- -------- -------- --------
63,712 230,417 106,763 148,394 59,760 54,144
-------- -------- -------- -------- -------- --------
Lodging expenses:
Rooms.................. 2,334 36,919 17,173 26,567 9,738 9,735
Other departmental..... 591 5,487 2,674 3,962 1,478 1,506
Property costs......... 3,201 43,225 19,987 30,261 11,616 12,817
General and
administrative......... 10,369 13,212 6,115 5,822 4,010 4,078
Payroll and related
benefits............... 17,666 21,892 10,982 10,439 6,743 4,908
Non-cash compensation.... 11,896 -- -- -- -- --
Lease expense............ 3,477 73,283 34,515 51,165 18,771 20,897
Depreciation and
amortization........... 4,385 4,845 2,152 10,659 1,311 4,658
-------- -------- -------- -------- -------- --------
53,919 198,863 93,598 138,875 53,667 58,599
-------- -------- -------- -------- -------- --------
Operating income
(loss)................. 9,793 31,554 13,165 9,519 6,093 (4,455)
Other income:
Interest, net.......... 501 498 204 390 124 59
Other, net............. -- 431 474 1,391 302 382
-------- -------- -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit).............. 10,294 32,483 13,843 11,300 6,519 (4,014)
Income tax expense
(benefit)............ 4,117 12,986 5,528 4,436 2,602 (1,625)
-------- -------- -------- -------- -------- --------
Income (loss) before
minority interest...... 6,177 19,497 8,315 6,864 3,917 (2,389)
Minority interest........ -- 18 24 209 14 49
-------- -------- -------- -------- -------- --------
Net income (loss)........ $ 6,177 $ 19,479 $ 8,291 $ 6,655 $ 3,903 $ (2,438)
======== ======== ======== ======== ======== ========
Owners' equity:
Beginning of period.... 63,840 56,886 80,730 79,181 80,730 92,607
Net income (loss)...... 6,177 19,479 8,291 6,655 3,903 (2,438)
Net capital
distributions........ (60,548) 4,365 (9,840) (49,981) 6,251 (6,880)
Change in Basis (Note
3)................... -- -- -- 56,752 -- --
Acquisition of hotel
leases for stock..... 47,417 -- -- -- -- --
-------- -------- -------- -------- -------- --------
End of period.......... $ 56,886 $ 80,730 $ 79,181 $ 92,607 $ 90,884 $ 83,289
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE> 86
INTERSTATE HOTELS CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
------------------------------------- ----------------- ----------- -----------
YEAR ENDED PERIOD FROM THREE MONTHS ENDED
DECEMBER 31, ----------------------------------- MARCH 31,
------------------- JANUARY 1, 1998 JUNE 2, 1998 -------------------------
TO TO
1996 1997 JUNE 1, 1998 DECEMBER 31, 1998 1998 1999
-------- -------- --------------- ----------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 19) (NOTE 19)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ 6,177 $ 19,479 $ 8,291 $ 6,655 $ 3,903 $ (2,438)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization.............. 4,385 4,845 2,152 10,659 1,311 4,658
Equity in earnings from
unconsolidated
subsidiaries.............. -- (373) (513) (1,526) (302) (382)
Deferred income taxes....... (1,644) 167 (1,555) 8,346 (813) (2,688)
Other....................... -- 18 200 344 96 49
Cash provided (used) by assets
and liabilities:
Accounts receivable, net.... 2,848 (8,158) (3,661) 2,552 (9,541) (2,114)
Prepaid expenses and other
assets.................... (3,033) (267) 307 1,092 (894) (623)
Related party receivables... (2,912) 1,312 (341) 1,017 352 (154)
Accounts payable............ 9,096 (2,572) 1,053 (5,181) (2,961) 992
Accrued liabilities......... 414 (1,934) 12,426 (14,365) 7,139 6,108
-------- -------- -------- -------- -------- --------
Net cash provided by (used
in) operating
activities.............. 15,331 12,517 18,359 9,593 (1,710) 3,408
-------- -------- -------- -------- -------- --------
Cash flows from investing
activities:
Net investment in direct
financing leases............ (1,007) (33) 145 (377) 174 330
Change in restricted cash..... (9) (219) 540 (417) 209 954
Purchase of property and
equipment, net.............. (695) (2,170) (709) (487) (573) (67)
Purchases of marketable
securities.................. -- -- -- (10,725) -- (909)
Proceeds from sale of
marketable securities....... -- -- -- 14,567 -- 838
Net cash invested in
unconsolidated
subsidiaries................ -- (16,147) 1,085 (2,327) 957 162
Change in notes receivable,
net......................... (3,384) (7,554) (2) (989) 388 (277)
Net investment in management
contracts................... -- (2,116) (666) (548) (38) (681)
Merger related acquisition
costs....................... -- -- -- (26,484) -- --
Change in affiliate
receivables................. 751 (5,071) 2,043 (311) 135 (989)
Acquisitions of leases........ -- (2,500) -- -- -- --
Other......................... 6 103 238 391 (471) 84
-------- -------- -------- -------- -------- --------
Net cash (used in)
provided by investing
activities.............. (4,338) (35,707) 2,674 (27,707) 781 (555)
-------- -------- -------- -------- -------- --------
Cash flows from financing
activities:
Repayment of long-term debt... (729) (171) (180) (190) (180) --
Net distributions to minority
interest.................... -- -- (44) (55) 15 (36)
Related party payables........ -- 10,260 (9,234) 17,571 (5,859) 7,232
Net (distributions)
contributions to owners..... (13,131) 4,365 (9,840) (1,727) 6,251 (9,043)
-------- -------- -------- -------- -------- --------
Net cash (used in)
provided by financing
activities.............. (13,860) 14,454 (19,298) 15,599 227 (1,847)
-------- -------- -------- -------- -------- --------
Net (decrease) increase in cash
and cash equivalents.......... (2,867) (8,736) 1,735 (2,515) (702) 1,006
Cash and cash equivalents at
beginning of period........... 14,035 11,168 2,432 4,167 2,432 1,652
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end
of period..................... $ 11,168 $ 2,432 $ 4,167 $ 1,652 $ 1,730 $ 2,658
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE> 87
INTERSTATE HOTELS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Interstate Hotels Company and Subsidiaries (Old Interstate or the Predecessor)
was merged into Patriot American Hospitality, Inc. (Patriot) on June 2, 1998.
Old 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 and 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
Old Interstate Hotels Corporation (Old IHC), Crossroads Hospitality Company,
L.L.C. (Crossroads) or Colony Hotels and Resorts Company (Colony), all
wholly-owned subsidiaries of Old Interstate.
Prior to the consummation of the merger of Old Interstate into Patriot (the
"Merger"), Marriott filed a lawsuit to stop the closing of the transaction as a
result of a dispute over certain franchise agreements Marriott had with Old
Interstate. On May 27, 1998, and pursuant to a settlement agreement with
Marriott, Patriot and Old Interstate announced a plan to transfer certain
operations, principally the third-party hotel management business, an ownership
interest in the Charles Hotel and the Leased Hotels, and certain assets and
liabilities of Old Interstate to a new entity, Interstate Hotels Corporation
(the Company or Interstate). The Company is expected to be spun-off from Patriot
(the Spin-off), which 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.
These financial statements, prior to the Merger, have been prepared using the
predecessor basis of accounting for the years ended December 31, 1996 and 1997
and for the period from January 1, 1998 to June 1, 1998 (June 1998 period) and
have been prepared using the successor basis of accounting for the period June
2, 1998 to December 31, 1998 (December 1998 period) to coincide with the periods
before and after the Merger. The Merger was accounted for using the purchase
method of accounting and Patriot allocated the purchase price to the fair market
value of the assets acquired. The Spin-off will be accounted for using this
historical basis of accounting. All references as of and for the two years in
the period ended December 31, 1997 and for the June 1998 period relate to the
predecessor and all references to December 31, 1998 and the December 1998 period
relate to the successor.
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 Old Interstate using the predecessor basis
of accounting and subsequent to the merger with Patriot include the successor's
basis of accounting which considers the effect of the purchase price allocation.
The financial statements include only those assets, liabilities, revenues and
expenses directly attributable to the third-party hotel management business, the
ownership interest in the Charles Hotel, the Leased Hotels and other services
described in the paragraph above which will succeed to the Company. These
activities were conducted primarily by Old 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
F-6
<PAGE> 88
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
debt, and results of operations of the Owned Hotels, as well as certain other
operating subsidiaries that will not be included in the continuing business of
the Company, have been carved out of the historical combined financial
statements.
The Company will have two principal subsidiaries. One subsidiary, Interstate
Hotels, LLC (IHC LLC) will assume management of the Managed Hotels and will hold
the ownership interest in the Charles Hotel and the leasehold interests of the
Leased Hotels as well as provide ancillary services previously provided by Old
Interstate, primarily centralized purchasing, equipment leasing and insurance
services. The Company will own a 45% managing member interest in this subsidiary
and Patriot will retain a 55% non-controlling ownership interest. The other
subsidiary will enter into management contracts to manage eleven 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.
After the Spin-off, Interstate will be required to distribute 55% of IHC LLC's
cash flows from operations to Patriot under the terms of the amended and
restated limited liability company agreement. The amended and restated limited
liability company agreement also contains provisions designed to allocate
between IHC LLC and Interstate those costs and expenses relating to services
provided by one party in whole or in part for the benefit of the other. Such
costs and expenses will be allocated between IHC LLC and Interstate based on
generally accepted accounting principles, on the basis of which party benefited
from the expenditure. To the extent that the allocation of any such costs and
expenses, including general and administrative expenses, cannot be fairly
apportioned, IHC LLC and Interstate will allocate such costs and expenses based
upon their respective gross revenues, so that each party's profit margins are
substantially the same for similar services.
The Company includes the revenues and expenses and assets and liabilities of the
Leased Hotels in the financial statements since the risk of operating these
hotels is borne by the Company, as lessee, under the terms of the lease. As a
result of the terms of the management contracts, the revenues and expenses from
operations of the Managed Hotels are not included in the financial statements
since the contracts are generally cancellable, not transferable and do not shift
risks of operations to the Company. Accordingly, the Company records revenues
from management fees for the Managed Hotels.
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 Old Interstate's cash in a central
account.
F-7
<PAGE> 89
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Amounts owed to related entities to meet short-term cash requirements in
connection with Old 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 approximately 20% of the annual insurance
premiums written by the Company (See Note 13).
Direct Financing Leases:
Equipment acquired and subsequently leased to hotels under capital leases is
recorded at the net investment in direct financing leases, which represents the
total future minimum lease payments receivable net of unearned income. When
payments are received, the receivable is reduced and the unearned income is
recognized on a pro-rata basis over the life of the lease.
Property and Equipment:
Property and equipment are recorded at cost, and are depreciated on the
straight-line method over their estimated useful lives. Expenditures for 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 at December 31, 1997. The notes
from the two executives and the advances were forgiven effective with the
Merger. 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 Old Interstate (see Note 15).
Intangible and Other Assets:
Intangible and other assets consist of the amounts paid to obtain management and
lease contracts including the allocation of the Old Interstate purchase price
paid by Patriot. Goodwill is also included in intangible and other assets
through December 31, 1997, 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.
F-8
<PAGE> 90
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Deferred Income Taxes:
Deferred income taxes are recorded in the combined financial statements of
Interstate 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.
Income Tax Status:
The entities that comprised Interstate were included in the consolidated federal
income tax return of Old Interstate or Patriot and all tax liabilities were paid
by Old Interstate or Patriot. The income tax provision for each period presented
in these combined financial statements has been calculated as if Interstate had
prepared and filed a separate income tax return for those periods. Accordingly,
the effective tax rate for Interstate in future years could vary from historical
effective rates depending on Interstate'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 Old Interstate or Patriot through
owners' equity.
Insurance:
Insurance revenues are earned through reinsurance premiums, direct premiums
written and reinsurance premiums ceded. Reinsurance premiums are recognized when
policies are written and any unearned portion of the premium is recognized to
account for the unexpired term of the policy (as-reported basis). Direct
premiums written are recognized pursuant to the underlying policy and
reinsurance premiums ceded are recognized on a pro-rata basis over the life of
the related policies. Unearned premiums represent the portion of premiums
applicable to the unexpired term of policies in force. 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 and historical loss rates. Accrued
claims liabilities are carried at present value without discounting since the
contracts are of a short duration and discounting would not be significant.
Actual liabilities may differ from estimated amounts. Any changes in estimated
losses and settlements are reflected in current earnings.
Owners' Equity:
Owners' equity represents the net equity of Old Interstate and Patriot in
Interstate. Net contributions/distributions from owners represent non-operating
transfers to and from Old Interstate and Patriot.
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:
Interstate is reimbursed for costs associated with providing 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> 91
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Financial Instruments:
As a policy, Interstate does not engage in speculative or leveraged
transactions, nor does Interstate hold or issue financial instruments for
trading purposes.
Earnings Per Share:
Because the accompanying combined financial statements have been carved out of
Old Interstate and Patriot and certain of its subsidiaries, some of which
are/were corporations and some of which are/were partnerships, Interstate
believes that the earnings per share calculations required to be presented are
not meaningful for periods presented herein and, therefore, have not been
provided. In conjunction with the Spin-off, the Company will distribute common
stock which will be accounted for in a manner similar to a recapitalization or
stock split. Accordingly, after the Spin-off, the Company will provide earnings
per share based on the then outstanding shares.
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.
3. MERGER:
In connection with the Merger, Patriot allocated the purchase price to the
estimated fair market value of the assets acquired. The fair market value of the
assets held by Interstate was determined using historical and projected cash
flow and earnings at then current market multiples. As a result, on June 2,
1998, Interstate recorded an additional intangible asset related to management
contracts of $69,862, a net decrease in other assets of $7,652 related to hotel
leases and a net deferred tax liability of $5,458, resulting in a net increase
to owners' equity of $56,752 (Change in Basis). The intangible asset related to
the management contacts will amortize over five years, based on the average
remaining contract term, and the intangible asset related to the Leased Hotels
will be amortized over the remaining periods of the leases of 11 and 13.5 years
beginning June 2, 1998.
Prior to the Merger, merger-related costs incurred by Old Interstate were not
reflected in the accompanying combined statement of operations for the June 1998
period, as they did not relate specifically to the ongoing business of
Interstate. In connection with the Merger, severance payments and other
merger-related costs were incurred by Patriot and capitalized as part of the
purchase price of Old Interstate. Certain of these costs were paid by Old
Interstate in the December 1998 period and certain remain unpaid at December 31,
1998. These remaining merger-related costs, amounting to $9,344 at December 31,
1998, have been accrued by Interstate and consist principally of unpaid
severance and professional fees.
4. CHANGE IN ACCOUNTING:
Effective September 30, 1998, the Company adopted the provisions of Emerging
Issues Task Force Issue 97-14 "Accounting for Deferred Compensation Arrangements
Where Amounts Earned are Held in a Rabbi Trust and Invested" (EITF 97-14). The
issue requires that the accounts of the rabbi trust (Trust) be
F-10
<PAGE> 92
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
4. CHANGE IN ACCOUNTING, CONTINUED:
consolidated with the accounts of the employer. Previously the accounts of the
Trust were not consolidated.
The Company provides deferred compensation for certain executives and hotel
general managers by depositing amounts into a Trust for the benefit of the
participating employees. Deposits into the Trust are expensed under both
accounting methods and amounted to $331, $662, $178 and $250 for the years ended
December 31, 1996 and 1997 and for the June 1998 and December 1998 periods,
respectively. Amounts in the Trust earn investment income, which serves to
increase the corresponding deferred compensation obligation. Amounts in the
Trust are always fully vested.
The effect of adopting EITF 97-14 as of September 30, 1998 was an increase in
investments and deferred compensation of $6,451. Investments are recorded at
market value, which approximates cost, are directed by the Company, and consist
principally of mutual funds. The adoption did not have any effect on net income
in the December 1998 period and is not expected to significantly impact net
income in future periods.
In October 1998 Interstate paid $4,213 in deferred compensation from the Trust
to certain executives.
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Leasehold improvements (10 years)........................... $ 1,345 $ 1,000
Furniture, fixtures and equipment (5 to 20 years)........... 6,021 3,522
------- -------
7,366 4,522
Less accumulated depreciation............................... (3,727) (446)
------- -------
$ 3,639 $ 4,076
======= =======
</TABLE>
Depreciation expense was approximately $523, $666, $313 and $446 for the years
ended December 31, 1996 and 1997 and for the June 1998 and December 1998
periods, respectively.
6. NET INVESTMENT IN DIRECT FINANCING LEASES:
The Company leases office, computer and telephone equipment to managed hotels
under capital leases. The following represents the components of the net
investment in direct financing leases at December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Total future minimum lease payments receivable.............. $ 2,918 $ 3,118
Less unearned income........................................ 643 611
------- -------
2,275 2,507
------- -------
Less current portion........................................ 751 827
------- -------
$ 1,524 $ 1,680
======= =======
</TABLE>
F-11
<PAGE> 93
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
6. NET INVESTMENT IN DIRECT FINANCING LEASES, CONTINUED:
Future minimum lease payments to be received under these leases for each of the
years ending December 31 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 1,297
2000........................................................ 846
2001........................................................ 630
2002........................................................ 262
2003........................................................ 83
-------
$ 3,118
=======
</TABLE>
Included in the direct financing leases is $1,015 and $1,122 of leases due from
the Owned Hotels as of December 31, 1997 and 1998, respectively.
7. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Management contracts (3 to 6 years through June 1998, 5
years in December 1998)................................ $ 8,568 $ 74,109
Lease contracts (15 and 11 years through June 1998, 13.5
and 11 years in December 1998)......................... 24,284 36,832
Goodwill (25 years)...................................... 21,725 --
Other.................................................... 2,056 --
------- --------
56,633 110,941
Less accumulated amortization............................ (6,322) (10,420)
------- --------
$50,311 $100,521
======= ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Leases, entered into by the Leased Hotels, have initial terms of 10 to 15 years
expiring through 2012, and provide for fixed base rent and variable components
based on a percentage of hotel revenues. Future fixed minimum lease payments are
computed based on the base rent of each lease, as defined, and are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 49,901
2000........................................................ 49,901
2001........................................................ 49,901
2002........................................................ 49,901
2003........................................................ 49,901
Thereafter.................................................. 364,814
--------
$614,319
========
</TABLE>
Interstate 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 $1,020, $1,571, $911 and $1,305 for the years ended
F-12
<PAGE> 94
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES, CONTINUED:
December 31, 1996 and 1997 and for the June, 1998 and December 1998 periods,
respectively. The following is a schedule of future minimum lease payments under
these leases:
<TABLE>
<S> <C>
1999........................................................ $ 2,170
2000........................................................ 1,923
2001........................................................ 1,849
2002........................................................ 1,337
2003........................................................ 1,331
Thereafter.................................................. 408
-------
$ 9,018
=======
</TABLE>
Interstate, pursuant to certain management contracts, has agreed to provide
additional loans of up to $750, in the aggregate, to the owner of a hotel
located in Russia.
In the ordinary course of business, various lawsuits, claims and proceedings
have been or may be instituted or asserted against Old Interstate. Interstate
will be held liable for certain of the lawsuits, claims and proceedings
instituted or asserted against Old Interstate to the extent that the claim
relates to operations of Interstate. Based on currently available facts,
management believes that the disposition of matters that are pending or asserted
against Interstate will not have a material adverse effect on the combined
financial position, results of operations or liquidity of Interstate.
Risk Related to Dispute Over Leased Hotel Portfolio:
As of the December 31, 1998, Interstate was engaged in a dispute with Equity
Inns Partnership, L.P. (Equity Inns) regarding, among other matters, the status
of leases for 79 hotels Interstate leases from Equity Inns or its affiliates.
The principal issue in the dispute was whether Interstate or Equity Inns was
responsible for funding property improvement plans (PIPs) which were issued by
franchisors under whose brand names Interstate operates the leased hotels.
Although franchise agreements generally provide to franchisors the right to
require third-party operators to fund PIPs at any time, these PIPs were issued
as a result of Patriot's merger with Old Interstate. The total amount required
to be funded under the PIPs is approximately $6.0 million.
On March 31, 1999, Interstate settled the dispute and entered into amended lease
agreements and master agreement with Equity Inns. As part of the amended
agreement, Equity Inns acknowledged that Interstate is not responsible for the
funding of the PIPs. Interstate agreed to pay a one-time additional incentive
rent payment for the 1999 lease year in the amount of $2.0 million. In addition
the amended agreement now requires, among other things, performance standards
with respect to the leased hotels, including requirements to maintain room
revenue per available room and expenditures to within specified percentages of
the amounts targeted in the hotels' operating budgets and a minimum net worth
covenant. Failure to meet the performance standards or maintain the minimum net
worth would be a default under the leases.
9. NET MANAGEMENT FEES:
Interstate's management agreements have initial terms that range from one month
to 49 years, expire through the year 2044 and are generally cancelable under
certain conditions, including the sale of the hotel.
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'
F-13
<PAGE> 95
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
9. NET MANAGEMENT FEES, CONTINUED:
profitability as defined by the management agreements. The net management fees
earned for the years ended December 31 and the June 1998 and December 1998
periods were as follows:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Base management fees................. $27,802 $32,220 $14,435 $16,108
Incentive management fees............ 5,766 7,238 3,882 7,096
------- ------- ------- -------
33,568 39,458 18,317 23,204
Less:
Administrative fees................ 545 322 299 441
------- ------- ------- -------
$33,023 $39,136 $18,018 $22,763
======= ======= ======= =======
</TABLE>
10. NON-CASH COMPENSATION:
Prior to an initial public offering of Old Interstate's common stock in 1996,
Old Interstate issued 785,533 shares of common stock to executives and key
employees in consideration for the cancellation of stock options issued by Old
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 Old IHC in 1995 and the issuance of the common stock at
no cost to the recipients, Interstate recorded non-cash compensation expense of
$11,896.
11. INCOME TAXES:
Income tax expense consisted of the following for the years ended December 31
and for the June 1998 period and the December 1998 period:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Current:
Federal................................ $ 5,041 $11,217 $ 6,198 $(3,421)
State.................................. 720 1,602 885 (489)
------- ------- ------- -------
5,761 12,819 7,083 (3,910)
------- ------- ------- -------
Deferred:
Federal................................ (1,438) 146 (1,360) 7,303
State.................................. (206) 21 (195) 1,043
------- ------- ------- -------
(1,644) 167 (1,555) 8,346
------- ------- ------- -------
Income tax expense..................... $ 4,117 $12,986 $ 5,528 $ 4,436
======= ======= ======= =======
</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% after
consideration of minority interests in passthrough tax entities. These rates
approximate Old Interstate's historical rates.
F-14
<PAGE> 96
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
11. INCOME TAXES, CONTINUED:
The components of net deferred tax assets and liabilities consisted of the
following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and amortization................... $ 410 $ -- $ -- $11,749
Payroll and related benefits.................... 121 -- 139 --
Self-insured health trust....................... 36 -- 614 --
Retirement plan................................. 1,356 -- -- 90
Other........................................... -- 362 -- 48
Investment in Hotel real estate................. 250 -- 696 --
------ ---- ------ -------
$2,173 $362 $1,449 $11,887
====== ==== ====== =======
</TABLE>
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest amounted to $274, $29, $20 and $10 for the years ended
December 31, 1996, and 1997 and for the June 1998 and December 1998 periods,
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.
In connection with the Merger, in the December 1998 period, Interstate excluded
a non-cash step-up of $30,268 which includes an increase to the management
contract intangible of $43,378, a decrease in other assets related to hotel
leases of $7,652 and a deferred tax liability of $5,458, from the December 1998
period statement of cash flows. In addition, as a result of the change in
accounting discussed in Note 4, the Company recorded marketable securities and
deferred compensation in the amount of $6,451 as of September 30, 1998 which was
also excluded from the December 1998 period statement of cash flows.
13. INSURANCE:
Interstate 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 Interstate, 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.
Interstate is liable for any deficiencies in the IHC Employee Health and Welfare
Plan (and related Health Trust), which provides employees of Interstate with
group health insurance benefits. Interstate has a financial indemnity liability
policy with Northridge which indemnifies Interstate for certain obligations for
the deficiency in the related Health Trust. The premiums for this coverage
received from the properties managed by Interstate, net of intercompany amounts
paid for employees at Interstate's corporate offices and Leased Hotels, are
recorded as direct premiums written. There was a deficiency of $1,451 in the
related Health Trust as of December 31, 1998, which was recorded as a liability
of Interstate on the accompanying combined balance sheet.
All accounts of Northridge are classified with assets and liabilities of a
similar nature in the combined balance sheets. Amounts restricted due to
statutory requirements consist of cash and cash equivalents of
F-15
<PAGE> 97
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
13. INSURANCE, CONTINUED:
$1,762 and $1,610 at December 31, 1997 and 1998, respectively. These amounts are
included in restricted cash in the accompanying 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, 1996
and 1997 and the June 1998 period and the December 1998 period:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------ ------ ------ --------
<S> <C> <C> <C> <C>
Reinsurance premiums written............... $5,245 $5,811 $3,191 $2,585
Direct premiums written.................... 2,032 2,221 625 875
Reinsurance premiums ceded................. (414) (544) (130) (170)
Change in unearned premiums reserve........ 158 (55) (87) (103)
Loss sharing premiums...................... 1,101 1,687 702 926
------ ------ ------ ------
Insurance income........................... $8,122 $9,120 $4,301 $4,113
====== ====== ====== ======
</TABLE>
14. FINANCIAL INSTRUMENTS:
The carrying values and fair values of Interstate's financial instruments
consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------------------- ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents................ $ 2,432 $ 2,432 $1,652 $1,652
Restricted cash.......................... 2,324 2,324 2,201 2,201
Officers and employees notes
receivable............................. 12,157 12,157 2,803 2,803
Marketable securities.................... -- -- 2,609 2,609
Long-term debt, including current
portion................................ 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 Interstate for issuance of debt with similar
terms and remaining maturities.
Marketable securities: The fair value of marketable securities is based
principally on the quoted market prices of the underlying security.
F-16
<PAGE> 98
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
15. RELATED PARTY TRANSACTIONS:
Transactions with Significant Related Parties:
Included in net management fees are management fees earned pursuant to
management agreements between Interstate and the affiliates of Old Interstate or
Patriot that owned the Owned Hotels. In addition, certain of the Owned Hotels
were subject to management agreements between Interstate and the third-party
owners of these hotels prior to the Owned Hotels' acquisition by Old 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 Old Interstate, if applicable) amounting to $11,726,
$15,752, $6,987, and $6,129 for the years ended December 31, 1996 and 1997 and
the June 1998 and December 1998 periods, 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 $1,260 and $705 at December 31, 1997 and 1998, respectively.
Revenues from other fees include primarily insurance revenues and purchasing
fees. Insurance revenues, which are described in Note 13, from Owned Hotels
amounted to $2,521, $2,842, $1,378 and $1,929 for the years ended December 31,
1996 and 1997 and the June 1998 and December 1998 periods, respectively.
Purchasing fees from Owned Hotels amounted to $969, $1,574, $616 and $552 for
the years ended December 31, 1996 and 1997 and the June 1998 and December 1998
periods, respectively.
Included in accounts receivable is approximately $302 and $548 at December 31,
1997 and 1998, respectively, due from hotels that Milton Fine, former Chairman
of the Old Interstate Board of Directors and significant shareholder of Old
Interstate, has an ownership interest. Interstate has waived the management fees
for one of these hotels through November 1998.
Affiliate Receivables:
Affiliate receivables consist principally of short-term interest bearing loans
to third-party owners.
Concentration of Risk:
Interstate manages three hotels located in Russia, one of which opened in
December 1998. As of December 31, 1997 and 1998, receivables from these hotels
amounted to $3,471 and $3,677, respectively. The Company currently estimates the
receivables as collectable, however, actual collections could differ from
current estimates.
16. INVESTMENT IN HOTEL REAL ESTATE:
On October 2, 1997, the Company, through a 95% owned subsidiary, Intercarp
Limited Partnership (Intercarp), purchased a 55% non-controlling general
partnership interest in Charles Square Associates (CSA), a joint venture general
partnership, which serves as the managing general partner of CH&S Limited
Partnership (CHS), and a 25% interest in Cambridge Hotel Associates (CHA) from
an unrelated third party for approximately $13,000. CH&S owns The Charles Hotel
Complex, which includes the hotel and related offices and retail space in
Cambridge, Massachusetts. CHA manages The Charles Hotel.
On October 10, 1997, Intercarp purchased 7.5 limited partnership units of CHS
for $150. During 1998, Intercarp purchased an additional 99.25 limited
partnership units for $2,948 and exchanged an 11.68% interest in Intercarp in
exchange for an additional 66.25 limited partnership units. As of December 31,
1998 Intercarp holds 173 of the 289 outstanding limited partnership units of
CHS.
F-17
<PAGE> 99
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
16. INVESTMENT IN HOTEL REAL ESTATE, CONTINUED:
In connection with the purchase of the interests in CSA and CHA, Intercarp is
party to certain put/call rights (P/C Options) with certain affiliates of the
45% general partnership interest in CSA and the 25% limited partnership interest
in CHA. The P/C Options allow Intercarp to acquire the interests in both CSA and
CHA anytime prior to December 31, 2000 for a price equal to approximately
$11,625. The Partnership may be required to buy the interest at the Option Price
upon the earlier of the completion of certain events, as defined, or October 2,
1999. As of December 31, 1998, neither party has exercised its rights under the
P/C Options.
The Company, accounts for its investment in CSA and CHA using the equity method
of accounting. Equity in earnings are included in other income in the statement
of income and the investments are included in Investment in Hotel Real Estate on
the balance sheet. The Company recognized equity in earnings from CHA of $136,
$146 and $123 for the year ended December 31, 1997 and the June 1998 and
December 1998 periods, respectively. Selected financial information of CSA
consolidated with CHS as of and for the year ended December 31, 1997 and as of
December 31, 1998 and for the June 1998 and December 1998 periods were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1998
------- -------
<S> <C> <C>
Assets.................................................... $67,453 $79,321
Liabilities............................................... 59,580 56,947
------- -------
Total net equity.......................................... 7,873 22,374
Net equity-others......................................... (8,292) 670
------- -------
Net equity-Intercarp...................................... $16,165 $21,704
======= =======
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
----------------------------------
YEAR ENDED JANUARY 1, TO JUNE 2, TO
1997 JUNE 1, 1998 DECEMBER 31, 1998
---------- ------------- -----------------
<S> <C> <C> <C>
Revenues.......................... $ 40,924 $ 17,052 $ 23,873
Expenses.......................... (37,054) (15,426) (21,597)
-------- -------- --------
Net income........................ 3,870 1,626 2,276
Income allocated to others........ 3,633 1,259 963
Income allocated to Intercarp..... 237 367 1,313
</TABLE>
17. SEGMENT INFORMATION:
Interstate adopted the provisions of Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information,"
effective December 31, 1998. The statement requires disclosure of segment
information for all periods presented. As discussed in Note 1, during the
periods of these financial statements, Interstate was carved out of Old
Interstate and Patriot. The manner of determining the segment information
presented below may be modified in future periods as the Company finalizes the
Spin-off and becomes a stand alone entity. In that event the Company will
restate all amounts to conform to the modification of the segment information.
The Company determined that its reportable segments are those that are based on
the Company's method of internal reporting, which disaggregates its business by
operating entities which provide differing services.
F-18
<PAGE> 100
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
17. SEGMENT INFORMATION, CONTINUED:
The Company's reportable segments are: operations of luxury and upscale hotels,
operations of mid-scale, upper economy and budget hotels, and The Charles Hotel.
The luxury and upscale hotels segment derives revenues from management fees and
other products which directly relate to providing management services including
revenues from insurance, purchasing and equipment leasing. The mid-scale, upper
economy and budget segment derives revenues from managing and leasing hotels and
certain specialized support services. The Charles Hotel segment is an equity
investment which is described in Note 16. The operations of this segment differ
from those of the other segments and the results are separately reviewed by the
Company's chief operating decision maker.
The accounting policies of the segment are the same as those described in Note
2. The Company evaluates the performance of its segments and allocates resources
to them based on operating income.
The table below presents information about revenues and operating income for the
years ended December 31 and the June 1998 and December 1998 periods.
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Luxury and Upscale Hotels......... $49,131 $ 57,961 $ 26,010 $ 30,745
Mid-Scale, Upper Economy
and Budget Hotels............... 14,581 172,456 80,753 117,649
------- -------- -------- --------
Consolidated Totals............. $63,712 $230,417 $106,763 $148,394
======= ======== ======== ========
OPERATING INCOME
Luxury and Upscale Hotels......... $ 8,675 $ 28,322 $ 11,887 $ 10,134
Mid-Scale, Upper Economy and
Budget Hotels................... 1,118 3,232 1,278 (615)
------- -------- -------- --------
Consolidated Totals............. $ 9,793 $ 31,554 $ 13,165 $ 9,519
======= ======== ======== ========
</TABLE>
Depreciation and amortization included in segment operating income for the years
ended December 31 and the June 1998 and December 1998 periods were as follows:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Luxury and Upscale Hotels......... $ 4,141 $ 1,646 $ 776 $ 8,437
Mid-Scale, Upper Economy
and Budget Hotels............... 244 3,199 1,376 2,222
------- -------- -------- --------
Consolidated Totals............. $ 4,385 $ 4,845 $ 2,152 $ 10,659
======= ======== ======== ========
</TABLE>
Intangible and other assets by segment are as follows as of December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Luxury and Upscale Hotels......... $ 3,817 $ 4,909 $ 60,823
Mid-Scale, Upper Economy
and Budget Hotels............... 48,075 45,402 39,698
------- -------- --------
Consolidated Totals............. $51,892 $ 50,311 $100,521
======= ======== ========
</TABLE>
F-19
<PAGE> 101
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
18. SUBSEQUENT EVENT:
Patriot and the Company have reached an agreement under which all of the
partnerships interests in CSA and CHS will be sold to an existing joint venture
partner in these equity interests. The Company, through IHC LLC, will receive an
aggregate purchase price on the sale of $19,250, consisting of $13,500 in cash
and $5,750 in the form of a secured promissory note. The $5,750 secured
promissory note is a three-year note that pays interest only, at a rate of 10%
per annum, until maturity date. The loss on the sale of CSA and CHS is expected
to approximate $342. The amended and restated limited liability company
agreement for IHC LLC will be amended to provide for the proceeds and interest
from the $5,750 promissory note to be allocated entirely to Interstate, with no
amounts allocated to Patriot. The Company will record an additional gain of
$3,163 arising from the effect of this amended allocation on the sale. The
management contract for the Charles Hotel will also be amended in conjunction
with the sale to provide for a reduction in management fees in exchange for a
ten-year life for the management agreement and IHC LLC will be required to loan
the hotel an amount not to exceed $2,500.
19. INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The unaudited combined balance sheet as of March 31, 1999, and the unaudited
combined statements of income and owners' equity and cash flows for the three
months ended March 31, 1998 and 1999, 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.
The combined statement of cash flows for the three months ended March 31, 1999
excludes contributed stock valued at $2,163 that was used to reduce accrued
liabilities that were recorded in connection with the Merger.
F-20
<PAGE> 102
- ---------------------------------------------------------
- ---------------------------------------------------------
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
AS HAVING BEEN AUTHORIZED BY INTERSTATE. THE AFFAIRS OF INTERSTATE 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
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers about the
Spin-off and Interstate............. 1
Summary............................... 3
Summary Financial and Other Data...... 8
Risk Factors.......................... 10
Recent Developments................... 18
The Spin-off.......................... 20
Business.............................. 25
Selected Financial and Other Data..... 36
Pro Forma Financial Data.............. 38
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 50
Management............................ 61
Certain Relationships and Related
Transactions........................ 71
Security Ownership of Certain
Beneficial Owners and Management.... 72
Description of Capital Stock.......... 72
Where You Can Find More Information... 78
Index to Combined Financial
Information......................... F-1
</TABLE>
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES MAY BE REQUIRED TO DELIVER THIS INFORMATION STATEMENT/PROSPECTUS.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
8,817,968 SHARES
INTERSTATE HOTELS
CORPORATION
COMMON STOCK
--------------------------------------------------
INFORMATION STATEMENT/PROSPECTUS
--------------------------------------------------
JUNE , 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 103
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 Interstate in
connection with the spin-off:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- ----------
<S> <C>
SEC Registration Fee........................................ $ 13,408
Nasdaq Filing Fee........................................... 61,875
Financial Advisory Fee...................................... 2,000,000
Accounting Fees and Expenses................................ 1,160,000
Legal Fees and Expenses..................................... 802,000
Printing Expenses........................................... 210,000
Director and Officer Insurance Premium...................... 199,820
Distribution Agent's Fee.................................... 7,500
Miscellaneous............................................... 545,397
----------
Total.................................................. $5,000,000
==========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and Nasdaq fees, are in each
case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Interstate'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 Interstate, a director or officer may not be indemnified in respect of any
proceeding in which he shall have been adjudged liable to Interstate, 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 Interstate'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.
Interstate's Bylaws provide for indemnification by Interstate 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 Interstate 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 Interstate,
and, with respect to criminal actions or proceedings, if such person had no
reasonable cause to believe his or her conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Interstate 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 Interstate
believes that each transaction was exempt from the registration require-
II-1
<PAGE> 104
ments 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 Interstate and acquired the securities for investment and not with a
view to the distribution thereof.
(1) On June 2, 1998, Interstate issued an aggregate of 9,900 shares of
its 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, Interstate issued an aggregate of 100 shares of its
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.
<TABLE>
<S> <C>
2.1+ Form of Distribution Agreement by and among Patriot American
Hospitality, Inc., Wyndham International, Inc., Interstate
Hotels Corporation and Interstate Hotels, LLC
3.1 Form of Articles of Amendment and Restatement of Interstate
Hotels Corporation
3.2+ Form of Amended and Restated Bylaws of Interstate Hotels
Corporation
3.3+ Form of Shareholder Rights Plan of Interstate Hotels
Corporation
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 Interstate Hotels Corporation
and the identified stockholders of Interstate Hotels
Corporation
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.
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 Corporation Guaranty
10.9+ Settlement Agreement dated as of May 27, 1998 by and among
Marriott International, Inc., Interstate Hotels Corporation,
Interstate Hotels Company, Patriot American Hospitality,
Inc. and Wyndham International, Inc.
10.10 First Amendment to Settlement Agreement dated as of August
26, 1998
10.11 Second Amendment to Settlement Agreement dated as of October
29, 1998
10.12 Third Amendment to Settlement Agreement dated as of January
6, 1999
10.13 Fourth Amendment to Settlement Agreement dated as of March
11, 1999
</TABLE>
II-2
<PAGE> 105
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, CONTINUED
<TABLE>
<S> <C>
10.14 Fifth Amendment to Settlement Agreement dated as of April 23, 1999
10.15 Sixth Amendment to Settlement Agreement dated as of May 14, 1999
10.16+ Employment Agreement by and between Interstate Hotels Management, Inc. and Thomas F. Hewitt
10.17+ Employment Agreement by and between Interstate Hotels Management, Inc. and Henry L. Ciaffone
10.18+ Employment Agreement by and between Interstate Hotels Management, Inc. and Charles R. Tomb, as amended
10.19 Letter Agreement dated as of March 22, 1999 between Interstate and Kevin Kilkeary
10.20 Form of Interstate Hotels Corporation 1999 Equity Incentive Plan
10.21+ Form of Interstate Hotels Corporation Employee Stock Purchase Plan
21.1 List of Subsidiaries of Interstate Hotels Corporation
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1)
27.1+ Financial Data Schedule
</TABLE>
- ---------------
+ Previously filed.
(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> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh,
Commonwealth of Pennsylvania, on May 27, 1999.
Interstate Hotels Corporation
By: /s/ THOMAS F. HEWITT
-----------------------------------
Thomas F. Hewitt
Chief Executive Officer
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
---------- ----- ----
<C> <S> <C>
/s/ THOMAS F. HEWITT Chief Executive Officer and May 27, 1999
- ----------------------------------- Chairman of the Board of Directors
Thomas F. Hewitt (Principal Executive Officer)
/s/ J. WILLIAM RICHARDSON Chief Financial Officer and May 27, 1999
- ----------------------------------- Executive Vice President, Finance
J. William Richardson and Administration (Principal
Financial Officer and Principal
Accounting Officer)
/s/ ANNE L. RAYMOND Director May 27, 1999
- -----------------------------------
Anne L. Raymond
/s/ MICHAEL L. ASHNER Director May 27, 1999
- -----------------------------------
Michael L. Ashner
/s/ BENJAMIN D. HOLLOWAY Director May 27, 1999
- -----------------------------------
Benjamin D. Holloway
/s/ STEPHEN P. JOYCE Director May 27, 1999
- -----------------------------------
Stephen P. Joyce
/s/ PHILLIP H. MCNEILL, SR. Director May 27, 1999
- -----------------------------------
Phillip H. McNeill, Sr.
</TABLE>
II-4
<PAGE> 1
Exhibit 3.1
FORM OF
ARTICLES OF
AMENDMENT AND RESTATEMENT
OF
INTERSTATE HOTELS CORPORATION
<PAGE> 2
THIS IS TO CERTIFY THAT:
FIRST: Interstate Hotels Corporation, 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 May 29, 1998, as amended on October
30, 1998 and June ___, 1999, 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 Corporation
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 CSC-Lawyers Incorporating Service Company, 11 East Chase Street, Baltimore,
Maryland 21202.
ARTICLE V
THE RESIDENT AGENT
The resident agent of the Corporation in Maryland is CSC-Lawyers
Incorporating Service Company, 11 East Chase Street, 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 annual meeting of stockholders to be held in
2000, the number of Directors of the Corporation shall be fixed at six. From the
date of the annual meeting of stockholders to be held in 2000 (the "First Annual
Meeting Date") 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 (x) eleven in the event
that, on the First Annual Meeting Date, Patriot American Hospitality, Inc., a
Delaware corporation ("Patriot"), qualifies as a "real estate investment trust"
(within the meaning of Section 856 of the Internal Revenue Code of 1986, as
amended) (a "REIT"), or (y) seven in the event that, on the First Annual Meeting
Date, Patriot does not qualify as a REIT. After
2
<PAGE> 4
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 (x) eleven in the event that, on the First Annual
Meeting Date, Patriot qualifies as a REIT, or (y) seven in the event that, on
the First Annual Meeting Date, Patriot does not qualify as a REIT, prior to
September 30, 2003 without the consent of the Class B Director, if any, or Class
C Director, if any, then serving on the Board of Directors; provided, further,
that the total number of Directors shall not be reduced below eleven prior to
September 30, 2003 at any time while Patriot qualifies as a REIT without the
consent of the Class C Director, if any, then serving on the Board of Directors;
and provided, further, that 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 Thomas F. Hewitt, Michael L.
Ashner, Benjamin D. Holloway, Phillip H. McNeill, Sr. and Anne L. Raymond. 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 2000, shall
be Anne L. Raymond; the initial Class A-II Directors of the Corporation, who
shall serve terms expiring at the annual meeting of stockholders to be held in
2001, shall be Michael L. Ashner and Benjamin D. Holloway; 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 2002, shall be Thomas F. Hewitt and
Phillip H. McNeill, Sr. On the First Annual Meeting Date, if Patriot qualifies
as a REIT, four additional Class A Directors shall be elected to the Board and
such additional Directors shall be classified by the Board of Directors into
appropriate classes so that the classes of the Board of Directors will
thereafter be as nearly equal in number as possible. 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.
One Director of the Corporation (hereinafter referred to, together with his
direct and indirect successors, as the "Class B Director") 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 Director of the Corporation shall be
Stephen P. Joyce, and shall serve a term expiring at the annual meeting of
stockholders to be held in 2001. Thereafter, the Class B Director shall serve
one-year terms expiring at each subsequent annual meeting of stockholders. At
each meeting of stockholders at which a Class B Director is to be elected, the
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
3
<PAGE> 5
B Directors. Upon the First Annual Meeting Date, one Director of the Corporation
(hereinafter referred to, together with his direct and indirect successors, as
the "Class C Director") 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 Director of the Corporation shall be elected on the First Annual Meeting
Date at either a meeting of holders of shares of Class C Common Stock or by the
unanimous written consent of such holders, and shall serve a term expiring at
the annual meeting of stockholders to be held in 2001. Thereafter, the Class C
Director shall serve one-year terms expiring at each subsequent annual meeting
of stockholders. At each meeting of stockholders at which a Class C Director is
to be elected, the 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. 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,
4
<PAGE> 6
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 Section 7.5.1 and Section 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) 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;
5
<PAGE> 7
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.
ARTICLE VII
STOCK
7.1 Authorized Stock. The total number of shares of stock ("Stock")
which the Corporation has authority to issue is twenty million (20,000,000)
shares, initially consisting of (i) five million (5,000,000) shares of Preferred
Stock, par value $.01 per share; (ii) fourteen million (14,000,000) shares of
Class A Common Stock, par value $.01 per share ("Class A Common Stock"); (iii)
five hundred thousand (500,000) shares of Class B Common Stock, par value $.01
per share ("Class B Common Stock"); and (iv) five hundred thousand (500,000)
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"). The aggregate par value of all the shares of all classes of
Stock is $200,000. 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.
6
<PAGE> 8
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):
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 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.
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, the
net assets of the Corporation available for distribution to the holders
of Common Stock shall be distributed pro rata to such holders in
proportion to the number of shares of Common 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 initially elect four
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 6.3, 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 one Class
B Director 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) 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 one and the vacancy 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 vacancy is
filled by the remaining Directors, such remaining Directors
shall classify the new Director into the class of Directors
whose terms expire at the next annual meeting of stockholders.
If such vacancy is filled by the holders of Class A Common
Stock, the remaining Directors shall classify the new Director
into an appropriate class 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,
8
<PAGE> 10
enter 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 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
9
<PAGE> 11
Section 7.5.1 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
such time that Marriott, together with its Affiliates, shall cease to
own at least two percent of the outstanding Common Stock. 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 below) 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 of shares of Class B Common Stock
shall at all times be the owner of record of such shares. "Beneficial
Ownership," when used with respect to ownership of shares of Stock by
any person, shall mean all shares of 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)
10
<PAGE> 12
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 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
Stock Beneficially Owned by that person, the Option Shares Beneficially
Owned by that person shall also be deemed to be outstanding.
7.6 Class C Common Stock.
7.6.1 Voting Rights.
(a) Upon the First Annual Meeting Date, the holders
of the outstanding shares of Class C Common Stock shall be
entitled, as a class, to elect one Class C Director of the
Corporation. A Class C 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 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, (ii) automatically upon the
occurrence of a Class C Conversion Event (as defined below) or
(iii) 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 one and the vacancy
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 vacancy is filled by the remaining
Directors, such remaining Directors shall classify the new
Director into the class of Directors whose terms expire at the
next annual meeting of stockholders. If such vacancy is filled
by the holders of Class A Common Stock, the remaining
Directors shall classify the new Director into an appropriate
class 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) 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, enter into a definitive agreement with respect
to, or authorize the corporate action necessary to carry out,
a Marriott Related Transaction (as defined
11
<PAGE> 13
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 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
12
<PAGE> 14
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 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 two percent of the
outstanding Common Stock. 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
(as defined in Section 7.5.4) 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 7.5.4) 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 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
13
<PAGE> 15
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 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
14
<PAGE> 16
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 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.
7.9 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.
7.10 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.
7.11 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.
7.12 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.
7.13 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.
15
<PAGE> 17
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
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:
9.1 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
16
<PAGE> 18
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.
9.2 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 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 or 7.7 of Article VII, Article IX or Article
XI of these Articles.
ARTICLE X
INDEMNIFICATION
The Corporation (which for the purpose of this Article X 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
17
<PAGE> 19
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.
ARTICLE XI
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 XII
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 XIII
MISCELLANEOUS
13.1 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 9.2 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.
18
<PAGE> 20
(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.
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 _____________,
1999.
ATTEST: INTERSTATE HOTELS
CORPORATION
_______________________________ By: _____________________________
Secretary President
[SEAL]
19
<PAGE> 1
EXHIBIT 5.1
May 27, 1999
Interstate Hotels Corporation
680 Andersen Drive, Foster Plaza Ten
Pittsburgh, Pennsylvania 15220
Ladies and Gentlemen:
This opinion is furnished in connection with the filing by Interstate
Hotels Corporation, a Maryland corporation (the "Company"), with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, of a
Registration Statement on Form S-1 (the "Registration Statement") relating to
the shares of common stock, par value $.01 per share (the "Common Stock"), of
the Company (the "Registered Shares") which are to be distributed by Patriot
American Hospitality, Inc. ("Patriot") to the holders of certain securities of
Patriot and Wyndham International, Inc.
In connection with rendering this opinion, we have examined the forms
of the proposed Distribution Agreement, the Articles of Incorporation and
By-laws of the Company, each as amended to date; such records of the corporate
proceedings of the Company as we deemed material; and such other certificates,
receipts, records and documents as we considered necessary for the purposes of
this opinion. In our examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as certified, photostatic or facsimile copies, the
authenticity of the originals of such copies and the authenticity of telephonic
confirmations of public officials and others. As to facts material to our
opinion, we have relied upon certificates or telephonic confirmations of public
officials and certificates, documents, statements and other information of the
Company or representatives or officers thereof.
We are attorneys admitted to practice in The Commonwealth of
Massachusetts and the State of New York. We express no opinion concerning the
laws of any jurisdictions other than the laws of the United States of America
and The Commonwealth of Massachusetts, the State of New York and the Maryland
General Corporation Law.
Based upon the foregoing, we are of the opinion that when the
Registered Shares are distributed pursuant to the terms of the Distribution
Agreement, the Registered Shares will be duly authorized, validly issued, fully
paid and nonassessable.
<PAGE> 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us with respect to this opinion
under the heading "Validity of Securities" in the Information
Statement/Prospectus which is a part of such Registration Statement.
Very truly yours,
/s/ Goodwin, Procter & Hoar LLP
Goodwin, Procter & Hoar LLP
<PAGE> 1
Exhibit 10.10
FIRST AMENDMENT TO SETTLEMENT AGREEMENT
THIS FIRST AMENDMENT TO SETTLEMENT AGREEMENT (this "Amendment") is executed
as of this 26th day of August, 1998, by and among MARRIOTT INTERNATIONAL, INC.,
a Delaware corporation, PATRIOT AMERICAN HOSPITALITY, INC., a Delaware
corporation, and WYNDHAM INTERNATIONAL, INC., a Delaware corporation.
PRELIMINARY STATEMENT
A. The parties hereto executed that certain Settlement Agreement dated the
27th day of May, 1998 ("Settlement Agreement").
B. The Merger contemplated by the Settlement Agreement was consummated on
June 2, 1998 and, as a result thereof, Patriot and Wyndham are direct or
indirect successors in interest to Interstate.
C. The parties desire to amend the Settlement Agreement in certain respects
as contained herein.
NOW, THEREFORE, in consideration of the mutual premises, obligations,
covenants and agreements herein contained and contained in the Settlement
Agreement, and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. DEFINITIONS. Except as specifically defined herein, all capitalized
terms used herein shall have the definitions provided in the Settlement
Agreement.
2. AMENDMENT TO CERTAIN EXHIBIT A-1's TO EXHIBIT B-1 TO THE SETTLEMENT
AGREEMENT. The Exhibit A-1's to Exhibit B-1 to the Settlement Agreement (the
form of Submanagement Agreement) relating to the Philadelphia West Marriott
(Conshohocken), Harrisburg Marriott and Pittsburgh Airport Marriott are amended
to correct the "Take-Over Date" referenced on such Exhibit A-1's and to make
Exhibit A-1's consistent with Exhibit B to the Settlement Agreement. The
Philadelphia West Marriott (Conshohocken) "Take-Over Date is changed from the
Divestiture Date to One Year after the Divestiture Date; the Harrisburg Marriott
Take-Over Date is changed from the Divestiture Date to One Year after the
Divestiture Date; and the Pittsburgh Airport Marriott Take-Over Date is changed
from One Year after the Divestiture Date to the Divestiture Date. As so amended,
corrected copies of the Exhibit A-1's are attached hereto.
3. NEW DEALS. For the hotels listed below, Interstate, Marriott, and
certain third parties intended to enter into agreements pursuant to which
Interstate will manage the hotels under license from Marriott:
A. Proposed Marriott Hotel Tverskaya, Moscow;
<PAGE> 2
B. Proposed Marriott Hotel, with name to be determined, at Stoleshnikov
Perculak 20/11, 16 and 18. Moreover, and
C. Proposed Marriott Hotel, with name to be determined, at Praia D'el Ray,
Obides, Portugal.
With respect to each of the above hotels, effective upon the execution of a
license agreement or franchise agreement pursuant to which Marriott authorizes
the use of the "Marriott" name, Exhibit D of the Settlement Agreement will be
deemed amended to include such hotel and such license or franchise agreement
shall be an "Exhibit D Hotel Franchise Agreement."
4. FILING DATE EXTENDED. The Filing Date is hereby extended until October
30, 1998, the references to November 30, 1998 in the first sentence of the
second paragraph of Section 5.11 of the Settlement Agreement is hereby amended
to be January 29, 1999, and the Final Divestiture Date is hereby extended until
March 30, 1999.
E. NO OTHER CHANGES. Except as specifically amended herein, the Settlement
Agreement remains in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized representatives to execute this Amendment as of the day and year
first written above.
ATTEST: MARRIOTT INTERNATIONAL, INC.,
By:/s/ John L. Williams [SEAL]
- ------------------------ --------------------------------------
John L. Williams
Senior Vice-President
PATRIOT AMERICAN HOSPITALITY, INC.,
By:/s/ William W. Evans III [SEAL]
- ------------------------ --------------------------------------
William W. Evans III
President and Chief Operating Officer
WYNDHAM INTERNATIONAL, INC.,
By:/s/ William W. Evans III [SEAL]
- ------------------------ --------------------------------------
William W. Evans III
Executive Vice President
S-1
<PAGE> 3
EXHIBIT A-1 (amended)
Name and Location of Hotel: Harrisburg Marriott
4650 Lindle Road
Harrisburg, Pennsylvania 17111
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: March 30, 2004
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues [subject to adjustment per
the Settlement Agreement]
Initial FF&E Reserve Balance: $144,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: March 30, 2004
Chain Exception: No
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five
Year Plan.
<PAGE> 4
EXHIBIT A-1 (amended)
Name and Location of Hotel: Pittsburgh Airport Marriott
100 Aten Road
Pittsburgh, Pennsylvania 15108
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: September 2, 2011
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues [subject to adjustment per
the Settlement Agreement]
Initial FF&E Reserve Balance: $18,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: September 2, 2011
Chain Exception: No
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five
Year Plan.
<PAGE> 5
EXHIBIT A-1 (amended)
Name and Location of Hotel: Philadelphia Marriott West
Matson Ford at Front Street
111 Crawford Avenue
Philadelphia, Pennsylvania 19428
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: August 28, 2014
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues [subject to adjustment per
the Settlement Agreement]
Initial FF&E Reserve Balance: $26,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: August 28, 2014
Chain Exception: Yes
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five
Year Plan.
<PAGE> 1
Exhibit 10.11
SECOND AMENDMENT TO SETTLEMENT AGREEMENT
This SECOND AMENDMENT TO SETTLEMENT AGREEMENT (this "AMENDMENT") is
made and entered into as of the ____ day of October, 1998, by and among MARRIOTT
INTERNATIONAL, INC., a Delaware corporation, PATRIOT AMERICAN HOSPITALITY, INC.,
a Delaware corporation, and WYNDHAM INTERNATIONAL, INC., a Delaware corporation.
PRELIMINARY STATEMENT
A. The parties hereto executed that certain Settlement Agreement dated
the 27th day of May, 1998, as amended by that certain First Amendment to
Settlement Agreement dated the 26th day of August, 1998 (collectively, the
"SETTLEMENT AGREEMENT").
B. The Merger contemplated by the Settlement Agreement was consummated
on June 2, 1998 and, as a result thereof, Patriot and Wyndham are direct or
indirect successors in interest to Interstate.
C. The parties hereto desire to further amend the Settlement Agreement
in certain respects as contained herein.
NOW THEREFORE, in consideration of the mutual premises, obligations,
covenants and agreements herein contained and contained in the Settlement
Agreement, and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. DEFINITIONS. Except as specifically defined herein, all capitalized
terms used herein shall have the definitions provided in the Settlement
Agreement.
2. FILING DATE. The Filing Date is hereby extended until November 13,
1998.
3. NO OTHER CHANGES. Except as specifically amended herein, the
Settlement Agreement remains in full force and effect.
4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
and all of which shall together constitute one and the same instrument.
<PAGE> 2
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized representative to execute this Amendment as of the day and year first
written above.
ATTEST: MARRIOTT INTERNATIONAL, INC.,
a Delaware corporation
By: [Seal]
--------------------------------------
Name:
Title:
PATRIOT AMERICAN HOSPITALITY, INC.,
a Delaware corporation
By: [Seal]
--------------------------------------
Name:
Title:
WYNDHAM INTERNATIONAL, INC.,
a Delaware corporation
By: [Seal]
--------------------------------------
Name:
Title:
S-1
<PAGE> 1
Exhibit 10.12
THIRD AMENDMENT TO SETTLEMENT AGREEMENT
This THIRD AMENDMENT TO SETTLEMENT AGREEMENT (this "AMENDMENT") is made
and entered into as of the 6th day of January, 1999, by and among MARRIOTT
INTERNATIONAL, INC., a Delaware corporation ("MARRIOTT"), PATRIOT AMERICAN
HOSPITALITY, INC., a Delaware corporation ("PAH"), and WYNDHAM INTERNATIONAL,
INC., a Delaware corporation (collectively with PAH, "PATRIOT").
PRELIMINARY STATEMENT
A. The parties hereto executed that certain Settlement Agreement dated
the 27th day of May, 1998, as amended by that certain First Amendment to
Settlement Agreement dated the 26th day of August, 1998, and as further amended
by that certain Second Amendment to Settlement Agreement dated as of October 29,
1998 (collectively, the "SETTLEMENT AGREEMENT").
B. The Merger contemplated by the Settlement Agreement was consummated
on June 2, 1998 and, as a result thereof, Patriot and Wyndham are direct or
indirect successors in interest to Interstate.
C. The parties hereto desire to further amend the Settlement Agreement
in certain respects as contained herein.
NOW THEREFORE, in consideration of the mutual premises, obligations,
covenants and agreements herein contained and contained in the Settlement
Agreement, and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. DEFINITIONS. Except as specifically defined herein, all capitalized
terms used herein shall have the definitions provided in the Settlement
Agreement.
2. DIVESTITURE CONSUMMATION EXTENSION. The reference to January 29,
1999 in the first sentence of the second paragraph of Section 5.11 of the
Settlement Agreement is hereby amended to be the earlier of (i) March 30, 1999
or (ii) 23 calendar days after Marriott receives notice from Patriot, or Patriot
receives notice from Marriott, that such party has elected to accelerate such
date.
3. NO OTHER CHANGES. Except as specifically amended herein, the
Settlement Agreement remains in full force and effect.
4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
and all of which shall together constitute one and the same instrument.
<PAGE> 2
5. NOTICE. Notice hereunder shall be given by facsimile, with original
by overnight delivery, to the parties as set forth below. Notice shall be deemed
given when received (if sent by facsimile).
If to Marriott:
Steven P. Joyce
Marriott Lodging
Marriott Drive, Dept. 929
Washington, DC 20058
Phone: (301) 380-2423
Fax: (301) 380-2778
With a copy to:
Michael D. Schecter, Esq.
Marriott International, Inc.
Marriott Drive, Dept. 52/923
Washington, DC 20058
Phone: (301) 380-6256
Fax: (301) 380-6727
If to Patriot:
William W. Evans III
Patriot American Hospitality
590 Madison, 22nd Floor
New York, NY 10022
Phone: (212) 521-1482
Fax: (212) 355-7772
With a copy to:
Robert S. Insolia, Esq.
Goodwin, Procter & Hoar LLP
599 Lexington Avenue, 40th Floor
New York, NY 10022
Phone: (212) 813-8888
Fax: (212) 355-3333
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
2
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused its
duly authorized representative to execute this Amendment as of the day and year
first written above.
ATTEST: MARRIOTT INTERNATIONAL, INC.,
a Delaware corporation
By: [Seal]
--------------------------------------
Name:
Title:
PATRIOT AMERICAN HOSPITALITY, INC.,
a Delaware corporation
By: [Seal]
--------------------------------------
Name:
Title:
WYNDHAM INTERNATIONAL, INC.,
a Delaware corporation
By: [Seal]
--------------------------------------
Name:
Title:
S-1
<PAGE> 1
Exhibit 10.13
FOURTH AMENDMENT TO SETTLEMENT AGREEMENT
THIS FOURTH AMENDMENT TO SETTLEMENT AGREEMENT (this "AMENDMENT") is
executed as of this 11th day of March, 1999, by and among MARRIOTT
INTERNATIONAL, INC., a Delaware corporation ("MARRIOTT"), PATRIOT AMERICAN
HOSPITALITY, INC., a Delaware corporation ("PAH"), and WYNDHAM INTERNATIONAL,
INC., a Delaware corporation ("WYNDHAM" and, collectively with PAH, "PATRIOT" ).
PRELIMINARY STATEMENT
A. The parties hereto executed that certain Settlement Agreement dated
the 27th day of May, 1998, as amended by that certain First Amendment to
Settlement Agreement dated as of August 26, 1998, and as further amended by that
certain Second Amendment to Settlement Agreement dated as of October 29, 1998
and the Third Amendment to Settlement Agreement dated as of January 6, 1999
(collectively, the "SETTLEMENT AGREEMENT").
B. The Merger contemplated by the Settlement Agreement was consummated
on June 2, 1998 and, as a result thereof, Patriot and Wyndham are direct or
indirect successors in interest to Interstate.
C. The parties desire to amend the Settlement Agreement in certain
respects as contained herein.
NOW, THEREFORE, in consideration of the mutual premises, obligations,
covenants and agreements herein contained and contained in the Settlement
Agreement, and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. DEFINITIONS. Except as specifically defined herein, all capitalized
terms used herein shall have the definitions provided in the Settlement
Agreement.
2. PRIVATE SALE OPTION. Patriot may enter into discussions with third
parties to sell all, or a part of, Newco to such third party (the "Purchaser")
in a private transaction (a "Sale Transaction"), in lieu of the spin-off of
Newco as contemplated under the original Settlement Agreement.
a. Patriot may negotiate a non-binding letter of intent (the
"Letter of Intent") for the Sale Transaction on or before March 31,
1999 and, if such letter of intent is acceptable to Marriott as
provided in Section 2(b) below, Patriot may negotiate a final binding
contract (the "Final Binding Contract") for the Sale Transaction. The
Final Binding Contract shall be executed no later than midnight on
April 14, 1999. The Final Binding Contract may contain
1
<PAGE> 2
customary conditions to closing, but it shall not contain a financing
contingency or a due diligence out. Pursuant to the Final Binding
Contract, the Purchaser must place at risk a deposit equal to the
lesser of 10% of the aggregate consideration to be paid at closing or
$3 million. In addition, the Final Binding Contract must contain a
provision requiring the closing of the Sale Transaction on or before
May 14, 1999.
b. The terms of the Letter of Intent and the Final Binding
Contract, the structure of the Sale Transaction and the Purchaser must
be acceptable to Marriott, in its sole, absolute discretion. Marriott
must approve or reject the Letter of Intent and the Final Binding
Contract within 5 business days of receiving an executed copy from
Patriot.
c. Any transaction which occurs under this Section 2 shall be
deemed a "Divestiture" under the Settlement Agreement to the same
extent as if Newco were spun-off as contemplated in the Settlement
Agreement. If a Final Binding Contract is entered into in accordance
with this Amendment, Patriot and Marriott shall work together to amend
the Settlement Agreement as needed to reflect the substitution of a
private sale for the spin-off.
d. The Final Divestiture Date and the reference to March 30,
1999 in the first sentence of the second paragraph of Section 5.11 of
the Settlement Agreement shall be extended to the earlier of (i) June
14, 1999 or (ii) the date thirty days after:
a) March 31, 1999, if Patriot does not enter into a
Letter of Intent on or before March 31, 1999,
b) the date on which Marriott disapproves the Letter
of Intent,
c) April 14, 1999, if Patriot does not enter into a
Final Binding Contract on or before April 14, 1999, or
d) the date on which Marriott disapproves the Final
Binding Contract.
3. TERMS OF THE DIVESTITURE. Section 5.4 of the Settlement Agreement is
hereby deleted and replaced with the following (which shall not apply if Newco
or its assets are sold privately in a transaction described in Section 2 of this
Amendment):
The parties desire for Newco to be a strong, viable
independent entity, and in order to accomplish such goal,
Patriot covenants and agrees that upon consummation of the
Divestiture Newco will be as described in the Term Sheet,
which is attached hereto and made a part hereof.
4. NO OTHER CHANGES. Except as specifically amended herein, the
Settlement Agreement remains in full force and effect.
5. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which, when so executed and delivered, shall be an
original and all of which shall together constitute one and the same instrument.
6. NOTICE. Notice hereunder shall be given by facsimile, with original
by overnight delivery to the parties as set forth below. Notice shall be deemed
given when received (if sent by facsimile).
2
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized representatives to execute this Amendment as of the day and year
first written above.
ATTEST: MARRIOTT INTERNATIONAL, INC.
By: [SEAL]
- --------------------------- -------------------------------------
Stephen Joyce
Executive Vice President
PATRIOT AMERICAN HOSPITALITY, INC.
By: [SEAL]
- --------------------------- -------------------------------------
William W. Evans III
President and Chief Operating Officer
WYNDHAM INTERNATIONAL, INC.
By: [SEAL]
- --------------------------- -------------------------------------
William W. Evans III
Executive Vice President
3
<PAGE> 4
TERM SHEET
I. BALANCE SHEET
At the time of the Divestiture, select lines of the balance sheet shall
be as follows:
A. ASSETS
1. INTANGIBLES. Newco shall have intangible assets valued at
approximately $100.5 million.
2. RELATED PARTY RECEIVABLES - PATRIOT. The "Related Party
Receivable-Patriot" line shall be zero and there shall be no
receivables due from Patriot or any affiliate of Patriot except those
receivables generated in the ordinary course of managing the assets of
Newco (or its subsidiaries). All receivables from related parties (as
of a date 5 days prior to the date of the Divestiture) shall be listed
on a schedule delivered prior to the Divestiture.
B. LIABILITIES
1. ACCRUED MERGER COSTS. All accrued merger costs from the
merger of Interstate and Patriot shall be paid in full (or cash shall
be placed in Newco in an amount equal to such accrued merger costs).
All costs associated with the formation and implementation of the Newco
structure (regardless of whether they are capitalized or a current
liability) shall be borne solely by Patriot (which may be accomplished
by depositing funds with Newco for such purposes).
2. ACCOUNTS PAYABLE. All accounts payable (especially any
accounts payable-related parties) shall arise in the ordinary course of
business and in good faith. All related parties accounts payable (as of
a date 5 days prior to the date of the Divestiture) shall be listed on
a schedule delivered prior to the Divestiture.
3. DEBT. Newco shall not have any debt that is a non-current
liability on its balance sheet in excess of the amount on the balance
sheet as of December 31, 1998. Newco shall have cash and cash
equivalents (not including any cash and cash equivalents contributed
under Section I.D or I.E) equal to all debt that is a non-current
liability in excess of the amount on the balance sheet as of December
31, 1998.
C. COMMITMENTS AND CONTINGENCIES. The "Commitments and Contingencies"
line shall be zero. Attached hereto as Annex 1 - Off Balance Sheet Contingent
Liabilities is a list which states, to the best of Patriot's (excluding Newco
and all of its subsidiaries) knowledge all contingent liabilities of Newco and
the status of these liabilities. In particular other than as disclosed on Annex
1, there are no current or potential "parachute" liabilities and all equipment
leases for all hotels which are now owned by Patriot will be in the name of
Patriot or an affiliate as of the time of the Divestiture. Patriot shall in good
faith attempt to resolve each of these contingent liabilities in the manner set
forth under the heading "Status" on or prior to the date of the Divestiture
(other than those matters that are "Footnote Disclosure only" or "IHC
Responsibility"). To the extent that Patriot is unable to resolve these matters
prior to the Divestiture and subject to the remainder of this paragraph, Patriot
shall (i) pay into an escrow account an amount up to $3,109,000 (which covers
only those liabilities with the word "Pay" under Status on Annex 1 and (ii) it
shall indemnify Newco or its subsidiaries, as appropriate, in an amount up to
$3,856,000 (which covers only those
4
<PAGE> 5
liabilities with the word "Indemnify" under Status on Annex 1; provided,
however, that with respect to the indemnification relating to the Y2K
Non-Compliance related to Equity Inns, Patriot does not believe that Newco or
its affiliates should be liable for these contingent liabilities but,
nevertheless Patriot is willing to indemnify Interstate Hotels, LLC for these
liabilities on the condition that Patriot (with reasonable participation by
Newco and/or its subsidiaries) is entitled to control the negotiations and any
litigation with respect thereto)). The amount that Patriot is obligated to
either pay for a given contingent liability on Annex 1 prior to Divestiture or
place into escrow at Divestiture or indemnify shall be limited to the dollar
amount set forth opposite such liability. In addition, as any given contingent
liability listed on Annex 1 is resolved (or an amount is contributed to Newco to
resolve such liability), the corresponding dollar amount of such escrow
obligation or indemnification (as appropriate) shall be reduced. At Divestiture,
Newco and Patriot shall enter into one or more Escrow and Indemnification
agreements which shall be reasonably acceptable to both Patriot and Marriott.
D. WORKING CAPITAL. Current assets (before the infusion of cash
discussed in Section I.E. below) shall be at least equal to current liabilities.
E. CASH AND CASH EQUIVALENTS. The "Cash and Cash Equivalents" line
shall be no less than $15 million plus any amount required by Section I.B.1, I.C
or I.D above (this cash shall be an asset of Newco, not Interstate Hotels, LLC).
II. INCOME STATEMENT
A. EXISTING MANAGEMENT CONTRACTS. Interstate Hotels, LLC shall manage
the hotels set forth on Annex II hereto pursuant to the existing management
contracts, subject to the addition and subtraction of management contracts in
the ordinary course of business from and after the date hereof.
B. AMENDED MANAGEMENT CONTRACTS. Interstate Hotels, LLC shall enter
into seven year management contracts with Patriot for the following hotels (the
"Six Main Hotels"):
Chicago Embassy Suites
Phoenix Embassy Suites
Schaumburg Embassy Suites
Denver Hilton
Lisle Radisson
San Jose Radisson
Interstate Hotels, LLC shall also enter into a 30 month management
contract (with an aggregate management fee of $100,000 per year) on the
Parsippany Hilton. This management contract shall not be terminable for the
first 15 months. After the first 15 months, the management contract will be
terminable upon the sale of the hotel without the payment of any fee for any
period after the sale of the hotel.
The management contracts shall be on the following terms:
1. The management contracts shall be negotiated and executed
in full by March 30, 1999 and shall be subject to Marriott's consent,
which consent shall not be unreasonably
5
<PAGE> 6
withheld. Such agreements shall be substantially similar to third party
management contracts entered into on an arms' length basis in the
ordinary course of business by Newco.
2. The management fees for each of the Six Main Hotels shall
be as set forth in the second column of Annex III hereto.
3. For each of the Six Main Hotel, Interstate shall either
have the right to provide all ancillary services (such as insurance)
and control all purchasing decisions or Patriot shall annually pay
Interstate, for such hotel, an amount equal to 55% of the Adjusted
Ancillary Fees (as defined below). For purposes of this Agreement, the
Adjusted Ancillary Fees shall mean the 1998 ancillary fees for each
hotel, as set forth in the third column of Annex III, which shall be
increased by 3% per year, compounded annually.
4. Subject to paragraph 5, the last sentence of this paragraph
and certain events of default, the agreements for the Six Main Hotels
shall be non-terminable. The agreements shall provide that Manager, in
the event of an attempted termination, shall have the option of either
seeking injunctive relief or accepting liquidated damages equal to all
projected future base and incentive fees and ancillary fees (based on
the average base and incentive fees for the prior two years, increased
for each remaining year by a percentage equal to the CPI for the most
recent year) to the end of such contract. In the event that there is a
change of control at Newco, Patriot will have the right to terminate
the agreements for the Six Main Hotels and Patriot will have no
obligation to pay any fees.
5. Notwithstanding paragraph 4, (i) until the end of the
thirtieth month following the effective date of the management
agreement, two of the Six Main Hotels may be terminable on sale, (ii)
from the start of the thirty-first month following the effective date
of the management agreement until the fifth anniversary of the
effective date of the management agreement, an aggregate of four hotels
(including the two hotels in clause (i)) may be terminable on sale, and
(iii) from the fifth anniversary of the effective date of the
management agreement until the seventh anniversary of the effective
date of the management agreement, all of the hotels may be terminable
on sale. In the event that the management agreement applicable to a
hotel is terminated pursuant to this paragraph before the end of the
thirtieth month following the effective date of the management
agreement, the management fees of the remaining hotels shall be
adjusted to cover 100% of the lost management fees and ancillary income
of such hotel (which amounts shall be increased each year by 3%,
compounded annually), as set forth on Annex III hereto. In the event
that the management agreement applicable to a hotel is terminated
pursuant to this paragraph from the start of the thirty-first month
following the effective date of the management agreement until the
fifth anniversary of the effective date of the management agreement,
the management fees of the remaining hotels shall be adjusted to cover
60% of the lost management fees and ancillary income of such hotel
(which amounts shall be increased each year by 3%, compounded
annually), as set forth on Annex III hereto. And, in the event that the
management agreement applicable to a hotel is terminated after the
fifth anniversary date of the management agreement, the management fees
of the remaining hotels (if any) shall be adjusted to cover 50% of the
lost management fees and ancillary income (which amounts shall be
increased each year by 3%, compounded annually), as set forth on Annex
III hereto
6
<PAGE> 7
(if there are no such remaining hotels, Patriot shall pay Interstate a
lump sum for the 50% of the remaining management fees and ancillary
income, discounted at a rate of 10%).
6. All reserves required by the existing management agreements
or franchise agreements shall be at least as well funded at the time of
the Divestiture as they were when Patriot purchased Interstate.
C. CHARLES HOTEL. Patriot shall use its best efforts to transfer, at
Divestiture, to Interstate Hotels, LLC all of its direct and indirect interests
and rights (however such interests and rights are constituted) in The Charles
Hotel at Harvard Square and in Intercarp and any of their respective
subsidiaries or affiliated interests. In the event that Patriot is unable to
obtain the consents necessary for such transfer, Patriot shall substitute (i)
real estate assets generating $1.67 million of EBITDA, (ii) management contracts
generating $835,000 of EBITDA, (iii) cash equal to $4,175,000 or (iv) some
combination of real estate assets, management contracts and cash with an
aggregate value of $4,175,000. For purposes of clause (iv), all management
contracts shall be valued using a 5 multiple, all real estate assets shall be
valued using a 2.5 multiple and all cash shall be given 100% credit. The
specific assets and management contracts shall be subject to the consent of
Marriott, which consent shall not be unreasonably withheld.
III. MANAGEMENT.
At Divestiture, Tom Hewitt, or another Approved Individual (as defined
below), shall become Chairman of the Board and CEO of Newco, Bill Richardson, or
another Approved Individual, shall be Chief Financial Officer. An Approved
Individual shall be any individual consented to by Marriott, which consent shall
not be unreasonably withheld.
IV. STRUCTURE
A. INTEREST IN INTERSTATE HOTELS LLC. Newco shall have at least a 45%
economic interest in Interstate Hotels LLC.
B. ABILITY TO BLOCK NEWCO ACTIONS. Section 7.6.1(b)(i) and Section 7.8
of the Articles of Amendment and Restatement of Newco shall be deleted. As a
result, Patriot shall not have any rights to approve or disapprove the
acquisition by Newco of any interest in property (whether fee simple, leasehold
or otherwise). In addition, upon Divestiture, Newco's board of directors shall
contain five members (one of which shall be nominated by Marriott, and the
remaining four of whom shall be acceptable to both Patriot and Marriott). In the
event that, at the first annual meeting of Newco's shareholders, Patriot
continues to maintain its REIT status, then the number of directors on Newco's
board of directors shall be increased to 11 (one of which shall be nominated by
Patriot and one of which shall be nominated by Marriott). For as long as Patriot
maintains its REIT status, Newco shall inform Patriot upon the acquisition of
any real property and give Patriot information reasonably requested by Patriot
regarding the projected and actual income to be produced by such asset;
provided, that Patriot shall have no right to object or to consent to the
acquisition by Newco of any such assets.
C. ON-GOING PATRIOT/NEWCO RELATIONSHIP. There shall be no on-going cost
sharing
7
<PAGE> 8
agreements, purchasing relationships or any other material contractual
relationships with the exception of (i) an equity interest in Newco and
Interstate Hotels LLC, (ii) directorship in Newco, (iii) the ownership by
Patriot of certain hotels managed by Interstate Hotels LLC and (iv) the
contracts discussed below. Patriot may bind any of the hotels owned by it and
managed by Newco (or its subsidiaries) with any global or master purchasing
contracts. As for any hotels owned by a third party and managed by Newco or any
subsidiary, the hotels may be bound by the Sprint and Pizza Hut contracts
attached hereto; provided, however, that if Newco is requested by a third party
owner to cancel such contract (and such owner has the right to do so under the
relevant management contract), then Newco or its subsidiary may terminate such
contracts for that hotel (without payment of any penalty or fee).
V. REVOLVER.
Patriot shall, together with Newco's CEO and CFO, make a good faith
effort to secure a commitment for a credit facility on behalf of Newco in an
estimated amount of $10 - 20 million before the Divestiture.
VI. CONSENTS AND LICENSES.
A. Prior to the Divestiture, Patriot shall use its best efforts to
obtain all necessary consents for the Divestiture and to assign all appropriate
liquor and other licenses to Newco or Interstate Hotels, LLC. In addition, to
the extent that any liquor or other licenses are currently in the name of Newco
or Interstate Hotels, LLC and such licenses are applicable to any hotel owned in
whole or in part by Patriot but not managed by Interstate Hotels, LLC or Newco,
Patriot shall cooperate to allow the continued operation of the hotels under the
current license until the liquor license transfer is completed, and for the
period prior to such transfer, Patriot shall indemnify Interstate Hotels LLC and
Newco for any costs, expenses or other liabilities that may arise because of
such licenses. To the extent that Interstate Hotels, LLC manages any hotels for
which Patriot maintains the liquor license (other than with respect to the
Patriot owned hotels), and Patriot is unable to transfer the liquor license to
Interstate Hotels, LLC prior to the Divestiture, Interstate Hotels, LLC shall
cooperate to allow the continued operation of the hotels under the current
license until the liquor license transfer is completed, and for the period prior
to such transfer, Interstate Hotels, LLC shall indemnify Patriot for any costs,
expenses or other liabilities that may arise because of such license.
B. In the event that Patriot is unable to obtain any consent to
transfer a management contract resulting in a loss of projected EBITDA, then,
subject to Section VI.C hereof, Patriot shall either (i) substitute management
contracts with substantially similar terms and EBITDA or (ii) deposit cash with
Newco in an amount equal to five times the lost projected EBITDA. The specific
hotels covered by the management contracts and the terms of such management
contract shall be subject to Marriott's consent, which shall not be unreasonably
withheld.
C. Notwithstanding anything contained in Section VI.B hereof, if
Patriot is unable to obtain the consents to transfer one or more third-party
management contracts, Interstate Hotels, LLC may not have less than $9.5 million
of projected EBITDA in the year 2000 derived from third-party management
contracts. If Interstate Hotels, LLC does have less than $9.5 million of
projected
8
<PAGE> 9
EBITDA in the year 2000 derived from third party management contracts, then
Patriot must make up such deficit with additional management contracts (pursuant
to Section VI.B(i) above) and not with cash (pursuant to Section VI.B(ii)
above). For purposes of this paragraph, all projected EBITDA shall be calculated
in a manner consistent with Marriott's assumptions concerning the calculation of
EBITDA for Newco and its subsidiaries prior to the date hereof (which
assumptions currently result in a projected EBITDA from third-party management
agreements of $11.3 million).
VII. D&O INSURANCE.
Before any Marriott employee signs the Form S-1, Newco shall have in
place director and officer insurance reasonably acceptable to Marriott.
9
<PAGE> 10
ANNEX I
OFF BALANCE SHEET CONTINGENT LIABILITIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET
CONTINGENT LIABILITIES DESCRIPTION ESTIMATED LIABILITY STATUS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Y2K Non-Compliance 1. As per the 1999 capital 1. Approx. $929,000 1. PAH to PAY up to
(corporate office) budget (less the PC's and 2. Approx. $1,193,500 $929,000
Laptops and the Orlando 2. PAH to INDEMNIFY up
software upgrades) to $1,193,500
2. Equity Inns DMR survey plus
remedies
- -----------------------------------------------------------------------------------------------------------------------
Litigation Reserves 1. Trezevant litigation 1. Approx. $500,000 1. PAH to INDEMNIFY up
(uninsured pending 2. General employment 2. Approx. $500,000 to $500,000
lawsuits) lawsuits deductibles 2. PAH to INDEMNIFY up
to $250,000
- -----------------------------------------------------------------------------------------------------------------------
Future Minimum Lease Assumes 2% CPI in future years Base Rent - Approx. $700 Footnote Disclosure Only
Payments - Equity Inns million
- -----------------------------------------------------------------------------------------------------------------------
Corporate Office Per PWCL Notes to Combined Approx. $11.5 million Footnote Disclosure Only
Bldg. Leases Financials
New Memphis Office Lease
for DNG Rapid Freight
- -----------------------------------------------------------------------------------------------------------------------
Health Plan Trust (VEBA) Based on 12/31/98 cash of Approx. $2.5 million IHC Responsibility
Approx. $3.1 million & Actuary
9/30/98 IBNR estimate of $5.5
million, there is a deficit
(12/31/98 IBNR in process)
- -----------------------------------------------------------------------------------------------------------------------
Russian Loans unfunded IHC has committed to fund Potential - $750,000 PAH to INDEMNIFY its Pro
preopening costs in the form Rata Portion (If
of loans up to a predetermined Required) based upon
maximum amount PAH's ownership interest
in Interstate Hotels, LLC
- -----------------------------------------------------------------------------------------------------------------------
Wyndham Sprint Telephone Early term fees for T-1 & Xeta Approx. $80,000 PAH to PAY $80,000
agreement which includes equipment as part of Sprint
IHC conversion - never received
- -----------------------------------------------------------------------------------------------------------------------
Equity Inns Dispute Dispute regarding leases and Approx. $2.1 million PAH to PAY up to $2.1
operations million plus any
franchise application
fees
- -----------------------------------------------------------------------------------------------------------------------
Employment Agreements Certain employees have options Approx. $1.5 million PAH to INDEMNIFY for all
for up to 90 days post-Spinco elections during the
(the Free Look Period) to Free Look Period, up to
elect to leave the Company. $1.5 million.
These employees are entitled
to forgiveness of outstanding
loans.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
ANNEX III
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MANAGEMENT FEE (AS A
PERCENTAGE OF GROSS ANCILLARY FEES IN MANAGEMENT FEE IN
HOTEL REVENUES) 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chicago Embassy Suites 3.00% $139,263 $618,900
- --------------------------------------------------------------------------------------------------------------------------
Phoenix Embassy Suites 2.80% $143,814 $333,900
- --------------------------------------------------------------------------------------------------------------------------
Schaumburg Embassy Suites 3.00% $100,949 $258,300
- --------------------------------------------------------------------------------------------------------------------------
Denver Hilton 3.00% $143,041 $347,900
- --------------------------------------------------------------------------------------------------------------------------
Parsippany Hilton $100,000 per annum n.a. n.a.
- --------------------------------------------------------------------------------------------------------------------------
Lisle Radisson 3.00% $183,552 $376,300
- --------------------------------------------------------------------------------------------------------------------------
San Jose Radisson 2.80% $86,240 $257,300
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 1
Exhibit 10.14
FIFTH AMENDMENT TO SETTLEMENT AGREEMENT
This FIFTH AMENDMENT TO SETTLEMENT AGREEMENT (this "AMENDMENT") is made and
entered into as of the ___ day of April, 1999, by and among MARRIOTT
INTERNATIONAL, INC., a Delaware corporation ("MARRIOTT"), PATRIOT AMERICAN
HOSPITALITY, INC., a Delaware corporation ("PAH"), and WYNDHAM INTERNATIONAL,
INC., a Delaware corporation (collectively with PAH, "PATRIOT").
PRELIMINARY STATEMENT
A. The parties hereto executed that ceratin Settlement Agreement dated the
27th day of May, 1998, as amended by that certain First Amendment to Settlement
Agreement dated the 26th day of August, 1998, as further amended by that certain
Second Amendment to Settlement Agreement dated as of October 29, 1998, as
further amended by that certain Third Amendment to Settlement Agreement dated as
of January 6, 1999, and as further amended by that certain Fourth Amendment to
Settlement Agreement dated as of March 11, 1999 (collectively, the "SETTLEMENT
AGREEMENT"), pursuant to which, among other things, Patriot has agreed to
dispose of certain assets, either by means of a spin-off to shareholders or
private sale, as more particularly provided herein (the "DIVESTITURE").
B. The Merger contemplated by the Settlement Agreement was consummated on
June 2, 1998 and, as a result thereof, Patriot and Wyndham are direct or
indirect successors in interest to Interstate.
C. The parties hereto desire to further amend the Settlement Agreement in
certain respects as contained herein.
NOW THEREFORE, in consideration of the mutual premises, obligations,
covenants and agreements herein contained and contained in the Settlement
Agreement, and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. DEFINITIONS. Except as specifically defined herein, all capitalized
terms used herein shall have the definitions provided in the Settlement
Agreement.
2. DIVESTITURE CONSUMMATION EXTENSION. The term "FINAL DIVESTITURE DATE",
as used in the Settlement Agreement, is hereby amended to mean May 14, 1999.
3. NO OTHER CHANGES. Except as specifically amended herein, the Settlement
Agreement remains in full force and effect.
<PAGE> 2
4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
and all of which shall together constitute one and the same instrument.
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized representative to execute this Amendment as of the day and year first
written above.
MARRIOTT INTERNATIONAL, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
PATRIOT AMERICAN HOSPITALITY, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
WYNDHAM INTERNATIONAL, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
S-3
<PAGE> 1
Exhibit 10.15
SIXTH AMENDMENT TO SETTLEMENT AGREEMENT
This SIXTH AMENDMENT TO SETTLEMENT AGREEMENT (this "AMENDMENT") is made
and entered into as of the 14th day of May, 1999, by and among MARRIOTT
INTERNATIONAL, INC., a Delaware corporation ("MARRIOTT"), PATRIOT AMERICAN
HOSPITALITY, INC., a Delaware corporation ("PAH"), and WYNDHAM INTERNATIONAL,
INC., a Delaware corporation (collectively with PAH, "PATRIOT").
PRELIMINARY STATEMENT
A. The parties hereto executed that certain Settlement Agreement dated
the 27th day of May, 1998 (the "ORIGINAL SETTLEMENT AGREEMENT"), as amended by
that certain First Amendment to Settlement Agreement dated the 26th day of
August, 1998, as further amended by that certain Second Amendment to Settlement
Agreement dated as of October 29, 1998, as further amended by that certain Third
Amendment to Settlement Agreement dated as of January 6, 1999, as further
amended by that certain Fourth Amendment to Settlement Agreement dated as of
March 11, 1999 (the "FOURTH AMENDMENT"), and as further amended by that certain
Fifth Amendment to Settlement Agreement dated as of April 23, 1999
(collectively, the "SETTLEMENT AGREEMENT"), pursuant to which, among other
things, Patriot has agreed to consummate the Divestiture (as such term is
defined in the Original Settlement Agreement).
B. The Merger contemplated by the Settlement Agreement was consummated
on June 2, 1998 and, as a result thereof, Patriot and Wyndham are direct or
indirect successors in interest to Interstate.
C. Patriot and Marriott have agreed on all material aspects of the
formation of Newco and the Divestiture, but have agreed to delay the Divestiture
to give Patriot the opportunity to revise the S-1 (as defined below) to include
Newco's financial results for the first quarter of 1999.
D. Accordingly, the parties hereto desire to further amend the
Settlement Agreement in certain respects as contained herein.
NOW THEREFORE, in consideration of the mutual premises, obligations,
covenants and agreements herein contained, and other valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, agree as follows:
1. DEFINITIONS. Except as specifically defined herein, all capitalized
terms used herein shall have the definitions provided in the Settlement
Agreement.
2. DIVESTITURE CONSUMMATION EXTENSION. The term "Final Divestiture
Date", as used in the Settlement Agreement, is hereby amended to mean June 14,
1999. However, Patriot would
<PAGE> 2
prefer to consummate the Divestiture on June 1, 1999. Accordingly, Patriot and
Marriott agree to use their best efforts to consummate the Divestiture on June
1, 1999, but if for any reason the Divestiture does not occur by such date,
Patriot shall have until June 14, 1999 to consummate the Divestiture.
3. DIVESTITURE CONSUMMATION. Marriott acknowledges that Patriot is
preparing to file with the Securities and Exchange Commission Amendment No. 4 to
Form S-1 Registration Statement, which shall include among other things first
quarter 1999 financial statements, and expects to file Amendment No. 5 to Form
S-1 shortly thereafter, which shall include among other things information on
directors and responses to comments received from the Securities and Exchange
Commission (including, without limitation, all exhibits and schedules thereto,
the "S-1"), a copy of the latest draft of which is attached hereto as Exhibit A.
(a) MARRIOTT CONSENT RIGHTS. In accordance with the Settlement
Agreement, Marriott has certain rights to approve and/or consent to
certain matters relating to the Divestiture, including, without
limitation, (i) material aspects of the formation of Newco, (ii) the
Divestiture, (iii) the selection of certain officers and directors of
Newco, (iv) the terms of the management contracts for the seven (7)
hotels referred to in paragraph II(B) of the Term Sheet attached to the
Fourth Amendment, (v) the Escrow Agreement, a form of which is attached
hereto as Exhibit B, (vi) the indemnification of Newco by Patriot for
those certain obligations outlined in paragraph I(C) of the Term Sheet
attached to the Fourth Amendment, which language is included within the
Distribution Agreement by and between Patriot, Interstate Hotels, LLC
and Newco to be entered into prior to the date of Divestiture, a copy
of which is attached hereto as Exhibit C (the "DISTRIBUTION
AGREEMENT"), and (vii) various additional matters relating to Newco,
Newco's subsidiaries (including, without limitation, for all purposes
in this Amendment Interstate Hotels, LLC and its subsidiaries), Newco's
or its subsidiaries' assets, and/or the Divestiture (collectively, the
"APPROVED MATTERS").
(b) DIVESTITURE CONSENT. Marriott hereby acknowledges that upon (i)
consummation of the spin-off of Newco's stock as described in the S-1
(as the same may be amended after the date hereof to reflect updated
financial information, to correct errors or misstatements, or as
otherwise required under federal or state securities laws, rules or
regulations) on or prior to June 14, 1999, and (ii) the contribution by
Patriot of the Contributed Assets (as such term is defined in the
Distribution Agreement) on or prior to June 14, 1999 in accordance with
the Distribution Agreement, Patriot shall have satisfied its
obligations to consummate the Divestiture in accordance with the
Settlement Agreement by the Final Divestiture Date, and Marriott hereby
consents to and approves of the Approved Matters.
(c) CONFLICTS. To the extent that Patriot's obligations relating to (i)
the Divestiture, (ii) Newco, or (iii) any of Newco's
2
<PAGE> 3
subsidiaries described in the S-1 conflict with the corresponding
obligations set forth in the Settlement Agreement (other than the
express terms of this Sixth Amendment, which shall control), the
Settlement Agreement shall be deemed to be amended to conform to the
obligations described in the S-1.
(d) FOURTH AMENDMENT OBLIGATIONS. Patriot and Marriott hereby agree
that Sections I.B.1, I.D, I.E, VI.B and VI.C of the Term Sheet attached
to the Fourth Amendment shall be deleted and that the provisions set
forth below shall replace such sections.
1. Funding of Working Capital Deficit. On the date of
Divestiture Patriot shall pay the LLC an amount equal to "Total current
assets" (which amount shall include $13.5 million from the sale of the
ownership interest in the Charles Hotel Complex and exclude "Related
party receivables-management contracts") minus "Total current
liabilities" (less (A) "Accounts payable-related parties," (B)
"Accounts payable-health trust" and (C) any amounts owing in respect of
"Accrued merger costs" to vendors or obligees of Interstate that have
agreed in writing that neither Interstate nor its subsidiaries shall be
liable for such amounts; the aggregate of such accrued merger costs
shall be referred to as "NON-INTERSTATE MERGER COSTS") (the amount so
calculated, "NET WORKING CAPITAL"), all as set forth in the historical
column on the Unaudited Pro Forma Combined Balance Sheet dated March
31, 1999 contained in the S-1 (the "MARCH 31 BALANCE SHEET"), if and to
the extent that Net Working Capital is negative.
2. Additional Capital Contribution. In addition to the payment
described in subparagraph (d)1 above, on the date of Divestiture
Patriot shall pay Newco (and not the LLC) sixteen million two hundred
sixty thousand dollars ($16.26 million), plus an amount equal
to"Accrued merger costs" as set forth in the March 31 Balance Sheet
less Non-Interstate Merger Costs, and less the amount, if any, of
Adjusted Positive Net Working Capital (as defined below). The LLC shall
make a special distribution of cash or cash equivalents to Newco in the
amount of any Adjusted Positive Net Working Capital. "ADJUSTED POSITIVE
NET WORKING CAPITAL" shall equal the lesser of (i) positive Net Working
Capital, if any (calculated in accordance with subparagraph (d)1 above)
and (ii) "Cash and cash equivalents" as set forth in the March 31
Balance Sheet. On the March 31 Balance Sheet, the amount of "Accrued
merger costs" on such balance sheet less Non-Interstate Merger Costs is
$2.37 million. Notwithstanding anything to the contrary, for purposes
of the post-Divestiture adjustment described in subparagraph 3 below,
the "Accrued merger costs" line on the April 30 Balance Sheet shall not
be less than $1.7 million.
3
<PAGE> 4
3. Post-Divestiture Adjustment. Patriot shall use its best
efforts to cause Interstate Hotels, LLC and its accountants to deliver
to Patriot and Marriott within thirty (30) days of the date of
Divestiture an Unaudited Pro Forma Combined Balance Sheet dated as of
April 30, 1999 (the "APRIL 30 BALANCE SHEET") prepared using the same
methodology as that used for the March 31 Balance Sheet. Following
delivery of the April 30 Balance Sheet, the parties agree to make the
following adjustments:
(i) to the extent that the Net Working Capital (which,
for all purposes under this subsection 3, shall be
calculated in accordance with subsection 1 above) as
set forth on the April 30 Balance Sheet is less than
the Net Working Capital as set forth on the March 31
Balance Sheet, Patriot shall pay to Newco, on or
before August 2, 1999, the amount of the difference.
(ii) to the extent that the Net Working Capital as set
forth on the April 30 Balance Sheet is greater than
the Net Working Capital as set forth on the March 31
Balance Sheet, Newco shall pay to Patriot, on or
before August 2, 1999, the amount of the difference.
Patriot represents and warrants that it has not received any funds
transferred from Newco or any of Newco's subsidiaries since April 30,
1999, and Patriot shall not withdraw any such funds from and after the
date hereof. Notwithstanding the previous sentence and to the extent
permitted by the applicable Management Agreement, Patriot may withdraw
from Newco any non-management fee cash or revenues related to hotels
owned by Patriot.
4. The Charles Hotel Complex. If the sale of the ownership
interest in the Charles Hotel Complex described in the S-1 (the
"CHARLES SALE") is not consummated on or prior to October 1, 1999, as
such date may be extended by agreement of Newco (or the Newco
subsidiary that is the seller of such asset) and the purchaser, then
Patriot shall contribute to the LLC an amount equal to $13.5 million
less $2.2 million and any proceeds received by Newco or its subsidiary
for the sale, such as liquidated damages from the purchaser (the amount
of any such payment from Patriot, the "CHARLES PAYMENT"), provided that
Newco shall perform its obligations relating to the Charles Sale set
forth in Section 6.11 of the Distribution Agreement. If Patriot makes
the Charles Payment and the ownership interest in the Charles is sold
pursuant to a contract of sale entered into prior to the first
anniversary of the date of distribution of Newco's shares by Patriot as
described in the S-1, then upon receipt of the sales proceeds from such
sale, Newco shall pay or cause to be paid to Patriot the amount of such
proceeds up to a maximum amount of the Charles Payment made by Patriot.
In addition, if a special distribution of Adjusted Positive Net Working
Capital as described in subsection 2 above has been made to Newco, then
the LLC operating agreement shall provide that such special
distribution shall be unwound.
4
<PAGE> 5
5. Accounts Payable-Related Parties. On the date of the
Divestiture, Newco's obligations to pay Patriot the amount set forth on
the "Accounts payable-related parties" line of the March 31 Balance
Sheet shall offset the obligation Patriot would otherwise have had to
contribute an equal amount to Newco to true-up working capital, and
such payables shall be deemed paid in full. Similarly, any increase in
the "Accounts payable-related parties" line on the April 30 Balance
Sheet from the March 31 Balance Sheet shall offset an equal amount of
any post-Divestiture adjustment obligation under subsection 3 above
Patriot would otherwise have had, and the amount of such increase shall
be deemed paid in full.
(e) FURTHER NEWCO OPERATIONS. Notwithstanding the Post-Divestiture
Adjustment set forth in Section 3(d)3. hereto, in no event shall
Patriot have any obligation under the Settlement Agreement or otherwise
for diminution of Newco's or Newco's subsidiaries' actual or projected
business from and after the date hereof, whether due to a default by
Newco or any of such subsidiaries or otherwise, including without
limitation any liability or obligation in respect of the contribution
of funds or other assets to Newco or any of its subsidiaries, the
actual or projected EBITDA of Newco or Interstate Hotels, LLC, or
otherwise, except to the extent expressly provided in the Distribution
Agreement.
(f) EXPENSES. No provision of this Amendment shall be construed as
limiting in any way Patriot's obligation in Section 12.2 of the
Distribution Agreement to pay for expenses as described in such
section; provided, however, that Patriot shall be given a credit for
any expenses included as a liability on either the March 31 Balance
Sheet or April 30 Balance Sheet.
(g) NORTHRIDGE HOLDINGS, INC. The LLC operating agreement shall be
modified to provide that Northridge Holdings, Inc. shall be the sole
Managing Member of the LLC, in place of Newco, and Newco shall own 100%
of Northridge Holdings, Inc. In addition, Newco shall guarantee to
Patriot the obligations of Northridge Holdings, Inc. to the LLC and
Patriot under the LLC operating agreement. Marriott consents to this
modified structure.
4. CONSENT TO APOLLO TRANSACTION. Patriot entered into a Securities
Purchase Agreement dated as of February 18, 1999 by and among Patriot and the
parties identified on the signature pages thereto as the Investors (the
"SECURITIES PURCHASE Agreement"). Marriott hereby consents, on behalf of itself
and its affiliates, to the transactions contemplated by the Securities Purchase
Agreement, and any amendments thereto, provided, however, that if the Securities
Purchase Agreement is amended, Marriott (on behalf of itself and its affiliates)
shall not be deemed to have consented to the transactions contemplated by such
amendment to the extent such transactions would result in a sale or transfer of
a Patriot Interest otherwise prohibited by Section 3.2.4 of the Settlement
Agreement.
5. WIOP LEASE TERMINATIONS. Certain hotels owned by PAH or its
affiliates are leased to Wyndham or its affiliates, and if PAH determines it no
longer wishes to maintain its REIT
5
<PAGE> 6
status, Patriot may determine to terminate such leases. Marriott agrees that to
the extent Patriot decides to do so, Marriott agrees to cooperate with Patriot
to permit the termination of such leases and the assignment or modification of
any applicable franchise agreements, management agreements, submanagement
agreements, owner's agreements and other related agreements to the extent
reasonably necessary to accomplish such lease terminations, with the result that
the parties to such agreements (other than the lessees) shall have the same
rights and obligations following such assignments or modifications but for the
termination of the leases. By way of example only, if the lease of an Exhibit B
Hotel from PAH to Wyndham or its affiliate was terminated, Patriot and Marriott
would cooperate to amend the related Management Agreement, Submanagement
Agreement and Owner's Agreement to delete references to such lease and lessee.
6. FUNDING OBLIGATIONS. In the event that any Take-Over Date for an
Exhibit B Hotel occurs prior to August 1, 1999, Marriott and Patriot agree that
Patriot shall fund the Owner/Lessee Funding Obligations for such hotel on August
2, 1999, rather than on the Take-Over Date.
7. NO OTHER CHANGES. Except as specifically amended herein, the
Settlement Agreement remains in full force and effect.
8. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
and all of which shall together constitute one and the same instrument.
9. MARRIOTT EXPENSES. Pursuant to Section 5.9 of the Original
Settlement Agreement, Patriot shall pay Marriott's costs associated with the
formation and implementation of the Newco structure; provided that such costs do
not exceed $500,000.
10. NO THIRD-PARTY BENEFICIARIES. Patriot and Marriott agree that
nothing contained in this Amendment shall be deemed to confer any rights or
benefits upon any third parties.
[The remainder of this page is intentionally left blank.]
6
<PAGE> 7
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized representative to execute this Amendment as of the day and year first
written above.
ATTEST: MARRIOTT INTERNATIONAL, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
PATRIOT AMERICAN HOSPITALITY, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
WYNDHAM INTERNATIONAL, INC.,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
S-1
<PAGE> 1
Exhibit 10.19
INTERSTATE HOTELS LETTERHEAD
- --------------------------------------------------------------------------------
THOMAS F. HEWITT, CHA
Chairman and Chief Executive Officer
March 22, 1999
Mr. Kevin Kelkeary
Executive Vice President & COO
Crossraods Hospitality
Foster Plaza Ten
680 Andersen Drive
Pittsburgh, PA 15220
Dear Kevin:
As we discussed, upon accomplishing the spinout of Interstate, I want you to
assume additional responsibilities as chief operating officer of the company. I
believe we have agreed upon the following package:
-----------------------------------------------------------
TITLE President & COO
-----------------------------------------------------------
BASE SALARY $300,000
-----------------------------------------------------------
BONUS Up to 1.75x base salary
-----------------------------------------------------------
STOCK OPTIONS 150,000 shares
-----------------------------------------------------------
LOAN $300,000 of which 50% will be
forgiven over three (3) years
-----------------------------------------------------------
TERM 3 Years
-----------------------------------------------------------
We will develop mutually acceptable language in the event a change in control of
the company takes place during the term of your contract.
The company will sponsor your relocation to a new home during 1999, not to
exceed $12,000. I believe this covers the key issues we have discussed. Base on
experience and expertise, there is no doubt in my mind you will make a very
significant contribution to the growth and future success of this company.
EXECUTIVE OFFICES, Foster Plaza Ten, 680 Andersen Drive,
Pittsburgh, Pennsylvania 15220
(412) 937-3325 o FAX (412) 920-5733
<PAGE> 2
Page two
I am looking forward to working with you as we launch the "new" Interstate.
Very truly yours,
/s/ THOMAS F. HEWITT
THOMAS F. HEWITT
ACKNOWLEGE ACCEPTANCE
DATE 3/24/99
--------------------------
SIGNATURE Kevin Kelkeary
--------------------------
<PAGE> 1
EXHIBIT 10.20
FORM OF
INTERSTATE HOTELS CORPORATION
1999 EQUITY INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Interstate Hotels Corporation 1999 Equity
Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable
the officers, employees, Independent Directors and other key persons (including
consultants) of Interstate Hotels Corporation (the "Company") and its
Subsidiaries upon whose judgment, initiative and efforts the Company largely
depends for the successful conduct of its business to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a
direct stake in the Company's welfare will assure a closer identification of
their interests with those of the Company, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Administrator" is defined in Section 2(a).
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Deferred Stock Awards, Restricted Stock Awards and Unrestricted Stock
Awards.
"Board" means the Board of Directors of the Company.
"Change of Control" is defined in Section 14.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" means the committee of the Board referred to in Section 2.
"Covered Employee" means an employee who is a "covered employee" within
the meaning of Section 162(m) of the Code.
"Deferred Stock Award" means Awards granted pursuant to Section 7.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 16.
<PAGE> 2
"Fair Market Value" of the Stock on any given date means the fair
market value of the Stock determined in good faith by the Administrator;
provided, however, that (i) if the Stock is admitted to quotation on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), NASDAQ National Market System or a national securities exchange, the
determination shall be made by reference to market quotations. If there are no
market quotations for such date, the determination shall be made by reference to
the last date preceding such date for which there are market quotations.
"Incentive Stock Option" means any Stock Option designated and
qualified as an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Performance Cycle" means one or more periods of time, which may be of
varying and overlapping durations, as the Administrator may select, over which
the attainment of one or more performance criteria will be measured for the
purpose of determining a participant's right to and the payment of a Restricted
Stock Award or Deferred Stock Award.
"Restricted Stock Award" means Awards granted pursuant to Section 6.
"Stock" means the Common Stock, par value $.01 per share, of the
Company, subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities beginning with
the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50 percent or more of the economic interest or the total combined
voting power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to Section
8.
SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS
(a) Committee. The Plan shall be administered by either the Board or a
committee of not less than two Independent Directors (in either case, the
"Administrator").
2
<PAGE> 3
(b) Powers of Administrator. The Administrator shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the individuals to whom Awards may from time to
time be granted;
(ii) to determine the time or times of grant, and the extent,
if any, of Incentive Stock Options, Non-Qualified Stock Options,
Restricted Stock Awards, Deferred Stock Awards and Unrestricted Stock
Awards, or any combination of the foregoing, granted to any one or more
participants;
(iii) to determine the number of shares of Stock to be covered
by any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of
the Plan, of any Award, which terms and conditions may differ among
individual Awards and participants, and to approve the form of written
instruments evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of
all or any portion of any Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend
at any time the period in which Stock Options may be exercised;
(vii) to determine at any time whether, to what extent, and
under what circumstances distribution or the receipt of Stock and other
amounts payable with respect to an Award shall be deferred either
automatically or at the election of the participant and whether and to
what extent the Company shall pay or credit amounts constituting
interest (at rates determined by the Administrator) or dividends or
deemed dividends on such deferrals; and
(viii) at any time to adopt, alter and repeal such rules,
guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms
and provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in
connection with the Plan; and to otherwise supervise the administration
of the Plan.
All decisions and interpretations of the Administrator shall be binding
on all persons, including the Company and Plan participants.
(c) Delegation of Authority to Grant Awards. The Administrator, in its
discretion, may delegate to the Chief Executive Officer of the Company all or
part of the Administrator's authority and duties with respect to the granting of
Awards at Fair Market Value, to
3
<PAGE> 4
individuals who are not subject to the reporting and other provisions of Section
16 of the Act or "covered employees" within the meaning of Section 162(m) of the
Code. Any such delegation by the Administrator shall include a limitation as to
the amount of Awards that may be granted during the period of the delegation and
shall contain guidelines as to the determination of the exercise price of any
Stock Option, the conversion ratio or price of other Awards and the vesting
criteria. The Administrator may revoke or amend the terms of a delegation at any
time but such action shall not invalidate any prior actions of the
Administrator's delegate or delegates that were consistent with the terms of the
Plan.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) Stock Issuable. The maximum number of shares of Stock reserved and
available for issuance under the Plan shall be such aggregate number of shares
of Stock as does not exceed the sum of (i) 2,300,000 shares; plus (ii) as of
each June 30 and December 31 after June 30, 1999, an additional positive number
equal to twenty percent (20%) of the shares of Stock issued by the Company
during that six month period; provided, however, that the maximum number of
shares of Stock for which Incentive Stock Options may be granted under the Plan
shall not exceed 2,300,000 shares. For purposes of the foregoing limitations,
the shares of Stock underlying any Awards which are forfeited, cancelled,
reacquired by the Company, satisfied without the issuance of Stock or otherwise
terminated (other than by exercise) shall be added back to the shares of Stock
available for issuance under the Plan. Subject to such overall limitations,
shares of Stock may be issued up to such maximum number pursuant to any type or
types of Award; provided, however, that from and after the date the Plan is
subject to Section 162(m) of the Code, Stock Options with respect to no more
than 400,000 shares of Stock may be granted to any one individual participant
during any one calendar year period. The shares available for issuance under the
Plan may be authorized but unissued shares of Stock or shares of Stock
reacquired by the Company and held in its treasury.
(b) Changes in Stock. If, as a result of any reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar change in the Company's capital stock, the outstanding
shares of Stock are increased or decreased or are exchanged for a different
number or kind of shares or other securities of the Company, or additional
shares or new or different shares or other securities of the Company or other
non-cash assets are distributed with respect to such shares of Stock or other
securities, the Administrator shall make an appropriate or proportionate
adjustment in (i) the maximum number of shares reserved for issuance under the
Plan, (ii) the number of Stock Options that can be granted to any one individual
participant, (iii) the number and kind of shares or other securities subject to
any then outstanding Awards under the Plan, and (iv) the price for each share
subject to any then outstanding Stock Options under the Plan, without changing
the aggregate exercise price (i.e., the exercise price multiplied by the number
of shares underlying outstanding Stock Options) as to which such Stock Options
remain exercisable and the repurchase price for shares subject to repurchase.
The adjustment by the Administrator shall
4
<PAGE> 5
be final, binding and conclusive. No fractional shares of Stock shall be issued
under the Plan resulting from any such adjustment, but the Administrator in its
discretion may make a cash payment in lieu of fractional shares.
The Administrator may also adjust the number of shares subject to
outstanding Awards and the exercise price and the terms of outstanding Awards to
take into consideration material changes in accounting practices or principles,
extraordinary dividends, acquisitions or dispositions of stock or property or
any other event if it is determined by the Administrator that such adjustment is
appropriate to avoid distortion in the operation of the Plan, provided that no
such adjustment shall be made in the case of an Incentive Stock Option, without
the consent of the participant, if it would constitute a modification, extension
or renewal of the Option within the meaning of Section 424(h) of the Code.
(c) Mergers and Other Transactions. In the case of and subject to the
consummation of (i) the dissolution or liquidation of the Company, (ii) the sale
of all or substantially all of the assets of the Company on a consolidated basis
to an unrelated person or entity, (iii) a merger, reorganization or
consolidation in which the holders of the Company's outstanding voting power
immediately prior to such transaction do not own a majority of the outstanding
voting power of the surviving or resulting entity immediately upon completion of
such transaction, (iv) the sale of all of the Stock of the Company to an
unrelated person or entity or (v) any other transaction in which the owners of
the Company's outstanding voting power prior to such transaction do not own at
least a majority of the outstanding voting power of the relevant entity after
the transaction (in each case, a "Covered Transaction"), all Options that are
not exercisable shall become fully exercisable and all other Awards with
conditions and restrictions relating solely to the passage of time and continued
employment shall become fully vested, except as the Administrator may otherwise
specify with respect to particular Awards. Upon the consummation of the Covered
Transaction, the Plan and all outstanding Awards granted hereunder shall
terminate, unless provision is made in connection with the Covered Transaction
for the assumption of Awards heretofore granted, or the substitution of such
Awards with new Awards of the successor entity or parent thereof, with
appropriate adjustment as to the number and kind of shares and, if appropriate,
the per share exercise prices, as provided in Section 3(b) above. In the event
of such termination, each optionee shall be permitted, within a specified period
of time determined by the Administrator prior to consummation of the Covered
Transaction, to exercise all outstanding Options held by such optionee,
including those that are not then exercisable, subject to the consummation of
the Covered Transaction.
(d) Substitute Awards. The Administrator may grant Awards under the
Plan in substitution for stock and stock based awards held by employees of
another corporation who become employees of the Company or a Subsidiary as the
result of a merger or consolidation of the employing corporation with the
Company or a Subsidiary or the acquisition by the Company or a Subsidiary of
property or stock of the employing corporation. The Administrator may direct
that the substitute awards be granted on such terms and conditions as
5
<PAGE> 6
the Administrator considers appropriate in the circumstances. Any substitute
Awards granted under the Plan shall not count against the share limitation set
forth in Section 3(a).
SECTION 4. ELIGIBILITY
Participants in the Plan will be such full or part-time officers and
other employees, Independent Directors and key persons (including consultants
and prospective employees) of the Company and its Subsidiaries as are selected
from time to time by the Administrator in its sole discretion.
SECTION 5. OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Administrator may from time to time approve. Option agreements need not be
identical.
Stock Options granted under the Plan may be either Incentive Stock
Options or NonQualified Stock Options. Incentive Stock Options may be granted
only to employees of the Company or any Subsidiary that is a "subsidiary
corporation" within the meaning of Section 424(f) of the Code. To the extent
that any Option does not qualify as an Incentive Stock Option, it shall be
deemed a Non-Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after June
___, 2009 [(10 years from the date plan is approved by Board of Directors)].
(a) Stock Options. The Administrator in its discretion may grant Stock
Options to eligible employees, Independent Directors and key persons of the
Company or any Subsidiary. Stock Options granted pursuant to this Section 5(a)
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan, as
the Administrator shall deem desirable. If the Administrator so determines,
Stock Options may be granted in lieu of cash compensation at the participant's
election, subject to such terms and conditions as the Administrator may
establish.
(i) Exercise Price. The exercise price per share for the Stock
covered by a Stock Option granted pursuant to this Section 5(a) shall
be determined by the Administrator at the time of grant but shall not
be less than 100 percent of the Fair Market Value on the date of grant
in the case of Incentive Stock Options, or 85 percent of the Fair
Market Value on the date of grant, in the case of Non-Qualified Stock
Options (other than options granted in lieu of cash compensation). If
an employee owns or is deemed to own (by reason of the attribution
rules of Section 424(d) of the Code) more than 10 percent of the
combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock
Option shall be not less than 110 percent of the Fair Market Value on
the grant date.
6
<PAGE> 7
(ii) Option Term. The term of each Stock Option shall be fixed
by the Administrator, but no Stock Option shall be exercisable more
than ten years after the date the option is granted. If an employee
owns or is deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10 percent of the combined voting power
of all classes of stock of the Company or any parent or subsidiary
corporation and an Incentive Stock Option is granted to such employee,
the term of such option shall be no more than five years from the date
of grant.
(iii) Exercisability; Rights of a Stockholder. Stock Options
shall become exercisable at such time or times, whether or not in
installments, as shall be determined by the Administrator at or after
the grant date; provided, however, that Stock Options granted in lieu
of cash compensation shall be exercisable in full as of the grant date.
The Administrator may at any time accelerate the exercisability of all
or any portion of any Stock Option. An optionee shall have the rights
of a stockholder only as to shares acquired upon the exercise of a
Stock Option and not as to unexercised Stock Options.
(iv) Method of Exercise. Stock Options may be exercised in
whole or in part, by giving written notice of exercise to the Company,
specifying the number of shares to be purchased. Payment of the
purchase price may be made by one or more of the following methods to
the extent provided in the Option agreement:
(A) In cash, by certified or bank check or other
instrument acceptable to the Administrator;
(B) Through the delivery (or attestation to the
ownership) of shares of Stock that have been purchased by the
optionee on the open market or that have been beneficially
owned by the optionee for at least six months and are not then
subject to restrictions under any Company plan. Such
surrendered shares shall be valued at Fair Market Value on the
exercise date;
(C) By the optionee delivering to the Company a
properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company
cash or a check payable and acceptable to the Company for the
purchase price; provided that in the event the optionee
chooses to pay the purchase price as so provided, the optionee
and the broker shall comply with such procedures and enter
into such agreements of indemnity and other agreements as the
Administrator shall prescribe as a condition of such payment
procedure; or
(D) By the optionee delivering to the Company a
promissory note if the Board has expressly authorized the loan
of funds to the optionee for the purpose of enabling or
assisting the optionee to effect the exercise of his Stock
Option; provided that at least so much of the exercise price
as represents the par value of the Stock shall be paid other
than with a promissory note.
7
<PAGE> 8
Payment instruments will be received subject to collection.
The delivery of certificates representing the shares of Stock
to be purchased pursuant to the exercise of a Stock Option
will be contingent upon receipt from the optionee (or a
purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full
purchase price for such shares and the fulfillment of any
other requirements contained in the Stock Option or applicable
provisions of laws. In the event an optionee chooses to pay
the purchase price by previously-owned shares of Stock through
the attestation method, the number of shares of Stock
transferred to the optionee upon the exercise of the Stock
Option shall be net of the number of shares attested to.
(v) Annual Limit on Incentive Stock Options. To the extent
required for "incentive stock option" treatment under Section 422 of
the Code, the aggregate Fair Market Value (determined as of the time of
grant) of the shares of Stock with respect to which Incentive Stock
Options granted under this Plan and any other plan of the Company or
its parent and subsidiary corporations become exercisable for the first
time by an optionee during any calendar year shall not exceed $100,000.
To the extent that any Stock Option exceeds this limit, it shall
constitute a Non-Qualified Stock Option.
(b) Reload Options. At the discretion of the Administrator, Options
granted under the Plan may include a "reload" feature pursuant to which an
optionee exercising an option by the delivery of a number of shares of Stock in
accordance with Section 5(a)(iv)(B) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with such other terms as
the Administrator may provide) to purchase that number of shares of Stock equal
to the sum of (i) the number delivered to exercise the original Option and (ii)
the number withheld to satisfy tax liabilities, with an Option term equal to the
remainder of the original Option term unless the Administrator otherwise
determines in the Award agreement for the original Option grant.
8
<PAGE> 9
(c) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee, or by the optionee's legal
representative or guardian in the event of the optionee's incapacity.
Notwithstanding the foregoing, the Administrator, in its sole discretion, may
provide in the Award agreement regarding a given Option that the optionee may
transfer his Non-Qualified Stock Options to members of his immediate family, to
trusts for the benefit of such family members, or to partnerships in which such
family members are the only partners, provided that the transferee agrees in
writing with the Company to be bound by all of the terms and conditions of this
Plan and the applicable Option.
SECTION 6. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. A Restricted Stock Award is an
Award entitling the recipient to acquire, at par value or such other higher
purchase price determined by the Administrator, shares of Stock subject to such
restrictions and conditions as the Administrator may determine at the time of
grant ("Restricted Stock"). Conditions may be based on continuing employment (or
other business relationship) and/or achievement of pre-established performance
goals and objectives. The grant of a Restricted Stock Award is contingent on the
participant executing a Restricted Stock Award agreement. The terms and
conditions of each such agreement shall be determined by the Administrator, and
such terms and conditions may differ among individual Awards and participants.
(b) Rights as a Stockholder. Upon execution of a written instrument
setting forth the Restricted Stock Award and payment of any applicable purchase
price, a participant shall
9
<PAGE> 10
have the rights of a stockholder with respect to the voting of the Restricted
Stock, subject to such conditions contained in the written instrument evidencing
the Restricted Stock Award. Unless the Administrator shall otherwise determine,
certificates evidencing the Restricted Stock shall remain in the possession of
the Company until such Restricted Stock is vested as provided in Section 6(d)
below, and the participant shall be required, as a condition of the grant, to
deliver to the Company a stock power endorsed in blank.
(c) Restrictions. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the Restricted Stock Award agreement. If a
participant's employment (or other business relationship) with the Company and
its Subsidiaries terminates for any reason, the Company shall have the right to
repurchase Restricted Stock that has not vested at the time of termination at
its original purchase price, from the participant or the participant's legal
representative.
(d) Vesting of Restricted Stock. The Administrator at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the
non-transferability of the Restricted Stock and the Company's right of
repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or
the attainment of such pre-established performance goals, objectives and other
conditions, the shares on which all restrictions have lapsed shall no longer be
Restricted Stock and shall be deemed "vested." Except as may otherwise be
provided by the Administrator either in the Award agreement or, subject to
Section 12 below, in writing after the Award agreement is issued, a
participant's rights in any shares of Restricted Stock that have not vested
shall automatically terminate upon the participant's termination of employment
(or other business relationship) with the Company and its Subsidiaries and such
shares shall be subject to the Company's right of repurchase as provided in
Section 6(c) above.
(e) Waiver, Deferral and Reinvestment of Dividends. The Restricted
Stock Award agreement will require the immediate payment or investment of
dividends paid on the Restricted Stock.
SECTION 7. DEFERRED STOCK AWARDS
(a) Nature of Deferred Stock Awards. A Deferred Stock Award is an Award
of phantom stock units to a participant, subject to restrictions and conditions
as the Administrator may determine at the time of grant. Conditions may be based
on continuing employment (or other business relationship) and/or achievement of
pre-established performance goals and objectives. The grant of a Deferred Stock
Award is contingent on the participant executing a Deferred Stock Award
agreement. The terms and conditions of each such agreement shall be determined
by the Administrator, and such terms and conditions may differ among individual
Awards and participants. At the end of the deferral period, the Deferred Stock
Award, to the extent vested, shall be paid to the participant in the form of
shares of Stock.
10
<PAGE> 11
(b) Election to Receive Deferred Stock Awards in Lieu of Compensation.
The Administrator may, in its sole discretion, permit a participant to elect to
receive a portion of the cash compensation or Restricted Stock Award otherwise
due to such participant in the form of a Deferred Stock Award. Any such election
shall be made in writing and shall be delivered to the Company no later than the
date specified by the Administrator and in accordance with rules and procedures
established by the Administrator. The Administrator shall have the sole right to
determine whether and under what circumstances to permit such elections and to
impose such limitations and other terms and conditions thereon as the
Administrator deems appropriate.
(c) Rights as a Stockholder. During the deferral period, a participant
shall have no rights as a stockholder; provided, however, that the participant
may be entitled to receive dividends paid on the Deferred Stock in accordance
with Section 7(e) below.
(d) Restrictions. A Deferred Stock Award may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of during the deferral
period.
(e) Waiver, Deferral and Reinvestment of Dividends. The Deferred Stock
Award Agreement may require or permit the immediate payment, waiver, deferral or
investment of dividends paid on the Deferred Stock.
(f) Termination. Except as may otherwise be provided by the
Administrator either in the Award agreement or, subject to Section 12 below, in
writing after the Award agreement is issued, a participant's right in all
Deferred Stock Awards that have not vested shall automatically terminate upon
the participant's termination of employment (or cessation of business
relationship) with the Company and its Subsidiaries for any reason.
SECTION 8. UNRESTRICTED STOCK AWARDS
Grant or Sale of Unrestricted Stock. The Administrator may, in its sole
discretion, grant (or sell at par value or such higher purchase price determined
by the Administrator) an Unrestricted Stock Award to any participant pursuant to
which such participant may receive shares of Stock free of any restrictions
("Unrestricted Stock") under the Plan. Unrestricted Stock Awards may be granted
or sold as described in the preceding sentence in respect of past services or
other valid consideration, or in lieu of cash compensation due to such
participant.
SECTION 9. PERFORMANCE-BASED AWARDS TO COVERED EMPLOYEES
Notwithstanding anything to the contrary contained herein, if any
Restricted Stock Award or Deferred Stock Award granted to a Covered Employee is
intended to qualify as "Performance-based Compensation" under Section 162(m) of
the Code and the regulations promulgated thereunder (a "Performance-based
Award"), such Award shall comply with the provisions set forth below:
11
<PAGE> 12
(a) Performance Criteria. The performance criteria used in performance
goals governing Performance-based Awards granted to Covered Employees may
include any or all of the following: (i) the Company's return on equity, assets,
capital or investment, (ii) pre-tax or after-tax profit levels of the Company or
any Subsidiary, a division, an operating unit or a business segment of the
Company, or any combination of the foregoing; (iii) cash flow, funds from
operations or similar measure; (iv) total shareholder return; (v) changes in the
market price of the Stock; (vi) sales or market share; or (vii) earnings per
share.
(b) Grant of Performance-based Awards. With respect to each
Performance-based Award granted to a Covered Employee, the Administrator shall
select, within the first 90 days of a Performance Cycle (or, if shorter, within
the maximum period allowed under Section 162(m) of the Code) the performance
criteria for such grant, and the achievement targets with respect to each
performance criterion (including a threshold level of performance below which no
amount will become payable with respect to such Award). Each Performance-based
Award will specify the amount payable, or the formula for determining the amount
payable, upon achievement of the various applicable performance targets. The
performance criteria established by the Administrator may be (but need not be)
different for each Performance Cycle and different goals may be applicable to
Performance-based Awards to different Covered Employees.
(c) Payment of Performance-based Awards. Following the completion of a
Performance Cycle, the Administrator shall meet to review and certify in writing
whether, and to what extent, the performance criteria for the Performance Cycle
have been achieved and, if so, to also calculate and certify in writing the
amount of the Performance-based Awards earned for the Performance Cycle. The
Administrator shall then determine the actual size of each Covered Employee's
Performance-based Award, and, in doing so, may reduce or eliminate the amount of
the Performance-based Award for a Covered Employee if, in its sole judgment,
such reduction or elimination is appropriate.
(d) Maximum Award Payable. The maximum Performance-based Award payable
to any one Covered Employee under the Plan for a Performance Cycle is 300,000
shares (subject to adjustment as provided in Section 3(b) hereof).
SECTION 10. TAX WITHHOLDING
(a) Payment by Participant. Each participant shall, no later than the
date as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any Federal, state, or
local taxes of any kind required by law to be withheld with respect to such
income. The Company and its Subsidiaries shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the participant. The Company's obligation to deliver stock certificates
to any participant is subject to and conditioned on tax obligations being
satisfied by the participant.
12
<PAGE> 13
(b) Payment in Stock. Subject to approval by the Administrator, a
participant may elect to have such tax withholding obligation satisfied, in
whole or in part, by (i) authorizing the Company to withhold from shares of
Stock to be issued pursuant to any Award a number of shares with an aggregate
Fair Market Value (as of the date the withholding is effected) that would
satisfy the withholding amount due, or (ii) transferring to the Company shares
of Stock owned by the participant with an aggregate Fair Market Value (as of the
date the withholding is effected) that would satisfy the withholding amount due.
SECTION 11. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or
from the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or
for any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the
Administrator otherwise so provides in writing.
SECTION 12. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Administrator may, at any time, amend or cancel any outstanding Award for the
purpose of satisfying changes in law or for any other lawful purpose, but no
such action shall adversely affect rights under any outstanding Award without
the holder's consent. If and to the extent determined by the Administrator to be
required by the Code to ensure that Incentive Stock Options granted under the
Plan are qualified under Section 422 of the Code or to ensure that compensation
earned under Awards qualifies as performance-based compensation under Section
162(m) of the Code, if and to the extent intended to so qualify, Plan amendments
shall be subject to approval by the Company stockholders entitled to vote at a
meeting of stockholders. Nothing in this Section 12 shall limit the
Administrator's authority to take any action permitted pursuant to Section 3(c).
SECTION 13. STATUS OF PLAN
With respect to the portion of any Award that has not been exercised
and any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Administrator shall otherwise expressly
determine in connection with any Award or Awards. In its sole discretion, the
Administrator may authorize the creation of trusts or other arrangements to meet
the Company's obligations to deliver Stock or make payments with respect to
Awards hereunder, provided that the existence of such trusts or other
arrangements is consistent with the foregoing sentence.
13
<PAGE> 14
SECTION 14. CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control as defined in this Section
14:
(a) Except as otherwise provided in the applicable Award agreement,
each outstanding Stock Option shall automatically become fully exercisable.
(b) Except as otherwise provided in the applicable Award Agreement,
conditions and restrictions on each outstanding Restricted Stock Award and
Deferred Stock Award which relate solely to the passage of time and continued
employment will be removed. Performance or other conditions (other than
conditions and restrictions relating solely to the passage of time and continued
employment) will continue to apply unless otherwise provided in the applicable
Award Agreement.
(c) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "Person," as such term is used in Sections 13(d) and
14(d) of the Act (other than the Company, any of its Subsidiaries, or
any trustee, fiduciary or other person or entity holding securities
under any employee benefit plan or trust of the Company or any of its
Subsidiaries), together with all "affiliates" and "associates" (as such
terms are defined in Rule 12b-2 under the Act) of such person, shall
become the "beneficial owner" (as such term is defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the combined voting power
of the Company's then outstanding securities having the right to vote
in an election of the Company's Board of Directors ("Voting
Securities") (in such case other than as a result of an acquisition of
securities directly from the Company); or
(ii) persons who, as of the Effective Date, constitute the
Company's Board of Directors (the "Incumbent Directors") cease for any
reason, including, without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a
majority of the Board, provided that any person becoming a director of
the Company subsequent to the Effective Date shall be considered an
Incumbent Director if such person's election was approved by or such
person was nominated for election by either (A) a vote of at least a
majority of the Incumbent Directors or (B) a vote of at least a
majority of the Incumbent Directors who are members of a nominating
committee comprised, in the majority, of Incumbent Directors; but
provided further, that any such person whose initial assumption of
office is in connection with an actual or threatened election contest
relating to the election of members of the Board of Directors or other
actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board, including by reason of
agreement intended to avoid or settle any such actual or threatened
contest or solicitation, shall not be considered an Incumbent Director;
or
14
<PAGE> 15
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company where the stockholders of the
Company, immediately prior to the consolidation or merger, would not,
immediately after the consolidation or merger, beneficially own (as
such term is defined in Rule 13d-3 under the Act), directly or
indirectly, shares representing in the aggregate more than [50] percent
of the voting shares of the corporation issuing cash or securities in
the consolidation or merger (or of its ultimate parent corporation, if
any), (B) any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged by any
party as a single plan) of all or substantially all of the assets of
the Company or (C) any plan or proposal for the liquidation or
dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be
deemed to have occurred for purposes of the foregoing clause (i) solely as the
result of an acquisition of securities by the Company which, by reducing the
number of shares of Voting Securities outstanding, increases the proportionate
number of shares of Voting Securities beneficially owned by any person to 25
percent or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any person referred to in this sentence
shall thereafter become the beneficial owner of any additional shares of Voting
Securities (other than pursuant to a stock split, stock dividend, or similar
transaction or as a result of an acquisition of securities directly from the
Company), then a "Change of Control" shall be deemed to have occurred for
purposes of the foregoing clause (i).
SECTION 15. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The
Administrator may require each person acquiring Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is acquiring
the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Administrator may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards as
it deems appropriate.
(b) Delivery of Stock Certificates. Stock certificates to participants
under this Plan shall be deemed delivered for all purposes when the Company or a
stock transfer agent of the Company shall have mailed such certificates in the
United States mail, addressed to the participant, at the participant's last
known address on file with the Company.
(c) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards do not
15
<PAGE> 16
confer upon any employee any right to continued employment with the Company or
any Subsidiary.
(d) Trading Policy Restrictions. Option exercises and other Awards
under the Plan shall be subject to such Company's insider trading policy, as in
effect from time to time.
SECTION 16. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a
majority of the votes cast at a meeting of stockholders at which a quorum is
present. Subject to such approval by the stockholders and to the requirement
that no Stock may be issued hereunder prior to such approval, Stock Options and
other Awards may be granted hereunder on and after adoption of this Plan by the
Board.
SECTION 17. GOVERNING LAW
This Plan and all Awards and actions taken thereunder shall be governed
by, and construed in accordance with, the laws of the State of Maryland, applied
without regard to conflict of law principles.
DATE APPROVED BY BOARD OF DIRECTORS: June ____, 1999
DATE APPROVED BY STOCKHOLDERS: June ____, 1999
16
<PAGE> 1
Exhibit 21.1
List of Subsidiaries State of Formation
- -------------------- ------------------
Cambridge Hotel Associates Pennsylvania
Charles Square Associates Massachusetts
CH&S Limited Partnership Massachusetts
CHR Services Company, L.L.C. Delaware
CHR Consulting Company, L.L.C. Delaware
Colony Hotels and Resorts Company Delaware
Colony de Mexico, S.A. de C.V. Mexico
Colony International Management Company, L.L.C. Delaware
Continental Design & Supplies Company, L.L.C. Delaware
Crossroads Future Company, L.L.C. Delaware
Crossroads Future Financing Company, L.L.C. Delaware
Crossroads Hospitality Company, L.L.C. Delaware
Crossroads Hospitality Tenant Company, L.L.C. Delaware
Crossroads/Memphis Company, L.L.C. Delaware
Crossroads/Memphis Financing Company II, L.L.C. Delaware
Crossroads/Memphis Financing Corporation Delaware
Crossroads/Memphis Financing II Corporation Delaware
Crossroads/Memphis Financing Company, L.L.C. Delaware
Crossroads/Memphis Partnership, L.P. Delaware
Equity Bluefield, Inc. West Virginia
Future Financing Member Corporation Delaware
Hilltop Equipment Leasing Company, L.P. Delaware
IHC Services Company, L.L.C. Delaware
IHC II, LLC Delaware
IHC/Moscow Corporation Delaware
Intercarp Limited Partnership Delaware
Interstate Hotels, LLC Delaware
Northridge Holdings, Inc. Delaware
Northridge Insurance Company Cayman Islands
Oak Hill Catering Company, Inc. West Virginia
PAH-Cambridge Holdings, LLC Delaware
PAH-Crossroads Member, Inc. Delaware
PAH-Hilltop GP, LLC Delaware
PAH-Interstate Member, Inc. Delaware
PAH-Member, Inc. Delaware
State College BBQ/Concord Joint Venture Pennsylvania
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 5 to registration statement on
Form S-1 (No. 333-67065) of our report dated March 5, 1999, except for the last
two paragraphs of Note 8, as to which the date is March 31, 1999, and Note 18,
as to which the date is May 3, 1999, on our audits of the combined financial
statements as of December 31, 1998 and 1997 and for the period from January 1,
1998 to June 1, 1998 and for the period from June 2, 1998 to December 31, 1998
and for each of the two years in the period ended December 31, 1997 of
Interstate Hotels Corporation.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
May 27, 1999
