<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1999
REGISTRATION STATEMENT NO. 333-67065
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERSTATE HOTELS MANAGEMENT, INC.
(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 MANAGEMENT, INC.
680 ANDERSEN DRIVE, FOSTER PLAZA TEN
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Name, address including zip code, and telephone number,
including area code, of agent for service)
-------------------------
COPIES TO:
CARLA S. MORELAND, ESQ.
JOHN P. BOHLMANN, ESQ.
C/O PATRIOT AMERICAN HOSPITALITY, INC.
1950 STEMMONS FREEWAY
SUITE 6001 DALLAS, TEXAS 75207
(214) 863-1000
TIMOTHY Q. HUDAK, ESQ.
INTERSTATE HOTELS MANAGEMENT, INC.
680 ANDERSEN DRIVE, FOSTER PLAZA TEN
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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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.
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SUBJECT TO COMPLETION, DATED MAY , 1999
8,817,968 SHARES
INTERSTATE HOTELS MANAGEMENT, INC.
DISTRIBUTION BY
PATRIOT AMERICAN HOSPITALITY, INC.
TO ITS SHAREHOLDERS OF UP TO
8,817,968 SHARES OF COMMON STOCK
OF INTERSTATE HOTELS MANAGEMENT, INC.
-------------------------
We are sending you this Information Statement/ Prospectus to describe the
spin-off of 92% of Interstate Hotels Management, Inc. from Patriot American
Hospitality, Inc., and the business and financial condition of Interstate
Management following the spin-off. When the spin-off is accomplished, you will
receive one share of common stock of Interstate Management 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.
Patriot will initially distribute 8,817,968 Interstate Management shares. In
addition, we will issue 475,000 shares to employees, Patriot will retain 242,555
shares and Marriott International, Inc. will purchase 242,555 shares in a
private sale. The Interstate Management shares being distributed to the three
counterparties to forward equity contracts with Patriot/Wyndham will be returned
to Patriot/Wyndham immediately following the spin-off in exchange for
adjustments to the forward equity contract arrangements. These shares will then
be returned to Interstate Management and cancelled. Based on the number of
Patriot securities subject to the forward equity contracts as of April 30, 1999,
we expect that 3,239,200 Interstate Management shares will be distributed to the
forward equity contract counterparties. Following the return and cancellation of
these shares, we expect that 6,538,878 Interstate Management shares will be
outstanding immediately following the spin-off, including the shares issued to
employees, the shares to be retained by Patriot/Wyndham and the shares to be
purchased by Marriott.
Patriot signed a merger agreement on December 2, 1997 pursuant to which it
was to acquire Interstate Hotels Company. In March 1998, prior to the closing of
the merger, Marriott International, Inc. sued Interstate Hotels Company seeking
to block the transaction, and the merger was preliminarily enjoined in April
1998 pending a trial on the merits of Marriott's claims. On May 27, 1998,
Patriot/Wyndham, Interstate Hotels Company and Marriott reached a settlement
allowing the Patriot/Interstate Hotels Company merger to close on June 2, 1998.
As part of the settlement agreement, Patriot agreed to effect the spin-off of
Interstate Management, which operates and has a 45% managing member interest in
the third-party hotel management business Patriot acquired from Interstate
Hotels Company. Interstate Management has been a subsidiary of Patriot since the
Interstate Hotels Company acquisition. The spin-off achieves two goals: you will
continue to own an equity stake in Interstate Hotels Company's third-party hotel
management business, but Wyndham, shares of which are paired and trade together
as a single unit with Patriot's shares and which is a major competitor of
Marriott's, will not have a direct operational relationship with Marriott or any
Marriott hotels. If you are a holder of record of Patriot securities on
, 1999, you will receive your Interstate Management shares automatically. You
do not need to take any further action. We intend to apply to have the
Interstate Management shares listed on the New York Stock Exchange under the
trading symbol "IHC."
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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.
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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.
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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 May , 1999.
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.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Questions and Answers about the Spin-off and Interstate
Management................................................ 1
Summary..................................................... 3
Summary Financial and Other Data............................ 8
Risk Factors................................................ 10
Recent Developments......................................... 17
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.............. 69
Security Ownership of Certain Beneficial Owners and
Management................................................ 71
Description of Capital Stock................................ 71
Where You Can Find More Information......................... 76
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
Management'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 Management, Inc.
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QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF AND INTERSTATE MANAGEMENT
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
Management" mean Interstate Hotels Management, Inc. and its subsidiaries,
references to "Interstate Hotels, LLC" mean Interstate Hotels, LLC and its
subsidiaries, references to "Patriot" mean Patriot American Hospitality, Inc.
and its subsidiaries, references to "Wyndham" mean Wyndham International, Inc.
and its subsidiaries, references to "Patriot/Wyndham" mean Patriot and its
subsidiaries together with Wyndham and its subsidiaries, references to "Old
Interstate" mean Interstate Hotels Company, references to "Interstate Management
stock" and "Interstate Management shares" mean the common stock of Interstate
Management, 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 Management'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 Management
following the spin-off.
Q: WHAT WILL HAPPEN IN THE SPIN-OFF?
A: In the spin-off, Patriot/Wyndham will separate from its hotel business Old
Interstate's third-party hotel management business and equity interests in
The Charles Hotel Complex, a hotel, retail and office complex located in
Cambridge, Massachusetts, to create a separate publicly traded company.
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. Patriot/Wyndham
acquired the assets being included in the spin-off primarily through
Patriot's merger with Old Interstate. In addition, there are several hotels
which Patriot owns that will be managed by us. "Third-party hotel management
business" refers to the management, leasing and related services we perform
for hotels that we do not own.
Q: WHAT WILL I RECEIVE IN THE SPIN-OFF?
A: You will receive one Interstate Management share for every 30 Patriot
securities you own on , 1999, the record date for the spin-off. We
will not issue any fractional shares. Instead, you will receive cash based on
the market value of any fractional shares.
Example: If you own 100 Patriot securities, then after the spin-off you will
receive three Interstate Management shares and a check for the market value
of the fractional interest.
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE SPIN-OFF?
A: Nothing. No proxy or vote is necessary for the spin-off. If you own Patriot
securities as of the close of business on , 1999, Interstate
Management 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 Management shares to be per share. The
actual trading value of the Interstate Management 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
Management shares may fluctuate significantly. Please obtain current
quotations prior to deciding whether to purchase or sell Interstate
Management shares.
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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
Management 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 per share to the Interstate Management 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 Management 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 MANAGEMENT SHARES?
A: Patriot will deliver the Interstate Management 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 MANAGEMENT SHARES?
A: You may buy and sell Interstate Management shares once the spin-off occurs.
Q: WHERE WILL THE INTERSTATE MANAGEMENT SHARES TRADE?
A: Interstate Management intends to apply to have its shares listed on the New
York Stock Exchange under the trading symbol "IHC."
Q: WILL DIVIDENDS BE PAID ON THE INTERSTATE MANAGEMENT SHARES?
A: We do not plan to pay dividends on the Interstate Management 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
MANAGEMENT?
A: If you have questions about the spin-off or Interstate Management 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 Management at (412) 937-0600.
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<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
Management share for every 30 Patriot securities you own on , 1999, the
record date for the spin-off. At the time of the spin-off, Marriott will also
purchase four percent of the outstanding Interstate Management shares for
approximately $2.1 million. We expect the spin-off to occur on , 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 Management, and the subsequent
spin-off of Interstate Management from Patriot/Wyndham.
OWNERSHIP OF INTERSTATE MANAGEMENT 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
Management shares will initially be distributed to the counterparties to forward
equity contracts into which Patriot/Wyndham has entered. However, the Interstate
Management 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 Management shares will be cancelled.
Based on the number of Patriot securities held as of April 30, 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 Management
shares in the spin-off. The table below indicates the effect we expect these
transactions to have on the outstanding shares of Interstate Management.
<TABLE>
<S> <C>
Total shares to be issued initially (including 242,555
shares owned by Patriot/Wyndham, 242,555 shares to be
purchased by Marriott and 475,000 shares to be issued to
Interstate Management employees).......................... 9,778,078
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................................ 6,538,878
</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 Management. This
3
<PAGE> 7
structure, in 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 Management, 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.
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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 Management immediately prior to and
immediately following the spin-off.
The first graphic, which depicts the ownership structure of Interstate
Management immediately prior to the spin-off, shows that:
o Patriot will own 99% of Interstate Management 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
Management;
o Interstate Management will own 100% of IHC II, LLC;
o Interstate Management 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 Management, 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.
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The second graphic, which depicts the ownership structure of Interstate
Management immediately following the spin-off, shows that:
o Marriott will own four percent of Interstate Management, the
holders of Patriot securities will own 92% of Interstate
Management, Wyndham will own three percent of Interstate
Management, 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 Management;
o Interstate Management will own 99.99% of IHC II, LLC and Marriott will
own .01% of IHC II, LLC;
o Interstate Management 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 Management, 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
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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.
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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 Management, 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 Management, 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 as of and 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
-------- ---------- ---------- ---------- ------------ -------------
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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 31,554 10,451 8,604 9,368
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 5,785 6,519 (4,014) (4,721)
Income tax expense (benefit)
(4)......................... 9,964 1,168 2,602 (1,625) (818)
---------- ---------- -------- -------- --------
Income (loss) before minority
interest.................... 15,179 4,617 3,917 (2,389) (3,903)
Minority interest............ 233 2,865 14 49 (2,676)
---------- ---------- -------- -------- --------
Net income (loss)............ $ 14,946 $ 1,752 $ 3,903 $ (2,438) $ (1,227)
========== ========== ======== ======== ========
Pro forma net income (loss)
per common share (5):
Basic....................... $ 0.28 $ (0.19)
Diluted..................... $ 0.28 $ (0.19)
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents.... $ 1,652 $ 1,730 $ 2,658 $ 25,263
Total assets................. 161,157 126,507 163,754 168,835
Long-term debt............... -- -- -- --
Total equity................. 92,607 90,884 83,289 69,256
OTHER FINANCIAL DATA:
EBITDA (6)................... $ 37,127 $ 10,261 $ 7,692 $ 536 $ (119)
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 6,363,878 shares of common stock outstanding on a pro forma basis
on the spin-off date, which represents 6,538,878 shares expected to be
outstanding immediately following the spin-off less 175,000 restricted
shares that will be granted to Interstate Management employees after the
spin-off.
(6) EBITDA represents earnings before interest, income tax expense, depreciation
and amortization. The 1998 and the three months ended March 31, 1999 pro
forma EBITDA represents Interstate Management'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 Management, 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 Management's
results of operations.
(7) Represents all hotels, including the leased hotels, which Interstate
Management 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.
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 thirty to ninety 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.
- - In the event that:
-- all of our management agreements which may be terminated without cause upon
thirty to ninety 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
10
<PAGE> 14
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 Management 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 under "Recent Developments--Recent Negative
Trend in Our Financial Results."
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 twelve 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
18. 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.
11
<PAGE> 15
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).
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
12
<PAGE> 16
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 Management 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 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 Management. In
addition, Interstate Hotels, LLC's operating agreement provides that, in the
event of a change of control of Interstate Management, 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 Management
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
13
<PAGE> 17
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
Management 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.
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 Management 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 Management shares within one year after the spin-off in an attempt to
reduce the holdings of Interstate Management shares by affiliates of
Patriot/Wyndham to less than 9.9% of the outstanding Interstate Management
shares by the first anniversary of the spin-off. These mandatory sales may
depress the trading price of Interstate Management shares. The Voting Agreement
is discussed in more detail on page 69.
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.
14
<PAGE> 18
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 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.
15
<PAGE> 19
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.
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. 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.
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RECENT DEVELOPMENTS
RECENT NEGATIVE TREND IN OUR 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 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 also incurred a
$2.0 million one-time payment to Equity Inns for additional 1999 incentive rent.
These factors, together with the general disruption to our business described
under "Risk Factors," 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 under
"Risk Factors," 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.
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.
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- 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.
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 Management 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.
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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 Management 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.
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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 Management 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 Management shares you will receive in the spin-off to be
per share. The final value of the spin-off distribution cannot be
determined until after the distribution is completed. We will make a public
announcement of the amount of the distribution promptly after it is determined
and will furnish 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 Management 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 Management shares
may fluctuate significantly. Please obtain current market quotations prior to
deciding whether to purchase or sell Interstate Management shares.
DISTRIBUTION OF INTERSTATE MANAGEMENT SHARES
Each holder of Patriot securities as of the close of business on , 1999
will receive one Interstate Management 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 Management a 35% interest in
Interstate Hotels, LLC, the entity holding Old Interstate's
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third-party hotel management business. The remaining 65% interest was
contributed to a subsidiary owned 99% by Patriot and 1% by Wyndham. Patriot and
Interstate Management 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 April 30, 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 Management 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 Management 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 Management 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 April 30, 1999 by and on
behalf of the counterparties) will immediately be returned by the counterparties
and cancelled. As a result, we expect that only 6,538,878 Interstate Management
shares (including 475,000 shares issued in connection with the spin-off to our
employees, 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 Management 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 Management 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 Management 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 Management 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
Management 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.
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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 Management 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 Management
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 Management 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 Management
shares that Patriot will distribute will be $ million in the aggregate.
However, the final value of the Interstate Management 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 Management's assets at the
time of the Old Interstate merger. Such tax will apply to Patriot as a REIT
because the assets of Interstate Management were acquired on a tax-free basis
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by a REIT from a C corporation. In determining the amount Patriot must
distribute annually to shareholders in order to maintain REIT qualification,
Patriot will take into account the excess of the amount of recognized
built-in-gain over the amount of tax paid. The value of the Interstate
Management shares distributed to Patriot shareholders will apply towards the
annual distribution requirement.
RECEIPT OF INTERSTATE MANAGEMENT SHARES. If you receive Interstate Management
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
Management 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
Management 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 Management 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 $ per share to the Interstate Management 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 Management shares with
respect to Wyndham preferred stock or interests in the Patriot or Wyndham
operating partnerships. A distribution of Interstate Management 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 Management 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 Management 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
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partnership interest immediately before the distribution. Your basis in the
Interstate Management 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 Management shares.
BACKUP WITHHOLDING. Patriot generally will be required to withhold 31% of the
Interstate Management 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.
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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
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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 Management 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
Management 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 Management 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;
28
<PAGE> 32
- Establishing quality standards for products and services and evaluating
performance against these standards;
- Conducting training conferences and workshops for rooms department
employees at all levels;
- Creating operating procedures, training manuals, 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.
29
<PAGE> 33
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 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.
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<PAGE> 37
Following the spin-off, 13 of the properties in our hotel portfolio 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 indemnity 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.
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<PAGE> 38
INTELLECTUAL PROPERTY
Generally, the third-party owners of our hotels, rather than Interstate
Management, 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 Management 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 Management, 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
Management, 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 as of and 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 18,981
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 4,790
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 5,785
Income tax expense
(benefit) (4)........... -- -- 4,117 12,986 5,528 4,436 9,964 1,168
-------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
minority interest....... 12,389 16,042 6,177 19,497 8,315 6,864 15,179 4,617
Minority interest........ -- -- -- 18 24 209 233 2,865
-------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 12,389 $ 16,042 $ 6,177 $ 19,479 $ 8,291 $ 6,655 $ 14,946 $ 1,752
======== ========== ========== ========== ========== ========== ========== ==========
Pro forma net income
(loss) per common share
(5):
Basic................... $ 0.28
Diluted................. $ 0.28
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 $ 10,261
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 5,040
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) (4,924)
Other income (expense):
Interest, net........... 124 59 203
Other, net.............. 302 382 --
-------- -------- --------
Income (loss) before
income tax expense
(benefit)............... 6,519 (4,014) (4,721)
Income tax expense
(benefit) (4)........... 2,602 (1,625) (818)
-------- -------- --------
Income (loss) before
minority interest....... 3,917 (2,389) (3,903)
Minority interest........ 14 49 (2,676)
-------- -------- --------
Net income (loss)........ $ 3,903 $ (2,438) $ (1,227)
======== ======== ========
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............. 126,507 163,754 168,835
Long-term debt........... -- -- --
Total equity............. 90,884 83,289 69,256
OTHER FINANCIAL DATA:
EBITDA (6)............... $ 7,692 $ 536 $ (119)
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 6,363,878 shares of Common Stock outstanding on a pro forma basis
on the spin-off date, which represents 6,538,878 shares expected to be
outstanding immediately following the spin-off less 175,000 restricted
shares that will be granted to Interstate Management employees after the
spin-off.
(6) EBITDA represents earnings before interest, income tax expense, depreciation
and amortization. The 1998 and the three months ended March 31, 1999 pro
forma EBITDA represents Interstate Management'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 Management, 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 Management's
results of operations.
(7) Represents all hotels, including the leased hotels, which Interstate
Management 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 Management
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 Management. 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
Management have been derived from and should be read in conjunction with the
historical combined financial statements and notes thereto of Interstate
Management contained elsewhere in this Information Statement/Prospectus. The
historical combined financial statements of Interstate Management 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 Management. 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 Management, or be necessarily
indicative of what the actual results of operations and financial position of
Interstate Management would have been had the spin-off occurred as of the dates
indicated.
38
<PAGE> 42
INTERSTATE HOTELS MANAGEMENT, INC.
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 MANAGEMENT, INC.
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............................... 4,908 132(E) 5,040
Lease expense.............................................. 20,897 (2,000)(F) 18,897
Depreciation and amortization.............................. 4,658 -- 4,658
------- ------- -------
Operating loss............................................. (4,455) (469) (4,924)
Other income:
Interest, net............................................ 59 144(H) 203
Other, net............................................... 382 (382)(I) --
------- ------- -------
Loss before income tax benefit............................. (4,014) (707) (4,721)
Income tax benefit......................................... (1,625) 807(J) (818)
------- ------- -------
Loss before minority interest.............................. (2,389) (1,514) (3,903)
Minority interest.......................................... 49 (2,725)(K) (2,676)
------- ------- -------
Net loss................................................... $(2,438) $ 1,211 $(1,227)
======= ======= =======
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 MANAGEMENT, INC.
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 (2,440)(E) 18,981
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 (17,894) 4,790
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 (19,358) 5,785
Income tax expense............ 5,528 4,436 9,964 (8,796)(J) 1,168
-------- -------- -------- -------- --------
Income before minority
interest.................... 8,315 6,864 15,179 (10,562) 4,617
Minority interest............. 24 209 233 2,632(K) 2,865
-------- -------- -------- -------- --------
Net income.................... $ 8,291 $ 6,655 $ 14,946 $(13,194) $ 1,752
======== ======== ======== ======== ========
Basic net income per common
share....................... $ 0.28(L)
========
Diluted net income per common
share....................... $ 0.28(L)
========
</TABLE>
- -------------------------
The accompanying notes are an integral part of this Pro Forma Combined Statement
of Operations.
41
<PAGE> 45
INTERSTATE HOTELS MANAGEMENT, INC.
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
Management 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 Management 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
Management 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 Management......... 9,275
========
Adjustments to reflect the net increase in cash and
cash equivalents:
Cash capital contributions to Interstate Management:
Cash proceeds of Marriott's purchase of a 4% interest
in Interstate Management............................ 2,120
Cash contributions from Patriot to Interstate
Management to provide working capital at the
spin-off date, net of excess working capital of
Interstate Hotels, LLC of $9,275 contributed to
Interstate Management 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 MANAGEMENT, INC.
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 Management 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 Management on the books of Patriot. Subsequent to the spin-off,
Interstate Management 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 Management 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 Management will own a 45% managing member interest in Interstate
Hotels, LLC, and therefore will control Interstate Hotels, LLC. Interstate
Management'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 Management 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
43
<PAGE> 47
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS--(CONTINUED)
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 limited liability company agreement, proceeds from the $5.75
million secured promissory note will be distributed from Interstate Hotels,
LLC to Interstate Hotels Management, Inc., 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 Management, Inc......................... (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 Management (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 MANAGEMENT, INC.
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 Management 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
Management. Ninety-two percent of the shares of Interstate Management will
be distributed to Patriot's shareholders. Patriot will retain a 4% ownership
interest in Interstate Management's common stock.
The number of shares above excludes 475,000 restricted Interstate Management
shares that will be issued to employees.
In connection with the spin-off of Interstate Management from Patriot,
Marriott will purchase a 4% ownership interest in Interstate Management's
common stock for $2,120 in cash.
45
<PAGE> 49
INTERSTATE HOTELS MANAGEMENT, INC.
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 Management for the three months
ended March 31, 1999 and the combined statement of
operations of Interstate Management 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
Management.............................................. 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 Management 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 Management 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 Management
will provide to seven Patriot-owned hotels, as discussed
in Note (B) above....................................... 221 885
-------- --------
$ (206) $ (4,713)
======== ========
</TABLE>
46
<PAGE> 50
INTERSTATE HOTELS MANAGEMENT, INC.
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 Management subsequent to the
merger.................................................. $ -- $ (2,969)
The increase in expense to reflect the issuance of
300,000 restricted Interstate Management shares to
Thomas F. Hewitt on the date of the spin-off 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............ 132 529
-------- --------
$ 132 $ (2,440)
======== ========
(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 MANAGEMENT, INC.
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 Management's
estimated effective income tax rate of 40% after
reduction of minority interest.......................... $ 807 $ (8,796)
======== ========
(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............................................. (2,676) 2,865
-------- --------
$ (2,725) $ 2,632
======== ========
</TABLE>
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<PAGE> 52
INTERSTATE HOTELS MANAGEMENT, INC.
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 6,363,878 shares of
common stock, which represents 6,538,878 shares expected
to be outstanding immediately following the spin-off
less 175,000 restricted shares that will be granted to
Interstate Management employees after the spin-off. The
historical combined financial statements of Interstate
Management 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 Management.
Historical earnings per share information for the carved
out company has not been presented because management
believes it is not meaningful.
</TABLE>
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<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 Management:
- reversing the current negative trend in Interstate Management'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 Management 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 Management. These financial statements have
been prepared as if Interstate Management 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 Management:
- 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 Management;
- the investments in such hotels; and
- the debt associated with such investments.
The following discussion and analysis includes discussion and analysis of
Interstate Management'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 Management 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
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<PAGE> 54
be retained by Patriot, and therefore will not be included in Interstate
Management, after the spin-off. In connection with the merger, an intangible
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 Management provides a wide variety of management and other services
to hotels that Interstate Management operates on behalf of third-party owners.
Additionally, Interstate Management 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 Management 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 Management 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 Management's management agreements have initial terms that
range from one month to 49 years expiring through 2044, and Interstate
Management'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 Management 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 Management'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 Management
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
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<PAGE> 55
Interstate Management in connection with the spin-off. Interstate Management 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 Management's future operations caused by these distractions has
disrupted Interstate Management's relationships with hotel owners and adversely
affected Interstate Management's financial results. Since the closing of the
Patriot/Old Interstate merger, there has been a net reduction in Interstate
Management's business of 25 management agreements. In addition, the disruption
to Interstate Management's business has reduced employee morale, increased
employee turnover and caused Interstate Management to be unable to actively
pursue new business. If, following the spin-off, Interstate Management 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 "Recent
Developments--Recent Negative Trend in our Financial Results."
In addition, Interstate Management 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. 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 Management.
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 Management provided to the hotels that were owned and
managed by subsidiaries of Old Interstate and are currently owned by Patriot.
Interstate Management 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 Management.
Pro forma payroll and related benefits expense includes an adjustment of $0.1
million to reflect the issuance of 300,000 restricted Interstate Management
shares of common stock to Thomas F. 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.
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<PAGE> 56
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 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 Management'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.
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<PAGE> 57
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 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 Management'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
54
<PAGE> 58
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 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 Management.
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 Management provided to the hotels that were owned and
managed by subsidiaries of Old Interstate and are currently owned by Patriot.
Interstate Management 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 Management.
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 $2.9 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 $0.5 million to reflect the
issuance of 300,000 restricted Interstate Management shares of common stock to
Thomas F. 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 Management'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 $2.9 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.
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<PAGE> 59
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 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 Management'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%.
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<PAGE> 60
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.
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 Management 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
Management'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 Management 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 Management'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 Management provides management and other services grew,
primarily resulting from the addition of the leased hotels for which Interstate
Management 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.
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<PAGE> 61
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 Management's acquisition of the
management and leasing businesses affiliated with Equity Inns in November 1996.
This increase was offset by decreased amortization of $2.5 million associated
with investments in management contracts that became fully amortized during
1996.
Operating income, exclusive of non-cash compensation, increased by $9.9 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 Management'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. In addition,
Patriot has agreed to provide working capital to Interstate Management in the
amount of $16.26 million, less positive working capital, if any, of Interstate
Hotels, LLC. Interstate Management'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 Management against
the remaining 50%. Patriot has also agreed to fund the payment of cash in lieu
of fractional shares in the spin-off.
Interstate Management'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 $3.3 million increase in depreciation and amortization during the 1999 Three
Months related to the step-up in basis of management and lease contract costs.
Interstate Management 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
Management'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 Management 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.
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After the spin-off, Interstate Management 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 Management 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
Management 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 Management
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 Management 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 Management 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 Management may be required to obtain debt or
equity financing to achieve its business plan. Interstate Management 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
Management on commercially reasonable terms, or at all. If Interstate Management
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.
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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
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.
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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
Anne L. Raymond 40 Director (term expiring 2001)
</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
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
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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.
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 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 Management 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
Management 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.
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EXECUTIVE COMPENSATION
Interstate Management 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 Management, as well as (ii) the expected compensation
to be paid in 1999 by Interstate Management to Old Interstate's (and Interstate
Management's) former Chief Executive Officer, Interstate Management's new Chief
Executive Officer and each of the four other most highly compensated executive
officers of Old Interstate and Interstate Management who are expected to be
executive officers of Interstate Management during 1999 and who earned at least
$100,000 in total salary and bonus from Old Interstate and Interstate Management
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)........... -- -- -- $350,000 $700,000
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) 270,000 472,000
President and Chief Operating
Officer
Henry L. Ciaffone............. 181,610 187,567 2,016,934(6) 200,000 240,000
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.
(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 and
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Richardson, whose bonuses are determined pursuant to their employment
agreements) are eligible to receive bonuses based upon the achievement of
specified targets and goals for Interstate Management 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, four of such employees eligible to receive up to 125% of
their base salaries and one such employee eligible to receive up to 150% of his
base salary.
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 Management or participants will be held in a
grantor trust established by Interstate Management. 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 the Company 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 Management 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 Management 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 Management shares as reported by
the New York Stock Exchange 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 Management shares acquired under the
Stock Purchase Plan without restrictions. Any "affiliate" who acquires
Interstate Management 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 Management.
We expect to reserve 400,000 authorized but unissued Interstate Management
shares for purchase under the Stock Purchase Plan. The Stock Purchase Plan will
remain in effect until terminated at any time by the
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Board, except that such termination will be subject to employees' rights to
purchase shares in any outstanding semi-annual offering period.
The Stock Purchase Plan may be amended from time to time by the Board. No
amendment will increase the aggregate number of Interstate Management 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 Management 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 Management shares that may be issued or transferred and
covered by outstanding awards granted under the Equity Incentive Plan shall at
all times equal % of the outstanding Interstate Management shares, which
may be shares of original issuance or treasury shares or a combination of both.
Officers, including officers who are members of the Board, and our key employees
and consultants and those of our subsidiaries may be selected to receive
benefits under the Equity Incentive Plan. As of the date of the spin-off,
475,000 restricted Interstate Management shares and options to purchase
Interstate Management shares will have been granted to Interstate Management
employees and 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 Management 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 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 Management 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 Management 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 Management 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 Management shares in consideration of the
performance of services;
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- - entitles the participant immediately to voting, dividend and other ownership
rights in the shares; and
- - 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
Management 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 Management 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 Management 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
Management 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
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corresponding deduction provided that, among other things, any applicable
reporting obligations are satisfied and the income:
- - 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 Management.
- - 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 Management, 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 Management.
- - 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 granted 300,000 restricted Interstate Management shares.
We have also entered into employment agreements with Mr. Ciaffone and Mr. Tomb.
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<PAGE> 71
Pursuant to the terms of Mr. Ciaffone's employment agreement:
- - 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 Management.
- - 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:
- - 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 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 Management.
- - 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.
We are currently negotiating the terms of employment agreements with the other
Named Executive Officers.
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<PAGE> 72
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXECUTIVE LOANS
In 1996, Interstate Management'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 Management also loaned an additional $100,000 and $357,317 to Messrs.
Parrington and Richardson, respectively, as advances against their 1998 bonuses.
On June 2, 1998, in connection with Old Interstate's merger into Patriot and in
accordance with the change of control provisions of their respective severance
agreements with Old Interstate, Interstate Management forgave loans in the
amount of $90,000 and $170,000 to Messrs. Kilkeary and Ciaffone, respectively.
Interstate Management loaned Mr. Ciaffone an additional $232,200, which was
repaid in full on October 29, 1998.
Interstate Management 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
Management. 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 Management shares. The Voting Agreement will
provide that, in such circumstances, the Shareholders will vote their Interstate
Management shares in proportion with the results of voting on the particular
matter by all Interstate Management 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 Management shares such that the Shareholders and the
Affiliated Shareholders will collectively own 9.9% or less of the outstanding
Interstate Management shares by the first anniversary of the spin-off. Based on
their holdings of Patriot securities on , 1999, we estimate that the
Shareholders and the Affiliated Shareholders will collectively own
Interstate Management shares, or % of the outstanding Interstate Management
shares, upon consummation of the spin-off. The Shareholders will thus be
obligated under the Voting Agreement to sell an aggregate of Interstate
Management shares, or % of the outstanding Interstate Management 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 Management that the
Shareholders and the Affiliated Shareholders collectively own greater than 9.9%
of the outstanding Interstate Management shares.
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<PAGE> 73
INTERSTATE MANAGEMENT CALL RIGHT. In the event that the Shareholders fail to
comply with their obligations to sell Interstate Management shares as described
above within five years after the spin-off, Interstate Management will have a
call right to purchase from the Shareholders for fair market value the number of
Interstate Management shares the Shareholders were obligated to sell. Marriott
will have the right to compel Interstate Management to exercise its call right
if Interstate Management fails to do so.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of Interstate Management 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 Management shares, each of our directors and Named
Executive Officers, and all of our directors and executive officers as a group.
Unless indicated otherwise, the address for each of the persons named in the
table is c/o Interstate Hotels Management, Inc., 680 Andersen Drive, Foster
Plaza Ten, Pittsburgh, Pennsylvania 15220. For purposes of the table, a person
or group of persons is deemed to have "beneficial ownership" 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
- ---- ------------ -------------
<S> <C> <C>
Thomas F. Hewitt........................................... 307,669(1) 4.7%
J. William Richardson...................................... 538(2) *
Kevin P. Kilkeary.......................................... 671 *
Henry L. Ciaffone.......................................... 0 0%
Charles R. Tomb............................................ 114 *
Anne L. Raymond............................................ 20,177 *
All directors and executive officers as a group (
persons)................................................. %
</TABLE>
- -------------------------
* Less than 1%
(1) Includes 300,000 restricted Interstate Management shares which will vest
.
(2) 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
million shares of stock, consisting of:
- million shares of Class A common stock;
- million shares of Class B common stock;
- million shares of Class C common stock; and
- million shares of preferred stock.
COMMON STOCK. Each holder of Class A shares, Class B shares and Class C shares
shall be entitled to one vote for each share held by such holder and no
shareholders shall have cumulative voting rights. The three classes shall vote
separately for the election of Interstate Management'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
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<PAGE> 75
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
Management, holders of shares of common stock share ratably in those assets of
Interstate Management 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 Management.
STOCK EXCHANGE LISTING
We intend to apply to list our common stock for trading on the New York Stock
Exchange.
There is currently no trading market for our shares. 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 Management and our business;
- our dividend policy;
- interest rates; and
- general economic and market conditions.
SHARES AVAILABLE FOR RESALE
Interstate Management 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 Management under the rules of the SEC. Persons who may be deemed to
be affiliates of Interstate Management after the spin-off include individuals or
entities that control, are controlled by or are under common control with
Interstate Management, and may include officers and directors of Interstate
Management as well as principal stockholders of Interstate Management. Persons
who are affiliates of Interstate Management will be permitted to sell their
Interstate
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<PAGE> 76
Management 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 Management 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. , , and .
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
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 2002. 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
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<PAGE> 77
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 2002. 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 Management 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 Management, if elected.
The presiding officer of the annual meeting may refuse to acknowledge the
nomination of any person not made in compliance with these requirements or the
requirements of the securities laws.
Any vacancy that occurs on the Board will be filled by first giving effect to
the respective rights of holders of Class B shares and Class C shares to replace
Class B directors and Class C directors. Otherwise, a majority of the votes cast
by the holders of Class A shares may fill vacancies due to removal for cause,
and the majority vote of the remaining directors may generally fill vacancies
which occur for any reason other than an increase in the number of directors.
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
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<PAGE> 78
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 Management, however, a director or officer may
not be indemnified in respect of any proceeding in which he shall have been
adjudged liable to Interstate Management 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 Management share to
stockholders of record as of a specified date. Each Right will entitle its
holder to purchase from Interstate Management a unit consisting of a specified
number of shares of Preferred Stock of Interstate Management 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 Management shares outstanding as of, or issued subsequent to, the
record date. The Rights will separate from Interstate Management 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
Management 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 Management shares.
Grandfathered persons are defined in the rights agreement as stockholders of
Interstate Management who beneficially own 10% or more of outstanding Interstate
Management 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 Management shares. In addition, a grandfathered
person generally will become an Acquiring Person only if such person acquires
additional Interstate Management 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.
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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. In addition, our filings may be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
Following the spin-off, we will be required to file annual, quarterly and other
reports with the SEC. We will also be subject to the proxy rules and,
accordingly, will furnish audited financial statements to you in connection with
our annual meetings of stockholders.
No person is authorized by Patriot or Interstate Management 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.
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INTERSTATE HOTELS MANAGEMENT, INC.
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> 81
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Patriot American Hospitality,
Inc.:
We have audited the accompanying combined balance sheets of Interstate Hotels
Management, Inc. (Interstate Management), 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 Management'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 Management 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
Management 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 Management 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> 82
INTERSTATE HOTELS MANAGEMENT, INC.
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> 83
9
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
------------------------------------- ----------------- ----------- -----------
PERIOD FROM
YEAR ENDED ----------------------------------- THREE MONTHS ENDED
DECEMBER 31 JANUARY 1, 1998 JUNE 2, 1998 MARCH 31,
------------------- 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> 84
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
------------------------------------- ----------------- ----------- -----------
PERIOD FROM
YEAR ENDED ----------------------------------- THREE MONTHS ENDED
DECEMBER 31, JANUARY 1, 1998 JUNE 2, 1998 MARCH 31,
------------------- 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> 85
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Interstate Hotels Company and Subsidiaries (Interstate or the Predecessor) was
merged into Patriot American Hospitality, Inc. (Patriot) on June 2, 1998.
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
Interstate Hotels Corporation (IHC), Crossroads Hospitality Company, L.L.C.
(Crossroads) or Colony Hotels and Resorts Company (Colony), all wholly-owned
subsidiaries of Interstate.
Prior to the consummation of the merger of 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
Interstate. On May 27, 1998, and pursuant to a settlement agreement with
Marriott, Patriot and Interstate announced a plan to transfer certain
operations, principally the third-party hotel management business, an ownership
interest in the Charles Hotel and the Leased Hotels, and certain assets and
liabilities of Interstate to a new entity, Interstate Hotels Management, Inc.
(the Company or Interstate Management). The Company is expected to be spun-off
from Patriot (the Spin-off) prior to March 31, 1999, 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 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 IHC, Crossroads and Colony. These
combined financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission, and as
if the Company had operated as a free-standing entity for all periods presented.
All investments in, associated debt, and results of operations of the Owned
Hotels, as well as certain other operating subsidiaries that will
F-6
<PAGE> 86
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
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
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 Management 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 Management 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 Management 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 Management 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 Interstate's cash in a central account.
F-7
<PAGE> 87
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 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 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 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> 88
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 Management 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 Management were included in the
consolidated federal income tax return of Interstate and all tax liabilities
were paid by Interstate or Patriot. The income tax provision for each period
presented in these combined financial statements has been calculated as if
Interstate Management had prepared and filed a separate income tax return for
those periods. Accordingly, the effective tax rate for Interstate Management in
future years could vary from historical effective rates depending on Interstate
Management's future legal and tax elections. The income tax liability for all
current income taxes for purposes of these combined financial statements have
been settled with Interstate 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 Interstate and Patriot in Interstate
Management. Net contributions/distributions from owners represent non-operating
transfers to and from 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 Management 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
F-9
<PAGE> 89
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
Financial Instruments:
As a policy, Interstate Management does not engage in speculative or leveraged
transactions, nor does Interstate Management hold or issue financial instruments
for trading purposes.
Earnings Per Share:
Because the accompanying combined financial statements have been carved out of
Interstate and Patriot and certain of its subsidiaries, some of which are/were
corporations and some of which are/were partnerships, Interstate Management
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 Management was determined using historical and
projected cash flow and earnings at then current market multiples. As a result,
on June 2, 1998, Interstate Management 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 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 Management. 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 Interstate. Certain of these costs were paid by 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 Management and consist principally of unpaid
severance and professional fees.
F-10
<PAGE> 90
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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 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 Management 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> 91
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 Management 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
F-12
<PAGE> 92
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES, CONTINUED:
years ended 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 Management, 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 Interstate. Interstate
Management will be held liable for certain of the lawsuits, claims and
proceedings instituted or asserted against Interstate to the extent that the
claim relates to operations of Interstate Management. Based on currently
available facts, management believes that the disposition of matters that are
pending or asserted against Interstate Management will not have a material
adverse effect on the combined financial position, results of operations or
liquidity of Interstate Management.
Risk Related to Dispute Over Leased Hotel Portfolio:
As of the December 31, 1998, Interstate Management 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 Management leases from Equity Inns or
its affiliates. The principal issue in the dispute was whether Interstate
Management or Equity Inns was responsible for funding property improvement plans
(PIPs) which were issued by franchisors under whose brand names Interstate
Management 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
Interstate. The total amount required to be funded under the PIPs is
approximately $6.0 million.
On March 31, 1999, the Company 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 the Company is not responsible for the
funding of the PIPs. The Company 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 Management'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.
F-13
<PAGE> 93
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
9. NET MANAGEMENT FEES, CONTINUED:
The management agreements specify the base management fees to be earned, which
are generally based on percentages of gross revenues. In certain cases,
incentive management fees are earned based on the hotels' profitability as
defined by the management agreements. The net management fees earned for the
years ended December 31 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 Interstate's common stock in 1996,
Interstate issued 785,533 shares of common stock to executives and key employees
in consideration for the cancellation of stock options issued by IHC in 1995.
The shares were valued based on the estimated value of the common stock at the
time the shares were issued. As a result of the cancellation of the stock
options issued by IHC in 1995 and the issuance of the common stock at no cost to
the recipients, Interstate Management 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 Interstate's historical rates.
F-14
<PAGE> 94
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
Management 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 Management 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 Management, 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 Management is liable for any deficiencies in the IHC Employee Health
and Welfare Plan (and related Health Trust), which provides employees of
Interstate Management with group health insurance benefits. Interstate
Management has a financial indemnity liability policy with Northridge which
indemnifies Interstate Management for certain obligations for the deficiency in
the related Health Trust. The premiums for this coverage received from the
properties managed by Interstate Management, net of intercompany amounts paid
for employees at Interstate Management'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 Management on the accompanying combined balance sheet.
F-15
<PAGE> 95
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
13. INSURANCE, CONTINUED:
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 $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 Management'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 Management 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> 96
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 Management and the affiliates of
Interstate or Patriot that owned the Owned Hotels. In addition, certain of the
Owned Hotels were subject to management agreements between Interstate Management
and the third-party owners of these hotels prior to the Owned Hotels'
acquisition by Interstate. Included in net management fee revenue in the
accompanying combined statements of operations are fees related to the Owned
Hotels (including periods prior to their acquisition by Interstate, if
applicable) amounting to $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 Interstate Board of Directors and significant shareholder of Interstate,
has an ownership interest. Interstate Management 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 Management manages three hotels located in Russia, one of which opens
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> 97
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 Management 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 Management
was carved out of 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> 98
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, 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> 99
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
Management, 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> 100
- ---------------------------------------------------------
- ---------------------------------------------------------
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 MANAGEMENT. THE AFFAIRS OF INTERSTATE
MANAGEMENT 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 Management....... 1
Summary............................... 3
Summary Financial and Other Data...... 8
Risk Factors.......................... 10
Recent Developments................... 17
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........................ 69
Security Ownership of Certain
Beneficial Owners and Management.... 71
Description of Capital Stock.......... 71
Where You Can Find More Information... 76
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
MANAGEMENT, INC.
COMMON STOCK
--------------------------------------------------
INFORMATION STATEMENT/PROSPECTUS
--------------------------------------------------
MAY , 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 101
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
Management in connection with the spin-off:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- ----------
<S> <C>
SEC Registration Fee........................................ $ 13,408
New York Stock Exchange Filing Fee.......................... 102,000
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...................... *
Distribution Agent's Fee.................................... 7,500
Miscellaneous............................................... 705,092
----------
Total.................................................. $5,000,000
==========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and New York Stock Exchange
fees, are in each case estimated.
* To be completed by Amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Interstate Management'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 Management, a director or officer may not be indemnified in
respect of any proceeding in which he shall have been adjudged liable to
Interstate Management, 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 Management'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 Management's Bylaws provide for indemnification by Interstate
Management 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 Management 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 Management, and, with respect to criminal actions
or proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
II-1
<PAGE> 102
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Interstate Management 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 Management believes that each transaction was exempt from the
registration requirements of the Securities Act of 1933, as amended, by reason
of Section 4(2) thereof, based on the private nature of the transactions and the
financial sophistication of the purchasers, all of whom had access to complete
information concerning Interstate Management and acquired the securities for
investment and not with a view to the distribution thereof.
(1) On June 2, 1998, Interstate Management issued an aggregate of 9,900
shares of Interstate Management's Class B Non-Voting Common Stock to
Patriot American Hospitality, Inc. in exchange for (i) a 35% managing
membership interest in Interstate Hotels, LLC; (ii) Patriot's rights under
its contract with Interstate Hotels, LLC pursuant to which Interstate
Hotels, LLC agreed not to pursue or conduct any third-party hotel
management business other than that in existence on June 2, 1998 (including
any renewals or extensions of management contracts in existence on such
date); and (iii) Patriot's rights under its contract with Interstate
Hotels, LLC pursuant to which Interstate Hotels, LLC agreed that it would
cease to manage certain identified hotels upon consummation of the
spin-off.
(2) On June 2, 1998, Interstate Management issued an aggregate of 100
shares of Interstate Management's Class A Voting Common Stock to
PAH-Interstate Holdings, Inc. for an aggregate purchase price of $478,836.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a complete list of Exhibits filed as part of this
Registration Statement.
<TABLE>
<S> <C>
2.1 Form of Distribution Agreement by and among Patriot American
Hospitality, Inc., Wyndham International, Inc., Interstate
Hotels Management, Inc. and Interstate Hotels, LLC
3.1+ Form of Articles of Amendment and Restatement of Interstate
Hotels Management, Inc.
3.2+ Form of Amended and Restated Bylaws of Interstate Hotels
Management, Inc.
3.3+ Form of Shareholder Rights Plan of Interstate Hotels
Management, Inc.
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 Management,
Inc. and the identified stockholders of Interstate Hotels
Management, Inc.
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 Management, Inc. 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.
</TABLE>
II-2
<PAGE> 103
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, CONTINUED
<TABLE>
<S> <C>
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
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 Form of Interstate Hotels Management, Inc. 1999 Equity Incentive Plan
10.20 Form of Interstate Hotels Management, Inc. Employee Stock Purchase Plan
21.1* List of Subsidiaries of Interstate Hotels Management, Inc.
23.1 Consent of PricewaterhouseCoopers LLC
23.2* Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1)
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Previously filed.
* To be filed by amendment.
(b) All applicable required schedules are included in the Information
Statement/Prospectus and are therefore omitted from this section.
ITEM 17. UNDERTAKINGS
(a) -- (g) Not applicable.
(h) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(i) -- (j) Not applicable.
II-3
<PAGE> 104
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 17, 1999.
Interstate Hotels Management, Inc.
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 17, 1999
- ---------------------------------- Chairman of the Board of Directors
Thomas F. Hewitt (Principal Executive Officer)
/s/ J. WILLIAM RICHARDSON Chief Financial Officer and May 17, 1999
- ---------------------------------- Executive Vice President, Finance
J. William Richardson and Administration (Principal
Financial Officer and Principal
Accounting Officer)
/s/ ANNE L. RAYMOND Director May 17, 1999
- ----------------------------------
Anne L. Raymond
</TABLE>
II-4
<PAGE> 1
Exhibit 2.1
FORM OF
DISTRIBUTION AGREEMENT
BY AND AMONG
PATRIOT AMERICAN HOSPITALITY, INC.,
WYNDHAM INTERNATIONAL, INC.,
INTERSTATE HOTELS, LLC
AND
INTERSTATE HOTELS MANAGEMENT, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. DEFINITIONS.....................................................................................1
Section 1.1 General................................................................................1
Section 2 REORGANIZATION AND RELATED TRANSACTIONS.........................................................6
Section 2.1 The Reorganization.....................................................................6
Section 2.2 Consideration..........................................................................7
Section 2.3 Representations and Warranties.........................................................8
Section 3 ASSUMPTION AND RETENTION OF LIABILITIES.........................................................9
Section 3.1 Assumed Liabilities....................................................................9
Section 3.2 Retained Liabilities...................................................................9
Section 4 THE DISTRIBUTION................................................................................9
Section 4.1 The Distribution.......................................................................9
Section 4.2 Fractional Shares......................................................................9
Section 4.3 Patriot/Wyndham Board Action..........................................................10
Section 5 SURVIVAL, INDEMNIFICATION, CLAIMS, AND OTHER...................................................10
MATTERS 10
Section 5.1 Survival of Agreements................................................................10
Section 5.2 Indemnification.......................................................................10
Section 5.3 Procedure for Indemnification of Third-Party Claims...................................13
Section 5.4 Other Claims..........................................................................15
Section 5.5 Certain Losses........................................................................15
Section 5.6 No Third Party Beneficiaries..........................................................15
Section 5.7 Named Parties.........................................................................16
Section 6 CERTAIN ADDITIONAL MATTERS.....................................................................16
Section 6.1 Conveyancing and Assumption Instruments...............................................16
Section 6.2 No Representations or Warranties......................................................16
Section 6.3 Further Assurances; Subsequent Transfers..............................................16
Section 6.4 Interstate Officers and Directors.....................................................18
Section 6.5 Related Agreements....................................................................18
Section 6.6 Joint Purchasing Arrangements.........................................................18
Section 6.7 St. Louis Marriott West...............................................................19
Section 6.8 Divestiture Payments..................................................................19
Section 6.9 Settlement Agreement Provisions.......................................................19
Section 6.10 Limitation on Claims..................................................................20
Section 6.11 The Charles...........................................................................20
Section 7 ACCESS TO INFORMATION AND SERVICES.............................................................21
</TABLE>
(ii)
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
Section 7.1 Provision of Corporate Records........................................................21
Section 7.2 Access to Information.................................................................21
Section 7.3 Production of Witnesses and Individuals...............................................21
Section 7.4 Retention of Records..................................................................21
Section 7.5 Confidentiality.......................................................................22
Section 7.6 Privileged Matters....................................................................22
Section 7.7 Mail and Other Communications.........................................................24
Section 7.8 Order of Precedence...................................................................24
Section 8 EMPLOYMENT AND EMPLOYEE BENEFIT MATTERS........................................................24
Section 8.1 Employee and Plan Transfers...........................................................24
Section 8.2 Limitation on Enforcement.............................................................24
Section 9 INSURANCE......................................................................................24
Section 9.1 General...............................................................................24
Section 10 DISPUTE RESOLUTION.............................................................................25
Section 10.1 Binding Arbitration...................................................................25
Section 10.2 Arbitration...........................................................................25
Section 10.3 Treatment of Negotiation..............................................................26
Section 10.4 Equitable Relief......................................................................26
Section 10.5 Consolidation.........................................................................26
Section 11 TAX MATTERS....................................................................................26
Section 11.1 Preparation of Tax Returns............................................................26
Section 11.2 Responsibility for Taxes..............................................................27
Section 11.3 Credits; Refunds......................................................................27
Section 11.4 Carrybacks............................................................................28
Section 11.5 Payments..............................................................................28
Section 11.6 Tax Contests..........................................................................28
Section 11.7 Cooperation...........................................................................29
Section 11.8 Tax Records...........................................................................29
Section 11.9 Interstate Hotels, LLC................................................................30
Section 11.10 Tax Elections.........................................................................30
Section 12 MISCELLANEOUS..................................................................................30
Section 12.1 Amendment and Waiver..................................................................30
Section 12.2 Expenses..............................................................................31
Section 12.3 Notices...............................................................................31
Section 12.4 Termination...........................................................................32
Section 12.5 Successors and Assigns................................................................32
Section 12.6 Entire Agreement: Parties in Interest.................................................32
Section 12.7 Severability..........................................................................32
Section 12.8 Captions..............................................................................32
Section 12.9 Annexes, Etc..........................................................................32
</TABLE>
(iii)
<PAGE> 4
<TABLE>
<CAPTION>
Page
<S> <C>
Section 12.10 Governing Law.........................................................................32
Section 12.11 Counterparts..........................................................................32
</TABLE>
(iv)
<PAGE> 5
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT ("Agreement") is dated as of May__, 1999,
by and among Patriot American Hospitality, Inc., a Delaware corporation
("Patriot"), Wyndham International, Inc., a Delaware corporation ("Wyndham" and,
together with Patriot, "Patriot/Wyndham"), Interstate Hotels, LLC, a Delaware
limited liability company (the "LLC") and Interstate Hotels Management, Inc., a
Maryland corporation ("Interstate"). The parties hereto are more particularly
defined below.
WHEREAS, Patriot/Wyndham and Interstate Hotels Company ("Old
Interstate") entered into an Agreement and Plan of Merger dated as of December
2, 1997 pursuant to which Old Interstate agreed to merge with and into Patriot
(the "Merger");
WHEREAS, prior to the closing of the Merger, Marriott International,
Inc. ("Marriott") sued Old Interstate in the United States District Court for
the District of Maryland seeking to block the Merger, and the Merger was
temporarily enjoined in April 1998 pending a trial on the merits of Marriott's
claims;
WHEREAS, Patriot/Wyndham, Old Interstate and Marriott entered into a
settlement agreement originally dated May 27, 1998 (as amended to date, the
"Settlement Agreement"), permitting the Merger to close on June 2, 1998;
WHEREAS, the Settlement Agreement requires Patriot/Wyndham to (i)
transfer or cause the transfer of certain assets and liabilities to Interstate
or the LLC, which assets and liabilities consist principally of the third-party
hotel management business and certain ancillary operations which Patriot/Wyndham
acquired from Old Interstate in the Merger and (ii) distribute all of the
outstanding shares of common stock of Interstate (other than shares owned by
Patriot/Wyndham and/or its Affiliates and shares to be purchased by Marriott
and/or its Affiliates) to the holders of certain securities of Patriot and
Wyndham (the "Distribution"); and
WHEREAS, Patriot and Wyndham have transferred or caused to be
transferred prior to the date hereof a portion of the assets and liabilities
required to be transferred to Interstate or the LLC pursuant to the Settlement
Agreement; and
WHEREAS, Patriot and Wyndham intend to transfer or cause to be
transferred on the date hereof the remaining assets and liabilities required to
be transferred to Interstate or the LLC pursuant to the Settlement Agreement via
the transactions (the "Restructuring Transactions") set forth on Annex I hereto.
NOW, THEREFORE, in consideration of the foregoing and the other
agreements and covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
<PAGE> 6
Section 1. DEFINITIONS.
Section 1.1 General. As used in this Agreement, capitalized terms
defined immediately after their use shall have the respective meanings thereby
provided and the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
Action: any action, claim, suit, arbitration, inquiry, subpoena,
discovery request, proceeding or investigation by or before any court or grand
jury, any governmental or other regulatory or administrative agency or
commission or any arbitration tribunal.
Affiliate: with respect to any specified person or entity, a person or
entity that, directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, such specified
person or entity; provided, however, that, for purposes of this Agreement, (i)
Patriot/Wyndham and Interstate shall not be deemed to be Affiliates of each
other and (ii) Patriot and Wyndham shall be deemed to be Affiliates of each
other.
Affiliated Group: an affiliated group of corporations within the
meaning of Code section 1504(a) for the taxable period in question.
Agent: American Stock Transfer & Trust Company, the distribution agent
appointed by Patriot/Wyndham to distribute shares of Interstate Common Stock
pursuant to the Distribution.
Assumed Liabilities: collectively, all of the Liabilities and other
obligations of Patriot/Wyndham listed on Annex II hereto.
Books and Records: the books and records of Patriot/Wyndham (or true
and complete copies thereof), including all computerized books and records owned
by Patriot/Wyndham, which relate principally to the Interstate Business.
Code: the Internal Revenue Code of 1986, as amended.
Contributed Assets: collectively, all of the assets and properties of
Patriot/Wyndham identified on Annex III hereto. Certain of the Contributed
Assets will, pursuant to the Restructuring Transactions, be transferred or
assigned to Interstate and then transferred or assigned by Interstate to the
LLC, and certain of the Contributed Assets will be transferred or assigned
directly to the LLC. Notwithstanding the fact that such assets are ultimately
transferred to the LLC (in which Patriot/Wyndham or an Affiliate of
Patriot/Wyndham may own an equity interest) or any other Affiliate of
Interstate, such assets shall be deemed Contributed Assets for all purposes of
this Agreement.
Conveyancing and Assumption Instruments: collectively, the various
agreements, instruments and other documents to be entered into in order to
effect the transfer to Interstate of the Contributed Assets, and the assumption
by Interstate or the LLC of the Assumed
2
<PAGE> 7
Liabilities, in the manner contemplated by this Agreement and the Restructuring
Memorandum attached as Annex I hereto.
Disclosing party: shall have the meaning set forth in Section 7.5.2
hereof.
Dispute: shall have the meaning set forth in Section 10.1 hereof.
Distribution: the distribution of 92% of the outstanding common stock
of Interstate to the holders of Patriot Securities, in accordance with the
provisions of Section 4.1 hereof, which shall be effective on the Distribution
Date.
Distribution Date: the date as of which the Distribution shall be
effected as determined by Patriot's and Wyndham's respective Boards of
Directors.
Distribution Transactions: shall have the meaning set forth in Section
4.1.1 hereof.
Form S-1: the Registration Statement on Form S-1 filed by Interstate
with the Securities and Exchange Commission to effect the registration of the
distribution of the Interstate Common Stock pursuant to the Securities Act, as
the same may be in effect as of the Distribution Date.
Indemnifiable Losses: with respect to any claim by an Indemnified Party
for indemnification authorized pursuant to Section 5 hereof, any and all losses,
liabilities, claims, damages, obligations, payments, costs and expenses
(including without limitation the costs and expenses of any and all Actions,
demands, assessments, judgments, settlements and compromises relating thereto
and reasonable attorneys' fees and disbursements in connection therewith)
suffered by such Indemnified Party with respect to such claim.
Indemnified Party: any person or entity who is entitled to receive
payment from an Indemnifying Party pursuant to Section 5 hereof.
Indemnifying Party: any party who is required to pay any other person
or entity pursuant to Section 5 hereof.
Indemnity Payment: the amount an Indemnifying Party is required to pay
an Indemnified Party pursuant to Section 5 hereof.
Information: shall have the meaning set forth in Section 7.2 hereof.
Information Statement/Prospectus: the Information Statement/Prospectus
to be sent to the holders of Patriot Securities in connection with the
Distribution.
Insurance Proceeds: those monies received by an insured from an
insurance carrier or paid by an insurance carrier on behalf of the insured.
3
<PAGE> 8
Interstate: means Interstate and each of its subsidiaries (immediately
following the Distribution, including the LLC), excluding for all purposes of
this Agreement the Patriot Excluded Knowledge Parties.
Interstate Business: means the business currently conducted by the
entities listed on Annex IV-A hereto, including without limitation, management
of the hotels listed on Annex IV-B hereto pursuant to the existing management
contracts, subject to the addition and subtraction of management contracts since
March 12, 1999.
Interstate Group: for each taxable period beginning on or after the
Distribution Date, the Affiliated Group of which Interstate is the common
parent, or if Interstate is not the common parent of an Affiliated Group, then
Interstate, in each case together with each foreign subsidiary or partnership
owned directly or indirectly by any such member during such period.
Interstate Common Stock: the common stock of Interstate, par value $.01
per share.
Interstate Excluded Knowledge Parties: means Interstate, each
subsidiary of Interstate (immediately following the Distribution, including the
LLC), and each employee and officer of Interstate and of each such subsidiary
immediately following the Distribution (notwithstanding that any such employee
or officer may have been an employee or officer of Patriot or Wyndham prior to
the Distribution).
Interstate Party: shall have the meaning set forth in Section 5.5
hereof.
Interstate's Knowledge: means the knowledge of Interstate, excluding
for all purposes the Patriot Excluded Knowledge Parties.
IRS: the United States Internal Revenue Service or any successor
thereto, including, but not limited to, its agents, representatives and
attorneys.
Liabilities: any and all debts, liabilities and obligations, whether or
not accrued, contingent (known or unknown) or reflected on a balance sheet,
including without limitation those arising under any law, rule, regulation,
Action, order or consent decree of any governmental entity or any judgment of
any court of any kind or any award of any arbitrator of any kind, and those
arising under any contract, commitment or undertaking.
Merger: shall have the meaning set forth in the first WHEREAS clause
hereof.
Patriot Excluded Knowledge Parties: means Patriot and Wyndham, each
subsidiary of Patriot and Wyndham (immediately following the Distribution), and
each employee and officer of Patriot and Wyndham and of each such subsidiary
immediately following the Distribution.
4
<PAGE> 9
Patriot Securities: means, collectively, Patriot Series A Preferred
Stock, Wyndham 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
stock.
Patriot's Knowledge: means the knowledge of Patriot/Wyndham, excluding
for all purposes the Interstate Excluded Knowledge Parties.
Patriot/Wyndham: means Patriot and Wyndham and each of their respective
subsidiaries (immediately following the Distribution).
Patriot/Wyndham Common Stock: the common stock of Patriot, par value
$.01 per share, and the common stock of Wyndham, par value $.01 per share,
shares of which are paired and trade together as a single unit.
Patriot/Wyndham Group: with respect to any taxable period, the
corporations that were members of any Affiliated Group of which Patriot, Wyndham
or any of their Affiliates was a member during such period, exclusive of the
corporations that are included in the Interstate Group immediately after the
Distribution Date, together with each foreign subsidiary or partnership owned
directly or indirectly by any such member during such period, other than LLC and
its subsidiaries and partnerships.
Patriot/Wyndham Insurance Policies: all policies and contracts of any
kind pursuant to which insurance carriers provide insurance coverage to
Patriot/Wyndham in respect of claims or occurrences relating to, without
limitation, property damage, business interruption, transit, extended coverage,
fiduciary liability, employee crime, general liability, products liability,
errors and omissions, automobile liability, employer's liability and workers'
compensation.
Patriot/Wyndham Obligations: shall have the meaning set forth in
Section 5.2.1 hereof.
Patriot/Wyndham Party: shall have the meaning set forth in Section 5.5
hereof.
Privilege: shall have the meaning set forth in Section 7.6.1 hereof.
Privileged Information: shall have the meaning set forth in Section
7.6.1 hereof.
Property Taxes: shall have the meaning set forth in Section 11.2.3
hereof.
Receiving party: shall have the meaning set forth in Section 7.5.2
hereof.
Record Date: the date determined by Patriot/Wyndham's Board of
Directors as the record date for the Distribution.
5
<PAGE> 10
Related Agreements: the Conveyancing and Assumption Instruments, the
Escrow Agreements, and ____________________.
Restructuring Transactions: those transactions effected in order to
transfer the Contributed Assets to Interstate or the LLC, as set forth on the
Restructuring Memorandum attached as Annex I hereto.
Retained Liabilities: collectively, all of the Liabilities and
obligations of Patriot/Wyndham listed on Annex V hereto.
Securities Act: the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
Sprint Contract: shall have the meaning set forth in Section 6.6
hereof.
Straddle Period: shall have the meaning set forth in Section 11.1
hereof.
Taxes: all Federal, state, local and foreign taxes, tariffs and charges
of any nature whatsoever (including all related interest and penalties).
Tax Returns: all returns, declarations of estimated tax payments,
reports, estimates, information returns and statements, including any related or
supporting information with respect to the foregoing, filed or required to be
filed with any governmental authority in connection with the determination,
assessment, collection or administration of Taxes.
Third-Party Claims. shall have the meaning set forth in Section 5.3.1
hereof.
Transaction Taxes: all Taxes (including without limitation all transfer
taxes and recording fees, and all interest and penalties related thereto),
incurred by any member of the Patriot/Wyndham Group or the Interstate Group
incurred as a result of the consummation of the Restructuring Transactions.
Section 2 REORGANIZATION AND RELATED TRANSACTIONS.
Section 2.1 The Reorganization.
Section 2.1.1 Subject to the terms and conditions of this Agreement,
Patriot, Wyndham, Interstate and the LLC shall use their respective best efforts
to cause, on or before the Distribution Date, (a) all of Patriot's and Wyndham's
right, title and interest in and to the Contributed Assets to be conveyed,
assigned, transferred and delivered to Interstate or the LLC, and (b) all of
Patriot's and Wyndham's duties, obligations and responsibilities under the
Assumed Liabilities to be assumed by Interstate or the LLC.
6
<PAGE> 11
Section 2.1.2 Subject to Section 6.3 hereof, to the extent that any
such conveyances, assignments, transfers, deliveries and other transactions
shall not have been so consummated on or before the Distribution Date, Patriot,
Wyndham, Interstate and the LLC shall cooperate to effect such consummation as
promptly thereafter as shall be practicable, it nonetheless being understood and
agreed by Patriot, Wyndham, Interstate and the LLC that no such party shall be
liable in any manner to any person who is not a party to this Agreement for any
failure of any of the transfers contemplated by this Section 2 to be consummated
before, on or after the Distribution Date, other than any liability Patriot may
have to Marriott under the Settlement Agreement.
Section 2.l.3 In furtherance of the transfers and assumptions
contemplated by the foregoing Section 2.1.1 and subject to the terms of Section
5 hereof, Patriot/Wyndham and Interstate, as between the two of them,
acknowledge and agree as follows: (a) Patriot/Wyndham and its Affiliates shall
have no obligation or liability of any kind to Interstate or its Affiliates for
any condition existing at or prior to the Distribution Date or for any conduct,
act or omission by or on behalf of Patriot/Wyndham, its Affiliates or any other
person on, or at any time prior to, the Distribution Date, and Interstate and
its Affiliates shall have no claims, or right to bring a claim or Action,
against Patriot/Wyndham or its Affiliates with respect thereto, including
without limitation any claim or Action arising out of (i) the operation of the
Interstate Business on or before the Distribution Date, (ii) any advice, rights,
products or services made available to the Interstate Business, on or before the
Distribution Date, by Patriot/Wyndham, its Affiliates or any other person, (iii)
the Assumed Liabilities or (iv) the formation of Interstate and its Affiliates;
except for, and to the extent of, any responsibilities specifically retained by
Patriot/Wyndham or any of its Affiliates pursuant to the terms of this Agreement
or any of the Related Agreements; and (b) Interstate and its Affiliates shall
have no obligation or liability of any kind to Patriot/Wyndham or its Affiliates
for any condition existing at or prior to the Distribution Date or for any
conduct, act or omission by or on behalf of Interstate, its Affiliates or any
other person on, or at any time prior to, the Distribution Date, and
Patriot/Wyndham and its Affiliates shall have no claims, or right to bring a
claim or Action, against Interstate or its Affiliates with respect thereto,
including without limitation any claim or Action arising out of the Retained
Liabilities; except for, and to the extent of, any responsibilities specifically
assumed by Interstate or any of its Affiliates pursuant to the terms of this
Agreement or any of the Related Agreements.
Section 2.2 Consideration. In consideration of the conveyance,
assignment, transfer and delivery of the Contributed Assets being made pursuant
to Section 2.1 hereof, Interstate and the LLC agree to assume the Assumed
Liabilities and to issue and Interstate agrees to deliver to the Agent for
delivery to holders of Patriot Securities as of the Record Date certificates
representing the number of shares of Interstate Common Stock provided for in
Section 4.1 hereof.
7
<PAGE> 12
Section 2.3 Representations and Warranties.
Section 2.3.1 Patriot/Wyndham represents and warrants that, to
Patriot's Knowledge, assuming that all of the conveyances, assignments,
transfers, assumptions, deliveries and other transactions contemplated by this
Agreement are successfully consummated, the assets and liabilities of Interstate
and its subsidiaries will be as described in the financial statements (including
the pro forma financial data) included in the Form S-1 in all material respects.
Section 2.3.2 Patriot/Wyndham represents and warrants that, to
Patriot's Knowledge, assuming that all of the conveyances, assignments,
transfers, assumptions, deliveries and other transactions contemplated by this
Agreement are successfully consummated, the description of the Interstate
Business set forth under "BUSINESS--General," "--Operations," "--Hotel
Portfolio," "--Facilities" and "--Intellectual Property" in the Form S-1 will be
true and correct in all material respects.
Section 2.3.3 Interstate represents and warrants that, to Interstate's
Knowledge, assuming that all of the conveyances, assignments, transfers,
assumptions, deliveries and other transactions contemplated by this Agreement
are successfully consummated, the assets and liabilities of Interstate and its
subsidiaries will be as described in the financial statements (including the pro
forma financial data) included in the Form S-1 in all material respects.
Section 2.3.4 Interstate represents and warrants that, to Interstate's
Knowledge, assuming that all of the conveyances, assignments, transfers,
assumptions, deliveries and other transactions contemplated by this Agreement
are successfully consummated, the description of the Interstate Business set
forth under "BUSINESS--General," "--Operations," "--Hotel Portfolio,"
"--Facilities" and "--Intellectual Property" in the Form S-1 will be true and
correct in all material respects.
Section 2.3.5 To Patriot's Knowledge, the Contributed Assets are not
subject to any liens, pledges, mortgages, security interests, charges or other
encumbrances at the time of the Distribution, except as disclosed in the Form
S-1, including without limitation, explicit or implicit disclosure in the
financial statements contained in the Form S-1. Patriot/Wyndham has the right,
power and authority to take all actions to be taken by it as contemplated by
this Agreement. Patriot/Wyndham has, and will continue to have at the
Distribution Date, good and marketable title to the Contributed Assets. Subject
to Sections 2.1.2 and 6.3 hereof, on and after the Distribution Date, Interstate
or the LLC, as applicable, will own all of Patriot/Wyndham's right, title and
interest in and to the Contributed Assets. Notwithstanding the foregoing,
Patriot/Wyndham makes no representation or warranty with respect to ownership of
or title to any real property.
Section 2.3.6 To Patriot's Knowledge, since the date of the Merger
there have been no material amendments to or modifications of any management or
franchise agreements relating to the Interstate Business of which Interstate is
or was not aware.
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Section 3 ASSUMPTION AND RETENTION OF LIABILITIES.
Section 3.1 Assumed Liabilities. Upon the terms and subject to the
conditions set forth in this Agreement and in addition to any other Liabilities
expressly assumed by Interstate pursuant to this Agreement, the Related
Agreements or any other agreement contemplated by this Agreement, Interstate and
the LLC hereby agree with Patriot/Wyndham to assume, pay, perform and discharge
in due course any and all Assumed Liabilities.
Section 3.2 Retained Liabilities. Upon the terms and subject to the
conditions set forth in this Agreement and in addition to any other Liabilities
otherwise expressly retained by Patriot/Wyndham pursuant to this Agreement, the
Related Agreements or any other agreement contemplated by this Agreement,
Patriot/Wyndham hereby agrees with Interstate and the LLC that Patriot/Wyndham
shall pay, perform and discharge in due course any and all Retained Liabilities.
Section 4 THE DISTRIBUTION.
Section 4.1 The Distribution.
Section 4.1.1 On the Distribution Date, the transactions set forth on
Schedule 4.1.1 hereto (the "Distribution Transactions") shall be effected.
Section 4.1.2 On the Distribution Date, Patriot/Wyndham shall deliver
to the Agent the certificates for 10,000 shares of existing common stock of
Interstate which are owned by Patriot/Wyndham prior to the Distribution Date.
Upon receipt from Patriot/Wyndham or its transfer agent of a certificate as to
the number of Patriot Securities outstanding on the Record Date, Interstate
shall deliver to the Agent, for the benefit of holders of record of Patriot
Securities on the Record Date, a stock certificate representing, in the
aggregate (and rounded down to the nearest whole share), a number of shares
representing one share of Interstate Common Stock for every ______ Patriot
Securities outstanding on the Record Date, and shall instruct the Agent to
distribute as promptly as practicable following the Distribution Date to holders
of record of Patriot Securities on the Record Date, in accordance with the
Restructuring Transactions set forth on Schedule 4.1.1, one share of Interstate
Common Stock for every _____ Patriot Securities and cash in lieu of fractional
shares of Interstate Common Stock in the manner provided in Section 4.2 hereof.
Notwithstanding that shares of Interstate Common Stock will be delivered by the
Agent directly to holders of Patriot Securities for convenience only to
facilitate the Distribution Transactions, such shares shall be deemed for all
purposes of this Agreement and otherwise to have been purchased, contributed
and/or distributed in accordance with the Distribution Transactions set forth on
Schedule 4.1.1, and Interstate and LLC agree to cooperate with Patriot/Wyndham
to execute any documentation requested by Patriot/Wyndham in furtherance of this
intention. Interstate agrees to provide to the Agent sufficient certificates in
such denominations as the Agent may request in order to effect the Distribution.
All of the shares of Interstate Common Stock issued in the Distribution shall be
fully paid, nonassessable and free of preemptive rights.
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Section 4.2 Fractional Shares. No certificate or scrip representing
fractional shares of Interstate Common Stock shall be issued as part of the
Distribution and, in lieu of receiving fractional shares, each holder of Patriot
Securities who would otherwise be entitled to receive a fractional share of
Interstate Common Stock pursuant to the Distribution will receive cash for such
fractional share. Patriot/Wyndham and Interstate agree that Patriot/Wyndham
shall instruct the Agent to determine the number of whole shares and fractional
shares of Interstate Common Stock allocable to each holder of record of Patriot
Securities as of the Record Date, to aggregate all such fractional shares into
whole shares and to sell the whole shares obtained thereby in the open market at
then prevailing prices on behalf of holders who otherwise would be entitled to
receive fractional share interests and to distribute to each such holder such
holder's ratable share of the total proceeds of such sales (net of any
commissions incurred in connection with such sales), net of any amount required
to be withheld under applicable law.
Section 4.3 Patriot/Wyndham Board Action.
Section 4.3.1 This Agreement and the Related Agreements have been
approved by the Boards of Directors of Patriot and Wyndham and the consummation
of the transactions provided for herein or therein shall only be effected after
the Distribution has been declared by the Boards of Directors of Patriot and
Wyndham and the satisfaction of any other conditions as determined by the Boards
of Directors of Patriot and Wyndham.
Section 4.3.2 The Boards of Directors of Patriot and Wyndham, in their
sole discretion, shall establish the Record Date and the Distribution Date and
all appropriate procedures to be followed by holders of Patriot Securities in
connection with the Distribution.
Section 5 SURVIVAL, INDEMNIFICATION, CLAIMS, AND OTHER MATTERS.
Section 5.1 Survival of Agreements.
Section 5.1.1 All covenants and agreements of the parties in this
Agreement shall survive the Distribution Date.
Section 5.1.2 Except as specifically provided herein, the provisions of
this Section 5 shall terminate and be of no further force and effect on the
tenth anniversary of the Distribution Date. Such termination shall in no way
limit the obligations of Interstate with respect to the Assumed Liabilities or
the obligations of Patriot/Wyndham with respect to the Retained Liabilities and
the indemnification rights under this Agreement pertaining to the Assumed
Liabilities and the Retained Liabilities, which shall survive indefinitely.
Section 5.2 Indemnification.
Section 5.2.1 Patriot/Wyndham shall indemnify, defend and hold harmless
Interstate, each of its directors, officers, employees and agents and each
Affiliate of Interstate from and
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against any and all Indemnifiable Losses of Interstate or any of its Affiliates
arising out of or due to, directly or indirectly, (a) Third-Party Claims in
connection with any of the Retained Liabilities, (b) Third-Party Claims which
assert that the information included in the Information Statement/Prospectus or
the Form S-1 under the captions set forth on Schedule 5.2.1(a) hereto is false
or misleading with respect to any material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, (c) Third-Party Claims which assert that Patriot/Wyndham or its
Affiliates failed to perform, or violated, any provision of this Agreement which
is to be performed or complied with by Patriot/Wyndham or its Affiliates, (d)
breaches of this Agreement by Patriot/Wyndham or its Affiliates, (e) the
obligations (the "Patriot/Wyndham Obligations") set forth on Schedule 5.2.1(b)
hereto (but only up to the maximum amounts specified on said Schedule 5.2.1(b)),
(f) any payments the LLC is obligated to make under that certain letter
agreement, dated January 1, 1999, from the LLC (and consented to by IHC Realty
Corporation) addressed to Connecticut General Life Insurance Company regarding
Interstone/CGL (WC) Partners L.P.[, for so long as the Warner Center Marriott is
the subject of a lease to an Affiliate of Patriot] or (g) Third-Party Claims in
connection with the utilization of liquor licenses issued to Interstate or an
Affiliate of Interstate (and the related operation of the bars, lounges and
liquor facilities subject to such liquor licenses) for the benefit of hotels
owned by Patriot/Wyndham and not managed by Interstate, which claims arise
during the period prior to the applicable liquor license being transferred or
assigned to Patriot/Wyndham or an Affiliate of Patriot/Wyndham.
Section 5.2.2 Interstate shall indemnify, defend and hold harmless
Patriot/Wyndham, each of its directors, officers, employees and agents and each
Affiliate of Patriot/Wyndham from and against any and all Indemnifiable Losses
of Patriot/Wyndham or any of its Affiliates arising out of or due to, directly
or indirectly, (a) Third-Party Claims in connection with any of the Assumed
Liabilities, (b) Third-Party Claims which assert that the information included
in the Information Statement/Prospectus or the Form S-1 under the captions set
forth on Schedule 5.2.2 hereto is false or misleading with respect to any
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, (c) Third-Party Claims
which assert that Interstate or its Affiliates failed to perform, or violated,
any provision of this Agreement which is to be performed or complied with by
Interstate or its Affiliates, (d) breaches of this Agreement by Interstate or
its Affiliates, (e) Third-Party Claims in connection with the utilization of
liquor licenses issued to Patriot/Wyndham or an Affiliate of Patriot/Wyndham
(and the related operation of the bars, lounges and liquor facilities subject to
such liquor licenses) for the benefit of Interstate and the Interstate Business
for the period from the Distribution Date until the applicable liquor license is
transferred or assigned to Interstate or an Affiliate of Interstate or (f) [the
guaranty by Wyndham of Interstate's performance under Management Agreements
relating to four Holiday Inns hotels].
Section 5.2.3 Amounts required to be paid pursuant to this Section 5
are hereinafter collectively called "Indemnity Payments" and are individually
called an "Indemnity Payment." The amount which any party (an "Indemnifying
Party") is required to pay to any other party
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(an "Indemnified Party") pursuant to Section 5.2.1 or Section 5.2.2 shall be
reduced (including retroactively) by any Insurance Proceeds or other amounts
actually recovered by such Indemnified Party in reduction of the related
Indemnifiable Loss. If an Indemnified Party shall have received an Indemnity
Payment in respect of an Indemnifiable Loss and shall subsequently actually
receive Insurance Proceeds or other amounts (such as judgment or settlement
amounts) in respect of such Indemnifiable Loss, then such Indemnified Party
shall pay to such Indemnifying Party a sum equal to the lesser of the amount of
such Insurance Proceeds or other amounts actually received or the net amount of
Indemnity Payments actually received previously. The Indemnified Party agrees
that the Indemnifying Party shall be subrogated to such Indemnified Party under
any insurance policy. In addition, any amount required to be paid by an
Indemnifying Party to an Indemnified Party pursuant to Section 5.2.1 or 5.2.2 of
this Agreement shall be net of any actual Tax benefit realized by the
Indemnified Party or its Affiliates as a result of incurring an Indemnifiable
Loss, calculated using the actual statutory rate (or rates, in the case of an
item that affects more than one Tax) applicable to the recipient of such payment
for the relevant year in which the Tax benefit is realized. In lieu of providing
any confidential information necessary for the determination of the "actual Tax
benefit" resulting from the payment of any amount under this Agreement or any
Indemnifiable Loss, Patriot/Wyndham or Interstate, as the case may be, may
provide to the other party a certification of such amount from a nationally
recognized independent certified public accountant, reasonably acceptable to
such other party, which certification shall explain in reasonable detail the
method for determining such amount.
Section 5.2.4 The parties acknowledge that the Restructuring
Transactions have been structured such that the Contributed Assets are
contributed to the LLC in a manner, and by the appropriate entities, so that
following the Restructuring Transactions Patriot/Wyndham or an Affiliate of
Patriot Wyndham will own a 55% economic interest in the LLC and Interstate will
own a 45% economic interest in the LLC. The parties agree that, in the event
that an Indemnity Payment must be made to LLC pursuant to this Section 5.2, such
Indemnity Payment will be made on behalf of Patriot/Wyndham, on the one hand, or
Interstate, on the other hand, by the entity that contributed the asset (or
retained the liability) that gave rise to the obligation to make the Indemnity
Payment (as set forth on the Restructuring Memorandum), so that following the
making of any such Indemnity Payment, the respective ownership percentages in
the LLC will remain as they were prior to the making of such Indemnity Payment,
and Interstate and LLC will cooperate with Patriot/Wyndham to execute any
documentation necessary to effect the foregoing.
Section 5.2.5 PATRIOT/WYNDHAM'S AND INTERSTATE'S RESPECTIVE OBLIGATIONS
PURSUANT TO SECTION 5.2.1(d) AND SECTION 5.2.2(d) SHALL BE LIMITED TO DIRECT AND
ACTUAL DAMAGES, TO THE EXCLUSION OF INCIDENTAL, CONSEQUENTIAL OR SPECIAL
DAMAGES. THIS SECTION 5.2.4 SHALL NOT APPLY TO (a) ANY FAILURE BY INTERSTATE OR
ITS AFFILIATES TO ASSUME, PAY, PERFORM OR DISCHARGE ANY AND ALL ASSUMED
LIABILITIES OR (b) ANY FAILURE BY PATRIOT/WYNDHAM OR ITS AFFILIATES TO PAY,
PERFORM OR DISCHARGE ANY AND ALL RETAINED LIABILITIES OR (c) ANY
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BREACH BY PATRIOT/WYNDHAM OR INTERSTATE OF THEIR RESPECTIVE INDEMNITY
OBLIGATIONS UNDER THIS AGREEMENT, INCLUDING THE INDEMNITY OBLIGATIONS SET FORTH
IN THIS SECTION 5.
Section 5.2.6 Indemnification obligations contained elsewhere in this
Agreement shall be subject to the provisions of this Section 5.
Section 5.3 Procedure for Indemnification of Third-Party Claims.
Section 5.3.1 If any party shall receive notice of any claim or Action
brought, asserted, commenced or pursued by any person or entity not a party to
this Agreement (herein referred to as a "Third Party Claim"), with respect to
which any other party is or may be obligated to make an Indemnity Payment, it
shall give such other party prompt written notice thereof (including any
pleadings relating thereto) after becoming aware of such Third Party Claim,
specifying in reasonable detail the nature of the Third Party Claim and the
amount or estimated amount thereof to the extent then feasible (which estimate
shall not be conclusive of the final amount of such claim); provided, however,
that the failure of a party to give notice as provided in this Section 5.3.1
shall not relieve any other party of its indemnification obligations under this
Section 5, except to the extent that such other party is actually prejudiced by
such failure to give notice.
Section 5.3.2 The Indemnifying Party may elect to defend or seek to
settle or compromise any Third Party claim as to which a claim for
indemnification hereunder has been asserted, at the Indemnifying Party's own
expense and by counsel selected by the Indemnifying Party and reasonably
acceptable to the Indemnified Party, by so notifying the Indemnified Party
within thirty (30) days after the Indemnified Party has given notice of the
Third Party Claim in accordance with Section 5.3.1 hereof (or such earlier time
as may be necessary for the Indemnified Party to submit a responsive pleading
required in connection with the Third Party Claim). Unless the Indemnifying
Party fails to assume the defense or to seek to settle or compromise the Third
Party Claim in a timely manner, the Indemnifying Party shall not be liable to
the Indemnified Party for any legal or other expenses subsequently incurred by
the Indemnified Party in connection with the defense, settlement or compromise
of the Third Party Claim; provided, however, that if, in the reasonable judgment
of the Indemnified Party based on the advice of counsel, a conflict of interest
between the Indemnified Party and the Indemnifying Party exists with respect to
the Third Party Claim, then the Indemnified Party shall have the right to employ
one counsel selected by it and reasonably acceptable to the Indemnifying Party
and, in that event, the reasonable fees and expenses of such separate counsel
shall be paid by the Indemnifying Party. Once the Indemnifying Party has assumed
the defense of any Third Party Claim, it must actively and diligently defend or
seek to settle or compromise the Third Party Claim until conclusion of the
matter, unless the Indemnified Party agrees to the Indemnifying Party's
withdrawal.
Section 5.3.3 If the Indemnifying Party responds to a notice of Third
Party Claim by denying its obligation to indemnify the person or entity claiming
a right of defense and
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indemnification under this Agreement, or if the Indemnifying Party fails to
defend or seek to settle or compromise such Third Party Claim in a timely
manner, the Indemnified Party shall be entitled to defend or seek to settle or
compromise such Third Party Claim by counsel selected by it. In addition, if it
is later determined, through procedures referenced in Section 10 of this
Agreement, or by agreement of the parties, that the Indemnifying Party wrongly
denied its indemnification obligation with respect to, or failed to timely
defend or seek to settle or compromise, such claim, then the Indemnifying Party
shall (a) reimburse the Indemnified Party for all costs and expenses (other than
salaries of officers and employees) reasonably incurred by the Indemnified Party
in connection with its defense, settlement or compromise of the Third Party
Claim and (b) be estopped from challenging a judgment, order, settlement or
compromise resolving the Third Party Claim entered into in good faith by the
Indemnified Party (if such claim has been resolved prior to the conclusion of
the proceeding between the Indemnified Party and the Indemnifying Party). The
Indemnifying Party, after initially rejecting a claim for defense or
indemnification by the Indemnified Party, may, at any time prior to the
resolution of the Third Party Claim, assume the defense of or seek to settle or
compromise said claim provided that (i) the Indemnifying Party reimburses the
Indemnified Party for all costs and expenses (other than salaries of officers
and employees) reasonably incurred by the Indemnified Party in connection with
the defense of such claim (including costs incurred in the transition of the
defense from the Indemnified Party to the Indemnifying Party) and (ii) the
assumption of the defense of the Third Party Claim will not prejudice or cause
harm to the Indemnified Party.
Section 5.3.4 With respect to any Third Party Claim relating to any
matter subject to a claim for indemnification hereunder, no party shall enter
into any compromise or settlement or consent to the entry of any judgment which
(a) does not include as a term thereof the giving by the third party of a
release to the Indemnified Party of all further liability in respect of such
Third Party Claim or (b) imposes any obligation on the Indemnified Party without
said Indemnified Party's written consent (which consent shall not be
unreasonably withheld), except an obligation to pay money which the Indemnifying
Party has agreed to pay on behalf of the Indemnified Party. In the event that an
Indemnified Party enters into any such compromise, settlement or consent without
the written consent of the Indemnifying Party (other than as contemplated by
Section 5.3.3 hereof), the entry of such compromise, settlement or consent shall
relieve the Indemnifying Party of its indemnification obligation related to the
Third Party Claim underlying such compromise, settlement or consent.
Section 5.3.5 Upon final judgment, determination, settlement or
compromise of any Third Party Claim, and unless otherwise agreed to by the
parties in writing, the Indemnifying Party shall pay promptly on behalf of the
Indemnified Party, or to the Indemnified Party in reimbursement of any amount
theretofore required to be paid by it, the amount so determined by final
judgment, determination, settlement or compromise. Upon the payment in full by
the Indemnifying Party of such amount, the Indemnifying Party shall succeed to
the rights of such Indemnified Party to the extent not waived in settlement,
against the third party who made such Third Party Claim and any other person who
may have been liable to the Indemnified Party with respect to such Third Party
Claim.
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Section 5.3.6 If the Indemnifying Party elects to defend or to seek to
settle or compromise the Third Party Claim, the Indemnified Party shall make
available to the Indemnifying Party any personnel or any books, records or other
documents within its control or which it otherwise has the ability to make
available that are necessary or appropriate for such defense, settlement or
compromise, and shall otherwise cooperate in the defense, settlement or
compromise of the Third Party Claim; provided, however, that nothing in this
Section 5.3.6 shall be deemed to require the waiver of any privilege, including
attorney-client privilege, or protection afforded by the attorney work product
doctrine. In addition, regardless of the party actually defending a Third Party
Claim for which there is an indemnity obligation under Section 5.2 hereof, the
parties shall give each other regular status reports relating to such action
with detail sufficient to permit the other party to assert and protect its
rights and obligations under this Agreement.
Section 5.3.7 The provisions of this Section 5.3 shall survive in
perpetuity and shall be the exclusive procedures for any Third Party Claims
subject to the provisions of Section 5.2.1 or 5.2.2 hereof.
Section 5.4 Other Claims. Any claim on account of an Indemnifiable
Loss which does not result from a Third Party Claim shall be asserted by written
notice from the Indemnified Party to the Indemnifying Party. The Indemnifying
Party shall have a period of sixty (60) days (or such shorter time period as may
be required by law as indicated by the Indemnified Party in the written notice)
within which to respond. If the Indemnifying Party does not respond within such
sixty (60) day (or lesser) period, the Indemnifying Party shall be deemed to
have accepted responsibility to make payment and shall have no further right to
contest the validity of such claim. If the Indemnifying Party does respond
within such sixty (60) day (or lesser) period and rejects such claim in whole or
in part, the Indemnified Party shall be free to pursue resolution of the matter
as provided in Section 10 hereof.
Section 5.5 Certain Losses. If the indemnification provided for in
Section 5.2 is unavailable to an Indemnified Party in respect of any
Indemnifiable Loss arising out of or related to information contained in the
Information Statement/Prospectus or the Form S-1, then the Indemnifying Party,
in lieu of indemnifying the Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Indemnifiable
Loss, in such proportion as is appropriate to reflect the relative fault of
Interstate, each of its directors, each of its officers who have signed any
registration statement and each Affiliate of Interstate (an "Interstate Party")
on the one hand and Patriot/Wyndham and each Affiliate of Patriot/Wyndham (a
"Patriot/Wyndham Party") on the other hand in connection with the statements or
omissions which resulted in such Indemnifiable Loss.
Section 5.6 No Third Party Beneficiaries. Except to the extent
expressly provided otherwise in this Section 5, the indemnification provided for
by this Section 5 shall not inure to the benefit of any third party or parties
and shall not relieve any insurer who would otherwise be obligated to pay any
claim of the responsibility with respect thereto or, solely by
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virtue of the indemnification provisions hereof, provide any subrogation rights
with respect thereto and each party agrees to waive such rights against the
other to the fullest extent permitted.
Section 5.7 Named Parties. The parties hereto acknowledge that it may
not be feasible to substitute Interstate (or one of its Affiliates) for
Patriot/Wyndham (or one of its Affiliates) as a named party in Actions, whether
domestic or foreign, in respect of Assumed Liabilities. In such event,
Patriot/Wyndham (or one of its Affiliates) shall remain as a named party, but,
following the Distribution Date, Interstate (or one of its Affiliates) shall
assume the defense of any such Action in accordance with the provisions of
Section 5.3 hereof and Patriot/Wyndham and its Affiliates shall cooperate with
Interstate as contemplated by Section 5.3 and Section 7 hereof.
Section 6 CERTAIN ADDITIONAL MATTERS.
Section 6.1 Conveyancing and Assumption Instruments. In connection
with the transfer, conveyance, assignment and delivery of the Contributed Assets
and the assumption of the Assumed Liabilities contemplated by this Agreement,
Patriot/Wyndham and Interstate agree to execute or cause to be executed by the
appropriate parties and to deliver to each other, as appropriate, the
Conveyancing and Assumption Instruments.
Section 6.2 No Representations or Warranties. Except as provided in
Sections 2.1 and 2.3 hereof, Interstate understands and agrees that
Patriot/Wyndham is not in this Agreement or in any other agreement or document
contemplated by this Agreement, representing or warranting in any way as to the
value or condition of any Contributed Assets, IT BEING UNDERSTOOD THAT ALL SUCH
ASSETS ARE BEING TRANSFERRED "AS IS, WHERE IS" and without any representation or
warranty of any kind, express or implied (the implied warranties of
merchantability and fitness for a particular purpose being hereby specifically
disclaimed). Similarly, Interstate understands and agrees that Patriot/Wyndham
is not, in this Agreement or in any other agreement or document contemplated by
this Agreement, representing or warranting in any way that the obtaining of the
consents or approvals, the execution and delivery of any amendatory agreements,
and the making of the filings and applications, in each case contemplated by
this Agreement, shall satisfy the provisions of all applicable laws or
judgments, it being understood and agreed that, subject to Section 6.3 hereof,
Interstate shall bear the economic and legal risk that any necessary consents or
approvals are not obtained or that any requirements of law or judgments are not
complied with. Nothing in this Section 6.2 is intended to or shall modify any
rights or obligations of Patriot/Wyndham or Marriott under the Settlement
Agreement.
Section 6.3 Further Assurances; Subsequent Transfers.
Section 6.3.1 Each of Patriot/Wyndham and Interstate will execute and
deliver such further instruments of conveyance, transfer and assignment and will
take such other actions as each of them may reasonably request of the other in
order to effectuate the purposes of this
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Agreement and to carry out the terms hereof. Without limiting the generality of
the foregoing, at any time and from time to time after the Distribution Date, at
the request of Interstate and without the payment of any further consideration,
Patriot/Wyndham will execute and deliver to Interstate or the LLC all other
instruments of transfer, conveyance, assignment and confirmation and take such
other action as Interstate may reasonably request in order to more effectively
transfer, convey and assign to Interstate or the LLC and to confirm Interstate's
or the LLC's title to all of the Contributed Assets, to put Interstate or the
LLC in actual possession and operating control thereof and to permit Interstate
or the LLC to exercise all rights with respect thereto (including without
limitation rights under contracts and other arrangements as to which the consent
of any required third party to the transfer thereof shall not have previously
been obtained) and Interstate and the LLC will execute and deliver to
Patriot/Wyndham all instruments, undertakings or other documents and take such
other action as Patriot/Wyndham may reasonably request in order to have
Interstate or the LLC fully assume and discharge the Assumed Liabilities and
relieve Patriot/Wyndham of any Liability or obligations with respect thereto and
evidence the same to third parties. The transfers, conveyances and assignments
made, if any, pursuant to this Section 6.3 shall be structured and effected
consistent with the Restructuring Transactions and the parties hereto will
cooperate with each other in executing documentation to effect the foregoing.
Notwithstanding the foregoing, Patriot/Wyndham, Interstate and the LLC shall not
be obligated, in connection with the foregoing, to expend monies other than
reasonable out-of-pocket expenses and attorneys' fees.
Section 6.3.2 Patriot/Wyndham and Interstate will use their respective
reasonable efforts to obtain any consent, approval or amendment required to
novate and/or assign all agreements, leases, licenses and other rights of any
nature whatsoever relating to the Contributed Assets to Interstate or the LLC;
provided, however, that Patriot/Wyndham shall not be obligated to pay any
consideration therefor (except for filing fees and other administrative charges)
to the third party from whom such consents, approvals and amendments are
requested. In the event and to the extent that Patriot/Wyndham is unable to
obtain any such required consent, approval or amendment, then to the extent
feasible and permissible (a) Patriot/Wyndham shall continue to be bound thereby
and (b) Interstate or the LLC shall pay, perform and discharge fully all the
obligations of Patriot/Wyndham thereunder from and after the Distribution Date
and indemnify Patriot/Wyndham for all Indemnifiable Losses arising out of such
performance by Interstate or the LLC. Patriot/Wyndham shall, without the payment
of any further consideration, pay and remit to Interstate or the LLC promptly
any monies, rights and other considerations received in respect of such
performance. Patriot/Wyndham shall exercise or exploit its rights and options
under all such agreements, leases, licenses and other rights and commitments
referred to in this Section 6.3.2 only as reasonably directed by Interstate and
at Interstate's expense. If and when any such consent shall be obtained or such
agreement, lease, license or other right shall otherwise become assignable or
able to be novated, Patriot/Wyndham shall promptly assign and novate all its
rights and obligations thereunder to Interstate or the LLC without payment of
further consideration and Interstate or the LLC shall, without the payment of
any further consideration, assume such rights and obligations. To the extent
that the assignment of any
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contract or agreement (or their proceeds) pursuant to this Section 6.3 is
prohibited by law or not otherwise obtained, the assignment provisions of this
Section shall operate to create a subcontract with Interstate or the LLC to
perform each relevant unassignable Patriot/Wyndham contract at a subcontract
price equal to the monies, rights and other considerations received by
Patriot/Wyndham with respect to the performance by Interstate or the LLC under
such subcontract.
Section 6.3.3 Without limiting the generality of the foregoing Sections
6.2.1 and 6.2.2, Patriot/Wyndham and Interstate agree that, to the extent that
authorizations from the necessary liquor and alcoholic beverage authorities to
permit (i) Interstate or the LLC to utilize all liquor licenses required for the
operation of the Interstate Business and (ii) Patriot/Wyndham to utilize all
liquor licenses required for the operation of the business being retained by
Patriot/Wyndham have not been received on or before the Distribution Date: (a)
Patriot/Wyndham and Interstate or the LLC will as soon as practicable execute
all such forms, applications and other documents required by the applicable
liquor and alcoholic beverage authorities in order that all necessary liquor
licenses may be utilized by Interstate or the LLC in operating the Interstate
Business and Patriot/Wyndham in operating the business which it is retaining;
and (b) Patriot/Wyndham, Interstate and the LLC will cooperate to the extent
reasonably necessary to keep open the bars and lounges and liquor facilities
used in the operation of the Interstate Business and Patriot/Wyndham's business
between the Distribution Date and the time when the requisite liquor license
transfers actually become effective.
Section 6.4 Interstate Officers and Directors. Interstate and
Patriot/Wyndham shall take all actions which may be required to elect or
otherwise appoint, as of or before the Distribution Date, those individuals
designated in the Information Statement/Prospectus to be directors or officers
of Interstate.
Section 6.5 Related Agreements. As of the Distribution Date,
Patriot/Wyndham and Interstate shall, and if applicable shall cause their
Affiliates to, enter into the Related Agreements.
Section 6.6 Joint Purchasing Arrangements. Interstate acknowledges
that Patriot/Wyndham has entered into a Telecommunications Services Term
Agreement with Sprint Communications Company L.P. and ASC Telecom, Inc. (as
amended to date, the "Sprint Contract") and that the terms of the Sprint
Contract were negotiated by Patriot/Wyndham in reliance in part upon use of
telephone service under the Sprint Contract by the hotels operated by the
Interstate Business. Interstate agrees that all hotels operated by the
Interstate Business shall be subject to the terms of the Sprint Contract until
[OCTOBER 1, 2001]; provided, however, that if Interstate is requested by a
third-party owner to cancel such Sprint Contract with respect to such owner's
hotel(s) (and such owner has the right to do so under the relevant management
contract), then Interstate or its subsidiary may terminate such contract with
respect to such hotel(s) (without payment of any penalty or fee). Other than the
Sprint Contract, there shall be no cost-sharing, joint purchasing or other
material contractual relationships between Patriot/Wyndham and Interstate or the
LLC following the Distribution
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Date other than (i) an equity interest in Interstate and the LLC, (ii) a seat on
the board of directors of Interstate and (iii) the ownership by Patriot/Wyndham
of certain hotels managed by the LLC. In accordance with the respective
Management Agreements, Patriot/Wyndham may bind any of the hotels owned by them
and managed by Interstate (or its subsidiaries) with any global or master
purchasing contracts. With the exception of the Sprint Contract, all other
Patriot/Wyndham purchasing or similar contracts with respect to the hotels
operated by the Interstate Business are terminable by Interstate and the LLC,
and neither Interstate nor the LLC shall have any liability or obligation in
respect of any of Patriot/Wyndham's purchasing or similar contracts, whether
such contracts were entered into before or after the Distribution Date.
Section 6.7 St. Louis Marriott West. Patriot/Wyndham covenants and
agrees that, after the Distribution Date, it will not exercise any of its
buy/sell rights in respect of its interest in the St. Louis Marriott West if
such exercise could reasonably be anticipated to result in the termination of
Interstate's management contract in respect of the St. Louis Marriott West.
Section 6.8 Divestiture Payments. On the Distribution Date, Patriot
will pay or cause to be paid all amounts not in dispute that are then currently
past due to Marriott or any other franchisor under any franchise or license
agreement for all Patriot-owned hotels to be operated by Interstate or its
subsidiaries.
Section 6.9 Settlement Agreement Provisions. Interstate hereby
acknowledges and agrees that the Sixth Amendment to Settlement Agreement, dated
as of May __, 1999, among Marriott, Patriot and Wyndham (the "Sixth Amendment")
contemplates a "true-up" following the Distribution of Interstate's working
capital as of April 30, 1999. Accordingly, Interstate hereby covenants and
agrees that:
(i) Interstate will deliver to Patriot and Marriott the Unaudited
Pro Forma Combined Balance Sheet dated as of April 30, 1999
referred to in Section 3(d)3 of the Sixth Amendment within
thirty days of the Distribution Date;
(ii) Interstate will cooperate in good faith with Patriot and
Marriott to resolve any disputes between Patriot and Marriott
with respect to such balance sheet; and
(iii) Interstate will make the payments, if any, to Patriot
described in the Sixth Amendment.
The parties hereto agree that any payments made pursuant to the
"true-up" provision in Section 3(d)3 of the Sixth Amendment represent an
adjustment to the contributions to Interstate pursuant to the Reorganization
Transactions and Interstate agrees to execute any documents requested by Patriot
in furtherance of the foregoing intention.
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Section 6.10 Limitation on Claims. Neither Patriot/Wyndham, on the one
hand, nor Interstate, on the other hand, shall be entitled to assert any claim
hereunder (other than under Sections 2.3.2 or 2.3.3) for any misrepresentation
by the other party if the party attempting to assert such claim had knowledge,
on or prior to the Distribution Date, of any facts which should reasonably have
put such asserting party on notice that the alleged misrepresentation was not
true. Any determination hereunder whether Patriot/Wyndham, on the one hand, or
Interstate, on the other hand, had "knowledge" of particular facts regarding an
alleged misrepresentation shall be made to Patriot's Knowledge, with respect to
Patriot/Wyndham, and to Interstate's Knowledge, with respect to Interstate.
Section 6.11 The Charles. Patriot/Wyndham and Interstate acknowledge
that the equity interests in the Charles Hotel Complex being contributed to the
LLC subject to an agreement to sell such interests to a third party (the
"Charles Sale Contract"), the LLC has assumed the obligations of the seller
under the Charles Sale Contract and Interstate has guaranteed the performance of
the seller under the Charles Sale Contract. The LLC and Interstate acknowledge
that the sale of the Charles pursuant to the Charles Sale Contract is a material
benefit to the LLC, Interstate and Patriot/Wyndham. Accordingly, the LLC and
Interstate agree that (i) Interstate and the LLC shall in good faith perform
their obligations under the Charles Sale Contract, as the same may be amended
with Patriot/Wyndham's approval (not to be unreasonably withheld or delayed);
(ii) neither Interstate nor the LLC shall enter into any modification or
termination of the Charles Sale Contract, or waive any rights either of them may
have under the Charles Sales Contract, in each such case without
Patriot/Wyndham's prior written approval (not to be unreasonably withheld or
delayed), (iii) Interstate and the LLC shall keep Patriot/Wyndham informed as to
all discussions and negotiations with the purchase of such interests; and (iv)
Patriot/Wyndham shall be entitled to discuss the status of the transaction and
any open issues directly with the purchaser or its agent or representative (in
which case Patriot/Wyndham shall keep Interstate informed as to such
discussions). In addition, if at any time the Charles Sales Contract terminates,
or the purchaser defaults in its obligation to close the sale thereunder, or it
becomes evident that the sale contemplated thereunder is not going to occur,
then Interstate and the LLC agree that (1) Interstate shall promptly market the
sale of such equity interests to other third parties, and shall use its best
efforts to enter into a binding purchase and sale agreement to sell such equity
interests prior to the first anniversary of the Distribution Date, in which case
Patriot/Wyndham shall have the same rights with respect to such contract and the
purchaser thereunder as the rights described in clauses (i) through (iv) above;
(2) Patriot/Wyndham shall be entitled to participate in the negotiations, and to
initiate negotiations, with any third party interested in acquiring the equity
interests in the Charles; and (3) Patriot/Wydham shall have reasonable approval
rights over the terms and conditions of any such purchase and sale agreement;
and (4) to the extent that Interstate or the LLC can enter into an agreement to
sell the equity interests in the Charles that puts Interstate and the LLC in
substantially the same position Interstate would have been in had the purchaser
closed on the sale in accordance with the Charles Sale Contract, then at
Patriot/Wyndham's request, Interstate and the LLC shall enter into such an
agreement and in good faith perform their obligations thereunder.
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Section 7 ACCESS TO INFORMATION AND SERVICES.
Section 7.1 Provision of Corporate Records. As soon as practicable
after the Distribution Date, Patriot/Wyndham shall deliver to Interstate all
Books and Records in its possession. Such Books and Records shall be the
property of Interstate, but shall be retained and made available readily to
Patriot/Wyndham for review and duplication until the earlier of (a) notice from
Patriot/Wyndham that such records are no longer needed by Patriot/Wyndham or (b)
the eighth anniversary of the Distribution Date.
Section 7.2 Access to Information. From and after the Distribution
Date, Patriot/Wyndham and Interstate shall afford to each other and to each
other's authorized accountants, counsel and other designated representatives
reasonable access and duplicating rights (with copying costs to be borne by the
requesting party) during normal business hours to all books and records and
documents, communications, items and matters to the extent such material is not
subject to a Privilege (as defined in Section 7.6 hereof) that would be waived
by delivery of such material and does not relate to any actual or potential
claim or dispute between the parties to this Agreement or between
Patriot/Wyndham and Marriott or any of its Affiliates (collectively,
"Information") within each other's knowledge, possession or control and relating
to the Contributed Assets, the Interstate Business, the Assumed Liabilities and
the Retained Liabilities, insofar as such access is reasonably required by
Patriot/Wyndham or Interstate, as the case may be (and each party shall use
reasonable efforts to cause persons or firms possessing relevant Information to
give similar access). Information may be requested under this Section 7 for,
without limitation, audit, accounting, claims, Actions, litigation and tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations, but not for competitive purposes.
Section 7.3 Production of Witnesses and Individuals. From and after the
Distribution Date, Patriot/Wyndham and Interstate shall each use reasonable
efforts to make available to each other, upon written request, its officers,
directors, employees and agents for fact finding, consultation and interviews
and as witnesses to the extent that any such person may reasonably be required
in connection with any Actions in which the requesting party may from time to
time be involved relating to the conduct of the Interstate Business or
Patriot/Wyndham's other businesses prior to the Distribution Date. Except as
otherwise agreed between the parties, Patriot/Wyndham and Interstate agree to
reimburse each other for reasonable out-of-pocket expenses (but not labor
charges or salary payments) incurred by the other in connection with providing
individuals and witnesses pursuant to this Section 7.3.
Section 7.4 Retention of Records. Except when a longer retention period
is otherwise required by law or agreed to in writing, Patriot/Wyndham and
Interstate shall retain, for a period of at least eight (8) years following the
Distribution Date, all material Information relating to the Interstate Business.
Notwithstanding the foregoing or any other provision hereof, in lieu of
retaining any specific Information, Patriot/Wyndham or Interstate may offer in
writing to deliver such Information to the other and, if such offer is not
accepted within ninety (90) days, the offered Information may be destroyed or
otherwise disposed of at any
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time. If the recipient of such offer shall request in writing prior to the
scheduled date for such destruction or disposal that any of the Information
proposed to be destroyed or disposed of be delivered to such requesting party,
the party proposing the destruction or disposal shall promptly arrange for the
delivery of such of the Information as was requested (at the cost of the
requesting party).
Section 7.5 Confidentiality.
Section 7.5.1 Each of Patriot/Wyndham and Interstate shall, and shall
use its best efforts to cause its officers, employees, agents, consultants,
advisors and Affiliates to, hold in strict confidence and not disclose
confidential information concerning the other party to another person, and to
not use any such confidential information, except as provided herein or unless
compelled to disclose such information by judicial or administrative process or,
in the opinion of counsel, by other requirements of law.
Section 7.5.2 For purposes of this Section 7.5, confidential
information concerning a particular party (referred to herein as the "disclosing
party") shall mean information known by the other party (referred to herein as
the "receiving party") on the Distribution Date and reasonably understood by the
receiving party to be confidential and related to the disclosing party's
business interests, or disclosed confidentially by the disclosing party to the
receiving party after the Distribution Date under the terms and for the purposes
of this Agreement or any of the Related Agreements except for: (a) information
which is or becomes generally available to the public other than as a result of
a disclosure by the receiving party; (b) information learned by the receiving
party on a non-confidential basis for the first time after the Distribution
Date, but prior to any disclosure by the disclosing party; (c) information
developed by the receiving party independent of any confidential information of
the disclosing party which is known by the receiving party on the Distribution
Date or disclosed by the disclosing party thereafter, and (d) information which
becomes available to the receiving party on a non-confidential basis from a
source other than the disclosing party if such source was not subject to any
prohibition against transmitting the information to the receiving party.
Section 7.5.3 Each party shall protect confidential information
concerning the other party by using the same degree of care, but no less than a
reasonable degree of care, to prevent the unauthorized disclosure of the other
party's confidential information as the party uses to protect its own
confidential information of a like nature.
Section 7.5.4 Each party shall use its best efforts to insure that its
officers, employees, agents, consultants, advisors and Affiliates agree to be
bound by the foregoing restrictions on use and disclosure of confidential
information concerning the other party as a condition to receiving such
information; provided, that such party will be responsible for any breach of
such confidentiality provisions by any such person.
Section 7.6 Privileged Matters.
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Section 7.6.1 Patriot/Wyndham, Interstate and the LLC agree to
maintain, preserve and assert all privileges that either party may have,
including without limitation any privilege or protection arising under or
relating to any attorney-client relationship that existed prior to the
Distribution Date ("Privilege" or "Privileges"). Patriot/Wyndham, Interstate and
the LLC shall be entitled in perpetuity to require the assertion or decide
whether to consent to the waiver of any and all Privileges which, in the case of
Interstate or the LLC, relate to the Third-Party Management Business and, in the
case of Patriot/Wyndham, relate to the Retained Liabilities. Patriot/Wyndham,
Interstate and the LLC shall each use the same degree of care as it would with
respect to itself so as not to waive any Privilege which could be asserted by
any other party under applicable law, without the prior written consent of such
other party. The rights and obligations created by this Section 7.6 shall apply
to all information as to which, but for the Distribution, Patriot/Wyndham,
Interstate or the LLC would have been entitled to assert or did assert the
protection of a Privilege ("Privileged Information"), including but not limited
to (a) all information generated prior to the Distribution Date but which, after
the Distribution, is in the possession of any other party or the Affiliates of
any other party, (b) all communications subject to a Privilege occurring prior
to the Distribution Date between counsel for Patriot/Wyndham and any person who,
at the time of the communication, was an employee of Patriot/Wyndham, regardless
of whether such employee is or becomes an employee of Interstate or the LLC, and
(c) all information generated, received or arising after the Distribution Date
that refers or relates to Privileged Information generated, received or arising
prior to the Distribution Date.
Section 7.6.2 Upon the receipt by any party of any subpoena, discovery
or other request which arguably calls for production or disclosure of Privileged
Information of any other party and whenever any party obtains knowledge that any
current or former employee of such party has received any subpoena, discovery or
other request which arguably calls for the production or disclosure of
Privileged Information of any other party, such party shall promptly notify such
other party of the existence of the request and shall provide such other party
with a reasonable opportunity to review the information and to assert any rights
it may have under this Section 7.6 or otherwise to prevent the production or
disclosure of Privileged Information. No party will produce or disclose any
information covered by a Privilege of any other party under this Section 7.6
unless (a) such other party has provided its express written consent to such
production or disclosure or (b) a court of competent jurisdiction has entered a
final, non-appealable order finding that the information is not entitled to
protection under any applicable Privilege.
Section 7.6.3 Patriot/Wyndham's transfer of Books and Records and any
other information to Interstate or the LLC, and each party's agreement to permit
the other parties to possess Privileged Information occurring or generated prior
to the Distribution Date, are made in reliance on each party's agreement, as set
forth in this Section 7.6, to maintain the confidentiality of Privileged
Information and to maintain, preserve and assert all applicable Privileges. The
access to information granted or permitted by this Agreement, the agreement to
provide witnesses and individuals pursuant to Section 7.3 hereof and the
transfer of Privileged Information to Interstate or the LLC pursuant to this
Agreement shall not be
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deemed a waiver of any Privilege that has been or may be asserted under this
Section 7.6 or otherwise. Nothing in this Agreement shall operate to reduce,
minimize or condition the rights granted to any party, or the obligations
imposed upon any party, by this Section 7.6.
Section 7.7 Mail and Other Communications. Each of Patriot/Wyndham,
Interstate and the LLC agrees to forward or direct (as appropriate) to the other
parties any mail or other communications intended for such other parties which
is received by it.
Section 7.8 Order of Precedence. To the extent that the provisions of
this Section 7 are inconsistent with the provisions of Section 11 hereof with
respect to the subject matter thereof, the provisions of Section 11 shall
control.
Section 8 EMPLOYMENT AND EMPLOYEE BENEFIT MATTERS.
Section 8.1 Employee and Plan Transfers. From and after the
Distribution Date, Patriot/Wyndham, Interstate and the LLC will take the actions
specified on Annex VI hereto with respect to employees and employee benefit
plans.
Section 8.2 Limitation on Enforcement. This Section 8 is an agreement
solely between Patriot/Wyndham, Interstate and the LLC. Nothing in this
Agreement or any Related Agreement, whether express or implied, confers upon any
employee or former employee of Patriot/Wyndham, Interstate or the LLC or any
other person, any rights or remedies, including without limitation (a) any right
to employment, (b) any right to continued employment for any specified period or
(c) any right to claim any particular compensation, benefit or aggregation of
benefits, of any kind or nature whatsoever.
Section 9 INSURANCE.
Section 9.1 General. Patriot/Wyndham shall keep in effect all policies
under the Patriot/Wyndham Insurance Policies in effect as of the date hereof
insuring the Contributed Assets and operations of the Interstate Business until
the end of the day on which the Distribution occurs, unless Interstate or the
LLC shall have earlier obtained appropriate coverage and notified
Patriot/Wyndham in writing to that effect. Beginning at 12:01 a.m. on the day
following the Distribution Date, Interstate and its Affiliates will cease to be
covered under the Patriot/Wyndham Insurance Policies with respect to any injury,
loss, Liability, damages or expense that is incurred or asserted by a third
party to have been incurred after the Distribution Date in, or in connection
with, the conduct of the Interstate Business or the operation of the Contributed
Assets.
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Section 10 DISPUTE RESOLUTION.
Section 10.1 Binding Arbitration. Except with respect to matters
involving Section 7.6 hereof ("Privileged Matters") and except as may be
expressly provided in any other agreement between the parties entered into
pursuant hereto, if a dispute, controversy or claim (collectively, a "Dispute")
between Patriot/Wyndham and Interstate or any of their respective Affiliates
arises out of or relates to this Agreement, the Related Agreements or any other
agreement entered into pursuant hereto or thereto, including without limitation
the breach, interpretation or validity of any such agreement or any matter
involving an Indemnifiable Loss, Patriot/Wyndham and Interstate agree to use the
following procedures, in lieu of either party pursuing other available remedies
and as the sole remedy, to resolve the Dispute.
Section 10.2 Arbitration.
Section 10.2.1 In the event that one party fails to participate in
mediation, the Dispute may be referred immediately to arbitration and the time
of such failure shall constitute the end of the mediation period. If the parties
are not successful in resolving the Dispute by the end of the mediation period,
then the parties agree to submit the matter to binding arbitration in New York,
New York pursuant to the Commercial Rules of Arbitration of the American
Arbitration Association (the "AAA"), as modified herein, by a sole arbitrator
selected in accordance with the provisions of Section 10.2.2 hereof. In the
arbitration, (a) the parties may require reasonable discovery, pursuant to the
New York Rules of Civil Procedure then in effect, (b) each party shall have the
right to cross-examine witnesses of other parties, (c) testimony shall be
transcribed and (d) any award shall be accompanied by written findings of fact
and statement of reasons. Any arbitration proceeding shall be concluded in a
maximum of sixty (60) days from the commencement of such proceeding. Any
arbitration award shall be final and binding on the parties and judgment may be
entered thereon, upon the application of either party by any court of competent
jurisdiction.
Section 10.2.2 The parties shall have ten (10) days from the end of the
mediation period to agree upon a mutually acceptable neutral person not
affiliated with either of the parties to act as arbitrator. If no arbitrator has
been selected within such time, either party may request the AAA or another
mutually agreed-upon organization to supply within ten (10) days of such request
a list of potential arbitrators with qualifications reasonably required to
settle the dispute. Within five (5) days of each party receiving the list, the
parties shall independently rank the proposed candidates, shall simultaneously
exchange rankings, and shall be deemed to have selected as the arbitrator the
individual receiving the highest combined ranking who is available to serve.
If there is a tie, then the tie shall be broken by lot. If one party shall not
cooperate in the selection of the arbitrator, the other party may solely select
the arbitrator utilizing the procedures set forth in this Section 10.2.2.
Section 10.2.3 The costs of arbitration shall be apportioned between
Patriot/Wyndham and Interstate as determined by the arbitrator in such manner as
the arbitrator deems
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reasonable taking into account the circumstances of the case, the conduct of the
parties during the proceeding, and the result of the arbitration.
Section 10.3 Treatment of Negotiation. All negotiations pursuant to
this Section 10 shall be treated as compromise and settlement negotiations for
purposes of Rule 408 of the Federal Rules of Evidence and comparable state rules
of evidence. All negotiation and arbitration proceedings under this Section 10
shall be treated as confidential information in accordance with the provisions
of Section 7.5 hereof. Any arbitrator shall be bound by an agreement containing
confidentiality provisions at least as restrictive as those contained in Section
7.5 hereof
Section 10.4 Equitable Relief. Nothing contained herein shall preclude
either party from seeking equitable relief to prevent any immediate, irreparable
harm to its interests, including multiple breaches of this Agreement or the
relevant Related Agreement by the other party. Otherwise, these procedures are
exclusive and shall be fully exhausted prior to the initiation of any
litigation. Either party may seek specific enforcement of any arbitrator's
decision under this Section 10. The other party's only defense to such a request
for specific enforcement shall be fraud by or on the arbitrator.
Section 10.5 Consolidation. The arbitrator may consolidate an
arbitration under this Agreement with any arbitration arising under or relating
to the Related Agreements or any other agreement between the parties entered
into pursuant hereto, as the case may be, if the subject of the Disputes
thereunder arise out of or relate essentially to the same set of facts or
transactions. Such consolidated arbitration shall be determined by the
arbitrator appointed for the arbitration proceeding that was commenced first in
time.
Section 11 TAX MATTERS.
Section 11.1 Preparation of Tax Returns. Interstate shall be
responsible for and control the preparation and filing of all Tax Returns with
respect to the Interstate Group. However, with respect to any such Tax Returns
for taxable periods (or portions thereof) that end before or include the
Distribution Date or otherwise reflect Taxes for which Patriot/Wyndham may be
liable under Section 11.2.2, (i) such returns shall be prepared in a manner
consistent with past practice and in a manner that does not distort taxable
income (i.e., by accelerating income to the period prior to the Distribution or
deferring deductions to the period following the Distribution), (ii) a draft of
such Tax Return shall be provided to Patriot/Wyndham for review at least 30 days
prior to the due date for filing thereof, and (iii) no such Tax Return shall be
filed or amended if Patriot or Wyndham reasonably objects in writing within such
30-day period.
Notwithstanding the foregoing, Patriot/Wyndham shall be responsible for and
control the preparation and filing of any such Tax Return relating to a member
of the Interstate Group if such Tax Return also includes a member of the
Patriot/Wyndham Group; provided that, with respect to any such Tax Return for a
taxable period that begins before but does not end on the
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Distribution Date (a "Straddle Period") or any Tax Return that could affect the
taxable income or loss of a member of the Interstate Group after the
Distribution Date, (i) such Tax Return shall be prepared in a manner consistent
with past practice and in a manner that does not distort taxable income (e.g.,
by deferring income to the period after the Distribution or accelerating
deductions to the period prior to the Distribution), (ii) a draft of such Tax
Return shall be provided to Interstate for review at least 30 days prior to the
due date for filing thereof and (iii) no such Tax Return shall be filed or
amended if Interstate reasonably objects in writing within such 30-day period.
Section 11.2 Responsibility for Taxes.
11.2.1 Interstate. Interstate shall be liable for and shall indemnify
and hold harmless the Patriot/Wyndham Group against any Taxes attributable to
any member of the Interstate Group, or otherwise attributable to the Interstate
Business, (i) for any taxable period (or portion thereof) beginning on or after
the Distribution Date, including any liability asserted against any member of
the Patriot/Wyndham Group under the provisions of Treasury Regulations section
1.1502-6 (or any comparable provision of state or local law) for Taxes
attributable to a member of the Interstate Group and (ii) for any taxable period
to the extent such Taxes are taken into account as current liabilities of
Interstate or its Affiliates for purposes of determining working capital on the
Distribution Date; provided however that the indemnity in this Section 11.2.1
shall not apply to Transaction Taxes.
11.2.2 Patriot/Wyndham. Patriot/Wyndham shall be liable for and shall
indemnify and hold harmless the Interstate Group against (i) any Taxes
attributable to any member of the Interstate Group, or otherwise attributable to
the Interstate Business, for any taxable period (or portion thereof) ending
prior to the Distribution Date; (ii) any Transaction Taxes and (iii) any Taxes
attributable to any member of the Patriot/Wyndham Group for any taxable period,
including any liability asserted against any member of the Interstate Group
under the provisions of Treasury Regulations section 1.1502-6 (or any comparable
provision of state or local law) for Taxes attributable to a member of the
Patriot/Wyndham Group.
11.2.3 Allocation of Tax Liabilities. In the case of any Taxes in
respect of a Straddle Period, (i) real, personal property and intangible Taxes
("Property Taxes") allocated and attributable to the period prior to the
Distribution shall be equal to the amount of such Taxes for the entire Straddle
Period multiplied by a fraction, the numerator of which is the number of days
during the Straddle Period that are in the period prior to the Distribution and
the denominator of which is the number of days in the Straddle Period, and (ii)
all Taxes other than Property Taxes shall be computed and allocated based on an
actual closing of the books as if the taxable period ended as of the close of
business on the day prior to the Distribution Date (based on the principles set
forth in Sections 706 and 1502 of the Code and the Treasury Regulations
thereunder).
Section 11.3 Credits; Refunds. The Interstate Group and the
Patriot/Wyndham Group shall each be entitled to prosecute any claims for and
receive the amount or economic benefit
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of any refund or credit of Taxes that relate to Taxes for which it is
responsible under Section 11.2. Each party hereto shall, promptly upon receipt
thereof, pay to the other party any such refund or reduction that such other
party is entitled to under this Section 11.3, together with any interest related
thereto. A refund will be considered to have been received by the Interstate
Group or the Patriot/Wyndham Group, as the case may be, (i) when received by a
member of such Group from the applicable taxing authority or (ii) on the due
date for payment of any Taxes, to the extent that the amount of such Taxes that
any member of such Group would be required to pay but for such refund is
reduced.
Section 11.4 Carrybacks. In no event shall Patriot/Wyndham have any
obligation to pay to Interstate or its Affiliates any amount in respect of a
carryback to a period prior to the Distribution of a net operating loss, unused
credit or similar item.
Section 11.5 Payments. To the extent that a party (or its successor)
(the "Payor") is liable to the other party (or its successor) (the "Payee") for
any amount of Taxes pursuant to Section 11.2, the Payor shall pay such amount to
Payee no later than 10 days after Payee has made written demand therefore. The
Payee shall submit with its written demand a calculation of the amount
requested, showing sufficient detail so as to permit the Payor to understand the
basis of the calculations. Any payment required by this Agreement which is not
made on or before the date provided thereunder shall bear interest after such
date at the rate then in effect for underpayments of Taxes to the IRS.
Patriot/Wyndham's indemnity obligation in respect of Taxes for any
taxable period shall be reduced to reflect the amount of any such Taxes paid by
Patriot/Wyndham, Interstate or their Affiliates on or prior to the Distribution
Date (including by payment of estimated Taxes) for which a refund is not
available. If the amount of such reduction exceeds the amount of
Patriot/Wyndham's indemnity obligation with respect to any Taxes, Interstate
shall pay to Patriot/Wyndham the amount of such excess no later than the date of
filing of the return reflecting the amount of such Taxes. In addition,
Patriot/Wyndham's indemnity obligation shall be increased or decreased, as the
case may be, as necessary to reflect the fact that Interstate is to bear all
taxes, and receive the benefit of any losses, generated on the Distribution
Date, except to the extent such taxes or losses are attributable to the
Restructuring Transactions.
Section 11.6 Tax Contests. Each of Patriot/Wyndham and Interstate shall
promptly notify the other party in writing of any proposed adjustment (and shall
provide all relevant correspondence with respect to a proposed adjustment) to a
Tax Return that could result in a liability to the other party under this
Agreement; provided that the failure of a party to give notice as provided in
this Section 11.6 shall not relieve any other party of its obligations
hereunder, except to the extent that such other party is actually prejudiced by
such failure to give notice. Patriot/Wyndham shall have control of all audits
and tax contests (i) relating to Taxes that it is required to indemnify under
Section 11.2 or (ii) relating to a member of the Interstate Group or the
operations of the Interstate Business for any taxable period ending on or prior
to the Distribution Date; provided that (x) Interstate shall have the right to
participate
28
<PAGE> 33
at its own expense in any such proceedings and (y) no such tax contest that
could affect the taxable income or loss of the Interstate Group for periods
after the Distribution shall be settled without the prior written consent of
Interstate, which consent shall not be unreasonably withheld or delayed.
Patriot/Wyndham and Interstate shall jointly control any audit or tax contest
relating to Taxes of a member of the Interstate Group for a Straddle Period;
provided that all major decisions shall be made by Patriot/Wyndham, but no such
contest shall be settled without the prior written consent of Interstate, which
consent shall not be unreasonably withheld or delayed. No Tax contest for a
taxable period (or portion thereof) ending on or prior to the Distribution Date
shall be settled without the prior written consent of Patriot/Wyndham, which
consent shall not be unreasonably withheld or delayed.
Section 11.7 Cooperation. After the Distribution Date, the parties
hereto will cooperate with each other, and will cause their respective
Affiliates, employees, representatives and agents to cooperate, in preparing and
filing all Tax Returns and other reports and documents relating to Taxes,
resolving all disputes and audits relating to Taxes with respect to all taxable
periods, and in any other matters relating to Taxes, including by maintaining
and making available to the other parties other all records relating to Taxes.
Such cooperation will include without limitation (i) providing information and
access to records relevant to Patriot's status as a real estate investment trust
(within the meaning of Section 856 of the Code), (ii) providing prior notice of
and ongoing information reasonably requested by Patriot/Wyndham with respect to
any direct or indirect acquisition by Interstate or its Affiliates of interests
in real property (including leasehold interests), and (iii) permitting access to
Patriot/Wyndham and its representatives and agents in connection with the
analysis of the earnings and profits of Old Interstate prior to its merger into
Patriot. Interstate acknowledges that its personnel prepared Tax Returns and
records and are familiar with issues relating to Old Interstate and its business
prior to and after the Merger, and that Patriot/Wyndham may suffer irreparable
harm without access to and cooperation from employees at Interstate with respect
to tax matters relating to taxable periods before and after the Merger.
Accordingly, Interstate agrees that Patriot/Wyndham shall be entitled on an
ongoing and mutually convenient basis, upon reasonable notice to access to and
cooperation from employees of Interstate and its Affiliates who are familiar
with the operations of and tax matters relating to Old Interstate and its
subsidiaries (including Mauro Macioce and other individuals who may have direct
knowledge of the operations of Old Interstate). Without limiting the generality
of the foregoing, Patriot/Wyndham and Interstate acknowledge that the IRS has
notified Patriot/Wyndham of its intent to conduct an audit of Old Interstate and
its subsidiaries for Tax periods beginning with the taxable year ended December
31, 1996. Interstate agrees that its personnel (including Mauro Macioce) shall
be made available to assist in the audit process, but that the audit will be
supervised and controlled by Patriot/Wyndham.
Section 11.8 Tax Records. All Tax Returns and related information
relating exclusively to the Interstate Business shall be the property of
Interstate; provided that Patriot/Wyndham shall be entitled to copies of or
access to any such Tax Returns or related information related to taxable periods
(or portions thereof) ending or prior to the Distribution Date, upon reasonable
notice to Interstate. All other Tax Returns and related information
29
<PAGE> 34
(including Tax returns of Interstate Hotels Company and its affiliates) shall be
the property of Patriot/Wyndham; provided that to the extent such Tax Returns or
information also relates to the Interstate Business or members of the Interstate
Group, Interstate shall be entitled to copies of or access to such returns or
related information upon reasonable notice to Patriot/Wyndham.
Patriot/Wyndham and Interstate agree to retain all Tax Returns and
related information which might contain information or provide evidence relevant
to the determination of the Tax liability of the Patriot/Wyndham Group or the
Interstate Group or the stockholders of either for any taxable period for a
period of ten years following the end of the latest taxable period to which they
relate, provided that no such records shall be discarded (i) until the
settlement of any ongoing contest relating thereto or (ii) without giving the
other party notice and the opportunity to retain such records.
Section 11.9 Interstate Hotels, LLC. The LLC shall comply, and
Interstate shall cause the LLC to comply, with the provisions of the LLC's
Amended and Restated Limited Liability Company Operating Agreement relating to
Taxes.
Section 11.10 Tax Elections. Except as required by the Code or the
regulations promulgated thereunder, no corporation, partnership or limited
liability company that will become a member of the Interstate Group before or on
the Distribution Date shall make any new election, change any existing election,
change any annual accounting period or adopt or change any accounting method
after May 13, 1999 and before the Distribution Date if any such election,
adoption or change could have the effect of increasing the tax owed by any
member of the Interstate Group on or after the Distribution Date; provided that
this Section 11.10(i) shall not prevent (x) the filing of new elections for
members of the Interstate Group upon the filing of their first applicable Tax
Returns, (y) elections, adoptions or changes made in consultation with
Interstate personnel, or (z) any other elections, adoptions or changes to the
extent that Patriot/Wyndham obtains Interstate's consent, which consent shall
not be unreasonably withheld or delayed. To Patriot's Knowledge, no election,
adoption or change described in the foregoing sentence has occurred since April
30, 1999, except that certain elections, adoptions or changes may have been made
in consultation with Interstate. Notwithstanding the foregoing, the restrictions
set forth in this Section 11.10 shall not apply if the Distribution has not
occurred by September 1, 1999.
Patriot/Wyndham covenants and agrees that no corporation that will
become a member of the Interstate Group on or before the Distribution Date has
made or will make prior to the Distribution Date any election under Section
341(f) of the Code.
Section 12 MISCELLANEOUS.
Section 12.1 Amendment and Waiver. No amendment of any provision of
this Agreement shall in any event be effective, unless the same shall be in
writing and signed by
30
<PAGE> 35
the parties hereto. Any failure of any party to comply with any obligation,
agreement or condition hereunder may only be waived in writing by the other
party but such waiver shall not operate as a waiver of, or estoppel with respect
to, any subsequent or other failure. No failure by any party to take any action
against any breach of this Agreement or default by the other party shall
constitute a waiver of such party's right to enforce any provisions hereof or to
take any such action.
Section 12.2 Expenses. Except as otherwise provided in this Agreement,
any Related Agreement or any other agreement being entered into by
Patriot/Wyndham and Interstate pursuant to this Agreement, Patriot/Wyndham shall
pay all investment banking, legal, accounting, printing, governmental filing,
listing, distribution agent and similar fees, costs and expenses incurred in
connection with the Distribution (whether or not payable as of the Distribution
Date) and with the consummation of the transactions contemplated by this
Agreement.
Section 12.3 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (a) on the date of service if served personally on the
party to whom notice is given, (b) on the day of transmission if sent via
facsimile transmission to the facsimile number given below, provided that
telephonic confirmation of receipt is obtained promptly after completion of the
transmission, (c) on the business day after delivery to a nationally recognized
overnight courier service or the Express Mail service maintained by the United
States Postal Service, provided receipt of delivery has been confirmed, or (d)
on the fifth day after mailing, provided receipt of delivery is confirmed, if
mailed to the party to whom notice is to be given, by first class mail,
registered or certified, postage prepaid, properly addressed and return receipt
requested, to the party as follows:
If to Patriot/Wyndham, at:
Patriot American Hospitality, Inc.
1950 Stemmons Freeway
Suite 6001
Dallas, Texas 75207
Attn.: Carla S. Moreland
Fax: (214) 863-1986
If to Interstate or the LLC, at:
Interstate Hotels Management, Inc.
680 Andersen Drive, Foster Plaza Ten
Pittsburgh, Pennsylvania 15220
Attn.: Timothy Q. Hudak
Fax: (412) 937-3265
31
<PAGE> 36
Either party may change its address for receiving notices by written
notice given to the other party in the manner provided above.
Section 12.4 Termination. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of Patriot/Wyndham without the approval of Interstate. Except as
set forth in the Settlement Agreement, in the event of such termination, no
party shall have any liability of any kind to any other party. From and after
the Distribution Date, this Agreement may not be terminated.
Section 12.5 Successors and Assigns. This Agreement shall inure to the
benefit of, and be binding upon and enforceable against the respective
successors and assigns of the parties hereto, provided that this Agreement may
not be assigned by either party without the prior written consent of the other
party, and any attempt to assign any rights or obligations hereunder without
such consent shall be void.
Section 12.6 Entire Agreement: Parties in Interest: This Agreement
(including the schedules, annexes and exhibits hereto) comprises the entire
agreement between the parties hereto as to the subject matter hereof and
supersedes all prior agreements and understandings between them relating thereto
and, except as provided in Section 5.2 hereof, is not intended to confer upon
any person other than the parties hereto (including their successors and
permitted assigns) any rights or remedies hereunder.
Section 12.7 Severability. If any term or provision of this Agreement
or the application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application of
such terms or provisions to persons or circumstances other than those as to
which it is invalid or unenforceable shall not be affected thereby and each term
and provision of this Agreement shall be valid and enforced to the fullest
extent permitted by law.
Section 12.8 Captions. Captions and headings are supplied herein for
convenience only and shall not be deemed a part of this Agreement for any
purpose.
Section 12.9 Annexes, Etc. The Annexes, Schedules and Exhibits shall be
construed with and as part of this Agreement to the same extent as if the same
had been set forth verbatim herein.
Section 12.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal substantive laws of the State of
Delaware, without giving effect to the principles of conflicts of laws thereof.
Section 12.11 Counterparts. This Agreement may be executed in several
counterparts, and all counterparts so executed shall constitute one agreement,
binding upon the parties hereto, notwithstanding that the parties are not
signatory to the same counterpart.
32
<PAGE> 37
IN WITNESS WHEREOF, Patriot/Wyndham, Interstate and the LLC have caused
this Agreement to be duly executed by their authorized representatives as an
agreement under seal, all as of the day and year first written above.
PATRIOT AMERICAN HOSPITALITY, INC.
By:_______________________________________
Name:
Title:
WYNDHAM INTERNATIONAL, INC.
By:_______________________________________
Name:
Title:
INTERSTATE HOTELS MANAGEMENT, INC.
By:_______________________________________
Name:
Title:
INTERSTATE HOTELS, LLC
By Interstate Hotels Management, Inc., its
Managing Member
By:_______________________________________
Name:
Title:
<PAGE> 38
Annex I
Restructuring Memorandum
[TO COME]
<PAGE> 39
Annex II
Assumed Liabilities
All liabilities and obligations relating to and arising from the
operation of the Interstate Business (except contingent liabilities in existence
on the date hereof which are within Patriot's Knowledge and are not disclosed in
Schedule 5.2.1(b) hereto), whether arising or accruing before or after the
Distribution Date, including but not limited to:
(a) All liabilities and obligations which should be set forth,
reflected, disclosed or reserved for on a combined balance sheet for Interstate
as of the Distribution Date prepared in the same manner as the December 31, 1998
combined balance sheet of Interstate included in the Information
Statement/Prospectus (after giving effect to any pro forma adjustments reflected
or described in the Information Statement/Prospectus);
(b) All liabilities and obligations of Patriot/Wyndham pursuant to,
under or relating to all agreements, contracts and leases of Patriot/Wyndham
relating to the Interstate Business;
(c) All liabilities and obligations being assumed by or agreed to be
performed by Interstate pursuant to any other agreement being entered into in
connection with this Agreement, including without limitation the Related
Agreements;
(d) All liabilities and obligations relating to all Actions relating
principally to or arising principally out of the operations of the Interstate
Business; and
(e) All liabilities and obligations relating to or arising from the
failure or other malfunction of any computer or other electronic system used or
useable in the Interstate Business due or relating to the year 2000.
<PAGE> 40
Annex III
Contributed Assets
1. 100% of the outstanding capital stock of Northridge Holdings, Inc.
2. A 99% membership interest in Crossroads Future Company, L.L.C.
3. A 99% membership interest in Crossroads/Memphis Company, L.L.C.
4. A 99% membership interest in Crossroads Hospitality Tenant Company, L.L.C.
5. 100% of the outstanding capital stock of PAH-Crossroads Member, Inc.
6. A 99% general partner interest in Hilltop Equipment Leasing Company, L.P.
7. A 99% membership interest in Continental Design & Supplies Company, L.L.C.
[8. A 25% general partner interest in Cambridge Hotel Associates]
9. 100% of the outstanding capital stock of PAH-Member, Inc.
10. 100% of the outstanding capital stock of PAH-Interstate Member, Inc.
[11. A 1% [limited] partner interest in Intercarp Limited Partnership]
[12. An 81.32% [limited] partner interest in Intercarp Limited Partnership]
13. Cash in the amount of $______________________
[14. Gencom contracts]
15. All tangible and intangible assets owned by Patriot/Wyndham relating
principally to the Interstate Business as of the Distribution Date,
including but not limited to:
(a) All assets and properties which should be set forth or reflected
on a combined balance sheet for Interstate as of the Distribution
Date prepared in the same manner as the December 31, 1998 combined
balance sheet of Interstate included in the Information
Statement/Prospectus (after giving effect to the pro forma
adjustments reflected or described in the Information
Statement/Prospectus);
(b) All of Patriot/Wyndham's right and interest in, to, under and
relating to all agreements, contracts and leases of
Patriot/Wyndham relating to the Interstate Business;
(c) All rights and interests of Patriot/Wyndham in and with respect to
the patents, trademarks, copyrights, trade secrets and other
intellectual property concerning the Interstate Business;
(d) All of the Books and Records; and
(e) All permits and licenses held by Patriot/Wyndham which are
transferrable and which relate principally to the Interstate
Business.
ANYTHING CONTAINED IN THIS ANNEX III TO THE CONTRARY
NOTWITHSTANDING, CONTRIBUTED ASSETS SHALL NOT INCLUDE:
<PAGE> 41
Annex III (continued)
(i) Cash and cash equivalents, including cash on hand or in bank
accounts, certificates of deposit, commercial paper and other
similar securities or other marketable securities other than
the $____________________ cash payment pursuant to item 13
above;
(ii) Any books and records relating to the Interstate Business
which Patriot/Wyndham is required by law to retain in its
possession; and
(iii) Any right, title or interest of Patriot/Wyndham in any
federal, state or local tax refund (including any income in
respect thereto) relating to the operations of the Interstate
Business prior to the Distribution Date.
<PAGE> 42
Annex IV-A
Entities Comprising the Interstate Business
IHC II, LLC
Northridge Holdings, Inc.
PAH-Crossroads Member, Inc.
PAH-Interstate Member, Inc.
PAH-Member, Inc.
IHC Services Company, L.L.C.
Crossroads Hospitality Company, L.L.C.
Crossroads Future Company, L.L.C.
Crossroads/Memphis Company, L.L.C.
Crossroads Hospitality Tenant Company, L.L.C.
Crossroads/Memphis Financing Corporation (Special Member)
Crossroads/Memphis Partnership, L.P.
Crossroads/Memphis Financing Company, L.L.C.
Oak Hill Catering Company, Inc.
Equity Bluefield, Inc.
State College BBQ/Concord Joint Venture
CHR Consulting Company, L.L.C.
Colony International Management Company, L.L.C.
Colony de Mexico, S.A. de C.V.
CHR Services Company, L.L.C.
Interstate Hotels, LLC
IHC/Moscow Corporation
PAH-Hilltop GP, LLC
Hilltop Equipment Leasing Company, L.P.
Northridge Insurance Company
Continental Design & Supplies Company, L.L.C.
PAH-Cambridge Holdings, LLC
Cambridge Hotel Associates
Intercarp Limited Partnership
Charles Sq. Associates; CH&S Ltd.
Colony Hotels and Resorts Company
<PAGE> 43
Annex IV-B
<PAGE> 44
Annex V
Retained Liabilities
All liabilities and obligations of Patriot/Wyndham and its subsidiaries
(other than Interstate and its subsidiaries, including without limitation, the
LLC), except those set forth on Annex II.
<PAGE> 45
Annex VI
Employment and Employee Benefit Plan Matters
[TO COME]
<PAGE> 46
Schedule 4.1.1
Distribution Transactions
[Purchase of Interstate Common Stock by Wyndham, contribution of Interstate
Common Stock to Patriot & Wyndham operating partnerships and distributions to
Wyndham preferred shareholders and unitholders to be described.]
<PAGE> 47
Schedule 5.2.1(a)
The information contained under the following captions of the
Information Statement/Prospectus and Form S-1 is subject to the indemnification
provisions of Section 5.2.1 of the Agreement:
INFORMATION STATEMENT/PROSPECTUS COVER PAGE
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF AND INTERSTATE MANAGEMENT - The
information contained in the first seven questions and answers.
SUMMARY - The Spin-off; Reasons for the Spin-off.
THE SPIN-OFF - Background of the Spin-off; Distribution of Interstate Management
Shares; Distribution Agreement*, Allocation of Shared Expenses*, Distribution
Agent, Federal Income Tax Consequences of the Spin-off.
- --------------
* Liability to be shared between Patriot/Wyndham, on the one hand, and
Interstate, on the other hand, on a 50/50 basis.
<PAGE> 48
Schedule 5.2.1(b)
Patriot/Wyndham Obligations
<TABLE>
<CAPTION>
CONTINGENT LIABILITY DESCRIPTION INDEMNITY OBLIGATION OF
PATRIOT/WYNDHAM, INCLUDING
MAXIMUM LIABILITY
<S> <C> <C>
Y2K Non-Compliance Equity Inns DMR survey Patriot to indemnify the LLC
(corporate office) plus remedies
for costs and expenses up to an
aggregate of $1,193,500 incurred
in connection with Y2K
compliance required under
existing contracts or leases
with Equity Inns
Trezevant litigation Reserve for uninsured Patriot to indemnify the LLC
lawsuit pending on the for costs and expenses up to an
date of this Agreement aggregate of $500,000 incurred
in connection with the
Trezevant litigation
General employment Reserves for deductibles Patriot to indemnify the LLC up
lawsuits deductible relating to employment- to an aggregate of $250,000 for
related lawsuits amounts paid for deductibles
relating to employment-related
lawsuits pending on the date of
this Agreement
Up to $750,000 for Interstate Hotels, LLC Patriot to cause the non-managing
unfunded loans relating has committed to fund member to contribute to the LLC
to the Marriott Grand preopening costs in the its pro rata portion (up to
Hotel, Moscow, Russia form of loans up to a $412,500) if and to the extent
predetermined maximum Interstate contributes its pro
amount rata portion
Loan Forgiveness under Certain employees have Patriot to indemnify for any losses
Employment Agreements options for up to 90 incurred by Interstate as a result
days following the of forgiveness of employee loans
Distribution Date (the due to elections to leave
"Free Look Period") to Interstate during the Free Look
elect to leave Period, up to $1.5 million
Interstate. These
employees are entitled
to forgiveness of
outstanding loans
</TABLE>
<PAGE> 49
Schedule 5.2.2
The information set forth below is subject to the indemnification
provisions of Section 5.2.2 of the Agreement:
All information contained in the Information Statement/Prospectus and
Form S-1 other than the information contained under the captions set forth on
Schedule 5.2.1(a); provided, that the information set forth under "THE
SPIN-OFF--Distribution Agreement" and "--Allocation of Shared Expenses" shall be
shared between Patriot/Wyndham, on the one hand, and Interstate, on the other
hand, on a 50/50 basis.
<PAGE> 1
Exhibit 10.2
FORM OF
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
INTERSTATE HOTELS, LLC
Dated as of May __, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 DEFINITIONS............................................................2
ARTICLE 2 FORMATION, DURATION AND PURPOSES.......................................7
Section 2.1 Formation.............................................7
Section 2.2 Name; Registered Agent and Registered Office..........7
Section 2.3 Principal Office......................................8
Section 2.4 Purposes and Business.................................8
Section 2.5 Future Business.......................................9
ARTICLE 3 RIGHTS AND OBLIGATIONS OF MEMBERS......................................9
Section 3.1 Limited Liability.....................................9
Section 3.2 Admission of Members..................................9
Section 3.3 Bankruptcy of a Member...............................10
Section 3.4 No Withdrawal........................................10
Section 3.5 Remuneration To Members..............................10
Section 3.6 Duties and Conflicts.................................10
ARTICLE 4 MANAGEMENT............................................................10
Section 4.1 Management by the Managing Member; Members...........10
Section 4.2 Bank Accounts........................................11
Section 4.3 Liability; Indemnification...........................11
Section 4.4 Limitations on Sale of Assets; Indemnification.......12
ARTICLE 5 BOOKS AND RECORDS.....................................................15
Section 5.1 Books and Records....................................15
Section 5.2 Accounting and Fiscal Year...........................15
Section 5.3 Reports..............................................15
Section 5.4 The Company Accountant...............................16
ARTICLE 6 CONTRIBUTIONS.........................................................17
Section 6.1 Initial Capital Contributions........................17
Section 6.2 Additional Capital Contributions.....................17
Section 6.3 No Third Party Beneficiary...........................17
Section 6.4 Capital Accounts.....................................18
Section 6.5 Withdrawal of Capital................................18
Section 6.6 Negative Capital Accounts............................18
Section 6.7 Satisfaction of Indemnity Obligations
Under Distribution................................18
ARTICLE 7 ALLOCATION OF PROFITS AND LOSSES; TAX MATTERS.........................19
Section 7.1 Profits and Losses...................................19
Section 7.2 Regulatory Allocations...............................19
Section 7.3 Tax Allocations......................................20
Section 7.4 Tax Matters Member...................................20
Section 7.5 Tax Elections........................................21
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 8 DISTRIBUTIONS.........................................................21
Section 8.1 Cash Available for Distributions.....................21
ARTICLE 8A COMPANY'S INTEREST IN INTERCARP......................................22
ARTICLE 9 TRANSFER..............................................................22
Section 9.1 No Transfer of Interests.............................22
Section 9.2 Permitted Transfers of Interests; Right of
First Offer.......................................22
Section 9.3 Transferees..........................................24
Section 9.4 Admission of Additional Members......................24
ARTICLE 10 TERMINATION..........................................................25
Section 10.1 Dissolution..........................................25
Section 10.2 Termination..........................................25
Section 10.3 Acts in Furtherance of Liquidation...................26
ARTICLE 11 TAG-ALONG AND DRAG-ALONG RIGHTS......................................27
Section 11.1 Notice of Proposed Transaction.......................27
Section 11.2 Tag-Along and Drag-Along Rights......................27
Section 11.3 Terms................................................28
Section 11.4 Closing..............................................29
ARTICLE 12 GENERAL PROVISIONS...................................................29
Section 12.1 Covenants, Representations and Warranties of
the Members.......................................29
Section 12.2 Notices..............................................30
Section 12.3 Governing Laws; Jurisdiction; Venue..................32
Section 12.4 Entire Agreement.....................................32
Section 12.5 Waiver...............................................33
Section 12.6 Severability.........................................33
Section 12.7 Terminology..........................................33
Section 12.8 Action by the Members................................33
Section 12.9 Amendments...........................................33
Section 12.10 Binding Agreement....................................33
Section 12.11 Further Assurances...................................33
</TABLE>
ii
<PAGE> 4
SCHEDULES & EXHIBITS:
Schedule 1.1 - Initial Capital Contributions, Capital Account Balances
Schedule 1.2 - Existing Subsidiaries
Schedule 2.4.1 - List of Existing Contracts
iii
<PAGE> 5
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this
"AGREEMENT"), made and entered into as of this _____ day of May, 1999 by and
among INTERSTATE HOTELS CORPORATION., a Maryland corporation (together with its
permitted successors and assigns hereunder "IHC"), and [PAH-INTERSTATE HOLDINGS,
INC.], a Delaware corporation (together with its permitted successors and
assigns hereunder "PAH"), amends and restates in its entirety the Limited
Liability Company Agreement dated as of June 2, 1998 by and among IHC and PAH
(the "ORIGINAL AGREEMENT"). IHC and PAH are each sometimes referred to herein
individually as a "MEMBER" and collectively as the "MEMBERS".
R E C I T A L S
WHEREAS, Patriot American Hospitality, Inc. ("PATRIOT REIT") formed a
limited liability company with the name "INTERSTATE HOTELS, LLC" (the "COMPANY")
under the Act (as defined below) by the filing of a Certificate of Formation
(the "CERTIFICATE OF FORMATION") with the Delaware Secretary of State on March
23, 1998;
WHEREAS, on June 2, 1998, Interstate Hotels Company, a Pennsylvania
corporation ("INTERSTATE"), merged with and into Patriot REIT (the "INTERSTATE
MERGER");
WHEREAS, immediately following the Interstate Merger, Patriot REIT
caused Interstate Hotels Corporation, a Pennsylvania corporation and a
wholly-owned subsidiary of Interstate to merge with and into the Company;
WHEREAS, Patriot REIT subsequently contributed on June 2, 1998 a 65%
non- managing member interest in the Company to [PAH] and a 35% managing member
interest in the Company to IHC;
WHEREAS, pursuant to a Distribution Agreement, dated as of June __,
1999, by and among Patriot REIT, Wyndham International, Inc. ("WYNDHAM" and,
together with Patriot REIT, "PATRIOT/WYNDHAM"), IHC and the Company (the
"DISTRIBUTION AGREEMENT"), Patriot/Wyndham has agreed to contribute additional
assets to the Company through [PAH] and IHC such that, following such
contributions, PAH will own a 55% non-managing member interest in the Company
and IHC will own a 45% managing member interest in the Company; and
WHEREAS, the Members now desire to amend and restate the Original
Agreement in its entirety so as to govern the operations of the Company and the
rights and obligations of the Members.
<PAGE> 6
NOW, THEREFORE, in consideration of the recitals and the covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Members hereby
agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, initially capitalized terms used herein
shall have the following meanings:
"ACT" as defined in Section 2.1.
"ADDITIONAL MEMBER" as defined in subsection 9.4.2.
"AFFILIATE" means, when used with respect to any Person, any other
Person controlling or controlled by or under common control with such Person.
For purposes of this definition, the term "CONTROL", with respect to any Person,
means possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or of other beneficial interests or by contract
or otherwise.
"AGREEMENT" as defined in the Preamble.
"BANKRUPTCY" means, with respect to any Person, (i) the commencement by
such Person of a proceeding seeking relief under any provision or chapter of the
Bankruptcy Code or any other federal or state law relating to insolvency,
bankruptcy or reorganization; (ii) an adjudication that such Person is insolvent
or bankrupt; (iii) the entry of an order for relief under the Bankruptcy Code
with respect to such Person; (iv) the filing of any such petition or the
commencement of any such case or proceeding against such Person, unless such
petition and the case or proceeding initiated thereby are dismissed within
seventy-five (75) days from the date of such filing; (v) the filing of an answer
by such Person admitting the material allegations of any such petition; (vi) the
appointment of a trustee, receiver or custodian for all or substantially all of
the assets of such Person unless such appointment is vacated or dismissed within
seventy-five (75) days from the date of such appointment but not less than five
(5) days before the proposed sale of any assets of such Person; (vii) the
insolvency of such Person or the execution by such Person of a general
assignment for the benefit of creditors; (viii) the convening by such Person of
a meeting of its creditors, or any class thereof, for purposes of effecting a
moratorium upon or composition of its debts or an extension of its debts; (ix)
the failure of such Person to pay its debts generally as they mature; (x) the
levy, attachment, execution or other seizure of substantially all of the assets
of such Person where such seizure is not discharged within ten (10) days
thereafter; or (xi) the admission by such Person in writing of its inability to
pay its debts generally as they mature or that it is generally not paying its
debts as they become due.
2
<PAGE> 7
"BANKRUPTCY CODE" means Title 11 of the United States Code entitled
"Bankruptcy", as now and hereafter in effect, or any successor statute.
"BOOK DEPRECIATION" means, for each fiscal year, an amount equal to the
depreciation, amortization or other cost recovery deduction allowable with
respect to an asset for such year, except that if the Book Value of an asset
differs from its adjusted basis for federal income tax purposes at the beginning
of such year, Book Depreciation shall be an amount which bears the same ratio to
such beginning Book Value as the federal income tax depreciation, amortization
or other cost recovery deduction for such year bears to such beginning adjusted
tax basis; provided, however, that if the adjusted basis for federal income tax
purposes of an asset at the beginning of such year is zero, Book Depreciation
shall be determined with reference to such beginning Book Value using a method
reasonably selected by the Managing Member pursuant to Section 7.5.
"BOOK VALUE" means, with respect to any asset of the Company, the
asset's adjusted basis for federal income tax purposes, except as follows:
(i) the initial Book Value of any asset contributed by a Member to
the Company shall be the gross fair market value of such assets as determined by
the Members;
(ii) the Book Values of all Company assets shall be adjusted to equal
their respective fair market values as permitted pursuant to Section
1.704-1(b)(2)(iv)(f) of the Treasury Regulations;
(iii) the Book Value of any asset of the Company distributed to any
Member shall be adjusted to equal the gross fair market value of such asset as
of the date of distribution as determined by the Members; and
(iv) the Book Value of Company assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or 743(b) to the extent such adjustments are
taken into account in determining Capital Accounts and are not otherwise
reflected in an adjustment made pursuant to this definition of "Book Value".
If the Book Value of an asset has been determined or adjusted pursuant
to this definition of Book Value, then such Book Value shall thereafter be
adjusted by Book Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL ACCOUNT" means, with respect to any Member, the separate
"book" account which the Company shall establish and maintain for such Member in
accordance with Section 704(b) of the Code and Regulations Section
1.704-1(b)(2)(iv) and such other provisions of Section 1.704-1(b) of the
Regulations as must be complied with in order for the Capital
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Accounts to be determined in accordance with the provisions of said Regulations.
In furtherance of the foregoing, the Capital Accounts shall be maintained in
compliance with Section 1.704-1(b)(2)(iv) of the Regulations, and the provisions
hereof shall be interpreted and applied in a manner consistent therewith.
"CAPITAL CALL DUE DATE" as defined in subsection 6.2.2.
"CAPITAL CALL NOTICE" as defined in subsection 6.2.2.
"CAPITAL CONTRIBUTIONS" as defined in subsection 6.2.1.
"CERTIFICATE OF FORMATION" as defined in the Preamble.
"CODE" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
successor provision of the Code.
"COMPANY" as defined in the Preamble.
"COMPANY ACCOUNTANT" as defined in Section 5.4.
"EXISTING CONTRACTS" means those agreements held by the Company or the
Existing Subsidiaries, each as more fully identified on Schedule 2.4.1 hereto.
"EXISTING SUBSIDIARY CONTRACTS" means those agreements held by the
Existing Subsidiaries, each as more fully identified on Schedule 2.4.1 hereto.
"EXISTING SUBSIDIARIES" means those entities listed on Schedule 1.2
hereto.
"FIRST OFFER NOTICE" as defined in subsection 9.2.2.1.
"FIRST OFFER PRICE" as defined in subsection 9.2.2.1.
"INITIAL CAPITAL CONTRIBUTIONS" as defined in Section 6.1.
"INTEREST" means, with respect to any Member at any time, the interest
of such Member in the Company at such time, including the right of such Member
to any and all of the benefits to which such Member may be entitled as provided
in this Agreement, together with the obligations of such Member to comply with
all of the terms and provisions of this Agreement.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York are authorized by law, regulation or
executive order to remain closed. If a date is a Legal Holiday, the date set for
any action hereunder shall be the next succeeding day that is not a Legal
Holiday.
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"LIQUIDATING MEMBER" means the Managing Member; provided, however, if
the Managing Member's bankruptcy, withdrawal or liquidation shall have preceded
the liquidation of the Company, the Non-Managing Member shall be the Liquidating
Member.
"MANAGING MEMBER" means IHC, and any successor to IHC appointed as
Managing Member in accordance with the provisions of this Agreement.
"MEMBER" or "MEMBERS" means, initially, the Persons identified as
Members in the preamble to this Agreement, and thereafter shall include any
Person admitted as a Substitute Member or an Additional Member.
"NECESSARY COSTS" as defined in subsection 6.2.3.
"NET CAPITAL PROCEEDS" means (i) the net cash proceeds arising out of
the refinancing or refunding of any Company indebtedness or any additional
indebtedness, and (ii) gross receipts (including condemnation and casualty
insurance proceeds) from the sale, exchange or other disposition (excluding
leasing in the ordinary course of business) of any Company assets, less (A) any
indebtedness relating to or secured by such assets which is paid out of such
gross receipts, (B) the costs and expenses of the sale, exchange or disposition
including brokerage commissions, and (C) in the case of condemnation or
casualty, the cost of any collection, repair or restoration.
"NET OPERATING CASH FLOW" means, for any period, the excess of cash
receipts of all kinds for that period (including disbursements from reserves
previously established by the Managing Member) over cash disbursements of all
kinds for that period (including reasonable reserves established by the Managing
Member), but excluding Net Capital Proceeds.
"NON-MANAGING MEMBER" means PAH, and any successor to PAH as permitted
in accordance with the terms of this Agreement.
"OFFERED PERCENTAGE INTEREST" as defined in subsection 9.2.2.1.
"PERCENTAGE INTEREST" means, with respect to each Member, the
percentage set forth below opposite its name, in each case, subject to
adjustment as provided in this Agreement:
IHC 45%
PAH 55%
Upon the making of any additional Capital Contribution each Member's Percentage
Interest shall thereafter be adjusted in accordance with Section 6.2.
"PERMITTED TRANSFER" means any Transfer expressly permitted by the
terms of this Agreement.
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"PERSON" means any individual, partnership, limited partnership, trust,
estate, association, corporation, limited liability company, or other entity
whether domestic or foreign.
"PROFITS"and "LOSSES" means, for each fiscal year or other period, an
amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) any depreciation, amortization and/or cost recovery
deductions with respect to any asset shall be deemed to be equal to the
Book Depreciation available with respect to such asset;
(b) any income or gain of the Company that is exempt from
federal income tax and not otherwise taken into account in computing
Profits or Losses shall be added to such taxable income or loss;
(c) any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses, shall be subtracted
from such taxable income or loss;
(d) to the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Section 734(b) or 743(b) of the Code is
required to be taken into account in determining Capital Accounts as a
result of a distribution other than in liquidation of a Member's
Interest, the amount of such adjustment shall be treated as an item of
gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases the basis of the asset) from the disposition
of the asset and shall be taken into account for purposes of computing
Profits or Losses;
(e) in the event the Book Value of any Company asset is
adjusted pursuant to the definition of Book Value, the amount of such
adjustment shall be taken into account as gain or loss from the
disposition of such asset for purposes of computing Profits or Losses;
(f) gain or loss resulting from any disposition of property
with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Book Value of the
property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Book Value; and
(g) any items of income, gain, loss or deduction which are
individually specially allocated pursuant to the provisions of Section
7.2 shall not be taken into
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account in computing Profits and Losses for any taxable year.
"REMAINING MEMBERS" as defined in subsection 10.1.1.
"REQUIRED FUNDS" as defined in subsection 6.2.2.
"SECURITIES ACT" as defined in subsection 12.1.6.
"SECURITIES LAWS" as defined in subsection 12.1.6.
"SPECIAL TRANSFER EVENT" as defined in subsection 9.2.2.
"SUBSTITUTE MEMBER" as defined in Section 9.3.
"TAX MATTERS MEMBER" as defined in Section 7.4.
"TRANSFER" as defined in subsection 9.1.1.
"TREASURY REGULATIONS" means the income tax regulations promulgated
under the Code, whether temporary, proposed or finalized, as such regulations
may be amended from time to time (including corresponding provisions of
succeeding regulations).
ARTICLE 2
FORMATION, DURATION AND PURPOSES
SECTION 2.1 FORMATION. Pursuant to the Delaware Limited Liability
Company Act, codified in the Delaware Code Annotated, Title 6, Sections 18-101
to 18-1109, as the same may be amended from time to time (the "ACT"), the
Members have formed a limited liability company by filing the Certificate of
Formation with the Secretary of State of the State of Delaware. The rights and
liabilities of the Members, and the operation of the Company, shall be governed
by and determined pursuant to the Act and this Agreement. To the extent the
rights and obligations of any Member are different by reason of any provision of
this Agreement than they would be in the absence of such provision, this
Agreement, to the extent permitted by the Act, shall control.
SECTION 2.2 NAME; REGISTERED AGENT AND REGISTERED OFFICE. The name of
the Company, and the name under which the business of the Company shall be
conducted shall be Interstate Hotels, LLC or such other name as hereafter may be
adopted by the Managing Member. The Registered Agent of the Company shall be The
Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801, or
such other Person as may be selected from time to time by the Managing Member.
The registered office of the Company shall be c/o The Corporation Trust Company,
1209 Orange Street, Wilmington, Delaware 19801.
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SECTION 2.3 PRINCIPAL OFFICE. The principal place of business and
office of the Company shall be located c/o Interstate Hotels Corporation, Foster
Plaza Ten, 680 Andersen Drive, Pittsburgh, Pennsylvania 15220-8126, or at such
other place as may be determined by the Managing Member.
SECTION 2.4 PURPOSES AND BUSINESS.
2.4.1 The purpose and nature of the business of the Company
shall be:
(i) to directly or indirectly own, hold, manage,
terminate, extend, amend, amend and restate
or otherwise modify, or renew or replace
(provided such renewal or replacement
relates solely to the hotels referenced in
the Existing Contracts) the Existing
Contracts;
(ii) to own and hold ownership interests in the
Existing Subsidiaries of the Company for the
purpose of causing said subsidiaries to (a)
own, hold, manage, terminate, extend, amend,
amend and restate or otherwise modify, or
renew or replace (provided such renewal or
replacement relates solely to the hotels
referenced in the Existing Subsidiary
Contracts) the Existing Subsidiary Contracts
to which they are a party and (b) provide
certain ancillary services to the hotels
subject to the Existing Contracts and the
Existing Subsidiary Contracts;
(iii) to exercise the rights and perform the
obligations of the Company and to cause the
Existing Subsidiaries to exercise their
respective rights and perform their
respective obligations under and pursuant to
the Existing Contracts, including to act as
managers and franchisees under such Existing
Contracts or any renewals or replacements
thereof with respect to the hotels
referenced in such Existing Contracts;
(iv) to own and hold ownership interests in
entities owning and managing The Charles
Hotel Complex in Cambridge, Massachusetts;
and
(v) to conduct all activities necessary or
desirable to accomplish the foregoing
purposes, including, without limitation,
retaining such employees as the Managing
Member deems reasonably necessary.
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2.4.2 The Company shall not:
(i) enter into or permit any Existing Subsidiary
to enter into any contract or agreement
other than as permitted under subsection
2.4.1;
(ii) enter into or permit any Existing Subsidiary
to enter into or conduct any business, other
than as set forth under subsection 2.4.1;
(iii) create, acquire or retain any equity
interest in any legal entity, other than the
Existing Subsidiaries;
(iv) make any loans, investments or other similar
payments other than loans, investments or
other similar payments made for the benefit
of the Company or the Existing Subsidiaries
(which may include, but shall not be limited
to, indirect benefits such as the renewal of
an Existing Contract or an Existing
Subsidiary Contract); or
(v) permit any Person other than the Company to
have any ownership interest in any Existing
Subsidiary.
SECTION 2.5 FUTURE BUSINESS. The Members acknowledge and agree that
they intend for all management and franchise activities, other than franchise or
management activities permitted under subsection 2.4.1 or relating to the hotels
currently managed under the Existing Contracts, to be conducted by IHC, as
opposed to the Company, and neither the Managing Member or the Non-Managing
Member shall have any obligation, fiduciary or otherwise, to offer or bring to
the Company any opportunities relating to any business activities not
contemplated in subsection 2.4.1. It is anticipated that all such opportunities
not contemplated by subsection 2.4.1 shall belong to IHC.
ARTICLE 3
RIGHTS AND OBLIGATIONS OF MEMBERS
SECTION 3.1 LIMITED LIABILITY. Except as required under the Act or as
expressly set forth in this Agreement, the debts, obligations and liabilities of
the Company, whether arising in contract, tort or otherwise, will be solely the
debts, obligations and liabilities of the Company, and no Member will be
obligated personally for any debt, obligation or liability of the Company solely
by reason of being a member of the Company.
SECTION 3.2 ADMISSION OF MEMBERS. IHC and PAH are Members of the
Company and shall be shown as such on the books and records of the Company.
Except as expressly permitted by this Agreement, no other Person will be
admitted as a member of the Company, and no additional Interests will be issued,
without the approval of IHC and PAH.
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SECTION 3.3 BANKRUPTCY OF A MEMBER. Except as provided in Section 10.1,
the Bankruptcy of any Member shall not cause a dissolution of the Company, and
the rights of such Member to share in the profits or losses of the Company and
to receive distributions of Company funds shall, on the happening of such event,
devolve on its successors or assigns, subject to the terms and conditions of
this Agreement, and the Company shall continue as a limited liability company.
However, in no event shall any such assignee become a substitute Member or
succeed to any right to vote or participate in the management of the business,
property and affairs of the Company or to exercise any rights of a Member,
unless such assignee shall otherwise be entitled to become a Substitute Member
under the terms of this Agreement.
SECTION 3.4 NO WITHDRAWAL. No Member may withdraw from the Company
without the prior consent of the other Members (which may be granted or withheld
in the sole discretion of such Members), other than as expressly provided in
this Agreement.
SECTION 3.5 REMUNERATION TO MEMBERS. Except as expressly otherwise
authorized in, or pursuant to, this Agreement, no Member shall be entitled to
remuneration for acting in the Company business.
SECTION 3.6 DUTIES AND CONFLICTS. Notwithstanding anything to the
contrary contained in this Agreement, (i) each Member recognizes that the other
Member and its Affiliates have or may have other business interests, activities
and investments, some of which may be in conflict or competition with the
business of the Company, and that such Persons are entitled to carry on such
other business interests, activities and investments; (ii) the Members and their
Affiliates may engage in or possess an interest in any other business or venture
of any kind, independently or with others, on their own behalf or on behalf of
other entities with which they are affiliated or associated, and such Persons
may engage in any activities, whether or not competitive with the Company,
without any obligation to offer any interest in such activities to the Company
or to any Member; and (iii) neither the Company nor any Member shall have any
right, by virtue of this Agreement, in or to such activities, or the income or
profits derived therefrom, and the pursuit of such activities, even if
competitive with the business of the Company, shall not be deemed wrongful or
improper.
ARTICLE 4
MANAGEMENT
SECTION 4.1 MANAGEMENT BY THE MANAGING MEMBER; MEMBERS.
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4.1.1 MANAGEMENT BY THE MANAGING MEMBER. The overall
management and control of the business and affairs of the Company shall
be overseen by the Managing Member, in the form and manner described
below. Except as otherwise expressly provided in this Agreement, the
Managing Member shall have the exclusive power and authority to take
such action for and on behalf of the Company as the Managing Member
shall from time to time deem necessary or appropriate to carry on the
Company business and to carry out the purposes for which the Company
was organized. The Managing Member shall in good faith use reasonable
efforts to extend or renew the Existing Contracts (including leases)
with the respective third party owners and shall cause the Existing
Subsidiaries to use good faith efforts to extend or renew the Existing
Subsidiary Contracts (including leases) with the respective third party
owners, in each case upon the expiration thereof, shall in good faith
use reasonable efforts to provide and promote the ancillary services
provided by the Existing Subsidiaries which are not parties to hotel
management contracts, and shall not allow or cause, directly or
indirectly, IHC or any other affiliate of IHC (other than the Company)
to become the Manager of the hotels currently managed under the
Existing Contracts.
4.1.2 INVOLVEMENT IN COMPANY BUSINESS. The Managing Member
shall devote such time to the Company business as it deems to be
necessary or desirable in connection with its respective duties and
responsibilities hereunder.
4.1.3 LIMITATIONS ON POWERS OF THE MEMBERS. Notwithstanding
the foregoing provisions of this Section 4.1 or any other provision of
this Agreement to the contrary, the Members shall not be empowered to,
and shall not (i) undertake any act in violation of this Agreement;
(ii) possess or take title to any assets of the Company; or (iii) take
any action that makes it illegal or impossible for the Company to carry
on its business.
SECTION 4.2 BANK ACCOUNTS. The Managing Member shall open and
thereafter maintain, for the Company, a commercial checking account and such
other accounts at one or more banks or trust companies organized and existing
under the laws of the United States or any state thereof, each having combined
capital and surplus aggregating at least $500,000,000 and none of which is an
Affiliate of any Member, which accounts shall be interest bearing to the extent
practicable. All funds of the Company shall be promptly deposited in said
accounts.
SECTION 4.3 LIABILITY; INDEMNIFICATION. Except as set forth in Section
4.4, no Member (including the Managing Member) shall be liable to the Company or
any Member for any act or omission by it in the conduct of its duties as a
Managing Member or Member, as the case may be, which is within the scope of such
Person's authority hereunder and which is performed or omitted in good faith and
without gross negligence or willful misconduct on its part. The Company shall
indemnify, defend and hold harmless each such Person and their respective
Affiliates and agents from and against any personal liability, claim, loss,
damage, cost or expenses, including attorneys' fees and expenses, incurred or
sustained by such Person
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or such Affiliate or agent by reason of any act or omission by it which is
within the scope of its authority hereunder and which is performed or omitted in
good faith and without gross negligence or willful misconduct on its part. The
indemnification provided under this Section 4.3 shall be in addition to, and
shall not limit or diminish, the coverage of any such Person or Affiliate or
agent under any insurance covering the Company. The provisions of this Section
4.3 shall survive any termination of the Company or this Agreement.
SECTION 4.4 LIMITATIONS ON SALE OF ASSETS; INDEMNIFICATION.
4.4.1 The Members acknowledge that if any or all of the Existing
Contracts or other assets of the Company were sold or
otherwise transferred or disposed of by the Company, or if the
Company were merged with or acquired by another entity or
otherwise engaged in a corporate transaction in which taxable
gain could be recognized in whole or in part, PAH would suffer
significant adverse tax consequences. The Members also
acknowledge that the stock of PAH is held by an entity that is
a "real estate investment trust" for Federal income tax
purposes (a "REIT") that must comply with certain requirements
to continue to qualify as a REIT, including proposed
legislation affecting the operations and activities of
"stapled" REITs entitled to grandfathering relief under
Section 269B of the Code. Accordingly, without the prior
written consent of PAH, the Company shall not, and the
Managing Member shall cause the Company not to, (i) sell or
otherwise dispose of any of the Existing Contracts or other
assets of the Company or the Existing Subsidiaries (except for
sale or disposals of the Existing Contracts or other assets
pursuant to the performance of obligations of the Company
which are required (as distinguished from permitted) under the
Existing Contracts), (ii) merge with, be acquired by or enter
into a corporate acquisition or reorganization transaction
with any other person or entity, or to allow any of the
Existing Subsidiaries to merge with, be acquired by or enter
into a corporate acquisition or reorganization transaction
with any other person or entity, (iii) knowingly cause PAH to
recognize any of the "built-in gain" with respect to its
interest in the Company or the Company's assets, (iv) acquire
any real property or other interests in real estate (including
leasehold interests), or acquire interests in, or
substantially all of the assets of, any other person or entity
(other than the Existing Subsidiaries), or to allow any of the
Existing Subsidiaries to acquire any real property or other
interests in real estate, or acquire interests in, or
substantially all of the assets of, any other person or entity
(including leasehold interests); or (v) change the nature of
the Company's business, or allow any of the Existing
Subsidiaries to change the nature of any of the Existing
Subsidiaries' business, in a manner not contemplated by this
Agreement; provided, however, that (a) nothing in this Section
4.4.1 or elsewhere in this Agreement shall prohibit the
Company from selling its interests in The Charles Hotel
Complex in Cambridge, Massachusetts pursuant to an Asset
Purchase Agreement, dated as of May [10] 1999, by and among
[IHC/Chaz Corporation, PAH-Management Corporation and F&H
Realty LLC]
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and (b) the indemnification obligations under Section 4.4.2
below shall not apply in connection with any such sale of
interests in The Charles Hotel Complex.
4.4.2 The Company and the Managing Member, jointly and severally,
hereby indemnify and hold harmless PAH, its shareholders,
officers, directors, agents and other indirect owners, and
their successors in interest, from and against any personal
liability, claim, loss, damage, cost or expenses, including
attorneys' fees and expenses, incurred or sustained by any
breach of the obligations set forth in subsections 4.4.1(i)
through 4.4.1(iii), including the amount of any such adverse
tax consequences.
SECTION 4.5 ALLOCATION OF COSTS AND EXPENSES. The Company and IHC
acknowledge that certain employees, equipment and services may be provided by
the Company for the benefit of IHC (including any subsidiary of IHC, other than
the Company), or vice versa. All costs and expenses relating to services
provided by one party for, in whole or in part, the benefit of the other (the
"SHARED EXPENSES") shall be allocated between the Company and IHC, based on
generally accepted accounting principles consistently applied, on the basis of
which party benefited from the expenditure of such Shared Expenses. To the
extent the allocation of any Shared Expenses cannot be fairly or equitably
apportioned (including general and administrative expenses), the Company and IHC
shall allocate Shared Expenses based on respective gross revenues so that each
party's profit margins are substantially the same for similar services. The
Managing Member and the Non-Managing Member may mutually agree in writing to
apportion Shared Expenses between the Company and IHC other than as set forth
above. The Managing Member shall regularly (not less frequently than quarterly)
provide all Members with a breakdown of such allocation of Shared Expenses,
which breakdown shall be reviewed by the Company Accountant. The Chief Financial
Officer of IHC shall certify quarterly to the Non-Managing Member that the
allocation of Shared Expenses for the immediately preceding quarter complies
with the allocation methodology set forth in this Section 4.5.
SECTION 4.6 RESOLUTION OF DISPUTES REGARDING SHARED EXPENSES.
4.6.1 All disputes, claims, or controversies relating to the
allocation of Shared Expenses pursuant to Section 4.5 shall be
resolved solely and exclusively by binding arbitration to be
conducted before the American Arbitration Association ("AAA")
or its successor. The arbitration shall be held in New York,
New York before a single arbitrator to be selected by the
Members or, if the Members are unable to agree on a single
arbitrator, then before a panel of three arbitrators appointed
by AAA, and the arbitration shall be conducted in accordance
with the rules and regulations promulgated by AAA, unless
specifically modified herein. The parties covenant and agree
that the arbitration shall commence within sixty (60) days of
the date on which a written demand for arbitration is filed by
any Member with AAA. In connection with the
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arbitration proceeding, the arbitrator shall have the power to
order the production of documents by each party and any
third-party witnesses; however, the arbitrator shall not have
the power to order the taking of depositions, the answering of
interrogatories or the response to requests for admission. In
connection with any arbitration, each party shall provide to
the other, no later than seven business days before the date
of the arbitration, the identity of all persons that may
testify at the arbitration and a copy of all documents that
may be introduced at the arbitration or considered or used by
a party's witness or expert. The arbitrator's decision and
award shall be made and delivered within six (6) months of the
selection of the arbitrator and judgment on the award may be
entered by any court having competent jurisdiction. The
arbitrator's decision shall set forth a reasoned basis for its
findings. The Members covenant and agree that they will
participate in the arbitration in good faith and that they
will share equally its costs except as otherwise provided
herein. This clause applies equally to requests for temporary,
preliminary or permanent injunctive relief, except that in the
case of temporary or preliminary injunctive relief any Member
may proceed in court without prior arbitration for the limited
purpose of avoiding immediate and irreparable harm. The
provisions of this Section 4.6 shall be enforceable in any
court of competent jurisdiction, and the parties shall bear
their own costs in the event of any proceeding to enforce this
Agreement except as otherwise provided herein. The arbitrator
may in his or her discretion assess costs and expenses
(including the reasonable legal fees and expenses of the
prevailing party) against any party to a proceeding. Any party
unsuccessfully refusing to comply with an order of the
arbitrators shall be liable for costs and expenses, including
attorneys' fees, incurred by the other party in enforcing the
award.
4.6.2 The Members agree not to institute, join in, or cooperate in
any litigation, lawsuit, claim or action against the Company
or any Member regarding the allocation of Shared Expenses,
other than by the means provided for in Section 4.6.1 of this
Agreement.
4.6.3 Each of the Members irrevocably and unconditionally consents
to the exclusive jurisdiction of AAA to resolve all disputes,
claims or controversies arising out of or relating to the
allocation of Shared Expenses, and further consents to the
jurisdiction of the courts of the State of New York for the
purposes of enforcing the arbitration provisions of Section
4.6.1 of this Agreement. Each Member further irrevocably
waives any objection to proceeding before AAA based upon lack
of personal jurisdiction or to the laying of venue and further
irrevocably and unconditionally waives and agrees not to make
a claim in any court that arbitration before AAA has been
brought in an inconvenient forum.
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ARTICLE 5
BOOKS AND RECORDS
SECTION 5.1 BOOKS AND RECORDS. The Managing Member shall maintain or
cause to be maintained, at the expense of the Company, in a manner customary and
consistent with good accounting principles, practices and procedures, a
comprehensive system of office records, books and accounts (which records, books
and accounts shall be and remain the property of the Company) in which shall be
entered fully and accurately each and every financial transaction with respect
to the operations of the Company. Bills, receipts and vouchers shall be
maintained on file by the Company. The Managing Member shall maintain or caused
to be maintained said books and accounts in a safe manner and separate from any
records not having to do directly with the Company. The Managing Member shall
cause audits to be performed and audited financial statements and income tax
returns to be prepared as it deems necessary. Such books and records of account
shall be prepared and maintained by the Managing Member at a location or
locations designated by the Managing Member. Each Member or its duly authorized
representative shall have the right to inspect, examine and copy such books and
records of account at the Company's office during reasonable business hours.
SECTION 5.2 ACCOUNTING AND FISCAL YEAR. The books of the Company
shall be kept on the accrual basis and the Company shall report its operations
for tax purposes on the accrual method. The taxable year of the Company shall
end on December 31 of each year, unless a different taxable year shall be
required by the Code.
SECTION 5.3 REPORTS.
5.3.1 The Managing Member shall prepare, or cause to be
prepared, at Company expense, the financial reports and other
information, including, without limitation, audited financial
statements, that the Managing Member may determine are appropriate. The
Managing Member shall prepare or cause to be prepared at the expense of
the Company and furnished to each of the Members the following:
5.3.1.1 Within sixty (60) calendar days after the close
of each calendar year of the Company, audited financial statements,
including, without limitation, related notes to financial statements, a
balance sheet of the Company dated as of the end of the calendar year,
a related statement of income and expense, a statement of cash flow and
a statement of changes in Members' capital for the Company for the
calendar year and information for the calendar year as to the balance
in each Member's Capital Account, and all other information deemed
reasonably necessary by the Managing Member, or as reasonably requested
by the Non-Managing Member, certified to by the an independent
accounting firm as being, to the best of its knowledge, true and
correct and prepared in accordance with generally accepted accounting
principles applied on a consistent basis, and all of which shall
otherwise be certified in such manner as is customary;
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5.3.1.2 Within twenty (20) calendar days after the close
of each calendar quarter of the Company (other than the last calendar
quarter in any calendar year), a balance sheet of the Company dated as
of the end of the calendar quarter, a related statement of income and
expense, a statement of cash flow and a statement of changes in
Members' capital for the calendar quarter and information for the
calendar quarter as to the balance in each Member's Capital Account,
and all other information, including a market update, as is deemed
reasonable by the Managing Member, or as reasonably requested by the
Non-Managing Member, all of which shall be certified to by the Person
preparing or responsible for preparing such statements as being, to the
best of its knowledge, true and correct;
5.3.1.3 Within twenty (20) calendar days after the end
of each calendar month, an income statement (with budget variance
explanations) and statement of cash flow; and
5.3.1.4 Promptly after the end of each calendar year and
after the end of each calendar quarter the Managing Member will use its
best efforts to have the Company Accountant prepare and deliver to each
Member a report setting forth in sufficient detail all such information
and data with respect to business transactions effected by or involving
the Company during the calendar year as will enable the Company and
each Member to timely prepare its federal, state and local income tax
returns (including with respect to quarterly estimated tax payments) in
accordance with the laws, rules and regulations then prevailing. The
Managing Member will use its reasonable efforts to have the Company
Accountant also prepare federal, state and local tax returns required
of the Company and submit those returns to the Company for its approval
no later than 30 calendar days prior to the date required for the
filing thereof (including any extensions granted) and will file the tax
returns after they have been approved by the Managing Member. In the
event the Managing Member shall not desire or be able to approve any
such tax return prior to the date required for the filing thereof
(including any extensions granted), the Company will timely obtain an
extension of such date if such extension is available under applicable
law. In all cases, tax returns shall be prepared and filed in
accordance with applicable law.
5.3.2 All decisions as to accounting principles shall be made
by the Managing Member subject to the provisions of this Agreement.
SECTION 5.4 THE COMPANY ACCOUNTANT. The Company shall retain as the
regular accountant and auditor for the Company (the "COMPANY ACCOUNTANT") a
nationally-recognized accounting firm or any other accounting firm acceptable to
the Managing Member in its sole discretion. The fees and expenses of the Company
Accountant shall be a Company expense.
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ARTICLE 6
CONTRIBUTIONS
SECTION 6.1 INITIAL CAPITAL CONTRIBUTIONS. The "INITIAL CAPITAL
CONTRIBUTIONS" of the Members and initial Capital Account balances shall be as
described on Schedule 1.1 attached hereto.
SECTION 6.2 ADDITIONAL CAPITAL CONTRIBUTIONS.
6.2.1 Except as otherwise provided herein, no Member shall be
obligated to make any additional contributions of capital (all
contributions of capital to the Company, including the Initial Capital
Contributions, "CAPITAL CONTRIBUTIONS") to the Company (including upon
dissolution and liquidation of the Company). Upon the making of any
additional Capital Contributions, each Member's Percentage Interest
shall thereafter be equal to the ratio, expressed as a percentage,
equal to the aggregate Capital Contributions made by such Member
divided by the aggregate Capital Contributions made by all Members to
the Company.
6.2.2 The Managing Member shall monitor the finances of the
Company in an attempt to determine whether or not, and when, the cash
receipts of the Company are insufficient to pay all costs and expenses
of the Company (such costs and expenses, the "NECESSARY COSTS"). Prior
to the Managing Member contributing any capital to the Company (other
than the Managing Member's Initial Capital Contribution), the Managing
Member shall issue capital calls to the Members to fund shortfalls
related to the Company (the "CAPITAL CALL NOTICE"). Such Capital Call
Notice shall set forth the amount of the required funds (the "REQUIRED
FUNDS") and a list of Necessary Costs, and shall specify a date (the
"CAPITAL CALL DUE DATE") for contribution of such funds. Upon receipt
of the Capital Call Notice, the Non-Managing Member shall have the
right, but not the obligation, to fund its proportionate share (based
on its respective Percentage Interest) of the total funds specified in
the Capital Call Notice. The Capital Call Due Date shall be at least
thirty (30) days after receipt of the Capital Call Notice unless a
shorter time is agreed to by the Non-Managing Member. All additional
Capital Contributions shall be made by wire transfer of immediately
available funds to an account of the Company.
6.2.3 To the extent the Non-Managing Member elects not to fund
its proportional share of the Required Funds, the Managing Member shall
have the right, but not the obligation, to contribute the unfunded
amount to the Company. Should the Managing Member elect to fund such
amount, then the Members' Percentage Interests will be adjusted as
described in subsection 6.2.1.
SECTION 6.3 NO THIRD PARTY BENEFICIARY. The provisions hereof are
intended for the benefit of the Members and the Company only and shall not
confer any right or claim
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upon, or otherwise inure to the benefit of, any officer or creditor of, or other
third party having dealings with, the Company.
SECTION 6.4 CAPITAL ACCOUNTS. A Capital Account shall be maintained
for each Member. Initially, the Capital Account of each Member shall be credited
with the amounts referred to in Schedule 1.1. Thereafter, each Member's Capital
Account shall be credited with such Member's share of Profits, any individual
items of income and gain allocated to such Member pursuant to the provisions of
Article 7, the amount of additional cash, and the Book Value of any asset (net
of any liabilities assumed by the Company and liabilities to which the asset is
subject), contributed to the Company by such Member (an "ADDITIONAL CAPITAL
CONTRIBUTION"), and shall be debited with the Member's share of Losses, any
individual items of deduction and loss allocated to such Member pursuant to the
provisions of Article 7, the amount of any cash distributed to such Member and
the Book Value of any asset distributed to such Member (net of any liabilities
assumed by the Member and liabilities to which the asset is subject). Each
Member's Capital Account shall also be credited with the amount of Company
liabilities assumed by such Member or which are secured by any property
distributed to such Member, and each Member's Capital Account shall be debited
with the amount of any liabilities of such Member assumed by the Company or
which are secured by any property contributed by such Member to the Company. In
the event that all or a portion of an interest in the Company is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it related to the transferred
interest.
The provisions of this Section 6.4 and the other provisions in this
Agreement relating to maintenance of Capital Accounts are intended to comply
with Treasury Regulations Section 1.704-1(b) and shall be interpreted in a
manner consistent therewith.
SECTION 6.5 WITHDRAWAL OF CAPITAL. Except as provided herein, (i) no
Member shall be entitled to withdraw any part of its Capital Account, (ii) no
Member shall be entitled to receive any interest on its Capital Account or
distributions from the Company, and (iii) no Member shall be entitled to demand
or receive any property from the Company other than cash.
SECTION 6.6 NEGATIVE CAPITAL ACCOUNTS. In no event shall any Member
be obligated to make any capital contribution to the Company solely as a result
of the existence at any time of a negative Capital Account balance for such
Member.
SECTION 6.7 SATISFACTION OF INDEMNITY OBLIGATIONS UNDER DISTRIBUTION
AGREEMENT. Payments made to the Company by PAH or its affiliates in satisfaction
of indemnity or "true-up" obligations under the Distribution Agreement shall be
treated as made by the Member that contributed the asset related to the
indemnity claim, or on a pro rata basis in proportion to the Member's initial
Percentage Interests to the extent related to an asset owned by the Company
prior to the Restructuring Transactions (as defined in the Distribution
Agreement) or to the "true-up" obligations. The Members shall cooperate to
execute any
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documents reasonably requested by PAH in furtherance of the foregoing. Any such
payments made pursuant to the Distribution Agreement shall be neither credited
nor charged to the Capital Accounts of any of the Members.
ARTICLE 7
ALLOCATION OF PROFITS AND LOSSES; TAX MATTERS
SECTION 7.1 PROFITS AND LOSSES. Profits and Losses for each fiscal
year of the Company shall allocated to the Members in accordance with their
respective Percentage Interests as determined from time to time. The Percentage
Interests of the Members shall be appropriately adjusted to reflect any
disproportionate contribution made by one or more of the Members.
SECTION 7.2 REGULATORY ALLOCATIONS.
7.2.1 Notwithstanding subsection 7.1, the following special
allocations shall be made each taxable year, to the extent required, in the
following order:
(i) Minimum Gain Chargebacks and Qualified Income Offset.
Items of Company income and gain shall be allocated to
the extent of, and in an amount sufficient to satisfy,
the "minimum gain chargeback" requirements of Treasury
Regulations Section 1.704-2(f) and (i)(4) and the
"qualified income offset" requirement of Treasury
Regulations Section 1.704-1(b)(2)(ii)(d)(3).
(ii) Nonrecourse and Partner Nonrecourse Deductions.
"Nonrecourse deductions" of the Company (within the
meaning of Treasury Regulations Section 1.704-2(b)(1))
shall be allocated among the Members in proportion to
their respective Percentage Interests. "Partner
nonrecourse deductions" (within the meaning of Treasury
Regulations Section 1.704-2(i)) shall be allocated to
the Member who bears the economic risk of loss
associated with such deductions, in accordance with
Treasury Regulations Section 1.704-2(i).
(iii) Any Other Allocations of Items Which Cannot Have
Economic Effect. Unless otherwise required by Code
Section 704(b) or the Treasury Regulations promulgated
thereunder or otherwise provided in this subsection
7.2.2, any allocations of Company items of income, gain,
loss, deduction or credit that cannot have "economic
effect" (within the meaning of Treasury Regulations
Section 1.704-1 and 1.704-2) shall be allocated among
the Members in proportion to their respective Percentage
Interests.
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(iv) Curative Allocations. The allocations set forth in this
Section 7.2.1 (the "Regulatory Allocations") are
intended to comply with certain requirements of the
Treasury Regulations. It is the intention of the Members
that, to the extent possible, all Regulatory Allocations
shall be offset either with other Regulatory Allocations
or with special allocations pursuant to this Section
7.2. Therefore, notwithstanding, any other provision of
this Agreement (other than the Regulatory Allocations),
offsetting special allocations of Company income, gain,
loss or deduction shall be made as appropriate so that,
taking into account such special allocations, each
Member's Capital Account balance is, to the extent
possible, equal to the Capital Account balance such
Member would have had if the Regulatory Allocations were
not part of this Agreement; provided that such
offsetting special allocations shall take into account
future Regulatory Allocations that are likely to offset
other Regulatory Allocations previously made.
7.2.2 Maintenance of Percentage Interests. It is the intention
of the parties that the Capital Account balances of the Members reflect their
respective Percentage Interests. In furtherance of the foregoing, from time to
time and to the extent necessary, items of Company income, gain, loss or
deduction shall be allocated to the Members to the extent possible to ensure
that each Member's Capital Account balance properly reflects its Percentage
Interest relative to the Capital Account balances of the other Member(s).
SECTION 7.3 TAX ALLOCATIONS. The Company's ordinary income and
losses and capital gain as determined for tax purposes (and each item of income,
gain, loss or deduction entering into the computation thereof) shall be
allocated to the Members in the same proportions as the corresponding "book"
items are allocated pursuant to Sections 7.1 and 7.2 of this Agreement.
Notwithstanding the foregoing, tax items relating to property with an adjusted
tax basis that is different from its Book Value shall be allocated among the
Members in accordance with Section 704(c) of the Code and the Treasury
Regulations issued thereunder. Items described in this Section 7.3 shall neither
be credited nor charged to the Member's Capital Accounts.
SECTION 7.4 TAX MATTERS MEMBER. The Managing Member is hereby
designated as the "TAX MATTERS MEMBER" for the Company (as such term is defined
in Section 6231(a)(7) of the Code), and all federal, state and local tax audits
and litigation shall be conducted under the direction of the Tax Matters Member.
Any action taken by the Tax Matters Member shall be made as a fiduciary with
respect to the interests of all Members notwithstanding any other provision
contained herein.
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SECTION 7.5 TAX ELECTIONS. All elections required or permitted to be
made by the Code or other applicable tax laws, and all material decisions with
respect to the calculation of taxable income or tax loss under the Code or any
other applicable tax laws, shall be made by the Tax Matters Member; provided
that the Tax Matters Member shall consult with and obtain the consent of the
other Member(s) (such consent not to be unreasonably withheld) to the extent
that any such election or decision could adversely impact the other Member(s).
Notwithstanding the foregoing, the Non-Managing Member shall be entitled to
determine whether the Company will elect installment sale treatment under
Section 453 of the Code with respect to property contributed to the Company by
the Non-Managing Member.
ARTICLE 8
DISTRIBUTIONS
SECTION 8.1 CASH AVAILABLE FOR DISTRIBUTIONS.
8.1.1 At such times as are determined by the Managing Member
(but no less frequently than quarterly), the Company shall make a
distribution of Net Operating Cash Flow of the Company (to the extent
positive). Net Operating Cash Flow distributions shall be made pro rata
to the Members, in accordance with their Percentage Interests.
8.1.2 Except upon the liquidation of the Company (in which
event Net Capital Proceeds shall be distributed pursuant to Section
10.2) and as provided in Section 8A, any Net Capital Proceeds shall be
distributed within thirty (30) days following receipt by the Company to
the Members pro rata to the Members, in accordance with their
Percentage Interests.
8.1.3 Except as provided in subsection 8.1.1 and subsection
8.1.2 above, no portion of any capital contribution made by any Member
to the Company may be withdrawn or distributed at any time.
8.1.4 If the Percentage Interests of the Members are adjusted
effective at any time or times during any fiscal year of the Company,
all distributions of cash made to the Members during such fiscal year
(without regard to the actual timing of such distributions) shall be
allocated to each portion of such fiscal year during which different
Percentage Interests are in effect in the proportion that the number of
days in such portion bears to the total number of days in such fiscal
year except with respect to Net Capital Proceeds, in which case such
proceeds shall be distributed in accordance with the Percentage
Interests on the date of the applicable transaction. The amounts so
allocated to each such portion of said fiscal year shall be divided
among the Members in proportion to their respective Percentage
Interests in effect during each such portion of the fiscal year in
question. Such allocations to such portions of a fiscal year, and the
adjustments, if any, of such cash distributions made during such year,
shall be
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determined with reasonable promptness after the close of each such
fiscal year by the Company's accountant. The Members will promptly make
any adjusting payments between them as may be required in order to
effect any adjustments of such cash distributions as determined by the
Company Accountant.
ARTICLE 8A
COMPANY'S INTEREST IN INTERCARP
The Members acknowledge that the Company holds certain
interests in Intercarp Limited Partnership (the "Intercarp Interests") which are
subject to a contract dated May __, 1999, pursuant to which such interests are
expected to be sold to [Friedman] or his affiliates. If the Intercarp Interests
are sold pursuant to such contract, as such contract may be amended from time to
time, (i) any cash received at the closing of the transaction shall not be
distributed to the Members pursuant to this Agreement, notwithstanding Section
8.1.2, and shall instead be used by the Company to pay current liabilities, and
(ii) with respect to any note in an amount not to exceed $5.75 million received
at the closing of the transaction, all interest income and principal payments
with respect to such note shall be distributed to the Managing Member; provided
that this clause (ii) shall not apply if the Managing Member fails to make a
loan to [an affiliate of Friedman] with a principal amount of at least $2.5
million as required pursuant to [contract].
ARTICLE 9
TRANSFER
SECTION 9.1 NO TRANSFER OF INTERESTS.
9.1.1 Except as expressly permitted or contemplated by this
Agreement, no Member may sell, assign, give, hypothecate, pledge,
encumber or otherwise transfer ("TRANSFER") all or any portion of its
Interest, whether directly or indirectly, without the written consent
of the other Members.
9.1.2 Any Transfer by a Member of its Interest in
contravention of this Article 9 shall be null and void. No Member shall
withdraw from the Company except in connection with a Permitted
Transfer or in accordance with Section 3.4.
SECTION 9.2 PERMITTED TRANSFERS OF INTERESTS; RIGHT OF FIRST OFFER.
9.2.1 The Non-Managing Member, from time to time and in its
sole discretion, without the consent of the Managing Member, may
Transfer its Interest in whole, or in part, to any party, provided such
transferee agrees to be bound by all the terms, conditions and
provisions of this Agreement (including the provisions of this Article
9). Any Transfer of the Non-Managing Member's Interest to a third party
shall
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be deemed a Permitted Transfer, and if such transferee acquires all of
the Non-Managing Member's Interest, such transferee shall be admitted
as a Substitute Member pursuant to Section 9.3.
9.2.2 Notwithstanding the foregoing, in the event of a
proposed transfer of all or part of the Non-Managing Member's Interest
to a third-party that is not an affiliate of PAH in a transaction that
would cause PAH to recognize any of the "built-in gain" with respect to
its interest in the Company or the assets of the Company (a "SPECIAL
TRANSFER EVENT"), the following procedures shall apply:
9.2.2.1 The Non-Managing Member shall, prior to any
transfer permitted under subsection 9.2.1, offer in writing
(the "FIRST OFFER NOTICE") to sell to the Managing Member all
or any part of its Percentage Interest (the "OFFERED
PERCENTAGE INTEREST"). The Managing Member shall notify the
Non- Managing Member within fifteen (15) Business Days of
receipt of the First Offer Notice that the Managing Member
either: a) is willing to purchase the Offered Percentage
Interest at a given price (the "FIRST OFFER PRICE"), or b) is
unwilling to purchase the Offered Percentage Interest. A
failure to respond to a First Offer Notice within such fifteen
(15) Business Day period shall be deemed to be an election not
to purchase the Percentage Interest.
9.2.2.2 If the Managing Member has timely offered
elected to purchase the Percentage Interest specified in the First
Offer Notice, then the Non- Managing Member may: a) sell the Offered
Percentage Interest to the Managing Member at the First Offer Price
(which, the sale shall be without recourse, representation or warranty,
except that the Non-Managing Member shall represent and warrant that it
has authority to sell, and owns the Interest free and clear of liens or
claims of third parties) or b) elect to market and sell the Offered
Percentage Interest to third parties within 180 days of receiving the
First Offer Price at a price not less than ninety-eight percent (98%)
of the First Offer Price. If the Non-Managing Member does not transfer
its interest within such 180 day period, then prior to any transfer
which would result in a Special Transfer Event, the Non-Managing Member
shall again comply with the terms of this subsection 9.2.2.
9.2.3 Any Permitted Transfer shall not relieve the
transferor of any of its obligations prior to such Transfer. Nothing
contained in this Article 9 shall prohibit a Transfer indirectly of a
Member's Interest in the Company if a direct Transfer would otherwise
be permitted under this Section 9.2. Subject to Section 9.3, any
transferee of a direct Interest pursuant to this Section 9.2 shall
become a Substitute Member of the Company. Each Member and its
permitted transferees shall be treated as one Member for all purposes
of this Agreement. The provisions of this Section 9.2 will not apply to
or be deemed to authorize or permit any collateral transfer of, or
grant of a security interest in, a Member's interest in the Company or
in any asset of the Company (which
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transfer or grant shall be subject to the other provisions of this
Agreement).
SECTION 9.3 TRANSFEREES. Notwithstanding anything to the contrary
contained in this Agreement, no transfer of all or any part of any Interest
shall be made if, as a result thereof, any income of the Company will be subject
to corporate federal income tax. No transferee of all or any portion of any
Interest shall be admitted as a Member unless such Interest is transferred in
compliance with the applicable provisions of this Agreement, such transferee
shall have furnished evidence of satisfaction of the requirements of Section 9.2
reasonably satisfactory to the remaining Members, and such transferee shall have
executed and delivered to the Company such instruments necessary to effectuate
the admission of such transferee as a Member and to confirm the agreement of
such transferee to be bound by all of the terms and provisions of this Agreement
with respect to such Interest. At the request of the remaining Members prior to
such transfer, each such transferee shall also cause to be delivered to the
Company, at the transferee's sole cost and expense, a favorable opinion of legal
counsel reasonably acceptable to the Company, to the effect that such transferee
has the legal right, power and capacity to own the Interest proposed to be
transferred. As promptly as practicable after the admission of any Person as a
Member, the books and records of the Company shall be changed to reflect such
admission. Upon satisfaction of the requirements of this Section 9.3 and any
other applicable provisions of this Agreement), such transferee shall be a
substitute Member (a "SUBSTITUTE MEMBER") of the Company. All reasonable costs
and expenses incurred by the Company in connection with any Transfer of any
Interest and, if applicable, the admission of any transferee as a Member shall
be paid by such transferee.
SECTION 9.4 ADMISSION OF ADDITIONAL MEMBERS.
9.4.1 No person may be admitted as an additional Member of the
Company (in contrast with admission as a Substitute Member in
connection with a Permitted Transfer) without the prior written consent
of the Members;[provided that no such consent shall be required for a
transfer to an affiliate of a Member.]
9.4.2 Any additional Member admitted to the Company shall
execute and deliver documentation in form satisfactory to the Managing
Member or the Members, as the case may be, accepting and agreeing to be
bound by this Agreement, and such other documentation as the Managing
Member or the Members, as the case may be, shall require in order to
effect such person's admission as an additional Member. The admission
of any person as an additional Member (an "ADDITIONAL MEMBER") shall
become effective as of the date upon which the name of such person is
recorded on the books and records of the Company following the consent
of the Managing Member or the Members, as the case may be, to such
admission.
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ARTICLE 10
TERMINATION
SECTION 10.1 DISSOLUTION. The Company shall be dissolved and its
business wound up upon the happening of any of the following events, whichever
shall first occur:
10.1.1 the Bankruptcy of any Member, if within ninety (90)
days thereafter a majority in interest of the remaining Members (the
"REMAINING MEMBERS") shall not have elected to continue the Company,
which right of election is hereby granted to them;
10.1.2 entry of a decree of judicial dissolution of the
Company; or
10.1.3 the termination of all of the Existing Contracts and
any renewals or replacements thereof entered into in accordance with
subsection 2.4.1.
In no event shall the Company dissolve prior to the occurrence of one of the
events set forth above.
SECTION 10.2 TERMINATION. In cases of dissolution of the Company, the
business of the Company shall be wound up and the Company terminated (and the
Company shall cause the Existing Subsidiaries to be wound up and the business of
the Existing Subsidiaries to be terminated) as promptly as practicable
thereafter, and each of the following shall be accomplished:
10.2.1 The Liquidating Member shall cause to be prepared a
statement setting forth the assets and liabilities of the Company (as
consolidated with the Existing Subsidiaries) as of the date of
dissolution, a copy of which statement shall be furnished to all of the
Members.
10.2.2 The property and assets of the Company (including those
held by the Existing Subsidiaries) shall be liquidated by the
Liquidating Member as promptly as possible, but in an orderly and
businesslike and commercially reasonable manner. The Liquidating Member
may, in the exercise of its business judgment and if commercially
reasonable, determine not to sell all or any portion of the property
and assets of the Company, in which event such property and assets
shall be distributed in kind pursuant to subsection 10.2.4 below.
10.2.3 Any income, gain, profit or loss realized by the
Company upon the sale or other disposition of its property pursuant to
subsection 10.2.2 shall be allocated to the Members as and to the
extent required by Article 7 hereof.
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10.2.4 The proceeds of sale and all other assets of the
Company shall be applied and distributed as follows and in the
following order of priority:
(i) To the payment of the Company's outstanding
liabilities, which shall be set forth on a
statement as provided in subsection 10.2.1.
(ii) To the setting up of any reserves which the
Liquidating Member shall determine to be reasonably
necessary for contingent, unliquidated or unforseen
liabilities or obligations of the Company or the
Members arising out of or in connection with the
Company. Such reserves, may, in the discretion of
the Liquidating Member, be paid over to a national
bank or national title with the Company as escrowee
for the purposes of disbursing such reserves to
satisfy the liabilities and obligations described
above, and at the expiration of such period as the
Liquidating Member may reasonably deem advisable,
distribute any remaining balance in the manner set
forth below.
(iii) To each Member in accordance with their respective
Capital Account balances.
No payment or distribution in any of the foregoing categories shall be
made until all payments in each prior category shall have been made in
full. If the payments due to be made in any of the foregoing categories
exceed the remaining assets available for such purpose, such payment
shall be made to the Persons entitled to receive the same pro rata in
accordance with the respective amount due to each such Person. Payments
described in clause (ii) above may be made in cash or in assets of the
Company in kind. Any asset distributed in kind shall be distributed
pro-rata unless the Members otherwise agree in writing and shall be
valued at its fair market value and for all purposes of this Agreement
shall be treated as if such asset had been sold at such value and the
net cash proceeds therefrom distributed to the Members. Without
limiting the foregoing, with respect to any assets distributed in kind,
there shall be a calculation of the amount of income, gain, profit or
loss that would have been realized by the Company with respect to such
assets if such assets had been sold at fair market value.
SECTION 10.3 ACTS IN FURTHERANCE OF LIQUIDATION. Each Member, upon
the request of the Liquidating Member, shall promptly execute, acknowledge and
deliver all documents and other instruments as the Liquidating Member shall
reasonably request to effectuate the proper dissolution and termination of the
Company, including the winding up of the business of the Company.
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ARTICLE 11
TAG-ALONG AND DRAG-ALONG RIGHTS
SECTION 11.1 NOTICE OF PROPOSED TRANSACTION. If the Board of
Directors of Managing Member votes to approve or to recommend that stockholders
of Managing Member consider and approve a transaction that, together with any
other transactions within the preceding twelve (12) months, would result in (i)
a Person and its Affiliates, or a group of Persons within the meaning of Section
13(d)(3) of the Exchange Act, (an "ACQUIROR") acquiring beneficial ownership of
50% or more of the outstanding common stock, par value $.01 per share, of
Managing Member (the "IHC COMMON STOCK") or (ii) the sale, exchange or other
disposition of all or substantially all of the assets of Managing Member (in
either case, a "TRANSACTION"), then Managing Member shall give written notice of
such vote (A "SALE NOTICE") to Non- Managing Member not less than two (2)
business days following the date of such vote. The date of such Sale Notice
shall not be less than ten (10) business days prior to the closing of the
Transaction to which it relates. The Sale Notice shall set forth in reasonable
detail the name of the parties to the proposed Transaction, the terms and
conditions of the Transaction (including the purchase price and any other
material economic terms) and the scheduled date of the Transaction. In addition,
Managing Member shall provide Non-Managing Member with additional information
reasonably requested by Non-Managing Member relating to the Transaction or the
Acquiror.
SECTION 11.2 TAG-ALONG AND DRAG-ALONG RIGHTS.
(a) In the event that the Board of Directors of Managing
Member votes to approve any Transaction or to recommend that the stockholders of
Managing Member consider any Transaction, Managing Member shall, at the written
election of Non-Managing Member given within five (5) business days of the later
of the date of the applicable Sale Notice or the date on which Non-Managing
Member learns of the Transaction (in which case Managing Member shall promptly
deliver a Sale Notice to Non-Managing Member), use its best efforts to cause the
terms and conditions of the proposed Transaction to include an offer to purchase
Non-Managing Member's Interest in accordance with the provisions set forth
below. In the event that Managing Member is unable to cause the terms and
conditions of the Transaction to include an offer to purchase Non-Managing
Member's Interest in accordance with the provisions set forth below, Managing
Member shall be deemed to have elected to purchase Non-Managing Member's
Interest on the terms set forth below.
(b) In the event that Managing Member has given a Sale Notice
to Non- Managing Member, and Non-Managing Member does not elect to participate
in the Transaction within the five (5) business day period set forth above,
Managing Member may, at its option (i) proceed with the Transaction on its
original terms or (ii) by written notice to Non- Managing Member given within
five (5) business days after the five (5) business day period set forth in (a)
above, require Non-Managing Member to sell its Interest to the Acquiror or
Managing Member on the terms set forth below.
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SECTION 11.3 TERMS.
(a) If, at any time on or prior to [JUNE __, 2002],
Non-Managing Member elects to sell, or Managing Member or Acquiror (such Party,
the "BUYER") elects to buy, as the case may be, Non-Managing Member's Interest,
in either case, pursuant to Section 11.2, the purchase price for Non-Managing
Member's Interest for purposes of this Article 11 shall be calculated on the
following basis. The value of the Transaction shall be determined, with
appropriate adjustment if less than all of the IHC Common Stock or assets of
Managing Member are being purchased in the Transaction, and taking into account
all cash and non cash consideration (including without limitation any deferred
consideration), less out of pocket expenses paid by Managing Member in the
transaction (such as legal, financial advisory and similar fees). A multiple of
Managing Member's earnings before interest, taxes, depreciation and amortization
("EBITDA") for the twelve full months immediately preceding the month in which
the Board of Directors of Managing Member voted to approve the Transaction or to
recommend that the stockholders of Managing Member consider the Transaction
shall then be calculated by dividing the value of the Transaction by such
EBITDA. A value for the Company shall then be calculated by multiplying the
Company's EBITDA for the twelve full months immediately preceding the month in
which the Board of Directors of Managing Member voted to approve the Transaction
or to recommend that the stockholders of Managing Member consider the
Transaction by the multiple calculated in accordance with the preceding
sentence. The purchase price for Non-Managing Member's Interest shall be equal
to the value of the Company calculated in accordance with the preceding sentence
multiplied by Non- Managing Member's Percentage Interest. Non-Managing Member
shall be obligated to pay only expenses incurred by Non-Managing Member in the
sale, and shall not be obligated for any transfer fees or taxes, financial
advisory fees or other amounts unless contracted for by Patriot.
(b) If, at any time after [JUNE ___, 2002], Non-Managing
Member elects to sell, or a Buyer elects to buy, as the case may be,
Non-Managing Member's Interest, in either case, pursuant to Section 11.2, the
purchase price for Non-Managing Member's Interest for purposes of this Article
11 shall be negotiated between Non-Managing Member and the Buyer within five (5)
business days. If the Buyer and Non-Managing Member are unable to reach
agreement on the purchase price within such time period, then either Managing
Member or Non-Managing Member may demand that the purchase price be determined
in the following manner. Within five (5) business days of such demand,
Non-Managing Member and Managing Member shall select a nationally-recognized
investment bank or other nationally-recognized independent appraiser; provided
that such bank or appraiser must have experience valuing hotel management
companies (such bank or appraiser, an "APPRAISER"). If Managing Member and
Non-Managing Member are unable to select an Appraiser, then, within an
additional five (5) business days, each such party shall select an Appraiser and
the two (2) Appraisers so selected shall, within an additional five (5) business
days, select a third Appraiser. Each Appraiser shall, in good faith, determine a
fair market value (the "FAIR MARKET VALUE") for Non-Managing Member's Interest
taking into account all relevant factors, utilizing methodology typically
employed in valuing hotel management companies. If one Appraiser is hired, the
purchase price for Non-Managing Member's Interest shall equal the Fair Market
Value; if more than one Appraiser is hired, then the purchase price for Non-
28
<PAGE> 33
Managing Member's Interest shall equal the average of each such determination of
Fair Market Value. The determination of the purchase price in such manner shall
be binding upon the parties and shall not be subject to dispute or appeal.
Non-Managing Member shall be obligated to pay one-half the expenses of each
Appraiser and expenses incurred by Non-Managing Member in the sale, and shall
not be obligated for any transfer fees or taxes, financial advisory fees or
other amounts unless contracted for by Patriot.
(c) If Managing Member is acquiring Non-Managing Member's
Interest, the agreement for the purchase and sale of Non-Managing Member's
Interest shall be on substantially the same terms and conditions as the
agreement relating to the acquisition of the stock or assets of Managing Member
by the Acquiror, with appropriate modifications to reflect that Non-Managing
Member is a passive investor in the Company and has no independent knowledge of
the Company's assets or business.
(d) Managing Member and Non-Managing Member agree that a
breach of any of the terms, conditions or other obligations under this Article
11 may result in irreparable harm to the non-breaching party, and shall give
rise to a right of the non-breaching party to seek enforcement of the provisions
of this Article 11 in a court of equity by a decree of specific performance.
This remedy is intended to be cumulative and in addition to any other remedy a
party may have.
SECTION 11.4 CLOSING. The closing of any purchase of Non-Managing
Member's Interest pursuant to this Article 11 shall occur simultaneously with
the closing of the Transaction which gave rise to such purchase, whether such
purchase is made by a Buyer or by Managing Member.
ARTICLE 12
GENERAL PROVISIONS
SECTION 12.1 COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
MEMBERS. Each Member represents and warrants to the other Members as follows:
12.1.1 It is duly organized, validly existing and in good
standing under the laws of its jurisdiction of formation with all
requisite power and authority to enter into this Agreement.
12.1.2 This Agreement constitutes the legal, valid and binding
obligation of the Member enforceable in accordance with its terms,
subject to the application of principles of equity and laws governing
insolvency and creditors' rights generally.
12.1.3 No consents or approvals are required from any
governmental authority or other Person for the Member to enter into
this Agreement. All limited liability company, corporate or partnership
action on the part of the Member necessary
29
<PAGE> 34
for the authorization, execution and delivery of this Agreement, and
the consummation of the transactions contemplated under this Agreement,
have been duly taken.
12.1.4 The execution and delivery of this Agreement by the
Member, and the consummation of the transactions contemplated under
this Agreement, do not conflict with or contravene the provision of the
Member's organizational documents or any agreement or instrument by
which it or its properties are bound or any law, rule, regulations,
order or decree to which it or its properties are subject.
12.1.5 No Member has retained any broker, finder or other
commission or fee agent, and no such person has acted on its behalf in
connection with the execution and delivery of this Agreement.
12.1.6 Each Member is acquiring its interest in the Company
for investment, solely for its own account, with the intention of
holding such interest for investment and not with a view to, or for
resale in connection with, any distribution or public offering or
resale of any portion of such interest within the meaning of the
Securities Act of 1933 (the "SECURITIES ACT") or any other applicable
federal or state securities law, rule or regulation ("SECURITIES
LAWS").
12.1.7 Each Member acknowledges that it is aware that its
interest in the Company has not been registered under the Securities
Act or under any other Securities Law in reliance upon exemption
contained therein. Each Member understands and acknowledges that its
representations and warranties contained herein are being relied upon
by the Company, the other Members and the constituent owners of such
other Members as the basis for exemption of the issuance of interest in
the Company from registration requirements of the Securities Act and
other Securities Laws. Each Member acknowledges that the Company will
not and has no obligation to register any interest in the Company under
the Securities Act or other Securities Laws.
12.1.8 Each Member acknowledges that prior to its execution of
this Agreement, it received a copy of this Agreement and that it
examined this document or caused this document to be examined by its
representative or attorney. Each Member further acknowledges that it or
its representative or attorney is familiar with this Agreement, and
with the business and affairs of the Company, and that except as
otherwise specifically provided in this Agreement, it does not desire
any further information or data relating to the Company, the Assets or
the other Members. Each Member acknowledges that it understand that the
acquisition of its interest in the Company is a speculative investment
involving a high degree of risks and represents that it has a net worth
sufficient to bear the economic risk of its investment in the Company
and to justify its investing in a highly speculative Company of this
type.
SECTION 12.2 NOTICES. All notices, demands, approvals, consents or
requests provided for or permitted to be given pursuant to this Agreement must
be in writing.
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<PAGE> 35
12.2.1 All notices, demands, approvals, consents and requests
to be sent to the Company pursuant to the terms hereof shall be deemed
to have been properly given or served by personal delivery or by a
nationally recognized overnight courier or by registered or certified
mail, return receipt requested, postage prepaid and addressed as
follows:
If to the Company:
c/o Interstate Hotels Corporation
680 Andersen Drive, Foster Plaza Ten
Pittsburgh, Pennsylvania 15220
Attn: ____________________________
With a copy to:
c/o Interstate Hotels Corporation
680 Andersen Drive, Foster Plaza Ten
Pittsburgh, Pennsylvania 15220
Attn: ____________________________
With a copy to:
c/o [PAH - Interstate Holdings, Inc.]
c/o Patriot American Hospitality, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn: ____________________________
If to IHC:
c/o Interstate Hotels Corporation
680 Andersen Drive, Foster Plaza Ten
Pittsburgh, Pennsylvania 15220
Attn: ____________________________
If to PAH:
c/o [PAH - Interstate Holdings, Inc.]
c/o Patriot American Hospitality, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn: ____________________________
31
<PAGE> 36
12.2.2 All notices, demands and requests shall be effective
upon personal delivery or upon the date of receipt by the addressee as
shown on the return receipt or upon the date of acknowledgment or
confirmation of receipt with respect to delivery by or nationally
recognized overnight courier. Rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice
was given shall be deemed to be receipt of the notice, demand or
request sent.
12.2.3 By giving to the other parties at least ten (10) days
prior written notice thereof, the parties hereto and their respective
successors and assigns shall have the right from time to time and at
any time during the term of this Agreement to change their respective
addresses.
SECTION 12.3 GOVERNING LAWS; JURISDICTION; VENUE.
12.3.1 GOVERNING LAWS. This Agreement and the obligations of
the Members hereunder shall be interpreted, construed and enforced in
accordance with the laws of the State of Delaware without regard to
conflicts of law principles.
12.3.2 JURISDICTION; VENUE. Each of the Members hereby
irrevocably submits to the exclusive jurisdiction of any state court
located in the City of Wilmington, Delaware and any federal court in
the State of Delaware and any other court with jurisdiction to hear
appeals from such courts for the purposes of any suit, action or other
proceeding of any type whatsoever arising out of this Agreement or the
subject matter hereof, and to the extent permitted by applicable law,
hereby waives, and agrees not to assert, by way of motion, as a
defense, or otherwise, in any such suit, action or proceeding any claim
that it is not personally subject to the jurisdiction of the
above-named courts, that the suit, action or proceeding is brought in
an inconvenient forum, that the venue of the suit, action or proceeding
is improper or that this Agreement or the subject matter hereof may not
be enforced in or by such court.
SECTION 12.4 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto relative to the formation and operation of
the Company. No variations, modifications, or changes herein or hereof shall be
binding upon any party hereto unless set forth in a document duly executed by or
on behalf of such party.
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<PAGE> 37
SECTION 12.5 WAIVER. No consent or waiver, express or implied, by any
Member to or of any breach or default by any other Member in the performance by
the other Member of its obligations hereunder shall be deemed or construed to be
a consent or waiver to or of any other breach or default in the performance by
such other Member of the same or any other obligations of such other Member
hereunder. Failure on the part of any Member to complain of any act or failure
to act of any of the other Members or to declare any of the other Members in
default, irrespective of how long such failure continues, shall not constitute a
waiver by such Member of its rights hereunder.
SECTION 12.6 SEVERABILITY. If any provision of this Agreement or the
application thereof to any Person or circumstance shall be invalid or
enforceable to any extent, the remainder of this Agreement and the application
of such provisions to other Persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
SECTION 12.7 TERMINOLOGY. All personal pronouns used in this
Agreement, whether used in the masculine, feminine, or neuter gender, shall
include all other genders; the singular shall include the plural, and vice versa
and shall refer solely to the parties signatory thereto except where otherwise
specifically provided. Titles of Articles and Sections are for convenience only,
and neither limit nor amplify the provisions of the Agreement itself, and all
references herein to Articles, Sections or subdivisions thereof shall refer to
the corresponding Articles, Sections or subdivisions thereof of this Agreement
unless specific reference is made to such Articles, Sections or subdivisions of
another document or instrument. Any use of the word "INCLUDING" herein shall,
unless the context clearly requires otherwise, be deemed to mean "INCLUDING
WITHOUT LIMITATION."
SECTION 12.8 ACTION BY THE MEMBERS. No approval, consent, designation
or other action by a Member shall be binding upon such Member unless the same is
in writing and executed on behalf of such Member by a duly authorized
representative of such Member.
SECTION 12.9 AMENDMENTS. No change, modification or amendment of this
Agreement shall be valid or binding unless such change, modification or
amendment shall be in writing and duly executed by all of the Members.
SECTION 12.10 BINDING AGREEMENT. Subject to the restrictions on
transfers and encumbrances set forth herein, this Agreement shall inure to the
benefit of and be binding upon the undersigned Members and their respective
heirs, executors, legal representatives, successors and assigns. Whenever, in
this instrument, a reference to any party or Member is made, such reference
shall be deemed to include a reference to the heirs, executors, legal
representatives, successors and assigns of such party or Member.
SECTION 12.11 FURTHER ASSURANCES. Each of the Members shall hereafter
execute and deliver such further instruments and do such further acts and things
as may be reasonably necessary to carry out the intent and purpose of this
Agreement and as are not inconsistent
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<PAGE> 38
with the terms hereof.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
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<PAGE> 39
IN WITNESS WHEREOF, this Agreement is executed effective as of the date
first set forth above.
INTERSTATE HOTELS MANAGEMENT, INC.
a Maryland corporation
By: ________________________
Name:
Title:
PAH-INTERSTATE HOLDINGS, INC.
a Delaware corporation
By: ____________________________
Name:
Title:
35
<PAGE> 40
SCHEDULE 1.1
INITIAL CAPITAL ACCOUNTS
Sch. 1.1
<PAGE> 41
SCHEDULE 1.2
EXISTING SUBSIDIARIES
Sch. 1.2
<PAGE> 42
SCHEDULE 2.4.1
LIST OF EXISTING CONTRACTS
(INCLUDING EXISTING SUBSIDIARY CONTRACTS)
Sch. 2.4.1
<PAGE> 1
EXHIBIT 10.8
GUARANTY
THIS GUARANTY (this "Guaranty") made this ____ day of __________, 199__
by NEWCO, LLC, a ______________________ (the "Guarantor") in favor of Marriott
International, Inc. and Marriott Hotel Services, Inc. and their affiliates
(collectively, "Marriott").
PRELIMINARY STATEMENT OF FACTS
This Preliminary Statement of Facts is not merely prefatory, but is
expressly incorporated into and made a part of this Guaranty.
A. IHC II, LLC ("Primary Manager") has entered into various
Submanagement Agreements of even date herewith with the entities constituting
Marriott (the "Submanagement Agreements") with respect to the hotels listed on
Exhibit A hereto (collectively, the "Hotels"). Primary Manager is a wholly-owned
subsidiary of Guarantor and has been organized by Guarantor for the purpose of
providing certain management services to the Hotels.
B. Marriott has agreed to enter into the Submanagement Agreements on
the condition that the Guarantor execute and deliver this Guaranty to Marriott.
C. Primary Manager has assumed the franchise and license agreements
with Marriott with respect to the Hotels (the "IHC Franchise Agreements"), and
Guarantor controls Interstate Hotels, LLC ("Interstate") which has entered into
or assumed franchise or license agreements with Marriott (the "LLC Franchise
Agreements") with respect to the hotels listed on Exhibit B [must include
exhibit C & D hotels] hereto (the LLC Franchise Agreements and the IHC Franchise
Agreements are hereinafter collectively referred to as the "Franchise
Agreements").
D. As a condition of Marriott allowing Interstate and IHC to enter into
or assume the Franchise Agreements or certain obligations thereunder, Marriott
has requested that the Guarantor execute and deliver this Guaranty to Marriott.
E. All of the above transactions are being undertaken pursuant to a
Settlement Agreement dated as of May__, 1998 by and among, Marriott, Interstate
Hotels Corporation, Interstate Hotels Company, Patriot American
<PAGE> 2
Hospitality, Inc. and Wyndham International, Inc. (the "Settlement Agreement").
The Settlement Agreement provides for obligations of Interstate and Primary
Manager to Marriott which shall also be subject to this Guaranty.
F. Guarantor has determined that it is in the best interest of the
Guarantor to execute and deliver this Guaranty.
NOW THEREFORE, Guarantor does hereby covenant and agree as follows:
1. GUARANTY. To induce Marriott to execute and deliver the
Submanagement Agreements and the Settlement Agreement, as applicable, and to
permit Interstate to enter into or assume the Franchise Agreements, Guarantor
does hereby unconditionally, absolutely and irrevocably guarantee to Marriott,
and their respective successors and assigns, (a) the full and due payment of all
amounts due to Marriott under the Submanagement Agreements, the Franchise
Agreements and the Settlement Agreement, (b) the full and complete performance
by Primary Manager and Interstate, and their respective successors and assigns,
of all the terms, obligations, covenants, and agreements of Primary Manager or
Interstate under the Submanagement Agreements, the Franchise Agreements or the
Settlement Agreement on the part of Primary Manager, Interstate, and their
respective successors and assigns to be observed or performed thereunder and,
without limiting the foregoing, the full and punctual payment by Primary
Manager, Interstate and their respective successors and assigns, of all
management fees, royalty fees, franchise fees, chain services fees, and other
sums of money, as and when they become due and payable as provided in the
Submanagement Agreements, the Franchise Agreements and the Settlement Agreement,
as applicable.
Pursuant to the foregoing, if Primary Manager shall fail to
comply with any term covenant or condition in the Submanagement Agreements or
the Settlement Agreement, or to make any payment or supply any funds required to
be made or supplied thereunder, in each case after any applicable notice and
cure period, Guarantor unconditionally guarantees to Marriott, that Guarantor
shall then (a) pay (without first requiring Marriott to proceed against the
Primary Manager, or any other person) to Marriott any such sums to be paid or
supplied under the Submanagement Agreements or the Settlement Agreement
including, without limitation, any interest, premiums, and late charges, and (b)
cure any default of Primary Manager in any term, covenant, or condition under
the Submanagement Agreements or the Settlement Agreement. Guarantor further
agrees to indemnify and hold harmless Marriott from any loss (including
attorneys' fees) resulting from any default made at any time by Primary Manager
in any term, covenant or condition of the Submanagement Agreements or the
<PAGE> 3
Settlement Agreement or by Guarantor under the terms of this Guaranty, in each
case after any applicable notice and cure period.
Pursuant to the foregoing, if Interstate shall fail to comply
with any term covenant or condition in the Franchise Agreements or the
Settlement Agreement, or to make any payment or supply any funds required to be
made or supplied thereunder, in each case after any applicable notice and cure
period, Guarantor unconditionally guarantees to Marriott, that Guarantor shall
then (a) pay (without first requiring the Marriott to proceed against
Interstate, or any other person) to Marriott any such sums to be paid or
supplied under the Franchise Agreements or the Settlement Agreement including,
without limitation, any interest, premiums, and late charges, and (b) cure any
default by Interstate in any term, covenant, or condition under the Franchise
Agreements and the Settlement Agreement. Guarantor further agrees to indemnify
and hold harmless Marriott from any loss (including attorneys' fees) resulting
from any default made at any time by Interstate in any term, covenant or
condition of the Franchise Agreements or the Settlement Agreement or by
Guarantor under the terms of this Guaranty, in each case after any applicable
notice and cure period.
2. GUARANTOR'S CONSENTS. Notice to Guarantor of any and all
defaults on the part of Primary Manager or Interstate, and any successor of
Primary Manager or Interstate or assignee of Primary Manager, or Interstate, is
waived, and consent is given to all extensions of time, waivers, or indulgences
of any kind, that Submanager, its successors or assigns, may grant to Primary
Manager, or Interstate, and any successor of Primary Manager or Interstate or
assignee of Primary Manager, or Interstate, with reference to the performance by
Primary Manager, or Interstate or any successor of Primary Manager, or
Interstate, or assignee of Primary Manager, or Interstate, of any of the terms,
obligations, covenants, or agreements in or under any of the Submanagement
Agreements or any of the Franchise Agreements. Full consent is also given by
Guarantor to any and all changes, modifications, or amendments in, of, or to any
such terms, obligations, covenants, or agreements as well as to conditions of,
in, or under the Submanagement Agreements and the Franchise Agreements that may
be made by agreement between Marriott or its successors or assigns, and Primary
Manager or Interstate, or any successor of Primary Manager or Interstate, or
assignee of Primary Manager or Interstate, or otherwise; and Guarantor waives
any and all requirements whatsoever on the part of Marriott or its successors or
assigns first to exhaust or pursue its, remedies against Primary Manager or
Interstate, their respective successors or assigns, before Marriott or its
successors or assigns shall have the right to proceed directly against and
recover from Guarantor.
<PAGE> 4
3. PRIMARY LIABILITY. Guarantor, without limiting any of the
foregoing provisions of this Guaranty, also waives notice of any and all
changes, modifications, or amendments in, of, or to, the Submanagement
Agreements or the Franchise Agreements that may be agreed upon between Marriott
or its successors or assigns and Primary Manager or Interstate, or their
respective successors or assigns, or that may be permitted or suffered in
connection with the Submanagement Agreements or the Franchise Agreements, or the
performance thereof, as well as notice of any waivers, indulgences, or
extensions granted or suffered by Marriott or its successors or assigns.
Guarantor further agrees that, notwithstanding any waivers, extensions, or
indulgences granted or suffered by Marriott or its successors or assigns, and
notwithstanding any changes, amendments, or modifications in, of, or to the
Submanagement Agreements or the Franchise Agreements, by agreement or otherwise,
Guarantor shall be and remain, and is primarily absolutely and fully liable to
Marriott and its successors and assigns for the full and punctual payment of all
payments to be made, and for the full and due performance of all the other
terms, obligations, covenants, agreements, and conditions of, in, or under the
Submanagement Agreements, Franchise Agreements, and in any change, amendment, or
modification thereof, by Primary Manager or Interstate and its successors and
assigns, without any notice whatsoever.
4. NO IMPAIRMENT. Without limiting any of the foregoing
provisions of this Guaranty, the Guarantor further agrees that this Guaranty,
and the obligations of the Guarantor under it, shall in no way be terminated,
affected, or impaired by reason of the assertion by Marriott or its respective
successors or assigns against Primary Manager or Interstate, their respective
successors or assigns, of any rights or remedies reserved to Marriott pursuant
to or by virtue of the provisions of the Submanagement Agreements of the
Franchise Agreements or any change, amendment, or modification of the
Submanagement Agreements or the Franchise Agreements.
5. NO ALTERATION. This Guaranty shall not be affected by any
deviation from or alteration of the terms, covenants or conditions of any of the
Submanagement Agreements, any of the Franchise Agreements, or by any assignment
or subletting of all or any part of said premises or of the interest of Primary
Manager or Interstate therein. This Guaranty shall not be relinquished,
extinguished, modified or in any way affected by failure on the part of Marriott
to enforce any or all of the rights or remedies of Marriott whether pursuant to
the terms of the Submanagement Agreements or Franchise Agreements, as
applicable, or at law or in equity.
6. TERMINATION. This Guaranty is a continuing one and shall
terminate only upon payment by Primary Manager or Interstate of all sums
<PAGE> 5
Primary Manager or Interstate is required to pay under the Submanagement
Agreements and Franchise Agreements and upon performance by Primary Manager or
Interstate or Interstate of all duties and obligations therein contained.
7. WAIVER. Guarantor waives notice to Guarantor (a) of any
default by Primary Manager or Interstate (i) of payment by Primary Manager or
Interstate of any of the sums hereby guaranteed and (ii) of performance by
Primary Manager or Interstate of the terms, covenants and conditions of said
Submanagement Agreements and the Franchise Agreements, and (b) of acceptance by
Marriott of this Guaranty.
8. EXTENSION OF TIME. Guarantor consents that Marriott, may
from time to time extend the time for performance or otherwise modify, alter or
change any of the Submanagement Agreements or Franchise Agreements and any or
all provisions thereof and may extend the time for payment of all sums hereby
guaranteed and may receive and accept notes, checks and other instruments made
by Primary Manager or Interstate for the payment of money and may agree to
extensions and renewals thereon without in any way releasing or discharging
Guarantor. Notice of presentment of any such note or notes and/or notice of
default in the payment thereof at maturity and/or protest or notice of protest
thereof is expressly waived by Guarantor.
9. PRIMARY MANAGER'S OR INTERSTATE'S DEFAULT. This Guaranty
may be immediately enforced upon any default continuing after any applicable
notice and cure period by Primary Manager or Interstate under the terms of any
of the Submanagement Agreements or the Franchise Agreements. Upon default
continuing after any applicable notice and cure period by Primary Manager under
any of the Submanagement Agreements or Franchise Agreements, Marriott can
proceed immediately and directly against Guarantor or Primary Manager or
Interstate, or both, as applicable (it being understand that Interstate is not
liable for payment or performance of Primary Manager's obligations and vice
versa). Guarantor waives the right to require Marriott to proceed against
Primary Manager or Interstate initially or exhaust any security that Marriott
holds from Primary Manager or Interstate or to pursue any other remedy in
Marriott's power and it shall not be necessary for Marriott, in order to enforce
this Guaranty, to institute suit or exhaust any legal remedies against Primary
Manager or Interstate.
10. ATTORNEYS' FEES. In the event any action should be
commenced by Marriott against the Guarantor to enforce any of the terms or
conditions of this Guaranty and Marriott shall be entitled to recover from
Guarantor reasonable attorneys' fees in any such action in which Marriott shall
prevail.
<PAGE> 6
11. TERM. The obligations of the Guarantor under this Guaranty
Agreement extend to the Term (as defined in the Submanagement Agreements and
Franchise Agreements) and to any holding over by the Primary Manager or
Interstate thereafter and to any renewal or extension of the Term which results
from the exercise by the Primary Manager or Interstate of any rights or option
contained in the Submanagement Agreements or Franchise Agreements.
12. ASSIGNMENT BY SUBMANAGER. The benefit of the Guarantor's
obligations under this Guaranty Agreement may be assigned by Marriott in
connection with any permissible assignment of the Submanagement Agreements or
the Franchise Agreements, and will benefit and be enforceable by the successors
and assigns of Marriott.
13. CONTINUED LIABILITY OF GUARANTOR. The liability of the
Guarantor hereunder shall in no way be affected by (a) the discharge of Primary
Manager or Interstate in any creditors', receivership, bankruptcy or other
proceedings, (b) the impairment, limitation or modification of the liability of
Primary Manager or Interstate or the estate of Primary Manager or Interstate in
bankruptcy, or of any remedy for the enforcement of Primary Manager's liability
under the Submanagement Agreements or Interstate's liability under the Franchise
Agreements resulting from the operation of any present or future provision of
the Bankruptcy Act or other statute or from the decision in any court; (c) the
rejection or disaffirmance of the Submanagement Agreements or Franchise
Agreements in any proceedings; (d) the assignment or transfer of any of the
Submanagement Agreements or any of the Franchise Agreements by the Primary
Manager or Interstate; (e) any disability or other defense of Primary Manager or
Interstate, including but not limited to any defense based on a failure of
Primary Manager's or Interstate's organizers to properly and legally form or
empower Primary Manager or Interstate to execute any of the Submanagement
Agreements or to enter into or assume any of the Franchise Agreements, as
applicable, and perform Primary Manager's or Interstate's obligations
thereunder; or (f) the cessation from any cause whatsoever of the liability of
Primary Manager or Interstate.
14. NOTICES. Any notice, demand, request or other
communication which Marriott may desire to give to the Guarantor with respect to
this Guaranty, shall be deemed sufficient if in writing and sent to the
following addresses:
<PAGE> 7
GUARANTOR:
-----------------------------------
A notice demand or request may be hand-delivered or delivered
via express delivery service or mailed, postage prepaid, first class, registered
or certified mail. Any notice sent by mail shall be deemed to have been received
on the second business day following the date of mailing. Notice delivered
personally or by express delivery service shall be effective upon receipt.
15. GOVERNING LAW. Guarantor hereby acknowledges, consents and
agrees (i) that the provisions of this Guaranty and the rights of all parties
mentioned herein shall be governed by the laws of the State of Maryland and
interpreted and construed in accordance with such laws (excluding Maryland
conflict of laws) and (ii) that the United States District Court for the
District of Maryland and any court of competent jurisdiction of the State of
Maryland shall have jurisdiction in any proceeding instituted to enforce this
Guaranty and any objections to venue are hereby waived.
16. SUCCESSORS AND ASSIGNS. The references in this Guaranty to
Marriott's, Primary Manager's or Interstate's successors and assigns shall not
be deemed a waiver by any party, of any prohibition in the Submanagement
Agreements or Franchise Agreements or Settlement Agreement relating to the
assignment of the Submanagement Agreements or Franchise Agreements or Settlement
Agreement.
17. INDUCEMENT. This Guaranty is executed by the Guarantor
prior to, or simultaneously with, the execution and delivery of the
Submanagement Agreements by Submanager, and to induce Marriott to execute and
deliver the Submanagement Agreements well knowing that Marriott would not do so
without this Guaranty. This Guaranty is executed by the Guarantor prior to, or
simultaneously with, the assumption or execution of the Franchise Agreements by
Interstate and to induce Marriott to permit Interstate to enter into or assume
the Franchise Agreements well knowing that Marriott would not do so without this
Guaranty.
18. MISCELLANEOUS. All references to the singular shall, where
applicable, refer to the plural.
<PAGE> 8
In witness whereof, ___________________________ has caused these
presents to be executed by its President thereunto duly authorized, and its
corporate seal to be hereunto affixed, this day of , 199__.
ATTEST: GUARANTOR:
NEWCO, LLC
By: (SEAL)
- --------------------------- -----------------------------
Name:
------------------------
Title:
-----------------------
<PAGE> 9
EXHIBIT A
Hotels Managed by Marriott
@@
<TABLE>
<CAPTION>
Hotel Effective Date Brand
----- -------------- -----
<S> <C> <C> <C>
1 Albany, NY Date of Divestiture MHRS
2 Atlanta North, GA 1 Year after Date of MHRS
Divestiture
3 Conshohocken, PA 1 Year after Date of MHRS
Divestiture
4 Harrisburg, PA 1 Year after Date of MHRS
Divestiture
5 Houston, TX 1 Year after Date of MHRS
Divestiture
6 Indian River Plantation, FL Date of Divestiture MHRS
7 San Diego Mission Valley, CA Date of Divestiture MHRS
8 Minneapolis, MN 1 Year after Date of MHRS
Divestiture
9 Warner Center, CA Date of Divestiture MHRS
10 Pittsburgh Airport, PA Date of Divestiture MHRS
</TABLE>
<PAGE> 10
EXHIBIT B
Hotels with Contracts Assumed
Hotel Brand
----- -----
1. New Haven Orange, CT CY
2. Tyson's Corner, VA MHRS
3. Troy, MI MHRS
4. Westborough, MA CY
5. St. Louis, MO CY
6. Pittsburgh Airport, PA RI
Hotels Owned by 3rd Parties
Hotel Brand
----- -----
1. Boca Raton, FL MHRS
2. Charlotte Executive Park, NC MHRS
3. Cincinnati, OH MHRS
4. Ft. Lauderdale North, FL MHRS
5. Laguna Cliffs Dana Point, CA MHRS
6. Manhattan Beach, CA MHRS
7. Memphis, TN MHRS
8. Ontario Airport, CA MHRS
9. Orlando Airport, FL MHRS
10. Pittsburgh City Center, PA MHRS
11. Pittsburgh Green Tree, PA MHRS
12. Providence, RI MHRS
13. San Francisco, CA MHRS
14. Sawgrass, FL MHRS
15. Trumbull, CT MHRS
16. Waterford Oklahoma City, OK MHRS
17. Orlando I Drive, FL MHRS
18. Moscow, Russia MHRS
19. Albany, NY (CY) CY
20. Burlington, VT (RI) RI
21. Chambersberg, PA (FFI) FFI
22. Colorado Springs, CO (RI) RI
23. Eagan Minneapolis, MN (RI) RI
24. Jackson, MS (FFI) FFI
<PAGE> 11
25. Madison, WI (RI) RI
26. Manhattan, NY (CY) CY
27. Memphis, MS (FFI) FFI
28. Mobile Gulf, AL (CY) CY
29. Oklahoma City, OK (RI) RI
30. Omaha Central NE (RI) RI
31. Princeton, NJ (RI) RI
32. Tinton Falls, NJ (RI) RI
33. Tucson, AZ (RI) RI
34. Vicksburg, MS (FFI) FFI
35. Boise, Idaho RI
36. Portland, Oregon RI
<PAGE> 1
EXHIBIT 10.19
FORM OF
INTERSTATE HOTELS MANAGEMENT, INC.
1999 EQUITY INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Interstate Hotels Management, Inc. 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 Management, Inc. (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)_________ shares; plus (ii) as of each
June 30 and December 31 after December 31, 1998, 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 _________ shares, and the maximum number of shares of stock
which may be the subject of outright grants shall not exceed ________ 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 [100,000] shares of Stock may be
granted to any one individual participant during any ______ 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 April
___, 2009 [(10 years from the date plan is approved by Board of Directors)].
(a) Stock Options Granted to Employees and Key Persons. The
Administrator in its discretion may grant Stock Options to eligible employees
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.
(c) Stock Options Granted to Independent Directors.
(i) Automatic Grant of Options.
(A) Each Independent Director who is serving as
Director of the Company on the fifth business day after each
annual meeting of shareholders, beginning with the 2000 annual
meeting, shall automatically be granted on such day a
Non-Qualified Stock Option to acquire _____ shares of Stock.
(B) The exercise price per share for the Stock
covered by a Stock Option granted under this Section 5(c)
shall be equal to the Fair Market Value of the Stock on the
date the Stock Option is granted.
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<PAGE> 9
(C) The Administrator, in its discretion, may grant
additional NonQualified Stock Options to Independent
Directors. Any such grant may vary among individual
Independent Directors.
(ii) Exercise; Termination.
(A) Unless otherwise determined by the Administrator,
an Option granted under Section 5(c) shall be [exercisable in
full as of the grant date] [or exercisable after the ___
anniversary of the grant date]. An Option issued under this
Section 5(c) shall not be exercisable after the expiration of
ten years from the date of grant.
(B) Options granted under this Section 5(c) may be
exercised only by written notice to the Company specifying the
number of shares to be purchased. Payment of the full purchase
price of the shares to be purchased may be made by one or more
of the methods specified in Section 5(a)(iv). 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.
(d) 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.
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<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 _______
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 Pennsylvania,
applied without regard to conflict of law principles.
DATE APPROVED BY BOARD OF DIRECTORS: May ____, 1999
DATE APPROVED BY STOCKHOLDERS: May ____, 1999
16
<PAGE> 1
EXHIBIT 10.20
FORM OF
INTERSTATE HOTELS MANAGEMENT, INC.
EMPLOYEE STOCK PURCHASE PLAN
The purpose of the Interstate Hotels Management, Inc. Employee Stock
Purchase Plan ("the Plan") is to provide eligible employees of Interstate Hotels
Management, Inc. (the "Company") and certain of its subsidiaries with
opportunities to purchase shares of the Company's common stock, par value $.01
per share (the "Common Stock"). ______ (_______) shares of Common Stock in the
aggregate have been approved and reserved for this purpose. The Plan is intended
to constitute an "employee stock purchase plan" within the meaning of Section
423(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and shall
be interpreted in accordance with that intent.
1. Administration. The Plan will be administered by the person or
persons (the "Administrator") appointed by the Company's Board of Directors (the
"Board") for such purpose. The Administrator has authority to make rules and
regulations for the administration of the Plan, and its interpretations and
decisions with regard thereto shall be final and conclusive. No member of the
Board or individual exercising administrative authority with respect to the Plan
shall be liable for any action or determination made in good faith with respect
to the Plan or any option granted hereunder.
2. Offerings. The Company will make one or more offerings to eligible
employees to purchase Common Stock under the Plan ("Offerings"). Unless
otherwise determined by the Administrator, the initial Offering will begin on
_________, 1999 and will end on [December 31, 1999] (the "Initial Offering").
Thereafter, unless otherwise determined by the Administrator, an Offering will
begin on the first business day occurring on or after each [January 1 and July
1] and will end on the last business day occurring on or before the following
[June 30 and December 31], respectively. The Administrator may, in its
discretion, designate a different period for any Offering, provided that no
Offering shall exceed one year in duration or overlap any other Offering.
3. Eligibility. All employees of the Company (including employees who
are also directors of the Company) and all employees of each Designated
Subsidiary (as defined in Section 11) are eligible to participate in any one or
more of the Offerings under the Plan, provided that as of the first day of the
applicable Offering (the "Offering Date") they are customarily employed by the
Company or a Designated Subsidiary for more than twenty (20) hours a week or
five (5) months a year and have completed at least twelve (12) consecutive
months of employment.
4. Participation. An employee eligible on any Offering Date may
participate in such Offering by submitting an enrollment form to his appropriate
payroll location at least fifteen (15) business days before the Offering Date
(or by such other deadline as shall be
<PAGE> 2
established for the Offering). The form will (a) state [a whole percentage] to
be deducted from his Compensation (as defined in Section 11) per pay period, (b)
authorize the purchase of Common Stock for him in each Offering in accordance
with the terms of the Plan and (c) specify the exact name or names in which
shares of Common Stock purchased for him are to be issued pursuant to Section
10. An employee who does not enroll in accordance with these procedures will be
deemed to have waived his right to participate. Unless an employee files a new
enrollment form or withdraws from the Plan, his deductions and purchases will
continue at the same percentage of Compensation for future Offerings, provided
he remains eligible. Notwithstanding the foregoing, participation in the Plan
will neither be permitted nor be denied contrary to the requirements of the
Code.
5. Employee Contributions. Each eligible employee may authorize payroll
deductions at a minimum of one percent (1%) up to a maximum of eight percent
(8%) of his Compensation for each pay period. The Company will maintain book
accounts showing the amount of payroll deductions made by each participating
employee for each Offering. No interest will accrue or be paid on payroll
deductions.
6. Deduction Changes. Except as may be determined by the Administrator
in advance of an Offering, an employee may not increase or decrease his payroll
deduction during any Offering, but may increase or decrease his payroll
deduction with respect to the next Offering (subject to the limitations of
Section 5) by filing a new enrollment form at least fifteen (15) business days
before the next Offering Date (or by such other deadline as shall be established
for the Offering). The Administrator may, in advance of any Offering, establish
rules permitting an employee to increase, decrease or terminate his payroll
deduction during an Offering.
7. Withdrawal. An employee may withdraw from participation in the Plan
by delivering a written notice of withdrawal to his appropriate payroll
location. The employee's withdrawal will be effective as of the next business
day. Following an employee's withdrawal, the Company will promptly refund to him
his entire account balance under the Plan (after payment for any Common Stock
purchased before the effective date of withdrawal). Partial withdrawals are not
permitted. The employee may not begin participation again during the remainder
of the Offering, but may enroll in a subsequent Offering in accordance with
Section 4.
8. Grant of Options. On each Offering Date, the Company will grant to
each eligible employee who is then a participant in the Plan an option
("Option") to purchase on the last day of such Offering (the "Exercise Date"),
at the Option Price hereinafter provided for, a maximum of [__________ (____)]
shares of Common Stock reserved for the purposes of the Plan, or such other
maximum number of shares as shall have been established by the Administrator in
advance of the Offering. The purchase price for each share purchased under such
Option (the "Option Price") will be established by the Administrator on or
before each Offering Date, but will not be less than 85% of the Fair Market
Value of the Common Stock on the Offering Date or the Exercise Date, whichever
is less.
2
<PAGE> 3
Notwithstanding the foregoing, no employee may be granted an option
hereunder if such employee, immediately after the option was granted, would be
treated as owning stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or any
Parent or Subsidiary (as defined in Section 11). For purposes of the preceding
sentence, the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of an employee, and all stock which the employee
has a contractual right to purchase shall be treated as stock owned by the
employee. In addition, no employee may be granted an Option which permits his
rights to purchase stock under the Plan, and any other employee stock purchase
plan of the Company and its Parents and Subsidiaries, to accrue at a rate which
exceeds $25,000 of the fair market value of such stock (determined on the option
grant date or dates) for each calendar year in which the Option is outstanding
at any time. The purpose of the limitation in the preceding sentence is to
comply with Section 423(b)(8) of the Code.
9. Exercise of Option and Purchase of Shares. Each employee who
continues to be a participant in the Plan on the Exercise Date shall be deemed
to have exercised his Option on such date and shall acquire from the Company
such number of whole shares of Common Stock reserved for the purpose of the Plan
as his accumulated payroll deductions on such date will purchase at the Option
Price, subject to any other limitations contained in the Plan. Any amount
remaining in an employee's account at the end of an Offering solely by reason of
the inability to purchase a fractional share will be carried forward to the next
Offering; any other balance remaining in an employee's account at the end of an
Offering will be refunded to the employee promptly.
10. Issuance of Certificates. Certificates representing shares of
Common Stock purchased under the Plan may be issued only in the name of the
employee, in the name of the employee and another person of legal age as joint
tenants with rights of survivorship, or in the name of a broker authorized by
the employee to be his, or their, nominee for such purpose.
11. Definitions.
The term "Compensation" means the amount of [base pay, prior to salary
reduction pursuant to either Section 125 or 401(k) of the Code, but excluding
overtime, incentive or bonus awards,] [total cash compensation, prior to salary
reduction pursuant to either Section 125 or 401(k) of the Code, including base
pay, overtime and incentive or bonus awards, but excluding] allowances and
reimbursements for expenses such as relocation allowances or travel expenses,
income or gains on the exercise of Company stock options, and similar items.
The term "Designated Subsidiary" means any present or future Subsidiary
(as defined below) that has been designated by the Board to participate in the
Plan. The Board may so designate any Subsidiary, or revoke any such designation,
at any time and from time to time, either before or after the Plan is approved
by the stockholders.
3
<PAGE> 4
The term "Fair Market Value of the Common Stock" means (i) if the
Common Stock is admitted to trading on a national securities exchange or the
Nasdaq National Market, the closing price reported for the Common Stock on such
exchange or system for such date or, if no sales were reported for such date,
for the next preceding date for which a sale was reported, or (ii) if clause (i)
does not apply but the Common Stock is admitted to quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), the
average of the highest bid and lowest asked prices reported.
The term "Parent" means a "parent corporation" with respect to the
Company, as defined in Section 424(e) of the Code.
The term "Subsidiary" means a "subsidiary corporation" with respect to
the Company, as defined in Section 424(f) of the Code.
12. Rights on Termination of Employment. If a participating employee's
employment terminates for any reason before the Exercise Date for any Offering,
no payroll deduction will be taken from any pay due and owing to the employee
and the balance in his account will be paid to him or, in the case of his death,
to his designated beneficiary as if he had withdrawn from the Plan under Section
7. An employee will be deemed to have terminated employment, for this purpose,
if the corporation that employs him, having been a Designated Subsidiary, ceases
to be a Subsidiary, or if the employee is transferred to any corporation other
than the Company or a Designated Subsidiary.
13. Special Rules. Notwithstanding anything herein to the contrary, the
Administrator may adopt special rules applicable to the employees of a
particular Designated Subsidiary, whenever the Administrator determines that
such rules are necessary or appropriate for the implementation of the Plan in a
jurisdiction where such Designated Subsidiary has employees; provided that such
rules are consistent with the requirements of Section 423(b) of the Code. Such
special rules may include (by way of example, but not by way of limitation) the
establishment of a method for employees of a given Designated Subsidiary to fund
the purchase of shares other than by payroll deduction, if the payroll deduction
method is prohibited by local law or is otherwise impracticable. Any special
rules established pursuant to this Section 13 shall, to the extent possible,
result in the employees subject to such rules having substantially the same
rights as other participants in the Plan.
14. Optionees Not Stockholders. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee a holder
of the shares of Common Stock covered by an Option under the Plan until such
shares have been purchased by and issued to him.
15. Rights Not Transferable. Rights under the Plan are not transferable
by a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
4
<PAGE> 5
16. Application of Funds. All funds received or held by the Company
under the Plan may be combined with other corporate funds and may be used for
any corporate purpose.
17. Adjustment in Case of Changes Affecting Common Stock. In the event
of a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for the Plan, and the
share limitation set forth in Section 8, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the
Administrator. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Administrator to give
proper effect to such event.
18. Amendment of the Plan. The Board may at any time, and from time to
time, amend the Plan in any respect, except that without the approval, within
twelve (12) months of such Board action, by the holders of a majority of the
shares of stock of the Company present or represented and entitled to vote at a
meeting of stockholders, no amendment shall be made increasing the number of
shares approved for the Plan or making any other change that would require
stockholder approval in order for the Plan, as amended, to qualify as an
"employee stock purchase plan" under Section 423(b) of the Code.
19. Insufficient Shares. If the total number of shares of Common Stock
that would otherwise be purchased on any Exercise Date plus the number of shares
purchased under previous Offerings under the Plan exceeds the maximum number of
shares issuable under the Plan, the shares then available shall be apportioned
among participants in proportion to the amount of payroll deductions accumulated
on behalf of each participant that would otherwise be used to purchase Common
Stock on such Exercise Date.
20. Termination of the Plan. The Plan may be terminated at any time by
the Board. Upon termination of the Plan, all amounts in the accounts of
participating employees shall be promptly refunded.
21. Governmental Regulations. The Company's obligation to sell and
deliver Common Stock under the Plan is subject to obtaining all governmental
approvals required in connection with the authorization, issuance, or sale of
such stock.
The Plan shall be governed by Pennsylvania law except to the extent
that such law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
23. Tax Withholding. Participation in the Plan is subject to any
required tax withholding on income of the participant in connection with the
Plan. Each employee agrees, by entering the Plan, that the Company and its
Subsidiaries shall have the right to deduct any
5
<PAGE> 6
such taxes from any payment of any kind otherwise due to the employee, including
shares issuable under the Plan.
24. Notification Upon Sale of Shares. Each employee agrees, by entering
the Plan, to give the Company prompt notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
25. Effective Date and Approval of Shareholders. The Plan shall take
effect on the later of the date it is adopted by the Board and the date it is
approved by the holders of a majority of the shares of stock of the Company
present or represented and entitled to vote at a meeting of stockholders, which
approval must occur within twelve (12) months of the adoption of the Plan by the
Board.
6
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 4 to registration statement on
Form S-1 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
Management, Inc.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
May 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEET AS OF MARCH 31, 1999 AND THE COMBINED STATEMENT OF OPERATIONS AND
OWNERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,658
<SECURITIES> 0
<RECEIVABLES> 20,496
<ALLOWANCES> (327)
<INVENTORY> 0
<CURRENT-ASSETS> 28,382
<PP&E> 8,630
<DEPRECIATION> (4,743)
<TOTAL-ASSETS> 163,754
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<OTHER-SE> 83,289
<TOTAL-LIABILITY-AND-EQUITY> 164,754
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<EPS-DILUTED> 0<F1>
<FN>
<F1>The accompanying combined financial statements have been carved out of the
financial statements of the Company's predecessors. Therefore, the Company
believes that earnings per share calculations required to be presented are not
meaningful for the period presented and have not been provided.
</FN>
</TABLE>
