1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1996
REGISTRATION NO. 333-03958
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERSTATE HOTELS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 7011 25-1788101
(State of incorporation) (Primary Standard (I.R.S. Employer
Industrial Classification Identification No.)
Code Number)
------------------------
FOSTER PLAZA 10
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Address and telephone number of Registrant's principal executive offices)
------------------------
MARVIN I. DROZ, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
FOSTER PLAZA 10
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Name, address and telephone number of agent for service)
------------------------
Copies to:
ROBERT A. PROFUSEK, ESQ. PATRICK J. FOYE, ESQ.
DAVID J. LOWERY, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
JONES, DAY, REAVIS & POGUE 919 THIRD AVENUE
599 LEXINGTON AVENUE NEW YORK, NEW YORK 10022
NEW YORK, NEW YORK 10022 (212) 735-3000
(212) 326-3939
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INTERSTATE HOTELS COMPANY
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K AND RULE 404
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS BY CAPTION
----------------------------------------- -----------------------------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and
Ratio
of Earnings to Fixed Charges........... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Prospectus Summary; Use of Proceeds;
Capitalization
5. Determination of Offering Price.......... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution................................. Dilution
7. Selling Security Holders................. *
8. Plan of Distribution..................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered............................. Prospectus Summary; Description of
Capital Stock
10. Interests of Named Experts and Counsel... *
11. Information with Respect to the
Registrant............................. Outside Front Cover Page of Prospectus;
Inside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors;
Business and Properties; Prior S
Corporation Status; Dividend Policy;
Dilution; Capitalization; Pro Forma
Financial Data; Selected Financial and
Other Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Management; The
Organization, Acquisition and Financing
Plan; Principal Shareholders; Certain
Relationships and Related Transactions;
Description of Capital Stock; Shares
Eligible for Future Sale; Underwriting
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities........................ *
- - ------------------
* Such item is inapplicable, or the answer thereto is in the negative, and is
omitted from the Prospectus.
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EXPLANATORY NOTE
This Registration Statement covers the registration of 9,350,000 shares of
Common Stock to be offered in a public offering in the United States and Canada
(the "U.S. Offering") and 1,650,000 shares of Common Stock to be offered in a
concurrent public offering outside the United States and Canada (the
"International Offering"). The complete form of prospectus relating to the U.S.
Offering (the "U.S. Prospectus") follows immediately after this explanatory
note. The form of prospectus relating to the International Offering (the
"International Prospectus") will be identical in all respects to the U.S.
Prospectus, except that the International Prospectus contains different front
and back cover pages and the section titled "Underwriting." The form of the U.S.
Prospectus included herein is followed by those pages to be used in the
International Prospectus which differ from those in the U.S. Prospectus. Each of
such pages included herein is labeled "Alternate Page for International
Prospectus."
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION OF THESE SECURITIES UNDER
THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 19, 1996
PROSPECTUS
11,000,000 SHARES
INTERSTATE HOTELS COMPANY
COMMON STOCK
------------------------
All of the shares of Common Stock of Interstate Hotels Company (the
"Company") are being offered by the Company. Of the 11,000,000 shares of Common
Stock offered, 9,350,000 shares are being offered hereby in the United States
and Canada by the U.S. Underwriters and 1,650,000 shares are being offered in a
concurrent offering outside the United States and Canada by the International
Underwriters. The initial public offering price and aggregate underwriting
discount per share will be identical for both offerings (the "Offering"). It is
currently estimated that the initial public offering price will be between $19
and $21 per share. For factors to be considered in determining the initial
public offering price, see "Underwriting."
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "IHC," subject to official notice of issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- - -----------------------------------------------------------------------------------------------------------
Per Share................................... $ $ $
- - -----------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
===========================================================================================================
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several U.S. Underwriters and the several
International Underwriters 30-day options to purchase up to an additional
1,402,500 and 247,500 shares of Common Stock, respectively, to cover over-
allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel to the Underwriters. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York City on or about , 1996.
------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
------------------------
The date of this Prospectus is , 1996
LOGO
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IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PHOTO
THE CHARLES HOTEL
CAMBRIDGE, MASSACHUSETTS
(MANAGED)
PHOTO PHOTO
WARNER CENTER MARRIOTT HOTEL TVERSKAYA, MOSCOW, RUSSIA (MANAGED)
LOS ANGELES, CALIFORNIA
(OWNED)
PHOTO
THE DON CESAR BEACH RESORT
ST. PETERSBURG BEACH, FLORIDA
(MANAGED, WITH A MINORITY
INTEREST)
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PHOTO
COLORADO SPRINGS MARRIOTT, COLORADO SPRINGS,
COLORADO (OWNED)
PHOTO
THE WESTIN BONAVENTURE, LOS ANGELES, CALIFORNIA
(MANAGED)
PHOTO
THE HAY-ADAMS HOTEL,
WASHINGTON, D.C. (MANAGED)
PHOTO
MARRIOTT AT SAWGRASS,
PONTE VEDRA BEACH, FLORIDA (MANAGED)
PHOTO
THE BELLEVUE HOTEL, PHILADELPHIA, PA
(MANAGED)
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. In this Prospectus, (i) the term the "Company" refers to
Interstate Hotels Company, a Pennsylvania corporation, its subsidiaries and its
predecessors and certain of their affiliates, (ii) all information gives effect
to the transactions described under the caption "The Organization, Acquisition
and Financing Plan," including the contribution of Interstate Hotels Corporation
and certain of its affiliates to the Company to be effected immediately prior to
the Offering and the acquisition of controlling interests in the Owned Hotels
(as defined below), (iii) except as otherwise specified herein, all information
assumes that the initial public offering price will be $20 per share and that
the Underwriters' over-allotment options will not be exercised, and (iv) except
as otherwise specified herein, all Company hotel statistics are as of May 1,
1996 and all lodging industry statistics (other than Company statistics) are
from, or derived from, information published or provided by Smith Travel
Research, an independent industry research organization. Smith Travel Research
has not provided any form of consultation, advice or counsel regarding the
Offering contemplated hereby, and Smith Travel Research is in no way associated
with the Offering.
THE COMPANY
The Company is the largest independent hotel management company in the
United States based on total portfolio hotel revenues and number of guestrooms
and properties managed. The Company manages or performs related services for 154
hotels, with 35,730 rooms, located in 28 states in the United States and in the
District of Columbia, Canada, Mexico, Israel, the Caribbean, Thailand and
Russia. Following consummation of the Offering, the Company will own or have a
controlling interest in 15 of these properties (the "Owned Hotels"), all of
which are upscale hotels currently managed by the Company. In 1995, the Owned
Hotels contributed 81.8% of the pro forma 1995 total revenues of the Company.
In 1995, 84.1% of the Company's net management revenues were derived from
upscale or luxury hotels and resorts. The Company is the largest franchisee of
upscale hotels in the Marriott(R) system, providing services to 36 hotels, with
12,649 rooms, bearing the Marriott(R) flag. Consistent with the Company's
multiple branding strategy, the Company also manages hotels under many other
major full-service brand names, including Doubletree(R), Embassy Suites(R),
Hilton(R), Radisson(R), Sheraton(R) and Westin(R), as well as under the
Company's own Colony(R) trade name. Among the well-known hotels managed by the
Company are: The Charles Hotel at Harvard Square in Cambridge, Massachusetts;
the Don CeSar Beach Resort in St. Petersburg Beach, Florida; The Hay-Adams Hotel
in Washington, D.C.; The Bellevue Hotel in Philadelphia, Pennsylvania; the
Westin Bonaventure in Los Angeles, California; Marriott's Casa Marina Resort in
Key West, Florida; and the Marriott at Sawgrass Resort in Ponte Vedra Beach,
Florida. The Company also operates in the mid-priced, economy and budget
segments of the lodging industry.
Since its founding in 1961 to own and operate a single motor lodge in
northwestern Pennsylvania, the Company has achieved consistent annual growth,
even through industry downturns. The total revenues of the hotels to which the
Company provided management or related services increased from $514 million in
1991 to almost $1.1 billion in 1995, an average annual compound growth rate of
19.7%. During the same period, the Company's portfolio of hotels increased from
49 to 150. The Company's total revenues grew from $17.6 million in 1991 to $45.0
million in 1995, an average annual compound growth rate of 26.5%. The Company's
net income increased at an average annual compound growth rate of 69.8% over the
same period, from $1.9 million in 1991 to $15.8 million in 1995. The Company
attributes its steady growth to the disciplined pursuit of four core strategies:
(i) providing superior, innovative hotel management services, resulting in
increased investment value for the hotel owner; (ii) adding new management
contracts and selectively acquiring hotel management businesses; (iii) adding
new hotels to the Company's portfolio of upscale and luxury properties through
acquisitions; and (iv) maximizing the profitability of the Company's acquired
hotels by repositioning them within their local markets and applying to them the
Company's proven management techniques.
The Company believes that its prospects for continuing sustainable growth
are enhanced by a number of competitive advantages, including: (i) a proven
ability to source management contract and property
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acquisition opportunities resulting from the Company's large and geographically
diverse hotel portfolio; (ii) excellent relationships with hotel investors and
owners due to the Company's disciplined management techniques and its track
record of improving the profitability of the hotels it manages; (iii) the
Company's flexible branding strategy, which permits the Company to own and
operate multiple hotels under different brands within the same geographic market
and to operate more opportunistically within existing and new markets than hotel
companies committed to particular flags; (iv) the Company's corporate
infrastructure and the operational synergies resulting therefrom, which permit
the Company to lower the unit costs of its services and assure the
implementation of quality management systems on a Company-wide basis; (v) the
strength and depth of its management team, the senior members of which have an
average tenure of 22 years in the lodging industry and 13 years with the
Company; (vi) the stability of the Company's cash flow resulting from the
Company's large portfolio of hotel contracts and the Owned Hotels; and (vii) the
Company's conservative capitalization and ability to access additional equity
and debt capital to finance future growth on a cost-effective basis.
Commencing in 1994, affiliates of the Company's predecessor, Interstate
Hotels Corporation ("IHC"), formed a series of partnerships with affiliates of
Blackstone Real Estate Advisors L.P. (collectively, "Blackstone") to acquire
hotel properties. These partnerships acquired fee title or controlling interests
in eight of the Owned Hotels. Thereafter, IHC and its affiliates formed a second
series of partnerships with Blackstone to acquire a controlling interest in an
additional six of the Owned Hotels. IHC and its affiliates acquired a 25%
interest in the partnerships with Blackstone, and IHC manages all of the hotel
properties. In connection with the formation of the second series of
partnerships, Blackstone acquired an option to purchase a 20% equity interest in
the Company (the "Blackstone Option"). In March 1996, IHC and an affiliate
agreed to acquire all of Blackstone's interests in the 14 Owned Hotels (the
"Acquisition") for an aggregate purchase price consisting of $124.4 million in
cash and $8.3 million of the Company's Common Stock. Blackstone also exercised
its option to acquire $44.8 million of the Company's Common Stock, conditioned
upon consummation of the Offering. In April 1996, IHC executed a contract to
acquire the Boston Marriott Westborough Hotel, an Owned Hotel which IHC manages,
from an unrelated third party. A substantial portion of the net proceeds from
the Offering will be used to finance the acquisition of Blackstone's interests
in the 14 Owned Hotels as well as the Boston Marriott Westborough Hotel. The
Company believes that it will acquire the Owned Hotels at prices reflecting
substantial discounts to replacement cost. Prior to consummation of the
Offering, all of the interests in the Owned Hotels owned by affiliates of IHC
will be contributed to the Company, and all of the capital stock of IHC will be
contributed to the Company, resulting in IHC becoming a wholly owned subsidiary
of the Company (the "Organization"). See "The Organization, Acquisition and
Financing Plan."
The Owned Hotels consist of 15 geographically diverse upscale hotels,
containing an aggregate of 4,621 rooms and operating under the Embassy
Suites(R), Hilton(R), Marriott(R) and Radisson(R) trade names principally in
major metropolitan markets such as Atlanta, Boston, Chicago, Los Angeles,
Philadelphia, Houston, Fort Lauderdale and Washington, D.C. The Owned Hotels
produced superior operating results in 1995, achieving an average occupancy rate
of 73.0%, an average daily rate ("ADR") of $88.03 and room revenue per available
room ("REVPAR") of $64.29, compared to 1995 industry averages for upscale hotels
of a 68.5% occupancy rate, ADR of $80.38 and REVPAR of $55.06. The Company
expects further improvement in the results of operations of the Owned Hotels as
the effects of the repositioning of certain of them, and the application of the
Company's management practices to all of them, are realized. The Company intends
to pursue additional acquisitions following the Offering, under certain
circumstances as a co-investor with Blackstone through a third series of
partnerships formed with the Company. Upon consummation of the Offering, the
Company expects to have in place a $100 million acquisition facility (the
"Acquisition Facility") to provide greater financial flexibility to pursue
acquisitions. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company believes that it has excellent opportunities for continued
growth, which are enhanced by the favorable industry environment. From 1994 to
1995, room demand in the United States increased at an average annual rate of
approximately 3.0%, nearly twice the average annual increase in supply of new
rooms of 1.6% over the same period. This excess of demand growth over supply
growth raised industry occupancy and ADR for upscale hotels to 68.5% and $80.38,
respectively, in 1995 from 68.1% and $77.19, respectively, in
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1994. With consistent demand growth and limited new supply, particularly in the
upscale and luxury segments, management expects that industry-wide occupancy and
ADR will continue to improve in 1996 and beyond.
The Company's principal executive offices are located at Foster Plaza 10,
680 Andersen Drive, Pittsburgh, Pennsylvania 15220, and its telephone number is
(412) 937-0600.
THE OFFERING
Common Stock Offered by the Company
U.S. Offering........................... 9,350,000 shares
International Offering.................. 1,650,000 shares
Total.............................. 11,000,000 shares (1)
Common Stock to be Outstanding after the
Offering................................... 27,220,000 shares (1)(2)
Use of Proceeds.............................. The net proceeds of the Offering, together
with the net proceeds of new debt financings,
will be used to finance the purchase of
controlling interests in the Owned Hotels, to
repay existing indebtedness and for general
corporate purposes.
New York Stock Exchange symbol............... IHC
- - ------------------
(1) Does not include up to 1,650,000 shares of Common Stock subject to
over-allotment options granted to the Underwriters. See "Underwriting."
(2) Assumes the issuance of 415,000 shares of Common Stock to purchase the Fort
Magruder Inn and Conference Center. See "The Organization, Acquisition and
Financing Plan--Acquisition of Owned Hotels." Does not include 2,400,000
shares of Common Stock reserved for issuance under the Company's equity
incentive plans and 850,000 shares reserved for issuance under other
compensation plans. See "Management--Director Compensation," "--Stock Option
Grants" and "--Compensation Plans and Arrangements."
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SUMMARY FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
The following table sets forth summary historical financial data of the
Company as of and for each of the years ended December 31, 1991, 1992, 1993,
1994 and 1995 and for the three months ended March 31, 1995 and 1996, summary
pro forma financial data for the Company for the year ended December 31, 1995
and as of and for the three months ended March 31, 1996, and certain other data.
The summary financial data of the Company as of December 31, 1994 and 1995 and
for each of the years ended December 31, 1993, 1994 and 1995 have been derived
from audited combined financial statements of the Company included elsewhere in
this Prospectus. The summary financial data of the Company as of December 31,
1991, 1992 and 1993 and for each of the years ended December 31, 1991 and 1992
have been derived from audited combined financial statements of the Company
which are not required to be included in this Prospectus. The summary historical
financial data of the Company as of and for the three months ended March 31,
1995 and 1996 have been derived from unaudited financial statements of the
Company and, in the opinion of the Company, reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
information set forth therein. The interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short term variations. The pro forma financial data give effect to the Offering
and the transactions described in "Business and Properties--Host Funding
Transaction" and "The Organization, Acquisition and Financing Plan" (excluding
the possible acquisition of the Trumbull Hotel) as if all such transactions had
occurred as of January 1, 1995, except that the pro forma balance sheet data
give effect to such transactions as if each had occurred on March 31, 1996. The
pro forma information presented is not necessarily indicative of what the actual
financial position and results of operations of the Company would have been as
of and for the periods indicated, nor does it purport to represent the Company's
future financial position and results of operations. The summary financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the combined financial
statements and notes thereto included elsewhere in this Prospectus. See "Index
to Financial Statements."
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
------- ------- ------- ------- -------- ---------- ------- ------- ----------
STATEMENT OF INCOME DATA:
Revenues:
Hotel revenues............... $ -- $ -- $ -- $ -- $ -- $ 183,842 $ -- $ -- $ 45,991
Management and related
revenues (2)............... $17,645 19,873 25,564 36,726 45,018 41,035 10,249 12,296 10,807
------- ------- ------- ------- -------- ---------- ------- ------- ----------
Total revenues............. 17,645 19,873 25,564 36,726 45,018 224,877 10,249 12,296 56,798
Expenses:
Operating expenses and other... 12,350 12,999 15,384 20,708 25,077 164,952 5,914 6,470 40,125
Depreciation and
amortization................. 3,286 3,352 3,282 3,659 4,201 21,010 1,042 1,101 5,360
Interest, net.................. 101 (98) (12) (30) (99) 18,288 (52) 488 4,340
------- ------- ------- ------- -------- ---------- ------- ------- ----------
Income before income taxes....... 1,908 3,620 6,910 12,389 15,839 20,627 3,345 4,237 6,973
Income tax expense (3)........... -- -- -- -- -- 7,838 -- -- 2,650
------- ------- ------- ------- -------- ---------- ------- ------- ----------
Net income....................... $ 1,908 $ 3,620 $ 6,910 $12,389 $ 15,839 $ 12,789 $ 3,345 $ 4,237 $ 4,323
======= ======= ======= ======= ======== ========= ======= ======= =========
Pro forma net income per common
share (4)...................... $ 0.47 $ .16
Pro forma common shares
outstanding.................... 27,220,000 27,220,000
BALANCE SHEET DATA (AT YEAR END):
Cash and cash equivalents...... $ 2,997 $ 4,461 $ 4,520 $ 6,702 $ 14,035 $ 7,303 $12,074 $ 21,112
Total assets................... 25,146 24,270 24,436 30,741 61,401 34,239 70,025 482,856
Total debt..................... 2,168 2,076 1,809 3,890 36,270 3,640 36,058 225,870
Total equity (deficit)......... 18,360 16,685 16,627 18,858 9,256 18,851 (16,740) 205,703
OTHER FINANCIAL DATA:
EBITDA (5)..................... $ 5,338 $ 7,109 $10,474 $16,668 $ 20,481 $ 60,465 $ 4,466 $ 5,860 $ 16,707
Net cash provided by operating
activities................... 3,668 7,332 10,389 15,318 25,328 52,422 4,868 4,945 4,940
Net cash (used in) investing
activities................... (726) (481) (3,088) (3,852) (22,858) (361,935 ) (644) (6,279) (148,427 )
Net cash (used in) provided by
financing activities......... (2,571) (5,387) (7,242) (9,285) 4,863 312,379 (3,603) (627) 134,779
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------- -------- --------
TOTAL PORTFOLIO HOTEL DATA: (6)
Total portfolio hotel revenues....... $513,907 $584,344 $760,766 $858,986 $1,056,279 $246,072 $301,401
Number of hotels (7)................. 49 53 82 136 150 138 149
Number of rooms (7).................. 17,386 18,985 24,202 31,502 35,044 31,738 35,357
COMPARABLE HOTEL OPERATING DATA: (8)
Occupancy percentage (9)............... 74.9% 75.4% 76.6% 75.3% 77.3%
ADR (10)............................... $83.73 $86.96 $91.78 $95.38 $100.29
REVPAR (11)............................ $62.74 $65.60 $70.31 $71.79 $77.51
Gross operating profit margin (12)..... 28.2% 30.0% 31.5% 32.6% 34.0%
- - ------------------
(1) Reflects the Offering, the transactions described in "Business and
Properties--Host Funding Transaction" and "The Organization, Acquisition
and Financing Plan" (excluding the possible acquisition of the Trumbull
Hotel) and the other adjustments described in "Pro Forma Financial Data."
(2) Pro forma management and related revenues declined due to the assumed
consolidation of the Owned Hotels and the resultant pro forma elimination
of $4.0 million and $1.5 million of management and related fees actually
derived from the Owned Hotels in 1995 and the three months ended March 31,
1996, respectively.
(3) Until immediately prior to the consummation of the Offering, the Company
operated as an S corporation and, accordingly, was not subject to federal
and certain state income taxes. The pro forma statement of income data have
been computed as if the Company had been subject to federal and state
income taxes, based on the applicable statutory tax rates then in effect.
(4) Based on 27,220,000 shares of Common Stock outstanding after the Offering.
(5) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. Management believes that EBITDA is a useful measure of
operating performance because it is industry practice to evaluate hotel
properties based on operating income before interest, depreciation and
amortization, which is generally equivalent to EBITDA, and EBITDA is
unaffected by the debt and equity structure of the property owner. EBITDA
does not represent cash flow from operations as defined by generally
accepted accounting principles ("GAAP"), is not necessarily indicative of
cash available to fund all cash flow needs and should not be considered as
an alternative to net income under GAAP for purposes of evaluating the
Company's results of operations.
(6) Represents all hotels to which the Company provides management or related
services.
(7) As of the end of the periods presented.
(8) The comparable hotel data set consists of all of the hotels (consisting of
35 hotels containing a total of 12,771 rooms) managed continually by the
Company from January 1, 1993 through March 31, 1996.
(9) Represents total rooms occupied by hotel guests on a paid basis divided by
total available rooms. Total available rooms represents the number of rooms
available for rent multiplied by the number of days in the reported period.
(10) Represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(11) Represents room revenues divided by total available rooms.
(12) Represents gross operating profit divided by total revenues. "Gross
operating profit" represents total revenues less departmental expenses and
undistributed operating expenses, excluding management fees.
5
13
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risks and investment considerations should be carefully considered
before purchasing shares of Common Stock offered hereby. Each of the following
factors may have a material adverse effect on the Company's operations,
financial results, financial condition, liquidity, market valuation or market
liquidity in future periods.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The Company is subject to the risks inherent in the lodging industry. In
addition to the specific risks discussed below, these risks include changes in
general, regional and local economic conditions, overbuilding, varying levels of
demand for rooms and related services, changes in travel patterns, the recurring
need for renovation, refurbishment and improvement of hotel properties, changes
in governmental regulations that influence or determine wages, prices and
construction and maintenance costs, changes in interest rates, the availability
of financing and changes in real estate taxes and operating expenses.
COMPETITION FOR GUESTS
The lodging industry is highly competitive, and the Company's hotels
generally are located in areas that contain numerous competitive properties.
Competitive factors in the lodging industry include room rates, quality of
accommodations, name recognition, service levels and convenience of location
and, to a lesser extent, the quality and scope of other amenities, including
food and beverage facilities. Many of the properties with which the Company's
hotels compete for guests are part of or owned by entities that have
substantially greater financial or other resources than the Company.
RISKS ASSOCIATED WITH OWNING OR LEASING REAL ESTATE
Following consummation of the transactions described in "The Organization,
Acquisition and Financing Plan" (excluding the possible acquisition of the
Trumbull Hotel), the Company will own fee title or controlling partnership
interests in 15 of the 154 hotels it manages and will operate 13 hotels under
leases, six of which are long-term leases. In addition, the Company's business
strategy contemplates the acquisition of ownership interests in additional
hotels. Accordingly, the Company will be subject to varying degrees of risk
generally related to owning or leasing real estate. These risks include, among
others, changes in national, regional and local economic conditions, local real
estate market conditions, changes in interest rates and in the availability,
costs and terms of financing, liability for long-term lease obligations, the
potential for uninsured casualty and other losses, the impact of present or
future environmental legislation and compliance with environmental laws and
adverse changes in zoning laws and other regulations, many of which are beyond
the control of the Company. In addition, real estate investments are relatively
illiquid; therefore, the ability of the Company to vary its portfolio of owned
hotels in response to changes in economic and other conditions may be limited.
TERMS OF MANAGEMENT AGREEMENTS
On a pro forma basis, net management revenues represented 10.8% of the
Company's 1995 total revenues. Hotel management agreements expire or are
acquired, terminated or renegotiated in the ordinary course of the Company's
business. Typically, the Company's hotel management agreements may be terminated
for various reasons, including default by the Company or sale of or foreclosure
on the underlying property. In addition, approximately one-third of the
Company's management agreements allow for termination without cause upon 30 to
90 days notice. An additional 20 management agreements allow for termination
without cause upon 30 to 90 days notice with the payment of a termination fee.
As of December 31, 1995, the Company had management agreements with remaining
terms of less than five years for 111 of its 150 managed hotels. These 111
management agreements accounted for $14.5 million, or 6.4%, of the Company's
total pro forma revenues in 1995. Sixty-three of these management agreements
(which generated $6.7 million, or 3.0%, of the Company's 1995 total pro forma
revenues) are subject to termination in 1996. Although the net number of hotel
management agreements to which the Company is a party has increased every year
since 1987, there can be no assurance that the Company will continue to obtain
new management agreements or that it will be able to renew or replace terminated
or expired management agreements, or that
6
14
the terms of new or renegotiated management agreements will be as favorable to
the Company as the terms of prior agreements.
In addition to the services called for under its management agreements, the
Company often provides purchasing services, equipment leasing services,
insurance and risk management services and other ancillary services to
third-party hotel owners. On a pro forma basis, 7.4% of the Company's total
revenues in 1995 were comprised of such services. The costs for these management
services are typically subject to prospective approval by the hotel owners on an
annual basis. Although the Company believes that its charges for these services
are generally competitive with those provided by unrelated third parties, there
can be no assurance that third-party hotel owners will not choose to obtain such
services from other providers.
COMPETITION FOR MANAGEMENT AGREEMENTS
The Company competes in the lodging industry with international, national,
regional and local hotel management companies, some of which have greater
financial or other resources than the Company. Competitive factors include
relationships with hotel owners and investors, the availability of capital,
financial performance, contract terms, brand name recognition, marketing
support, reservation system capacity and the willingness to provide funds in
connection with new management arrangements. In order for the Company to expand
its business by acquiring additional management agreements, the Company may be
required to offer more attractive terms to hotel owners than it has had to make
in the past or to make equity investments in hotel properties. Hotel owners in
many cases have been requesting lower base fees coupled with greater incentive
fees or seeking capital contributions from independent hotel management
companies in the form of loans or equity investments.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The lodging industry is seasonal in nature, with the second and third
calendar quarters generally accounting for a greater portion of annual revenues
than the first and fourth calendar quarters. Quarterly earnings may be adversely
affected by events beyond the Company's control, such as poor weather
conditions, economic factors and other considerations affecting travel. In
addition, the loss of one or several management agreements (which could involve
the write-off of capitalized acquisition costs in addition to the loss of future
revenues), the timing of achieving incremental revenues from additional hotels
and the realization of a gain or loss upon the sale of a hotel also may
adversely impact earnings comparisons.
RISKS ASSOCIATED WITH EXPANSION
Growth Risks. The Company's revenues and net income have grown
substantially during the past several years and the Company intends to continue
to pursue a growth-oriented strategy. The Company's ability to successfully
pursue new growth opportunities will depend on a number of factors, including,
among others, the Company's ability to identify suitable growth opportunities,
finance acquisitions and integrate new hotels into its operations, competition
and the availability and the cost of capital. In addition, there can be no
assurance that the Company will be able successfully to integrate new hotels
into its operations or that new hotels will achieve revenue and profitability
levels comparable to the Company's existing portfolio hotels. Furthermore, the
Company's expansion within its existing markets could adversely affect the
financial performance of its existing portfolio hotels and expansion into new
markets may present operating and marketing challenges that are different from
those currently encountered by the Company in its existing markets.
Acquisition and Development Risks. The Company expects to acquire
additional hotels in the future. Acquisitions entail the risk that investments
will fail to perform in accordance with expectations. In addition, the Company
may develop new hotels in the future, depending on market conditions. New
project development is subject to a number of risks, including market or site
deterioration after acquisition and the possibility of construction delays or
cost overruns due to regulatory approvals, inclement weather, labor or material
shortages, work stoppages and the continued availability of construction and
permanent financing.
RISK OF INCREASING LEVERAGE; RESTRICTIVE COVENANTS
It is likely that acquisitions made by the Company in the future will be
financed largely with indebtedness obtained pursuant to the Acquisition Facility
or other credit facilities obtained by the Company in the future.
7
15
The definitive credit agreement with respect to the Acquisition Facility will
contain restrictive covenants, including covenants limiting capital
expenditures, incurrence of debt and sales of assets and requiring the Company
to achieve certain financial ratios, some of which will become more restrictive
over time. The Company's pro forma indebtedness as well as the indebtedness to
be incurred under the Acquisition Facility will be secured by mortgages on the
Company's hotel properties as well as other assets of the Company. Among other
consequences, the leverage of the Company and such restrictive covenants and
other terms of the Company's debt instruments could impair the Company's ability
to obtain additional financing in the future, to make acquisitions and to take
advantage of significant business opportunities that may arise. In addition, the
Company's leverage may increase its vulnerability to adverse general economic
and lodging industry conditions and to increased competitive pressures.
DIVIDEND POLICIES; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company does not anticipate that it will pay any dividends on the
Common Stock in the foreseeable future. The Acquisition Facility will restrict
the Company's ability to pay dividends or make certain other distributions to
shareholders. See "Dividend Policy."
CONFLICTS OF INTEREST
Milton Fine, the co-founder of the Company and its Chairman of the Board,
and individuals and entities affiliated with Mr. Fine (collectively, the "Fine
Family Shareholders") will beneficially own approximately 47.0% of the
outstanding Common Stock following consummation of the Offering. See "Principal
Shareholders." Certain of the Fine Family Shareholders also have ownership
interests in 12 hotels that are managed or leased but not owned by the Company.
Each of the Fine Family Shareholders has agreed not to transfer any of its
interests in any of these hotels (subject to certain permitted transfers)
without first complying with a right of first offer and a right of first refusal
procedure in favor of the Company. See "Certain Relationships and Related
Transactions--Transactions with the Fine Family Shareholders." Except for one
management agreement pursuant to which the Company waived its management fee for
a period ending no later than November 30, 1998, the Company believes that its
management agreements and leases for these hotels are on terms no less favorable
to the Company than those that could have been obtained from unaffiliated third
parties. These relationships, however, coupled with the ownership of Common
Stock by the Fine Family Shareholders and representation on the Company's Board
of Directors (the "Board") by certain of the Fine Family Shareholders, could
give rise to potential conflicts of interest. The Company has implemented a
policy requiring transactions between the Company and related parties to be
approved by a majority of disinterested directors upon such disinterested
directors' determination that the terms of the transaction are no less favorable
to the Company than those that could have been obtained from unrelated third
parties. There can be no assurance, however, that this policy will always be
successful in eliminating the influence of such potential conflicts of interest.
See "Management--Directors and Executive Officers."
CONTROL BY PRINCIPAL SHAREHOLDERS
Upon consummation of the Offering, the Fine Family Shareholders will be
able to exert substantial influence over the election of directors and the
management and affairs of the Company and over the outcome of any corporate
transactions or other matters submitted to the shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of
the Company's assets. Blackstone may also be able to exert influence over these
matters. Pursuant to a stockholders agreement with the Company and Blackstone,
so long as Blackstone owns 25% or more of the shares of Common Stock issued to
it on the date of such stockholders agreement, the Fine Family Shareholders have
agreed that they will vote all of their shares of Common Stock for the election
of a director candidate nominated by Blackstone, and Blackstone has agreed to
vote all of its shares of Common Stock for the election of the director
candidates nominated by the Board. See "The Organization, Acquisition and
Financing Plan--Acquisition of Owned Hotels."
SUBSTANTIAL RELIANCE ON SENIOR MANAGEMENT
The Company will place substantial reliance on the lodging industry
knowledge and experience and the continued services of its senior management.
The Company's future success and its ability to manage future growth depends in
large part upon the efforts of these persons and on the Company's ability to
attract and
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16
retain these key executives and other highly qualified personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel.
BENEFITS TO EXISTING SHAREHOLDERS
The Fine Family Shareholders, Blackstone and the officers and current and
former employees of IHC that own interests in IHC and its subsidiaries and the
Owned Hotels will receive certain benefits as a result of the Organization and
Acquisition, including the following: (i) the Fine Family Shareholders will
receive repayment of notes in the amount of $30 million issued to them in
payment of an S corporation dividend in March 1996, (ii) Blackstone will receive
in connection with the Company's acquisition of its interests in the 14 Owned
Hotels $8.3 million of Common Stock at the initial public offering price and
$124.4 million cash, (iii) the payments to Blackstone described in clause (ii)
will result in a substantial profit to Blackstone since the cost of its
interests in the Owned Hotels is approximately $82.9 million, (iv) Blackstone
will receive $44.8 million of Common Stock at the initial public offering price
for a purchase price of $23.3 million cash in connection with the exercise of
the Blackstone Option, and (v) the Fine Family Shareholders and the officers and
current and former employees of IHC that own interests in IHC and its
subsidiaries and the Owned Hotels will receive 13,565,000 shares of Common Stock
having a value of $271.3 million (based upon an assumed initial public offering
price of $20 per share). See "The Organization, Acquisition and Financing Plan."
GOVERNMENT REGULATION
The Company is subject to numerous foreign and U.S. federal, state and
local government laws, including those relating to the preparation and sale of
food and beverages (such as health and liquor license laws), accessibility for
disabled persons and general building and zoning requirements. Managers of
hotels are also subject to laws governing their relationship with hotel
employees, including minimum wage requirements, overtime, working conditions and
work permit requirements. Compliance with, or changes in, these laws, including
liquor license laws or increases in minimum wage rate requirements, reduces
revenues and profits of hotels owned, leased and managed by the Company and
could otherwise adversely affect the Company's operations. Although third-party
hotel owners are generally responsible for all costs, expenses and liabilities
incurred in connection with operating the hotels under the Company's management
agreements, including compliance with government laws, the Company may be
contingently liable for certain liabilities for which it does not maintain
insurance, including certain employment liabilities, environmental liabilities
and, in respect of properties in the United States, claims arising under the
Americans with Disabilities Act. The Company also is subject to various foreign
and U.S. federal, state and local environmental laws and regulations relating to
the environment and the handling of hazardous substances which may impose or
create significant potential environmental liabilities. Under the Company's
hotel management agreements, third-party hotel owners are generally responsible
for any environmental liabilities. However, under certain countries' laws,
including those of the United States, the Company also may be exposed to
environmental liabilities whether or not the third-party hotel owner is able to
satisfy such liabilities. In addition, the Company will be subject to any
environmental liabilities arising with respect to its owned hotels.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and By-Laws, and Pennsylvania law,
include various provisions that could have the effect of making it more
difficult for a third party to acquire control of the Company. See "Description
of Capital Stock--Certain Corporate Governance Matters." In addition, the
Company's Articles of Incorporation grant the Board authority to issue up to
25,000,000 shares of preferred stock having such rights, preferences and
privileges as designated by the Board without shareholder approval. See
"Description of Capital Stock--Preferred Stock." The rights of holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of such preferred stock that may be issued in the future.
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY IN STOCK PRICE;
DILUTION
The initial public offering price will be determined by negotiations among
the Company and the Underwriters and may not be indicative of the market price
of the Common Stock after the Offering. See
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"Underwriting." Prior to the Offering, there has been no public market for the
Common Stock. Accordingly, there can be no assurance that an active trading
market for the Common Stock will develop and continue upon consummation of the
Offering or that the market price of the Common Stock will not decline below the
initial public offering price. Following consummation of the Offering, the
market price of the Common Stock could be subject to significant fluctuations in
response to variations in the Company's results of operations, general economic
and market conditions and other factors. Purchasers of the Common Stock offered
hereby will experience dilution of $12.88 per share in pro forma net tangible
book value per share of Common Stock from the initial public offering price. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock (including shares issuable upon the exercise of stock
options), or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock. Upon consummation of the
Offering, the Company will have outstanding 27,220,000 shares of Common Stock.
Except for the 11,000,000 shares sold in the Offering, all of these shares will
be "restricted securities" under Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"). All of the existing shareholders have
registration rights with respect to future registrations of the Common Stock
beneficially owned by them. The Company and its directors, executive officers
and existing shareholders, including Blackstone, have agreed, subject to certain
exceptions, not to offer, sell, contract to sell or otherwise dispose of any
such shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). See "Principal Shareholders," "Shares
Eligible for Future Sale" and "Underwriting."
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DILUTION
The pro forma net tangible book value of the Company prior to the Offering
at March 31, 1996 was $(9.5) million, or $(0.59) per share of Common Stock. Pro
forma net tangible book value per share represents the amount of tangible assets
of the Company, less total liabilities, divided by the number of shares of
Common Stock outstanding. Without taking into account any other changes in pro
forma net tangible book value after March 31, 1996, other than to give effect to
the sale of 11,000,000 shares of Common Stock offered hereby (after deduction of
the underwriting discounts and commissions and other estimated offering expenses
and the application of the estimated net proceeds therefrom), the pro forma net
tangible book value of the Company at March 31, 1996 would have been $193.7
million, or $7.12 per share. This represents an immediate increase in pro forma
net tangible book value of $7.71 per share of Common Stock to existing
shareholders and an immediate dilution of approximately $12.88 per share to new
investors purchasing shares in the Offering. The following table illustrates the
per share dilution to new investors:
Assumed initial public offering price per share................. $20.00
Pro forma net tangible book value per share
as of March 31, 1996.......................................... (0.59)
Increase per share attributable to new investors................ 7.71
------
Pro forma net tangible book value per share after the
Offering...................................................... 7.12
------
Dilution per share to new investors............................. $12.88
------
The following table sets forth on a pro forma basis as of March 31, 1996
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing shareholders, including Blackstone, and by the new investors
(before deduction of underwriting discounts and commissions and estimated
offering expenses):
AVERAGE
TOTAL CASH PRICE PER
SHARES PURCHASED CONSIDERATION SHARE
-------------------- --------------------- ---------
Existing shareholders........ 16,220,000 59.6% $ 23,300,000 9.6% $ 1.44
New investors................ 11,000,000 40.4 220,000,000 90.4 20.00
---------- ----- ------------ -----
Total................... 27,220,000 100.0% $243,300,000 100.0%
========== ===== ============ =====
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $203.2 million (approximately $234.1 million if the over-allotment
options are exercised in full), assuming an initial public offering price of $20
per share and after giving effect to estimated underwriting discounts and
commissions and offering expenses payable by the Company. The net proceeds from
the Offering, together with the net proceeds of a new secured term loan in the
amount of approximately $191.7 million (the "Term Loan"), and the proceeds of
the exercise of the Blackstone Option in the amount of $23.3 million will be
used to fund the purchase of controlling interests in the Owned Hotels, to repay
or refinance approximately $239.4 million of indebtedness having maturities
ranging from June 1998 to December 2002, with a weighted average maturity date
of September 2000, and bearing interest at fixed and variable rates ranging from
8.00% to 9.41%, with a weighted average interest rate at March 31, 1996 of
approximately 8.5%. Of the indebtedness to be repaid or refinanced, $223.1
million of the indebtedness was incurred within the last year for the following
purposes: $188.1 million of indebtedness was incurred to finance or refinance
certain of the Owned Hotels, $12.8 million of indebtedness was incurred in
connection with the 1995 Reorganization (as defined in "The Organization,
Acquisition and Financing Plan--1995 Reorganization"), $12.9 million of
indebtedness was incurred in connection with the acquisition of equity interests
in certain of the Owned Hotels and $9.3 million of indebtedness was incurred in
connection with the refinancing of existing indebtedness. See "The Organization,
Acquisition and Financing Plan." Any remaining proceeds from the Offering and
the Term Loan, together with capital available under the Acquisition Facility,
will be used for general corporate purposes, including acquisitions.
PRIOR S CORPORATION STATUS
Until immediately prior to the consummation of the Offering, the Company
will have been subject to taxation under Subchapter S of the Internal Revenue
Code of 1986, as amended (the "Code"), and other provisions of the Code
providing for pass-through taxation. As a result, for federal and certain state
income tax purposes, the taxable income of the Company has been reported by and
taxed directly to the Company's shareholders rather than to the Company. The
Company paid S corporation dividends and distributions aggregating $6.0 million
in 1993, $10.9 million in 1994, $14.8 million in 1995 and $30.0 million (in the
form of promissory notes) as of March 31, 1996. In connection with the
consummation of the Offering, the Company will pay a final dividend to its
shareholders in an amount equal to its undistributed taxable income from April
1, 1996 to the date of consummation of the Offering. Such final S corporation
dividend is estimated to be $9.7 million. The Company's status as an S
corporation will terminate upon consummation of the Offering. Thereafter, the
Company will be fully subject to federal and state income taxes at the corporate
level. See "Pro Forma Financial Data."
DIVIDEND POLICY
The Company does not anticipate paying any dividends on the Common Stock
following consummation of the Offering. The Company intends to retain earnings
to provide funds for the continued growth and development of the Company's
business. Further, the terms of the Term Loan and Acquisition Facility will
restrict the payment of dividends on the Common Stock. Any determination to pay
cash dividends in the future will be at the discretion of the Board and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 and as adjusted to give effect to, among other things, the
Offering and the transactions described in "The Organization, Acquisition and
Financing Plan" (excluding the possible acquisition of the Trumbull Hotel). The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the pro forma
financial information and the financial statements and notes thereto included
elsewhere in this Prospectus.
MARCH 31, 1996
---------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Total short-term borrowings and current portion of long-term debt.... $ 371 $ 6,121
Total long-term debt, excluding current portion...................... 35,687 219,749
Notes payable to shareholders........................................ 30,000 --
Minority interests................................................... 880 6,619
Shareholders' (deficit) equity:
Preferred Stock ($.01 par value, no shares authorized, issued or
outstanding at March 31, 1996; 25,000,000 shares authorized, no
shares issued and outstanding, as adjusted..................... -- --
Common Stock ($.01 par value, 75,000,000 shares authorized,
27,220,000 shares issued and outstanding, as adjusted) (1)..... 3 272
Paid-in capital................................................. -- 207,321
Unearned compensation........................................... (3,216) --
Retained deficit................................................ (11,637) --
Receivable from shareholders.................................... (1,890) (1,890)
---------- -----------
Total shareholders' (deficit) equity....................... (16,740) 205,703
---------- -----------
Total capitalization.................................. $ 50,198 $ 438,192
========= =========
- - ------------------
(1) See Note 8 of Notes to Combined Financial Statements with respect to the
Company's historical capitalization.
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PRO FORMA FINANCIAL DATA
The following unaudited Pro Forma Balance Sheet of the Company as of March
31, 1996 presents, in the "The Company Pro Forma" column, the financial position
of the Company as if the Offering and the transactions described in "Business
and Properties--Host Funding Transaction" and "The Organization, Acquisition and
Financing Plan," but excluding the possible acquisition of the Trumbull Hotel,
had occurred on March 31, 1996. The unaudited Pro Forma Statements of Income of
the Company for the year ended December 31, 1995 and the three months ended
March 31, 1996 present, in the "The Company Pro Forma" column, the results of
operations of the Company as if the Offering and the transactions described in
"Business and Properties--Host Funding Transaction" and "The Organization,
Acquisition and Financing Plan," but excluding the possible acquisition of the
Trumbull Hotel, had occurred on January 1, 1995. The adjustments required to
reflect such transactions are set forth in the "Pro Forma Adjustments" columns
and are discussed in the accompanying notes.
The unaudited Pro Forma Balance Sheet and Statements of Income of the
Company are presented for informational purposes only and may not reflect the
future results of operations and financial position or what the results of
operations and financial position of the Company would have been had such
transactions occurred as of the dates indicated. The unaudited pro forma
financial data and notes thereto should be read in conjunction with the
financial statements and notes thereto contained elsewhere in this Prospectus.
See "Index to Financial Statements."
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INTERSTATE HOTELS COMPANY
PRO FORMA BALANCE SHEET (2)
MARCH 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
PRO FORMA ADJUSTMENTS
-----------------------------------
ACQUISITION FINANCING PLAN
AND AND OTHER THE
THE COMPANY INTERSTONE I INTERSTONE/CGL ORGANIZATION PRO FORMA COMPANY
HISTORICAL HISTORICAL HISTORICAL PLAN ADJUSTMENTS PRO FORMA
----------- ------------- --------------- ------------- -------------- ----------
Current assets:
Cash and cash
equivalents....... $ 12,074 $ 5,682 $ 5,711 $(140,464)(a) $138,109(k) $ 21,112
Restricted cash..... -- 891 -- -- -- 891
Accounts
receivable........ 15,652 7,203 5,475 (33)(b) (674)(l) 27,623
Net investment in
direct financing
leases............ 369 -- -- -- -- 369
Deferred income
taxes............. -- -- -- -- 4,500(m) 4,500
Prepaid expenses and
other assets...... 432 1,848 1,119 -- -- 3,399
--------- --------- --------- --------- --------- ---------
Total current
assets.......... 28,527 15,624 12,305 (140,497) 141,935 57,894
Restricted cash,
long-term........... 1,936 4,497 3,414 1,200(c) -- 11,047
Property and
equipment, net...... 1,883 150,277 164,228 79,833(d) -- 396,221
Investments in
contracts, net...... 5,048 -- -- -- -- 5,048
Equity investment in
hotel real estate... 13,009 -- -- (13,009)(e) -- --
Officer and employee
notes receivable.... 1,865 -- -- -- -- 1,865
Affiliate notes
receivable.......... 8,718 -- -- (7,380)(f) (1,298)(n) 40
Net investment in
direct financing
leases.............. 882 -- -- -- -- 882
Deposits and other
assets.............. 8,157 2,907 2,803 (5,103)(g) 1,095(o) 9,859
--------- --------- --------- --------- -------- --------
Total assets...... $ 70,025 $ 173,305 $ 182,750 $ (84,956) $141,732 $482,856
========= ========= ========= ========= ======== ========
LIABILITIES AND (DEFICIT) EQUITY
Current liabilities:
Accounts payable.... $ 654 $ 4,100 $ 2,059 $ -- $ -- $ 6,813
Accounts
payable--health
trust............. 7,481 -- -- -- -- 7,481
Accrued payroll and
related benefits.. 2,052 1,992 2,082 -- -- 6,126
Other accrued
liabilities....... 9,640 7,427 3,820 -- (1,456)(p) 19,431
Current portion of
long-term debt.... 371 1,417 3,000 -- 1,333(q) 6,121
--------- --------- --------- --------- -------- --------
Total current
liabilities..... 20,198 14,936 10,961 -- (123) 45,972
Long-term debt........ 35,687 113,506 116,250 -- (45,694)(r) 219,749
Deferred income
taxes............... -- -- -- -- 3,600(m) 3,600
Notes payable to
shareholders........ 30,000 -- -- -- (30,000)(s) --
Other liabilities..... -- -- 1,213 -- -- 1,213
--------- ---------- --------- ---------- --------- --------
Total
liabilities..... 85,885 128,442 128,424 -- (72,217) 270,534
Minority interests.... 880 -- -- 5,739(h) -- 6,619
(Deficit) equity:
Partners' capital... -- 44,863 54,326 (99,189)(i) -- --
Common Stock........ 3 -- -- -- 269(t) 272
Paid-in capital..... -- -- -- 8,494(j) 198,827(u) 207,321
Unearned
compensation...... (3,216) -- -- -- 3,216(v) --
Retained deficit.... (11,637) -- -- -- 11,637(w) --
Receivable from
shareholders...... (1,890) -- -- -- -- (1,890)
--------- ---------- ----------- ---------- ---------- --------
Total (deficit)
equity.......... (16,740) 44,863 54,326 (90,695) 213,949 205,703
--------- ---------- ----------- ---------- ---------- --------
Total liabilities
and (deficit)
equity.......... $ 70,025 $ 173,305 $ 182,750 $ (84,956) $141,732 $482,856
========= ========= ========= ========= ======== ========
The accompanying notes are an integral part of this Pro Forma Balance Sheet.
15
23
INTERSTATE HOTELS COMPANY
PRO FORMA STATEMENT OF INCOME (3)
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS
-------------------------------
FINANCING
ACQUISITION PLAN
AND AND OTHER THE
THE COMPANY INTERSTONE I INTERSTONE/CGL ORGANIZATION PRO FORMA COMPANY
HISTORICAL HISTORICAL HISTORICAL PLAN ADJUSTMENTS PRO FORMA
----------- ------------- --------------- ------------ ----------- ----------
Revenues:
Hotel revenues.......... $ -- $ 95,944 $77,087 $ 10,811(a) $ -- $183,842
Net management fees..... 27,022 -- -- -- (2,716)(d) 24,306
Purchasing fees......... 2,508 -- -- -- (421)(e) 2,087
Other fees.............. 7,816 -- -- -- -- 7,816
Insurance income........ 7,672 -- -- -- (846)(f) 6,826
------- --------- ------- -------- -------- --------
45,018 95,944 77,087 10,811 (3,983) 224,877
------- --------- ------- -------- -------- --------
Operating expenses:
Hotel expenses.......... -- 75,822 60,255 8,515(b) (7,356)(g) 137,236
General and
administrative........ 9,271 -- -- -- 1,000(h) 10,271
Payroll and related
benefits.............. 15,469 -- -- -- -- 15,469
State and local taxes... 540 -- -- -- -- 540
Depreciation and
amortization.......... 4,201 10,251 7,455 858(c) (1,755)(i) 21,010
------- --------- ------- -------- -------- --------
29,481 86,073 67,710 9,373 (8,111) 184,526
------- --------- ------- -------- -------- --------
Operating income.......... 15,537 9,871 9,377 1,438 4,128 40,351
------- --------- ------- -------- -------- --------
Other income (expense):
Interest, net........... 99 (9,605) (460) -- (8,322)(j) (18,288)
Equity (loss) income
from investment in
real estate........... (154) -- -- -- 154(k) --
Minority interests'
share of equity
loss (income)......... 11 -- -- -- (506)(l) (495)
Other, net.............. 346 (1,275) (654) -- 642(m) (941)
------- --------- ------- -------- -------- --------
302 (10,880) (1,114) -- (8,032) (19,724)
------- --------- ------- -------- -------- --------
Income before income
taxes................... 15,839 (1,009) 8,263 1,438 (3,904) 20,627
Income tax expense........ -- -- 3,607 -- 4,231(n) 7,838
------- --------- ------- -------- -------- --------
Net income................ $15,839 $ (1,009) $ 4,656 $ 1,438 $(8,135)(o) $ 12,789
======= ========= ======= ======== ======= ========
Pro forma net income per
common share............ $ 0.47
Pro forma common shares
outstanding............. 27,220,000
The accompanying notes are an integral part of this Pro Forma Statement of
Income.
16
24
INTERSTATE HOTELS COMPANY
PRO FORMA STATEMENT OF INCOME (3)
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS
-------------------------------
FINANCING
ACQUISITION PLAN
AND AND OTHER THE
THE COMPANY INTERSTONE I INTERSTONE/CGL ORGANIZATION PRO FORMA COMPANY
HISTORICAL HISTORICAL HISTORICAL PLAN ADJUSTMENTS PRO FORMA
----------- ------------- --------------- ----------- ------------ ----------
Revenues:
Hotel revenues.......... $ -- $23,677 $19,625 $ 2,689(a) $ -- $ 45,991
Net management fees..... 7,183 -- -- -- (1,211)(d) 5,972
Purchasing fees......... 801 -- -- -- (67)(e) 734
Other fees.............. 2,540 -- -- -- -- 2,540
Insurance income........ 1,772 -- -- -- (211)(f) 1,561
------- ------- ------- ------- -------- --------
12,296 23,677 19,625 2,689 (1,489) 56,798
------- ------- ------- ------- -------- --------
Operating expenses:
Hotel expenses.......... -- 18,753 14,104 2,096(b) (1,478)(g) 33,475
General and
administrative........ 2,304 -- -- -- 250(h) 2,554
Payroll and related
benefits.............. 4,249 -- -- -- -- 4,249
State and local taxes... 34 -- -- -- -- 34
Depreciation and
amortization.......... 1,101 2,704 2,194 236(c) (875)(i) 5,360
------- ------- ------- ------- -------- --------
7,688 21,457 16,298 2,332 (2,103) 45,672
------- ------- ------- ------- -------- --------
Operating income.......... 4,608 2,220 3,327 357 614 11,126
------- ------- ------- ------- -------- --------
Other income (expense):
Interest, net........... (488) (2,510) (2,509) -- 1,167(j) (4,340)
Equity income (loss)
from investment in
real estate........... 125 -- -- -- (125)(k) --
Minority interests'
share of equity
(income) loss......... (8) -- -- -- 359(l) 351
Other, net.............. -- (301) (208) -- 345(m) (164)
------- ------- ------- ------- -------- --------
(371) (2,811) (2,717) -- 1,746 (4,153)
------- ------- ------- ------- -------- --------
Income before income
taxes................... 4,237 (591) 610 357 2,360 6,973
Income tax expense........ -- -- -- -- 2,650(n) 2,650
------- ------- ------- ------- -------- --------
Net income................ $ 4,237 $ (591) $ 610 $ 357 $ (290)(o) $ 4,323
======= ======= ======= ======= ======== ========
Pro forma net income per
common share............ $ 0.16
Pro forma common shares
outstanding............. 27,220,000
The accompanying notes are an integral part of this Pro Forma Statement of
Income.
17
25
NOTES TO PRO FORMA FINANCIAL DATA
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The acquisition of the equity interests in the Owned Hotels from Blackstone has
been accounted for in the accompanying pro forma financial data at fair value
using the purchase method, except that carryover basis has been used for 9.8% of
such acquisitions. The contributions of equity interests in the Owned Hotels
have been accounted for using predecessor carryover basis. The acquisition of
the Boston Marriott Westborough Hotel has been accounted for using the purchase
method.
NOTE 2. PRO FORMA BALANCE SHEET ADJUSTMENTS (IN THOUSANDS)
ACQUISITION AND ORGANIZATION PLAN PRO FORMA ADJUSTMENTS
(a) Adjustments to reflect the net decrease in cash and cash equivalents:
Payments related to the purchase of partnership interests
net of deposits paid of $5,393.......................................... $(118,994)(1)
Payment of arrangement fee for exercise of Blackstone Option............ (233)(2)
Purchase of Boston Marriott Westborough Hotel, net of $250 deposit
paid.................................................................... (19,977)(3)
Distributions of first quarter cash flow to Blackstone from the
Owned Hotels............................................................ (970)(4)
Purchase of common stock of Host Funding, Inc. ......................... (540)(5)
Working capital funded for Boston Marriott Westborough Hotel............ 250(3)
---------
$(140,464)
=========
(b) Elimination of interest receivable from the partners in the Owned
Hotels.................................................................. $ (33)(6)
=========
(c) Adjustment to reflect the funding of cash restricted for renovations to
the Boston Marriott Westborough Hotel................................... $ 1,200(3)
=========
(d) Adjustments to reflect the net increase in the basis of the fixed assets
related to the acquisition of the Owned Hotels:
Purchase of the Boston Marriott Westborough Hotel from an unrelated
third party............................................................. $ 18,777(3)
Record the step-up in basis on 90.2% of the excess cash paid over the
net book
value of the acquisition of Blackstone's partnership interests in the
Owned Hotels............................................................ 61,056(1)
---------
$ 79,833
=========
(e) Adjustment to reflect the elimination of the investment in
Interstone/CGL ......................................................... $ (13,009)(6)
=========
(f) Adjustment to reflect the elimination of loans to the partners in the
Owned Hotels............................................................ $ (7,380)(6)
=========
(g) Adjustments to reflect the net decrease in deposits and other assets:
Application of deposit for purchase of Blackstone's partnership
interests in
the Owned Hotels........................................................ $ (5,393)(1)
Application of deposit for the purchase of the Boston Marriott
Westborough Hotel....................................................... (250)(3)
Purchase of common stock of Host Funding, Inc., accounted for on the
cost method............................................................. 540(5)
---------
$ (5,103)
=========
18
26
(h) Adjustments to reflect the increase in the minority interests for the
outside ownership maintained in Interstone/CGL:
Minority interest in Interstone/CGL .................................... $ 6,619(7)
Elimination of minority interest acquired by the Company................ (880)(6)
---------
$ 5,739
=========
(i) Adjustments to eliminate partners capital for the Owned Hotels:
Book value of partnership interests contributed......................... $ (35,872)(6)
Book value of Blackstone's partnership interests purchased.............. (56,698)(1)
Book value of minority interest retained in Interstone/CGL ............. (6,619)(7)
---------
$ (99,189)
=========
(j) Adjustments to reflect the net increase in paid-in capital:
Record 9.8% of the excess cash paid over the net book value of the
partnership
interests acquired recorded at carryover basis.......................... $ (6,633)(1)
Arrangement fee for Blackstone Option paid in cash...................... (233)(2)
Distributions of first quarter cash flow to Blackstone from
the Owned Hotels........................................................ (970)(4)
Book value of partnership interests contributed......................... 35,872(6)
Adjustment to reflect the elimination of the investment in
Interstone/CGL.......................................................... (13,009)(6)
Elimination of minority interests acquired by the Company............... 880(6)
Elimination of loans to the partners in the Owned Hotels................ (7,380)(6)
Elimination of interest receivable from the partners in the Owned
Hotels.................................................................. (33)(6)
---------
$ 8,494
=========
FINANCING PLAN AND OTHER PRO FORMA ADJUSTMENTS
(k) Adjustments to reflect the net increase in cash and cash equivalents:
Proceeds from issuance of 11,000,000 shares of Common Stock
at $20 per share and exercise of Blackstone Option...................... $ 243,300(8)
Proceeds of the Term Loan............................................... 195,000(8)
Payment of estimated fees and expenses related to the issuance
of Common Stock......................................................... (16,800)(8)
Payment of estimated fees and expenses related to the Term Loan, the
Acquisition Facility, the interim loan commitment fee and the interest
rate hedge.............................................................. (10,886)(8)
Repayment of existing indebtedness of the Company....................... (35,000)(9)
Repayment of existing indebtedness of the Owned Hotels, except the
Boston Marriott Westborough Hotel....................................... (204,361)(9)
Payment of prepayment penalties related to existing indebtedness........ (2,324)(9)
Payment of accrued interest related to existing indebtedness............ (820)(9)
Payment of notes payable to shareholder................................. (30,000)(10)
---------
$ 138,109
=========
(l) Adjustments to reflect the net decrease in accounts receivable:
Distribution of interest receivable on partner loans to shareholders for
investments made in the Owned Hotels.................................... $ (38)(10)
Elimination of management fees receivable from the Owned Hotels......... (636)(11)
---------
$ (674)
=========
19
27
(m) Adjustments to reflect the net deferred income taxes in accordance with
Statement of Financial Accounting Standard 109 ("SFAS 109") following
the transition from pass-through tax entities to C Corporation status:
Current deferred tax asset.............................................. $ 4,500
Long-term deferred tax liability........................................ (3,600)
---------
$ 900(12)
=========
(n) Distribution of partner loans to shareholders for investments made in
the Owned Hotels........................................................ $ (1,298)(10)
=========
(o) Adjustments to reflect the net increase in deposits and other assets:
Deferred loan costs on the issuance of the Term Loan and the
Acquisition Facility.................................................... $ 7,644(8)
Write-off of deferred loan costs of the Company......................... (2,159)(9)
Write-off of deferred loan costs of the Owned Hotels, except the
Boston Marriott Westborough Hotel....................................... (4,390)(9)
---------
$ 1,095
=========
(p) Adjustments to reflect the net decrease in other accrued liabilities:
Elimination of management fees receivable from the Owned Hotels......... $ (636)(11)
Payment of accrued interest related to existing indebtedness............ (820)(9)
---------
$ (1,456)
=========
(q) Adjustments to reflect the net increase in the current portion of
long-term debt:
Proceeds from issuance of the Term Loan, current portion................ $ 5,000(8)
Repayment of existing indebtedness, current portion..................... (3,667)(9)
---------
$ 1,333
=========
(r) Adjustments to reflect the net decrease in long-term debt, excluding
current portion:
Repayment of existing indebtedness of the Company....................... $ (35,000)(9)
Repayment of existing indebtedness of the Owned Hotels, except the
Boston Marriott Westborough Hotel, long-term portion.................... (200,694)(9)
Proceeds of the Term Loan, long-term portion............................ 190,000(8)
---------
$ (45,694)
=========
(s) Payment of notes payable to shareholders................................ $ (30,000)(10)
=========
(t) Adjustment to reflect increase in par value of stock outstanding........ $ 269(13)
=========
20
28
(u) Adjustments to reflect the net increase in paid-in capital:
Proceeds from issuance of 11,000,000 shares of Common Stock
at $20 per share and exercise of the Blackstone Option.................. $ 243,300(8)
Payment of estimated fees and expenses related to the issuance of Common
Stock and the interim loan commitment fee.......................... (20,042)(8)
Distribution of partner loans to shareholders for investments made in
the
Owned Hotels............................................................ (1,298)(10)
Distribution of interest receivable on partner loans to shareholders for
investments
made in the Owned Hotels................................................ (38)(10)
Write-off of deferred loan costs of the Company......................... (2,159)(9)
Write-off of deferred loan costs of the Owned Hotels, except the
Boston Marriott Westborough Hotel....................................... (4,390)(9)
Payment of prepayment penalties related to existing indebtedness........ (2,324)(9)
Record deferred income taxes in accordance with SFAS 109................ 900(12)
Increase in par value of stock outstanding.............................. (269)(13)
Reduction of paid-in capital for reclassification of retained deficit... (11,637)(14)
Increase in unearned compensation....................................... (3,216)(15)
---------
$ 198,827
=========
(v) Adjustments to reflect net increase in unearned compensation:
Increase in unearned compensation for issuance of restricted stock...... $ (6,319)(15)
Unearned compensation related to restricted stock expensed on Offering
date.................................................................... 9,535(15)
---------
$ 3,216
=========
(w) Adjustment to reflect reclassification of retained deficit.............. $ 11,637(14)
=========
The detail supporting the pro forma balance sheet as of March 31, 1996
reflect 15 self-balancing entries which are identified in (1) through (15) below
and reflect the following:
(1) Record purchase of Blackstone partnership interests in the Owned Hotels and
adjustment of the basis in the assets.
(2) Record arrangement fee paid for exercise of the Blackstone Option.
(3) Record purchase of the Boston Marriott Westborough Hotel from an unrelated
third party.
(4) Record final cash flow distribution to Blackstone from the Owned Hotels.
(5) Record purchase of 60,000 shares of common stock of Host Funding, Inc. at
$9.00 per share.
(6) Record contribution by existing shareholders of the partnership interests
in the Owned Hotels, in exchange for stock in the Company, net of
outstanding loans related to the Owned Hotels.
(7) Record consolidation of minority interest in Interstone/CGL retained by an
unrelated third party.
(8) Record debt and equity financing and related costs and expenses.
(9) Record repayment of indebtedness to unaffiliated third parties and
write-off of related deferred loan costs.
(10) Record final distributions to shareholders.
(11) Record elimination of intercompany receivables/payables.
(12) Record initial net deferred tax benefit in accordance with SFAS 109.
(13) Record change in par value of shares outstanding.
(14) Record reclassification of retained deficit to paid-in capital.
(15) Record unearned compensation related to restricted stock plans.
21
29
NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS (IN THOUSANDS)
ACQUISITION AND ORGANIZATION PLAN PRO FORMA ADJUSTMENTS
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------- ----------------
(a) Adjustments to reflect the addition of revenues for the
acquisition of the Boston Marriott Westborough Hotel........ $ 10,811 $ 2,689
========= ========
(b) Adjustments to reflect addition of operating expenses for
the acquisitions of the Boston Marriott Westborough Hotel... $ 8,515 $ 2,096
========= =========
(c) Adjustment to reflect the pro forma depreciation expense
related to the purchase of the Boston Marriott Westborough
Hotel from an unrelated third party......................... $ 858 $ 236
========= =========
FINANCING PLAN AND OTHER PRO FORMA ADJUSTMENTS
(d) Adjustments to reflect net decrease in net management fees:
Pro forma adjustment to reflect full year management of the
Owned Hotels and Host Hotels................................ $ 2,306 $ 50
Elimination of net management fees for the Owned Hotels..... (5,022) (1,261)
--------- ---------
$ (2,716) $ (1,211)
========= =========
(e) Adjustments to eliminate purchasing fees earned from the
Owned Hotels:
Elimination of purchasing fees capitalized by the Owned
Hotels...................................................... $ (360) $ (61)
Elimination of purchasing fees expensed by the Owned
Hotels...................................................... (61) (6)
--------- ---------
$ (421) $ (67)
========= ========
(f) Adjustment to reflect the elimination of insurance premiums
paid by the Owned Hotels.................................... $ (846) $ (211)
========= ========
(g) Adjustments to reflect net decrease in operating expenses of
the Owned Hotels:
Pro forma net increase in management fee expense for
Interstone I
properties as a result of new management contracts.......... $ 490 $ --
Pro forma net decrease in management fee expense for
Interstone/CGL properties as a result of new
management contracts........................................ (1,917) --
Elimination of net management fees for the Owned Hotels..... (5,022) (1,261)
Elimination of insurance premiums paid by the Owned
Hotels...................................................... (846) (211)
Elimination of purchasing fees expensed by the Owned
Hotels...................................................... (61) (6)
--------- --------
$ (7,356) $ (1,478)
========= ========
(h) Adjustment to reflect increase in general and administrative
expenses related to managing and administering a publicly
held company................................................ $ 1,000 $ 250
========= ========
22
30
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------- ----------------
(i) Adjustments to reflect the net decrease in depreciation and
amortization:
Pro forma depreciation and amortization expense of the
Interstone I properties*.................................... $ 8,886 $ 2,331
Pro forma depreciation and amortization expense of the
Interstone/CGL properties*.................................. 7,113 1,780
Elimination of historical depreciation and amortization
expense of
the Interstone I properties................................. (10,251) (2,704)
Elimination of historical depreciation and amortization
expense of
the Interstone/CGL properties............................... (7,455) (2,194)
Elimination of amortization of loan costs of the Company
related
to indebtedness repaid...................................... (36) (76)
Elimination of depreciation expense related to purchasing
fees capitalized............................................ (12) (12)
--------- --------
$ (1,755) $ (875)
========= ========
(j) Adjustments to reflect the net change in interest expense:
Interest expense related to the Term Loan**................. $ (14,696) $ (3,615)
Net interest expense related to the Interstone/CGL
loan***..................................................... (2,281) (561)
Interest expense related to the unused commitment fee on the
Acquisition Facility****.................................... (375) (94)
Amortization of loan costs relating to the Term Loan, the
Acquisition Facility and the interest rate hedge............ (1,540) (385)
Elimination of interest expense of the Company related to
indebtedness repaid......................................... 505 803
Elimination of interest expense of the Interstone I
properties
related to indebtedness repaid.............................. 9,605 2,510
Elimination of interest expense of the Interstone/CGL
properties
related to indebtedness repaid.............................. 460 2,509
--------- --------
$ (8,322) $ 1,167
========= ========
- - ----
* Pro forma depreciation expense is calculated on the straight line method over the estimated
useful life of the asset. (Pro forma depreciation expense for buildings and improvements is
calculated over a period of 10 to 38 years, and pro forma depreciation expense for furniture
and fixtures is calculated over a period of 7 years.) Pro forma amortization of deferred
expenses is calculated on the straight line method over the estimated useful life of the
asset. (Pro forma amortization for franchise fees is calculated over a period of 8 to 25
years, and a non-compete agreement is calculated over a period of 5 years.)
** Interest on the $195 million Term Loan is assumed in two tranches: $54 million swapped at
7.80% and the remainder floating at LIBOR (5.5%) plus 2%. Principal is assumed to be
amortized at $1.25 million per quarter. A $50,000 annual agency fee is also assumed.
*** Interest on the $29.8 million Interstone/CGL loan is assumed in two tranches: $18 million
swapped at 7.80% and the remainder floating at LIBOR (5.5%) plus 2%. Principal is assumed to
be amortized at $187,500 per quarter. A $12,500 annual agency fee is also assumed.
**** Interest expense for the unused commitment fee is 3/8 of 1% of the available draw on the
Acquisition Facility.
(k) Adjustment to reflect the elimination of equity income from
Interstone/CGL.............................................. $ 154 $ (125)
========= ========
23
31
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------- ------------
(l) Adjustments to reflect the net change in the minority
interests for the outside ownership maintained in
Interstone/CGL:
Minority interests' share of loss (income) of
Interstone/CGL.............................................. $ (495) $ 351
Elimination of minority interests acquired by the Company... (11) 8
--------- --------
$ (506) $ 359
========= ========
(m) Adjustments to reflect the net decrease in other income
(expense):
Elimination of gain on settlement of debt obligations
assumed by
the Company in connection with the 1995 Reorganization
(see "Certain Relationships and Related Transactions--
1995 Reorganization")....................................... $ (346) $ --
Elimination of corporate overhead allocations from the prior
owner
of the Interstone/CGL properties............................ 622 --
Record $500 for annual asset management fees on
Interstone/CGL
to an unrelated partner..................................... (500) --
Elimination of relocation costs of management funded by the
previous partners of the Owned Hotels....................... 277 345
Elimination of losses recognized by the Interstone I
properties
related to a 1995 debt refinancing.......................... 589 --
--------- --------
$ 642 $ 345
========= ========
(n) Adjustments to record corporate income tax using an
effective income tax rate of 38%. The pro forma consolidated
statement of income does not include the initial recording
of an estimated net deferred income tax liability of $1,620
associated with the change in tax status. This amount will
be recorded by the Company subsequent to the consummation of
the Offering:
Income tax at an effective rate of 38%...................... $ 7,838 $ 2,650
Elimination of income tax recorded by previous corporate
owner of the Interstone/CGL properties...................... (3,607) --
--------- --------
$ 4,231 $ 2,650
========= ========
(o) Pro forma net income does not include certain one-time charges to income amounting to $17,191
related to the recognition of unearned compensation, the interim loan commitment fee, payment of
prepayment penalties, the Blackstone arrangement fee and the write-off of deferred loan costs of
indebtedness repaid, net of applicable income taxes.
24
32
SELECTED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
The following table sets forth selected historical financial data of the
Company as of and for each of the years ended December 31, 1991, 1992, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996, selected pro
forma financial data of the Company for the year ended December 31, 1995 and as
of and for the three months ended March 31, 1996, and certain other data. The
selected financial data as of December 31, 1994 and 1995 and for each of the
years ended December 31, 1993, 1994 and 1995 have been derived from audited
combined financial statements of the Company included elsewhere in this
Prospectus. The selected financial data of the Company as of December 31, 1991,
1992 and 1993 and for each of the years ended December 31, 1991 and 1992 have
been derived from audited combined financial statements of the Company which are
not required to be included in this Prospectus. The selected historical
financial data of the Company as of and for the three months ended March 31,
1995 and 1996 have been derived from unaudited financial statements of the
Company and, in the opinion of the Company, reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
information set forth therein. The interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short term variations. The pro forma financial data give effect to the Offering
and the transactions described in "Business and Properties--Host Funding
Transaction" and "The Organization, Acquisition and Financing Plan" (excluding
the possible acquisition of the Trumbull Hotel) as if all such transactions had
occurred as of January 1, 1995, except that the pro forma balance sheet data
give effect to such transactions as if each had occurred on March 31, 1996. The
pro forma financial information presented is not necessarily indicative of what
the actual financial position and results of operations of the Company would
have been as of and for the periods indicated, nor does it purport to represent
the Company's future financial position and results of operations. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this Prospectus.
25
33
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------ -------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
STATEMENT OF INCOME DATA:
Revenues:
Hotel revenues......... $ -- $ -- $ -- $ -- $ -- $183,842 $ -- $ -- $ 45,991
Net management fees
(2).................. 16,304 16,219 19,229 22,284 27,022 24,306 5,846 7,183 5,972
Purchasing fees (2).... 928 1,182 1,414 2,157 2,508 2,087 544 801 734
Other fees............. 413 609 2,065 5,324 7,816 7,816 1,518 2,540 2,540
Insurance income (2)... -- 1,863 2,856 6,961 7,672 6,826 2,341 1,772 1,561
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
Total revenues..... 17,645 19,873 25,564 36,726 45,018 224,877 10,249 12,296 56,798
Operating expenses:
Hotel expenses......... -- -- -- -- -- 137,236 -- -- 33,475
General and
administrative....... 3,020 3,861 4,763 7,652 9,271 10,271 1,949 2,304 2,554
Payroll and related
benefits............. 8,856 8,803 10,321 12,420 15,469 15,469 3,834 4,249 4,249
State and local
taxes................ 43 235 294 650 540 540 131 34 34
Depreciation and
amortization......... 3,286 3,352 3,282 3,659 4,201 21,010 1,042 1,101 5,360
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
Operating income......... 2,440 3,622 6,904 12,345 15,537 40,351 3,293 4,608 11,126
Other income (expense):
Interest, net.......... (101) 98 12 30 99 (18,288) 52 (488) (4,340)
Equity (loss) income
from investment in
real estate.......... -- -- -- -- (154) -- -- 125 --
Minority interests'
share of equity loss
(income)............. -- -- -- -- 11 (495) -- (8) 351
Other, net............. (431) (100) (6) 14 346 (941) -- -- (164)
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Income before income
taxes.................. 1,908 3,620 6,910 12,389 15,839 20,627 3,345 4,237 6,973
Income tax expense (3)... -- -- -- -- -- 7,838 -- -- 2,650
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Net income............... $ 1,908 $ 3,620 $ 6,910 $ 12,389 $ 15,839 $ 12,789 $ 3,345 $ 4,237 $ 4,323
======== ======== ======== ======== ========== ======== ======== ======== ========
Pro forma net income per
common share (4)....... $ 0.47 $ .16
Pro forma common shares
outstanding............ 27,220,000 27,220,000
BALANCE SHEET DATA (AT
YEAR END):
Cash and cash
equivalents.............. $ 2,997 $ 4,461 $ 4,520 $ 6,702 $ 14,035 $ 7,303 $ 12,074 $ 21,112
Total assets.............. 25,146 24,270 24,436 30,741 61,401 34,239 70,025 482,856
Total debt................ 2,168 2,076 1,809 3,890 36,270 3,640 36,058 225,870
Total equity (deficit).... 18,360 16,685 16,627 18,858 9,256 18,851 (16,740) 205,703
OTHER FINANCIAL DATA:
EBITDA (5)................ $ 5,338 $ 7,109 $ 10,474 $ 16,668 $ 20,481 $ 60,465 $ 4,466 $ 5,860 $ 16,707
Net cash provided by
operating
activities............... 3,668 7,332 10,389 15,318 25,328 52,422 4,868 4,945 4,940
Net cash (used in)
investing activities..... (726) (481) (3,088) (3,852) (22,858) (361,935) (664) (6,279) (148,427)
Net cash (used in)
provided by financing
activities............... (2,571) (5,387) (7,242) (9,285) 4,863 312,379 (3,603) (627) 134,779
TOTAL PORTFOLIO HOTEL
DATA: (6)
Total portfolio hotel
revenues................. $513,907 $584,344 $760,766 $858,986 $1,056,279 $246,072 $301,401
Number of hotels (7)...... 49 53 82 136 150 138 149
Number of rooms (7)....... 17,386 18,985 24,202 31,502 35,044 31,738 35,357
COMPARABLE HOTEL OPERATING DATA: (8)
Occupancy percentage
(9)...................... 74.9% 75.4% 76.6% 75.3% 77.3%
ADR (10).................. $83.73 $86.96 $91.78 $95.38 $100.29
REVPAR (11)............... $62.74 $65.60 $70.31 $71.79 $77.51
Gross operating profit
margin (12).............. 28.2% 30.0% 31.5% 32.6% 34.0%
26
34
- - ------------------
(1) Reflects the Offering, the transactions described in "Business and
Properties--Host Funding Transaction" and "The Organization, Acquisition
and Financing Plan" (excluding the possible acquisition of the Trumbull
Hotel) and the other adjustments described in "Pro Forma Financial Data."
(2) Pro forma net management and purchasing fees and insurance income declined
due to the assumed consolidation of the Owned Hotels and the resultant pro
forma elimination of $4.0 million and $1.5 million of management and
related fees actually derived from the Owned Hotels in 1995 and the three
months ended March 31, 1996, respectively.
(3) Until immediately prior to the consummation of the Offering, the Company
operated as an S corporation and, accordingly, was not subject to federal
and certain state income taxes. The pro forma statement of income data have
been computed as if the Company had been subject to federal and state
income taxes, based on the applicable statutory tax rates and tax laws then
in effect.
(4) Based on 27,220,000 shares of Common Stock outstanding after the Offering.
(5) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. Management believes that EBITDA is a useful measure of
operating performance because it is industry practice to evaluate hotel
properties based on operating income before interest, depreciation and
amortization, which is generally equivalent to EBITDA, and EBITDA is
unaffected by the debt and equity structure of the property owner. EBITDA
does not represent cash flow from operations as defined by GAAP, is not
necessarily indicative of cash available to fund all cash flow needs and
should not be considered as an alternative to net income under GAAP for
purposes of evaluating the Company's results of operations.
(6) Represents all hotels to which the Company provides management or related
services.
(7) As of the end of the periods presented.
(8) The comparable hotel data set consists of all of the hotels (consisting of
35 hotels containing a total of 12,771 rooms) managed continually by the
Company from January 1, 1993 through March 31, 1996.
(9) Represents total rooms occupied by hotel guests on a paid basis divided by
total available rooms. Total available rooms represents the number of rooms
available for rent multiplied by the number of days in the reported period.
(10) Represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(11) Represents room revenues divided by total available rooms.
(12) Represents gross operating profit divided by total revenues. "Gross
operating profit" represents total revenues less departmental expenses and
undistributed operating expenses, excluding management fees.
27
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is management's discussion and analysis of the Company's
financial position and results of operations. In light of the transactions
referred to in "Business and Properties--Host Funding Transaction" and "The
Organization, Acquisition and Financing Plan," the Offering and application of
the net proceeds therefrom as described in "Use of Proceeds" and the fact that
the Owned Hotels were purchased on varying dates since 1994, the following
discussion and analysis includes discussion and analysis of the Company's pro
forma financial position and results of operations in addition to historical
data. See "Pro Forma Financial Data" for a discussion of the adjustments made to
the historical data.
The following table sets forth selected items from the statements of income
as a percent of total revenues and certain other selected data:
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------- --------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1995 1995 1996 1996
----- ----- ----- -------- ----- ----- --------
Total revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Hotel expenses................... -- -- -- 61.1 -- -- 58.9
General and administrative....... 18.6 20.8 20.6 4.6 19.0 18.7 4.5
Payroll and related benefits..... 40.4 33.8 34.4 6.9 37.4 34.6 7.5
State and local taxes............ 1.2 1.8 1.2 0.2 1.3 0.3 0.1
Depreciation and amortization.... 12.8 10.0 9.3 9.3 10.2 8.9 9.4
----- ----- ----- -------- ----- ----- --------
Operating income............... 27.0 33.6 34.5 17.9 32.1 37.5 19.6
Other income (expense)........... -- 0.1 0.7 (8.7) 0.5 (3.0) (7.3)
----- ----- ----- -------- ----- ----- --------
Income before income taxes..... 27.0 33.7 35.2 9.2 32.6 34.5 12.3
Income tax expense............... -- -- -- 3.5 -- -- 4.7
----- ----- ----- -------- ----- ----- --------
Net income..................... 27.0% 33.7% 35.2% 5.7% 32.6% 34.5% 7.6%
===== ===== ===== ======== ===== ===== ========
The pro forma adjustments described below under "Pro Forma Three Months
Ended March 31, 1996 Compared to Combined Three Months Ended March 31, 1995" and
"Pro Forma Year Ended December 31, 1995 Compared to Combined Year Ended December
31, 1994" result primarily from the acquisition of the Owned Hotels. The Owned
Hotels consist of 15 geographically diverse upscale hotels, containing an
aggregate of 4,621 rooms and operating under the Embassy Suites(R), Hilton(R),
Marriott(R) and Radisson(R) trade names principally in major metropolitan
markets such as Atlanta, Boston, Chicago, Los Angeles, Philadelphia, Houston,
Fort Lauderdale and Washington, D.C. The Owned Hotels produced superior
operating results in
28
36
1995, achieving an average occupancy rate of 73.0%, ADR of $88.03 and REVPAR of
$64.29. The following is a list of the Owned Hotels:
NUMBER
HOTEL LOCATION OF ROOMS
---------------
Warner Center Marriott Woodland Hills, CA 463
Colorado Springs Marriott Colorado Springs, CO 310
Denver Hilton South Greenwood Village, CO 305
Ft. Lauderdale Airport Hilton Dania, FL 388
Atlanta Marriott North Central Atlanta, GA 287
Lisle Radisson Lisle, IL 242
Schaumburg Embassy Suites Schaumburg, IL 209
Boston Marriott Andover Andover, MA 293
Boston Marriott Westborough Westborough, MA 223
Huntington Hilton Melville, NY 302
Philadelphia Marriott West West Conshohocken, PA 286
Marriott Suites at Valley Forge Valley Forge, PA 229
Houston Marriott North at Greenspoint Houston, TX 391
Tysons Corner Marriott Tysons Corner, VA 390
Fort Magruder Inn and Conference Center Williamsburg, VA 303
------
4,621
=============
The amounts referred to as combined financial information ("combined")
represent the historical financial results of operations of the Company combined
with the historical financial results of operations of the Owned Hotels, without
any pro forma adjustments related to the Acquisition, Organization or Financing
Plan.
PRO FORMA THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO COMBINED THREE MONTHS
ENDED
MARCH 31, 1995
Total revenues increased by $3.2 million, or 6.1%, from $53.6 million in
the first three months of combined 1995 to $56.8 million in the first three
months of pro forma 1996. Hotel revenues increased by $2.7 million, or 6.2%,
from $43.3 million in the first three months of combined 1995 to $46.0 million
in the first three months of pro forma 1996. The increase was due to the overall
improvement in the operating performance of the Owned Hotels, partially
attributed to a change in franchise affiliations for certain of the Owned Hotels
and the completion of hotel renovations during 1995. Net management fees
increased slightly from $5.8 million in the first three months of combined 1995
to $6.0 million in the first three months of pro forma 1996 due primarily to
performance improvement of managed hotels. Purchasing fees and other fees
increased by $1.2 million, or 58.8%, from $2.1 million in the first three months
of combined 1995 to $3.3 million in the first three months of pro forma 1996 due
partially to incremental revenues of $0.3 million associated with the net
addition of new hotels that required renovation and purchasing services. The
remaining increase of $0.9 million was attributed to incremental revenues
related to the net addition of new hotels, many of which utilize the Company's
other contractual services, such as MIS support and the training and relocation
programs. Insurance income decreased by $0.7 million, or 33.3%, from $2.3
million in the first three months of combined 1995 to $1.6 million in the first
three months of pro forma 1996 due to timing associated with the recognition of
income from premiums written.
Hotel expenses decreased by $1.2 million, or 3.6%, from $34.7 million in
the first three months of combined 1995 to $33.5 million in the first three
months of pro forma 1996. The decrease was due primarily to the overall
improvement in operating efficiencies.
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 increased by $0.7 million, or 31.0%, from $1.9 million in the first
three months of combined 1995 to $2.6 million in the first three months of pro
forma 1996. The increase was due primarily to incremental expenses associated
with the
29
37
net addition of new hotels and expenses associated with managing and
administering a publicly held company. General and administrative expenses as a
percentage of revenues increased to 4.5% in the first three months of pro forma
1996 compared to 3.6% in the first three months of combined 1995 as a result of
operating leverage and increased operating efficiencies.
Payroll and related benefits expenses increased by $0.4 million, or 10.8%,
from $3.8 million in the first three months of combined 1995 to $4.2 million in
the first three months of pro forma 1996. The increase was due primarily to the
addition of new employees related to the growth of the Company's hotel
management business. Payroll and related benefits expenses as a percentage of
revenues increased to 7.5% in the first three months of pro forma 1996 compared
to 7.2% in the first three months of combined 1995.
Depreciation and amortization of $5.5 million in the first three months of
combined 1995 remained relatively consistent with depreciation and amortization
of $5.4 million in the first three months of pro forma 1996.
Operating income increased by $3.7 million, or 50.8%, from $7.4 million in
the first three months of combined 1995 to $11.1 million in the first three
months of pro forma 1996. Operating margin increased from 13.8% in the first
three months of combined 1995 to 19.6% in the first three months of pro forma
1996. The improvement in the operating margin was attributed to the increase in
revenues and the decrease in hotel expenses as a percentage of revenues,
partially offset by an increase in general and administrative expenses and
payroll and related benefits expenses.
Interest expense increased by $2.5 million, or 107.3%, from $2.2 million in
the first three months of combined 1995 to $4.7 million in the first three
months of pro forma 1996 due primarily to additional borrowings related to the
Acquisition and the Financing Plan.
The pro forma income tax expense of $2.7 million in the first three months
of pro forma 1996 was computed as if the Company was subject to federal and
state income taxes, based on an effective tax rate of 38%. The majority of the
results of operations in the first three months of combined 1995 were not taxed
since certain entities were pass-through entities for tax purposes.
As a result of the changes noted above, net income increased by $0.3
million, or 8.6%, from $4.0 million in the first three months of combined 1995
to $4.3 million in the first three months of pro forma 1996. Net income margin
increased from 7.4% in the first three months of combined 1995 to 7.6% in the
first three months of pro forma 1996.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Total revenues increased by $2.1 million, or 20.0%, from $10.2 million in
the first three months of 1995 to $12.3 million in the first three months of
1996. Net management fees increased by $1.4 million, or 22.9%, from $5.8 million
in the first three months of 1995 to $7.2 million in the first three months of
1996 due to the addition of 40 new management contacts and increased revenues
associated with existing managed hotels. The increase in net management fees was
partially offset by the loss of 29 management contracts primarily due to the
divestiture of hotels by third-party hotel owners. Approximately $0.8 million,
or 57%, of this increase resulted from increases in base management fees, and
$0.6 million, or 43%, of this increase resulted from increases in incentive
management fees due to performance improvement of existing contracts and the
increase in the number of new contracts that provide for incentive management
fees. Purchasing fees and other fees increased by $1.3 million, or 62.0%, from
$2.0 million in the first three months of 1995 to $3.3 million in the first
three months of 1996 due partially to incremental revenues of $0.3 million
associated with the net addition of new hotels that required renovation and
purchasing services. The remaining increase of $1.0 million was attributable to
incremental revenues related to the net addition of new hotels, many of which
utilize the Company's other contractual services, such as MIS support and
training and relocation programs. Insurance income decreased by $0.5 million, or
24.3%, from $2.3 million in the first three months of 1995 to $1.8 million in
the first three months of 1996 due to the timing associated with the recognition
of income from premiums written.
General and administrative expenses increased by $0.4 million, or 18.2%,
from $1.9 million in the first three months of 1995 to $2.3 million in the first
three months of 1996. The increase was due primarily to
30
38
incremental expenses associated with the net addition of new hotels. General and
administrative expenses as a percentage of revenues decreased to 18.7% in the
first three months of 1996 compared to 19.0% in the first three months of 1995.
Payroll and related benefits expenses increased by $0.4 million, or 10.8%,
from $3.8 million in the first three months of 1995 to $4.2 million in the first
three months of 1996. The increase was due primarily to the addition of new
employees related to the growth of the Company's hotel management business.
Payroll and related benefits expenses as a percentage of revenues decreased to
34.6% in the first three months of 1996 compared to 37.4% in the first three
months of 1995 as a result of operating leverage and increased operating
efficiencies.
Operating income increased by $1.3 million, or 39.9%, from $3.3 million in
the first three months of 1995 to $4.6 million in the first three months of
1996. Operating margin increased from 32.1% in the first three months of 1995 to
37.5% in the first three months of 1996. The improvement in the operating margin
was attributed to the increase in revenues and the decrease in operating
expenses as a percentage of revenues.
As a result of the changes noted above, net income (exclusive of income tax
expense) increased by $0.9 million, or 26.7%, from $3.3 million in the first
three months of 1995 to $4.2 million in the first three months of 1996. Net
income margin increased from 32.6% in the first three months of 1995 to 34.5% in
the first three months of 1996.
PRO FORMA YEAR ENDED DECEMBER 31, 1995 COMPARED TO COMBINED YEAR ENDED DECEMBER
31, 1994
Total revenues increased by $34.3 million, or 18.0%, from $190.6 million in
combined 1994 to $224.9 million in pro forma 1995. Hotel revenues increased by
$29.9 million, or 19.5%, from $153.9 million in combined 1994 to $183.8 million
in pro forma 1995. The increase was due primarily to incremental revenues of
$20.2 million related to four of the Owned Hotels for which only partial year
financial results were included in combined 1994. The remaining increase
resulted from the overall performance improvement of the Owned Hotels. Net
management fees increased by $2.0 million, or 9.1%, from $22.3 million in
combined 1994 to $24.3 million in pro forma 1995 due primarily to the net
addition of 14 new management contracts throughout the year and increased
revenues associated with existing managed hotels. Purchasing fees and other fees
increased by $2.4 million, or 32.4%, from $7.5 million in combined 1994 to $9.9
million in pro forma 1995 due primarily to incremental revenues of $0.7 million
relating to additional franchise/marketing representation fees related to the
Colony portfolio, which was acquired in May 1994, and incremental revenues of
$0.6 million resulting from additional centralized accounting fees associated
with the management contracts that were acquired from Winthrop Hotels & Resorts
in July 1994 (the "Winthrop contracts"). The remaining increase of $1.1 million
was attributable to incremental revenues related to the net addition of new
hotels, many of which utilize the Company's purchasing, project management and
other contractual services. Insurance income of $7.0 million in combined 1994
remained relatively consistent with insurance income of $6.8 million in pro
forma 1995.
Hotel expenses increased by $15.4 million, or 12.7%, from $121.8 million in
combined 1994 to $137.2 million in pro forma 1995. The increase was due
primarily to incremental expenses of $14.1 million related to four of the Owned
Hotels for which only partial year financial results were included in combined
1994.
General and administrative expenses increased by $2.6 million, or 34.2%,
from $7.7 million in combined 1994 to $10.3 million in pro forma 1995. The
increase was due primarily to incremental expenses of $1.3 million associated
with the Colony portfolio, increased commissions and claims expenses of $0.5
million related to the Company's insurance business and $1.0 million of
incremental expenses associated with managing and administering a publicly held
company, offset by a $0.2 million decrease in general corporate expenses as a
result of operating leverage and increased operating efficiencies. General and
administrative expenses as a percentage of revenues increased to 4.6% in pro
forma 1995 compared to 4.0% in combined 1994.
Payroll and related benefits expenses increased by $3.1 million, or 24.5%,
from $12.4 million in combined 1994 to $15.5 million in pro forma 1995. The
increase was due primarily to incremental expenses of $1.5 million associated
with the Colony portfolio and the growth of the Crossroads portfolio and $1.3
million
31
39
related to an increase in incentive bonuses paid to certain executive officers
and development staff. Payroll and related benefits expenses as a percentage of
revenues increased to 6.9% in pro forma 1995 compared to 6.5% in combined 1994.
Depreciation and amortization increased by $1.6 million, or 8.1%, from
$19.4 million in combined 1994 to $21.0 million in pro forma 1995 due primarily
to incremental depreciation related to the step-up in basis of the Owned Hotels
included in pro forma 1995.
Operating income increased by $11.7 million, or 40.8%, from $28.7 million
in combined 1994 to $40.4 million in pro forma 1995. Operating margin increased
from 15.0% in combined 1994 to 17.9% in pro forma 1995. The improvement in the
operating margin was attributed to the increase in revenues and the decrease in
hotel expenses as a percentage of revenues, partially offset by an increase in
general and administrative expenses, payroll and related benefits expenses and
depreciation and amortization.
Interest expense increased by $10.9 million, or 133.6%, from $8.1 million
in combined 1994 to $19.0 million in pro forma 1995 due primarily to additional
borrowings related to the Acquisition and the Financing Plan.
An extraordinary item of $18.4 million was recognized as income in combined
1994 to reflect a gain on the early extinguishment of debt for one of the Owned
Hotels, and no such gains were recognized in pro forma 1995.
The pro forma income tax expense of $7.8 million in pro forma 1995 was
computed as if the Company was subject to federal and state income taxes, based
on an effective tax rate of 38%. The majority of the results of operations in
combined 1994 were not taxed since certain entities were pass-through entities
for tax purposes.
As a result of the changes noted above, net income (exclusive of the
extraordinary item) decreased by $4.0 million, or 23.9%, from $16.8 million in
combined 1994 to $12.8 million in pro forma 1995. Net income margin decreased
from 18.5% in combined 1994 to 5.7% in pro forma 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased by $8.3 million, or 22.6%, from $36.7 million in
1994 to $45.0 million in 1995. Net management fees increased by $4.7 million, or
21.3%, from $22.3 million in 1994 to $27.0 million in 1995 due to the addition
of 43 new management contracts and increased revenues associated with existing
managed hotels. The increase in net management fees was partially offset by the
loss of 29 management contracts primarily due to the divestiture of hotels by
third-party hotel owners. Approximately $3.1 million, or 66%, of this increase
resulted from increases in base management fees, and $1.6 million, or 34%, of
this increase resulted from increases in incentive management fees due to
performance improvement of existing contracts and the increase in the number of
new contracts that provide for incentive management fees. Purchasing fees and
other fees increased by $2.8 million, or 38.0%, from $7.5 million in 1994 to
$10.3 million in 1995 due primarily to incremental revenues of $0.7 million
relating to additional franchise/marketing representation fees related to the
Colony portfolio and incremental revenues of $0.6 million resulting from
additional centralized accounting fees associated with the Winthrop Contracts.
The remaining increase of $1.5 million was attributable to incremental revenues
related to the net addition of new hotels, many of which utilize the Company's
purchasing, project management and other contractual services. Insurance income
increased by $0.7 million, or 10.2%, from $7.0 million in 1994 to $7.7 million
in 1995 due to the net addition of new managed hotels that elected to
participate in the Company's insurance program.
General and administrative expenses increased by $1.6 million, or 21.2%,
from $7.7 million in 1994 to $9.3 million in 1995. The increase was due
primarily to incremental expenses of $1.3 million associated with the Colony
portfolio and increased commissions and claims expenses of $0.5 million related
to the Company's insurance business, offset by a $0.2 million decrease in
general corporate expenses as a result of operating leverage and increased
operating efficiencies. General and administrative expenses as a percentage of
revenues decreased to 20.6% in 1995 compared to 20.8% in 1994.
Payroll and related benefits expenses increased by $3.1 million, or 24.5%,
from $12.4 million in 1994 to $15.5 million in 1995. The increase was due
primarily to incremental expenses of $1.5 million associated with
32
40
the Colony portfolio and the growth of the Crossroads portfolio and $1.3 million
related to an increase in incentive bonuses paid to certain executive officers
and development staff. Payroll and related benefits expenses as a percentage of
revenues increased to 34.4% in 1995 compared to 33.8% in 1994.
Operating income increased by $3.2 million, or 25.9%, from $12.3 million in
1994 to $15.5 million in 1995. Operating margin increased from 33.6% in 1994 to
34.5% in 1995. The improvement in the operating margin was attributed to the
increase in revenues and the decrease in general and administrative expenses as
a percentage of revenues, partially offset by an increase in payroll and related
benefits expenses and other operating expenses.
As a result of the changes noted above, net income (exclusive of income tax
expense) increased by $3.4 million, or 27.8%, from $12.4 million in 1994 to
$15.8 million in 1995. Net income margin increased from 33.7% in 1994 to 35.2%
in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues increased by $11.1 million, or 43.7%, from $25.6 million in
1993 to $36.7 million in 1994. Net management fees increased by $3.1 million, or
15.9%, from $19.2 million in 1993 to $22.3 million in 1994 due to the addition
of 83 new management contracts and increased revenues associated with existing
managed hotels. The increase in net management fees was partially offset by the
loss of 29 management contracts primarily due to the divestiture of hotels by
third-party hotel owners. Approximately $1.3 million, or 42%, of this increase
resulted from increases in base management fees and $1.8 million, or 58%, of
this increase resulted from increases in incentive management fees. Purchasing
fees and other fees increased by $4.0 million, or 115.0%, from $3.5 million in
1993 to $7.5 million in 1994 due primarily to an increase of $2.0 million
associated with the creation of training and relocation programs for managed
hotels and new revenues of $0.8 million relating to additional
franchise/marketing representation fees related to the Colony portfolio. The
remaining increase of $1.2 million was attributed to incremental revenues
related to the net addition of new hotels, many of which utilize the Company's
purchasing, project management and other contractual services. Insurance income
increased by $4.1 million, or 143.7%, from $2.9 million in 1993 to $7.0 million
in 1994. Approximately $1.5 million of the increase was attributed to the
addition of new managed hotels that elected to participate in the Company's
insurance program, and the balance was due to the addition in mid-1994 of a
health care financial indemnity policy to Northridge's coverages.
General and administrative expenses increased by $2.9 million, or 60.7%,
from $4.8 million in 1993 to $7.7 million in 1994. The increase was due
primarily to new expenses of $0.8 million associated with the Colony portfolio,
an increase of $1.3 million associated with the creation of training and
relocation programs, and non-recurring expenses of $0.3 million to assist the
families of three employees who were killed in an airplane crash. The remaining
$0.5 million of the increase was attributed to incremental expenses related to
the growth in the Company's hotel management business. General and
administrative expenses as a percentage of revenues increased to 20.8% in 1994
compared to 18.6% in 1993.
Payroll and related benefits expenses increased by $2.1 million, or 20.3%,
from $10.3 million in 1993 to $12.4 million in 1994. The increase was due
primarily to new expenses of $0.9 million associated with the Colony portfolio.
The remaining $1.2 million of the increase was attributed to the addition of new
employees related to the growth of the Company's hotel management business and
the new training and relocation programs. Payroll and related benefits expenses
as a percentage of revenues decreased to 33.8% in 1994 compared to 40.4% in 1993
due to increased operating efficiencies.
Operating income increased by $5.4 million, or 78.8%, from $6.9 million in
1993 to $12.3 million in 1994. Operating margin increased from 27.0% in 1993 to
33.6% in 1994. The improvement in the operating margin was attributed to the
increase in revenues (including insurance income) and the decrease in payroll
and related benefits expenses as a percentage of revenues, partially offset by
an increase in other operating expenses.
As a result of the changes noted above, net income (exclusive of income tax
expense) increased by $5.5 million, or 79.3%, from $6.9 million in 1993 to $12.4
million in 1994. Net income margin increased from 27.0% in 1993 to 33.7% in
1994.
33
41
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash from
operations and borrowings under certain credit facilities.
Net cash provided by operations was $25.3 million in 1995, compared to
$15.3 million in 1994. The increase was primarily attributable to a $3.5 million
increase in net income and a net increase in accounts payable and accrued
liabilities of $8.2 million. Net cash used in investing activities (after $4.9
million of net cash provided by financing activities) was $18.0 million,
primarily as a result of the Company's equity investment in hotel real estate.
The Company has received a commitment from, and prior to consummation of
the Offering intends to enter into a definitive credit agreement with, Credit
Lyonnais, New York Branch ("Credit Lyonnais") pursuant to which Credit Lyonnais,
will provide or arrange for, subject to certain conditions, a total of $295
million of financing, consisting of a seven year $100 million revolving credit
facility (the "Acquisition Facility") and a seven-year $195 million term loan
facility (the "Term Loan" and, together with the Acquisition Facility, the
"Credit Facilities"). The agreement will be subject to a number of customary
conditions and to the consummation of the Acquisition and the Organization,
retirement of certain debt, and receipt of gross proceeds from the Offering of
at least $203 million.
The Term Loan will be used to refinance certain indebtedness of the Company
and to pay fees and expenses incurred in connection with the Credit Facilities.
Of the proceeds of the Term Loan used to refinance existing Company
indebtedness, $90 million will be used to purchase a subordinated participation
interest in $120 million of mortgage indebtedness currently encumbering the six
Owned Hotels owned by Interstone/CGL. Following such purchase, the Company will
have outstanding, on a consolidated basis, in addition to the Term Loan, $30
million of the Interstone/CGL indebtedness. Such indebtedness will mature
contemporaneously with the Credit Facilities and will bear interest, at the
borrower's option, at a reserve-adjusted Eurodollar rate for periods of one,
two, three or six months plus 2% or at the Base Rate (as defined) plus 1%. Of
the $120 million of Term Loan and Interstone/CGL indebtedness, $72 million will
be subject to an interest rate swap agreement hedging the Company's interest
rate exposure for increases in the adjusted Eurodollar rate in excess of 5.8%.
The Acquisition Facility will be used to finance (i) the expansion of
existing facilities, (ii) advances to third parties owning hotel properties in
connection with obtaining management contracts for such properties, and (iii)
acquisitions of hotel properties and/or interests in and/or advances to limited
partnerships or other entities owning hotel properties. Upon consummation of the
Offering, there will be no amounts outstanding under the Acquisition Facility.
The Term Loan will mature in 2003 and requires a principal payment of $20
million on the seventh anniversary of closing. The remainder of the Term Loan
will be amortized in quarterly payments in a yearly aggregate as follows: $5
million in the first year, $10 million in the second year, $15 million in the
third year, $25 million in the fourth year, $35 million in the fifth year, $40
million in the sixth year and $45 million in the seventh year. The Acquisition
Facility will mature in 2003 and will be reduced by quarterly commitment
reductions totalling $5 million per quarter after the first five years. Usage of
the Acquisition Facility (with no more than $15 million of the facility being
available at closing to effect the transactions described in "The Organization,
Acquisition and Financing Plan") may include up to $5 million for trade letters
of credit and letters of credit in support of ordinary course of business
obligations. Revolving loans (other than acquisition loans) under the
Acquisition Facility and the maximum amount available to be drawn under such
outstanding letters of credit will be required to be reduced to no more than $10
million in the aggregate for a period of at least 30 consecutive days during
each 12 consecutive month period. Revolving loans incurred to finance additional
hotel acquisitions may not exceed $95 million outstanding at any time.
Mandatory prepayments of the Credit Facilities will be required from the
net cash proceeds of asset sales or the issuance of certain indebtedness or
equity (other than the Offering), 50% of annual excess cash flow and net
termination fees under management contracts in excess of $500,000 per year. All
such mandatory prepayments generally will be applied (i) first to repay
revolving loans under the Acquisition Facility incurred to finance additional
hotel acquisitions without any reduction in the Acquisition Facility commitment,
(ii)
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second to repay on a pro rata basis the remaining installments of the Term Loan,
and (iii) third to reduce the Acquisition Facility commitment. However, proceeds
from sales of assets owned on the closing date of the Credit Facilities (other
than the Boston Marriott Westborough Hotel) and termination fees received under
management contracts in effect on such closing date are to be applied first as
provided in clause (ii), second as provided in clause (i), and third as provided
in clause (iii).
Amounts outstanding under the Credit Facilities will bear interest, at the
Company's option, at the Base Rate (as defined) plus 1% or at a reserve-adjusted
Eurodollar rate for periods of one, two, three or six months, plus 2%. The Base
Rate will be the higher of (i) the rate which Credit Lyonnais establishes from
time to time as its reference rate for short-term commercial loans in U.S.
dollars and (ii) the rate which is .5% in excess of the overnight cost of funds
of Credit Lyonnais. The Company will be required to keep in effect interest rate
protection agreements in an amount equal to 60% of (a) the total indebtedness
outstanding as of the initial borrowing date under the Credit Facilities less
(b) the $90 million portion thereof which is used to acquire the subordinated
participation in the Interstone/CGL indebtedness. Depending on market
conditions, the Company may consider entering into interest rate protection
agreements in addition to those required under the Credit Facilities in order to
limit its exposure to contract rate changes. In connection with the Credit
Facilities, the Company will pay customary commitment and other fees.
The obligations under the Credit Facilities will be secured by
substantially all of the Company's assets, including (i) a first mortgage on all
properties owned or subsequently acquired by the Company, to the extent not
prohibited by agreements governing indebtedness of the Company, (ii) an
assignment of the Company's interests under all recorded leases and subsequently
acquired recorded leasehold interests, (iii) a security interest and assignment
of all of the Company's management contracts or amounts payable thereunder,
accounts receivable and general intangibles, (iv) the stock or partnership
interests of the Company's subsidiaries, and (v) a security interest in all of
the Company's personal property and intangibles.
The Credit Facilities will contain various covenants, including
restrictions on (i) the incurrence or existence of indebtedness, (ii) mergers,
acquisitions, divestitures, reorganizations and other asset acquisitions and
dispositions, (iii) the creation or existence of liens on property or assets,
(iv) dividends or other distributions on the Company's capital stock, (v)
certain transactions with affiliates, (vi) prepayment or amendment to
subordinated indebtedness or equity and (vii) investments, leases and capital
expenditures. The Credit Facilities also require the Company to spend each year
a minimum of 1.5% and a maximum of 6% of its annual revenues on capital
expenditures for maintenance of its hotels. Additionally, the Company must
satisfy certain financial covenants, including, without limitation, the
following: (a) the Company must maintain, on a quarterly basis, a minimum annual
EBITDA of $65 million in 1996, $70 million in each of 1997 and 1998 and $75
million each year thereafter; (b) the Company must maintain, on a quarterly
basis, a consolidated net worth of (x) $190 million plus (y) the aggregate of
80% of its consolidated net income, if positive, for each fiscal quarter ending
after the initial borrowing date (which percentage reduces to 70% for each
fiscal quarter after 1998); (c) the Company must not permit its leverage ratio
(defined as the ratio of the Company's total indebtedness (excluding up to $30
million in certain non-recourse indebtedness) to the Company's EBITDA) to be
greater than 4.5 to 1 at the end of each fiscal quarter of 1996 and 1997, 4.25
to 1 at the end of each fiscal quarter of 1998 and 1999, 4.00 to 1 at the end of
each fiscal quarter of 2000 and 2001, 3.75 to 1 at the end of each fiscal
quarter of 2002, or 3.50 to 1 at the end of each fiscal quarter of 2003; (d) the
Company must not permit its interest coverage ratio (defined as the ratio of the
Company's EBITDA to the Company's total interest expense on its outstanding
indebtedness) to be less than 2.5 to 1 at the end of each fiscal quarter of 1996
and 1997, or 2.75 to 1 at the end of each fiscal quarter thereafter; and (e) the
Company must not permit its debt service coverage ratio (defined as the ratio of
the Company's EBITDA to the Company's total interest expense plus scheduled
principal payments on its outstanding indebtedness) to be less than 2.00 to 1 at
the end of each fiscal quarter of 1996 and 1997, or 2.25 to 1 at the end of each
fiscal quarter thereafter. All of the foregoing tests are to be made using data
from the four consecutive fiscal quarters then last ended.
The Company's 1996 and 1997 capital expenditure budgets (before
acquisitions) are $9.2 million and $8.7 million, respectively. The Company
intends to pursue a growth-oriented strategy involving, among other things, the
acquisition of additional management contracts (which may from time to time
require capital
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expenditures by the Company), as well as acquisitions of interests in additional
hotel properties and hotel management companies. Management believes that the
Acquisition Facility, plus cash provided by operations, will be sufficient to
pursue the Company's strategy for the immediate future. However, depending upon
conditions in the capital and other financial markets and other factors, the
Company may from time to time consider the issuance of debt or other securities,
the proceeds of which could be used to finance acquisitions, to refinance debt
or for other general corporate purposes. Management of the Company believes that
with respect to its current operations, the Company's cash on hand and funds
from operations will be sufficient to cover its reasonably foreseeable working
capital, capital expenditure and debt service requirements.
SEASONALITY
The lodging industry is affected by normally recurring seasonal patterns.
At most of the Company's hotels, demand is higher in the second and third
quarters than during the remainder of the year. Demand also changes on different
days of the week, with Sunday having the lowest occupancy.
INFLATION
The effects of inflation, as measured by fluctuations in the consumer price
index, have not had a material impact on the Company's revenues or net income in
recent years.
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BUSINESS AND PROPERTIES
The Company is the largest independent hotel management company in the
United States based on total portfolio hotel revenues and number of guestrooms
and properties managed. The Company manages or performs related services for 154
hotels, with 35,730 rooms, located in 28 states in the United States and in the
District of Columbia, Canada, Mexico, Israel, the Caribbean, Thailand and
Russia. Following consummation of the Offering, the Company will own or have a
controlling interest in 15 of these properties (the "Owned Hotels"), all of
which are upscale hotels currently managed by the Company. In 1995, the Owned
Hotels contributed 81.8% of the pro forma 1995 total revenues of the Company.
In 1995, 84.1% of the Company's net management revenues were derived from
upscale or luxury hotels and resorts. The Company is the largest franchisee of
upscale hotels in the Marriott(R) system, providing services to 36 hotels, with
12,649 rooms, bearing the Marriott(R) flag. Consistent with the Company's
multiple branding strategy, the Company also manages hotels under many other
major full-service brand names, including Doubletree(R), Embassy Suites(R),
Hilton(R), Radisson(R), Sheraton(R) and Westin(R), as well as under the
Company's own Colony(R) trade name. Among the well-known hotels managed by the
Company are: The Charles Hotel at Harvard Square in Cambridge, Massachusetts;
the Don CeSar Beach Resort in St. Petersburg Beach, Florida; The Hay-Adams Hotel
in Washington, D.C.; The Bellevue Hotel in Philadelphia, Pennsylvania; the
Westin Bonaventure in Los Angeles, California; Marriott's Casa Marina Resort in
Key West, Florida; and the Marriott at Sawgrass Resort in Ponte Vedra Beach,
Florida.
Since its founding in 1961 to own and operate a single motor lodge in
northwestern Pennsylvania, the Company has achieved consistent annual growth,
even through industry downturns. The total revenues of the hotels to which the
Company provided management or related services increased from $514 million in
1991 to almost $1.1 billion in 1995, an average annual compound growth rate of
19.7%. During the same period, the Company's portfolio of hotels increased from
49 to 150. The Company's total revenues grew from $17.6 million in 1991 to $45.0
million in 1995, an average annual compound growth rate of 26.5%. The Company's
net income increased at an average annual compound growth rate of 69.8% over the
same period, from $1.9 million in 1991 to $15.8 million in 1995. The Company
attributes its steady growth to the disciplined pursuit of four core strategies:
(i) providing superior, innovative hotel management services, resulting in
increased investment value for the hotel owner; (ii) adding new management
contracts and selectively acquiring hotel management businesses; (iii) adding
new hotels to the Company's portfolio of upscale and luxury properties through
acquisitions; and (iv) maximizing the profitability of the Company's acquired
hotels by repositioning them within their local markets and applying to them the
Company's proven management techniques.
Proven Ability to Source Acquisitions. As a result of its experienced
management and the size and geographic diversity of its hotel portfolio, as well
as an in-depth knowledge of individual markets, the Company has access to
acquisition opportunities not available to all its competitors. Information
about acquisition opportunities is obtained through contacts at every level of
the Company, including hotel general managers, regional managers and senior
management. Industry association contacts also provide information about
potential acquisitions. In addition, management's knowledge of existing hotels
throughout the United States and personal relationships with numerous hotel
owners and operators provide the Company with extensive information regarding
acquisition opportunities.
Flexibility Afforded by Multiple Branding. The Company is able to own and
operate hotels under a variety of brand names. This flexibility allows the
Company to own and operate multiple hotels under different brands within the
same geographic market and provides the Company with competitive and economic
advantages such as the ability to optimally position hotels within their local
markets, to provide a broad base of national reservation and marketing systems
and to pursue acquisitions within both its existing and new markets more freely
than hotel operating companies that are committed to particular flags.
Corporate Infrastructure and Operational Synergies. By virtue of providing
management and related services to 154 hotels, the Company achieves significant
synergies and economies of scale not available to many of its competitors. The
Company's management seeks to maintain a blend of centralized control over
strategic issues while encouraging decentralized decision-making with respect to
appropriate operational issues. All personnel, marketing, cash management and
other policies are formulated at the Company's central
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corporate offices and are provided to its hotels. The Company's corporate
offices also provide accounting, legal, insurance and finance functions,
institute management information systems and coordinate the preparation of
budgets. This centralization of control over strategic matters allows the
Company's hotels to be operated with fewer employees and frees hotel management
personnel to focus on matters having the greatest impact on the performance of
the particular hotel and on the quality of its guests' hotel stays.
Strong Management Team. Collectively, the Company's senior management has
an average of 22 years of experience in the lodging industry and an average of
13 years with the Company. Following consummation of the Offering, the seven
members of the Company's senior management will beneficially own an aggregate of
2.6% of the outstanding shares of Common Stock (excluding Milton Fine, who will
beneficially own 23.1% of the outstanding shares of Common Stock). As a result,
the interests of the Company's senior management will be closely aligned with
the interests of the Company's shareholders. See "Management--Compensation Plans
and Arrangements."
Stable Cash Flow. The Company believes that it will have long-term
financial stability and significant sources of internal financing for future
growth as a result of its ownership of the Owned Hotels, its substantial
portfolio of hotel management agreements and its expected growth in its hotel
portfolio. On a pro forma basis, giving effect to the transactions described in
"Business and Properties--Host Funding Transaction," and "The Organization,
Acquisition and Financing Plan" (excluding the possible acquisition of the
Trumbull Hotel), 80.6% of the Company's total revenues in 1995 were generated
from the Owned Hotels. The Company also expects to generate stable cash flow
from net management fees. As of December 31, 1995, the Company had 39 management
agreements with remaining terms of five years or more. These agreements
generated net management fees of $12.6 million, constituting 5.5% of the
Company's total pro forma revenues in 1995. In addition, the Company has a
favorable renewal record for its management agreements, which has contributed to
the stability of the Company's cash flow. Since 1990, over 90% of the Company's
management agreements for upscale hotels have been renewed at expiration,
excluding management agreements covering properties that have been sold to
unaffiliated parties.
Access to Capital. The Company believes that in order to continue to
maximize the value of its shareholders' equity and to execute its growth
strategy, it is essential to implement and periodically review a diversified
financing strategy that (i) incorporates long-term, secured and unsecured
corporate debt, (ii) minimizes exposure to fluctuations of interest rates and
(iii) maintains maximum flexibility to manage the Company's short-term cash
needs. The Company believes that its capital structure will be conducive to and
will allow flexibility for the growth which the Company seeks to achieve.
THE LODGING INDUSTRY
The domestic lodging industry as a whole has shown significant improvement
in recent years. According to Coopers & Lybrand Hospitality Directions (January
1996) ("Hospitality Directions"), the lodging industry earned estimated pre-tax
profits of $7.6 billion in 1995, which is an increase of 38% over the amount of
pre-tax profit earned during 1994. The percentage growth in room demand exceeded
the percentage growth in new room supply by 2.0%, 1.6%, 3.3% and 1.4% in 1992,
1993, 1994 and 1995, respectively. The excess of demand growth over supply
growth has given the lodging industry a significant and increasing degree of
"pricing power,"--an operator's ability to increase ADR without affecting
occupancy percentages. This pricing power has resulted in significant
industry-wide growth in ADR from 1992 through 1995. In 1995, industry-wide ADR
increased 4.8% over 1994, and industry-wide occupancy percentages increased 1.2%
over 1994. ADR increases exceeded the rate of inflation in 1995 by 1.7%, the
third consecutive year of real rate growth. Hospitality Directions also projects
that occupancy will continue to increase in 1996 and 1997 to 66.3% and 66.7%,
respectively, and that ADR will increase 4.5% and 4.4% in 1996 and 1997,
respectively.
The Company believes that, in the near-term, pricing power within the
lodging industry is likely to be particularly strong in the upscale segment, in
which the Company primarily operates. Two primary factors underlying this
projected strength are the lower consumer price sensitivity in the upscale
segment and an absence of significant additions to the upscale room base over
the next few years. The lack of a significant increase in the upscale segment
room base is projected because, in general, returns on construction cost are not
sufficient to justify investment capital.
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The hotel management business within the lodging industry is comprised of
large franchise operators such as Best Western(R), Comfort Inn(R), Days Inn(R),
Doubletree(R), Embassy Suites(R), Hilton(R), Holiday Inn(R), Howard Johnson(R),
Hyatt(R), Marriott(R), Radisson(R), Ramada(R), Sheraton(R), Super 8(R) and
Westin(R), as well as independent companies such as the Company. Due to intense
competition-based requirements with respect to marketing and cost controls,
hotel owners have frequently turned to professional third-party hotel management
companies to oversee and manage the operation of their properties. The Company
believes that hotel owners are also increasingly turning to independent hotel
management companies due to their focus on managing individual properties rather
than a hotel brand.
BUSINESS STRATEGY
The Company attributes its steady growth to the disciplined pursuit of four
core strategies: (i) providing superior, innovative hotel management services,
resulting in increased investment value for the hotel owner; (ii) adding new
management contracts and selectively acquiring hotel management businesses;
(iii) adding new hotels to the Company's portfolio of upscale and luxury
properties through acquisitions; and (iv) maximizing the profitability of the
Company's acquired hotels by repositioning them within their local markets and
applying to them the Company's proven management techniques.
Improving Value for Hotel Owners. The Company has consistently generated
operating results superior to the hotel industry through a business philosophy
emphasizing the creation and enhancement of investment value for the hotel owner
and the employment of innovative management strategies designed to maximize
owner value. The Company's operating strategies involve specific procedures and
services designed to achieve revenue and asset value enhancement, cost control
and guest and employee satisfaction. After entering into a new hotel management
agreement or acquiring a new hotel, the Company implements an operating plan
based on a comprehensive operations and market-position study which identifies
key areas requiring immediate attention to ensure that resources are devoted to
the most critical areas first. Key areas may include such departments as rooms,
food and beverage, sales and marketing, general and administrative and
maintenance. The Company then develops a detailed action plan to implement the
new standards of operation. If necessary, certain departments are quickly and
aggressively streamlined to maximize efficiencies and reduce costs. The
Company's system of investigation, prioritization and immediate action is
designed to ensure that the hotel will achieve optimal performance as rapidly as
possible.
After implementation of initial improvements, the Company continues to seek
methods to increase revenue and operating cash flow from the hotels. Quality of
facilities and customer service is continually reviewed and emphasized by
management. As the Company gains experience with the operations of a particular
hotel, the marketing plan and budget for the hotel are refined to increase the
occupancy rate and ADR at the hotel, while maintaining effective cost controls.
In addition, regional and general managers are provided incentives through cash
bonuses to achieve revenue and operating goals.
Addition of New Hotel Management Agreements. The increasing profitability
of the Company's hotel management business has been driven by its ability to win
new hotel management agreements and by the operating leverage inherent in the
hotel management business. Through the application of its proven operating
principles, the Company has achieved consistent annual growth, even through
industry downturns. Since 1990, over 90% of the Company's management agreements
for upscale hotels have been renewed at expiration, excluding management
agreements covering properties that have been sold to unaffiliated parties. The
Company has increased the net number of hotel management agreements in its
portfolio every year since
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1987, and since 1990 has achieved significant growth in the net number of
management contracts added to its portfolio, as demonstrated in the following
table:
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
Contracts at Beginning of Year............................ 30 39 49 53 82 136
Contracts Added:
Interstate portfolio................................. 4 12 12 15 18 16
Crossroads portfolio................................. 5 3 2 28 33 21
Colony portfolio..................................... -- -- -- -- 32 6
Contracts Lost:
Interstate portfolio................................. -- (3) (6) (4) (10) (7)
Crossroads portfolio................................. -- (2) (4) (10) (10) (17)
Colony portfolio..................................... -- -- -- -- (9) (5)
---- ---- ---- ---- ---- ----
Contracts at End of Year.................................. 39 49 53 82 136 150
==== ==== ==== ==== ==== ====
Through the efforts of its internal business development staff, comprised
of 12 salespeople, the Company will continue to seek to acquire new hotel
management agreements and hotel management companies that operate hotels
suitable for integration into the Company's portfolios. These individuals will
continue to identify new business by conducting comprehensive market studies,
developing extensive call lists, employing direct solicitation techniques and
seeking referrals from third-party owners of the Company's managed hotels.
The Company believes that it will continue to win new hotel management
agreements as a result of its reputation for integrity, its track record of
delivering superior financial returns for hotel owners and investors and its
willingness to structure key terms of hotel management agreements to satisfy
hotel owner objectives. In particular, the Company believes that its stable
relationships with institutional hotel investors will facilitate the Company's
growth by generating new hotel management agreements within the institutions'
existing hotel portfolios, as well as for hotels newly acquired by them.
The Company also believes that the operation of hotels in the United States
is highly fragmented, with many hotels being operated by managers who lack the
experience and expertise to operate, market and maintain such hotels profitably.
The Company believes that the industry will experience consolidation as existing
owners and operators continue to experience financial and operating difficulties
and sell or lease hotels to professional management companies such as the
Company.
By operating hotels in multiple segments of the lodging industry, the
Company increases its opportunities to compete for new hotel management
agreements. Although the Company remains committed to participating in each
segment of the lodging industry and, accordingly, will seek to add hotel
management agreements to each of its three portfolios as opportunities arise,
the Company believes that the greatest opportunities for expansion exist in the
luxury and upscale segments of the lodging industry. Many luxury and upscale
hotels have been underperforming and could greatly benefit from the Company's
strong management and proven operating strategies, without compromising the
quality and service expectations of the hotels' guests.
Improvement of Performance of Owned Hotels. The Company operates its
portfolio hotels efficiently by utilizing regional and centralized support
services to control costs, efficiently allocating resources and maintaining
consistently high quality services to guests. In addition, the Company believes
that significant opportunities exist to enhance the value of some of the Owned
Hotels, either through modest upgrading or through major renovation.
Approximately $13.7 million of capital was committed by the Company and its
partners at the time of the purchase of certain of the Owned Hotels for
renovations entailing exterior and interior reconstruction. A majority of the
planned renovation has been completed, and the entire renovation plan is
expected to be completed by the end of 1996.
Selective Hotel Acquisitions and New Construction. The Company anticipates
that it will be able to grow through the acquisition of hotels having attractive
economic prospects that are suitable for application of the Company's operating
strategies. In particular, the Company will seek to acquire well-located and
constructed hotels at significant discounts to replacement cost and at
attractive returns with potential for cash flow growth and long-term capital
appreciation. In addition, the Company anticipates that it may make partial
investments
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in hotel properties through joint ventures with strategic business partners or
through equity contributions or secured loans. The Company also believes that
its extensive real estate and finance industry contacts, as well as its
continuing relationship with Blackstone, will continue to facilitate the
Company's ability to identify, evaluate and negotiate potential acquisition
opportunities. Under existing arrangements with Blackstone, which expire at the
end of 1997, the Company and Blackstone may co-invest up to a total of $60
million of equity for additional hotel investments. See "The Organization,
Acquisition and Financing Plan--Acquisition of Owned Hotels."
The Company may also pursue growth through the construction of new
mid-market hotels in selected markets. In particular, the Company will evaluate
the competitive environment, including market room and occupancy rates, site
location and marketing, financial and operating issues, as well as the
opportunity to realize operating efficiencies from the ownership of multiple
hotels, in any market under consideration for new development.
OPERATIONS
The Company provides a wide variety of services to its portfolio hotels.
Such services include those traditionally provided by major hotel operating
companies, such as sales and marketing support, financial planning and
reporting, rooms, food and beverage and engineering services, human resources
and training programs and legal support, as well as certain specialized support
services, such as purchasing, project management, leasing and risk management.
The Company's services are provided by hotel personnel who are employed,
trained and supported by the Company's experienced corporate personnel. Most of
these services are provided by the Company in consideration of the management
fees payable to the Company, which are based upon a percentage of gross revenues
and/or operating profits. The Company's management agreements generally provide
for payment to the Company of a base fee equal to a specific percentage of the
hotel's gross revenues. The Company's base fees range from 1% to 6% of gross
revenues, with an average of approximately 2.4%. In addition, some of the
Company's contracts provide for payment of an incentive fee based on operating
profits or net operating cash flow if certain operating profit or cash flow
levels are achieved. The Company's incentive fees generally range from 10% to
20% of operating profits or net operating cash flow. In 1995, base fees
represented approximately 82.4% of the Company's net management fees, and
incentive fees represented the remaining 17.6% of net management fees. Hotel
owners are responsible for all operating expenses, capital expenditures and
working capital requirements related to the managed hotels. The Company charges
the third-party owners incremental fees for providing purchasing, project
management and equipment leasing services. The following is a brief description
of each of the services generally provided by the Company to its managed hotels.
Purchasing. The Company assists its portfolio hotels with purchases of a
wide variety of goods and services, including perishable food, consumable
supplies, dry goods, linens, cable television systems, telephone systems,
advertising agency services, independent marketing services, consulting
services, printing services, furniture, fixtures and equipment. The Company's
purchasing service is a key element of its operating system and its ability to
improve the profitability of its portfolio hotels. As the largest independent
hotel management company in the United States, the Company has significant
leverage to negotiate competitive prices on goods and services from both local
and national vendors. As a result, the Company is able to pass along substantial
savings to its hotels. The purchasing services provided by the Company are
offered at a fee based on merchandise value.
Project Management. The Company assists and advises its portfolio hotels
on all aspects of renovation and reconstruction projects, including design,
budgeting, scheduling, purchasing, systems, materials and contracting. The
Company is actively involved in each stage of a project, from planning through
completion of construction. The project management services provided are offered
on a contracted fee basis.
Leasing. The Company offers equipment leasing services to its portfolio
hotels for furniture and office equipment such as computers, telephone equipment
and photocopiers. The Company generally leases such items for a term of three to
five years. The Company also provides some shorter-term rentals. The Company
offers equipment leasing services primarily as a convenience for its hotels. The
Company provided leasing services to 26 of the hotels in the Company's portfolio
in 1995.
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Risk Management. Through its subsidiary, Northridge Insurance Company
("Northridge") the Company offers its portfolio hotels reinsurance and risk
management services. The Company purchases insurance from major insurance
carriers at attractive rates due to the Company's high volume purchasing and
exceptional claims history. The Company then provides its hotels the opportunity
to participate in the policy at prices and coverages more advantageous than
third-party hotel owners could otherwise obtain. As of December 31, 1995, over
70% of the Company's managed properties participated in its insurance program,
which currently covers over $1.5 billion in insurable values. In conjunction
with its risk management services and in order to minimize its operating
liabilities, the Company sets policies regarding the standards of operation to
which all of its portfolio hotels and their employees must adhere.
Sales and Marketing Support. The Company provides its portfolio hotels
with traditional sales and marketing support, as well as customized assistance,
to identify and attract potential business, leisure and convention guests.
Rooms Services. The Company assists its portfolio hotels in developing
quality standards and operating procedures for room operations, while focusing
on controlling expenses and maximizing profits. Such assistance includes:
- Developing the concept, design and staffing requirements for the front
office, housekeeping, property maintenance, laundry, valet,
telecommunications, garage and other guest services departments;
- Establishing quality standards for products and services and evaluating
performance against these standards;
- Conducting training conferences and workshops for rooms department
employees at all levels;
- Creating operating procedures, training manuals, reference guides and
training programs;
- Developing, maintaining and auditing front office software applications
and training staff in their proper usage; and
- Selecting equipment and supplies such as linens, guest room amenities and
uniforms.
Food and Beverage Services. The Company assists its portfolio hotels in
developing high quality, profitable food and beverage operations as well as
innovative approaches to food and beverage concepts and designs. Such assistance
includes:
- Providing educational and technical training materials and seminars on
how to improve the technical skills of employees;
- Establishing quality levels and management guidelines for new and
existing food and beverage facilities in accordance with area market
expectations;
- Providing ongoing research and development of systems and equipment;
- Creating and implementing system-wide promotional programs to enhance
hotel revenues;
- Conducting business audits that analyze current financial performance
against industry norms, providing a detailed review of existing
procedures and programs and setting a plan for achieving goals in
business growth and cost containment; and
- Providing low cost access to the freshest and highest quality food
products and beverages available in the market.
Human Resources and Training Programs. The Company's human resources
department is responsible for designing the employee selection process, creating
competitive compensation programs and developing appropriate training programs
at all levels. The Company's human resources department has developed 26
training programs to introduce new employees to the Company's methods of
operation and to augment their skills. The training programs focus on such areas
as supervisory development, middle management training, career planning,
technical training and executive development. In addition, Company employees are
required to attend outside courses developed by a variety of managerial and
technical organizations both within and outside the industry.
Financial Planning and Reporting. The Company provides its portfolio
hotels with a wide variety of accounting, financial reporting and financial
planning services that assist the hotel owners in making informed decisions.
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Management Information Systems. The Company provides its portfolio hotels
with access to key operating information and technologies as well as on-going
systems support. Access to key information enables the Company's hotels to set
operating objectives and measure their operating performance on a daily basis.
Engineering Services. The Company provides its portfolio hotels with
expertise in physical plant systems such as mechanical, plumbing, electrical,
fire and life safety and swimming pools.
Legal Support. The Company's in-house legal department provides its
portfolio hotels with legal support with respect to employment law issues,
liquor licensing and various vendor and service contract negotiations.
THE COMPANY'S PORTFOLIOS
The Company has achieved superior operating results as compared to other
hotel operating companies as a result of its ability to successfully manage a
highly diverse group of hotels and other properties, both in terms of their
geographic location and the segment of the lodging industry they serve. The
Company operates hotels throughout the United States and in the District of
Columbia, Canada, Mexico, Israel, the Caribbean, Thailand and Russia. The
Company also manages hotels in each segment of the lodging industry--luxury,
upscale, mid-priced, economy and budget. In addition, the Company operates
hotels in diverse geographic locations and market segments which makes the
Company less susceptible to unfavorable general and regional economic
conditions.
To facilitate the management of its diverse portfolio of hotels, the
Company has divided its hotels among three separate portfolios--Interstate
(luxury and upscale), Crossroads (mid-priced, economy and budget) and Colony
(hotels and resorts, including condominium and time-shares)--as indicated in the
following table and as described more fully below.
NUMBER NUMBER % OF 1995 NET
THE COMPANY'S PORTFOLIOS OF HOTELS OF ROOMS MANAGEMENT FEES
------------------------------------- --------- -------- ---------------
Interstate........................... 78 26,259 84%
Crossroads........................... 53 7,145 11%
Colony............................... 23 2,326 5%
--- ------ ---
Total........................... 154 35,730 100%
=== ====== ===
Interstate Portfolio. Interstate, the original and largest of the
Company's three hotel management portfolios and the core of its hotel management
business, consists of luxury and upscale hotels, suites and resorts, comprised
of 78 hotels with a total of 26,259 rooms. Among Interstate's top performing
hotels are the Owned Hotels, all of which are contained in this portfolio. The
Owned Hotels, which consist of 15 hotels, containing an aggregate of 4,621
rooms, produced superior operating results in 1995, achieving an average
occupancy rate of 73.0%, ADR of $88.03 and REVPAR of $64.29, compared to 1995
industry averages for upscale hotels of a 68.5% occupancy rate, ADR of $80.38
and REVPAR of $55.06. The Company expects further improvement in the results of
operations of the Owned Hotels as the effects of the repositioning of certain of
them are realized.
The Company manages many of the Interstate portfolio hotels under brand
names such as Colony(R), Doubletree(R), Embassy Suites(R), Hilton(R), Holiday
Inn(R), Marriott(R), Radisson(R), Sheraton(R) and Westin(R). Among the
well-known hotels in the Interstate portfolio are: The Charles Hotel at Harvard
Square in Cambridge, Massachusetts; the Don CeSar Beach Resort in St. Petersburg
Beach, Florida; The Hay-Adams Hotel in Washington, D.C.; The Bellevue Hotel in
Philadelphia, Pennsylvania; the Westin Bonaventure in Los Angeles, California;
Marriott's Casa Marina Resort in Key West, Florida; and the Marriott at Sawgrass
Resort in Ponte Vedra Beach, Florida. Interstate's hotels are geographically
diversified, located in 23 states throughout the United States and in the
District of Columbia and Canada.
Interstate's hotels serve a diverse customer base comprised of travelers
involved in business, leisure and convention and meeting activities. Business
travelers, which represent the largest and most profitable customer group for
Interstate's hotels, have increased as a proportion of total customers since
1991 due to the Company's strategic efforts to attract more business travelers
and the general improvement in the economy.
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Interstate's hotels are typically large upscale hotels or resorts with high
volume food, catering and beverage operations and ample meeting space. These
hotels provide guests with high quality rooms, facilities and guest services
such as concierge services, room service, health clubs, business centers, voice
mail, in-room movies and other amenities. Many of the hotels in the Interstate
portfolio also provide quality leisure activities. For example, the Marriott at
Sawgrass Resort offers golfing privileges at the famous TPC Stadium golf course.
The following table provides a complete listing of the hotels in the
Interstate portfolio as of May 1, 1996:
INTERSTATE PORTFOLIO HOTELS
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
Colony Properties under Interstate Management
Harbor View Hotel Edgartown, MA 124 July 94
Kelley House Edgartown, MA 59 July 94
Harbor House Hotel Nantucket, MA 112 July 94
Wharf Cottages and Marina Nantucket, MA 23 July 94
White Elephant Inn Nantucket, MA 96 July 94
Toronto Colony Hotel Toronto, Ontario 717 Dec. 93
Delta
Toronto Delta Meadowvale Mississauga, Ontario 374 Feb. 96
Doubletree
Doubletree Resort Surfside Clearwater Beach, FL 428 Dec. 94
Embassy Suites
Schaumburg Embassy Suites (1) Schaumburg, IL 209 Dec. 95
Hilton
Denver Hilton South (2) Greenwood Village, CO 305 Dec. 94
Ft. Lauderdale Airport Hilton (1) Dania, FL 388 Dec. 95
Gaithersburg Hilton Gaithersburg, MD 301 June 93
Newark Hilton Gateway Newark, NJ 253 Sep. 95
Parsippany Hilton Parsippany, NJ 508 Sep. 91
Huntington Hilton (2) Melville, NY 302 Dec. 95
Holiday Inn and Crowne Plaza
San Francisco Holiday Inn Golden Gateway San Francisco, CA 498 Aug. 92
Seattle Crowne Plaza Seattle, WA 415 Dec. 92
Marriott
Marriott's Laguna Cliffs Resort Dana Point, CA 346 Oct. 94
San Diego Marriott Suites Downtown San Diego, CA 264 Jan. 90
San Diego Marriott Mission Valley (3) San Diego, CA 350 Dec. 88
San Francisco Marriott Fisherman's Wharf San Francisco, CA 255 Oct. 88
Warner Center Marriott (1) Woodland Hills, CA 463 Feb. 94
Colorado Springs Marriott (2) Colorado Springs, CO 310 Feb. 89
Trumbull Marriott (3) Trumbull, CT 321 Dec. 85
Boca Raton Marriott Boca Raton, FL 256 Aug. 87
Ft. Lauderdale Marriott North (3) Ft. Lauderdale, FL 321 Dec. 86
Marriott's Casa Marina Resort Key West, FL 312 Dec. 78
Marriott's Reach Resort (3) Key West, FL 149 Dec. 93
Orlando Airport Marriott Orlando, FL 484 Nov. 88
Orlando Marriott Orlando, FL 1,064 Nov. 88
Marriott at Sawgrass Resort Ponte Vedra Beach, FL 516 Aug. 88
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NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
Atlanta Marriott North Central (2) Atlanta, GA 287 Feb. 95
Boston Marriott Andover (1) Andover, MA 293 Dec. 95
Boston Marriott Westborough (4) Westborough, MA 223 July 91
Minneapolis Marriott Southwest (3) Minnetonka, MN 320 Nov. 88
St. Louis Marriott West (3) St. Louis, MO 300 Jan. 92
Charlotte Marriott Executive Park Charlotte, NC 298 Sep. 83
Albany Marriott (3) Albany, NY 360 July 85
Syracuse Marriott East Syracuse, NY 250 July 77
Cincinnati Marriott (3) Cincinnati, OH 352 Mar. 86
Harrisburg Marriott (3) Harrisburg, PA 348 June 80
Philadelphia Marriott West (2) West Conshohocken, PA 286 Oct. 91
Pittsburgh Airport Marriott (3) Pittsburgh, PA 314 Nov. 87
Pittsburgh Green Tree Marriott (3) Pittsburgh, PA 467 Nov. 72
Marriott Suites at Valley Forge (1) Valley Forge, PA 229 Dec. 95
Providence Marriott (3) Providence, RI 345 Nov. 75
Chattanooga Marriott Chattanooga, TN 343 Jan. 88
Memphis Marriott Memphis, TN 320 Oct. 87
Arlington Dallas Marriott Arlington, TX 310 Dec. 92
Houston Marriott North at Greenspoint (2) Houston, TX 391 May 88
Radisson
Manhattan Beach Radisson Plaza Hotel Manhattan Beach, CA 380 Jan. 91
San Jose Radisson Plaza Hotel Airport San Jose, CA 185 Dec. 95
Union City Radisson Hotel Union City, CA 265 Dec. 95
Lisle Radisson (2)(5) Lisle, IL 242 Nov. 93
Sheraton
Sheraton Biscayne Bay Miami, FL 598 Oct. 86
Westin
Los Angeles Westin Bonaventure Los Angeles, CA 1,369 Dec. 95
Independent
Lexington Hotel Phoenix, AZ 180 Nov. 93
Pala Mesa Resort Fallbrook, CA 133 June 93
Colonial Inn La Jolla, CA 75 Sep. 94
Cliffs at Shell Beach Resort Shell Beach, CA 165 Oct. 94
Goodwin Hotel Hartford, CT 124 Jan. 92
Hay-Adams Hotel Washington, DC 143 June 95
Don CeSar Beach Resort (6) St. Petersburg Beach, FL 275 Dec. 92
The Charles Hotel at Harvard Square Cambridge, MA 296 Feb. 85
Mission Point Resort Mackinac, MI 235 July 94
Waterford Hotel Oklahoma City, OK 197 Dec. 94
The Bellevue Hotel Philadelphia, PA 170 Dec. 94
Founders Inn and Conference Center Virginia Beach, VA 240 Nov. 95
Fort Magruder Inn and Conference
Center (2) Williamsburg, VA 303 Oct. 95
Other Contracts (7)
Hyatt Regency Burlingame San Francisco, CA 793 Jan. 96
Hartford Marriott Farmington Farmington, CT 381 Jan. 95
Crowne Plaza Westshore Tampa, FL 272 Jan. 93
Hyatt Charlotte South Park Charlotte, NC 262 Jan. 93
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NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
Charlotte Marriott City Center Charlotte, NC 431 Jan. 93
New York Palace New York, NY 963 Aug. 92
Hyatt Fairlakes Fairfax, VA 316 Jan. 93
Hyatt Dulles Herndon, VA 317 Jan. 93
Tysons Corner Marriott (1) Tysons Corner, VA 390 Dec. 95
------
Total Interstate Rooms 26,259
Total Interstate Hotels 78
- - ------------------
(1) Denotes an Owned Hotel in which Interstone II has a controlling interest (as
defined in "The Organization, Acquisition and Financing Plan--Acquisition of
Owned Hotels").
(2) Denotes an Owned Hotel owned by Interstone I (as defined in "The
Organization, Acquisition and Financing Plan--Acquisition of Owned Hotels")
or in which it has a controlling interest.
(3) An affiliate of Milton Fine (but not the Company) will continue to own a
minority interest in this hotel following the Offering.
(4) In April 1996, the Company executed a contract to acquire this hotel.
(5) Includes an office center containing approximately 150,000 square feet.
(6) In February 1996, the Company signed a letter of intent to purchase
approximately 13% of the partnership interests in this hotel.
(7) The Company provides certain services, such as asset management or
consulting services but not property management services, to these hotels.
Crossroads Portfolio. The Company's Crossroads portfolio consists of
mid-priced, economy and budget hotels, motels and inns comprised of 53 hotels
with a total of 7,145 rooms. The Company established the Crossroads portfolio in
1990 to broaden the scope of its hotel management business beyond upscale
hotels. In 1995, the Crossroads portfolio accounted for approximately $3.0
million, or 11%, of the Company's net management fees. The Company does not own
any equity interests in any of the Crossroads hotels.
Crossroads manages hotels under brand names such as Best Western(R),
Comfort Inn(R), Courtyard by Marriott(R), Days Inn(R), Fairfield Inn(R),
Hilton(R), Holiday Inn(R), Howard Johnson(R), Radisson(R), Ramada(R),
Sheraton(R), Super 8(R), Travelodge(R) and Villager Lodge(R) and also manages
several independent hotels. Crossroads' hotels are located in 15 states,
primarily on the east and west coasts. The hotels in the Crossroads portfolio
appeal to value-oriented business and leisure travelers. They are typically
mid-priced hotels with limited food, catering and beverage operations and little
or no meeting space. Crossroads' hotels provide guests with modest rooms,
facilities and guest services. Amenities may include complimentary continental
breakfasts, pool facilities, facsimile services and cable television.
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The following table provides a complete listing of the hotels in the
Crossroads portfolio as of May 1, 1996:
CROSSROADS PORTFOLIO HOTELS
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
Best Western
Canton Best Western University Inn Canton, NY 102 Apr. 95
Comfort Inn
Comfort Inn Murray Hill Murray Hill, NY 128 Nov. 95
Courtyard by Marriott
Marina Del Rey Courtyard by Marriott Marina Del Rey, CA 276 May 95
Albany Courtyard by Marriott Albany, NY 78 Jan. 96
Days Inn
West Palm Beach Days Inn West Palm Beach, FL 234 Aug. 94
College Park Days Inn College Park, MD 68 Feb. 95
Days Inn Brookville Brookville, PA 134 Feb. 96
Chambersburg Days Inn Chambersburg, PA 107 May 94
Virginia Beach Days Inn Airport Virginia Beach, VA 148 Nov. 94
Fairfield Inn
Vicksburg Fairfield Inn Vicksburg, MS 81 July 95
Hilton
Meadowlands Hilton Secaucus, NJ 295 Aug. 91
Holiday Inn
Walnut Creek Holiday Inn Walnut Creek, CA 148 May 95
Ft. Lauderdale Beach Galleria Holiday Inn Ft. Lauderdale, FL 240 Dec. 94
Madeira Beach Holiday Inn Madeira Beach, FL 149 Dec. 94
Fort Wayne Holiday Inn Ft. Wayne, IN 147 Sep. 93
Richmond Holiday Inn Richmond, VA 280 Aug. 94
Howard Johnson
Greenwich Howard Johnson Greenwich, CT 103 Sep. 93
Clearwater Central Howard Johnson Clearwater Beach, FL 193 Dec. 94
Ithaca Howard Johnson Ithaca, NY 72 Sep. 93
Latham Howard Johnson Latham, NY 146 Sep. 93
Utica Howard Johnson Utica, NY 147 Sep. 93
Radisson
Rochester Radisson Inn Rochester, NY 171 Sep. 93
Radisson Hotel Virginia Beach Virginia Beach, VA 292 Dec. 95
Ramada
Santa Ana Ramada Grand Avenue Hotel Santa Ana, CA 182 Nov. 94
Ramada Inn Gulfview Clearwater Beach, FL 289 Dec. 94
Ft. Lauderdale Airport Ramada Inn Ft. Lauderdale, FL 298 Dec. 94
Niles Ramada Inn Niles, MI 127 Feb. 95
Bordentown Ramada Inn Bordentown, NJ 95 Feb. 95
Sheraton
Batavia Sheraton Inn Batavia, NY 200 July 93
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NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
Super 8
Flagstaff Super 8 Motel Flagstaff, AZ 86 Dec. 94
Arcata Super 8 Motel Arcata, CA 62 Dec. 94
Indio Super 8 Motel Indio, CA 70 Dec. 94
Red Bluff Super 8 Motel Red Bluff, CA 72 Dec. 94
Mission Bay Super 8 Motel San Diego, CA 117 Apr. 96
Selma Super 8 Motel Selma, CA 40 Dec. 94
Willows Super 8 Motel Willows, CA 41 Dec. 94
Yucca Valley Super 8 Motel Yucca Valley, CA 48 Dec. 94
Rock Falls Super 8 Motel Rock Falls, IL 63 Apr. 96
Somerset Super 8 Motel Somerset, KY 63 Apr. 96
Poplar Bluff Super 8 Motel Poplar Bluff, MO 63 Apr. 96
Miner/Sikeston Super 8 Motel Sikeston, MO 63 Apr. 96
Travelodge
Travelodge Metro Center Phoenix, AZ 170 Dec. 95
Villager Lodge
Villager Lodge Cincinnati Cincinnati, OH 98 June 95
Columbus Villager Lodge Columbus, OH 161 June 95
Independent
Mirage Springs Hotel and Casino Desert Hot Springs, CA 110 Mar. 96
Azure Tides Inn Sarasota-Lido Key, FL 59 Dec. 95
Mears Great Oak Landing Chestertown, MD 28 June 95
College Park Royal Pine Inn College Park, MD 114 Feb. 95
Government Hotel Charlotte, NC 195 Dec. 95
Brookstown Inn Winston-Salem, NC 71 July 94
Plainview Plaza Hotel Plainview, NY 182 Sep. 93
Linden Row Inn Richmond, VA 70 July 94
Other Contracts
Greensboro Ramada Inn Airport(1) Greensboro, NC 169 Oct. 94
-----
Total Crossroads Rooms 7,145
Total Crossroads Hotels 53
- - ------------------
(1) The Company provides certain services, such as accounting or consulting
services but not property management services, to this hotel.
Colony Portfolio. The Company's Colony portfolio consists of upscale and
mid-priced leisure hotels and resorts, condominiums and time-shares, comprised
of 23 properties with a total of 2,326 rooms. The Company purchased the assets
of Colony Hotel and Resorts in May 1994 for $1 million, payable in five equal
annual installments through 1999. The portfolio of resorts enabled the Company
to expand its presence in the resort market and establish a presence in the
global market. In 1995, the Colony portfolio accounted for approximately $1.3
million, or 5% of the Company's net management fees.
Colony operates most of its properties under the brand name "A Colony Hotel
and Resort." Colony's managed hotels and other properties are located in six
states (including vacation destinations such as Hawaii, Colorado and Vermont) as
well as Mexico, Israel, the Caribbean, Thailand and Russia.
The properties in the Colony portfolio appeal primarily to leisure
travelers. They include upscale and mid-priced properties with a wide range of
room types, facilities and guest services. Most of Colony's properties provide
amenities such as golf, tennis, beach facilities and/or water or snow skiing,
depending on the location.
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The following table provides a complete listing of the properties in the
Colony portfolio as of May 1, 1996:
COLONY PORTFOLIO PROPERTIES
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
Hotels and Resorts
Hawaii Polo Inn (1) Honolulu, HI 72 June 94
Kaluakoi Hotel & Golf Club Kepuhi Beach, Molokai, HI 103 June 94
Lawaii Beach Resort Koloa, Kauai, HI 171 June 94
Banyan Harbor Lihue, Kauai, HI 148 June 95
Alana Waikiki Hotel Waikiki Beach, HI 313 Feb. 96
Lake Lure Golf Resort Lake Lure, NC 47 June 94
Montauk Yacht Club Resort and Marina Montauk, NY 107 June 94
Stratton Village Lodge Stratton Mountain, VT 91 June 94
Stratton Mountain Inn Stratton Mountain, VT 119 June 94
Hotel Tverskaya Moscow, Russia 122 Sep. 95
Kamala Bay Terrace Phuket, Thailand 117 June 94
Vacation Villa Resorts
Ocotillo Lodge Palm Springs, CA 124 Nov. 95
Mountainside at Silvercreek Silvercreek, CO 120 June 94
Kona Bali Kai Resort Kailua-Kona, HI 66 June 94
Poipu Kai Resort Koloa, Kauai, HI 85 June 94
Golden Eagle Resort (1) Stowe, VT 89 June 94
Colony Tel Aviv Resort (1) Tel Aviv, Israel 80 June 94
San Felipe Marina and Spa (1) Baja, Mexico 52 June 94
Puerto Aventuras Beach Hotel Cancun, Mexico 30 Sep. 95
Oyster Pond Beach Hotel St. Maarten, Netherlands Antilles 40 Oct. 94
Point Pleasant St. Thomas, Virgin Islands 110 Sep. 95
Timothy Beach Resort St. Kitts, West Indies 60 June 94
Caribees Resort St. Lucia, West Indies 60 Oct. 95
------
Total Colony Rooms 2,326
Total Colony Properties 23
- - ------------------
(1) Denotes a property for which the Company provides only franchise and/or
marketing services.
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GEOGRAPHIC DIVERSIFICATION
The geographic distribution of the Company's hotel portfolio reflects the
Company's belief that geographic diversification helps to insulate its portfolio
from local market fluctuations that are typical for the lodging industry. The
following table summarizes certain information with respect to the distribution
of the Company's hotel portfolio as of December 31, 1995:
NUMBER NUMBER % OF PRO FORMA 1995
OF OF % OF MANAGEMENT % OF PRO FORMA
STATE/COUNTRY HOTELS ROOMS TOTAL ROOMS REVENUES (1) 1995 HOTEL REVENUES
- - ---------------------------- ------- ------- ----------- -------------------- -------------------
Florida (2) 23 7,576 21.6 27.7% 6.6%
California (3) 24 5,964 17.0 14.0 11.5
Massachusetts (4) 8 1,226 3.5 6.4 12.3
New York (5) 13 3,130 8.9 6.2 10.1
Pennsylvania (6) 7 1,921 5.5 6.1 13.5
New Jersey 4 1,151 3.3 5.5 --
Tennessee 2 663 1.9 4.2 --
North Carolina 7 1,473 4.2 2.9 --
Washington 1 415 1.2 2.7 --
Missouri 1 300 0.9 2.4 --
Connecticut 4 929 2.7 2.0 --
Texas (7) 2 701 2.0 2.0 6.0
Ohio 3 611 1.8 1.8 --
Canada 1 717 2.0 1.7 --
Rhode Island 1 345 1.0 1.6 --
Hawaii 6 645 1.9 1.4 --
Maryland 4 511 1.5 1.4 --
Virginia (8) 9 2,356 6.7 1.4 13.2
Minnesota 1 320 0.9 1.3 --
Oklahoma 1 197 0.6 1.2 --
Arizona 3 436 1.3 0.9 --
Michigan 2 362 1.0 0.8 --
Nevada 1 147 0.4 0.8 --
Colorado (9) 3 731 2.1 0.6 11.0
District of Columbia 1 143 0.4 0.6 --
Indiana 1 147 0.4 0.4 --
Netherlands Antilles 1 40 0.1 0.4 --
Russia 1 122 0.3 0.4 --
Vermont 3 299 0.9 0.4 --
Wisconsin 1 138 0.4 0.2 --
Israel 1 80 0.2 0.2 --
Thailand 1 117 0.3 0.2 --
Mississippi 1 81 0.2 0.1 --
Mexico 2 82 0.2 0.1 --
Georgia (10) 1 287 0.8 * 4.2
Illinois (10) 2 451 1.3 * 11.6
West Indies 2 120 0.3 * --
Virgin Islands 1 110 0.3 * --
--- ------ ----- ----- -----
Totals 150 35,044 100.0% 100.0% 100.0%
=== ====== ===== ===== ======
- - ------------------
* Less than 0.1%
(1) Management Fee Revenues include net management fees and asset management
fees.
(2) Includes one Owned Hotel, containing 388 rooms.
(3) Includes one Owned Hotel, containing 463 rooms.
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(4) Includes two Owned Hotels, containing 516 rooms.
(5) Includes one Owned Hotel, containing 302 rooms.
(6) Includes two Owned Hotels, containing 515 rooms.
(7) Includes one Owned Hotel, containing 391 rooms.
(8) Includes two Owned Hotels, containing 693 rooms.
(9) Includes two Owned Hotels, containing 611 rooms.
(10) All hotels located in this state are Owned Hotels, and management fees
relating thereto are eliminated on a pro forma basis.
NATIONAL FRANCHISE AFFILIATIONS
As an independent hotel operating company, the Company can choose the
franchises that will provide the greatest benefits to the hotels it manages.
Factors considered when selecting a franchise include brand recognition, access
to national reservations systems, national direct sales efforts, volume
purchasing agreements, and technical and business assistance. As of December 31,
1995, 123 hotels were operated under a national or regional franchise system.
Operating under multiple franchise systems provides the Company with further
diversification, less dependence on the continued popularity of one brand and
less vulnerability to new requirements of any individual franchise system. The
following chart summarizes certain information with respect to the franchise
affiliations of the hotels in the Company's portfolio as of December 31, 1995:
NUMBER NUMBER % OF
FRANCHISE OF HOTELS OF ROOMS TOTAL ROOMS
- - ----------------------------- --------- -------- ------------
Marriott (1) 36 12,649 36.1%
Colony 25 3,030 8.6
Hilton (2) 7 2,348 6.7
Holiday Inn and Crowne Plaza 9 2,287 6.5
Radisson (3) 7 1,741 5.0
Westin 1 1,369 3.9
Ramada Hotel 6 1,160 3.3
Hyatt 3 895 2.6
Sheraton 2 798 2.3
Days Inn 5 737 2.1
Howard Johnson 5 661 1.9
Doubletree 1 428 1.2
Super 8 Motels 7 419 1.2
Courtyard by Marriott 1 276 0.8
Villager Lodge 2 259 0.7
Embassy Suites (4) 1 209 0.6
Travelodge 1 170 0.5
Country Hearth 1 150 0.4
Comfort Inn 1 128 0.4
Best Western 1 102 0.3
Fairfield Inn 1 81 0.2
Independent (5) 27 5,147 14.7
--- ------ -----
Totals 150 35,044 100.0%
=== ====== =====
- - ------------------
(1) Includes nine Owned Hotels, containing 2,872 rooms.
(2) Includes three Owned Hotels, containing 991 rooms.
(3) Includes one Owned Hotel, containing 242 rooms.
(4) Includes one Owned Hotel, containing 209 rooms.
(5) Includes one Owned Hotel, containing 303 rooms.
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HOST FUNDING TRANSACTION
In April 1996, Crossroads purchased 60,000 shares of common stock of Host
Funding, Inc. ("Host"), a publicly traded hotel real estate investment trust, in
connection with Host's initial public offering. In connection therewith, a
subsidiary of Crossroads entered into long-term leases with Host to lease five
Super 8 Motels (the "Host Hotels") owned by Host. Rental payments under each
lease consist of base rent (the "Base Rent"), payable monthly, which is based
upon a schedule for each hotel. The yearly total Base Rent for each hotel varies
from $112,300 to $265,300. In 1996, the monthly Base Rent for each hotel will be
reduced by 1% of monthly gross room revenue. In addition, each hotel will pay
percentage rent, payable quarterly, which is based upon gross revenues from the
operation of the hotel. Crossroads will receive a management fee based on a
percentage of gross revenues for each hotel. Crossroads is generally responsible
for paying all operating expenses of the hotel property, including maintenance
and repair costs and insurance premiums, and for maintaining any underlying
ground utilities. Other than hotels or motels owned, managed, operated, or in
which Crossroads had an interest prior to the commencement of the leases,
Crossroads is not permitted to manage, operate or own any interest in any hotel
or motel property within a five mile radius of each leased hotel. The leases
will expire in 2011 but are terminable earlier upon the payment of certain
termination fees. Crossroads has agreed to initially pledge one-half of the
shares of Host common stock acquired by it to secure its subsidiary's
performance during the first three years of the leases. Thereafter, the number
of shares required to be pledged declines during the remaining term of the
leases. In lieu of such pledge, Crossroads may elect to guaranty the obligations
of the tenant under the leases. As part of this transaction, Crossroads and Host
have formed a strategic alliance that is expected to provide Crossroads the
opportunity to lease additional hotels acquired by Host.
REINSURANCE BUSINESS
The Company operates a strategically related reinsurance business through
its Northridge subsidiary. Northridge provides reinsurance to major insurance
carriers solely in connection with the insurance that those carriers provide to
the Company and its hotels. Northridge limits its reinsurance to specific lines
of insurance with defined limits. Northridge also provides direct insurance
coverage to the Company in connection with its self-insured health care program.
In 1995 and 1994, Northridge generated revenues of $7.7 million and $7.0
million, respectively, incurred claims expenses of $0.6 million and $0.1
million, respectively, and recorded net income of $6.7 million and $6.4 million,
respectively.
MANAGEMENT
The Company has a distinct corporate culture and management style, which
has evolved over the Company's 35 years of operation. The Company's management
seeks to maintain a blend of centralized control over strategic issues while
encouraging decentralized decision-making with respect to operational issues.
The Company believes that the operational details which determine the quality of
a guest's hotel stay are best managed by on-site hotel personnel.
The Company has a human resources department dedicated to designing the
employee selection process, creating competitive compensation programs and
developing appropriate training programs at all levels. The Company's human
resources department has developed 26 training programs to introduce new
employees to the Company's method of operation and to augment their managerial
skills. The training programs focus on such areas as supervisory development,
middle management training, career planning, technical training and executive
development. In addition, Company employees are required to attend outside
courses developed by a variety of managerial and technical organizations both
within and outside the industry.
The Company's executive officers supervise core departments such as
accounting, management information systems, marketing, central purchasing and
human resources. The corporate office utilizes information systems that track
each hotel's daily occupancy, average room rate and revenues from rooms and food
and beverage operations. By having the latest information available at all
times, management believes it is better able to respond to changes in each
market and control variable expenses to maximize the profitability of each
hotel. The Company's senior management has been with the Company for an average
of 13 years and have an average of 22 years of experience in the lodging
industry. See "Risk Factors--Substantial Reliance on Senior Management."
Following consummation of the Offering, the senior management will beneficially
own 2.6% of
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the outstanding shares of Common Stock (excluding Milton Fine, who will
beneficially own 23.1% of the outstanding shares of Common Stock). As a result,
the interests of the Company's senior management will be closely aligned with
the interests of shareholders. See "Management--Stock Option Grants" and
"--Compensation Plans and Arrangements."
The Company's hotel management business is organized generally around
geographic regions to ensure a close working relationship among individuals at
the Company's hotels and at its corporate offices. Each region is headed by a
Regional Vice President or a Regional Director of Operations who is responsible
for overseeing and monitoring the hotels in his or her respective region to
ensure that they are operating under the specific guidelines established by the
Company. Each Regional Vice President and Regional Director of Operations heads
a team that specializes in sales and marketing, operations and accounting. The
regional teams are responsible for ensuring that the on-site management
personnel adhere to the Company's policies, take full advantage of the Company's
corporate resources and achieve financial and operating targets. The Company's
five Regional Vice Presidents and nine Regional Directors of Operations have
been with the Company an average of six years.
Each of the Company's hotels is managed by a General Manager and an
Executive Committee, which is comprised of the hotel department heads. In
addition to conducting the day-to-day operations of the hotel, the General
Manager and Executive Committee are responsible for developing and implementing
an accurate, timely and detailed annual budget, comprehensive marketing plan,
capital improvement program, human resources development program and short- and
long-term operating strategies. The General Manager and the Executive Committee
regularly review current activity and discuss overall performance and direction
of key areas of the hotel. The Company's 66 General Managers in the Company's
Interstate division have been with the Company an average of eight years.
COMPETITION
The hotel management business is highly competitive. Some of the Company's
competitors may have substantially greater marketing and financial resources
than the Company. Competition among independent hotel management companies has
intensified in the past few years, and, as a result, hotel owners in many cases
have been requesting lower base fees coupled with greater incentive fees or
seeking capital contributions from independent hotel management companies in the
form of loans or equity investments. See "Risk Factors-- Competition for
Management Agreements."
PROPERTIES
The principal executive offices of the Company are located in Pittsburgh,
Pennsylvania and are occupied pursuant to a lease that expires December 31,
1997. The Company is currently renegotiating this lease. In addition to its
executive offices, the Company leases office space in Scottsdale, Arizona,
Honolulu, Hawaii and Orlando, Florida. The Company believes that such properties
are sufficient to meet its present needs and does not anticipate any difficulty
in securing additional space, as needed, on terms acceptable to the Company.
EMPLOYEES
The Company employs most of the employees at its owned, leased and managed
hotels as well as those at its corporate offices; however, third-party hotel
owners pay the wages and benefits for all the employees in their hotels. At
December 31, 1995, the Company had approximately 18,200 employees, approximately
18,000 of whom were employees of specific hotels.
Fourteen of the properties under the Company's management, employing
approximately 2,200 workers, are subject to labor union contracts. The Company
has not experienced any union strikes or other material labor disruptions.
GOVERNMENT REGULATION
The lodging industry in general, and the Company in particular, is subject
to extensive foreign and U.S. federal, state and local government regulations.
See "Risk Factors--Government Regulation." There are currently no material legal
or administrative proceedings pending against the Company with respect to any
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regulatory matters, and the Company believes that it is in compliance in all
material respects with statutory and administrative regulations with respect to
its business.
ENVIRONMENTAL MATTERS
Under various foreign and U.S. federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In certain jurisdictions,
liability may be imposed upon owners or operators of real properties for
personal injury associated with exposure to asbestos-containing materials.
Environmental laws also may impose restrictions on the manner in which property
may be used or businesses may be operated, and these restrictions may result in
expenditures and require interruption of such businesses. In connection with its
current or previous operations or previous ownership of hotels, the Company may
be potentially liable for any of these costs under environmental laws and
related common law principles. The Company seeks to reduce its environmental
liability when it acquires hotels by conducting environmental audits of the
subject property. Although the Company currently is not aware of any material
environmental claims pending or threatened against it or any of its managed,
leased, owned or previously owned hotels, no assurance can be given that a
material environmental claim will not be asserted against, and ultimately result
in liability for, the Company. The cost of defending against, and ultimately
paying or settling, claims of liability or of remediating a contaminated
property could have a material adverse effect on the financial condition and
results of operations of the Company. See "Risk Factors--Government Regulation."
All of the Owned Hotels have undergone Phase I environmental assessments
(which generally provide a physical inspection and database search but not soil
or groundwater analyses) within the last 24 months. In addition, most of the
Company's owned, leased and managed hotels have been inspected to determine the
presence of asbestos containing materials ("ACMs"). While ACMs are present in
certain of the properties, operations and maintenance programs for maintaining
such ACMs have been or are in the process of being designed and implemented, or
the ACMs have been scheduled to be or have been abated, at such hotels. The
Company believes that the presence of ACMs in its owned, leased and managed
hotels will not have a material adverse effect on its financial condition and
results of operations; however, there can be no assurance that this will be the
case.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is named as defendant
in legal proceedings resulting from incidents at its hotels. The Company
maintains comprehensive liability insurance and also requires hotel owners to
maintain adequate insurance coverage. The Company believes such coverage to be
of a nature and amount sufficient to ensure that it is adequately protected from
any material financial loss as a result of such claims. In addition, the Company
generally is indemnified by third-party hotel owners for lawsuits and damages
against it in its capacity as hotel manager. The Company currently is not the
subject of any legal actions for which it is neither insured nor indemnified and
which the Company believes will individually or in the aggregate have a material
adverse effect on the Company's financial condition or results of operations,
nor to the Company's knowledge is any such litigation threatened.
INTELLECTUAL PROPERTY
Generally, the third-party owners of the Company's portfolio hotels, rather
than the Company, are parties to the franchise agreements to use the trade names
under which the hotels are operated. The Company is a party, however, to
franchise agreements with Marriott International, Inc., Hilton Inns, Inc.,
Promus Hotels, Inc. and Radisson Hotels International, Inc. The Company's
franchise agreements to use the Marriott(R), Hilton(R), Embassy Suites(R) and
Radisson(R) trade names expire at varying times generally ranging from 2000 to
2015. The Company has registered, or has applied with the United States Patent
Office for registration of, a number of trademarks and service marks
incorporating the word "Colony," as well as many other trademarks and service
marks used in the Company's business.
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Below are trade names utilized by the Company's portfolio hotels pursuant
to license arrangements with national franchisors:
EMBASSY SUITES(R) IS A REGISTERED TRADEMARK OF EMBASSY SUITES, INC.
("EMBASSY"), WHICH IS A WHOLLY-OWNED SUBSIDIARY OF PROMUS HOTELS, INC.
("PROMUS"). NEITHER EMBASSY NOR PROMUS HAS ENDORSED OR APPROVED THE OFFERING
MADE HEREBY. A GRANT OF AN EMBASSY SUITES FRANCHISE LICENSE FOR CERTAIN OF THE
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY EMBASSY OR PROMUS (OR ANY OF THEIR RESPECTIVE
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.
HILTON(R), HILTON INN(R) AND THE STYLIZED H(R) ARE REGISTERED TRADEMARKS OF
HILTON INNS, INC. ("HILTON HOTELS"). NEITHER HILTON INNS, INC. NOR HILTON HOTELS
NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES
(COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN ISSUER OR
UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAS ANY OF THE
HILTON ENTITIES ENDORSED OR APPROVED THE OFFERING. THE HILTON ENTITIES HAVE NOT
ASSUMED AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL
STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY PROSPECTUS OR
ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER HEREOF. A GRANT
OF A HILTON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
ANY OF THE HILTON ENTITIES (OR ANY OF THEIR AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY.
MARRIOTT(R), MARRIOTT BY COURTYARD(R) AND FAIRFIELD INN(R) ARE REGISTERED
TRADEMARKS OF MARRIOTT INTERNATIONAL, INC., WHICH HAS NOT ENDORSED OR APPROVED
THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS
PROSPECTUS. A GRANT OF A MARRIOTT FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS
NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.
RADISSON(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL,
INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL
RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A RADISSON
FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT
BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY RADISSON
HOTELS INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS)
OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY.
In addition, other hotels in the Company's portfolio operate pursuant to
license agreements with these and other franchisors.
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THE ORGANIZATION, ACQUISITION AND FINANCING PLAN
THE ORGANIZATION
Prior to consummation of the Offering, the Fine Family Shareholders owned
all of the voting stock and approximately 92% of the non-voting stock of IHC,
with the remaining approximately 8% of the non-voting stock in IHC owned by
certain of IHC's officers (excluding Milton Fine). In addition, the Fine Family
Shareholders owned direct and indirect interests in certain of the subsidiaries
and affiliated companies of IHC including its Crossroads, Northridge and Colony
subsidiaries. The Fine Family Shareholders and certain officers (excluding
Milton Fine) and former employees of IHC also owned interests in the Interstone
I, Interstone II and Interstone III partnerships with Blackstone (as described
below in "--Acquisition of Owned Hotels"), which own 14 Owned Hotels. Prior to
consummation of the Offering, all of the foregoing interests will be contributed
to the Company in exchange for Common Stock of the Company. As a result,
following the Offering neither the Fine Family Shareholders nor any of the
Company's officers and employees will have any direct ownership interest in any
of the Company's subsidiaries or any of the Owned Hotels. In addition, prior to
the consummation of the Offering, the Company and its affiliates will effect the
following transactions (collectively with the foregoing transactions, the
"Organization"): (i) all of the outstanding shares of common stock of IHC will
be contributed to the Company by the Fine Family Shareholders in exchange for
Common Stock of the Company and (ii) the Company will issue restricted shares of
Common Stock to certain officers and employees of the Company in exchange for
restricted stock in IHC previously issued to them (see "Management--Stock Option
Grants"). As a result and after giving effect to the Acquisition from Blackstone
described below the Company will own 100% of IHC and its subsidiaries and all of
the equity interests in the Owned Hotels (excluding minority interests owned by
third parties in seven hotels). The Company will issue 13,565,000 shares of
Common Stock pursuant to the Organization to the Fine Family Shareholders and
certain officers and current and former employees of the Company, all of which
will be restricted shares under the Securities Act. See "Shares Eligible for
Future Sale." In addition, the Company will enter into a Registration Rights
Agreement with each of the existing shareholders of the Company prior to the
Offering (collectively, the "Original Shareholders") pursuant to which the
Original Shareholders will have the right to request the Company to register
under the Securities Act (a "Demand Registration") shares of Common Stock held
by them ("Registrable Securities") and, if the Company proposes to register
shares of Common Stock under the Securities Act (other than a registration on
Form S-8 or S-4), the right to request the Company to include in such
registration Registrable Securities held by the Original Shareholders (a
"Piggyback Registration"). The Company has agreed to pay substantially all
expenses in connection with any such Demand Registration or Piggyback
Registration. The Company has also agreed to indemnify the Original Shareholders
against certain liabilities, including liabilities under the Securities Act,
incident to any such Demand Registration or Piggyback Registration.
ACQUISITION OF OWNED HOTELS
In March 1994, Milton Fine, as trustee, and certain officers and former
employees of IHC formed a partnership ("IHC/Interstone") which in turn formed a
series of partnerships (collectively, "Interstone I") with Blackstone to pursue
acquisitions of hotel properties. Interstone I acquired title to seven hotels
and a controlling interest in another hotel, consisting of the Denver Hilton
South, the Huntington Hilton, the Colorado Springs Marriott, the Atlanta
Marriott North Central, the Philadelphia Marriott West, the Houston Marriott
North at Greenspoint, the Lisle Radisson, and the Fort Magruder Inn and
Conference Center. Under the Interstone I partnership agreements, Blackstone
serves as the managing general partner, and IHC manages all eight of the hotel
properties acquired by Interstone I. IHC/Interstone will contribute all of their
interests in Interstone I to the Company prior to consummation of the Offering
(see "--The Organization"), and the Company will purchase the equity interests
of Blackstone in Interstone I pursuant to the Acquisition Agreement described
below.
Following the completion of the Interstone I investment program, in
December 1995 IHC, the Fine Family Shareholders and certain officers of IHC
formed a partnership ("IHC/Interstone II"), which in turn formed another series
of partnerships with Blackstone (collectively, "Interstone II") to acquire a 75%
interest in a portfolio of six hotels owned by an institutional investor,
consisting of the Schaumburg Embassy Suites,
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the Fort Lauderdale Airport Hilton, the Warner Center Marriott, the Boston
Marriott Andover, the Marriott Suites at Valley Forge and the Tysons Corner
Marriott. Under the Interstone II partnership agreements, Blackstone serves as
the managing general partner, and IHC manages all six of the hotel properties
acquired by Interstone II. The following actions may not be taken without the
prior consent of the institutional investor: (i) requiring that the partners
make capital contributions to pay for any discretionary extraordinary expenses;
(ii) selling or refinancing one or more of the properties on or before the third
anniversary of the date Interstone II acquired such property; (iii) incurring
indebtedness materially in excess of 65% of the fair market value of Interstone
II's properties (or such portion of its properties being used as collateral for
the indebtedness); or (iv) transferring any interest in the partnership (other
than to an affiliate), admitting a new partner into the partnership or partially
disposing of property owned by the partnership. The Fine Family Shareholders and
the officers of IHC will contribute all of their interests in Interstone II to
the Company prior to consummation of the Offering (see "--The Organization"),
and the Company will purchase the interest of Blackstone in Interstone II as
described below.
In connection with the formation of Interstone II, IHC and Blackstone
entered into an Option Agreement (the "Option Agreement") pursuant to which IHC
granted to Blackstone the Blackstone Option to purchase a 20% equity interest in
a new company to be formed upon exercise of the Blackstone Option to succeed the
Company and upon payment by Blackstone of the exercise price of $23.3 million.
In connection with the execution of the Acquisition Agreement (as described
below), Blackstone exercised the Blackstone Option conditioned upon the
consummation of the Offering. Upon the closing of the Blackstone Option and
payment of the $23.3 million exercise price, Blackstone will receive $44.8
million of Common Stock based on the initial public offering price and the
Company will pay one of the Blackstone entities a $233,000 arrangement fee which
it agreed to pay to Blackstone pursuant to the Option Agreement for services in
negotiating and arranging the Blackstone Option.
Simultaneously with the completion of the Interstone II investment program,
in December 1995, IHC/Interstone II and Blackstone formed a third series of
partnerships (collectively, "Interstone III") to acquire additional hotel
properties. IHC/Interstone II (which following the consummation of the Offering
will be wholly owned by the Company) initially committed up to $15 million for a
25% interest therein, and Blackstone initially committed up to $45 million for a
75% interest therein. The capital commitments expire on December 31, 1997. No
acquisitions have been made by Interstone III as of the date of this Prospectus.
Pursuant to the Interstone III partnership agreements, all hotel acquisition
opportunities that meet the investment parameters for Interstone III which come
to the attention of the Company or Blackstone must be presented to Interstone
III unless the party identifying the acquisition opportunity certifies that in
its judgment the acquisition by Interstone III would not be feasible,
appropriate or practical. IHC will seek to manage all hotels, if any, acquired
by Interstone III. The Interstone III investment parameters include mid- to
high-quality hotel properties located in growing markets, requiring an equity
investment of at least $5 million and having a total purchase price of at least
$10 million, and which are well-positioned in relation to their competition and
provide a significant growth opportunity through intensive management
repositioning and/or redevelopment. In evaluating prospective acquisitions for
Interstone III, the Company intends to apply generally the same investment
criteria it uses for its own acquisitions, including the projected initial
free-and-clear rate of return and future growth in such rate of return. If one
of the partners of Interstone III considers, but determines not to pursue, a
hotel acquisition opportunity, the other partner may pursue such hotel
acquisition opportunity for its own account. Pursuant to the Acquisition
Agreement, the Company and Blackstone agreed to modify the terms of the
Interstone III investment program effective as of the closing of the Acquisition
to increase IHC/Interstone II's percentage interest and capital commitment in
Interstone III to 51% and $30.6 million, respectively, and to reduce
Blackstone's percentage interest and capital commitment to 49% and $29.4
million, respectively. Following such closing, all major decisions involving
Interstone III will be made jointly by the Company and Blackstone. The Company
and Blackstone will each have a buy-sell option commencing in December 1997.
Interstone III will pay a 1% acquisition fee to the partner introducing each
hotel acquisition made by such partnerships. IHC/Interstone II will contribute
all of its interests in Interstone III to the Company prior to consummation of
the Offering. See"--The Organization."
In March 1996, the Company entered into an Agreement of Purchase and Sale
(the "Acquisition Agreement") to acquire all of Blackstone's interests in
Interstone I (excluding one Interstone I hotel, the Fort
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Magruder Hotel and Conference Center), Interstone II and the Trumbull Hotel
(collectively, the "Acquisition") for a cash purchase price of approximately
$136.4 million plus the assumption of certain indebtedness related to the
Trumbull Hotel. The acquisition of the Trumbull Hotel, however, is conditioned
on Blackstone, which presently holds the mortgage loan secured by the Trumbull
Hotel, acquiring fee title to the Trumbull Hotel from its current owner, a
partnership in which one of the Fine Family Shareholders owns a less than 1%
general partner interest, prior to the closing of the Acquisition. Blackstone
currently does not have an agreement to acquire the Trumbull Hotel and,
accordingly, the acquisition of the Trumbull Hotel has not been reflected in the
pro forma financial information included in this Prospectus. Closing of the
Acquisition will occur upon the earlier of the consummation of the Offering or
July 15, 1996.
In connection with the execution of the Acquisition Agreement, the Company
also entered into a Contribution Agreement (the "Contribution Agreement") with
certain affiliates of the Company and Blackstone pursuant to which such
affiliates agreed to contribute to the Company their interests in the
partnership (the "Fort Magruder Partnership") that owns the Fort Magruder Inn
and Conference Center in consideration of the issuance of $8.3 million of Common
Stock at the initial public offering price (the "Contribution"). Closing of the
Contribution will occur immediately prior to the closing of the Acquisition. If
at the time of the closing of the Contribution the Offering has not been
consummated, the Company will be required to pay Blackstone $8.3 million cash in
lieu of shares of Common Stock.
The simplified organization charts set forth on the following page
summarize the organizational structure of the Company and its predecessors
before the Organization, Acquisition and Offering, and upon consummation of the
Organization, Acquisition and Offering and exercise of the Blackstone Option.
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BEFORE THE ORGANIZATION AND OFFERING
----------------------
I I ----------------
I Fine Family I I I
I Trusts/Management I I Blackstone I
I I I I
---------------------- ----------------
I I I I
I I I 80% I 20% Stock Option
I I I I
I I ---------------------------
I I I I
I I I I
I I I Interstate Hotels I
I I I Corporation I
I I I I
I I I I
I I ---------------------------
I I I
I I I
I I ------------------------------------------------------------------------
I I I I I
I I I ----------------------- I --------------- I
---------------- I I I ---------------- I Fine Family Trusts/ I I I Fine Family I I
I Blackstone I I I I I Blackstone I I Management I I I Trusts I I
---------------- I I I ---------------- ----------------------- I --------------- I
I ----------------- I I I I I I I I
I I I I I ----------------- I I (1) I I (2)
75% I I 25% 2% I 23% I I 75% 75% I I 2% I 23% ------------------
------------------------ ------------------------ ----------------------- I I
I I I I I I I Northridge, I
I Interstone I I I Interstone II I I Interstone III I I Crossroads I
I I I I I I I and Colony I
------------------------ ------------------------ ----------------------- I I
I ------------------
------------------- I
I Institutional I I
I Investor I I
------------------- I
I I
-------------- I
I I
25% I I 75%
----------------------
I I
I Interstone/CGL I
I I
----------------------
AFTER THE ORGANIZATION AND OFFERING
----------------- ----------------------
I I I I ----------------
I Public I I Fine Family I I I
I Shareholders I I Trusts/Management I I Blackstone I
I I I I I I
----------------- ---------------------- ----------------
I I I
I I I
I I I
------------------- I ------------------
I I I
40.4% I 49.8% I I 9.8%
-------------------------
I I
I Interstate Hotels I
I Company I
I (Registrant) I
I I
-------------------------
I
I 100%
I
---------------------------
I I
I I
I Interstate Hotels I
I Corporation I
I I
I I
---------------------------
I
I
-------------------------------------------------------------------------------------------------------
I I I I
I I I ---------------- I
I I I I Blackstone I I
I I I ---------------- I
I I I I I 100%
I 100% I 100% 51% I I 49% ------------------
------------------------ ------------------------ ----------------------- I I
I I I I I I I Northridge, I
I Interstone I I I Interstone II I I Interstone III I I Crossroads I
I I I I I I I and Colony I
------------------------ ------------------------ ----------------------- I I
I ------------------
------------------- I
I Institutional I I
I Investor I I
------------------- I
I I
-------------- I
I I
25% I I 75%
----------------------
I I
I Interstone/CGL I
I I
----------------------
- - ------------------
(1) 25% Voting Interest; 1% Distribution Interest.
(2) 75% Voting Interest; 99% Distribution Interest.
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Pursuant to the Contribution Agreement the Company, Blackstone and the Fine
Family Shareholders agreed to execute a Stockholders Agreement (the "Interstone
Shareholders Agreement") at the closings of the Acquisition and the
Contribution.
Tag Along Rights. The Interstone Shareholders Agreement provides that if
any Fine Family Shareholder seeks to transfer his or its shares of Common Stock,
Blackstone will have the right to participate in such transfer at the same price
and on the same terms and sell a specified number of its shares of Common Stock
based upon the ratio which the number of shares of Common Stock owned by
Blackstone bears to the aggregate number of shares of Common Stock owned by
Blackstone and the selling Fine Family Shareholder. Such tag along rights do not
apply to any transfers made pursuant to a public offering registered under the
Securities Act, to certain permitted transferees, or to any other parties
provided the aggregate number of shares transferred in reliance on this
exception shall not exceed 250,000 shares.
Right of First Offer. Under the Interstone Shareholders Agreement,
Blackstone has agreed not to transfer any of its shares of Common Stock without
first complying with a right of first offer procedure in favor of the Fine
Family Shareholders pursuant to which they have the first right to offer to
purchase the shares of Common Stock Blackstone proposes to sell ("First Offer
Shares"). If no purchase offer is received pursuant to such procedure or if
Blackstone declines a purchase offer made by the Fine Family Shareholders,
Blackstone will be entitled for a period of 120 days to sell all, but (subject
to certain exceptions) not less than all, of the First Offer Shares provided
that if a purchase offer was submitted by the Fine Family Shareholders no such
transfer may be made at a cash per share price less than the purchase offer per
share price. These right of first offer procedures do not apply to transfers
involving a registered public offering or sales made under Rule 144 under the
Securities Act in compliance with the "manner of sale" requirements of Rule
144(f), or to certain permitted transferees.
Registration Rights. The Interstone Shareholders Agreement provides that,
following consummation of the Offering, Blackstone will have the right to
request, up to three times, the Company to register under the Securities Act
shares of Common Stock held by Blackstone (a "Demand Registration") and, if the
Company proposes to register shares of Common Stock under the Securities Act
(other than a registration on Form S-8 or S-4), the right to request the Company
to include in such registration shares of Common Stock held by Blackstone (a
"Piggyback Registration"). Any Demand Registration must be for the registration
of at least 25% of the total number of shares of Common Stock issued to
Blackstone on the date of execution of the Stockholders Agreement or if less,
all shares of Common Stock owned by it. The Company has agreed to pay
substantially all expenses in connection with any Demand Registration or
Piggyback Registration. In any underwritten Demand Registration or Piggyback
Registration, the managing underwriters will have the right, subject to certain
limitations, to limit the number of shares of Common Stock included in such
registration. The Company has agreed to indemnify Blackstone against certain
liabilities, including liabilities under the Securities Act, incident to any
Demand Registration or Piggyback Registration.
Board Representation and Voting. The Interstone Shareholders Agreement
provides that the Fine Family Shareholders will vote their shares of Common
Stock and take other necessary actions from time to time so that the Board
includes at least one individual selected by Blackstone and who is reasonably
acceptable to the Company. The Blackstone director designee also has the right
to serve on an executive committee formed by the Board of Directors.
Blackstone's initial director designee is Thomas J. Saylak. See
"Management--Directors and Executive Officers." The Company and the Fine Family
Shareholders have agreed not to take any action to remove any Blackstone
director designee without cause. Blackstone will vote all of its shares of
Common Stock for the election of the director-candidates nominated by the Board.
Lock-up Agreement. The Interstone Shareholders Agreement provides that,
subject to certain conditions, Blackstone will not sell, transfer, pledge or
otherwise dispose of its shares of Common Stock (except to permitted
transferees) for a period of 180 days following consummation of the Offering,
and upon request of the Company in the case of any non-underwritten public
offering and upon the request of the managing underwriter in the case of an
underwritten public offering, not to sell or offer to sell any shares of Common
Stock, other than shares included in such public offering, during the period
ending 90 days following the date of the final prospectus for such offering.
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Termination. The Interstone Shareholders Agreement provides that the
tag-along rights, right of first offer and registration rights provisions of the
Interstone Shareholders Agreement terminate at the time Blackstone and its
permitted transferees own less than 10% of the shares of Common Stock issued to
Blackstone on the date of the Interstone Shareholders Agreement. The Board
representation and voting provisions of the Interstone Shareholders Agreement
will terminate at the time Blackstone and its permitted transferees own less
than 25% of the shares of Common Stock issued to Blackstone on the date of the
Interstone Shareholders Agreement, provided that Blackstone may terminate these
provisions at any time.
ACQUISITION OF ADDITIONAL HOTELS
In February 1996, the Company signed a letter of intent to purchase an
approximately 13.0% partnership interest in the Don CeSar Beach Resort, a resort
currently managed by the Company.
In April 1996, the Company executed a contract to purchase the Boston
Marriott Westborough Hotel located in Westborough, Massachusetts. The Company
has managed this hotel since 1991. The total acquisition cost including a
reserve for capital renovations is approximately $20.2 million. Closing is
currently scheduled to occur by July 31, 1996. The contract is subject to
certain closing conditions. The Company anticipates using working capital to
finance the acquisition cost. See "Use of Proceeds." There can be no assurance
that this property will be acquired.
THE FINANCING PLAN
The Company will implement a financing plan (the "Financing Plan") in order
to fund the cash payments associated with the Organization, the Acquisition and
the purchase of the Boston Marriott Westborough Hotel, to repay certain mortgage
and other indebtedness of the Company and to provide liquidity for the Company's
operating and growth strategies. Under the Financing Plan, the Company intends
to offer 11,000,000 shares of Common Stock in the Offering, and thereby raise
approximately $220 million in gross proceeds (assuming an initial public
offering price of $20 per share) and enter into a revolving credit facility,
which will include the Term Loan and the Acquisition Facility. In addition, the
Company will receive $23.3 million upon the closing of the Blackstone Option,
which will be applied toward the repayment of notes issued to the existing
shareholders in payment of an S corporation dividend in March 1996. See "Prior S
Corporation Status" and "Certain Relationships and Related
Transactions--Transactions with the Fine Family Shareholders." After applying
the net proceeds from the Offering and borrowings under the Term Loan and
Acquisition Facility and the cash received upon exercise of the Blackstone
Option as set forth below, the Company will have approximately $21.1 million of
cash available plus $100 million of capital available under the Acquisition
Facility (the availability of which will be subject to the terms set forth in
the definitive agreements relating thereto), to fund the Company's operating and
growth strategies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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The following table sets forth the anticipated sources and uses of funds:
(IN MILLIONS)
Sources of Funds:
Pro forma cash prior to the Offering..................... $ 23.5
Common Stock (gross proceeds derived from the
Offering).............................................. 220.0
Term Loan................................................ 195.0
Application of deposits made for acquisitions............ 5.6
Exercise of Blackstone Option............................ 23.3
-------
Total............................................... 467.4
-------
Uses of Funds:
Cash funding of the Acquisition (excluding the possible
acquisition of the Trumbull Hotel)..................... (124.4)
Cash funding of the Boston Marriott Westborough Hotel
acquisition............................................ (20.2)
Repayment of certain mortgage and other indebtedness..... (239.4)
Commissions, fees and expenses:
Offering............................................ (16.8)
Debt financing...................................... (10.9)
Other............................................... (2.6)
Other.................................................... (2.0)
-------
Total............................................. (416.3)
-------
Remaining Proceeds............................................ 51.1
Less:
Repayment of notes to shareholders....................... (30.0)
-------
Pro forma cash after the Offering................... $ 21.1
=======
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers, and their ages and
positions with the Company as of the date of this Prospectus, are as follows:
NAME AGE POSITION
------------------------ ---- ------------------------------------------------
Milton Fine 70 Chairman of the Board
W. Thomas Parrington, Jr. 51 President, Chief Executive Officer and Director
J. William Richardson 48 Chief Financial Officer and Executive Vice
President, Finance and Administration
Robert L. Froman 49 Executive Vice President, Development
Marvin I. Droz 41 Senior Vice President and General Counsel
David J. Fine 32 Director
Michael J. Aranson 51 Director
R. Michael McCullough 57 Director
Thomas J. Saylak 35 Director
Steven J. Smith 55 Director
Milton Fine co-founded the Company in 1961 and served as its Chief
Executive Officer until April 1996. Mr. Fine is a life trustee of the Carnegie
Institute and Chairman of the Board of the Carnegie Museum of Art. He is also a
member of the Board of Directors of the Andy Warhol Museum in Pittsburgh,
Pennsylvania.
W. Thomas Parrington, Jr. has been with the Company since 1981, serving as
Chief Executive Officer since April 1996, President and Director since 1994 and
as Chief Financial Officer prior thereto.
J. William Richardson has served as the Company's Chief Financial Officer
and Executive Vice President of Finance and Administration since 1994. Mr.
Richardson previously served as Controller and Treasurer of the Company since
1988.
Robert L. Froman has been with the Company since 1984, serving as Executive
Vice President of Development since 1986.
Marvin I. Droz has served as Senior Vice President and General Counsel
since joining the Company in 1990.
David J. Fine has been a Director of the Company since 1991. Mr. Fine is an
attorney concentrating his legal practice in the areas of real estate finance
and property acquisition, development and disposition. From 1990 to 1991, Mr.
Fine was an attorney with Gaston and Snow, and from 1991 to 1996, he was an
attorney with Eckert, Seamans, Cherin & Mellott. David J. Fine is the son of
Milton Fine.
Michael J. Aranson has been a Director of the Company since 1991 and is an
Officer and Director of Resource Investments, Inc., which functioned as a
private broker-dealer and investment advisory firm, which he co-founded, from
1975 through 1986. Mr. Aranson and his affiliated entities serve as a general
partner of 67 investment partnerships which own commercial real estate in 33
states.
R. Michael McCullough has been a Director of the Company since 1991. Mr.
McCullough is Senior Chairman of Booz, Allen & Hamilton, Inc., an international
management and technology consulting firm.
Thomas J. Saylak has been a Director of the Company since December 1995.
Mr. Saylak is a Senior Managing Director of The Blackstone Group L.P. Prior to
joining Blackstone in 1993, Mr. Saylak was a principal in Trammell Crow
Ventures, the real estate investment, banking and investment management unit of
the Trammell Crow Company, from 1987 to 1993.
Steven J. Smith has been a Director of the Company since 1991 and has been
a management consultant since 1989.
Board Committees. The Board has established two directorate committees--a
compensation committee (the "Compensation Committee") and an audit review
committee (the "Audit Review Committee"). The
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Compensation Committee is comprised of persons who are not full-time employees
of the Company and are not eligible to receive options or other rights under any
employee stock or other benefit plan (other than plans in which only directors
may participate). The Compensation Committee reviews executive salaries,
administers the bonus, incentive compensation and stock option plans of the
Company and approves the salaries and other benefits of the executive officers
of the Company. In addition, the Compensation Committee consults with the
Company's management regarding pension and other benefit plans and compensation
policies and practices of the Company. The Audit Review Committee reviews the
professional services provided by the Company's independent auditors and the
independence of such auditors from the management of the Company. The Audit
Review Committee also reviews the scope of the audit by the Company's
independent auditors, the annual financial statements of the Company, the
Company's system of internal accounting controls and such other matters with
respect to the accounting, auditing and financial reporting practices and
procedures of the Company as it finds appropriate or as are brought to its
attention, and meets from time to time with members of the Company's internal
audit staff. A majority of the members of the Audit Review Committee are
directors who are not employed by the Company or any of its affiliates.
Director Nomination Procedures. Nominations for election of directors by
the shareholders may be made by the Board or by any shareholder entitled to vote
in the election of directors generally. The Company's By-Laws require that
shareholders intending to nominate candidates for election as directors deliver
written notice thereof to the Secretary of the Company not later than 60 days in
advance of the meeting of shareholders; provided, however, that in the event
that the date of the meeting is not publicly announced by the Company by
inclusion in a report filed with the Securities and Exchange Commission (the
"Commission") or furnished to shareholders, or by mail, press release or
otherwise more than 75 days prior to the meeting, notice by the shareholders to
be timely must be delivered to the Secretary of the Company not later than the
close of business on the tenth day following the day on which such announcement
of the date of the meeting was so communicated. The Company's By-Laws further
require that the notice by the shareholder set forth certain information
concerning such shareholder and the shareholder's nominees, including their
names and addresses, a representation that the shareholder is entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, the class and number of
shares of the Company's stock owned or beneficially owned by such shareholder, a
description of all arrangements or understandings between the shareholder and
each nominee, such other information as would be required to be included in a
proxy statement soliciting proxies for the election of the nominees of such
shareholder and the consent of each nominee to serve as a director of the
Company if so elected. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with these requirements.
Pursuant to the Interstone Shareholders Agreement, the Fine Family Shareholders
have agreed to vote their shares of Common Stock for a director designee
selected by Blackstone. See "The Organization, Acquisition and Financing
Plan--Acquisition of Owned Hotels."
DIRECTOR COMPENSATION
Directors who are not also officers or employees of the Company ("Outside
Directors") will be paid an annual retainer of $15,000 plus $750 for each Board
meeting attended. In addition, members of each directorate committee will be
paid $500 ($650 in the case of the committee chairperson) for each committee
meeting attended on days on which the Board does not also meet. Outside
Directors will also be entitled to participate in the Company's Stock Option
Plan for Non-Employee Directors (the "Director Plan").
The Director Plan will be administered by a committee (the "Director Plan
Committee") of the Board to be comprised of not less than two directors. The
Director Plan Committee will have the power to interpret the Director Plan, to
determine all questions thereunder and to adopt and amend rules and regulations
for the administration of the Director Plan, except that the Director Plan
Committee will have no authority, discretion or power to determine the terms or
timing of options to be granted under the Director Plan.
Subject to adjustment as described below, the number of shares of Common
Stock issued or transferred, plus the number of shares covered by outstanding
options, under the Director Plan may not exceed 100,000. Shares of Common Stock
covered by an option which is cancelled or terminated will again be available to
be issued or to be the subject of a stock option granted under the Director
Plan. The Director Plan Committee will make or provide for adjustments to the
maximum number of shares issuable pursuant to the Director
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Plan, the number and kind of shares of Common Stock or other securities that are
covered by outstanding options and the exercise price applicable to outstanding
options as the Director Plan Committee determines to be equitably required to
prevent dilution or expansion of the rights of optionees which would otherwise
result from any stock dividend, stock split, combination of shares,
recapitalization or other change in the capital structure of the Company, any
merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization,
partial or complete liquidation or other distribution of assets, issuance of
warrants or other rights to purchase securities or any other corporate
transaction or event (any such transaction or event, an "Antidilution Event")
which the Director Plan Committee determines has or may have an effect similar
to any of the foregoing.
Any person who becomes an Outside Director will automatically receive at
such time an option to purchase 5,000 shares of Common Stock at an exercise
price per share equal to the market value of a share of Common Stock on the date
the individual first becomes a director (the options described in this sentence
are hereinafter referred to as "Initial Options"). For purposes of the Director
Plan and the Company's Equity Incentive Plan, "fair market value" is the closing
sale price of the shares of Common Stock as reported on the Composite
Transactions tape of the New York Stock Exchange on the date an Option is
granted or, if there were no sales on such date, on the most recent preceding
date on which sales occurred. Initial Options will become exercisable to the
extent of 34% of the shares covered thereby after the optionee continuously has
served as a director through the next annual shareholders' meeting immediately
following such grant date, and to the extent of an additional 33% of the shares
covered thereby in each of the next two successive years if the optionee has
continuously served as a director in such years. Notwithstanding the foregoing,
if an optionee dies or becomes disabled, all Initial Options held by such
optionee will become immediately exercisable to the extent the Initial Options
would have been exercisable had the optionee remained a director through the
date of the Company's next annual shareholders' meeting. To the extent
exercisable, each Initial Option will be exercisable in whole or in part.
On the date of the annual meeting of the Company's shareholders in each
year, commencing with the 1997 annual meeting, each Outside Director elected at
or continuing his or her term after such meeting automatically will be granted a
non-qualified option to purchase 5,000 shares of Common Stock at an exercise
price per share equal to the fair market value of a share of Common Stock on
such date ("Annual Option"). Annual Options become exercisable on the same basis
as Initial Options.
The exercise price of stock options granted under the Director Plan may be
paid in cash, shares of Common Stock held by the optionee for at least six
months or a combination thereof. The requirement of payment in cash will be
deemed to be satisfied if the optionee provides for a broker who is a member of
the National Association of Securities Dealers, Inc. ("NASD") to sell a
sufficient number of shares of Common Stock being purchased so that the net
sales proceeds equal, at least, the exercise price, and such broker agrees to
deliver the exercise price to the Company not later than the settlement date of
the sale. Shares of Common Stock issued pursuant to the Director Plan may be
authorized but unissued shares or treasury stock. Fractional shares will not be
issued in connection with the exercise of a stock option, and cash in lieu
thereof will be paid by the Company. Each Initial Option and Annual Option (each
an "Option") will terminate on the earliest to occur of (i) three months after
the optionee ceases to serve as a director of the Company for a reason other
than the optionee's death or disability, (ii) one year following the optionee's
death or disability, or (iii) five years from the date the Option becomes
exercisable. Options will not be transferable other than by will or the laws of
descent or distribution and will be exercisable during the lifetime of the
Optionee only by the Optionee or, in the event of the Optionee's incapacity, by
the Optionee's guardian or legal representative acting in a fiduciary capacity.
The Board may at any time amend or terminate the Director Plan.
Notwithstanding the foregoing, (i) except for the adjustments described above,
without the approval of the shareholders of the Company, no such amendment will
increase the maximum number of shares covered by the Director Plan, materially
modify the requirements as to eligibility for participation in the Director Plan
or otherwise cause the Director Plan or any grant made pursuant thereto to cease
to satisfy any applicable condition of Rule 16b-3; (ii) no such amendment will
cause any Director to fail to qualify as a "disinterested person" within the
meaning of Rule 16b-3; (iii) provisions relating to the amount and price of
securities to be awarded and the timing of awards under the Director Plan will
not be amended more than once every six months, other than to comport
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with changes in the Code, the Employment Retirement Income Security Act or the
rules promulgated thereunder; and (iv) no amendment or termination will
adversely affect any outstanding award without the consent of the director
holding such award.
In general, (i) no income will be recognized by an Optionee at the time an
Option is granted and (ii) at the time of exercise of an Option, ordinary income
will be recognized by the Optionee in an amount equal to the difference between
the Option price paid for the shares and the fair market value of the shares on
the date of exercise. To the extent that an Optionee recognizes ordinary income
in the circumstances described above, the Company will be entitled to a
corresponding deduction provided that, among other things, the income meets the
test of reasonableness, is an ordinary and necessary business expense and is not
an "excess parachute payment" within the meaning of Section 280G of the Code.
Options under the Director Plan will be granted automatically. The number
of Initial Options and Annual Options to be granted will depend on the number of
Outside Directors elected to the Board and the timing of any such election. No
Options may be granted under the Director Plan after April 2006.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid to Milton Fine, who served as Chairman of the Board and Chief
Executive Officer in 1995 but is presently Chairman of the Board, and each of
the four other most highly compensated executive officers of the Company in 1995
(collectively, the "Named Executive Officers"). The information in the table
gives effect to the ratio applicable to an exchange of shares of IHC common
stock for shares of Common Stock of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS PAYOUTS COMPENSATION(1)
- - ------------------------------ -------- -------- ---------- ------- ---------------
Milton Fine................... $159,896 $ -- -- $ -- $50,000
Chairman of the Board
W. Thomas Parrington, Jr...... 313,781 378,000 227,906 2,600 18,000
President and Chief
Executive Officer (2)
J. William Richardson......... 216,608 259,929 136,744 3,250 15,000
Chief Financial Officer and
Executive Vice President,
Finance and Administration
Robert L. Froman.............. 225,163 181,666 136,744 -- --
Executive Vice President,
Development
Marvin I. Droz................ 174,720 200,928 91,163 -- --
Senior Vice President and
General Counsel
- - ------------------
(1) Consists entirely of fees paid for services as a director of the Company's
subsidiary, Northridge Insurance Company.
(2) Mr. Parrington was President and Chief Operating Officer during 1995.
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STOCK OPTION GRANTS
The following table sets forth certain information with respect to the
options granted to the Named Executive Officers during 1995 (the "Prior
Options"), all of which were cancelled prior to and in anticipation of the
Offering as described below. The information gives effect to the ratio
applicable to an exchange of shares of common stock of IHC for shares of Common
Stock of the Company.
OPTION GRANTS IN FISCAL YEAR 1995
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK PRICE
UNDERLYING EMPLOYEES IN MARKET PRICE APPRECIATION FOR OPTION TERM
OPTIONS 1995 FISCAL EXERCISE OR AT DATE OF EXPIRATION --------------------------------------
NAME GRANTED YEAR BASE PRICE GRANT(1) DATE 0% 5% 10%
- - -------------- ---------- ------------ ----------- ------------ ---------- ---------- ---------- -----------
Mr. Fine...... -- n/a n/a n/a n/a n/a n/a n/a
Mr.
Parrington.. 227,906 25.5% $ 3.18 $10.65 2013 $1,702,458 $5,116,490 $12,769,573
Mr.
Richardson.. 136,744 15.3 5.52 10.65 2013 701,497 2,749,922 7,341,785
Mr. Froman.... 136,744 15.3 4.39 10.65 2013 856,017 2,904,443 7,496,306
Mr. Droz...... 91,163 10.2 10.65 10.65 2013 -- 1,365,622 4,426,875
- - ------------------
(1) Market price has been determined based upon a valuation performed in 1995
for the Company prior to the Offering and the transactions referred to in
"Business and Properties--Host Funding Transaction" and "The Organization,
Acquisition and Financing Plan."
The following table sets forth information regarding the values of the
Prior Options at December 31, 1995. The information gives effect to the ratio
applicable to an exchange of shares of common stock of IHC for shares of Common
Stock of the Company.
OPTION VALUES AT DECEMBER 31, 1995
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT IN-THE-MONEY OPTIONS
NAME DECEMBER 31, 1995(1) AT DECEMBER 31, 1995(1)(2)
- - ------------------------------------------ -------------------- --------------------------
Mr. Fine.................................. -- --
Mr. Parrington............................ 227,906 $1,702,458
Mr. Richardson............................ 136,744 701,497
Mr. Froman................................ 136,744 856,017
Mr. Droz.................................. 91,163 --
- - ------------------
(1) All Prior Options held by the Named Executive Officers at December 31, 1995
were unexercisable.
(2) Market price has been determined based upon a valuation performed in 1995
for the Company prior to the Offering and the transactions referred to in
"Business and Properties--Host Funding Transaction" and "The Organization,
Acquisition and Financing Plan."
Prior to and in anticipation of the Offering, the Prior Options were
cancelled in consideration of the issuance to the Named Executive Officers and
certain other employees of restricted stock of IHC that will be exchanged for a
total of 635,681 shares of Common Stock (the "Outstanding Restricted Stock"), as
follows: Mr. Droz: 53,833 shares; Mr. Fine: 0 shares; Mr. Froman: 123,574
shares; Mr. Parrington: 219,761 shares; Mr. Richardson: 115,849 shares; and all
other employees: 122,664 shares. The Outstanding Restricted Stock is subject to
restrictions on transfer and rights of repurchase in the event of the employee's
death, disability or termination of employment prior to the consummation of the
Offering. See "--Compensation Plans and Arrangements--Equity Incentive Plan" for
a discussion of the Company's Equity Incentive Plan, under which options and
other equity-based rights have been and in the future may be issued by the
Company.
Outstanding Options. Pursuant to the Company's Equity Incentive Plan, the
Company has granted stock options to purchase an aggregate of 900,000 shares of
Common Stock at an exercise price equal to the initial public offering price.
Each of the options has a ten-year term and becomes exercisable as to one-third
of the
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shares covered thereby on each of the first three annual anniversaries of the
date of grant so long as the holder thereof remains a full-time employee of the
Company, except that the options become immediately exercisable in the event of
the holder's death, disability or termination of employment by the Company for
Cause (as defined) or in the event that any person or group (other than the Fine
Family) becomes the beneficial owner of more than 30% of the outstanding shares
of capital stock of the Company entitled generally to vote in the election of
directors ("Voting Stock") and, within 12 months after such acquisition, there
is a change in a majority of the members of the Board (any such event, a "Change
in Control"). Unexercised options terminate 30 calendar days after the holder's
termination of employment by the Company, except that such period is 180 days in
the event of disability and 360 days in the event of death.
It is the present intention of the Board that additional Option Rights or
other awards will not be awarded until decisions are made regarding compensation
levels for 1997, except in connection with new hires, promotions or awards to
directors who are not employees of the Company or any of its affiliates.
Decisions as to the awarding of Option Rights or other awards are within the
discretion of the Compensation Committee.
Set forth in the table below are the numbers of shares of Common Stock
underlying the stock options granted to (i) the Named Executive Officers, (ii)
all current executive officers as a group, (iii) all current directors who are
not executive officers as a group, and (iv) all employees, including all current
officers who are not executive officers, as a group.
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
------------------------------------------------------------ ------------------
Milton Fine................................................. 150,000
Chairman of the Board
W. Thomas Parrington, Jr.................................... 200,000
President and Chief Executive Officer
J. William Richardson....................................... 93,750
Chief Financial Officer and Executive Vice President,
Finance and Administration
Robert L. Froman............................................ 62,500
Executive Vice President, Development
Marvin I. Droz.............................................. 62,500
Senior Vice President and General Counsel
All directors who are not executive officers, as a group.... --
All employees, including officers who are not executive
officers, as a group...................................... 331,250
COMPENSATION PLANS AND ARRANGEMENTS
Management Bonus Plan. The Company has established a Management Bonus Plan
under which all key management employees who are directly involved in the growth
and success of the Company and its subsidiaries, including the Named Executive
Officers, are eligible to receive bonuses based upon achievement of specified
targets and goals for the Company and the individual employee. Bonus awards may
not exceed 50% to 120% of the executive's annual base salary and 20% of each
executive's bonus award will be payable in the form of shares of Common Stock,
which will be subject to restrictions and forfeiture provisions similar to those
applicable to the Outstanding Restricted Stock. Subject to adjustment as
provided in the Management Bonus Plan, the number of shares that may be issued
or transferred under the Management Bonus Plan may not in the aggregate exceed
250,000 shares, which may be shares of original issuance or treasury shares or a
combination thereof. The Management Bonus Plan is administered by the
Compensation Committee or such other committee of the Board as the Board may
appoint.
Executive Loans. In 1996, the Company loaned $2.0 million and $1.0 million
to, respectively, Messrs. Parrington and Richardson (the "Executive Loans"). The
Executive Loans are fully recourse to the borrowers thereunder, mature on June
30, 2006 and bear interest at the adjusted federal rate. If the executive's
employment is terminated by the Company for cause or by the executive for any
reason other than death,
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disability or circumstances that would entitle the executive to benefits under
his or her change in control agreement (described below), then the executive's
loan would become due and payable in three equal annual installments commencing
with the first anniversary of the date of such termination. If the executive's
employment is terminated for any other reason, the loan plus accrued interest
would be forgiven. If the executive remains employed by the Company, one-tenth
of the principal amount of the Executive Loans plus the interest for that year
will be forgiven on June 30, 1997 and each of the next nine annual anniversaries
thereof.
Deferred Compensation Agreements. In connection with the termination of
certain prior benefit arrangements, each of Messrs. Parrington and Richardson
entered into a deferred compensation agreement. Under the deferred compensation
agreements, $561,000 and $702,000 will be deposited into a grantor trust
established by the Company for the benefit of, respectively, Messrs. Parrington
and Richardson. Such amounts plus accumulated earnings will be paid out in ten
semiannual payments beginning at the earlier of the date of approved retirement
from the Company or the attainment of age 60, provided that the beneficiary
thereof performs consulting services to the Company and does not engage in any
competitive activity. See "Certain Relationships and Related
Transactions--Transaction with Officers and Directors" for a discussion of
certain other loans by the Company.
Executive Retirement Plan. Each of the General Managers of the Company's
hotels which are employees of the Company and other employees of the Company
holding job classifications of Vice President or above, including the Named
Executive Officers (collectively, the "Participants"), is eligible to
participate in the Company's executive retirement plan (the "ERP"). The ERP is
intended to be a non-qualified and unfunded plan maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees. Actual participation in the ERP is determined by
the ERP's administrative committee, which is appointed by the Board.
The Company annually contributes 8% of the Participant's base salary and
may make discretionary contributions of up to an additional 5% of the
Participant's base salary. These discretionary contributions are based on the
Company's net increase in earnings per share in a given year. In addition,
Participants are eligible to designate a portion (specified annually by the
Board or the Compensation Committee) of their cash bonus to be contributed to
the ERP.
The funds contributed by the Company or participants are held in a grantor
trust established by the Company. Unless the administrative committee determines
that the amounts contributed to the ERP on behalf of a participant ("Plan
Benefits") are payable earlier, in general a Participant receives his ERP Plan
Benefits one year after his retirement or termination of employment. Plan
Benefits are paid out in a lump sum and are taxable to the Participant as
ordinary income upon receipt.
Stock Purchase Plan. Each full-time employee who has completed 12
consecutive months of employment with the Company, including the Named Executive
Officers but excluding any employee whose customary employment is not for more
than 20 hours per week or more than five months per calendar year, is eligible
to participate in the Company's stock purchase plan (the "Stock Purchase Plan").
The Stock Purchase Plan is intended to satisfy the requirements of Section 423
of the Code. Under the Stock Purchase Plan, participating employees may elect to
authorize the Company to withhold a minimum of $390 per six-month period or $15
per week and a maximum of 8% of the participating employee's salary, which
amounts will be held in the participating employee's account and used to
purchase from the Company Common Stock on a semi-annual basis at a price equal
to a designated percentage from 85% to 100% of the average closing sales price
for Common Stock as reported on the Composite Transactions Tape of the New York
Stock Exchange (except as described below). The designated percentage will be
established semi-annually by the Compensation Committee, which is responsible
for the administration of the Stock Purchase Plan, except that for the period
ending December 31, 1996 the price will be the Offering Price (subject to the
limitations described below).
The price paid by a participating employee under the Stock Purchase Plan
for shares of Common Stock may not be less than the lesser of (i) 85% of the
fair market value of such shares on the date of the regular offering of the
right to participate in such plan (the "offering date") and (ii) 85% of the fair
market price of such shares on the date the shares are purchased (the "purchase
date"). The fair market value of the shares
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available for purchase by a participating employee (determined as of the
offering date) generally may not exceed $25,000 per calendar year.
Amounts withheld from a participating employee's salary in order to
purchase shares of Common Stock under the Stock Purchase Plan will be taxable as
part of the employee's compensation. However, the purchase of shares under the
Stock Purchase Plan will not itself be a taxable event even if the purchase
price for the shares is less than the fair market value of the shares on either
the offering date or the purchase date. (The difference between the fair market
value, on either the offering date or the purchase date, and the purchase price
is not taxable on the offering date or the purchase date.)
If a participating employee disposes of shares that were purchased under
the Stock Purchase Plan, and the purchase price was less than 100% of the fair
market value of the shares at the offering date, and such disposition is neither
within two years after the offering date nor within one year after the purchase
date (the "holding period"), then the employee will realize ordinary income to
the extent of the lesser of (i) the amount by which the fair market value of the
shares on the offering date exceeded the purchase price and (ii) the amount by
which the fair market value of the shares at the time of disposition exceeds the
price paid for the shares. Any further gain, upon a sale of such shares, is
taxed as a long-term capital gain. To the extent the purchase price exceeded the
amount realized by an employee upon the sale of the shares, the employee will
have a long-term capital loss.
If, during the holding period, an employee disposes of shares that were
purchased under the Stock Purchase Plan, and the purchase price was less than
100% of the fair market value of the shares at the offering date, then the full
amount of the excess of the fair market value of the shares on the purchase date
over the purchase price will be taxable as ordinary income in the year of sale
(regardless of the market price of the shares at the time of disposition), and
any profit above the amount of such excess upon a disposition by sale will be
taxable as a longterm or short-term capital gain (depending upon how long the
employee has held the shares). Any loss, after including the amount of the
excess of the fair market value of the shares on the purchase date over the
purchase price as ordinary income, will be treated as a capital loss.
If, during the holding period, a participating employee sells or disposes
of shares purchased under the Stock Purchase Plan, the Company will be entitled
to a deduction against ordinary income for the full amount of the compensation
that the employee must report as ordinary income. The Company will not be
entitled to any deduction if the employee sells the shares after the holding
period or dies while owning such shares.
If a participating employee dies prior to disposing of shares purchased
under the Stock Purchase Plan, the employee's tax return for the year of death
must include as ordinary income the lesser of (i) the amount by which the fair
market value of the shares on the offering date exceeded the purchase price or
(ii) the amount by which the fair market value of the shares at the time of
death exceeded the purchase price. If such an amount is required to be included
on the employee's tax return for the year of death, an estate tax deduction may
be available to the estate of the deceased employee.
Any dividends paid on shares purchased under the Stock Purchase Plan must
be reported as ordinary income in the year received.
Employees may resell Common Stock acquired under the Stock Purchase Plan
without restrictions; however, any "affiliate" who acquires Common Stock under
the Stock Purchase Plan may resell only upon compliance with Rule 144 of the
commission, except that the two-year holding period requirement of Rule 144 will
not apply. For this purpose, the term "affiliate" includes any participating
employee who directly, or through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Company.
The Stock Purchase Plan reserves 500,000 shares of authorized but unissued
or reacquired Common Stock for purchase thereunder. The Stock Purchase Plan will
remain in effect until terminated at any time by the Board, except that such
termination will be subject to employees' rights to purchase shares in any
outstanding semi-annual offering period.
The Stock Purchase Plan may be amended from time to time by the Board. No
amendment will increase the aggregate number of shares of Common Stock that may
be issued and sold under the Stock Purchase Plan (except for authorizations
pursuant to the antidilution provisions of the Stock Purchase Plan) without
further
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approval by the Company's shareholders. Furthermore, no amendment that would
cause the Stock Purchase Plan to fail to meet the requirements of Section 423 of
the Code will be adopted without shareholder approval.
Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the
"Equity Incentive Plan") is designed to attract and retain qualified officers
and other key employees of the Company. The Equity Incentive Plan authorizes the
grant of options to purchase shares of Common Stock ("Option Rights"), stock
appreciation rights ("Appreciation Rights"), restricted shares ("Restricted
Shares"), deferred shares ("Deferred Shares"), performance shares ("Performance
Shares") and performance units ("Performance Units"). The Compensation Committee
administers the Equity Incentive Plan and determines to whom Option Rights,
Appreciation Rights, Restricted Shares, Deferred Shares, Performance Shares and
Performance Units are to be granted and the terms and conditions, including the
number of shares and the period of exercisability, thereof.
Subject to adjustment as provided in the Equity Incentive Plan, the number
of shares of Common Stock that may be issued or transferred and covered by
outstanding awards granted under the Equity Incentive Plan may not in the
aggregate exceed 2,400,000 shares, which may be shares of original issuance or
treasury shares or a combination thereof. Officers, including officers who are
members of the Board, and other key employees of and consultants to the Company
and its subsidiaries may be selected by the Compensation Committee to receive
benefits under the Equity Incentive Plan.
The Compensation Committee may grant Option Rights that entitle the
optionee to purchase shares of Common Stock at a price equal to or greater or
less than market value on the date of grant, and the Option Rights may be
conditioned on the achievement of specified performance objectives ("Management
Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted Option Rights and Appreciation Rights, in the
aggregate, for more than 100,000 shares during any calendar year. The
Compensation Committee may provide that the option price is payable at the time
of exercise (i) in cash, (ii) by the transfer to the Company of nonforfeitable,
nonrestricted shares of Common Stock that are already owned by the optionee,
(iii) with any other legal consideration the Compensation Committee may deem
appropriate, or (iv) by any combination of the foregoing methods of payment. Any
grant may provide for deferred payment of the option price from the proceeds of
sale through a broker on the date of exercise of some or all of the shares of
Common Stock to which the exercise relates. Any grant may provide for automatic
grant of reload option rights upon the exercise of Option Rights, including
reload option rights, for shares of Common Stock or any other noncash
consideration authorized under the Equity Incentive Plan, except that the term
of any reload option right shall not extend beyond the term of the Option Right
originally exercised. The Compensation Committee has the authority to specify at
the time Option Rights are granted that shares of Common Stock will not be
accepted in payment of the option price until they have been owned by the
optionee for a specified period; however, the Equity Incentive Plan does not
require any such holding period and would permit immediate sequential exchanges
of shares of Common Stock at the time of exercise of Option Rights. Option
Rights granted under the Equity Incentive Plan may be Option Rights that are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Code, or Option Rights that are not intended to so qualify. Any grant
may provide for the payment of dividend equivalents to the optionee on a
current, deferred or contingent basis or may provide that dividend equivalents
be credited against the option price. No Option Right may be exercised more than
ten years from the date of grant. Each grant must specify the period of
continuous employment with, or continuous engagement of consulting services by,
the Company or any subsidiary that is necessary before the Option Rights will
become exercisable and may provide for the earlier exercise of the Option Rights
in the event of a change of control of the Company or other similar transaction
or event. Successive grants may be made to the same optionee regardless of
whether Option Rights previously granted to him or her remain unexercised.
Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Option Rights. An Appreciation Right represents the right to receive
from the Company the difference (the "Spread"), or a percentage thereof not in
excess of 100%, between the base price per share of Common Stock in the case of
a free-standing Appreciation Right, or the option price of the related Option
Right in the case of a tandem Appreciation Right, and the market value of the
Common Stock on the date of exercise of the Appreciation Right. Tandem
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Appreciation Rights may only be exercised at a time when the related Option
Right is exercisable and the Spread is positive, and the exercise of a tandem
Appreciation Right requires the surrender of the related Option Right for
cancellation. A free-standing Appreciation Right must specify a base price,
which may be equal to or greater or less than the fair market value of a share
of Common Stock on the date of grant, must specify the period of continuous
employment, or continuous engagement of consulting services, that is necessary
before the Appreciation Right becomes exercisable (except that it may provide
for its earlier exercise in the event of a change in control of the Company or
other similar transaction or event) and may not be exercised more than ten years
from the date of grant. Any grant of Appreciation Rights may specify that the
amount payable by the Company upon exercise may be paid in cash, Common Stock or
a combination thereof and may either (i) grant to the recipient or retain in the
Compensation Committee the right to elect among those alternatives or (ii)
preclude the right of the participant to receive, and the Company to issue,
Common Stock or other equity securities in lieu of cash. In addition, any grant
may specify that the Appreciation Right may be exercised only in the event of a
change in control of the Company. Subject to adjustment as provided in the
Equity Incentive Plan, no participant shall be granted Option Rights and
Appreciation Rights, in the aggregate, for more than 100,000 shares during any
calendar year. The Compensation Committee may condition the award of
Appreciation Rights on the achievement of one or more Management Objectives and
may provide with respect to any grant of Appreciation Rights for the payment of
dividend equivalents thereon in cash or Common Stock on a current, deferred or
contingent basis.
An award of Restricted Shares involves the immediate transfer by the
Company to a participant of ownership of a specific number of shares of Common
Stock in consideration of the performance of services. The participant is
entitled immediately to voting, dividend and other ownership rights in the
shares. The transfer may be made without additional consideration or for
consideration in an amount that is less than the market value of the shares on
the date of grant, as the Compensation Committee may determine. The Compensation
Committee may condition the award on the achievement of specified Management
Objectives. Restricted Shares must be subject to a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code for a period to be
determined by the Compensation Committee. An example would be a provision that
the Restricted Shares would be forfeited if the participant ceased to serve the
Company as an officer or other salaried employee during a specified period of
years. In order to enforce these forfeiture provisions, the transferability of
Restricted Shares will be prohibited or restricted in a manner and to the extent
prescribed by the Compensation Committee for the period during which the
forfeiture provisions are to continue. The Compensation Committee may provide
for a shorter period during which the forfeiture provisions are to apply in the
event of a change in control of the Company or other similar transaction or
event.
An award of Deferred Shares constitutes an agreement by the Company to
deliver shares of Common Stock to the participant in the future in consideration
of the performance of services, subject to the fulfillment of such conditions
during the Deferral Period (as defined in the Equity Incentive Plan) as the
Compensation Committee may specify. During the Deferral Period, the participant
has no right to transfer any rights covered by the award and no right to vote
the shares covered by the award. On or after the date of any grant of Deferred
Shares, the Compensation Committee may authorize the payment of dividend
equivalents thereon on a current, deferred or contingent basis in either cash or
additional shares of Common Stock. Grants of Deferred Shares may be made without
additional consideration or for consideration in an amount that is less than the
market value of the shares on the date of grant. Deferred Shares must be subject
to a Deferral Period, as determined by the Compensation Committee on the date of
grant, except that the Compensation Committee may provide for a shorter Deferral
Period in the event of a change in control of the Company or other similar
transaction or event. The Compensation Committee may condition the award of
Deferred Shares on the achievement of one or more Management Objectives.
A Performance Share is the equivalent of one share of Common Stock, and a
Performance Unit is the equivalent of $1.00. A participant may be granted any
number of Performance Shares or Performance Units, which shall be specified in
any such grant. The participant will be given one or more Management Objectives
to meet within a specified period (the "Performance Period"). The specified
Performance Period may be subject to earlier termination in the event of a
change in control of the Company or other similar transaction or event. A
minimum level of acceptable achievement will also be established by the
Compensation Committee. If by the end of the Performance Period the participant
has achieved the specified Management Objectives,
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the participant will be deemed to have fully earned the Performance Shares or
Performance Units. If the participant has not achieved the Management Objectives
but has attained or exceeded the predetermined minimum level of acceptable
achievement, the participant will be deemed to have partly earned the
Performance Shares or Performance Units in accordance with a predetermined
formula. To the extent earned, the Performance Shares or Performance Units will
be paid to the participant at the time and in the manner determined by the
Compensation Committee in cash, shares of Common Stock or any combination
thereof. Management Objectives may be described in terms of either Company-wide
objectives or objectives that are related to the performance of the division,
subsidiary, department or function within the Company or a subsidiary in which
the participant is employed or with respect to which the participant provides
consulting services. The Compensation Committee may adjust any Management
Objectives and the related minimum level of acceptable achievement if, in its
judgment, transactions or events have occurred after the date of grant that are
unrelated to the participant's performance and result in distortion of the
Management Objectives or the related minimum level of acceptable achievement.
No Option Right, Appreciation Right or other "derivative security" within
the meaning of Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), is transferable by a participant except
by will or the laws of descent and distribution. Option Rights and Appreciation
Rights may not be exercised during a participant's lifetime except by the
participant or, in the event of the participant's incapacity, by the
participant's guardian or legal representative acting in a fiduciary capacity on
behalf of the participant under state law and court supervision. Notwithstanding
the foregoing, the Compensation Committee, in its sole discretion, may provide
for the transferability of the particular awards under the Equity Incentive Plan
so long as such provisions will not disqualify the exemption for other awards
under Rule 16b-3, if such rule is then applicable to awards under the plan. The
Compensation Committee may specify at the date of grant that all or any part of
the shares of Common Stock that are to be issued or transferred by the Company
upon the exercise of Option Rights or Appreciation Rights, upon the termination
of the Deferral Period applicable to Deferred Shares or upon payment under any
grant of Performance Shares or Performance Units, or are to be no longer subject
to the substantial risk of forfeiture and restrictions on transfer referred to
in the Equity Incentive Plan with respect to Restricted Shares, are subject to
further restrictions on transfer.
The maximum number of shares that may be issued or transferred under the
Equity Incentive Plan, the number of shares covered by outstanding Option Rights
or Appreciation Rights and the option prices or base prices per share applicable
thereto, and the number of shares covered by outstanding grants of Deferred
Shares and Performance Shares, are subject to adjustment in the event of stock
dividends, stock splits, combinations of shares, recapitalizations, mergers,
consolidations, spin-offs, reorganizations, liquidations, issuances of rights or
warrants, and similar transactions or events. In the event of any such
transaction or event, the Compensation Committee may in its discretion provide
in substitution for any or all outstanding awards under the Equity Incentive
Plan such alternative consideration as it may in good faith determine to be
equitable in the circumstances and may require the surrender of all awards so
replaced. The Compensation Committee may also, as it determines to be
appropriate in order to reflect any such transaction or event, make or provide
for such adjustments in the number of shares that may be issued or transferred
and covered by outstanding awards granted under the Equity Incentive Plan and
the number of shares permitted to be covered by Option Rights and Appreciation
Rights, granted to any one participant during any calendar year.
The Compensation Committee must consist of not less than two nonemployee
directors who are "disinterested persons" within the meaning of Rule 16b-3. In
connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan and
related agreements and other documents. The Compensation Committee may make
grants to participants under any or a combination of all of the various
categories of awards that are authorized under the Equity Incentive Plan and may
condition the grant of awards on the surrender or deferral by the participant of
the participant's right to receive a cash bonus or other compensation otherwise
payable by the Company or a subsidiary to the participant. The Equity Incentive
Plan may be amended from time to time by the Compensation Committee but, without
further approval by the shareholders of the Company, no such amendment may (i)
increase the aggregate number of shares of Common Stock that may be issued or
transferred and covered by outstanding
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awards or increase the number of shares which may be granted to any participant
in any calendar year or (ii) otherwise cause Rule 16b-3 to cease to be
applicable to the Equity Incentive Plan.
The following is a brief summary of certain of the federal income tax
consequences of certain transactions under the Equity Incentive Plan based on
federal income tax laws in effect on the date of this Prospectus. This summary
is not intended to be exhaustive and does not describe state or local tax
consequences.
In general: (i) no income will be recognized by an optionee at the time a
nonqualified Option Right is granted; (ii) at the time of exercise of a
nonqualified Option Right, ordinary income will be recognized by the optionee in
an amount equal to the difference between the option price paid for the shares
and the fair market value of the shares if they are nonrestricted on the date of
exercise; and (iii) at the time of sale of shares acquired pursuant to the
exercise of a nonqualified Option Right, any appreciation (or depreciation) in
the value of the shares after the date of exercise will be treated as either
short-term or long-term capital gain (or loss) depending on how long the shares
have been held. No income generally will be recognized by an optionee upon the
grant or qualifying exercise of an incentive stock option. However, for purposes
of calculating the Optionee's alternative minimum tax, if any, the difference
between the fair market value of the shares of Common Stock at exercise and the
option exercise price constitutes an item of adjustment. If shares of Common
Stock are issued to an optionee pursuant to the exercise of an incentive stock
option and no disqualifying disposition of the shares is made by the optionee
within two years after the date of grant or within one year after the transfer
of the shares to the optionee, then upon the sale of the shares any amount
realized in excess of the option price will be taxed to the optionee as
long-term capital gain and any loss sustained will be a long-term capital loss.
If shares of Common Stock acquired upon the exercise of an incentive stock
option are disposed of prior to the expiration of either holding period
described above, the optionee generally will recognize ordinary income in the
year of disposition in an amount equal to any excess of the fair market value of
the shares at the time of exercise (or, if less, the amount realized on the
disposition of the shares in a sale or exchange) over the option price paid for
the shares. Any further gain (or loss) realized by the optionee generally will
be taxed as short-term or long-term gain (or loss) depending on the holding
period. No income will be recognized by a participant in connection with the
grant of an Appreciation Right. When the Appreciation Right is exercised, the
participant normally will be required to include as taxable ordinary income in
the year of exercise an amount equal to the amount of any cash, and the fair
market value of any nonrestricted shares of Common Stock, received pursuant to
the exercise. A recipient of Restricted Shares generally will be subject to tax
at ordinary income rates on the fair market value of the Restricted Shares
reduced by any amount paid by the recipient at such time as the shares are no
longer subject to a substantial risk of forfeiture or restrictions on transfer
for purposes of Section 83 of the Code. However, a recipient who so elects under
Section 83(b) of the Code within 30 days of the date of transfer of the shares
will have taxable ordinary income on the date of transfer of the shares equal to
the excess of the fair market value of the shares (determined without regard to
the risk of forfeiture or restrictions on transfer) over any purchase price paid
for the shares. If a Section 83(b) election has not been made, any dividends
received with respect to Restricted Shares that are subject at that time to a
substantial risk of forfeiture and restrictions on transfer generally will be
treated as compensation that is taxable as ordinary income to the recipient. No
income generally will be recognized upon the grant of Deferred Shares. The
recipient of a grant of Deferred Shares generally will be subject to tax at
ordinary income rates on the fair market value of nonrestricted shares of Common
Stock on the date that the Deferred Shares are transferred to him or her,
reduced by any amount paid by him or her, and the capital gains or loss holding
period for the Deferred Shares will also commence on that date. No income
generally will be recognized upon the grant of Performance Shares or Performance
Units. Upon payment in respect of the earn-out of Performance Shares or
Performance Units, the recipient generally will be required to include as
taxable ordinary income in the year of receipt an amount equal to the amount of
cash received and the fair market value of any nonrestricted shares of Common
Stock received.
To the extent that a participant recognizes ordinary income in the
circumstances described above, the Company or subsidiary for which the
participant performs services will be entitled to a corresponding deduction
provided that, among other things, (i) the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 280G of the Code and is
not disallowed by the $1.0 million limitation on certain executive compensation
and (ii) any applicable reporting obligations are satisfied.
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The total number of stock options or other awards that will be granted
under the Equity Incentive Plan in the future is not determinable at this time.
The Equity Incentive Plan is not intended to be the exclusive means by which the
Company may grant equity-based incentive awards, and the adoption thereof will
in no way limit the ability of the Company to grant equity-based awards outside
the Equity Incentive Plan.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
Each of the Named Executive Officers is a party to an employment agreement
with the Company. Pursuant to the employment agreements, the Named Executive
Officer party thereto is entitled to the greater of either (i) the Named
Executive Officer's salary and bonus for the prior fiscal year or (ii) the
monthly payments which the Named Executive Officer is entitled to under the
executive's employment agreement for the remainder of the term of the agreement,
plus the continuation of health and other welfare benefits for the greater of
one year or the remainder of the term of the agreement, in the event that the
Named Executive Officer is terminated by the Company without Cause (as defined).
In addition, each of the Named Executive Officers is a party to a
change-in-control agreement that provides for the payment of such severance
benefits and the provision of such health and other benefits if the Named
Executive's employment is terminated by the Company, or by the Executive,
following a Change in Control (as defined), except that the severance benefits
payable thereunder are based upon three times the highest salary and bonus that
the Executive received during any of the three years preceding the year in which
the Change in Control occurred and are reduced dollar-for-dollar for salary and
bonus payments made by the Company during any period of continuation of
employment following the Change in Control. In addition, the amounts payable
under the change-in-control agreements are increased to compensate the Named
Executive Officer for any excise tax payable by the Company pursuant to Section
280G of the Code. The Named Executive Officers are not obligated under the
employment agreements or the change-in-control agreements to mitigate damages by
seeking alternative employment; however, the Company's obligations to provide
health and other welfare benefits thereunder terminates if the Named Executive
Officer obtains other full-time employment within three years of such
termination. Each Named Executive Officer's employment agreement will terminate
without further action immediately prior to the payment of any severance
benefits under the Named Executive Officer's change-in-control agreement. The
employment agreements and the change-in-control agreements include provisions
prohibiting the Named Executive Officers from engaging in any Competitive
Activity (as defined) for two year after termination of employment and providing
for the payment of legal fees and expenses incurred in enforcing or defending
such agreements.
All of the foregoing plans and agreements were approved by the Company's
shareholders and the Board prior to the Offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was formed in June 1996 and currently is
composed of R. Michael McCullough (Chairman), Michael J. Aranson and Steven J.
Smith. Prior thereto, decisions regarding the compensation of officers were made
by the Board.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock on the date hereof and as adjusted to reflect the sale
of the shares of Common Stock offered hereby by (i) each person that owns
beneficially more than 5% of the Common Stock, (ii) each director and Named
Executive Officer of the Company, and (iii) all directors and executive officers
of the Company as a group. Unless indicated otherwise, the address for each of
the shareholders named in the table is Foster Plaza 10, 680 Andersen Drive,
Pittsburgh, Pennsylvania 15220. For purposes of the table, a person or group of
persons is deemed to have "beneficial ownership" of any shares as of a given
date which such person has the right to acquire within 60 days after such date.
PERCENTAGE OF
SHARES OWNED
NUMBER -----------------------
OF SHARES PRIOR TO AFTER
OWNED OFFERING OFFERING(1)
----------- -------- -----------
Milton Fine (2).................................... 6,293,797 46.4% 23.1%
Fine Family Trusts (3)............................. 12,796,365 94.3 47.0
Blackstone (4)..................................... 2,655,000 -- 9.8
David J. Fine (5).................................. 6,502,568 47.9 23.9
W. Thomas Parrington, Jr. (6)...................... 256,387 1.9 *
J. William Richardson (7).......................... 140,266 1.0 *
Robert L. Froman (8)............................... 161,067 1.2 *
Marvin I. Droz (9)................................. 78,250 0.6 *
Michael J. Aranson................................. -- -- --
R. Michael McCullough.............................. -- -- --
Thomas J. Saylak................................... -- -- --
Steven J. Smith.................................... -- -- --
All directors and executive officers as a
group (10 persons)............................... 13,432,335 99.0% 49.3%
- - ------------------
* Less than 1%.
(1) Percentages reflect the issuance, concurrent with the consummation of the
Offering, of 2,655,000 shares of Common Stock in connection with the
exercise of the Blackstone Option and the Contribution. See "The
Organization, Acquisition and Financing Plan--Acquisition of Owned Hotels."
(2) Milton Fine may be deemed to beneficially own 6,293,797 of the 12,796,365
shares of Common Stock beneficially owned by the Fine Family Trusts. Milton
Fine disclaims beneficial ownership of such shares.
(3) The "Fine Family Trusts" are comprised of five trusts: one of which Milton
Fine is the trustee and four of which David Fine is the trustee.
(4) Blackstone's address is 345 Park Avenue, New York, New York 10154.
Concurrent with the consummation of the Offering and Contribution, the
Company will issue to Blackstone $53.1 million of Common Stock based on the
initial public offering price (2,655,000 shares assuming an initial public
offering price of $20 per share) in connection with the exercise of the
Blackstone Option and the Contribution. See "The Organization, Acquisition
and Financing Plan--Acquisition of Owned Hotels."
(5) David Fine may be deemed to beneficially own 6,502,568 of the 12,796,365
shares of Common Stock beneficially owned by the Fine Family Trusts. David
J. Fine disclaims beneficial ownership of such shares.
(6) Includes 219,761 shares of Outstanding Restricted Stock, which are subject
to certain risks of forfeiture as described in "Management--Stock Option
Grants."
(7) Includes 115,849 shares of Outstanding Restricted Stock, which are subject
to certain risks of forfeiture as described in "Management--Stock Option
Grants."
(8) Includes 123,574 shares of Outstanding Restricted Stock, which are subject
to certain risks of forfeiture as described in "Management--Stock Option
Grants."
(9) Includes 53,833 shares of Outstanding Restricted Stock, which are subject to
certain risks of forfeiture as described in "Management--Stock Option
Grants."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1995 REORGANIZATION
The Company was incorporated in April 1996 as a Pennsylvania corporation.
In 1995, the Company's predecessors consummated a series of transactions to
aggregate the hotel management businesses owned by the Fine Family Trusts into a
single entity (the "1995 Reorganization"). As a result of the 1995
Reorganization, 59 separate corporations that were wholly owned by the Fine
Family Trusts were merged with and into IHC, effective November 1, 1995, with
IHC being the surviving corporation. Pursuant to the Agreement and Plan of
Merger entered into in connection with the 1995 Reorganization, IHC assumed
liabilities aggregated approximately $7.4 million incurred by Milton Fine and a
$5.6 million liability incurred by the Fine Family Trusts to purchase stock
owned by a deceased shareholder of IHC. These liabilities were satisfied in
December 1995.
TRANSACTIONS WITH THE FINE FAMILY SHAREHOLDERS
During 1993, 1994 and 1995, the Company received payments in the aggregate
amounts of approximately $5.8 million, $6.7 million and $7.9 million,
respectively, for management services provided to 13, 18 and 27 hotels,
respectively, in which the Fine Family Trusts had an ownership interest.
Accounts receivable of approximately $0.7 million, $0.9 million and $1.0 million
were due from these hotels at December 31, 1993, 1994 and 1995, respectively.
During 1993, 1994 and 1995, the Company advanced funds from time to time to
its shareholders, and received repayments of a portion of such advances. At
December 31, 1995, the outstanding amount of such advances to shareholders was
$1.6 million.
In March 1996, the Company made a distribution to its existing shareholders
in the aggregate amount of $30 million. The distribution was paid with
promissory notes payable on September 28, 1997 and bearing interest at 5% per
annum. These notes will be repaid in connection with the Offering from proceeds
of the exercise of the Blackstone Option and working capital. See "The
Organization, Acquisition and Financing Plan--The Financing Plan."
Certain of the Fine Family Shareholders own minority interests in 12 hotels
that are managed but not owned by the Company. Except for one management
agreement pursuant to which the Company waived its management fee for a period
ending no later than November 30, 1998, the Company believes that in each case
the terms on which these hotels are managed are at least as favorable to the
Company as those it could have obtained from unaffiliated persons. The Fine
Family Shareholders have agreed to grant the Company a right of first offer and
a right of first refusal in connection with any proposed transfer of their
interests (subject to certain permitted transfers) in these hotels in
consideration of the Company's agreeing to continue to provide at no cost to the
Fine Family Shareholders certain accounting and administrative services of the
type which the Company is currently providing to the Fine Family Shareholders in
connection therewith.
See "The Organization, Acquisition and Financing Plan" for a description of
additional transactions among the Company and the Fine Family Shareholders in
contemplation of the Offering.
TRANSACTIONS WITH OFFICERS AND DIRECTORS
See "Management--Compensation Plans and Arrangements--Executive Loans" for
a description of loans from the Company to Messrs. Parrington and Richardson.
The Company has made loans from time to time to its senior executives, including
each of the Named Executives other than Mr. Fine. The maximum amount of such
loans to any executive was $210,000 during the three-year period since January
1, 1993. Such loans are payable upon demand and, in general, do not bear
interest until such demand is made. The loans made to Messrs. Parrington and
Richardson are forgiven over time provided certain conditions are satisfied.
TRANSACTIONS WITH BLACKSTONE
See "The Organization, Acquisition and Financing Plan--Acquisition of Owned
Hotels" for a description of certain transactions between the Company and
Blackstone.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Articles of Incorporation provide that the authorized capital
stock of the Company consists of 75,000,000 shares of Common Stock, par value
$.01 per share, and 25,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock"). Upon consummation of the Offering, 27,220,000 shares
of Common Stock will be issued and outstanding (28,870,000 shares if the
over-allotment option is exercised in full), and no shares of Preferred Stock
will be issued or outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per each share owned
of record on all matters voted upon by shareholders. Subject to preferential
rights that may be applicable to any Preferred Stock outstanding, holders of
Common Stock are entitled to receive dividends if, as and when declared by the
Board out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding-up of the Company, holders of
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all liabilities of the Company
and the liquidation preferences of any outstanding Preferred Stock. Holders of
the Common Stock have no preemptive rights and no rights to convert their Common
Stock to any other securities, and there are no redemption or sinking fund
provisions with respect to the Common Stock. The Company is subject to
provisions of the Pennsylvania Business Corporation Law (the "BCL") which
provide for cumulative voting.
PREFERRED STOCK
The Board has the authority to issue the authorized shares of Preferred
Stock in one or more series and to fix the designations, relative powers,
preferences, rights, qualifications, limitations and restrictions of all shares
of each such series, including without limitation dividend rates, conversion
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by the shareholders. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock or adversely affect the rights and powers, including
voting rights, of the holders of Common Stock. The issuance of Preferred Stock
also could have the effect of delaying, deferring or preventing a change in
control of the Company.
CERTAIN CORPORATE GOVERNANCE MATTERS
The Company's Articles of Incorporation and By-Laws provide, in general,
that (i) the number of directors of the Company will be fixed, within a
specified range, by a majority of the total number of the directors of the
Company(assuming no vacancies) or by the holders of at least 80% of the
Company's voting stock, (ii) shareholder action can be taken only at an annual
or special meeting of shareholders and not by written consent in lieu of a
meeting, (iii) except as described below, special meetings of shareholders may
be called only by the Chairman of the Board or by 80% of the total number of
directors of the Company (assuming no vacancies) and the business permitted to
be conducted at any such meeting is limited to that brought before the meeting
by the Company's Chairman of the Board or his specific designee or by 80% of the
total number of directors of the Company (assuming no vacancies), (iv) the
Chairman of the Board may be removed only by the holders of at least 80% of the
Company's voting stock, (v) directors of the Company may be removed only for
cause and (vi) the Board or the Chairman of the Board may postpone and
reschedule any previously scheduled annual or special meeting of shareholders.
The Company's By-Laws also require that shareholders desiring to bring any
business before an annual meeting of shareholders deliver written notice thereof
to the Secretary of the Company not later than 60 days in advance of the meeting
of shareholders; provided, however, that in the event that the date of the
meeting is not publicly announced by the Company by press release or inclusion
in a report filed with the Commission or furnished to shareholders more than 75
days prior to the meeting, notice by the shareholder to be timely must be
delivered to the Secretary of the Company not later than the close of business
on the tenth day following the day on which such announcement of the date of the
meeting was so communicated. The Company's By-Laws further require that the
notice by the shareholder set forth a description of the business to be brought
before the meeting and the reasons for conducting such business at the meeting
and certain information concerning the shareholder proposing such
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business and the beneficial owner, if any, on whose behalf the proposal is made,
including their names and addresses, the class and number of shares of the
Company that are owned beneficially and of record by each of them and any
material interest of either of them in the business proposed to be brought
before the meeting. Upon the written request of the holders of not less than 25%
of the Company's voting stock or upon the request of the Chairman of the Board,
the Board will be required to call a meeting of shareholders for the purpose
specified in such written request and fix a record date for the determination of
shareholders entitled to notice of and to vote at such meeting (which record
date may not be later than 60 days after the date of receipt of notice of such
meeting), provided that (i) in the event that the Board calls an annual or
special meeting of shareholders to be held not later than 90 days after receipt
of any such written request, no separate special meeting of shareholder as so
requested will be required to be convened provided that the purposes of such
annual or special meeting called by the Board include (among others) the
purposes specified in such written request of the shareholders and (ii) unless
otherwise determined by the Chairman of the Board or vote of a majority of the
members of the Board then in office, action may not be taken at a special
meeting of the shareholders in respect of the removal of directors other than
for cause, any change in the number of directors or any other matter affecting
the composition of the Board or any directorate committee.
Under applicable provisions of Pennsylvania law, the approval of a
Pennsylvania company's board of directors, in addition to shareholder approval,
is required to adopt any amendment to the company's articles of incorporation,
but a company's by-laws may be amended either by action of its shareholders or,
if the company's articles of incorporation so provide, its board of directors.
The Company's Articles of Incorporation and By-Laws provide that except as
described below, the provisions summarized above and the provisions relating to
nomination procedures may not be amended by the shareholders, nor may any
provision inconsistent therewith be adopted by the shareholders, without the
affirmative vote of the holders of at least 80% of the Company's voting stock,
voting together as a single class, except that if any such action (other than
any direct or indirect amendments to the provision requiring that shareholder
action be taken at a meeting of shareholders rather than by written consent in
lieu of a meeting) is approved by the holders of a majority, but less than 80%,
of the then-outstanding voting stock (in addition to any other approvals
required by law, including approval by the Board with respect to any amendment
to the Company's Articles of Incorporation), such action will be effective as of
one year from the date of adoption.
The foregoing provisions of the Company's Articles of Incorporation and
By-Laws may discourage or make more difficult the acquisition of control of the
Company by means of a tender offer, open market purchase, proxy contest or
otherwise. These provisions may have the effect of discouraging certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company first to negotiate with the
Company. The Company's management believes that the foregoing measures provide
benefits to the Company and its shareholders by enhancing the Company's ability
to negotiate with the proponent of any unfriendly or unsolicited proposal to
take over or restructure the Company and that such benefits outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
The Company is subject to provisions of the BCL which require that a
merger, consolidation, share exchange or sale of assets between a public
corporation, or a subsidiary thereof, and a shareholder be approved by a
majority of voting shares outstanding other than those held by the "interested
shareholder" (which includes a shareholder who is a party to the proposed
transaction or who is treated differently from other shareholders) unless (i)
the transaction has been approved by a majority of the corporation's directors
who are not affiliated with the interested shareholder and first elected to the
board within 24 months of the vote to approve such transaction, or (ii) the
transaction results in the payment to all other shareholders of an amount not
less than the highest amount paid for the same class of shares by the interested
shareholder. In addition, subject to certain exceptions, a "business
combination" with a shareholder or group of shareholders beneficially owning
more than 20% of the voting power of a public corporation (excluding certain
shares) is prohibited for a five-year period following the date on which the
holder acquired the 20% or greater voting power and, unless certain other
conditions are satisfied, requires approval of a majority of voting shares
outstanding other than those held by such interested shareholder. Moreover, the
BCL provides that any profit realized from the disposition of an equity security
of a corporation by a shareholder who disposes of such security within 18 months
after obtaining control must be returned to the corporation. These and other
related
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BCL provisions may discourage open market purchases of a corporation's stock or
a non-negotiated tender or exchange offer for such stock and, accordingly, may
limit a shareholder's ability to realize a premium over the market price of the
Common Stock in connection with any such transaction.
Because of the length of time that the Fine Family Trusts have held
controlling interests in the Company, these statutory restrictions are not
applicable to such shareholders.
TRANSFER AGENT AND REGISTRAR
The Company has appointed Chemical Mellon Shareholder Services as the
transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering (assuming the over-allotment options are
not exercised), the Company will have 27,220,000 shares of Common Stock
outstanding. Of these shares, all of the shares of Common Stock sold in the
Offering will be freely tradeable by persons other than "affiliates" of the
Company without restriction or limitation under the Securities Act. The
remaining 16,220,000 shares are "restricted securities" within the meaning of
Rule 144 under the Securities Act (the "Restricted Shares") and may not be sold
in the absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption contained in Rule 144.
In general, under Rule 144, if two years have elapsed since the later of
the date of acquisition of Restricted Shares from the Company or any "affiliate"
of the Company, as that term is defined under the Securities Act, the acquiror
or subsequent holder thereof is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the Common Stock then
outstanding or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of Restricted Shares from the Company or from any "affiliate" of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements. The Company
and each of the existing shareholders have agreed that, subject to certain
limited exceptions, for a period of 180 days from the date of this Prospectus
they will not, without the prior written consent of Merrill Lynch, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable for Common Stock.
Prior to the Offering, there has been no public market for the Common
Stock. See "Risk Factors--No Prior Market for the Common Stock." The Company can
make no predictions as to the effect, if any, that future sales of Restricted
Shares, or the availability of such Restricted Shares for sale, or the issuance
of shares of Common Stock upon the exercise of options or otherwise, or the
perception that such sales or exercises could occur, will have on the market
price prevailing from time to time. Sales of substantial amounts of Restricted
Shares in the public market could have an adverse effect on the market price of
the Common Stock.
In connection with the Acquisition, the Company entered into a stockholders
agreement, pursuant to which it granted Blackstone certain registration rights
with respect to the Common Stock. In addition, pursuant to the Organization the
Company granted to the existing shareholders certain registration rights with
respect to the Common Stock. See "The Organization, Acquisition and Financing
Plan--The Organization" and "--Acquisition of Owned Hotels."
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TAXATION
The following is a general discussion of certain material U.S. federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a "Non-U.S. Holder." A "Non-U.S. Holder" is any person other than (i) a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state thereof or (iii) an estate or trust whose income is includable
in gross income for U.S. federal income tax purposes regardless of its source.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date hereof, all of
which may be changed either retroactively or prospectively. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant to Non-U.S. Holders and, in particular, does not address consequences
that may apply in light of their particular circumstances. In addition, the
discussion does not address any tax consequences arising under the laws of any
state, local or foreign taxing jurisdiction.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING AND DISPOSING OF COMMON STOCK.
DIVIDENDS
Subject to the discussion below, dividends paid to a Non-U.S. Holder of
Common Stock generally will be subject to withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. For purposes
of determining whether tax is to be withheld at a 30% rate or at a reduced
treaty rate, the Company ordinarily will presume that dividends paid to an
address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted.
There will be no withholding tax on dividends that are effectively
connected with the Non-U.S. Holder's conduct of a trade or business within the
United States provided such holder provides a valid Internal Revenue Service
(the "IRS") Form 4224 to the payor. Instead, the effectively connected dividends
will be subject to regular U.S. income tax generally in the same manner as if
the Non-U.S. Holder were a U.S. resident. A non-U.S. corporation receiving
effectively connected dividends also may be subject to an additional "branch
profits tax" which is imposed, under certain circumstances, at a rate of 30% (or
such lower rate as may be specified by an applicable treaty) of the non-U.S.
corporation's effectively connected earnings and profits, subject to certain
adjustments.
Proposed regulations were issued by the IRS in April 1996 that would, if
and when finalized, substantially modify the existing rules for withholding of
tax on payments of certain types of income (including dividends) to foreign
persons. These proposals ("Proposed Regulations") would, subject to certain
exceptions and transition rules, be effective for payments made after December
31, 1997, regardless of the date of issuance of the instrument with respect to
which those payments are made. There can be no assurance that the Proposed
Regulations will be finalized (whether before or after their proposed effective
date) or, if they are finalized, that they will not be materially modified from
their current form.
Among the provisions of the Proposed Regulations is a proposal that would
require a Non-U.S. Holder of common stock to certify its residence in a country
with which the United States has an income tax treaty in order to claim the
benefit of a reduced rate of withholding tax under such treaty on dividends paid
with respect to such common stock. In addition, the Proposed Regulations would,
if finalized in their current form, make other changes to the existing
procedures relating to withholding of tax on dividends. Prospective investors
are urged to consult their tax advisors with respect to the possible impact of
the Proposed Regulations on their particular situations.
In addition, under a 1984 proposed regulation (which never entered into
force), in order to claim the benefits of a tax treaty, a Non-U.S. Holder of
Common Stock would have been required to demonstrate entitlement to such
benefits by filing certain forms including a statement from a designated
governmental body of the treaty country. The administrative document whereby the
IRS issued the Proposed Regulations also removes that 1984 proposed regulation.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will be subject to U.S. federal income tax with
respect to gain realized on a sale or other disposition of Common Stock only if
(i) the gain is effectively connected with a trade or business of such holder in
the United States, (ii) in the case of certain Non-U.S. Holders who are
non-resident alien individuals and hold the Common Stock as a capital asset,
such individuals are present in the United States
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for 183 or more days in the taxable year of the disposition or (iii) subject to
the exception below, the Company is or has been a "United States real property
holding corporation" within the meaning of Section 897(c)(2) of the Code at any
time within the shorter of the five-year period preceding such disposition or
such holder's holding period. The Company believes it currently is and will
likely remain a U.S. real property holding corporation. However, gain realized
on a disposition of Common Stock by a Non-U.S. Holder that is not deemed to own
more than five percent of the Common Stock during such period will not be
subject to U.S. federal income tax under the rule described in clause (iii) of
this paragraph, provided that the Common Stock is "regularly traded" (within the
meaning of Section 897(c)(3) of the Code) on an established securities market
located in the United States at the time of disposition. If a Non-U.S. Holder is
deemed to own more than five percent of the Common Stock at any time during the
shorter of the five-year period preceding such disposition or such holder's
holding period, such Non-U.S. Holder may be subject to U.S. federal income tax
upon a disposition of shares of such stock and is urged to consult its tax
advisor.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, each Non-U.S.
Holder. These reporting requirements apply regardless of whether withholding was
reduced or eliminated by an applicable income tax treaty. Copies of this
information also may be made available under the provisions of a specific treaty
or agreement with the tax authorities in the country in which the Non-U.S.
Holder resides or is established.
United States backup withholding (which generally is imposed at the rate of
31% on certain payments to persons that fail to furnish the information required
under the United States information reporting requirements) and information
reporting generally will not apply to dividends paid on Common Stock to a
Non-U.S. Holder at an address outside the United States.
The payment of proceeds from the disposition of Common Stock to or through
a United States office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of proceeds from the disposition of Common Stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting, except as noted below. In the case
of proceeds from a disposition of Common Stock paid to or through a non-United
States office of a broker that is (i) a United States person, (ii) a "controlled
foreign corporation" for United States federal income tax purposes or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a United States trade or business, (a) backup
withholding will not apply unless such broker has actual knowledge that the
owner is not a Non-U.S. Holder, and (b) information reporting will apply unless
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder (and the broker has no actual knowledge to the contrary).
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
DIVIDENDS
The Proposed Regulations would, if finalized in their current form, modify
the foregoing rules to conform them to the rules proposed therein with respect
to withholding tax on dividends. Prospective investors are urged to consult
their tax advisors with respect to the possible impact of these provisions of
the Proposed Regulations on their particular situations.
FEDERAL ESTATE TAX
An individual who is not a citizen or resident (as defined for U.S. federal
estate tax purposes) of the United States at the time of death and who is
treated as the owner of Common Stock, or that has made certain lifetime
transfers of an interest in the Common Stock, will be required to include the
value thereof in his or her gross estate for U.S. federal estate tax purposes
and may be subject to U.S. federal estate tax unless an applicable estate tax
treaty provides otherwise.
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UNDERWRITING
The U.S. Underwriters named below (the "U.S. Underwriters"), acting through
their U.S. representatives, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Montgomery Securities, Morgan Stanley & Co. Incorporated,
Smith Barney Inc. and Credit Lyonnais Securities (USA) Inc. (the "U.S.
Representatives"), have severally agreed, subject to the terms and conditions of
a U.S. Purchase Agreement with the Company (the "U.S. Purchase Agreement"), to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names. The U.S. Underwriters are committed to purchase
all of such shares if any are purchased. Under certain circumstances, the
commitments of non-defaulting U.S. Underwriters may be increased as set forth in
the U.S. Purchase Agreement.
NUMBER
U.S. UNDERWRITERS OF SHARES
------------------------------------------------------------------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Montgomery Securities....................................................
Morgan Stanley & Co. Incorporated........................................
Smith Barney Inc.........................................................
Credit Lyonnais Securities (USA) Inc.....................................
---------
Total....................................................... 9,350,000
========
The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States (the
"International Underwriters" and, together with the U.S. Underwriters, the
"Underwriters") for whom Merrill Lynch International, Credit Lyonnais
Securities, Montgomery Securities, Morgan Stanley & Co. International Limited
and Smith Barney Inc. are acting as International representatives (the
"International Representatives"). Subject to the terms and conditions set forth
in the International Purchase Agreement, and concurrently with the sale of
9,350,000 shares of Common Stock to the U.S. Underwriters pursuant to the U.S.
Purchase Agreement, the Company has agreed to sell to the International
Underwriters, and the International Underwriters have severally agreed to
purchase, an aggregate of 1,650,000 shares of Common Stock. Under certain
circumstances under the International Purchase Agreement, the commitments of
non-defaulting International Underwriters may be increased. The initial public
offering price per share and the total underwriting discount per share will be
identical under the U.S. Purchase Agreement and the International Purchase
Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
each such agreement are purchased. Sales of Common Stock to be purchased by the
U.S. Underwriters in the U.S. Offering and the International Underwriters in the
International Offering are conditioned upon one another.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date hereof to purchase up to an additional 1,402,500 shares at
the initial public offering price per share, less the underwriting discount,
solely to cover over-allotments, if any. To the extent that the U.S.
Underwriters exercise this option, each U.S. Underwriter will be obligated,
subject to certain conditions, to purchase the number of additional shares of
Common Stock proportionate to such U.S. Underwriter's initial amount reflected
in the foregoing table. Additionally, the Company has granted the International
Underwriters an option exercisable for 30 days after the date hereof to purchase
up to an additional 247,500 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments, if any,
on terms similar to those granted to the U.S. Underwriters.
The U.S. Underwriters propose initially to offer the shares to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain selected dealers at such price less a concession not
in excess of $ per share, and the U.S. Underwriters may allow, and such dealers
may reallow, a discount not in excess of $ per share to certain other dealers.
After the completion of the Offering, the offering price, concession and
discount may be changed.
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The U.S. Underwriters and the International Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the International Underwriters and the U.S.
Underwriters of such number of shares of Common Stock as may be mutually agreed.
The price of any Common Stock so sold shall be the initial public offering
price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell Common Stock will not offer to
sell or sell Common Stock to persons who are U.S. or Canadian persons or to
persons they believe intend to resell to persons who are U.S. or Canadian
persons, and the U.S. Underwriters and any dealer to whom they sell Common Stock
will not offer to sell or sell Common Stock to non-U.S. or non-Canadian persons
or to persons they believe intend to resell to non-U.S. or non-Canadian persons,
except, in each case, for transactions pursuant to such agreement.
Prior to the Offering, there has been no active public market for the
Common Stock. The initial public offering price will be determined by
negotiations among the Company and the U.S. Representatives. Among the factors
to be considered in such negotiations are the Company's recent results of
operations, the future prospects of the Company and its industry in general, the
price-earnings ratios and market prices of securities of companies engaged in
activities similar to those of the Company and prevailing conditions in the
securities markets. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offering at or above the initial public offering price.
The Company and its directors, executive officers and existing
shareholders, including Blackstone, have agreed not to sell or otherwise dispose
of any shares of Common Stock (other than shares purchased pursuant to the
Offering or in the open market) or securities convertible into or exercisable
for Common Stock without the prior written consent of Merrill Lynch for a period
of 180 days after the date of this Prospectus. See "Shares Eligible for Future
Sale."
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance. In order to meet the
requirements for listing of the Common Stock on that exchange, the U.S.
Underwriters have undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial owners.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
The Company has agreed to pay Merrill Lynch a fee for advisory services in
connection with the Organization in an amount up to 0.50% of the gross proceeds
of the Offering.
At the request of the Company, the Underwriters have reserved up to 250,000
shares of Common Stock for sale at the initial public offering price to certain
employees, customers, vendors and business associates of the Company who have
expressed an interest in purchasing shares of Common Stock. The number of shares
of Common Stock available to the general public will be reduced to the extent
these persons purchase the reserved shares of Common Stock. Any reserved shares
of Common Stock that are not so purchased by such persons at the closing of the
Offering will be offered by the Underwriters to the general public on the same
terms as the other Common Stock offered by this Prospectus.
The Company is concurrently offering 1,000 shares of Common Stock at the
initial public offering price directly to certain employees and business
associates of the Company pursuant to this Prospectus in certain jurisdictions
outside of the United States where the Underwriters are prohibited by law from
selling the Common Stock. Such shares are included in the 11,000,000 shares
being sold pursuant to this Prospectus. Since such shares are being sold
directly by the Company and not through the Underwriters, no underwriting
discount or commission will be paid to the Underwriters with respect to such
shares.
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Each International Underwriter has represented and agreed that (i) it has
not offered or sold, and will not offer or sell, in the United Kingdom by means
of any document, any shares of the Common Stock other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent (except under circumstances which do not constitute an offer
to the public within the meaning of the Companies Act of 1985), (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act of 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom, and (iii) it
has only issued or passed on, and will only issue or pass on in the United
Kingdom, any document received by it in connection with the issue of the Common
Stock to a person who is of a kind described in Article 9(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a
person to whom such document may otherwise lawfully be issued or passed on.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Jones, Day, Reavis & Pogue, New York, New
York. Certain legal matters in connection with this Offering will be passed upon
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, New York, New
York.
EXPERTS
The balance sheet of the Company as of April 23, 1996; the Combined
Financial Statements of Interstate Hotels Corporation and Affiliates as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and
1995; the Combined Financial Statements of Interstone I Property Partnerships
and Predecessor Entities as of December 31, 1994 and 1995 and for the years
ended December 31, 1993, 1994 and 1995; the Combined Financial Statements of
Interstone/CGL Partners, L.P. and Predecessor Entity as of December 31, 1994,
December 14, 1995 and December 31, 1995 and for the years ended December 31,
1993 and 1994, for the period from January 1, 1995 to December 14, 1995 and for
the period from December 15, 1995 to December 31, 1995; and Financial Statements
of Boston Marriott Westborough Hotel as of December 31, 1994 and 1995 and for
the years ended December 31, 1993, 1994 and 1995 included in this Prospectus
have been included herein in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on their authority as experts in
accounting and auditing.
85
93
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is a part of the Registration Statement, omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement and the exhibits thereto for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. The Registration Statement,
including exhibits filed therewith, may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and will also be available for inspection
and copying at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed
by the Commission. The Common Stock has been approved for listing on the New
York Stock Exchange, subject to official notice of issuance. Reports and other
information concerning the Company may be inspected and copied at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. The Company intends
to furnish its shareholders annual reports containing consolidated financial
statements certified by its independent accountants and quarterly reports
containing unaudited condensed consolidated financial statements for each of the
first three quarters of each fiscal year.
86
94
INTERSTATE HOTELS COMPANY
INDEX TO COMBINED FINANCIAL STATEMENTS
---------
PAGE
----
INTERSTATE HOTELS COMPANY
Report of Independent Accountants.................................................. F-2
Balance Sheet as of April 23, 1996................................................. F-3
Note to Financial Statement........................................................ F-4
INTERSTATE HOTELS CORPORATION AND AFFILIATES
Report of Independent Accountants.................................................. F-5
Combined Balance Sheets as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited)...................................................... F-6
Combined Statements of Income for the years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995 and 1996 (unaudited).................. F-7
Combined Statements of Changes in Equity (Deficit) for the years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1996 (unaudited)....... F-8
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)............. F-9
Notes to Combined Financial Statements............................................. F-10
INTERSTONE I PROPERTY PARTNERSHIPS AND PREDECESSOR ENTITIES
Report of Independent Accountants.................................................. F-24
Combined Balance Sheets as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited)...................................................... F-25
Combined Statements of Operations and Owners' Equity for the years ended December
31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996
(unaudited)..................................................................... F-26
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)............. F-27
Notes to Combined Financial Statements............................................. F-28
INTERSTONE/CGL PARTNERS, L.P. AND PREDECESSOR ENTITY
Report of Independent Accountants.................................................. F-37
Combined Balance Sheets as of December 31, 1994, December 14, 1995 and
December 31, 1995 and March 31, 1996 (unaudited)................................ F-38
Combined Statements of Operations and Predecessor's Equity and Partners' Capital
for the years ended December 31, 1993 and 1994, for the period from January 1,
1995 to December 14, 1995 and for the period from December 15, 1995 to December
31, 1995 and the three months ended March 31, 1995 and 1996 (unaudited)......... F-39
Combined Statements of Cash Flows for the years ended December 31, 1993 and 1994,
for the period from January 1, 1995 to December 14, 1995 and for the period from
December 15, 1995 to December 31, 1995 and the three months ended March 31, 1995
and 1996 (unaudited)............................................................ F-40
Notes to Combined Financial Statements............................................. F-41
BOSTON MARRIOTT WESTBOROUGH HOTEL
Report of Independent Accountants.................................................. F-49
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)..... F-50
Statements of Operations and Equity for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)............. F-51
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1995 and 1996 (unaudited)...................... F-52
Notes to Financial Statements...................................................... F-53
F-1
95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Interstate Hotels Company:
We have audited the accompanying balance sheet of Interstate Hotels Company
(the Company), as of April 23, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of April 23, 1996 in
conformity with generally accepted accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
April 23, 1996
F-2
96
INTERSTATE HOTELS COMPANY
BALANCE SHEET
APRIL 23, 1996
---------
ASSETS
Cash................................................................................ $ 1,000
-------
Total assets.............................................................. $ 1,000
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity:
Common stock, $0.01 par value; 50,000,000 shares authorized; 10,000 shares issued
and outstanding................................................................ 100
Additional paid-in capital........................................................ 900
-------
Total stockholders' equity................................................ 1,000
-------
Total liabilities and stockholders' equity........................... $ 1,000
======
The accompanying note is an integral part of the financial statement.
F-3
97
INTERSTATE HOTELS COMPANY
NOTE TO FINANCIAL STATEMENT
---------
1. BASIS OF PRESENTATION:
Interstate Hotels Company (the Company) was formed on April 19, 1996
pursuant to a plan to pursue an initial public offering (the Offering) of common
stock. Immediately prior to the consummation of the Offering, Interstate Hotels
Corporation (IHC), an entity owned by the stockholders of the Company, will
contribute all of the outstanding shares of common stock of IHC to the Company
in exchange for equal shares of common stock. Prior to the consummation of the
Offering, certain other affiliates which own interests in hotels (the Owned
Hotels) and certain executives of IHC, who own interests in the Owned Hotels,
will contribute all of their interests to the Company in exchange for common
stock. As a result, the Company anticipates owning 100% of its subsidiaries and
all of the interests in the Owned Hotels (excluding minority equity interests in
seven of the hotels).
F-4
98
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Interstate Hotels Corporation:
We have audited the accompanying combined balance sheets of Interstate Hotels
Corporation and Affiliates (the Company) as of December 31, 1994 and 1995, and
the related combined statements of income, changes in equity (deficit) and cash
flows for the three years in the period ended December 31, 1995. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
as of December 31, 1994 and 1995, and the combined results of their operations,
changes in equity (deficit) and cash flows for the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
/S/ COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
April 10, 1996, except for the
third paragraph of Note 9,
as to which the date is April 22, 1996
F-5
99
INTERSTATE HOTELS CORPORATION AND AFFILIATES
COMBINED BALANCE SHEETS
---------
ASSETS
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents............................ $ 6,701,518 $ 14,034,622 $ 12,073,518
Accounts receivable (Note 13)........................ 8,276,693 10,653,952 15,652,224
Net investment in direct financing leases (Note 4)... 242,818 399,266 368,897
Prepaid expenses and other assets.................... 55,182 312,642 432,542
----------- ------------ ------------
Total current assets....................... 15,276,211 25,400,482 28,527,181
Restricted cash (Notes 14 and 15)........................ 1,285,674 2,096,213 1,936,278
Property and equipment, net (Note 5)..................... 1,913,704 1,894,149 1,882,811
Investments in contracts, net of accumulated amortization
of $13,790,408 and $16,933,107 at December 31, 1994 and
1995, respectively, and $17,795,805 at March 31,
1996................................................... 8,752,174 5,860,972 5,048,272
Equity investment in hotel real estate (Note 6).......... -- 12,884,150 13,008,969
Notes receivable (Note 13):
Officers and employees............................... 1,370,537 1,219,313 1,865,134
Affiliates........................................... 879,944 8,717,662 8,717,662
Net investment in direct financing leases (Note 4)....... 681,611 836,010 882,303
Deposits and other assets................................ 581,228 2,492,041 8,156,734
----------- ------------ ------------
Total assets.......................... $30,741,083 $ 61,400,992 $ 70,025,344
=========== ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable:
Trade........................................... 1,116,329 925,085 653,776
Health Trust (Note 11).......................... 539,436 5,505,207 7,480,998
Affiliates (Note 3)............................. 1,220,000 -- --
Accrued payroll and related benefits................. 2,757,565 3,026,235 2,051,859
Other accrued liabilities............................ 2,359,074 5,546,201 9,640,627
Current portion of long-term debt.................... 672,792 362,735 371,003
----------- ------------ ------------
Total current liabilities.................. 8,665,196 15,365,463 20,198,263
Notes payable to stockholders (Note 20).................. -- -- 30,000,000
Long-term debt (Note 7).................................. 3,217,436 35,907,225 35,686,654
----------- ------------ ------------
Total liabilities.......................... 11,882,632 51,272,688 85,884,917
----------- ------------ ------------
Minority interests (Note 6).............................. -- 871,910 880,357
Commitments and contingencies (Note 14)
Equity (deficit):
Common stock (Note 8)................................ 41,600 2,780 2,780
Paid-in capital...................................... 17,880,302 26,883,017 --
Partners' capital.................................... 3,878,442 -- --
Unearned compensation (Note 9)....................... -- (3,262,853) (3,216,142)
Retained deficit..................................... (738,739) (12,736,889) (11,636,905)
Receivable from stockholders (Note 13)............... (2,203,154) (1,629,661) (1,889,663)
----------- ------------ ------------
Total equity (deficit)..................... 18,858,451 9,256,394 (16,739,930)
----------- ------------ ------------
Total liabilities and equity
(deficit)........................... $30,741,083 $ 61,400,992 $ 70,025,344
=========== ============ ============
The accompanying notes are an integral part of the combined financial
statements.
F-6
100
INTERSTATE HOTELS CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF INCOME
---------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Income from managed hotels
(Notes 10 and 13):
Net management fees........ $13,769,936 $16,117,152 $19,604,917 $ 4,308,852 $ 5,033,615
Net management
fees--related party...... 5,459,527 6,167,359 7,417,134 1,537,155 2,149,282
Purchasing fees............ 1,414,311 2,156,817 2,508,507 543,710 801,052
Other fees................. 2,064,457 5,323,707 7,815,689 1,518,075 2,540,263
Insurance income (Note 15)...... 2,855,744 6,961,026 7,672,097 2,341,269 1,772,337
----------- ----------- ----------- ----------- -----------
25,563,975 36,726,061 45,018,344 10,249,061 12,296,549
----------- ----------- ----------- ----------- -----------
Operating expenses:
General and administrative.... 4,762,425 7,651,646 9,271,215 1,949,015 2,304,280
Payroll and related
benefits................... 10,320,729 12,420,248 15,468,422 3,834,433 4,249,381
State and local taxes......... 294,378 649,598 540,088 131,201 34,056
Depreciation and
amortization............... 3,282,044 3,659,132 4,201,266 1,041,543 1,100,888
----------- ----------- ----------- ----------- -----------
18,659,576 24,380,624 29,480,991 6,956,192 7,688,605
----------- ----------- ----------- ----------- -----------
Operating income...... 6,904,399 12,345,437 15,537,353 3,292,869 4,607,944
Other income (expense):
Interest income............... 251,930 302,110 693,263 127,654 365,709
Interest expense.............. (240,136) (271,651) (594,103) (75,419) (853,058)
Equity (loss) income from
investment in hotel real
estate (Note 6)............ -- -- (154,003) -- 124,819
Minority interests' share of
equity loss (income) from
investment in hotel real
estate (Note 6)............ -- -- 10,421 -- (8,447)
Other, net.................... (5,761) 13,547 346,383 -- --
----------- ----------- ----------- ----------- -----------
Net income............ $ 6,910,432 $12,389,443 $15,839,314 $ 3,345,104 $ 4,236,967
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-7
101
INTERSTATE HOTELS CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
---------
RECEIVABLE
COMMON PAID-IN PARTNERS' UNEARNED RETAINED FROM
STOCK CAPITAL CAPITAL COMPENSATION DEFICIT STOCKHOLDERS TOTAL
-------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at December 31,
1992.................. $ 34,000 $17,756,802 $ 1,009,680 -- $ (269,403) $ (1,846,080) $ 16,684,999
Common stock of newly
established
entities............ 22,700 -- -- -- -- -- 22,700
Additional capital
contributions....... -- 99,400 -- -- -- -- 99,400
Partners' capital
contributions....... -- -- 1,000 -- -- -- 1,000
Net increase in
receivable from
stockholders........ -- -- -- -- -- (1,133,320) (1,133,320)
Distributions paid.... -- -- (1,690,000) -- (4,268,646) -- (5,958,646)
Net income............ -- -- 2,641,353 -- 4,269,079 -- 6,910,432
-------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at December 31,
1993.................. 56,700 17,856,202 1,962,033 -- (268,970) (2,979,400) 16,626,565
Effect of
recapitalization
(Note 8)............ (21,500) 21,500 -- -- -- -- --
Common stock of newly
established
entities............ 6,400 -- -- -- -- -- 6,400
Additional capital
contributions....... -- 2,600 -- -- -- -- 2,600
Net decrease in
receivable from
stockholders........ -- -- -- -- -- 776,246 776,246
Distributions paid.... -- -- (4,955,600) -- (5,987,203) -- (10,942,803)
Net income............ -- -- 6,872,009 -- 5,517,434 -- 12,389,443
-------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at December 31,
1994.................. 41,600 17,880,302 3,878,442 -- (738,739) (2,203,154) 18,858,451
Effect of
Reorganization (Note
3).................. (41,583) 4,520,025 (4,478,442) -- -- -- --
Assumption of
liability by
principal
stockholder (Note
3).................. -- 1,220,000 -- -- -- -- 1,220,000
Common stock of newly
established
entities............ 2,600 -- -- -- -- -- 2,600
Partners' capital
contributions....... -- -- 600,000 -- -- -- 600,000
Stock options granted
(Note 9)............ 163 3,262,690 -- $ (3,262,853) -- -- --
Assumption of
stockholders'
liability (Note
3).................. -- -- -- -- (12,994,923) -- (12,994,923)
Net decrease in
receivable from
stockholders........ -- -- -- -- -- 573,493 573,493
Distributions paid.... -- -- -- -- (14,842,541) -- (14,842,541)
Net income............ -- -- -- -- 15,839,314 -- 15,839,314
-------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at December 31,
1995.................. 2,780 26,883,017 -- (3,262,853) (12,736,889) (1,629,661) 9,256,394
-------- ----------- ----------- ------------ ------------ ------------ ------------
Unearned compensation
recognized.......... -- -- -- 46,711 -- -- 46,711
Notes payable to
stockholders
(Note 20)........... -- (26,883,017) -- -- (3,116,983) -- (30,000,000)
Net increase in
receivable from
stockholders........ -- -- -- -- -- (260,002) (260,002)
Distributions paid.... -- -- -- -- (20,000) -- (20,000)
Net income............ -- -- -- -- 4,236,967 -- 4,236,967
-------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at March 31,
1996
(unaudited)........... $ 2,780 $ -- $ -- $ (3,216,142) $(11,636,905) $ (1,889,663) $(16,739,930)
======== ========== ========== ========== =========== ========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-8
102
INTERSTATE HOTELS CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
---------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income........................................ $ 6,910,432 $ 12,389,443 $ 15,839,314 $ 3,345,104 $ 4,236,967
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 3,282,044 3,659,132 4,201,266 1,041,543 1,100,888
Gain on sales of equipment...................... -- (14,682) (9,387) -- --
Financing revenue received on capital leases.... (5,710) (39,089) (92,539) (16,699) (29,766)
Equity loss (income) from investment in hotel
real estate................................... -- -- 154,003 -- (124,819)
Minority interests' share of equity (loss)
income from investment in hotel real estate... -- -- (10,421) -- 8,447
Other income.................................... -- -- (350,000) -- --
Unearned compensation........................... -- -- -- -- 46,711
Cash provided (used) by assets and liabilities:
Accounts receivable............................. (489,170) (2,652,129) (2,377,259) (3,034,694) (4,998,272)
Prepaid expenses and other assets............... 48,989 (16,878) (257,460) (222,471) (119,900)
Accounts payable................................ 108,806 915,261 4,774,527 16,999 1,704,482
Accrued liabilities............................. 533,892 1,076,703 3,455,797 3,738,363 3,120,050
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities..... 10,389,283 15,317,761 25,327,841 4,868,145 4,944,778
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Investments in contracts.......................... (352,000) (2,138,921) (941,817) (89,988) (50,000)
Equity investment in hotel real estate............ -- -- (13,038,153) -- --
(Increase) decrease in notes receivable........... (1,478,595) 528,694 (7,686,494) (216,379) (645,821)
Purchase of property and equipment................ (716,007) (607,354) (438,165) (86,538) (113,837)
Proceeds from sale of management contract......... -- -- 266,041 -- --
Purchase of assets to be leased................... (236,380) (874,697) (606,115) (26,697) (104,945)
Payments received under capital leases............ 26,759 204,688 387,807 47,746 118,797
(Increase) decrease in restricted cash............ (205,308) (813,572) (810,539) (324,326) 159,935
Deposits and other assets......................... (126,558) (150,364) 9,617 31,775 (5,643,214)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities......... (3,088,089) (3,851,526) (22,857,818) (664,407) (6,279,085)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt...................... 1,625,000 3,548,000 35,000,000 -- --
Repayment of long-term debt....................... (1,892,739) (2,641,990) (15,265,191) (250,000) (212,303)
Financing costs paid.............................. (5,000) (33,518) (2,087,611) -- (134,492)
Minority interests................................ -- -- 882,331 -- --
Capital contributions............................. 123,100 9,000 602,600 600,000 --
Funds advanced to stockholders.................... (1,704,136) (1,688,754) (3,244,661) (3,803,810) (260,002)
Repayment of funds advanced to stockholders....... 570,816 2,465,000 3,818,154 1,089,400 --
Distributions paid................................ (5,958,646) (10,942,803) (14,842,541) (1,238,153) (20,000)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by financing
activities.................................. (7,241,605) (9,285,065) 4,863,081 (3,602,563) (626,797)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 59,589 2,181,170 7,333,104 601,175 (1,961,104)
Cash and cash equivalents at beginning of period.... 4,460,759 4,520,348 6,701,518 6,701,518 14,034,622
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 4,520,348 $ 6,701,518 $ 14,034,622 $ 7,302,693 $12,073,518
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 240,136 $ 261,151 $ 507,398 $ 75,419 $ 858,561
=========== =========== =========== =========== ===========
Supplemental disclosure of noncash investing and
financing activities:
Notes payable issued to acquire contracts......... -- $ 1,175,568 -- -- --
=========== =========== =========== =========== ===========
Assumption of liability by principal stockholder
(Note 3)........................................ -- -- $ 1,220,000 -- --
=========== =========== =========== =========== ===========
Assumption of stockholders' liability (Note 3).... -- -- $ 12,994,923 -- --
=========== =========== =========== =========== ===========
Unearned compensation related to stock options
(Note 9)........................................ -- -- $ 3,262,853 -- --
=========== =========== =========== =========== ===========
Notes payable issued to stockholders (Note 20).... -- -- -- -- $30,000,000
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-9
103
INTERSTATE HOTELS CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
---------
1. BASIS OF PRESENTATION:
Interstate Hotels Corporation and Affiliates (the Company) provides
management and other services principally to hotels. The Company's financial
statements combine the accounts of Interstate Hotels Corporation (IHC) and IHC
Member Corporation (IHC Member), which are under common control and ownership.
These combined financial statements also include the following wholly-owned
subsidiaries of the combined entities: Crossroads Hospitality Company, L.L.C.
(Crossroads), Colony Hotels and Resorts Company (Colony), Continental Design and
Supplies Company, L.L.C. (CDS), Hilltop Equipment Leasing Company, L.P.
(Hilltop) and Northridge Insurance Company (Northridge). Also included in these
combined financial statements is the majority-owned consolidated investment in
IHC/Interstone Partnership II, L.P. (IHC/IPII).
IHC, Crossroads and Colony operate properties and collect management fees
pursuant to management agreements with the respective owners of the hotels. It
is the responsibility of IHC, Crossroads and Colony to manage the assets,
collect the revenues and pay the operating expenses and other liabilities of the
respective properties in accordance with the management agreements. In addition,
franchise, accounting and other operating fees are earned for certain properties
as stipulated in the respective agreements. These fees are included in other
fees in the Company's combined statements of income. The accompanying combined
statements of income include only the income earned by the Company from the
operation of the respective properties (refer to Note 10). The properties'
operating assets, liabilities, income and expenses are included in the owners'
financial statements.
CDS, Hilltop and Northridge provide various services to properties operated
by IHC, Crossroads and Colony. CDS provides the hotels with certain purchasing
and project management services and earns fees based on a percentage of the
price of equipment purchased and hotel gift shop revenues. Fees earned by CDS
comprise purchasing fees in the Company's combined statements of income.
Hilltop provides office, computer and telephone equipment under capital and
operating leases to certain hotels with noncancelable terms ranging from one to
sixty months. Rental income earned by Hilltop is included in other fees in the
Company's combined statements of income.
Northridge provides reinsurance to major insurance carriers solely in
connection with the insurance that those carriers provide to the properties
managed by the Company. Northridge also provides direct insurance coverage to
the Company in connection with its self-insured health care program. Income
earned by Northridge comprises insurance income in the Company's combined
statements of income.
IHC/IPII owns an interest in an affiliated partnership that owns six
hotels, five of which are managed by the Company (Note 6).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination and Consolidation:
The combined financial statements of the Company include the accounts of
the entities described in Note 1. All transactions and intercompany balances
among the entities are eliminated.
The principal stockholder of the Company has an ownership interest in
certain hotels and related entities managed by the Company (Note 13). These
entities are not included in the Company's combined financial statements.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. They
F-10
104
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
may also affect the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents:
For purposes of the combined statements of cash flows, all unrestricted,
highly liquid investments purchased with a remaining maturity of three months or
less are considered to be cash equivalents. Substantially all cash and cash
equivalents are maintained at a limited number of financial institutions. No
collateral or other security is provided on cash deposits, other than $100,000
of deposits for each financial institution insured by the Federal Deposit
Insurance Corporation.
Leases:
Assets acquired and subsequently leased to hotels under capital leases are
recorded at the net investment in direct financing leases, which represents the
total future minimum lease payments receivable net of unearned income. When
payments are received, the receivable is reduced and the unearned income is
recognized on a pro-rata basis over the life of the lease.
Property and Equipment:
Property and equipment are recorded at cost and are depreciated on the
straight-line method over their estimated useful lives. Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service or sold are
eliminated from the accounts and any gain or loss thereon is included in
operations.
Investments in Contracts:
Investments in contracts consists of the allocated costs arising from the
purchase and change in control of the Company in 1989 and amounts paid to obtain
management and other contracts. Investments in contracts are being amortized
over the average life of the contracts ranging from three to ten years.
Equity Investment:
The Company accounts for investments in less than 50% owned entities on the
equity method of accounting.
Other Assets:
Other assets in 1995 include financing fees of approximately $2,075,000,
which are being amortized over the term of the related indebtedness of 84
months.
Revenue Recognition:
Net management fees, purchasing fees and other fees are recognized when
earned. Hotels managed under short-term operating leases with certain lessee and
lessor cancellation clauses are treated as management contracts, with the fees
earned from these leases recognized when earned.
Reimbursable Expenses:
The Company is reimbursed for costs associated with providing data
processing, sales and marketing and employee training services to managed
hotels. These revenues are included in other fees and the corresponding costs
are included in general and administrative and payroll and related benefits on
the combined statements of income.
Insurance:
Insurance premiums are recorded as income on a pro-rata basis over the life
of the related policies, as appropriate, with the portion applicable to the
unexpired terms of the policies in force recorded as unearned
F-11
105
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
premium reserves. Losses are provided for reported claims, claims incurred but
not reported and claim settlement expense at each balance sheet date. Such
losses are based on management's best estimate of the ultimate cost of
settlement of claims. Actual liabilities may differ from estimated amounts. Any
changes in estimates are reflected in current earnings.
Income Tax Status:
Prior to the Reorganization on November 1, 1995 discussed in Note 3, the
entities that comprise the Company elected to be treated as either S
Corporations or limited partnerships. Similar elections were made, where
possible, for state income tax purposes.
After the Reorganization, the S Corporation status of Colony was terminated
and for the period subsequent to November 29, 1995 Colony is treated as a C
Corporation for federal and state income tax purposes. All of the other entities
included in the Company are S Corporations, limited liability companies or
partnerships, which are generally all treated as pass-through entities for tax
purposes.
Accordingly, the majority of all federal and state income tax liabilities
and benefits are borne by the respective stockholders or partners. State and
local income tax liabilities and benefits borne by the Company are not
significant and are included in the combined statements of income.
Pursuant to a proposed initial public offering, the Company will terminate
its status as an S Corporation. Accordingly, the Company will be fully subject
to federal and state income taxes.
3. REORGANIZATION:
On November 1, 1995, the Company underwent a capital restructuring in order
to eliminate duplicative administrative and accounting expenses, among other
things. Pursuant to the Reorganization, the Company merged a number of companies
and created subsidiaries for certain other entities which were all under common
control. The Reorganization was accounted for in a manner similar to that used
in pooling-of-interests accounting. Additionally, concurrent with the
Reorganization, the Company assumed a $12,995,000 obligation of the principal
stockholder that was accounted for as a distribution of capital. The Company
also recorded a contribution of capital when indebtedness in the amount of
$1,220,000 that was owed to an affiliate was assumed by the principal
stockholder.
4. NET INVESTMENT IN DIRECT FINANCING LEASES:
Hilltop leases office, computer and telephone equipment to hotels under
capital leases. The following represents the components of the net investment in
direct financing leases:
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
Total future minimum lease payments receivable........... $1,212,082 $1,611,815 $1,635,183
Less unearned income..................................... 287,653 376,539 383,983
----------- ----------- -----------
924,429 1,235,276 1,251,200
Less current portion..................................... 242,818 399,266 368,897
----------- ----------- -----------
$ 681,611 $ 836,010 $ 882,303
=========== =========== ===========
F-12
106
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
4. NET INVESTMENT IN DIRECT FINANCING LEASES--CONTINUED
Future minimum lease payments to be received under these leases for each of
the years ending December 31 are as follows:
1996.................................................................... $ 508,798
1997.................................................................... 430,278
1998.................................................................... 382,245
1999.................................................................... 240,477
2000.................................................................... 50,017
----------
$1,611,815
=========
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
Leasehold improvements................................... $ 656,590 $ 678,142 $ 678,142
Furniture, fixtures and equipment:
Corporate offices...................................... 3,274,097 3,681,498 3,790,783
Assets leased to hotels under operating leases......... 93,134 94,179 98,731
----------- ----------- -----------
4,023,821 4,453,819 4,567,656
Less accumulated depreciation............................ 2,110,117 2,559,670 2,684,845
----------- ----------- -----------
$1,913,704 $1,894,149 $1,882,811
=========== =========== ===========
6. EQUITY INVESTMENT IN HOTEL REAL ESTATE:
IHC/IPII is owned 93.23% by the Company, with the remaining 6.77% owned by
a limited partnership consisting of certain officers of the Company. This
minority partnership contributed $882,331 to IHC/IPII for their interest, which
is reflected as minority interests in the Company's combined balance sheets.
IHC/IPII made a $13,038,000 investment on December 15, 1995 for a 20.45%
interest in Interstone/CGL Partners, L.P. (CGL).
F-13
107
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
6. EQUITY INVESTMENT IN HOTEL REAL ESTATE--CONTINUED
The following represents the summarized financial information of CGL:
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
Assets:
Current.................................................. $ 7,822,863 $ 12,304,855
Noncurrent............................................... 171,741,811 170,445,058
------------ ------------
Total assets..................................... 179,564,674 182,749,913
Liabilities:
Current.................................................. 4,636,254 7,961,176
Other long-term liabilities.............................. 1,212,968 1,212,968
Long-term debt, including current portion................ 120,000,000 119,250,000
------------ ------------
Total liabilities................................ 125,849,222 128,424,144
------------ ------------
Net assets............................................ 53,715,452 54,325,769
Less ownership interest of others.......................... 40,831,302 41,316,800
------------ ------------
Equity investment in hotel real estate..................... $ 12,884,150 $ 13,008,969
============ ============
DECEMBER 15, THREE
(INCEPTION) MONTHS
TO ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
Hotel operations:
Operating revenues....................................... $2,484,498 $19,625,173
Operating costs and expenses............................. 1,386,137 7,695,917
---------- -----------
Operating profit......................................... 1,098,361 11,929,256
Other expenses........................................... 1,025,197 6,615,401
---------- -----------
Hotel income before partnership expenses................... 73,164 5,313,855
Partnership expenses:
Depreciation and amortization............................ 366,181 2,193,605
Interest................................................. 460,000 2,509,933
---------- -----------
826,181 4,703,538
---------- -----------
Net (loss) income.......................................... (753,017) 610,317
Ownership interest of others............................... (599,014) 485,498
---------- -----------
Equity (loss) income of investment in hotel real estate.... $ (154,003) $ 124,819
========== ===========
F-14
108
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
IHC 1995 revolving credit and term loan facility.... -- $35,000,000 $35,000,000
IHC 1994 revolving credit and term loan facility.... $1,948,000 -- --
Colony note payable................................. 875,568 703,300 540,997
Bank notes payable.................................. 766,660 566,660 516,660
Note payable........................................ 300,000 -- --
---------- ----------- -----------
3,890,228 36,269,960 36,057,657
Less current portion................................ 672,792 362,735 371,003
---------- ----------- -----------
$3,217,436 $35,907,225 $35,686,654
========== =========== ===========
On December 13, 1995, IHC entered into a $35,000,000 Term Loan agreement
and a $15,000,000 Revolving Credit Facility (collectively, the Loan Agreement).
The Term Loan is separated into four seven-year notes and one six-year note. The
notes are payable in four quarterly installments of $1,750,000 beginning March
13, 2000, four quarterly installments of $2,625,000 beginning March 13, 2001 and
four quarterly installments of $4,375,000 beginning March 13, 2002. The Loan
Agreement provides for a 1% prepayment penalty in the first year. The Loan
Agreement also provides for mandatory prepayments to be made commencing with the
year ending December 31, 1998 based on excess cash flow, as defined in the
agreement.
Interest is payable subject to IHC's election of the Base Rate Option or
the Euro Rate Option. The Base Rate Option is the lender's prime rate plus 1.75%
for the seven-year notes and prime plus 1.5% for the six-year note. The Euro
Rate Option is LIBOR plus 3.25% for the seven-year notes and LIBOR plus 3% for
the six-year note. IHC elected the Euro Rate Option to be in effect at December
31, 1995, which was equal to 9.125% and 8.875% for the seven-year notes and the
six-year note, respectively.
A portion of the proceeds from the Term Loan was used to repay the
outstanding balance of the IHC 1994 revolving credit and term loan facility. The
proceeds were also used to retire the $12,995,000 obligation assumed pursuant to
the Reorganization (Note 3), fund the $13,038,000 equity investment in hotel
real estate (Note 6) and lend $7,380,000 to an uncombined affiliate (Note 13).
Included in other income on the Company's combined statements of income is a
$350,000 gain resulting from the settlement of the $12,995,000 obligation
assumed from the principal stockholder.
On December 13, 1998, the outstanding balance on the Revolving Credit
Facility will convert to a term loan and will be payable in eight equal
quarterly installments beginning March 13, 1999. No amounts were outstanding on
the Revolving Credit Facility at December 31, 1995. Interest is payable subject
to IHC's election of the Base Rate Option (prime plus 1%) or the Euro Rate
Option (LIBOR plus 2.5%). The available borrowings under the Revolving Credit
Facility are reduced by the letters of credit outstanding (Note 14), which at no
time may exceed $2,500,000. At December 31, 1995, the borrowings available
amounted to approximately $14,513,000. A nonrefundable commitment fee equal to
.375% of the unused portion of the Revolving Credit Facility is payable
quarterly. Additionally, letter of credit fees equal to 2.25% of the outstanding
letters of credit and an annual agent's fee of $40,000 are payable quarterly.
The Loan Agreement contains certain restrictive covenants, including the
maintenance of certain financial ratios, restrictions on the payment of
dividends, limitations on additional indebtedness and certain other reporting
requirements. The stockholders have pledged all of the stock and substantially
all of the assets of the Company as collateral for the Loan Agreement.
In 1993, the Company entered into a loan agreement with a bank. The
agreement provided for aggregate borrowings of $1,000,000 in the form of two
separate notes. One note for $500,000 was borrowed in 1993 and
F-15
109
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT--CONTINUED
is payable in 60 equal monthly installments plus interest at 7.77%. The second
note for $500,000 was borrowed in 1994 and is payable in 60 equal monthly
installments plus interest at 9.08%.
On May 31, 1994, Colony entered into a $1,000,000 non-interest bearing note
with Radisson Hotels International, Inc. in connection with the acquisition of
management and other service contracts. The note is payable in five annual
installments of $200,000 beginning January 1, 1995. At December 31, 1995, the
present value of the interest-free note was $703,300.
On July 12, 1994, IHC entered into a $300,000 7% note payable in connection
with the acquisition of management contracts. The note was paid on July 8, 1995.
Statement of Financial Accounting Standards No. 107 requires disclosure
about the fair value of financial instruments. Based on interest rates currently
available, management believes that the carrying amount of all long-term debt is
a reasonable estimation of fair value.
Aggregate scheduled maturities of long-term debt for each of the five years
ending December 31 and thereafter are as follows:
1996........................................................... $ 362,735
1997........................................................... 371,344
1998........................................................... 297,068
1999........................................................... 238,813
2000........................................................... 7,000,000
Thereafter..................................................... 28,000,000
-----------
$36,269,960
===========
8. COMMON STOCK:
Common stock at December 31, 1995 and March 31, 1996 consisted of the
following:
CLASS "A" CLASS "B"
NUMBER OF SHARES NUMBER OF SHARES
------------------------- -------------------------
PAR ISSUED AND ISSUED AND TOTAL
COMPANY VALUE AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING AMOUNT
--------------------------- ----------- ---------- ----------- ---------- ----------- ------
IHC........................ $ .01 5,000 1,471 495,000 164,326 $1,658
IHC Member................. .01 1,000 100 49,000 12,075 122
Other entities............. .01 - 1.00 11,000 1,000 49,000 39,600 1,000
------ ----- ------- ------- ------
17,000 2,571 593,000 216,001 $2,780
====== ===== ======= ======= ======
The Reorganization discussed in Note 3 resulted in the reclassification of
$41,583 between common stock and paid-in capital and the reclassification of
$4,478,442 between partners' capital and paid-in capital. The above changes have
been reflected in the 1995 combined financial statements.
In 1994, the Company recapitalized certain companies and created two
classes of common stock. Both classes are identical in all respects, including a
ratable share of all dividends and other distributions, except for voting
rights. Holders of Class "A" Common Stock are entitled to one vote per share,
while Class "B" Common Stock is non-voting. The recapitalization resulted in the
reclassification of $21,500 between common stock and paid-in capital, which was
reflected in the 1994 combined financial statements.
The Blackstone Option:
In October 1995, the Company and Blackstone Real Estate Partners, L.P.
(Blackstone) entered into an Option Agreement (the Option Agreement) pursuant to
which the Company granted to Blackstone an option (the Blackstone Option) to
purchase a 20% equity interest in a new company to be formed to succeed the
Company and certain of its affiliates and upon payment by Blackstone of the
exercise price of $23.3 million.
F-16
110
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
8. COMMON STOCK--CONTINUED
The Blackstone Option was exercisable upon the occurrence of certain events,
including the filing by the Company with the Securities and Exchange Commission
of a registration statement relating to an underwritten initial public offering
(IPO) of shares of its common stock. In connection with the execution of the
Blackstone Acquisition Agreement discussed in Note 17, Blackstone exercised the
Blackstone Option conditioned upon the consummation of a proposed IPO. Upon the
closing of the Blackstone Option, Blackstone will receive $44.8 million of
common stock based on the IPO price, and the Company will pay Blackstone a
$233,000 arrangement fee.
9. STOCK OPTIONS:
In December 1995, the Company granted stock options pursuant to a Stock
Option Plan adopted on the same date to certain officers to purchase shares of
common stock. The exercise price for 7,143 of the options was determined based
on an independent market valuation to be fair market value of the stock on the
date of the grant and the exercise price for 9,137 of the options was below fair
market value. The Stock Option Plan also provides for a reserve for future
issuance of 332 options. The options are exercisable in installments over an
eight-year period commencing the earlier of age 60 or 10 years from the date of
the grant. No options were exercisable at December 31, 1995. The officers must
continue in the employment of the Company or serve as consultants to the Company
and not compete against the Company in order for the options to vest. The
unearned compensation related to the stock options granted is being charged to
expense over the vesting period using the market value at the issuance date.
Transactions involving stock options are summarized as follows:
RANGE OF
OPTION
OPTION PRICE
NUMBER PRICE GRANTED AT
OF GRANTED AT BELOW FAIR
OPTIONS FAIR VALUE VALUE
-------- ---------- ----------
Outstanding, December 31, 1994.................... -- -- --
Granted........................................... 16,280 $585 $ 174-303
Exercised......................................... -- -- --
Canceled.......................................... -- -- --
------
Outstanding, December 31, 1995.................... 16,280
======
On April 22, 1996, the Company agreed to cancel the stock options granted
under the Stock Option Plan adopted in December 1995 in consideration of its
agreement to issue to the option holders an aggregate of 8,492 shares of
restricted stock. The restricted stock will be subject to restrictions on
transfer and rights of repurchase in the event of the employee's death,
disability or termination of employment prior to the consummation of a planned
initial public offering (refer to Note 17). As a result of the cancellation of
the stock options and issuance of the restricted stock at no cost to the
recipients, the Company will reverse the unamortized unearned compensation
related to the stock options and record compensation expense of approximately
$9.5 million, based on a market value of $1,123 per share for the Company's
common stock.
10. NET MANAGEMENT FEES:
The Company's management agreements have initial terms that range from one
month to 50 years, expire through the year 2044 and generally are cancelable
under certain conditions. In addition, certain agreements are renewable for
successive terms of one to ten years.
F-17
111
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
10. NET MANAGEMENT FEES--CONTINUED
The management agreements specify the base fees to be earned, which are
generally based on percentages of gross revenues. In certain cases, incentive
fees are earned based on profitability as defined by the management agreements.
The net management fees earned were as follows:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
Base management fees.............. $17,621,678 $19,704,733 $22,792,054 $5,567,682 $6,382,104
Incentive management fees......... 1,347,634 3,118,482 4,752,936 394,019 923,681
Receivership fees................. 757,991 34,519 -- -- --
----------- ----------- ----------- ---------- ----------
19,727,303 22,857,734 27,544,990 5,961,701 7,305,785
Less:
Administrative fees (Note
13)........................ 497,840 487,997 438,805 106,083 122,888
Write-off of uncollectible
base management fees....... -- 85,226 84,134 9,611 --
----------- ----------- ----------- ---------- ----------
$19,229,463 $22,284,511 $27,022,051 $5,846,007 $7,182,897
=========== =========== =========== ========== ==========
11. EMPLOYEE BENEFITS:
The Company participates in the following employee benefit plans:
The IHC Employee Health and Welfare Plan (and related Health Trust)
provides employees of the Company, including hotels under management, with
group health insurance benefits. The Company is self-insured for certain
benefits, subject to certain individual claim and aggregate maximum
liability limits. For the period January 1, 1993 through July 31, 1994, the
Company and each Company-covered hotel paid premiums to the Health Trust
based on the estimated conventional premiums. Effective August 1, 1994,
each Company-covered hotel pays the premiums directly to the Company and
the Company funds the Health Trust. The Company is responsible for any
underfunding of the Health Trust and receives an insurance premium as
discussed in Note 15. The employee portion of the premiums continues to be
paid directly to the Health Trust. These premiums may be prospectively
adjusted to consider actual claims experience. The Company paid and
expensed amounts to the Health Trust related to coverage for employees at
its corporate offices of approximately $346,000 in 1993 and $217,000 in
1994. Amounts paid to the Health Trust since August 1, 1994 have been
eliminated against the insurance income recorded by the Company as
discussed in Note 15. Premiums for employees at the hotels managed by the
Company are borne by the respective hotels. The Health Trust is exempt from
federal income tax under Section 501(c)(9) of the Internal Revenue Code as
a voluntary employees' beneficiary association.
The Company maintains defined contribution savings plans for all
employees of the Company. Eligibility for participation in the plans is
based on the employee's attainment of 21 years of age and on the completion
of one year of service with the Company. Employer contributions are based
on a percentage of employee contributions. Participants may make voluntary
contributions to the plans of up to 6% of their compensation, as defined.
The Company incurred expenses related to employees at its corporate offices
of approximately $99,000 in 1993, $110,000 in 1994 and $124,000 in 1995.
12. DEFERRED COMPENSATION AGREEMENTS:
In December 1995, the Company entered into deferred compensation agreements
with two officers. The agreements provide for the officers to receive certain
future annual payments for an eight year period commencing the earlier of age 60
or 10 years from the date of the agreement. The officers must continue in
F-18
112
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
12. DEFERRED COMPENSATION AGREEMENTS--CONTINUED
the employment of the Company or serve as consultants to the Company and not
compete against the Company in order for the future payments to be earned.
Certain key employees are awarded other deferred compensation based on
performance. Expense recorded for these awards amounted to approximately
$257,000 in 1993, $259,000 in 1994 and $224,000 in 1995.
13. RELATED PARTY TRANSACTIONS:
Income and Accounts Receivable:
Of the total income from managed hotels, approximately $5,793,000 in 1993,
$6,678,000 in 1994, $7,886,000 in 1995 and $1,706,000 and $2,422,000 for the
three months ended March 31, 1995 and 1996, respectively, were earned from
hotels in which the principal stockholder of the Company has an ownership
interest. Accounts receivable of approximately $946,000 and $1,028,000 at
December 31, 1994 and 1995, respectively, and $946,000 at March 31, 1996 were
due from these hotels.
Notes Receivable:
Included in notes receivable from affiliates is a note to IHC/Interstone
Partnership, L.P. (IHC/IPLP), an uncombined affiliate of IHC. On December 13,
1995, IHC/IPLP borrowed $7,380,000 from IHC. The note is payable in four
quarterly installments of $369,000 beginning March 13, 2000, four quarterly
installments of $400,000 beginning March 13, 2001 and four quarterly
installments of $1,076,000 beginning March 13, 2002. The note bears interest at
the rate in effect selected by IHC for the Loan Agreement discussed in Note 7.
Receivable from Stockholders:
The Company advanced approximately $1,133,000 (net of repayments of
approximately $571,000) in 1993, received approximately $776,000 (net of
advances of approximately $1,689,000) in 1994 and received approximately
$573,000 (net of advances of approximately $3,245,000) in 1995 from the
stockholders of the Company. Such advances have no specific repayment terms and
have been classified as a reduction of equity in the combined balance sheets.
Principal Stockholder's Obligation:
In 1989, the principal stockholder purchased the remaining ownership
interest in the Company from a deceased stockholder's estate for approximately
$20,388,000. The purchase was financed through a cash payment of $1,010,064 and
the issuance of two notes in the amount of $17,078,158 and $2,300,000,
respectively. The notes accrued interest at 8.5% and were payable in quarterly
principal and interest payments through 2002. Pursuant to the Reorganization
discussed in Note 3, the Company assumed the remaining obligation under the
notes of approximately $12,995,000, which was accounted for as a capital
distribution. The remaining balance on the notes was paid in December 1995
(refer to Note 7).
Administrative Fee Agreements:
Certain management contracts provide for the payment of administrative fees
to related parties for services rendered and to be rendered in connection with
the development and management of the various hotel facilities. The fees are
based on a percentage of the management fees earned from the operation of the
respective hotel properties.
Administrative fee expenses to related parties included in Note 10 amounted
to $430,000 in 1993, $398,000 in 1994 and $439,000 in 1995. Amounts payable on
these fees are included in accounts payable in the combined balance sheets and
amounted to $59,000 and $111,000 at December 31, 1994 and 1995, respectively.
F-19
113
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
14. COMMITMENTS AND CONTINGENCIES:
The Company accounts for the leases of office space (the office leases
expire through 1999) and certain office equipment (the equipment leases expire
through 1998) as operating leases. Total rental expense amounted to
approximately $685,000 in 1993, $739,000 in 1994 and $912,000 in 1995. The
following is a schedule of future minimum lease payments under these leases:
1996............................................................ $1,014,000
1997............................................................ 916,000
1998............................................................ 76,000
1999............................................................ 41,000
----------
$2,047,000
==========
The Company is required to pay a proportional share of real estate taxes
and operating expenses based on terms specified in one of the office space
leases. This additional rental payment amounted to $110,000 in 1993, $117,000 in
1994 and $132,000 in 1995.
The Company has made guarantees through the issuance of letters of credit
for affiliated entities regarding the payment of certain liabilities of:
Interstate/Ft. Lauderdale Associates, Ltd., the owner of the Ft. Lauderdale
Marriott North Hotel, in the amount of $77,000, IHC in the amount of $400,000
and CDS in the amount of $10,000. The Company also entered into two formal
agreements in 1995 that guarantee the obligation under a letter of credit issued
by affiliated partnerships (Interstone/Atlanta Partnership, L.P.,
Interstone/Colorado Springs Partnership, L.P., Interstone/Conshohocken
Partnership, L.P., Interstone/ Denver Partnership, L.P. and Interstone/Lisle
Partnership, L.P.) that have ownership interests in five hotels managed by IHC
in the amount of $1,250,000, as well as IHC's obligation to the owner of the
Dana Point Resort for certain financial performance thresholds as defined in the
management agreement in the amount of $1,000,000. The obligation to the owner of
the Dana Point Resort also requires IHC to maintain $500,000 in escrow, which is
included in restricted cash in the Company's combined balance sheets. The
Company also provides certain financial guarantees to the lessors of hotels
managed under lease agreements which operate in a manner similar to management
agreements. Presently, management does not expect to incur any claims against
these letters of credit and guarantees.
As discussed in Note 8, the exercise of the Blackstone Option is
conditioned upon the consummation of the proposed IPO. On November 27, 1996, if
the IPO is not consummated, the Company has the right to call the Blackstone
Option, and Blackstone has the right to require the Company to purchase the
Blackstone Option for a cash payment to Blackstone of $10,500,000. If the IPO is
not consummated, the Company will record an expense no later than November 27,
1996 for any cash payment required to purchase the Blackstone Option.
Additionally, the Company has employment contracts with five executives
which provide for payments of two times the individual's salary and bonus for
the prior fiscal year or the remaining salary due under the terms of the
contracts in the event the employee is terminated without cause or if there is a
change-in-control of the Company.
In the ordinary course of business various lawsuits, claims and proceedings
have been or may be instituted or asserted against the Company. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
15. INSURANCE:
The Company provides certain insurance coverage to hotels under terms of
the various management contracts. This insurance is generally arranged through a
third party carrier. Northridge reinsures a portion of the coverage from this
third party primary insurer. The policies provide for layers of coverage with
minimum deductibles and annual aggregate limits. The policies are for coverage
relating to innkeepers' losses
F-20
114
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
15. INSURANCE--CONTINUED
(general/comprehensive liability), wrongful employment practices, garage
keeper's legal liability, replacement cost automobile losses, and real and
personal property and business interruption insurance. All policies are
short-duration contracts and expire through August 1, 1996.
The Company is liable for any deficiencies in the IHC Employee Health and
Welfare Plan (and related Health Trust), which provides employees of the Company
with group health insurance benefits (Note 11). The Company has a Financial
Indemnity Liability Policy with Northridge which indemnifies the Company for its
obligations for the deficiency in the related Health Trust from between $900,000
and $4,000,000. The premiums for this coverage received from the properties
managed by the Company, net of intercompany amounts paid for employees at the
Company's corporate offices, are recorded as direct premiums written. There was
no deficiency in the related Health Trust at December 31, 1995.
Included in partners' capital is $1,285,674 and $1,596,213 at December 31,
1994 and 1995, respectively, of capital restricted under applicable government
insurance regulations. The corresponding asset associated with restricted
capital is included in restricted cash in the combined balance sheets. All other
accounts of Northridge are classified with assets and liabilities of a similar
nature in the combined balance sheets.
The combined statements of income include the insurance income earned and
related insurance expenses incurred by Northridge. The insurance expenses
incurred by Northridge totaled approximately $344,000, $617,000 and $1,089,000
for the years ended December 31, 1993, 1994 and 1995, respectively, and $165,000
and $315,000 for the three months ended March 31, 1995 and 1996, respectively.
The insurance income earned has been reflected as a separate item in the
accompanying combined statements of income and were comprised of the following:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Reinsurance premiums written......... $2,360,509 $3,428,371 $4,981,063 $5,050,000 $4,094,053
Direct premiums written.............. -- 2,581,100 2,477,150 2,876,375 2,860,058
Reinsurance premiums ceded........... -- -- (422,136) -- --
Change in unearned premiums
reserve............................ (235,998) 41,511 (61,693) (5,940,000) (5,181,774)
Loss sharing premiums................ 731,233 910,044 697,713 354,894 --
---------- ---------- ---------- ---------- ----------
Insurance income..................... $2,855,744 $6,961,026 $7,672,097 $2,341,269 $1,772,337
========== ========== ========== ========== ==========
16. CONCENTRATION OF OPERATIONS:
The Company provides services principally to hotels. These hotels are
located in 28 states, the District of Columbia, Canada, Mexico, Israel, the
Caribbean, Thailand and Russia, with the largest concentration of hotels in the
states of Florida and California. These hotels are operated under a number of
franchisers, most predominantly, Marriott International, Inc.
17. SUBSEQUENT EVENTS:
The Company's Board of Directors has authorized management to pursue an
initial public offering (the Offering) by a newly formed company to be
wholly-owned by shareholders of the Company.
The Blackstone Acquisition:
In March 1996, IHC Member entered into an Agreement of Purchase and Sale
(the Blackstone Acquisition Agreement) to acquire (the Blackstone Acquisition)
all of Blackstone's 75% interest in seven hotels and an approximate 54% interest
in CGL for a cash purchase price of approximately $124.4 million.
F-21
115
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
17. SUBSEQUENT EVENTS--CONTINUED
Closing of the Blackstone Acquisition will occur upon the earlier of the
consummation of the Offering or July 15, 1996.
In March 1996, IHC Member made a $5.4 million deposit for the Blackstone
Acquisition, which is included in deposits and other assets in the accompanying
March 31, 1996 combined balance sheet.
In connection with the Blackstone Acquisition, the Company also entered
into a Contribution Agreement in which Blackstone will contribute their 75%
interest in one hotel in consideration for the issuance of $8.3 million of
common stock based on the price of the stock at the Offering, or cash, depending
on the closing date. The closing of the Contribution Agreement will occur
concurrent with the Offering.
Host Funding Transaction:
In April 1996, Crossroads purchased 60,000 shares of common stock of Host
Funding, Inc. (Host), a hotel real estate investment trust, in connection with
Host's initial public offering. In connection therewith, Crossroads entered into
long-term leases with Host to lease five Super 8 Motels owned by Host, which are
cancelable under certain conditions specified in the lease agreements. Rental
payments under each lease consist of base rent, payable quarterly, which is
based upon revenues received from the operation of the leased hotels, plus a
payment based on gross revenues of the hotel. The annual total base rent for
each hotel varies from $112,000 to $265,000. Crossroads will receive a base
management fee of 6% of gross revenues for each hotel after required rental
payments. Additionally, Crossroads has agreed to pledge all of its shares of
Host common stock to collateralize their performance under the leases during the
first three years of their term. Thereafter, the number of shares required to be
pledged declines during the remaining term of the leases.
Acquisition of Additional Hotels:
In February 1996, the Company signed a letter of intent to purchase an
approximately 13% partnership interest in the Don CeSar Beach Resort, a resort
currently managed by the Company.
In March 1996, the Company executed a contract to purchase the Boston
Marriott Westborough located in Westborough, Massachusetts. The Company has
managed this hotel since 1991. The purchase price is $19.5 million payable in
cash, with closing currently scheduled to occur by July 31, 1996, subject to
certain closing conditions. The Company has made a $250,000 deposit against the
purchase price, which is included in deposits and other assets in the
accompanying March 31, 1996 combined balance sheet.
18. UNAUDITED FINANCIAL STATEMENTS:
The unaudited combined balance sheet as of March 31, 1996 and the unaudited
combined statements of income, changes in equity (deficit) and cash flows for
the three months ended March 31, 1995 and 1996, in the opinion of management,
have been prepared on the same basis as the audited combined financial
statements and include all significant adjustments (consisting primarily of
normal recurring adjustments) considered necessary for a fair presentation of
the results of these interim periods. The data disclosed in these notes to the
combined financial statements for these periods are also unaudited. Operating
results for the three month period ended March 31, 1996 is not necessarily
indicative of the results for the entire year.
19. NEW ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The
new standard is effective for fiscal year 1996. Management believes that the
implementation of the standard will not have a material effect on its combined
financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." The new standard, which is effective for fiscal year 1996,
requires the Company to adopt either a recognition
F-22
116
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
19. NEW ACCOUNTING PRONOUNCEMENTS--CONTINUED
method or a disclosure-only approach of accounting for stock based employee
compensation plans. Management intends to adopt the disclosure-only approach
and, as such, does not believe that the implementation of the standard will have
a material effect on its combined financial statements.
20. NOTES PAYABLE TO STOCKHOLDERS:
In March 1996, the Company made a capital distribution by issuing notes
payable to the stockholders of IHC in the aggregate amount of $30,000,000. The
notes accrue interest at a rate of 5%, payable quarterly in arrears, with the
principal amount, plus any accrued interest, due and payable in September 1997.
The combined balance sheet as of March 31, 1996 reflects a distribution to the
stockholders and corresponding liability for the notes payable.
F-23
117
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Interstone I Property Partnerships:
We have audited the accompanying combined balance sheets of Interstone I
Property Partnerships (the Partnerships) and Predecessor Entities (as defined in
Note 1) as of December 31, 1994 and 1995 and the related combined statements of
operations and owners' equity and cash flows for each of the three years in the
period ended December 31, 1995. These combined financial statements are the
responsibility of the Partnerships' and Predecessor Entities' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the combined financial statements of the
Predecessor Entities have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a Registration Statement of Interstate Hotels Company and are not intended to be
a complete presentation of the Predecessor Entities.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Interstone
I Property Partnerships and Predecessor Entities as of December 31, 1994 and
1995 and the combined results of their operations and cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
April 10, 1996
F-24
118
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED BALANCE SHEETS
---------
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 7,547,516 $ 9,659,554 $ 5,681,625
Restricted cash (Note 2)......................... 685,149 508,459 890,824
Accounts receivable.............................. 3,725,508 4,341,929 7,202,585
Due from affiliates.............................. 626,387 -- --
Inventories (Note 4)............................. 715,673 651,548 612,291
Prepaid expenses and other assets................ 546,563 644,209 1,236,191
------------ ------------ ------------
Total current assets........................ 13,846,796 15,805,699 15,623,516
Restricted cash (Note 2)
Property and equipment........................... 3,724,731 1,337,293 1,927,936
Renovations...................................... 758,396 3,347,593 2,569,496
Property and equipment, net (Notes 1, 5 and 7)..... 139,535,123 150,597,558 150,276,540
Deferred expenses (Note 6)......................... 934,857 3,108,961 2,907,371
------------ ------------ ------------
Total assets................................ $158,799,903 $174,197,104 $173,304,859
============ ============ ============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable................................. 3,940,977 3,033,068 4,099,912
Accrued liabilities:
Real estate taxes............................. 1,308,662 1,948,622 1,734,884
Salaries and benefits......................... 2,199,684 2,716,995 1,992,088
Royalties and fees (Note 3)................... 136,236 337,430 303,543
Management fees (Note 3)...................... 103,157 207,013 264,533
Other......................................... 3,205,713 2,865,170 2,610,454
Customer deposits................................ 535,858 504,171 1,531,777
Interest payable................................. 649,425 1,022,845 981,102
Due to affiliates................................ 648,437 -- --
Current portion of long-term debt (Note 7)....... 44,766,516 1,417,217 1,417,217
------------ ------------ ------------
Total current liabilities................... 57,494,665 14,052,531 14,935,510
Long-term debt (Note 7)............................ 74,381,625 113,719,504 113,506,225
Deferred taxes..................................... 126,500 -- --
------------ ------------ ------------
Total liabilities........................... 132,002,790 127,772,035 128,441,735
Commitments and contingencies (Note 14)............
Owners' equity..................................... 26,797,113 46,425,069 44,863,124
------------ ------------ ------------
Total liabilities and owners' equity........ $158,799,903 $174,197,104 $173,304,859
============ ============ ============
The accompanying notes are an integral part of the combined financial
statements.
F-25
119
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
---------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
Revenues:
Rooms...................... $ 29,965,305 $ 40,612,704 $ 53,450,530 $12,851,402 $13,024,152
Food and beverage.......... 22,298,100 28,314,060 35,351,678 8,076,865 8,849,996
Telephone.................. 1,390,266 1,790,750 2,501,378 589,054 698,904
Gift shop and other........ 1,323,639 1,739,119 2,089,690 469,407 400,845
Office building lease...... -- 1,163,712 2,550,325 587,197 702,992
------------ ------------ ------------ ----------- -----------
54,977,310 73,620,345 95,943,601 22,573,925 23,676,889
Departmental costs and
expenses................... 28,026,057 34,481,202 42,247,524 10,820,450 10,177,959
------------ ------------ ------------ ----------- -----------
Departmental income
(Note 8).............. 26,951,253 39,139,143 53,696,077 11,753,475 13,498,930
------------ ------------ ------------ ----------- -----------
Other expenses (Note 3):
Administration and
general................. 4,649,691 6,481,683 9,210,839 2,100,580 2,197,645
Management fees............ 1,031,121 1,506,734 2,234,306 502,916 672,124
Royalties.................. 1,455,729 2,124,273 2,551,021 559,680 684,010
Advertising and sales...... 3,398,061 4,413,912 6,079,721 1,456,944 1,624,393
Repairs and maintenance.... 2,734,284 3,580,133 4,545,730 1,121,499 1,103,681
Heat, power and light...... 2,901,874 3,742,593 4,549,014 1,045,068 1,170,272
Insurance and taxes........ 2,236,296 2,797,763 4,403,629 989,962 1,122,606
Depreciation and
amortization............ 6,877,251 7,840,428 10,250,714 2,427,513 2,704,320
Other...................... 231,023 288,489 1,275,986 247,749 300,965
------------ ------------ ------------ ----------- -----------
25,515,330 32,776,008 45,100,960 10,451,911 11,580,016
------------ ------------ ------------ ----------- -----------
1,435,923 6,363,135 8,595,117 1,301,564 1,918,914
Interest expense (Note 7).... 6,381,912 7,852,173 9,605,070 2,170,198 2,509,728
------------ ------------ ------------ ----------- -----------
Loss before
extraordinary items... (4,945,989) (1,489,038) (1,009,953) (868,634) (590,814)
Extraordinary items-
extinguishments of debt
(Note 7)................... 25,795,725 18,381,077 -- -- --
------------ ------------ ------------ ----------- -----------
Net income (loss)....... 20,849,736 16,892,039 (1,009,953) (868,634) (590,814)
Owners' equity:
Beginning of period........ (22,131,943) (1,192,017) 26,797,113 26,797,113 46,425,069
Capital contributions...... 156,386 40,431,885 45,273,069 24,016,806 --
Capital distributions...... (66,196) (17,901) (29,486,579) (2,550,498) (971,131)
Elimination of predecessor
entities' equity........ -- (29,316,893) 4,851,419 (4,218,288) --
------------ ------------ ------------ ----------- -----------
End of period...... $ (1,192,017) $ 26,797,113 $ 46,425,069 $43,176,499 $44,863,124
============ ============ ============ =========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-26
120
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
---------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).................. $ 20,849,736 $ 16,892,039 $ (1,009,953) $ (868,634) $ (590,814)
Adjustments to reconcile net income
(loss) to cash provided by
operations:
Gain on extinguishments of
debt........................ (25,795,725) (18,381,077) -- -- --
Interest expense financed by
term debt................... 422,197 -- -- -- --
Depreciation and
amortization................ 6,877,251 7,840,428 10,250,714 2,427,513 2,704,320
Loss on disposal of assets.... 318,191 227,927 167,103 -- --
Deferred interest on
mortgages................... 943,400 938,495 1,070,260 -- --
Change in deferred income
taxes....................... (11,700) (22,100) 14,400 -- --
Changes in assets and liabilities:
Accounts receivable........... 374,838 (1,202,856) (1,042,981) (797,217) (2,860,656)
Inventories................... (151,830) 53,451 46,924 11,844 39,257
Prepaid expenses and other
assets...................... 278,031 213,266 (221,975) (318,933) (591,982)
Due from affiliates........... -- -- -- 156,596 --
Accounts payable.............. (582,208) 1,760,765 (483,874) (126,532) 1,066,844
Accrued liabilities........... 573,382 747,324 2,963,723 (1,255,125) (1,211,471)
Customer deposits............. 64,218 101,483 (31,687) 61,999 1,027,606
------------ ------------ ------------ ----------- -----------
Net cash flows provided
by (used in) operating
activities............. 4,159,781 9,169,145 11,722,654 (708,489) (416,896)
------------ ------------ ------------ ----------- -----------
Cash flows from investing activities:
Funds restricted for future
acquisition of furniture,
fixtures and equipment.......... (887,040) (3,905,387) (4,533,117) (627,567) (1,989,841)
Acquisition of property and
equipment....................... (2,471,662) (2,234,879) (6,402,351) (2,254,016) (2,177,295)
Restricted funds used to purchase
property and equipment.......... 181,509 451,022 3,964,646 1,406,357 2,177,295
Cash paid for deferred expenses.... (112,092) -- (1,242,300) -- --
Proceeds from sale of assets....... 125,849 19,772 1,006,937 -- --
Acquisitions, net of cash
acquired........................ -- (56,210,897) (52,887,935) (10,634,147) --
------------ ------------ ------------ ----------- -----------
Net cash used in
investing activities... (3,163,436) (61,880,369) (60,094,120) (12,109,373) (1,989,841)
------------ ------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt....... 20,116,368 54,418,832 100,983,134 15,228,203 --
Payments on long-term debt......... (21,056,662) (5,126,112) (70,482,677) (22,959,860) (213,279)
Cash paid for financing fees....... -- (533,483) (786,708) -- (4,417)
Change in funds restricted for
escrow reserve.................. (53,055) (364,386) (894,541) 540,535 (382,365)
Advances from partners............. -- -- 400,000 -- --
Capital contributions.............. 156,386 9,357,372 45,899,456 24,016,806 --
Capital distributions.............. (66,196) (17,901) (24,635,160) (6,768,786) (971,131)
------------ ------------ ------------ ----------- -----------
Net cash (used in)
provided by financing
activities............. (903,159) 57,734,322 50,483,504 10,056,898 (1,571,192)
------------ ------------ ------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents..................... 93,186 5,023,098 2,112,038 (2,760,964) (3,977,929)
Cash and cash equivalents at beginning
of period............................ 2,431,232 2,524,418 7,547,516 7,547,516 9,659,554
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period............................... $ 2,524,418 $ 7,547,516 $ 9,659,554 $ 4,786,552 $ 5,681,625
============ ============ ============ =========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-27
121
INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
---------
1. BASIS OF PRESENTATION:
The accompanying combined financial statements are comprised of nine
limited partnerships (Interstone I or Partnerships) and Predecessor Entities,
which at December 31, 1995, are affiliates through common ownership. At December
31, 1995, the Partnerships are owned, either directly or indirectly, 75% by
Blackstone Real Estate Partners L.P. (Blackstone) and 25% by Milt Fine, the
principal stockholder of Interstate Hotels Corporation (IHC), and other IHC
executives. The Partnerships' assets consist of eight full-service operating
hotel properties, (collectively, the Hotels).
Interests in the Partnerships are expected to be purchased and acquired by
IHC Member Corporation as of July 15, 1996 or earlier based on the closing of
the initial public offering of common stock of IHC.
The following details the Partnerships and Predecessor Entities and the
respective properties included in the combined financial statements:
Interstone/Houston Partnership, L.P. (Houston) was formed effective
March 4, 1994. Effective March 7, 1994, Houston acquired the Houston
Marriott North at Greenspoint for $21,000,000.
Interstone/Lisle Partnership, L.P. (Lisle) was formed effective July
8, 1994, when it acquired the Radisson Hotel Lisle and the Lisle Executive
Center in Lisle, Illinois for $23,201,000. The executive center consists of
150,437 square feet and is managed by Blackstone Real Estate Advisors
(BREA), an affiliate of Blackstone.
Interstone/Colorado Springs Partnership, L.P. (Colorado) was formed
effective September 15, 1994. An option agreement exercised on September
27, 1994 resulted in the contribution of the Colorado Springs Marriott and
$792,379 in cash and all of the associated assets and liabilities to
Colorado. The predecessor owner of the hotel was controlled by the owner of
IHC.
Interstone/Denver Partnership, L.P. (Denver) was formed effective
November 7, 1994 and acquired the Denver Hilton South for $12,500,000
effective December 14, 1994.
Interstone/Atlanta Partnership, L.P. (Atlanta) was formed effective
February 1, 1995. Effective February 15, 1995, Atlanta acquired
substantially all of the assets and liabilities, except for the land, of
the Atlanta Marriott Northeast. The purchase price was $14,025,000 and the
land is being leased through an operating lease. See Note 12.
Interstone/Conshohocken Partnership, L.P. (Conshohocken) was formed
March 15, 1995 and on that date acquired all of the partnership interests
in WCB Eleven Limited Partnership, the owner of the Philadelphia Marriott
West for $23,744,000.
Interstone/Williamsburg Partnership, L.P. (Williamsburg), formed
effective July 6, 1995, purchased the Fort Magruder Inn and Conference
Center on October 10, 1995. The purchase price was $12,800,000, which
included $2,192,000 to acquire the land previously leased by the seller. In
addition to the purchase price, $1,200,000 was paid for a noncompete
agreement with the seller for a five year period.
Interstone/Huntington Partnership, L.P. (IHPLP) and Huntington Hotel
Partners, L.P. (HHPLP) (collectively, Huntington) own the Huntington Hilton
Hotel, effective December 7, 1995, located in Melville, New York and the
first and second mortgages encumbering the hotel, respectively. The hotel
was acquired through the acquisition of the first and second mortgages on
the hotel for $21,212,306 and a settlement agreement with 110 Huntington
Associates (HA), the former owner of the hotel.
With the exception of Lisle, Houston and Denver, the accompanying combined
financial statements include all transactions of the Partnerships and the
Predecessor Entities from January 1, 1993 to December 31, 1995 and are presented
on the basis of the predecessors' historical cost basis up to the date that the
property was acquired. From the date of acquisition to December 31, 1995, the
accompanying combined
F-28
122
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
1. BASIS OF PRESENTATION--CONTINUED
financial statements are presented based on the Partnerships' new basis. Lisle,
Houston and Denver are included from their respective date of acquisition.
The terms of the Partnerships expire December 31, 2044 or 2045; however,
dissolution will occur earlier in the event of the sale of the Partnerships'
assets or a disabling event, as defined by the agreements. In accordance with
the terms of the partnership agreements, subsequent capital contributions from
the partners may be required in instances where cash from operations is
insufficient to meet debt service requirements and other partnership expenses.
Such additional capital contributions are to be made at the discretion of the
general partner and are to be paid by the partners in proportion to their
respective partnership interests.
The combined financial statements of the Predecessor Entities have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotels' operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
The Partnerships consider all unrestricted, highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
Restricted Cash:
The management and franchise agreements discussed in Note 3 and the
long-term debt discussed in Note 7 provide that certain cash from operations be
restricted for the future acquisition of or for the replacement of property and
equipment each year based on a percentage of gross hotel revenues. The
requirements range from 3% to 4%. In addition, certain of the loan agreements
described in Note 7 also required an amount to be deposited into a renovation
reserve for certain capital improvements and require monthly deposits to be made
into an escrow account for real estate taxes.
Inventories:
Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.
Property and Equipment:
Property and equipment are recorded at cost which includes the allocated
purchase price for the acquisitions described in Note 1. Property and equipment
are depreciated primarily on the straight-line method over their estimated
useful lives (buildings and improvements over 28 to 35 years and furniture,
fixtures and equipment over 5 to 7 years). Expenditures for maintenance and
repairs are expensed as incurred. The cost and related accumulated depreciation
applicable to property no longer in service are eliminated from the accounts and
any gain or loss thereon is included in operations. A hotel's initial
expenditures for the purchase of china, glassware, silverware and linens are
capitalized as furniture, fixtures and equipment and amortized on a
straight-line basis over a five year life. Costs for replacement of those items
are charged to operations in the period the items are placed in service.
Deferred Expenses:
Generally the deferred financing costs and franchise fees are being
amortized on the straight-line basis over periods ranging from 3 to 5 years. The
non-compete agreement is being amortized over its 5 year term.
F-29
123
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Concentration of Credit Risk:
The Partnerships maintain cash and cash equivalents accounts with various
financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Partnership has not experienced any losses in such
accounts.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
The Hotels recognize revenue from their rooms, catering, gift shop and
restaurant facilities as earned on the close of each business day.
Income Tax Status:
The entities included in the combined financial statement are non-tax
paying entities (partnerships) with the exception of one predecessor entity. For
the tax paying predecessor entity, income taxes were accrued and recorded in the
combined financial statements. Partnerships are not subject to state and federal
income taxes. Accordingly, net income or loss and any available tax credits are
allocated to the individual partners in proportion to their income and loss
rates of participation. Should loss allocations cause the adjusted capital
account of the limited partners to be reduced to zero, any additional losses are
allocated to the general partners.
Acquisitions:
The acquisitions from third parties have been accounted for by the purchase
method. Accordingly, the purchase price has been allocated to assets acquired
and liabilities assumed based on their estimated fair values, as determined by
real estate tax assessments and other fair market valuations. The acquisitions
were financed through the issuance of debt and capital contributions.
Unaudited Financial Statements:
The unaudited combined balance sheet as of March 31, 1996 and the unaudited
combined statements of operations and owners' equity and cash flows for the
three months ended March 31, 1995 and 1996, in the opinion of management, have
been prepared on the same basis as the audited combined financial statements and
include all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. The data disclosed in these notes to the combined
financial statements for these periods are also unaudited. Operating results for
the three month period ended March 31, 1996 is not necessarily indicative of the
results for the entire year.
3. RELATED PARTY TRANSACTIONS:
Since their acquisition by the Partnerships, the Hotels have generally been
operated pursuant to franchise agreements between IHC, as franchisee, and
various franchisers. Prior to their acquisition by the Partnerships, the
Predecessor Entities generally were also party to franchise arrangements. The
terms of the franchise agreements range from 10 to 25 years and can be extended
by the mutual consent of the parties. The agreements require ongoing fees, which
comprise royalty expense in the combined statement of operations, generally
ranging from 3% to 6% of room revenues and 2% to 3% of certain food and beverage
revenues. In
F-30
124
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
3. RELATED PARTY TRANSACTIONS--CONTINUED
addition, other fees paid to the franchisers include a national advertising
campaign fee of approximately 1% of room revenues, as well as fees for a
national reservation system, networking, honored guest awards and other
promotional programs.
Since their acquisition by the Partnerships, the Hotels have been operated
under a management agreement with IHC which provides for a management fee of
2.8% of gross operating revenue. The terms of the agreements extend through
December 31, 2044. The agreements can be terminated earlier by either party upon
the occurrence of certain conditions as specified in the agreements. In
addition, Colorado and Conshohocken were managed by IHC prior to their
acquisition by the Partnerships. Generally, the Hotels not managed by IHC prior
to their acquisition by the Partnerships were party to similar management
arrangements. The management fees earned by IHC were approximately $726,000 in
1993, $1,062,000 in 1994 and $1,900,000 in 1995.
An affiliate of IHC provides reinsurance to major insurance carriers solely
in connection with the insurance coverage that those carriers provide to the
Hotels. IHC also provides certain accounting and bookkeeping assistance to the
Partnerships, of which no amounts were paid by the Partnerships for these
services.
4. INVENTORIES:
The components of inventories were as follows:
DECEMBER 31, MARCH
-------------------- 31,
1994 1995 1996
-------- -------- --------
(UNAUDITED)
Food......................................................... $263,244 $248,327 $238,405
Beverage..................................................... 281,752 308,976 286,120
Gift shop and other.......................................... 170,677 94,245 87,766
-------- -------- --------
$715,673 $651,548 $612,291
======== ======== ========
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
Land............................................... $ 14,975,971 $ 18,357,867 $ 18,357,867
Buildings and improvements......................... 124,326,343 114,315,868 114,400,685
Furniture, fixtures and equipment.................. 30,679,335 33,600,537 35,686,812
------------ ------------ ------------
169,981,649 166,274,272 168,445,364
Less accumulated depreciation...................... 30,446,526 15,676,714 18,168,824
------------ ------------ ------------
$139,535,123 $150,597,558 $150,276,540
============ ============ ============
When assets were acquired from Predecessor Entities, a new basis was
determined and accumulated depreciation was reduced to zero.
F-31
125
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
6. DEFERRED EXPENSES:
The components of deferred expenses were as follows:
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
Deferred financing costs................................. $1,548,043 $2,069,941 $2,074,357
Franchise fees........................................... 77,500 119,800 119,800
Non-compete agreement.................................... -- 1,200,000 1,200,000
---------- ---------- ----------
1,625,543 3,389,741 3,394,157
Less accumulated amortization............................ 690,686 280,780 486,786
---------- ---------- ----------
$ 934,857 $3,108,961 $2,907,371
========== ========== ==========
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
PROPERTY DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
Lisle:
5.98% note payable due 1999...................... $ 15,425,000 -- --
Pooled loan agreement (A)........................ -- $ 22,436,016 $ 22,372,033
Houston:
8.0% note payable due 2001 (B)................... 16,250,000 16,250,000 16,250,000
Colorado:
5.98% note payable due 1999...................... 8,000,000 -- --
Pooled loan agreement (A)........................ -- 10,220,852 10,191,704
Denver:
10.69% note payable due 1998..................... 9,500,000 -- --
Pooled loan agreement (A)........................ -- 11,467,297 11,434,594
Atlanta:
Notes payable (average rate of 8.75%)............ 7,381,432 -- --
Capital lease obligations........................ 250,662 -- --
Pooled loan agreement (A)........................ -- 12,713,743 12,677,485
Conshohocken:
9.50% note payable due 1996...................... 14,598,203 -- --
Pooled loan agreement (A)........................ -- 17,948,813 17,897,626
Williamsburg:
6.75% note payable due 2003...................... 4,533,200 -- --
Capital lease obligations........................ 148,042 -- --
Variable rate note payable due 1999 (C).......... -- 11,000,000 11,000,000
Huntington:
7.5% note payable due 1996....................... 43,061,602 -- --
Variable rate note payable due 1998 (D).......... -- 13,100,000 13,100,000
----------- ----------- -----------
119,148,141 115,136,721 114,923,442
Less current portion..................... 44,766,516 1,417,217 1,417,217
------------ ------------ ------------
$ 74,381,625 $113,719,504 $113,506,225
============ ============ ============
F-32
126
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT--CONTINUED
(A) Effective August 31, 1995, Lisle, Denver, Atlanta, Conshohocken and
Colorado entered into a pooled loan agreement. The total amount borrowed under
the pooled loan agreement was $75,000,000. The proceeds were used to retire debt
and acquire certain properties. The pooled loan agreement provides for joint and
several liability to the Partnerships for the full amount of the outstanding
loan. Substantially all of the assets and the management agreement of the
Partnerships collateralize the borrowings. Principal is payable in varying
monthly payments with interest at LIBOR plus 3%. The interest rate in effect at
December 31, 1995 was 8.91%. The varying monthly principal payments are based on
an annual calculation using a percentage of the outstanding principal balance,
net income and cash flows, as defined by the agreement. All remaining unpaid
accrued interest and principal will be due August 31, 1999. The loan agreement
provides for a 2% prepayment penalty in the first year and a 1% penalty in the
second year. The Partnerships purchased an interest rate cap that limits LIBOR
to 7.5% through August 31, 1998. The carrying value of the interest rate cap at
December 31, 1995 was approximately $443,000.
The pooled loan agreement contains certain restrictive covenants including
limitations on the assumption of additional indebtedness, changes in the
Partnerships' agreements and changes to the franchiser and the managing agents
of the Hotels (IHC and BREA). Additionally, an entity affiliated with the
managing general partner issued a letter of credit in the amount of $5,000,000
on behalf of the Partnerships. The letter of credit provides for principal
repayment upon the occurrence of a default or if certain financial terms are not
met by the Partnerships between March 31, 1996 and April 25, 1998.
(B) The Houston partnership borrowed $16,250,000 under a note payable
agreement, the proceeds of which, combined with capital contributions, were used
to acquire the Hotel. The note accrues interest at the contract rate of 8% and
is payable in monthly interest only payments at the pay rate of 7% through March
1995, 7.5% from April 1995 through March 1996 and 8% thereafter. Interest due in
excess of the pay rate is added to the principal balance and accrues interest at
the contract rate. At December 31, 1995, such amount was $246,895 and was
included in accrued interest on the accompanying combined balance sheets.
Beginning April 1996, the note will be payable in equal monthly installments of
principal and interest of $121,208 through March 2001, at which time all
remaining unpaid accrued interest and principal will be due.
(C) Effective October 10, 1995, the Williamsburg partnership entered into a
loan agreement which provides for an available $13,000,000, of which $11,000,000
was drawn on the date of the agreement (the initial disbursement). The proceeds
of the initial disbursement, combined with capital contributions, were used to
acquire the hotel. The agreement also includes a provision that allows for an
additional draw of up to $2,000,000 within 12 to 18 months after the initial
disbursement if certain financial conditions are met, as defined by the
agreement (the second disbursement). Interest is payable monthly at the rate of
LIBOR plus 3.5%. The interest rate in effect at December 31, 1995 was 9.44%.
Beginning at the time of the second disbursement or 18 months after the initial
disbursement, whichever is earlier, equal monthly principal payments will be due
based on the then outstanding principal balance amortized at the current
interest rate in effect over a 25 year period. The note payable matures October,
1999 at which time all remaining unpaid accrued interest and principal will be
due. The agreement provides for a 2% prepayment penalty for the first two years
after the initial disbursement and a 1% penalty in the third year.
(D) Huntington borrowed $13,100,000, the proceeds of which, combined with
capital contributions, were used to complete the acquisition described in Note
1. Interest is payable at the rate of LIBOR plus 4.0%. The interest rate in
effect at December 31, 1995 was 9.66%. The partnership has the option to request
a fixed interest rate based on quoted rates from the borrower for portions of
the outstanding balance not to exceed $4,000,000 for various periods as provided
in the note agreement. Interest is payable monthly commencing July 1, 1995.
Commencing March 1, 1997, equal monthly principal payments will be due based on
a 25 year amortization period. The note payable matures June 1998, at which time
all remaining unpaid principal and accrued interest will be due. The note
payable requires a 2% prepayment penalty through June 1996.
F-33
127
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
7. LONG-TERM DEBT--CONTINUED
The management of the Partnerships estimate that based on projected net
income and cash flows, approximately $1,417,000 of principal payments will be
due during 1996 and, accordingly, this amount has been classified as a current
liability on the accompanying combined balance sheets.
Based on interest rates currently available to the Partnerships for the
issuance of debt with similar terms and remaining maturities, management
believes that the carrying amount of debt and the interest rate cap is a
reasonable estimation of fair value.
Aggregate scheduled maturities of the notes for each of the five years
ending December 31 are as follows:
1996.......................................................... $ 1,417,217
1997.......................................................... 3,229,342
1998.......................................................... 16,597,473
1999.......................................................... 88,712,876
2000.......................................................... 4,102,144
Thereafter.................................................... 1,077,669
------------
$115,136,721
============
A predecessor entity obtained a first mortgage note in the amount of
$14,000,000, the proceeds of which were used to satisfy an existing mortgage and
letter of credit note plus accrued interest, pursuant to a binding letter of
intent. The predecessor entity also entered into a subordinated mortgage note
with the lender and, in exchange for entering into the agreement, in addition to
payment of $600,000 proceeds from the first mortgage, the lender sold the
promissory note to the predecessor entity. The extinguishment of the mortgage
and letter of credit notes and the promissory note resulted in a gain of
$25,795,725, which is presented as an extraordinary item in the 1993 combined
statements of operations.
Pursuant to the terms of the commitment letter dated March 8, 1994, IHC
paid $100,000 to the holder of the term loan as an option for the purchase of a
predecessor entity's loan for $11,000,000. The extinguishment of the predecessor
entity's loan resulted in an $18,381,077 gain, which is presented as an
extraordinary item in the 1994 combined statements of operations.
8. DEPARTMENTAL INCOME:
Combined departmental income was as follows:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Rooms........................... $21,637,770 $28,813,329 $40,291,221 $ 8,862,336 $ 9,881,965
Food and beverage............... 4,367,048 7,676,644 9,305,887 1,936,860 2,486,623
Telephone....................... 603,939 836,275 1,132,807 272,110 382,249
Gift shop and other............. 342,496 772,157 692,895 170,387 129,812
Office.......................... -- 1,040,738 2,273,267 511,782 618,281
----------- ----------- ----------- ----------- -----------
$26,951,253 $39,139,143 $53,696,077 $11,753,475 $13,498,930
=========== =========== =========== =========== ===========
9. EMPLOYEE BENEFITS:
The Hotels participate in the following employee benefit plans which are
sponsored by IHC:
The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Health Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby IHC is
self-insured for certain benefits, subject to certain individual claim and
F-34
128
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
9. EMPLOYEE BENEFITS--CONTINUED
aggregate maximum liability limits. The Hotels pay, directly to IHC, the
employer portion of the premiums, which is based on the estimated conventional
premium. Premiums may be prospectively adjusted to consider actual claims
experience. The Hotels incurred expenses of approximately $573,000 in 1994 and
$1,007,000 in 1995 related to the plan. The Health Trust is exempt from federal
income tax under Section 501(c)(9) of the Internal Revenue Code as a voluntary
employees' beneficiary association.
IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's attainment
of 21 years of age and on the completion of one year of service with IHC.
Employer contributions are based on a percentage of employee contributions.
Participants may make voluntary contributions to the plan of up to 6% of their
compensation, as defined. The Hotels incurred expenses of approximately $87,000
in 1994 and $175,000 in 1995 related to the plan.
Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotels. These compensation
awards are dependent on the Hotel's performance and other established criteria.
The Hotels incurred expenses amounting to approximately $96,000 in 1994 and
$607,000 in 1995 related to these plans.
Predecessor entities generally did not provide any health and welfare,
retirement benefit or bonus and deferred compensation plans.
10. INCOME TAXES:
The provision for taxes of a predecessor entity was approximately $85,000,
$142,000 and $89,000 in 1993, 1994 and 1995, respectively, and consists
primarily of current federal and state taxes. These amounts are included in
other expenses in the accompanying combined statements of operations. The net
deferred tax liability primarily relates to depreciation.
11. LEASE INCOME:
The following is a schedule of future minimum rental income for the
Lisle Executive Center under noncancelable operating leases as of December
31, 1995:
1996........................................................... $ 2,680,000
1997........................................................... 2,451,000
1998........................................................... 1,789,000
1999........................................................... 1,572,000
2000........................................................... 1,018,000
Thereafter..................................................... 658,000
-----------
$10,168,000
===========
F-35
129
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
12. OPERATING LEASES:
The Hotels have various land and equipment operating leases. Total rental
expense amounted to approximately $247,000 in 1993, $294,000 in 1994 and
$685,000 in 1995. The following is a schedule of future minimum lease payments
under these leases:
1996............................................................ $ 655,000
1997............................................................ 377,000
1998............................................................ 193,000
1999............................................................ 43,000
2000............................................................ 29,000
Thereafter...................................................... 1,823,000
----------
$3,120,000
==========
13. CASH FLOW INFORMATION:
Cash payments for interest were $1,788,652, $11,866,008 and $9,231,650 in
1993, 1994 and 1995, respectively.
Cash payments for taxes were $103,345, $79,978 and $4,184 in 1993, 1994 and
1995, respectively.
Non-cash investing and financing activities were as follows:
1994:
Elimination of Predecessor Entities' equity.................... $29,316,893
===========
1995:
Elimination of Predecessor Entities' equity.................... $ 4,851,419
===========
14. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business various lawsuits, claims and proceedings
have been or may be instituted or asserted against the Partnerships. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operations or liquidity of the Partnerships.
The Huntington Hilton Hotel is encumbered by a third mortgage which is held
by an unrelated party for a principal sum of $2,100,000. The third mortgage is
subordinated to the first and second mortgages. The third mortgage arises from a
note payable from HA to the third mortgage holder which was not assumed by IHPLP
or HHPLP pursuant to the settlement agreement. See Note 1.
15. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for fiscal year 1996. Management believes that the implementation of
the standard will not have a material effect on these combined financial
statements.
F-36
130
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Interstone/CGL Partners, L.P.:
We have audited the accompanying combined balance sheet of Interstone/CGL
Partners, L.P. (the Partnership) as of December 31, 1995 and the related
combined statements of operations and partners' capital and cash flows for the
period from December 15, 1995 (inception) to December 31, 1995 and the
accompanying combined balance sheets of Predecessor Entity (as defined in Note
1) as of December 31, 1994 and December 14, 1995 and the related combined
statements of operations and predecessor equity and cash flows for the years
ended December 31, 1993 and 1994 and for the period from January 1, 1995 to
December 14, 1995. These combined financial statements are the responsibility of
the Partnership's and Predecessor Entity's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2, the combined financial statements of the
Predecessor Entity have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a Registration Statement of Interstate Hotels Company and are not intended to be
a complete presentation of the Predecessor Entity.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Interstone/CGL
Partners, L.P. as of December 31, 1995 and the combined results of its
operations and cash flows for the period from December 15, 1995 (inception) to
December 31, 1995 and the financial position of the Predecessor Entity as of
December 31, 1994 and December 14, 1995 and the combined results of its
operations and cash flows for the years ended December 31, 1993 and 1994 and for
the period from January 1, 1995 to December 14, 1995, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P
Pittsburgh, Pennsylvania
April 10, 1996
F-37
131
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
COMBINED BALANCE SHEETS
---------
ASSETS
PREDECESSOR ENTITY PARTNERSHIP
---------------------------- ----------------------------
DECEMBER 31, DECEMBER 14, DECEMBER 31, MARCH 31,
1994 1995 1996 1996
------------ ------------ ------------ -----------
(UNAUDITED)
Current assets:
Cash and cash equivalents........... $ 3,198,348 $ 198,922 $ 6,126,483 $ 5,711,517
Accounts receivable................. 3,700,112 4,470,676 1,231,348 5,474,875
Inventories (Note 6)................ 1,525,754 1,367,815 350,229 388,751
Prepaid expenses and other.......... 1,024,352 763,053 114,803 729,712
------------ ------------ ------------ ------------
Total current assets........... 9,448,566 6,800,466 7,822,863 12,304,855
------------ ------------ ------------ ------------
Restricted cash (Note 3).............. 884,364 992,337 2,771,814 3,414,438
Property and equipment, net (Notes 3,
7 and 10)........................... 127,839,673 123,341,620 166,041,651 164,227,543
Deferred expenses (Note 8)............ -- -- 2,928,346 2,803,077
------------ ------------ ------------ ------------
Total assets................... $138,172,603 $131,134,423 $179,564,674 $182,749,913
============ ============ ============ ============
LIABILITIES, EQUITY AND CAPITAL
Current liabilities:
Accounts payable.................... 1,433,882 622,800 1,561,280 2,059,040
Due to CIGNA (Note 3)............... 1,592,863 1,848,384 -- --
Accrued liabilities:
Real estate taxes................ 721,912 623,778 595,053 658,712
Salaries and benefits............ 1,157,502 698,812 1,230,178 2,081,943
Royalties and fees (Note 5)...... 123,010 48,037 103,523 292,317
Management fees (Note 5)......... 594,871 512,588 57,037 266,085
Other............................ 979,274 1,589,552 714,682 2,360,846
Customer deposits................... 326,955 458,108 374,501 242,233
Current portion of long-term debt
(Note 10)........................ -- -- 3,000,000 3,000,000
------------ ------------ ------------ ------------
Total current liabilities...... 6,930,269 6,402,059 7,636,254 10,961,176
------------ ------------ ------------ ------------
Other liabilities (Note 9)............ -- -- 1,212,968 1,212,968
Long-term debt (Note 10).............. -- -- 117,000,000 116,250,000
------------ ------------ ------------ ------------
Total liabilities.............. 6,930,269 6,402,059 125,849,222 128,424,144
------------ ------------ ------------ ------------
Commitments and contingencies (Notes 9
and 13)
Predecessor equity.................... 131,242,334 124,732,364 -- --
Partners' capital..................... -- -- 53,715,452 54,325,769
------------ ------------ ------------ ------------
Total liabilities, equity and
capital..................... $138,172,603 $131,134,423 $179,564,674 $182,749,913
============ ============ ============ ============
The accompanying notes are an integral part of the combined financial
statements.
F-38
132
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
COMBINED STATEMENTS OF OPERATIONS AND PREDECESSOR'S EQUITY
AND PARTNERS' CAPITAL
---------
PREDECESSOR ENTITY PARTNERSHIP
----------------------------------------- ----------- PREDECESSOR
DECEMBER 15 ENTITY PARTNERSHIP
(INCEPTION) ------------ -----------
JANUARY 1 TO THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, TO DECEMBER MARCH 31,
-------------------------- DECEMBER 14, 31, ---------------------------
1993 1994 1995 1995 1995 1996
----------- ------------ ------------ ----------- ------------ ------------
(UNAUDITED)
Revenues:
Rooms................. $29,689,872 $ 44,368,711 $47,005,616 $1,197,237 $ 11,630,678 $ 12,523,368
Food and beverage..... 14,377,451 22,211,752 23,571,905 1,174,170 5,606,531 5,948,203
Telephone............. 1,472,886 2,051,051 2,369,874 59,208 574,674 717,126
Gift shop............. 269,430 491,778 381,200 19,760 90,574 90,835
Other................. 457,579 1,082,302 1,274,314 34,123 332,822 345,641
----------- ------------ ------------ ------------ ------------ ------------
46,267,218 70,205,594 74,602,909 2,484,498 18,235,279 19,625,173
Departmental costs and
expenses.............. 20,128,137 29,295,928 30,499,098 1,386,137 7,455,917 7,695,917
----------- ------------ ------------ ------------ ------------ ------------
Departmental income
(Note 11)......... 26,139,081 40,909,666 44,103,811 1,098,361 10,779,362 11,929,256
Other expenses (Note 5):
Administration and
general............. 5,007,565 7,733,793 7,624,794 292,393 1,859,342 1,692,922
Management fee........ 1,868,102 3,268,802 4,034,540 80,896 685,991 556,076
Royalties............. 673,762 1,120,609 1,272,321 55,255 370,335 494,902
Advertising and
sales............... 2,864,140 4,113,422 4,636,739 168,934 1,118,633 1,200,960
Repairs and
maintenance......... 2,406,479 3,358,253 3,469,537 152,470 809,337 843,441
Heat, power and
light............... 2,081,933 2,784,810 2,833,376 146,171 817,695 717,204
Insurance and taxes... 2,100,483 3,023,493 3,505,079 97,478 1,013,741 902,344
Depreciation and
amortization........ 4,885,249 7,124,855 7,088,752 366,181 1,867,231 2,193,605
Other, net............ 239,405 (198,437) 622,125 31,600 25,003 207,552
----------- ------------ ------------ ------------ ------------ ------------
22,127,118 32,329,600 35,087,263 1,391,378 8,567,308 8,809,006
----------- ------------ ------------ ------------ ------------ ------------
4,011,963 8,580,066 9,016,548 (293,017 ) 2,212,054 3,120,250
Interest expense (Note
10)................... -- -- -- (460,000 ) -- (2,509,933)
----------- ------------ ------------ ------------ ------------
Income (loss) before
income taxes...... 4,011,963 8,580,066 9,016,548 (753,017 ) 2,212,054 610,317
Income tax expense (Note
3).................... 1,605,000 3,432,000 3,607,000 -- 884,800 --
----------- ------------ ------------ ------------ ------------ ------------
Net income (loss)... 2,406,963 5,148,066 5,409,548 (753,017 ) 1,327,254 610,317
----------- ------------ ------------ ------------ ------------ ------------
Predecessor's equity and
partners' capital:
Beginning of period... 75,519,277 91,875,901 131,242,334 -- 131,242,334 53,715,452
Increase (decrease) in
predecessor's
equity.............. 13,949,661 34,218,367 (11,919,518 ) -- (3,977,397) --
Capital
contributions....... -- -- -- 54,468,469 -- --
----------- ------------ ------------ ------------ ------------ ------------
End of period......... $91,875,901 $131,242,334 $124,732,364 $53,715,452 $128,592,191 $ 54,325,769
=========== ============ ============ ============ ============ ============
The accompanying notes are an integral part of the combined financial
statements.
F-39
133
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
COMBINED STATEMENTS OF CASH FLOWS
---------
PREDECESSOR ENTITY PARTNERSHIP PREDECESSOR
------------------------------------------ ------------ ENTITY PARTNERSHIP
DECEMBER 15 ------------ -----------
JANUARY 1 (INCEPTION) THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, TO TO MARCH 31,
--------------------------- DECEMBER 14, DECEMBER 31, ---------------------------
1993 1994 1995 1995 1995 1996
----------- ------------ ------------ ------------- ------------ -----------
(UNAUDITED)
Cash flows from operating
activities:
Net income (loss)................ $ 2,406,963 $ 5,148,066 $ 5,409,548 $ (753,017) $ 1,327,254 $ 610,317
Adjustments to reconcile net
income (loss) to cash provided
by operations:
Depreciation and
amortization................. 4,885,249 7,124,855 7,088,752 366,181 1,867,231 2,193,605
Changes in assets and
liabilities:
Accounts receivable............ (694,952) 355,572 (770,564) (823,798) (1,031,507) (4,243,527)
Inventories.................... (234,024) 29,445 157,939 (6,085) 10,061 (38,522)
Prepaid expenses and other..... (79,904) (242,593) 261,299 64,234 (107,767) (614,909)
Accounts payable............... (15,025) 505,177 (811,082) 752,999 (157,210) 497,760
Accrued liabilities............ 527,007 1,685,986 (103,802) 1,468,004 388,466 2,959,430
Customer deposits.............. 136,001 (42,124) 131,153 (170,307) 52,863 (132,268)
----------- ------------ ----------- ------------ ----------- -----------
Net cash provided by
operating activities....... 6,931,315 14,564,384 11,363,243 898,211 2,349,391 1,231,886
----------- ------------ ----------- ------------ ----------- -----------
Cash flows from investing
activities:
Funds restricted for future
acquisition of furniture,
fixtures
and equipment.................. (374,721) (569,691) (489,594) (2,771,814) (85,727) (796,990)
Restricted funds used to purchase
furniture, fixtures and
equipment...................... 366,224 936,768 381,621 -- 23,056 154,366
Cash paid for deferred franchise
fees........................... -- -- -- (107,045) -- (20,000)
Cash received on foreclosure..... 351,384 2,247,262 -- -- -- --
Acquisition of Hotels, net of
cash acquired of $144,650...... -- -- -- (159,994,406) -- --
Acquisition of property and
equipment, net................. (1,280,646) (2,883,340) (2,590,699) -- (910,720) (234,228)
----------- ------------ ------------ ------------ ----------- -----------
Net cash used in investing
activities................. (937,759) (269,001) (2,698,672) (162,873,265) (973,391) (896,852)
----------- ------------ ------------ ------------ ----------- -----------
Cash flows from financing
activities:
Proceeds from long-term debt..... -- -- -- 120,000,000 -- --
Repayment of long-term debt...... -- -- -- -- -- (750,000)
Cash paid for financing fees..... -- -- -- (2,650,000) -- --
Distributions to predecessor..... (7,846,423) (12,446,117) (11,919,518) -- (3,977,397) --
Change in due to CIGNA........... 378,496 72,963 255,521 -- 496,047 --
Partner capital contributions.... -- -- -- 50,751,537 -- --
----------- ------------ ----------- ------------- ----------- -----------
Net cash (used in) provided
by financing activities.... (7,467,927) (12,373,154) (11,663,997) 168,101,537 (3,481,350) (750,000)
----------- ------------ ----------- ------------ ----------- -----------
Net (decrease) increase in cash and
cash equivalents................. (1,474,371) 1,922,229 (2,999,426) 6,126,483 (2,105,350) (414,966)
Cash and cash equivalents at
beginning of period.............. 2,750,490 1,276,119 3,198,348 -- 3,198,348 6,126,483
----------- ------------ ------------ ------------- ----------- -----------
Cash and cash equivalents at end of
period........................... $ 1,276,119 $ 3,198,348 $ 198,922 $ 6,126,483 $ 1,092,998 $ 5,711,517
=========== ============ =========== ============= =========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-40
134
INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY
NOTES TO COMBINED FINANCIAL STATEMENTS
---------
1. ORGANIZATION:
Interstone/CGL Partners, L.P.:
Interstone/CGL Partners, L.P. (the Partnership), a limited partnership, was
formed effective November 2, 1995 by Interstone/CGL Management Associates (as
general partner) and Interstone Two Partners I, L.P., Interstone Two Partners
II, L.P., Interstone Two Partners III, L.P. and Interstone Two Partners IV, L.P.
(as limited partners, collectively the Interstone Partners). A Purchase, Sale
and Contribution Agreement (the Sale Agreement) was entered into between the
Partnership, CGI Partners L.P. (CGI), Quebec Street Investments Inc. (QSI) and
Connecticut General Life Insurance Company (CIGNA) on November 20, 1995. CGI and
QSI are affiliates of CIGNA, the then current owner of six hotels (the Hotels).
Pursuant to the Sale Agreement, CGI and QSI were admitted as 25% limited
partners of the Partnership in exchange for a 25% interest in the Hotels. On the
closing date, December 15, 1995, the Interstone Partners purchased the remaining
75% interest in the Hotels from CGI and QSI. Immediately following the purchase,
CGI and QSI distributed their limited partnership interests in the Partnership
to CIGNA. The transaction was accounted for as a purchase with CIGNA's
contributed basis in the Hotels recorded at CIGNA's historical cost.
Interests in the Partnership is expected to be purchased and acquired by
IHC Member Corporation (an affiliate of the partners) as of July 15, 1996 or
earlier, based on the closing of the initial public offering of common stock of
Interstate Hotels Company.
Predecessor Entity:
CIGNA (Predecessor Entity) acquired the Hotels through foreclosure or
deed-in-lieu-of foreclosure. Four of the Hotels were acquired prior to January
1, 1993 and are included in these financial statements beginning January 1,
1993. Valley Forge Doubletree Guest Suites Hotel and Warner Center Marriott
Hotel are included in the accompanying combined financial statements beginning
on May 20, 1993 and February 25, 1994, respectively, since records prior to such
dates are not available. The Predecessor Entity recorded the assets acquired at
the lower of cost or fair value.
Hotels:
The properties included in the combined financial statements include the
following full-service hotels (collectively, the Hotels):
HOTEL LOCATION
- - ------------------------------------------------------------- ---------------------
Tysons Corner Marriott Hotel (Tysons) Tysons Corner, VA
Marriott Suites at Valley Forge, formerly Valley Forge
Doubletree Guest Suites Hotel through January 15, 1996
(collectively, Valley Forge) Wayne, PA
Embassy Suites Schaumburg Hotel (Schaumburg) Schaumburg, IL
Fort Lauderdale Airport Hilton (Ft. Lauderdale) Fort Lauderdale, FL
Boston Marriott Andover (Andover) Andover, MA
Warner Center Marriott Hotel (Warner) Woodland Hills, CA
2. BASIS OF PRESENTATION:
The above entities are affiliates through common ownership, and accordingly
are presented in a combined presentation. All significant intercompany balances
and transactions have been eliminated in combination.
The term of the Partnership expires December 31, 2045; however, dissolution
will occur earlier in the event of the sale of the Partnership's assets or a
disabling event, as defined by the agreement. In accordance
F-41
135
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
2. BASIS OF PRESENTATION--CONTINUED
with the terms of the partnership agreement, subsequent capital contributions
from the partners may be required in instances where cash from operations is
insufficient to meet debt service requirements and other partnership expenses.
Such additional capital contributions are to be made at the discretion of the
general partner and are to be paid by the partners in proportion to their
respective partnership interests. The partnership agreement also provides for
the exchange of partnership interests in the event of the failure of a partner
to make subsequent capital contributions.
The Partnership does not have access to certain books and records of CIGNA
for the period prior to December 15, 1995 and, therefore, the financial
statements for the Predecessor Entity include only those transactions recorded
in the books and records of the Hotels, except that income tax expense has been
provided for in the statements of operations based on applicable statutory
rates. Transactions recorded by CIGNA that related to the Hotels, principally
interest on intercompany borrowings, are excluded from these combined financial
statements since they were not recorded on the Hotels' records.
The combined financial statements of the Predecessor Entity have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotels' operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents:
The Partnership considers all unrestricted, highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
Restricted Cash:
The management and franchise agreements discussed in Note 5 and the
long-term debt discussed in Note 10 provide that certain cash from operations be
restricted based on a percentage of gross hotel revenues for the future
acquisition or for the replacement of property and equipment each year.
Inventories:
Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting. Upon the acquisition of the Hotels by the
Partnership, china, glass, silver and linen were no longer inventoried but
included in furniture, fixtures and equipment as discussed below.
Property and Equipment:
Property and equipment are recorded at cost which includes the allocated
purchase price for the acquisition described in Note 4 or the lower of cost or
fair value at the date of acquisition for the Predecessor Entity. Property and
equipment are depreciated primarily on the straight-line method over their
estimated useful lives (buildings and improvements over 28 to 35 years and
furniture, fixtures and equipment over 5 to 7 years). Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service are
eliminated from the accounts and any gain or loss thereon is included in
operations. Upon the formation of the Partnership, the Hotels' allocation of the
purchase price of china, glassware, silverware and linens were capitalized as
furniture, fixtures and equipment and are being amortized on a straight-line
basis over a five year life. Costs for replacement of these items are charged to
operations in the period the items are placed in service.
F-42
136
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Deferred Expenses:
Deferred expenses at December 31,1995 consist of deferred financing costs
and franchise fees related to the formation of the Partnership on December 15,
1995. The deferred financing costs and franchise fees are being amortized on the
straight-line basis over periods ranging from 5 to 12 years.
Due to CIGNA:
Prior to December 15, 1995, the Hotels participated in a centralized cash
management system with CIGNA. Cash advanced to the Hotels under this system is
presented as a current liability due to CIGNA in the accompanying combined
balance sheets.
Concentrations of Credit Risk:
The Partnership maintains cash and cash equivalents accounts with various
financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Partnership has not experienced any losses in such
accounts.
Financial Instruments:
Derivative financial instruments are used by the Partnership in the
management of its interest rate exposures and are accounted for on the accrual
basis. Costs of interest rate swap agreements are amortized over the life of the
contract.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
The Hotels recognize revenue from their rooms, catering, gift shop and
restaurant facilities as earned on the close of each business day.
Income Tax Status:
Partnerships are not subject to state and federal income taxes.
Accordingly, net income or loss and any available tax credits are allocated to
the individual partners in proportion to their income and loss rates of
participation. Should loss allocations cause the adjusted capital account of the
limited partners to be reduced to zero, any additional losses are allocated
instead to the general partners. As discussed in Note 1, for the period prior to
December 15, CIGNA was a taxable entity and an income tax expense was provided
based on applicable statutory rates.
Unaudited Financial Statements:
The unaudited combined balance sheet as of March 31, 1996 and the unaudited
combined statements of operations and equity and partners' capital and cash
flows for the three months ended March 31, 1995 and 1996, in the opinion of
management, have been prepared on the same basis as the audited combined
financial statements and include all significant adjustments (consisting
primarily of normal recurring adjustments) considered necessary for a fair
presentation of the results of these interim periods. The data disclosed in
these notes to the combined financial statements for these periods are also
unaudited. Operating results for the three month period ended March 31, 1996 is
not necessarily indicative of the results for the entire year.
F-43
137
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
4. ACQUISITION OF PROPERTY:
Effective December 15, 1995, the Partnership acquired the Hotels and
substantially all of the associated assets and liabilities. The purchase price
of $172,000,000, which was financed through the issuance of $120,000,000 in
long-term debt and contributed cash, was allocated to assets and liabilities of
each hotel based on their estimated fair values, as determined by certain fair
market valuations. In addition, an acquisition fee of $500,000 was paid to an
affiliate of the managing general partner.
5. FRANCHISE, MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS:
The Hotel franchise agreements are as follows:
HOTEL FRANCHISEE FRANCHISER
- - --------------------- -------------------------------------- ------------------------------
Valley Forge Interstone/CGL Partners, L.P. Doubletree Hotel Systems, Inc.
Schaumburg Interstone/CGL Partners, L.P. Promus Hotels, Inc.
Ft. Lauderdale Connecticut General Life Insurance Co. Hilton Inns, Inc.
and Interstone/CGL Partners, L.P.
Andover Interstate Hotels Corporation Marriott International, Inc.
Warner Interstate Hotels Corporation Marriott International, Inc.
The terms of the agreements range from 30 days to 20 years. The agreements,
except for Tysons, require ongoing fees ranging from 2% to 5% of room revenue.
Such fees comprise royalty expense in the combined statements of operations. In
addition, other fees paid to the various franchisers include national
reservation system fees, national advertising campaign fees, honored guest
awards, and other promotional program fees.
Management agreements with Interstate Hotels Corporation (IHC) provide for
a management fee of 2.8% of gross revenues, 1.4% of which is subordinated to
debt service. The terms of the agreements extend through December 31, 2044. The
agreements can be terminated earlier by either party upon the occurrence of
certain conditions as specified in the agreement. The management agreement for
Tysons with Marriott International, Inc. provides for a management fee of 3% of
gross revenues in lieu of any franchise fees. The term of the agreement expired
March 12, 1996 and has been extended on a month to month basis by mutual consent
of the parties on the then current terms of the management agreement. With the
exception of Warner, each Hotel was managed by a management company other than
IHC for the period prior to December 15, 1995. Management fee expense for Warner
amounted to approximately $812,000 for the year ended December 31, 1994 and
$830,000 for the period from January 1, 1995 to December 14, 1995.
The Partnership also has an asset management agreement with an affiliate of
CIGNA which provides for fees of $500,000 per year. Additionally, the asset
management agreement provides for a termination fee payable to CIGNA in the
amount of $2,500,000, less aggregate management asset fees paid, in the event
that CIGNA no longer holds an interest in the Partnership.
An affiliate of IHC provides reinsurance to major insurance carriers solely
in connection with the insurance coverages that those carriers provide to the
Hotels. IHC also provides certain accounting and bookkeeping assistance to the
Partnership, of which no amounts were paid by the Partnership for these services
in 1995.
Rent expense approximating $627,000 and $500,000 for the periods ending
December 31, 1994 and December 14, 1995, respectively, was paid to affiliates of
the Predecessor Entity for Warner land rent. The land was acquired by the
Partnership on December 15, 1995.
F-44
138
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
6. INVENTORIES:
The components of inventories were as follows:
MARCH
DECEMBER DECEMBER DECEMBER 31,
31, 14, 31, 1996
1994 1995 1995 --------
---------- ---------- ---------- (UNAUDITED)
China, glass, silver and linen............... $1,109,711 $ 791,217 -- --
Food......................................... 156,148 142,865 $113,782 $131,739
Beverage..................................... 158,454 138,395 163,012 157,754
Gift shop and other.......................... 101,441 295,338 73,435 99,258
---------- ---------- -------- --------
$1,525,754 $1,367,815 $350,229 $388,751
========== ========== ======== ========
7. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
MARCH 31,
DECEMBER 31, DECEMBER 14, DECEMBER 31, 1996
1994 1995 1995 -----------
------------ ------------ ------------ (UNAUDITED)
Land.................................. $ 19,546,363 $ 19,570,133 $ 19,489,864 $ 19,489,864
Buildings and improvements............ 100,123,030 100,148,647 125,222,411 125,314,322
Furniture, fixtures and equipment..... 33,453,013 35,994,325 21,671,427 21,813,744
------------ ------------ ------------ ------------
153,122,406 155,713,105 166,383,702 166,617,930
Less accumulated depreciation......... 25,282,733 32,371,485 342,051 2,390,387
------------ ------------ ------------ ------------
$127,839,673 $123,341,620 $166,041,651 $164,227,543
============ ============ ============ ============
8. DEFERRED EXPENSES:
The components of deferred expenses were as follows:
DECEMBER MARCH 31,
31, 1996
1995 ----------
---------- (UNAUDITED)
Deferred financing costs.................................... $2,825,000 $2,825,000
Franchise fees.............................................. 127,475 147,475
---------- ----------
2,952,475 2,972,475
Less accumulated amortization............................... 24,129 169,398
---------- ----------
$2,928,346 $2,803,077
========== ==========
9. OTHER LIABILITIES:
Pursuant to an agreement dated December 15, 1995 between the Partnership
and Marriott Hotel Services, Inc. and in connection with the Sale Agreement
discussed in Note 1, the Partnership assumed a liability payable to Marriott
Hotel Services, Inc. upon the termination of certain franchise agreements. The
agreement stipulates a payment varying between $1,212,968 and $2,425,936
depending upon when termination of the franchise agreements occurs. It is the
intent of management to maintain the franchise agreements for the full term. As
such, management accrued $1,212,968 as of December 31, 1995, which represents
the minimum liability under the agreement.
10. LONG-TERM DEBT:
Effective December 15, 1995, the Partnership entered into a loan agreement
(the Agreement). The Agreement consisted of two notes payable in the aggregate
principal amount of $120,000,000 made pursuant to a loan (the MultiState Loan)
and a California loan (the California Loan). The MultiState Loan's and the
California Loan's portions of the total were $100,000,000 and $20,000,000,
respectively.
F-45
139
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
10. LONG-TERM DEBT--CONTINUED
The notes are payable in quarterly principal payments of $750,000 with
monthly interest at LIBOR plus 2.75%. The interest rate in effect at December
31, 1995 was 8.63%. In addition, the Agreement provides for supplemental
amortization payments beginning in January 1997 based on cash flow, as defined
by the Agreement. All remaining unpaid interest and principal will be due
December 14, 2000. The Partnership entered into an interest rate swap that
provides for a fixed interest rate of 8.55% on principal of $72,000,000
effective January 31, 1996 and expiring December 15, 2000.
The Agreement provides that no distributions, dividends or repayments are
permitted during the first loan year. Thereafter, distributions, dividends or
repayments to partners will be made based on cash flow as defined in the
Agreement. The monthly asset management fee payment to CIGNA, pursuant to a
separate agreement (Note 5), is also subject to cash flow. The notes payable
contain certain other restrictive covenants including limitations on the
assumption of additional indebtedness, changes in the partnership agreement and
changes in the franchiser and the managing agent of the Hotel (IHC). The notes
are collateralized by the management agreements.
The Agreement also provides for joint and several liability to the
Partnership for the full amount of the outstanding loan. The California Loan is
collateralized by substantially all of the assets of Warner and the MultiState
Loan is collateralized by all of the assets of the other Hotels. The Agreement
also provides for the release of a hotel from the collateral requirements upon
the payment of a release price, as defined in the loan agreement, to be applied
to the total outstanding principal balance under the Agreement for all Hotels.
Additionally, the monthly principal payments are increased upon the collateral
release of each hotel.
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value of financial instruments. Based on interest rates currently
available, management believes that the carrying amount of the notes payable and
the interest rate swap are a reasonable estimation of fair value.
Aggregate scheduled maturities of the notes for each of the five years
ending December 31, are as follows:
1996............................................................ $ 3,000,000
1997............................................................ 3,000,000
1998............................................................ 3,000,000
1999............................................................ 3,000,000
2000............................................................ 108,000,000
------------
$120,000,000
============
11. DEPARTMENTAL INCOME:
Combined departmental income was as follows:
DECEMBER 15 THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, JANUARY 1 TO (INCEPTION) TO MARCH 31,
--------------------------- DECEMBER 14, DECEMBER 31, -------------------------
1993 1994 1995 1995 1995 1996
------------ ------------ ------------ -------------- ----------- -----------
(UNAUDITED)
Rooms.............. $ 22,022,998 $ 33,954,095 $ 36,056,686 $ 778,989 $ 8,947,762 $ 9,736,645
Food and
beverage......... 3,420,603 5,703,848 6,205,118 279,568 1,406,239 1,580,862
Telephone.......... 733,229 972,971 1,413,475 2,482 304,179 436,506
Gift shop.......... 46,351 54,248 68,799 4,275 18,572 10,028
Other.............. (84,100) 224,504 359,733 33,047 102,610 165,215
------------ ------------ ------------ ---------- ----------- -----------
$ 26,139,081 $ 40,909,666 $ 44,103,811 $1,098,361 $10,779,362 $11,929,256
============ ============ ============ ========== =========== ===========
F-46
140
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
12. EMPLOYEE BENEFITS:
Effective December 15, 1995, the Hotels participate in the following
employee benefit plans which are sponsored by IHC:
The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Health Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby IHC is
self-insured for certain benefits, subject to certain individual claim and
aggregate maximum liability limits. The Hotels pay, directly to IHC, the
employer portion of the premiums, which is based on the estimated conventional
premium. Premiums may be prospectively adjusted to consider actual claims
experience. The Hotels incurred expenses of approximately $4,300 for the period
from December 15, 1995 to December 31, 1995 related to the plan. The Health
Trust is exempt from federal income tax under Section 501(c)(9) of the Internal
Revenue Code as a voluntary employees' beneficiary association.
IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's attainment
of 21 years of age and on the completion of one year of service with IHC.
Employer contributions are based on a percentage of employee contributions.
Participants may make voluntary contributions to the plan of up to 6% of their
compensation, as defined. The Hotels incurred expenses of approximately $2,400
for the period from December 15, 1995 to December 31, 1995 related to the plan.
Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotels. These compensation
awards are dependent on the Hotel's performance and other established criteria.
The Hotels incurred expenses amounting to approximately $10,000 for the period
from December 15, 1995 to December 31, 1995 related to these plans.
13. COMMITMENTS AND CONTINGENCIES:
Earthquake Insurance:
Warner participates in a pooled earthquake insurance program that includes
all Company-managed properties in California. The program provides a total
aggregate coverage of $35,000,000 with each hotel paying a deductible equal to
5% of its then current fair market value.
The Partnership's investment in the property and equipment of Warner as of
December 31, 1995 was as follows:
Land............................................................. $ 6,250,000
Buildings and improvements....................................... 43,613,883
Furniture, fixtures and equipment................................ 6,707,068
-----------
$56,570,951
===========
In the ordinary course of business, various lawsuits, claims or proceedings
have been or may be instituted or asserted against the Partnership. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operation or liquidity of the Partnership.
F-47
141
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing for foreclosed or contributed properties
activities consisted of the following:
1993:
Land........................................................... $ 4,548,000
Building....................................................... 14,357,084
Furniture, fixtures and equipment.............................. 2,891,000
-----------
$21,796,084
===========
1994:
Building....................................................... $34,359,250
Furniture, fixtures and equipment.............................. 7,248,950
Accounts receivable............................................ 1,791,127
Inventory...................................................... 721,052
Prepaid expenses............................................... 337,778
Liabilities.................................................... (40,935)
-----------
$44,417,222
===========
DECEMBER 15 TO DECEMBER 31, 1995:
CIGNA 25% capital contribution of the Hotels................... $ 3,716,932
Acquisition costs incurred by CIGNA............................ 613,281
Deferred expenses.............................................. 195,000
-----------
$ 4,525,213
===========
15. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these combined
financial statements.
F-48
142
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Interstate Hotels Corporation:
We have audited the accompanying balance sheets of Boston Marriott Westborough
Hotel (the Hotel) as of December 31, 1994 and 1995, and the related statements
of operations and equity and cash flows for the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Hotel's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the financial statements of the Hotel have been prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a Registration Statement of Interstate
Hotels Company and are not intended to be a complete presentation of the Hotel.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Boston Marriott Westborough
Hotel as of December 31, 1994 and 1995, and its operations and cash flows for
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
May 2, 1996
F-49
143
BOSTON MARRIOTT WESTBOROUGH HOTEL
BALANCE SHEETS
---------
DECEMBER 31, MARCH 31,
-------------------------- 1996
1994 1995 -----------
----------- ----------- (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 110,616 $ 1,049,549 $ 1,738,937
Accounts receivable.............................. 962,699 870,685 657,447
Inventories (Note 4)............................. 259,882 275,039 245,698
Prepaid expenses and other....................... 138,677.... 129,074 102,202
----------- ----------- -----------
Total current assets................... 1,471,874 2,324,347 2,744,284
Property and equipment, net (Note 5).................. 12,024,769 11,438,422 11,310,447
----------- ----------- -----------
Total assets........................... $13,496,643 $13,762,769 $14,054,731
=========== =========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable................................. 269,670 134,779 194,436
Accrued liabilities:
Salaries and benefits.......................... 248,415 294,890 145,735
Compensated absences........................... 187,175 179,552 205,594
Royalties and fees (Note 3).................... 31,764 56,253 64,587
Management fees (Note 3)....................... 98,442 89,592 71,351
Other.......................................... 228,792 195,930 155,835
Customer deposits................................ 25,548 19,788 30,589
----------- ----------- -----------
Total liabilities...................... 1,089,806 970,784 868,127
Commitments and contingencies (Notes 8 and 9)
Equity................................................ 12,406,837 12,791,985 13,186,604
----------- ----------- -----------
Total liabilities and equity........... $13,496,643 $13,762,769 $14,054,731
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-50
144
BOSTON MARRIOTT WESTBOROUGH HOTEL
STATEMENTS OF OPERATIONS AND EQUITY
---------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Revenues:
Rooms......................... $ 5,011,439 $ 5,501,954 $ 5,997,813 $ 1,348,732 $ 1,535,105
Food and beverage............. 3,683,959 4,016,093 4,218,510 1,003,700 990,709
Telephone..................... 322,211 318,707 358,571 84,615 99,872
Gift shop..................... 91,115 92,761 91,381 21,525 13,328
Other......................... 104,851 120,947 144,350 37,908 49,909
----------- ----------- ----------- ----------- -----------
9,213,575 10,050,462 10,810,625 2,496,480 2,688,923
Departmental costs and expenses
(Note 3)...................... 4,087,048 4,419,216 4,680,309 1,094,856 1,130,263
----------- ----------- ----------- ----------- -----------
Departmental income (Note
7)....................... 5,126,527 5,631,246 6,130,316 1,401,624 1,558,660
Other expenses (Note 3):
Administration and general.... 882,379 855,731 925,265 216,452 216,855
Credit card commissions....... 138,316 141,075 156,962 31,697 40,351
Management fee................ 414,355 479,286 528,631 87,377 129,112
Royalties..................... 394,229 434,731 464,945 106,422 115,045
Advertising and sales......... 625,127 599,276 640,302 156,766 139,624
Repairs and maintenance....... 344,957 418,660 474,837 109,553 131,629
Heat, power and light......... 323,592 343,711 385,730 115,834 117,929
Insurance and taxes........... 230,773 275,270 258,503 72,173 75,014
Depreciation.................. 775,388 808,323 830,760 207,690 207,690
----------- ----------- ----------- ----------- -----------
4,129,116 4,356,063 4,665,935 1,103,964 1,173,249
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................... 997,411 1,275,183 1,464,381 297,660 385,411
Income tax expense.............. 399,000 510,000 586,000 119,000 154,000
----------- ----------- ----------- ----------- -----------
Net income................. 598,411 765,183 878,381 178,660 231,411
Equity:
Beginning of period........... 13,810,649 12,271,929 12,406,837 12,406,837 12,791,985
(Decrease) increase in
equity..................... (2,137,131) (630,275) (493,233) (701,025) 163,208
----------- ----------- ----------- ----------- -----------
End of period................. $12,271,929 $12,406,837 $12,791,985 $11,884,472 $13,186,604
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-51
145
BOSTON MARRIOTT WESTBOROUGH HOTEL
STATEMENTS OF CASH FLOWS
---------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
----------- --------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from operating
activities:
Net income........................ $ 598,411 $ 765,183 $ 878,381 $ 178,660 $ 231,411
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................... 775,388 808,323 830,760 207,690 207,690
Changes in assets and liabilities:
Accounts receivable............ (116,944) (94,839) 92,014 647,004 213,328
Inventories.................... 9,350 11,685 (15,157) 9,205 29,341
Prepaid expenses and other..... (10,559) (47,842) 9,603 (37,244) 26,872
Accounts payable............... 68,179 70,941 (134,891) (12,924) 59,657
Accrued liabilities............ 150,564 206,429 21,629 (236,397) (173,115)
Customer deposits.............. 838,769 (852,557) (5,760) 418,287 10,801
----------- --------- ---------- ---------- ----------
Net cash provided by operating
activities................... 2,313,158 867,323 1,676,579 1,174,281 605,895
----------- --------- ---------- ---------- ----------
Cash flows from investing
activities:
Purchase of property and
equipment...................... (148,734) (451,052) (244,413) (28,636) (79,715)
----------- --------- ---------- ---------- ----------
Net cash used in investing
activities................... (148,734) (451,052) (244,413) (28,636) (79,715)
Cash flows from financing
activities:
Net (distributions) contributions
from owners.................... (2,137,131) (630,275) (493,233) (701,025) 163,208
----------- --------- ---------- ---------- ----------
Net cash (used in) provided by
financing activities......... (2,137,131) (630,275) (493,233) (701,025) 163,208
Net increase (decrease) in cash and
cash equivalents.................. 27,293 (214,004) 938,933 444,620 689,388
Cash and cash equivalents at
beginning of period............... 297,327 324,620 110,616 110,616 1,049,549
----------- --------- ---------- ---------- ----------
Cash and cash equivalents at end of
period............................ $ 324,620 $ 110,616 $1,049,549 $ 555,236 $1,738,937
=========== ========= ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-52
146
BOSTON MARRIOTT WESTBOROUGH HOTEL
NOTES TO FINANCIAL STATEMENTS
---------
1. BASIS OF PRESENTATION:
The Boston Marriott Westborough Hotel (Hotel) is a full service property
operated under a management agreement (Agreement) with Interstate Hotels
Corporation (IHC) and the owner of the Hotel, State Mutual Life Insurance
Company of America (SMLIC). The initial term of the Agreement ends on December
31, 2001 and can be extended, by mutual consent of the parties, on the then
current terms of the Agreement for annual periods. SMLIC obtained the Hotel on
January 2, 1991 through a deed-in-lieu of foreclosure and recorded the assets
acquired at the lower of cost or fair value based on certain fair market
valuations. The Hotel is expected to be purchased by IHC Member Corporation (an
affiliate of IHC).
IHC does not have access to certain books and records of SMLIC, and
therefore, the financial statements include only those transactions recorded in
the books and records of the Hotel except that income tax expense has been
provided for in the statement of operations based on applicable statutory rates.
Transactions recorded by SMLIC that relate to the Hotel, principally interest on
intercompany borrowings, are excluded from these financial statements since they
are not recorded on the Hotel's records.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in a Registration Statement of Interstate Hotels Company and are not
intended to be a complete presentation of the Hotel's operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
The Hotel considers all unrestricted, highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
Inventories:
Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.
Property and Equipment:
Property and equipment are recorded at cost (or the allocated lower of cost
or fair value at the date of foreclosure as described in Note 1). Property and
equipment are depreciated primarily on the straight-line method over their
useful lives (building and improvements over 25 years and furniture, fixtures
and equipment over 7 years). Expenditures for maintenance and repairs are
expensed as incurred. The cost and the related accumulated depreciation
applicable to property no longer in service or fully depreciated are eliminated
from the accounts, and any gain or loss thereon is included in operations.
Concentration of Credit Risk:
The Hotel maintains cash and cash equivalents with two financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. The Hotel has not experienced any losses in such amounts.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-53
147
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Revenue Recognition:
The Hotel recognizes revenue from its rooms, gift shop, catering and
restaurant facilities as earned on the close of each business day.
Unaudited Financial Statements:
The unaudited balance sheet as of March 31, 1996 and the unaudited
statements of operations and equity and cash flows for the three months ended
March 31, 1995 and 1996, in the opinion of management, have been prepared on the
same basis as the audited financial statements and include all significant
adjustments (consisting primarily of normal recurring adjustments) considered
necessary for a fair presentation of the results of these interim periods. The
data disclosed in these notes to the financial statements for these periods are
also unaudited. Operating results for the three month period ended March 31,
1996 is not necessarily indicative of the results for the entire year.
3. RELATED PARTY TRANSACTIONS:
The Hotel is operated as a Marriott Hotel pursuant to a franchise agreement
(Agreement) dated July 13, 1991 between Interstate Hotels Corporation as
franchisee, and Marriott Corporation, as franchiser. The initial term of the
Agreement extends through July 12, 2001 and can be extended, by the mutual
consent of the parties and on the then current terms of Marriott International
franchise agreements, for five successive five-year terms. The Agreement
requires ongoing fees, which comprise royalty expense in the statements of
operations and equity amounting to 6% of room revenues and 3% of certain food
and beverage revenues. In addition, other fees paid to Marriott Corporation
include a national advertising campaign fee of .8% of room revenues, as well as
fees for a national reservation system, networking, honored guest awards and
other promotional programs. These other fees amounted to approximately $433,000
in 1993, $475,000 in 1994 and $513,000 in 1995.
The management agreement referred to in Note 1 provides for a base
management fee of 3.5% of gross revenues and an incentive fee equal to 20% of
cash available for distribution, as defined, in the management agreement. The
management fees earned by IHC were approximately $323,000 in 1993, $352,000 in
1994 and $378,000 in 1995. The incentive fees earned by IHC approximated $92,000
in 1993, $128,000 in 1994 and $150,000 in 1995.
An affiliate of IHC provides reinsurance to major insurance carriers for
certain insurance coverages that the carriers provide to the Hotel. IHC also
provides certain accounting and bookkeeping assistance to the Hotel, of which no
amounts were paid by the Hotel for these services.
4. INVENTORIES:
The components of inventories were as follows:
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
China, glass, silver and linen............................... $175,233 $196,611 $189,651
Food......................................................... 34,363 32,394 26,099
Beverage..................................................... 40,668 37,300 29,948
Gift shop and other.......................................... 9,618 8,734 --
-------- -------- --------
$259,882 $275,039 $245,698
======== ======== ========
F-54
148
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
Land................................................. $ 1,020,646 $ 1,050,646 $1,050,646
Building and improvements............................ 11,465,695 11,457,392 11,457,392
Furniture, fixtures and equipment.................... 2,354,638 2,577,354 2,657,069
----------- ----------- -----------
14,840,979 15,085,392 15,165,107
Less accumulated depreciation........................ 2,816,210 3,646,970 3,854,660
----------- ----------- -----------
$12,024,769 $11,438,422 $11,310,447
=========== =========== ===========
6. DEPARTMENTAL INCOME:
Departmental income was as follows:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Rooms............................ $3,858,285 $4,232,332 $4,686,660 $1,041,932 $1,187,072
Food and beverage................ 1,069,955 1,200,047 1,185,742 299,975 278,785
Telephone........................ 190,143 198,935 237,011 54,614 70,831
Gift shop........................ (9,223) (15,979) (13,168) (2,632) (3,356)
Other............................ 17,367 15,911 34,071 7,735 25,328
---------- ---------- ---------- ---------- ----------
$5,126,527 $5,631,246 $6,130,316 $1,401,624 $1,558,660
========== ========== ========== ========== ==========
7. EMPLOYEE BENEFITS:
The Hotel participates in the following employee benefit plans which are
sponsored by IHC:
The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Trust) provides employees of IHC with group health insurance benefits.
The group policies provide for a "minimum premium plan" whereby IHC is
self-insured for certain benefits, subject to certain individual claim and
aggregate maximum liability limits. The Hotel pays, directly to IHC, the
employer portion of the premium, which is based on the estimated conventional
premium. Premiums may be prospectively adjusted to consider actual claims
experience. The Hotel incurred expenses of approximately $147,000, $188,000 and
$154,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The
Trust is exempt from federal income tax under Section 501(c)(9) of the Internal
Revenue Code as a voluntary employees' beneficiary association.
IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's attainment
of 21 years of age and on the completion of one year of service with IHC.
Employer contributions are based on a percentage of employee contributions.
Participants may make voluntary contributions to the plan of up to 6% of their
compensation, as defined. The Hotel incurred expenses of approximately $32,000
in 1993, $40,000 in 1994 and $44,000 in 1995 related to the plan.
Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotel. These compensation
awards are dependent on the Hotel's performance and other established criteria.
The Hotel incurred expenses amounting to approximately $159,000 in 1993,
$100,000 in 1994 and $109,000 in 1995 related to these plans.
F-55
149
NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------
8. OPERATING LEASES:
The Hotel accounts for various equipment leases as operating leases. Total
rental expense amounted to approximately $136,000 in 1993, $121,000 in 1994 and
$129,000 in 1995. The following is a schedule of future minimum lease payments
under these leases:
1996............................................................... $129,000
1997............................................................... 65,000
1998............................................................... 5,000
1999............................................................... 2,000
--------
$201,000
========
9. COMMITMENT AND CONTINGENCIES:
Pursuant to the management agreement referred to in Note 1, SMLIC is
required to deposit in the Hotel's account additional funds necessary to
maintain operating funds on hand of $300,000.
In the ordinary course of business, various lawsuits, claims or proceedings
have been or may be instituted or asserted against the Hotel. Based on currently
available facts, management believes that the disposition of matters that are
pending or asserted will not have a material adverse effect on the financial
position, results of operation or liquidity of the Hotel.
10. SIGNIFICANT CUSTOMERS:
The Hotel's largest customer represented approximately 13%, 16% and 18% of
revenues for the years ended December 31, 1993, 1994 and 1995 and 18% and 17%
for the three month periods ended March 31, 1995 and 1996, respectively.
11. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these
financial statements.
F-56
150
PHOTO PHOTO
BOCA RATON MARRIOTT, FORT MAGRUDER INN, WILLIAMSBURG, VIRGINIA (OWNED)
BOCA RATON, FLORIDA
(MANAGED)
PHOTO
MARRIOTT'S CASA MARINA RESORT, KEY WEST,
FLORIDA (MANAGED)
PHOTO
SEATTLE CROWNE PLAZA, SEATTLE, WASHINGTON
(MANAGED)
PHOTO
FT. LAUDERDALE AIRPORT HILTON, DANIA,
FLORIDA (OWNED)
PHOTO
PITTSBURGH AIRPORT MARRIOTT,
PITTSBURGH, PENNSYLVANIA (MANAGED)
151
===============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................. 1
Risk Factors........................ 6
Dilution............................ 11
Use of Proceeds..................... 12
Prior S Corporation Status.......... 12
Dividend Policy..................... 12
Capitalization...................... 13
Pro Forma Financial Data............ 14
Selected Financial and Other Data... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 28
Business and Properties............. 37
The Organization, Acquisition and
Financing Plan.................... 56
Management.......................... 63
Principal Shareholders.............. 76
Certain Relationships and Related
Transactions...................... 77
Description of Capital Stock........ 78
Shares Eligible for Future Sale..... 80
Taxation............................ 81
Underwriting........................ 83
Legal Matters....................... 85
Experts............................. 85
Additional Information.............. 86
Index to Financial Statements....... F-1
---------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
11,000,000 SHARES
LOGO
INTERSTATE HOTELS
COMPANY
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES
(USA) INC.
, 1996
===============================================================================
152
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION OF THESE SECURITIES UNDER
THE SECURITIES LAWS OF ANY SUCH STATE.
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 19, 1996
PROSPECTUS
11,000,000 SHARES
INTERSTATE HOTELS COMPANY
COMMON STOCK
------------------------
All of the shares of Common Stock of Interstate Hotels Company (the
"Company") are being offered by the Company. Of the 11,000,000 shares of Common
Stock offered, 1,650,000 shares are being offered hereby outside the United
States and Canada by the International Underwriters and 9,350,000 shares are
being offered in a concurrent offering in the United States and Canada by the
U.S. Underwriters. The initial public offering price and aggregate underwriting
discount per share will be identical for both offerings (the "Offering"). It is
currently estimated that the initial public offering price will be between $19
and $21 per share. For factors to be considered in determining the initial
public offering price, see "Underwriting."
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "IHC," subject to official notice of issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
===========================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- - -----------------------------------------------------------------------------------------------------------
Per Share................................... $ $ $
- - -----------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
===========================================================================================================
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several International Underwriters and the
several U.S. Underwriters 30-day options to purchase up to an additional
1,402,500 and 247,500 shares of Common Stock, respectively, to cover over-
allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel to the Underwriters. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York City on or about , 1996.
------------------------
MERRILL LYNCH INTERNATIONAL
CREDIT LYONNAIS SECURITIES
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
INTERNATIONAL
SMITH BARNEY INC.
------------------------
The date of this Prospectus is , 1996
LOGO
153
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
UNDERWRITING
The International Underwriters named below (the "International
Underwriters"), acting through their international representatives, Merrill
Lynch International, Credit Lyonnais Securities, Montgomery Securities, Morgan
Stanley & Co. International Limited and Smith Barney Inc. (the "International
Representatives"), have severally agreed, subject to the terms and conditions of
an International Purchase Agreement with the Company (the "International
Purchase Agreement"), to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names. The International
Underwriters are committed to purchase all of such shares if any are purchased.
Under certain circumstances, the commitments of non-defaulting International
Underwriters may be increased as set forth in the International Purchase
Agreement.
NUMBER
INTERNATIONAL UNDERWRITER OF SHARES
----------------------------------------------------------------------------- ---------
Merrill Lynch International..................................................
Credit Lyonnais Securities...................................................
Montgomery Securities........................................................
Morgan Stanley & Co. International Limited ..................................
Smith Barney Inc ............................................................
---------
Total........................................................... 1,650,000
=========
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement") with certain underwriters in the United States (the "U.S.
Underwriters" and, together with the International Underwriters, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Montgomery Securities, Morgan Stanley & Co. Incorporated, Smith Barney Inc. and
Credit Lyonnais Securities (USA) Inc. are acting as U.S. representatives (the
"U.S. Representatives"). Subject to the terms and conditions set forth in the
U.S. Purchase Agreement, and concurrently with the sale of 1,650,000 shares of
Common Stock to the International Underwriters pursuant to the International
Purchase Agreement, the Company has agreed to sell to the U.S. Underwriters, and
the U.S. Underwriters have severally agreed to purchase, an aggregate of
9,350,000 shares of Common Stock. Under certain circumstances under the U.S.
Purchase Agreement, the commitments of non-defaulting U.S. Underwriters may be
increased. The initial public offering price per share and the total
underwriting discount per share will be identical under the International
Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Underwriters and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
each such agreement are purchased. Sales of Common Stock to be purchased by the
International Underwriters in the International Offering and the U.S.
Underwriters in the U.S. Offering are conditioned upon one another.
The Company has granted the International Underwriters an option
exercisable for 30 days after the date hereof to purchase up to an additional
247,500 shares at the initial public offering price per share, less the
underwriting discount, solely to cover over-allotments, if any. To the extent
that the International Underwriters exercise this option, each International
Underwriter will be obligated, subject to certain conditions, to purchase the
number of additional shares of Common Stock proportionate to such International
Underwriter's initial amount reflected in the foregoing table. Additionally, the
Company has granted the U.S. Underwriters an option exercisable for 30 days
after the date hereof to purchase up to an additional 1,402,500 shares at the
initial public offering price per share, less the underwriting discount, solely
to cover over-allotments, if any, on terms similar to those granted to the
International Underwriters.
The International Underwriters propose initially to offer the shares to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain selected dealers at such price less a concession not
in excess of $ per share, and the International Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share to certain
other dealers. After the completion of the Offering, the offering price,
concession and discount may be changed.
82
154
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
The International Underwriters and the U.S. Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the International Underwriters and the U.S.
Underwriters of such number of shares of Common Stock as may be mutually agreed.
The price of any Common Stock so sold shall be the initial public offering
price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell Common Stock will not offer to
sell or sell Common Stock to persons who are U.S. or Canadian persons or to
persons they believe intend to resell to persons who are U.S. or Canadian
persons, and the U.S. Underwriters and any dealer to whom they sell Common Stock
will not offer to sell or sell Common Stock to non-U.S. or non-Canadian persons
or to persons they believe intend to resell to non-U.S. or non-Canadian persons,
except, in each case, for transactions pursuant to such agreement.
Prior to the Offering, there has been no active public market for the
Common Stock. The initial public offering price will be determined by
negotiations among the Company and the U.S. Representatives. Among the factors
to be considered in such negotiations are the Company's recent results of
operations, the future prospects of the Company and its industry in general, the
price-earnings ratios and market prices of securities of companies engaged in
activities similar to those of the Company and prevailing conditions in the
securities markets. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offering at or above the initial public offering price.
The Company and its directors, executive officers and existing
shareholders, including Blackstone, have agreed not to sell or otherwise dispose
of any shares of Common Stock (other than shares purchased pursuant to the
Offering or in the open market) or securities convertible into or exercisable
for Common Stock without the prior written consent of Merrill Lynch for a period
of 180 days after the date of this Prospectus. See "Shares Eligible For Future
Sale."
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance. In order to meet the
requirements for listing of the Common Stock on that exchange, the U.S.
Underwriters have undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial owners.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company and the several Underwriters have agreed to indemnify each
other against liabilities under the Securities Act.
The Company has agreed to pay Merrill Lynch a fee for advisory services in
connection with the Organization in an amount up to .50% of the gross proceeds
of the Offering.
At the request of the Company, the Underwriters have reserved up to 250,000
shares of Common Stock for sale at the initial public offering price to certain
employees, customers, vendors and business associates of the Company who have
expressed an interest in purchasing shares of Common Stock. The number of shares
of Common Stock available to the general public will be reduced to the extent
these persons purchase the reserved shares of Common Stock. Any reserved shares
of Common Stock that are not so purchased by such persons at the closing of the
Offering will be offered by the Underwriters to the general public on the same
terms as the other Common Stock offered by this Prospectus.
The Company is concurrently offering 1,000 shares of Common Stock at the
initial public offering price directly to certain employees and business
associates of the Company pursuant to this Prospectus in certain jurisdictions
where the Underwriters are prohibited by law from selling the Common Stock. Such
shares are included in the 11,000,000 shares being sold pursuant to this
Prospectus. Since such shares are being sold directly by the Company and not
through the Underwriters, no underwriting discount or commission will be paid to
the Underwriters with respect to such shares.
83
155
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
Each International Underwriter has represented and agreed that (i) it has
not offered or sold, and will not offer or sell, in the United Kingdom by means
of any document, any shares of the Common Stock other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent (except under circumstances which do not constitute an offer
to the public within the meaning of the Public Offers of Securities Regulations
1995), (ii) it has complied and will comply with all applicable provisions of
the Financial Services Act of 1986 with respect to anything done by it in
relation to the Common Stock in, from or otherwise involving the United Kingdom,
and (iii) it has only issued or passed on, and will only issue or pass on in the
United Kingdom, any document received by it in connection with the issue of the
Common
84
156
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
Stock to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a
person to whom such document may otherwise lawfully be issued or passed on.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Jones, Day, Reavis & Pogue, New York, New
York. Certain legal matters in connection with this Offering will be passed upon
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, New York, New
York.
EXPERTS
The balance sheet of the Company as of April 23, 1996; the Combined
Financial Statements of Interstate Hotels Corporation and Affiliates as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and
1995; the Combined Financial Statements of Interstone I Property Partnerships
and Predecessor Entities as of December 31, 1994 and 1995 and for the years
ended December 31, 1993, 1994 and 1995; the Combined Financial Statements of
Interstone/CGL Partners, L.P. and Predecessor Entity as of December 31, 1994,
December 14, 1995 and December 31, 1995 and for the years ended December 31,
1993 and 1994, for the period from January 1, 1995 to December 14, 1995 and for
the period from December 15, 1995 to December 31, 1995; and Financial Statements
of Boston Marriott Westborough Hotel as of December 31, 1994 and 1995 and for
the years ended December 31, 1993, 1994 and 1995 included in this Prospectus
have been included herein in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is a part of the Registration Statement, omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement and the exhibits thereto for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. The Registration Statement,
including exhibits filed therewith, may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and will also be available for inspection
and copying at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed
by the Commission. The Common Stock has been approved for listing on the New
York Stock Exchange, subject to official notice of issuance. Reports and other
information concerning the Company may be inspected and copied at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. The Company intends
to furnish its shareholders annual reports containing consolidated financial
statements certified by its independent accountants and quarterly reports
containing unaudited condensed consolidated financial statements for each of the
first three quarters of each fiscal year.
85
157
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
===============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................. 1
Risk Factors........................ 6
Dilution............................ 11
Use of Proceeds..................... 12
Prior S Corporation Status.......... 12
Dividend Policy..................... 12
Capitalization...................... 13
Pro Forma Financial Data............ 14
Selected Financial and Other Data... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 28
Business and Properties............. 37
The Organization, Acquisition and
Financing Plan.................... 56
Management.......................... 63
Principal Shareholders.............. 76
Certain Relationships and Related
Transactions...................... 77
Description of Capital Stock........ 78
Shares Eligible for Future Sale..... 80
Taxation............................ 81
Underwriting........................ 83
Legal Matters....................... 85
Experts............................. 85
Additional Information.............. 85
Index to Financial Statements....... F-1
---------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
11,000,000 SHARES
LOGO
INTERSTATE HOTELS
COMPANY
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH INTERNATIONAL
CREDIT LYONNAIS SECURITIES
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
INTERNATIONAL
SMITH BARNEY INC.
, 1996
===============================================================================
158
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses, other than underwriting
discounts and commissions, paid or payable in connection with the issuance and
distribution of the Common Stock being registered hereby:
Securities and Exchange Commission Registration Fee............. $ 91,604
National Association of Securities Dealers, Inc. Filing Fee..... 27,065
New York Stock Exchange Listing Fee............................. 112,600
Printing and Engraving Expenses................................. 325,000
Legal Fees and Expenses......................................... 600,000
Accounting Fees and Expenses.................................... 700,000
Blue Sky Fees and Expenses...................................... 10,000
Transfer Agent and Registrar Fees............................... 3,000
Miscellaneous Fees and Expenses................................. 80,731
----------
Total...................................................... $1,950,000
==========
All amounts are estimated except the Securities and Exchange Commission
Registration Fee and the National Association of Securities Dealers, Inc. Filing
Fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for
mandatory and discretionary indemnification of a corporation's directors,
officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with an action or
proceeding, whether civil, criminal, administrative or investigative (other than
derivative actions), to which any of them is a party or is threatened to be made
a party by reason of his being a representative of the corporation or serving at
the request of the corporation as a representative of another corporation,
partnership, joint venture, trust or other enterprise, if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful.
Section 1742 permits indemnification in derivative actions if the
appropriate standard of conduct is met, except in respect of any claim, issue or
matter as to which the person has been adjudged to be liable to the corporation
unless and only to the extent that the proper court determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for the
expenses that the court deems proper.
Under Section 1743, indemnification is mandatory to the extent that the
officer or director has been successful on the merits or otherwise in defense of
any action or proceeding referred to in Section 1741 or 1742.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that the representative met the
applicable standard of conduct and that such determination will be made (i) by
the board of directors by a majority vote of a quorum of directors not parties
to the action or proceeding; (ii) if a quorum is not obtainable, or if
obtainable and a majority of disinterested directors so directs, by independent
legal counsel; or (iii) by the shareholders.
Section 1745 provides that expenses incurred by an officer or director in
defending an action or proceeding may be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determining that he is not entitled to be indemnified by the
corporation.
II-1
159
Section 1746 provides generally that the indemnification and advancement of
expenses provided by Subchapter 17D of the BCL (i) will not be deemed exclusive
of any other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding that office, and (ii) may not
be made in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness.
Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any director or officer against any liability incurred by
him in his capacity as officer or director, whether or not the corporation would
have the power to indemnify him against that liability under Subchapter 17D of
BCL.
Sections 1748 and 1749 extend the indemnification and advancement of
expenses provisions contained in Subchapter 17D of the BCL to successor
corporations in fundamental corporate changes and to representatives serving as
fiduciaries of employee benefit plans.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter 17D of the BCL shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs and personal representative of such person.
The Company's Bylaws provide in general that the Company shall indemnify
its officers and directors to the fullest extent permitted by law. The Bylaws
further provide that any alteration, amendment, or repeal of the indemnification
provisions, if not approved by 80% of the total number of directors of the
Company, requires the affirmative vote of shareholders owning at least 80% of
the outstanding shares entitled to vote.
As authorized by the Company's Articles of Incorporation, the Company
entered into indemnification agreements with each of its directors. These
indemnification agreements provide for, among other things, (i) the
indemnification by the Company of the indemnitees thereunder to the extent
described above, (ii) the advancement of attorney's fees and other expenses, and
(iii) the establishment, upon approval by the Board, of trusts or other funding
mechanisms to fund the Company's indemnification obligations thereunder.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In April 1996, the Company issued 10,000 shares of Common Stock to Milton
Fine, Chairman of the Board of the Company, for nominal consideration. The
shares were issued without registration under the Securities Act pursuant to the
exemption afforded by Section 4(2) of the Securities Act.
Reference is made to "The Organization, Acquisition and Financing Plan--The
Organization" and "Management--Stock Option Grants" regarding shares of Common
Stock to be issued in connection with the Organization, the purchasers thereof
and the consideration therefor. Such issuances will occur without registration
under the Securities Act pursuant to the exemptions afforded by Section 3(a)(9)
or 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
- - ------------- ------------------------------------------------------------------------------
* 1.1(a) Form of Purchase Agreement (U.S. Version)
* 1.1(b) Form of Purchase Agreement (International Version)
2.1 Agreement and Plan of Merger, dated as of November 1, 1995, among Interstate
Hotels Corporation and the other persons signatory thereto
* 2.2 Form of Formation Agreement among the Company and the parties identified on
the signature page thereof
* 3.1 Form of Amended and Restated Articles of Incorporation of the Company
* 3.2 Form of Amended and Restated By-Laws of the Company
4.1 Specimen Common Stock Certificate
II-2
160
EXHIBIT NO. DESCRIPTION
- - ------------- ------------------------------------------------------------------------------
* 4.2 Form of Credit Agreement among Interstate Hotels Corporation, Credit Lyonnais
and the other parties signatory thereto
* 5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of issuance of
the Common Stock being registered
10.1(a) Option Agreement, dated as of October 12, 1995, among Interstate Hotels
Corporation and the other persons signatory thereto
10.1(b) Amendment No. 1 to Option Agreement, dated as of December 15, 1995, among
Interstate Hotels Corporation and the other persons signatory thereto
10.1(c) Amendment No. 2 to Option Agreement, dated as of March 29, 1996, among
Interstate Hotels Corporation and the other persons signatory thereto, as
revised
* 10.2(a) Agreement of Purchase and Sale, dated as of March 29, 1996, among the Sellers
named therein and IHC Member Corporation
* 10.2(b) First Amendment to Agreement of Purchase and Sale, dated as of March 29, 1996,
among the Sellers named therein and IHC Member Corporation
10.3(a) Contribution Agreement, dated as of March 29, 1996, among Interstate Hotels
Corporation and the other persons signatory thereto
* 10.3(b) First Amendment to Contribution Agreement, dated as of March 29, 1996, among
Interstate Hotels Corporation and the other persons signatory thereto
10.4 Form of Stockholders Agreement among the Company, Blackstone Real Estate
Advisors L.P. and the shareholders named therein
* 10.5 Form of Registration Rights and Shareholders Agreement among the Company and
the shareholders named therein
10.6 Master Agreement, dated as of April 1, 1996, among Host Funding, Inc.,
Crossroads Hospitality Tenant Company, L.L.C. and Crossroads Hospitality
Company, L.L.C.
10.7(a) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 Miner,
Missouri
10.7(b) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 Poplar
Bluff, Missouri
10.7(c) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 Rock
Falls, Illinois
10.7(d) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 San
Diego, California
10.7(e) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8
Somerset, Kentucky
10.8 [Intentionally omitted]
10.9(a)(1) Interstone Three Partners I L.P. Limited Partnership Agreement, dated as of
December 15, 1995, among BJS Interstone Management Associates, IHC/Interstone
Corporation, Blackstone Real Estate Partners I L.P. and IHC/Interstone
Partnership II, L.P.
* 10.9(a)(2) Form of First Amendment to Interstone Three Partners I L.P. Limited
Partnership Agreement among BJS Interstone Management Associates,
IHC/Interstone Corporation, Blackstone Real Estate Partners I L.P. and
IHC/Interstone Partnership II, L.P.
10.9(b)(1) Interstone Three Partners II L.P. Limited Partnership Agreement, dated as of
December 15, 1995, among BJS Interstone Management Associates, IHC/Interstone
Corporation, Blackstone Real Estate Partners II L.P. and IHC/Interstone
Partnership II, L.P.
* 10.9(b)(2) Form of First Amendment to Interstone Three Partners II L.P. Limited
Partnership Agreement among BJS Interstone Management Associates,
IHC/Interstone Corporation, Blackstone Real Estate Partners II L.P. and
IHC/Interstone Partnership II, L.P.
II-3
161
EXHIBIT NO. DESCRIPTION
- - ------------- ------------------------------------------------------------------------------
10.9(c)(1) Interstone Three Partners III L.P. Limited Partnership Agreement, dated as of
December 15, 1995, among BJS Interstone Management Associates, IHC/Interstone
Corporation, Blackstone Real Estate Partners III L.P., Blackstone Real Estate
Holdings L.P., Blackstone RE Capital Partners L.P., Blackstone RE Offshore
Capital Partners L.P. and IHC/Interstone Partnership II, L.P.
* 10.9(c)(2) Form of First Amendment to Interstone Three Partners III L.P. Limited
Partnership Agreement among BJS Interstone Management Associates,
IHC/Interstone Corporation, Blackstone Real Estate Partners III L.P.,
Blackstone Real Estate Holdings L.P., Blackstone RE Capital Partners L.P.,
Blackstone RE Offshore Capital Partners L.P. and IHC/Interstone Partnership
II, L.P.
10.9(d)(1) Interstone Three Partners IV L.P. Limited Partnership Agreement dated as of
December 15, 1995, among BJS Interstone Management Associates, IHC/Interstone
Corporation, Blackstone Real Estate Partners IV L.P., Blackstone RE Capital
Partners II L.P. and IHC/Interstone Partnership II, L.P.
* 10.9(d)(2) Form of First Amendment to Interstone Three Partners IV L.P. Limited
Partnership Agreement among BJS Interstone Management Associates,
IHC/Interstone Corporation, Blackstone Real Estate Partners IV L.P.,
Blackstone RE Capital Partners II L.P. and IHC/Interstone Partnership II, L.P.
10.10 Interstate Hotels Corporation Executive Retirement Plan
10.11 Interstate Hotels Company Equity Incentive Plan
10.12 Interstate Hotels Company Stock Purchase Plan
* 10.13 Interstate Hotels Company Management Bonus Plan, as revised
* 10.14 Interstate Hotels Company Stock Option Plan for Non-Employee Directors, as
revised
* 10.15(a) Employment Agreement between the Company and Milton Fine
10.15(b) Employment Agreement between the Company and W. Thomas Parrington, Jr.
10.15(c) Employment Agreement between the Company and J. William Richardson
10.15(d) Employment Agreement between the Company and Robert L. Froman
10.15(e) Employment Agreement between the Company and Marvin I. Droz
10.16 Form of Severance Agreement between the Company and each of Milton Fine, W.
Thomas Parrington, Jr., J. William Richardson, Robert L. Froman and Marvin I.
Droz
* 10.17 Form of Indemnification Agreement between the Company and each of its
directors
10.18(a) Interstate Hotels Company Supplemental Deferred Compensation Plan
10.18(b) Deferred Compensation Agreement between the Company and W. Thomas Parrington,
Jr.
10.18(c) Deferred Compensation Agreement between the Company and J. William Richardson
* 21.1 List of Subsidiaries of the Company
* 23.1 Consent of Coopers & Lybrand L.L.P.
* 23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1)
24.1 Powers of Attorney executed by the Company, Michael J. Aranson, David J. Fine,
Milton Fine, R. Michael McCullough, W. Thomas Parrington, Jr., J. William
Richardson, Thomas J. Saylak and Steven J. Smith
- - ------------------
* Filed herewith. All other exhibits have been filed previously.
(b) Financial Statement Schedules.
No schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission are required under the related
instructions or are applicable or the information is contained in the financial
statements and therefore have been omitted.
II-4
162
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Purchase Agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 3 to the Company's Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Pittsburgh, in the State of Pennsylvania, on June 19, 1996.
INTERSTATE HOTELS COMPANY
By: /s/ W. THOMAS PARRINGTON, JR.
-----------------------------------
W. Thomas Parrington, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Company's Registration Statement on Form S-1 has been signed below
by the following persons in the capacities indicated on June 19, 1996.
SIGNATURE TITLE
--------- -----
/s/ W. THOMAS PARRINGTON, JR. President, Chief Executive Officer and Director
- - ----------------------------------------
W. Thomas Parrington, Jr.
* Executive Vice President and Chief Financial
- - ---------------------------------------- Officer
J. William Richardson (Principal Financial and Accounting Officer)
* Director
- - ----------------------------------------
Milton Fine
* Director
- - ----------------------------------------
David J. Fine
* Director
- - ----------------------------------------
Michael J. Aranson
* Director
- - ----------------------------------------
R. Michael McCullough
* Director
- - ----------------------------------------
Steven J. Smith
* Director
- - ----------------------------------------
Thomas J. Saylak
*By: /s/ W. THOMAS PARRINGTON, JR.
---------------------------------
W. Thomas Parrington, Jr.
Pursuant to Powers of Attorney
filed previously with the
Securities and Exchange Commission
II-6
164
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
* 1.1(a) Form of Purchase Agreement (U.S. Version)
* 1.1(b) Form of Purchase Agreement (International Version)
2.1 Agreement and Plan of Merger, dated as of November 1, 1995, among
Interstate Hotels Corporation and the other persons signatory
thereto
* 2.2 Form of Formation Agreement among the Company and the parties
identified on the signature page thereof
* 3.1 Form of Amended and Restated Articles of Incorporation of the
Company
* 3.2 Form of Amended and Restated By-Laws of the Company
4.1 Specimen Common Stock Certificate
* 4.2 Form of Credit Agreement among Interstate Hotels Corporation,
Credit Lyonnais and the other parties signatory thereto
* 5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of
issuance of the Common Stock being registered
10.1(a) Option Agreement, dated as of October 12, 1995, among Interstate
Hotels Corporation and the other persons signatory thereto
10.1(b) Amendment No. 1 to Option Agreement, dated as of December 15, 1995,
among Interstate Hotels Corporation and the other persons signatory
thereto
10.1(c) Amendment No. 2 to Option Agreement, dated as of March 29, 1996,
among Interstate Hotels Corporation and the other persons signatory
thereto, as revised
* 10.2(a) Agreement of Purchase and Sale, dated as of March 29, 1996, among
the Sellers named therein and IHC Member Corporation
* 10.2(b) First Amendment to Agreement of Purchase and Sale, dated as of
March 29, 1996, among the Sellers named therein and IHC Member
Corporation
10.3(a) Contribution Agreement, dated as of March 29, 1996, among
Interstate Hotels Corporation and the other persons signatory
thereto
* 10.3(b) First Amendment to Contribution Agreement, dated as of March 29,
1996, among Interstate Hotels Corporation and the other persons
signatory thereto
10.4 Form of Stockholders Agreement among the Company, Blackstone Real
Estate Advisors L.P. and the shareholders named therein
* 10.5 Form of Registration Rights and Shareholders Agreement among the
Company and the shareholders named therein
10.6 Master Agreement, dated as of April 1, 1996, among Host Funding,
Inc., Crossroads Hospitality Tenant Company, L.L.C. and Crossroads
Hospitality Company, L.L.C.
10.7(a) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to
the Super 8 Miner, Missouri
10.7(b) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to
the Super 8 Poplar Bluff, Missouri
10.7(c) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to
the Super 8 Rock Falls, Illinois
165
EXHIBIT NO. DESCRIPTION PAGE
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10.7(d) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to
the Super 8 San Diego, California
10.7(e) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to
the Super 8 Somerset, Kentucky
10.8 [Intentionally omitted]
10.9(a)(1) Interstone Three Partners I L.P. Limited Partnership Agreement,
dated as of December 15, 1995, among BJS Interstone Management
Associates, IHC/Interstone Corporation, Blackstone Real Estate
Partners I L.P. and IHC/Interstone Partnership II, L.P.
* 10.9(a)(2) Form of First Amendment to Interstone Three Partners I L.P. Limited
Partnership Agreement among BJS Interstone Management Associates,
IHC/Interstone Corporation, Blackstone Real Estate Partners I L.P.
and IHC/Interstone Partnership II, L.P.
10.9(b)(1) Interstone Three Partners II L.P. Limited Partnership Agreement,
dated as of December 15, 1995, among BJS Interstone Management
Associates, IHC/Interstone Corporation, Blackstone Real Estate
Partners II L.P. and IHC/Interstone Partnership II, L.P.
* 10.9(b)(2) Form of First Amendment to Interstone Three Partners II L.P.
Limited Partnership Agreement among BJS Interstone Management
Associates, IHC/Interstone Corporation, Blackstone Real Estate
Partners II L.P. and IHC/Interstone Partnership II, L.P.
10.9(c)(1) Interstone Three Partners III L.P. Limited Partnership Agreement,
dated as of December 15, 1995, among BJS Interstone Management
Associates, IHC/Interstone Corporation, Blackstone Real Estate
Partners III L.P., Blackstone Real Estate Holdings L.P., Blackstone
RE Capital Partners L.P., Blackstone RE Offshore Capital Partners
L.P. and IHC/Interstone Partnership II, L.P.
* 10.9(c)(2) Form of First Amendment to Interstone Three Partners III L.P.
Limited Partnership Agreement among BJS Interstone Management
Associates, IHC/Interstone Corporation, Blackstone Real Estate
Partners III L.P., Blackstone Real Estate Holdings L.P., Blackstone
RE Capital Partners L.P., Blackstone RE Offshore Capital Partners
L.P. and IHC/Interstone Partnership II, L.P.
10.9(d)(1) Interstone Three Partners IV L.P. Limited Partnership Agreement,
dated as of December 15, 1995, among BJS Interstone Management
Associates, IHC/Interstone Corporation, Blackstone Real Estate
Partners IV L.P., Blackstone RE Capital Partners II L.P. and
IHC/Interstone
Partnership II, L.P.
* 10.9(d)(2) Form of First Amendment to Interstone Three Partners IV L.P.
Limited Partnership Agreement among BJS Interstone Management
Associates, IHC/Interstone Corporation, Blackstone Real Estate
Partners IV L.P., Blackstone RE Capital Partners II L.P. and
IHC/Interstone Partnership II, L.P.
10.10 Interstate Hotels Corporation Executive Retirement Plan
10.11 Interstate Hotels Company Equity Incentive Plan
10.12 Interstate Hotels Company Stock Purchase Plan
* 10.13 Interstate Hotels Company Management Bonus Plan, as revised
166
EXHIBIT NO. DESCRIPTION PAGE
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* 10.14 Interstate Hotels Company Stock Option Plan for Non-Employee
Directors, as revised
* 10.15(a) Employment Agreement between the Company and Milton Fine
10.15(b) Employment Agreement between the Company and
W. Thomas Parrington, Jr.
10.15(c) Employment Agreement between the Company and J. William Richardson
10.15(d) Employment Agreement between the Company and Robert L. Froman
10.15(e) Employment Agreement between the Company and Marvin I. Droz
10.16 Form of Severance Agreement between the Company and each of Milton
Fine, W. Thomas Parrington, Jr., J. William Richardson, Robert L.
Froman and Marvin I. Droz
* 10.17 Form of Indemnification Agreement between the Company and each of
its directors
10.18(a) Interstate Hotels Company Supplemental Deferred Compensation Plan
10.18(b) Deferred Compensation Agreement between the Company and
W. Thomas Parrington, Jr.
10.18(c) Deferred Compensation Agreement between the Company and
J. William Richardson
* 21.1 List of Subsidiaries of the Company
* 23.1 Consent of Coopers & Lybrand L.L.P.
* 23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1)
24.1 Powers of Attorney executed by the Company, Michael J. Aranson,
David J. Fine, Milton Fine, R. Michael McCullough,
W. Thomas Parrington, Jr., J. William Richardson, Thomas J. Saylak
and Steven J. Smith
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* Filed herewith. All other exhibits have been filed previously.