<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AMERICAN GENERAL HOSPITALITY CORPORATION
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 7011 75-2648842
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
5605 MACARTHUR BOULEVARD, SUITE 1200
IRVING, TEXAS 75038
(972) 550-6800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEVEN D. JORNS
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
AMERICAN GENERAL HOSPITALITY CORPORATION
5605 MACARTHUR BOULEVARD, SUITE 1200
IRVING, TEXAS 75038
(972) 550-6800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
STEVEN L. LICHTENFELD, ESQ. RICHARD S. BORISOFF, ESQ.
BATTLE FOWLER LLP PAUL, WEISS, RIFKIND, WHARTON &
PARK AVENUE TOWER GARRISON
75 EAST 55TH STREET 1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10019-6064
(212) 856-7000 (212) 373-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and upon
consummation of the transactions described in the enclosed Joint Proxy
Statement/Prospectus.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) REGISTERED(2) PRICE PER SHARE(3) OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share........ 28,899,622 $34.0625 $984,393,374.38 $290,397
</TABLE>
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(1) This Registration Statement relates to the common stock, par value $0.01
per share, of the Registrant (the "AGH Common Stock") to be issued to
holders of common stock, par value $0.01 per share (the "CapStar Common
Stock"), of CapStar Hotel Company ("CapStar") in connection with the
proposed merger of CapStar with and into the Registrant, with the
Registrant as the surviving corporation.
(2) Includes shares of AGH Common Stock to be registered for issuance upon
exchange of CapStar's 4.75% Convertible Subordinated Notes due 2004.
(3) Estimated solely for the purpose of determining the Registration Fee in
accordance with Rule 457(f). Pursuant to Rule 457(f)(1), the proposed
maximum offering price per share of the AGH Common Stock of the Registrant
is based upon the average of the high and low prices per share of the
CapStar Common Stock on April 2, 1998 on the New York Stock Exchange
Composite Transaction Tape.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
. , 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"AGH Meeting") of American General Hospitality Corporation ("AGH") to be held
on . , 1998, at 1:00 p.m., local time, at the Holiday Inn Select DFW
Airport South, 440 West Airport Freeway, Irving, Texas 75062. A Notice of
Annual Meeting of Stockholders, a Joint Proxy Statement/Prospectus containing
information about the matters to be acted upon at the AGH Meeting and a proxy
card are enclosed. Attendance at the AGH Meeting will be limited to the
stockholders of record on . , 1998, the record date for the AGH Meeting
(the "AGH Record Date"), or their proxies, beneficial owners having evidence
of ownership on that date and invited guests of AGH.
At the AGH Meeting, you will be asked to: (i) approve and adopt an Agreement
and Plan of Merger, dated as of March 15, 1998 (the "Merger Agreement"), that
provides for the merger of CapStar Hotel Company ("CapStar") with and into AGH
(the "Merger Proposal" or "Proposal One"); (ii) approve and adopt amendments
to AGH's Charter to: (a) increase the authorized number of shares of stock and
authorized number of shares of common stock, par value $.01 per share, of AGH
(the "AGH Common Stock"), (b) authorize the issuance of shares of preferred
stock having such preferences, rights and other terms as the Board of
Directors may determine from time to time and (c) to the extent permitted
under Maryland law, authorize the Board of Directors to increase or decrease
the number of authorized shares of stock without stockholder approval
("Proposal Two"); (iii) approve an amendment and restatement of the American
General Hospitality Corporation Non-Employee Directors' Incentive Plan (as
amended, the "MeriStar Directors' Plan") ("Proposal Three"); (iv) approve an
amendment and restatement of the American General Hospitality Corporation 1996
Incentive Plan (as amended, the "MeriStar Incentive Plan") ("Proposal Four");
(v) approve the election of eight directors, with the election of six of the
nominees conditioned upon approval of the Merger Proposal ("Proposal Five");
and (vi) transact such other business that may properly be brought before the
AGH Meeting and at any adjournments or postponements thereof. Proposals Two
through Five are collectively referred to herein as the "AGH Proposals" and,
together with the Merger Proposal, the "AGH Meeting Proposals."
Upon completion of the transactions contemplated by the Merger Agreement
(the "Transactions"):
. CapStar will have transferred certain assets and liabilities to MeriStar
Hotels & Resorts, Inc., a Delaware corporation and a wholly owned
subsidiary of CapStar ("OpCo"), so that OpCo will own the hotel
management and leasing business previously operated by CapStar and its
subsidiaries, and CapStar will then distribute to its stockholders on a
share-for-share basis (the "Spin-Off") all of the outstanding capital
stock of OpCo;
. CapStar will merge with and into AGH (the "Merger") and CapStar's
operating partnership will merge with and into AGH's operating
partnership;
. AGH will be the surviving corporation and will continue its corporate
existence under the name MeriStar Hospitality Corporation ("MeriStar" or
the "Surviving Corporation"); and
. each outstanding share of common stock, par value $0.01 per share
("CapStar Common Stock"), of CapStar will be converted into the right to
receive 1.0 share of common stock, par value $0.01 per share ("Surviving
Corporation Common Stock" or "MeriStar Common Stock"), of the Surviving
Corporation (the "CapStar Exchange Ratio"), and each outstanding share
of common stock, par value $0.01 per share ("AGH Common Stock"), of AGH
will be converted into 0.8475 shares of Surviving Corporation Common
Stock (the "AGH Exchange Ratio" and, together with the CapStar Exchange
Ratio, the "Exchange Ratios"). Based on the closing prices on April 6,
1998, the market price of one share of AGH Common Stock was $26 3/4, one
share of CapStar Common Stock was $33 1/4, and 0.8475 of a share of AGH
Common Stock was $22 2/3. We estimate that following the Merger, AGH
Stockholders will own approximately 44% of the stock of MeriStar and
CapStar stockholders will own approximately 56% of the stock of
MeriStar.
<PAGE>
Detailed descriptions of the Merger Agreement and the Transactions and the
AGH Meeting Proposals are set forth in the accompanying Joint Proxy
Statement/Prospectus, which you should read carefully in its entirety.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AND THE TRANSACTIONS
ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF AGH. ACCORDINGLY,
THE BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT
ALL AGH STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
PROPOSAL. I believe that the Merger and the Transactions will generate
significant opportunities for increasing stockholder value. In determining to
approve the Merger Agreement and recommend the approval and adoption of the
Merger Proposal, the Board of Directors carefully reviewed and considered the
terms and conditions of the proposed Merger and the Transactions, as well as a
number of other factors. In addition, the Board of Directors has received the
written opinion, dated March 15, 1998, of Salomon Smith Barney, AGH's
financial advisor, as to the fairness, from a financial point of view, of the
Exchange Ratios to AGH. The full text of the written opinion of Salomon Smith
Barney, dated March 15, 1998, which sets forth the assumptions made, matters
considered and limitations on the review undertaken, is attached as Appendix B
to the accompanying Joint Proxy Statement/Prospectus and should be read
carefully in its entirety.
FURTHERMORE, YOUR BOARD OF DIRECTORS ALSO RECOMMENDS THAT ALL AGH
STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE AGH PROPOSALS.
Your vote is important. The presence, in person or by proxy, of holders of
at least a majority of the total number of outstanding shares of AGH Common
Stock entitled to vote is necessary to constitute a quorum for the transaction
of business at the AGH Meeting. Approval and adoption of the Merger Proposal
requires the affirmative vote of the holders of record of a majority of the
shares of AGH Common Stock outstanding on the AGH Record Date. FAILURE TO VOTE
OR TO RETURN YOUR PROXY CARD WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER PROPOSAL. UNDER THE MARYLAND GENERAL CORPORATION LAW AND THE AGH
CHARTER, APPROVAL OF PROPOSAL TWO, THE AMENDMENTS TO AGH'S CHARTER REQUIRES
THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE SHARES OF AGH COMMON
STOCK OUTSTANDING ON THE AGH RECORD DATE. APPROVAL AND ADOPTION OF (I)
PROPOSAL THREE, THE MERISTAR DIRECTORS' PLAN AND (II) PROPOSAL FOUR, THE
MERISTAR INCENTIVE PLAN, REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY OF ALL
VOTES CAST AT THE AGH MEETING. PROPOSAL FIVE, ELECTION OF THE DIRECTORS TO
SERVE ON THE BOARD OF DIRECTORS, REQUIRES THE AFFIRMATIVE VOTE OF A PLURALITY
OF ALL OF THE VOTES CAST AT THE AGH MEETING. THEREFORE, WHETHER OR NOT YOU
PLAN TO ATTEND THE AGH MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF
SHARES YOU OWN, I URGE YOU TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE AS SOON AS POSSIBLE. As a
holder of record, you may, of course, attend the AGH Meeting and vote in
person, even if you have previously returned your proxy card.
Sincerely yours,
Steven D. Jorns
Chairman of the Board, Chief
ExecutiveOfficer and President
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON . , 1998
The Annual Meeting of Stockholders (the "AGH Meeting") of American General
Hospitality Corporation, a Maryland corporation ("AGH"), will be held on
. , 1998, at 1:00 p.m., local time, at the Holiday Inn Select DFW Airport
South, 440 West Airport Freeway, Irving, Texas 75062. Attendance at the AGH
Meeting will be limited to stockholders of record on . , 1998, the record
date for the AGH Meeting (the "AGH Record Date"), or their proxies, beneficial
owners having evidence of ownership on that date and invited guests of AGH.
The purposes of the AGH Meeting are:
1. To consider and vote upon a proposal (the "Merger Proposal" or
"Proposal One") to approve and adopt an Agreement and Plan of Merger, dated
as of March 15, 1998 (the "Merger Agreement"), among AGH, American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership,
CapStar Hotel Company, a Delaware corporation ("CapStar"), CapStar
Management Company, L.P., a Delaware limited partnership, and CapStar
Management Company II, L.P., a Delaware limited partnership;
2. To consider and vote upon a proposal to amend AGH's Charter to: (i)
increase the number of authorized shares of stock and authorized number of
shares of common stock, par value $.01 per share, of AGH ("AGH Common
Stock"), (ii) authorize the issuance of shares of preferred stock having
such preferences, rights and other terms as the Board of Directors may
determine from time to time, and (iii) to the extent permitted under
applicable Maryland law, permit the Board of Directors to increase or
decrease the number of authorized shares of stock of AGH without
stockholder approval ("Proposal Two");
3. To consider and vote upon a proposal to approve the amendment and
restatement of the American General Hospitality Corporation Non-Employee
Directors' Incentive Plan (as amended, the "MeriStar Directors' Plan")
("Proposal Three");
4. To consider and vote upon a proposal to approve the amendment and
restatement of the American General Hospitality Corporation 1996 Incentive
Plan (as amended, the "MeriStar Incentive Plan") ("Proposal Four");
5. To consider and vote upon a proposal to elect eight directors, with
the election of six of the nominees conditioned upon approval of the Merger
Proposal ("Proposal Five"); and
6. To transact such other business that may properly come before the AGH
Meeting or any adjournments or postponements thereof.
Proposals Two through Five are collectively referred to herein as the
"AGH Proposals" and, together with the Merger Proposal, the "AGH Meeting
Proposals."
Additional information relating to these matters is described in the
accompanying Joint Proxy Statement/Prospectus, which should be read carefully
and in its entirety.
The Merger Agreement contemplates, among other things, that through a series
of transactions CapStar will transfer or cause to be transferred certain
assets and liabilities to MeriStar Hotels & Resorts, Inc., a Delaware
corporation and a wholly owned subsidiary of CapStar ("OpCo"), so that OpCo
will own the hotel management and leasing business previously operated by
CapStar and its subsidiaries, and that CapStar will then distribute to its
stockholders on a share-for-share basis (the "Spin-Off") all of the
outstanding capital stock of OpCo. Immediately after the Merger occurs, OpCo
will acquire 100% of the limited partnership interests in the third-party
lessee that leases most of the hotels owned by AGH and substantially all of
the assets of the third-party manager that manages most of the hotels owned by
AGH. Thereafter, the Merger Agreement provides that CapStar will merge with
and into AGH (the "Merger"), with the result that (a) AGH will be the
surviving corporation operating under the name MeriStar Hospitality
Corporation ("MeriStar" or the "Surviving Corporation"), (b) CapStar's
operating partnership will be merged with and into AGH's operating
partnership, and (c) each outstanding share of common stock, par
<PAGE>
value $0.01 per share ("CapStar Common Stock"), of CapStar will be converted
into the right to receive 1.0 share of common stock, par value $0.01 per share
("Surviving Corporation Common Stock" or "MeriStar Common Stock"), of the
Surviving Corporation, and each outstanding share of common stock, par value
$0.01 per share ("AGH Common Stock") of AGH will be converted into 0.8475
shares of Surviving Corporation Common Stock. The transactions contemplated by
the Merger Agreement are referred to herein as the "Transactions."
THE BOARD OF DIRECTORS UNANIMOUSLY HAS DETERMINED THAT THE MERGER IS FAIR TO
AND IN THE BEST INTERESTS OF THE STOCKHOLDERS, HAS APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER PROPOSAL. FURTHERMORE, THE BOARD
OF DIRECTORS ALSO UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
APPROVAL OF THE AGH PROPOSALS.
To ensure that your vote will be counted, please complete, sign and date the
enclosed green proxy card and return it promptly in the enclosed postage paid
envelope, whether or not you plan to attend the AGH Meeting. You may revoke
your proxy in the manner described in the accompanying Joint Proxy
Statement/Prospectus at any time before it is voted at the AGH Meeting.
Only stockholders of record of AGH at the close of business on the AGH
Record Date, are entitled to notice of the AGH Meeting, and all holders of
record of shares of AGH Common Stock at the close of business on the AGH
Record Date, are entitled to vote at the AGH Meeting or at any adjournments or
postponements thereof.
The presence, in person or by proxy, of holders of at least a majority of
the total number of outstanding shares of AGH Common Stock entitled to vote is
necessary to constitute a quorum for the transaction of business at the AGH
Meeting. Approval of the Merger Proposal requires the affirmative vote of the
holders of record of a majority of the shares of AGH Common Stock outstanding
on the AGH Record Date. Under the Maryland General Corporation Law and the AGH
Charter, approval of Proposal Two, the amendments to AGH's Charter, requires
the affirmative vote of the holders of two-thirds of the shares of AGH Common
Stock outstanding on the AGH Record Date. Approval and adoption of (i)
Proposal Three, the MeriStar Directors' Plan and (ii) Proposal Four, the
MeriStar Incentive Plan, requires the affirmative vote of the holders of a
majority of all votes cast at the AGH Meeting. Proposal Five, election of the
directors to serve on the Board of Directors, requires the affirmative vote of
a plurality of all votes cast at the AGH Meeting.
By Order of the Board of Directors,
Kenneth E. Barr
Secretary
Irving, Texas
. , 1998
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE AGH MEETING IN PERSON, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE. A
RETURN ENVELOPE IS PROVIDED FOR YOUR CONVENIENCE. YOU MAY REVOKE YOUR PROXY AT
ANY TIME BEFORE IT IS VOTED BY DELIVERING TO THE SECRETARY OF AGH AT AMERICAN
GENERAL HOSPITALITY CORPORATION, 5605 MACARTHUR BOULEVARD, SUITE 1200, IRVING,
TEXAS 75038, ATTENTION: SECRETARY, A SIGNED NOTICE OF REVOCATION OR A LATER
DATED SIGNED PROXY CARD OR BY ATTENDING THE AGH MEETING AND VOTING IN PERSON.
NO STOCKHOLDER OF RECORD MAY APPOINT MORE THAN THREE PERSONS TO ACT AS HIS OR
HER PROXY AT THE AGH MEETING.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
CAPSTAR HOTEL COMPANY
. , 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"CapStar Meeting") of CapStar Hotel Company ("CapStar") to be held on . ,
1998, at 9:00 a.m., local time, at the Embassy Row Hilton, 2015 Massachusetts
Avenue, N.W., Washington, D.C. 20036. A Notice of Special Meeting of
Stockholders, a Joint Proxy Statement/Prospectus containing information about
the matters to be acted upon at the CapStar Meeting and a proxy card are
enclosed. Attendance at the CapStar Meeting will be limited to the
stockholders of record on . , 1998, the record date for the CapStar Meeting
(the "CapStar Record Date"), or their proxies, beneficial owners having
evidence of ownership on that date and invited guests of CapStar.
At the CapStar Meeting, you will be asked to approve and adopt an Agreement
and Plan of Merger, dated as of March 15, 1998 (the "Merger Agreement"), that
provides for the merger of CapStar with and into American General Hospitality
Corporation ("AGH").
Upon completion of the transactions contemplated by the Merger Agreement
(the "Transactions"):
. CapStar will have transferred certain assets and liabilities to MeriStar
Hotels & Resorts, Inc., a Delaware corporation and a wholly owned
subsidiary of CapStar ("OpCo"), so that OpCo will own the hotel
management and leasing business previously operated by CapStar and its
subsidiaries, and CapStar will then distribute to its stockholders on a
share for share basis (the "Spin-Off") all of the outstanding capital
stock of OpCo;
. CapStar will merge with and into AGH (the "Merger") and CapStar's
operating partnership will merge with and into AGH's operating
partnership;
. AGH will be the surviving corporation and will continue its corporate
existence under the name MeriStar Hospitality Corporation ("MeriStar" or
the "Surviving Corporation"); and
. each outstanding share of common stock, par value $0.01 per share
("CapStar Common Stock"), of CapStar will be converted into the right to
receive 1.0 share of common stock, par value $0.01 per share ("Surviving
Corporation Common Stock" or "MeriStar Common Stock"), of the Surviving
Corporation (the "CapStar Exchange Ratio"), and each outstanding share
of common stock, par value $0.01 per share ("AGH Common Stock"), of AGH
will be converted into 0.8475 shares of Surviving Corporation Common
Stock (the "AGH Exchange Ratio" and, together with the CapStar Exchange
Ratio, the "Exchange Ratios"). Based on the closing price on April 6,
1998, the market price of one share of AGH Common Stock was $26 3/4, one
share of CapStar Common Stock was $33 1/4, and 0.8475 of a share of AGH
Common Stock was $22 2/3. We estimate that following the Merger, CapStar
stockholders will own approximately 56% of the stock of MeriStar and AGH
stockholders will own approximately 44% of the stock of MeriStar.
Detailed descriptions of the Merger Agreement and the Transactions are set
forth in the accompanying Joint Proxy Statement/Prospectus, which you should
read carefully in its entirety.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AND THE
TRANSACTIONS ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF
CAPSTAR. ACCORDINGLY, THE BOARD OF DIRECTORS HAS APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT ALL CAPSTAR STOCKHOLDERS VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER PROPOSAL. I believe that the Merger and
the Transactions will generate significant opportunities for increasing
stockholder value. In determining to approve the Merger Agreement and
recommend adoption of the Merger Agreement, the Board of Directors
carefully reviewed and considered the terms and conditions of the proposed
Merger and the Transactions, as well as a number of other factors. In
addition, the Board of Directors has received the opinions of its financial
advisors, Lehman Brothers Inc.
<PAGE>
and Goldman, Sachs & Co. The full text of the written opinions of Lehman
Brothers Inc. and Goldman, Sachs & Co., dated March 16, 1998 and March 15,
1998, respectively, which set forth the assumptions made, matters
considered and limitations on the review undertaken, are attached as
Appendix C and Appendix D, respectively, to the accompanying Joint Proxy
Statement/Prospectus and should be read carefully in their entirety.
Your vote is important. Approval and adoption of the Merger Proposal
requires the affirmative vote of the holders of record of a majority of the
shares of CapStar Common Stock outstanding on the CapStar Record Date. FAILURE
TO VOTE OR TO RETURN YOUR PROXY CARD WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE MERGER AGREEMENT. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE
CAPSTAR MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF SHARES YOU OWN, I
URGE YOU TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN
THE ENCLOSED PREPAID ENVELOPE AS SOON AS POSSIBLE. As a holder of record, you
may, of course, attend the CapStar Meeting and vote in person, even if you
have previously returned your proxy card.
Sincerely yours,
Paul W. Whetsell
Chairman of the Board, Chief
Executive Officer and President
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
<PAGE>
CAPSTAR HOTEL COMPANY
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON . , 1998
A Special Meeting of stockholders (the "CapStar Meeting") of CapStar Hotel
Company, a Delaware corporation ("CapStar"), will be held on . , 1998, at
9:00 a.m., local time, at the Embassy Row Hilton, 2015 Massachusetts Avenue,
N.W., Washington, D.C. 20036. Attendance at the CapStar Meeting will be
limited to stockholders of record on . , 1998, the record date for the
CapStar meeting (the "CapStar Record Date") or their proxies, beneficial
owners having evidence of ownership on that date and invited guests of
CapStar.
The purpose of the CapStar Meeting is to consider and vote upon a proposal
(the "Merger Proposal") to approve and adopt an Agreement and Plan of Merger,
dated as of March 15, 1998 (the "Merger Agreement"), among American General
Hospitality Corporation, a Maryland corporation ("AGH"), American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership,
CapStar, CapStar Management Company, L.P., a Delaware limited partnership, and
CapStar Management Company II, L.P., a Delaware limited partnership.
The Merger Agreement contemplates, among other things, that through a series
of transactions CapStar will transfer or cause to be transferred certain
assets and liabilities to MeriStar Hotels & Resorts, Inc., a Delaware
corporation and a wholly owned subsidiary of CapStar ("OpCo"), so that OpCo
will own the hotel management and leasing business previously operated by
CapStar and its subsidiaries, and that CapStar will then distribute to its
stockholders on a share-for-share basis (the "Spin-Off") all of the
outstanding capital stock of OpCo. Immediately after the Merger occurs, OpCo
will acquire 100% of the limited partnership interests in the third-party
lessee that leases most of the hotels owned by AGH and substantially all of
the assets of the third-party manager that manages most of the hotels owned by
AGH. Thereafter, the Merger Agreement provides that CapStar will merge with
and into AGH (the "Merger"), with the result that (a) AGH will be the
surviving corporation operating under the name MeriStar Hospitality
Corporation ("MeriStar" or the "Surviving Corporation"), (b) CapStar's
operating partnership will be merged with and into AGH's operating
partnership, and (c) each outstanding share of common stock, par value $0.01
per share ("CapStar Common Stock"), of CapStar, will be converted into the
right to receive 1.0 share of common stock, par value $0.01 per share
("Surviving Corporation Common Stock" or "MeriStar Common Stock"), of the
Surviving Corporation, and each outstanding share of common stock, par value
$0.01 per share ("AGH Common Stock"), of AGH will be converted into 0.8475
shares of Surviving Corporation Common Stock.
The transactions contemplated by the Merger Agreement are referred to herein
as the "Transactions." The terms of the Merger Agreement and the Surviving
Corporation Common Stock to be issued in connection therewith are described in
detail in the accompanying Joint Proxy Statement/Prospectus.
THE BOARD OF DIRECTORS UNANIMOUSLY HAS DETERMINED THAT THE MERGER IS FAIR TO
AND IN THE BEST INTERESTS OF THE STOCKHOLDERS, HAS APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT
STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
To ensure that your vote will be counted, please complete, sign and date the
enclosed proxy card and return it promptly in the enclosed postage paid
envelope, whether or not you plan to attend the CapStar Meeting. You may
revoke your proxy in the manner described in the accompanying Joint Proxy
Statement/Prospectus at any time before it is voted at the CapStar Meeting.
<PAGE>
Only stockholders of record of CapStar at the close of business on the
CapStar Record Date, are entitled to notice of the CapStar Meeting, and all
holders of record of shares of CapStar Common Stock at the close of business
on such record date, are entitled to vote at the CapStar Meeting or at any
adjournments or postponements thereof. Approval of the Merger Proposal
requires the affirmative vote of the holders of a majority in voting power of
all outstanding shares of CapStar Common Stock.
By Order of the Board of Directors,
John Emery
Secretary
New York, New York
. , 1998
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE CAPSTAR MEETING IN PERSON, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE. A
RETURN ENVELOPE IS PROVIDED FOR YOUR CONVENIENCE. YOU MAY REVOKE YOUR PROXY AT
ANY TIME BEFORE IT IS VOTED BY DELIVERING TO THE SECRETARY OF CAPSTAR AT
CAPSTAR HOTEL COMPANY, 1010 WISCONSIN AVENUE, WASHINGTON, D.C. 20007,
ATTENTION: SECRETARY, A SIGNED NOTICE OF REVOCATION OR A LATER DATED SIGNED
PROXY CARD OR BY ATTENDING THE CAPSTAR MEETING AND VOTING IN PERSON. NO
STOCKHOLDER OF RECORD MAY APPOINT MORE THAN THREE PERSONS TO ACT AS HIS OR HER
PROXY AT THE CAPSTAR MEETING.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 7, 1998
[LOGO] [LOGO]
JOINT PROXY STATEMENT/PROSPECTUS
-----------
JOINT PROXY STATEMENT
FOR
AMERICAN GENERAL HOSPITALITY CORPORATION
ANNUAL MEETING OF STOCKHOLDERS OF AMERICAN GENERAL HOSPITALITY CORPORATION
TO BE HELD ON . , 1998
CAPSTAR HOTEL COMPANY
SPECIAL MEETING OF STOCKHOLDERS OF CAPSTAR HOTEL COMPANY
TO BE HELD ON . , 1998
-----------
PROSPECTUS
FOR
AMERICAN GENERAL HOSPITALITY CORPORATION
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
-----------
This Joint Proxy Statement/Prospectus is being furnished to the holders of
outstanding shares of common stock, par value $0.01 per share ("AGH Common
Stock"), of American General Hospitality Corporation, a Maryland corporation
("AGH"), in connection with the solicitation of proxies by the Board of
Directors of AGH (the "AGH Board"), for use at the Annual Meeting of
Stockholders of AGH (the "AGH Meeting") and at any adjournments or
postponements thereof. At the AGH Meeting, the stockholders of AGH will be
asked to consider and vote upon the following proposals: (i) to approve and
adopt the Agreement and Plan of Merger, dated as of March 15, 1998 (the "Merger
Agreement"), among AGH, American General Hospitality Operating Partnership,
L.P., a Delaware limited partnership ("AGH Operating Partnership"), CapStar
Hotel Company, a Delaware corporation ("CapStar"), CapStar Management Company,
L.P., a Delaware limited partnership, L.P. ("CapStar Management"), and CapStar
Management Company II, L.P., a Delaware limited partnership ("CapStar
Management II") that provides for the merger of CapStar with and into AGH (the
"Merger Proposal" or "Proposal One"); (ii) to approve and adopt amendments to
AGH's Charter (as amended, the "MeriStar Charter") to: (a) increase the number
of authorized shares of stock and authorized number of shares of AGH Common
Stock, (b) authorize the issuance of shares of preferred stock having such
preferences, rights and other terms as the AGH Board may determine from time to
time and (c) to the extent permitted under Maryland law, authorize the AGH
Board to increase or decrease the number of authorized shares of AGH without
stockholder approval ("Proposal Two"); (iii) to approve the amendment and
restatement of the American General Hospitality Corporation Non-Employee
Directors' Incentive Plan (the "Directors' Plan" and, as amended, the "MeriStar
Directors' Plan") ("Proposal Three"); (iv) to approve the amendment and
restatement of the American General Hospitality Corporation 1996 Incentive Plan
(the "1996 Incentive Plan" and, as amended, the "MeriStar Incentive Plan")
("Proposal Four"); (v) to elect eight directors, with the election of six of
the nominees conditioned upon approval of the Merger Proposal ("Proposal
Five"); and (vi) to transact such other business that may properly be brought
before the AGH Meeting and at any adjournments or postponements thereof.
Proposals Two through Five are collectively referred to herein as the "AGH
Proposals" and, together with the Merger Proposal, the "AGH Annual Meeting
Proposals." The AGH Meeting will be held on . , 1998, at 1:00 p.m., local
time, at the Holiday Inn Select DFW Airport South, 440 West Airport Freeway,
Irving, Texas 75062.
This Joint Proxy Statement/Prospectus is also being furnished to the holders
of outstanding shares of common stock, par value $0.01 per share ("CapStar
Common Stock"), of CapStar in connection with the solicitation of proxies by
the Board of Directors of CapStar (the "CapStar Board"), for use at the Special
Meeting of Stockholders of CapStar (the "CapStar Meeting") and at any
adjournment or postponement thereof. At the CapStar Meeting, the Stockholders
of CapStar will be asked to consider and vote upon the Merger Proposal. The
CapStar Meeting will be held on . , 1998 at . , at 9:00 a.m., local time,
at the Embassy Row Hilton, 2015 Massachusetts Avenue, N.W., Washington, D.C.
20036.
<PAGE>
This Joint Proxy Statement/Prospectus also constitutes the prospectus of AGH
in connection with the shares of common stock, par value $0.01 per share
("Surviving Corporation Common Stock" or "MeriStar Common Stock") of MeriStar,
that may be issued pursuant to the Merger Agreement. The Merger Agreement
provides that CapStar will merge with and into AGH (the "Merger"), with the
result that (a) AGH will be the surviving corporation operating under the name
MeriStar Hospitality Corporation ("MeriStar" or the "Surviving Corporation")
and (b) each outstanding share of CapStar Common Stock will be converted into
the right to receive 1.0 share of the Surviving Corporation Common Stock (the
"CapStar Exchange Ratio") and each outstanding share of common stock, par
value $0.01 per share ("AGH Common Stock"), of AGH will be converted into
0.8475 shares of the Surviving Corporation Common Stock (the "AGH Exchange
Ratio" and, together with the CapStar Exchange Ratio, the "Exchange Ratios").
Based on the closing prices on April 6, 1998, the market value of one share of
AGH Common Stock was $26 3/4 , one share of CapStar Common Stock was $33 1/4 ,
and 0.8475 of a share of AGH Common Stock was $22 2/3.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY THE AGH STOCKHOLDERS AND CAPSTAR
STOCKHOLDERS.
This Joint Proxy Statement/Prospectus, the accompanying form of proxy and
the accompanying Notices of Meeting are first being mailed to the stockholders
of AGH and CapStar on or about . , 1998.
THE SECURITIES TO BE ISSUED PURSUANT TO THE MERGER 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 JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS . , 1998.
ii
<PAGE>
The Merger Agreement contemplates, among other things, that through a series
of transactions CapStar will transfer or cause to be transferred certain
assets and liabilities to MeriStar Hotels & Resorts, Inc., a Delaware
corporation and a wholly owned subsidiary of CapStar ("OpCo"), so that OpCo
will own the hotel management and leasing business previously operated by
CapStar and its subsidiaries, and that CapStar will then distribute to its
stockholders on a share-for-share basis (the "Spin-Off") all of the
outstanding capital stock of OpCo. Immediately after the Merger occurs, OpCo
will acquire 100% of the limited partnership interests in the third-party
lessee that leases most of the hotels owned by AGH and substantially all of
the assets of the third-party manager that manages most of the hotels owned by
AGH.
The transactions contemplated by the Merger Agreement are referred to herein
as the "Transactions." The terms of the Merger Agreement and the MeriStar
Common Stock to be issued in connection therewith are described in detail in
the accompanying Joint Proxy Statement/Prospectus.
Upon consummation of the Merger, the MeriStar Common Stock will be listed on
the New York Stock Exchange, Inc. (the "NYSE"), subject to official notice of
issuance, under the symbol ". ."
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY AGH OR
CAPSTAR. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OR THE SOLICITATION OF A PROXY IN ANY JURISDICTION IN WHICH, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR SOLICITATION OF A PROXY. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR THE SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF AGH OR CAPSTAR SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Joint Proxy Statement/Prospectus and the
documents incorporated by reference herein constitute or may constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause actual results, performances or achievements of
MeriStar to be materially different from any future results, performances or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others things, the following: the matters described
under "Risk Factors"; the possibility that expected cost savings from the
Transactions may not be fully realized or may not be realized within the
expected time frames; the possibility that costs or difficulties may arise
relating to the integration of the businesses of CapStar and AGH; the ability
of MeriStar and OpCo to successfully implement their acquisition and operating
strategies; MeriStar's and OpCo's ability to manage rapid expansion; lease
rents and availability of financing; changes in economic cycles; competition
from other hospitality companies; and changes in the laws and government
regulations applicable to MeriStar, OpCo or the structure of the Transactions.
In addition, MeriStar's continued qualification as a real estate investment
trust involves the application of highly technical and complex provisions of
the Internal Revenue Code of 1986, as amended (the "Code"). Readers should
carefully review AGH's and CapStar's financial statements and the notes
thereto, as well as the risk factors described herein and in the AGH
Incorporated Documents (as defined herein) and the CapStar Incorporated
Documents (as defined herein).
iii
<PAGE>
AVAILABLE INFORMATION
AGH and CapStar are each subject to the informational requirements of the
Exchange Act, and in accordance therewith file reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Copies of such reports, proxy statements and other information
filed with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices
of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. AGH and CapStar each file
information electronically with the Commission, and the Commission maintains a
Web Site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of the Commission's Web Site is (http://www.sec.gov).
In addition, the AGH Common Stock and CapStar Common Stock are listed on the
NYSE. AGH and CapStar file reports, proxy and information statements and other
information with the NYSE. These documents may be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
AGH has filed with the Commission a registration statement on Form S-4
(together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act, relating to the shares of
the Surviving Corporation Common Stock that will be issued to holders of
CapStar Common Stock in connection with the Merger. This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto filed by AGH with the
Commission, certain portions of which are omitted in accordance with the rules
and regulations of the Commission. Such additional information is available
for inspection and copying at the offices of the Commission. Statements
contained in this Joint Proxy Statement/Prospectus or in any document
incorporated into this Joint Proxy Statement/Prospectus by reference as to the
contents of any contract or other document referred to herein or therein are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents (the "AGH Incorporated Documents") previously filed
by AGH with the Commission (File No. 001-11903) under the Exchange Act are
incorporated herein by reference:
(a) AGH's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (the "AGH Form 10-K"); and
(b) AGH's Current Reports on Form 8-K, dated January 8, 1998, February
13, 1998, March 17, 1998 and April 7, 1998.
The following documents (the "CapStar Incorporated Documents") previously
filed by CapStar with the Commission (File No. 001-12017) under the Exchange
Act are incorporated herein by reference:
(a) CapStar's Annual Report on Form 10-K for the year ended December 31,
1997 (the "CapStar Form 10-K"); and
(b) CapStar's Current Reports on Form 8-K, dated January 6, 1998, March
6, 1998, March 17, 1998 (two) and April 7, 1998.
In addition, all documents filed by AGH or CapStar pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Joint
Proxy Statement/Prospectus and prior to the AGH Meeting and the CapStar
Meeting shall be deemed to be incorporated by reference into this Joint
Proxy/Statement Prospectus and to be a part hereof from the date of filing of
such documents.
iv
<PAGE>
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
All information contained or incorporated by reference in this Joint Proxy
Statement/Prospectus relating to AGH and its subsidiaries, and to the third-
party lessee and manager, which lease and manage most of AGH's hotels, has
been supplied by AGH, and all such information relating to CapStar and it
subsidiaries, including OpCo, has been supplied by CapStar.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR
WRITTEN REQUEST BY ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF SHARES OF
CAPSTAR COMMON STOCK OR AGH COMMON STOCK, TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS HAS BEEN DELIVERED, IN THE CASE OF DOCUMENTS RELATING TO
AGH, FROM AMERICAN GENERAL HOSPITALITY CORPORATION, 5605 MACARTHUR BOULEVARD,
SUITE 1200, IRVING, TEXAS 75038, (972) 550-6800, ATTENTION: CORPORATE
SECRETARY, AND IN THE CASE OF DOCUMENTS RELATING TO CAPSTAR, FROM CAPSTAR
HOTEL COMPANY, 1010 WISCONSIN AVENUE, N.W., WASHINGTON, D.C. 20007, (202) 965-
4455, ATTENTION: CORPORATE SECRETARY. IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY . , 1998.
v
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS......................... iii
AVAILABLE INFORMATION..................................................... iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... iv
SUMMARY................................................................... 1
General................................................................. 1
The Companies........................................................... 2
The AGH Meeting......................................................... 2
The CapStar Meeting..................................................... 4
The Opinions of Financial Advisors...................................... 5
The Merger.............................................................. 5
Risk Factors............................................................ 7
Ownership Structure..................................................... 8
AGH Selected Historical Consolidated Financial Information.............. 9
CapStar Selected Historical Financial Information....................... 10
MeriStar Selected Unaudited Pro Forma Financial Information............. 12
OpCo Selected Unaudited Pro Forma Financial Information................. 13
Comparative Per Share Information....................................... 14
Comparative Per Share Market Price and Dividend and Distribution
Information............................................................ 15
RISK FACTORS.............................................................. 16
Risks Associated with the Transactions.................................. 16
Risks of Debt Financing; No Limits on Indebtedness...................... 16
Benefits of the Transactions to Affiliates.............................. 17
No Appraisal or Dissenters' Rights...................................... 17
Conflict of Interest Risks in Relationship Between MeriStar and OpCo.... 18
Risks Associated with the Lodging Industry.............................. 19
Risks Associated with Owning Real Estate................................ 22
Competition for Expansion Opportunities................................. 23
Consent of Ground Lessor Required for Sale and Renovation of Certain
Hotels................................................................. 23
REIT Tax Risks.......................................................... 24
Dependence on Key Personnel............................................. 25
Possible Adverse Effects on Market Price of MeriStar Common Stock
Arising from Shares Available for Future Sale.......................... 26
Adverse Effect of Increase in Market Interest Rates on Prices for
MeriStar Common Stock.................................................. 26
Absence of a Public Market for OpCo Common Stock........................ 26
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the MeriStar Charter and MeriStar Bylaws............................ 26
Ability of MeriStar Board to Change Policies............................ 28
Risks to CapStar and AGH Stockholders Resulting from Fixed Exchange
Ratio.................................................................. 28
Risks to CapStar Stockholders Resulting from Differences in Stockholder
Rights................................................................. 28
THE AGH MEETING........................................................... 29
Date, Time and Place of AGH Meeting..................................... 29
Purposes of the AGH Meeting............................................. 29
Record Date............................................................. 29
Proxies; Voting and Revocation.......................................... 30
Required Votes.......................................................... 30
Solicitation of Proxies................................................. 31
No Dissenters' Appraisal Rights......................................... 31
Proposal One: Approval and Adoption of the Merger Agreement............. 31
Proposal Two: Approval of the MeriStar Charter.......................... 31
Reasons for and Effect of the Proposed Amendments....................... 31
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Recommendation of the Board of Directors; Vote Required for Approval..... 33
Proposal Three: Approval of the MeriStar Directors' Plan................. 34
Summary of Amendment..................................................... 34
Recommendation of Board of Directors; Vote Required for Approval......... 35
Proposal Four: Approval of the Meristar Incentive Plan................... 36
The MeriStar Incentive Plan.............................................. 36
Recommendation of Board of Directors; Vote Required for Approval......... 40
Proposal Five: Election of Directors..................................... 40
Information Regarding Nominees and Directors............................. 41
Recommendation of the Board of Directors; Required Vote for Approval..... 43
THE CAPSTAR MEETING........................................................ 44
Date, Time and Place of CapStar Meeting.................................. 44
Purpose of the CapStar Meeting........................................... 44
Record Date.............................................................. 44
Proxies; Voting and Revocation........................................... 44
Required Votes........................................................... 45
Solicitation of Proxies.................................................. 45
No Appraisal or Dissenters' Rights....................................... 45
THE MERGER................................................................. 46
Background............................................................... 46
Recommendation of the AGH Board; AGH's Reasons for the Merger............ 48
Recommendation of the CapStar Board; CapStar's Reasons for the Merger.... 49
Opinion of Financial Advisor to AGH...................................... 51
Opinion of Financial Advisors to CapStar................................. 54
Federal Income Tax Consequences to Holders of CapStar Common Stock....... 62
Federal Income Tax Consequences to Holders of AGH Common Stock........... 63
Federal Income Tax Considerations Relating to MeriStar................... 64
Accounting Treatment..................................................... 77
Regulatory Approvals..................................................... 77
Stock Exchange Listing................................................... 77
Federal Securities Laws Consequences..................................... 77
Appraisal and Dissenters' Rights......................................... 77
CapStar Convertible Notes................................................ 78
THE MERGER AGREEMENT....................................................... 79
Terms of the Merger...................................................... 79
Exchange of New Stock Certificates....................................... 80
Transactions Relating to the OP Merger................................... 82
Other Transactions....................................................... 82
Representations and Warranties........................................... 82
Certain Covenants........................................................ 83
No Solicitation of Transactions.......................................... 84
Employment Matters....................................................... 85
Stock Exchange Listing................................................... 86
Preparation of Registration Statement.................................... 86
Indemnification.......................................................... 86
Conditions to the Merger................................................. 86
Termination.............................................................. 87
Termination Fees and Expenses............................................ 88
Amendment and Waiver..................................................... 89
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE SPIN-OFF............................................................. 90
Background of and Reasons for the Spin-Off............................. 90
Restructuring and Spin-Off............................................. 91
Federal Income Tax Consequences to Holders of CapStar Common Stock..... 92
Federal Income Tax Considerations Relating to OpCo..................... 94
The AGH Operating Partnership Credit Commitment to OpCo................ 96
The Lessee-Manager Acquisition Agreement............................... 96
The Intercompany Agreement............................................. 97
Terms of Contribution, Assumption and Indemnity Agreement.............. 98
Rights Offering........................................................ 98
CERTAIN RELATED AGREEMENTS............................................... 99
MeriStar Operating Partnership Agreement............................... 99
The Participating Leases............................................... 101
UNAUDITED PRO FORMA FINANCIAL STATEMENTS................................. 103
BUSINESS OF AGH.......................................................... 111
BUSINESS OF CAPSTAR...................................................... 112
BUSINESS OF OPCO......................................................... 113
POLICIES OF MERISTAR..................................................... 114
Dividend and Distribution Policies..................................... 114
Investment Policies.................................................... 114
Financing Policies..................................................... 115
Conflict of Interest Policies.......................................... 116
Policies with Respect to Other Activities.............................. 116
Working Capital Reserves............................................... 117
MANAGEMENT OF MERISTAR................................................... 118
Directors.............................................................. 118
Executive Officers..................................................... 118
Employment Agreements.................................................. 118
MANAGEMENT OF OPCO....................................................... 121
Directors.............................................................. 121
Executive Officers..................................................... 121
DESCRIPTION OF MERISTAR CAPITAL STOCK.................................... 123
General................................................................ 123
MeriStar Common Stock.................................................. 123
MeriStar Preferred Stock............................................... 123
Transfer Agent and Registrar........................................... 124
COMPARISON OF RIGHTS OF HOLDERS OF AGH COMMON STOCK AND CAPSTAR COMMON
STOCK................................................................... 125
General................................................................ 125
Authorized Capital..................................................... 125
Number of Directors; Election of Directors; Removal; Vacancies......... 125
Charter Amendments..................................................... 127
ByLaw Amendments....................................................... 127
Advance Notice of Director Nominations and New Business................ 127
Stockholder Meetings................................................... 128
Stockholder Action Without a Meeting................................... 128
Restrictions on Ownership and Transfer................................. 128
Certain Extraordinary Transactions..................................... 129
State Takeover Legislation............................................. 129
Standard of Conduct for Directors...................................... 131
Indemnification of Directors and Officers.............................. 131
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Limitation of Personal Liability of Directors and Officers............... 132
Appraisal and Dissenters' Rights......................................... 133
Payment of Dividends and Other Distributions............................. 133
Inspection of Books and Records.......................................... 134
Investment Policies...................................................... 134
ADDITIONAL INFORMATION FOR AGH MEETING..................................... 135
Security Ownership of Certain Beneficial Owners and Management........... 135
AGH Board and Committee.................................................. 136
Executive Officers....................................................... 137
Executive Compensation................................................... 138
Report of the AGH Compensation Committee of the AGH Board................ 140
Stock Performance Graph.................................................. 143
Certain Relationships and Related Transactions........................... 144
Proposed Acquisition of Madison Hotel.................................... 144
Compliance with Section 16(a) of the Exchange Act........................ 145
Advance Notice Bylaw..................................................... 145
Stockholder Proposals.................................................... 146
Other Matters............................................................ 146
LEGAL MATTERS.............................................................. 147
EXPERTS.................................................................... 147
APPENDIX A--THE MERGER AGREEMENT........................................... A-1
APPENDIX B--THE OPINION OF SALOMON SMITH BARNEY............................ B-1
APPENDIX C--THE OPINION OF LEHMAN BROTHERS INC. ........................... C-1
APPENDIX D--THE OPINION OF GOLDMAN, SACHS & CO. ........................... D-1
APPENDIX E--THE MERISTAR CHARTER........................................... E-1
APPENDIX F--THE MERISTAR DIRECTORS' PLAN................................... F-1
APPENDIX G--THE MERISTAR INCENTIVE PLAN.................................... G-1
</TABLE>
ix
<PAGE>
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Joint Proxy Statement/Prospectus. This summary is
not intended to be complete and is qualified in its entirety by the more
detailed information contained elsewhere in this Joint Proxy
Statement/Prospectus, the Appendices hereto and the documents incorporated by
reference or otherwise referred to herein. Stockholders of AGH and CapStar are
urged to review this entire Joint Proxy Statement/Prospectus carefully,
including such Appendices and the documents incorporated herein by reference.
As used herein, (i) references to "CapStar" refer to CapStar or CapStar and its
subsidiaries (including OpCo), as the context requires, and (ii) references to
AGH refer to AGH or AGH and its subsidiaries, as the context requires.
GENERAL
This Joint Proxy Statement/Prospectus relates to the Annual Meeting of
stockholders (the "AGH Meeting") of American General Hospitality Corporation, a
Maryland corporation ("AGH"), and the Special Meeting of stockholders (the
"CapStar Meeting") of CapStar Hotel Company, a Delaware Corporation
("CapStar"). At the respective meetings of AGH and CapStar, among other things,
the AGH stockholders and the CapStar stockholders will each consider a proposal
(the "Merger Proposal" or "Proposal One") involving the combination of AGH and
CapStar through the proposed merger (the "Merger") of CapStar with and into
AGH. See "The Merger" and "The Merger Agreement." At the AGH Meeting, the
stockholders of AGH will also be asked to consider certain other matters,
including: (i) amendments to AGH's charter (the "AGH Charter" and, as amended,
the "MeriStar Charter") to become effective upon the effective time (the
"Effective Time") of the Merger ("Proposal Two"); (ii) the MeriStar Directors'
Plan ("Proposal Three"); (iii) the MeriStar Incentive Plan ("Proposal Four");
(iv) the election of eight directors, with the election of six of the nominees
conditioned upon approval of the Merger Proposal ("Proposal Five"); and (v) to
transact such other business that may properly come before the AGH Meeting or
any adjournments or postponements thereof. Proposals Two through Five are
collectively referred to herein as the "AGH Proposals," and, together with the
Merger Proposal, the "AGH Meeting Proposals." See "The AGH Meeting--Proposal
Two: Approval of the MeriStar Charter," "--Proposal Three: Approval of the
MeriStar Directors' Plan," "--Proposal Four: Approval of the MeriStar Incentive
Plan," and "--Proposal Five: Election of Directors."
The Merger will be effected pursuant to an Agreement and Plan of Merger,
dated as of March 15, 1998 (the "Merger Agreement"), among AGH, American
General Hospitality Operating Partnership, L.P. ("AGH Operating Partnership");
CapStar, CapStar Management Company, L.P. ("CapStar Management") and CapStar
Management Company II, L.P. ("CapStar Management II"), a copy of which is
attached to this Joint Proxy Statement/Prospectus as Appendix A. See "The
Merger Agreement" and "The AGH Meeting--Proposal One: Approval and Adoption of
the Merger Agreement." The Merger Agreement contemplates, among other things,
that through a series of transactions CapStar will transfer or cause to be
transferred certain assets and liabilities to MeriStar Hotels & Resorts, Inc.,
a Delaware corporation and a wholly owned subsidiary of CapStar ("OpCo"), so
that OpCo will own the hotel management and leasing business previously
operated by CapStar and its subsidiaries, and that CapStar will then distribute
to its stockholders on a share-for-share basis (the "Spin-Off") all of the
outstanding capital stock of OpCo. Immediately following the Merger, OpCo will
acquire 100% of the limited partnership interests in the third-party lessee
that leases most of the hotels owned by AGH and substantially all of the assets
of the third-party manager that manages most of the hotels owned by AGH.
Thereafter, the Merger Agreement provides that the Merger will occur, with the
result that (i) AGH will be the surviving corporation operating under the name
MeriStar Hospitality Corporation ("MeriStar"), (ii) CapStar's operating
partnership will be merged with and into the AGH Operating Partnership, and
(iii) each outstanding share of common stock, par value $0.01 per share
("CapStar Common Stock"), of CapStar will be converted into the right to
receive 1.0 share of common stock, par value $0.01 per share, of the Surviving
Corporation ("Surviving Corporation Common Stock" or "MeriStar Common Stock")
and each outstanding share of common stock, par value $0.01 per share ("AGH
Common Stock"), of AGH will be converted into 0.8475 shares of the Surviving
Corporation Common Stock.
1
<PAGE>
THE COMPANIES
American General
Hospitality Corporation.... AGH is a self-administered real estate investment
5605 MacArthur Boulevard, trust (a "REIT") that owns a geographically di-
Suite 1200 verse portfolio of primarily full-service hotels.
Irving, Texas 75038 AGH currently owns 53 hotels located in 21 states
(972) 550-6800 and containing an aggregate of approximately
12,600 rooms (the "AGH Owned Hotels"). Substan-
tially all of the AGH Owned Hotels are operated
under franchise agreements with national hotel
brands, including Crowne Plaza(R), Hilton(R),
Wyndham(R), Marriott(R), Holiday Inn Select(R),
Radisson(R), Westin(R), DoubleTree(R), Holiday
Inn(R) and Sheraton(R).
CapStar is a leading owner and manager of
CapStar Hotel Company....... upscale, full-service hotels in North America.
1010 Wisconsin Avenue, N.W. CapStar owns, leases and/or manages 141 hotels
Washington, D.C. 20007 located in 30 states, the District of Columbia,
(202) 965-4455 the Virgin Islands and Canada, and containing
28,247 rooms. Of these hotels, CapStar owns and
manages 56 upscale, full-service hotels that con-
tain 14,938 rooms (the "CapStar Owned Hotels"),
leases 45 (of which it manages 35) hotels that
contain 6,410 rooms (the "CapStar Leased Ho-
tels"), and manages an additional 40 hotels owned
by third parties that contain 6,899 rooms (the
"CapStar Managed Hotels"). The CapStar Owned Ho-
tels are located in major metropolitan areas or
rapidly growing secondary cities and are well lo-
cated within these markets. Such hotels are oper-
ated under nationally recognized brand names such
as Hilton, Sheraton, Westin, Marriott, Doubletree
and Embassy Suites(R).
MeriStar Hospitality MeriStar will become the owner of all of the AGH
Corporation................ Owned Hotels and CapStar Owned Hotels (collec-
1010 Wisconsin Avenue, N.W. tively, the "MeriStar Owned Hotels"), and will
Washington, D.C. 20007 continue the hotel ownership and investment busi-
(202) 965-4455 nesses of AGH and CapStar.
MeriStar Hotels & Resorts, OpCo will be the successor in interest to and
Inc. ...................... will assume all of the rights and liabilities
1010 Wisconsin Avenue, N.W. with respect to the management agreements and
Washington, D.C. 20007 leases of CapStar, American General Hospitality,
(202) 965-4455 Inc., a Texas corporation ("AGHI"), and AGH Leas-
ing, L.P., a Delaware limited partnership ("AGH
Leasing" and, together with CapStar and AGHI, the
"Predecessor Entities"). See "The Spin-Off--The
Lessee-Manager Acquisition Agreement." Upon the
effective time of the Spin-Off, OpCo will lease
and manage 134 hotels containing 30,907 rooms,
manage an additional 55 hotels containing 9,787
rooms, and lease (but not manage) 11 hotels con-
taining 1,498 rooms. OpCo expects to be one of
the largest independent hotel management company
in the United States based on rooms under manage-
ment.
THE AGH MEETING
Date, Time and Place of The AGH Meeting will be held on . , 1998, at
Meeting.................... 1:00 p.m., local time, at the Holiday Inn Select
DFW Airport South, 440 West Airport Freeway, Ir-
ving, Texas 75062.
2
<PAGE>
Record Date; Shares Holders of record of AGH Common Stock at the
Entitled to Vote........... close of business on . , 1998 (the "AGH Record
Date"), are entitled to notice of and to vote at
the AGH Meeting. At the close of business on the
AGH Record Date, there were . shares of AGH
Common Stock outstanding and entitled to vote.
Matters for Consideration
at the AGH Meeting......... At the AGH Meeting, the stockholders of AGH will
be asked to consider and vote upon the following
proposals:
Proposal One: to consider and vote upon a pro-
posal to approve and adopt the Merger Agreement
(the "Merger Proposal");
Proposal Two: to consider and vote upon a pro-
posal to amend AGH's Charter to: (i) increase the
number of authorized shares of stock and number
of authorized shares of AGH Common Stock, (ii)
authorize the issuance of shares of preferred
stock having such preferences, rights and other
terms as the AGH Board may determine from time to
time, and (iii) to the extent permitted under ap-
plicable Maryland law, permit the AGH Board to
increase or decrease the number of authorized
shares of AGH without stockholder approval;
Proposal Three: to consider and vote upon a pro-
posal to approve the MeriStar Directors' Plan;
Proposal Four: to consider and vote upon a pro-
posal to approve the MeriStar Incentive Plan; and
Proposal Five: to consider and vote upon a pro-
posal to elect eight directors, with the election
of six of the nominees conditioned upon approval
of the Merger Proposal (Proposals Two through
Five are collectively referred to herein as the
"AGH Proposals").
Approval of the Merger
Proposal and the AGH Each stockholder of record as of the AGH Record
Proposals.................. Date is entitled at the AGH Meeting to one vote
for each share of AGH Common Stock held. The
presence, in person or by proxy, of holders of at
least a majority of the total number of outstand-
ing shares of AGH Common Stock entitled to vote
is necessary to constitute a quorum for the
transaction of business at the AGH Meeting. Under
the Maryland General Corporation Law (the "MGCL")
and AGH Charter, the affirmative vote of the
holders of a majority of all of the outstanding
shares of AGH Common Stock outstanding on the AGH
Record Date is required to approve the Merger
Proposal. Under the MGCL and the AGH Charter, ap-
proval and adoption of the amendments to AGH's
Charter requires the affirmative vote of the
holders of record of two-thirds of the shares of
AGH Common Stock outstanding on the AGH Record
Date. Approval and adoption of: (i) the MeriStar
Directors' Plan and (ii) the MeriStar Incentive
Plan requires the affirmative vote of a majority
of all votes cast at the AGH Meeting. The elec-
tion of the directors to serve on the MeriStar
3
<PAGE>
Board requires the affirmative vote of a plural-
ity of all of the votes cast at the AGH Meeting.
As of the date hereof, the directors and execu-
tive officers of AGH and their respective affili-
ates, owned 2.1% of the issued and outstanding
shares of AGH Common Stock.
Recommendations of the AGH The AGH Board has unanimously approved the Merger
Board...................... Agreement and the other agreements to be executed
by AGH or its subsidiaries and determined that
the Transactions are fair to, and in the best in-
terests of, AGH and its stockholders. The AGH
Board unanimously recommends that stockholders of
AGH vote FOR the Merger Proposal. Further, the
AGH Board has approved the amendment to AGH's
Charter, the MeriStar Directors' Plan, the
MeriStar Incentive Plan and the election of di-
rectors, and unanimously recommends that the
stockholders of AGH vote FOR the AGH Proposals.
Reasons for the Merger...... See "Recommendation of the AGH Board; AGH's Rea-
sons for the Merger."
THE CAPSTAR MEETING
Date, Time and Place of The CapStar Meeting will be held on . , 1998, at
Meeting.................... 9:00 a.m., local time, at the Embassy Row Hilton,
2015 Massachusetts Avenue, N.W., Washington, D.C.
20036.
Record Date; Shares Holders of record of CapStar Common Stock at the
Entitled to Vote........... close of business on . , 1998 (the "CapStar Rec-
ord Date"), are entitled to notice of and to vote
at the CapStar Meeting. At the close of business
on the CapStar Record Date, there were . shares
of CapStar Common Stock outstanding and entitled
to vote.
Approval of the Merger Each stockholder of record as of the CapStar Rec-
Proposal................... ord Date is entitled at the CapStar Meeting to
one vote for each share of CapStar Common Stock
held. Under the Delaware General Corporation Law
(the "DGCL") and the Certificate of Incorporation
of CapStar, as amended (the "CapStar Charter"),
the affirmative vote, in person or by proxy, of
the holders of a majority in voting power of all
of the outstanding shares of CapStar Common Stock
is required to approve the Merger Agreement. As
of the date hereof, the directors and executive
officers of CapStar, and their respective affili-
ates, owned 2.9% of the issued and outstanding
shares of CapStar Common Stock.
Recommendations of the
CapStar Board.............. The CapStar Board has unanimously approved the
Merger Agreement and the other agreements to be
executed by CapStar or its subsidiaries and de-
termined that the Transactions are fair to and in
the best interests of CapStar and its stockhold-
ers. The CapStar Board unanimously recommends
that stockholders of CapStar vote FOR the Merger
Proposal.
Reasons for the Merger...... See "Recommendation of the CapStar Board;
CapStar's Reasons for the Merger."
4
<PAGE>
THE OPINIONS OF FINANCIAL ADVISORS
Opinion of Financial Smith Barney Inc. and Salomon Brothers Inc (col-
Advisor to AGH............. lectively doing business as, and referred to
herein as, "Salomon Smith Barney") has acted as
financial advisor to AGH in connection with the
Merger and has delivered to the AGH Board a writ-
ten opinion, dated March 15, 1998, to the effect
that, as of the date of such opinion and based
upon and subject to certain matters stated there-
in, the Exchange Ratios were fair, from a finan-
cial point of view, to AGH. The full text of the
written opinion of Salomon Smith Barney, dated
March 15, 1998, which sets forth the assumptions
made, matters considered and limitations on the
review undertaken, is attached as Appendix B to
this Joint Proxy Statement/Prospectus and should
be read carefully in its entirety. THE OPINION OF
SALOMON SMITH BARNEY IS DIRECTED TO THE AGH BOARD
AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE
RATIOS FROM A FINANCIAL POINT OF VIEW TO AGH,
DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER
OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE AGH MEETING. See
"The Merger--Opinion of Financial Advisor to
AGH."
Opinions of Financial
Advisors to CapStar........ The CapStar Board has received the written opin-
ion dated March 15, 1998, of Goldman, Sachs & Co.
("Goldman Sachs"), financial advisor to CapStar,
to the effect that, as of such date, and based
upon and subject to the matters stated therein,
the CapStar Exchange Ratio pursuant to the Merger
Agreement was fair, from a financial point of
view, to the holders of CapStar Common Stock. The
CapStar Board has received the written opinion,
dated March 16, 1998, of Lehman Brothers Inc.
("Lehman Brothers"), financial advisor to
CapStar, to the effect that, as of such date, and
based upon and subject to the matters stated
therein, the CapStar Exchange Ratio and shares of
OpCo to be received by holders of CapStar Common
Stock pursuant to the Spin-Off, taken together,
was fair to such holders from a financial point
of view. The full text of the opinions of Lehman
Brothers and Goldman Sachs, which set forth the
assumptions made, matters considered and limits
of the review undertaken by Lehman Brothers and
Goldman Sachs, are attached hereto as Appendix C
and Appendix D, respectively, and should be read
carefully in their entirety by CapStar stockhold-
ers. THE OPINIONS OF GOLDMAN SACHS AND LEHMAN
BROTHERS ARE DIRECTED TO THE CAPSTAR BOARD AND
RELATE ONLY TO THE MATTERS DESCRIBED ABOVE, DO
NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RE-
LATED TRANSACTIONS AND DO NOT CONSTITUTE A RECOM-
MENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE CAPSTAR MEETING.
See "The Merger--Opinion of Financial Advisors to
CapStar."
THE MERGER
Purpose of the Merger....... The purpose of the Merger is to merge AGH and
CapStar.
5
<PAGE>
Effect of the Merger upon CapStar will merge with and into AGH with the re-
AGH........................ sult that (a) AGH will be the Surviving Corpora-
tion operating under the name MeriStar Hospital-
ity Corporation, (b) CapStar's operating partner-
ship will be merged with and into AGH's operating
partnership, and (c) each share of AGH Common
Stock will be converted into 0.8475 shares of
Surviving Corporation Common Stock.
Effect of the Merger upon CapStar will merge with and into AGH with the re-
CapStar.................... sult that (a) AGH will be the Surviving Corpora-
tion operating under the name MeriStar Hospital-
ity Corporation, (b) CapStar's operating partner-
ship will be merged with and into AGH's operating
partnership, and (c) each outstanding share of
CapStar Common Stock will be converted into the
right to receive 1.0 share of Surviving Corpora-
tion Common Stock.
Conditions to the Merger.... See "The Merger Agreement--Conditions to the
Merger."
Material Differences
between Rights of AGH
Stockholders and CapStar
Stockholders...............
See "Comparison of Rights of Holders of AGH Com-
mon Stock and CapStar Common Stock."
Appraisal and Dissenters' Holders of shares of AGH Common Stock are not en-
Rights..................... titled to dissenters' appraisal rights under the
MGCL. Holders of shares of CapStar Common Stock
are not entitled to appraisal or dissenters'
rights under the DGCL. See "The Merger--Appraisal
and Dissenters' Rights."
Accounting Treatment........ The transaction will be accounted for by MeriStar
under the purchase method of accounting for busi-
ness combinations. See "Unaudited Pro Forma Fi-
nancial Statements."
Regulatory Approvals........ Other than (i) the Commission's declaring effec-
tive the Registration Statement containing this
Prospectus/Joint Proxy Statement and the Regis-
tration Statement on Form 8-A relating to OpCo,
(ii) approvals in connection with compliance with
applicable Blue Sky or state securities laws,
(iii) the filing of the Articles of Merger with
the State Department of Assessments and Taxation
of Maryland and the filing of the Certificate of
Merger with the Secretary of State of the State
of Delaware, and (iv) the filing of such reports
under Section 13(a) of the Exchange Act as may be
required in connection with the Merger Agreement
and the other Transactions, neither the manage-
ment of AGH nor the management of CapStar be-
lieves that any filing with or approval of any
governmental authority is necessary in connection
with the Merger.
Federal Income Tax It is a condition to the consummation of the
Consequences............... Merger that CapStar receive an opinion from Paul,
Weiss, Rifkind, Wharton & Garrison, counsel to
CapStar, to the effect that, as of the date of
consummation
6
<PAGE>
of the Merger, the Merger will be treated for
U.S. Federal income tax purposes as a reorganiza-
tion under the provision of Section 368 of the
Code. See "The Merger--Federal Income Tax Conse-
quences to Holders of CapStar Common Stock." The
Spin-Off will be treated as a taxable distribu-
tion to holders of CapStar Common Stock. See "The
Spin-Off--Federal Income Tax Consequences to
Holders of CapStar Common Stock."
RISK FACTORS................
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A
DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE
CAREFULLY CONSIDERED BY THE AGH STOCKHOLDERS AND
CAPSTAR STOCKHOLDERS.
7
<PAGE>
OWNERSHIP STRUCTURE
The diagrams set forth below illustrate the ownership of AGH and CapStar at
the date of this Joint Proxy Statement/Prospectus and following consummation of
the Merger.
[diagrams of AGH and CapStar
pre- and post-Merger]
8
<PAGE>
AGH SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information of AGH set forth below has been
derived from and should be read in conjunction with the consolidated financial
statements and other financial information of AGH contained in the AGH Form 10-
K which is incorporated herein by reference.
<TABLE>
<CAPTION>
JULY 31,1996
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
OPERATING RESULTS:
Participating Lease revenue......................... $ 59,934 $ 13,388
Office building rental income....................... 1,206 --
-------- --------
Total revenue..................................... 61,140 13,388
-------- --------
Depreciation........................................ 13,970 2,635
Amortization........................................ 1,106 274
Real estate and personal property taxes and property
insurance.......................................... 7,073 1,445
Office building operating expenses.................. 597 --
General and administrative.......................... 2,000 822
Ground lease expense................................ 1,272 545
Amortization of unearned officers' compensation(A).. 126 37
Interest expense, net............................... 8,277 1,304
-------- --------
Total expenses.................................... 34,421 7,062
-------- --------
Income before minority interest..................... 26,719 6,326
Minority interest (B)............................... 3,234 1,197
-------- --------
Net income applicable to common stockholders........ $ 23,485 $ 5,129
======== ========
Basic net income per common share................... $ 1.60 $ 0.63
======== ========
Diluted net income per common share................. $ 1.58 $ 0.63
======== ========
Weighted average number of basic shares of AGH
Common Stock outstanding........................... 14,678 8,122
======== ========
Weighted average number of diluted shares of AGH
Common Stock outstanding........................... 14,841 8,165
======== ========
BALANCE SHEET DATA (AS OF DECEMBER 31):
Investments in hotel properties, net................ $569,590 $230,761
Total assets........................................ 585,088 243,115
Debt................................................ 77,452 76,622
Minority interest in Operating Partnership.......... 43,357 29,125
Stockholders' equity................................ 443,250 127,461
OTHER FINANCIAL DATA:
Funds from operations (C)........................... $ 35,764 $ 7,266
Net cash provided by operating activities........... 42,430 8,826
Net cash used in investing activities............... (328,193) (186,447)
Net cash provided by financing activities........... 282,675 181,510
</TABLE>
- --------
(A) Represents amortization of unearned officer's compensation, represented by
an aggregate of 50,000 shares of restricted AGH Common Stock issued to
executive officers, 10% of which shares vested at the date of grant (5,000
shares at $17.75 per share) 20% of which shares vested on the anniversary
date of the date of grant.
(B) Calculated as 12.1% for the historical period ended December 31, 1997 and
as 18.9% for the historical period from July 31, 1996 (inception of
operations) through December 31, 1996.
(C) Represents Funds From Operations of AGH. The items added back to net income
applicable to common stockholders have been adjusted for AGH's ownership
percentage in the AGH Operating Partnership of 87.9% for the historical
period ended December 31, 1997 and 81.1% for the historical period from
July 31, 1996 (inception of operations) through December 31, 1996. AGH
computes Funds From Operations under the National Association of Real
Estate Investment Trusts ("NAREIT") definition. Funds From Operations
consists of net income applicable to common stockholders (computed in
accordance with generally accepted accounting principles) excluding gains
(losses) from debt restructuring and sales of property (including furniture
and equipment) plus real estate related depreciation and amortization
(excluding amortization of deferred financing costs) and after adjustments
for unconsolidated partnerships and joint ventures. AGH considers Funds
From Operations to be an appropriate measure of the performance of an
equity REIT. Funds From Operations should not be considered as an
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance or to cash
flows from operating, investing or financing activities as a measure of
liquidity. Although Funds From Operations has been calculated in accordance
with the NAREIT definition, Funds From Operations as presented may not be
comparable to other similarly titled measures used by other REITs. Funds
From Operations does not reflect cash expenditures for capital improvements
or principal amortization of indebtedness on its hotels.
9
<PAGE>
CAPSTAR SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information of CapStar set forth below has
been derived from and should be read in conjunction with the consolidated
financial statements and other financial information of CapStar contained in
the CapStar Form 10-K which is incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenue:
Rooms....................... $ 207,736 $ 68,498 $ 14,456 $ 0 $ 0
Food, beverage, office
rental and other........... 103,521 36,949 7,471 0 0
Management services and
other revenues............. 5,136 4,345 4,436 4,418 4,234
---------- --------- --------- ------ ------
Total revenue........... 316,393 109,792 26,363 4,418 4,234
---------- --------- --------- ------ ------
Operating expenses:
Departmental expenses:
Rooms....................... 51,075 17,509 4,190 0 0
Food, beverage and other.... 77,373 27,102 5,437 0 0
Undistributed operating ex-
penses:
Administrative and general.. 50,332 20,448 8,078 4,508 4,065
Property and other operating
costs...................... 55,111 17,151 3,934 0 0
Depreciation and amortiza-
tion....................... 20,990 8,248 2,097 23 14
---------- --------- --------- ------ ------
Total operating ex-
penses................. 254,881 90,458 23,736 4,531 4,079
---------- --------- --------- ------ ------
Net operating income
(loss)..................... 61,512 19,334 2,627 (113) 155
Interest expense, net....... 21,024 12,346 2,414 0 0
Minority interest........... (1,425) 39 18 0 0
Provision for income taxes
(A)........................ 14,911 2,674 0 0 0
Income (loss) before ex-
traordinary loss........... 24,152 4,353 231 (113) 155
Extraordinary loss (B)...... (4,092) (1,956) (888) 0 0
---------- --------- --------- ------ ------
Net income (loss)....... $ 20,060 $ 2,397 $ (657) $ (113) $ 155
========== ========= ========= ====== ======
Basic earnings per share be-
fore extraordinary
loss (C)................... $ 1.29 $ 0.31 -- -- --
Diluted earnings per share
before extraordinary
loss (C)................... $ 1.27 $ 0.31 -- -- --
Number of shares of common
stock issued and
outstanding (D)............ 24,867 12,754 -- -- --
BALANCE SHEET DATA (AS OF
DECEMBER 31):
Property and equipment,
gross...................... $ 950,052 $ 343,092 $ 110,883 $ 176 $ 134
Total assets................ 1,124,642 379,161 132,650 1,232 1,458
Debt........................ 492,771 200,361 73,574 0 0
OTHER FINANCIAL DATA:
EBITDA (E).................. $ 82,502 $ 27,621 $ 4,741 $ (90) $ 169
Net cash provided by (used
in) operating activities... 59,882 13,373 4,357 66 (101)
Net cash used in investing
activities................. (586,259) (225,251) (116,573) (41) (24)
Net cash provided by financ-
ing activities............. 588,428 226,830 119,048 0 244
</TABLE>
- --------
(A) No provision for federal income taxes was included prior to August 1996
because CapStar's predecessor entities were partnerships and all federal
income tax liabilities were passed through to the individual partners.
(B) During 1995, 1996 and 1997, certain loan facilities were refinanced and the
write-offs of deferred costs associated with the prior facilities were
recorded as extraordinary losses.
(C) Basic and diluted earnings per share before extraordinary loss for the year
ended December 31, 1996 is based on earnings for the period from August 20,
1996 through December 31, 1996.
(D) As of December 31 for the periods presented.
10
<PAGE>
(E) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is a useful
measure of operating performance because (i) it is industry practice to
evaluate hotel properties based on operating income before interest,
depreciation and amortization and minority interests of common and
preferred CapStar OP Unit holders, which is generally equivalent to EBITDA,
and (ii) EBITDA is unaffected by the debt and equity structure of the
entity. 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 CapStar's results of operations.
11
<PAGE>
MERISTAR SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The selected unaudited pro forma financial information of MeriStar set forth
below is presented assuming the following Transactions had occurred on December
31, 1997 or at the beginning of 1997: (i) CapStar's purchase of six hotels in
January 1998, (ii) the Spin-Off, (iii) the execution of the Participating
Leases and the related transfer of net hotel operating assets to OpCo, (iv) the
execution of the note receivable from OpCo to fund OpCo's acquisition of AGH
Leasing and AGHI, (v) CapStar's purchase of 28 hotels, 40 leases and the
management business of Winston during 1997, (vi) the Merger, and (vii) the
Transactions. The following is qualified in its entirety by, and should be read
in conjunction with, the MeriStar Unaudited Pro Forma Financial Statements
included herein and the historical financial information of AGH and CapStar
incorporated by reference herein.
<TABLE>
<CAPTION>
PRO FORMA
1997
(IN THOUSANDS, EXCEPT PER SHARE DATA) -----------
<S> <C>
OPERATING RESULTS:
Lease revenue..................................................... $ 293,688
Office rental and other revenue................................... 7,948
-----------
Total revenue................................................. 301,636
-----------
Depreciation and amortization..................................... 91,485
Property taxes, insurance and other............................... 43,565
General and administrative........................................ 6,066
Office rental and other expenses.................................. 3,448
Interest expense, net............................................. 90,762
-----------
Total expenses................................................ 235,326
-----------
Income before minority interest................................... 66,310
Minority interest................................................. 6,390
-----------
Net income applicable to common share stockholders................ $ 59,920
===========
Basic net income per common share................................. $ 1.32
===========
Diluted net income per common share............................... $ 1.31
===========
Weighted average number of basic shares of MeriStar Common Stock
outstanding...................................................... 45,475
===========
Weighted average number of diluted shares of MeriStar Common Stock
outstanding...................................................... 45,768
===========
BALANCE SHEET DATA (AS OF DECEMBER 31):
Investment in hotel properties, net............................... $ 2,596,762
Total assets...................................................... 2,702,272
Debt.............................................................. 1,374,502
Minority interest in MeriStar Operating Partnership............... 153,163
Stockholders' equity.............................................. 1,137,770
===========
OTHER FINANCIAL DATA:
Funds from operations(A).......................................... $ 138,995
Funds from operations per common share............................ 3.04
Net cash provided by operating activities......................... 168,476
Net cash used in investing activities............................. (1,824,556)
Net cash provided by financing activities......................... 1,772,273
===========
Number of shares of MeriStar Common Stock and MeriStar Common OP
Units outstanding................................................ 49,864
Number of shares of MeriStar preferred OP Units outstanding....... 392
</TABLE>
- --------
(A) Represents pro forma funds from operations of MeriStar. The items added
back to net income applicable to MeriStar Common Stock have been adjusted
by MeriStar's ownership percentage in the MeriStar Operating Partnership on
a pro forma basis. Funds from operations for MeriStar is computed under the
NAREIT definition. Funds from operations consist of net income applicable
to common stockholders (computed in accordance with generally accepted
accounting principles) excluding gains (losses) from debt restructuring and
sales of property (including furniture and equipment) plus real estate
related depreciation and amortization (excluding amortization of deferred
financing costs) and after adjustments for unconsolidated partnerships and
joint ventures. Funds from operations is considered to be an appropriate
measure of the performance of an equity REIT. Funds from operations should
not be considered as an alternative to net income or other measurements
under generally accepted accounting principles as an indicator of operating
performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. Although funds from operations has
been calculated in accordance with the NAREIT definition, funds from
operations as presented may not be comparable to other similarly titled
measures used by other REITs. Funds from operation does not reflect cash
expenditures for capital improvements or principal amortization of
indebtedness on MeriStar's hotels.
12
<PAGE>
OPCO SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The OpCo selected unaudited pro forma and historical financial information
set forth below is qualified in its entirety by, and should be read in
conjunction with, the Unaudited Pro Forma Financial Statements of OpCo included
herein and the historical combined financial statements of OpCo incorporated
herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
PRO FORMA
1997 1997 1996 1995 1994 1993
--------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenue:
Rooms................. $ 642,151 $ 9,880 $ -- $ -- $ -- $ --
Food, beverage and
other................ 253,346 1,871 -- -- -- --
Management services
and other revenues... 10,510 12,088 7,050 5,354 4,418 4,234
--------- -------- -------- ------- ------- -------
Total revenues...... 906,007 23,839 7,050 5,354 4,418 4,234
--------- -------- -------- ------- ------- -------
Operating expenses:
Departmental expenses:
Rooms................. 156,738 2,533 -- -- -- --
Food, beverage and
other ............... 187,608 1,170 -- -- -- --
Undistributed operating
expenses:
Administrative and
general.............. 155,574 10,473 6,140 4,745 4,508 4,065
Participating lease
expense.............. 280,949 4,135 -- -- -- --
Property operating
costs................ 111,127 1,917 -- -- -- --
Depreciation and
amortization......... 4,690 636 349 84 23 14
--------- -------- -------- ------- ------- -------
Total operating
expenses........... 896,686 20,864 6,489 4,829 4,531 4,079
--------- -------- -------- ------- ------- -------
Net operating income
(loss)................. 9,321 2,975 561 525 (113) 155
Equity in earnings of
affiliates............. 46 46 -- -- -- --
Interest expense, net... 5,297 56 123 44 -- --
Minority interest....... 700 103 -- -- -- --
Income tax provision.... 1,349 -- -- -- -- --
--------- -------- -------- ------- ------- -------
Net income (loss)... $ 2,021 $ 2,862 $ 438 $ 481 $ (113) $ 155
========= ======== ======== ======= ======= =======
Basic and diluted net
income per common
share.................. $ 0.08 $ -- $ -- $ -- $ -- $ --
OTHER FINANCIAL DATA:
EBITDA.................. 14,057 3,657 910 609 (90) 169
Net cash provided by
(used in) operating
activities............. 8,278 4,465 1,226 208 66 (101)
Net cash used in
investing activities... (90,300) (6,501) (1,826) (61) (41) (24)
Net cash provided by
financing activities... 91,495 4,208 699 59 -- 244
BALANCE SHEET DATA:
Total assets ........... $ 189,200 $ 84,419 $ 24,366 $ 2,881 $ 1,232 $ 1,458
Debt.................... 65,981 981 885 950 -- --
</TABLE>
13
<PAGE>
COMPARATIVE PER SHARE INFORMATION
Set forth below are historical net income per common share, cash
distributions per common share and book value per common share data of AGH and
CapStar, pro forma combined per share data of MeriStar and equivalent pro forma
per share data of AGH (for accounting purposes, the Merger is treated as an
acquisition of AGH by CapStar). The data set forth below should be read in
conjunction with AGH and CapStar audited consolidated financial statements,
including the notes thereto, which are incorporated by reference in this Joint
Proxy Statement/Prospectus. The data should also be read in conjunction with
the MeriStar Unaudited Pro Forma Financial Statements, including the notes
thereto, included elsewhere herein. The pro forma data is not necessarily
indicative of the actual financial position that would have occurred, or future
operating results that will occur, upon consummation of the Merger.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
------------------------------------------------
AGH
AGH CAPSTAR MERISTAR PRO FORMA
HISTORICAL HISTORICAL PRO FORMA(A) EQUIVALENT(B)
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Basic net income per common
share before extraordinary
items....................... $ 1.60 $ 1.29 $ 1.32 $ 1.12
Diluted net income per common
share before extraordinary
items....................... 1.58 1.27 1.31 1.11
Cash distributions/dividends
per common share............ 1.67 -- 1.97 1.67
Book value per common share.. 20.93 20.89 25.02 21.20
</TABLE>
- --------
(A) The MeriStar pro forma per share information has been prepared as if the
Spin-Off, the Merger and the Transactions, as described in the MeriStar
Unaudited Pro Forma Financial Statements (included elsewhere herein), had
occurred at January 1, 1997.
(B) The equivalent pro forma per share data of AGH is calculated by multiplying
each MeriStar pro forma per share amount by the AGH Exchange Ratio of
0.8475.
14
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND AND DISTRIBUTION INFORMATION
AGH Common Stock and CapStar Common Stock are listed on the NYSE under the
symbols "AGT" and "CHO," respectively.
The table below sets forth, for the calendar quarters indicated, the reported
high and low sales prices of AGH Common Stock and CapStar Common Stock, in each
case as reported on the NYSE composite tape, and the dividends and/or cash
distributions declared on such stock for the same period.
<TABLE>
<CAPTION>
AGH COMMON STOCK CAPSTAR COMMON STOCK
--------------------------- ----------------------------
HIGH LOW DISTRIBUTION HIGH LOW DIVIDENDS
------ ------- ------------ ------- ---- ---------
(IN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
1996
Third Quarter(1)...... $ 19 $17 1/2 $0.2476(2) $18 3/8 $16 1/2 $ --
Fourth Quarter........ 23 3/4 18 7/8 0.4075 19 5/8 16 7/8 --
1997
First Quarter......... 28 3/8 23 1/8 0.4075 28 1/8 19 3/8 --
Second Quarter........ 27 1/8 23 0.4075 31 5/8 24 1/2 --
Third Quarter......... 29 1/4 24 1/4 0.4275 36 9/16 30 57/64 --
Fourth Quarter........ 29 7/8 24 5/8 0.4275 38 5/16 32 3/8 --
1998
First Quarter......... 28 1/2 26 0.4275(3) 36 7/8 31 --
Second Quarter
(through April 6,
1998)................ 27 3/4 26 1/2 --(4) 34 3/4 32 15/16 --
</TABLE>
- --------
(1) From July 31, 1996 for AGH Common Stock and from August 20, 1996 for
CapStar Common Stock.
(2) Represents a pro rata distribution of AGH's quarterly distribution of
$0.4075 per share of AGH Common Stock based on a partial calendar quarter
beginning on July 31, 1996 (the date of AGH's initial public offering)
through September 30, 1996.
(3) On March 12, 1998, AGH declared a distribution of $0.4275 per share of AGH
Common Stock relating to the first quarter of 1998 that will be paid on
April 30, 1998 to AGH stockholders of record as of April 15, 1998.
(4) Not yet declared.
MeriStar intends to make regular quarterly distributions to its stockholders.
Future distributions by MeriStar will be at the discretion of the MeriStar
Board and will depend on MeriStar's financial condition, capital requirements,
annual distributions requirements under the REIT provisions of the Code and
such other factors as the MeriStar Board deems relevant. There can be no
assurance that any such distributions will be made by MeriStar.
In order to maintain its qualification as a REIT, MeriStar must make annual
distributions to its stockholders of at least 95% of its REIT taxable income
(excluding net capital gains). Under certain circumstances, MeriStar may be
required to make distributions in excess of cash available for distribution in
order to meet such distribution requirements. In such event, MeriStar would
seek to borrow the amount to obtain the cash necessary to make distributions to
retain its qualification as a REIT for federal income tax purposes.
On March 13, 1998, the last full trading day preceding the joint public
announcement by AGH and CapStar that they had entered into the Merger
Agreement, the closing price of AGH Common Stock and CapStar Common Stock on
the NYSE Composite Tape was $26 15/16 and $35 3/4 per share, respectively. On
April 6, 1998, the most recent practicable date prior to the printing of this
Joint Proxy Statement/Prospectus, the closing price of AGH Common Stock and
CapStar Common Stock on the NYSE Composite Tape was $26 3/4 and $33 1/4 per
share, respectively. HOLDERS OF AGH COMMON STOCK AND CAPSTAR COMMON STOCK ARE
URGED TO OBTAIN CURRENT MARKET QUOTATIONS PRIOR TO MAKING ANY DECISION WITH
RESPECT TO THE TRANSACTIONS.
For a discussion of MeriStar's distribution policy following the Merger, see
"Policies of MeriStar--Distribution Policies."
15
<PAGE>
RISK FACTORS
Stockholders of AGH and CapStar, in considering whether to approve the
Merger, should consider, in addition to the other information set forth in
this Joint Proxy Statement/Prospectus, the matters discussed in this section.
Such matters address the risks of the Transactions, the risks arising from the
relationship of MeriStar and OpCo and the risks relating to the businesses in
which CapStar and AGH are engaged. This Joint Proxy Statement/Prospectus
contains forward-looking statements which involve material risks and
uncertainties. See "Special Note Regarding Forward-Looking Statements."
MeriStar's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this Joint
Proxy Statement/Prospectus.
RISKS ASSOCIATED WITH THE TRANSACTIONS
Failure to Manage Rapid Growth and Integrate Operations
AGH and CapStar are currently experiencing a period of rapid growth. Since
their initial public offerings in July 1996 and August 1996, respectively, AGH
and CapStar have invested an aggregate of approximately $1,807 million to
purchase 84 hotels, increasing their combined guest room portfolios by more
than 421%. Based upon the respective portfolios of AGH and CapStar at April 1,
1998, MeriStar's aggregate rooms portfolio after giving effect to the Merger
will consist of 109 hotels. The consolidation of functions and integration of
departments, systems and procedures and the formation of OpCo to manage the
MeriStar Owned Hotels will present a significant management challenge, and the
failure to integrate all of such hotels into OpCo's management and operating
structures could have a material adverse effect on the results of operations
and financial condition of MeriStar. There can be no assurance that the
anticipated benefits from the Merger will be realized or that the integration
will be successful and timely implemented.
MeriStar's ability to manage its growth effectively requires MeriStar to
select capable lessees and managers for its newly acquired hotels. There can
be no assurance that OpCo or other hotel management companies and/or operators
will be able to manage MeriStar's newly acquired hotels. See "--Dependence on
OpCo and Payments under the Participating Leases."
Risks of Transfer of Liquor and Food Licenses
In connection with the Merger, CapStar intends to transfer certain operating
licenses, such as food and beverage licenses, to OpCo. MeriStar will also be
subject to the risk that in connection with the Merger, it may not be possible
to transfer such operating licenses, or to obtain new licenses in a timely
manner in the event such licenses cannot be transferred. Although hotels can
provide alcoholic beverages under interim licenses or licenses obtained prior
to the acquisition of these hotels, there can be no assurance that these
licenses will remain in effect until OpCo obtains new licenses or that new
licenses will be obtained. The failure to have alcoholic beverage licenses or
other operating licenses could adversely affect the ability of OpCo to
generate revenues and make lease payments to MeriStar.
RISKS OF DEBT FINANCING; NO LIMITS ON INDEBTEDNESS
MeriStar is currently negotiating a line of credit facility (the "Proposed
Credit Facility") with an anticipated maximum principal amount of
approximately $1.0 billion to $1.3 billion. Upon consummation of the Merger,
MeriStar expects that it will have approximately $788 million of outstanding
indebtedness under the Proposed Credit Facility, $150 million of outstanding
8.75% Senior Subordinated Notes due 2007 and $173 million of outstanding 4.75%
Convertible Notes due 2004, and will have outstanding mortgage indebtedness
encumbering nine of the hotels of approximately $104 million. Neither the
MeriStar Charter nor the bylaws of MeriStar (the "MeriStar Bylaws") will limit
the amount of indebtedness it may incur. Subject to limitations in its debt
instruments, MeriStar expects to incur additional debt in the future to
finance acquisitions, capital improvements and renovations.
16
<PAGE>
There can be no assurances that MeriStar will be able to meet its debt
service obligations, and, to the extent that it cannot, MeriStar risks the
loss of some or all of its assets. Economic conditions could result in higher
interest rates, which could increase debt service requirements on variable
rate debt, such as the Proposed Credit Facility, and could reduce the amount
of cash available to MeriStar to service its debt. Adverse economic conditions
could cause the terms on which borrowings become available to MeriStar to be
unfavorable. In such circumstances, if MeriStar is in need of capital to repay
indebtedness in accordance with its terms or otherwise, it could be required
to liquidate one or more investments in hotel properties, at times which may
not permit realization of the maximum return on such investments.
BENEFITS OF THE TRANSACTIONS TO AFFILIATES
Lessee-Manager Acquisition Agreement to Certain AGH Officers
OpCo has agreed to pay $95 million, payable through the issuance of
approximately $11.2 million of units of limited partnership interests in the
OpCo Operating Partnership ("OpCo OP Units") and approximately $83.8 million
in cash, in connection with OpCo's acquisition of 100% of the limited
partnership interests in AGH Leasing, the third party lessee that leases most
of the hotels owned by AGH, and substantially all of the assets and certain
liabilities of AGHI, the third-party manager that manages most of the hotels
owned by AGH. Steven D. Jorns and Bruce G. Wiles, who are each principals of
AGH Leasing and stockholders of AGHI, and Kenneth E. Barr, who is a principal
of AGH Leasing, will realize material benefits as a result of the consummation
of the Lessee-Manager Acquisition Agreement (as defined herein), including the
receipt of approximately $3.5 million, $1.1 million and $.3 million,
respectively, of OpCo Op Units and approximately $14.0 million, $4.4 million
and $1.0 million, respectively, of cash. See "The Spin-Off--The Lessee-Manager
Acquisition Agreement."
In addition, upon consummation of the Lessee-Manager Acquisition Agreement,
the pledge of 275,000 AGH OP Units by the partners of AGH Leasing, including
Messrs. Jorns, Wiles and Barr, to secure AGH Leasing's obligations under the
participating leases will be terminated. Moreover, Messrs. Jorns and Wiles, as
stockholders of AGHI, will be relieved of a contractual obligation to purchase
interests in AGH with the respective portion of the dividends each receives as
a stockholder of AGHI.
Acceleration of Options
The non-employee directors of AGH and CapStar will be entitled to the
immediate vesting of their outstanding stock options at the Effective Time.
Although Messrs. Whetsell, Jorns, Wiles, Emery and Barr are entitled to the
immediate vesting of their outstanding stock options at the Effective Time,
each, however, has waived this entitlement to the vesting of their options.
See "The Merger Agreement--Stock Option and Other Stock Rights." In addition,
the executive officers of AGH and CapStar who will be employed by MeriStar,
Messrs. Whetsell, Jorns, Wiles, Emery and Barr, will enter into new employment
agreements with MeriStar, which will entitle them to have such outstanding
stock options continue to vest in accordance with their original terms upon
the voluntary or involuntary termination of employment within 24 months after
the Effective Time.
Payment of Additional MeriStar Common Stock
At the Effective Time, a total of 150,000 shares of MeriStar Common Stock,
which shares are expected to have a fair market value at the Effective Time of
approximately $5 million, will be awarded to the holders of CapStar Stock
Options (as defined herein). The stock awards will be made in proportion to
each holder's total CapStar Stock Option holdings immediately prior to the
Effective Time. Such shares of MeriStar Common Stock will vest in three annual
installments beginning on the first anniversary of the Effective Time.
NO APPRAISAL OR DISSENTERS' RIGHTS
Under the MGCL and the DGCL, stockholders of AGH and CapStar who do not vote
in favor of the Merger will not have appraisal or dissenters' rights in
connection with the Merger if it is approved. The stockholders of MeriStar
will be governed by the MGCL.
17
<PAGE>
CONFLICT OF INTEREST RISKS IN RELATIONSHIP BETWEEN MERISTAR AND OPCO
General Conflicts of Interest
MeriStar and OpCo will have several common members of their Boards of
Directors and their two top executives. MeriStar and OpCo will operate in a
relationship governed by the Intercompany Agreement which restricts each party
from taking advantage of certain business opportunities without first
presenting those opportunities to the other party. Also, in their relationship
with MeriStar as owner and OpCo as lessee and manager of hotels, MeriStar and
OpCo may have conflicting views on the manner in which the MeriStar hotels are
operated and managed, and with respect to lease arrangements, acquisitions and
dispositions. As a result, the directors and senior executives of MeriStar
(who serve in similar capacities at OpCo) may well be presented with several
decisions which provide them the opportunity to benefit MeriStar to the
detriment of OpCo or benefit OpCo to the detriment of MeriStar. Such inherent
potential conflicts of interest will be present in all of the numerous
transactions between MeriStar and OpCo. See "The Spin-Off" for a description
of the relationship between MeriStar and OpCo and the Intercompany Agreement.
Restrictions on OpCo's and MeriStar's Business and Future Opportunities
The certificate of incorporation of OpCo (the "OpCo Charter") provides that,
for so long as the Intercompany Agreement remains in effect, OpCo is
prohibited from engaging in activities or making investments that a REIT could
make unless MeriStar was first given the opportunity but elected not to pursue
such activities or investments. The OpCo Charter also provides that a
corporate purpose of OpCo is to perform its obligations under the Intercompany
Agreement. Under the OpCo Charter and the Intercompany Agreement, OpCo has
agreed not to acquire or make (i) investments in real estate (which, for
purposes of the Intercompany Agreement, include the provision of services
related to real estate and investment in hotel properties, real estate
mortgages, real estate derivatives or entities that invest in real estate
assets) or (ii) any other investments that may be structured in a manner that
qualifies under the federal income tax requirements applicable to REITs,
unless in either case it has notified MeriStar of the acquisition or
investment opportunity, in accordance with the terms of the Intercompany
Agreement, and MeriStar has determined not to pursue such acquisition or
investment; provided, however, that OpCo may make limited minority investments
or contributions as part of a lease arrangement with a party that is not an
affiliate of OpCo in a bona fide arm's-length transaction; provided further,
that such investment or contribution does not materially impact OpCo's
financial and legal qualifications to lease and manage additional MeriStar
properties. See "The Spin-Off--The Intercompany Agreement." OpCo also has
agreed to assist MeriStar in structuring and consummating any such acquisition
or investment which MeriStar elects to pursue, on terms determined by
MeriStar. On the other hand, the Intercompany Agreement grants OpCo the right
of first refusal to become the lessee of any real property acquired by
MeriStar as to which MeriStar determines that, consistent with MeriStar's
status as a REIT, it is required to enter into a master lease arrangement.
This lessee opportunity will be available to OpCo only if MeriStar determines,
in its sole discretion, that OpCo is qualified to be the lessee. Because of
the provisions of the Intercompany Agreement and the OpCo Charter, the nature
of OpCo's business and the opportunities it may pursue are restricted.
OpCo's Dependence upon MeriStar; Limited Resources for Growth Through New
Opportunities
Due to OpCo's restricted corporate purpose and the Intercompany Agreement,
OpCo will rely on MeriStar to provide OpCo with the lessee opportunities
described in the Intercompany Agreement only if it is necessary for MeriStar,
consistent with its status as a REIT, to enter into a master lease arrangement
and only if OpCo and MeriStar negotiate mutually satisfactory master lease
arrangements. If MeriStar in the future should fail to qualify as a REIT, such
failure could have a substantial adverse effect on those aspects of OpCo's
business operations and business opportunities that are dependent upon
MeriStar. For example, the Intercompany Agreement remains effective even if
MeriStar ceases to qualify as a REIT, with OpCo's rights relating to lessee
opportunities under the Intercompany Agreement continuing to be based on
MeriStar's need to create a master lease structure due to its status as a
REIT. Accordingly, if MeriStar failed to qualify as a REIT and thereafter
acquired a property, MeriStar would have the right under the Intercompany
Agreement to lease the property to
18
<PAGE>
any person or entity pursuant to any type of lease (including a master lease
arrangement) or to operate the property itself. OpCo, however, would remain
subject to all of the limitations on its operations contained in the OpCo
Charter and the Intercompany Agreement. In addition, although it is
anticipated that any master lease arrangement involving OpCo generally will
provide that OpCo's rights will continue following a sale of the property or
an assignment of the lease (with the likelihood of a sale or assignment of
lease possibly increasing if MeriStar fails to qualify as a REIT), OpCo could
lose its rights under any such master lease arrangement upon the expiration of
the lease. If OpCo and MeriStar do not negotiate a mutually satisfactory lease
arrangement within 30 days after MeriStar provides OpCo with written notice of
the lessee opportunity (or such longer period to which OpCo and MeriStar may
agree), MeriStar may offer the opportunity to others for a period of one year
before it must again offer the opportunity to OpCo.
Conflicts Relating to Sale of Hotels Subject to Leases
MeriStar generally will be obligated under its master leases with OpCo to
pay a lease termination fee to OpCo if MeriStar elects to sell a hotel or if
it elects not to restore a hotel after a casualty and does not replace it with
another hotel on terms that would create a leasehold interest in such hotel
with a fair market value equal to the fair market value of OpCo's remaining
leasehold interest under the lease to be terminated. Where applicable, the
termination fee is equal to the fair market value of OpCo's leasehold interest
in the remaining term of the lease to be terminated. A decision to sell a
hotel may, therefore, have significantly different consequences for MeriStar
and OpCo.
Dependence on OpCo and Payments under the Participating Leases
Upon consummation of the Merger, MeriStar will lease substantially all of
the MeriStar Owned Hotels to OpCo pursuant to separate lease agreements
("Participating Leases"). MeriStar's ability to make distributions to its
stockholders will depend primarily upon the ability of OpCo to make rent
payments under the Participating Leases (which will be dependent primarily on
the ability of OpCo and other potential operators to generate sufficient
revenues in excess of operating expenses from those hotels which are leased to
them). A failure or a delay by OpCo in making such payments may be caused by
reductions in revenue from such hotels or in the net operating income of OpCo
or otherwise. Any failure or delay by OpCo in making rent payments may
adversely affect MeriStar's ability to make distributions to stockholders.
Although failure on the part of OpCo to materially comply with the terms of a
Participating Lease (including failure to pay rent when due) will give
MeriStar the non-exclusive right to terminate such lease, repossess the
applicable property and enforce the payment obligations under the lease,
MeriStar would then be required to find another lessee to lease such hotel.
There can be no assurance that MeriStar would be able to find another lessee
or that, if another lessee were found, MeriStar would be able to enter into a
new lease on favorable terms.
Lack of Control Over Management and Operations of the Hotels
MeriStar will be dependent on the ability of OpCo and other operators of
hotels to operate and manage the MeriStar Owned Hotels. To maintain its status
as a REIT, MeriStar will not be able to operate the MeriStar Owned Hotels or
any subsequently acquired hotels. As a result, MeriStar will be unable to
directly implement strategic business decisions with respect to the operation
and marketing of the MeriStar Owned Hotels, such as decisions with respect to
the setting of room rates, food and beverage operations and certain similar
matters.
Potential Negative Impact on MeriStar Acquisitions
MeriStar's ability to acquire additional hotels could be negatively impacted
by the relationship between MeriStar and OpCo because hotel management
companies, franchisees and others who historically approached CapStar or AGH
with acquisition opportunities in hopes of establishing lessee or management
relationships may not do so in the future knowing that MeriStar will rely
primarily on OpCo to lease and/or manage the acquired
19
<PAGE>
properties. Such persons may instead provide such acquisition opportunities to
hotel companies that will allow them to manage the properties following the
sale. This could have a negative impact on MeriStar's acquisition activities
in the future.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
Operating Risks
MeriStar's business will be subject to all of the operating risks inherent
in the lodging industry. These risks include the following: (i) changes in
general and local economic conditions; (ii) cyclical overbuilding in the
lodging industry; (iii) varying levels of demand for rooms and related
services; (iv) competition from other hotels, motels and recreational
properties, some of which may have greater marketing and financial resources
than MeriStar; (v) dependence on business and commercial travelers and
tourism, which business may fluctuate and be seasonal; (vi) the recurring need
for renovations, refurbishment and improvements of hotel properties; (vii)
changes in governmental regulations that influence or determine wages, prices
and construction and maintenance costs; and (viii) changes in interest rates
and the availability of credit. Demographic, geographic or other changes in
one or more of MeriStar's markets could impact the convenience or desirability
of the sites of certain hotels, which would in turn affect the operations of
those hotels. In addition, due to the level of fixed costs required to operate
full-service hotels, certain significant expenditures necessary for the
operation of hotels generally cannot be reduced when circumstances cause a
reduction in revenue.
These factors could adversely affect the ability of OpCo to generate
revenues and make lease payments to MeriStar and, therefore, MeriStar's
ability to make distributions to its stockholders.
Seasonality
The lodging industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters
although this may not be true for hotels in major tourist destinations.
Revenues for hotels in tourist areas generally are substantially greater
during tourist season than other times of the year. Seasonal variations in
revenue at the MeriStar Owned Hotels can be expected to cause quarterly
fluctuations in the lease revenues of MeriStar. Quarterly earnings also may be
adversely affected by events beyond MeriStar's control, such as extreme
weather conditions, economic factors and other considerations affecting
travel.
Franchise Agreements
Upon completion of the Merger, 103 of the MeriStar Owned Hotels will be
operated pursuant to existing franchise or license agreements with nationally
recognized hotel companies (the "Franchise Agreements"). The Franchise
Agreements generally contain specific standards for, and restrictions and
limitations on, the operation and maintenance of a hotel in order to maintain
uniformity within the franchisor system. Those limitations may conflict with
MeriStar's and OpCo's philosophy of creating specific business plans tailored
to each hotel and to each market. Such standards are often subject to change
over time, in some cases at the discretion of the franchisor, and may restrict
a franchisee's ability to make improvements or modifications to a hotel
without the consent of the franchisor. In addition, compliance with such
standards could require a franchisee to incur significant expenses or capital
expenditures. Action or inaction on the part of any of MeriStar, OpCo or
third-party operators could result in a breach of such standards or other
terms and conditions of the franchise agreements and could result in the loss
or cancellation of a franchise license.
In connection with terminating or changing the franchise affiliation of a
MeriStar Owned Hotel or a subsequently acquired hotel, OpCo may be required to
incur significant expenses or capital expenditures. Moreover, the loss of a
franchise license could have a material adverse effect upon the operations or
the underlying value of the hotel covered by the franchise because of the loss
of associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. The Franchise Agreements
20
<PAGE>
covering the MeriStar Owned Hotels expire or terminate, without specified
renewal rights, at various times and have differing remaining terms. As a
condition to renewal, the Franchise Agreements frequently contemplate a
renewal application process, which may require substantial capital
improvements to be made to the hotel.
Under their existing Franchise Agreements, AGH and CapStar will be required
to obtain the consent of the franchisors under such agreements to consummate
the Transactions. Although AGH and CapStar expect to obtain such consents,
there can be no assurance that they will be obtained.
Risk of Necessary Operating Costs and Capital Expenditures
Hotels in general, including the MeriStar Owned Hotels, require ongoing
renovations and other capital improvements, including periodic replacement or
refurbishment of furniture, fixture and equipment ("FF&E"). Under the terms of
the Participating Leases, MeriStar is obligated to establish a reserve to pay
the cost of certain capital expenditures at the MeriStar Owned Hotels and pay
for periodic replacement or refurbishment of FF&E. MeriStar controls the use
of funds in this reserve. However, if capital expenditures exceed MeriStar's
expectations, there can be no assurance that sufficient sources of financing
will be available to fund such expenditures. The additional cost of such
expenditures could have an adverse effect on cash available for distribution.
In addition, MeriStar may acquire hotels in the future that require
significant renovation. Renovation of hotels involves certain risks, including
the possibility of environmental problems, construction cost overruns and
delays, uncertainties as to market demand or deterioration in market demand
after commencement of renovation and the emergence of unanticipated
competition from other hotels.
Competition in the Lodging Industry
The lodging industry is highly competitive. There is no single competitor or
small number of competitors of MeriStar that will be dominant in the industry.
The MeriStar Owned Hotels will operate in areas that contain numerous
competitors, some of which have substantially greater resources than MeriStar
and the ability to accept more risk than MeriStar will be able to manage.
Competition in the lodging industry is based generally on location, room rates
and range and quality of services and guest amenities offered. New or existing
competitors could significantly lower rates or offer greater conveniences,
services or amenities or significantly expand, improve or introduce new
facilities in markets in which the MeriStar Owned Hotels will compete, thereby
adversely affecting MeriStar's operations and the number of suitable
investment opportunities.
Environmental Risks
Under various 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 addition, the presence of
contamination from hazardous or toxic substances, or the failure to properly
remediate such contaminated property, may adversely affect the owner's ability
to sell or rent such real property or to borrow using such real property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not such
facility is or ever was owned or operated by such person. The operation and
removal of certain underground storage tanks are also regulated by federal and
state laws. In connection with the ownership and operation of the hotels,
MeriStar could be held liable for the costs of remedial action with respect to
such regulated substances and storage tanks and claims related thereto.
Activities have been undertaken to close or remove storage tanks located on
the property of several of the MeriStar Owned Hotels.
All of the MeriStar Owned Hotels have undergone Phase I environmental site
assessments ("Phase Is"), which generally provide a nonintrusive physical
inspection and database search, but not soil or groundwater analyses, by a
qualified independent environmental engineer, within the last 18 months. The
purpose of the Phase I is to identify potential sources of contamination for
which the MeriStar Owned Hotels may be responsible and to assess the status of
environmental regulatory compliance. The Phase Is have not revealed any
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environmental liability or compliance concerns that MeriStar believes would
have a material adverse effect on MeriStar's results of operation or financial
condition, nor is MeriStar aware of any such liability or concerns.
In addition, the MeriStar Owned Hotels have been inspected to determine the
presence of asbestos. Federal, state and local environmental laws, ordinances
and regulations also require abatement or removal of certain asbestos-
containing materials ("ACMs") and govern emissions of and exposure to asbestos
fibers in the air. ACMs are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
MeriStar Owned Hotels. 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.
Based on third-party environmental assessments and due diligence
investigations recently conducted by MeriStar and its lenders, MeriStar
believes that the presence of ACMs in the MeriStar Owned Hotels will not have
a material adverse effect on MeriStar's results of operations or financial
condition. However, there can be no assurance that this will be the case. Any
liability resulting from non-compliance or other claims relating to
environmental matters could have a material adverse effect on MeriStar's
results of operations or financial condition.
Governmental Regulation
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. MeriStar
believes that it is substantially in compliance with these 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 could reduce the revenue and profitability of the MeriStar Owned Hotels
and could otherwise adversely affect MeriStar's results of operations or
financial condition.
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations are required to meet certain requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA required
upgrades to the MeriStar Owned Hotels, a determination that MeriStar is not in
compliance with the ADA could result in a judicial order requiring compliance,
imposition of fines or an award of damages to private litigants. MeriStar is
likely to incur additional costs of complying with the ADA; however, such
costs are not expected to have a material adverse effect on MeriStar's results
of operations or financial condition.
Investment in Single Industry
MeriStar's current strategy is to acquire interests only in hospitality and
lodging. As a result, MeriStar will be subject to risks inherent in
investments in a single industry. The effects on cash available for
distribution resulting from a downturn in the hotel industry may be more
pronounced than if MeriStar had diversified its investments.
RISKS ASSOCIATED WITH OWNING REAL ESTATE
General Risks
Upon consummation of the Merger, MeriStar will continue the businesses
previously undertaken separately by AGH and CapStar of owning, operating and
acquiring hotels. The business risks to be faced by MeriStar will be similar
to those now faced separately by AGH and CapStar. MeriStar's strategy to
acquire interests only in hotels will be subject to varying degrees of risk
generally incident to the ownership of real property and investment in a
single industry. The underlying value of MeriStar's hotel investments and
MeriStar's income and ability to make distributions to its stockholders will
be dependent upon the ability of OpCo or any third-party operators to operate
the hotels in a manner sufficient to maintain or increase revenues and to
generate sufficient revenue in excess of operating expenses to make lease
payments to MeriStar. Income from the hotels may be adversely affected by
changes in national, regional and local economic conditions, changes in local
real estate market conditions, changes in interest rates and in the
availability, cost and terms of financing, the potential for
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uninsured casualty or other losses, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements, changes in real estate tax rates and other
operating expenses and adverse changes in zoning laws and other governmental
rules and fiscal policies. Many of these risks are beyond the control of
MeriStar and the effects of these risks are likely to be more pronounced than
if MeriStar had diversified investments. In addition, real estate investments
are relatively illiquid, resulting in a limited ability of MeriStar to vary
its portfolio of hotels in response to changes in economic and other
conditions.
Value and Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of MeriStar to
vary its portfolio in response to changes in economic and other conditions
will be limited. If MeriStar must sell an investment, there can be no
assurance that MeriStar will be able to dispose of it in the time period it
desires or that the sale price of any investment will recoup or exceed the
amount of MeriStar's investment.
COMPETITION FOR EXPANSION OPPORTUNITIES
MeriStar will compete for the acquisition of hotels with entities that have
substantially greater financial resources than MeriStar. MeriStar believes
that, as a result of the downturn experienced by the lodging industry from the
late 1980s through the early 1990s and the significant number of foreclosures
and bankruptcies created thereby, the prices for many hotels have for several
years been at historically low levels and often well below the cost to build
new hotels. The economic recovery in the lodging industry and the resulting
increase in funds available for hotel acquisitions may cause additional
investors to enter the hotel acquisition market, which may in turn cause hotel
acquisition costs to increase and the number of attractive hotel acquisition
opportunities to decrease.
CONSENT OF GROUND LESSOR REQUIRED FOR SALE AND RENOVATION OF CERTAIN HOTELS
Certain of MeriStar's hotels will be subject to ground leases, space leases
and a bay bottom lease for certain offshore property. In addition, MeriStar
may acquire hotels in the future that are subject to ground leases. Any
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proposed sale of such hotels by MeriStar or any proposed assignment of
MeriStar's leasehold interest in the ground leases, space leases and bay
bottom lease, as well as subletting, may require the consent of the respective
third-party lessors. Upon consummation of the Merger, there can be no
assurance that MeriStar will be able to obtain such requisite consents. As a
result, MeriStar may not be able to sell, assign, transfer or convey its
interest in any such property in the future absent the consent of such third
parties, even if such transaction may be in the best interests of the
stockholders of MeriStar.
Under certain of their existing ground leases and mortgages, AGH and CapStar
will be required to obtain the consent of third parties to consummate the
Transactions. Although AGH and CapStar expect to obtain such consents, there
can be no assurance that they will be obtained.
REIT TAX RISKS
Dependence on Qualification as a REIT
AGH has and MeriStar intends to operate in a manner designed to permit it to
qualify as a REIT for federal income tax purposes. Qualification as a REIT
involves the application of highly technical and complex provisions of the
Code, for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and
circumstances not entirely within MeriStar's control may affect its ability to
continue to qualify as a REIT. The complexity of these provisions and of the
applicable income tax regulations that have been promulgated under the Code is
greater in the case of a REIT that holds its assets through a partnership,
such as MeriStar. Moreover, no assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. MeriStar will receive an opinion of
counsel to the effect that, based on various assumptions relating to the
operation of AGH and CapStar, representations made by AGH and CapStar as to
certain factual matters and an opinion of counsel to AGH to be given in
connection with the Merger, commencing with the taxable year ending December
31, 1998, AGH was organized and has operated in conformity with the
requirements for qualification as a REIT within the meaning of the Code and
the proposed method of operation of MeriStar, including, without limitation,
the consummation of the Transactions, will enable MeriStar to continue to meet
the requirements for qualification and taxation as a REIT under the Code. Such
legal opinion is not binding on the Internal Revenue Service (the "IRS"). See
"The Merger--Federal Income Tax Considerations Relating to MeriStar."
If MeriStar fails to qualify as a REIT in any taxable year, MeriStar will
not be allowed a deduction for distributions to its stockholders in computing
its taxable income and will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at the applicable
corporate rate. In addition, unless it were entitled to relief under certain
statutory provisions, MeriStar would be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification is
lost. This disqualification would reduce the funds of MeriStar available for
investment or distribution to stockholders because of the additional tax
liability of MeriStar for the year or years involved. See "The Merger--Federal
Income Tax Considerations Relating to MeriStar."
If MeriStar were to fail to qualify as a REIT, it no longer would be subject
to the distribution requirements of the Code and, to the extent that
distributions to stockholders would have been made in anticipation of
MeriStar's qualifying as a REIT, MeriStar might be required to borrow funds or
to liquidate certain of its assets to pay the applicable corporate income tax.
Although MeriStar currently operates in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the MeriStar Board to decide to revoke the REIT
election.
Adverse Effects of REIT Minimum Distribution Requirements
To obtain the favorable tax treatment accorded to REITs under the Code,
MeriStar generally will be required each year to distribute to its
stockholders at least 95% of its REIT taxable income. MeriStar will be subject
to income tax on any undistributed REIT taxable income and net capital gain,
and to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than
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the sum of (i) 85% of its ordinary income for the calendar year, (ii) 95% of
its capital gain net income for such year, and (iii) 100% of its undistributed
income from prior years.
MeriStar intends to make distributions to its stockholders to comply with
the distribution provisions of the Code and generally to avoid federal income
taxes and the nondeductible 4% excise tax. MeriStar's income will consist
primarily of its share of the income of MeriStar Operating Partnership, and
MeriStar's cash flow will consist primarily of its share of distributions from
MeriStar Operating Partnership. Differences in timing between the receipt of
income and the payment of expenses in arriving at taxable income (of MeriStar
or MeriStar Operating Partnership) and the effect of nondeductible capital
expenditures, the creation of reserves or required debt amortization payments
could in the future require MeriStar to borrow funds directly or through
MeriStar Operating Partnership on a short-term or long-term basis to meet the
distribution requirements that are necessary to continue to qualify as a REIT
and avoid federal income taxes and the 4% nondeductible excise tax. In such
circumstances, MeriStar might need to borrow funds directly in order to avoid
adverse tax consequences even if management believes that the then prevailing
market conditions generally are not favorable for such borrowings or that such
borrowings are not advisable in the absence of such tax considerations.
Distributions by MeriStar Operating Partnership will be determined by its
sole general partner, a wholly owned subsidiary of MeriStar, and are dependent
on a number of factors, including the amount of cash available for
distribution, MeriStar Operating Partnership's financial condition, any
decision by the MeriStar Board to reinvest funds rather than to distribute
such funds, MeriStar Operating Partnership's capital expenditure requirements,
the annual distribution requirements under the REIT provisions of the Code and
such other factors as the MeriStar Board deems relevant. Accordingly, although
MeriStar intends to continue to satisfy the annual distribution requirement so
as to avoid corporate income taxation on the earnings that it distributes,
there can be no assurance that it will be able to do so.
Consequences of Failure to Qualify as Partnerships
MeriStar will receive an opinion of counsel stating that, based upon the
provisions of the partnership agreement of the CapStar Operating Partnership,
on certain factual assumptions and representations by AGH and CapStar, on the
opinion of counsel to AGH with respect to the federal tax classification of
the AGH Operating Partnership and its subsidiary partnerships, and the
assumption that the MeriStar Operating Partnership Agreement will contain
provisions to ensure that the MeriStar Operating Partnership is not a publicly
traded partnership, the AGH Operating Partnership and its subsidiary
partnerships have been and continue to be, and giving effect to the
Transactions, the MeriStar Operating Partnership and each of its subsidiary
partnerships will be treated as partnerships, and not as corporations, for
federal income tax purposes. Such opinion is not binding on the IRS. If the
IRS were successfully to determine that any such partnership is properly
treated as a corporation, MeriStar would cease to qualify as a REIT for
federal income tax purposes. The imposition of a corporate tax on MeriStar
Operating Partnership or any of the subsidiary partnerships, with a
concomitant loss of REIT status of MeriStar, would substantially reduce the
amount of cash available for distribution. See "The Merger--Federal Income Tax
Considerations Relating to MeriStar."
DEPENDENCE ON KEY PERSONNEL
Upon consummation of the Merger, MeriStar and OpCo will place substantial
reliance on the lodging industry knowledge and experience and the continued
services of both AGH and CapStar senior management, led by Messrs. Whetsell
and Jorns. MeriStar's future success and its ability to manage future growth
depend in large part upon the efforts of these persons and on MeriStar's
ability to attract and retain other highly qualified personnel. Competition
for such personnel is intense, and there can be no assurance that MeriStar
will be successful in attracting and retaining such personnel. MeriStar's
inability to attract and retain other highly qualified personnel may adversely
affect the results of operations and financial condition. MeriStar and OpCo
will have employment agreements with Messrs. Whetsell and Jorns for initial
terms of five years with automatic renewals on a year-to-year basis
thereafter, unless terminated in accordance with their terms. See "Management
of MeriStar--Employment Agreements."
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POSSIBLE ADVERSE EFFECTS ON MARKET PRICE OF MERISTAR COMMON STOCK ARISING FROM
SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that any future sales of
shares, or the availability of shares for future sale, will have on the market
prices for MeriStar Common Stock following the Merger. Sales of substantial
amounts of MeriStar Common Stock (including MeriStar Common Stock issued in
connection with outstanding stock options or the exchange or sale of units of
limited partner interest ("MeriStar OP Units") in the MeriStar Operating
Partnership) or the perception that such sales could occur could adversely
affect the prevailing market price for MeriStar Common Stock. With the
exception of the MeriStar Common Stock issued to affiliates of MeriStar and
CapStar in connection with the Merger, all of the MeriStar Common Stock to be
issued to holders of AGH Common Stock or CapStar Common Stock in connection
with the Merger will be freely transferable, except as otherwise restricted by
the AGH Charter.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICES FOR MERISTAR
COMMON STOCK
One of the factors that may influence the prices for the MeriStar Common
Stock in public trading markets will be the annual yield from distributions by
MeriStar on the MeriStar Common Stock as compared to yields on certain
financial instruments. An increase in market interest rates will result in
higher yields on certain financial instruments, which could adversely affect
the market prices for the MeriStar Common Stock.
ABSENCE OF A PUBLIC MARKET FOR OPCO COMMON STOCK
There is currently no public market for the common stock, par value $0.01
per share ("OpCo Common Stock"), of OpCo. Application has been made to list
the OpCo Common Stock on the NYSE. There can be no assurance as to the prices
at which trading in OpCo Common Stock will occur after the Spin-Off or that an
active trading market in the OpCo Common Stock will develop or be sustained in
the future. In the event no active trading market develops for the OpCo Common
Stock, holders of shares of OpCo Common Stock may not be able to sell their
shares promptly at a reasonable price. Accordingly, holders of OpCo Common
Stock should consider the OpCo Common Stock a long-term investment.
The prices at which the OpCo Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
MeriStar's and OpCo's performance and prospects, the depth and liquidity of
the market for the OpCo Common Stock, investor perception of MeriStar, OpCo
and of the hotel industry in which MeriStar and OpCo operate, economic
conditions in general, OpCo's dividend policy, and general financial and other
market conditions. Such volatility and other factors may materially adversely
affect the market price of the OpCo Common Stock.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE MERISTAR CHARTER AND MERISTAR BYLAWS
Certain provisions of Maryland law and of the MeriStar Charter and the
MeriStar Bylaws (the "MeriStar Bylaws") may have the effect of discouraging a
third party from making an acquisition proposal for MeriStar and could delay,
defer or prevent a change in control of MeriStar or other transaction under
circumstances that could give the holders of MeriStar Common Stock the
opportunity to realize a premium over the then prevailing market prices of the
MeriStar Common Stock. Such provisions include the following:
Ownership Limitation
In order for MeriStar to maintain its qualification as a REIT under the
Code, not more than 50% in value of the outstanding shares of stock of
MeriStar may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) at any time during the
last half of MeriStar's taxable year. Furthermore, if any stockholder of
MeriStar owns, actually or constructively, 10% or more of OpCo, OpCo could
become a Related Party Tenant (as defined in "The Merger--Federal Income Tax
Considerations Relating to MeriStar Consequences") of MeriStar, which would
result in loss of REIT status for MeriStar. The MeriStar
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Charter prohibits direct or indirect ownership (taking into account applicable
ownership provisions of the Code) of more than 9.8% of any class of MeriStar's
outstanding stock by any person (the "Ownership Limitation"), subject to an
exception that permits mutual funds and certain other entities to own as much
as 15% of any class of MeriStar's stock in appropriate circumstances (the
"Look-Through Ownership Limitation"). Generally, the stock owned by affiliated
owners will be aggregated for purposes of the Ownership Limitation. In
addition, the MeriStar Charter prohibits a stockholder of MeriStar from owning
MeriStar Common Stock if such ownership would cause MeriStar to own, actually
or constructively, 10% or more of the ownership interests in a tenant of
MeriStar's, the MeriStar Operating Partnership's or a subsidiary partnership's
real property. The Ownership Limitation could have the effect of delaying,
deferring or preventing a transaction or a change in control of MeriStar in
which holders of some or a majority of the MeriStar Common Stock might receive
a premium for their MeriStar Common Stock over the then prevailing market
price or which such holders might believe to be otherwise in their best
interests.
Staggered Board
The MeriStar Board will be divided into three classes of directors. The
initial term of the first class expired in 1997 and the current term of such
class expires in 2000, and the initial terms of the second and third classes
will expire in 1998, and 1999, respectively. Directors of each class will be
elected for three-year terms upon the expiration of the current class terms,
and, beginning in 1999 and each year thereafter, one class of directors will
be elected by the stockholders. A director may be removed, with or without
cause, by the affirmative vote of 75% of the votes entitled to be cast for the
election of directors, which super-majority vote may have the effect of
delaying, deferring or preventing a change in control of MeriStar even though
a change in control might be in the best interests of the stockholders of
MeriStar. See "Comparison of Rights of Holders of MeriStar Common Stock and
CapStar Common Stock."
Maryland Business Combination Statute
Under the MGCL, certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation, such as MeriStar and any
person who owns 10% or more of the voting power of the corporation's shares
(an "Interested Stockholder") or an affiliate thereof are prohibited for five
years after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
approved by two super-majority votes unless, among other conditions, the
holders of shares of MeriStar Common Stock receive a minimum price (as defined
in the MGCL) for their stock and the consideration is received in cash or in
the same form as previously paid by the Interested Stockholder for its shares.
See "Comparison of Rights of Holders of MeriStar Common Stock and CapStar
Common Stock."
Maryland Control Share Acquisition Statute
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes eligible under the statute to be
cast on the matter. "Control shares" are voting shares of stock, which, if
aggregated with all other such shares of stock previously acquired by the
acquiror or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of all voting power. Control shares do not include shares that the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
The MeriStar Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any persons of shares of stock
of MeriStar. There can be no assurance that such provision will not be amended
or eliminated at any point in the future. If the foregoing exemption in the
MeriStar Bylaws is rescinded, the control share acquisition statute could have
the effect of delaying, deferring, preventing or
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otherwise discouraging offers to acquire MeriStar and of increasing the
difficulty of consummating any such offer. See "Comparison of Rights of
Holders of MeriStar Common Stock and CapStar Common Stock."
Issuance of Additional Shares
Upon stockholder approval of the amendment and restatement of the AGH
Charter (which upon approval will become the MeriStar Charter), the MeriStar
Charter will authorize the MeriStar Board, without a vote of the stockholders,
to (i) amend the MeriStar Charter to increase or decrease the aggregate number
of shares of any class that MeriStar has the authority to issue; provided that
House Bill 360 is ratified (see "Proposal Two: Approval of the MeriStar
Charter"), (ii) cause MeriStar to issue additional authorized but unissued
shares of MeriStar Common Stock or MeriStar Preferred Stock, and (iii)
classify any unissued shares of MeriStar Preferred Stock and to set the
preferences, rights and other terms of such classified or unclassified shares.
See "Proposal Two: Approval of Articles of Amendment and Restatement of
MeriStar." Although there is no such intention at the present time, the
MeriStar Board could establish a series of MeriStar Preferred Stock that
could, depending on the terms of such series, adversely affect the voting
power of the holders of MeriStar Common Stock and could delay, defer or
prevent a transaction or a change in control of MeriStar that might involve a
premium price for the MeriStar Common Stock or otherwise be in the best
interest of the stockholders. The MeriStar Charter and Bylaws of MeriStar will
also contain other provisions that may have the effect of delaying, deferring
or preventing a transaction or a change in control of MeriStar that might
involve a premium price for the MeriStar Common Stock or otherwise be in the
best interest of the stockholders. See "Description of MeriStar Common Stock"
and "Comparison of Rights of Holders of MeriStar Common Stock and CapStar
Common Stock."
ABILITY OF MERISTAR BOARD TO CHANGE POLICIES
The major policies of MeriStar, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by the MeriStar Board. The MeriStar Board
may amend or revise these and other policies at any time and from time to time
at its discretion without a vote of the stockholders of MeriStar. See
"Policies of MeriStar."
RISKS TO CAPSTAR AND AGH STOCKHOLDERS RESULTING FROM FIXED EXCHANGE RATIO
Upon completion of the Merger, each share of CapStar Common Stock will be
converted into the right to receive 1.0 share of MeriStar Common Stock and
each share of AGH Common Stock will be converted into 0.8475 of a share of
MeriStar Common Stock. The Exchange Ratios are fixed numbers and will not be
adjusted in the event of any increase or decrease in the price of either AGH
or CapStar Common Stock. As a result, the value of the shares of MeriStar
Common Stock received by the CapStar and AGH stockholders in the Merger could
vary depending on fluctuations in the value of CapStar Common Stock or AGH
Common Stock. Such fluctuations may be the result of changes in business,
operations or prospects of CapStar, AGH or MeriStar, market assessments of the
likelihood that the Merger will be consummated, the timing thereof, and the
prospects of AGH, CapStar and MeriStar, regulatory considerations, general
market and economic conditions and other factors. Accordingly, there can be no
assurance that the value of the MeriStar Common Stock received pursuant to the
Merger on the date of the Merger Agreement will be the same as on the date of
the AGH Meeting and CapStar Meeting, or the Effective Time of the Merger.
RISKS TO CAPSTAR STOCKHOLDERS RESULTING FROM DIFFERENCES IN STOCKHOLDER RIGHTS
As a result of the Merger, CapStar stockholders will no longer own shares of
CapStar and will become stockholders of MeriStar. While CapStar is a Delaware
corporation, MeriStar will be a Maryland corporation, and the different laws
governing the two corporations, together with differences in the provisions of
the respective corporate charters and bylaws of MeriStar and CapStar, result
in differences in the rights of stockholders of the two corporations. As a
result of these differences, the rights of MeriStar stockholders may in some
cases be considered less favorable than the rights of CapStar stockholders.
See "Comparison of Rights of Holders of AGH Common Stock and CapStar Common
Stock."
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THE AGH MEETING
DATE, TIME AND PLACE OF AGH MEETING
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
AGH as part of the solicitation of proxies by the AGH Board for use at the AGH
Meeting to be held on . , 1998, at 1:00 p.m., local time, at the Holiday Inn
Select DFW Airport South, 440 West Airport Freeway, Irving, Texas 75062. This
Joint Proxy Statement/Prospectus, the enclosed form of proxy and the
accompanying Notice of Annual Meeting are first being mailed to stockholders
of AGH on or about . , 1998.
PURPOSES OF THE AGH MEETING
The Merger
At the AGH Meeting, holders of AGH Common Stock will consider and vote upon
Proposal One, the approval and adoption of the Merger Agreement, pursuant to
which CapStar will be merged with and into AGH, with AGH as the surviving
entity, and each outstanding share of CapStar Common Stock will be converted
into the right to receive 1.0 share of MeriStar Common Stock and each share of
AGH Common Stock will be converted into 0.8475 share of MeriStar Common Stock.
Maryland law requires AGH to obtain stockholder approval of the Merger by the
vote of a majority of the outstanding shares of AGH Common Stock entitled to
vote at the AGH Meeting.
Other Matters
The stockholders of AGH will also consider at the AGH Meeting and vote upon
(i) Proposal Two, approval of an amendment and restatement of the AGH Charter
to (a) increase the authorized number of shares of stock and the authorized
number of shares of AGH Common Stock, (b) authorize the issuance of preferred
stock having such preferences, rights and other terms as the AGH Board may
determine from time to time, and (c) to the extent permitted under applicable
Maryland law, permit the AGH Board to increase or decrease the number of
authorized shares of AGH without stockholder approval; (ii) Proposal Three, to
approve the MeriStar Directors' Plan; (iii) Proposal Four, to approve the
MeriStar Incentive Plan; (iv) Proposal Five, to approve the election of eight
directors, in each case, to serve until the end of such director's term and
until their successors are elected and qualify; provided that the election of
six of the directors is conditional upon approval of the Merger Proposal; and
(v) to consider and vote upon such other matters as may properly come before
the AGH Meeting.
Management of AGH knows of no matter to be brought before the AGH Meeting
other than referred to herein. If any other business should properly come
before the AGH Meeting, other than as referred to herein, the persons named in
the proxy will vote in their discretion.
THE AGH BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF AGH VOTE FOR APPROVAL OF THE MERGER
PROPOSAL. THE AGH BOARD ALSO UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
AGH VOTE FOR APPROVAL OF THE AGH PROPOSALS.
RECORD DATE
The AGH Board has fixed the close of business on . , 1998 as the AGH Record
Date. Only the holders of record of the outstanding shares of AGH Common Stock
on the AGH Record Date will be entitled to notice of, and to vote at, the AGH
Meeting and any adjournments or postponements thereof. At the AGH Record Date,
. shares of AGH Common Stock were outstanding and entitled to vote. The
presence, in person or by proxy, of a majority of the aggregate number of
shares of AGH Common Stock outstanding and entitled to vote on the AGH Record
Date is necessary to constitute a quorum at the AGH Meeting. Votes at the AGH
Meeting will be tabulated by one or more independent inspectors of election
appointed by AGH. Abstentions and votes withheld by brokers in the absence of
instructions from street-name holders ("broker non-votes") will be deemed
included in the determination of shares present at the AGH Meeting for
purposes of determining a quorum. Abstentions and broker non-votes will not be
counted as votes cast on proposals submitted to stockholders. Abstentions and
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broker non-votes will have the effect of votes cast against Proposals One and
Two and will have no effect on the votes to approve Proposals Three, Four and
Five.
PROXIES; VOTING AND REVOCATION
Shares of AGH Common Stock, represented by a properly executed proxy
received prior to the vote at the AGH Meeting and not revoked, will be voted
at the AGH Meeting as directed in the proxy. If a proxy is submitted and no
directions are given, the proxy will be voted for the approval of the Merger
Proposal and for the additional proposals referred to herein. AGH intends to
count shares of AGH Common Stock present in person at the AGH Meeting but not
voting, and shares of AGH Common Stock for which it has received proxies but
with respect to which holders of shares have abstained on any matter, as
present at the AGH Meeting for purposes of determining the presence or absence
of a quorum for the transaction of business. Under the rules of the NYSE,
brokers who hold shares in street name for customers who are the beneficial
owners of such shares are prohibited from giving a proxy to vote shares for
the Merger held for such customers without special instructions from such
customers. Nonvoting shares (including broker non-votes) and abstentions will
have the effect of a vote against the Merger Proposal and Proposal Two and
will have no effect on the votes to approve Proposals Three, Four and Five.
Each share of AGH Common Stock is entitled to one vote with respect to the
Merger Proposal and the other proposals referred to herein. The persons named
as proxies by a stockholder may propose and vote for one or more adjournments
or postponements of the AGH Meeting to permit further solicitation of proxies
in favor of such proposals; provided, however, that no proxy that is voted
against the Merger Proposal and the other proposals referred to herein will be
voted in favor of any adjournment or postponement if the Merger Proposal and
the other proposals are to be considered at the adjourned or postponed
meeting. Votes will be tabulated at the AGH Meetings by inspectors of
election.
A stockholder of record may revoke a proxy at any time prior to its being
voted by filing an instrument of revocation with the Secretary of AGH
(American General Hospitality Corporation, 5605 MacArthur Boulevard, Suite
1200, Irving, Texas 75038), by filing a duly executed proxy bearing a later
date, or by appearing at the AGH Meetings in person, notifying the Secretary
and voting by ballot at the AGH Meeting. Any stockholder of record attending
the AGH Meeting may vote in person whether or not a proxy has been previously
given, but the mere presence (without notifying the Secretary of AGH) of a
stockholder at the AGH Meeting will not constitute revocation of a previously
given proxy. In addition, stockholders who beneficially hold shares of AGH
Common Stock that are not registered in their own name will need additional
documentation from the record holder of such shares to attend and vote
personally at the AGH Meeting.
REQUIRED VOTES
As of the AGH Record Date, . shares of AGH Common Stock were outstanding
and entitled to vote. All properly executed proxies delivered pursuant to this
solicitation and not properly revoked will be voted at the AGH Meeting as
specified in such proxies. If no choice is specified, the shares represented
by a signed proxy will be voted in favor of each of the proposals set forth in
the Notice of Annual Meeting of AGH attached hereto.
The presence, in person or by proxy, of holders of at least a majority of
the total number of outstanding shares of AGH Common Stock entitled to vote is
necessary to constitute a quorum for the transaction of business at the AGH
Meeting. The affirmative vote of the holders of record of a majority of the
shares of AGH Common Stock outstanding on the AGH Record Date is required to
approve the Merger Proposal. The affirmative vote of the holders of record of
two-thirds of the shares of AGH Common Stock outstanding on the AGH Record
Date is required for the approval of Proposal Two, approval of the MeriStar
Charter. The affirmative vote of a majority of all votes cast at the AGH
Meeting is necessary to approve Proposals Three, approval of the MeriStar
Directors' Plan and Four, approval of the MeriStar Incentive Plan. The
affirmative vote of a plurality of all of the votes cast at the AGH Meeting is
required for Proposal Five, election of Directors.
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SOLICITATION OF PROXIES
The expense of printing and mailing this Joint Proxy Statement/Prospectus
and the material used in this solicitation of proxies will be borne equally by
AGH and CapStar. It is contemplated that AGH proxies will be solicited through
the mail and directly by officers, directors, and regular employees of AGH and
CapStar not specifically employed for such purpose, without additional
remuneration therefor. AGH will reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in
forwarding these proxy materials to the principals. AGH has engaged . to
represent it in connection with the solicitations of proxies at a cost of
approximately $ . plus expenses.
NO DISSENTERS' APPRAISAL RIGHTS
Holders of AGH Common Stock will not have dissenters' appraisal rights in
connection with the Merger or any other matter to be voted on at the AGH
Meeting. See "Risk Factors--No Dissenters' Rights."
THE MATTERS TO BE CONSIDERED AT THE AGH MEETING ARE OF GREAT IMPORTANCE TO
THE STOCKHOLDERS OF AGH. ACCORDINGLY, THE STOCKHOLDERS OF AGH ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
PROPOSAL ONE: APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
For a description of the Merger Proposal and the Merger Agreement, see "The
Merger" and "The Merger Agreement."
PROPOSAL TWO: APPROVAL OF THE MERISTAR CHARTER
The Proposed Amendments
By resolutions adopted on April 6, 1998, the AGH Board approved and declared
advisable the adoption of certain amendments to the AGH Charter pursuant to
which:
1. Article V, Section 1 would be amended to provide that the number of
authorized shares of stock of AGH will be increased to 350,000,000, and the
number of authorized shares of AGH Common Stock will be increased to
250,000,000;
2. Article V, Section 1 would further be amended to provide for
authorization of 100,000,000 shares of preferred stock, par value $0.01 per
share, of AGH (the "AGH Preferred Stock"); and
3. Article V, Section 1 would further be amended to allow the AGH Board, to
the extent permitted by Maryland law, to amend the AGH Charter, without
stockholder approval, to increase or decrease the aggregate number of
authorized shares or the number of authorized shares of any class of stock of
AGH.
If the stockholders of AGH approve the proposed amendments, the AGH Charter
will be amended and restated as proposed by the AGH Board, and the provisions
described above will take effect upon acceptance for record of the MeriStar
Charter by the State Department of Assessments and Taxation of Maryland in
substantially the form attached hereto as Appendix E.
REASONS FOR AND EFFECT OF THE PROPOSED AMENDMENTS
Increase in Authorized Shares and Authorized Shares of AGH Common Stock
The AGH Charter currently authorizes AGH to issue up to 100,000,000 shares
of stock, consisting of 100,000,000 shares of AGH Common Stock. As of March
31, 1998, AGH had 24,315,832 shares of AGH Common Stock outstanding. In
addition, as of the same date, 6,724,240 shares of AGH Common Stock were
reserved for issuance as follows: 923,748 shares were reserved for issuance
under the 1996 Incentive Plan; 58,692 shares were reserved for issuance under
the Directors' Plan; 1,841,863 shares were issuable upon exercise
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of outstanding stock options to purchase shares of AGH Common Stock; and
3,899,937 shares were reserved for issuance upon exchange of AGH OP Units for
AGH Common Stock.
The AGH Board believes that if the Merger is consummated without an increase
in the number of authorized shares of stock and the number of authorized
shares of AGH Common Stock, AGH will not have a sufficient number of
authorized but unissued shares of stock and AGH Common Stock to give it
maximum flexibility to meet a variety of business needs as they may arise and
to enhance AGH's flexibility in connection with possible future opportunities.
Increasing the number of authorized shares of stock to a number that
provides for a substantial number of additional authorized but unissued shares
of stock is a common occurrence among publicly held companies. The authorized
shares of AGH Common Stock will be available for issuance at such times and
for such purposes as the AGH Board may deem advisable without further action
by AGH's stockholders, except as may be required by applicable laws or
regulations, including applicable stock exchange rules. These purposes may
include, without limitation, stock dividends, stock splits, retirement of
indebtedness, employee benefit programs, corporate business combinations,
acquisitions of property, funding of programs or businesses, raising
additional capital or other corporate purposes. The AGH Board has no current
plan to issue any shares of AGH Common Stock for any such purposes (other than
issuances pursuant to the Merger, the transactions contemplated pursuant to
the Merger Agreement, existing employee benefit programs and in connection
with the exchange of units of limited partnership interest in AGH Operating
Partnership) and does not intend to issue any stock except on terms or for
reasons which the AGH Board deems to be in the best interests of AGH.
Because the holders of the AGH Common Stock do not have preemptive rights,
the issuance of additional AGH Common Stock (other than on a pro rata basis to
all current stockholders) would reduce the current stockholders' proportionate
interests. However, in any such event, stockholders wishing to maintain their
interests may be able to do so through normal market purchases.
While the issuance of shares by certain entities in certain instances may
have the effect of delaying, deferring or preventing a hostile takeover, the
AGH Board does not believe that the authority to issue additional shares of
AGH Common Stock is likely to have a significant additional anti-takeover
effect because of existing provisions in AGH's Charter restricting the
concentration of ownership of the outstanding shares of AGH Common Stock.
Authorization of AGH Preferred Stock
The proposed amendments to the AGH Charter will (i) authorize AGH to issue
up to 100,000,000 shares of AGH Preferred Stock and (ii) authorize the AGH
Board to classify any unissued shares of AGH Preferred Stock. Prior to the
issuance of shares of each series, the AGH Board will be required by the MGCL
and new Article V, Section 5 to set, subject to the provisions of the AGH
Charter regarding the restrictions on transfer of stock, the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms
or conditions of redemption for each such class or series of AGH Preferred
Stock. Shares of AGH Preferred Stock of any such series will be available for
issuance without further action by the stockholders of AGH (except as required
by applicable laws or regulations, including applicable stock exchange rules).
The proposed amendment to authorize AGH Preferred Stock does not effect any
change in the number or rights of authorized shares of AGH Common Stock except
to the extent that any class or series of AGH Preferred Stock authorized by
the AGH Board may grant to the holders thereof preferential rights that would
grant to the holders of such class or series certain preferences or priorities
over the holders of the AGH Common Stock, such as a liquidation or dividend
preference.
AGH's primary purpose in having AGH Preferred Stock available for issuance
is to allow greater flexibility with respect to future financings or
acquisitions and in carrying out other corporate purposes. Since no AGH
Preferred Stock has been issued, and the issuance of the same is not currently
contemplated, it is not possible to
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know whether or to what extent such AGH Preferred Stock, if ever issued, would
have preference over the holders of AGH Common Stock in the distribution of
any assets in the event of a liquidation.
While the issuance of shares by certain entities in certain instances may
have the effect of delaying, deferring or preventing a hostile takeover, the
AGH Board believes that the existing provisions in AGH's Charter restricting
the concentration of ownership of the outstanding shares of AGH makes the
authority to issue AGH Preferred Stock less significant as an anti-takeover
device. See "Risk Factors--Issuance of Additional Shares."
Authority of the AGH Board to Increase or Decrease the Authorized Capital
House Bill 360, which has been introduced in the House of Delegates of the
General Assembly of Maryland and, if enacted, will become effective on October
1, 1998, will permit the board of directors of a Maryland corporation, such as
AGH, to include in its charter a provision permitting the board of directors,
without stockholder action, to amend the corporation's charter to increase or
decrease the aggregate number of shares of stock or the number of shares of
stock of any class that the corporation has authority to issue.
Under Maryland law as in effect prior to the effectiveness of House Bill
360, a Maryland corporation, such as AGH, is required to obtain the approval
of its stockholders each time it proposes to amend its charter to increase or
decrease its number of authorized shares of stock. This process is expensive
and time-consuming. Adopting the proposed amendment to the AGH Charter,
although such amendment would not permit the AGH Board to increase or decrease
the number of authorized shares of AGH until House Bill 360 is ratified and
becomes effective, will enable the AGH Board to amend the AGH Charter to
increase or decrease the number of authorized shares of stock without
stockholder approval. Adding the provision permitted by House Bill 360 to the
AGH Charter requires the approval of the stockholders of AGH.
Accordingly, the AGH Board unanimously adopted a resolution declaring that
it is advisable and in the best interests of AGH to add to Article V, Section
I of the AGH Charter the following sentence: "To the extent permitted under
Maryland law, the Board of Directors, without any action by the stockholders
of the Corporation, may amend the charter from time to time to increase or
decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that the Corporation has authority to issue." The
effect of this amendment will be to permit the AGH Board, without stockholder
action, to increase or decrease (a) the total number of authorized shares of
AGH and/or (b) the number of authorized shares of any one or more classes.
The AGH Board believes that the proposed amendment is in the best interests
of AGH and its stockholders because it will provide AGH with additional
flexibility to meet a variety of business needs as they may arise. These
business needs may include stock dividends, stock splits, retirement of
indebtedness, employee benefit programs, corporate business combinations,
acquisitions of property, funding of programs or businesses, raising
additional capital or other corporate purposes. Responding to such needs or
opportunities often requires quick action and the process of obtaining
stockholder approval to amend the Charter is both time-consuming and
expensive. The AGH Board has no current plan to exercise the power conferred
by this amendment, assuming that House Bill 360 is enacted, and become
effective and does not intend to exercise this power except on terms or for
reasons which the AGH Board deems to be in the best interests of AGH.
RECOMMENDATION OF THE BOARD OF DIRECTORS; VOTE REQUIRED FOR APPROVAL
The affirmative vote of holders of record of two-thirds of the outstanding
shares of AGH Common Stock on the AGH Record Date is required for approval of
the proposed amendments to the AGH Charter. See "The AGH Meeting--Required
Votes." If the proposed amendments are approved by the stockholders of AGH,
they will become effective upon the acceptance of the Articles of Amendment
and Restatement of AGH for record by the State Department of Assessments and
Taxation of Maryland, which is expected to occur as soon as reasonably
practicable after approval.
THE AGH BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
APPROVE THE MERISTAR CHARTER.
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PROPOSAL THREE: APPROVAL OF THE MERISTAR DIRECTORS' PLAN
In connection with the Merger, the AGH Board has adopted, subject to
stockholder approval of the Merger and in consultation with a professional
compensation consultant, an amendment to the American General Hospitality
Corporation Non-Employee Directors' Incentive Plan (the "Directors' Plan"),
which amends and restates the Directors' Plan (as so amended following
stockholder approval, the "MeriStar Directors' Plan").
SUMMARY OF AMENDMENT
AGH instituted the Directors' Plan in July 1996 to attract and retain
experienced and knowledgeable persons to serve as outside directors to AGH.
The Directors' Plan initially provided for a one-time grant of options to each
outside director and an annual grant of shares equal in value to approximately
one-half of the director's annual retainer. The amendment, among other things,
(i) changes the name of the plan to the MeriStar Hospitality Corporation Non-
Employee Directors' Incentive Plan, (ii) increases the number of shares of
MeriStar Common Stock authorized for issuance under the MeriStar Directors'
Plan, (iii) provides for annual option grants and eliminates the stock awards,
(iv) permits the accelerated vesting of options granted under the MeriStar
Directors' Plan, including previously granted options, and (v) makes certain
revisions in light of changes to Rule 16b under the Exchange Act. The
amendments were made in accordance with the recommendations of a professional
compensation consultant.
The AGH Board authorized the increase in shares of AGH Common Stock, subject
to stockholder approval, in order to accommodate director compensation
following the Merger. Following the Merger, MeriStar Common Stock will be
issued under the MeriStar Directors' Plan. The MeriStar Board will receive
annual option grants to purchase 5,000 shares of MeriStar Common Stock; the
initial grant is with respect to 7,500 shares. In addition, the AGH Board
amended the Directors' Plan to reflect the current flexibility permitted by
Rule 16b-3 under the Exchange Act. In this regard, the AGH Board authorized
the discretionary acceleration of vesting of options and the limited transfer
of options for estate planning purposes. If the MeriStar Directors' Plan is
approved by the stockholders, options previously granted under the Directors'
Plan will become fully vested upon consummation of the Merger.
A copy of the MeriStar Directors' Plan is attached as Appendix F. The
following summary of certain provisions of the MeriStar Directors' Plan does
not purport to be complete and is qualified in its entirety by reference to
Appendix F.
Share Authorization
A maximum of 125,000 shares of MeriStar Common Stock (which includes 57,256
shares remaining available under the existing Directors' Plan) may be issued
under the MeriStar Directors' Plan. The share limitation and terms of
outstanding awards will be adjusted, as the Compensation Committee deems
appropriate, in the event of a stock dividend, stock split, combination,
reclassification, recapitalization or other similar event.
Eligibility
The MeriStar Directors' Plan provides for the grant of options to purchase
MeriStar Common Stock to each director, who is not an officer or employee of
MeriStar or its subsidiaries (each an "Independent Director").
Options
Pursuant to the MeriStar Directors' Plan, each Independent Director will be
awarded an option to purchase 7,500 shares of MeriStar Common Stock upon
initial commencement of service after the Merger, whether by appointment or
election. Thereafter, each Independent Director will be granted an option (a
"MeriStar Stock Option") to purchase 5,000 shares of MeriStar Common Stock on
the first business day following MeriStar's annual meeting of stockholders.
The exercise price of option grants will be 100% of the fair market value of
the MeriStar Common Stock on the date of grant, and options will vest in three
annual installments. The exercise price may be paid in cash, cash equivalents
acceptable to the AGH Compensation Committee, MeriStar Common Stock or a
combination thereof. Options granted under the MeriStar Directors' Plan, once
vested, are exercisable
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for ten years from the date of grant. Upon termination of service as a
director, options which have not vested are forfeited and vested options may
be exercised until they expire. All options accelerate upon a change in
control of MeriStar.
Certain Federal Income Tax Consequences Relating to Options
Generally, an eligible director does not recognize any taxable income, and
MeriStar is not entitled to a deduction upon the grant of an option. Upon the
exercise of an option, the eligible director recognizes ordinary income equal
to the excess of the fair market value of the shares acquired over the option
exercise price, if any. The director will then take a basis in such shares
equal to their fair market value at the time of option exercise, and any gain
or loss subsequently recognized upon a sale or exchange of such shares will be
treated as capital gain or loss to such director. Special rules may apply as a
result of Section 16 of the Exchange Act. MeriStar is generally entitled to a
deduction equal to the compensation taxable to the eligible director as
ordinary income. Eligible directors may be subject to backup withholding
requirements for federal income tax. Options are generally non-transferrable.
However, the MeriStar Directors' Plan authorizes the granting of options which
are transferable to Permitted Family Members (as defined therein).
The transfer of an option to a Permitted Family Member will have no
immediate tax consequences to MeriStar, the director or the Permitted Family
Member. Upon the subsequent exercise of the transferred option by the
Permitted Family Member, the director will realize ordinary income in an
amount measured by the difference between the option exercise price and the
fair market value of the shares on the date of exercise, and the employer will
be entitled to a deduction in the same amount. Any difference between such
fair market value and the price at which the Permitted Family Member may
subsequently sell such shares will be treated as capital gain or loss to the
Permitted Family Member, long-term or short-term depending on the length of
time the shares have been held by the Permitted Family Member.
MeriStar Common Stock in Lieu of Fees
Independent Directors may elect to receive all or a portion of their annual
retainer in shares of MeriStar Common Stock rather than cash. Unless an
Independent Director elects otherwise, fees paid in stock will be paid at the
same time as fees paid in cash.
Amendment and Termination
The MeriStar Directors' Plan provides that the MeriStar Board may amend or
terminate the MeriStar Directors' Plan at any time. An amendment will not
become effective without stockholder approval if the amendment (i) materially
increases the number of shares that may be issued under the MeriStar
Directors' Plan or (ii) stockholder approval would be required for compliance
with stock exchange rules. No options may be granted under the MeriStar
Directors' Plan after December 31, 2008.
MeriStar Stock Option Grants
The following table sets forth information regarding the proposed grants of
MeriStar Stock Options under the MeriStar Directors Plan:
<TABLE>
<CAPTION>
NUMBER OF MERISTAR
STOCK OPTIONS TO
NAME AND POSITION BE GRANTED
- ----------------- ------------------
<S> <C>
James F. Dannhauser--Director................................ 7,500
Daniel Doctoroff--Director................................... 7,500
William Janes--Director...................................... 7,500
H. Cabot Lodge III--Director................................. 7,500
James R. Worms--Director..................................... 7,500
</TABLE>
RECOMMENDATION OF BOARD OF DIRECTORS; VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of all votes cast at the AGH Meeting is
required to approve the MeriStar Directors' Plan. See "The AGH Meeting--
Required Votes."
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THE AGH BOARD HAS UNANIMOUSLY APPROVED THE MERISTAR DIRECTORS' PLAN AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERISTAR DIRECTORS'
PLAN.
PROPOSAL FOUR: APPROVAL OF THE MERISTAR INCENTIVE PLAN
The AGH Board, in connection with the Merger and in consultation with a
professional compensation consultant, has amended and restated the American
General Hospitality Corporation 1996 Stock Incentive Plan to provide a means
with which to compensate executives following the Merger (upon approval of the
stockholders, the "MeriStar Incentive Plan"). The AGH Board continues to
believe that stock-based performance compensation is an effective means of
aligning the interests of executives with the interests of stockholders.
Accordingly, the MeriStar Incentive Plan (i) increases the number of options
that can be granted to a participant from 250,000 to 750,000 in any calendar
year, (ii) limits the number of shares that may be granted at less than fair
market value, (iii) provides for the automatic acceleration of vesting of
awards upon a change in control of MeriStar (as defined in the MeriStar
Incentive Plan) and (iv) changes the name of the 1996 Incentive Plan to the
MeriStar Incentive Plan. Following the Merger, MeriStar Common Stock will be
issued under the MeriStar Incentive Plan. In all other respects, the MeriStar
Incentive Plan remains as it was following its amendment on April 7, 1997.
Current trends in compensation favor larger grants of options subject to
longer vesting schedules rather than smaller annual grants. The AGH Board has
found that the current annual limit of 250,000 shares is not sufficient in
light of this recent trend. The AGH Board believes this change is necessary
for MeriStar to remain competitive in terms of executive compensation and for
MeriStar to continue to attract and retain talented, high-caliber executives.
In addition, the AGH Board recognizes the MeriStar Incentive Plan's
flexibility in permitting grants to newly-hired employees at 85% of fair
market value. This flexibility is intended to allow for the price fluctuations
that might occur between the time a new executive is recruited and the time
the Compensation Committee officially acts to grant options to the newly hired
executive. The provision is not intended to permit general "in-the-money
grants" to new hires. Accordingly, and in light of the increased limit on
grants, the AGH Board has amended the 1996 Plan to place specific limitations
on the frequency with which this feature can be used. Accordingly, the
MeriStar Incentive Plan provides that no more than 10% of the shares granted
under the MeriStar Incentive Plan will be granted at less than fair market
value. In addition, the MeriStar Incentive Plan provides for the automatic
acceleration of awards in the event of a change in control of MeriStar. This
amendment was made to bring the MeriStar Incentive Plan in line with current
compensatory practices.
A copy of the MeriStar Incentive Plan is attached as Appendix G. The
following summary of certain provisions of the MeriStar Incentive Plan does
not purport to be complete and is qualified in its entirety by reference to
Appendix G.
THE MERISTAR INCENTIVE PLAN
The AGH Board adopted, subject to stockholder approval, the MeriStar
Incentive Plan for the purposes of (i) attracting and retaining employees,
directors and other service providers with ability and initiative, (ii)
providing incentives to those deemed important to the success of MeriStar and
related entities, and (iii) associating the interests of these individuals
with the interests of MeriStar and its stockholders through opportunities for
increased stock ownership.
Administration
The MeriStar Incentive Plan is administered by the Compensation Committee.
The Compensation Committee may delegate its authority to administer the
MeriStar Incentive Plan. The Compensation Committee may not, however, delegate
its authority with respect to grants and awards to individuals subject to
Section 16 of the Exchange Act. As used in this summary, the term
"Administrator" means the Compensation Committee or its delegate, as
appropriate.
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Eligibility
Each employee of MeriStar or of an affiliate of MeriStar (other than
employees of the Lessee, AGHI or OpCo who are not also employees of MeriStar)
or any other person whose efforts contribute to MeriStar's performance,
including an employee who is a member of the MeriStar Board, is eligible to
participate in the MeriStar Incentive Plan ("Participants"). Notwithstanding
the foregoing, as a result of the Merger, CapStar options will be converted
into MeriStar options, whether or not the option holders are employed by
MeriStar. See "The Merger Agreement--Stock Options and Other Stock Rights."
The Administrator may, from time to time, grant stock options, stock awards,
incentive awards, or performance shares to Participants. As of March 31, 1998,
the class of Participants consisted of approximately 17 persons.
Options
Options granted under the MeriStar Incentive Plan may be incentive stock
options ("ISOs") or nonqualified stock options. An option entitles a
Participant to purchase shares of MeriStar Common Stock from MeriStar at the
option price. The option price may be paid in cash, with shares of MeriStar
Common Stock, or with a combination of cash and MeriStar Common Stock. The
option price will be fixed by the Administrator at the time the option is
granted, but the price cannot be less than 100% for existing employees (85% in
connection with the hiring of new employees) of the shares' fair market value
on the date of grant; provided, however, no more than 10% of the shares under
the MeriStar Incentive Plan will be granted at less than 100% of fair market
value. The exercise price of an ISO may not be less than 100% of the shares'
fair market value on the date of grant (110% of the fair market value in the
case of an ISO granted to a 10% stockholder of MeriStar). Options may be
exercised at such times and subject to such conditions as may be prescribed by
the Administrator but the maximum term of an option is ten years in the case
of an ISO or five years in the case of an ISO granted to a 10% stockholder.
ISOs may only be granted to employees; however, no employee may be granted
ISOs (under the MeriStar Incentive Plan or any other plan of MeriStar) that
are first exercisable in a calendar year for MeriStar Common Stock having an
aggregate fair market value (determined as of the date the option is granted)
exceeding $100,000. In addition, no Participant may be granted options in any
calendar year for more than 750,000 shares of MeriStar Common Stock.
Stock Awards
Participants also may be awarded shares of MeriStar Common Stock pursuant to
a stock award. A Participant's rights in a stock award will be nontransferable
or forfeitable or both unless certain conditions prescribed by the
Administrator are satisfied. These conditions may include, for example, a
requirement that the Participant continue employment with MeriStar for a
specified period or that MeriStar or the Participant achieve stated,
performance-related objectives. The objectives may be stated with reference to
the fair market value of the MeriStar Common Stock or MeriStar's, a
subsidiary's, or an operating unit's return on equity, earnings per share,
total earnings, earnings growth, return on capital, funds from operations or
return on assets or other acceptable performance criteria. A stock award, no
portion of which is immediately vested and nonforfeitable, will be restricted,
in whole or in part, for a period of at least three years; provided, however,
that the period will be at least one year in the case of a stock award that is
subject to objectives based on one or more of the foregoing performance
criteria. The maximum number of stock awards that may be granted to an
individual in any calendar year cannot exceed 50,000 shares of MeriStar Common
Stock.
Incentive Awards
Incentive awards also may be granted under the MeriStar Incentive Plan. An
incentive award is an opportunity to earn a bonus, payable in cash, upon
attainment of stated performance objectives. The objectives may be stated with
reference to the fair market value of the MeriStar Common Stock or on
MeriStar's, a subsidiary's, or an operating units' return on equity, earnings
per share, total earnings, earnings growth, return on capital, funds from
operations or return on assets or other acceptable performance criteria. The
period in
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which performance will be measured will be at least one year. No Participant
may receive an incentive award payment in any calendar year that exceeds the
lesser of (i) 100% of the Participant's base salary (prior to any salary
reduction or deferral election) as of the date of grant of the incentive award
or (ii) $250,000.
Performance Share Awards
The MeriStar Incentive Plan also provides for the award of performance
shares. A performance share award entitles the Participant to receive a
payment equal to the fair market value of a specified number of shares of
MeriStar Common Stock if certain standards are met. The Administrator will
prescribe the requirements that must be satisfied before a performance share
award is earned. These conditions may include, for example, a requirement that
the Participant continue employment with MeriStar for a specified period or
that MeriStar or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the MeriStar Common Stock or on MeriStar's, a subsidiary's, or an
operating unit's return on equity, earnings per share, total earnings,
earnings growth, return on capital, funds from operations or return on assets
or other acceptable performance criteria. To the extent that performance
shares are earned, the obligation may be settled in cash, in MeriStar Common
Stock, or by a combination of the two. No Participant may be granted
performance shares for more than 12,500 shares of MeriStar Common Stock in any
calendar year.
Transferability
Awards granted under the MeriStar Incentive Plan are generally
nontransferable. The Compensation Committee may, however, grant awards other
than ISOs, which are transferable to Permitted Family Members.
Share Authorization
At any given time, the maximum number of shares of MeriStar Common Stock
that may be issued pursuant to awards granted under the MeriStar Incentive
Plan will be the total of (i) ten (10%) percent of the number of shares of
MeriStar Common Stock that were outstanding as of the end of the immediately
preceding calendar year (rounded downward if necessary to eliminate fractional
shares), minus (ii) the number of shares subject to awards which were granted
under the MeriStar Incentive Plan through the last day of the immediately
preceding calendar year, plus (iii) as of the last day of the immediately
preceding calendar year, the number of shares with respect to which previously
granted awards have expired. In addition to the foregoing, in no event may the
total number of shares of MeriStar Common Stock covered by outstanding ISOs
granted under the MeriStar Incentive Plan, plus the number of shares of
MeriStar Common Stock issued pursuant to the exercise of ISOs, whenever
granted under the Amended and Restated Plan, exceed approximately 1.4 million
shares. All awards made under the MeriStar Incentive Plan will be evidenced by
written agreements between MeriStar and the Participant. The share limitation
and the terms of outstanding awards will be adjusted, as the Compensation
Committee deems appropriate, in the event of a stock dividend, stock split,
combination, reclassification, recapitalization or other similar event. As of
. , 1998, the closing price of a share of AGH Common Stock on the NYSE was
$ . .
Termination and Amendment
No option or stock award may be granted and no performance shares may be
awarded under the MeriStar Incentive Plan more than ten years after the
earlier of the date that the MeriStar Incentive Plan is adopted by the
MeriStar Board or the date that it is approved by MeriStar's stockholders. The
MeriStar Board may amend or terminate the MeriStar Incentive Plan at any time,
but, except as set forth in the immediately preceding paragraph, an amendment
will not become effective without stockholder approval if the amendment
materially (i) increases the number of shares of MeriStar Common Stock that
may be issued under the MeriStar Incentive Plan (other than an adjustment as
described above), (ii) changes the eligibility requirements, or (iii)
increases the benefits that may be provided under the MeriStar Incentive Plan.
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Certain Federal Income Tax Consequences
In general, a Participant will not recognize taxable income upon the grant
or exercise of an ISO. However, upon the exercise of an ISO, the excess of the
fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as an adjustment to alternative
minimum taxable income. When a Participant disposes of shares acquired by
exercise of an ISO, the Participant's gain (the difference between the sale
proceeds and the price paid by the Participant for the shares) upon the
disposition will be taxed as capital gain provided the Participant does not
dispose of the shares within two years after the date of grant nor within one
year after the date of exercise, and exercises the option while an employee of
MeriStar or of a subsidiary of MeriStar or within three months after
termination of employment for reasons other than death or disability. If the
first condition is not met, the Participant generally will realize ordinary
income in the year of the disqualifying disposition. If the second condition
is not met, the Participant generally will recognize ordinary income upon
exercise of the ISO.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date
of exercise over the exercise price of the option. Special timing rules may
apply to a Participant who is subject to Section 16(a) of the Exchange Act.
A Participant will recognize income on account of the settlement of a
performance share award or incentive award. A Participant will recognize
income equal to any cash that is paid and with respect to performance share
awards, which are settled in shares, will recognize the fair market value of
MeriStar Common Stock (on the date that the shares are first transferable or
not subject to a substantial risk of forfeiture) that is received in
settlement of the award.
The employer (either MeriStar or its affiliate) will be entitled to claim a
federal income tax deduction on account of the exercise of a nonqualified
option, the vesting of a restricted share award, payment under an incentive
award and the settlement of a performance share award. The amount of the
deduction will be equal to the ordinary income recognized by the Participant.
The employer will not be entitled to a federal income tax deduction on account
of the grant or the exercise of an ISO. The employer may claim a federal
income tax deduction on account of certain disqualifying dispositions of AGH
Common Stock acquired upon the exercise of an ISO.
The transfer of a nonqualified stock option to a Permitted Family Member
will have no immediate tax consequences to MeriStar, the Participant or the
Permitted Family Member. Upon the subsequent exercise of the transferred
option by the Permitted Family Member, the Participant will realize ordinary
income in an amount measured by the difference between the option exercise
price and the fair market value of the shares on the date of exercise, and the
employer will be entitled to a deduction in the same amount. Any difference
between such fair market value and the price at which the Permitted Family
Member may subsequently sell such shares will be treated as capital gain or
loss to the Permitted Family Member, long-term or short-term depending on the
length of time the shares have been held by the Permitted Family Member. There
has been no formal pronouncement on the tax consequences of the transfer of
other awards. Accordingly, if such transfers are permitted, Participants will
be directed to consult their own tax advisers.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that MeriStar
may deduct for federal income tax purposes. The limit does not apply to
certain performance-based compensation paid under a plan that meets the
requirements of the Code and regulations promulgated thereunder. While the
MeriStar Incentive Plan generally complies with the requirements for
performance-based compensation, options granted at less than 100% of fair
market value and stock awards granted under the MeriStar Incentive Plan will
not satisfy those requirements.
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MeriStar Stock Options; Shares of MeriStar Stock
The following table sets forth for certain executive officers of MeriStar
information regarding the grant of MeriStar Stock Options as parity awards and
the grant of shares of MeriStar Common Stock under the MeriStar Incentive
Plan. See "Management of MeriStar" information concerning the business
experience of the proposed executive officers of MeriStar.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES
MERISTAR STOCK OF MERISTAR
OPTIONS TO BE COMMON STOCK
NAME AND POSITION GRANTED(1) TO BE GRANTED(2)
- ----------------- -------------- ----------------
<S> <C> <C>
Paul W. Whetsell............................... 353,743 21,916
Chairman of the Board and Chief Executive Of-
ficer
John Emery..................................... 120,936 9,122
Chief Financial Officer
</TABLE>
- --------
(1) The awards described herein are parity awards, such that after the Merger
similarly situated executives will have the same number of options to
purchase MeriStar Common Stock. Similar parity awards will be made by
OpCo. The options will vest in three annual installments beginning on the
first anniversary of the Effective Time.
(2) The awards are part of a pool of 150,000 shares of MeriStar Common Stock
to be awarded to holders of CapStar Stock Options in proportion to their
total CapStar option holdings. The shares of MeriStar Common Stock will
vest in three annual installments beginning on the first anniversary of
the Effective Time.
Awards granted under the MeriStar Incentive Plan are discretionary and are
therefore not determinable at this time.
RECOMMENDATION OF BOARD OF DIRECTORS; VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of all votes cast at the AGH Meeting is
required to approve the MeriStar Incentive Plan. See "The AGH Meeting--
Required Votes."
THE AGH BOARD HAS UNANIMOUSLY APPROVED THE MERISTAR INCENTIVE PLAN AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERISTAR INCENTIVE PLAN.
PROPOSAL FIVE: ELECTION OF DIRECTORS
In connection with the Merger, the AGH Board has approved, (i) subject to
the approval of the Merger Proposal, the election of six individuals to serve
as members of the MeriStar Board, (ii) subject to the approval of the Merger
Proposal, the resignation of two individuals who are currently members of the
AGH Board who will no longer serve on the MeriStar Board, and (iii) the
reelection of two individuals who are currently members of the AGH Board, who
will also serve as members of the MeriStar Board if the Merger Proposal is
approved. Although certain of the proposed directors will also serve as
initial directors of OpCo, a majority of the directors of MeriStar will be
independent of OpCo and a majority of the directors of OpCo will be
independent of MeriStar.
The AGH Board is divided into three classes. The initial term of the Class I
directors expired in 1997 and the current term of such class expires in 2000,
the initial term of the Class II directors expires in 1998 and the initial
term of the Class III directors expires in 1999. As the term of each class
expires, directors in that class will be elected by the stockholders of AGH
for a term of three years and until their successors are duly elected and
qualified or until their earlier death, resignation or removal.
At the AGH Meeting, three Class II directors will be elected to serve on the
AGH Board until the Annual Meeting of Stockholders in 2001 and until their
successors are duly elected and qualified or until their earlier
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death, resignation or removal. The AGH Board has nominated H. Cabot Lodge III,
James R. Worms and Paul W. Whetsell to serve as Class II Directors. Paul W.
Whetsell is nominated to become a member of the MeriStar Board only if both
the Merger Proposal and Proposal Five are approved. The AGH Board anticipates
that Messrs. Lodge, Worms and Whetsell will serve, if elected, as Class II
directors. However, if Messrs. Lodge, Worms and Whetsell are unable to accept
the election, the proxies will be voted for the election of such other person
as the AGH Board may recommend.
At the AGH Meeting, two Class I directors will be elected to serve on the
MeriStar Board until the Annual Meeting of Stockholders in 2000 and until
their successors are duly elected and qualified or until their earlier death,
resignation or removal. The AGH Board has nominated Daniel L. Doctoroff and
William S. Janes to serve as Class I Directors. Messrs. Doctoroff and Janes
are nominated to become members of the MeriStar Board only if both the Merger
Proposal and Proposal Five are approved. The AGH Board anticipates that
Messrs. Doctoroff and Janes will serve, if elected, as Class I directors.
However, if Messrs. Doctoroff and Janes are unable to accept the election, the
proxies will be voted for the election of such other person as the AGH Board
may recommend.
At the AGH Meeting, three Class III directors will be elected to serve on
the MeriStar Board until the Annual Meeting of Stockholders in 1999 and until
their successors are duly elected and qualified or until their earlier death,
resignation or removal. The AGH Board has nominated Bruce G. Wiles, James F.
Dannhauser and [additional director] to serve as Class III Directors. Messrs.
Wiles, Dannhauser and [additional director] are nominated to become members of
the MeriStar Board only if both the Merger Proposal and Proposal Five are
approved. The AGH Board anticipates that Messrs. Wiles, Dannhauser and
[additional director] will serve, if elected, as Class III directors. However,
if Messrs. Wiles, Dannhauser and [additional director] are unable to accept
the election, the proxies will be voted for the election of such other person
as the AGH Board may recommend.
The following discussion sets forth the names, age and business histories of
the nominees, the director whose term will continue after the AGH Meeting and
the resigning directors, and the year of the Annual Meeting of Stockholders at
which each director's term will expire (assuming, in the case of the eight
nominees, that they are elected).
INFORMATION REGARDING NOMINEES AND DIRECTORS
Class II Nominees for Election at 1998 Meeting (Terms Expiring in 2001)
H. Cabot Lodge III has been a director of AGH since July 1996. Mr. Lodge is
a co-founder and has served since October 1995 as Chairman of the Board of
Superconducting Core Technologies, Inc., a wireless telecommunications
equipment manufacturer. From August 1983 to August 1995, he was a Managing
director and Executive Vice President of W.P. Carey & Co., a New York real
estate investment bank that specializes in long-term net leases with
corporations and manages in excess of $1.5 billion in assets, through one
publicly traded limited liability company and three non-publicly-traded real
estate investment trusts. Mr. Lodge also is a principal of Carmel Lodge, LLC,
a New York-based investment firm. He is a member of the Board of Directors of
TelAmerica Media, Inc., High Voltage Engineering Corp. and Monument Realty.
James R. Worms has been a director of AGH since July 1996. Mr. Worms has
served since August 1995 as a Managing Director of William E. Simon & Sons
L.L.C., a private investment firm and merchant bank, and President of William
E. Simon & Sons Realty, through which the firm conducts its real estate
activities. Prior to joining William E. Simon & Sons, Mr. Worms was employed
since March 1987 by Salomon Brothers Inc, an international investment banking
firm, most recently as a Managing Director.
The following individual is nominated to become a member of the MeriStar
Board only if both the Merger Proposal and Proposal Five are approved:
Paul W. Whetsell has been Chairman of the Board of CapStar since 1996 and
served as President and Chief Executive Officer of CapStar since its founding
in 1987. From 1981 to 1986, Mr. Whetsell served as Vice President of
Development for Lincoln Hotels in Dallas, Texas. Prior to that, from 1973 to
1981, Mr. Whetsell worked for Quality Inns in various capacities in its
franchise division, culminating in Vice President of Franchise.
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Class I Nominees for Election at 1998 Meeting (Terms Expiring in 2000)
The following individuals are nominated to become members of the MeriStar
Board only if both the Merger Proposal and Proposal Five are approved:
Daniel L. Doctoroff has been Managing Director of Oak Hill Partners, Inc.,
the investment advisor to several private investment funds (including Acadia
Partners, L.P.), and its predecessor since August 1987; Vice President and
Director of Acadia Partners MGP, Inc. since March 1992; Vice President of
Keystone, Inc. since March 1992; and a Managing Partner of Insurance Partners
Advisors, L.P. since February 1994. All of such entities are affiliates of
Acadia Partners. Mr. Doctoroff is also a Director of Bell & Howell Holdings
Company, Kemper Corporation and Specialty Foods Corporation.
William S. Janes has served as a Principal and Director of RMB Realty, Inc.
since 1990. Prior to that, from 1984 to 1989, Mr. Janes served as Regional
General Partner of Lincoln Property Company. Mr. Janes serves as a Director of
Paragon Group, Inc., a publicly traded real estate investment trust, as well
as Brazos Asset Management, Brazos Fund, Paragon Property Services, Inc. and
Carr Real Estate Services. Mr. Janes maintains professional affiliations as a
member of the National Association of Real Estate Investment Trusts, the
Society of Industrial and Office Realtors and the Urban Land Institute.
Class III Nominees for Election at 1998 Meeting (Terms Expiring in 1999)
The following individuals are nominated to become members of the MeriStar
Board only if both the Merger Proposal and Proposal Five are approved:
Bruce G. Wiles has been an Executive Vice President of AGH since April 1996.
Mr. Wiles has served since 1989 as an Executive Vice President of AGHI, where
he is responsible for AGHI's acquisition and development activities. Mr. Wiles
has more than fourteen years of experience in the hospitality industry. Prior
to joining AGHI in 1989, Mr. Wiles was a Senior Vice President for Integra, a
Dallas-based NYSE hotel management and restaurant company. At Integra, his
duties included evaluating hotel acquisitions and overseeing real estate
development, as well as the acquisition and negotiation of all real estate
based financing.
James F. Dannhauser has been the Chief Financial Officer of Premier Parks
Inc. since October 1995 and a member of the Board of Directors of that company
since December 1992. Premier Parks Inc. is a public company listed on the
NYSE. From 1990 through June 1996, Mr. Dannhauser was a managing director of
Lepercq de Neuflize & Co. Incorporated, an investment banking firm. Mr.
Dannhauser is a member of the Board of Directors of Lepercq.
Additional Director
[To come]
Continuing Class I Director (Term to Expire in 2000)
Steven D. Jorns has been the Chairman of the Board of AGH, Chief Executive
Officer and President of AGH since April 1996. Mr. Jorns is the founder of and
has served since its formation in 1981 as Chairman of the Board, Chief
Executive Officer and President of AGHI. Prior to forming AGHI, Mr. Jorns
spent seven years with an affiliate of General Growth Companies overseeing
that company's hotel portfolio. Prior to that, Mr. Jorns was associated with
Hospitality Motor Inns, a division of Standard Oil of Ohio, and held marketing
positions with Holiday Inns, Inc.
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The following individuals are currently Class III members of the AGH Board
and have agreed to resign their membership on the AGH Board if the Merger
Proposal and Proposal Five are approved. Accordingly, such individuals will
not serve as members of the MeriStar Board:
James B. McCurry has been a director of AGH since July 1996. Since July 1997
Mr. McCurry has been a partner at Bain & Company, an international management
consulting firm specializing in corporate strategy. Mr. McCurry served from
December 1994 through December 1996 as Chief Executive Officer of NeoStar
Retail Group, Inc. ("NeoStar"), a specialty retailer of consumer software.
NeoStar filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code in September 1996. From April 1983 to December 1994, Mr. McCurry was the
Chairman of Babbage's Inc., a consumer software retailer, which merged with
Software Etc. Stores, Inc. in December of 1994 to form NeoStar. He is a member
of the Board of Directors of Pacific Sunwear of California, Inc.
Kent R. Hance has been a director of AGH since July 1996. Mr. Hance has been
since 1994 a law partner in the firm Hance, Scarborough, Woodward & Weisbart,
L.L.P., Austin, Texas, and from 1991 to 1994 he was a law partner in the firm
of Hance and Gamble. From 1985 to 1987, Mr. Hance was a law partner with Boyd,
Viegal and Hance. Mr. Hance served as a member of the Texas Railroad
Commission from 1987 until 1990 and as its Chairman from 1989 until 1990. From
1979 to 1985, he served as a member of the United States Congress. Mr. Hance
served as a State Senator in the State of Texas from 1975 to 1979 and was a
professor of business law at Texas Tech University from 1969 to 1973.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REQUIRED VOTE FOR APPROVAL
The affirmative vote of a plurality of all votes cast at the AGH Meeting is
required to approve the election of the directors as set forth above. See "The
AGH Meeting--Required Votes."
THE AGH BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO ELECT
THE DIRECTORS AS SET FORTH ABOVE.
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THE CAPSTAR MEETING
DATE, TIME AND PLACE OF CAPSTAR MEETING
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
CapStar as part of the solicitation of proxies by the CapStar Board for use at
the CapStar Meeting to be held on . , 1998, at 9:00 a.m., local time, at the
Embassy Row Hilton, 2015 Massachusetts Avenue, N.W., Washington, D.C. 20036.
This Joint Proxy Statement/Prospectus, the enclosed form of proxy and the
accompanying Notice of Special Meeting are first being mailed to stockholders
of CapStar on or about . , 1998.
PURPOSE OF THE CAPSTAR MEETING
The Merger
At the CapStar Meeting, holders of CapStar Common Stock will consider and
vote upon the approval and adoption of the Merger Agreement, pursuant to which
CapStar will be merged with and into AGH, with AGH as the surviving entity,
and each outstanding share of CapStar Common Stock will be converted into the
right to receive 1.0 share of MeriStar Common Stock and each share of AGH
Common Stock will be converted into 0.8475 shares of MeriStar Common Stock.
Delaware law requires CapStar to obtain stockholder approval of the Merger
Agreement by the vote of a majority of the outstanding shares of CapStar
Common Stock entitled to vote at the CapStar Meeting.
Management of CapStar knows of no matters to be brought before the CapStar
Meeting other than referred to herein. If any other business should properly
come before the CapStar Meeting, other than that referred to herein, the
persons named in the proxy will vote in accordance with their best judgment.
THE CAPSTAR BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF CAPSTAR VOTE FOR APPROVAL OF
THE MERGER PROPOSAL.
RECORD DATE
The CapStar Board has fixed the close of business on . , 1998 as the
CapStar Record Date. Only the holders of record of the outstanding shares of
CapStar Common Stock on the CapStar Record Date will be entitled to notice of,
and to vote at, the CapStar Meeting and any adjournments or postponements
thereof. At the CapStar Record Date, . shares of CapStar Common Stock were
outstanding and entitled to vote. The presence, in person or by proxy, of a
majority of the aggregate number of shares of CapStar Common Stock outstanding
and entitled to vote on the CapStar Record Date is necessary to constitute a
quorum at the CapStar Meeting.
PROXIES; VOTING AND REVOCATION
Shares of CapStar Common Stock, represented by a properly executed proxy
received prior to the vote at the CapStar Meeting, and not revoked, will be
voted at the CapStar Meeting as directed in the proxy. If a proxy is submitted
and no directions are given, the proxy will be voted for the approval and
adoption of the Merger Agreement. CapStar intends to count shares of CapStar
Common Stock present in person at the CapStar Meeting but not voting, and
shares of CapStar Common Stock for which it has received proxies but with
respect to which holders of shares have abstained on any matter, as present at
the CapStar Meeting for purposes of determining the presence or absence of a
quorum for the transaction of business. Since the affirmative vote of the
holders of a majority of the outstanding shares of CapStar Common Stock
entitled to vote on the Merger is required to approve and adopt the Merger
Agreement, such nonvoting shares and abstentions will have the effect of a
vote against the approval of the Merger Agreement. In addition, under the
rules of the NYSE, brokers who hold shares in street name for customers who
are the beneficial owners of such shares are prohibited from giving a proxy to
vote shares held for such customers with respect to the approval and adoption
of the Merger Agreement without special instructions from such customers.
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Each share of CapStar Common Stock is entitled to one vote with respect to
the Merger Proposal. The persons named as proxies by a stockholder may propose
and vote for one or more adjournments or postponements of the CapStar Meeting
to permit further solicitation of proxies in favor of such proposal; provided,
however, that no proxy that is voted against the Merger Proposal will be voted
in favor of any adjournment or postponements if such postponement is to be
considered at the adjourned or postponed meeting. Votes are tabulated at the
CapStar Meeting by inspectors of election.
A stockholder of record may revoke a proxy at any time prior to its being
voted by filing an instrument of revocation with John Emery, Corporate
Secretary of CapStar (CapStar Hotel Company, 1010 Wisconsin Avenue, N.W.,
Washington, D.C. 20007), by filing a duly executed proxy bearing a later date,
or by appearing at the CapStar Meeting in person, notifying the Corporate
Secretary, and voting by ballot at the CapStar Meeting. Any stockholder of
record attending the CapStar Meeting may vote in person whether or not a proxy
has been previously given, but the mere presence of a stockholder at the
CapStar Meeting will not constitute revocation of a previously given proxy. In
addition, stockholders who beneficially hold shares of CapStar Common Stock
that are not registered in their own name will need additional documentation
from the record holder of such shares to vote personally at the CapStar
Meeting.
REQUIRED VOTES
As of the CapStar Record Date, . shares of CapStar Common Stock were
outstanding and entitled to vote. All properly executed proxies delivered
pursuant to this solicitation and not properly revoked will be forwarded at
the CapStar Meeting as specified in such proxies. If no choice is specified,
the shares represented by a signed proxy will be voted in favor of each of the
proposals set forth in the Notice of Special Meeting of CapStar attached
hereto. The affirmative vote of the holders of record of a majority of the
shares of CapStar Common Stock outstanding on the CapStar Record Date is
required to approve the Merger Proposal. Although holders are not being asked
to vote on the Spin-Off, the approval of the Merger Agreement by holders of
CapStar Common Stock is a condition to the consummation of the Spin-Off and
the Merger.
SOLICITATION OF PROXIES
The expense of printing and mailing this Joint Proxy Statement/Prospectus
and the material used in this solicitation of proxies will be borne equally by
AGH and CapStar. It is contemplated that CapStar proxies will be solicited
through the mail and directly by officers, directors and regular employees of
AGH and CapStar. CapStar will reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in
forwarding these proxy materials to the principals. CapStar has engaged . to
represent it in connection with the solicitations of proxies at a cost of
approximately $ . plus expenses.
NO APPRAISAL OR DISSENTERS' RIGHTS
Holders of CapStar Common Stock will not have dissenters' rights in
connection with the Merger. See "Risk Factors--No Dissenters' Rights."
THE MATTERS TO BE CONSIDERED AT THE CAPSTAR MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF CAPSTAR. ACCORDINGLY, THE STOCKHOLDERS OF CAPSTAR ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
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THE MERGER
BACKGROUND
AGH is a self-administered REIT that owns a geographically diverse portfolio
of full-service hotels. CapStar is a leading owner and manager of upscale,
full-service hotels in North America.
On or about June 2, 1997, Steven Jorns, Chairman of the Board, Chief
Executive Officer and President of AGH, and Bruce Wiles, Executive Vice
President of AGH, met with Paul Whetsell, Chairman of the Board, President and
Chief Executive Officer of CapStar, and Mahmood Khimji, a Director of CapStar
and a principal of Highgate Hotels, Inc., for dinner in New York City, at
which time they informally discussed a potential business alliance between
CapStar and AGH.
On July 28, 1997, Steven Jorns met with Mahmood Khimji in Irving, Texas to
discuss a possible strategic alliance between CapStar and AGH.
On July 29, 1997, Steven Jorns met with Paul Whetsell in Irving, Texas to
discuss matters relating to the proposed strategic alliance that Mr. Jorns had
discussed the previous day with Mr. Khimji.
On September 22, 1997, Steven Jorns met with Paul Whetsell and a
representative of Lehman Brothers Inc., CapStar's financial advisor, and a
representative of Smith Barney Inc. (now associated with Salomon Brothers Inc
and collectively doing business as Salomon Smith Barney), AGH's financial
advisor, in New York City. The parties discussed a possible business
combination of AGH and CapStar. During the two week period following the
meeting, financial information regarding the companies was exchanged. Based on
this information, AGH and CapStar determined that parties could not agree on
the basis for establishing an appropriate methodology for valuing the
companies in a business combination and, as a result, all further discussions
were terminated.
On February 3, 1998, discussions between Steven Jorns and Paul Whetsell were
reinitiated. Mr. Jorns met Mr. Whetsell in New York City to discuss a possible
merger between CapStar and AGH, including a proposal to possibly spin-off the
management/leasing business of CapStar.
Meetings between Paul Whetsell, Steven Jorns and representatives of the
financial advisors of AGH and CapStar continued on February 10 and 11, 1998 in
New York City. During these meetings, among other things, further proposals
relating to a possible merger between CapStar and AGH and a spin-off and the
potential benefits afforded by such transactions were discussed. These
benefits included the integration of senior management from the two companies
which would combine the companies' recognized leadership in property
management and acquisitions.
On February 19, 1998, a telephonic meeting of the AGH Board was held to
advise the AGH Board of the discussions with CapStar to date.
Paul Whetsell, John Emery, Chief Financial Officer of CapStar, Bruce Wiles
and Steven Jorns held the next meeting on February 23, 1998 in Washington
D.C., together with representatives of the financial advisors to AGH and
CapStar (including Goldman, Sachs & Co., CapStar's financial co-advisor). From
February 23 to February 24, 1998, the parties continued to negotiate the terms
of the transaction which included: (i) governance matters for the surviving
entity, including the board of directors of the combined company and naming of
key executive officers; (ii) certain tax matters relating to the proposed
merger of AGH and CapStar; and (iii) the respective views on the valuation
methods and proposed range of exchange ratios for the AGH Common Stock and
CapStar Common Stock.
On the afternoon of February 24, 1998, the parties met at CapStar's offices
to discuss the proposed merger. At the meeting, the parties considered the
unique benefits of a merger and the opportunity to enhance stockholder value
that could be realized if the two companies were merged, including the
creation of a larger company that would pursue a more aggressive growth
strategy, synergies in expenses, greater purchasing power, increased marketing
strength, a deeper combined management team, solidified franchise
affiliations, potentially improved
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credit rating and reduced cost of borrowings, and potentially increased
liquidity in the combined company's equity due to the larger public float and
increased diversification of the combined company's asset base. Later that
evening, executives of AGH and CapStar met.
On February 25, 1998, Paul Whetsell, Steven Jorns, Bruce Wiles and John
Emery met with FPL Associates Consulting, an employee benefits consulting
company, to discuss engaging such company to analyze employee benefit and
compensation issues in connection with the proposed merger. AGH's and
CapStar's legal and financial advisors and accountants also met on this date
at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, CapStar's counsel,
to discuss a range of issues, including the basic terms and provisions of the
proposed agreement, structuring issues, documents, transaction responsibility
and the mechanics of due diligence associated with the proposed transaction.
At the conclusion of the meeting, it was agreed that counsel for AGH would
commence the drafting of definitive merger documentation for review by all
parties. Discussions regarding this and other issues continued throughout the
week of March 2, 1998.
On February 27, 1998, the CapStar Board convened and received a report from
management on the status of the proposed merger of CapStar and AGH to date.
On March 2, 1998, the AGH Board convened and received a report from
management on the status of the proposed Merger of CapStar and AGH to date.
On March 4 and March 5, 1998, executives of AGH and CapStar met together
with representatives of Salomon Smith Barney, to attend operational due
diligence meetings in Irving, Texas.
During the week of March 9, 1998, CapStar and AGH met with their respective
counsel, as well as their respective financial advisors, to discuss and
negotiate the terms and conditions of the drafts of the definitive
documentation prepared by AGH's counsel. At the conclusion of these
discussions, it was agreed that there were certain issues remaining to be
resolved, including the proposed exchange ratios.
During the period March 9, 1998 through March 11, 1998, more discussions
were held by telephone between representatives of AGH and CapStar to resolve
outstanding economic issues with respect to the proposed merger transaction.
During those discussions, proposals were made for a ratio for exchanging
CapStar Common Stock for MeriStar Common Stock and a ratio for exchanging AGH
Common Stock for MeriStar Common Stock at the time of the merger. The
representatives of AGH and CapStar present at the meeting also discussed the
necessity for both AGH and CapStar to gain approval by the required vote of
each of its stockholders to effect the proposed transaction. At the conclusion
of the meeting, the parties agreed to proceed as rapidly as possible to
resolve all outstanding issues and finalize the documentation for the proposed
transaction by March 15, 1998.
On March 12, 1998, the CapStar Board held a meeting in New York City at
which time details of the status of the proposed merger were discussed.
Representatives of CapStar's legal and financial advisors also attended the
meeting. During the meeting, the CapStar Board discussed the status of the
proposed transaction, including the proposed CapStar Exchange Ratio and the
issues concerning financial valuation and diligence matters presented by the
counsel and financial advisors to CapStar. The CapStar Board concluded that it
would take no action at that meeting concerning the proposed transaction and
that it agreed with the positions taken by CapStar's management with respect
to the outstanding issues regarding the proposed transaction. Mr. Whetsell
indicated to the CapStar Board that he would keep them apprised of further
developments.
On March 12, 1998, the AGH Board held a meeting in New York City at which
time details of the status of the proposed merger were discussed.
Representatives of AGH's legal and financial advisors also participated in the
meeting. At the meeting, Mr. Jorns updated the AGH Board as to the
negotiations that had taken place since the March 2, 1998 telephonic board
meeting, and described the potential benefits to AGH and its stockholders of
the Merger. Salomon Smith Barney reviewed with the AGH Board the financial
terms of the proposed transaction and the valuation methodologies to be
utilized by Salomon Smith Barney in connection with its analysis of the
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Exchange Ratios. AGH's legal and accounting representatives discussed the
results of their due diligence review. AGH Board members asked management and
its financial and legal advisors several questions regarding the proposed
transaction, including the potential operational and financial benefits and
considerations relating to the proposed merger. The AGH Board requested
management to proceed with its negotiations and concluded that it would take
no action at that time, but scheduled an AGH Board meeting for March 15, 1998.
On March 15, 1998, a meeting of the CapStar Board was held. Lehman Brothers
and Goldman Sachs presented the CapStar Board with their analysis of certain
financial aspects of the proposed merger. Prior to the meeting, the members of
the CapStar Board were furnished with a summary of the proposed transaction
prepared by counsel for CapStar and the then current drafts of the Merger
Agreement and the related agreements. At the conclusion of this meeting,
Lehman Brothers and Goldman Sachs delivered their oral opinions, which they
subsequently confirmed in writing. See "The Merger--Opinion of Financial
Advisors to CapStar." The CapStar Board then voted that the Merger, including
the CapStar Exchange Ratio, is fair and in the best interests of CapStar and
its stockholders, and to approve the Merger and the transactions contemplated
thereby and to recommend that the stockholders of CapStar vote FOR the
approval and adoption of the Merger Agreement.
On March 15, 1998, a meeting of the AGH Board was held. At such meeting,
Salomon Smith Barney reviewed with the AGH Board the financial analyses
performed by Salomon Smith Barney in respect of the Exchange Ratios and
rendered to the AGH Board an oral opinion (which opinion was subsequently
confirmed by delivery of a written opinion, dated March 15, 1998) to the
effect that, as of such date and based upon and subject to certain matters
stated therein, the Exchange Ratios were fair, from a financial point of view,
to AGH. The AGH Board then voted that the Merger, including the Exchange
Ratios, is fair and in the best interests of AGH and its stockholders and to
approve the Merger and the transactions contemplated thereby and to recommend
that the stockholders of AGH vote FOR the Merger Proposal.
On March 16, 1998, AGH and CapStar issued a joint press release to the
effect that a definitive Merger Agreement had been signed.
RECOMMENDATION OF THE AGH BOARD; AGH'S REASONS FOR THE MERGER
At the AGH Board meeting held on March 12, 1998, the AGH Board received and
considered the presentations of the senior management of AGH and its legal and
financial advisors regarding the proposed Transactions. On March 15, 1998, the
AGH Board unanimously approved the terms of the Merger Agreement and the other
agreements to be executed by AGH or its subsidiaries and determined that the
Transactions were fair to and in the best interests of AGH and its
stockholders. THE AGH BOARD HAS DETERMINED THAT THE TRANSACTIONS ARE FAIR TO
AND IN THE BEST INTERESTS OF AGH AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE
STOCKHOLDERS OF AGH VOTE FOR APPROVAL AND ADOPTION OF THE MERGER PROPOSAL.
In reaching its determination to approve the Merger and the Transactions,
the AGH Board considered a number of factors, including, without limitation,
the factors listed below. In view of the number and wide variety of factors
considered in connection with its evaluation of the Merger and the
Transactions, the AGH Board did not consider it practicable to, nor did it
attempt to, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination.
The material factors that the AGH Board of Directors considered in granting
such approval include, among other things, the following:
(i) the belief that the Merger would create the largest independent
multi-brand owner of premium, full-service hotels in the country that
combines the senior management teams of AGH and CapStar and creates a
combined entity that has the ability to capitalize on the complementary
expertise and philosophies of each other's acquisition and management
teams;
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(ii) the belief that the Merger would create significant expansion in the
geographic diversification of the combined entity's ownership, management
and operation of hotel properties which would reduce competition and
exposure to the fluctuating local economic and seasonal cycles;
(iii) the belief that the Merger would create increased access to capital
markets, which would result in the combined entity having debt or other
financing available on more attractive terms, thereby enhancing its
liquidity and possibly increasing institutional investor participation in
the ownership of the AGH Common Stock and improving AGH's credit rating;
(iv) the belief that the Merger would create the ability for the combined
entity to compete more effectively for acquisition and expansion
opportunities, and for its experienced acquisitions team to be a superior
consolidator (especially with respect to larger portfolios and corporate
acquisitions);
(v) the belief that the Merger would create opportunities for economies
of scale and operating efficiencies that should result from the Merger and
which are expected to increase AGH's funds from operations per share;
(vi) the belief that the Merger would create the opportunity to recognize
unrealized potential in the AGH portfolio through improved leasing and
management opportunities, enhanced franchise relationships and enhanced
professional acquisitions and management teams;
(vii) the belief that the Merger would create the attractive opportunity
of the REIT structure to investors that may choose to invest in the hotel
ownership business, the hotel management business, or both;
(viii) the belief that the Merger would create the opportunity to
recognize operational cost savings and that the significant synergies in
the MeriStar/OpCo structure makes hotel ownership interests complementary
with management interests;
(ix) the favorable structure of the Merger as a merger-of-equals, in that
AGH will be engaging in a strategic combination with a company with similar
strategies and goals, and is not placing itself for sale. The AGH Board
views as favorable the fact that the Merger will allow AGH to achieve many
of the same objectives of a large acquisition (for example, increasing size
and total market capitalization) without paying a substantial premium to
the acquired company. Further, the AGH Board views as favorable the fact
that the Merger, because it has been structured as a merger-of-equals, will
allow AGH's stockholders to fully participate in the growth of the combined
entity while retaining, for the benefit of the combined entity, the
services of the senior management team of AGH;
(x) general industry, economic and market conditions, both current and
projected, the paramount interests of AGH's stockholders and the potential
impact of the Merger upon the interests of AGH's employees, and creditors
as well as the possible impacts on the communities in which AGH has
operations; and
(xi) the belief that the combined company's nine member MeriStar Board,
made up of four directors of AGH, four directors of CapStar, and one
director chosen jointly by AGH and CapStar, and a seasoned and proven
management team drawn from both companies, will provide sound and effective
leadership for the combined company.
The decision of the AGH Board to approve the Merger Agreement and to
recommend that the AGH stockholders vote to approve and adopt the Merger
Agreement and to approve the Merger is also based upon several other factors,
including the written opinion of Salomon Smith Barney, dated March 15, 1998,
to the effect that, as of such date and based upon and subject to certain
matters stated in such opinion, the Exchange Ratios were fair from a financial
point of view to AGH. See "Opinion of Financial Advisor to AGH."
RECOMMENDATION OF THE CAPSTAR BOARD; CAPSTAR'S REASONS FOR THE MERGER
At the CapStar Board meeting held on March 12, 1998, the CapStar Board
received and considered the presentations of the management of CapStar and its
legal and financial advisors regarding the proposed Transactions. On March 15,
1998, the CapStar Board unanimously approved the terms of the Merger Agreement
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and the other agreements to be executed by CapStar or its subsidiaries and
determined that the Transactions were fair to and in the best interests of
CapStar and its stockholders. THE CAPSTAR BOARD HAS DETERMINED THAT THE
TRANSACTIONS ARE FAIR TO AND IN THE BEST INTERESTS OF CAPSTAR AND ITS
STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF CAPSTAR VOTE FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
In reaching its determination to approve the Transactions, the CapStar Board
considered a number of factors, including, without limitation, the factors
listed below. In view of the number and wide variety of factors considered in
connection with its evaluation of the Transactions, the CapStar Board did not
consider it practicable to, nor did it attempt to, quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination.
.50 The material factors that the CapStar Board of Directors considered in
granting such approval include, among other things, the following:
(i) the belief that the Merger would create the largest independent
multi-brand owner of premium, full-service hotels in the country that
combines the senior management teams of AGH and CapStar and creates a
combined entity that has the ability to capitalize on the complementary
expertise and philosophies of each other's acquisition and management
teams;
(ii) the belief that the Merger would create significant expansion in the
geographic diversification of the combined entity's ownership, management
and operation of hotel properties which would reduce competition and
exposure to the fluctuating local economic and seasonal cycles;
(iii) the belief that the Merger would create increased access to capital
markets, which would result in the combined entity having debt or other
financing available on more attractive terms, thereby enhancing its
liquidity and possibly increasing institutional investor participation in
the ownership of the CapStar Common Stock and improving CapStar's credit
rating;
(iv) the belief that the Merger would create the ability for the combined
entity to compete more effectively for acquisition and expansion
opportunities, and for its experienced acquisitions team to be a superior
consolidator (especially with respect to larger portfolios and corporate
acquisitions);
(v) the belief that the Merger would create opportunities for economies
of scale and operating efficiencies that should result from the Merger and
which are expected to increase CapStar's funds from operations per share;
(vi) the belief that the Merger would create the opportunity to recognize
unrealized potential in the CapStar portfolio through improved leasing and
management opportunities, enhanced franchise relationships and enhanced
professional acquisitions and management teams;
(vii) the belief that the Merger would create the attractive opportunity
of the REIT structure to investors that may choose to invest in the hotel
ownership business, the hotel management business, or both;
(viii) the belief that the Merger would create the opportunity to
recognize operational cost savings and that the significant synergies in
the MeriStar/OpCo structure makes hotel ownership interests complementary
with management interests;
(ix) the favorable structure of the Merger as a merger-of-equals, in that
CapStar will be engaging in a strategic combination with a company with
similar strategies and goals, and is not placing itself for sale. The
CapStar Board views as favorable the fact that the Merger will allow
CapStar to achieve many of the same objectives of a large acquisition (for
example, increasing size and total market capitalization) without paying a
substantial premium to the acquired company. Further, the CapStar Board
views as favorable the fact that the Merger, because it has been structured
as a merger-of-equals, will allow CapStar's stockholders to fully
participate in the growth of the combined entity while retaining, for the
benefit of the combined entity, the services of the senior management team
of CapStar;
(x) general industry, economic and market conditions, both current and
projected, the paramount interests of CapStar's stockholders and the
potential impact of the Merger upon the interests of CapStar's
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employees, and creditors as well as the possible impacts on the communities
in which CapStar has operations; and
(xi) the belief that the combined company's nine member MeriStar Board,
made up of four directors of AGH, four directors of CapStar, and one
director chosen jointly by AGH and CapStar, and a seasoned and proven
management team drawn from both companies, will provide sound and effective
leadership for the combined company.
The decision of the CapStar Board to approve the Merger Agreement and to
recommend that the CapStar stockholders vote to adopt the Merger Agreement and
to approve the Merger is also based upon several other factors, including the
opinions of Goldman Sachs and Lehman Brothers, CapStar's financial advisors
for the Merger. See "The Merger--Opinions of Financial Advisors to CapStar."
OPINION OF FINANCIAL ADVISOR TO AGH
Salomon Smith Barney was retained by AGH to act as its financial advisor in
connection with the proposed Merger. On March 15, 1998, at a meeting of the
AGH Board held to evaluate the proposed Merger, Salomon Smith Barney delivered
an oral opinion (which opinion was subsequently confirmed by delivery of a
written opinion dated March 15, 1998) to the AGH Board to the effect that, as
of the date of such opinion and based upon and subject to certain matters
stated therein, the Exchange Ratios were fair, from a financial point of view,
to AGH.
In arriving at its opinion, Salomon Smith Barney reviewed the Merger
Agreement and certain related documents, and held discussions with certain
senior officers, directors and other representatives and advisors of AGH and
certain senior officers and other representatives and advisors of CapStar
concerning the businesses, operations and prospects of AGH and CapStar.
Salomon Smith Barney examined certain publicly available business and
financial information relating to AGH and CapStar as well as certain financial
forecasts and other information and data for AGH and CapStar which were
provided to or otherwise discussed with Salomon Smith Barney by the respective
managements of AGH and CapStar, including information relating to certain
strategic implications and operational benefits anticipated to result from the
Merger. Salomon Smith Barney reviewed the financial terms of the Merger as set
forth in the Merger Agreement in relation to, among other things: current and
historical market prices and trading volumes of the AGH Common Stock and
CapStar Common Stock; the historical and projected earnings and other
operating data of AGH and CapStar; and the capitalization and financial
condition of AGH and CapStar. Salomon Smith Barney analyzed certain financial,
stock market and other publicly available information relating to the
businesses of other companies whose operations Salomon Smith Barney considered
relevant in evaluating those of AGH and CapStar. Salomon Smith Barney also
evaluated the potential pro forma financial impact of the Merger on AGH. In
addition to the foregoing, Salomon Smith Barney conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as Salomon Smith Barney deemed appropriate in arriving at its
opinion. Salomon Smith Barney noted that its opinion was necessarily based
upon information available, and financial, stock market and other conditions
and circumstances existing and disclosed, to Salomon Smith Barney as of the
date of its opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Salomon Smith Barney. With respect to financial
forecasts and other information and data provided to or otherwise reviewed by
or discussed with Salomon Smith Barney, the managements of AGH and CapStar
advised Salomon Smith Barney that such forecasts and other information and
data were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of AGH and CapStar as to the future
financial performance of AGH and CapStar and the strategic implications and
operational benefits anticipated to result from the Merger. Salomon Smith
Barney assumed, with the consent of the AGH Board, that the Transactions will
be effected in accordance with the terms contemplated thereby and, to the
extent relevant to its analysis, Salomon Smith Barney evaluated AGH and
CapStar after giving effect to such Transactions. Salomon Smith Barney also
assumed, with the consent of the
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AGH Board, that the Merger will be treated as a reorganization for federal
income tax purposes and that the Merger and the Transactions will not
adversely affect the real estate investment trust status of the combined
entity resulting from the Merger. The opinion of Salomon Smith Barney, as set
forth therein, relates to the relative values of AGH and CapStar. Salomon
Smith Barney did not express any opinion as to what the value of the MeriStar
Common Stock actually will be when issued pursuant to the Merger or the price
at which the MeriStar Common Stock will trade subsequent to the Merger.
Salomon Smith Barney did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of AGH or CapStar nor did Salomon Smith Barney make any physical inspection of
the properties or assets of AGH or CapStar. Salomon Smith Barney was not
requested to consider, and Salomon Smith Barney's opinion does not address,
the relative merits of the Merger as compared to any alternative business
strategies that might exist for AGH or the effect of any other transaction in
which AGH might engage. Although Salomon Smith Barney evaluated the Exchange
Ratios from a financial point of view, Salomon Smith Barney was not asked to
and did not recommend the specific consideration payable in the Merger, which
was determined through negotiation between AGH and CapStar. No other
limitations were imposed by AGH on Salomon Smith Barney with respect to the
investigations made or procedures followed by Salomon Smith Barney in
rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SALOMON SMITH BARNEY DATED MARCH 15,
1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B AND
SHOULD BE READ CAREFULLY IN ITS ENTIRETY. THE OPINION OF SALOMON SMITH BARNEY
IS DIRECTED TO THE AGH BOARD AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE
RATIOS FROM A FINANCIAL POINT OF VIEW TO AGH, DOES NOT ADDRESS ANY OTHER
ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT
THE AGH MEETING. THE SUMMARY OF THE OPINION OF SALOMON SMITH BARNEY SET FORTH
IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. The
summary of such analyses does not purport to be a complete description of the
analyses underlying Salomon Smith Barney's opinion. The preparation of a
fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, Salomon Smith Barney believes that its analyses must
be considered as a whole and that selecting portions of its analyses and
factors, without considering all analyses and factors, could create a
misleading or incomplete view of the processes underlying such analyses and
opinion. In its analyses, Salomon Smith Barney made numerous assumptions with
respect to AGH, CapStar, industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond
the control of AGH and CapStar. The estimates contained in such analyses and
the valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Salomon Smith
Barney's opinion and analyses were only one of many factors considered by the
AGH Board in its evaluation of the Merger and should not be viewed as
determinative of the views of the AGH Board or management of AGH with respect
to the Exchange Ratios or the proposed Merger.
Contribution Analysis
Salomon Smith Barney analyzed the respective contributions of AGH and
CapStar to, among other things, the earnings before interest, taxes,
depreciation and amortization ("EBITDA") and funds from operations ("FFO") of
the combined company for fiscal years 1998 and 1999 based on internal
estimates of the managements of AGH and CapStar, without giving effect to
certain cost savings and other potential synergies anticipated by the
managements of AGH and CapStar to result from the Merger. This analysis
indicated that (i)
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in fiscal year 1998, AGH and CapStar would contribute approximately 47.3% and
52.7% and 45.7% and 54.3%, respectively, of the FFO and EBITDA of the combined
company, implying an exchange ratio of 0.8360 to 0.9230 and (ii) in fiscal
year 1999, AGH and CapStar would contribute approximately 46.7% and 53.3% and
45.7% and 54.3%, respectively, of the FFO and EBITDA of the combined company,
implying an exchange ratio of 0.8165 to 0.9202, as compared to the AGH
Exchange Ratio of 0.8475.
Pro Forma Merger Analysis
Salomon Smith Barney analyzed certain pro forma effects resulting from the
Merger, including, among other things, the impact of the Merger on the
estimated FFO of AGH in fiscal years 1998 and 1999 based on internal estimates
of the managements of AGH and CapStar. The results of the pro forma merger
analysis suggested that the Merger could be accretive to the FFO of AGH in
fiscal year 1998 after giving effect to certain cost savings and other
potential synergies anticipated by the managements of AGH and CapStar to
result from the Merger, and accretive to the FFO of AGH in fiscal year 1999
both before and after giving effect to such cost savings and other potential
synergies. The actual results achieved by the combined entity may vary from
projected results and the variations may be material.
Selected Company Analysis
Using publicly available information, Salomon Smith Barney analyzed, among
other things, the market values and trading multiples of CapStar and the
following selected publicly traded REIT companies in the lodging industry:
Boykin Lodging Company; Equity Inns, Inc.; FelCor Suite Hotels, Inc.;
Hospitality Properties Trust; Innkeepers USA Trust; RFS Hotel Investors Inc.;
and Sunstone Hotel Investors, Inc. (collectively, the "CapStar Selected
Companies"). Salomon Smith Barney compared, among other things, market values
as a multiple of estimated calendar 1998 and 1999 FFO. All multiples were
based on closing stock prices as of March 13, 1998. FFO estimates for the
CapStar Selected Companies were based on estimates of selected investment
banking firms and FFO estimates for CapStar were based on internal estimates
of CapStar management. Salomon Smith Barney also evaluated the estimated
calendar 1998 and 1999 FFO of CapStar on an adjusted basis assuming CapStar
completed an equity offering to reduce its total debt to capitalization ratio
to 35% ("AFFO"). Applying a range of multiples for the CapStar Selected
Companies of estimated calendar 1998 and 1999 FFO of 7.6x to 9.6x and 7.0x to
8.9x, respectively, to CapStar's estimated calendar 1998 and 1999 FFO and AFFO
resulted in implied exchange ratios of 0.6491 to 0.8228 and 0.6784 to 0.8599,
respectively, as compared to the AGH Exchange Ratio of 0.8475.
Salomon Smith Barney also compared certain financial and stock market
information for AGH and the following selected publicly traded REIT companies
in the lodging industry: Boykin Lodging Company; Equity Inns, Inc.; FelCor
Suite Hotels, Inc.; Hospitality Properties Trust; Innkeepers USA Trust;
Patriot American Hospitality, Inc.; RFS Hotel Investors Inc.; Starwood
Lodging; and Sunstone Hotel Investors, Inc. (collectively, the "AGH Selected
Companies"). Salomon Smith Barney compared, among other things, market values
as multiples of estimated calendar 1998 and 1999 FFO. All multiples were based
on closing stock prices on March 13, 1998. FFO estimates for the AGH Selected
Companies and AGH were based on estimates of selected investment banking
firms. This analysis indicated a range of multiples of estimated calendar 1998
and 1999 FFO for the AGH Selected Companies of 7.6x to 10.3x and 7.0x to 8.9x,
respectively, as compared to estimated calendar 1998 and 1999 FFO multiples
for AGH of 9.4x and 8.2x, respectively.
No company or business used in the "Selected Company Analysis" as a
comparison is identical to AGH or CapStar. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the Selected Companies or the business
segment or company to which they are being compared.
Trading Analysis
Salomon Smith Barney performed an analysis designed to determine an implied
exchange ratio based upon the average trading prices of AGH Common Stock and
CapStar Common Stock over the 30-day, 10-day and
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5-day periods prior to, and as of, March 13, 1998. Assuming a range of
multiples of estimated calendar 1998 earnings per share ("EPS") for OpCo of
14.8x to 29.7x and subtracting the implied per share value of OpCo from the
average trading prices of CapStar Common Stock over the related periods, this
analysis resulted in an implied exchange ratio of 0.7982 to 0.9442, as
compared to the AGH Exchange Ratio of 0.8475.
Net Asset Valuation Analysis
Salomon Smith Barney performed separate net asset valuation analyses of each
of AGH Owned Hotels and CapStar Owned Hotels, including hotels undergoing
repositioning (the "Repositioning Hotels") and hotels currently expected to be
sold, by subtracting outstanding debt from the gross estimated value of such
hotels, based on internal estimates of the managements of AGH and CapStar.
Gross estimated value for the AGH Owned Hotels and CapStar Owned Hotels was
estimated by capitalizing estimated calendar 1998 net operating income ("NOI")
after reserves for recurring capital expenditures. Gross estimated value for
the Repositioning Hotels was estimated by capitalizing estimated calendar 1999
NOI after reserves for recurring capital expenditures. Capitalization rates
were applied based on each hotel's market and ranged from 9.25% to 12.75% in
the case of the AGH Owned Hotels and 9.00% to 11.00% in the case of the
CapStar Owned Hotels. This analysis indicated an implied exchange ratio of
0.8027 to 0.9626, as compared to the AGH Exchange Ratio of 0.8475.
Other Factors and Comparative Analyses
In rendering its opinion, Salomon Smith Barney considered certain other
factors and conducted certain other comparative analyses, including, among
other things, a review of (i) the historical and projected financial results
of AGH and CapStar, (ii) the history of trading prices and volume of AGH
Common Stock and CapStar Common Stock and the relationship of movements of
such Common Stock and movements of the common stock of various lodging REIT
companies and C corporation companies and (iii) the relationship of movements
of AGH Common Stock, movements of the common stock of various paired share and
other hotel REIT companies and movements in the REIT Index.
Miscellaneous
Pursuant to the terms of Salomon Smith Barney's engagement, AGH has agreed
to pay Salomon Smith Barney for its services in connection with the Merger an
aggregate financial advisory fee of $5.0 million. AGH has also agreed to
indemnify Salomon Smith Barney and related persons against certain
liabilities, including liabilities under the federal securities laws, arising
out of Salomon Smith Barney's engagement.
Salomon Smith Barney has advised AGH that, in the ordinary course of
business, Salomon Smith Barney and its affiliates may actively trade or hold
the securities of AGH and CapStar for their own account or for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities. Salomon Smith Barney has in the past provided investment
banking services to AGH and CapStar unrelated to the Merger, for which
services Salomon Smith Barney has received and will receive compensation. In
addition, Salomon Smith Barney and its affiliates (including Travelers Group
Inc. and its affiliates) may maintain relationships with AGH, CapStar and
their respective affiliates.
Salomon Smith Barney is an internationally recognized investment banking
firm and was selected by AGH based on its experience, expertise and
familiarity with AGH and its business. Salomon Smith Barney regularly engages
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
OPINION OF FINANCIAL ADVISORS TO CAPSTAR
GOLDMAN, SACHS & CO.
At the March 15, 1998 meeting of the CapStar Board, Goldman Sachs rendered
its oral opinion, which was subsequently confirmed by a written opinion dated
the same date, that as of such date, and based upon and subject to various
qualifications and assumptions described therein, the CapStar Exchange Ratio
pursuant to the Merger Agreement is fair, from a financial point of view, to
the holders of CapStar Common Stock.
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THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED MARCH 15, 1998,
WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND MATTERS
CONSIDERED IN, AND THE LIMITATIONS ON, THE REVIEW UNDERTAKEN IN CONNECTION
WITH SUCH OPINION, IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS
ANNEX D AND IS INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE OPINION
SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION. GOLDMAN SACHS' OPINION WAS DIRECTED TO THE CAPSTAR BOARD IN
CONNECTION WITH, AND FOR THE PURPOSES OF, ITS EVALUATION OF THE MERGER AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF CAPSTAR AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER.
In connection with its opinion, Goldman Sachs reviewed among other things,
the Merger Agreement and the form of Intercompany Agreement; CapStar's
Registration Statements as amended and supplemented by CapStar since the
initial public offering of CapStar Common Stock and AGH's Registration
Statements as amended and supplemented by AGH since the initial public
offering of AGH Common Stock; Annual Reports to Stockholders and Annual
Reports on Form 10-K of CapStar for the two years ended December 31, 1997 and
Annual Reports to Stockholders and Annual Reports on Form 10-K of AGH for the
year ended December 31, 1996 and a draft Annual Report on Form 10-K of AGH for
the year ended December 31, 1997; certain interim reports to stockholders and
Quarterly Reports on Form 10-Q of CapStar and AGH; certain other
communications from CapStar and AGH to their respective stockholders; certain
internal financial analyses and forecasts for CapStar and AGH prepared by
their respective managements and certain pro forma financial information and
forecasts for MeriStar prepared by CapStar and reviewed by AGH, which
financial information and forecasts take into account the effects of the
Transactions. Goldman Sachs also held discussions with members of the senior
management of CapStar and AGH regarding the past and current business
operations, financial condition and future prospects of their respective
companies, both individually and on a combined pro forma basis after giving
effect to the Transactions and the strategic rationale for, and the potential
benefits of, the Transactions. The financial prospects discussed included
future potential acquisitions and synergies in operations and costs of
financing. In addition, Goldman Sachs reviewed the reported price and trading
activity for CapStar Common Stock and AGH Common Stock, compared certain
financial and stock market information for CapStar and AGH with similar
information for certain other companies the securities of which are publicly
traded, reviewed the financial terms of certain recent business combinations
in the lodging industry specifically and in other industries generally and
performed such other studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed such accuracy
and completeness for purposes of rendering its opinion. With respect to the
financial forecasts furnished by CapStar and AGH, Goldman Sachs assumed, with
CapStar's consent, that they have been reasonably prepared and reflected the
best currently available estimates and judgment of CapStar's and AGH's
management as to the expected future financial performance of CapStar and AGH,
as the case may be, both individually and, in the case of MeriStar, on a pro
forma basis after giving effect to the Transactions. Goldman Sachs assumed,
with CapStar's consent, that the Transactions will comply with any applicable
laws, including, without limitation, laws relating to the payment of
dividends, bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer or other similar laws now or hereafter in effect affecting
creditors' rights generally. In addition, Goldman Sachs did not make an
independent evaluation or appraisal of the assets and liabilities of CapStar
or AGH or any of their subsidiaries and Goldman Sachs was not furnished with
any such evaluation or appraisal. Goldman Sachs' opinion was necessarily based
upon financial, economic, market and other conditions as they existed and
could be evaluated on the date of its opinion. Goldman Sachs noted that its
opinion did not address, and it was not opining upon, the prices at which
shares of Surviving Corporation Common Stock and shares of OpCo Common Stock
will trade following the consummation of the Transactions, nor upon any of the
Transactions contemplated by the Merger Agreement and the related agreements,
other than the fairness, from a financial point of view, of the CapStar
Exchange Ratio to the holders of CapStar Common Stock. Goldman Sachs noted
that the distribution of OpCo's Common Stock to holders of CapStar Common
Stock in connection with the Spin-Off will be effected on a pro rata basis.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings,
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competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Goldman Sachs is familiar with CapStar, having provided certain
investment banking services to CapStar from time to time, including having
acted as (i) a co-managing underwriter of the initial public offering of
CapStar Common Stock on August 20, 1996, (ii) a co-managing underwriter of a
public offering of CapStar Common Stock on March 12, 1997, (iii) a co-managing
underwriter of a public offering of CapStar's 4.75% Convertible Subordinated
Notes due 2004 and CapStar Common Stock on October 9, 1997, and (iv) having
acted as CapStar's financial advisor in connection with, and having
participated in certain of the negotiations leading to, the Merger Agreement.
In addition, Goldman Sachs is a full service securities firm and in the
ordinary course of its trading activities it may from time to time effect
transactions, for its own account or the account of customers, and hold
positions in securities or options on securities of CapStar and AGH.
For information concerning Goldman Sachs' fee arrangement with CapStar, see
"--The CapStar Financial Advisors Fee Arrangement."
LEHMAN BROTHERS INC.
On March 15, 1998, Lehman Brothers rendered its oral opinion, which was
subsequently confirmed in a written opinion, dated March 16, 1998, that as of
such date, and based upon and subject to various qualifications and
assumptions described therein, the CapStar Exchange Ratio and shares of OpCo
to be offered to holders of CapStar Common Stock pursuant to the Spin-Off,
taken together, is fair, from a financial point of view, to such shareholders.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS, DATED MARCH 16,
1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND MATTERS
CONSIDERED IN, AND THE LIMITATIONS ON, THE REVIEW UNDERTAKEN IN CONNECTION
WITH SUCH OPINION, IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS
ANNEX C AND IS INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE OPINION
SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION.
No limitations were imposed by CapStar on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. Lehman Brothers was not requested to and did not make any
recommendation to the CapStar Board as to the form or amount of consideration
to be received by CapStar stockholders in the Merger and the Spin-Off, which
was determined through arm's-length negotiations between CapStar and AGH and
their legal and financial advisors. In arriving at its opinion, Lehman
Brothers did not ascribe a range of values to CapStar and OpCo, but rather
made its determination as to the fairness, from a financial point of view, of
the consideration to be offered to CapStar stockholders in the Merger and the
Spin-Off (the "Proposed Transaction") on the basis of the financial and
comparative analyses described below. Lehman Brothers' opinion is for the use
and benefit of the CapStar Board in connection with its consideration of the
Proposed Transaction and does not constitute a recommendation to any
stockholder of CapStar as to how such stockholder should vote with respect to
the Proposed Transaction. Lehman Brothers was not requested to opine as to,
and its opinion does not in any manner address, CapStar's underlying business
decision to proceed with or effect the Proposed Transaction.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (i) the
Merger Agreement and the specific terms of the Proposed Transaction, including
with respect to the corporate governance and management of MeriStar; (ii)
publicly available information concerning CapStar and AGH that Lehman Brothers
believed to be relevant to its analysis; (iii) financial and operating
information with respect to the business, operations, properties and prospects
of CapStar, OpCo and AGH furnished to Lehman Brothers by CapStar and AGH; (iv)
a trading history of CapStar's Common Stock from September 1996 to present,
and a comparison of that trading history with those of other companies that
Lehman Brothers deemed relevant; (v) a trading history of AGH's common stock
from September 1996 to present, and a comparison of that trading history with
those of other companies that Lehman Brothers deemed relevant; (vi) a
comparison of the historical financial results and present financial
conditions of CapStar and OpCo with those of other companies that Lehman
Brothers deemed relevant; (vii) a comparison of the historical financial
results and present financial condition of AGH with those of other
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companies that Lehman Brothers deemed relevant; (viii) a comparison of the
financial terms of the Proposed Transaction with the financial terms of
certain other completed transactions that Lehman Brothers deemed relevant and
with strategic alternatives available to CapStar on a stand alone basis; (ix)
the relative contributions of CapStar and AGH, on a pro forma basis, to the
historical and projected funds from operations and cash flow of MeriStar; and
(x) the potential pro forma impact of the Proposed Transaction on MeriStar,
including the cost savings, operating synergies and strategic benefits
expected by management of CapStar to result from a combination of the
applicable businesses. In addition, Lehman Brothers had discussions with the
management of CapStar concerning the businesses, operations, assets, financial
conditions and prospects of CapStar and OpCo and with the management of AGH
concerning its business, operations, assets, financial condition and
prospects, both individually and on a combined pro forma basis after giving
effect to the transactions contemplated by the Merger Agreement, and undertook
such other studies, analyses and investigations as Lehman Brothers deemed
appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the management of
CapStar and AGH that they were not aware of any facts or circumstances that
would make such information inaccurate or misleading. With respect to the
financial projections of CapStar, OpCo, AGH and MeriStar, upon advice of
CapStar and AGH, Lehman Brothers assumed that such projections have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the managements of CapStar and AGH, as the case may
be, as to the future financial performance of CapStar, OpCo, AGH and MeriStar,
and that CapStar and AGH would perform, and OpCo and MeriStar will perform,
substantially in accordance with such projections. In arriving at its opinion,
Lehman Brothers conducted only a limited physical inspection of certain of the
properties of CapStar and AGH and did not make or obtain any evaluations or
appraisals of the assets or liabilities of CapStar or AGH. Upon advice of
CapStar and its legal and accounting advisors, Lehman Brothers assumed that
the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code, and therefore as a tax-free transaction to the
shareholders of CapStar. Lehman Brothers assumed, with CapStar's consent, that
the transactions contemplated by the Merger Agreement will comply with
applicable laws, including, without limitation, laws relating to the payment
of dividends, bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer or other similar laws now or hereafter in effect affecting
creditors' rights generally. Lehman Brothers' opinion necessarily is based
upon market, economic and other conditions as they existed on, and could be
evaluated as of, the date of its opinion.
In addition, Lehman Brothers expressed no opinion as to the prices at which
shares of common stock of MeriStar or OpCo actually will trade following the
consummation of the Merger and the Spin-Off. Lehman Brothers noted that the
process by which securities trading markets establish a market price for any
security is complex, involving the interaction of numerous factors, and market
prices will fluctuate with changes in, among other things, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, Lehman Brothers noted
that trading in shares of OpCo will likely be characterized by a period of
redistribution among holders of CapStar Common Stock who receive such shares
in the Spin-off (especially in light of the taxable nature of the Spin-off)
which may temporarily depress the market price of such shares during such
period. Accordingly, Lehman Brothers' opinion should not be viewed as
providing any assurance that the combined market value of the shares of common
stock of MeriStar and the shares of common stock of OpCo to be received by
holders of CapStar Common Stock pursuant to the Proposed Transaction will be
in excess of the current market value of the shares of CapStar Common Stock
owned by such shareholder at any time prior to announcement or consummation of
the Proposed Transaction.
Lehman Brothers is an internationally recognized investment banking firm.
Lehman Brothers, as a part of its investment banking business, is continuously
engaged in the valuation of business and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The CapStar Board retained Lehman
Brothers based upon Lehman Brothers' experience and expertise and its
familiarity with CapStar. Lehman Brothers has performed various investment
banking services for CapStar, has acted as lender
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to CapStar in the past and has received customary fees for such services. In
the ordinary course of its business, Lehman Brothers actively trades in the
securities of CapStar and AGH for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
For information concerning Lehman Brothers' fee arrangement with CapStar,
see "--The CapStar Financial Advisers Fee Arrangement."
CapStar Financial Advisors Board Presentation
The following is a summary of certain financial analysis presented to the
CapStar Board by Goldman Sachs and Lehman Brothers (the "CapStar Financial
Advisors") on March 15, 1998 in connection with their respective opinions and
does not purport to be a complete description of the analyses performed by
Goldman Sachs and Lehman Brothers respectively.
Pro Forma Merger Analysis
The CapStar Financial Advisors performed an accretion and dilution analysis
to shareholders of CapStar under a "stand-alone" basis and "merged REIT" basis
using certain projections provided by CapStar management, in each case on a
primary shares basis and a fully-diluted shares basis (which assumed the
conversion of CapStar's $172.5 million 4.75% Convertible Notes due 2004). The
analysis performed under the "stand-alone" basis assumed that CapStar would
not merge with AGH but would instead operate as a separate company under a
REIT structure, whereas the analysis performed under the "merged REIT" basis
assumed the merger of CapStar and AGH pursuant to the Merger Agreement. In
evaluating the estimated funds from operations ("FFO") of the combined
company, the CapStar Financial Advisors utilized certain projections provided
by CapStar and AGH management which projections, among other things, combined
the operating results of CapStar and AGH. The analysis indicated that the
"merged REIT" basis, when compared to the stand-alone basis, would be
accretive to CapStar's FFO per share on both a primary shares basis and fully
diluted shares basis in both 1998 and 1999.
Contribution Analysis
The CapStar Financial Advisors analyzed the respective contributions of
EBITDA, FFO, equity market capitalization and total market capitalization by
CapStar and AGH to MeriStar on a pro forma basis before taking into account
any of the possible benefits that may be realized following the Merger. The
review was based on CapStar's and AGH's current operating characteristics and
existing hotels portfolios as if all their respective hotels had been owned as
of January 1, 1998 and assumed that no future acquisitions would be made. In
addition, CapStar's projected EBITDA and FFO were derived assuming that OpCo
had been spun-off, and that in calculating equity market capitalization, it
was assumed that OpCo was a spun-off entity in a "paper-clip" REIT structure.
The analysis showed that: (i) CapStar would contribute 54.3% of MeriStar's
1998 EBITDA and that AGH would contribute 45.7%, resulting in an implied AGH
Exchange Ratio of 0.8433; (ii) CapStar would contribute 54.1% of MeriStar's
1999 EBITDA and that AGH would contribute 45.9%, resulting an implied AGH
Exchange Ratio of 0.8492; (iii) CapStar would contribute 53.4% of MeriStar's
1998 FFO and that AGH would contribute 46.6%, resulting in an implied AGH
Exchange Ratio of 0.8721; (iv) CapStar would contribute 53.6% of MeriStar's
1999 FFO and that AGH would contribute 46.4%, resulting in an implied AGH
Exchange Ratio of 0.8641; (v) CapStar would contribute 51.5% of MeriStar's
equity market capitalization (as of March 13, 1998) and that AGH would
contribute 48.5%, resulting in an implied AGH Exchange Ratio of 0.9409; and
(vi) CapStar would contribute 54.8% of MeriStar's total market capitalization
(which was calculated with net debt as of February, 1998) as of March 13, 1998
and that AGH would contribute 45.2%, resulting in an implied AGH Exchange
Ratio of 0.8244.
AGH Exchange Ratio Analysis
The CapStar Financial Advisors analyzed the hypothetical value to be
received by AGH shareholders for the following periods (the "Designated
Periods"): March 13, 1998 and the average for the periods preceding
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March 13, 1998 by 30 days, 90 days, 180 days and 360 days. The analysis was
based on applying the AGH Exchange Ratio to the implied per share price of
MeriStar (which was calculated by subtracting the value of OpCo, which in turn
was calculated net of projected tax liability from the implied per share price
of CapStar and based on the midpoint of the EBITDA multiple range set forth
below in OpCo Sensitivity Analysis) for the Designated Periods. The review
showed that the net value per share to AGH shareholders had a range of $28.13
to $25.20 for the Designated Periods, resulting in a premium to AGH
shareholders of 4.4% to (6.4)%. Based on management run-rate estimates of AGH
1998 EBITDA and 1999 EBITDA, the CapStar Financial Advisors calculated that
the implied purchase price to 1998 EBITDA multiple would range from 9.6x to
8.9x and that the implied purchase price to 1999 EBITDA multiple would range
from 8.4x to 7.9x, in each case for the Designated Periods. Using management
run-rate estimates of AGH 1998 EBITDA, the CapStar Financial Advisors
calculated that the implied purchase price to 1998 FFO multiple would range
from 8.4x to 7.5x for the Designated Periods, compared to 9.8x to 8.8x based
on First Call estimates. Based on management run-rate estimates of AGH 1999,
the CapStar Financial Advisors calculated that the implied purchase price to
1999 FFO multiple would range from 7.1x to 6.4x for the Designated Periods, as
compared to 8.5x to 7.7x based on First Call estimates. First Call is an on-
line data service which monitors and publishes a compilation of earnings
estimates produced by selected research analysts on certain public companies.
Merged REIT Sensitivity Analysis
Using projections provided by CapStar and AGH management, the CapStar
Financial Advisors analyzed the theoretical value per share to CapStar
shareholders of the value to be received by such shareholders on a "merged
REIT" basis using: (i) 1998 FFO multiples of 9.0x to 11.0x for MeriStar
(following the Spin-Off of OpCo) and 1999 EBITDA multiples from 7.0x to 11.0x
for OpCo (the estimated value of OpCo was not adjusted for shareholders' tax
liability associated with the Spin-Off); and (ii) 1999 FFO multiples of 8.0x
to 10.0x for MeriStar and 1999 EBITDA multiples from 7.0x to 11.0x for OpCo.
The analysis indicated the per share value to be received by CapStar
shareholders on a "merged REIT" basis would range from approximately $36.00 to
$46.00 for 1998 and from approximately $37.75 to $49.00 for 1999. The CapStar
Financial Advisors make no assurance or representation that shares of MeriStar
Common Stock will trade within such ranges subsequent to the Effective Time.
CapStar Stand-Alone Sensitivity Analysis
Using projections provided by CapStar and AGH management, the CapStar
Financial Advisors analyzed the theoretical value per share to CapStar
shareholders of the value to be received by such shareholders on a "stand-
alone" basis using: (i) 1998 FFO multiples of 9.0x to 11.0x for CapStar on a
"stand-alone" basis (following the Spin-Off of OpCo) and OpCo 1998 EBITDA
multiples from 7.0x to 11.0x (the value of OpCo was not adjusted for
shareholders' tax liability associated with the Spin-Off); and (ii) 1999 FFO
multiples of CapStar on a "stand-alone" basis with a range from 8.0x to 10.0x
and OpCo 1999 EBITDA of 7.0x to 11.0x. The analysis indicated the per share
value to be received by CapStar shareholders on a "stand-alone" basis would
range from approximately $33.50 to $42.25 for 1998 and from approximately
$33.75 to $43.25 for 1999.
OpCo Sensitivity Analysis
Using CapStar management projections for 1998 EBITDA and pro forma average
net debt of OpCo outstanding in 1998, the CapStar Financial Advisors analyzed
the theoretical value per share to CapStar shareholders of OpCo on both a
"stand-alone" basis and "merged REIT" basis based on 1998 EBITDA multiples
ranging from 7.0x to 11.0x. The analysis indicated that on a "stand-alone"
basis, the per share price of OpCo would range from approximately $1.75 to
$3.50, compared to from approximately $2.25 to $5.00 on a "merged REIT" basis.
The CapStar Financial Advisors make no assurance or representation that shares
of OpCo Common Stock will trade within such range subsequent to the Effective
Time.
Selected Transaction Analysis
The CapStar Financial Advisors reviewed certain publicly available
information relating to certain pending and consummated business combinations
in the lodging industry since 1996 (the "Comparable Transactions").
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For each Comparable Transaction, the CapStar Financial Advisors reviewed,
among other things, the total transaction value as multiple of forward EBITDA
and forward FFO and the premium over the stock price one month prior to
announcement. Because the market conditions, rationale and circumstances
surrounding each of the transactions analyzed were specific to each
transaction and because of the inherent differences between the businesses,
operations and prospects of CapStar and the acquired businesses analyzed, the
CapStar Financial Advisors believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis,
and accordingly, also made qualitative judgments concerning differences
between the characteristics of these transactions and the Merger that would
affect the acquisition values of CapStar and such acquired companies.
The analysis indicated that, for the Comparable Transactions: (i) the
forward EBITDA multiples had a range of 7.6x to 11.3x, compared to a multiple
of 9.6x AGH's 1998 management run-rate estimated EBITDA; (ii) the forward FFO
multiples had a range of 6.9x to 10.0x, compared to a multiple of 8.4x AGH's
1998 management run-rate estimated FFO; and (iii) a discount over the average
stock price one month prior to announcement of 0.4% to a premium of 35.7%,
compared to a discount of 1.8% to the AGH one month average stock price.
Comparable Company Analysis
The CapStar Financial Advisors reviewed and compared certain financial
information, ratios and public market multiples relating to CapStar and AGH to
corresponding financial information, ratios and public market multiples for
selected publicly traded companies in the hotel and lodging industry. The
selected companies with respect to the hotel ownership aspect of the analysis
were Bristol Hotel Company, Prime Hospitality Corp., Starwood Hotels and
Resorts Worldwide, Inc., Patriot American Hospitality, Inc., FelCor Suite
Hotels, Inc., Boykin Lodging and Sunstone Hotel Investors, Inc. (collectively,
the "Selected Hotel Owner Companies"). The selected companies with respect to
the operating aspect of the analysis were Promus Hotel Corporation, Choice
Hotels International, Marriott International, Insignia Financial Group, CB
Commercial, Grubb & Ellis and Trammell Crow (collectively, the "Selected
Operating Companies," together with the Selected Hotel Owner Companies, the
"Selected Companies"). The Selected Hotel Owner Companies and the Selected
Operating Companies were chosen because they are publicly-traded companies
with operations that, for the purpose of the CapStar Financial Advisor's
analysis, are similar to those aspects of CapStar and AGH to which they were
compared. For the comparable company analysis, the estimates for CapStar, AGH
and the Selected Companies were based on research published by selected
investment banking firms and market valuations as of March 13, 1998. Because
of the lack of a sufficient number of independent comparable companies and the
inherent difference between the businesses, operations and prospects of
CapStar and AGH and the businesses, operations and prospects of the companies
included as Selected Companies, the CapStar Financial Advisors believed that a
purely quantitative comparable CapStar analysis would not be particularly
meaningful in the context of the Merger. The CapStar Financial Advisors
believe that an appropriate use of a comparable CapStar analysis in this
instance would involve qualitative judgments concerning differences between
the financial and operating characteristics of CapStar and AGH and the
companies included as Selected Companies that would affect the public trading
values of CapStar and such comparable companies.
With respect to the Selected Hotel Owner Companies, the CapStar Financial
Advisors considered: (i) 1998 and 1999 EBITDA multiples (based on March 13,
1998 closing share prices and research analysts' EBITDA estimates) that ranged
from 6.1x to 12.1x for 1998 and 4.4x to 10.3x for 1999; (ii) 1998 and 1999 FFO
multiples that ranged from 8.5x to 10.7x for 1998 and 7.8x to 8.9x for 1999;
and (iii) net debt to total market capitalization ratios that ranged from
14.6% to 45.8%. For CapStar, the CapStar Financial Advisors observed that: (i)
1998 and 1999 EBITDA multiples were 9.6x and 8.2x, respectively; (ii) 1998 and
1999 FFO multiples were 9.3x and 7.8x, respectively, and (iii) the 1998 net
debt to total market capitalization ration was 27.0%. For AGH, the CapStar
Financial Advisors observed that: (i) 1998 and 1999 EBITDA multiples were
10.2x and 9.1x, respectively; (ii) 1998 and 1999 FFO multiples were 9.4x and
8.2x, respectively; and (iii) the average 1998 net debt to total market
capitalization ratio was 36.9%.
With respect to the Selected Operating Companies, the CapStar Financial
Advisors considered: (i) 1998 and 1999 EBITDA multiples that ranged from 6.9x
to 13.1x for 1998 and 9.8x to 10.5x for 1999; and (ii) 1998 and
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1999 earnings per share multiples that ranged from 10.0x to 26.9x for 1998 and
8.6x to 23.3x for 1999. For purposes of their analysis the CapStar Financial
Advisors utilized a range of 1998 EBITDA multiples for OpCo of 7.0x to 11.0x.
Net Asset Value Analysis
The CapStar Financial Advisors performed a theoretical net asset value
analysis, based upon the product of management's estimates of 1998 EBITDA and
a real estate valuation multiple of approximately 9.0x 1998 EBITDA and current
debt levels, of: (i) CapStar as currently constituted as a subchapter C
corporation; and (ii) AGH, as compared to CapStar's and AGH's current equity
market capitalization per share, 30-day average share price, 60-day average
share price, 180-day average share price and 360-day average share price. The
analysis indicates that CapStar has traded at a range during the various
periods reviewed from a discount of 2.8% to net asset value to a premium of
7.6% of net asset value. The analysis indicates that AGH has traded during the
various periods reviewed at a range of premium of 5.1% to 8.5%.
Exchange Ratio Analysis
The CapStar Financial Advisors compared the AGH Exchange Ratio of 0.8475 to
the ratio of AGH's and CapStar's share prices over various historical periods
(the "Historical Ratios"), as well as the ratio adjusted to reflect a
management's estimate of a theoretical value for OpCo of approximately $2.50
per share (the "Adjusted Ratios"). The CapStar Financial Advisors observed
that the Historical Ratios ranged from 0.7456 to 0.8923 and the Adjusted
Ratios ranged from 0.8032 to 0.9813.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying the opinions of the CapStar Financial Advisors. In arriving at
their fairness opinions, the CapStar Financial Advisors considered the results
of all such analyses and did not attribute any particular weight to any
analysis or factor considered by them; rather the CapStar Financial Advisors
made their determination as to fairness on the basis of their experience and
professional judgment, after considering the results of all such analyses. No
company or transaction used in the above analyses as a comparison is identical
to CapStar, AGH, OpCo or MeriStar. The analyses were prepared solely for the
purpose of the CapStar Financial Advisors providing their opinions to the
CapStar Board and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. Analyses based
upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or their respective advisors, none of CapStar, AGH and the CapStar
Financial Advisors or any other person assumes responsibility if future
results are materially different from those forecasted. As described above,
the CapStar Financial Advisors' opinions to the CapStar Board were one of many
factors taken into consideration by the CapStar Board in making its
determination to approve the Merger Agreement.
The CapStar Financial Advisors Fee Arrangement
Pursuant to engagement letters between Goldman Sachs and CapStar and Lehman
Brothers and CapStar, each of the CapStar Financial Advisors is entitled to a
fee of $625,000 upon execution of the Merger Agreement. Upon consummation of
the Merger, each of the CapStar Financial Advisors will be entitled to a fee
of $2.75 million and the prior payment of $625,000 will be credited toward
such fee. In addition, under certain circumstances, each of the CapStar
Financial Advisors will be entitled to 5% of any termination fees paid to
CapStar. CapStar has agreed to reimburse the CapStar Financial Advisors for
their reasonable expenses in connection with their engagement and to indemnify
the CapStar Financial Advisors against certain liabilities, including certain
liabilities under federal securities laws.
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FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CAPSTAR COMMON STOCK
In the opinion of special tax counsel, the following describes the federal
income tax considerations likely to be material to holders of CapStar Common
Stock that are expected to result from the Merger. However, this discussion
does not address all aspects of taxation that may be relevant to particular
stockholders in light of their personal investment or tax circumstance or to
certain types of stockholders (including insurance companies, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws, nor does it give a detailed discussion of any
state, local or foreign tax considerations. Accordingly, CAPSTAR STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
This discussion is based on the Code, applicable Department of Treasury
regulations ("Treasury Regulations"), judicial authority and administrative
rulings and practice, all as of the date of this Joint Proxy
Statement/Prospectus. There can be no assurance that future legislative,
judicial or administrative changes or interpretations will not adversely
affect the accuracy of the statements and conclusions set forth herein. Any
such changes or interpretations could be applied retroactively and could
affect the tax consequences of the Merger to CapStar's stockholders.
The Merger has been structured to qualify as a reorganization within the
meaning of Section 368(a) of the Code. It is expected that Paul, Weiss,
Rifkind, Wharton & Garrison, counsel to CapStar, will issue an opinion at the
closing of the Merger to such effect. Such opinion will be based upon the
understanding that the relevant facts are as described in the Joint Proxy
Statement/Prospectus and exhibits and appendices hereto, and in rendering such
opinion such counsel will rely on the accuracy of the factual statements and
representations in the foregoing documents and upon certain representations
made in writing to such counsel. The obligation of CapStar to consummate the
Merger is conditioned upon the receipt of such opinion. An opinion of counsel
is not binding on the Internal Revenue Service (the "IRS") or the courts.
CapStar has not requested and will not request an advance ruling from the IRS.
Assuming the Merger so qualifies as a reorganization, the material federal
income tax consequences of the Merger will be as follows:
(i) The exchange in the Merger of CapStar Common Stock for MeriStar
Common Stock will not result in the recognition of gain or loss to CapStar
stockholders with respect to such exchange, except as described in (ii)
below and except to the extent that the receipt of the stock of OpCo in the
Spin-Off is treated as "boot" received in the Merger. See "The Spin-Off--
Federal Income Tax Consequences to Holders of CapStar Common Stock".
(ii) Each stockholder of CapStar who receives cash proceeds in lieu of
fractional interests in shares of MeriStar Common Stock will recognize gain
or loss equal to the difference between such proceeds and the tax basis
allocated to such stockholder's fractional share interests. Such gain or
loss generally will constitute capital gain or loss if such stockholder's
shares of CapStar Common Stock were held as a capital asset at the
Effective Time.
(iii) The tax basis of the shares of MeriStar Common Stock (including
fractional share interests for which cash is ultimately received) received
by a CapStar stockholder in the Merger will be equal to the tax basis of
the shares of CapStar Common Stock exchanged therefor, decreased by the
amount of cash and the fair market value of any other "boot" received by
such stockholder and increased by the amount of gain (if any) recognized by
such stockholder in the Merger.
(iv) A stockholder's holding period with respect to the MeriStar Common
Stock received in the Merger will include the holding period of the CapStar
Common Stock exchanged in the Merger if such CapStar Common Stock was held
as a capital asset at the Effective Time.
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(v) No gain or loss will be recognized by AGH or CapStar as a result of
the Merger, except to the extent that the distribution of stock of OpCo in
the Spin-Off is treated as "boot" distributed in the Merger. See "The Spin-
Off--Federal Income Tax Consequences to Holders of CapStar Common Stock."
Even if the Merger qualifies as a reorganization with the meaning of Section
368(a) of the Code, a recipient of shares of MeriStar Common Stock would
recognize gain to the extent that such shares were considered to be received
in exchange for services or property (other than solely in exchange for shares
of CapStar Common Stock). Gain also will have to be recognized to the extent
that a holder of CapStar Common Stock is treated as receiving (directly or
indirectly) consideration other than MeriStar Common Stock in exchange for
such stockholder's CapStar Common Stock. See "The Spin-Off--Federal Income Tax
Consequences to Holders of CapStar Common Stock."
If the Merger does not qualify as a reorganization within the meaning of
Section 368(a) of the Code, then each holder of CapStar Common Stock will
recognize gain or loss with respect to each share of CapStar Common Stock
equal to the difference between the stockholder's basis in such share and the
fair market value, as of the Effective Time, of the MeriStar Common Stock
received in exchange therefor. In such event, a CapStar stockholder's
aggregate basis in any MeriStar Common Stock received will equal its fair
market value, and the stockholder's holding period for such stock will begin
the day after the Merger.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF AGH COMMON STOCK
In the opinion of special tax counsel, the following describes the federal
income tax considerations likely to be material to holders of AGH Common Stock
that are expected to result from the conversion of each share of AGH Common
Stock into 0.8475 shares of MeriStar Common Stock in connection with the
Merger. However, this discussion does not address all aspects of taxation that
may be relevant to particular stockholders in light of their personal
investment or tax circumstance or to certain types of stockholders (including
insurance companies, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws, nor
does it give a detailed discussion of any state, local or foreign tax
considerations. Accordingly, AGH STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE CONVERSION, INCLUDING
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
This discussion is based on the Code, applicable Treasury Regulations,
judicial authority and administrative rulings and practice, all as of the date
of this Joint Proxy Statement/Prospectus. There can be no assurance that
future legislative, judicial or administrative changes or interpretations will
not adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could affect the tax consequences of the conversion to AGH's stockholders.
The conversion of each share of AGH Common Stock into 0.8475 shares of
MeriStar Common Stock will be a tax-free transaction to the holders of AGH
Common Stock. Each holder of AGH Common Stock who receives cash proceeds in
lieu of fractional interests in shares of MeriStar Common Stock will recognize
gain or loss equal to the difference between such proceeds and the tax basis
allocated to such stockholder's fractional share interests. Such gain or loss
generally will constitute capital gain or loss if such stockholder's shares of
AGH Common Stock were held as a capital asset at the time of the conversion.
The tax basis of the shares of MeriStar Common Stock (including fractional
share interests for which cash is ultimately received) received by an AGH
stockholder in the conversion will be equal to the tax basis of the shares of
AGH Common Stock exchanged therefor, decreased by the amount of cash received
by such stockholder. A stockholder's holding period with respect to the
MeriStar Common Stock received in the conversion will include the holding
period of the AGH Common Stock exchanged in the conversion if such AGH Common
Stock was held as a capital asset at the time of the conversion. No gain or
loss will be recognized by AGH or MeriStar as a result of the conversion.
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FEDERAL INCOME TAX CONSIDERATIONS RELATING TO MERISTAR
The following is a summary of material federal income tax matters relating
to the operations of MeriStar following the Merger that may be relevant to
prospective stockholders of MeriStar, is based upon current law and is not tax
advice. This discussion does not address all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or
tax circumstances, or to certain types of stockholders (including, without
limitation, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws, nor does it give a detailed discussion of any
state, local or foreign tax considerations. In the opinion of Special Tax
Counsel, the following discussion accurately reflects the federal income tax
considerations relating to the operations of MeriStar following the Merger
that are likely to be material to a stockholder of MeriStar. See "Federal
Income Tax Consequences to Holders of CapStar Common Stock" and "Federal
Income Tax Consequences to Holders of AGH Common Stock" for a discussion of
certain tax consequences of the Merger to the holders of CapStar Common Stock
and AGH Common Stock and "The Spin-Off--Federal Income Tax Consequences to
holders of CapStar Common Stock" for a discussion of certain tax consequences
of the Spin-Off to CapStar and to the holders of CapStar Common Stock.
EACH PROSPECTIVE STOCKHOLDER OF MERISTAR IS ENCOURAGED TO CONSULT ITS OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE,
OWNERSHIP AND SALE OF SHARES OF COMMON STOCK OF MERISTAR AND OF MERISTAR'S
ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND
OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
General
AGH made an election to be taxed as a REIT for federal income tax purposes
commencing with its taxable year ended December 31, 1996. AGH believes it is
organized and operated in such a manner as to qualify for taxation as a REIT
under the Code. MeriStar intends to continue to operate in such a manner and,
as a result of the Merger, the assets and income of CapStar, other than those
transferred to OpCo in connection with the Spin-Off, will be subject to the
REIT rules described below. However, no assurance can be given that MeriStar
will operate in a manner so as to qualify or remain qualified.
The requirements relating to the federal income tax treatment of REITs and
their stockholders are highly technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
qualified in its entirety by the applicable Code provisions, rules and
Treasury Regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Opinion of Special Tax Counsel
In the opinion of special tax counsel commencing with the taxable year
ending December 31, 1998, AGH is organized and has operated in conformity with
the requirements for qualification as a REIT within the meaning of the Code
and the proposed method of operation of MeriStar, including, without
limitation, the consummation of the Transactions, will enable MeriStar to
continue to meet the requirements for qualification and taxation as a REIT
under the Code. It must be emphasized that the opinion of Special Tax Counsel
is based on various assumptions and is conditioned upon certain
representations made by AGH and CapStar as to factual matters and upon an
opinion of counsel to AGH to be given in connection with the Merger. Such
factual assumptions and representations are set forth below. Moreover, for
periods beginning after December 31, 1997, such qualification and taxation as
a REIT depends upon the ability of AGH and MeriStar to meet, through actual
annual operating results, the distribution levels, diversity of stock
ownership, and the various other qualification tests imposed under the Code
that are discussed below, the results of which have not and will not be
reviewed by Special Tax Counsel. Accordingly, no assurance can be given that
the actual results of MeriStar's operations for any one taxable year will
satisfy such requirements.
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Taxation of MeriStar
A REIT generally is not subject to federal corporate income taxes on that
portion of its ordinary income or capital gain that is distributed currently
to stockholders because the REIT provisions of the Code generally allow a REIT
to deduct dividends paid to its stockholders. This deduction for dividends
paid to stockholders substantially eliminates the federal "double taxation" on
earnings (once at the corporate level and once again at the stockholder level)
that generally results from investment in a corporation.
However, REITs may be subject to federal income tax in the following
circumstances. First, a REIT will be taxed at regular corporate rates on any
undistributed REIT taxable income and undistributed net capital gains. Second,
under certain circumstances, a REIT may be subject to the "alternative minimum
tax" on its items of tax preference, if any. Third, if the REIT has (i) net
income from the sale or other disposition of "foreclosure property"
(generally, property acquired by reason of a default on a lease or an
indebtedness held by a REIT) that is held primarily for sale to customers in
the ordinary course of business or (ii) other non-qualifying net income from
foreclosure property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if the REIT has net income from a "prohibited
transaction" (generally, a sale or other disposition of property held
primarily for sale to customers in the ordinary course of business, other than
foreclosure property), such income will be subject to a 100% tax. Fifth, if
the REIT should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the REIT fails the 75% or 95% test, multiplied by a
fraction intended to reflect the REIT's profitability. Sixth, if the REIT
should fail to distribute with respect to each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the REIT will be subject to a four percent excise
tax on the excess of such required distribution over the amounts actually
distributed. Seventh, if a REIT acquires any asset from a C corporation (i.e.,
a corporation generally subject to a full corporate-level tax) in a
transaction in which the basis of the asset in the REIT's hands is determined
by reference to the basis of the asset (or any other property) in the hands of
the C corporation (a "carryover basis transaction"), and the REIT recognizes
gain on the disposition of such asset during the 10-year period beginning on
the date on which such asset was acquired by the REIT (the "Restriction
Period"), then pursuant to guidelines issued by the Internal Revenue Service
(the "IRS") in IRS Notice 88-19 (the "Built-in Gain Rules"), the excess of the
fair market value of such property at the beginning of the applicable
Restriction Period over the REIT's adjusted basis in such asset as of the
beginning of such Restriction Period (the "Built-in Gain") will be subject to
a tax at the highest regular corporate rate. Assuming that AGH and MeriStar
will make elections pursuant to the Built-in Gain Rules or applicable future
administrative rules or Treasury Regulations, the Built-in Gain Rules will
apply to the acquisition of assets from CapStar in the Merger. Certain
recently-proposed legislation, if enacted, would change the Built-in Gain
Rules. See "--Possible Federal Tax Developments".
Requirements for Qualification
To qualify as a REIT, a corporation must elect to be so treated and must
meet the requirements, discussed below, relating to its organization, sources
of income, nature of assets, and distributions of income to stockholders.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation but
for the REIT provisions of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
and (vi) during the last half of each taxable year not more than 50% in value
of the outstanding capital stock of which is owned, directly or indirectly
through the application of certain attribution rules, by five or fewer
individuals (as defined in the Code to include certain entities). In addition,
certain other tests, described below, regarding the nature of a REIT's
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income and assets, also must be satisfied. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and
that condition (v) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made to be taxed as a REIT.
For taxable years beginning after 1997, if a REIT complies with Treasury
Regulations that provide procedures for ascertaining the actual ownership of
shares of its stock for such taxable year and the REIT did not know (and with
the exercise of reasonable diligence could not have known) that it failed to
meet the requirement of condition (vi) above for such taxable year, the REIT
will be treated as having met the requirement of condition (vi) for such year.
AGH has satisfied and MeriStar intends to continue to satisfy the
requirements set forth in (i) through (iv) above and believe that they have
and will have sufficient diversity of share ownership to allow them to satisfy
conditions (v) and (vi) above. The AGH Charter includes certain restrictions
regarding transfers of shares of MeriStar Common Stock that are intended to
assist MeriStar in satisfying the share ownership requirements described in
(v) and (vi) above.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. MeriStar's taxable year is the calendar year.
MeriStar anticipates that it will have one or more "qualified REIT
subsidiaries." Section 856(i) of the Code provides that a corporation that is
a "qualified REIT subsidiary" will not be treated as a separate corporation,
and all assets, liabilities and items of income, deduction, and credit of a
"qualified REIT subsidiary" will be treated as assets, liabilities, and such
items (as the case may be) of the REIT. In applying the requirements described
herein, MeriStar's "qualified REIT subsidiaries" will be ignored, and all
assets and liabilities, and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities and items of MeriStar.
In the case of a REIT which is a partner in a partnership, the REIT will be
deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership will retain the same character in the hands of the REIT for
purposes of the REIT requirements, including satisfying the income and asset
tests described herein. Thus, MeriStar's proportionate share of the assets,
liabilities and items of income of the MeriStar Operating Partnership, and of
the partnerships in which MeriStar or the MeriStar Operating Partnership will
have an interest (the "Subsidiary Partnerships") will be treated as assets,
liabilities and items of income of MeriStar for purposes of applying the
requirements described herein, provided that the MeriStar Operating
Partnership and the Subsidiary Partnerships are treated as partnerships for
federal income tax purposes. See "--Income Taxation of the MeriStar Operating
Partnership, the Subsidiary Partnerships and Their Partners."
Income Tests
For MeriStar to maintain qualification as a REIT, there are two gross income
requirements that it must satisfy annually. First, at least 75% of its gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property,"
dividends from qualified REITs and, in certain circumstances, interest) or
from "qualified temporary investment income" (generally, income attributable
to the temporary investment of new capital received by the REIT). Second, at
least 95% of its gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments and from dividends, interest, and gain from the sale or
disposition of stock or securities or from any combination of the foregoing.
In addition, for taxable years of AGH prior to 1998, short-term gain from the
sale or other disposition of stock or securities, gain from prohibited
transactions, and gain on the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) must have represented less than 30% of AGH's gross
income (including gross income from prohibited transactions) for each taxable
year.
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Rents received by MeriStar, the MeriStar Operating Partnership and the
Subsidiary Partnerships will qualify as "rents from real property" only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, rents received from a tenant will
not qualify as "rents from real property" if the REIT, or an owner of ten
percent or more of the REIT, directly or constructively (through the
application of certain stock attribution rules modified, for taxable years
beginning after 1997, to attribute stock owned by partners to a partnership
only in the case of partners who own 25 percent or more of the capital or
profits interest in such partnership) owns ten percent or more of such tenant
(a "Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, for rents received to qualify as "rents from real property," the REIT
generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the REIT does not
derive any income; provided, however, that the REIT may directly perform
certain customary services (e.g., furnishing water, heat, light and air
conditioning and cleaning windows, public entrances and lobbies) other than
services which are considered rendered to the occupant of the property (e.g.,
renting parking spaces on a reserved basis to tenants).
Upon the consummation of the Merger, substantially all of the MeriStar Owned
Hotels will be leased to the OpCo Operating Partnership under the
Participating Leases. In order for the rents payable under the leases to
constitute "rents from real property", the leases must be respected as true
leases for federal income tax purposes and not treated as service contracts,
joint ventures or some other type of arrangement. The determination of whether
the leases are true leases depends on an analysis of all the surrounding facts
and circumstances. In making such a determination, courts have considered a
variety of factors, including the intent of the parties, the form of the
agreement, the degree of control over the property that is retained by the
property owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee is required simply to use its
best efforts to perform its obligations under the agreement) and the extent to
which the property owner retains the risk of loss with respect to the property
(e.g., whether the lessee bears the risk of increases in operating expenses or
the risk of damage to the property) or the potential for economic gain (e.g.,
appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of
the useful life of the property, the service recipient shares the risk that
the property will decline in value, the service recipient shares in any
appreciation in the value of the property, the service recipient shares in
increases in the property's operating costs or the service recipient bears the
risk of damage to or loss of the property), (iv) the service provider does not
bear any risk of substantially diminished receipts or substantially increased
expenditures if there is nonperformance under the contract, (v) the service
provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service contract
should be treated as a lease is inherently factual, the present or absence of
any single factor may not be dispositive in every case.
Special Tax Counsel is of the opinion that the Participating Leases will be
treated as true leases for federal income tax purposes. Such opinion is based,
in part, on the following facts: (i) the MeriStar Operating Partnership or a
Subsidiary Partnership, as applicable, and the OpCo Operating Partnership or
other applicable lessee intend for their relationship to be that of a lessor
and lessee and such relationship will be documented by lease agreements, (ii)
the lessee will have the right to exclusive possession and use and quiet
enjoyment of the
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hotels during the term of the lease, (iii) the lessee will bear the cost of,
and be responsible for, day-to-day maintenance and repair of the hotels and
generally will control how the hotels are operated and maintained, (iv) the
lessee generally will bear all of the costs and expenses of operating the
hotels during the term of the leases, (v) the lessee will benefit from any
savings in the costs of operating the hotels during the term of the lease,
(vi) the lessee will indemnify MeriStar against liabilities imposed upon or
asserted against MeriStar during the term of the lease, (vii) the lessee will
be obligated to pay substantial fixed rent for the period of use of the hotels
and (viii) the lessee stands to incur substantial losses (or reap substantial
gains) depending on how successfully it operates the hotels.
Stockholders should be aware that there are no controlling Treasury
Regulations, published rulings or judicial decisions involving leases with
terms substantially the same as the leases that discuss whether such leases
constitute true leases for federal income tax purposes. Therefore, the opinion
of Special Tax Counsel with respect to the relationship between the MeriStar
Operating Partnership or a Subsidiary Partnership, as applicable, and the
lessee is based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
Special Tax Counsel's opinion is not binding upon the IRS or the courts. If
the IRS were to successfully recharacterize the leases as service contracts or
partnership agreements, rather than true leases, part or all of the payments
that the MeriStar Operating Partnership and the Subsidiary Partnerships
receive from the lessee would not qualify as "rents from real property". In
such event, MeriStar likely would not be able to satisfy either the 75% or 95%
gross income tests, and as a result, would lose its REIT status.
As noted above, in order to be treated as "rents from real property", the
rents under the Participating Leases must not be based in whole or in part on
the income or profits of any person. The rents will qualify as "rents from
real property" if they are based on percentages of receipts or sales and the
percentages (i) are fixed at the time the leases are entered into, (ii) are
not renegotiated during the term of the leases in a manner that has the effect
of basing rent on income or profits and (iii) conform with normal business
practice. MeriStar anticipates that rentals under the Participating Leases
will comply with these requirements.
As noted above, rent received from a Related Party Tenant does not qualify
as "rents from real property". The Charter prohibits a stockholder of MeriStar
from owning MeriStar Common Stock if such ownership would cause MeriStar to
own, actually or constructively, 10% or more of the ownership interests in a
tenant of MeriStar's, the MeriStar Operating Partnership's or a Subsidiary
Partnership's real property. As a result, the lessee should not be a Related
Party Tenant of MeriStar.
The Participating Leases will provide that the rents attributable to leased
personal property will not be greater than 15% of the total rents under the
Participating Lease. The lessee may be required to purchase any excess
personal property at fair market value.
The fourth requirement noted above for qualification of rents under the
Participating Leases as "rents from real property" is that MeriStar cannot
furnish or render noncustomary services to the tenants of the hotels or
operate or manage the hotels, other than through an independent contractor who
is adequately compensated and from whom MeriStar does not derive any income.
Provided that the Participating Leases are treated as true leases, MeriStar
should not be considered to manage or operate the MeriStar Owned Hotels,
because OpCo will manage the MeriStar Owned Hotels for its own account in its
capacity as lessee. None of MeriStar, the MeriStar Operating Partnership or
any Subsidiary Partnership will furnish or provide any services to a tenant
and none of such entities will contract with any other person to provide such
services.
If MeriStar fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions generally will be available if (i) the failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) a
schedule of the sources of qualifying income is attached to the federal income
tax return of MeriStar for such taxable year, and (iii) any incorrect
information on the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances
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MeriStar would be entitled to the benefit of these relief provisions. As
discussed above in "--Taxation of AGH and MeriStar," even if these relief
provisions apply, a tax would be imposed with respect to the excess net
income. No similar relief provision would apply if the 30% income test had
been failed by AGH for a taxable year prior to 1998, and in such case, AGH
would cease to qualify as a REIT.
Asset Tests
In order for MeriStar to qualify as a REIT, at the close of each quarter of
its taxable year it must also satisfy three tests relating to the nature of
its assets. First, at least 75% of the value of its total assets must be
represented by real estate assets (which for this purpose include (i) its
allocable share of real estate assets held by partnerships in which MeriStar
or a "qualified REIT subsidiary" owns an interest, (ii) stock or debt
instruments purchased with the proceeds of a stock offering or a long-term (at
least five years) debt offering and held for not more than one year from the
date MeriStar receives such proceeds and (iii) shares in qualified REITs) and
cash, cash items and government securities. Second, not more than 25% of the
total assets of MeriStar may be represented by securities other than those in
the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities may not exceed five percent of
the value of the total assets of MeriStar, and MeriStar may not own more than
ten percent of any one issuer's outstanding voting securities (excluding
securities of a qualified REIT subsidiary or another REIT).
MeriStar anticipates that it will be able to comply with these asset tests.
MeriStar will be deemed to hold directly its proportionate share of all real
estate and other assets of the MeriStar Operating Partnership and the
Subsidiary Partnerships, and it should be considered to hold its proportionate
share of all assets deemed owned by those partnerships through the
partnerships' ownership of partnership interests in other partnerships. As a
result, MeriStar plans to hold more than 75% of its assets as real estate
assets. In addition, MeriStar does not plan to hold any securities
representing more than ten percent of any one issuer's voting securities,
other than any qualified REIT subsidiary, nor securities of any one issuer
exceeding five percent of the value of MeriStar's gross assets (determined in
accordance with generally accepted accounting principles).
After initially meeting the asset tests at the close of any quarter,
MeriStar will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. It is intended that MeriStar will maintain adequate records
of the value of its assets to ensure compliance with the asset tests, and will
take such other action within 30 days after the close of any quarter as may be
required to cure any noncompliance. However, there can be no assurance that
such other action always will be successful.
Annual Distribution Requirements
In order to be taxed as a REIT, MeriStar will be required to meet certain
annual distribution requirements. MeriStar will have to distribute dividends
(other than capital gain dividends) to its stockholders in an amount at least
equal to (1) the sum of (a) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and MeriStar's net capital gain) and
(b) 95% of the net income, if any, from foreclosure property in excess of the
special tax on income from foreclosure property, minus (2) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before
MeriStar timely files its tax return for such year and if paid on or before
the first regular dividend payment after such declaration.
To the extent that MeriStar does not distribute all of its net capital gain
or distributes at least 95% (but less than 100%) of its REIT taxable income,
as adjusted, it will be subject to tax on the undistributed portion, at
regular ordinary and capital gains corporate tax rates. Furthermore, if
MeriStar fails to distribute for each calendar year at least the sum of (a)
85% of its REIT ordinary income for such year, (b) 95% of its REIT capital
gain net income for such year, and (c) any undistributed ordinary income and
capital gain net income from prior periods, such corporation will be subject
to a four percent excise tax on the excess of such required distribution
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over the amounts actually distributed. MeriStar intends to make timely
distributions sufficient to satisfy this annual distribution requirement.
It is expected that MeriStar's taxable income ordinarily will be less than
its cash flow, due to the allowance of depreciation and other noncash charges
in computing its taxable income. Accordingly, MeriStar anticipates that it
generally will have sufficient cash or liquid assets to enable it to satisfy
the 95% distribution requirement.
It is possible that, from time to time, MeriStar may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of such income and deduction of such
expenses in arriving at taxable income of MeriStar or if the amount of
nondeductible expenses such as principal amortization or capital expenditures
exceed the amount of noncash deductions. In the event that such situation
occurs, in order to meet the 95% distribution requirement, MeriStar may find
it necessary to arrange for short-term, or possibly long-term, borrowings or
to pay dividends in the form of taxable share dividends. If the amount of
nondeductible expenses exceeds noncash deductions, MeriStar may refinance its
indebtedness to reduce principal payments and borrow funds for capital
expenditures.
Under certain circumstances in which an adjustment is made that affects the
amount that should have been distributed for a prior taxable year, MeriStar
may be able to rectify the failure to meet such distribution requirement by
paying "deficiency dividends" to stockholders in the later year, which may be
included in MeriStar's deduction for dividends paid for the earlier year.
Thus, MeriStar may be able to avoid being taxed on amounts distributed as
deficiency dividends; however, it will be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
Non-REIT Earnings and Profits
In order to be taxed as a REIT, MeriStar generally must not have any
earnings and profits at the close of a taxable year that were accumulated in
any taxable year in which the REIT provisions did not apply. If MeriStar were
to succeed to any so called "Subchapter C earnings and profits" of CapStar
pursuant to the Merger, MeriStar would be required to distribute such
Subchapter C earnings and profits before the end of the calendar year in which
the Merger occurs in order to retain its ability to be taxed as a REIT. Based
in part upon a certificate to be delivered at the closing of the Merger by
KPMG Peat Marwick LLP as to the accumulated earnings and profits of CapStar
and the basis of the shares in OpCo, it is anticipated that the distribution
of the stock of OpCo in the Spin-Off will reduce the earnings and profits of
CapStar to zero at the time of the Merger. If the IRS subsequently were to
determine that CapStar did have earnings and profits which were succeeded to
by MeriStar in the Merger and MeriStar had not distributed such earnings and
profits by the end of the taxable year in which the Merger occurred, MeriStar
would be entitled to make such distribution within 90 days of such
determination by the IRS. In such event, MeriStar would be subject to an
interest penalty in respect of the delay.
Failure to Qualify
If MeriStar fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, MeriStar would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
such corporation fails to qualify will not be deductible by the corporation
nor will they be required to be made. In such event, to the extent of current
or accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, MeriStar also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances MeriStar would be entitled to such
statutory relief.
Taxation of U.S. Stockholders of MeriStar
As used herein, the term "U.S. Stockholder" means a holder of shares of
Company Stock that (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation,
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partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) is an estate the
income of which is subject to United States federal income taxation regardless
of its source or (iv) is a trust if a United States court is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial decisions
of the trust. For any taxable year for which MeriStar qualifies for taxation
as a REIT, amounts distributed to taxable U.S. Stockholders will be taxed as
follows:
Distributions Generally
Distributions to U.S. Stockholders, other than capital gain dividends
discussed below, will be taxable as ordinary income to such holders up to the
amount of MeriStar's current or accumulated earnings and profits. Such
distributions are not eligible for the dividends-received deduction for
corporations. To the extent that MeriStar makes distributions in excess of its
current or accumulated earnings and profits, such distributions will first be
treated as a tax-free return of capital, reducing the tax basis in the U.S.
Stockholders' shares of Stock, and distributions in excess of the U.S.
Stockholders' tax basis in their respective shares of Stock will be taxable as
gain realized from the sale of such shares. Dividends declared by MeriStar in
October, November, or December of any year payable to a stockholder of record
on a specified date in any such month will be treated as both paid by MeriStar
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by MeriStar during January of the following calendar
year. Stockholders may not include on their own income tax returns any tax
losses of MeriStar.
MeriStar will be treated as having sufficient earnings and profits to treat
as a dividend any distribution by MeriStar up to the greater of its current or
accumulated earnings and profits. As a result, stockholders may be required to
treat certain distributions that would otherwise result in a tax-free return
of capital as taxable dividends. Moreover, any "deficiency dividend" will be
treated as a "dividend" (an ordinary dividend or a capital gain dividend, as
the case may be), regardless of MeriStar's earnings and profits.
Capital Gain Dividends
Dividends to U.S. Stockholders that are properly designated by MeriStar as
capital gain dividends will be treated as long-term capital gain (to the
extent they do not exceed MeriStar's actual net capital gain) for the taxable
year without regard to the period for which the stockholder has held his
stock. Corporate stockholders, however, may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Capital gain dividends are
not eligible for the dividends-received deduction for corporations.
Individual U.S. Stockholders and U.S. Stockholders that are estates and
trusts currently are subject to federal income tax on net capital gains at
different tax rates depending upon the nature of the gain and the holding
period of the asset disposed of. Current guidance applicable until the
issuance of Treasury Regulations provides, subject to certain limitations,
that a REIT may designate the tax rate on a capital gain dividend and such
dividend will be treated as a 28%-rate distribution if no designation is made.
Although a REIT is taxed on its undistributed net capital gains, for taxable
years beginning after 1997, a REIT may elect to include all or a portion of
such undistributed net capital gains in the income of its stockholders. In
such event, the stockholder will receive a credit or refund for the amount of
tax paid by the REIT on such undistributed net capital gains.
Passive Activity and Loss; Investment Interest Limitations
Distributions from MeriStar and gain from the disposition of shares of
MeriStar Common Stock ordinarily will not be treated as passive activity
income, and therefore, U.S. Stockholders generally will not be able to apply
any "passive losses" against such income. Dividends from MeriStar (to the
extent they do not constitute a return of capital) generally will be treated
as investment income for purposes of the investment interest limitation. Net
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capital gain from the disposition of shares of MeriStar Common Stock and
capital gain dividends generally will be excluded from investment income
unless the taxpayer elects to have the gain taxed at ordinary rates.
Dispositions of Shares of Common Stock
A U.S. Stockholder will recognize gain or loss on the sale or exchange of
shares of MeriStar Common Stock to the extent of the difference between the
amount realized on such sale or exchange and the holder's tax basis in such
shares. Such gain or loss generally will constitute long-term capital gain or
loss if the holder has held such shares for more than one year and in the case
of an individual, will be taxed at a lower rate if the shares have been held
for more than 18 months. Losses incurred on the sale or exchange of shares of
MeriStar Common Stock held for six months or less (after applying certain
holding period rules), however, generally will be deemed long-term capital
loss to the extent of any long-term capital gain dividends received by the
U.S. Stockholder with respect to such shares.
Treatment of Tax-Exempt U.S. Stockholders
The IRS has ruled that amounts distributed by a REIT out of its earnings and
profits to a tax-exempt pension trust did not constitute unrelated business
taxable income ("UBTI"). Although rulings are merely interpretations of law by
the IRS and may be revoked or modified, based on this analysis, indebtedness
incurred by MeriStar in connection with the acquisition of an investment
should not cause any income derived from the investment to be treated as UBTI
upon the distribution of such income as dividends to a tax-exempt entity. A
tax-exempt entity that incurs indebtedness to finance its purchase of shares,
however, will be subject to UBTI by virtue of the debt-financed income rules.
In addition, tax-exempt pension and certain other tax-exempt trusts that
hold more than ten percent (by value) of the interests in a REIT are required
to treat a percentage of REIT dividends as UBTI. The requirement applies only
if (i) the qualification of the REIT depends upon the application of a "look-
through" exception to the restriction on REIT stockholdings by five or fewer
individuals, including such trusts and (ii) the REIT is "predominantly held"
by such tax-exempt trusts. It is not anticipated that qualification of
MeriStar as a REIT will depend upon application of the "look-through"
exception or that MeriStar will be "predominantly held" by such trusts.
Special Tax Considerations for Foreign Stockholders
The rules governing United States federal income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates (collectively, "Non-U.S. Stockholders") are complex, and
the following discussion is intended only as a summary of such rules.
Prospective Non-U.S. Stockholders should consult with their own tax advisors
to determine the impact of federal, state, and local income tax laws on an
investment in MeriStar, including any reporting requirements, as well as the
tax treatment of such an investment under their home country laws.
In general, Non-U.S. Stockholders will be subject to United States federal
income tax with respect to their investment in MeriStar if such investment is
"effectively connected" with the Non-U.S. Stockholder's conduct of a trade or
business in the United States. A corporate Non-U.S. Stockholder that receives
income that is (or is treated as) effectively connected with a United States
trade or business also may be subject to the branch profits tax under Section
884 of the Code, which is payable in addition to United States corporate
income tax. The following discussion will apply to Non-U.S. Stockholders whose
investment in MeriStar is not so effectively connected. MeriStar expects to
withhold United States income tax, as described below, on the gross amount of
any distributions paid to a Non-U.S. Stockholder unless (i) a lower treaty
rate applies and the required form evidencing eligibility for that reduced
rate is filed with MeriStar, or (ii) the Non-U.S. Stockholder files an IRS
Form 4224 or applicable successor form with MeriStar, claiming that the
distribution is "effectively connected" income.
A distribution by MeriStar that is not attributable to gain from the sale or
exchange by MeriStar of a United States real property interest and that is not
designated by MeriStar as a capital gain dividend will be treated as
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an ordinary income dividend to the extent made out of current or accumulated
earnings and profits. Generally, an ordinary income dividend will be subject
to a United States withholding tax equal to 30% of the gross amount of the
distribution unless such tax is reduced or eliminated by an applicable tax
treaty. A distribution of cash in excess of MeriStar's earnings and profits
will be treated first as a return of capital that will reduce a Non-U.S.
Stockholder's basis in its shares of MeriStar Common Stock (but not below
zero) and then as gain from the disposition of such shares, the tax treatment
of which is described under the rules discussed below with respect to
dispositions of shares.
Distributions by MeriStar that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as if such distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a Non-U.S. Stockholder will be
taxed at the normal capital gain rates applicable to a U.S. Stockholder
(subject to any applicable alternative minimum tax and a special alternative
minimum tax in the case of non-resident alien individuals). Distributions
subject to FIRPTA also may be subject to a 30% branch profits tax in the hands
of a foreign corporate stockholder that is not entitled to treaty exemption.
MeriStar will be required to withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, (i) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could
be designated as capital gain dividends) and (ii) 30% of ordinary dividends
paid out of earnings and profits. In addition, if MeriStar designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions not withheld against, will be treated as
capital gain dividends for purposes of withholding. A distribution in excess
of MeriStar's earnings and profits may be subject to 30% dividend withholding
if at the time of the distribution it cannot be determined whether the
distribution will be in an amount in excess of MeriStar's current or
accumulated earnings and profits. Tax treaties may reduce MeriStar's
withholding obligations. If the amount withheld by MeriStar with respect to a
distribution to a Non-U.S. Stockholder exceeds the stockholder's United States
tax liability with respect to such distribution (as determined under the rules
described in the two preceding paragraphs), the Non-U.S. Stockholder may file
for a refund of such excess from the IRS. It should be noted that the 35%
withholding tax rate on capital gain dividends currently corresponds to the
maximum income tax rate applicable to corporations, but is higher than the 20%
maximum rate on capital gains of individuals.
Unless the shares of MeriStar Common Stock constitute a "United States real
property interest" within the meaning of FIRPTA or are effectively connected
with a U.S. trade or business, a sale of such shares by a Non-U.S. Stockholder
generally will not be subject to United States taxation. The shares of Stock
will not constitute a United States real property interest if MeriStar is a
"domestically-controlled REIT." A domestically-controlled REIT is a REIT in
which at all times during a specified testing period less than 50% in value of
its shares is held directly or indirectly by Non-U.S. Stockholders. It is
currently anticipated that MeriStar will be a domestically-controlled REIT,
and therefore that the sale of shares in MeriStar will not be subject to
taxation under FIRPTA. However, because the shares of MeriStar Stock will be
publicly traded, no assurance can be given that MeriStar will continue to be a
domestically-controlled REIT. Notwithstanding the foregoing, capital gain not
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other
conditions apply, in which case the nonresident alien individual will be
subject to a 30% tax on such individual's capital gains. If MeriStar did not
constitute a domestically-controlled REIT, whether a Non-U.S. Stockholder's
sale of shares of MeriStar Common Stock would be subject to tax under FIRPTA
as a sale of a United States real property interest would depend on whether
the shares were "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the NYSE, on which
shares of AGH Common Stock currently are listed) and on the size of the
selling stockholder's interest in MeriStar. If the gain on the sale of
MeriStar's shares were subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as a U.S. Stockholder with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
In any event, a
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purchaser of shares of MeriStar Common Stock from a Non-U.S. Stockholder will
not be required under FIRPTA to withhold on the purchase price if the
purchased shares of MeriStar Common Stock are "regularly traded" on an
established securities market or if MeriStar is a domestically-controlled
REIT. Otherwise, under FIRPTA the purchaser of shares of MeriStar Common Stock
may be required to withhold ten percent of the purchase price and remit such
amount to the IRS.
Income Taxation of the MeriStar Operating Partnership, the Subsidiary
Partnerships and Their Partners
The following discussion summarizes certain federal income tax
considerations applicable to MeriStar's investment in the MeriStar Operating
Partnership and the indirect interest of MeriStar in the Subsidiary
Partnerships.
Classification of the MeriStar Operating Partnership and the Subsidiary
Partnerships as Partnerships
MeriStar will be entitled to include in its income its distributive share of
the income and to deduct its distributive share of the losses of the MeriStar
Operating Partnership (including the MeriStar Operating Partnership's share of
the income or losses of the Subsidiary Partnerships) only if such partnerships
are classified for federal income tax purposes as partnerships rather than as
associations taxable as corporations. With certain exceptions, an
unincorporated domestic organization formed on or after January 1, 1997 that
has two or more members will be treated as a partnership for federal income
tax purposes absent an election by such organization to be treated as an
association taxable as a corporation. Such an organization formed prior to
January 1, 1997 was treated as a partnership for federal income tax purposes
rather than as a corporation for periods prior to January 1, 1997 only if it
had no more than two of the four corporate characteristics that the Treasury
Regulations applicable to such organizations used to distinguish a partnership
from a corporation for tax purposes. These four characteristics were
continuity of life, centralization of management, limited liability, and free
transferability of interests. Unless such organization elects otherwise, the
classification claimed by the organization prior to January 1, 1997 will
continue for periods on or after January 1, 1997 and such classification will
be respected for all prior periods if the organization had a reasonable basis
for such classification, the organization and all members of the organization
recognized the federal tax consequences of any change in the organization's
classification within the sixty months prior to January 1, 1997 and neither
the organization nor any member was notified in writing on or before May 8,
1996 that the classification of the organization was under examination.
MeriStar expects that the MeriStar Operating Partnership and all Subsidiary
Partnerships formed on and after January 1, 1997 will have two or more members
at all times and that none of those partnerships will elect to be treated as
an association for federal income tax purposes. In addition, the AGH Operating
Partnership and the Subsidiary Partnerships in existence prior to January 1,
1997 and owned directly or indirectly by AGH prior to the Effective Time have
claimed to be partnerships for all periods prior to January 1, 1997 and have
not been notified in writing on or before May 8, 1996 that such classification
was under examination. In the opinion of Special Tax Counsel, which is based
on the provisions of the partnership agreement of CapStar Hotel OP, on certain
factual assumptions and representations by AGH and CapStar, on the opinion of
counsel to AGH with respect to the federal tax classification of the AGH
Operating Partnership and the Subsidiary Partnerships, including the
assumption that the limited partnership agreement of MeriStar Operating
Partnership will contain provisions to ensure that the MeriStar Operating
Partnership is not a publicly traded partnership (as described below), the AGH
Operating Partnership and the Subsidiary Partnerships have been and continue
to be, and giving effect to the Transactions the MeriStar Operating
Partnership and the Subsidiary Partnerships will be, treated as partnerships
for federal income tax purposes. However, none of CapStar Hotel OP, the AGH
Operating Partnership or any of the Subsidiary Partnerships have requested,
nor do they intend to request, a ruling from the IRS that they will be treated
as partnerships for federal income tax purposes. Special Tax Counsel's opinion
is not binding on the IRS or the courts.
A publicly traded partnership is a partnership whose interests are traded on
an established securities market or are readily tradeable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at
least 90% of such partnership's gross income for each taxable year consists of
"qualifying income," which generally includes any income that is
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qualifying income for purposes of the 95% gross income test applicable to
REITs (the "Qualifying Income Exception"). See "--Requirements for
Qualification--Income Tests." For this purpose, the related party lessee test
is applied by treating the partnership as owning an interest in any
corporation that is owned directly or indirectly by any 5% partner. It is
unclear whether the right of unit holders in the Meristar Operating
Partnership to exchange their units for shares of Meristar would be treated as
the "substantial equivalent" of the units being readily tradeable or the
substantial equivalent thereof. Applicable Treasury Regulations provide
certain safe harbors that, if applicable, will cause partnership interests to
be treated as interests that are not readily tradable on a secondary market or
the substantial equivalent thereof. One such safe harbor requires that (i) all
interests in the partnership were issued in transactions that were not
required to be registered under the Securities Act of 1933 and (ii) the
partnership does not have more than 100 partners at any time during the
partnership's taxable year. Although interests in the Meristar Operating
Partnership and its predecessors were issued in transactions that were not
required to be registered under the Securities Act, it is anticipated that
immediately following the Merger the MeriStar Operating Partnership will have
more than 100 partners and therefore the safe harbor would not apply. However,
because it is anticipated that the MeriStar Operating Partnership will meet
the Qualifying Income Exception, it should not be treated as a corporation
under the publicly traded partnership rules.
If for any reason the MeriStar Operating Partnership or one of the
Subsidiary Partnerships were taxable as a corporation rather than as a
partnership for federal income tax purposes, MeriStar would not be able to
satisfy the requirements for REIT status. See "--Requirements for
Qualification--Income Tests" and "--Requirements for Qualification--Asset
Tests." In addition, any change in any such partnership's status for tax
purposes might be treated as a taxable event, in which case MeriStar might
incur a tax liability without any related cash distribution. See "--
Requirements for Qualification--Annual Distribution Requirements." Further,
items of income and deduction of any such partnership would not pass through
to its partners, and its partners would be treated as stockholders for tax
purposes. Any such partnership would be required to pay income tax at
corporate tax rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing such
partnership's taxable income.
Partners, Not Partnerships, Subject to Tax
A partnership is not a taxable entity for federal income tax purposes.
Rather, a partner is required to take into account its allocable share of a
partnership's income, gains, losses, deductions, and credits for any taxable
year of the partnership ending within or with the taxable year of the partner,
without regard to whether the partner has received or will receive any
distributions from the partnership.
Partnership Allocations
Although a partnership agreement will generally determine the allocation of
income and losses among partners, such allocations will be disregarded for tax
purposes under section 704(b) of the Code if they do not comply with the
provisions of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder as to substantial economic effect.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
of the MeriStar Operating Partnership and the Subsidiary Partnerships are
intended to comply with the requirements of section 704(b) of the Code and the
Treasury Regulations promulgated thereunder.
Sale of Partnership Property
Generally, any gain realized by a partnership on the sale of property held
by the partnership for more than one year and allocated to a corporate partner
will be long-term capital gain, except for any portion of such gain that is
treated as depreciation or cost recovery recapture. However, under the REIT
requirements imposed by the
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Code, MeriStar's share, as a partner, of any gain realized by the MeriStar
Operating Partnership or the Subsidiary Partnerships on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of a trade or business will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax.
See "--Taxation of MeriStar."
Information Reporting Requirements and Backup Withholding Tax
MeriStar will report to its U.S. Stockholders and the IRS the amount of
distributions paid during each calendar year and the amount of tax withheld,
if any. Under certain circumstances, U.S. Stockholders may be subject to
backup withholding at a rate of 31% with respect to distributions paid. Backup
withholding will apply only if the stockholder (i) fails to furnish its
taxpayer identification number ("TIN") (which, for an individual, would be
such individual's Social Security number), (ii) furnishes an incorrect TIN,
(iii) is notified by the IRS that it has failed properly to report payments of
interest and dividends, or (iv) under certain circumstances, fails to certify,
under penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. U.S. Stockholders should consult their own tax
advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. Backup withholding is not
an additional tax. Rather, the amount of any backup withholding with respect
to a payment to a U.S. Stockholder will be allowed as a credit against such
U.S. Stockholder's United States federal income tax liability and may entitle
such U.S. Stockholder to a refund, provided that the required information is
furnished to the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders. Non-U.S. Stockholders
should consult their tax advisors with respect to any such information
reporting and backup withholding requirements.
State and Local Tax Considerations
MeriStar will be, and its stockholders may be, subject to state or local
taxation in various state or local jurisdictions, including those in which
MeriStar, its stockholders, the MeriStar Operating Partnership or the
Subsidiary Partnerships transact business or reside. The state and local tax
treatment of MeriStar, the MeriStar Operating Partnership, the Subsidiary
Partnerships and MeriStar's stockholders may not conform to the federal income
tax consequences discussed above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws on their investment in MeriStar.
Possible Federal Tax Developments
The rules dealing with federal income taxation are constantly under review
by the IRS, the Treasury Department, Congress and the courts. New federal tax
legislation or other provisions may be enacted into law or new
interpretations, rulings or Treasury Regulations could be adopted or judicial
decisions rendered, all of which could affect the taxation of MeriStar or of
its stockholders. No prediction can be made as to the likelihood of passage of
any new tax legislation or other provisions either directly or indirectly
affecting MeriStar or its stockholders. Consequently, the tax treatment
described herein may be modified prospectively or retroactively by such
legislative, judicial or administrative action.
Recently-proposed legislation would limit the ability of existing "stapled
REITs" to continue to obtain certain federal income tax benefits for which
such REITs were "grandfathered" under previous legislation but which are not
currently available to other REITs. In a stapled REIT structure, the stock of
a REIT and a C corporation trade as a single unit. Under statutory provisions
enacted in 1984, for purposes of determining whether an entity qualifies as a
REIT, the income, assets and operations of any other entity to which it is
stapled must be taken into account. These rules did not apply to certain
stapled REITs in existence at the time such rules were enacted. For purposes
of determining whether such a grandfathered stapled entity is a REIT, the
proposed legislation would treat the REIT and the C corporation as one entity
with respect to newly-acquired properties
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and the activities or services relating to such properties undertaken by
either entity. Because AGH is not a grandfathered stapled REIT and because the
stock of OpCo and MeriStar will trade separately, this legislation, if
enacted, will not apply to either corporation. As a result, the activities of
OpCo will not be considered in determining whether MeriStar qualifies as a
REIT.
Another current legislative proposal would revise Notice 88-19 (see "--
Taxation of MeriStar") so that the Built-in Gain Rules would no longer be
applicable to the transfer of assets to a REIT by a C corporation in a
transaction such as the Merger. Such proposal would require the C corporation
to recognize the net built-in gain in such assets as of the date preceding the
date of the transfer. If enacted as proposed, the legislation would be
effective for acquisitions after December 31, 1998, and accordingly if enacted
will not apply to the Merger if it is completed prior to such date.
ACCOUNTING TREATMENT
The transaction will be accounted for by MeriStar under the purchase method
of accounting for business combinations in accordance with the Accounting
Principles Board Opinion No. 16, "Business Combinations," as amended and, upon
consummation of the Merger, the cost basis of AGH's net assets will be
recorded at fair market value. See "MeriStar Unaudited Pro Forma Financial
Statements."
REGULATORY APPROVALS
Other than (i) the Commission's declaring effective the Registration
Statement containing this Prospectus/Joint Proxy Statement and the
Registration Statement on Form 8-A relating to OpCo, (ii) approvals in
connection with compliance with applicable Blue Sky or state securities laws,
(iii) the acceptance for record of the Articles of Merger by the State
Department of Assessments and Taxation of Maryland and the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware,
and (iv) the filing of such reports under Section 13(a) of the Exchange Act as
may be required in connection with the Merger Agreement and the other
Transactions, neither the management of AGH nor the management of CapStar
believes that any filing with or approval of any governmental authority is
necessary in connection with the Merger.
STOCK EXCHANGE LISTING
Upon consummation of the Merger, CapStar Common Stock will be delisted from
the NYSE and deregistered under the Exchange Act. The MeriStar Common Stock to
be issued to stockholders of CapStar in the Merger will be listed on the NYSE,
subject to official notice of issuance. It is a condition to the consummation
of the Merger that the shares of MeriStar Common Stock to be issued in
connection with the Merger will have been approved for listing on the NYSE,
subject only to official notice of issuance under the symbol " . ."
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of the MeriStar Common Stock received by the AGH and CapStar
stockholders in the Merger will be freely transferable under the Federal
securities laws, except that shares of MeriStar Common Stock received by
persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of CapStar prior to the consummation of the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 promulgated under the Securities Act (or Rule 144 in the case of such
persons who become affiliates of MeriStar) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of AGH, CapStar or
MeriStar generally include individuals or entities that control, are
controlled by, or are under common control with, such parties.
APPRAISAL AND DISSENTERS' RIGHTS
Holders of shares of AGH Common Stock are not entitled to dissenters'
appraisal rights under the MGCL. Holders of shares of CapStar Common Stock are
not entitled to appraisal or dissenters' rights under the DGCL.
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CAPSTAR CONVERTIBLE NOTES
CapStar has outstanding $172,500,000 principal amount of 4.75% Convertible
Subordinated Notes due 2004 (the "Convertible Notes"), which are convertible
into shares of CapStar Common Stock at a current conversion price of $43.00
per share. In connection with the Merger, pursuant to the terms of the
Convertible Notes, the conversion price will be adjusted by multiplying the
current conversion price by a fraction, the numerator of which is Current
Market Value (as defined in the indenture relating to the Convertible Notes)
of the CapStar Common Stock on the Effective Time of the Merger minus the Fair
Market Value (also as so defined) of OpCo on a per share basis transferred to
the holders of CapStar Common Stock in the Spin-Off and the denominator of
which is the Current Market Value of the CapStar Common Stock on the Effective
Time. AGH and CapStar are currently evaluating the possibility of refinancing
or exchanging the Convertible Notes. There can be no assurance, however, that
MeriStar will refinance or exchange the Convertible Notes in whole or in part.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full text of the Merger
Agreement. ALL STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT CAREFULLY.
TERMS OF THE MERGER
General
The Merger will effect the combination of AGH and CapStar, with AGH being
the Surviving Corporation in the Merger. The Merger will be preceded by the
Spin-Off and the CapStar OP Restructuring, and concurrent with the Merger,
CapStar Hotel OP will merge with and into the AGH Operating Partnership.
Corporate Governance
Upon consummation of the Merger, the AGH Charter and AGH Bylaws will become
the MeriStar Charter and the MeriStar Bylaws. If the amendment to the AGH
Charter is approved (Proposal Two), the Amended Charter of AGH will be the
MeriStar Charter. See "The AGH Meeting--Proposal Two: Approval of the MeriStar
Charter."
Conversion of Securities
At the Effective Time, by virtue of the Merger and without any action on the
part of AGH, CapStar or any holders of any of their securities, the following
will occur:
1. Each share of CapStar Common Stock issued and outstanding immediately
prior to the Merger will be converted, as the result of the Merger, into
the right to receive 1.0 share of MeriStar Common Stock (the "CapStar
Exchange Ratio"); and
2. Each share of AGH Common Stock issued and outstanding immediately
prior to the Merger will be converted, as a result of the Merger, into and
become 0.8475 shares of MeriStar Common Stock (the "AGH Exchange Ratio"
and, together with the CapStar Exchange Ratio, the "Exchange Ratios");
provided that the AGH Stockholders will receive cash in lieu of any
fractional share of MeriStar Common Stock resulting from the conversion at
the AGH Exchange Ratio (see "Fractional Shares," below).
Cancellation of Securities
The Merger will cause the automatic cancellation of all shares of CapStar
Common Stock and of all shares of AGH Common Stock that are converted into
shares of MeriStar Common Stock.
Stock Options and Other Stock Rights
Pursuant to the terms of CapStar's Equity Incentive Plan, upon the Effective
Time, each then outstanding option to purchase shares of CapStar Common Stock
(a "CapStar Stock Option"), which is outstanding will vest and become
exercisable. However, CapStar named executive officers (including Messrs.
Whetsell and Emery) have agreed to waive this right to accelerate their
CapStar Stock Options and such options will instead continue to vest according
to their original term. In addition, the substituted options described herein
granted to such named executive officers will vest in accordance with their
original terms in the event that such executive's employment is terminated
voluntarily or involuntarily within 24 months after the Effective Time. At the
Effective Time, each CapStar Stock Option will be assumed by MeriStar and
converted into an option to purchase the number of shares of MeriStar Common
Stock equal to the number of shares of CapStar Common Stock subject to such
option multiplied by the CapStar Exchange Ratio, at an exercise price per
share of MeriStar Common Stock (the "MeriStar Exercise Price") equal to the
former exercise price per share of CapStar Common Stock
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under each such option immediately prior to the Effective Time multiplied by a
fraction, the numerator of which is the fair market value per share of CapStar
Common Stock at the Effective Time and the denominator of which is such fair
market value per share of CapStar Common Stock immediately prior to the Merger
and Spin-Off. In connection with the Merger, each holder of a CapStar Stock
Option will also receive an option to purchase the number of shares of OpCo
Common Stock equal to the number of shares of CapStar Common Stock subject to
such option at an exercise price per share of OpCo Common Stock equal to the
former exercise price per share of CapStar Common Stock under each such option
immediately prior to the Effective Time minus the MeriStar Exercise Price. The
adjustment to the exercise price of the CapStar Stock Options reflects the
value of the Spin-Off, as determined in good faith by the CapStar Board. In
addition, prior to the Effective Time, but in no event later than the last day
of the calendar month immediately proceeding the Effective Time, CapStar will
terminate CapStar's stock purchase plan (the "Stock Purchase Plan"). Prior to
the Effective Time, CapStar will cause any dollar amounts withheld under the
Stock Purchase Plan and not applied to the purchase of CapStar Common Stock to
be returned to the respective employees of CapStar or its subsidiaries and any
shares of CapStar Common Stock held in custodial accounts to be also
distributed to such employees. Upon the Effective Time, a total of 150,000
shares of MeriStar Common Stock, which shares are expected to have a fair
market value at the Effective Time equal to $5 million, will be awarded to the
holders of CapStar Stock Options. The stock awards will be made in proportion
to each holder's total CapStar Stock Options holdings. The shares of MeriStar
Common Stock will vest in three annual installments beginning on the first
anniversary of the Effective Time.
Upon the Merger, each then outstanding option to purchase shares of AGH
Common Stock (an "AGH Stock Option") which is outstanding at such time will be
vested and exercisable. However, Messrs. Jorns, Wiles, and Barr have agreed to
waive their right to accelerate the vesting of their AGH Stock Options as well
as their shares of restricted AGH Common Stock granted under the AGH 1996
Incentive Plan as a result of the Merger. Moreover, all such substitute
options and shares of restricted AGH Common Stock granted under AGH's 1996
Incentive Plan prior to the Merger will continue to vest in accordance with
their original terms if the executive's employment is terminated voluntarily
or involuntarily within 24 months of the Effective Time. As of the Effective
Time, each AGH Stock Option will be assumed by MeriStar and converted into an
option to purchase the number of shares of MeriStar Common Stock equal to the
number of shares of AGH Common Stock subject to such option multiplied by the
AGH Exchange Ratio, at an exercise price per share of AGH Common Stock equal
to the former exercise price per share of AGH Common Stock under such option
immediately prior to the Effective Time. The vesting of the AGH Stock Options
granted under the Directors' Plan is conditioned upon the approval of the
Director's Plan. See "The AGH Meeting--Proposal Three: Approval of MeriStar
Directors' Plan." The substitute options granted to all AGH executives at the
executive vice president level and above will be placed on the three-year
vesting schedule in conformity with CapStar's vesting schedule.
Fractional Shares
No fractional shares of MeriStar Common Stock will be issued to the
stockholders of CapStar or AGH, as the case may be, pursuant to the Merger.
Any holder of shares of AGH Common Stock who would be entitled under the
Merger Agreement to receive a fractional share of AGH Common Stock will
instead receive, in lieu of such fractional interest, a cash payment in an
amount equal to the product of the mean average of the closing sale price of a
share of AGH Common Stock on the NYSE over the ten trading days immediately
preceding the closing date of the Merger, multiplied by such fraction.
EXCHANGE OF NEW STOCK CERTIFICATES
Exchange Agent
Promptly after the Effective Time, . (the "Exchange Agent") will mail to
each person who was, immediately prior to the Effective Time, a holder of
record of a certificate or certificates (the "Certificate" or the
"Certificates") representing shares of CapStar Common Stock and MeriStar
Common Stock, a Letter of Transmittal to be used by such holders in forwarding
their Certificates, and instructions for effecting the surrender of the
Certificates in exchange for a stock certificate or certificates representing
shares of MeriStar
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Common Stock. Upon surrender to the Exchange Agent of the Certificates for
cancellation, together with such Letter of Transmittal, the holder of such
Certificates will be entitled to receive in exchange therefor (x) a
Certificate representing the number of whole shares of MeriStar Common Stock
to which such holder is entitled pursuant to the Merger under the Exchange
Ratios and (y) a check representing the amount of cash such holder is entitled
to receive in lieu of any fractional share of AGH Common Stock, and the
Certificates so surrendered shall be canceled. CAPSTAR STOCKHOLDERS AND AGH
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A
LETTER OF TRANSMITTAL. Until Certificates are surrendered, each outstanding
Certificate shall be deemed to represent the right to receive the number of
whole shares of MeriStar Common Stock and cash in lieu of any fractional
shares, as described above.
Distributions and Dividends
NO DIVIDENDS OR OTHER DISTRIBUTIONS ON MERISTAR COMMON STOCK WILL BE PAID
WITH RESPECT TO ANY CERTIFICATES UNTIL THE CERTIFICATE IS SURRENDERED FOR
EXCHANGE AS PROVIDED IN THE MERGER AGREEMENT. Subject to the effect of
applicable laws, upon surrender of any such Certificate, MeriStar will pay the
holder, without interest, the amount of any previously unpaid dividends or
other distributions with a record date after the Effective Time payable with
respect to the shares of MeriStar Common Stock issuable upon surrender of such
Certificate, less the amount of any withholding taxes which may be required
thereon. AGH and AGH Operating Partnership will authorize under applicable law
a dividend to their respective stockholders and limited partners, as the case
may be, the record date for which shall be the close of business on the last
business day prior to the Effective Time. The dividend shall be equal to AGH's
and AGH Operating Partnership's most recent quarterly dividend rate for such
stockholders and limited partners, as the case may be, multiplied by the
number of days elapsed since the last dividend record date through and
including the Effective Time, and divided by 91. If payment of such dividends
is made after the Effective Time, MeriStar will pay such dividends to such
stockholders and limited partners as of such record date.
Transfers
At the Effective Time, the stock transfer books of CapStar will be closed,
and there will be no further registration of transfers of CapStar Common
Stock.
Termination of Exchange Fund
One year after the Effective Time, the services of the Exchange Agent with
respect to the exchange fund may be terminated. Thereafter, any former holders
of Certificates who have not theretofore complied with the exchange procedures
may look only to MeriStar for the issuance of MeriStar Common Stock and the
payment of cash in lieu of fractional shares to which such former stockholders
are entitled pursuant to the Merger.
No Liability
None of AGH, CapStar, MeriStar, the Exchange Agent or any other person shall
be liable to any former holder of Certificates for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
No Interest
No interest will be paid or accrued on cash in lieu of fractional shares and
unpaid dividends and distributions, if any, which may be payable upon
surrender of certificates.
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Withholding Rights
AGH or the Exchange Agent will be entitled to deduct and withhold from the
consideration payable to stockholder of CapStar Common Stock or AGH Common
Stock such amounts that are required to be deducted and withheld with respect
to federal, state, local or foreign tax law.
Lost or Stolen Certificates
In the event that any certificate has been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such
certificate to be lost, stolen or destroyed and, if required by MeriStar, the
posting by such person of a bond in such reasonable amount as MeriStar may
direct as indemnity against any claim that may be made against it with respect
to such Certificate(s), the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate(s), MeriStar Common Stock and cash in
lieu of any fractional share, if applicable, MeriStar will pay any unpaid
dividends or distributions on AGH Common Stock, all as described above and
such person shall be entitled to the voting, dividend and other distribution
rights provided under the Merger Agreement with respect thereto.
TRANSACTIONS RELATING TO THE OP MERGER
Immediately prior to the Effective Time, AGH shall cause AGH GP, Inc. ("AGH
GP"), AGH's subsidiary that acts as general partner of AGH Operating
Partnership, to merge with and into AGH. Immediately following the Effective
Time, and consistent with the MeriStar Operating Partnership Agreement,
MeriStar shall contribute all of its assets (other than AGH OP Units) to the
AGH Operating Partnership and MeriStar shall expressly assume all obligations
of the general partner thereunder (the "MeriStar Contribution and
Assumption").
Immediately following the MeriStar Contribution and Assumption, MeriStar
shall cause CapStar Hotel OP to merge with and into the AGH Operating
Partnership, with AGH Operating Partnership as the surviving entity (the "OP
Merger"). The OP Merger shall have, to the extent applicable, the same
economic and tax consequences for the limited partners of CapStar Hotel OP
(the "CapStar LPs") and the limited partners of AGH Operating Partnership as
the Merger has for holders of CapStar Common Stock and AGH Common Stock,
respectively; provided, however, that the holders of preferred units of
limited partnership interest in the AGH Operating Partnership and CapStar
Hotel OP will be provided with substantially the same rights, privileges, and
preferences that such holders currently have in effect.
OTHER TRANSACTIONS
Concurrent with the execution of the Merger Agreement, the partners of AGH
Leasing, AGHI and OpCo entered into an acquisition agreement pursuant to which
OpCo agreed to purchase (i) substantially all of the assets of AGHI and (ii)
100% of the limited partnership interests in AGH Leasing, which purchasers
will close immediately following the Spin-Off and the Merger. See "The Spin-
Off--The Lessee-Manager Acquisition Agreement."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
relating to, among other things: (i) the due organization, power, authority
and standing of the companies and similar corporate matters; (ii) the
authorization, execution, delivery and enforceability of the Merger Agreement
and the Participating Leases to be entered into between OpCo and AGH or their
respective subsidiaries; (iii) the companies' respective capital structures;
(iv) the companies' respective subsidiaries and investment interests; (v)
compliance by the companies with applicable laws, orders and regulations and
with the companies' respective charter documents and material agreements; (vi)
the receipt of consents and approvals required for the Merger; (vii)
compliance by the companies with the filing requirements of applicable
securities laws and the accuracy of information contained in such filings;
(viii) the accuracy of financial information furnished by the companies to
each other, and the
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absence of undisclosed liabilities; (ix) the absence of changes which are not
in the ordinary course of the companies' respective businesses; (x) litigation
affecting the companies; (xi) tax reporting and payment by the companies;
(xii) compliance by AGH with REIT qualification requirements; (xiii) the
identity, status and condition of the companies' respective properties,
leases, other property rights and mortgages, including ownership, title, title
insurance matters, the existence of necessary permits and licenses to operate
their respective properties, the identity of certain agreements for the
purchase, sale or granting of similar rights for their respective properties,
the amount of the companies, capital expenditure budget through 1998 and the
identity of ground leases and hotel franchise agreements; (xiv) retirement and
other employee benefit plans; (xv) labor and employment matters; (xvi)
brokers' and finders' fees payable with respect to the Merger; (xvii) cross-
ownership of shares of the companies' capital stock; (xviii) the identity of
certain material contracts, commitments and agreements and debt instruments of
the companies; (xix) the existence of any registration rights agreements; (xx)
the accuracy of information supplied by the companies in connection of with
the registration statement and proxy statement filed in connection with the
Merger; (xxi) the lack of any requirement to be registered under the
Investment Company Act of 1940, as amended; (xxii) the amount of current and
accumulated earnings and profits ("E&P") of CapStar; (xxiii) the stockholder
votes of the companies required to approve the Merger; (xxiv) the
applicability of state business combination statutes; (xxv) the companies'
receipt of fairness opinions; and (xxvi) the issuance of common stock of
MeriStar in the Merger.
CERTAIN COVENANTS
Each of the parties has agreed that, among other things (and subject to
certain qualifications set forth in the Merger Agreement), prior to the
consummation of the Merger, unless the other party agrees in writing or, with
respect to clauses (i) through (xii) below, approved by the Interim
Transactions Committee (which consists of two individuals selected by AGH and
two individuals selected by CapStar), or unless required or permitted by the
Merger Agreement, it will, and will cause its subsidiaries to: (i) conduct its
business only in the ordinary course of business and in a manner consistent
with past practices; (ii) preserve intact its business organization and
goodwill and use its reasonable efforts, to keep available the services of its
present officers, and employees; (iii) not acquire additional real property,
incur additional indebtedness, encumber assets or commence construction of,
other real estate or hotel projects, except that each Company may incur
additional indebtedness under its revolving credit facility in an aggregate
amount of $50,000,000; (iv) not amend its charter, certificate of
incorporation or by-laws, or other comparable organizational documents; (v)
except for (a) the grant of stock options in connection with the Spin-Off, (b)
the exercise of AGH Stock Options and CapStar Stock Options, (c) the exchange
and redemption of units of limited partnership interests of AGH Operating
Partnership and CapStar Partners, respectively, and (d) the conversion of
CapStar's 4.75% Convertible Subordinated Notes due 2004, make no change in the
number of shares of capital stock, membership interests or units (or their
equivalent) of partnership interests issued and outstanding, or grant any
rights, warrants or options to acquire any such shares, membership or
partnership interests; (vi) with respect to CapStar, not authorize, declare,
set aside or pay any dividend or make any other distribution or payment with
respect to any shares of CapStar Common Stock or partnership interests in
CapStar Management or CapStar Management II except for the declaration and
payment of (A) regular quarterly distributions in an amount not in excess of
$0.4144 per CapStar Preferred OP Unit or (B) tax distributions in an amount
described in the Merger Agreement per CapStar Common OP Unit, (vii) not
directly or indirectly redeem, purchase or otherwise acquire any shares of
capital stock, membership interests or units of partnership interest or any
option, warrant or right to acquire, or security convertible into, shares of
capital stock, membership interests, or units of partnership interest except
for the exchange of AGH OP Units into shares of AGH Common Stock pursuant to
such unit holder's exchange agreement; (viii) with respect to AGH, not
authorize, declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of AGH Common Stock or
partnership interests in AGH Operating Partnership except for the declaration
and payment of regular quarterly distributions in an amount not in excess of
$0.4275 per share of AGH Common Stock or $0.4725 per AGH OP Unit and the
distribution by AGH and AGH Operating Partnership to their respective
stockholders and limited partners prior to the Effective Time (as described
below); (ix) not sell, lease, mortgage, subject to lien or otherwise dispose
of any of the companies' properties; (x) not enter into any commitment,
contractual obligation, capital expenditure or transaction which may result in
total
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payments or liability by or to it in excess of $500,000 or aggregate
commitments in excess of $1,000,000 except for capital expenditures disclosed
by the companies; (xi) not settle any stockholder derivative or class action
claims arising out of or in connection with any of the transactions
contemplated by the Merger Agreement; (xii) not enter into or amend any
employment agreement with any of its officers, directors or employees, other
than waivers by employees of benefits under such agreements; (xiii) call and
hold a meeting of its stockholders as promptly as practicable for the purpose
of obtaining the requisite stockholders' approval of the Merger; (xiv)
recommend that its stockholders approve the Merger; (xv) provide to the
officers, employees, accountants, counsel and other representatives of the
other party all information concerning, and reasonable access to, all its
properties, books, records and files; (xvi) promptly make its regulatory
filings and obtain all consents, approvals, permits or authorizations required
to be obtained from third parties or governmental or regulatory authorities in
connection with the Merger; (xvii) not to cause any of its representations or
warranties in the Merger Agreement to be materially untrue or inaccurate or
any of the conditions not to be satisfied; (xviii) cooperate with each other
in the developing and distribution of public information; (xix) provide to
employees of CapStar who become employees of MeriStar benefits on terms no
less favorable then AGH employees who are similarly situated; (xx) convert the
CapStar Stock Options and AGH Stock Options to reflect the effects of the
Merger as described above; (xxi) cooperate in preparation, execution and
filing of all tax returns; (xxii) pay to the CapStar lenders the amount
necessary to discharge and terminate CapStar's $450 million senior secured
credit facility; (xxiii) with respect to CapStar, cause KPMG Peat Marwick LLP
to deliver a statement confirming that the earnings and profits of CapStar,
immediately before the distribution of the stock of OpCo, will be no greater
than $55,000,000 and the tax basis is of such stock is not less than
$67,000,000; (xxiv) cause their respective officers and directors to submit
letters of resignation; (xxv) with respect to CapStar effectuate the (a)
CapStar OP Restructuring (see "The Spin-Off--The Lessee-Manager Acquisition
Agreement"), and (b) the Spin-Off (see "The Spin- Off"); (xxvi) with respect
to CapStar, take all actions necessary to cause CapStar Hotel OP not to own
any interest in any corporation; (xxvii) OpCo and MeriStar will have entered
into the Intercompany Agreement; (xxviii) cause the Participating Leases to be
executed and delivered and the AGH existing Participating Leases with AGH
Leasing to be amended to the extent required to make such leases consistent
with the Lease Agreements; (xxix) if applicable, arrange for the sale by
CapStar of certain personal property to OpCo Operating Partnership prior to
the Effective Time in exchange for the issuance of a recourse promissory note;
(xxx) with respect to AGH, execute and deliver supplemented indentures in
order to assume the obligation of CapStar under certain indentures in
connection with CapStar's public indebtedness; (xxxi) with respect to CapStar,
to use commercially reasonable efforts to cause the CapStar LPs to represent
and certify to AGH their status as an accredited investor under Rule 501 of
the Securities Act; (xxxii) with respect to AGH, to use commercially
reasonable efforts to cause certain amendments to the participating leases
between AGH Operating Partnership and Clifton Holding Corp and its affiliates;
and (xxxiii) cooperating and using reasonable efforts to do all things
necessary to consummate the Merger and the other transactions contemplated by
the Merger Agreement. CapStar has agreed to use its best efforts to obtain and
deliver to AGH certain letters from its "affiliates" as defined under Rule 145
promulgated under the Securities Act. In connection therewith, the Merger
Agreement requires MeriStar to file reports required to be filed by it under
the Exchange Act and the rules and regulations adopted by the Commission
thereunder, and to take such further action as any such affiliate may
reasonably request, all to the extent required from time to time to enable
such affiliate to sell MeriStar Common Stock it received in the Merger without
registration under the Securities Act pursuant to Rule 145(d)(1) or any
successor rule or regulation adopted by the Commission.
NO SOLICITATION OF TRANSACTIONS
Each company has agreed that, from and after the date of the Merger
Agreement until the Effective Time, it will not, nor will it permit its
respective subsidiaries to, nor will it permit or authorize any officers,
directors or employees of or any investment bankers, attorneys, accountants,
agents or other advisors or representatives of the companies or their
respective subsidiaries to, (i) solicit, initiate, or encourage the submission
of, any Acquisition Proposal (as defined below); (ii) except to the extent
permitted by the following paragraph, enter into any agreement with respect to
any Acquisition Proposal; or (iii) participate in any discussion or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any
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inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal; provided, however, that prior
to the Stockholder Meetings to the extent required by the duties of the board
of directors of either company under Delaware law or Maryland law as the case
may be, as determined in a good faith by a majority of the disinterested
members thereof based on the advice of outside counsel, such company may, in
response to unsolicited requests therefor, participate in discussions or
negotiations with, or furnish information pursuant to an appropriate
confidentiality agreement to, any person or entity that makes or expresses a
bona fide intention to make an unsolicited Acquisition Proposal, provided that
the board of directors of such company first determines in good faith, based
on the vote of a majority of the disinterested members thereof, that such
person or entity has the ability and the financial wherewithal to consummate a
Superior Proposal (as defined below). "Acquisition Proposal" means any
proposal, other than a proposal by AGH or AGH Operating Partnership, with
respect to CapStar, or a proposal of CapStar or the CapStar Partners with
respect to AGH, for a merger, consolidation, share exchange, business
combination or other similar transaction involving the companies or any of
their respective Significant Subsidiaries (within the meaning of Rule 1.02 of
Regulation S-X of the Commission) or any proposal or offer (including, without
limitation, any proposal or offer to stockholders of CapStar or AGH, as the
case may be), other than a proposal or offer by AGH or AGH Operating
Partnership, with respect to CapStar, and CapStar or the CapStar Partners,
with respect to AGH, to acquire in any manner, directly or indirectly, more
than 10% equity interest in any voting securities of, or 10% or more of the
consolidated assets of, CapStar or any of its Significant Subsidiaries or AGH
or any of its Significant Subsidiaries, as the case may be.
The companies have agreed that neither the AGH Board nor the CapStar Board,
nor any committee thereof will, (i) withdraw or modify, or propose publicly to
withdraw or modify, in a manner adverse to AGH or AGH Operating Partnership,
or CapStar or the CapStar Partners, as the case may be, the approval or
recommendation by the board of directors of such company or any committee
thereof of the Merger; or (ii) approve or recommend, or propose to approve or
recommend, any Acquisition Proposal. Notwithstanding the foregoing, the board
of directors of either company, to the extent required by their respective
duties under Delaware law or Maryland law, as the case may be, as determined
in good faith by a majority of the disinterested members thereof based on the
advice of outside counsel, may approve or recommend (and, in connection
therewith, withdraw or modify its approval or recommendation of the Merger) a
Superior Proposal (as defined below). For purposes of this Agreement, a
"Superior Proposal" means a bona fide written proposal made by a third-party
to acquire either company pursuant to a tender or exchange offer, a merger, a
share exchange, a sale of all or substantially all of its assets or otherwise,
in any such case, on terms which a majority of the disinterested members of
the board of directors of such company determines in their good faith judgment
(after consultation with independent financial advisors) to be more favorable
to such company and its stockholders than the Merger and for which financing,
to the extent required, is then fully committed or which, in the good faith
judgment of a majority of such disinterested members (after consultation with
independent financial advisors), is reasonably capable of being financed by
such third-party.
The companies have agreed to promptly advise each other of any Acquisition
Proposal or any inquiry with respect to or which could reasonably be expected
to lead to any Acquisition Proposal, the material terms and conditions of such
Acquisition Proposal or inquiry and the identity of the person making any such
Acquisition Proposal or inquiry. The companies have agreed to keep each other
fully informed of the status and details of any such Acquisition Proposal or
inquiry. The companies have agreed to give each other at least one days'
advance notice of any information to be supplied to, and at least three days'
advance notice of any agreement to be entered into with, any person making an
Acquisition Proposal.
EMPLOYMENT MATTERS
Prior to the Effective Time, MeriStar will offer employment agreements to
certain CapStar and AGH employees, including, Paul W. Whetsell, as Chairman of
the Board and Chief Executive Officer; Steven D. Jorns, as Vice Chairman of
the Board and Chief Operating Officer; Bruce G. Wiles as President and Chief
Investment Officer; John Emery, as Chief Financial Officer; and Kenneth E.
Barr, as Chief Accounting Officer and Treasurer. Prior to the Effective Time,
OpCo will also offer employment agreements to certain CapStar and AGH
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employees, including Messrs. Whetsell and Jorns, each holding similar
positions at MeriStar and David E. McCaslin as President, James A. Calder as
Chief Financial Officer and John E. Plunket as Executive Vice President,
Finance and Development.
STOCK EXCHANGE LISTING
AGH has agreed to prepare promptly and submit to the NYSE a listing
application covering the AGH Common Stock issuable in the Merger, and to use
its best efforts to obtain, prior to the Effective Time, approval for the
listing of such AGH Common Stock on the NYSE, subject to official notice of
issuance. Such approval is a condition to consummation of the Merger.
PREPARATION OF REGISTRATION STATEMENT
CapStar and OpCo have agreed to promptly file a registration statement (the
"OpCo Registration Statement") with the Commission in order to register the
common stock of OpCo distributable in the Spin-Off. The effectiveness of the
OpCo Registration Statement is a condition to consummation of the Merger.
INDEMNIFICATION
MeriStar has agreed, from and after the Effective Time, to the fullest
extent permitted by law, to indemnify all current and former officers and
directors of the companies. MeriStar has agreed to keep in effect, from and
after the Effective Time, the provisions in the companies' respective charter,
articles of incorporation, by-laws, or other organizational documents of the
companies, and all rights for indemnification of all current and former
directors, officers, employees and agents to the maximum extent permitted by
law for at least six years. In addition, MeriStar has agreed to obtain "tail
insurance" providing for the extension of the directors and officers liability
insurance maintained at CapStar for six years after the Closing Date.
CONDITIONS TO THE MERGER
The respective obligations of AGH and CapStar to consummate the Merger are
subject to the fulfillment or waiver of each of the following conditions: (i)
the Merger shall have been approved in the manner required by applicable law
or by applicable regulations of any stock exchange or other regulatory body by
the AGH and CapStar stockholders entitled to vote thereon; (ii) the NYSE shall
have approved for listing the shares of AGH Common Stock of MeriStar to be
issued in the Merger, subject to official notice of issuance; (iii) the
Registration Statement (of which this Proxy Statement is a part) shall have
become effective under the Securities Act and shall not be the subject of any
stop order or proceedings by the Commission seeking a stop order and the OpCo
Registration Statement shall have become effective under the Exchange Act;
(iv) none of the parties to the Merger Agreement shall be subject to any order
or injunction against the consummation of the transactions contemplated by the
Merger Agreement; (v) all necessary state securities or "blue sky" permits and
other authorizations necessary to issue shares of AGH Common Stock to the
stockholders of CapStar shall have been obtained by MeriStar; (vi) AGH and
CapStar shall have received the opinion of AGH's Maryland counsel to the
effect that, to the extent specifically applicable, the Merger Agreement, to
the extent governed by Maryland law, is enforceable under Maryland law, that
all requisite approvals of the Merger by the stockholders of AGH have been
obtained, and as to such other matters as are customary in connection with
consummation of a transaction such as the Merger; (vii) each of AGH and its
appropriate subsidiaries and OpCo and its appropriate subsidiaries shall have
executed and delivered the Intercompany Agreement; (viii) any waiting period
under the Hart Scott Rodino Antitrust Improvements Act of 1976 applicable to
the Merger or the Spin-Off shall have expired or been terminated; (ix) there
shall not have been any federal legislative or regulatory change that would
cause AGH to cease to qualify as a REIT for federal income tax purposes; (x)
OpCo shall have received a commitment from AGH Operating Partnership for a
$50,000,000 line of credit at an interest rate no greater than LIBOR plus 350
basis points and payable quarterly, with other customary terms and conditions;
(xi) the voting agreements entered into with certain stockholders of AGH and
CapStar shall be in full force and effect and the parties thereto have not
breached any of their obligations thereunder; (xii) the Spin-Off shall have
been consummated; (xiii) OpCo or
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its subsidiaries, as the case may be, shall have executed and delivered each
of the Lease Agreements; (xiv) AGH and AGH Operating Partnership shall have
obtained a senior credit facility in the amount of at least $1,000,000,000,
having a term of at least three years, and having other terms and conditions
substantially the same as the terms of their existing credit facility; (xv)
all conditions to the closing of the Lessee-Manager Acquisition Agreement
shall have been satisfied or waived.
The obligations of each of AGH and CapStar to effect the Merger are also
subject to the satisfaction or waiver by the other party prior to the
Effective Time of the following conditions: (i) the representations and
warranties made by the other party shall have been true and correct as of the
date of the Merger Agreement and as of the Effective Time, unless the
representation or warranty is expressly limited by its terms to another date;
(ii) the other party shall have performed in all material respects all
obligations required to be performed under the Merger Agreement prior to the
Effective Time; (iii) from the date of the Merger Agreement through the
Effective Time, there shall not have occurred any material adverse change in
the business, financial condition or results of operations of the other party;
and (iv) all consents and waivers (including, without limitation, waivers or
rights of first refusal) from third parties necessary in connection with the
consummation of the transactions contemplated by the Merger Agreement shall
have been obtained by the other party, other than consents and waivers from
third parties, which, if not obtained, would not result, individually or in
the aggregate, in a material adverse effect on the business, properties,
assets, financial condition or results of operations in the other party and
its subsidiaries, taken as a whole.
The obligation of AGH to effect the Merger is also subject to the
satisfaction or waiver prior to the Effective Time of the following
conditions: (i) AGH shall have received an opinion from CapStar's Delaware
counsel to the effect that the Merger Agreement, to the extent governed by
Delaware law, is enforceable under Delaware law and that (a) all the requisite
approvals of the Merger required under Delaware law and pursuant to CapStar's
certificate of incorporation and other governing documents has been obtained
and (b) the conditions of (x) Section 8.3 of the Indenture, dated as of
October 16, 1997, between CapStar and First Trust of New York, N.A. and (y)
Section 5.1(v) of the Indenture, dated as of August 19, 1997, between CapStar
and IBJ Schroder Bank & Trust Company shall have been satisfied; (ii) KPMG
Peat Marwick LLP shall have delivered to AGH and AGH Operating Partnership a
statement confirming that the earnings and profits of CapStar immediately
before the Spin-Off is not greater than $55,000,000 and the tax basis of such
stock is not less than $67,000,000; (iii) the required affiliate letters shall
have been delivered to AGH and (iv) KPMG Peat Marwick LLP shall have delivered
to AGH and AGH Operating Partnership a statement confirming that the pro forma
book value of OpCo as of January 1, 1997 (after taking into account the
transactions contemplated of the Merger Agreement) does not exceed
$75,000,000.
The obligation of CapStar to effect the Merger is also subject to the
satisfaction or waiver prior to the Effective Time of the following
conditions: (i) CapStar shall have received tax opinions from AGH's counsel
relating to the REIT status of AGH and the partnership status of AGH Operating
Partnership; and (ii) CapStar shall have received, from its own counsel, an
opinion stating that the Merger will qualify as a reorganization under the
provisions of Section 368(a) of the Code.
TERMINATION
The Merger Agreement may be terminated by the parties, and the Merger
abandoned, at any time prior to the Effective Time, before or after the
approval by the stockholders of AGH and CapStar, in the following
circumstances: (a) by mutual consent of the parties; (b) by AGH, upon a breach
of any representation, warranty, covenant, obligation or agreement on the part
of CapStar set forth in the Merger Agreement, such that the conditions set
forth therein regarding the representations and warranties of CapStar or the
performance of CapStar's obligations would be incapable of being satisfied by
October 31, 1998 (or as otherwise extended); (c) by CapStar, upon a breach of
any representation, warranty, covenant obligation or agreement on the part of
AGH set forth in the Merger Agreement, such that the conditions set forth
therein regarding the representations and warranties of AGH or the performance
of AGH's obligations would be incapable of being satisfied by October 31, 1998
(or as otherwise extended); (d) by either AGH or CapStar, if any judgment,
injunction, order, decree or
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action by any governmental entity of competent authority preventing the
consummation of the Merger shall have become final and nonappealable; (e) by
either AGH or CapStar, if the Merger shall not have been consummated before
October 31, 1998; provided, that a party may not terminate pursuant to such
provision if the terminating party shall have breached in any material respect
its obligations under the Merger Agreement in any manner that shall have
proximately contributed to the occurrence of the failure referred to in such
provision; (f) by either AGH or CapStar if, upon a vote at the stockholders
meeting of CapStar, the approval of the transactions contemplated by the
Merger Agreement shall not have been obtained; (g) by either AGH or CapStar
if, upon a vote at the stockholders meeting of AGH, the approval of the
transactions contemplated by the Merger Agreement shall not have been
obtained; (h) by CapStar, if prior to the CapStar stockholders meeting, the
CapStar Board shall have withdrawn or modified in any manner adverse to AGH
its approval or recommendation of the Merger or the Merger Agreement in
connection with, or approved or recommended, a Superior Proposal; provided
that such termination shall not be effective until CapStar has made payment of
the Break-Up Fee (as defined below); (i) by AGH, if prior to the AGH
stockholders meeting, the AGH Board shall have withdrawn or modified in any
manner adverse to CapStar its approval or recommendation of the Merger or the
Merger Agreement in connection with, or approved or recommended, any Superior
Proposal; provided that such termination shall not be effective until AGH has
made payment of the Break-Up Fee; (j) by AGH if (1) prior to the CapStar
stockholders meeting, the CapStar Board shall have withdrawn or modified in
any manner adverse to AGH its approval or recommendation of the Merger or the
Merger Agreement in connection with, or approved or recommended, any
Acquisition Proposal, (2) prior to the CapStar stockholders meeting, CapStar
shall have entered into any agreement with respect to a Acquisition Proposal
(other than a confidentiality agreement) or (3) the CapStar Board shall have
resolved to do any of the foregoing; (k) by CapStar if (x) prior to the AGH
stockholders meeting, the AGH Board shall have withdrawn or modified in any
manner adverse to CapStar its approval or recommendation of the Merger or the
Merger Agreement in connection with, or approved or recommended, any
Acquisition Proposal, (y) prior to the AGH stockholders meeting, AGH shall
have entered into any agreement with respect to an Acquisition Proposal (other
than a confidentiality agreement) or (z) the AGH Board shall have resolved to
do any of the foregoing; and (l) by either AGH or CapStar if, during the 20
consecutive trading days ending with and including the trading date that is
five trading days immediately preceding the date this Joint Proxy
Statement/Prospectus is first mailed, the average Closing Price (as defined
below) of the CapStar Common Stock is less than $29, and the party desiring
such termination provides notice to the other party within three business days
of the end of such 20-trading-day period. "Closing Price" will mean the last
reported sale price per share of CapStar Common Stock as reported on the NYSE
consolidated tape on the trading day in question.
TERMINATION FEES AND EXPENSES
Except as otherwise specified in the Merger Agreement or agreed in writing
by the parties, all out-of-pocket costs and expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereby
(including, without limitation, all expenses relating to the transfer of any
hotel franchises) will be paid by the party incurring such cost or expenses.
AGH has agreed that if the Merger Agreement shall be terminated pursuant to
the provisions outlined above in clauses (c), (g), (i) or (k) under the
section "Termination" and, in the case of the provisions outlined above in
clauses (c) or (g) under the section "Termination," following the date of the
Merger Agreement and prior to termination of the Merger Agreement, AGH shall
have received an Acquisition Proposal and within six months following
termination of the Merger Agreement, AGH shall enter into a definitive
agreement providing for an Acquisition Proposal, then AGH will pay as directed
by CapStar a fee in an amount equal to the Break-Up Fee. In the event of a
termination pursuant to the provisions outlined above in (c) or (g) under the
section "Termination," AGH shall immediately pay as directed by CapStar an
amount equal to the Break-Up Expenses, which amount shall be credited against
any Break-Up Fee that may ultimately become payable.
CapStar has agreed that if the Merger Agreement shall be terminated pursuant
to the provisions outlined above in clauses (b), (f), (h) or (j) under the
section "Termination" and, in the case of the provisions outlined in clauses
(b) or (f) under the Section "Termination," following the date of the Merger
Agreement and prior to the
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termination of the Merger Agreement, CapStar shall have received an
Acquisition Proposal and within six months following termination of the Merger
Agreement, CapStar shall enter into a definitive agreement providing for an
Acquisition Proposal, then CapStar will pay as directed by AGH a fee in an
amount equal to the Break-Up Fee. In the event of a termination pursuant to
the provisions outlined above in (b) or (f) under the section "Termination,"
then CapStar will pay, as directed by AGH, an amount equal to the Break-Up
Expenses, which amount shall be credited against any Break-Up Fee that may
ultimately become payable pursuant to the preceding sentence.
"Break-Up Fee" will be an amount equal to $35,000,000 plus Break-Up Expenses
(the "Base Amount"); provided, however, that in the case of a Break-Up Fee
payable to AGH, such fee shall be paid in accordance with certain provisions
of the Code, as described in the Merger Agreement.
The "Break-Up Expenses" payable to AGH or CapStar, as the case may be (the
"Recipient"), will be an amount equal to the lesser of (i) $3,000,000 and (ii)
the Recipient's out-of-pocket expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby (including, without
limitation, all attorneys', accountants', commercial bankers' and investment
bankers' fees and expenses); provided, however, in the case of Break-Up
Expenses payable to AGH, such expenses shall be paid in accordance with
certain provisions of the Code, as described in the Merger Agreement.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties in writing by action of
their respective board of directors at any time before or after any approvals
of the stockholders of AGH or CapStar are obtained and prior to the filing of
the Articles of Merger and the Certificate of Merger with the State Department
of Assessments and Taxation of Maryland and the Secretary of State of the
State of Delaware; provided, however, that, after such stockholder approvals
are obtained, no such amendment, modification or supplement shall be made
which by law requires the further approval of stockholders without obtaining
such further approval.
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THE SPIN-OFF
This section of the Joint Proxy Statement/Prospectus describes certain
aspects of the proposed Spin-Off. To the extent that they relate to the Merger
Agreement, the Contribution, Assumption and Indemnity Agreement, the
Intercompany Agreement or any of the other related documents, the following
descriptions do not purport to be complete and are qualified in their entirety
by reference to such agreements, which are included as exhibits to this Joint
Proxy Statement/Prospectus and incorporated herein by reference. Certain
capitalized terms used herein and not defined have the meanings ascribed to
them in such agreements.
BACKGROUND OF AND REASONS FOR THE SPIN-OFF
OpCo will be formed to become the lessee, manager and operator of the
various hotel assets owned or to be owned by MeriStar, and to perform the
services more fully described in the Intercompany Agreement. The distribution
of OpCo Common Stock will provide the stockholders of CapStar as of the
CapStar Record Date with the opportunity to participate in the benefits of
both the real estate operations of MeriStar (including ownership of real
property), and the leasing and management operations (including the ownership
of certain non-real estate assets) of OpCo.
Under the Intercompany Agreement, OpCo and its operating partnership,
MeriStar Hotels & Resorts Operating Partnership, L.P., a Delaware limited
partnership ("OpCo Operating Partnership" and, together with OpCo, the "OpCo
Parties"), on the one hand, and MeriStar and MeriStar Hospitality Operating
Partnership, L.P., a Delaware limited partnership ("MeriStar Operating
Partnership" and, together with MeriStar, the "MeriStar Parties"), on the
other hand, will agree (i) to provide each other with reciprocal rights to
participate in certain transactions entered into by such parties; (ii) that
the OpCo Parties will provide certain corporate and other general services to
the MeriStar Parties; and (iii) to set forth certain terms regarding
cooperation and coordination between the parties. In particular, the OpCo
Parties will have a right of first refusal to become the lessee of any real
property acquired by the MeriStar Parties if the MeriStar Parties determine
that, consistent with MeriStar's status as a REIT, the MeriStar Parties are
required to enter into such a lease arrangement; provided that the OpCo
Parties or an entity that the OpCo Parties control is qualified to be the
lessee. See "--The Intercompany Agreement." In addition, the OpCo Parties
intend to pursue additional opportunities with others in the future. See "Risk
Factors--Conflicts of Interest Risks in Relationship between MeriStar and
OpCo."
OpCo is intended to function principally as a hotel leasing, management and
operating company, in contrast to MeriStar's principal focus on investment in
real estate assets. The Spin-Off is designed to provide CapStar's existing
stockholders with the long-term benefits of ownership in an entity devoted to
the conduct of operating business activities in addition to their investment
interest in MeriStar itself. A small number of REITs, operating under tax
provisions that no longer are available to newly formed REITs, have shares
that are "paired" or "stapled" with shares of a related operating company, and
therefore cannot be owned or transferred independently. The shares of OpCo and
MeriStar are not, and will not be, paired or stapled in any manner. Because
the shares of MeriStar and OpCo can be owned and transferred separately and
independently of each other, MeriStar and OpCo will not provide a paired
investment on an ongoing basis to investors who purchase shares of only one
company or the other.
Although the Spin-Off will not be effected unless the Merger is approved by
the stockholders of CapStar and all other conditions precedent have been
satisfied or waived, the Spin-Off is separate from the Merger and the shares
of OpCo to be received by holders of CapStar Common Stock in the Spin-Off do
not constitute a part of the Merger consideration. The stockholders of OpCo
and CapStar are being asked to vote on the approval and adoption of the Merger
Agreement and are not being asked to vote on the Spin-Off. See "Risk Factor--
Conflicts of Interest Risks in Relationship between MeriStar and OpCo."
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RESTRUCTURING AND SPIN-OFF
General
In order to effectuate the Spin-Off, CapStar will effect a series of
mergers, asset and stock transfers and liability assumptions among itself and
its subsidiaries (the "CapStar OP Restructuring"). The purpose and effect of
the CapStar OP Restructuring is to separate substantially all of the
management and leasing business of CapStar from the real estate investments of
CapStar. In connection with the CapStar OP Restructuring, OpCo will assume the
liabilities associated with its business and CapStar will retain, or will
cause one of its subsidiaries to retain, all other liabilities.
Substantially all of CapStar's assets are currently held indirectly by and
operated through CapStar Management and CapStar Management II, CapStar's
subsidiary operating partnerships. CapStar is the sole general partner of
CapStar Management, and CapStar, CapStar LP Corporation, a wholly owned
subsidiary of CapStar ("CapStar LP"), and certain third parties are the sole
limited partners of CapStar Management. CapStar General Corp., a wholly owned
subsidiary of CapStar ("CapStar General"), is the sole general partner of
CapStar Management II, and CapStar Limited Corp., a wholly owned subsidiary of
CapStar General ("CapStar Limited"), and certain third parties are the sole
limited partners of CapStar Management II. The partnership agreements of
CapStar Management and CapStar Management II (in each case, a "CapStar
Operating Partnership") give the general partner full control over the
business and affairs of the CapStar Operating Partnerships.
The Contributions
Prior to the Effective Time, CapStar, CapStar Management and CapStar
Management II will effectuate the following transactions (the
"Contributions"):
1. CapStar Management and CapStar Management II will merge into a single
limited partnership that subsequently may convert to a Delaware limited
liability company ("Old CMC") that will have as its sole members CapStar,
CapStar LP, CapStar General and CapStar Limited and certain third parties;
2. Each of CapStar LP, CapStar Limited and CapStar General will merge
with and into CapStar;
3. Old CMC will contribute all of its hotel related assets together with
certain other assets, subject to all of its liabilities except as set forth
in the Merger Agreement, to CapStar Hotel OP, L.P., a Delaware limited
partnership established in connection with the CapStar OP Restructuring
("CapStar Hotel OP"), in exchange for interests in CapStar Hotel OP;
4. Old CMC will contribute all its management and substantially all its
leasehold related assets, together with certain other assets (including
cash), subject to $30.0 million of indebtedness and certain other
liabilities, to OpCo Operating Partnership in exchange for interests in
OpCo Operating Partnership;
5. Old CMC will redeem CapStar's interests in Old CMC in exchange for
CapStar's pro rata share of its interests in OpCo Operating Partnership and
CapStar Hotel OP; and,
6. CapStar will contribute its general partnership interest (the
"Interest") in, and all of its rights and title in and to substantially all
of the assets and business of, OpCo Operating Partnership represented by
such Interest (collectively, the "Contributed Assets") to OpCo in exchange
for 100% of the outstanding capital stock of OpCo.
The Spin-Off
Upon completion of the Contributions, the Spin-Off will be effected by the
distribution to each holder of record of CapStar Common Stock as of the close
of business on the CapStar Record Date of one share of OpCo Common Stock for
every share of CapStar Common Stock held by such holder. As a result of the
Spin-Off, the stockholders of record of CapStar at the closing of business on
the CapStar Record Date will own all of the outstanding OpCo Common Stock.
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Listing
CapStar will cause the OpCo Common Stock to be issued pursuant to the Spin-
Off to be listed on the NYSE, the American Stock Exchange or the Nasdaq
National Market (as applicable), subject to final notification of issuance.
CapStar expects to apply to have the OpCo Common Stock listed on the NYSE,
although no assurance can be given that such listing will be approved.
Use of "MeriStar" Name
Pursuant to the terms of the Intercompany Agreement, the MeriStar Parties
will grant to the OpCo Parties a non-exclusive, royalty-free license to use
"MeriStar Hospitality Corporation" and other names that include "MeriStar
Hospitality Corporation" (the "Licensed Property") in the corporate name of
the OpCo Parties. Upon termination of the Intercompany Agreement, all rights
of the OpCo Parties to the Licensed Property will terminate. See "--
Intercompany Agreement."
Employees and Employee Benefit Plans
Effective as of the effective date of the Spin-Off, CapStar will cause OpCo
to offer employment to certain employees of CapStar, on the same terms and
conditions as were in effect immediately prior to the Spin-Off. Any such
transfer of employment from CapStar to OpCo will not constitute a termination
or qualifying event under any severance policy.
OpCo will establish new employee benefit plans substantially similar to the
benefit plans that will be maintained by MeriStar after the Merger. Employees
who currently hold CapStar Stock Options will be granted new stock options in
MeriStar and OpCo.
Conditions to the Spin-Off
The obligations of CapStar to consummate the Spin-Off are subject to the
satisfaction or waiver of the same conditions to the consummation of the
Merger set forth in the Merger Agreement.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CAPSTAR COMMON STOCK
In the opinion of special tax counsel, the following describes the material
federal income tax considerations applicable to holders of CapStar Common
Stock that are expected to result from the Spin-Off. This discussion does not
address all aspects of taxation that may be relevant to particular
stockholders in light of their personal investment or tax circumstance or to
certain types of stockholders (including insurance companies, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws, nor does it give a detailed discussion of any
state, local or foreign tax considerations. Accordingly, CAPSTAR STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE SPIN-OFF, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES.
This discussion is based on the Code, Treasury Regulations, judicial
authority and administrative rulings and practice, all as of the date of this
Joint Proxy Statement/Prospectus. There can be no assurance that future
legislative, judicial or administrative changes or interpretations will not
adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could affect the tax consequences of the Spin-Off to CapStar's stockholders.
The Spin-Off will be a taxable distribution to holders of CapStar Common
Stock. The amount and the character of the gain to be recognized by a CapStar
stockholder as a result of the Spin-Off is unclear and depends in part on
whether the OpCo Common Stock is properly treated as other property ("boot")
in the Merger or instead as a distribution of property under section 301 of
the Code.
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Because the Spin-off is an integral part of a series of related transactions
culminating in the Merger, CapStar intends to take the position that the OpCo
Common Stock constitutes boot in the Merger. As a result, a holder of CapStar
Common Stock will recognize gain equal to the lesser of (i) the fair market
value of the OpCo Common Stock received by such stockholder or (ii) the fair
market value of the MeriStar Common Stock and the OpCo Common Stock received
in the Merger minus the adjusted tax basis of such stockholder in its CapStar
Common Stock exchanged therefor. The amount of gain recognized by a holder of
CapStar Common Stock that "has the effect of the distribution of a dividend"
will be treated as ordinary dividend income to the extent of the stockholder's
ratable share of the undistributed earnings and profits of CapStar as of the
Effective Time and any excess will be treated as gain from the exchange of
property. Such gain will be capital gain if such shares of CapStar Common
Stock were held as a capital asset at the Effective Time.
In general, the determination as to whether the gain recognized by a CapStar
stockholder in the Merger will be treated as capital gain or dividend income
depends upon whether and to what extent the transactions related to the Merger
will be deemed to reduce the stockholder's percentage ownership of MeriStar
following the Merger. For purposes of that determination, the stockholder is
treated as if it first exchanged all of its shares of CapStar Common Stock
solely for MeriStar Common Stock and then MeriStar immediately redeemed (the
"deemed redemption") a portion of such MeriStar Common Stock in exchange for
the boot the stockholder actually received. If, under section 302 of the Code,
the deemed redemption is "substantially disproportionate" with respect to a
CapStar stockholder, the gain recognized will be treated as capital gain. One
requirement that must be met in order for the deemed redemption to be
"substantially disproportionate" is that the percentage of the outstanding
voting stock of MeriStar following the Merger and the deemed redemption
considered owned by the stockholder is less than 80% of the percentage of the
outstanding voting stock of MeriStar considered owned by the stockholder
following the Merger but immediately before the deemed redemption. Based on
calculations of the relative values of the OpCo Common Stock and the MeriStar
Common Stock to be received by holders of CapStar Common Stock, CapStar
anticipates that the deemed redemption will not be "substantially
disproportionate" with respect to holders of CapStar Common Stock. Accordingly
unless a CapStar stockholder qualifies for the exception described below, the
gain recognized by such stockholder will be taxed as dividend income to the
extent of the accumulated earnings and profits of CapStar at the time of the
Effective Time.
Section 302 of the Code also provides that if the deemed redemption is "not
essentially equivalent to a dividend" with respect to the stockholder, then
any gain recognized by the stockholder in the transaction will be capital
gain. In general, in order for the deemed redemption to be "not essentially
equivalent to a dividend", the deemed redemption must result in a "meaningful
reduction" in the stockholder's deemed percentage stock ownership of MeriStar
following the Merger. That determination generally requires a comparison of
(i) the percentage of the outstanding stock of MeriStar the stockholder is
considered to have owned immediately before the deemed redemption and (ii) the
percentage of the outstanding stock of MeriStar the stockholder owns
immediately after the deemed redemption. The Internal Revenue Service has
indicated in a published ruling that, in the case of a small minority holder
of a publicly-held corporation who exercises no control over corporate
affairs, a reduction in the holder's proportionate interest in the corporation
from .0001118% to .0001081% would constitute a meaningful reduction.
In applying the foregoing tests, under the attribution rules of section 318
of the Code, a stockholder is deemed to own (i) stock owned and, in some
cases, constructively owned by family members, by certain estates and trusts
of which the stockholder is a beneficiary and by certain affiliated entities
and (ii) stock subject to an option actually or constructively owned by the
stockholder or such other persons. As the determination as to whether a
CapStar stockholder has recognized capital gain with respect to the receipt of
OpCo Common Stock is complex, each stockholder that believes that it might
qualify for capital gain treatment under the above rules is urged to consult
its tax advisor with respect to such determination.
To the extent that the gain recognized by a holder of CapStar Common Stock
"has the effect of the distribution of a dividend", the amount that will be
treated as ordinary dividend income will depend on the earnings and profits of
CapStar at the Effective Time. Earnings and profits immediately prior to the
Effective Time will be increased by an amount equal to the excess of the fair
market value of the OpCo Common Stock over CapStar's tax basis in such stock.
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If, contrary to the position taken by CapStar, the distribution of OpCo
Common Stock instead were treated as a distribution of property under Section
301 of the Code, an amount equal to the fair market value of the OpCo Common
Stock on the date of the distribution would be treated as a dividend to the
extent of the current and accumulated earnings and profits of CapStar on such
date, including earnings and profits resulting from the distribution of the
OpCo Common Stock, as described in the preceding paragraph. Any amount in
excess of the earnings and profits of CapStar would be treated first as a tax-
free return of capital, reducing the stockholder's tax basis in its CapStar
Common Stock and any amount in excess of tax basis would be taxable as gain
from the sale or exchange of such stockholder's shares of CapStar Common
Stock. Such gain would be capital gain if such stockholder's shares of CapStar
Common Stock were held as a capital asset on the date of distribution.
The tax basis of a CapStar stockholder in the OpCo Common Stock received in
the distribution will be the fair market value of such stock and the holding
period for such stock will begin on the date of the distribution.
Whether the Spin-Off is treated as a distribution of boot in a
reorganization or as a dividend, CapStar will recognize gain on the
distribution of the OpCo Common Stock in an amount equal to the fair market
value of such stock minus the tax basis of CapStar in such stock at the time
of the distribution. No gain or loss will be recognized by OpCo as a result of
the distribution of its stock in the Spin-Off.
FEDERAL INCOME TAX CONSIDERATIONS RELATING TO OPCO
In the opinion of special tax counsel, the following describes the material
federal income tax considerations that may be relevant to prospective
stockholders of OpCo, is based upon current law and is not tax advice. This
discussion does not address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including, without
limitation, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws, nor does it give a detailed discussion of any
state, local or foreign tax considerations. See "The Merger--Federal Income
Tax Consequences to Holders of CapStar Common Stock" and "--Federal Income Tax
Consequences to Holders of AGH Common Stock" for a discussion of certain tax
consequences of the Merger to the holders of CapStar Common Stock and AGH
Common Stock and "--Federal Income Tax Considerations Relating to MeriStar"
for a discussion of certain tax considerations relating to MeriStar.
EACH PROSPECTIVE STOCKHOLDER OF OPCO IS ENCOURAGED TO CONSULT ITS OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE OWNERSHIP AND
DISPOSITION OF SHARES OF STOCK OF OPCO, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH OWNERSHIP AND DISPOSITION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of OpCo
As a C corporation under the Code, OpCo will be subject to United States
federal income tax on its taxable income at corporate rates.
Taxation of U.S. Stockholders
Distributions to U.S. Stockholders (as such term is defined in "Federal
Income Tax Considerations Relating to MeriStar--Taxation of U.S.
Stockholders") of OpCo generally will be taxable as ordinary income to such
holders up to the amount of OpCo's current or accumulated earnings and
profits. Such distributions generally will be eligible for the dividends-
received deduction for corporations. To the extent that OpCo makes
distributions in excess of its current and accumulated earnings and profits,
such distributions will first be treated as a tax-free return of capital,
reducing the tax basis in the stockholder's shares of stock, and distributions
in
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excess of a stockholder's tax basis in its respective shares of stock will be
taxable as gain realized from the sale of such shares.
A stockholder generally will recognize gain or loss on the sale, exchange or
other disposition of shares of OpCo Common Stock (unless a specific
nonrecognition provision applies). Such gain or loss will be equal to the
difference between the amount of cash and the fair market value of any
property received and the stockholder's tax basis in such shares. If the OpCo
shares are a capital asset in the hands of the stockholder, such gain or loss
will constitute long-term capital gain or loss if the holder has held such
shares for more than one year and in the case of individuals, trusts and
estates, will be taxed at a reduced rate if the shares have been held for more
than 18 months.
Dividends paid by OpCo to U.S. Stockholders who are exempt from United
States federal income taxation generally should not constitute UBTI. If such
exempt U.S. Stockholder incurs indebtedness to finance its purchase of shares,
however, it will be subject to UBTI by virtue of the debt-financed income
rules. The rules described in "Federal Income Tax Considerations Relating to
MeriStar--Passive Activity and Loss; Investment Interest Limitations" also
will apply in respect of distributions from OpCo and gain from the disposition
of shares of OpCo Common Stock.
Taxation of Non-U.S. Stockholders
OpCo expects to withhold United States income tax, as described below, on
the gross amount of any distributions paid to a Non-U.S. Stockholder (as such
term is defined in "Federal Income Tax Considerations Relating to MeriStar--
Special Tax Considerations for Foreign Stockholders") unless (i) a lower
treaty rate applies and the required form evidencing eligibility for that
reduced rate is filed with OpCo or (ii) the Non-U.S. Stockholder files an
Internal Revenue Service Form 4224 or applicable successor form with OpCo,
claiming that the distribution is "effectively connected" income.
Unless the shares of OpCo Common Stock constitute a "United States real
property interest" within the meaning of FIRPTA or are effectively connected
with a U.S. trade or business, a sale of such shares by a Non-U.S. Stockholder
generally will not be subject to United States taxation, except that if the
Non-U.S. Stockholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and certain other
conditions apply, such individual will be subject to a 30% tax on such
individual's capital gains. Generally, shares of a corporation will not
constitute as a United States real property interest unless 50% or more of its
assets represent interests in U.S. real property. Because a substantial
portion of OpCo's assets will consist of leasehold interests, which are
treated as interests in a real property for these purposes, it is uncertain
whether OpCo will meet this test. If the OpCo shares otherwise constitute a
United States real property interest, a Non-U.S. Stockholder's sale of shares
of OpCo Common Stock would not be subject to tax under FIRPTA as a sale of a
United States real property interest if the shares are "regularly traded" (as
defined by applicable Treasury Regulations) on an established securities
market and the selling stockholder holds less than 5% of the shares of OpCo.
If the gain on the sale of OpCo's shares were subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as a
U.S. Stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of shares of OpCo Common Stock may be
required to withhold ten percent of the purchase price and remit such amount
to the Internal Revenue Service.
Information Reporting Requirements and Backup Withholding
OpCo will report to its U.S. Stockholders and the IRS the amount of
distributions paid during each calendar year and the amount of tax withheld,
if any. Under certain circumstances, stockholders may be subject to backup
withholding at a rate of 31% with respect to distributions paid. Backup
withholding will apply only if the stockholder (i) fails to furnish its
taxpayer identification number ("TIN") (which, for an individual, would be
such individual's Social Security number), (ii) furnishes an incorrect TIN,
(iii) is notified by the IRS that it has failed properly to report payments of
interest and dividends, or (iv) under certain circumstances, fails to certify,
under penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply
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with respect to payments made to certain exempt recipients, such as
corporations and tax-exempt organizations. Stockholders should consult their
own tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption. Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding with respect to a payment to a stockholder will be allowed as a
credit against such stockholder's United States federal income tax liability
and may entitle such stockholder to a refund, provided that the required
information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders. Non-U.S. Stockholders
should consult their tax advisors with respect to any such information
reporting and backup withholding requirements.
State and Local Tax Considerations
OpCo will be, and its stockholders may be, subject to state or local
taxation in various state or local jurisdictions, including those in which
OpCo, its stockholders or the OpCo Operating Partnership transact business or
reside. Stockholders should consult their own tax advisors regarding the
effect of state and local tax laws on their investment in OpCo.
Possible Federal Tax Developments
The rules dealing with federal income taxation are constantly under review
by the IRS, the Treasury Department, Congress and the courts. New federal tax
legislation or other provisions may be enacted into law or new
interpretations, rulings or Treasury Regulations could be adopted or judicial
decisions rendered, all of which could affect the taxation of OpCo or of its
stockholders. No prediction can be made as to the likelihood of passage of any
new tax legislation or other provisions either directly or indirectly
affecting OpCo or its stockholders. Consequently, the tax treatment described
herein may be modified prospectively or retroactively by such legislative,
judicial or administrative action.
THE AGH OPERATING PARTNERSHIP CREDIT COMMITMENT TO OPCO
OpCo shall have received a credit commitment from AGH Operating Partnership
at or prior to the Effective Time for a $50 million line of credit. The line
of credit will bear interest at a rate no greater than the London Interbank
Offered Rate plus 350 basis points and will be payable quarterly. The line of
credit will have other terms and conditions customary of a commitment of that
type.
THE LESSEE-MANAGER ACQUISITION AGREEMENT
OpCo Operating Partnership has entered into an Acquisition Agreement, dated
as of March 15, 1998 (the "Lessee-Manager Acquisition Agreement"), by and
among OpCo Operating Partnership, American General Hospitality, Inc., a Texas
corporation ("AGHI"), AGHL GP, Inc., a Delaware corporation, the general
partner of AGH Leasing, L.P., a Delaware limited partnership ("AGH Leasing")
and the limited partners of AGH Leasing. In order to address any potential
conflicts of interest and to ensure arm's length bargaining, the partners of
AGH Leasing and AGHI employed counsel independent from AGH for the negotiation
of the Lessee-Manager Acquisition Agreement. Pursuant to the Lessee-Manager
Acquisition Agreement, following the Spin-Off and immediately after the
Effective Time, OpCo Operating Partnership will acquire: (i) substantially all
of the assets and certain liabilities of AGHI for a cash purchase price of $10
million; and (ii) 100% of the partnership interests in AGH Leasing for a
purchase price of $85 million, consisting of approximately $73.8 million in
cash and approximately $11.2 million in the form of limited partnership units
of OpCo Operating Partnership, which will be convertible into OpCo Common
Stock. Upon consummation of the Lessee-Manger Acquisition Agreement, OpCo
Operating Partnership will become the lessee and manager of all of the AGH
Owned Hotels that are currently leased by AGH Leasing. As contemplated by the
Lessee-Manager Acquisition Agreement, MeriStar and OpCo will enter into new
Participating Leases with respect to all of the CapStar Owned Hotels and amend
the lease agreements with respect to all of the AGH Owned Hotels that are
currently leased by AGH Leasing. See "Certain Related Agreements."
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It is a condition to the closing of the Merger that the transactions set
forth in the Lessee-Manager Acquisition Agreement are consummated.
THE INTERCOMPANY AGREEMENT
Rights of First Refusal
Pursuant to the Intercompany Agreement, the OpCo Parties will have a right
of first refusal to become the lessee of any real property acquired by the
MeriStar Parties if the MeriStar Parties determine that, consistent with
MeriStar's status as a REIT, the MeriStar Parties are required to enter into
such a lease arrangement; provided that the OpCo Parties or an entity
controlled by the OpCo Parties is qualified to be the lessee based on
experience in the industry and financial and legal qualifications.
As to opportunities for the OpCo Parties to become the lessee of any assets
under a lease arrangement, the Intercompany Agreement provides that the
MeriStar Parties must provide the OpCo Parties with written notice of the
lessee opportunity. During the 30 days following such notice, the OpCo Parties
have a right of first refusal with regard to the offer to become a lessee and
the right to negotiate with the MeriStar Parties on an exclusive basis
regarding the terms and conditions of the lease. If a mutually satisfactory
agreement cannot be reached within the 30-day period, or if the OpCo Parties
indicate that they are not interested in pursuing the lessee opportunity, the
MeriStar Parties may offer the opportunity to others for a period of one year
thereafter, at a price and on terms and conditions that are not more favorable
to such other parties than the price and terms and conditions proposed by the
MeriStar Parties to the OpCo Parties, before it must again offer the
opportunity to the OpCo Parties in accordance with the procedures specified
above.
The MeriStar Parties and the OpCo Parties will each establish, following the
closing of the Merger, a leasing committee which shall review all hotel leases
to be entered into between the MeriStar Parties and the OpCo Parties. The
MeriStar Parties' leasing committee will consist of directors of MeriStar that
are not also directors of OpCo and the OpCo Parties' leasing committee will
consist of directors of OpCo that are not also directors of MeriStar.
The OpCo Parties will agree not to acquire or make (i) investments in real
estate which, for purposes of the Intercompany Agreement, includes the
provision of services related to real estate and investments in hotel
properties, real estate mortgages, real estate derivatives or entities that
invest in real estate assets or (ii) any other investments that may be
structured in a manner that qualifies under the federal income tax
requirements applicable to REITs unless they have provided written notice to
the MeriStar Parties of the material terms and conditions of the acquisition
or investment opportunity, and the MeriStar Parties have determined not to
pursue such acquisitions or investments either by providing written notice to
the OpCo Parties rejecting the opportunity within 20 days from the date of
receipt of notice of the opportunity or by allowing such 20-day period to
lapse. The OpCo Parties also have agreed to assist the MeriStar Parties in
structuring and consummating any such acquisition or investment which the
MeriStar Parties elect to pursue, on terms determined by the MeriStar Parties.
Provision of Services
The OpCo Parties will provide the MeriStar Parties with certain services as
the MeriStar Parties may reasonably request from time to time, including
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services. The MeriStar Parties
will compensate the OpCo Parties for services provided in an amount determined
in good faith by the OpCo Parties as the amount an unaffiliated third party
would charge the MeriStar Parties for comparable services.
Equity Offerings
If either the MeriStar Parties or the OpCo Parties desire to engage in a
securities issuance (the "Issuing Party"), then such Issuing Party will give
notice to such other party (the "Non-Issuing Party") as promptly as
practicable of their desire to engage in a securities issuance. Any such
notice will include the proposed material terms of such issuance, to the
extent determined by the Issuing Party, including whether such issuance is
proposed to be pursuant to public or private offering, the amount of
securities proposed to be issued and the
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manner of determining the offering price and other terms thereof. The Non-
Issuing Party will cooperate with the Issuing Party in every way to effect any
securities issuance of the Issuing Party by assisting in the preparation of
any registration statement or other document required in connection with such
issuance and, in connection therewith, providing the Issuing Party with such
information as may be required to be included in such registration statement
or other document.
Term
The Intercompany Agreement will terminate upon the earlier of (a) the tenth
anniversary of the date of the Intercompany Agreement, and (b) a change in
ownership or control of OpCo.
TERMS OF CONTRIBUTION, ASSUMPTION AND INDEMNITY AGREEMENT
Contributed Assets
CapStar will contribute to OpCo the Contributed Assets in exchange for 100%
of the outstanding capital stock of OpCo.
Assumption of Obligations
OpCo will assume all of the liabilities, obligations, debt and commitments
arising out of its ownership of the Interest, the Contributed Assets and the
operation of the business conducted by OpCo Operating Partnership
(collectively, the "Assumed Liabilities").
Indemnification Obligations
OpCo will indemnify, defend and hold harmless CapStar, its affiliates and
their respective successors (including MeriStar and MeriStar Operating
Partnership) and any directors, officers, employees and agents of the
foregoing, from and against any losses arising out of or resulting from the
Assumed Liabilities, the Contributed Assets or the business and operations of
OpCo or the OpCo Operating Partnership.
CapStar will indemnify, defend and hold harmless OpCo, its affiliates and
their respective successors and any directors, officers, employees and agents
of the foregoing, from and against any losses arising out of any assets or
liabilities retained by CapStar or by the business and operations of CapStar
and its successors (including MeriStar and MeriStar Operating Partnership).
RIGHTS OFFERING
Following the execution of the Merger Agreement, the AGH Board and the
CapStar Board explored ways to encourage holders of AGH Common Stock to invest
in OpCo, if they so wished, to more closely align the interests of such
holders with the interests of holders of OpCo Common Stock. The boards
determined that an appropriate means of achieving such goal was for OpCo to
make a separate offering to holders of MeriStar Common Stock and holders of
MeriStar OP Units. The rights offering will result in each such holder of
MeriStar Common Stock or MeriStar OP Units receiving a non-transferrable right
to purchase one share of OpCo Common Stock for each six shares of MeriStar
Common Stock or MeriStar OP Units held. The subscription price for such rights
is expected to be equal to ninety five percent (95%) of the average of the
daily closing prices of the OpCo Common Stock on the NYSE, American Stock
Exchange or Nasdaq National Market, as applicable, for the period of five
consecutive trading days immediately following the third trading day after
Effective Time. This Joint Proxy Statement/Prospectus does not constitute an
offer of any rights or any shares of OpCo Common Stock to be issued in
connection with the rights offering, which offer will be made only pursuant to
a prospectus of OpCo contained in an effective registration statement.
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CERTAIN RELATED AGREEMENTS
MERISTAR OPERATING PARTNERSHIP AGREEMENT
Structure of MeriStar
In structuring the Merger, AGH and CapStar have determined that the
businesses of AGH and CapStar will be conducted through, and MeriStar Owned
Hotels will be owned by, the MeriStar Operating Partnership which will be
organized as a Delaware limited partnership (the sole general partner of which
will become, after the Merger, the "MeriStar GP"), with MeriStar GP, MeriStar
LP, Inc., a wholly-owned subsidiary of MeriStar remaining as a limited partner
of the MeriStar Operating Partnership (the "MeriStar LP"), and certain other
persons, as additional limited partners (together with MeriStar LP, the
"MeriStar Limited Partners"). The MeriStar Operating Partnership will be a
continuation of the AGH Operating Partnership. Accordingly, the AGH Operating
Partnership Agreement will be amended and restated at the Effective Time to
become the MeriStar Operating Partnership Agreement.
The following description of the terms and provisions of the MeriStar
Operating Partnership Agreement, MeriStar OP Units and certain provisions set
forth elsewhere in this Prospectus/Joint Proxy Statement are qualified in
their entirety by reference to the applicable provisions of the MeriStar
Operating Partnership Agreement, which is incorporated by reference into the
Registration Statement of which this Joint Proxy Statement/Prospectus is a
part.
Management
Generally, pursuant to the MeriStar Operating Partnership Agreement, the
MeriStar GP will have full, exclusive and complete responsibility and
discretion in the management and control of the MeriStar Operating
Partnership, and the MeriStar Limited Partners in their capacity as such will
have no authority to transact business for, or participate in the management
activities or decisions of, the MeriStar Operating Partnership. However, any
amendment to the MeriStar Operating Partnership Agreement, other than
amendments that: (i) add to the obligations of the MeriStar GP; (ii) reflect
the admission or withdrawal of partners; (iii) set forth the rights or
preferences of additional partnership interests issued by the MeriStar
Operating Partnership; (iv) reflect a change that does not adversely affect
the MeriStar Limited Partners; and (v) are necessary to satisfy legal
requirements, will require the consent of MeriStar Limited Partners holding
more than 50% of the MeriStar OP Units held by the MeriStar Limited Partners.
The consent of each adversely affected partner will be required for any
amendment that would affect the MeriStar Limited Partners' liability or right
to receive distributions or that would dissolve the MeriStar Operating
Partnership prior to the end of its term (other than as a result of certain
mergers or consolidations).
Transferability of Interests
Subject to limited exceptions, the MeriStar Operating Partnership Agreement
provides that the MeriStar GP and MeriStar LP may not voluntarily withdraw
from the MeriStar Operating Partnership or transfer or assign their interests
in the MeriStar Operating Partnership unless the transaction in which such
withdrawal or transfer occurs results in the MeriStar Limited Partners
receiving property in an amount equal to the amount they would have received
had they exercised their Exchange Rights (as defined herein) immediately prior
to such transaction, or unless the successors to the MeriStar GP and MeriStar
LP contribute substantially all of their assets to the MeriStar Operating
Partnership in return for an interest in the MeriStar Operating Partnership.
With certain exceptions, the MeriStar Limited Partners may transfer their
MeriStar OP Units, in whole or in part, without the consent of the MeriStar
GP.
Capital Contribution
The MeriStar Operating Partnership Agreement provides that if the MeriStar
Operating Partnership requires additional funds at any time or from time to
time in excess of funds available to the MeriStar Operating
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<PAGE>
Partnership from borrowing or capital contributions, MeriStar may borrow such
funds from a financial institution or other lender and lend such funds to the
MeriStar Operating Partnership on the same terms and conditions as are
applicable to MeriStar's borrowing of such funds. Under the MeriStar Operating
Partnership Agreement, MeriStar generally will be obligated to contribute as
MeriStar GP and through the MeriStar LP, the proceeds of any stock offering as
additional capital to the MeriStar Operating Partnership. Moreover, MeriStar
will be authorized as MeriStar GP and through the MeriStar LP, to cause the
MeriStar Operating Partnership to issue partnership interests for less than
fair market value if MeriStar has concluded in good faith that such issuance
is in the best interests of MeriStar and the MeriStar Operating Partnership.
If MeriStar so contributes additional capital to the MeriStar Operating
Partnership, MeriStar, as Meristar GP, and MeriStar LP will receive additional
MeriStar OP Units, and their percentage interests in the MeriStar Operating
Partnership will be increased on a proportionate basis based upon the amount
of such additional capital contributions and the value of the MeriStar
Operating Partnership at the time of such contributions. Conversely, the
percentage interests of the MeriStar Limited Partners, other than MeriStar LP,
will be decreased on a proportionate basis in the event of additional capital
contributions by MeriStar.
Exchange Rights
The MeriStar Operating Partnership and the MeriStar Limited Partners, other
than the MeriStar LP, are parties to, and the persons who become MeriStar
Limited Partners as part of the OP Merger will enter into, the Exchange Rights
Agreement, which provides such MeriStar Limited Partners with rights (the
"Exchange Rights") that enable them to cause the MeriStar Operating
Partnership to exchange each MeriStar OP Unit for cash or, at MeriStar's
election for one share of MeriStar Common Stock. MeriStar may not satisfy a
MeriStar Limited Partner's Exchange Right by delivery of MeriStar Common
Stock, if and to the extent that the delivery of MeriStar Common Stock upon
exercise of such rights would: (i) be prohibited under the MeriStar Charter;
(ii) otherwise jeopardize the REIT status of MeriStar; or (iii) cause the
acquisition of shares of MeriStar Common Stock by such exchanging MeriStar
Limited Partner to be "integrated" with any other distribution of shares of
MeriStar Common Stock for purposes of complying with the Securities Act. A
MeriStar Limited Partner may not exercise the Exchange Rights for less than
1,000 MeriStar OP Units or, if such MeriStar Limited Partner holds less than
1,000 MeriStar OP Units, for all of the MeriStar OP Units held by such
MeriStar Limited Partner.
Registration Rights
MeriStar and certain MeriStar Limited Partners, other than the MeriStar LP,
are parties to, and the persons who become MeriStar Limited Partners as part
of the OP Merger may enter into, the Registration Rights Agreements (the
"Registration Rights Agreements"), which provide such MeriStar Limited
Partners with certain rights to require the registration for resale of the
shares of MeriStar Common Stock held by them or received by them upon exchange
of their MeriStar OP Units. MeriStar is required to bear the costs of such
registration statements exclusive of underwriting discounts, commissions and
certain other costs attributable to, and to be borne by, the selling
stockholders.
Operations
The MeriStar Operating Partnership Agreement requires the MeriStar Operating
Partnership to continue to be operated in a manner that will enable MeriStar
to satisfy the requirements for being classified as a REIT, to avoid any
federal income or excise tax liability imposed under the Code and to ensure
that the MeriStar Operating Partnership will not be classified as a "publicly
traded partnership" for purposes of section 7704 of the Code.
Distributions and Allocations
The MeriStar Operating Partnership Agreement provides that the MeriStar
Operating Partnership will distribute cash from operations (including net sale
or refinancing proceeds, but excluding net proceeds from the sale of MeriStar
Operating Partnership's property in connection with the liquidation of the
MeriStar Operating Partnership) on a quarterly (or, at the election of the
MeriStar GP, more frequent) basis, in amounts determined
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by the MeriStar GP in its sole discretion, to the partners in accordance with
their respective percentage interests in the MeriStar Operating Partnership.
Profit and loss of the MeriStar Operating Partnership for each fiscal year of
the MeriStar Operating Partnership generally will be allocated among the
partners in accordance with their respective interests in the MeriStar
Operating Partnership. Taxable income and loss will be allocated in the same
manner, subject to compliance with the provisions of Code sections 704(b) and
704(c) and the Treasury Regulations promulgated thereunder.
THE PARTICIPATING LEASES
At the Effective Time, MeriStar and the OpCo Operating Partnership will
enter into a Participating Lease for each CapStar Owned Hotel. In addition,
MeriStar and the OpCo Operating Partnership will enter into amended and
restated Participating Leases for each of the AGH Owned Hotels that is
currently leased by AGH Leasing which will conform the Participating Leases
for the applicable AGH Owned Hotels with the Participating Leases for the
CapStar Owned Hotels, except that (a) the base rent and percentage rent for
each Participating Lease of an applicable AGH Owned Hotel will not be modified
and (b) the initial term of each Participating Lease of an applicable AGH
Owned Hotel will not be modified.
The obligations of the OpCo Operating Partnership under each Participating
Lease will be guaranteed by OpCo.
Term
Each Participating Lease of an applicable AGH Owned Hotel provides for an
initial term of 12 years commencing on the date on which the hotel was
acquired. Each Participating Lease of a CapStar Owned Hotel provides for an
initial term of 12 years commencing at the Effective Time. Each Participating
Lease of an applicable AGH Owned Hotel will be modified to provide, and each
Participating Lease of a CapStar Owned Hotel will provide, the OpCo Operating
Partnership with three renewal options of five years each (except in the case
of properties with ground leases having a remaining term of less than 40
years) provided that (a) the OpCo Operating Partnership will not have the
right to a renewal if there shall have occurred a change in the tax law which
would permit MeriStar to operate the hotel directly; (b) if the OpCo Operating
Partnership shall elect not to renew a Participating Lease for any applicable
MeriStar Owned Hotel, then MeriStar shall have the right to reject the
exercise of a renewal right on a Participating Lease of a comparable hotel;
and (c) the rent for each renewal term shall be adjusted to reflect the then
fair market rental value of the hotel. If MeriStar and OpCo are unable to
agree upon the then fair market rental value of a hotel, the Participating
Lease shall terminate upon the expiration of the then current term and the
OpCo Operating Partnership shall thereupon have a right of first refusal to
lease the hotel from MeriStar on such terms as MeriStar may have agreed upon
with a third-party lessee.
Base Rent; Participating Rent; Additional Charges
Each Participating Lease requires the lessee to pay (i) fixed monthly Base
Rent (as defined in the Glossary), (ii) on a monthly basis, the excess of
Participating Rent (as defined in the Glossary) over Base Rent, with
Participating Rent based on certain percentages of room revenue, food and
beverage revenue and telephone and other revenue at each hotel, and (iii)
certain other amounts, including interest accrued on any late payments or
charges ("Additional Charges"). Base Rent and Participating Rent departmental
thresholds (departmental revenue on which the rent percentage is based) are
increased annually by a percentage equal to the percentage increase in the CPI
(as defined in the Glossary) (CPI percentage increase plus 0.75% in the case
of the participating Rent departmental revenue threshold) compared to the
price year. Base Rent is payable monthly in arrears. Participating Rent is
payable in arrears based on a monthly schedule adjusted to reflect the
seasonal variations in the hotel's revenue. Participating Rent payments during
each calendar quarter will be adjusted at the end of each quarter to reflect
actual results.
Other than real estate and personal property taxes and assessments, rent
payable under ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and
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refurbishments (determined in accordance with generally accepted accounting
principles), which are obligations of MeriStar, the Participating Leases
require the Lessee to pay rent, liability insurance, all costs and expenses
and all utility and other charges incurred in the operation of the hotels. The
Participating Leases also provide for rent reductions and abatements in the
event of damage or destruction or a partial taking of any hotel.
The Participating Leases also provide for a rental adjustment under certain
circumstances in the event of (a) a major renovation of the hotel, (b) a
change in the franchisor of the hotel or (c) a material change in the scope in
the lessee's operations at the hotel.
Lessee Capitalization
The Participating Leases require the OpCo Operating Partnership (or OpCo as
guarantor of the Participating Leases) to maintain a book net worth of not
less than $25 million. Further, commencing January 1, 1999, for so long as the
tangible net worth of the OpCo Operating Partnership (or OpCo as guarantor of
the Participating Leases) is less than 17.5% of the aggregate rents payable
under the Participating Leases for the prior calendar year, the OpCo Operating
Partnership (or OpCo as guarantor of the Participating Leases) is prohibited
from paying dividends or making distributions other than dividends or
distributions made for the purpose of permitting the partners of the OpCo
Operating Partnership to pay taxes on the taxable income of the OpCo Operating
Partnership attributable to its partners plus any required preferred
distributions to partners.
Termination
MeriStar shall have the right to terminate the applicable Participating
Lease upon the sale of a hotel to a third-party or, upon MeriStar's
determination not to rebuild after a casualty, upon payment to the OpCo
Operating Partnership of the fair market value of the leasehold estate. The
fair market value of the leasehold estate shall be determined by discounting
to present value at a discount rate of 10% per annum the cash flow for each
remaining year of the then current lease term, which cash flow shall be deemed
to be the cash flow realized by the OpCo Operating Partnership under the
applicable Participating Lease for the 12-month period preceding the
termination date. MeriStar shall receive as a credit against any such
termination payments an amount equal to any outstanding "New Lease Credits,"
which shall mean the projected cash flow (determined on the same basis as the
termination payment) of any new Participating Leases entered into between
MeriStar and the OpCo Operating Partnership or OpCo after the Effective Date
for the initial term of such new Participating Lease amortized on a straight-
line basis over a period of 72 months commencing on the commencement of the
new Participating Lease.
Performance Standards
MeriStar shall have the right to terminate the applicable Participating
Lease if, in any calendar year, the gross revenues from a hotel are less than
95% of the projected gross revenues for such year as set forth in the
applicable budget unless (a) the OpCo Operating Partnership can reasonably
demonstrate that the gross revenue shortfall was caused by general market
conditions beyond the OpCo Operating Partnership's control or (b) the OpCo
Operating Partnership "cures" the shortfall by paying to MeriStar the
difference between the rent that would have been paid to MeriStar had the
property achieved gross revenues of 95% of the budgeted amounts and the rent
paid based on actual gross revenues. The OpCo Operating Partnership shall not
have such cure right for more than two consecutive years.
The Participating Leases also require that the OpCo Operating Partnership
spend in each calendar year at least 95% of the amounts budgeted for marketing
expenses and for repair and maintenance expenses.
Assignment and Subleasing
The OpCo Operating Partnership shall not have the right to assign a
Participating Lease or sublet a hotel without the prior written consent of
MeriStar. For purposes of the Participating Lease, a change in control of the
OpCo Operating Partnership shall be deemed an assignment of the Participating
Lease and shall require MeriStar's consent, which may be granted or withheld
in its sole discretion.
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MERISTAR UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The MeriStar Unaudited Pro Forma Balance Sheet as of December 31, 1997 is
presented assuming the following transactions had occurred on December 31,
1997: (i) CapStar's purchase of six hotels in January 1998, (ii) the Spin-Off,
(iii) the execution of the Participating Leases and the related transfer of
net hotel operating assets to OpCo, (iv) the execution of the note receivable
from OpCo to fund OpCo's acquisition of AGH Leasing and AGHI, (v) the Merger,
and (vi) the Transactions.
The MeriStar Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1997 is presented assuming the following transactions occurred at
the beginning of 1997: (i) CapStar's purchase of 28 hotels, 40 leases and the
management business of Winston during 1997 and the purchase of six hotels
subsequent to year-end, (ii) the Spin-Off, (iii) the execution of the
Participating Leases and the related transfer of hotel operations, (iv) the
execution of the note receivable from OpCo to fund OpCo's acquisition of AGH
Leasing and AGHI, (v) the Merger, and (vi) the Transactions.
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments columns, which are
further described in the notes to the MeriStar Unaudited Pro Forma Financial
Statements. The MeriStar Unaudited Pro Forma Financial Statements are not
necessarily indicative of what MeriStar's financial position or results of
operations would have been if all the hotels were owned on such dates and if
the Spin-Off, merger and other transactions occurred on such dates.
Additionally, the pro forma information does not purport to project MeriStar's
financial position or results of operations at any future date or for any
future period. The MeriStar Unaudited Pro Forma Financial Statements should be
read in conjunction with the historical financial statements and related notes
thereto of AGH and CapStar, which are incorporated by reference herein.
103
<PAGE>
MERISTAR
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MERGER
-------------------------
ADDITIONAL
CAPSTAR ACQUISITIONS SPIN-OFF PARTICIPATING OPCO AGH PRO OTHER
HISTORICAL(A) PRO FORMA(B) (C) LEASES(D) FINANCING(E) SUBTOTAL FORMA(F) ADJUSTMENTS(G) PRO FORMA
------------- ------------ -------- ------------- ------------ ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents..... $ 83,429 $(54,877) $(27,022) $ -- $ -- $ 1,530 $ 800 $ -- $ 2,330
Property and
equipment, net.. 922,777 151,400 (2,283) -- -- 1,071,894 1,347,669 177,199 2,596,762
Deposits and
other assets.... 118,436 (14,164) (55,114) (28,580) -- 20,578 16,198 (529) 36,247
Due from
affiliate....... -- -- -- 1,933 -- 1,933 -- -- 1,933
Note receivable
from OpCo....... -- -- 30,000 -- 35,000 65,000 -- -- 65,000
---------- -------- -------- -------- ------- ---------- ---------- -------- ----------
Total assets.... $1,124,642 $ 82,359 $(54,419) $(26,647) $35,000 $1,160,935 $1,364,667 $176,670 $2,702,272
========== ======== ======== ======== ======= ========== ========== ======== ==========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Other
liabilities..... $ 63,635 $ 1,359 $(16,442) $(26,647) $ -- $ 21,905 $ 21,030 $ (6,098) $ 36,837
Long-term debt... 492,771 81,000 29,019 -- 35,000 637,790 545,399 191,313 1,374,502
---------- -------- -------- -------- ------- ---------- ---------- -------- ----------
Total
liabilities..... 556,406 82,359 12,577 (26,647) 35,000 659,695 566,429 185,215 1,411,339
Minority
interest........ 48,824 -- (4,732) -- -- 44,092 88,400 20,671 153,163
Stockholders'
equity.......... 519,412 -- (62,264) -- -- 457,148 709,838 (29,216) 1,137,770
---------- -------- -------- -------- ------- ---------- ---------- -------- ----------
Total
liabilities,
minority
interest and
stockholders'
equity......... $1,124,642 $ 82,359 $(54,419) $(26,647) $35,000 $1,160,935 $1,364,667 $176,670 $2,702,272
========== ======== ======== ======== ======= ========== ========== ======== ==========
</TABLE>
- -------
(A) Reflects the audited historical condensed consolidated balance sheet of
CapStar as of December 31, 1997.
(B) Reflects CapStar's cost basis and draws on CapStar's credit facility to
finance the acquisition of the portfolio of six hotels acquired subsequent
to December 31, 1997.
(C) Reflects the Spin-Off which includes: (i) the historical balances of OpCo
as of December 31, 1997, (ii) the execution of a $30,000 note receivable
with OpCo at an interest rate of 9.25%, (iii) draws on CapStar's credit
facility of $30,000 to finance the additional capitalization of OpCo, and
(iv) the non-cash distribution made of OpCo Common Stock and OpCo OP Units
to holders of CapStar Common Stock and CapStar OP Units.
(D) Reflects the transfer of net hotel operating assets to OpCo in conjunction
with the Participating Leases.
(E) Reflects the execution of an additional note receivable at an interest
rate of 9.25% from OpCo to finance OpCo's acquisition of AGH Leasing and
AGHI.
(F) Reflects pro forma AGH as presented in AGH's Current Report on Form 8-K,
dated April 7, 1998, filed with the Commission and incorporated herein by
reference.
(G) Reflects (i) the Merger and other transaction costs of approximately
$6,000 incurred by CapStar and the $171,199 adjustment to record AGH's net
assets acquired at fair market value in connection with the Merger, (ii)
the write-off of CapStar's deferred financing fees of $5,529 in
conjunction with the termination of its credit facility, net of estimated
deferred financing costs of $5,000 associated with the Proposed Credit
Facility, (iii) borrowings of $191,313 to finance the Merger and other
transaction costs and the financing costs for the Proposed Credit
Facility, (iv) the adjustment to remove CapStar's deferred taxes payable
of $6,098 in conjunction with the change in its tax status to a REIT.
Included in (iii) above is the change in the assumptions per the AGH Pro
Forma column, which assumes the Prime Group II Acquisition (as defined in
the AGH Form 10-K) will be financed with $182,024 in proceeds from a
proposed future equity offering, to assume financing with proceeds from
the Proposed Credit Facility.
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<PAGE>
MERISTAR
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MERGER
-----------------------
CAPSTAR ACQUISITIONS PRO FORMA PARTICIPATING OPCO AGH PRO OTHER
HISTORICAL(A) PRO FORMA(B) SPIN-OFF(C) LEASES(D) FINANCING(E) SUBTOTAL FORMA(F) ADJUSTMENTS(G)
------------- ------------ ----------- ------------- ------------ -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hotel operating
revenue.......... $309,083 $241,508 $(87,042) $(463,549) $ -- $ -- $ -- $ --
Office rental and
other revenue.... 2,174 3,246 -- -- -- 5,420 2,340 --
Hotel management,
accounting and
other............ 5,136 (98) (4,850) -- -- 188 -- --
Participating
lease revenue.... -- -- -- 124,684 -- 124,684 169,004 --
-------- -------- -------- --------- ----- -------- -------- --------
Total revenue... 316,393 244,656 (91,892) (338,865) -- 130,292 171,344 --
Hotel operating
expenses......... 127,603 90,041 (21,866) (195,778) -- -- -- --
Office rental and
other expenses... 845 1,347 -- -- -- 2,192 1,256 --
Undistributed
operating
expenses:
Administrative
and general.... 50,332 42,580 (21,240) (68,672) -- 3,000 3,066 --
Property
operating
costs.......... 42,553 64,459 (50,319) (56,693) -- -- -- --
Property taxes,
insurance and
other.......... 12,558 8,030 (402) (2,246) -- 17,940 25,625 --
Depreciation and
amortization... 20,990 16,917 (1,462) -- -- 36,445 50,621 4,419
-------- -------- -------- --------- ----- -------- -------- --------
254,881 223,374 (95,289) (323,389) -- 59,577 80,568 4,419
Interest expense,
net.............. 21,024 18,826 (638) -- (700) 38,512 38,727 13,523
-------- -------- -------- --------- ----- -------- -------- --------
Total expenses.. 275,905 242,200 (95,927) (323,389) (700) 98,089 119,295 17,942
-------- -------- -------- --------- ----- -------- -------- --------
Income (loss) be-
fore minority in-
terest and income
taxes............ 40,488 2,456 4,035 (15,476) 700 32,203 52,049 (17,942)
Minority inter-
est.............. 1,425 1,008 (214) (647) 29 1,601 5,764 (975)
-------- -------- -------- --------- ----- -------- -------- --------
Income (loss) be-
fore income tax-
es............... 39,063 1,448 4,249 (14,829) 671 30,602 46,285 (16,967)
Income tax provi-
sion............. 14,911 483 1,614 (5,635) 255 11,629 -- (11,629)
-------- -------- -------- --------- ----- -------- -------- --------
Net income........ $ 24,152 $ 965 $ 2,635 $ (9,194) $ 416 $ 18,973 $ 46,285 $ (5,338)
======== ======== ======== ========= ===== ======== ======== ========
Basic net income
per common
share(H)......... $ 1.29
========
Diluted net income
per common
share(H)......... $ 1.27
========
<CAPTION>
PRO FORMA
------------
<S> <C>
Hotel operating
revenue.......... $ --
Office rental and
other revenue.... 7,760
Hotel management,
accounting and
other............ 188
Participating
lease revenue.... 293,688
------------
Total revenue... 301,636
Hotel operating
expenses......... --
Office rental and
other expenses... 3,448
Undistributed
operating
expenses:
Administrative
and general.... 6,066
Property
operating
costs.......... --
Property taxes,
insurance and
other.......... 43,565
Depreciation and
amortization... 91,485
------------
144,564
Interest expense,
net.............. 90,762
------------
Total expenses.. 235,326
------------
Income (loss) be-
fore minority in-
terest and income
taxes............ 66,310
Minority inter-
est.............. 6,390
------------
Income (loss) be-
fore income tax-
es............... 59,920
Income tax provi-
sion............. --
------------
Net income........ $ 59,920
============
Basic net income
per common
share(H)......... $ 1.32
============
Diluted net income
per common
share(H)......... $ 1.31(H)
============
</TABLE>
(A) Reflects the audited historical condensed consolidated statement of
operations of CapStar for the year ended December 31, 1997.
(B) Reflects the 1997 pre-acquisition operations of 28 CapStar Owned Hotels
acquired during 1997, the 1997 pre-acquisition operations for the 40
leases and management business of Winston acquired during 1997, and the
1997 operations of the six hotels purchased subsequent to year-end. For
each, the pre-acquisition operations were obtained from the pre-
acquisition financial statements. Also reflects adjustments to (i) record
depreciation and amortization expense as if the hotels and the leases and
management business of Winston had been acquired as of the beginning of
the year, (ii) record interest expense as if the various financing
activities that occurred during 1997 had occurred at the beginning of the
year, (iii) adjust minority interest for the effects of the acquisitions
and (i) and (ii), and (iv) record income taxes at 38%.
105
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(C) Reflects the pro forma Spin-Off. In addition, reflects (i) the elimination
of management fee revenue, (ii) interest income on the $30,000 note
receivable from OpCo, net of interest expense incurred on the $30,000
drawn on the credit facility to capitalize OpCo, (iii) minority interest
adjusted for the effects of the Spin-Off and (i) and (ii), and (iv) income
taxes at 38%.
(D) Reflects the execution of the Participating Leases to (i) transfer the
hotel operations to OpCo, and (ii) adjust minority interest for the
effects of (i), and (iii) record income taxes at 38%.
(E) Reflects (i) interest income at an interest rate of 9.25% on the $35,000
note receivable to OpCo, net of interest expense on the $35,000 draw on
the credit facility to finance the note and (ii) adjusted minority
interest and income taxes at 38%.
(F) Reflects pro forma AGH as presented in AGH's Current Report on Form 8-K,
dated April 7, 1998, filed with the Commission and incorporated herein by
reference.
(G) Reflects (i) the amortization related to the additional deferred financing
costs net of the amortization on the financing fees written off in
connection with the termination of CapStar's credit facility, (ii)
additional depreciation expense related to the adjustment to record AGH
net assets acquired at fair market value in connection with the Merger,
(iii) the change in the assumptions per the AGH Pro Forma column, which
assumed the Prime Group II Acquisition (as defined in the AGH Form 10-K)
will be financed with $182,024 in proceeds from a proposed future equity
offering, to assume financing with proceeds from the credit facility, (iv)
adjusted minority interest, and (v) the adjustment to remove CapStar's
income taxes in conjunction with the change in its tax status to a REIT.
(H) Pro forma net income per common share has been calculated using 45,474,873
basic shares and 45,767,508 diluted shares of MeriStar Common Stock.
(I) As a result of the Spin-Off, the Merger and the Transactions, MeriStar
expects the following non-recurring items: (i) estimated tax expense of
$20,000 and transaction expenses of $2,000 related to the Spin-Off, (ii)
the write off of deferred financing fees of $5,529 in connection with the
termination of CapStar's credit facility, and (iii) the write off of
CapStar's deferred tax liability of $6,098 in conjunction with the change
in its tax status to a REIT. These items will be charged to operations as
incurred and have not been included in the Unaudited Pro Forma Statement
of Operations.
106
<PAGE>
OPCO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The Unaudited Pro Forma Balance Sheet of OpCo as of December 31, 1997 is
presented assuming the following transactions had occurred on December 31,
1997: (i) the Spin-Off, (ii) the execution of the Participating Leases and the
transfer of net hotel operating assets from CapStar, and (iii) the acquisition
of AGH Leasing and AGHI.
The Unaudited Pro Forma Statement of Operations of OpCo for the year ended
December 31, 1997 is presented assuming the following transactions occurred at
the beginning of 1997: (i) the Spin-Off, (ii) the execution of the
Participating Leases and the related transfer of hotel operations, and (iii)
the acquisition of AGH Leasing and AGHI.
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments columns, which are
further described in the notes to the OpCo Unaudited Pro Forma Financial
Statements. The OpCo Unaudited Pro Forma Financial Statements are not
necessarily indicative of what OpCo's financial position or results of
operations would have been if all the hotels were owned on such dates and if
the Spin-Off and other related transactions occurred on such dates.
Additionally, the pro forma information does not purport to project OpCo's
financial position or results of operations at any future date or for any
future period. The OpCo Unaudited Pro Forma Financial Statements should be
read in conjunction with the historical financial statements and related notes
thereto of OpCo, AGH Leasing and AGHI which are incorporated by reference
herein.
107
<PAGE>
OPCO
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUIRE
AGH
SPIN- PARTICIPATING LEASING AND
HISTORICAL(A) OFF(B) LEASES(C) SUBTOTAL AGHI(D) PRO FORMA
------------- -------- ------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $27,022 $ 30,000 $ -- $ 57,022 $(48,799) $ 8,223
Prepaid expenses,
deposits and other..... 19,173 -- 28,580 47,753 -- 47,753
Intangible and fixed
assets, net............ 38,224 -- -- 38,224 95,000 133,224
------- -------- ------- -------- -------- --------
Total assets.......... $84,419 $ 30,000 $28,580 $142,999 $ 46,201 $189,200
======= ======== ======= ======== ======== ========
LIABILITIES, MINORITY INTEREST AND
OWNERS'/STOCKHOLDERS' EQUITY
Due to affiliate........ $22,287 $(22,287) $ 1,933 $ 1,933 $ -- $ 1,933
Other liabilities....... 16,442 -- 26,647 43,089 -- 43,089
Note payable to
affiliate.............. -- 30,000 -- 30,000 35,000 65,000
Capital leases and other
debt................... 981 -- 981 -- 981
------- -------- ------- -------- -------- --------
Total liabilities..... 39,710 7,713 28,580 76,003 35,000 111,003
Minority interest....... 3,800 932 -- 4,732 11,201 15,933
Owners'/Stockholders'
equity................. 40,909 21,355 -- 62,264 -- 62,264
------- -------- ------- -------- -------- --------
Total liabilities,
minority interest and
owners'/stockholders'
equity............... $84,419 $ 30,000 $28,580 $142,999 $ 46,201 $189,200
======= ======== ======= ======== ======== ========
</TABLE>
- --------
(A) Reflects the audited historical condensed combined balance sheet of OpCo
as of December 31, 1997.
(B) Reflects adjustments to capitalize OpCo upon the Spin-Off for (i) $30,000
of cash drawn from OpCo's credit facility to be provided by MeriStar, and
(ii) contributions of $22,287 to OpCo by CapStar upon forgiveness of the
amounts due to CapStar.
(C) Reflects the transfer of net hotel operating assets from CapStar in
conjunction with the execution of the Participating Leases.
(D) Reflects the acquisitions of AGH Leasing and AGHI for $95,000. Based on
preliminary estimates, the purchase price will be allocated $26,500 to
intangible hotel leases acquired and $68,500 to goodwill. The transaction
is to be financed with $48,799 in cash, an additional $35,000 drawn from
OpCo's credit facility to be provided by MeriStar, and $11,201 in OpCo OP
Units.
108
<PAGE>
OPCO
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACQUIRE AGH LEASING
AND AGHI
----------------------------------
SPIN-OFF PARTICIPATING AGH OTHER
HISTORICAL(A) PRO FORMA(B) LEASES(C) SUBTOTAL LEASING(D) AGHI(D) ADJUSTMENTS(E) PRO FORMA
------------- ------------ ------------- -------- ---------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from hotel
operations:
Rooms.................. $ 9,880 $68,738 $311,020 $389,638 $252,513 $ -- $ -- $642,151
Food and beverage...... 1,397 3,316 128,787 133,500 76,703 -- -- 210,203
Other.................. 474 3,237 23,742 27,453 15,690 -- -- 43,143
Hotel management,
accounting and other... 12,088 -- (7,238) 4,850 -- 7,351 (1,691) 10,510
------- ------- -------- -------- -------- ------ -------- --------
Total revenue.......... 23,839 75,291 456,311 555,441 344,906 7,351 (1,691) 906,007
Hotel operating expense
by department:
Rooms.................. 2,533 14,300 80,402 97,235 59,503 -- -- 156,738
Food and beverage...... 909 2,215 102,013 105,137 58,940 -- -- 164,077
Other operating
departments........... 261 1,648 13,363 15,272 8,259 -- -- 23,531
Undistributed operating
expenses:
Administrative and
general............... 10,473 11,169 72,919 94,561 54,873 7,242 (1,102) 155,574
Property operating
costs................. 1,917 12,265 56,693 70,875 47,607 -- (7,355) 111,127
Participating lease
expense............... 4,135 32,002 124,684 160,821 120,128 -- -- 280,949
Depreciation and
amortization.......... 636 826 -- 1,462 104 124 3,000 4,690
------- ------- -------- -------- -------- ------ -------- --------
20,864 74,425 450,074 545,363 349,414 7,366 (5,457) 896,686
Interest expense and
other, net............. 10 2,775 -- 2,785 (373) (135) 2,974 5,251
------- ------- -------- -------- -------- ------ -------- --------
Total expenses.......... 20,874 77,200 450,074 548,148 349,041 7,231 (2,483) 901,937
------- ------- -------- -------- -------- ------ -------- --------
Income (loss) before
minority interest and
income taxes........... 2,965 (1,909) 6,237 7,293 (4,135) 120 792 4,070
Minority interest....... 103 (14) 261 350 (1,663) -- 2,013 700
------- ------- -------- -------- -------- ------ -------- --------
Income (loss) before
income taxes........... 2,862 (1,895) 5,976 6,943 (2,472) 120 (1,221) 3,370
Income tax provision.... -- 387 2,391 2,778 -- -- (1,429) 1,349
------- ------- -------- -------- -------- ------ -------- --------
Net income (loss)....... $ 2,862 $(2,282) $ 3,585 $ 4,165 $ (2,472) $ 120 $ 208 $ 2,021
======= ======= ======== ======== ======== ====== ======== ========
Basic net income per
common share(F)........ NA $ 0.08
======= ========
Diluted net income per
common share(F)........ NA $ 0.08
======= ========
</TABLE>
- --------
(A) Reflects the audited historical condensed combined statement of operations
of OpCo for the year ended December 31, 1997.
(B) Reflects the pre-acquisition operations of the management operations and
leases acquired during 1997 as if they were acquired at the beginning of
the year. The pre-acquisition operations were obtained from each entity's
pre-acquisition financial statements. Also reflects adjustments to (i)
record pro forma depreciation and amortization at OpCo's cost basis for
its acquisitions, (ii) record interest expense of $2,775 at 9.25% relating
to the $30,000 drawn from OpCo's credit facility, (iii) adjust minority
interest for the effects of the acquisitions and (i) and (ii), and (iv)
record income taxes at 40% in conjunction with the change in tax status to
a C Corporation.
(C) Reflects the execution of the Participating Leases to (i) present a full
year of hotel operations for hotels leased from CapStar, (ii) eliminate
$7,238 of management fee revenue earned from CapStar-owned hotels, (iii)
adjust minority interest for the effects of (i) and (ii), and (iv) record
income taxes at 40%.
109
<PAGE>
(D) Reflects adjustments for the acquisition of AGH Leasing and AGHI for (i)
pro forma AGH Leasing presented in AGH's Current Report on Form 8-K, dated
April 7, 1998, filed with the Commission and incorporated herein by
reference and (ii) the historical operating activity of AGHI which is
derived from the historical financial statements of AGHI included in
CapStar's Current Report on Form 8-K, dated April 7, 1997 filed with the
Commission and incorporated herein by reference.
(E) Other adjustments for the acquisition reflect (i) elimination of
historical management fees earned by AGHI from the AGH Owned Hotels of
$1,691, (ii) elimination of pro forma management fees incurred by AGH
Leasing for AGHI services of $7,355, (iii) elimination of a consulting fee
of $2,227 which will not be incurred in the future net of $1,125 of
addition general and administrative costs expected to be incurred upon the
Spin- Off and acquisition, (iv) amortization of $3,000 on intangible
assets acquired in the purchase, (v) interest expense of $3,238 relating
to the $35,000 draw from OpCo's credit facility net of historical AGH
Leasing and AGHI interest expense of $264 which will not be incurred upon
acquisition, (vi) minority interest adjusted for (i) through (v), and
(vii) income taxes at 40%.
(F) Pro forma basic and diluted net income per common share has been
calculated using 24,867,205 shares of OpCo Common Stock.
110
<PAGE>
BUSINESS OF AGH
AGH is a self-administered REIT that owns a geographically diverse portfolio
of primarily full- service hotels. There are currently 53 AGH Owned Hotels
located in 21 states and containing an aggregate of approximately 12,600 guest
rooms. Substantially all of the AGH Owned Hotels are operated under franchise
agreements with such national hotel brands as Crowne Plaza, Hilton, Wyndham,
Marriot, Holiday Inn Select, Radisson, Westin, DoubleTree, Holiday Inn and
Sheraton. AGH's management believes that the full-service segment of the hotel
market continues to offer numerous opportunities to acquire hotels at
attractive multiples of cash flow and at discounts to replacement cost,
including underperforming hotels that may benefit from AGH's repositioning
strategies.
In order to qualify as a REIT, AGH may not operate hotels. AGH has leased 45
of the AGH Owned Hotels to AGH Leasing (and an affiliate of AGH Leasing known
as Twin Towers Leasing, L.P.) and eight of the AGH Owned Hotels to independent
lessees that are affiliates of Prime Hospitality Corp. ("Prime"), a NYSE-
listed corporation (together, the "Prime Lessee"), each pursuant to separate
Participating Leases. Following the Merger, AGH expects that it will lease
future acquired hotels to OpCo, and certain hotels subject to purchase
contracts with Prime, to the Prime Lessee. AGH Leasing has entered into
separate management agreements with AGHI to manage 44 of the AGH Owned Hotels
and Wyndham Hotel Corporation ("Wyndham") to manage one of the MeriStar Owned
Hotels. The remaining eight AGH Owned Hotels are leased and managed by the
Prime Lessee. Following the Merger, MeriStar will enter into management
agreements for future acquired hotels, other than certain hotels subject to
existing hotel purchase agreements with Prime.
Concurrent with the execution of the Merger Agreement, the partners of AGH
Leasing, AGHI and OpCo entered into an acquisition agreement pursuant to which
OpCo agreed to purchase (i) substantially all of the assets of the AGHI and
(ii) 100% of the limited partnership interests in the AGH Leasing, which
purchases will close immediately following the Spin-Off and the Merger. See
"The Spin-Off--The Lessee-Manager Acquisition Agreement."
111
<PAGE>
BUSINESS OF CAPSTAR
CapStar is a leading owner and manager of upscale, full-service hotels in
North America. CapStar owns, leases and/or manages 141 hotels that contain
28,247 rooms. There are 56 CapStar Owned Hotels containing 14,938 rooms, 45
CapStar Leased Hotels (of which it manages 35) containing 6,410 rooms and 40
CapStar Managed Hotels containing 6,899 rooms. The CapStar Owned Hotels are
located in major metropolitan areas or rapidly growing secondary cities and
are well located within these markets. The CapStar Owned Hotels include hotels
operated under nationally recognized brand names such as Hilton, Sheraton,
Westin, Marriott, Doubletree and Embassy Suites. CapStar's business strategy
is to opportunistically acquire hotel properties and related businesses with
the potential for cash flow growth, and to renovate, reposition and operate
each hotel according to a business plan specifically tailored to the
characteristics of the hotel and its market.
CapStar is one of the fastest growing owner/operators of upscale, full-
service hotels in North America, having increased its portfolio of CapStar
Owned Hotels fourfold since its initial public offering in August 1996. During
the year ended December 31, 1997, CapStar expanded its portfolio by completing
the purchase of 28 upscale, full-service hotels containing 6,853 rooms for an
aggregate purchase price, including planned initial renovations, of $602.1
million. In January 1998, CapStar completed the acquisition of a portfolio of
six upscale, full-service hotels containing 1,960 rooms from certain
affiliates of Medallion Hotels, Inc. for a purchase price of $150.0 million.
In addition, in April 1998 CapStar acquired the 524-room Sheraton Fisherman's
Wharf Hotel for a purchase price of $84.0 million. During 1997, CapStar
expanded its base of CapStar Leased Hotels and CapStar Managed Hotels through
the acquisition of substantially all of the assets of Winston, for a purchase
price of approximately $34.0 million. As a result of the Winston acquisition,
CapStar currently leases 43 hotels owned by Winston Hotels, Inc., a real
estate investment trust, and manages 33 of such hotels.
As a fully integrated owner and manager, CapStar has capitalized on its
management experience and expertise by continuing to make opportunistic
acquisitions of full-service hotels, securing additional management agreements
and improving the operating performance of its hotels. CapStar's senior
management team, with an average of 20 years of lodging industry experience,
has successfully managed hotels in all segments of the lodging industry, with
particular emphasis on upscale, full-service hotels. Since the inception of
CapStar's management business in 1987, CapStar has achieved consistent revenue
and portfolio growth, even during periods of relative industry weakness.
CapStar believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to own, manage and acquire
hotels and further believes that there are currently many attractive
opportunities to acquire properties in this segment of the industry at prices
below replacement cost. The upscale, full-service segment is attractive for
several reasons. First, CapStar expects that there will be no significant
increases in the supply of upscale, full-service hotels in the next several
years because the cost of new construction generally does not justify new
hotel development. Second, upscale, full-service hotels appeal to a wide
variety of customers, thus reducing the risk of decreasing demand from any
particular customer group. Additionally, such hotels have particular appeal to
both business executives and upscale leisure travelers, customers who are
generally less price sensitive than travelers who use limited-service hotels.
Finally, full-service hotels require a greater depth of management expertise
than limited-service hotels, and CapStar believes that its superior management
skills provide it with a significant competitive advantage in their operation.
112
<PAGE>
BUSINESS OF OPCO
OpCo will be the successor in interest and will assume all of the rights and
liabilities with respect to the management agreements and Participating Leases
of the Predecessor Entities. See "The Spin- Off--The Lessee-Manager
Acquisition Agreement." At the effective time of the Spin-Off, OpCo will lease
and manage 134 hotels containing 30,907 rooms and manage an additional 55
hotels containing 9,787 rooms, and lease (but not manage) 11 hotels containing
1,498 rooms. OpCo will be one of the largest independent hotel management
company in the United States based on rooms under management.
OpCo will enter into the Intercompany Agreement with MeriStar pursuant to
which OpCo will be given the right of first refusal to manage all of the
future MeriStar Owned Hotels. OpCo believes that the Intercompany Agreement
represents an attractive opportunity because (i) the MeriStar Owned Hotels are
upscale, full-service hotels operated under nationally recognized brand names
located in major metropolitan or growing secondary markets and (ii) they have
attractive current returns and potential for significant revenue and cash flow
growth through implementation of OpCo's operating strategy.
OpCo will capitalize on its management experience and expertise by
continuing to secure additional management agreements and improving the
operating performance of the hotels it leases and/or manages. OpCo's senior
management team, with an average of 20 years of lodging industry experience,
has successfully managed hotels in all segments of the lodging industry, with
particular emphasis on upscale, full-service hotels. This management
experience led the Predecessor Entities to achieve consistent revenue and
portfolio growth, even during periods of relative industry weakness.
The Predecessor Entities attributed their management success to their
ability to analyze each hotel as a unique property and identify those
particular cash flow growth opportunities which each hotel presents. OpCo's
principal operating objectives will be to continue to analyze each hotel as a
unique property, to generate higher RevPAR, to increase average daily rates
ADR, and to increase net operating income while providing its hotel guests
with high-quality service and value.
In addition to assuming the rights and obligations under all of the
operating leases and management contracts of the Predecessor Entities, OpCo
will assume the interest of the Predecessor Entities in two joint ventures.
OpCo expects to form additional strategic alliances with institutional and
private hotel owners and to secure additional fee management arrangements. See
"Special Note Regarding Forward-Looking Statements."
113
<PAGE>
POLICIES OF MERISTAR
The following is a discussion of MeriStar's policies with respect to
distributions, investment, financing, conflicts of interest and certain other
activities, which MeriStar expects to implement following the Merger. Neither
the MeriStar Charter nor the MeriStar Bylaws mandate any specific policies,
and those set forth below may be amended or rescinded from time to time
following consummation of the Merger at the discretion of the MeriStar Board
without a vote of its stockholders, except that (i) changes in certain
policies with respect to conflicts of interest must be consistent with legal
requirements and (ii) certain policies with respect to competition are imposed
pursuant to contracts that cannot be amended without the consent of all
parties thereto.
DIVIDEND AND DISTRIBUTION POLICIES
It is intended that MeriStar will operate so as to qualify as a REIT under
sections 856 through 860 of the Code and applicable Treasury Regulations. To
obtain and maintain its status as a REIT, MeriStar generally will be required
each year to distribute to its stockholders at least 95% of its taxable income
after certain adjustments.
Future distributions by MeriStar will be at the discretion of the MeriStar
Board and will depend on MeriStar's financial condition, its capital
requirements, the annual distribution requirements under the REIT provisions
of the Code and such other factors as the MeriStar Board deems relevant. There
can be no assurance that any such distributions will be made by MeriStar.
Distributions by MeriStar to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income. Distributions in excess of
current and accumulated earnings and profits will be treated as a non-taxable
reduction of the stockholder's basis in its shares of MeriStar Common Stock to
the extent thereof, and thereafter as taxable gain. Distributions that are
treated as a reduction of the stockholder's basis in its shares of MeriStar
Common Stock will have the effect of deferring taxation until the sale of the
stockholder's shares. No assurances can be given regarding what percent of
future distributions will constitute return of capital for federal income tax
purposes.
INVESTMENT POLICIES
As part of the Merger, the CapStar Hotel OP will be merged into the AGH
Operating Partnership, and MeriStar intends to conduct all its investment
activities, as well as, new activities through the MeriStar Operating
Partnership for as long as such partnership exists.
Investments in Real Estate or Interests in Real Estate
MeriStar intends to acquire equity interests in hotels and related
properties throughout the United States and, on a limited basis, elsewhere in
North America. Additional acquisitions could be made directly or by the
MeriStar Operating Partnership or other entities controlled by MeriStar, if
any exist. MeriStar's investment objective is to maximize current returns to
MeriStar stockholders through increases in cash available for distribution and
to increase long-term returns to MeriStar stockholders through appreciation in
the value of the MeriStar Common Stock. MeriStar intends to achieve these
objectives by participating in increased profits from the MeriStar Owned
Hotels pursuant to the Participating Leases and by the selective acquisition
and development of hotel properties.
Although AGH presently anticipates that additional investments in hotel
properties will be made through the MeriStar Operating Partnership, additional
investments may be made directly by MeriStar or other entities controlled by
MeriStar, if any exist. Such investments may be financed, in whole or in part,
with excess cash flow, borrowings or subsequent issuances of shares of
MeriStar Common Stock or other securities issued by MeriStar or by entities
controlled by MeriStar.
114
<PAGE>
Investments in Other Entities
MeriStar also may participate with other entities in property ownership,
through joint ventures or other types of co-ownership. Equity investments may
be subject to existing mortgage financing and other indebtedness that may have
priority over the equity interests in MeriStar.
Investments in Real Estate Mortgages and Securities of Other Issuers
While MeriStar will emphasize equity hospitality investments, it may, in its
discretion, invest in mortgage and other real estate interests, including
securities of REITs and other issuers. Subject to compliance with applicable
REIT asset test requirements. MeriStar will have no limit on the amount or
percentage of assets represented by one investment or investment type.
MeriStar does not presently intend to invest in securities of REITs or other
issuers. MeriStar also does not presently intend to trade or underwrite
securities or to make investments for the purpose of exercising control over
other issuers. MeriStar may invest in participating or convertible mortgages
if it concludes that by doing so it may benefit from the cash flow or any
appreciation in the value of the subject property. Such mortgages are similar
to equity participations, because they permit the lender to either participate
in increasing revenues from the property or convert some or all of the
mortgage to equity.
FINANCING POLICIES
MeriStar intends to make additional investments in hotel properties and may
incur indebtedness to make such investments or to meet the distribution
requirements imposed by the REIT provisions of the Code, to the extent that
cash flow from MeriStar's investments and working capital is insufficient to
fund such investments or distributions.
To ensure that MeriStar has sufficient liquidity to conduct its operations,
including making investments in additional hotel properties and funding its
anticipated distribution obligations and financing costs, MeriStar is
currently negotiating the Proposed Credit Facility. Borrowings under the
Proposed Credit Facility, among other things, will be utilized to purchase the
new hotels and additional funds may be used to acquire related businesses.
MeriStar intends to maintain a conservative capital structure.
Borrowings may be incurred through the MeriStar Operating Partnership or
MeriStar. Indebtedness incurred by MeriStar may be in the form of bank
borrowings, secured and unsecured, and publicly and privately placed debt
instruments. Indebtedness incurred by the MeriStar Operating Partnership may
be in the form of purchase money obligations to the sellers of hotels,
publicly or privately placed debt instruments, financing from banks,
institutional investors or other lenders, any of which indebtedness may be
unsecured or may be secured by mortgages or other interests in the hotels
owned by the MeriStar Operating Partnership. Such indebtedness may be recourse
to all or any part of the hotels of MeriStar or the MeriStar Operating
Partnership, or may be limited to the particular hotel to which the
indebtedness relates. The proceeds from any borrowings by MeriStar or the
MeriStar Operating Partnership may be used for the payment of distributions or
dividends, working capital, to refinance existing indebtedness or to finance
acquisitions, expansions, additions or renovations of hotel properties.
If the MeriStar Board determines to raise additional equity capital, upon
approval of Proposal Two, the MeriStar Board will have the authority, without
stockholder approval, to issue additional shares of MeriStar Common Stock and
MeriStar Preferred Stock in any manner (and on such terms and for such
consideration) as it deems appropriate, including in exchange for property.
The stockholders of MeriStar will have no preemptive right to purchase shares
issued in any subsequent offering of shares by MeriStar, and any such issuance
could cause a dilution of a stockholder's investment in MeriStar. See "The
Spin-Off--The Intercompany Agreement."
MeriStar may make investments other than as previously described, although
it does not currently intend to do so.
115
<PAGE>
CONFLICTS OF INTEREST POLICIES
MeriStar will continue certain policies and agreements of AGH and CapStar
designed to minimize potential conflicts of interest. The MeriStar Board will
be subject to certain provisions of Maryland law, which are designed to
eliminate or minimize certain potential conflicts of interest. However, there
can be no assurance that these policies will always be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders. See "Risk Factors--Conflicts of Interest Risks in Relationship
Between MeriStar and the MeriStar Operating Partnership."
Charter and Bylaw Provisions
The MeriStar Charter, with limited exceptions, will require that a majority
of the MeriStar Board be comprised of Independent Directors. The MeriStar
Charter will provide that such provisions relating to Independent Directors
may not be amended, altered, changed or repealed without the affirmative vote
of all of the Independent Directors and the affirmative vote of the holders of
not less than two-thirds of the votes entitled to be cast on such a matter. In
addition, MeriStar's Bylaws will provide that any action pertaining to any
transaction in which MeriStar is purchasing, selling, leasing or mortgaging
any real estate asset, making a joint venture investment or engaging in any
other transaction in which an advisor, director or officer of MeriStar, any
affiliated lessee or affiliated contract manager of any property of MeriStar
or any affiliate of the foregoing, has any direct or indirect interest other
than as a result of such person's status as a director, officer or stockholder
of MeriStar, must be approved by the affirmative vote of a majority of the
Independent Directors even if the Independent Directors constitute less than a
quorum.
The MeriStar Operating Partnership
A conflict of interest may arise between MeriStar, as a general and limited
partner of the MeriStar Operating Partnership, and the other MeriStar Limited
Partners of the MeriStar Operating Partnership, due to the differing potential
tax liability to MeriStar and the other MeriStar Limited Partners from the
subsequent sale of certain hotels by the MeriStar Operating Partnership
resulting from the differing tax bases of MeriStar and such affiliates
associated with such hotels. The MeriStar Operating Partnership Agreement will
give MeriStar, as the general partner of the MeriStar Operating Partnership,
full, complete and exclusive discretion in managing and controlling the
business of the MeriStar Operating Partnership and in making all decisions
affecting the business and assets of the MeriStar Operating Partnership.
Provisions of the MGCL
Pursuant to the MGCL, each director of MeriStar will be required to
discharge his duties in good faith, in a manner he reasonably believes to be
in the best interest of MeriStar and with the care that an ordinarily prudent
person in a like position would use under similar circumstances. In addition,
under the MGCL, a contract or other transaction between MeriStar and a
director or between MeriStar and any other corporation or other entity in
which a director of MeriStar is a director or has a material financial
interest will not be void or voidable solely on the grounds of such interest,
the presence of the director at the meeting at which the contract or
transaction is approved or the director's vote in favor thereof if (a) the
fact of the common directorship or interest is disclosed or known to (i) the
board of directors or committee, and the board or committee authorizes,
approves or ratifies the contract or transaction by the affirmative vote of a
majority of disinterested directors, even if the disinterested directors
constitute less than a quorum, or (ii) the stockholders entitled to vote, and
the transaction or contract is authorized, approved or ratified by a majority
of the votes cast by the stockholders entitled to vote other than the votes of
shares owned of record or beneficially by the interested director or
corporation, firm or other entity, or (b) the contract or the transaction is
fair and reasonable to MeriStar.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
MeriStar will have the authority to offer shares of stock or other
securities and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. MeriStar may (but
is
116
<PAGE>
not obligated to) issue shares of MeriStar Common Stock to holders of MeriStar
OP Units upon exercise of the Exchange Rights. MeriStar does not intend to
engage in trading, underwriting or agency distribution or sale of securities
of other issuers, nor does MeriStar intend to invest in the securities of
other issuers other than the MeriStar Operating Partnership for the purpose of
exercising control over such issuers. MeriStar does not intend to make any
loans to third parties, although it does intend to make certain loans to the
OpCo, and it may in the future make loans to third parties, including, without
limitation, to joint ventures in which it participates. See "The Spin-Off."
MeriStar intends to make investments in such a way that it will not be
required to register as an investment company under the Investment Company Act
of 1940, as amended.
WORKING CAPITAL RESERVES
MeriStar will maintain working capital reserves in amounts that the MeriStar
Board determines to be adequate to meet normal contingencies in connection
with the operation of MeriStar's business and investments.
117
<PAGE>
MANAGEMENT OF MERISTAR
DIRECTORS
The following table sets forth the proposed composition of the MeriStar
Board following consummation of the Merger, if both the Merger Proposal and
Proposal Five are approved. See "The AGH Meeting--The Merger Proposal" and "--
Proposal Five: Election of Directors." For information concerning the business
experience of the persons to be elected to the MeriStar Board, see "The AGH
Meeting--Proposal Five: Election of Directors."
<TABLE>
<CAPTION>
EXPIRATION
NAME AGE OF TERM CLASS
---- --- ---------- -----
<S> <C> <C> <C>
Daniel L. Doctoroff..................................... 39 2000 I
William S. Janes........................................ 43 2000 I
Steven D. Jorns......................................... 49 2000 I
H. Cabot Lodge III...................................... 41 2001 II
Paul W. Whetsell........................................ 47 2001 II
James R. Worms.......................................... 51 2001 II
James F. Dannhauser..................................... 45 1999 III
Bruce G. Wiles.......................................... 46 1999 III
[Additional Director]................................... . 1999 III
</TABLE>
EXECUTIVE OFFICERS
The following table sets forth the name, age, expected title and business
experience for each person who is expected to serve as an executive officer of
MeriStar following consummation of the Merger. For information concerning the
business experience of Messrs. Whetsell, Jorns and Wiles, see "The AGH
Meeting--Proposal Five: Election of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul W. Whetsell...... 47 Chairman of the Board and Chief Executive Officer
Steven D. Jorns....... 49 Vice Chairman and Chief Operating Officer
Bruce G. Wiles........ 46 President and Chief Investment Officer
John Emery............ 34 Chief Financial Officer
Kenneth E. Barr....... 49 Treasurer and Chief Accounting Officer
</TABLE>
John Emery has served as Chief Financial Officer of CapStar since June 1997.
From March 1996 to June of 1997, Mr. Emery served as Treasurer and Secretary
of CapStar. From September 1995 to March 1996, he served as Director of
Finance of CapStar. Prior to that, from January 1987 to September 1995, he
worked for Deloitte & Touche LLP in various capacities, culminating with
Senior Manager for the hotel and real estate industries.
Kenneth E. Barr has served as Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of AGH since April 1996. Mr. Barr has also
served since 1994 as a Senior Vice President of AGHI, where he directs the
Accounting and Finance Department. At AGHI, Mr. Barr is responsible for
financial management and controllership functions, including financial,
accounting and reporting, management information systems, risk management,
internal audits and treasury activities. Prior to joining AGHI, Mr. Barr held
a senior financial position with Richfield Hotel Management, Inc., a national
hotel management company. Prior to joining Richfield Hotel Management, Inc. in
1991, Mr. Barr served as the partner in charge of the audit practice of
Laventhol & Horwath in Dallas and was also a member of that firm's National
Audit Advisory Board. He is a Certified Public Accountant in Texas, Oklahoma
and Puerto Rico.
EMPLOYMENT AGREEMENTS
MeriStar has agreed to enter into employment agreements with Paul W.
Whetsell, Steven D. Jorns, Bruce G. Wiles, John Emery and Kenneth E. Barr
effective as of the Effective Time. With respect to Messrs. Whetsell
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and Jorns, each agreement will be for an initial term of five years with
automatic renewals on a year-to-year basis thereafter unless terminated in
accordance with its terms. The other employment agreements will be for an
initial term of three years, with automatic renewals on a year-to-year basis
thereafter, unless terminated in accordance with their respective terms.
Certain material terms of these agreements are as follows:
Base Salary
Messrs. Whetsell and Jorns will each receive a base salary of $285,000 per
year (Messrs. Whetsell and Jorns will each receive a base salary of $190,000
per year as employees of OpCo). Mr. Wiles will receive a base salary of
$300,000 per year, Mr. Emery will receive a base salary of $275,000 per year
and Mr. Barr will receive a base salary of $190,000 per year. Each base salary
will be subject to review annually.
Annual Incentive Bonus
Each executive shall be eligible to receive an annual incentive bonus at the
following targeted amounts of base salary:
<TABLE>
<CAPTION>
THRESHOLD MAXIMUM
TARGET TARGET BONUS AMOUNT
--------- ------ ------------
<S> <C> <C> <C>
Paul W. Whetsell............................... 25% 75% 150%
Steven D. Jorns................................ 25% 75% 150%
Bruce G. Wiles................................. 25% 50% 100%
John Emery..................................... 25% 50% 100%
Kenneth E. Barr................................ 25% 50% 100%
</TABLE>
The amount of the annual bonus will be based on the achievement of
predefined operating or performance goals and other criteria to be established
by the Compensation Committee of the MeriStar Board.
Long-Term Incentives
Each executive will be eligible to participate in the MeriStar Incentive
Plan. Awards will be made in the discretion of the Compensation Committee.
Certain Severance Benefits
If, at any time during the term of their respective employment agreements or
any automatic renewal period, the employment of Messrs. Whetsell, Jorns,
Wiles, Emery or Barr is terminated, he shall be entitled to receive the
benefits described below.
Termination by MeriStar Without Cause or by the Executive with Good
Reason. In the case of Messrs. Whetsell and Jorns, if such executive is
terminated without cause or voluntarily terminates with "good reason," he is
entitled to a lump sum payment equal to two times the sum of his then annual
base salary plus his bonus for the preceding year. In addition, all of the
executive's options and restricted stock will vest, effective as of the
termination date. The other executives will receive (i) a lump sum payment
equal to one times their then annual base salary, (ii) the amount of their
bonus for the preceding year, and (iii) immediate vesting and exercisability
of all unvested stock options and restricted stock awards.
In the case of each of the executives, in the event that any accelerated
vesting of the executive's rights with respect to stock options, restricted
stock or any other benefit or compensation results in the imposition of an
excise tax payable by the executive under Section 4999 of the Code, or any
successor or other provision with respect to "excess parachute payments"
within the meaning of Section 280G(b) of the Internal Revenue Code, MeriStar
will make a cash payment to the executive in the amount of such taxes and
shall also make a cash payment to the executive in an amount equal to the
total of federal, state and local income and excise taxes for which the
executive may be liable on account of such cash payments made (the "280G
Payment").
Termination Due to Death or Disability. Upon termination due to death or
disability, the executive or his estate will receive a lump sum payment equal
to the executive's base salary, plus the pro rata portion of his
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bonus for the fiscal year in question, in addition to payment for one year of
any other compensation due the executive pursuant to his employment contract.
The executive's stock options and restricted stock will vest immediately.
Voluntary Termination or Termination For Cause. Upon voluntary termination
or termination for "cause" by MeriStar, the executive will receive the pro
rata portion of his base salary through the termination date. Any vested
options held by the executive will expire ninety (90) days after the
termination date.
Termination Following a Change in Control. If Mr. Whetsell or Mr. Jorns is
terminated without cause or voluntarily terminates with "good reason" within
24 months following a "Change in Control," the executive will receive the
following benefits: (i) a lump sum payment equal to three times the sum of his
then annual base salary and an amount equal to his bonus for the previous
year; (ii) all unvested stock options held by the executive will vest and be
exercisable immediately; and (iii) the 280G Payment. In the case of the other
executives, they would each be entitled to the same type of payments provided
the termination occurred within 18 months of the Change in Control, except
they will only receive two times the sum of their then annual base salary plus
bonus.
Termination within 24 Months of Effective Time
Notwithstanding anything to the contrary, stock options or awards of
restricted stock made to Messrs. Whetsell, Jorns, Wiles, Emery, Barr and
Valentine prior to the Effective Time, will continue to vest in accordance
with their original terms if such executive's employment is terminated
voluntarily or involuntarily within 24 months after the Effective Time.
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MANAGEMENT OF OPCO
DIRECTORS
The following table sets forth the proposed composition of the OpCo Board
following consummation of the Merger, if the Merger Proposal is approved. See
"The AGH Meeting--The Merger Proposal." For information concerning the
business experience of Messrs. Doctoroff, Hance, Jorns, McCurry, Whetsell and
Worms, see "The AGH Meeting--Proposal Five: Election of Directors."
<TABLE>
<CAPTION>
NAME AGE
---- ---
<S> <C>
Daniel L. Doctoroff...................................................... 39
Kent R. Hance............................................................ 55
Steven D. Jorns.......................................................... 49
Joseph McCarthy.......................................................... 65
David E. McCaslin........................................................ 41
James McCurry............................................................ 49
Paul W. Whetsell......................................................... 47
James Worms.............................................................. 51
[Additional Director].................................................... .
</TABLE>
Joseph McCarthy has been retired since 1994 and has been a director of
CapStar since 1996. From 1993 to 1994 he served as Chairman of the Board for
Motel 6. From 1985 to 1993, he served as President and Chief Executive Officer
for Motel 6. From 1980 to 1985, he served as President and Chief Executive
Officer of Lincoln Hotels. From 1976 to 1980, he served as President and Chief
Executive Officer of Quality Inns International. Prior to that, from 1971 to
1976, he served as Senior Vice President of the Sheraton Corporation.
David E. McCaslin has been a director of CapStar since 1996. He will serve
as President of MeriStar Hotels. He has served as Chief Operating Officer of
CapStar since 1994. Mr. McCaslin joined CapStar in 1987 as a General Manager
and was named Vice President of Operations in 1988. From 1985 to 1987, Mr.
McCaslin served as General Manager for Lincoln Hotels. Prior to that, from
1979 to 1985, he worked for Westin Hotels in various capacities, including
Assistant General Manager, Rooms Division Manager and Food & Beverage Manager.
EXECUTIVE OFFICERS
The following table sets forth the name, age, expected title and business
experience for each person who is expected to serve as an executive officer of
OpCo following consummation of the Merger. For information concerning the
business experience of Messrs. Whetsell and Jorns, see "The AGH Meeting--
Proposal Five: Election of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul W. Whetsell.......... 47 Chairman of the Board and Chief Executive Officer
Steven D. Jorns........... 49 Vice Chairman and Chief Operating Officer
David E. McCaslin......... 41 President
James A. Calder........... 35 Chief Financial Officer
John E. Plunket........... 42 Executive Vice President, Finance and Development
</TABLE>
James A. Calder has served as Senior Vice President of Finance of CapStar
since September 1997. From May 1995 to September 1997, he served as Senior
Vice President and Corporate Controller of ICF Kaiser International, Inc.
Prior to that, from July 1984 to May 1995, he worked for Deloitte & Touche LLP
in various capacities, culminating with Audit Senior Manager for the real
estate industry.
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John E. Plunket has served as Executive Vice President, Finance and
Development of CapStar since November 1993. From September 1991 to October
1993, Mr. Plunket served as Vice President and Principal Broker for CIG
International, an investment and hotel asset management company. From February
1988 to August 1991, Mr. Plunket served as Managing Director of Cassidy &
Pinkard Inc., a commercial real estate services company. From 1985 to 1987,
Mr. Plunket served as Senior Vice President for Oxford Development
Corporation. Prior to that, from December 1979 to April 1985, Mr. Plunket
worked for Marriott Corporation in various capacities, culminating in Director
of Project Finance.
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DESCRIPTION OF MERISTAR CAPITAL STOCK
The following summary of the terms of the stock of MeriStar, which will be
the stock of the combined entity following the Merger, and the transactions
and certain provisions of the organizational documents of MeriStar, does not
purport to be complete and is subject to and qualified in its entirety by
reference to the AGH Charter and AGH Bylaws, each of which is incorporated by
reference as an exhibit to the Registration Statement of which this Joint
Proxy Statement/Prospectus is a part.
GENERAL
The AGH Charter provides that AGH may issue up to 100,000,000 shares of
stock, par value $0.01 per share. Upon completion of the Merger and the
Transactions and subject to approval by the stockholders of AGH of Proposal
Two, the authorized stock of MeriStar will consist of 250,000,000 shares of
MeriStar Common Stock and 100,000,000 shares of preferred stock, par value
$0.01 per share, of MeriStar (the "MeriStar Preferred Stock"). Conditioned
upon approval of Proposal Two, the MeriStar Charter will contain a provision
permitting the MeriStar Board, to the extent permitted by Maryland law,
without any action by the stockholders of the MeriStar, to amend the MeriStar
Charter to increase or decrease the aggregate number of shares of stock or the
number of shares of any class or series of stock that MeriStar has authority
to issue.
MERISTAR COMMON STOCK
All shares of MeriStar Common Stock offered hereby will be duly authorized,
fully paid and nonassessable. Subject to the preferential rights of any other
class or series of stock and to the provisions of the AGH Charter regarding
the restrictions on transfer of stock, holders of shares of MeriStar Common
Stock will be entitled to receive dividends on such stock if, as and when
authorized and declared by the MeriStar Board out of assets legally available
therefor and to share ratably in the assets of the MeriStar legally available
for distribution to its stockholders in the event of its liquidation,
dissolution or winding up after payment of or adequate provision for all known
debts and liabilities of the MeriStar.
Subject to the provisions of the MeriStar Charter regarding the restrictions
on transfer of stock, each outstanding share of MeriStar Common Stock entitles
the holder to one vote on all matters submitted to the vote of stockholders,
including the election of directors and, except as provided with respect to
any other class or series of stock, holders of such shares will possess the
exclusive voting power. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the outstanding
shares of MeriStar Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares will not be able to elect
any directors.
Holders of shares of MeriStar Common Stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have no preemptive
rights to subscribe for any securities of MeriStar. Shares of MeriStar Common
Stock will have equal dividend, liquidation and other rights.
Except with respect to the number of authorized shares of MeriStar stock,
the authorization of the MeriStar Board to amend the charter to increase or
decrease the number of authorized shares of stock or the number of shares of
stock of any class or series and authorization of the MeriStar Board to
classify any unissued shares of the MeriStar Preferred Stock, as summarized in
Proposal Two, each share of MeriStar Common Stock has the same rights and
restrictions as a share of AGH Common Stock. See "Proposal Two: Approval of
the MeriStar Charter" and "Comparison of Rights of Holders of AGH Common Stock
and CapStar Common Stock."
MERISTAR PREFERRED STOCK
Subject to the approval of stockholders of AGH, MeriStar will be authorized
to issue 100,000,000 shares of MeriStar Preferred Stock. In addition, the
MeriStar Board will be authorized: (i) to classify and reclassify any unissued
shares of any series of MeriStar Preferred Stock; (ii) to provide for the
issuance of shares in other classes or series, including preferred stock in
one or more series; (iii) to establish the number of shares in each
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class or series or (iv) to fix the preferences, conversion and other rights,
voting powers, restrictions; limitations as to dividends, qualifications and
terms and conditions of redemption of such class or series. See "Proposal Two:
Approval of the MeriStar Charter."
For a discussion of (i) the voting rights of the MeriStar stockholders, (ii)
dividends and other distributions payable on the MeriStar Common Stock, (iii)
preemptive rights with respect to the MeriStar Common Stock, and (iv) the
rights of the MeriStar stockholders with respect to certain mergers and
acquisitions and restrictions on the transfer of shares of MeriStar Common
Stock, see "Proposal Two: Approval of the MeriStar Charter" and "Comparison of
Rights of Holders of AGH Common Stock and CapStar Common Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the MeriStar Common Stock will be . .
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COMPARISON OF RIGHTS OF HOLDERS OF AGH COMMON STOCK AND CAPSTAR COMMON STOCK
GENERAL
AGH is incorporated under the laws of the State of Maryland and CapStar is
incorporated under the laws of the State of Delaware. CapStar stockholders,
whose rights as stockholders currently are governed by Delaware law and the
CapStar Charter, will become, upon consummation of the Merger, stockholders of
AGH, and their rights as stockholders will then be governed by Maryland law
and the AGH Charter and AGH Bylaws. The following summary, which does not
purport to be a complete statement of the differences between the rights of
AGH stockholders and the rights of CapStar stockholders, sets forth certain
differences, including differences which are material to CapStar stockholders.
The following summary is qualified in its entirety by reference to the MGCL
and the DGCL, and to the AGH Charter and AGH Bylaws and the CapStar Charter
and the CapStar By-Laws. Except as otherwise discussed below or in the section
"Amendments to the AGH Charter and the AGH Bylaws," the provisions of the AGH
Charter and AGH By-Laws described below remain unchanged and are not affected
by the Amended AGH Charter and Amended AGH Bylaws.
The MGCL, the AGH Charter and AGH Bylaws contain provisions that may be
deemed to have an anti-takeover effect and that may delay, defer or prevent a
change in control of AGH or other transaction that an AGH stockholder might
consider in its best interest, including a transaction that might result in a
premium over the market price for the shares held by stockholders. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of AGH to negotiate first with the AGH Board. AGH's management
believes that the benefits of these provisions outweigh the potential
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals might result in an improvement of their terms.
Although similar provisions exist under Delaware law and have been applicable
to CapStar, the CapStar Charter and CapStar By-laws do not contain certain
anti-takeover provisions contained in the AGH Charter.
AUTHORIZED CAPITAL
The authorized stock of AGH consists of 100,000,000 shares of AGH Common
Stock. Contingent upon the Merger, if the required vote is obtained to approve
Proposal Two, Approval of Article of Amendment and Restatement of AGH, the
authorized stock of MeriStar will be increased to 250,000,000 shares of
MeriStar Common Stock and 100,000,000 shares of MeriStar Preferred Stock. The
authorized capital stock of CapStar consists of 49,000,000 shares of CapStar
Common Stock and 25,000,000 shares of CapStar preferred stock, par value $0.01
per share.
NUMBER OF DIRECTORS; ELECTION OF DIRECTORS; REMOVAL; VACANCIES
The MGCL provides that a corporation shall have the number of directors
provided in its charter until such number is changed by the bylaws. The AGH
Charter and the AGH Bylaws provide that the number of directors will consist
of not less than three nor more than 15 persons, as determined by the
affirmative vote of a majority of the entire AGH Board. At all times, a
majority of the directors of the AGH Board shall be Independent Directors (as
defined in the AGH Charter), except that upon the death, removal, incapacity
or resignation of an Independent Director, such requirement shall not be
applicable for 60 days. There are currently five directors on the AGH Board,
four of whom are Independent Directors. Pursuant to the Merger, the number of
directors on the MeriStar Board will be increased to nine, six of whom will be
Independent Directors.
Pursuant to the AGH Charter, the AGH Board is divided into three classes of
directors. The initial term of the first class expired in 1997 and that
director was reelected to a term scheduled to expire in 2000, and the initial
terms of the second and third classes will expire in 1998 and 1999,
respectively. As the term of each class expires, directors in that class will
be elected by the AGH Stockholders for a term of three years and until their
successors are duly elected and qualify. Classification of the AGH Board is
intended to assure the continuity and stability of AGH's business strategies
and policies as determined by the AGH Board. Because holders of AGH
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Common Stock will have no right to cumulative voting in the election of
directors, at each annual meeting of stockholders, the holders of a majority
of the shares of AGH Common Stock will be able to elect all of the successors
of the class of directors whose terms expire at that meeting.
The CapStar Board consists of a single class of directors and, thus, at each
meeting of stockholders for the election of directors, the holders of a
majority of the shares of CapStar Common Stock are able to elect all of the
successors of the class of directors whose terms expire at that meeting. The
CapStar Charter does not limit the persons who may serve as directors.
The classified board provision of the AGH Board could have the effect of
making the replacement of incumbent directors more time consuming and
difficult, which could delay, defer or prevent an attempt by a third party to
obtain control of AGH or to pursue another transaction, even though such an
attempt or other transaction might be beneficial to AGH or its stockholders.
At least two annual meetings of stockholders, instead of one, will generally
be required to effect a change in a majority of the AGH Board. Thus, the
classified board provision could increase the likelihood that incumbent
directors will retain their positions.
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and qualifications of
directors. However, if the certificate of incorporation contains provisions
fixing the number of directors, such number may not be changed without
amending the certificate of incorporation. The CapStar By-Laws state that the
number of directors shall be any number not less than one. Pursuant to the
CapStar By-Laws, directors shall be elected by a plurality of votes cast at a
meeting of stockholders and shall hold office until the next annual meeting of
stockholders and until a successor is elected and qualified or until the
director's death, resignation or removal.
Under the MGCL, unless the corporation's charter provides otherwise, the
stockholders of a corporation with a classified board of directors may remove
any director, only for cause, by the affirmative vote of a majority of all the
votes entitled to be cast for the election of directors. The AGH Charter
provides that directors may be removed, with or without cause, only by the
affirmative vote of the holders of at least 75% of votes entitled to be cast
in the election of the directors.
Under the DGCL, unless the board of a corporation is classified or the by-
laws provide for cumulative voting, any director may be removed, with or
without cause, by the holders of a majority of shares entitled to vote for the
election of directors.
Under the MGCL, stockholders may elect a successor to fill a vacancy on the
board of directors which results from the removal of a director. Further,
unless the charter or bylaws provide otherwise, a majority of the remaining
directors (even though less than a quorum) may fill a vacancy which results
from any cause except an increase in the authorized number of directors, and a
majority of the entire board of directors may fill a vacancy which results
from an increase in the number of directors. There is no provision in the MGCL
providing for the filling of vacancies on the board of directors by the
Maryland courts. A director elected by the board of directors to fill a
vacancy serves until the next annual meeting of stockholders and until his
successor is elected and qualified. A director elected by the stockholders to
fill a vacancy which results from the removal of a director serves for the
balance of the term of the removed director. Under the AGH Bylaws, any
vacancies (except vacancies resulting from an increase in the number of
directors) will be filled by the affirmative vote of a majority of the
remaining directors, though less than a quorum. Any directors so elected shall
hold office until the next annual meeting of the stockholders. This provision,
when coupled with the provision of the AGH Charter requiring the affirmative
vote of the holders of at least 75% of votes entitled to be cast in the
election of the directors to remove any director, precludes stockholders,
except upon a substantial affirmative vote, from removing incumbent directors
and filling the vacancies created by such removal with their own nominees.
Under the DGCL, vacancies and newly created directorships may be filled by a
majority of the directors then in office or by a sole remaining director (even
though less than a quorum) unless otherwise provided in the certificate of
incorporation or by-laws. However, the DGCL also provides that if the
directors in office at the
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time of the filling of any such vacancy or newly created directorship
constitute less than a majority of the board as constituted prior to any such
increase, the Court of Chancery may, upon application of any stockholder or
stockholders holding at least 10% of the total number of shares at the time
outstanding entitled to vote for directors, order an election of directors to
be held. The CapStar By-Laws also provide that any vacancies may be filled by
the vote of plurality of the total number of shares at the time outstanding
entitled to vote in the election at a special meeting of stockholders called
for that purpose.
CHARTER AMENDMENTS
As permitted by the MGCL, the AGH Charter provides that it may be amended by
the affirmative vote of holders of shares entitled to cast a majority of all
votes entitled to be cast on such an amendment; provided, however, (i) no term
or provision of the AGH Charter may be added, amended or repealed in any
respect that would, in the determination of the AGH Board, cause AGH not to
qualify as a REIT under the Code, (ii) certain provisions of the AGH Charter,
including provisions relating to the classification of directors, the removal
of directors, Independent Directors, preemptive rights of holders of stock and
the indemnification and limitation of liability of officers and directors may
not be amended or repealed and (iii) provisions imposing cumulative voting in
the election of directors may not be added to the AGH Charter, unless, in each
such case, such action is approved by the affirmative vote of the holders of
not less than two-thirds of all the votes entitled to be cast on the matter.
Also, amendments to Article V of the AGH Charter (which addresses authorized
stock and the restrictions on transfer of stock) may not be made without the
affirmative vote of all the Independent Directors and the holders of not less
than two-thirds of the outstanding shares of stock of AGH entitled to vote
generally in the election of directors.
Under the DGCL, a proposed amendment to the certificate of incorporation
requires a resolution adopted by the board of directors and, unless a greater
vote is required by the certificate of incorporation (which the CapStar
Charter does not require), the affirmative vote of the holders of a majority
of the outstanding stock entitled to vote thereon and (if applicable) the
affirmative vote of the holders of a majority of the outstanding stock of each
class entitled to vote thereon as a class. The holders of a majority of all
outstanding shares of the class or series, voting as a class, is also
necessary to authorize a proposed amendment to increase or decrease the
aggregate number of authorized shares of a class, or to alter or change the
powers, preferences, or special rights of the shares of such class so as to
affect them adversely.
BYLAW AMENDMENTS
Under the MGCL, the power to adopt, alter and repeal the bylaws is vested in
the stockholders, except to the extent a corporation's charter or bylaws vest
it in the board of directors. The AGH Bylaws provide that the AGH Board has
the exclusive power to adopt, alter or repeal any provision of the AGH Bylaws
and to make new bylaws.
Under the DGCL, the power to adopt, alter and repeal the by-laws is vested
in the stockholders, except to the extent that a corporation's certificate of
incorporation or by-laws vest it in the board of directors. However, the
conferral of the power to adopt, alter and repeal the by-laws upon the
directors does not divest the stockholders of their power to adopt, amend or
repeal the by-laws. The CapStar Charter grants the CapStar Board the power to
make and alter the CapStar By-Laws. The CapStar By-Laws provide that the
CapStar By-Laws may be adopted, altered or repealed by the affirmative vote of
the holders of a majority of shares present and entitled to vote in the
election of directors.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The AGH Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election of the AGH Board and the
proposal of business to be considered by stockholders may be made only (i)
pursuant to AGH's notice of the meeting, (ii) by the AGH Board or (iii) by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the AGH Bylaws and (b) with respect to
special meetings of stockholders, only the business specified in AGH's notice
of meeting may be brought before the meeting of stockholders. Nominations of
persons for election to the AGH Board may be made at a special meeting of
stockholders (i) pursuant to AGH's notice of the meeting, (ii) by the AGH
Board or (iii)
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provided that the AGH has determined that directors shall be elected at such
meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the AGH Bylaws.
The CapStar Charter and the CapStar By-laws do not require advance notice of
nomination of persons for election to the CapStar Board.
STOCKHOLDER MEETINGS
The AGH Bylaws provide that annual meetings of stockholders of AGH must be
held on a date and at the time set by the AGH Board during the month of May
each year. The AGH Board has amended the Bylaws to provide that the AGH
Meeting shall be held in the months of June or July of 1998. As permitted by
the MGCL, the AGH Bylaws provide that special meetings of the stockholders may
be called by (i) the President of AGH, (ii) the Chief Executive Officer or
(iii) the AGH Board, and that special meetings must be called by the Secretary
of AGH upon the written request of the holders of shares entitled to cast not
less than a majority of all votes entitled to be cast at the meeting.
The CapStar By-laws provide that annual meetings of stockholders must be
held in April of each year or at such other time as the CapStar Board may
determine. The DGCL provides that a special meeting of stockholders may be
called by the board of directors or by such person or persons as may be
authorized by a corporation's certificate of incorporation or by-laws. The
CapStar By-Laws provide that a special meeting (other than a special meeting
for the election of directors) may be called at any time by the CapStar Board,
the President or the Secretary.
STOCKHOLDER ACTION WITHOUT A MEETING
Under the MGCL, any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting only if a unanimous written
consent is signed by each stockholder entitled to vote on the matter and a
written waiver of any right to dissent is signed by each stockholder who would
have been entitled to notice of, but could not vote at, such stockholder
meeting.
Under the DGCL, unless otherwise provided in the corporation's certificate
of incorporation, any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without
a vote, if a written consent or consents setting forth the action taken is
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote upon such action were present and
voted and such votes are delivered to the corporation.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The AGH Charter, subject to certain exceptions described below, provides
that no person may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8% of the number of outstanding shares of
any class of AGH Common Stock (subject to the Look-Through Ownership
Limitation applicable to certain stockholders, as described below). Certain
types of entities, such as pension trusts qualifying under section 401 (a) of
the Code, mutual funds qualifying as regulated investment companies under
section 851 of the Code, and corporations, will be looked through for purposes
of the "closely held" test in section 856(h) of the Code. Subject to certain
limited exceptions, the AGH Charter will allow such an entity under the Look-
Through Ownership Limitation to own up to 15% of the shares of any class or
series of stock; provided that such ownership does not cause any beneficial
owner of such entity to exceed the Ownership Limitation or otherwise result in
a violation of the tests described in clauses (ii), (iii) and (iv) of the
second sentence of the succeeding paragraph.
Any transfer of AGH Common Stock that would (i) result in any person owning,
directly or indirectly, AGH Common Stock in excess of the Ownership Limitation
(or the Look-Through Ownership Limitation, if applicable), (ii) result in AGH
Common Stock being owned by fewer than 100 persons (determined without
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reference to any rules of attribution), (iii) result in AGH being "closely
held" within the meaning of section 856(h) of the Code, or (iv) cause AGH to
own, actually or constructively, 9.9% or more of the ownership interests in
the real property of AGH, AGH Operating Partnership or a subsidiary
partnership of AGH, within the meaning of section 856(d)(2)(B) of the Code,
will be void ab initio, and the intended transferee will acquire no rights in
such shares of AGH Common Stock.
All persons who own, directly or indirectly, more than 5% (or such lower
percent as required pursuant to regulations under the Code) of the outstanding
shares of AGH Common Stock must, within 30 days after January 1 of each year,
provide to AGH a written statement or affidavit stating (i) the name and
address of such direct or indirect owner, (ii) the number of shares of AGH
Common Stock owned directly or indirectly, and (iii) a description of how such
shares are held. In addition, each direct or indirect stockholder shall
provide to AGH such additional information as AGH may request in order to
determine the effect, if any, of such ownership or AGH's status as a REIT and
to ensure compliance with the Ownership Limitation.
The Ownership Limitation or the Look-Through Ownership Limitation, as
applicable, generally will not apply to the acquisition of shares of AGH
Common Stock by an underwriter that participates in a public offering of such
shares. In addition, the AGH Board, upon conditions as the AGH Board may
exempt a person from the Ownership Limitation or the Look-Through Ownership
Limitation, as applicable under certain circumstances.
The CapStar Charter and the CapStar By-Laws do not contain any provisions
restricting the ownership or transfer of CapStar Common Stock.
CERTAIN EXTRAORDINARY TRANSACTIONS
Under the MGCL, the affirmative vote of at least two-thirds of all the votes
entitled to be cast on the matter is required to approve a merger,
consolidation, share exchange or transfer of all or substantially all of the
corporation's assets, subject to certain exceptions unless the charter
provides for a greater or lesser (but not less than a majority) percentage.
The AGH Charter provides that a majority of all votes entitled to be cast on
any such matter is sufficient to approve and authorize such matters.
Under the DGCL, the approval by the affirmative vote of the holders of a
majority of the outstanding stock of a corporation entitled to vote on the
matter generally is required for a merger, consolidation or sale, lease or
exchange of all or substantially all the corporation's assets to be
consummated.
STATE TAKEOVER LEGISLATION
Maryland Business Combination Law. Under the MGCL, certain business
combinations (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and an Interested Stockholder or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder became an Interested Stockholder. Thereafter,
any such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) 80% of
the votes entitled to be cast by holders of outstanding voting shares of such
corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting shares of such corporation other than the shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be affected, unless, among other conditions, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by
the Interested Stockholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder.
A Maryland corporation may elect not to be subject to the foregoing
requirements by amending its charter, but such amendment must be approved by
the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and at least two-thirds of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not Interested Stockholders. Any such amendment is not effective
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until 18 months after the vote of stockholders and does not apply to any
business combination of a corporation with a stockholder who was an Interested
Stockholder on the date of the stockholder vote. AGH has not adopted an
amendment to the AGH Charter by which AGH elects not to be governed by the
default provisions of the MGCL with respect to business combinations with
Interested Stockholders.
Delaware Business Combination Law. Section 203 of the DGCL generally
prohibits a Delaware corporation from engaging in a "business combination"
(defined as a variety of transactions, including mergers, asset sales,
issuance of stock and other transactions resulting in a financial benefit to
the Interested Stockholder) with an "Interested Stockholder" (defined
generally as a person that is the beneficial owner of 15% or more of a
corporation's outstanding voting stock) for a period of three years following
the date that such person became an Interested Stockholder unless:
(i) prior to the date such person became an Interested Stockholder, the
board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder's becoming
an Interested Stockholder;
(ii) upon consummation of the transaction that resulted in the
stockholder becoming an Interested Stockholder, the Interested Stockholder
owned at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced, excluding stock held by directors who
are also officers of the corporation and employee stock ownership plans
that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
(iii) on or subsequent to the date such person became an Interested
Stockholder, the business combination is approved by the board of directors
of the corporation and authorized at a meeting of stockholders, and not by
written consent, by the affirmative vote of the holders of at least 66 2/3%
of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.
A corporation may adopt an amendment to its certificate of incorporation or
by-laws expressly electing not to be governed by Section 203 of the DGCL if,
in addition to any other vote required by law, such amendment is approved by
the affirmative vote of a majority of the shares entitled to vote. However,
such amendment generally will not be effective until 12 months after adoption
of such amendment and will not apply to a business combination with an
Interested Stockholder who was such on or prior to the adoption of the
amendment. CapStar has not adopted an amendment to the CapStar Charter or the
CapStar By-laws by which CapStar elects not to be governed by Section 203 of
the DGCL.
Control Share Acquisition Statute. The MGCL provides that "control shares"
of a Maryland corporation acquired in a "control share acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares owned by the
acquiror, by officers or by directors who are employees of the corporation.
"Control Shares" are voting shares which, if aggregated with all other such
shares previously acquired by the acquiror, or in respect of which the
acquiror is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more of all voting
power. Control Shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation
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may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without
regard to the absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of appraisal rights do not apply in the context of
a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange, if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation. The AGH Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
AGH Common Stock. There can be no assurance that such provision will not be
amended or eliminated at any time in the future.
The DGCL has no comparable control share acquisition provision.
STANDARD OF CONDUCT FOR DIRECTORS
Under Maryland law, the standard of conduct for directors is set forth in
Section 2-405.1(a) of the MGCL, which requires that a director of a Maryland
corporation perform his or her duties in "good faith," with "a reasonable
belief" that his or her actions are "in the best interests of the corporation"
and with the care of an "ordinarily prudent person in a like position . . .
under similar circumstances."
Under Delaware law, the standards of conduct for directors have developed
through written opinions of the Delaware courts in cases decided by them.
Generally, directors of Delaware corporations are subject to a duty of loyalty
and a duty of care. The duty of loyalty requires directors to refrain from
acting in their own interests where that interest conflicts with interests of
the corporation or its stockholders. According to the Delaware Supreme Court,
the duty of care requires "directors . . . in managing the corporate affairs
. . . to use that amount of care which ordinarily careful and prudent men
would use in similar circumstances." Later case law has established "gross
negligence" as the test for breach of the standard for the duty of care in the
process of decision-making by directors of Delaware corporations.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a corporation to indemnify its current and former directors
and officers, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any
proceeding to which they may be a party by reason of their service in those or
other capacities, unless it is established that: (a) the act or omission of
the director or officer was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active
and deliberate dishonesty; (b) the director or officer actually received an
improper personal benefit in money, property, or services; or (c) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under the MGCL, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis
that personal benefit was improperly received, unless in either case a court
orders indemnification and then only for expenses. Indemnification for
settlement of a suit by or in the right of the corporation is permitted under
the MGCL. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (a) a
written affirmation by the director or officer of his good faith belief that
he has met the standard of conduct necessary for indemnification by the
corporation and (b) a written undertaking by him or on his behalf to repay the
amount paid or reimbursed by the corporation if it shall ultimately be
determined that the standard of conduct was not met. Unless limited by a
corporation's charter, a corporation must indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding subject to the MGCL's indemnification provisions.
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The AGH Charter provides, in substance, that AGH, to the fullest extent of
the MGCL, will indemnify, and advance expenses to, any person (or the estate
of any person) who is or was a party to, or is threatened to be made a party
to, any threatened, pending or complete action, suit or proceeding, whether or
not by or in the right of AGH, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of AGH, or is or was serving at the request of AGH as a
director, officer, trustee, partner, member, agent or employee of another
corporation, partnership, limited liability company, association, joint
venture, trust or other enterprise.
Under the DGCL, a corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding if such person 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 action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The DGCL permits indemnification for expenses under similar circumstances in
the case of derivative actions or other actions by or in right of the
corporation, except that no indemnification may be made for settlement of a
derivative action or in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability and in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper. A director
or officer who is successful, on the merits or otherwise, in defense of any
proceeding subject to the DGCL's indemnification provisions must be
indemnified by the corporation for reasonable expenses incurred in connection
therewith, including attorneys' fees.
The CapStar By-Laws provide, in substance, that each person made a party or
threatened to be made a party to any type of proceeding, by reason of the fact
that he or she is or was a director or officer of CapStar, or is or was
serving at the request of CapStar as a director, officer, employee or agent of
another corporation or in a capacity with comparable authority or
responsibilities for any partnership, joint venture, trust, employee benefit
plan or other enterprise, will be indemnified and held harmless by CapStar to
the full extent permitted by the DGCL, against all expense, liability and loss
actually and reasonably incurred by such person in connection therewith. In
certain cases, the indemnified party will be entitled to the advancement of
certain expenses relating to indemnification.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation's charter to include a provision
expanding or limiting the liability of its directors and officers to the
corporation or its stockholders for money damages, except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property, or services (in which case recovery is limited to the actual amount
of the benefit or profit actually received) or (b) a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a
finding in the proceeding that the person's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. The AGH Charter provides that, to the
fullest extent permitted by law, AGH directors and officers are not liable to
AGH or its stockholders for money damages. However, such provisions do not
limit the availability of equitable relief to AGH or its stockholders.
The DGCL provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
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duty as a director. However, no such provision may limit the liability of a
director for (i) any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
violation of certain provisions of the DGCL relating to unlawful dividends and
certain other distributions, (iv) any transaction from which the director
derived an improper personal benefit or (v) any act or omission prior to the
adoption of such a provision in the certificate of incorporation. The CapStar
Charter provides that, to the full extent of the DGCL, CapStar directors are
not liable to CapStar or its stockholders for monetary damages for conduct as
a director. However, such provisions do not limit the availability of non-
monetary equitable relief to CapStar or its stockholders.
APPRAISAL AND DISSENTERS' RIGHTS
Under the MGCL, stockholders have the right, subject to certain exceptions,
to demand and receive payment of the fair value of their stock in the event of
certain mergers, consolidations, share exchanges or transfers of assets or if
the corporation amends its charter in a way that substantially adversely
affects the stockholder's rights unless the right to do so is reserved in the
corporation's charter (which the AGH Charter and the MeriStar Charter do).
However, except as otherwise provided by the MGCL, a stockholder does not have
such appraisal rights if, among other things, (i) such stockholder's stock is
listed on a national securities exchange or is designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. ("NASD"), or (ii) such stockholder's stock is that
of the surviving corporation in the merger unless the merger alters the
contract rights of the stock as expressly set forth in the charter, and the
charter does not reserve the right to do so, or the stock is to be changed or
converted in whole or in part in the merger into something other than either
stock in the successor or cash, scrip, or other rights or interests, arising
out of provisions for the treatment of fractional shares of stock in the
successor. The AGH Common Stock is listed on the NYSE so holders of shares of
AGH Common Stock generally will not be entitled to appraisal rights.
Under the DGCL, except as otherwise provided by the DGCL, stockholders have
the right to demand and receive payment in cash of the fair value of their
stock (as appraised pursuant to judicial proceedings) in the event of a merger
or consolidation in lieu of the consideration such stockholder would otherwise
receive in such transaction. However, except as otherwise provided by the
DGCL, stockholders do not have such appraisal rights if (A) their stock is
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the NASD or held of
record by more than 2,000 stockholders and (B) the consideration they receive
for their shares consists of (i) shares of stock of the corporation surviving
or resulting from such merger or consolidation, (ii) shares of stock of any
other corporation which at the effective date of the merger or consolidation
will be either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the NASD
or held of record by more than 2,000 stockholders, (iii) cash in lieu of
fractional shares of the corporations described in clause (i) or (ii) of this
sentence, or (iv) any combination of shares of stock and cash in lieu of
fractional shares described in the foregoing clauses (i), (ii) and (iii). The
CapStar Common Stock is listed on the NYSE.
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Under the MGCL, a corporation may not pay a dividend or other distribution
if, after giving effect to such distribution, (i) the corporation would not be
able to pay its indebtedness as such indebtedness becomes due in the usual
course of business or (ii) the corporation's total assets would be less than
the sum of the corporation's total liabilities plus, unless the charter
provides otherwise (which the AGH Charter does not), the amount that would be
needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights on dissolution are superior to those
receiving the distribution. The AGH Charter provides that any dividends and
distributions authorized by the AGH Board on Shares-in-Trust will be paid to
the Trust for the benefit of the beneficiary of the Trust.
Under the DGCL, a board of directors may authorize a corporation to make
distributions to its stockholders, subject to any restrictions in its
certificate of incorporation, either (i) out of surplus or (ii) if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Under the
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DGCL, no distribution out of net profits is permitted, however, if, following
the distribution, the corporation's capital is less than the aggregate amount
of capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. The CapStar Certificate
does not further restrict the ability of the CapStar Board to declare
dividends.
INSPECTION OF BOOKS AND RECORDS
The MGCL provides that persons who together have been stockholders for more
than six months and own at least 5% of the outstanding stock of any class of a
Maryland corporation may inspect and copy the corporation's books of account
and stock ledger, request and receive a statement of the corporation's affairs
and request and receive a list of its stockholders. In addition, any
stockholder of a Maryland corporation may (a) inspect and copy the bylaws,
minutes of the proceedings of stockholders and annual statements of affairs
and (b) request the corporation to provide a sworn statement showing all stock
and securities issued and all consideration received by the corporation for
such stock during the preceding twelve months.
Under the DGCL, any stockholder of a Delaware corporation may examine the
list of stockholders and any stockholder making a written demand may inspect
any other corporate books and records for any purpose reasonably related to
the stockholder's interest as a stockholder.
INVESTMENT POLICIES
Neither AGH, in the AGH Charter or the AGH Bylaws, nor CapStar, in the
CapStar Charter or the CapStar By-Laws, has a stated investment policy. The
AGH Charter, however, requires the AGH Board generally to use commercially
reasonable efforts to cause AGH qualify as a REIT.
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ADDITIONAL INFORMATION FOR AGH MEETING
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1998, certain information
regarding the beneficial ownership of shares of AGH Common Stock by (i) each
director of AGH, (ii) each executive officer of AGH, (iii) all directors and
executive officers of AGH as a group, and (iv) persons who own more than 5% of
the outstanding shares of AGH Common Stock. Except as otherwise described
below, all shares are owned directly and the indicated person has sole voting
and investment power. The number of shares of AGH Common Stock includes the
number of shares of AGH Common Stock that such person could receive if it
exchanged its AGH OP Units for shares of AGH Common Stock under certain
circumstances.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(1)
------------------------ --------------------- ----------
<S> <C> <C>
Kenneth E. Barr(2)......................... 46,228 *
Kent R. Hance(3)........................... 9,852 *
Steven D. Jorns(4)......................... 255,427 1.2%
H. Cabot Lodge III(5)...................... 7,352 *
James McCurry(5)........................... 7,352 *
Russ C. Valentine(6)....................... 22,133 *
Bruce G. Wiles(7).......................... 87,722 *
James R. Worms(8).......................... 8,352 *
Executive officers and directors as a group
(8 persons)............................... 444,418 2.1%
ABKB/LaSalle Securities Limited
Partnership(9)............................ 1,548,728 6.3%
LaSalle Advisors Capital Management,
Inc.(9)................................... 1,335,505 5.5%
The Equitable Companies Incorporated(10)... 1,357,400 5.5%
Boston Partners Asset Management, L.P.,
Boston Partners, Inc. and Desmond John
Heathwood(11)............................. 1,233,135 5.0%
</TABLE>
- --------
*Represents less than 1% of the class.
(1) Assumes that all AGH OP Units held by each named person are exchanged for
shares of AGH Common Stock. The total number of shares outstanding used
in calculating the percentage assumes that none of the AGH OP Units held
by other persons are exchanged for shares of AGH Common Stock. Pursuant
to various Exchange Rights Agreements, among AGH, the AGH Operating
Partnership and the limited partners identified herein, AGH OP Units are
exchangeable for shares of AGH Common Stock commencing after the first
year anniversary date of the issuance of the AGH OP Units.
(2) Includes (a) 29,449 shares of AGH Common Stock that have vested under
options granted pursuant to AGH's 1996 Incentive Plan (the "1996 Plan"),
(b) 6,000 shares of restricted AGH Common Stock that constitute stock
awards, (c) 79 shares of AGH Common Stock held by AGHI's Retirement
Savings Plan (the "Retirement Plan") and attributable to Mr. Barr, (d)
10,000 AGH OP Units issued to Mr. Barr in connection with the principal
transaction associated with the formation of AGH and the acquisition of
its initial hotels (the "Formation Transactions"), and (e) 100 shares of
AGH Common Stock purchased by Mr. Barr through open market transactions,
as custodian on behalf of a family member, with respect to which Mr. Barr
disclaims beneficial ownership.
(3) Includes (a) 6,666 shares of AGH Common Stock that have vested under
options granted pursuant to the Directors' Plan and (b) 686 shares of AGH
Common Stock issued pursuant to the Directors' Plan.
(4) Includes (a) 128,780 shares of AGH Common Stock that have vested under
options granted pursuant to the 1996 Plan, (b) 30,000 shares of
restricted AGH Common Stock that constitute stock awards, (c) 74,376 AGH
OP Units issued to Mr. Jorns in connection with the Formation
Transactions, (d) 19,104 AGH OP Units issued to Mr. Jorns' wife in
connection with the Formation Transaction with respect to which Mr. Jorns
disclaims beneficial ownership and (e) 2,167 shares of AGH Common Stock
held by the Retirement Plan and attributable to Mr. Jorns.
(5) Includes (a) 6,666 shares of AGH Common Stock that have vested under
options granted pursuant to the Directors' Plan and (b) 686 shares of AGH
Common Stock issued pursuant to the Directors' Plan.
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(6) Includes (a) 14,453 shares of AGH Common Stock that have vested under
options granted pursuant to the 1996 Plan, (b) 4,000 shares of restricted
AGH Common Stock that constitute stock awards and (c) 1,840 shares of AGH
Common Stock held by the Retirement Plan and attributable to Mr.
Valentine.
(7) Includes (a) 46,949 shares of AGH Common Stock that have vested under
options granted pursuant to the 1996 Plan, (b) 10,000 shares of
restricted AGH Common Stock that constitute stock awards, (c) 2,352
shares of AGH Common Stock held by the Retirement Plan and attributable
to Mr. Wiles and (d) 28,121 AGH OP Units issued to Mr. Wiles in
connection with the Formation Transactions.
(8) Includes (a) 6,666 shares of Common Stock that have vested under options
granted pursuant to the Directors' Plan, and (b) 686 shares of AGH Common
Stock issued pursuant to the Directors' Plan.
(9) Beneficial ownership information is based on the Schedule 13G jointly
filed by LaSalle Advisors Capital Management, Inc. (200 East Randolph
Drive, Chicago, Illinois 60601) and ABKB/LaSalle Securities Limited
Partnership (200 East Randolph Drive, Chicago, Illinois 60601), dated
February 13, 1998.
(10) Beneficial ownership information is based on Schedule 13G jointly filed
by Alpha Assurances Vie Mutuelle (100-101 Terrasse Boieldieu, 92042 Paris
la Defense France), AXA Assurances I.A.R.D. Mutuelle and AXA Assurances
Vie Mutuelle (21, rue de Chateaudun, 75009 Paris France), AXA Courtage
Assurance Mutuelle (26, rue de le Grand, 75002 Paris France), AXA-UAP
(23, avenue Matignon, 75008 Paris France) and The Equitable Companies
Incorporated (1290 Avenue of the Americas, New York, New York 10104),
dated February 17, 1998.
(11) Beneficial ownership information is based on the Schedule 13G jointly
filed by Boston Partners Asset Management, L.P., Boston Partners, Inc.
and Desmond John Heathwood (all located at One Financial Center, 43rd
Floor, Boston, MA 02111), dated February 13, 1998.
AGH BOARD AND COMMITTEES
AGH is managed by the five-member AGH Board, a majority of whom are not
officers or affiliates of AGH. The AGH Board held twelve meetings during the
fiscal year ended December 31, 1997. No director attended fewer than seventy-
five percent (75%) of the meetings of the AGH Board and committees on which
such officer served.
The AGH Board has an Audit Committee, a Compensation Committee and a Leasing
Committee.
Audit Committee. The Audit Committee consists of Messrs. Hance and McCurry.
The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public
accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of AGH's internal accounting
controls. The Audit Committee held one meeting during the fiscal year ended
December 31, 1997.
Compensation Committee. The Compensation Committee consists of Messrs. Hance
and Worms. The Compensation Committee determines compensation of the AGH
executive officers and administers the AGH 1996 Stock Incentive Plan. The
Compensation Committee held three meetings during the fiscal year ended
December 31, 1997.
Leasing Committee. The Leasing Committee consists of Messrs. Lodge and
Worms. The Leasing Committee reviews not less frequently than annually the
compliance of AGH's lessee's with the terms of the Participating Leases and
reviews and approves the terms of any new leases between AGH and its lessees.
The Leasing Committee held two meetings for the year ended December 31, 1997.
AGH may from time to time form other committees as circumstances warrant.
Such committees will have authority and responsibility as delegated by the AGH
Board.
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EXECUTIVE OFFICERS
The following discussion sets forth the names, ages and business histories
of the executive officers of AGH. Information concerning the business
experience of Messrs. Jorns and Wiles is provided under the caption "Proposal
Five: Election of Directors" and information concerning the business
experience of Mr. Barr is provided under the caption "Management of MeriStar."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven D. Jorns......... 49 Chairman of the Board, Chief Executive Officer and President
Bruce G. Wiles.......... 46 Executive Vice President
Kenneth E. Barr......... 49 Executive Vice President, Chief Financial Officer, Secretary and Treasurer
Russ C. Valentine....... 53 Senior Vice President--Acquisitions
John P. Buza............ 36 Senior Vice President--Asset Management
</TABLE>
Russ C. Valentine has been Senior Vice-President--Acquisitions of AGH since
April 1996. Mr. Valentine has served since 1990 as a Senior Vice President--
Acquisitions of AGHI. Prior to joining AGHI, Mr. Valentine was a Principal
with Laventhol & Horwath, in charge of the firm's Dallas and Southwest Real
Estate and Hospitality Consulting Practice. Prior to joining Laventhol &
Horwath in January 1983, Mr. Valentine was a Senior Vice President--
Acquisitions for Prime Financial Partnership, L.P., a real estate and
development company listed on the American Stock Exchange. Mr. Valentine's
responsibilities with Prime Financial included acquisition, negotiation and
financing of hotel and other real estate investments.
John P. Buza has been Senior Vice-President--Asset Management of AGH since
January 1998. Mr. Buza joined AGH after spending the last 11 years with
Salomon Brothers Inc where he served as Director and was responsible for all
of the Salomon Brothers Inc investments. Mr. Buza has 10 years of real estate
experience and has spent portions of the last six years working in the hotel
industry. Mr. Buza has been a member of the Board of Directors of Hudson
Hotels Corporation since November 1996, as well as, a member of two Advisory
Committees for certain real estate joint venture funds for Trammell Crow.
Prior to Salomon Brothers Inc Mr. Buza worked for Touche Ross & Co. Mr. Buza
is a Certified Public Accountant and is a member of the New Jersey State
Society of CPA's.
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EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended December 31, 1997
and 1996, information regarding the compensation of AGH's executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------- ------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
SALARY BONUS COMPENSATION STOCK AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(1) OPTIONS (#) ($)
- --------------------------- ---- ------- ------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven D. Jorns 1997 100,000 60,000 -- -- 250,000(2) --
Chairman, Chief 1996(4) 41,667 -- -- 532,500 225,000(3) --
Executive Officer and
President
Bruce G. Wiles 1997 90,000 45,000 -- -- 237,796(2) --
Executive Vice President 1996(4) 37,500 -- -- 177,500 75,000(3) --
Kenneth E. Barr 1997 80,000 40,000 -- -- 212,796(2) --
Executive Vice 1996(4) 33,333 -- -- 106,500 40,000(3) --
President, Chief
Financial Officer,
Secretary and Treasurer
</TABLE>
- --------
(1) AGH has granted Messrs. Jorns, Wiles and Barr stock awards of 30,000,
10,000 and 6,000 shares of restricted AGH Common Stock, respectively. 30%
of the restricted stock awards have vested, 20% vest on July 31, 1998 and
25% vest on each of July 31, 1999 and July 31, 2000. The calculation is
based on a per share price of AGH Common Stock of $17.75.
(2) Represents shares purchasable pursuant to options granted in 1997. See "--
Option Grants" below.
(3) Represents shares purchasable pursuant to options granted in 1996. The
options are comprised of both ISOs and nonqualified options. Each of
Messrs. Jorns, Wiles and Barr has 22,532 ISOs. The remainder are non-
qualified stock options.
(4) Includes compensation only during the period from July 31, 1996 (inception
of operations) through December 31, 1996.
The executive officers, including Messrs. Jorns, Wiles and Barr, receive
health and disability insurance benefits which do not exceed 10% of their
respective salaries. These benefits are also provided to all other employees
of AGH.
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Option Grants
The following table sets forth information regarding grants of stock options
to AGH's executive officers during the 1997 fiscal year. The options were
granted pursuant to the 1996 plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATE OF STOCK PRICE
APPRECIATION OF
INDIVIDUAL GRANTS OPTION TERM
--------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS GRANTED EXERCISE OR
OPTIONS/SARS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ------------ --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven D. Jorns ........ 65,118 30.3% 23.25 01/02/07 952,142 2,412,916
184,882 18.9% 26.625 11/14/07 3,095,723 7,845,171
Bruce G. Wiles ......... 37,796 17.6% 23.25 01/02/07 552,646 1,400,512
200,000 20.4% 26.625 11/14/07 3,349,000 8,486,679
Kenneth E. Barr ........ 37,796 17.6% 23.25 01/02/07 552,646 1,400,512
175,000 17.9% 26.625 11/14/07 2,930,256 7,425,844
Russ C. Valentine ...... 17,811 8.3% 23.25 01/02/07 260,429 659,978
150,000 15.3% 26.625 11/14/07 2,511,648 6,365,009
</TABLE>
The options granted to Messrs. Jorns, Wiles, Barr and Valentine on January
2, 1997 were granted at an exercise price of $23.25 per share, the per share
price of the AGH Common Stock at the date of grant. Each of such options
becomes exercisable over four equal annual installments, commencing on the
first anniversary date of grant and expires on the tenth anniversary of the
date of grant. These options also included dividend equivalent rights ("DERs")
on the vested portion of the options if AGH achieves an overall 15% annualized
return (stock price appreciation plus dividends) on the AGH Common Stock for
the year.
The options granted to Messrs. Jorns, Wiles, Barr and Valentine on November
14, 1997 were granted at an exercise price of $26.625 per share, the per share
price of the Common Stock at the date of grant. Each of such options becomes
exercisable as follows: 25% of the option award will vest on each of the third
and fourth anniversary of the grant date and 50% will vest on the fifth
anniversary of the grant date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($)(2)
----------------------------------- -------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven D. Jorns......... 112,500 362,500 1,012,500 1,263,523
Bruce G. Wiles.......... 37,500 275,296 337,500 494,786
Kenneth E. Barr......... 20,000 232,796 180,000 334,161
Russ C. Valentine....... 10,000 177,811 90,000 171,089
</TABLE>
- --------
(1) No options were exercised in 1997.
(2) Based on the difference between the option exercise price and the closing
sales price for the AGH Common Stock on the NYSE for December 31, 1997,
which was $26.75.
Employment Agreements
AGH has entered into an employment agreement with Mr. Jorns, pursuant to
which Mr. Jorns serves as Chairman of the AGH Board, Chief Executive Officer
and President of AGH for a term of five years at an initial
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<PAGE>
annual base compensation of $100,000, subject to any increases in base
compensation approved by the AGH Compensation Committee. In addition, AGH has
entered into employment agreements with Messrs. Wiles, Barr and Valentine,
pursuant to which Mr. Wiles serves as Executive Vice President, Mr. Barr
serves as Executive Vice President and Chief Financial Officer and Mr.
Valentine serves as Senior Vice President--Acquisitions, each for a term of
five years, at an annual base compensation of $90,000, $80,000 and $60,000,
respectively, subject to any increases in base compensation approved by the
AGH Compensation Committee. At its July 17, 1997 meeting, the AGH Compensation
Committee approved amendments to the employment agreements of each of Messrs.
Jorns, Wiles, Barr and Valentine that, among other things, set their
respective 1998 base salaries as follows: Steven D. Jorns ($125,000); Bruce G.
Wiles ($110,000); Kenneth E. Barr ($95,000); and Russ C. Valentine ($75,000).
In addition to base salary, each such executive officer is eligible to
receive a performance-based bonus in the discretion of the AGH Compensation
Committee. For 1997, 50% of each executive officer's bonus compensation was
conditioned upon AGH attaining specific financial performance targets. The
balance of the bonus was subject to the discretion of the AGH Compensation
Committee based on individual and overall corporate performance.
Upon termination of an officer's employment agreement other than for cause,
or by such officer for "good reason" (as such term is defined in each
officer's employment agreement), each of such officers is entitled to receive
severance benefits in an amount equal to the greater of (i) the aggregate of
all compensation due such officer during the balance of the term of the
employment agreement or (ii) 1.99 times the "base amount" as determined in the
Code.
At its July 17, 1997 meeting, in addition to adjusting the 1998 base
salaries of certain executive officer's, the AGH Compensation Committee
approved amendments to the employment agreements of Messrs. Jorns, Wiles, Barr
and Valentine, the (i) added "evergreen renewal" options and (ii) provided for
greater severance benefits following a change in control of AGH, including the
vesting of all incentive compensation (i.e. options and restricted stock),
subject to "golden parachute" limitations.
REPORT OF THE AGH COMPENSATION COMMITTEE OF THE AGH BOARD
Introduction
The AGH Compensation Committee of the AGH Board was established in July 1996
and is comprised of Messrs. Worms and Hance, neither of whom is or was an
employee or officer of AGH prior to or during 1997. The AGH Compensation
Committee is authorized to determine the compensation of AGH's executive
officers, administer AGH's stock incentive plans, including determining the
terms and conditions of the benefits and the recipients thereof in accordance
with the plans, review all existing and proposed employee benefit plans and
advise the AGH Board regarding the results and benefits thereof, and perform
such other functions as necessary, advisable or appropriate in the efficient
discharge of its duties. The AGH Compensation Committee is in the process of
devising and implementing compensation policies for AGH's executive officers
for the fiscal year 1998, which are commensurate with their positions, but,
with the exception of approving base salaries for fiscal year 1998, has not
yet developed or adopted any such policies.
Objectives of Executive Compensation
AGH's executive compensation program is intended to attract, retain and
reward experienced, highly motivated executives who are capable of leading AGH
effectively and continuing its long-term growth. The compensation program for
executives is comprised of base salary, annual incentives and long-term
incentive awards. Base salary is targeted to be within a reasonable range of
compensation for comparable companies and for comparable levels of expertise
by executives. Annual incentives are based upon the achievement of one or more
performance goals. AGH also utilizes equity-based compensation as a long-term
incentive.
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<PAGE>
AGH Compensation Committee Procedures
The AGH Compensation Committee engaged Deloitte & Touche LLP in November
1996 to advise the AGH Compensation Committee with respect to executive
compensation matters, including, among other things, compensation amounts and
the relative allocation of compensation among base salary and short-term
incentive compensation. The report addressed (i) 1998 base salaries for
Company executives, (ii) performance standards for the allocation of annual
incentives to Company executives, (iii) long-term incentives, including stock
options and DERs, and (iv) an increase in the number of shares under the
Incentive Plan using a ten percent (10%) evergreen limitation.
Subsequently, the AGH Compensation Committee engaged FPL Associates
Consulting (the "Compensation Consultant") to further develop long-term
incentive compensation arrangements for AGH. The AGH Compensation Committee,
working with the Compensation Consultant and in collaboration with senior
management, is also establishing quantitative and qualitative performance
targets for the year ending December 31, 1998 for both annual and short-term
compensation awards. The results of this review will be reflected in the
annual incentive and short-term compensation decisions for the fiscal year
ending December 31, 1998.
Members of the AGH Compensation Committee consult periodically by telephone
prior to the meeting at which compensation decisions are made. The AGH
Compensation Committee exercises its independent discretion in determining the
compensation of the executive officers.
Each element of AGH's executive compensation, as well as compensation of the
Chief Executive Officer, is discussed separately below.
Employment Agreements
At its July 17, 1997 meeting, the AGH Compensation Committee approved
amendments to the employment agreements of each of Messrs. Jorns, Wiles, Barr
and Valentine, that (i) added evergreen renewal options and (ii) provided for
greater severance benefits following a change in control of AGH, including the
vesting of all incentive compensation (i.e., options and restricted stock),
subject to "golden parachute" limitations.
Base Salary
Base salaries are determined by the AGH Compensation Committee after
reviewing salaries paid by real estate investment trusts of similar size,
makeup and performance. The AGH Compensation Committee generally sets base
salaries at a level to weight total compensation in favor of annual and long-
term performance-based compensation.
For the year ended December 31, 1997, the executive officers (other than its
Chief Executive Officer, who is discussed separately below) received the same
base salaries as in 1996: Bruce Wiles ($90,000); Kenneth Barr ($80,000); and
Russ Valentine ($60,000). The AGH Compensation Committee set the 1998 base
salaries for the executive officers at its July 17, 1997 meeting as follows
(other than its Chief Executive Officer, who is discussed separately below):
Bruce Wiles ($110,000); Kenneth Barr ($95,000); and Russ Valentine ($75,000).
Annual Incentives
Annual incentives are provided in the form of cash bonuses. Annual
incentives are designed to reward executives and management for the annual
growth and achievement of AGH. The AGH Compensation Committee awards cash
bonuses based primarily upon AGH's total earnings and earnings growth,
including growth in funds from operations.
At the July 17, 1997 AGH Compensation Committee meeting, the Committee
approved the payment of the following target bonus for 1997, determined in
accordance with the policy stated above and as recommended by Deloitte &
Touche LLP, pending certification of certain performance criteria (the Chief
Executive Officer is
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<PAGE>
discussed separately below): Bruce Wiles--50% of base salary, Kenneth Barr--
50% of base salary and Russ Valentine--45% of base salary. Fifty percent of
the target bonus is subject to attaining or exceeding targeted funds from
operations. The balance is subject to the discretion of the AGH Compensation
Committee based on individual and corporate performance. With respect to
assessing the performance of senior management, the AGH Compensation Committee
will seek the input of the Chief Executive Officer.
Long-Term Incentives
Long-term incentives are provided primarily through the grant of stock
options. These grants are designed to align executives with the long-term
goals of AGH and the interests of AGH's stockholders and encourage high levels
of stock ownership among executives. Long-term incentive compensation depends
upon quantitative and objectives, as well as qualitative measures of corporate
performance. The AGH Compensation Committee uses long-term incentive
compensation awards to reward management for achieving favorable results based
on predefined performance measures. Primary emphasis of the total compensation
package for all executives is placed on the long-term component.
The AGH Compensation Committee approved the grant of stock options as of
January 2, 1997 and November 14, 1997 for the fiscal year ended December 31,
1997 in accordance with the policy stated above, after reviewing the
preliminary and final recommendations of both Deloitte & Touche LLP and the
Compensation Consultant. The executive officers (other than its Chief
Executive Officer, who is discussed separately below) received the following
options: Bruce Wiles (237,796); Kenneth Barr (212,796); and Russ Valentine
(167,811).
The AGH Compensation Committee also approved the grant of dividend
equivalent rights ("DERs") DERs. DERs entitle holders to receive a cash bonus
equivalent to the dividends paid during a particular year on the number of
shares subject to vested options if AGH achieves total shareholder return
(stock price appreciation plus dividends) of at least 15 percent during that
year. The executive officers (other than its Chief Executive Officer who is
discussed separately below) received DERs with respect to the following
options: Bruce Wiles (37,796); Kenneth Barr (37,796); and Russ Valentine
(17,811), no cash payments were made with respect to DER's for 1997 as none
had vested in that year.
Compensation of Chief Executive Officer
Like senior management, Mr. Jorns' 1997 base salary was the same as his 1996
salary: $100,000. For fiscal year 1998, the AGH Compensation Committee has
approved a base salary for Mr. Jorns of $125,000, representing a 25% increase
over his 1997 base salary.
Mr. Jorns' target bonus for 1997 was determined by the AGH Compensation
Committee substantially in accordance with the policies described above
relating to all executive officers and in accordance with the recommendation
of Deloitte & Touche LLP. Additionally, the AGH Compensation Committee
considered a subjective evaluation of Mr. Jorns' ability to influence AGH's
long-term growth and profitability. For the year ended December 31, 1997, Mr.
Jorns' target bonus, pending certification of certain performance criteria, is
60% of his base salary.
The AGH Compensation Committee determined Mr. Jorns' grant of stock options
and other long-term compensation for the year ended December 31, 1997
substantially in accordance with the policies described above relating to all
executive officers. Mr. Jorns received a total of 250,000 Non-Qualified Stock
Options for the fiscal year ended December 31, 1997. Mr. Jorns also received a
grant of DERs with respect to 65,118 options. At its November 14, 1997
meeting, the AGH Compensation Committee approved an additional stock option
award to Mr. Jorns, effective January 2, 1998, of 237,381 Non-Qualified Stock
Options, based on the recommendations of the Compensation Consultant.
Tax Deductibility of Compensation
Section 162(m) of the Code limits the deductibility in AGH's tax return of
compensation over $1 million to any of the executive officers unless, in
general, the compensation is paid pursuant to a plan which is performance-
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<PAGE>
related, non-discretionary and has been approved by AGH's stockholders. The
AGH Compensation Committee's policy with respect to Section 162(m) is to make
every reasonable effort to ensure that compensation is deductible to the
extent permitted while simultaneously providing Company executives with
appropriate rewards for their performance. AGH did not pay any compensation
during 1997 that would be subject to the limitations of Section 162(m).
Submitted by the AGH Compensation Committee:
Kent R. Hance
James R. Worms
STOCK PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
stockholder return for the period from July 26, 1996 (the date upon which the
AGH Common Stock was issued at $17.75 per share) through December 31, 1997
(assuming reinvestment of any dividends) among AGH, the Standard & Poor's
("S&P") 500 Index and the National Association of Real Estate Investment Trust
Equity Index (the "NAREIT Equity Index"). On the graph, total return equals
appreciation in stock price plus dividends paid. AGH will provide upon request
the names of the companies included in the NAREIT Equity Index. The NAREIT
Equity Index is published monthly by the National Association of Real Estate
Investment Trusts ("NAREIT") in its publication, REITWatch. The index is
available to the public upon request to NAREIT.
[STOCK PERFORMANCE GRAPH INSERTED HERE]
The foregoing graph is based upon the following data:
<TABLE>
<CAPTION>
07/26/96 09/30/96 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
AGH..................... $100.00 $107.04 $138.00 $158.34 $146.07 $174.74 $165.62
NAREIT Equity Index..... 100.00 113.77 114.19 122.40 164.54 166.07 149.96
S&P 500 Index........... 100.00 107.86 116.85 119.98 140.93 151.48 155.83
</TABLE>
There can be no assurance that AGH's share performance will continue into
the future with the same or similar trends depicted in the graph above. AGH
will not make or endorse any predictions as to future share performance.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationships Among Officers and Directors
Mr. Jorns is an executive officer, director and securityholder of each of
AGH, AGH Leasing, AGHI and the beverage corporations (the "Beverage
Corporations") that sublease from AGH Leasing the portion of certain of the 45
AGH Owned Hotels where alcoholic beverages are sold. Mr. Wiles is an executive
officer and stockholder of AGH and is an executive officer, director and
securityholder of each of AGH Leasing and AGHI. Mr. Barr is an executive
officer and stockholder of AGH, an executive officer and securityholder of AGH
Leasing and an executive officer of AGHI. Mr. Valentine is an executive
officer and stockholder of AGH and is an executive officer of AGHI.
Acquisition of Interest in the Courtyard by Marriott Durham
One or more of Messrs. Jorns and Wiles and their respective affiliates owned
equity interests relating to the Courtyard by Marriott in Durham, North
Carolina acquired by AGH in November 1997. Such persons and affiliates
received an aggregate of 13,650 AGH OP Units in exchange for such interests in
the Durham hotel. Upon exercise of their rights to exchange such AGH OP Units
(which rights are not exercisable until December 1998), such persons and
entities may receive cash or, at AGH's option, an aggregate of 13,650 shares
of AGH Common Stock. In addition, in connection with the acquisition of the
Courtyard by Marriott Durham, AGH paid an additional $132,000 to such persons
as consideration for entering into an indemnification agreement for
representations and warranties relating to the partnership that owned the
interest in the hotel.
PROPOSED ACQUISITION OF MADISON HOTEL
In June 1997, AGH entered into an agreement to acquire the 202-room Madison
Hotel in Madison, Wisconsin (the "Madison Acquisition") for an aggregate
purchase price of approximately $12 million payable through a combination of
cash and the issuance of AGH OP Units. This acquisition will occur following
the complete renovation of the hotel to a full-service Holiday Inn. The
acquisition and the hotel is conditioned upon the seller's renovation of the
hotel (to which approximately $8 million of the purchase price will be
applied). The hotel is currently owned by a private partnership which consists
primarily of AGHI shareholders, including Messrs. Jorns and Wiles. The Madison
Acquisition is expected to close during the second quarter of 1998.
Shared Services and Office Space Agreement
AGH has entered into a shared services and office space agreement with AGHI
pursuant to which AGHI provides AGH with office space and limited support
personnel for AGH's headquarters at 5605 MacArthur Boulevard, Irving, Texas
75038 for an annual fee of approximately $103,000.
Purchase of Personal Property
In order for AGH to qualify as a REIT, the AGH Operating Partnership sold
certain personal property relating to certain of the hotels acquired by AGH in
connection with its initial public offering to the AGH Leasing for $315,000,
which amount was paid by issuance of a promissory note to the AGH Operating
Partnership. The promissory notes are recourse to AGH Leasing and bear
interest at the rate of 10.0% per annum and require the payment of quarterly
installments of principal and interest of approximately $20,000 that will
fully amortize the notes over a five-year period ending on July 31, 2001.
The Participating Leases
AGH Operating Partnership and AGH Leasing have entered into the
participating leases, each with a term of twelve years from the inception of
the lease, relating to each of the AGH Owned Hotels leased by AGH Leasing.
Pursuant to the terms of the participating leases, AGH Leasing is required to
pay the greater of fixed weekly base rent or monthly participating rent and is
entitled to all profits from the operation of the hotels it leases after the
payment of rent and all other operating and other expenses. In addition, AGH
has entered into a
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lease master agreement with AGH Leasing which sets forth the terms of the
pledge by the owners of AGH Leasing who pledged certain of their interests in
the AGH Operating Partnership to secure AGH Leasing's obligations under the
participating leases and certain other matters.
The Management Agreements
AGH Leasing and AGHI entered into management agreements, each with a term of
twelve years from the date of the acquisition of the applicable hotel,
relating to the management of 44 of the AGH Owned Hotels. In the future when
AGHI is engaged as the manager of additional hotel properties, AGH anticipates
that similar management agreements will be entered into with AGHI. Pursuant to
the management agreements, AGHI is entitled to receive a base fee of 1.5% of
gross revenues, plus an incentive fee of up to 2.0% of gross revenues based on
the hotels achieving certain increases in revenue. The payment of management
fees to AGHI by AGH Leasing is subordinate to AGH Leasing's obligations to AGH
under the participating leases to which it is a party.
The Beverage Corporations
In order to facilitate compliance with state and local liquor laws and
regulations, AGH Leasing subleases those areas of certain of the AGH Owned
Hotels that comprise the restaurant and other areas where alcoholic beverages
are served to the Beverage Corporations, 39 of which are wholly owned by Mr.
Jorns. In accordance with the terms of certain sublease agreements, each
Beverage Corporation is obligated to pay to AGH Leasing rent payments equal to
30% of each such corporation's annual gross revenues generated from the sale
of food and beverages generated from such areas; however, pursuant to the
participating leases, such subleases will not reduce the Participating Rent
payments to the AGH Operating Partnership, which it is entitled to receive
from such food and beverage sales.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act ("Section 16(a)"), requires AGH's
executive officers and directors and persons who beneficially own more than
10% of a registered class of AGH's equity securities (collectively, "Section
16 reporting persons"), to file with the Commission initial reports of
ownership and reports of changes in ownership of common stock or other equity
securities of AGH. Section 16 reporting persons are required by the Commission
regulations to furnish AGH with copies of all Section 16(a) forms they file.
To AGH's knowledge, based solely on a review of the copies of such report
furnished to AGH an on written representations that no other reports were
required, during the fiscal year ended December 31, 1997, the Section 16
reporting persons complied with all Section 16(a) requirements applicable to
them except that Mr. Jorns inadvertently failed to file a Form 4 with the
Commission with respect to one acquisition of AGH OP Units by an entity which
he owns by indirect interest in connection with AGH's acquisition of the
Courtyard by Marriott Durham. Mr. Jorns reported that acquisition of AGH OP
Units on a Form 5 filed on a timely basis with the Commission. All such other
filings have been made.
ADVANCE NOTICE BYLAW
The AGH Bylaws provide that in order to nominate a candidate for election as
a member of the AGH Board at an annual meeting of stockholders or propose
business for consideration at such meeting, notice must be delivered to the
Secretary of AGH no more than 90 days nor less than 60 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that if
the 1999 annual meeting is advanced by more than 30 days or delayed for more
than 60 days from the date of the first anniversary of the 1998 annual
meeting, such written notice must be received by AGH not earlier than the 90th
day prior to the date of the 1999 annual meeting and not later than the later
of the 60th day prior to such meeting or the tenth day after the first public
announcement of the date of such meeting.
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STOCKHOLDER PROPOSALS
The AGH Board will provide for presentation of proposals by AGH's
stockholders at its annual meeting of stockholders for 1999, provided that
such proposals are submitted by eligible stockholders who have complied with
the relevant regulations of the Commission regarding stockholder proposals and
AGH's Bylaws, a copy of which is available upon written request from the
Secretary of AGH. Stockholder proposals intended to be submitted for
presentation at AGH's annual meeting of stockholders for 1999 must be in
writing and must be received by AGH at its executive offices on or before
December 15, 1998 for inclusion in AGH's proxy statement and the form of proxy
relating to the 1999 annual meeting. Any such proposal should be mailed to:
MeriStar Hospitality Corporation, 1010 Wisconsin Avenue, N.W., Suite 650,
Washington, D.C. 20007; Attention: Secretary or, if the Merger Proposal is not
approved, to: American General Hospitality Corporation, 3860 West Northwest
Highway, Suite 300, Dallas, Texas 75220; Attention: Secretary.
OTHER MATTERS
The AGH Board does not know of any matters other than those described in
this Joint Proxy Statement/Prospectus that will be presented for action at the
AGH Meeting. If other matters are presented, proxies will be voted at the
discretion of the proxy holders.
146
<PAGE>
LEGAL MATTERS
The validity of the AGH Common Stock to be issued in connection with the
Merger will be passed upon by Battle Fowler LLP. Battle Fowler LLP, counsel
for AGH, and Paul, Weiss, Rifkind, Wharton & Garrison, counsel for CapStar,
will pass on certain federal income tax consequences of the Merger for AGH and
CapStar, respectively. With regard to certain matters of Maryland Law, Battle
Fowler LLP will rely on the opinion of Ballard Spahr Andrews & Ingersoll, LLP.
With respect to certain matters of Delaware law, Paul, Weiss, Rifkind, Wharton
& Garrison will rely on the opinion of Morris, Nichols, Arsht & Tunnell.
EXPERTS
The (a) Consolidated Financial Statements and financial statement schedule
of AGH as of December 31, 1997 and 1996, and for the year ended December 31,
1997 and for the period from July 31, 1996 through December 31, 1996, and (b)
the Financial Statements of AGH Leasing as of December 31, 1997 and 1996 and
for the year ended December 31, 1997 and for the period from July 31, 1996
through December 31, 1996, included in the AGH Form 10-K; (a) the Financial
Statements and financial statement schedule of the Chicago O'Hare Hotel as of
and for the year ended December 31, 1996, (b) the Combined Financial
Statements and financial statement schedule of the Potomac Acquisition Hotels
as of and for the year ended December 31, 1996, (c) the Combined Financial
Statements and financial statement schedule of the Prime Acquisition Hotels
(as defined therein) as of December 1995, and 1996 and for each of the three
years in the period ended December 31, 1996, and (d) the Combined Financial
Statements and financial statement schedule of the FSA Acquisition Hotels (as
defined therein) as of December 31, 1996 and September 30, 1997 and for the
years ended December 31, 1995 and 1996 and for the nine month period ended
September 30, 1997, included in the Report on Form 8-K dated January 23, 1998;
and the Combined and Combining Financial Statements and financial statement
schedule of the Prime Acquisition Hotels as of December 31, 1996, and 1997 and
for each of the three years in the period ended December 31, 1997, included on
the Report on Form 8-K, dated April 7, 1998, incorporated by reference in this
Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accounts, as set forth in their reports thereon. Each of the above
referenced financial statements have been incorporated by reference herein in
reliance upon the authority of said firm as expert in accounting and auditing.
The consolidated financial statements and supplementary schedule of CapStar
Hotel Company and subsidiaries as of December 31, 1997 and 1996 and for the
three-year period ended December 31, 1997, included in CapStar's Annual Report
on Form 10-K and incorporated by reference herein, and the combined financial
statements of the management and leasing business of CapStar Hotel Company and
subsidiaries ("OpCo") as of December 31, 1997 and 1996 and for the three-year
period ended December 31, 1997 included in CapStar's Current Report on Form 8-
K dated April 7, 1998 and incorporated by reference herein, have been
incorporated by reference in reliance on the reports of KPMG Peat Marwick LLP,
independent accountants, and on the authority of said firm as experts in
accounting and auditing.
147
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
AMERICAN GENERAL HOSPITALITY CORPORATION,
AND
AMERICAN GENERAL HOSPITALITY OPERATING
PARTNERSHIP, L.P.,
ON THE ONE HAND,
AND
CAPSTAR HOTEL COMPANY,
CAPSTAR MANAGEMENT COMPANY, L.P.,
AND
CAPSTAR MANAGEMENT COMPANY II, L.P.,
ON THE OTHER HAND
DATED AS OF MARCH 15, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Agreement and Plan of Merger............................................ 1
RECITALS................................................................ 1
ARTICLE 1 THE MERGER................................................ A-2
1.1 The Merger................................................ A-2
1.2 Closing................................................... A-2
1.3 Effective Time............................................ A-2
1.4 Effects of the Merger..................................... A-2
1.5 Charters and Bylaws....................................... A-2
1.6 Directors................................................. A-3
1.7 Officers.................................................. A-3
ARTICLE 2 TREATMENT OF SHARES....................................... A-3
2.1 Effect of the Merger on Capital Stock..................... A-3
2.2 Issuance of New Certificates.............................. A-4
ARTICLE 3 CERTAIN TRANSACTIONS RELATING TO THE CAPSTAR HOTEL OP..... A-6
3.1 OP Business Combination................................... A-6
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE CAPSTAR PARTIES..... A-7
4.1 Organization, Standing and Power of CapStar............... A-7
4.2 CapStar Subsidiaries...................................... A-7
4.3 CapStar Structure......................................... A-8
4.4 Registration Rights....................................... A-10
4.5 Authority; Noncontravention; Consents..................... A-10
4.6 SEC Documents; Financial Statements; Undisclosed
Liabilities.............................................. A-11
4.7 Absence of Certain Changes or Events...................... A-11
4.8 Litigation................................................ A-12
4.9 Properties................................................ A-12
4.10 Employee Benefits......................................... A-13
4.11 Labor Matters; Employees.................................. A-14
4.12 Taxes..................................................... A-14
4.13 No Payments to Employees, Officers or Directors........... A-15
4.14 Brokers; Schedule of Fees and Expenses.................... A-15
4.15 Contracts; Debt Instruments............................... A-15
4.16 Opinion of Financial Advisor.............................. A-15
4.17 Delaware Takeover Law..................................... A-15
4.18 Information Supplied...................................... A-16
4.19 Investment Company Act of 1940............................ A-16
4.20 Definition of Knowledge of CapStar........................ A-16
4.21 Lease Agreement: Authority; Noncontravention; Consents.... A-16
4.22 Current Earnings and Profits.............................. A-17
4.23 Ownership of AGH Common Stock............................. A-17
4.24 Voting Requirements....................................... A-17
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE AGH PARTIES......... A-17
5.1 Organization, Standing and Power of AGH................... A-17
5.2 AGH Subsidiaries.......................................... A-17
5.3 AGH Structure............................................. A-18
5.4 Organization, Standing and Power of AGH OP................ A-19
5.5 Registration Rights....................................... A-19
5.6 Authority; Noncontravention; Consents..................... A-19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
5.7 SEC Documents; Financial Statements; Undisclosed
Liabilities................................................ A-20
5.8 Absence of Certain Changes or Events........................ A-21
5.9 Litigation.................................................. A-21
5.10 Properties.................................................. A-21
5.11 Taxes....................................................... A-22
5.12 Labor Matters; Employees.................................... A-23
5.13 No Payments to Employees, Officers or Directors............. A-23
5.14 Brokers; Schedule of Fees and Expenses...................... A-24
5.15 Contracts; Debt Instruments................................. A-24
5.16 Opinion of Financial Advisor................................ A-24
5.17 Maryland Takeover Laws...................................... A-24
5.18 Information Supplied........................................ A-24
5.19 Investment Company Act of 1940.............................. A-24
5.20 Definition of Knowledge of AGH.............................. A-24
5.21 Ownership of CapStar Common Stock........................... A-25
5.22 Lease Agreements; Authority; Noncontravention; Consents..... A-25
5.23 Employee Benefit Plans...................................... A-25
5.24 Voting Requirements......................................... A-26
ARTICLE 6 COVENANTS................................................... A-26
6.1 No Solicitation by CapStar.................................. A-26
6.2 No Solicitation by AGH...................................... A-27
6.3 Conduct of CapStar's Business Pending Merger................ A-28
6.4 Conduct of AGH's Business Pending Merger.................... A-29
6.5 Interim Transactions Committee.............................. A-30
6.6 Compliance with the Securities Act.......................... A-30
6.7 Filing of Certain Reports................................... A-31
6.8 Other Actions............................................... A-31
ARTICLE 7 ADDITIONAL COVENANTS........................................ A-31
7.1 Preparation of the Registration Statement and the Proxy
Statement; CapStar Stockholders Meeting and AGH
Stockholders Meeting....................................... A-31
7.2 Access to Information: Confidentiality...................... A-32
7.3 Regulatory Matters.......................................... A-33
7.4 Directors' and Officers' Indemnification.................... A-33
7.5 Public Announcements........................................ A-34
7.6 Employment Agreements and Workforce Matters................. A-34
7.7 Employee Benefit Plans...................................... A-35
7.8 Stock Option and Other Stock Plans.......................... A-35
7.9 CapStar Hotel OP Subsidiaries............................... A-36
7.10 Reorganization Status....................................... A-36
7.11 Preparation of the Form 10 Registration Statement........... A-37
7.12 NYSE Listing................................................ A-37
7.13 Transfer Taxes.............................................. A-37
7.14 Payment of CapStar Debt..................................... A-37
7.15 CapStar's Accumulated and Current Earnings and Profits...... A-37
7.16 Resignations................................................ A-37
7.17 Pre-Merger Transactions..................................... A-37
7.18 Spin-Off Transaction........................................ A-38
7.19 Lease Agreements............................................ A-39
7.20 FF&E Agreements............................................. A-39
7.21 Assumption of Debt.......................................... A-39
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
7.22 Accredited CapStar LPs.................................... A-39
7.23 Appointment of Manager.................................... A-39
7.24 Reasonable Efforts and Cooperation........................ A-39
ARTICLE 8 CONDITIONS................................................ A-40
8.1 Conditions to Each Party's Obligation to Effect the
Merger................................................... A-40
8.2 Conditions to Obligations of the CapStar Parties.......... A-41
8.3 Conditions to Obligations of the AGH Parties.............. A-41
8.4 Frustration of Closing Conditions......................... A-42
ARTICLE 9 TERMINATION, AMENDMENT AND WAIVER......................... A-43
9.1 Termination............................................... A-43
9.2 Certain Fees and Expenses................................. A-44
9.3 Effect of Termination..................................... A-45
9.4 Amendment................................................. A-45
9.5 Extension; Waiver......................................... A-46
ARTICLE 10 GENERAL PROVISIONS........................................ A-46
10.1 Nonsurvival of Representations and Warranties............. A-46
10.2 Notices................................................... A-46
10.3 Interpretation............................................ A-47
10.4 Counterparts.............................................. A-47
10.5 Entire Agreement; No Third-Party Beneficiaries............ A-47
10.6 Governing Law............................................. A-47
10.7 Assignment................................................ A-47
10.8 Enforcement............................................... A-47
10.9 Severability.............................................. A-47
</TABLE>
iii
<PAGE>
EXHIBITS
<TABLE>
<C> <S>
Exhibit "A-1" Articles of Merger
Exhibit "A-2" Certificate of Merger
Exhibit "B" Form of Exchange Rights Agreement
Exhibit "C" Form of Voting Agreement
Exhibit "D" Form of OP Merger Articles
Exhibit "E" Form of Affiliate Agreement
Exhibit "F" Form of Contribution, Assumption and Indemnity Agreement
Exhibit "G" Form of Intercompany Agreement
Exhibit "H" Form of OPCO Lease Agreement
</TABLE>
iv
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
1940 Act.............................................................. 4.19
1996 Plan............................................................. 5.3(a)
Affiliates............................................................ 6.6
AGH................................................................... Preamble
AGH Acquisition Proposal.............................................. 6.2(a)
AGH Benefit Plans..................................................... 5.23
AGH Budget and Schedule............................................... 5.10(e)
AGH Bylaws............................................................ 5.1
AGH Commitment........................................................ 6.4(h)
AGH Common Stock...................................................... 2.1(a)
AGH Charter........................................................... 1.5
AGH Disclosure Letter................................................. Article 5
AGH Exchange Ratio.................................................... 2.1(c)
AGH Financial Statement Date.......................................... 5.8
AGH Franchise Agreements.............................................. 5.10(g)
AGH GP................................................................ 5.2(a)
AGH Ground Leases..................................................... 5.10(f)
AGH Indemnified Liabilities........................................... 7.4(b)
AGH Indemnified Party and AGH Indemnified Parties..................... 7.4(b)
AGH Lessee............................................................ Recital G
AGH LP................................................................ 5.2(a)
AGH Manager........................................................... Recital G
AGH Material Adverse Change........................................... 5.8
AGH Material Adverse Effect........................................... 5.1
AGH OP................................................................ Preamble
AGH Operating Partnership Agreement................................... 5.4
AGH Options........................................................... 5.3(b)
AGH OP Units.......................................................... 5.2(a)
AGH OP Unit Holder.................................................... 5.2(a)
AGH Parties........................................................... Preamble
AGH Properties........................................................ 5.10(a)
AGH Restricted Stock Grants........................................... 5.3(b)
AGH SEC Documents..................................................... 5.7
AGH Stockholder Approvals............................................. 5.6(a)
AGH Stockholders Meeting.............................................. 7.1(e)
AGH Stock Option...................................................... 7.8(b)
AGH Subsidiaries...................................................... 5.2(b)
AGH Superior Proposal................................................. 6.2(b)
AGH Title Policies.................................................... 5.10(a)
Agreement............................................................. Preamble
Amended AGH Charter................................................... 1.5
Articles of Merger.................................................... Recital B
Base Amount........................................................... 9.2(c)
Break-Up Expenses..................................................... 9.2(c)
Break-Up Fee.......................................................... 9.2(c)
Break-Up Fee Tax Opinion.............................................. 9.2(c)
Canceled Shares....................................................... 2.2(b)
CapStar............................................................... Preamble
CapStar Acquisition Proposal.......................................... 6.1(a)
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
CapStar Benefit Plans................................................. 4.10
CapStar Budget and Schedule........................................... 4.9(e)
CapStar Bylaws........................................................ 4.1
CapStar Charter....................................................... 4.1
CapStar Commitment.................................................... 6.3(h)
CapStar Common OP Units............................................... 4.3(e)
CapStar Common Stock.................................................. 2.1(a)
CapStar Convertible Notes............................................. 4.3(a)
CapStar Disclosure Letter............................................. Article 4
CapStar Exchange Ratio................................................ 2.1(a)
CapStar Financial Statement Date...................................... 4.7
CapStar Franchise Agreements.......................................... 4.9(g)
CapStar Ground Leases................................................. 4.9(f)
CapStar Hotel OP...................................................... Recital D
CapStar Hotel OP Partnership Agreement................................ 4.2(b)
CapStar Incentive Plan................................................ 4.3(a)
CapStar Indemnified Liabilities....................................... 7.4(a)
CapStar Indemnified Party and CapStar Indemnified Parties............. 7.4(a)
CapStar LP Approvals.................................................. 4.5(c)
CapStar LPs........................................................... Recital D
CapStar Management I.................................................. Preamble
CapStar Management II................................................. Preamble
CapStar Management OP................................................. Recital D
CapStar Material Adverse Change....................................... 4.7
CapStar Material Adverse Effect....................................... 4.1
CapStar Options....................................................... 4.3(b)
CapStar OP Unit Holder................................................ 4.3(e)
CapStar OP Units...................................................... 4.3(a)
CapStar Parties....................................................... Preamble
CapStar Partners...................................................... Preamble
CapStar Partnership Agreements........................................ 4.3(d)
CapStar Preferred OP Units............................................ 4.3(e)
CapStar Properties.................................................... 4.9(a)
CapStar SEC Documents................................................. 4.6
CapStar Stockholder Approvals......................................... 4.5(a)
CapStar Stockholders Meeting.......................................... 7.1(d)
CapStar Stock Option.................................................. 7.8(a)
CapStar Subsidiary and CapStar Subsidiaries........................... 4.2(a)
CapStar Superior Proposal............................................. 6.1(b)
CapStar Title Policies................................................ 4.9(a)
Certificate and Certificates.......................................... 2.2(b)
Certificate of Merger................................................. Recital B
CH OP Units........................................................... 4.3(f)
Closing............................................................... 1.2
Closing Date.......................................................... 1.2
Closing Price......................................................... 9.1(l)
CM OP Units........................................................... 4.3(g)
Code.................................................................. Recital C
Confidentiality Agreement............................................. 7.2
Departments........................................................... 1.3
DGCL.................................................................. 1.1
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Directors' Plan....................................................... 5.3(a)
Dividend Equivalent Rights............................................ 5.3(b)
DRULPA................................................................ 3.1(a)
E&P................................................................... 4.22
Effective Time........................................................ 1.3
Encumbrances.......................................................... 4.9(a)
Environmental Laws.................................................... 4.6
ERISA................................................................. 4.10
Exchange Act.......................................................... 4.6
Exchange Agent........................................................ 2.2(a)
Exchange Fund......................................................... 2.2(a)
Exchange Ratios....................................................... 2.1(c)
Exchange Rights Agreement............................................. Recital D
Form 10 Registration Statement........................................ 7.11(a)
GAAP.................................................................. 4.6
Governing Acts........................................................ 1.1
Governmental Entity................................................... 4.5(b)
Hazardous Materials................................................... 4.6
HSR Act............................................................... 4.5(b)
Indebtedness.......................................................... 4.15(b)
Indentures............................................................ 7.21
Intercompany Agreement................................................ 7.18(f)
Interim Transactions Committee........................................ 6.5
Knowledge of AGH...................................................... 5.20
Knowledge of CapStar.................................................. 4.20
Laws.................................................................. 4.5(b)
Lease Agreements...................................................... 4.21(a)
Liens................................................................. 4.2(b)
Manager-Lessee Agreement.............................................. Recital G
Maryland Department................................................... 1.3
Merger................................................................ Recital A
MGCL.................................................................. 1.1
NYSE.................................................................. 1.2
Old CMC............................................................... 7.17(a)
OP Business Combination............................................... 3.1(b)
OPCO.................................................................. Recital D
OPCO Leases........................................................... 7.19
OPCO Stock............................................................ 7.18(b)
OP Merger............................................................. 3.1(b)
OP Merger Articles.................................................... 3.1(b)
OP Reorganization..................................................... Recital D
Paul Weiss............................................................ 8.2(e)
Payor................................................................. 9.2(c)
Person................................................................ 2.2(h)
Proxy Statement....................................................... 7.1(a)
Purchased FF&E........................................................ 7.20
Qualifying Income..................................................... 9.2(c)
Recipient............................................................. 9.2(c)
Registration Statement................................................ 7.1(a)
REIT Requirements..................................................... 9.2(c)
SEC................................................................... 4.5(b)
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Significant Subsidiary................................................ 6.1(a)
Spin-Off Transaction.................................................. Recital D
Stockholder Approvals................................................. 5.6(a)
Stock Purchase Plan................................................... 7.8(d)
Subsidiary............................................................ 4.2(a)
Surviving Corporation................................................. 1.1
Surviving Corporation Contribution and Assumption..................... 3.1(a)
Surviving Corporation Stock Benefits.................................. 7.8(c)
tail insurance........................................................ 7.4(c)
Taxing Authority...................................................... 4.12(a)
Tax or Taxes.......................................................... 4.12(a)
Tax Returns........................................................... 4.12(a)
Transactions.......................................................... Recital D
Voting Agreement...................................................... Recital F
</TABLE>
viii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 15,
1998, by and among AMERICAN GENERAL HOSPITALITY CORPORATION, a Maryland
corporation ("AGH"), AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P.,
a Delaware limited partnership ("AGH OP" and together with AGH, the "AGH
Parties"), on the one hand, and CAPSTAR HOTEL COMPANY, a Delaware corporation
("CapStar"), CAPSTAR MANAGEMENT COMPANY, L.P., a Delaware limited partnership
("CapStar Management I"), and CAPSTAR MANAGEMENT COMPANY II, L.P., a Delaware
limited partnership ("CapStar Management II" and together with CapStar
Management I, the "CapStar Partners"). (The CapStar Partners and CapStar are
sometimes collectively referred to herein as the "CapStar Parties").
RECITALS:
A. The Board of Directors of AGH and the Board of Directors of CapStar have
each determined that a business combination between AGH and CapStar is in the
best interests of their respective companies and stockholders and presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits, and accordingly have agreed to effect the merger (the
"Merger") of CapStar with and into AGH upon the terms and subject to the
conditions set forth herein.
B. Upon the terms and conditions set forth herein, CapStar and AGH shall
execute Articles of Merger (the "Articles of Merger") and the Certificate of
Merger (the "Certificate of Merger") in substantially the forms attached
hereto as Exhibit A-1 and Exhibit A-2, respectively and shall file such
Articles of Merger and Certificate of Merger in accordance with applicable
Maryland and Delaware law to effectuate the Merger.
C. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization under Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and that this Agreement shall constitute a plan
of reorganization under Section 368 of the Code.
D. In connection with the Merger, the following additional transactions will
be effected (the Merger, together with the other documents, agreements and
transactions, including without limitation, the Spin-Off Transaction and the
OP Reorganization (as defined below), contemplated by this Agreement, being
referred to collectively herein as the "Transactions"): (i) pursuant to a
series of transactions as more fully set forth in Sections 7.17 and 7.18, the
CapStar Parties will contribute or transfer all of their management agreements
and substantially all of their leasehold interests to a newly formed Delaware
limited partnership ("CapStar Management OP"), the general partner of which
will be a newly formed Delaware corporation and a wholly-owned subsidiary of
CapStar ("OPCO"), and, immediately prior to the Merger, CapStar will
distribute the stock of OPCO to CapStar's stockholders (the "Spin-Off
Transaction"); (ii) pursuant to a series of merger, contribution and
redemption transactions as more fully set forth in Section 7.18, the CapStar
Parties will contribute or transfer all their hotel assets to a newly formed
Delaware limited partnership (the "CapStar Hotel OP") and, concurrent with the
Merger, the CapStar Parties and the AGH Parties will effect a business
combination of the CapStar Hotel OP with the AGH OP as contemplated by Section
3.1, with the AGH OP as the survivor (the "OP Reorganization"); and (iii) the
AGH Parties will enter into an Exchange Rights Agreement in substantially the
form attached hereto as Exhibit B (the "Exchange Rights Agreement"), with
certain holders (the "CapStar LPs") of limited partnership interests in the
CapStar Hotel OP (prior to giving effect to the OP Reorganization).
E. The AGH Parties and the CapStar Parties desire to make certain
representations, warranties and agreements in connection with the Merger.
F. Concurrently with the execution of this Agreement and as an inducement to
the parties to enter into this Agreement, certain stockholders of CapStar and
AGH have entered into a voting agreement in the form attached
<PAGE>
hereto as Exhibit C (the "Voting Agreement") pursuant to which such
stockholders of CapStar and AGH have agreed, among other things, to vote their
CapStar Common Stock (as hereinafter defined) or AGH Common Stock (as
hereinafter defined), as the case may be, in favor of the Merger and the other
transactions contemplated by this Agreement.
G. Concurrently with the execution of this Agreement, the partners in AGH
Leasing, L.P. (the "AGH Lessee"), AGH Management, Inc. (the "AGH Manager") and
CapStar Management OP are entering into an acquisition agreement pursuant to
which CapStar Management OP is agreeing to purchase (i) certain partnership
interests in the AGH Lessee and (ii) substantially all of the assets of the
AGH Manager (the "Manager-Lessee Agreement") which agreement will close
immediately following the Spin-Off Transaction and the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
The Merger
1.1 The Merger. Upon the terms and subject to the conditions of this
Agreement, and in accordance with the Maryland General Corporation Law
("MGCL") and the Delaware General Corporation Law ("DGCL" and, together with
the MGCL, the "Governing Acts"), CapStar shall be merged with and into AGH, at
the Effective Time (as defined in Section 1.3). AGH shall be the surviving
corporation in the Merger and shall continue its corporate existence under the
laws of the State of Maryland under the name "MeriStar Hospitality
Corporation." The effects and consequences of the Merger are set forth in
Sections 1.4 through 1.7 hereof. AGH after the Effective Time is sometimes
referred to herein as the "Surviving Corporation."
1.2 Closing. The closing of the Merger (the "Closing") shall take place at
the offices of Battle Fowler LLP, 75 East 55th Street, New York, New York, at
10:00 A.M. local time, on the third New York Stock Exchange, Inc. ("NYSE")
trading day immediately following the date on which the last of the conditions
set forth in Article 8 hereof (other than conditions with respect to actions
the respective parties will take at the Closing) is first fulfilled or has
been waived, provided that all such conditions continue to be so satisfied or
waived on such third trading day, and if not so satisfied or waived, the
Closing shall be automatically extended from time to time until the first
subsequent trading day on which all such conditions are again so satisfied or
waived, subject, however to Article 9 hereof, or at such other time, date and
place as CapStar and AGH shall mutually agree in writing (the "Closing Date").
1.3 Effective Time. The Merger shall become effective (the "Effective Time")
upon the acceptance of the filing of the Articles of Merger with the State
Department of Assessments and Taxation of Maryland (the "Maryland Department")
and the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware and, together with the Maryland Department, the
"Departments") in accordance with the provisions of the Governing Acts, and by
making all other filings required under the Governing Acts to be made prior to
or concurrent with the effectiveness of the Merger, which filings shall be
made as soon as practicable on the Closing Date.
1.4 Effects of the Merger. The Merger shall have the effects set forth in
the Governing Acts.
1.5 Charters and Bylaws. The charter of AGH, as in effect immediately prior
to the Effective Time (the "AGH Charter") and as amended, prior to the
Effective Time, to reflect the name of the Surviving Corporation (and such
other matters as the parties may agree) pursuant to the Articles of Merger
(the "Amended AGH Charter"), shall be the charter of the Surviving Corporation
until thereafter amended as provided by applicable law and the Amended AGH
Charter, and the bylaws of AGH, as in effect immediately prior to the
Effective Time, shall be the bylaws of the Surviving Corporation until
thereafter amended as provided by applicable law, the Amended AGH Charter and
such bylaws.
A-2
<PAGE>
1.6 Directors.
(a) At the Effective Time, the number of directors of the Surviving
Corporation shall be increased to nine. The directors of the Surviving
Corporation immediately following the Effective Time shall be the persons
named on Schedule 1.6(a), each of whom shall serve until the earlier of his
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
(b) AGH and CapStar agree that in the event any person set forth on Schedule
1.6(a) is unable or otherwise fails to serve, for any reason, as a director of
the Surviving Corporation at the Effective Time, then (i) if such person was a
member of the Board of Directors of CapStar as of the date hereof, then
CapStar shall have the right to designate another individual to serve as a
director of the Surviving Corporation at the Effective Time, (ii) if such
person was a member of the Board of Directors of AGH as of the date hereof,
then AGH shall have the right to designate another individual to serve as a
director of the Surviving Corporation at the Effective Time and (iii) if such
person was not a member of the Board of Directors of either CapStar or AGH as
of the date hereof, then the persons set forth on Schedule 1.6(a) shall have
the right to designate another individual to serve as a director of the
Surviving Corporation at the Effective Time. AGH shall use its best efforts to
have any person designated to be a director pursuant to the previous sentence
elected as a director.
1.7 Officers.
(a) The officers of the Surviving Corporation immediately following the
Effective Time shall be the persons named on Schedule 1.7(a) who shall hold
the office set forth opposite such person's name, all of whom shall serve
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
(b) AGH and CapStar agree that in the event any person set forth on Schedule
1.7(a) is unable or otherwise fails to serve, for any reason, as an officer of
the Surviving Corporation at the Effective Time, the persons set forth on
Schedule 1.6(a) shall have the right (but not the obligation) to designate
another individual to serve as an officer of the Surviving Corporation in such
capacity, which person shall be approved by the respective Board of Directors
of AGH and CapStar prior to the Effective Time. AGH shall use its best efforts
to have any person designated pursuant to the previous sentence elected as an
officer of the Surviving Corporation.
ARTICLE 2
Treatment of Shares
2.1 Effect of the Merger on Capital Stock.
(a) Common Stock of CapStar. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any capital stock
of CapStar, subject to Section 2.1(b), each issued and outstanding share of
Common Stock, par value $0.01 per share, of CapStar ("CapStar Common Stock"),
other than shares of CapStar Common Stock to be canceled pursuant to Section
2.1(b), shall be converted into and become 1.0 (the "CapStar Exchange Ratio")
fully paid and nonassessable share of Common Stock, par value $0.01 per share,
of AGH ("AGH Common Stock"); provided, however, that, in any event, if between
the date of this Agreement and the Effective Time the outstanding shares of
CapStar Common Stock or AGH Common Stock shall have been changed into a
different number of shares or a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination
or exchange of shares, the CapStar Exchange Ratio shall be correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares. All such shares of
CapStar Common Stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate previously
evidencing any such shares shall thereafter represent the right to receive,
upon the surrender of such certificate in accordance with the provisions of
Section 2.2, certificates evidencing such number of whole shares of AGH Common
Stock into which such CapStar Common Stock was converted in accordance with
the CapStar Exchange Ratio. The holders of such certificates previously
evidencing such shares of CapStar Common Stock
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outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to such shares of CapStar Common Stock except as otherwise
provided herein or by law. No fractional share of AGH Common Stock shall be
issued, and, in lieu thereof, a cash payment shall be made pursuant to Section
2.2(d).
(b) Cancellation of Certain Common Stock of CapStar. As of the Effective
Time, by virtue of the Merger and without any action on the part of any holder
of any capital stock of CapStar and any shares of CapStar Common Stock that
are owned by CapStar, or any of its Subsidiaries (as treasury stock) or by AGH
or any of its Subsidiaries shall be canceled and retired and shall cease to
exist and no stock of AGH or other consideration shall be issued or delivered
in exchange therefor.
(c) Common Stock of AGH. As of the Effective Time, by virtue of the Merger
and without any action on the part of any holder of any capital stock of AGH,
each issued and outstanding share of AGH Common Stock shall be converted into
and become .8475 (the "AGH Exchange Ratio," and together with the CapStar
Exchange Ratio, the "Exchange Ratios") fully paid and non assessable shares of
AGH Common Stock. All such shares of AGH Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each certificate previously evidencing any such shares shall
thereafter represent the right to receive, upon the surrender of such
certificate in accordance with the provisions of Section 2.2, certificates
evidencing such number of whole shares of AGH Common Stock into which such AGH
Common Stock was converted in accordance with the AGH Exchange Ratio. The
holders of such certificates previously evidencing such shares of AGH Common
Stock outstanding immediately prior to the Effective Time shall cease to have
any rights with respect to such shares of AGH Common Stock except as otherwise
provided herein or by law. No fractional share of AGH Common Stock shall be
issued, and, in lieu thereof, a cash payment shall be made pursuant to Section
2.2(d).
2.2 Issuance of New Certificates.
(a) Deposit with Exchange Agent. As soon as practicable after the Effective
Time, AGH shall deposit, in trust for the benefit of holders of shares of
CapStar Common Stock and AGH Common Stock to be converted into shares of AGH
Common Stock pursuant to Section 2.1, with a bank and trust company mutually
agreeable to AGH and CapStar (the "Exchange Agent"), certificates representing
shares of AGH Common Stock required to effect the issuance referred to in
Section 2.1(a) and 2.1(c), and the cash payable in respect of fractional
shares pursuant to Section 2.2(d) (collectively, the "Exchange Fund"). The
Exchange Fund shall not be used for any purpose other than as contemplated by
this Agreement.
(b) Issuance Procedures. As soon as practicable after the Effective Time,
AGH shall cause the Exchange Agent to mail to each holder of record a
certificate or certificates (the "Certificate" or the "Certificates") which
immediately prior to the Effective Time represented outstanding shares of
CapStar Common Stock and AGH Common Stock (the "Canceled Shares") that were
canceled and became instead the right to receive shares of AGH Common Stock
pursuant to Section 2.1(a) and 2.1(c): (i) a letter of transmittal in
customary and reasonable form (which shall specify that delivery shall be
effected, and risk of loss and title to the certificates shall pass, only upon
actual delivery of the Certificates to the Exchange Agent) and (ii)
instructions for use in effecting the surrender of the CapStar Common Stock
and the AGH Common Stock. Without limitation to the rights under Section
2.2(c), upon surrender of Certificate to the Exchange Agent for cancellation
(or to such other agent or agents as may be appointed by AGH), together with a
duly executed letter of transmittal and such other customary documents as the
Exchange Agent shall require, the holder of such Certificate shall be entitled
to receive, with respect to the shares of CapStar Common Stock and AGH Common
Stock formerly represented thereby (A) a certificate or certificates
representing that number of whole shares of AGH Common Stock which such holder
has the right to receive pursuant to the provisions of Section 2.1(a) and
2.1(c), and (B) cash in lieu of fractional shares which such holder is
entitled to receive pursuant to Section 2.2(b) hereof. In the event of a
transfer of ownership of Canceled Shares which is not registered in the
transfer records of CapStar or AGH, as the case may be, a certificate
representing the proper number of shares of AGH Common Stock may be issued to
a transferee if the Certificate representing such Canceled Shares is presented
to the Exchange Agent,
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accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time to represent shares of AGH Common
Stock and dividends and other distributions and cash in lieu of any fractional
shares of AGH Common Stock as contemplated by this Section 2.2.
(c) Certain Distributions.
(i) The AGH Parties shall authorize under applicable law a dividend to
their respective stockholders and limited partners, as the case may be, the
record date for which shall be the close of business on the last business
day prior to the Effective Time. The dividend shall be equal to the AGH
Parties' most recent quarterly dividend rate for such stockholders and
limited partners, as the case may be, multiplied by the number of days
elapsed since the last dividend record date through and including the
Effective Time, and divided by 91. Such dividend shall be paid in the
ordinary course of business consistent with the past practice of the AGH
Parties as to the manner and timing of payment. If payment of such
dividends is made after the Effective Time, the Surviving Corporation shall
pay such dividends to such stockholders and limited partners as of such
record date.
(ii) No dividends or other distributions declared or made after the
Effective Time with respect to shares of AGH Common Stock with a record
date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of AGH Common Stock
represented thereby and no cash payment in lieu of fractional shares shall
be paid to any such holder pursuant to Section 2.2(b) until the holder of
such Certificate shall surrender such Certificate. Subject to the effect of
unclaimed property, escheat and other applicable laws, following surrender
of any such Certificate, there shall be paid to the holder of the
certificates representing whole shares of AGH Common Stock issued in
consideration therefor, without interest, (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional share of
AGH Common Stock to which such holder is entitled pursuant to Section
2.2(b) and the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole
shares of AGH Common Stock and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of AGH Common Stock.
(d) No Fractional Securities. No certificates or scrip representing
fractional shares of AGH Common Stock shall be issued upon the surrender for
exchange of Certificates and such fractional shares shall not entitle the
owner thereof to vote or to any other rights of a holder of AGH Common Stock.
A holder of CapStar Common Stock or AGH Common Stock, as the case may be, who
would otherwise have been entitled to a fractional share of AGH Common Stock
shall be entitled to receive a cash payment in lieu of such fractional share
in an amount equal to the product of such fraction multiplied by the mean
average of the closing sale price of a share of AGH Common Stock on the NYSE
over the 10 trading days immediately preceding the Closing Date.
(e) Book Entry. Notwithstanding any other provision of this Agreement, the
letter of transmittal referred to in Section 2.2(b) may, at the option of AGH,
provide for the ability of a holder of one or more Certificates to elect that
shares of AGH Common Stock to be received in exchange for the Canceled Shares
formerly represented by such surrendered Certificates be issued in
uncertificated form.
(f) Closing of Transfer Books; Etc. From and after the Effective Time, the
stock transfer books of CapStar shall be closed and no registration of any
transfer of capital stock of CapStar shall thereafter be made on the records
of CapStar. If, after the Effective Time, Certificates are presented to AGH,
they shall be canceled and exchanged for certificates representing the
appropriate number of shares of AGH Common Stock and cash in lieu of
fractional shares and dividends and other distributions as provided in this
Section 2.2. Shares of AGH Common Stock issued in the Merger shall be issued
as of, and be deemed to be outstanding as of, the Effective Time. AGH shall
cause all such shares of AGH Common Stock issued pursuant to the Merger to be
duly
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authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. In the event any Certificate(s) shall have been lost,
stolen or destroyed, upon the making of any affidavit of that fact by the
person claiming such certificates to be lost, stolen or destroyed and, if
reasonably required by AGH, upon the posting by such person of a bond in such
amount as reasonably determined as indemnity against any claim that may be
made against it with respect to such Certificate(s), the Exchange Agent will
issue in respect of such lost, stolen or destroyed Certificate(s), the
consideration to be received thereby (subject to the payment of cash in lieu
of fractional shares in accordance herewith) and such person shall be entitled
to the voting, dividend and other distribution rights provided herein with
respect thereto. Appropriate procedures shall be established by AGH and the
Exchange Agent so that each holder of a Certificate at the Effective Time
shall be entitled to vote on all matters subject to the vote of holders of AGH
Common Stock with a record date on or after the date of the Effective Time,
whether or not such Certificate holder shall have surrendered Certificates in
accordance with the provisions of this Agreement. For purposes of the
immediately preceding sentence, AGH may rely conclusively on the stockholder
records of CapStar in determining the identity of, and the number of CapStar
Shares held by, each holder of a Certificate of CapStar Common Stock at the
Effective Time.
(g) Withholding Rights. AGH or the Exchange Agent shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of CapStar Common Stock or AGH Common Stock,
as the case may be, such amounts as AGH or the Exchange Agent is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law. To the extent that
amounts are so withheld by AGH or the Exchange Agent, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of the shares of CapStar Common Stock or AGH Common Stock, as the case
may be, in respect of which such deduction and withholding was made by AGH or
the Exchange Agent.
(h) Termination of Exchange. Any certificates representing shares of AGH
Common Stock deposited with the Exchange Agent pursuant to Section 2.2(a) and
not exchanged within one year after the Effective Time pursuant to this
Section 2.2 shall be returned by the Exchange Agent to AGH which shall
thereafter act as Exchange Agent. All funds held by the Exchange Agent for
payment to the holders of unsurrendered Certificates and unclaimed at the end
of one year from the Effective Time shall be returned to AGH; after which time
any holder of unsurrendered Certificates shall look only to AGH and be
entitled to payment of such funds to which such holder may be due, subject to
applicable law. AGH shall not be liable to any person for such shares or funds
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. As used in this Agreement, the term "Person" shall
mean any natural person, corporation, general or limited partnership, limited
liability company, joint venture, trust, association, unincorporated
organization or entity of any kind.
ARTICLE 3
Certain Transactions
Relating to the CapStar Hotel op
3.1 OP Business Combination.
(a) Immediately prior to the Effective Time, AGH shall cause AGH GP (as
defined herein), AGH's Subsidiary that acts as general partner of the AGH OP,
to merge with and into AGH. Immediately following the Effective Time, the
Surviving Corporation shall, consistent with the AGH Operating Partnership
Agreement (as defined herein), contribute all of its assets (other than AGH OP
Units) (as such term is defined herein) to the AGH OP and the Surviving
Corporation shall expressly assume all obligations of the General Partner
thereunder (the "Surviving Corporation Contribution and Assumption").
(b) Immediately following the Surviving Corporation Contribution and
Assumption, the Surviving Corporation shall cause CapStar Hotel OP to merge
(the "OP Merger") with and into the AGH OP in accordance with the Delaware
Revised Uniform Limited Partnership Act ("DRULPA"), with the AGH OP as
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the surviving entity (the "OP Business Combination"). At the Effective Time,
the Surviving Corporation shall cause CapStar Hotel OP to execute the
Agreement and Plan of Merger and Certificate of Merger (the "OP Merger
Articles") in the form attached hereto as Exhibit D, which certificate shall
then be executed by the AGH OP and filed with the Delaware Secretary of State.
The effects of the OP Merger Articles are set forth in the OP Merger Articles
and the DRULPA. The OP Business Combination shall have, to the extent
applicable, the same economic and tax consequences for the CapStar LPs and the
limited partners of AGH OP as the Merger has for holders of CapStar Common
Stock and the AGH Common Stock, respectively; provided, however, that the
holders of preferred units of limited partnership interest in the AGH OP and
the holders of CapStar Preferred OP Units (as defined herein) will be provided
with substantially the same rights, privileges, and preferences that such
holders currently have in effect.
(c) Concurrently with the issuance contemplated by Section 2.2(b), the
Surviving Corporation shall (i) cause to be issued to the CapStar LPs, units
of limited partnership in the AGH OP issuable upon consummation of the OP
Business Combination and (ii) enter into, and cause the AGH OP to enter into,
an Exchange Rights Agreement with each CapStar LP.
ARTICLE 4
Representations and Warranties of the Capstar Parties
Except as set forth in the letter of even date herewith signed by the
Chairman of the Board or President of CapStar and delivered to the AGH Parties
prior to the execution hereof (the "CapStar Disclosure Letter"), the CapStar
Parties, jointly and severally, represent and warrant to the AGH Parties as
follows:
4.1 Organization, Standing and Power of CapStar. CapStar is a corporation
duly organized and validly existing under the laws of the State of Delaware.
CapStar has requisite corporate power and authority to carry on its business
as now being conducted. CapStar is duly qualified or licensed to do business
as a foreign corporation and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed, individually or in the
aggregate, would not have a material adverse effect on the business,
properties, assets, financial condition or results of operations of CapStar
and the CapStar Subsidiaries (as defined below), taken as a whole, or on the
ability of the CapStar Parties to perform any of their respective obligations
under this Agreement (any such effect, a "CapStar Material Adverse Effect").
CapStar has delivered to the AGH Parties complete and correct copies of
CapStar's Amended and Restated Certificate of Incorporation (the "CapStar
Charter") and the Bylaws of CapStar (the "CapStar Bylaws"), in each case, as
amended to the date of this Agreement.
4.2 CapStar Subsidiaries.
(a) Schedule 4.2(a) to the CapStar Disclosure Letter sets forth (i) each
Subsidiary (as defined below) of CapStar (the "CapStar Subsidiary" or "CapStar
Subsidiaries," which term includes, without limitation, upon its formation,
CapStar Hotel OP and CapStar Management OP), (ii) the ownership interest
therein of CapStar, (iii) if not wholly-owned by CapStar, the identity and
ownership interest of each of the other owners of each CapStar Subsidiary and
(iv) each hotel (identified by name and location) and other real property
owned by such CapStar Subsidiary. As used in this Agreement, "Subsidiary" of
any Person means any corporation, partnership, limited liability company,
joint venture, trust or other legal entity of which such Person (either
directly or through or together with another Subsidiary of such Person) owns
any of the capital stock or other equity interests of such corporation,
partnership, limited liability company, joint venture or other legal entity
except passive investments held for investment purposes, which are not
material in amount.
(b) Except as set forth in Schedule 4.2(b) to the CapStar Disclosure Letter,
(i) all the outstanding shares of capital stock of each CapStar Subsidiary
that is a corporation have been validly issued and are (A) fully paid and
nonassessable, (B) owned by CapStar or by another CapStar Subsidiary and (C)
owned free and clear of all
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pledges, claims, liens, charges, encumbrances and security interests of any
kind or nature whatsoever (collectively, "Liens") and (ii) all equity
interests in each CapStar Subsidiary that is a partnership, joint venture,
limited liability company or trust which are owned by CapStar, or by another
CapStar Subsidiary are owned free and clear of all Liens. At the Effective
Time, CapStar Hotel OP will not own, directly or indirectly, any interest in
any corporation. Each CapStar Subsidiary that is a corporation is duly
incorporated and validly existing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to carry on
its business as now being conducted, and each CapStar Subsidiary that is a
partnership, limited liability company or trust is duly organized and validly
existing under the laws of its jurisdiction of organization and has the
requisite power and authority to carry on its business as now being conducted.
Each CapStar Subsidiary is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
CapStar Material Adverse Effect. Copies of the articles of incorporation,
bylaws, organization documents and partnership, joint venture and operating
agreements of each CapStar Subsidiary, in each case as amended to the date of
this Agreement, have been previously delivered or made available to the AGH
Parties. A true and correct copy of the form of limited partnership agreement
of CapStar Hotel OP (the "CapStar Hotel OP Partnership Agreement") to be in
full force and effect at the Effective Time will be delivered to the AGH
Parties for review prior to execution and such agreement shall be
substantially similar to the CapStar Partnership Agreements (as hereinafter
defined). Neither CapStar nor any of the CapStar Subsidiaries is in breach of
any provision of any agreement, document or contract governing its rights in
or to the interests owned or held by it other than breaches which could not
reasonably be expected to have a CapStar Material Adverse Effect. To the
Knowledge of CapStar (as defined in Section 4.20), the other parties to such
agreements, documents or contracts are not in breach of any of their
respective obligations under such agreements, documents or contracts other
than breaches which could not reasonably be expected to have a CapStar
Material Adverse Effect.
4.3 CapStar Structure.
(a) The authorized shares of stock of CapStar consist of 25,000,000 shares
of preferred stock, $0.01 par value per share, none of which is issued or
outstanding, and 49,000,000 shares of CapStar Common Stock, of which
24,887,944 were issued and outstanding as of the date hereof. On the date
hereof, (i) 1,740,000 shares of CapStar Common Stock have been reserved for
issuance under CapStar's Equity Incentive Plan (the "CapStar Incentive Plan"),
under which options in respect of $2,686,354 shares of CapStar Common Stock
have been granted and are outstanding on the date hereof, (ii) 1,475,916
shares of CapStar Common Stock have been reserved for issuance upon the
redemption of units of limited partnership interest ("CapStar OP Units") in
the CapStar Partners and (iii) 4,011,628 shares of CapStar Common Stock have
been reserved for issuance upon the conversion of CapStar's 4.75% Convertible
Subordinated Notes due 2004 (the "CapStar Convertible Notes").
(b) Set forth in Schedule 4.3(b) of the CapStar Disclosure Letter is a true
and complete list of the following: each qualified or nonqualified option to
purchase shares of CapStar Common Stock granted under the Incentive Plan or
any other formal or informal arrangement ("CapStar Options"). As of the date
of this Agreement, other than CapStar Options, there were no outstanding
warrants or other rights to acquire stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units, restricted stock grants and
performance shares granted under the CapStar Incentive Plan or rights to
receive shares of CapStar Common Stock on a deferred basis granted by CapStar
under the CapStar Incentive Plan or otherwise. Schedule 4.3(b) of the CapStar
Disclosure Letter sets forth for each CapStar Option the name of the grantee,
the date of the grant, status of the option as qualified or nonqualified under
Section 422 of the Code, the number of shares of CapStar Common Stock subject
to such option, the number of shares subject to options that are currently
exercisable, the exercise price per share, and the number of such shares
subject to stock appreciation rights. On the date of this Agreement, except as
set forth in this Section 4.3 or Schedule 4.3(b) of the CapStar Disclosure
Letter, no shares of stock of CapStar were outstanding or reserved for
issuance.
(c) All outstanding shares of CapStar Common Stock are duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. Except for the CapStar Convertible Notes, there are no bonds,
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debentures, notes or other indebtedness of CapStar having the right to vote
(or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which stockholders of CapStar may vote.
(d) Except as set forth in this Section 4.3, Schedule 4.3(d) of the CapStar
Disclosure Letter or the limited partnership agreements for each of the
CapStar Partners (the "CapStar Partnership Agreements") there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which CapStar or any
CapStar Subsidiary is a party or by which such entity is bound, obligating
CapStar or any CapStar Subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock, voting
securities or other ownership interests of CapStar or any CapStar Subsidiary
or obligating CapStar or any CapStar Subsidiary to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking (other than to CapStar or a CapStar
Subsidiary).
(e) As of the date hereof, there are 696,979 and 778,937 CapStar OP Units
issued and outstanding in CapStar Management I and CapStar Management II,
respectively, exclusive of the CapStar OP Units owned by CapStar. The CapStar
OP Units consist of 1,083,759 common CapStar OP Units (the "CapStar Common OP
Units") and 392,157 preferred CapStar OP Units (the "CapStar Preferred OP
Units") exclusive of the CapStar OP Units owned by CapStar. The CapStar OP
Units are validly issued and outstanding, fully paid and nonassessable. As of
the date hereof, CapStar owns 23,019,871 issued and outstanding CapStar Common
OP Units in the CapStar Partners and none of the CapStar Preferred OP Units
are owned by CapStar. Schedule 4.3(e) of the CapStar Disclosure Letter sets
forth the name of each holder of a CapStar OP Unit (a "CapStar OP Unit
Holder") and the number of CapStar OP Units owned by each such CapStar OP Unit
Holder in each CapStar Partner as of the date of this Agreement. The CapStar
OP Units are subject to no restriction except as set forth in the CapStar
Partnership Agreements and pursuant to applicable securities laws. The CapStar
Partners have not issued or granted and are not a party to any outstanding
commitments of any kind relating to, or any presently effective agreements or
understandings with respect to, interests in CapStar Partners, whether issued
or unissued, or securities convertible into interests in CapStar Partners.
(f) Assuming that the Transactions were consummated as of the date hereof,
(i) there would be 24,887,944 units of limited partnership interests of
CapStar Hotel OP (the "CH OP Units") issued and outstanding, (ii) the CH OP
Units would convert to 24,495,787 common CH OP Units and 392,157 preferred CH
OP Units that each would have identical rights, privileges and preferences as
the CapStar Preferred OP Units, (iii) 23,019,871 of the CH OP Units would be
owned by CapStar and, (iv) Schedule 4.3(f) of the CapStar Disclosure Letter
sets forth the name of each contemplated holder of CH OP Units and the number
of CH OP Units that would be owned by each such holder of CH OP Units at that
time. As of the Effective Time, (i) the CH OP Units will be validly issued and
outstanding, fully paid and non assessable, (ii) the CH OP Units will not be
subject to restrictions except as set forth in the CapStar Hotel OP
Partnership Agreement and pursuant to applicable securities laws and (iii)
CapStar Hotel OP will not have issued or granted and will not be a party to
any outstanding commitments of any kind relating to, or any effective
agreements or understandings with respect to, interests in CapStar Hotel OP,
whether issued or unissued, or securities convertible into interests in
CapStar Hotel OP.
(g) Assuming that the Transactions were consummated as of the date hereof,
(i) there would be 24,887,944 units of limited partnership interests of
CapStar Management OP (the "CM OP Units") issued and outstanding, 23,019,871
of which would be owned by OPCO and (ii) Schedule 4.3(g) of the CapStar
Disclosure Letter sets forth the name of each contemplated holder of CM OP
Units and the number of CM OP Units that would be owned by each such holder of
CM OP Units. As of the Effective Time, the issued and outstanding CM OP Units
will be validly issued and outstanding, fully paid and non assessable.
(h) Except for (x) tax distributions paid to the holders of the CapStar
Common OP Units with respect to taxable income allocated to such holders for
1997 and for 1998 through the Effective Date, other than CapStar and any
CapStar Subsidiary, and (y) regular quarterly distributions paid to the holder
of the CapStar Preferred OP Units, CapStar or its Subsidiaries have never
declared any dividends on shares of CapStar Common Stock or distributions on
CapStar OP Units.
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4.4 Registration Rights. Except as set forth in Schedule 4.4(a) of the
CapStar Disclosure Letter, no Person has any right to require the registration
of any shares of CapStar Common Stock or any other securities of CapStar or
any CapStar Subsidiary.
4.5 Authority; Noncontravention; Consents.
(a) CapStar has the requisite corporate power and authority to enter into
this Agreement and, subject to the requisite stockholder approval of the
Merger (the "CapStar Stockholder Approvals"), to consummate the transactions
contemplated by this Agreement to which CapStar is a party, including without
limitation, the Spin-Off Transaction. Except as set forth on Schedule 4.5(a)
to the CapStar Disclosure Letter, the CapStar Partners have the requisite
partnership power and authority to enter into this Agreement, and to
consummate the transaction contemplated by this Agreement to which the CapStar
Partners are a party. The execution and delivery of this Agreement by the
CapStar Parties and the consummation by the CapStar Parties of the
transactions contemplated by this Agreement to which the CapStar Parties are a
party have been duly authorized by all necessary action on the part of the
CapStar Parties, except for and subject to the CapStar Stockholder Approvals
with respect to CapStar and the approvals set forth on Schedule 4.5(a). This
Agreement has been duly executed and delivered by the CapStar Parties and
constitutes a valid and binding obligation of the CapStar Parties, enforceable
against the CapStar Parties in accordance with and subject to its terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
(b) Except as set forth in Schedule 4.5(b) to the CapStar Disclosure Letter,
the execution and delivery of this Agreement by the CapStar Parties do not,
and the consummation of the transactions contemplated by this Agreement to
which the CapStar Parties are a party, including without limitation, the
Transactions, and compliance by the CapStar Parties with the provisions of
this Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or
to loss of a benefit under, or result in the creation of any Lien upon any of
the properties or assets of the CapStar Parties or any CapStar Subsidiary and,
at the Effective Time, CapStar Hotel OP, under, (i) the CapStar Charter or the
CapStar Bylaws or the comparable charter or organizational documents or
partnership or similar agreement (as the case may be) of any CapStar
Subsidiary, including, without limitation, the CapStar Hotel OP, each as
amended or supplemented to the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement,
lease or other agreement, instrument, permit, concession, franchise or license
applicable to CapStar or any CapStar Subsidiary or their respective properties
or assets or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any judgment, order, decree, statute,
law, ordinance, rule or regulation (collectively, "Laws") applicable to
CapStar or any CapStar Subsidiary, or their respective properties or assets,
other than, in the case of clause (ii) or (iii), any such conflicts,
violations, defaults, rights, loss or Liens that individually or in the
aggregate would not (x) have a CapStar Material Adverse Effect or (y) prevent
the consummation of the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any federal, state or local government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity"), is
required in connection with the execution and delivery of this Agreement by
the CapStar Parties or the consummation by the CapStar Parties of the
transactions contemplated by this Agreement, except for (i) the filing with
the Securities and Exchange Commission (the "SEC") of the Proxy Statement (as
defined in Section 7.1), (ii) the acceptance for record of the Articles of
Merger by the Departments, (iii) such filings as may be required in connection
with the payment of any transfer and gain taxes, (iv) the filing of a
premerger notification and report form by CapStar under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), if required by
applicable law and (v) such other consents, approvals, orders, authorizations,
registrations, declarations and filings (A) as are set forth in Schedules
4.5(a) and (b) to the CapStar Disclosure Letter, (B) as may be required under
(y) federal, state or local environmental laws or (z) the "blue sky" laws of
various states, to the extent applicable or (C) which, if not obtained or
made, would not prevent or delay in any material respect the consummation of
any of the transactions contemplated by this Agreement or otherwise prevent
the CapStar Parties from performing their obligations under this Agreement in
any material respect or have, individually or in the aggregate, a CapStar
Material Adverse Effect:
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(c) Schedule 4.5(c) to the CapStar Disclosure Letter sets forth all of the
approvals of the CapStar LPs needed to effectuate the OP Reorganization, the
Spin-Off Transaction and the other transactions contemplated by this Agreement
(such approvals the "CapStar LP Approvals").
4.6 SEC Documents; Financial Statements; Undisclosed Liabilities. CapStar
has filed all required reports, schedules, forms, statements and other
documents with the SEC since August 23, 1996 through the date hereof (the
"CapStar SEC Documents"). All of the CapStar SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
each case, the rules and regulations promulgated thereunder applicable to such
CapStar SEC Documents. None of the CapStar SEC Documents at the time of filing
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent such statements have been modified or
superseded by later CapStar SEC Documents filed and publicly available prior
to the date of this Agreement. The consolidated financial statements of
CapStar included in the CapStar SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited statements, as permitted by the applicable rules and
regulations of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly
presented, in accordance with the applicable requirements of GAAP and the
applicable rules and regulations of the SEC, the financial position of CapStar
and the CapStar Subsidiaries, as the case may be, in each case taken as a
whole, as of the dates thereof and the consolidated results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except as set forth in
Schedule 4.6 of the CapStar Disclosure Letter, CapStar has no Subsidiaries
which are not consolidated for accounting purposes. Except for liabilities and
obligations set forth in the CapStar SEC Documents or in Schedule 4.6 to the
CapStar Disclosure Letter, neither CapStar nor any of the CapStar Subsidiaries
has any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise), including liabilities arising under applicable
local, state and federal environmental laws, regulations, ordinances and
administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any hazardous
substances, hazardous material, toxic substances or waste materials
(collectively, "Hazardous Materials") (collectively, "Environmental Laws")
which are required by GAAP to be set forth on a consolidated balance sheet of
CapStar or in the notes thereto and which, individually or in the aggregate,
would have a CapStar Material Adverse Effect.
4.7 Absence of Certain Changes or Events. Except (i) as disclosed in the
CapStar SEC Documents or on Schedule 4.7 of the CapStar Disclosure Letter,
(ii) except for the Transactions and (iii) the transactions permitted by
Section 6.3, since the date of the most recent audited financial statements
included in the CapStar SEC Documents (the "CapStar Financial Statement
Date"), CapStar and the CapStar Subsidiaries have conducted their business
only in the ordinary course (taking into account prior practices, including
the acquisition of properties and issuance of securities) and there has not
been (a) any material adverse change in the business, financial condition or
results of operations of CapStar and the CapStar Subsidiaries taken as a whole
(a "CapStar Material Adverse Change"), nor has there been any occurrence or
circumstance that with the passage of time would reasonably be expected to
result in a CapStar Material Adverse Change, (b) except for the Transactions
and regular quarterly distributions in the amount of $.4144 per CapStar
Preferred OP Unit, any authorization, declaration, setting aside or payment of
any dividend or other distribution (whether in cash, stock or property) with
respect to the CapStar Common Stock or any security of any CapStar Subsidiary,
(c) any split, combination or reclassification of the CapStar Common Stock or
any issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for, or giving the right to acquire
by exchange or exercise, shares of stock of CapStar or partnership interests
in any CapStar Subsidiary which is a partnership, or any issuance of an
ownership interest in, any CapStar Subsidiary, (d) any damage, destruction or
loss, whether or not covered by insurance, that has or would have a CapStar
Material Adverse Effect, or (e) any change in accounting methods, principles
or practices by CapStar or any CapStar Subsidiary materially affecting its
assets,
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liabilities or business, except insofar as may have been disclosed in the
CapStar SEC Documents or required by a change in GAAP.
4.8 Litigation. Except as disclosed in the CapStar SEC Documents or in
Schedule 4.8 to the CapStar Disclosure Letter, and other than personal injury
and other routine tort litigation arising from the ordinary course of
operations of CapStar and the CapStar Subsidiaries (a) which are covered by
adequate insurance or (b) for which all material costs and liabilities arising
therefrom are reimbursable pursuant to common area maintenance or similar
agreements, there is no suit, action or proceeding pending (in which service
of process has been received by an employee of CapStar or any CapStar
Subsidiary) or, to the Knowledge of CapStar, threatened in writing against or
affecting CapStar or any CapStar Subsidiary that, individually or in the
aggregate, could reasonably be expected to (i) have a CapStar Material Adverse
Effect or (ii) nor is there any judgment, decree, injunction, rule or order of
any court or Governmental Entity or arbitrator outstanding against CapStar or
any of the CapStar Subsidiaries having, or which, insofar as reasonably can be
foreseen, in the future would have, any such effect.
4.9 Properties.
(a) Schedule 4.9(a) of the CapStar Disclosure Letter sets forth a complete
and accurate list and the address of all real property owned or leased by
CapStar or any of its Subsidiaries (collectively, and together with the land
at each address referenced in Schedule 4.9(a) of the CapStar Disclosure Letter
and all buildings, structures and other improvements and fixtures located on
or under such land and all easements, rights and other appurtenances to such
land, the "CapStar Properties"). CapStar or the CapStar Subsidiaries, owns or
own, as the case may be, good and insurable fee simple title (or, if so
indicated in Schedule 4.9(a) of the CapStar Disclosure Letter, leasehold
title) to each of the CapStar Properties, in each case free and clear of
liens, mortgages or deeds of trust, claims against title, charges which are
liens, security interests or other encumbrances on title (collectively,
"Encumbrances"), except for such mortgages set forth on Schedule 4.18(b) of
the CapStar Disclosure Letter and such Encumbrances as individually, and in
the aggregate, could not reasonably be expected to have a CapStar Material
Adverse Effect. Except for such of the following as individually or in
aggregate could not reasonably be expected to have a CapStar Material Adverse
Effect, policies of title insurance (or marked title insurance commitments
having the same force and effect as title insurance policies) have been issued
by national title insurance companies insuring the fee simple or leasehold, as
applicable, title of CapStar or its Subsidiaries, as applicable, to each of
the CapStar Properties in amounts at least equal to the portion of the
purchase price thereof allocated to real estate (the "CapStar Title
Policies"), and, to CapStar's knowledge, the CapStar Title Policies are valid
and in full force and effect and no claim has been made under any such policy.
(b) Except as set forth in Schedule 4.9(b) of the CapStar Disclosure Letter,
and except for matters which would not, individually or in the aggregate,
reasonably be expected to have a CapStar Material Adverse Effect or to
materially and adversely affect the use or occupancy (or, if applicable, any
proposed developments) of the CapStar Properties, which would reasonably be
expected to have a CapStar Material Adverse Effect, CapStar has no knowledge
that any currently required certificate, permit or license (including building
permits and certificates of occupancy) from any Governmental Entity having
jurisdiction over any CapStar Property or any agreement, easement or other
right which is necessary to permit the lawful use, occupancy or operation of
the existing buildings, structures or other improvements which constitute a
part of any of the CapStar Properties has not been obtained or is not in full
force and effect, or of any pending modification or cancellation of any of the
same.
(c) Schedule 4.9(c) of the CapStar Disclosure Letter sets forth a complete
and accurate list of all definitive agreements made or entered into by CapStar
or any of its Subsidiaries as of the date hereof, (x) to sell, mortgage,
pledge or hypothecate any CapStar Property, which, individually or in the
aggregate, are material, or to otherwise enter into a material transaction in
respect of the ownership or financing of any CapStar Property and (y) to
purchase real property to which CapStar or any Subsidiary is a party.
(d) Except as set forth in Schedule 4.9(d) of the CapStar Disclosure Letter,
none of the CapStar Properties is subject to any outstanding purchase options,
rights of first refusal, rights of first offer or similar rights, other
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than such rights which would not reasonably be expected to have a CapStar
Material Adverse Effect, nor has CapStar or any of its Subsidiaries entered
into any outstanding contracts with others for the sale, mortgage, pledge,
hypothecation, assignment, sublease or lease of any material portion of the
CapStar Property or other transfer of all or any part of any CapStar Property,
and no person has any right or option to acquire, or right of first refusal or
right of first offer with respect to, CapStar's or any of its Subsidiaries'
interest in any CapStar Property or any part thereof.
(e) Schedule 4.9(e) of the CapStar Disclosure Letter sets forth CapStar's or
any Subsidiaries' capital expenditure budget and schedule for each CapStar
Property, which describes the capital expenditures which the CapStar or any
Subsidiary has budgeted for such CapStar Property for the period running
through December 31, 1998 (the "CapStar Budget and Schedule").
(f) The ground leases underlying the leased CapStar Properties referenced in
Schedule 4.9(a) of the CapStar Disclosure Letter (collectively, the "CapStar
Ground Leases") are accurately described in Schedule 4.9(f) of the CapStar
Disclosure Letter. Each of the CapStar Ground Leases is valid, binding and in
full force and effect as against CapStar or its Subsidiaries and, to CapStar's
knowledge, as against the other party thereto, except to the extent the
failure to be binding and in full force and effect would not reasonably be
expected to have a CapStar Material Adverse Effect. There does not exist under
any of the CapStar Ground Leases any default, and, to CapStar's knowledge, no
event has occurred which, with notice or lapse of time or both, would
constitute such a default, except as would not, individually or in the
aggregate, be reasonably expected to result in a CapStar Material Adverse
Effect.
(g) Schedule 4.9(g) to the CapStar Disclosure Letter sets forth a list of
the hotel franchise agreements (the "CapStar Franchise Agreements") pursuant
to which each of the CapStar Properties is being operated. Each of the CapStar
Franchise Agreements is in full force effect and, to the knowledge of CapStar,
there are no defaults thereunder by either party thereto, nor have any events
occurred which with the giving notice or the passage time or both would
constitute a default or event of default thereunder, except for those which
either singly or in the aggregate would not constitute a CapStar Material
Adverse Effect.
(h) Immediately prior to the Effective Time, CapStar Hotel OP will, directly
or indirectly, hold title (or, if so indicated in Schedule 4.9(a) of the
CapStar Disclosure Letter, leasehold title) to the CapStar Properties.
4.10 Employee Benefits. With respect to all the employee benefit plans,
programs and arrangements maintained for the benefit of any current or former
employee, officer or director of CapStar or any of its Subsidiaries (the
"CapStar Benefit Plans"), except for such matters, as, individually or in the
aggregate, could not be reasonably expected to have a CapStar Material Adverse
Effect, (a) each CapStar Benefit Plan and any related trust intended to be
qualified under Sections 401(a) and 501(a) of the Code has received a
favorable determination letter from the IRS that it is so qualified and to the
Knowledge of CapStar nothing has occurred since the date of such letter that
could reasonably be expected to materially adversely affect the qualified
status of such CapStar Benefit Plan or related trust, (b) each CapStar Benefit
Plan has been operated in all material respects in accordance with the terms
and requirements of applicable law and all required returns and filings for
each CapStar Benefit Plan have been timely made, (c) neither CapStar nor any
of its Subsidiaries has incurred any direct or indirect material liability
under, arising out of or by operation of Title I or Title IV of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), in connection
with any CapStar Benefit Plan or other retirement plan or arrangement, and to
the Knowledge of CapStar no fact or event exists that could reasonably be
expected to give rise to any such material liability, (d) all material
contributions due and payable on or before the date hereof in respect of each
CapStar Benefit Plan have been made in full and in proper form, (e) neither
CapStar nor any of its Subsidiaries has ever sponsored or been obligated to
contribute to any "multiemployer plan" (as defined in Section 3(37) of ERISA),
"multiple employer plan" (as defined in Section 413 of the Code) or "defined
benefit plan" (as defined in Section 3(35) of ERISA), (f) except as otherwise
required under ERISA, the Code and applicable laws, no CapStar Benefit Plan
currently or previously maintained by CapStar or any of its Subsidiaries
provides any post-retirement health or life insurance benefits in the future,
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(g) all material reporting and disclosure obligations imposed under ERISA and
the Code have been satisfied with respect to each CapStar Benefit Plan, and
(h) no benefit or amount payable or which may become payable by CapStar or any
of its Subsidiaries pursuant to any CapStar Benefit Plan, agreement or
contract with any employee, shall constitute an "excess parachute payment,"
within the meaning of Section 280(G) of the Code, which is or may be subject
to the imposition of any excise tax under Section 4999 of the Code or which
would not be deductible by reason of Section 280G of the Code.
4.11 Labor Matters; Employees.
(a) Except as set forth on Schedule 4.11(a), neither CapStar nor any of its
Subsidiaries is a party to, or bound by, any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor union
organization. CapStar has delivered true, correct and complete copies of such
agreements to the AGH Parties. There is no unfair labor practice or labor
arbitration proceeding pending or, to CapStar's Knowledge, threatened against
CapStar or any of its Subsidiaries relating to their business which, if
determined adversely to CapStar or any of its Subsidiaries, would have a
CapStar Material Adverse Effect.
(b) Schedule 4.11(b) to the CapStar Disclosure Letter sets forth all
employment agreements between CapStar or any of its Subsidiaries and any other
Person.
4.12 Taxes. Except as, individually or in the aggregate, could not be
reasonably expected to have a CapStar Material Adverse Effect:
(a) All returns, reports and forms ("Tax Returns") required to be filed with
any governmental authority, domestic or foreign, having jurisdiction over the
assessment, determination, collection, or other imposition ("Taxing
Authority") of (i) any and all taxes (whether federal, state, local or
foreign), including, without limitation, gross receipts, profits, sales, use,
occupation, value added, ad valorem, transfer, franchise, withholding,
payroll, employment, excise, or property taxes, together with any interest,
penalties or additions to tax imposed with respect thereto and (ii) any
obligations under any agreements or arrangements with respect to any taxes
described in clause (i) above ("Tax" or "Taxes") for all periods ending on or
before the Closing Date that are or were required to be filed by, or with
respect to, CapStar or any CapStar Subsidiaries, either separately or as a
member of an affiliated group of corporations, have been or will be filed on a
timely basis in accordance with the laws, regulations and administrative
requirements of each Taxing Authority. All such Tax Returns that have been
filed on or before the Closing Date were, when filed, and continue to be,
true, correct and complete and the financial statements included in CapStar's
Form 10-K for the year ended December 31, 1997 reflect an adequate reserve for
all taxes payable by CapStar for all taxable periods and portions thereof
through the date of those financial statements. No Taxing Authority is now
asserting by written notice to CapStar or the CapStar Subsidiaries or, to the
Knowledge of CapStar, threatening to assert against CapStar or the CapStar
Subsidiaries, any deficiency or claim for additional Taxes. No written claim
has been made since January 1, 1997 by a Taxing Authority in a jurisdiction
where CapStar does not file Tax Returns that CapStar is or may be subject to
taxation by that jurisdiction. There are no security interests on any of the
assets of CapStar or the CapStar Subsidiaries that arose in connection with
any failure (or alleged failure) to pay any Taxes. CapStar has not since
January 1, 1997 entered into a closing agreement pursuant to Section 7121 of
the Code. CapStar has not received written notice of any audit of any Tax
Return filed by CapStar, and CapStar has not been notified in writing that any
such audit is contemplated or pending. Neither CapStar nor any of the CapStar
Subsidiaries has executed or filed with any Taxing Authority any agreement now
in effect extending the period for assessment or collection of any Taxes.
Copies of all income or franchise tax returns filed by CapStar and each of the
CapStar Subsidiaries since August 1996 and all communications relating thereto
since that date have been delivered to AGH or made available to
representatives of AGH. CapStar and each CapStar Subsidiary has paid all Taxes
required to be paid prior to the date hereof and has made provision, in
accordance with GAAP, for all Taxes owed or accrued through the date hereof;
(b) Each of CapStar Management I and CapStar Management II has been since
its formation, and will be through the Closing Date, treated as a partnership
and not as an association taxable as a corporation for federal
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income tax purposes. CapStar Hotel OP will be, upon its formation and through
the Closing Date, treated as a partnership and not as an association taxable
as a corporation for federal income tax purposes;
(c) There is no contract, agreement, plan or arrangement covering any person
that, individually or collectively, as a consequence of the Transactions could
give rise to the payment of any amount that would not be deductible by CapStar
or any of the CapStar Subsidiaries by reason of Section 280G of the Code; and
(d) None of the CapStar Subsidiaries that are taxed as a partnership are
publicly-traded partnerships as defined in Section 7704 of the Code.
4.13 No Payments to Employees, Officers or Directors. There are no cash or
non-cash payments which will become payable to each employee, officer or
director of CapStar or any CapStar Subsidiary as a result of the Merger and
the Transactions. Except as otherwise provided for in this Agreement, there is
no employment or severance contract, or other agreement requiring payments,
cancellation of indebtedness or other obligation to be made upon a change of
control or otherwise as a result of the consummation of any of the
transactions contemplated by this Agreement, with respect to any employee,
officer or director of CapStar or any CapStar Subsidiary.
4.14 Brokers; Schedule of Fees and Expenses. No broker, investment banker,
financial advisor or other person, other than Lehman Brothers Inc. and Goldman
Sachs & Co., the fees and expenses of which are as described in (i) the
engagement letter, dated March 11, 1998, between Lehman Brothers Inc. and
CapStar, and (ii) the engagement letter, dated March 11, 1998, between Goldman
Sachs & Co. and CapStar, a true and correct copy of each of which has
previously been delivered to the AGH Parties, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated hereby based upon arrangements made by or
on behalf of CapStar or any CapStar Subsidiary.
4.15 Contracts; Debt Instruments.
(a) Neither CapStar nor any CapStar Subsidiary has received a written notice
that CapStar or any CapStar Subsidiary is in violation of or in default under
(nor to the Knowledge of CapStar does there exist any condition which upon the
passage of time or the giving of notice or both would cause such a violation
of or default under) any material loan or credit agreement, note, bond,
mortgage, indenture, lease, permit, concession, franchise, license or any
other material contract, agreement, arrangement or understanding, to which it
is a party or by which it or any of its properties or assets is bound, except
as set forth in Schedule 4.15(a) to the CapStar Disclosure Letter, nor to the
Knowledge of CapStar does such a violation or default exist, except to the
extent that such violation or default, individually or in the aggregate, would
not have a CapStar Material Adverse Effect.
(b) Except for any of the following expressly identified in CapStar SEC
Documents, Schedule 4.15(b) of the CapStar Disclosure Letter sets forth a list
of each loan or credit agreement, note, bond, mortgage, indenture and any
other agreement and instrument pursuant to which any Indebtedness in excess of
$10,000,000 of CapStar or any of CapStar Subsidiaries, other than such
Indebtedness payable to CapStar or a CapStar Subsidiary is outstanding or may
be incurred. For purposes of this Agreement, "Indebtedness" shall mean (i)
indebtedness for borrowed money, whether secured or unsecured, (ii)
obligations under conditional sale or other title retention agreements
relating to property purchased by such person, (iii) capitalized lease
obligations, (iv) obligations under interest rate cap, swap, collar or similar
transaction or currency hedging transactions (valued at the termination value
thereof), and (v) guarantees of any such indebtedness of any other person.
4.16 Opinion of Financial Advisor. The Board of Directors of CapStar has
received the opinions of Lehman Brothers Inc. and Goldman Sachs & Co., dated
the date of this Agreement, to the effect that the CapStar Exchange Ratio
after giving effect to the AGH Exchange Ratio is fair, from a financial point
of view, to the holders of shares of CapStar Common Stock.
4.17 Delaware Takeover Law. The restrictions provided by Section 203 of the
DGCL will not apply to AGH in connection with this Agreement and the other
transactions contemplated hereby. The resolutions in the
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form set forth in Schedule 4.17 of the CapStar Disclosure Letter have been
adopted by CapStar and have not been rescinded or revoked.
4.18 Information Supplied. None of the information supplied or to be
supplied by CapStar specifically for inclusion or incorporation by reference
in (i) the Registration Statement, at the time the Registration Statement is
filed with the SEC or at the time it becomes effective under the Securities
Act, or (ii) the Proxy Statement (as defined in Section 7.1(e), at the date it
is first mailed to CapStar's stockholders or at the time of CapStar
Stockholders Meeting (as defined in Section 7.1(e)), will contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading. The
Registration Statement and Proxy Statement will comply in all material
respects with the requirements of the Exchange Act and the rules and
regulations thereunder, except that no representation or warranty is made by
CapStar with respect to statements made or incorporated by reference therein
based on information supplied by AGH specifically for inclusion or
incorporated by reference in the Proxy Statement or contained in any AGH SEC
Documents incorporated by reference in the Registration Statement or the Proxy
Statement.
4.19 Investment Company Act of 1940. Neither CapStar nor any of CapStar
Subsidiaries is, or at the Effective Time will be, required to be registered
under the Investment Company Act of 1940, as amended (the "1940 Act").
4.20 Definition of Knowledge of CapStar. As used in this Agreement, the
phrase "Knowledge of CapStar" (or words of similar import) means the knowledge
of those individuals identified in Schedule 4.20 of the CapStar Disclosure
Letter.
4.21 Lease Agreement: Authority; Non contravention; Consents.
(a) At the Effective Time, OPCO or its Subsidiaries, as the case may be,
shall have all requisite power, corporate or otherwise, and authority to enter
into each of the lease agreements (the "Lease Agreements") with AGH OP or its
Subsidiaries, as the case may be, and to consummate the transactions
contemplated by the Lease Agreements. At the Effective Time, the execution and
delivery of each of the Lease Agreements by OPCO or its Subsidiaries, as the
case may be, and the consummation by OPCO or its Subsidiaries, as the case may
be, of the transactions contemplated by the Lease Agreements will have been
duly authorized by all necessary action on the part of OPCO or its
Subsidiaries, as the case may be. At the Effective Time, the Lease Agreements
will have been duly executed and delivered by OPCO or its Subsidiaries, as the
case may be, and will constitute a valid and binding obligation of such
parties, enforceable against each in accordance with and subject to its terms.
(b) At the Effective Time, the execution and delivery of the Lease
Agreements by OPCO or its Subsidiaries, as the case may be, will not, and the
consummation of the transactions contemplated by the Lease Agreements to which
OPCO or its Subsidiaries, as the case may be, is a party and compliance by
OPCO or its Subsidiaries with the provisions of the Lease Agreements will not,
conflict with or result in any violation of or default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any material obligation or to loss of a
material benefit under, or result in the creation of any Lien upon any of the
properties or assets of OPCO or its Subsidiaries, as the case may be, under,
(i) the charter or organizational documents or partnership or similar
agreement, as the case may be, of such party, each as amended or supplemented
to the date of the Effective Time, (ii) any loan or credit agreement, note,
bond, mortgage, indenture, reciprocal easement agreement, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
such party or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any Laws applicable to such party or their respective properties or assets,
other than, in the case of clause (ii) or (iii), any such conflicts,
violations, defaults, rights, losses or Liens that individually or in the
aggregate would not have a material adverse effect on the business to be
conducted by such party, properties, assets, financial condition or results of
operations of OPCO and its Subsidiaries, taken as a whole, or on their ability
to perform any of their respective obligations under the Lease Agreements. No
consent, approval, order or authorization of, or registration, declaration of
filing
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with, any Governmental Entity is required by or with respect to OPCO or its
Subsidiaries in connection with the execution and delivery of the Lease
Agreements or the consummation by OPCO or its Subsidiaries of any of the
transactions contemplated by the Lease Agreements.
4.22 Current Earnings and Profits. As of December 31, 1997, CapStar and the
CapStar Subsidiaries did not have current and accumulated earnings and profits
(as determined for federal income tax purposes) ("E&P") in excess of
$22,500,000.
4.23 Ownership of AGH Common Stock. Neither CapStar, any of the CapStar
Subsidiaries, nor, to its knowledge, its directors or executive officers,
beneficially owns (as such term is defined in Rule 13d-3 under the Exchange
Act) more than 5% of the shares of AGH Common Stock.
4.24 Voting Requirements. The CapStar Stockholder Approvals which shall
consist of the affirmative vote of a majority of the votes cast by all
stockholders entitled to vote thereon at the CapStar Stockholders Meeting,
which shall be a duly convened meeting at which a quorum was present and
acting throughout, to adopt this Agreement is the only vote of the holders of
any class or series of CapStar's capital stock necessary to approve and adopt
this Agreement and the transactions contemplated hereby.
ARTICLE 5
Representations and Warranties of the AGH Parties
Except as set forth in the letter of even date herewith signed by the
Chairman of the Board or President of AGH and delivered to the CapStar Parties
prior to the execution hereof (the "AGH Disclosure Letter"), the AGH Parties,
jointly and severally, represent and warrant to the CapStar Parties as
follows:
5.1 Organization, Standing and Power of AGH. AGH is a corporation duly
organized and validly existing under the laws of Maryland and has the
requisite corporate power and authority to carry on its business as now being
conducted. AGH is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed, individually or in the aggregate,
would not have a material adverse effect on the business, properties, assets,
financial condition or results of operations of AGH and the AGH Subsidiaries
(as defined below), taken as a whole, or the ability of the AGH Parties to
perform any of their respective obligations under this Agreement (any such
effect a "AGH Material Adverse Effect"). AGH has delivered to the CapStar
Parties complete and correct copies of the Second Articles of Amendment and
Restatement of AGH and the Bylaws of AGH (the "AGH Bylaws") as amended or
supplemented to the date of this Agreement.
5.2 AGH Subsidiaries.
(a) AGH is the record and beneficial owner of all of the issued and
outstanding shares of capital stock of AGH GP, Inc., a Nevada corporation
("AGH GP") and AGH LP, Inc., a Nevada corporation ("AGH LP"). As of the date
of hereof, AGH GP and AGH LP own collectively approximately 86.2% of the
issued and outstanding units of limited partnership of AGH OP (the "AGH OP
Units") free and clear of all Liens. The AGH OP Units are validly issued and
outstanding, fully paid and nonassessable. Schedule 5.2(a) of the AGH
Disclosure Letter sets forth the name of each holder of a AGH OP Unit (a "AGH
OP Unit Holder") and the number of AGH OP Units owned by each such AGH OP Unit
Holder in AGH OP as of the date of this Agreement. The AGH OP Units are
subject to no restriction except as set forth in the AGH Operating Partnership
Agreement and pursuant to applicable securities laws. AGH OP has not issued or
granted and is not a party to any outstanding commitments of any kind relating
to, or any presently effective agreements or understandings with respect to,
interests in AGH OP, whether issued or unissued, or securities convertible
into interests in AGH OP.
(b) Schedule 5.2(b) to the AGH Disclosure Letter sets forth (i) each
Subsidiary of AGH (the "AGH Subsidiaries"), (ii) the ownership interest
therein of AGH, (iii) if not wholly-owned by AGH, the identity and
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ownership interest of each of the other owners of such AGH Subsidiary and (iv)
each hotel (identified by name and location) owned by such Subsidiary.
(c) Except as set forth in Schedule 5.2(c) to the AGH Disclosure Letter, (i)
all the outstanding shares of capital stock of each AGH Subsidiary that is a
corporation have been validly issued and are (A) fully paid and nonassessable,
(B) owned by AGH and (C) owned free and clear of all Liens and (ii) all equity
interests in each AGH Subsidiary that is a partnership, joint venture or
limited liability company which are owned by AGH or by another AGH Subsidiary
are owned free and clear of all Liens. Each AGH Subsidiary that is a
corporation is duly incorporated and validly existing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to carry on its business as now being conducted, and each AGH
Subsidiary that is a partnership, limited liability company or joint venture
is duly organized and validly existing under the laws of its jurisdiction of
organization and has the requisite power and authority to carry on its
business as now being conducted. Each AGH Subsidiary is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed, individually or in the
aggregate, would not have a AGH Material Adverse Effect. Copies of the
articles of incorporation, bylaws, organization documents and partnership,
joint venture and operating agreements of each AGH Subsidiary, in each case as
amended to the date of this Agreement, have been previously delivered or made
available to the CapStar Parties. Neither AGH nor any of the AGH Subsidiaries
is in breach of any provision of any agreement, document or contract governing
its rights in or to the interests owned or held by it other than breaches,
which could not reasonably be expected to have a AGH Material Adverse Effect.
To the Knowledge of AGH (as defined in Section 5.20), the other parties to
such agreements, documents or contracts are not in breach of any of their
respective obligations under such agreements, documents or contracts other
than breaches, which could not reasonably be expected to have a AGH Material
Adverse Effect.
5.3 AGH Structure.
(a) The authorized shares of stock of AGH consist of 100,000,000 shares of
AGH Common Stock. As of the date hereof, (i) 24,315,832 shares of AGH Common
Stock were outstanding, (ii) 923,748 shares of AGH Common Stock were available
for issuance under AGH's 1996 Stock Incentive Plan, as amended (the "1996
Plan") and 58,692 shares of AGH Common Stock were available for issuance under
AGH's Non-Employee Directors' Incentive Plan (the "Directors' Plan"), (iii)
1,841,863 shares of AGH Common Stock were issuable upon exercise of
outstanding stock options (the "AGH Options") to purchase shares of AGH Common
Stock and (iv) 3,899,937 shares of AGH Common Stock were reserved for issuance
upon exchange of AGH OP Units for shares of AGH Common Stock. On the date
hereof, except as set forth in this Section 5.3, no shares of AGH Common Stock
or other voting securities of AGH were issued, reserved for issuance or
outstanding.
(b) Set forth in Schedule 5.3(b) of the AGH Disclosure Letter is a true and
complete list of the following: (i) each qualified or nonqualified option to
purchase shares of CapStar Common Stock granted under the 1996 Plan and
Directors' Plan or any other formal or informal arrangement ("AGH Options"),
(ii) each dividend equivalent right ("Dividend Equivalent Rights") granted
with respect to certain AGH Options and (iii) each grant of shares of AGH
Common Stock to employees which are subject to any risk of forfeiture ("AGH
Restricted Stock Grants"). As of the date of this Agreement, other than AGH
Options, AGH Restricted Stock Grants and Dividend Equivalent Rights, there
were no outstanding warrants or other rights to acquire stock, stock
appreciation rights, phantom stock, dividend equivalents, performance units
and performance shares granted under the 1996 Plan and Directors' Plan or
rights to receive shares of AGH Common Stock on a deferred basis granted under
the 1996 Plan and Directors' Plan or otherwise. Schedule 5.3(b) of the AGH
Disclosure Letter sets forth for each AGH Option the name of the grantee, the
date of the grant, status of the option as qualified or nonqualified under
Section 422 of the Code, the number of shares of AGH Common Stock subject to
such option, the number of shares subject to options that are currently
exercisable, the exercise price per share, and the number of such shares
subject to share appreciation rights. For each AGH Restricted Stock Grant,
Schedule 5.3(b) of the AGH Disclosure Letter sets forth the name of the
grantee, the date of the grant and the number of shares of AGH Common Stock
granted and the date any risk of forfeiture with respect to such shares
lapses. On the date
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of this Agreement, except as set forth in this Section 5.3 or Schedule 5.3(b)
of the AGH Disclosure Letter, no shares of stock of AGH are outstanding or
reserved for issuance.
(c) All outstanding shares of AGH Common Stock are duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights.
There are no bonds, debentures, notes or other indebtedness of AGH having the
right to vote (or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which stockholders of AGH may vote.
(d) Except (i) as set forth in this Section 5.3, in Schedule 5.3(d) of the
AGH Disclosure Letter or the AGH Operating Partnership Agreement (as defined
herein) and (ii) the AGH OP Units held by partners in the AGH OP (which,
subject to certain restrictions, may be exchanged by the holders thereof for
either cash or at AGH's option, shares of AGH Common Stock on a one-for-one
basis), there are no outstanding securities, options, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which AGH
or any AGH Subsidiary is a party or by which such entity is bound, obligating
AGH or any AGH Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of AGH Common Stock, voting securities or
other ownership interests of AGH or of any AGH Subsidiary or obligating AGH or
any AGH Subsidiary to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or
undertaking (other than to AGH or a AGH Subsidiary).
(e) Neither AGH nor any of its Subsidiaries have ever declared and paid any
distributions on shares of AGH Common Stock or AGH OP Units other than regular
quarterly distributions on such securities declared and paid since the date of
AGH's initial public offering.
5.4 Organization, Standing and Power of AGH OP. AGH OP is a Delaware limited
partnership duly organized and validly existing under the laws of Delaware and
has the requisite power and authority to carry on its business as now being
conducted. AGH OP is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not have an AGH
Material Adverse Effect. AGH has delivered to the CapStar Parties complete and
correct copies of the AGH OP limited partnership agreement (the "AGH Operating
Partnership Agreement") as amended or supplemented to the date of this
Agreement.
5.5 Registration Rights. Except as set forth in Schedule 5.5(a) of the AGH
Disclosure Letter, no Person has any right to require the registration of any
shares of AGH Common Stock or any other securities of AGH or any AGH
Subsidiary.
5.6 Authority; Noncontravention; Consents.
(a) AGH has the requisite power and authority to enter into this Agreement
and, subject to the requisite stockholder approval of the Merger (the "AGH
Stockholder Approvals" and, together with the CapStar Stockholder Approvals,
the "Stockholder Approvals"), to consummate the transactions contemplated by
this Agreement to which AGH is a party. Except as set forth on Schedule 5.6(a)
to the AGH Disclosure Letter, the AGH OP has the requisite partnership power
and authority to enter into this Agreement, and to consummate the transactions
contemplated by this Agreement to which AGH OP is a party. The execution and
delivery of this Agreement by the AGH Parties and the consummation by AGH of
the transactions contemplated by this Agreement to which the AGH Parties are a
party have been duly authorized by all necessary action on the part of the AGH
Parties, except for and subject to the AGH Stockholder Approval and the
approvals set forth on Schedule 5.6(a) to the AGH Disclosure Letter. This
Agreement has been duly executed and delivered by the AGH Parties and
constitutes a valid and binding obligation of the AGH Parties, enforceable
against the AGH Parties in accordance with and subject to its terms, subject
to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
(b) Except as set forth in Schedule 5.6(b) to the AGH Disclosure Letter, the
execution and delivery of this Agreement by the AGH Parties do not, and the
consummation of the transactions contemplated by this
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Agreement to which the AGH Parties are a party, including, without limitation,
the Transactions, and compliance by the AGH Parties with the provisions of
this Agreement will not, conflict with, or result in any violation of or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any material
obligation or to loss of a material benefit under, or result in the creation
of any Lien upon any of the properties or assets of AGH or any AGH Subsidiary
under, (i) the AGH Charter, AGH Bylaws or the comparable charter or
organizational documents or partnership or similar agreement (as the case may
be) of any AGH Subsidiary, each as amended or supplemented to the date of this
Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
reciprocal easement agreement, lease or other agreement, instrument, permit,
concession, franchise or license applicable to AGH or any AGH Subsidiary or
their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any Laws
applicable to AGH or any AGH Subsidiary or their respective properties or
assets, other than, in the case of clause (ii) or (iii), any such conflicts,
violations, defaults, rights, loss or Liens that individually or in the
aggregate would not (x) have a AGH Material Adverse Effect or (y) prevent the
consummation of the transactions contemplated by this Agreement. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity is required by or with respect to AGH or any AGH
Subsidiary in connection with the execution and delivery of this Agreement or
the consummation by the AGH Parties of any of the transactions contemplated by
this Agreement, except for (i) the filing with the SEC of (x) the Registration
Statement and (y) such reports under Section 13(a) of the Exchange Act as may
be required in connection with this Agreement and the transactions
contemplated by this Agreement, (ii) the acceptance for record of the Articles
of Merger by the Departments, (iii) such filings as may be required in
connection with the payment of any transfer and gains taxes, (iv) the filing
of a premerger notification and report form by AGH under the HSR Act if
required by applicable law and (v) such other consents, approvals, orders,
authorizations, registrations, declarations and filings (A) as are set forth
in Schedule 5.6(a) or (b) to the AGH Disclosure Letter or (B) as may be
required under (y) federal, state or local environmental laws or (z) the"blue
sky" laws of various states, to the extent applicable or (C) which, if not
obtained or made, would not prevent or delay in any material respect the
consummation of any of the transactions contemplated by this Agreement or
otherwise prevent AGH from performing their obligations under this Agreement
in any material respect or have, individually or in the aggregate, a AGH
Material Adverse Effect.
5.7 SEC Documents; Financial Statements; Undisclosed Liabilities. AGH has
filed all required reports, schedules, forms, statements and other documents
with the SEC since July 25, 1996 through the date hereof (the "AGH SEC
Documents"). All of the AGH SEC Documents (other than preliminary material),
as of their respective filing dates, complied in all material respects with
all applicable requirements of the Securities Act and the Exchange Act and, in
each case, the rules and regulations promulgated thereunder applicable to such
AGH SEC Documents. None of the AGH SEC Documents at the time of filing
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent such statements have been modified or
superseded by later AGH SEC Documents filed and publicly available prior to
the date of this Agreement. The consolidated financial statements of AGH and
the AGH Subsidiaries included in the AGH SEC Documents complied as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by the applicable rules and regulations of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position of AGH and the AGH Subsidiaries, taken as a
whole, as of the dates thereof and the consolidated results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except for liabilities and
obligations set forth in the AGH SEC Documents or in Schedule 5.7 to the AGH
Disclosure Letter, neither AGH nor any AGH Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
including liabilities under Environmental Laws which are required by GAAP to
be set forth on a consolidated balance sheet of AGH or in the notes thereto
and which, individually or in the aggregate, would have a AGH Material Adverse
Effect.
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5.8 Absence of Certain Changes or Events. Except (i) as disclosed in the AGH
SEC Documents or in Schedule 5.8 to the AGH Disclosure Letter, (ii) except for
the Transactions and the distribution contemplated under Section 2.2(c)(i) and
(iii) the transactions permitted by Section 6.4, since the date of the most
recent audited financial statements included in the AGH SEC Documents (the
"AGH Financial Statement Date"), AGH and the AGH Subsidiaries have conducted
their business only in the ordinary course (taking into account prior
practices, including the acquisition of properties and issuance of securities)
and there has not been (a) any material adverse change in the business,
financial condition or results of operations of AGH and the AGH Subsidiaries
taken as a whole (a "AGH Material Adverse Change"), nor has there been any
occurrence or circumstance that with the passage of time would reasonably be
expected to result in a AGH Material Adverse Change, (b) except for regular
quarterly distributions not in excess of $.4275 per share of AGH Common Stock
and $.4725 per AGH OP Unit, with customary record and payment dates, any
authorization, declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any shares
of AGH Common Stock or AGH OP Units, (c) any split, combination or
reclassification of any shares of AGH Common Stock, (d) any damage,
destruction or loss, whether or not covered by insurance, that has or would
have a AGH Material Adverse Effect or (e) any change made prior to the date of
this Agreement in accounting methods, principles or practices by AGH or any
AGH Subsidiary materially affecting its assets, liabilities or business,
except insofar as may have been disclosed in the AGH SEC Documents or required
by a change in GAAP.
5.9 Litigation. Except as disclosed in the AGH SEC Documents or in Schedule
5.9 to the AGH Disclosure Letter, and other than personal injury and other
routine tort litigation arising from the ordinary course of operations of AGH
and the AGH Subsidiaries (a) which are covered by adequate insurance or (b)
for which all material costs and liabilities arising therefrom are
reimbursable pursuant to common area maintenance or similar agreements, there
is no suit, action or proceeding pending (in which service of process has been
received by an employee of AGH or a AGH Subsidiary) or, to the Knowledge of
AGH, threatened in writing against or affecting AGH or any AGH Subsidiary that
(i) individually or in the aggregate, could reasonably be expected to have a
AGH Material Adverse Effect or (ii) nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against AGH or any AGH Subsidiary having, or which, insofar as reasonably can
be foreseen, in the future would have, any such effect.
5.10 Properties.
(a) Schedule 5.10(a) of the AGH Disclosure Letter sets forth a complete and
accurate list and the address of all real property owned or leased by AGH or
any of its Subsidiaries (collectively, and together with the land at each
address referenced in Schedule 5.10(a) of the AGH Disclosure Letter and all
buildings, structures and other improvements and fixtures located on or under
such land and all easements, rights and other appurtenances to such land, the
"AGH Properties"). AGH or the AGH Subsidiaries, owns or own, as the case may
be, good and insurable fee simple title (or, if so indicated in Schedule
5.10(a) of the AGH Disclosure Letter, leasehold title) to each of the AGH
Properties, in each case free and clear of Encumbrances, except for such
mortgages set forth on Schedule 5.15(b) of the AGH Disclosure Letter and such
Encumbrances as individually, and in the aggregate, could not reasonably be
expected to have a AGH Material Adverse Effect. Except for such of the
following as individually or in aggregate could not reasonably be expected to
have a AGH Material Adverse Effect, policies of title insurance (or marked
title insurance commitments having the same force and effect as title
insurance policies) have been issued by national title insurance companies
insuring the fee simple or leasehold, as applicable, title of AGH or its
Subsidiaries, as applicable, to each of the AGH Properties in amounts at least
equal to the portion of the purchase price thereof allocated to real estate
(the "AGH Title Policies"), and, to AGH's knowledge, the AGH Title Policies
are valid and in full force and effect and no claim has been made under any
such policy.
(b) Except as set forth in Schedule 5.10(b) of the AGH Disclosure Letter,
and except for matters which would not, individually or in the aggregate,
reasonably be expected to have a AGH Material Adverse Effect or to materially
and adversely affect the use or occupancy (or, if applicable, any proposed
developments) of the AGH Properties, which would reasonably be expected to
have a AGH Material Adverse Effect, AGH has no
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knowledge that any currently required certificate, permit or license
(including building permits and certificates of occupancy) from any
Governmental Entity having jurisdiction over any AGH Property or any
agreement, easement or other right which is necessary to permit the lawful
use, occupancy or operation of the existing buildings, structures or other
improvements which constitute a part of any of the AGH Properties has not been
obtained or is not in full force and effect, or of any pending modification or
cancellation of any of the same.
(c) Schedule 5.10(c) of the AGH Disclosure Letter sets forth a complete and
accurate list of all definitive agreements made or entered into by AGH or any
of its Subsidiaries as of the date hereof, (x) to sell, mortgage, pledge or
hypothecate any AGH Property, which, individually or in the aggregate, are
material, or to otherwise enter into a material transaction in respect of the
ownership or financing of any AGH Property, and (y) to purchase real property
to which AGH or any Subsidiary is a party.
(d) Except as set forth in Schedule 5.10(d) of the AGH Disclosure Letter,
none of the AGH Properties is subject to any outstanding purchase options,
rights of first refusal, rights of first offer or similar rights other than
such rights, which would not reasonably be expected to have a AGH Material
Adverse Effect nor has AGH or any of its Subsidiaries entered into any
outstanding contracts with others for the sale, mortgage, pledge,
hypothecation, assignment, sublease or lease of any material portion of the
AGH Property or other transfer of all or any part of any AGH Property, and no
person has any right or option to acquire, or right of first refusal or right
of first refusal with respect to, AGH's or any of its Subsidiaries' interest
in any AGH Property or any part thereof.
(e) Schedule 5.10(e) of the AGH Disclosure Letter sets forth AGH's or any
Subsidiaries' capital expenditure budget and schedule for each CapStar
Property, which describes the capital expenditures which the AGH or any
Subsidiary has budgeted for such AGH Property for the period running through
December 31, 1998 (the "AGH Budget and Schedule").
(f) The ground leases underlying the leased AGH Properties referenced in
Schedule 5.10(a) of the AGH Disclosure Letter (collectively, the "AGH Ground
Leases") are accurately described in Schedule 5.10(f) of the AGH Disclosure
Letter. Each of the AGH Ground Leases is valid, binding and in full force and
effect as against AGH or its Subsidiaries and, to AGH's knowledge, as against
the other party thereto, except to the extent the failure to be binding and in
full force and effect would not reasonably be expected to have a AGH Material
Adverse Effect. There does not exist under any of the AGH Ground Leases any
default, and, to AGH's knowledge, no event has occurred which, with notice or
lapse of time or both, would constitute such a default, except as would not,
individually or in the aggregate, be reasonably expected to result in a AGH
Material Adverse Effect.
(g) Schedule 5.10(g) to the AGH Disclosure Letter sets forth a list of the
hotel franchise agreements (the "AGH Franchise Agreements") pursuant to which
each of the AGH Properties is being operated. Each of the AGH Franchise
Agreements is in full force effect and, to the Knowledge of AGH, there are no
defaults thereunder by either party thereto, nor have any events occurred
which with the giving of notice or the passage time or both would constitute a
default or event of default thereunder, except for those which either singly
or in the aggregate would not constitute a AGH Material Adverse Effect.
5.11 Taxes. Except as, individually or in the aggregate, could not be
reasonably expected to have a AGH Material Adverse Effect:
(a) All Tax Returns required to be filed with any Taxing Authority of any
and all Taxes for all periods ending on or before the Closing Date that are or
were required to be filed by, or with respect to, AGH or any AGH Subsidiaries,
either separately or as a member of an affiliated group of corporations, have
been or will be filed on a timely basis in accordance with the laws,
regulations and administrative requirements of each Taxing Authority. All such
Tax Returns that have been filed on or before the Closing Date were, when
filed, and continue to be, true, correct and complete and the financial
statements included in the AGH's Form 10-K for the year ended December 31,
1996 reflect, and the financial statements for the year ended December 31,
1997, when
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filed, will reflect, an adequate reserve for all taxes payable by AGH for all
taxable periods and portions thereof through the date of those respective
financial statements. No Taxing Authority is now asserting by written notice
to AGH or the AGH Subsidiaries or, to the Knowledge of AGH, threatening to
assert against AGH or the AGH Subsidiaries, any deficiency or claim for
additional Taxes. No written claim has been made since January 1, 1997 by a
Taxing Authority in a jurisdiction where AGH does not file Tax Returns that
AGH is or may be subject to taxation by that jurisdiction. There are no
security interests on any of the assets of AGH or the AGH Subsidiaries that
arose in connection with any failure (or alleged failure) to pay any Taxes.
AGH has not since January 1, 1997 entered into a closing agreement pursuant to
Section 7121 of the Code. AGH has not received written notice of any audit of
any Tax Return filed by AGH, and AGH has not been notified in writing that any
such audit is contemplated or pending. Neither AGH nor any of the AGH
Subsidiaries has executed or filed with any Taxing Authority any agreement now
in effect extending the period for assessment or collection of any Taxes.
Copies of all income or franchise tax returns filed by AGH and each of the AGH
Subsidiaries since April 1996 and all communications relating thereto since
that date have been delivered to CapStar or made available to representatives
of CapStar. AGH and each AGH Subsidiary has paid all Taxes required to be paid
prior to the date hereof and has made the provision, in accordance with GAAP,
for all taxes owed or accrued through the date hereof;
(b) There is no contract, agreement, plan or arrangement covering any person
that, individually or collectively, as a consequence of this transaction could
give rise to the payment of any amount that would not be deductible by AGH or
any of the AGH Subsidiaries by reason of Section 280G of the Code;
(c) Since its formation, AGH has incurred no liability for Taxes under
Sections 857(b), 860(c) or 4981 of the Code and neither AGH nor any AGH
Subsidiary has incurred any liability for Taxes other than in the ordinary
course of business. Except as set forth in Schedule 5.11(c) of the AGH
Disclosure Letter, no event has occurred, and no condition or circumstance
exists, which presents a material risk that any material tax described in the
preceding sentence will be imposed;
(d) None of the AGH Subsidiaries that are taxed as a partnership are
publicly-traded partnerships as defined in Section 7704 of the Code; and
(e) AGH (i) for all of its taxable years commencing the year ended December
31, 1996 through the year ended December 31, 1997, has been subject to
taxation as a real estate investment trust within the meaning of the Code and
has satisfied all requirements to qualify as a real estate investment trust
within the meaning of the Code and has satisfied all requirements to qualify
as a real estate investment trust for such years, (ii) has operated and
intends to continue to operate in such a manner as to qualify as a real estate
investment trust for its taxable year ending December 31, 1998 and (iii) has
not taken or omitted to take any action which could reasonably be expected to
result in a challenge to its status as a real estate investment trust, and to
AGH's knowledge, no such challenge is pending or threatened. The AGH OP has
been since its date of formation, and will be, through the Closing Date,
treated as a partnership and not as an association taxable as a corporation
for federal income tax purposes.
5.12 Labor Matters; Employees. Neither AGH nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to AGH's Knowledge, threatened against AGH or any of its Subsidiaries relating
to other business which, if determined adversely to AGH or any of its
Subsidiaries, would have a AGH Material Adverse Effect.
(a) Schedule 5.12 of the AGH Disclosure Letter sets forth all employment
agreements in effect between AGH or any of its Subsidiaries and any other
Person.
5.13 No Payments to Employees, Officers or Directors. Except as set forth on
Schedule 5.13(a), there are no cash or non-cash payments which will become
payable to each employee, officer or director of AGH or any AGH Subsidiary as
a result of the Merger and the Transactions. Except as otherwise provided for
in this Agreement, there is no employment or severance contract, or other
agreement requiring payments, cancellation
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of indebtedness or other obligation to be made upon a change of control or
otherwise as a result of the consummation of any of the transactions
contemplated by this Agreement, with respect to any employee, officer or
director of AGH or any AGH Subsidiary.
5.14 Brokers; Schedule of Fees and Expenses. No broker, investment banker,
financial advisor or other person, other than Salomon Smith Barney, the fees
and expenses of which are as described in the engagement letter, dated January
20, 1998 between Salomon Smith Barney and AGH, a true and correct copy of
which has previously been delivered to the CapStar Parties, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated hereby based upon arrangements
made by or on behalf of AGH or any AGH Subsidiary.
5.15 Contracts; Debt Instruments.
(a) Neither AGH nor any AGH Subsidiary has received a written notice that
AGH or any AGH Subsidiary is in violation of or in default under (nor to the
Knowledge of AGH does there exist any condition which upon the passage of time
or the giving of notice or both would cause such a violation of or default
under) any material loan or credit agreement, note, bond, mortgage, indenture,
lease, permit, concession, franchise, license or any other material contract,
agreement, arrangement or understanding, to which it is a party or by which it
or any of its properties or assets is bound, except as set forth in Schedule
5.15 to the AGH Disclosure Letter, nor to the Knowledge of AGH does such a
violation or default exist except to the extent that such violation or
default, individually or in the aggregate, would not have a AGH Material
Adverse Effect.
(b) Except for any of the following expressly identified in AGH SEC
Documents, Schedule 5.15(b) of the AGH Disclosure Letter sets forth a list of
each loan or credit agreement, note, bond, mortgage, indenture and any other
agreement and instrument pursuant to which any Indebtedness in excess of
$10,000,000 of AGH or any of AGH Subsidiaries, other than such Indebtedness
payable to AGH or a AGH Subsidiary is outstanding or may be incurred.
5.16 Opinion of Financial Advisor. The Board of Directors of AGH has
received the opinion of Smith Barney Inc., dated the date of this Agreement,
to the effect that, as of such date, the AGH Exchange Ratio after giving
effect to the CapStar Exchange Ratio is fair, from a financial point of view,
to AGH.
5.17 Maryland Takeover Laws. The terms of Sections 3-602 and 3-702 of the
MGCL will not apply to CapStar in connection with this Agreement and the other
transactions contemplated hereby. The resolution in the form of Schedule 5.17
to the AGH Disclosure Letter has been adopted by AGH and have not been
rescinded or revoked.
5.18 Information Supplied. None of the information supplied or to be
supplied by AGH specifically for inclusion or incorporation by reference in
(i) the Registration Statement, at the time the Registration Statement is
filed with the SEC or at the time it becomes effective under the Securities
Act, or (ii) the Proxy Statement, at the date it is first mailed to AGH's
stockholders or at the time of the AGH Stockholders Meeting, will contain any
untrue statement of material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
Registration Statement and Proxy Statement will comply in all material
respects with the requirements of the Exchange Act and the rules and
regulations thereunder, except that no representation or warranty is made by
AGH with respect to statements made or incorporated by reference therein based
on in formation supplied by CapStar specifically for inclusion or incorporated
by reference in the Proxy Statement or contained in any CapStar SEC Documents
incorporated by reference in the Registration Statement or the Proxy
Statement.
5.19 Investment Company Act of 1940. Neither AGH nor any of the AGH
Subsidiaries is, or at the Effective Time will be, required to be registered
under the 1940 Act.
5.20 Definition of Knowledge of AGH. As used in this Agreement, the phrase
"Knowledge of AGH" (or words of similar import) means the knowledge of those
individuals identified in Schedule 5.20 of the AGH Disclosure Letter.
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5.21 Ownership of CapStar Common Stock. Neither AGH, any of the AGH
Subsidiaries, nor to its knowledge, its directors or executive officers,
beneficially owns (as such term is defined in Rule 13d-3 under the Exchange
Act) more than 5% of the shares of CapStar Common Stock.
5.22 Lease Agreements; Authority; Noncontravention; Consents.
(a) At the Effective Time, the applicable AGH Subsidiary shall have all
requisite power, corporate or otherwise, and authority to enter into each of
the Lease Agreements with OPCO or its Subsidiaries, as the case may be, and to
consummate the transactions contemplated by the Lease Agreements. At the
Effective Time, the execution and delivery of each of the Lease Agreements by
the applicable AGH Subsidiary, and the consummation by the applicable AGH
Subsidiary of the transactions contemplated by the Lease Agreements will have
been duly authorized by all necessary action on the part of the applicable AGH
Subsidiary. At the Effective Time, the Lease Agreements will have been duly
executed and delivered by the applicable AGH Subsidiary and will constitute a
valid and binding obligation of such parties, enforceable against each in
accordance with and subject to its terms.
(b) At the Effective Time, the execution and delivery of the Lease
Agreements by the applicable AGH Subsidiary will not, and the consummation of
the transactions contemplated by the Lease Agreements to which the applicable
AGH Subsidiary is a party and compliance by the AGH Subsidiary with the
provisions of the Lease Agreements will not, conflict with or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any material obligation or to a loss of a material benefit under, or result in
the creation of any Lien upon any of the properties or assets of the
applicable AGH Subsidiary under, (i) the charter or organizational documents
or partnership or similar agreement (as the case may be) of such party, each
as amended or supplemented to the date of Effective Time, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, reciprocal easement
agreement, lease or other agreement, instrument, permit, concession, franchise
or license applicable to such party or its respective properties or assets, or
(iii) subject to the governmental filings and other matters referred to in the
following sentence, any Laws applicable to such party or its respective
properties or assets, other than, in the case of clause (ii) or (iii), any
such conflicts, violations, defaults, rights, loss or Liens that individually
or in the aggregate would not have a material adverse effect on the business
to be conducted by such party, properties, assets, financial condition or
results of operations of AGH and its Subsidiaries, taken as a whole, or on
their ability to perform any of their respective obligations under the Lease
Agreements. No consent, approval order or authorization of, or registration,
declaration of filing with, any Governmental Entity is required by or with
respect to the applicable AGH Subsidiary in connection with the execution and
delivery of the Lease Agreements or the consummation by the applicable AGH
Subsidiary of any of the transactions contemplated by the Lease Agreements.
5.23 Employee Benefit Plans. With respect to all the employee benefit plans,
programs and arrangements maintained for the benefit of any current or former
employee, officer or director of AGH or any of its Subsidiaries (the "AGH
Benefit Plans"), except for such matters, as, individually or in the
aggregate, could not be reasonably expected to have a AGH Material Adverse
Effect, (a) each AGH Benefit Plan and any related trust intended to be
qualified under Sections 401(a) and 501(a) of the Code has received a
favorable determination letter from the IRS that it is so qualified and to the
Knowledge of AGH nothing has occurred since the date of such letter that could
reasonably be expected to materially adversely affect the qualified status of
such AGH Benefit Plan or related trust, (b) each AGH Benefit Plan has been
operated in all material respects in accordance with the terms and
requirements of applicable law and all required returns and filings for each
AGH Benefit Plan have been timely made, (c) neither AGH nor any of its
Subsidiaries has incurred any direct or indirect material liability under,
arising out of or by operation of Title I or Title IV of the ERISA, in
connection with any AGH Benefit Plan or other retirement plan or arrangement,
and to the Knowledge of AGH no fact or event exists that could reasonably be
expected to give rise to any such material liability, (d) all material
contributions due and payable on or before the date hereof in respect of each
AGH Benefit Plan have been made in full and in proper form, (e) neither AGH
nor any of its Subsidiaries has ever sponsored or been obligated to contribute
to any "multiemployer plan" (as defined in Section 3(37) of ERISA), "multiple
employer plan" (as defined in Section 413 of the Code) or "defined benefit
plan" (as defined in Section 3(35) of ERISA), (f) except as otherwise
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required under ERISA, the Code and applicable laws, no AGH Benefit Plan
currently or previously maintained by AGH or any of its Subsidiaries provides
any post- retirement health or life insurance benefits in the future, (g) all
material reporting and disclosure obligations imposed under ERISA and the Code
have been satisfied with respect to each AGH Benefit Plan, and (h) no benefit
or amount payable or which may become payable by AGH or any of its
Subsidiaries pursuant to any AGH Benefit Plan, agreement or contract with any
employee, shall constitute an "excess parachute payment," within the meaning
of Section 280(G) of the Code, which is or may be subject to the imposition of
any excise tax under Section 4999 of the Code or which would not be deductible
by reason of Section 280G of the Code.
5.24 Voting Requirements. The AGH Stockholder Approvals which shall consist
of the affirmative vote of holders of shares entitled to cast a majority of
votes entitled to be cast on the matter at the AGH Stockholders Meeting, which
shall be a duly convened meeting at which a quorum was present and acting
throughout, to approve the Merger is the only vote of the holders of any class
or series of AGH's stock necessary to approve the Merger and the other
transactions contemplated by this Agreement.
ARTICLE 6
Covenants
The parties agree as follows with respect to the period from and after the
date of this Agreement to the Effective Time.
6.1 No Solicitation by CapStar.
(a) CapStar shall not, nor shall it permit any of the CapStar Subsidiaries
to, nor shall it authorize or permit any officer, director or employee of or
any investment banker, attorney, accountant, agent or other advisor or
representative of CapStar or any of the CapStar Subsidiaries to, (i) solicit,
initiate, or encourage the submission of, any CapStar Acquisition Proposal (as
defined below), (ii) except to the extent permitted by paragraph (b), enter
into any agreement with respect to any CapStar Acquisition Proposal, or (iii)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any CapStar Acquisition Proposal; provided,
however, that prior to the CapStar Stockholder Meeting, to the extent required
by the duties of the Board of Directors of CapStar under Delaware law, as
determined in good faith by a majority of the disinterested members thereof
based on the advice of outside counsel, CapStar may, in response to
unsolicited requests therefor, participate in discussions or negotiations
with, or furnish information pursuant to an appropriate confidentiality
agreement to, any person or entity that makes or expresses a bona fide
intention to make an unsolicited CapStar Acquisition Proposal, provided that
the Board of Directors of CapStar first determine in good faith, based on the
vote of a majority of the disinterested members thereof, that such Person or
entity has the ability and the financial wherewithal to consummate a CapStar
Superior Proposal (as defined below). Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the preceding
sentence by an officer, director or employee of or any investment banker,
attorney, accountant, agent or other advisor or representative of CapStar or
any of the CapStar Subsidiaries, whether or not such person is purporting to
act on behalf of CapStar, a CapStar Subsidiary or otherwise, shall be deemed
to be a breach of this paragraph by CapStar. For all purposes of this
Agreement, "CapStar Acquisition Proposal" means any proposal, other than a
proposal by AGH or AGH OP, for a merger, consolidation, share exchange,
business combination or other similar transaction involving CapStar or any of
its Significant Subsidiaries (as defined below) or any proposal or offer
(including, without limitation, any proposal or offer to stockholders of
CapStar), other than a proposal or offer by AGH or AGH OP, to acquire in any
manner, directly or indirectly, more than a 10% equity interest in any voting
securities of, or 10% or more of the consolidated assets of, CapStar or any of
its Significant Subsidiaries. CapStar immediately shall cease and cause to be
terminated all existing discussions or negotiations with any persons conducted
heretofore with respect to, or that could reasonably be expected to lead to,
any CapStar Acquisition Proposal. As used herein, a "Significant Subsidiary"
means any Subsidiary that would constitute a "significant subsidiary" within
the meaning of Rule 1.02 of Regulation S-X of the SEC.
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(b) Neither the Board of Directors of CapStar nor any committee thereof
shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to AGH or AGH OP, the approval or recommendation by the Board
of Directors of CapStar or any committee thereof of this Agreement or the
Merger or (ii) approve or recommend, or propose to approve or recommend, any
CapStar Acquisition Proposal. Notwithstanding the foregoing, the Board of
Directors of CapStar, to the extent required by its duties under Delaware law,
as determined in good faith by a majority of the disinterested members thereof
based on the advice of outside counsel, may approve or recommend (and, in
connection therewith, withdraw or modify its approval or recommendation of
this Agreement or the Merger) a CapStar Superior Proposal (as defined below).
For purposes of this Agreement, a "CapStar Superior Proposal" means a bona
fide written proposal made by a third party to acquire CapStar pursuant to a
tender or exchange offer, a merger, a share exchange, a sale of all or
substantially all of its assets or otherwise, in any such case, on terms which
a majority of the disinterested members of the Board of Directors of CapStar
determines in their good faith judgment (after consultation with independent
financial advisors) to be more favorable to CapStar and its stockholders than
the Merger and for which financing, to the extent required, is then fully
committed or which, in the good faith judgment of a majority of such
disinterested members (after consultation with independent financial
advisors), is reasonably capable of being financed by such third party.
(c) CapStar shall promptly advise AGH orally and in writing of any CapStar
Acquisition Proposal or any inquiry with respect to or which could reasonably
be expected to lead to any CapStar Acquisition Proposal, the material terms
and conditions of such CapStar Acquisition Proposal or inquiry and the
identity of the person making any such CapStar Acquisition Proposal or
inquiry. CapStar will keep AGH fully informed of the status and details of any
such CapStar Acquisition Proposal or inquiry. CapStar shall give AGH at least
one day's advance notice of any information to be supplied to, and at least
three days' advance notice of any agreement to be entered into with, any
Person making a CapStar Acquisition Proposal.
(d) Nothing contained in this Section 6.1 will prohibit CapStar from taking
and disclosing to its stockholders a position contemplated by Rule 14e-2(a)
promulgated under the Exchange Act or from making any disclosure to CapStar's
stockholders if the CapStar Board of Directors determines that such disclosure
is necessary in order to comply with the CapStar Board of Director's duties
under Delaware law; provided, however, that neither CapStar nor the CapStar
Board of Directors nor any committee thereof may, except in accordance with
Section 6.1(b), withdraw or modify, or propose publicly to withdraw or modify,
its position with respect to this Agreement or the Merger or approve or
recommend, or propose publicly to approve or recommend, a CapStar Acquisition
Proposal.
6.2 No Solicitation by AGH.
(a) AGH shall not, nor shall it permit any of the AGH Subsidiaries to, nor
shall it authorize or permit any officer, director or employee of or any
investment banker, attorney, accountant, agent or other advisor or
representative of AGH or any of the AGH Subsidiaries to, (i) solicit,
initiate, or encourage the submission of, any AGH Acquisition Proposal (as
defined below), (ii) except to the extent permitted by paragraph (b), enter
into any agreement with respect to any AGH Acquisition Proposal, or (iii)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any AGH Acquisition Proposal; provided,
however, that prior to the AGH Stockholder Meeting, to the extent required by
the duties of the Board of Directors of AGH under Maryland law, as determined
in good faith by a majority of the disinterested members thereof based on the
advice of outside counsel, AGH may, in response to unsolicited requests
therefor, participate in discussions or negotiations with, or furnish
information pursuant to an appropriate confidentiality agreement to, any
person or entity that makes or expresses a bona fide intention to make an
unsolicited AGH Acquisition Proposal, provided that the Board of Directors of
AGH first determine in good faith, based on the vote of a majority of the
disinterested members thereof, that such Person or entity has the ability and
financial wherewithal to consummate a AGH Superior Proposal (as determined
below). Without limiting the foregoing, it is understood that any violation of
the restrictions set forth in the preceding sentence by an officer, director
or employee of or any investment banker, attorney, accountant, agent or other
advisor or
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representative of AGH or any of the AGH Subsidiaries, whether or not such
person is purporting to act on behalf of AGH, a AGH Subsidiary or otherwise,
shall be deemed to be a breach of this paragraph by AGH. For all purposes of
this Agreement, "AGH Acquisition Proposal" means any proposal other than a
proposal by CapStar or the CapStar Partners, for a merger, consolidation,
share exchange, business combination or other similar transaction involving
AGH or any of its Significant Subsidiaries or any proposal or offer
(including, without limitation, any proposal or offer to stockholders of AGH),
other than a proposal or offer by CapStar or the CapStar Partners, to acquire
in any manner, directly or indirectly, more than a 10% equity interest in any
voting securities of, or 10% or more of the consolidated assets of, AGH or any
of its Significant Subsidiaries. AGH immediately shall cease and cause to be
terminated all existing discussions or negotiations with any persons conducted
heretofore with respect to, or that could reasonably be expected to lead to,
any AGH Acquisition Proposal.
(b) Neither the Board of Directors of AGH nor any committee thereof shall
(i) withdraw or modify, or propose publicly to withdraw or modify, in a manner
adverse to CapStar or CapStar OP, the approval or recommendation by the Board
of Directors of AGH or any committee thereof of this Agreement or the Merger
or (ii) approve or recommend, or propose to approve or recommend, any AGH
Acquisition Proposal. Notwithstanding the foregoing, the Board of Directors of
AGH, to the extent required by its duties under Maryland law, as determined in
good faith by a majority of the disinterested members thereof based on the
advice of outside counsel, may approve or recommend (and, in connection
therewith, withdraw or modify its approval or recommendation of this Agreement
or the Merger) a AGH Superior Proposal (as defined below). For purposes of
this Agreement, a "AGH Superior Proposal" means a bona fide written proposal
made by a third party to acquire AGH pursuant to a tender or exchange offer, a
merger, a share exchange, a sale of all or substantially all of its assets or
otherwise, in any such case, on terms which a majority of the disinterested
members of the Board of Directors of AGH determines in their good faith
judgment (after consultation with independent financial advisors) to be more
favorable to AGH and its stockholders than the Merger and for which financing,
to the extent required, is then fully committed or which, in the good faith
judgment of a majority of such disinterested members (after consultation with
independent financial advisors), is reasonably capable of being financed by
such third party.
(c) AGH shall promptly advise CapStar orally and in writing of any AGH
Acquisition Proposal or any inquiry with respect to or which could reasonably
be expected to lead to any AGH Acquisition Proposal, the material terms and
conditions of such AGH Acquisition Proposal or inquiry and the identity of the
person making any such AGH Acquisition Proposal or inquiry. AGH will keep
CapStar fully informed of the status and details of any such AGH Acquisition
Proposal or inquiry. AGH shall give CapStar at least one day's advance notice
of any information to be supplied to, and at least three days' advance notice
of any agreement to be entered into with, any Person making an AGH Acquisition
Proposal.
(d) Nothing contained in this Section 6.2 will prohibit AGH from taking and
disclosing to its stockholders a position contemplated by Rule 14e-2(a)
promulgated under the Exchange Act or from making any disclosure to AGH's
stockholders if the AGH Board of Directors determines that such disclosure is
necessary in order to comply with the AGH Board of Directors' duties under
Maryland law; provided, however, that neither AGH nor the AGH Board of
Directors nor any committee thereof may, except in accordance with Section
6.2(b), withdraw or modify, or propose publicly to withdraw or modify, its
position with respect to this Agreement or the Merger or approve or recommend,
or propose publicly to approve or recommend, a AGH Acquisition Proposal.
6.3 Conduct of CapStar's Business Pending Merger. Prior to the Effective
Time, (i) except as expressly provided for in this Agreement, (ii) except as
consented to in writing by AGH or approved by the Interim Transactions
Committee (as hereinafter defined), or (iii) except as otherwise set forth in
Schedule 6.3 of the CapStar Disclosure Letter, CapStar shall, and shall cause
each of the CapStar Subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary course and
in substantially the same manner as heretofore conducted;
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(b) preserve intact its business organizations and goodwill and use its
reasonable efforts to keep available the services of its officers and
employees;
(c) not acquire, enter into any option to acquire, or exercise an option or
contract to acquire, additional real property (including, without limitation,
any hotel property), incur additional indebtedness, encumber assets or
commence construction of, or enter into any agreement or commitment to develop
or construct, other real estate or hotel projects, except that CapStar may
incur additional indebtedness under its revolving credit facility as in effect
on the date hereof in an aggregate amount of $50,000,000;
(d) not amend its Certificate of Incorporation or By-laws, or other
comparable organizational documents;
(e) except for the grant of stock options in connection with the Spin-Off
Transactions, make no change in the number of shares of capital stock,
membership interests or units (or their equivalent) of partnership interests
issued and outstanding, other than pursuant to (i) the exercise of options
disclosed in Schedule 4.3(b) to the CapStar Disclosure Letter, or (ii) the
redemption of units of limited partnership interest in CapStar Management I or
CapStar Management II pursuant to their respective limited partnership
agreement for shares of CapStar Common Stock, or (iii) any exchange or
conversion of the CapStar Convertible Notes into shares of CapStar Common
Stock, or grant any rights, warrants or options to acquire any such shares,
membership or partnership interests;
(f) not (i) authorize, declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of CapStar Common
Stock or partnership interests in CapStar Management I or CapStar Management
II except for the declaration and payment of (A) regular quarterly
distributions in an amount not in excess of $.4144 per CapStar Preferred OP
Unit or (B) tax distributions in an amount described in Section 4.3(h)(x) per
CapStar Common OP Unit, or (ii) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or units
of partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of capital stock, membership interests, or
units of partnership interest;
(g) not sell, lease, mortgage, subject to Lien or otherwise dispose of any
of the CapStar Properties;
(h) not enter into any commitment, contractual obligation, capital
expenditure or transaction (each, a "CapStar Commitment") which may result in
total payments or liability by or to it in excess of $500,000 or aggregate
CapStar Commitments in excess of $1,000,000 except for capital expenditures
disclosed in the CapStar Budget and Schedule;
(i) not settle any stockholder derivative or class action claims arising out
of or in connection with any of the transactions contemplated by this
Agreement; and
(j) not enter into or amend any employment agreement with any of its
officers, directors or employees, other than waivers by employees of benefits
under such agreements.
6.4 Conduct of AGH's Business Pending Merger. Prior to the Effective Time,
(i) except as expressly provided for in this Agreement, (ii) except as
consented to in writing by CapStar or approved by the Interim Transactions
Committee or (iii) except as otherwise set forth in Schedule 6.4 of the AGH
Disclosure Letter, AGH shall, and shall cause each of the AGH Subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary course and
in substantially the same manner as heretofore conducted;
(b) preserve intact its business organizations and goodwill and use its
reasonable efforts to keep available the services of its officers and
employees;
(c) not acquire, enter into any option to acquire, or exercise an option or
contract to acquire, additional real property (including, without limitation,
any hotel property), incur additional indebtedness, encumber assets
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or commence construction of, or enter into any agreement or commitment to
develop or construct, other real estate or hotel projects, except that AGH may
incur additional indebtedness under its revolving credit facility as in effect
on the date hereof in an aggregate amount of $50,000,000;
(d) not amend its charter, Articles of Incorporation or By-laws, or other
comparable organizational documents;
(e) make no change in the number of shares of stock of AGH, membership
interests or units (or their equivalent) of partnership interests issued and
outstanding, other than pursuant to (i) the exercise of options disclosed in
Schedule 5.3(c) to the AGH Disclosure Letter, or (ii) the exchange of AGH OP
Units pursuant to their respective exchange agreements for shares of AGH
Common Stock or grant any rights, warrants or options to require any such
shares, membership or partnership interests;
(f) not (i) authorize, declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of AGH Common Stock
or partnership interests in AGH OP except for the declaration and payment of
regular quarterly distributions in an amount not in excess of $.4275 per share
of AGH Common Stock or $.4725 per AGH OP Unit and the distribution
contemplated by Section 2.2(a) or (ii) directly or indirectly redeem, purchase
or otherwise acquire any shares of capital stock, membership interests or
units of partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of capital stock, membership interests, or
units of partnership interest except for the exchange of AGH OP Units pursuant
to a AGH OP Unit Holder's respective exchange agreement for shares of AGH
Common Stock;
(g) not sell, lease, mortgage, subject to Lien or otherwise dispose of any
of the AGH Properties;
(h) not enter into any commitment, contractual obligation, capital
expenditure or transaction (each, a "AGH Commitment") which may result in
total payments or liability by or to it in excess of $500,000 or aggregate AGH
Commitments in excess of $1,000,000 except for capital expenditures disclosed
in the AGH Budget and Schedule;
(i) not settle any stockholder derivative or class action claims arising out
of or in connection with any of the transactions contemplated by this
Agreement; and
(j) not enter into or amend any employment agreement with any of its
officers, directors or employees, other than waivers by employees of benefits
under such agreements.
6.5 Interim Transactions Committee. Promptly following the execution of this
Agreement, CapStar and AGH will constitute and establish a committee which
will evaluate and consider any proposed commitment, contractual obligation,
capital expenditure or transaction of the type referred to in Sections 6.3 or
6.4 of this Agreement, or the settlement of any stockholder derivative or
class action claims arising out of or in connection with any of the
transactions contemplated by this Agreement between the date hereof and the
Effective Time (the "Interim Transactions Committee"). The Interim
Transactions Committee will consist of two individuals selected by AGH, who
are reasonably acceptable to CapStar, and two individuals selected by CapStar,
who are reasonably acceptable to AGH. The Interim Transactions Committee will
act only by the affirmative vote of at least three of the four members
thereof. The Interim Transactions Committee will be abolished at the Effective
Time.
6.6 Compliance with the Securities Act. Prior to the Effective Time, CapStar
shall cause to be prepared and delivered to AGH a list (reasonably
satisfactory to counsel for AGH) identifying all persons who, at the time of
the AGH and CapStar Stockholders Meetings, may be deemed to be "affiliates" of
CapStar as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "Affiliates"). CapStar shall use its best efforts to cause
each person who is identified as an Affiliate in such list to deliver to AGH
on or prior to the Effective Time a written agreement, in the form attached
hereto as Exhibit E, that such Affiliate will not sell, pledge, transfer or
otherwise dispose of any AGH Capital Stock issued to such Affiliate pursuant
to the Merger,
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except pursuant to an effective registration statement under the Securities
Act or in compliance with paragraph (d) of Rule 145 or pursuant to the
exemptions to the registration requirements of the Securities Act. AGH shall
be entitled to place legends as specified in such written agreements on the
certificates representing any AGH Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the AGH Common Stock,
consistent with the terms of such agreements.
6.7 Filing of Certain Reports. The Surviving Corporation shall file the
reports required to be filed by it under the Exchange Act and the rules and
regulations adopted by the SEC thereunder, and it will take such further
action as any Affiliate of CapStar or AGH may reasonably request, all to the
extent required from time to time to enable such Affiliate to sell shares of
stock of the Surviving Corporation received by such Affiliate in the Merger
without registration under the Securities Act pursuant to (i) Rule 145(d)(1)
under the Securities Act, as such rule may be amended from to time, or (ii)
any successor rule or regulation hereafter adopted by the SEC.
6.8 Other Actions. Each of CapStar on the one hand and AGH on the other hand
shall not, and shall use commercially reasonable efforts to cause their
respective Subsidiaries not to, take any action that would result in (i) any
of the representations and warranties of such party (without giving effect to
any "knowledge" qualification) set forth in this Agreement that are qualified
as to materiality becoming untrue, (ii) any of such representations and
warranties (without giving effect to any "knowledge" qualification) that are
not so qualified becoming untrue in any material respect or (iii) except as
contemplated by Section 6.1 or 6.2 (as the case may be), any of the conditions
to the Merger set forth in Article 8 not being satisfied.
ARTICLE 7
Additional Covenants
The parties additionally agree as follows with respect to the period from
and after the date of this Agreement to the Effective Time.
7.1 Preparation of the Registration Statement and the Proxy Statement;
CapStar Stockholders Meeting and AGH Stockholders Meeting.
(a) The parties shall cooperate and promptly prepare and AGH shall file with
the SEC as soon as practicable a Registration Statement on Form S-4 under the
Securities Act (the "Registration Statement") covering the AGH Common Stock
issuable in the Merger, a portion of which registration statement shall also
serve as the joint proxy statement with respect to the meetings of the
stockholders of AGH and CapStar in connection with the Merger (the "Proxy
Statement"). AGH shall use commercially reasonable efforts, and CapStar shall
use commercially reasonable efforts to cooperate with AGH, to (i) respond to
any comments of the SEC and (ii) have the Registration Statement declared
effective under the Securities Act and the rules and regulations promulgated
thereunder as promptly as practicable after such filing and to keep the
Registration Statement effective as long as is necessary to consummate the
Merger and the transactions contemplated hereby. Each of CapStar and AGH will
use its reasonable best efforts to cause the Proxy Statement to be mailed to
CapStar's stockholders and AGH's stockholders, respectively, as promptly as
practicable after the Registration Statement is declared effective under the
Securities Act. Each party agrees to date its Proxy Statement as of the same
date, which shall be the approximate date of mailing to the stockholders of
the respective parties. AGH will notify CapStar promptly of the receipt of any
comments from the SEC and of any request by the SEC for amendments or
supplements to the Registration Statement or the Proxy Statement or for
additional information and will supply CapStar with copies of all
correspondence between such party or any of its representatives and the SEC,
with respect to the Registration Statement or the Proxy Statement. Whenever
any event occurs which is required to be set forth in an amendment or
supplement to the Registration Statement or the Proxy Statement, CapStar or
AGH, as the case may be, shall promptly inform the other of such occurrences
and cooperate in filing with the SEC and/or mailing to the stockholders of
CapStar or AGH such amendment or supplement to the Registration Statement or
Proxy Statement. Each party hereto shall also take such action as may be
reasonably required to
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cause the shares of AGH Common Stock issuable in connection with the Merger to
be registered or to obtain an exemption from registration under applicable
state "blue sky" or securities laws; provided, however, that no party shall be
required to register or qualify as a foreign corporation or to take other
action which would subject it to general service of process in any
jurisdiction where the Surviving Corporation will not be, following the
Merger, so subject. Each of the parties hereto shall furnish all information
concerning itself which is required or customary for inclusion in the Proxy
Statement and Registration Statement. The information provided by any party
hereto for use in the Proxy Statement and Registration Statement shall be true
and correct in all material respects without omission of any material fact
which is required to make such information not false or misleading. No
representation, covenant or agreement is made by any party hereto with respect
to information supplied by any other party for inclusion in the Proxy
Statement and Registration Statement.
(b) CapStar shall use its best efforts to cause to be delivered to AGH
letters of KPMG Peat Marwick LLP, dated a date within two business days before
the date of the Proxy Statement and Registration Statement, and addressed to
AGH, in form and substance satisfactory to AGH and customary in scope and
substance for "cold comfort" letters delivered by independent public
accountants in connection with registration statements on Form S-4.
(c) AGH shall use its best efforts to cause to be delivered to CapStar a
letter of Coopers & Lybrand L.L.P., dated a date within two business days
before the date of the Proxy Statement and Registration Statement, and
addressed to CapStar, in form and substance reasonably satisfactory to CapStar
and customary in scope and substance for "cold comfort" letters delivered by
independent public accountants in connection with registration statements on
Form S-4.
(d) CapStar will, as soon as practicable following the date of this
Agreement, duly call, give notice of (no sooner than 20 business days
following the date the Proxy Statement is mailed to the stockholders of
CapStar), and convene and hold a meeting of its stockholders (the "CapStar
Stockholders Meeting") for the purpose of obtaining CapStar Stockholder
Approvals. CapStar will, through its Board of Directors, recommend to its
stockholders approval of this Agreement, the Merger and the transactions
contemplated by this Agreement, which recommendation shall also be stated in
the Proxy Statement; provided that prior to the CapStar Stockholders Meeting,
such recommendation may be withdrawn, modified or amended to the extent that,
as a result of the commencement or receipt of a proposal constituting a
CapStar Superior Proposal, the Board of Directors of CapStar determines in
good faith that such withdrawal, modification or amendment is appropriate.
(e) AGH will, as soon as practicable following the date of this Agreement,
duly call, give notice of (no sooner than 20 business days following the date
the Proxy Statement is mailed to the stockholders of CapStar), and convene and
hold a meeting of its stockholders (the "AGH Stockholders Meeting") for the
purpose of obtaining the AGH Stockholder Approvals. AGH will, through its
Board of Directors, recommend to its stockholders approval of this Agreement,
the Merger, and the transactions contemplated by this Agreement, which
recommendation shall also be stated in the Proxy Statement; provided that
prior to the AGH Stockholders Meeting, such recommendation may be withdrawn,
modified or amended to the extent that, as a result of the commencement or
receipt of a proposal constituting a AGH Superior Proposal, the Board of
Directors of AGH determines in good faith that such withdrawal, modification
or amendment is appropriate.
(f) CapStar and AGH shall use their best efforts to hold their respective
stockholder meetings on the same day, which day, subject to the provisions of
Section 7.1(d) and 7.1(e), shall be a day not later than 45 days after the
date the Proxy Statement is mailed.
7.2 Access to Information: Confidentiality. Subject to the requirements of
confidentiality agreements with third parties, each of CapStar and AGH shall,
and shall cause each of its Subsidiaries to, afford to the other party and to
the officers, employees, accountants, counsel, financial advisors and other
representatives of such other party, reasonable access during normal business
hours prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, each of
CapStar and AGH shall, and shall cause each of its Subsidiaries to, furnish
promptly to the other party (a) a copy of each
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report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of federal or state securities laws
and (b) all other information concerning its business, properties and
personnel as such other party may reasonably request. Each of CapStar and AGH
shall cause its Subsidiaries to, and shall use commercially reasonable efforts
to cause its officers, employees, accountants, counsel, financial advisors and
other representatives and affiliates to, hold any nonpublic information in
confidence to the extent required by, and in accordance with, and will comply
with the provisions of the letter agreement dated as of September 15, 1997
between CapStar and AGH (the "Confidentiality Agreement").
7.3 Regulatory Matters.
(a) HSR Filings. If required under applicable law, each party hereto shall
file or cause to be filed with the Federal Trade Commission and the Department
of Justice any notifications required to be filed by their respective
"ultimate parent" companies under the HSR Act, and the rules and regulations
promulgated thereunder with respect to the transactions contemplated hereby.
Such parties will use all commercially reasonable efforts to make such filings
in a timely manner, to respond on a timely basis to any requests for
additional information made by either of such agencies.
(b) Other Regulatory Approvals. Each party hereto shall cooperate and use
its best efforts to promptly prepare and file all necessary documentation, to
effect all necessary applications, notices, petitions, filings and other
documents, and to use all commercially reasonable efforts to obtain all
necessary permits, consents, approvals and authorizations of all Governmental
Authorities, including, without limitation, the NYSE, Nasdaq National Market
or the American Stock Exchange (as applicable) necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement.
7.4 Directors' and Officers' Indemnification.
(a) CapStar Indemnification. From and after the Effective Time, the
Surviving Corporation shall, to the fullest extent permitted by applicable
law, indemnify, defend and hold harmless each person who is now, or has been
at any time prior to the date hereof, or who becomes prior to the Effective
Time, an officer or director of CapStar or any CapStar Subsidiary (each a
"CapStar Indemnified Party" and collectively, the "CapStar Indemnified
Parties") against all losses, expenses (including reasonable attorney's fees
and expenses), claims, damages or liabilities or, subject to the proviso of
the next succeeding sentence, amounts paid in settlement, arising out of
actions or omissions occurring at or prior to the Effective Time (and whether
asserted or claimed prior to, at or after the Effective Time) that are, in
whole or in part, based on or arising out of the fact that such person is or
was a director or officer of CapStar or any CapStar Subsidiary (the "CapStar
Indemnified Liabilities"), including, without limitation, all CapStar
Indemnified Liabilities to the extent they are based on or arise out of or
pertain to the transactions contemplated by this Agreement. In the event of
any such loss, expense, claim, damage or liability (whether or not arising
before the Effective Time), (i) the Surviving Corporation shall pay the
reasonable fees and expenses of counsel selected by the CapStar Indemnified
Parties, which counsel shall be reasonably satisfactory to the Surviving
Corporation, promptly after statements therefor are received and otherwise
advance to such CapStar Indemnified Party upon request reimbursement of
documented expenses reasonably incurred, in either case to the extent not
prohibited by the MGCL, (ii) the Surviving Corporation will cooperate in the
defense of any such matter and (iii) any determination required to be made
with respect to whether a CapStar Indemnified Party's conduct complies with
the standards set forth under the MGCL and the charter or bylaws of the
Surviving Corporation shall be made by independent counsel mutually acceptable
to the Surviving Corporation and the CapStar Indemnified Party; provided,
however, that the Surviving Corporation shall not be liable for any settlement
effected without its written consent (which consent shall not be unreasonably
withheld or unreasonably delayed).
(b) AGH Indemnification. From and after the Effective Time, the Surviving
Corporation shall, to the fullest extent permitted by applicable law,
indemnify, defend and hold harmless each person who is now, or has been at any
time prior to the date hereof, or who becomes prior to the Effective Time, an
officer or director of AGH or any AGH Subsidiary (each a "AGH Indemnified
Party" and collectively, the "AGH Indemnified Parties") against all losses,
expenses (including reasonable attorney's fees and expenses), claims, damages
or
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liabilities or, subject to the proviso of the next succeeding sentence,
amounts paid in settlement, arising out of actions or omissions occurring at
or prior to the Effective Time (and whether asserted or claimed prior to, at
or after the Effective Time) that are, in whole or in part, based on or
arising out of the fact that such person is or was a director or officer of
AGH or any AGH Subsidiary (the "AGH Indemnified Liabilities"), including,
without limitation, all AGH Indemnified Liabilities to the extent they are
based on or arise out of or pertain to the transactions contemplated by this
Agreement. In the event of any such loss, expense, claim, damage or liability
(whether or not arising before the Effective Time), (i) the Surviving
Corporation shall pay the reasonable fees and expenses of counsel selected by
the AGH Indemnified Parties, which counsel shall be reasonably satisfactory to
the Surviving Corporation, promptly after statements therefor are received and
otherwise advance to such AGH Indemnified Party upon request reimbursement of
documented expenses reasonably incurred, in either case to the extent not
prohibited by the MGCL, (ii) the Surviving Corporation will cooperate in the
defense of any such matter and (iii) any determination required to be made
with respect to whether a AGH Indemnified Party's conduct complies with the
standards set forth under the MGCL and the charter or bylaws of the Surviving
Corporation shall be made by independent counsel mutually acceptable to the
Surviving Corporation and the AGH Indemnified Party; provided, however, that
the Surviving Corporation shall not be liable for any settlement effected
without its written consent (which consent shall not be unreasonably withheld
or unreasonably delayed).
(c) Insurance. The Surviving Corporation shall obtain, at its expense, so-
called "tail insurance" providing for the extension of the directors and
officers liability insurance maintained by CapStar for six years after the
Closing Date.
(d) Successors. In the event the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person or
entity and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person or entity, then and in either such case,
proper provisions shall be made so that the successors and assigns of the
Surviving Corporation shall assume the obligations set forth in this Section
7.4.
(e) Survival of Indemnification. To the fullest extent permitted by law,
from and after the Effective Time, all rights to indemnification as of the
date hereof in favor of the employees, agents, directors and officers of
CapStar, AGH and their respective Subsidiaries with respect to their
activities as such prior to the Effective Time, as provided in their
respective articles of incorporation and bylaws or other organizational
documents in effect on the date thereof, or otherwise in effect on the date
hereof, shall survive the Merger and shall continue in full force and effect
for a period of not less than six years from the Effective Time.
(f) Benefit. The provisions of this Section 7.4 are intended to be for the
benefit of, and shall be enforceable by, each CapStar Indemnified Party, AGH
Indemnified Party, his or her heirs and his or her representatives.
7.5 Public Announcements. Subject to each party's disclosure obligations
imposed by law, CapStar and AGH will cooperate with each other in the
development and distribution of all news releases and other public information
disclosures with respect to this Agreement or any of the transactions
contemplated hereby and shall not issue any public announcement or statement
with respect hereto or thereto without the consent of the other party (which
consent shall not be unreasonably withheld). It is understood and agreed that
this Section 7.5 is intended to address matters with respect to this Agreement
and the transactions contemplated hereby (e.g., status, terms, etc.), and is
not intended to address disclosure of confidential non-public information of a
party obtained by the other party in connection with this Agreement and the
transactions contemplated hereby, which information is subject to the
Confidentiality Agreement and Section 7.1 hereof.
7.6 Employment Agreements and Workforce Matters. Prior to the Effective
Time, AGH, on behalf of the Surviving Corporation, shall tender employment
agreements or make offers of employment (as applicable) to the CapStar and AGH
employees set forth on Schedule 7.6 to the AGH Disclosure Letter upon the
terms and subject to the conditions set forth on such schedule. Prior to the
Effective Time, CapStar, on behalf of OPCO, shall tender employment agreements
or make offers of employment (as applicable) to the CapStar and AGH employees
set forth on Schedule 7.6 to the CapStar Disclosure Letter upon the terms and
subject to the conditions set forth on such Schedule.
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7.7 Employee Benefit Plans.
(a) CapStar Plans. From the Effective Time, the Surviving Corporation shall
provide to all employees of CapStar who are employed by the Surviving
Corporation benefits on the same terms applicable to other similarly situated
employees of AGH on terms no less favorable than those currently applicable to
such employees.
(b) Credit for Past Services. Without limitation of the foregoing provisions
of this Section 7.7, each participant in any benefit plan of the Surviving
Corporation and each employee of CapStar that is employed by the Surviving
Corporation shall receive credit for service with CapStar, as the case may be,
for purposes of (i) eligibility to participate (including waiting periods and
without being subject to any subsequent entry date requirement for which the
waiting period has already been satisfied), vesting and eligibility to receive
benefits (including without pre-existing conditions limitations) under any
benefit plan of the Surviving Corporation or any of its Subsidiaries or
affiliates and (ii) benefit accrual under any severance or vacation pay plan;
provided, however, that such crediting of benefit accrual service shall not
operate to duplicate any benefit to any such participant for the same period
or the funding for any such benefit.
7.8 Stock Option and Other Stock Plans.
(a) CapStar Stock Options. Immediately prior to the Effective Time, each
option to purchase shares of CapStar Common Stock (a "CapStar Stock Option")
set forth in Schedule 4.3(b) of the CapStar Disclosure Letter which is
outstanding at such time shall be vested and exercisable. As of the Effective
Time, each CapStar Stock Option which is outstanding as of the Effective Time
shall be assumed by the Surviving Corporation and converted into an option (or
a new substitute option shall be granted) to purchase the number of shares of
AGH Common Stock (rounded up to the nearest whole share) equal to the number
of shares of CapStar Common Stock subject to such option multiplied by the
CapStar Exchange Ratio, at an exercise price per share of AGH Common Stock
(rounded down to the nearest penny) equal to the former exercise price per
share of CapStar Common Stock under such option immediately prior to the
Effective Time as appropriately adjusted to reflect the value of the Spin-Off
Transaction, as determined in good faith by the board of directors of CapStar;
provided, however, that in the case of any CapStar Stock Option to which
Section 421 of the Code applies by reason of its qualification under Section
422 of the Code, the conversion formula shall be adjusted, if necessary, to
comply with Section 424(a) of the Code. Except as provided above, the
converted or substituted CapStar Stock Options shall be subject to the same
terms and conditions (including, without limitation, expiration date, vesting
and exercise provisions) as were applicable to CapStar Stock Options
immediately prior to the Effective Time, except that all converted or
substituted CapStar Stock Options shall be vested and fully exercisable.
Except as provided in the immediately preceding sentence, the Merger shall not
be treated as an event which shall affect the period for exercising CapStar
Stock Options. CapStar Stock Options shall not be treated as expiring as of
the Effective Time solely due to the fact that CapStar shall cease to exist as
of the Effective Time. CapStar and AGH shall take such necessary action to
effectuate the terms of this Section 7.8(a), including the amendment by the
Board of Directors of CapStar of the CapStar Stock Plans and the filing of any
registration statements or other documents.
(b) AGH Stock Options. Immediately prior to the Effective Time, each option
to purchase shares of AGH Common Stock (a "AGH Stock Option") set forth in
Schedule 5.3(b) of the AGH Disclosure Letter which is outstanding at such time
shall be vested and exercisable. As the Effective Time, each AGH Stock Option,
which is outstanding as of the Effective Time, shall be assumed by the
Surviving Corporation and converted into an option (or a new substitute option
shall be granted) to purchase the number of shares of AGH Common Stock
(rounded up to the nearest whole share) equal to the number of shares of AGH
Common Stock subject to such option multiplied by the AGH Exchange Ratio, at
an exercise price per share of AGH Common Stock equal to the former exercise
price per share of AGH Common Stock under such option immediately prior to the
Effective Time divided by the AGH Exchange Ratio; provided, however, that in
the case of any AGH Stock Option to which Section 421 of the Code applies by
reason of its qualification under Section 422 of the Code, the conversion
formula shall be adjusted, if necessary, to comply with Section 424(a) of the
Code. Except as provided above, the converted or substituted AGH Stock Options
shall be subject to the same terms and
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conditions (including, without limitation, expiration date, vesting and
exercise provisions) as were applicable to AGH Stock Options immediately prior
to the Effective Time, except that all converted or substituted AGH Stock
Options shall be vested and fully exercisable. Except as provided in the
immediately preceding sentence, the Merger shall not be treated as an event
which shall affect the period for exercising AGH Stock Options. CapStar and
AGH shall take such necessary action to effectuate the terms of this Section
7.8(b), including the amendment by the Board of Directors of AGH, or an
appropriate committee thereof, of the AGH Stock Plans and the filing of any
registration statements or other documents.
(c) Surviving Corporation Action. As soon as practicable after the Effective
Time, the Surviving Corporation shall deliver to the holders of CapStar Stock
Options, AGH Stock Options and AGH Restricted Stock Grants appropriate notice
setting forth such holders' rights (the "Surviving Corporation Stock
Benefits") under each underlying stock option agreement, each as assumed by
the Surviving Corporation. On or as soon as possible after the Effective Time,
the Surviving Corporation will cause to be filed one or more registration
statements on Form S-3 or Form S-8 under the Securities Act (or any successor
or other appropriate forms), in order to register those shares of AGH Common
Stock issuable in connection with the Surviving Corporation Stock Benefits not
previously registered, and the Surviving Corporation shall use its best
efforts to maintain the effectiveness of such registration statements (and
maintain the current status of the prospectuses contained therein) for so long
as such benefits and grants remain payable and such options remain
outstanding. AGH shall use its best efforts to cause such registration
statements on Form S-8 to become effective within 10 days after the Effective
Time and all other registration statements to become effective within 60 days
after the Effective Time. At or prior to the Effective Time, the Surviving
Corporation shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of AGH Common Stock for delivery in connection
with (i) the Surviving Corporation Stock Benefits, (ii) the exchange of AGH OP
Units and (iii) the Convertible Notes. The Surviving Corporation shall take
all corporate action necessary or appropriate to obtain stockholder approval
with respect to the Surviving Corporation Stock Benefits to the extent such
approval is required for purposes of the Code or other applicable law. With
respect to the those individuals who subsequent to the Merger will be subject
to the reporting requirements under Section 16(a) of the Exchange Act with
respect to equity securities of the Surviving Corporation, the Surviving
Corporation shall administer such Surviving Corporation Stock Benefits, where
applicable, in a manner that complies with Rule 16b-3 promulgated under the
Exchange Act.
(d) CapStar Stock Purchase Plan. Prior to the Effective Time, but in no
event later than the last day of the calendar month immediately proceeding the
Effective Time, CapStar shall terminate CapStar's stock purchase plan (the
"Stock Purchase Plan"). Prior to the Effective Time, CapStar shall cause any
dollar amounts withheld under the Stock Purchase Plan and not applied to the
purchase of CapStar Common Stock to be returned to the respective employee of
CapStar or its Subsidiaries and any shares of CapStar Common Stock held in
custodial accounts to be also distributed to such employee.
(e) AGH Restricted Stock Grants. Immediately prior to the Effective time,
each AGH Restricted Stock Grant set forth in Schedule 5.3(b) of the AGH
Disclosure Letter shall become fully vested and will not be subject to
forfeiture.
7.9 CapStar Hotel OP Subsidiaries. CapStar agrees to take all actions
necessary to cause CapStar Hotel OP not to own, directly or indirectly, any
interest in any corporation at the Effective Time.
7.10 Reorganization Status. Each party hereto agrees, as to itself and to
each of its Subsidiaries, that after the date hereof and prior to the
Effective Time or earlier termination of this Agreement, except as expressly
contemplated or permitted in this Agreement, neither party hereto shall, nor
shall either party hereto permit any of its Subsidiaries or any employees,
officers or directors of such party or of any of its Subsidiaries to, take any
actions which would, or would be reasonably likely to, adversely affect the
ability of the Merger to qualify as a reorganization under Section 386(a) of
the Code, and each party hereto shall use all reasonable efforts to achieve
such result.
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7.11 Preparation of the Form 10 Registration Statement. CapStar and OPCO
shall promptly prepare and file with the SEC a Registration Statement on Form
10 under the Exchange Act (the "Form 10 Registration Statement") registering
the OPCO Stock (as defined herein) distributable in the Spin-Off Transaction
under the Exchange Act. CapStar shall use commercially reasonable efforts to
(i) respond to any comments of the SEC and (ii) have the Form 10 Registration
Statement declared effective under the Exchange Act and the rules and
regulations promulgated thereunder as promptly as practicable after such
filing (but in no event later than the Registration Statement is declared
effective under the Securities Act) and to keep the Form 10 Registration
Statement effective. CapStar will notify AGH promptly of the receipt of any
comments from the SEC and of any request by the SEC for amendments or
supplements to the Form 10 Registration Statement or for additional
information and will supply AGH with copies of all correspondence between such
party or any of its representatives and the SEC, with respect to the Form 10
Registration Statement. Prior to filing the Form 10 Registration Statement,
any amendments or supplements thereto or any response letters to the SEC with
the SEC, CapStar shall provide copies of all such documents and letters to
AGH, and AGH shall be provided sufficient time to review such documents and
letters and shall have the right to comment on such documents and letters
prior to CapStar filing such with the SEC. CapStar shall also take such action
as may be reasonably required to cause the shares of OPCO Stock distributable
in connection with the Spin-Off Transaction to be exempt from registration
under the Securities Act and applicable state "blue sky" or securities laws;
provided, however, that it shall not be required to register or qualify as a
foreign corporation or to take other action which would subject it to general
service of process in any jurisdiction where OPCO will not be, following the
Spin-Off Transaction, so subject. CapStar shall use commercially reasonable
efforts to cause the shares of OPCO Stock to be approved for listing or quoted
on the NYSE, the American Stock Exchange or the Nasdaq National Market (as
applicable), subject to official notification of issuance.
7.12 NYSE Listing. AGH shall use commercially reasonable efforts to cause
the shares of AGH Common Stock to be issued in the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time.
7.13 Transfer Taxes. CapStar and AGH shall cooperate in the preparation,
execution and filing of all returns, questionnaires, applications or other
documents regarding any real property transfer or gains, sales, use, transfer,
value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees or any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time.
7.14 Payment of CapStar Debt. CapStar and AGH agree that immediately prior
to, or upon, the Effective Time, the Surviving Corporation shall pay to the
applicable CapStar lenders the amount necessary to discharge and terminate
CapStar's $450 million Senior Secured Credit Facility.
7.15 CapStar's Accumulated and Current Earnings and Profits. At the
Closing, CapStar shall cause KPMG Peat Marwick LLP to deliver to AGH, in a
form reasonably acceptable to AGH, a statement confirming that the E&P of
CapStar, immediately before the distribution of the stock of OPCO, will be no
greater than $55,000,000 and the tax basis of such stock, of which CapStar is
the record and beneficial Owner, will not be less than $67,000,000.
7.16 Resignations. On the Closing Date, CapStar shall cause the directors
and officers of each of the CapStar Subsidiaries and AGH shall cause the
directors and officers of each of the AGH Subsidiaries to submit their
resignations from such positions, effective as of the Effective Time.
7.17 Pre-Merger Transactions. Prior to the Effective Time, the CapStar
Parties shall effectuate the following transactions as part of the OP
Reorganization:
(a) CapStar Management I and CapStar Management II will merge into a single
limited partnership that subsequently may convert to a Delaware limited
liability company ("Old CMC") that will have as its sole members CapStar and
the CapStar LPs;
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(b) CapStar General Corp., the general partner of CapStar Management II,
will merge with and into CapStar and CapStar LP Corporation, a limited partner
of CapStar Management I will merge with and into CapStar;
(c) Old CMC will contribute all of its hotel related assets each as set
forth on Schedule 7.17(c) to the CapStar Disclosure Letter, together with all
its other assets (except those set forth on Schedule 7.17(d) to the CapStar
Disclosure Letter), subject to all of its liabilities except for such
liabilities set forth on Schedule 7.17(d), to CapStar Hotel OP in exchange for
interests in CapStar Hotel OP;
(d) Old CMC will contribute all its management and substantially all of the
leasehold related assets (inclusive of certain leases, interests in joint
ventures and certain notes, each as set forth on Schedule 7.17(d) to the
CapStar Disclosure Letter) together with certain other assets (including
cash), each as set forth on Schedule 7.17(d) to the CapStar Disclosure Letter,
subject to $30.0 million in liabilities and such other liabilities as set
forth on Schedule 7.17(d) to the CapStar Disclosure Letter, to CapStar
Management OP in exchange for interests in CapStar Management OP;
(e) Old CMC will redeem CapStar's interests in Old CMC in exchange for
CapStar's pro rata share of its interests in CapStar Management OP and CapStar
Hotel OP;
(f) CapStar will contribute its interests in CapStar Management OP to OPCO
in exchange for 100% of the outstanding capital stock of OPCO; and
(g) CapStar will distribute 100% of the OPCO stock to CapStar's stockholders
in connection with the Spin-Off Transaction.
7.18 Spin-Off Transaction. Immediately prior to the Effective Time, CapStar
will effectuate the Spin-Off Transaction as follows:
(a) Pursuant to the transactions as set forth in Section 7.17(d), all of the
assets set forth on Schedule 7.17(d) to the CapStar Disclosure Letter, subject
to $30.0 million of liabilities and such other liabilities as set forth on
such schedule, will be held by CapStar Management OP, a Subsidiary of OPCO;
(b) CapStar will distribute pro rata to its stockholders, as a distribution
taxable under Section 301 or 356 of the Code, all of the issued and
outstanding shares of common stock of OPCO (the "OPCO Stock");
(c) CapStar will cause the OPCO Stock to be listed or quoted on either the
NYSE, the American Stock Exchange or the Nasdaq National Market (as
applicable), subject to official notification of issuance;
(d) OPCO and CapStar will enter into a Contribution, Assumption and
Indemnity Agreement in the form attached hereto as Exhibit F in connection
with the Spin-Off Transaction;
(e) CapStar will cause OPCO to tender employment agreements, make offers of
employment and grant restricted stock and stock options to certain existing
employees of CapStar and AGH as set forth on Schedule 7.6 to the CapStar
Disclosure Letter;
(f) CapStar will cause OPCO to enter into the Intercompany Agreement in the
form attached hereto as Exhibit G (the "Intercompany Agreement") with the
Surviving Corporation;
(g) CapStar will cause the persons set forth on Schedule 7.18(g)(i) of the
CapStar Disclosure Letter to be elected to the Board of Directors of OPCO and
the persons set forth on Schedule 7.18(g)(ii) of the CapStar Disclosure Letter
to be elected as officers of OPCO to hold such positions set forth beside
their respective names; and
(h) CapStar shall cause the organizational documents of OPCO and its
Subsidiaries to be submitted to AGH for its review, comment and approval,
which approval shall not be unreasonably withheld, prior to such documents
being adopted by OPCO.
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7.19 Lease Agreements. At the Effective Time, CapStar Management OP will
enter into leases in the form attached hereto as Exhibit H with the AGH OP or
its Subsidiaries that, pursuant to the Merger, will hold title to the hotel
assets owned, directly or indirectly, by CapStar or the CapStar Hotel OP
immediately prior to the Effective Time ( the "OPCO Leases"). The OPCO Leases
will have the terms set forth in Schedule 7.19 of the CapStar Disclosure
Letter. Immediately following the Effective Time, the existing participating
leases between the AGH OP and the AGH Lessee shall be amended to the extent
required to make such leases consistent with the form of lease attached hereto
as Exhibit H.
7.20 FF&E Agreements. With respect to each of the hotels owned directly or
indirectly by CapStar, to the extent the tax bases of the personal property
which will be leased pursuant to the OPCO Lease relating to such hotel exceeds
15% of the aggregate tax bases of such personal property, CapStar, immediately
prior to the Effective Time, shall sell, with respect to such hotel, a portion
of such personal property to CapStar Management OP. The amount of personal
property to be sold shall equal an amount of the personal property such that
after such sale the tax bases of the remaining personal property at such hotel
shall not exceed 15% of the aggregate tax bases of the remaining personal
property (the "Purchased FF&E"). The purchase price for the Purchased FF&E
will be payable by CapStar Management OP's delivery of a recourse promissory
note that bears interest at a rate of 10% per annum and requires equal
quarterly installments of principal and interest that would amortize the note
over a five-year period.
7.21 Assumption of Debt. With respect to the debt issued by CapStar under
indentures qualified under the Trust Indenture Act of 1939 (the "Indentures"),
AGH shall execute and deliver to the trustees under the respective Indentures,
Supplemental Indentures, in form satisfactory to the respective trustees,
expressly assuming the obligations of CapStar with respect to the due and
punctual payment of the principal of and interest, if any, on all debt
securities issued by CapStar under the respective Indentures and the due and
punctual performance of all the terms, covenants and conditions of the
respective Indentures to be kept or performed by CapStar, and shall deliver
such Supplemental Indentures to the respective trustees under the Indenture.
7.22 Accredited CapStar LPs. CapStar shall use commercially reasonable
efforts to cause each of the CapStar LPs to give appropriate representations
and certifications to the AGH Parties confirming that each of the CapStar LPs
is an accredited investor within the meaning of Rule 501 of the regulations
promulgated under the Securities Act as of the Effective Time and make other
customary representations and certifications that are typically made in
connection with ensuring a valid private placement of securities under the
securities laws.
7.23 Appointment of Manager. AGH will use commercially reasonable efforts to
cause the lease agreements between AGH OP and Clifton Holding Corp. to be
amended to provide that OPCO will be the preferred replacement manager under
Section 36.1 of such agreement.
7.24 Reasonable Efforts and Cooperation. Upon the terms and subject to the
conditions of this Agreement, each of the parties hereto will use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to permit and cooperate with the other parties in doing,
all things necessary, proper or advisable to consummate or make effective, in
the most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including without limitation, (i) obtaining
all consents, approvals and waivers from third parties prior to the Effective
Time, (ii) defending any lawsuits or other legal proceedings, whether judicial
or administrative, challenging this Agreement or the consummation of the
transactions contemplated hereby, including seeking to have any adverse order
entered by any court or other Governmental Entity vacated or reversed and
(iii) executing and delivering any additional instruments necessary to
consummate the transactions contemplated by, and to carry out fully, the
purposes of this Agreement. In addition, and without limiting the generality
of the foregoing, CapStar will cooperate with AGH to ensure that AGH continues
to qualify as a REIT following the Effective Time.
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ARTICLE 8
Conditions
8.1 Conditions to Each Party's Obligation to Effect the Merger. The
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) Stockholder Approvals. Each of the Stockholder Approvals will have
been obtained.
(b) Listing of Shares. The NYSE shall have approved for listing the
shares of AGH Common Stock of the Surviving Corporation to be issued in the
Merger, subject to official notice of issuance.
(c) Registration Statements. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings by the SEC seeking a stop order. The Form 10
Registration Statement shall have become effective under the Exchange Act.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger or any of the other transactions
contemplated hereby shall be in effect.
(e) Blue Sky Laws. The Surviving Corporation shall have received all
state securities or "blue sky" permits and other authorizations necessary
to issue shares of AGH Common Stock to the stockholders of CapStar.
(f) Opinion of Maryland Counsel. AGH and CapStar shall have received the
opinion of Ballard Spahr Andrews & Ingersoll, LLP to the effect that, to
the extent specifically applicable, this Agreement and the Articles of
Merger, to the extent governed by Maryland law, are enforceable under
Maryland law, that all requisite approvals of the Merger by the
stockholders of AGH has been obtained, and as to such other matters as are
customary in connection with consummation of a transaction such as the
Merger. Such opinion may contain customary assumptions, limitations and
qualifications.
(g) Intercompany Agreement. Each of AGH and its appropriate Subsidiaries
and OPCO and its appropriate Subsidiaries have executed and delivered the
Intercompany Agreement.
(h) HSR Act. Any waiting period under the HSR Act applicable to the
merger or the Spin-Off Transaction shall have expired or been terminated.
(i) Change in Tax Laws. There shall not have been any federal legislative
or regulatory change that would cause AGH to cease to qualify as a "real
estate investment trust" for federal income tax purposes.
(j) Credit Commitment. OPCO shall have received a commitment from AGH OP
for a $50,000,000 line of credit at an interest rate no greater than LIBOR
plus 350 basis points and payable quarterly. The line of credit will have
other terms and conditions customary of a commitment of this type.
(k) Voting Agreements. Each of the Voting Agreements shall remain in full
force and effect and the individuals and entities party thereto shall not
have breached any of their obligations thereunder.
(l) Spin-Off Transactions. Each of the Spin-Off Transactions shall have
been consummated.
(m) Lease Agreements. OPCO or its Subsidiaries, as the case may be, shall
have executed and delivered each of the Lease Agreements.
(n) Credit Facility. The AGH Parties shall have obtained a senior credit
facility in the amount of at least $1,000,000,000, having a term of at
least three years, and having other terms and conditions substantially the
same as the terms of the AGH Parties existing credit facility.
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(o) Other Transactions. All conditions to the closing of the Manager-
Lessee Agreement shall have been satisfied or waived and all parties to
such agreement shall provide AGH and CapStar with a certificate indicating
that such conditions have been satisfied or waived and that all of the
transactions under such agreement shall be consummated immediately
following the Effective Time.
8.2 Conditions to Obligations of the CapStar Parties. The obligation of the
CapStar Parties to effect the Merger and to consummate the other transactions
contemplated to occur on the Closing Date is further subject to the following
conditions, any one or more of which may be waived by the CapStar Parties:
(a) Representations and Warranties. The representations and warranties of
the AGH Parties set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of the AGH Parties that are not so qualified shall be true and
correct in all material respects in each case as of the date of this
Agreement and as of the Closing Date, as though made on and as of the
Closing Date, except to the extent the representation or warranty is
expressly limited by its terms to another date, and the CapStar Parties
shall have received a certificate (which certificate may be qualified by
Knowledge to the same extent as the representations and warranties of the
AGH Parties contained herein are so qualified) signed on behalf of the AGH
Parties by the chief executive officer and the chief financial officer of
AGH, in such capacity, to such effect.
(b) Performance of Obligations of the AGH Parties. Each of the AGH
Parties shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the
Effective Time, and the CapStar Parties shall have received a certificate
of the AGH Parties signed on behalf of the AGH Parties by the chief
executive officer or the chief financial officer of AGH, in such capacity,
to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no AGH Material Adverse Change and the CapStar Parties
shall have received a certificate of the chief executive officer or chief
financial officer of AGH, in such capacity, certifying to such effect.
(d) Tax Opinions Relating to REIT Status of AGH and Partnership Status of
AGH OP. The CapStar Parties shall have received an opinion of Battle Fowler
LLP, reasonably satisfactory to the CapStar Parties, that, commencing with
its taxable year ended December 31, 1996, (i) AGH was organized and has
operated in conformity with the requirements for qualification as a REIT
under the Code and (ii) AGH OP has been during and since 1996, and
continues to be, treated for federal income tax purposes as a partnership
and not as a corporation or association taxable as a corporation (with
customary exceptions, assumptions and qualifications and based upon
customary representations).
(e) Tax Opinion Relating to Merger. The CapStar Parties shall have
received an opinion dated the Closing Date from Paul, Weiss, Rifkind,
Wharton & Garrison ("Paul Weiss"), based upon certificates and letters,
which letters and certificates are in the form agreed upon by the parties
and dated the Closing Date, to the effect that the Merger will qualify as a
reorganization under the provisions of Section 368(a) of the Code.
(f) Consents. All consents and waivers (including, without limitation,
waivers or rights of first refusal) from third parties necessary in
connection with the consummation of the transactions contemplated hereby
shall have been obtained, other than such consents and waivers from third
parties, which, if not obtained, would not result, individually or in the
aggregate, in a AGH Material Adverse Effect or a CapStar Material Adverse
Effect.
8.3 Conditions to Obligations of the AGH Parties. The obligations of the AGH
Parties to effect the Merger and to consummate the other transactions
contemplated to occur on the Closing Date are further subject to the following
conditions, any one or more of which may be waived by the AGH Parties:
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(a) Representations and Warranties. The representations and warranties of
the CapStar Parties set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of the CapStar Parties that are not so qualified shall be true
and correct in all material respects as of the date of this Agreement and
as of the Closing Date, as though made on and as of the Closing Date,
except to the extent the representation or warranty is expressly limited by
its terms to another date, and AGH shall have received a certificate (which
certificate may be qualified by Knowledge to the same extent as the
representations and warranties of the CapStar Parties contained herein are
so qualified) signed on behalf of the CapStar Parties by the chief
executive officer or the chief financial officer of CapStar, in such
capacity, to such effect.
(b) Performance of Obligations of the CapStar Parties. Each of the
CapStar Parties shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Effective Time, and AGH shall have received a certificate signed on
behalf of the CapStar Parties by the chief executive officer or the chief
financial officer of CapStar, in such capacity, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no CapStar Material Adverse Change and AGH shall have
received a certificate of the chief executive officer or chief financial
officer of CapStar, in such capacity, certifying to such effect.
(d) Opinion of Counsel. The AGH Parties shall have received an opinion
from Morris, Nichols, Arsht & Tunnell, Delaware counsel to the CapStar
Parties, dated the Closing Date to the effect that, to the extent
specifically applicable, this Agreement, to the extent governed by Delaware
law, is enforceable under Delaware law and that all requisite approvals of
the Merger required under Delaware law and pursuant to CapStar's
certificate of incorporation and other governing documents has been
obtained. Paul Weiss shall have delivered to the appropriate parties the
necessary legal options to satisfy the conditions of (i) Section 8.3 of the
Indenture dated as of October 16, 1997 between CapStar and First Trust of
New York, N.A. and (ii) Section 5.1(v) of the Indenture dated as of August
19, 1997 between CapStar and IBJ Schroder Bank & Trust Company.
(e) Consents. All consents and waivers (including, without limitation,
waivers of rights of first refusal) from third parties necessary in
connection with the consummation of the transactions contemplated by this
Agreement shall have been obtained, other than such consents and waivers
from third parties, which, if not obtained, would not result, individually
or in the aggregate, in a AGH Material Adverse Effect or a CapStar Material
Adverse Effect.
(f) E&P Certificate. KPMG Peat Marwick LLP shall have delivered to the
AGH Parties, in a form acceptable to the AGH Parties, a statement
confirming that the E&P of CapStar, immediately before the distribution of
the stock of OPCO, will be no greater than $55,000,000 and the tax basis of
such stock, of which CapStar is the record and beneficial owner, will not
be less than $67,000,000.
(g) Affiliates Letter. Each of the Affiliates referred to in Section 6.6
shall have delivered to AGH the written agreement contemplated by Section
6.6.
(h) Net Worth Certificate. KPMG Peat Marwick LLP shall have delivered to
the AGH Parties, in a form acceptable to the AGH Parties, a statement
confirming that the pro forma book value (as determined in accordance with
GAAP) of OPCO as of January 1, 1997 (after taking into account the
transactions contemplated by this Agreement), does not exceed $75,000,000.
8.4 Frustration of Closing Conditions. Neither the CapStar Parties nor the
AGH Parties may rely on the failure of any condition set forth in Section 8.1,
8.2 or 8.3, as the case may be, to be satisfied if such failure was caused by
such party's failure to use reasonable efforts to commence or complete the
Merger and the other transactions contemplated by this Agreement.
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ARTICLE 9
Termination, Amendment and Waiver
9.1 Termination. This Agreement may be terminated at any time prior to the
filing of the Articles of Merger with the Departments, whether before or after
either of the Stockholder Approvals are obtained:
(a) by mutual written consent duly authorized by both the Board of
Directors of AGH and the Board of Directors of CapStar;
(b) by AGH, upon a breach of any representation, warranty, covenant,
obligation or agreement on the part of the CapStar Parties set forth in
this Agreement, in either case such that the conditions set forth in
Section 8.3(a) or Section 8.3(b), as the case may be, would be incapable of
being satisfied by October 31, 1998 (or as otherwise extended);
(c) by CapStar, upon a breach of any representation, warranty, covenant
obligation or agreement on the part of the AGH Parties set forth in this
Agreement, in either case such that the conditions set forth in Section
8.2(a) or Section 8.2(b), as the case may be, would be incapable of being
satisfied by October 31, 1998 (or as otherwise extended);
(d) by either AGH or CapStar, if any judgment, injunction, order, decree
or action by any Governmental Entity of competent authority preventing the
consummation of the Merger shall have become final and nonappealable;
(e) by either AGH or CapStar, if the Merger shall not have been
consummated before October 31, 1998; provided, that a party may not
terminate pursuant to this clause (e) if the terminating party shall have
breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the occurrence of the
failure referred to in this clause;
(f) by either AGH or CapStar if, upon a vote at a duly held CapStar
Stockholders Meeting or any adjournment thereof, the CapStar Stockholder
Approvals shall not have been obtained as contemplated by Section 7.1;
(g) by either AGH or CapStar if, upon a vote at a duly held AGH
Stockholders Meeting or any adjournment thereof, the AGH Stockholder
Approvals shall not have been obtained as contemplated by Section 7.1;
(h) by CapStar, if prior to the CapStar Stockholders Meeting, the Board
of Directors of CapStar shall have withdrawn or modified in accordance with
Section 6.1 hereof in any manner adverse to AGH its approval or
recommendation of the Merger or this Agreement in connection with, or
approved or recommended, a CapStar Superior Proposal; provided that such
termination pursuant to this clause (h) shall not be effective until
CapStar has made payment of the Break-Up Fee (as defined below) required by
(and to the extent then payable pursuant to) Section 9.2(c) hereof;
(i) by AGH, if prior to the AGH Stockholders Meeting, the Board of
Directors of AGH shall have withdrawn or modified in accordance with
Section 6.2 hereof in any manner adverse to CapStar its approval or
recommendation of the Merger or this Agreement in connection with, or
approved or recommended, any AGH Superior Proposal; provided that such
termination pursuant to this clause (i) shall not be effective until AGH
has made payment of the Break-Up Fee required by Section 9.2(c) hereof;
(j) by AGH if (i) prior to the CapStar Stockholders Meeting, the Board of
Directors of CapStar shall have withdrawn or modified in any manner adverse
to AGH its approval or recommendation of the Merger or this Agreement in
connection with, or approved or recommended, any CapStar Acquisition
Proposal, (ii) prior to the CapStar Stockholders Meeting, CapStar shall
have entered into any agreement with respect to a CapStar Acquisition
Proposal (other than a confidentiality agreement as contemplated and
permitted by Section 6.1(a)) or (iii) the Board of Directors of CapStar
shall have resolved to do any of the foregoing;
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(k) by CapStar if (i) prior to the AGH Stockholders Meeting, the Board of
Directors of AGH shall have withdrawn or modified in any manner adverse to
CapStar its approval or recommendation of the Merger or this Agreement in
connection with, or approved or recommended, any AGH Acquisition Proposal,
(ii) prior to the AGH Stockholders Meeting, AGH shall have entered into any
agreement with respect to a AGH Acquisition Proposal (other than a
confidentiality agreement as contemplated and permitted by Section 6.2(a))
or (iii) the Board of Directors of AGH shall have resolved to do any of the
foregoing; and
(l) by either AGH or CapStar if, during the 20 consecutive trading days
ending with and including the trading date that is five trading days
immediately preceding the date the Proxy Statement required by Section 7.1
is first mailed, the average Closing Price (as defined below) of the
CapStar Common Stock is less than $29, and the party desiring such
termination provides notice to the other party within three business days
of the end of such 20-trading-day period. For purposes hereof, "Closing
Price" shall mean the last reported sale price per share of CapStar Common
Stock as reported on the NYSE consolidated tape on the trading day in
question.
9.2 Certain Fees and Expenses.
(a) Except as otherwise specified in this Agreement or agreed in writing by
the parties, all out-of-pocket costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby (including, without
limitation, all expenses relating to the transfer of any hotel franchises)
shall be paid by the party incurring such cost or expense.
(b) AGH agrees that if this Agreement shall be terminated pursuant to
Section 9.1(c), (g), (i) or (k) and, in the case of (c) or (g), following the
date of this Agreement and prior to termination of this Agreement, AGH shall
have received a AGH Acquisition Proposal and within six months following
termination of this Agreement, AGH shall enter into a definitive agreement
providing for a AGH Acquisition Proposal, then AGH will pay as directed by
CapStar a fee in an amount equal to the Break-Up Fee. Notwithstanding the
foregoing, in the event of a termination pursuant to Section 9.1(c) or 9.1(g),
AGH shall immediately pay as directed by CapStar an amount equal to the Break-
Up Expenses, which amount shall be credited against any Break-Up Fee that may
ultimately become payable pursuant to the preceding sentence. Payment of any
of such amounts shall be made, as directed by CapStar, by wire transfer of
immediately available funds immediately upon this occurrence of the event
giving rise to payment of such fee or expenses. The payment of the Breakup Fee
shall be compensation for the loss suffered by CapStar as the result of the
failure of the Merger to be consummated and to avoid the difficulty of
determining damages under the circumstances and neither party shall have any
other liability to the other, other than the payment of the Breakup Fee.
(c) CapStar agrees that if this Agreement shall be terminated pursuant to
Section 9.1(b), (f), (h) or (j) and, in the case of (b) or (f), following the
date of this Agreement and prior to the termination of this Agreement, CapStar
shall have received a CapStar Acquisition Proposal and within six months
following termination of this Agreement, CapStar shall enter into a definitive
agreement providing for a CapStar Acquisition Proposal, then CapStar will pay
as directed by AGH a fee in an amount equal to the Break-Up Fee.
Notwithstanding the foregoing, in the event of a termination pursuant to
Section 9.1(b) or 9.1(f), then CapStar will pay, as directed by AGH, an amount
equal to the Break-Up Expenses, which amount shall be credited against any
Break-Up Fee that may ultimately become payable pursuant to the preceding
sentence. Payment of any of such amounts shall be made, as directed by AGH, by
wire transfer of immediately available funds immediately upon this occurrence
of the event giving rise to payment of such fee or expenses. The payment of
the Breakup Fee shall be compensation for the loss suffered by AGH as the
result of the failure of the Merger to be consummated and to avoid the
difficulty of determining damages under the circumstances and neither party
shall have any other liability to the other, other than the payment of the
Breakup Fee.
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As used in this Agreement, "Break-Up Fee" shall be an amount equal to
$35,000,000 plus Break-Up Expenses (the "Base Amount"); provided, however,
that in the case of a Break-Up Fee payable to AGH, such fee shall not exceed
the sum of (A) the maximum amount that can be paid to AGH without causing it
to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by independent accountants to AGH, and
(B) in the event AGH receives a letter from outside counsel (the "Break-Up Fee
Tax Opinion") indicating that AGH has received a ruling from the IRS holding
that AGH's receipt of the Base Amount would either constitute Qualifying
Income or would be excluded from gross income within the meaning of Sections
856(c)(2) and (3) of the Code (the "REIT Requirements") or that the receipt by
AGH of the remaining balance of the Base Amount following the receipt of and
pursuant to such ruling would not be deemed constructively received prior
thereto, the Base Amount less the amount payable under clause (A) above.
CapStar's obligation to pay any unpaid portion of the Break-Up Fee shall
terminate three years from the date of this Agreement. In the event that AGH
is not able to receive the full Base Amount, CapStar shall place the unpaid
amount in escrow and shall not release any portion thereof to AGH unless and
until CapStar receives either one or combination of the following: (i) a
letter from AGH's independent accountants indicating the maximum amount that
can be paid at that time to AGH without causing AGH to fail to meet the REIT
Requirements or (ii) a Break-Up Fee Tax Opinion, in either of which events
CapStar shall pay to AGH the lesser of the unpaid Base Amount or the maximum
amount stated in the letter referred to in (i) above. The "Break-Up Expenses"
payable to AGH or CapStar, as the case may be (the "Recipient"), shall be an
amount equal to the lesser of (i) $3,000,000 and (ii) the Recipient's out-of-
pocket expenses incurred in connection with this Agreement and the
transactions contemplated hereby (including, without limitation, all
attorneys', accountants', commercial bankers' and investment bankers' fees and
expenses); provided, however, in the case of Break-Up Expenses payable to AGH,
such expenses shall not exceed the sum of (A) the maximum amount that can be
paid to the Recipient without causing it to fail to meet the requirements of
Sections 856(c)(2) and (3) of the Code determined as if the payment of such
amount did not constitute Qualifying Income, as determined by independent
accountants to the Recipient, and (B) in the event the Recipient receives a
Break Up Fee Tax Opinion indicating that the Recipient has received a ruling
from the IRS holding that the Recipient's receipt of the Break-Up Expenses
would either constitute Qualifying Income or would be excluded from gross
income within the meaning of the REIT Requirements or that receipt by the
Recipient of the remaining balance of the Break-Up Expenses following the
receipt of and pursuant to such ruling would not be deemed constructively
received prior thereto, the Break-Up Expenses less the amount payable under
clause (A) above. The obligation of AGH or CapStar, as applicable ("Payor"),
to pay any unpaid portion of the Break Up Expenses shall terminate three years
from the date of this Agreement. In the event that the Recipient is not able
to receive the full Break-Up Expenses, the Payor shall place the unpaid amount
in escrow and shall not release any portion thereof to the Recipient unless
and until the Payor receives any one or combination of the following: (i) a
letter from the Recipient's independent accountants indicating the maximum
amount that can be paid at that time to the Recipient without causing the
Recipient to fail to meet the REIT Requirements or (ii) a Break-Up Expense Tax
Opinion, in either of which events the Payor shall pay to the Recipient the
lesser of the unpaid Break-Up Expenses or the maximum amount stated in the
letter referred to in (i) above.
9.3 Effect of Termination. In the event of termination of this Agreement by
either CapStar or AGH as provided in Section 9.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation
on the part of AGH, or CapStar, other than the last sentence of Section 7.2,
Section 9.2, this Section 9.3 and Article 10.
9.4 Amendment. This Agreement may be amended by the parties in writing by
action of their respective Board of Directors at any time before or after any
Stockholder Approvals are obtained and prior to the filing of the Articles of
Merger and the Certificate of Merger with the Departments; provided, however,
that, after the Stockholder Approvals are obtained, no such amendment,
modification or supplement shall be made which by law requires the further
approval of stockholders without obtaining such further approval. The parties
agree to amend this Agreement in the manner provided in the immediately
preceding sentence to the extent required to (a) continue the status of AGH as
a REIT or (b) preserve the Merger as a tax-free reorganization under Section
368 of the Code.
A-45
<PAGE>
9.5 Extension; Waiver. At any time prior to the Effective Time, the parties
may (a) extend the time for the performance of any of the obligations or other
acts of the other party, (b) waive any inaccuracies in the representations and
warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
9.4, waive compliance with any of the agreements or conditions of the other
party contained in this Agreement. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
ARTICLE 10
General Provisions
10.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement confirming the representations and
warranties in this Agreement shall survive the Effective Time. This Section
10.1 shall not limit any covenant or agreement of the parties which by its
terms contemplates performance after the Effective Time.
10.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be delivered
personally, sent by overnight courier (providing proof of delivery) to the
parties or sent by telecopy (providing confirmation of transmission) at the
following addresses or telecopy numbers (or at such other address or telecopy
number for a party as shall be specified by like notice):
(a)if to AGH, to:
American General Hospitality Corporation
5605 MacArthur Blvd.
Irving, Texas 75038
Attention: President
Fax No. (972) 550-6895
with a copy to:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Steven L. Lichtenfeld, Esq.
Fax No. (212) 856-9150
(b)if to CapStar, to:
CapStar Hotel Company
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Attention: President
Fax No. (202) 295-2230
with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Richard S. Borisoff, Esq.
Fax No. (212) 757-3990
A-46
<PAGE>
and
DeCampo, Diamond & Ash
805 Third Avenue
New York, New York 10022
Attention: William H. Diamond, Esq.
Fax No. (212) 758-1728
All notices shall be deemed given only when actually received.
10.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation."
10.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party.
10.5 Entire Agreement; No Third-Party Beneficiaries. Except as provided in
Section 7.4, this Agreement, the CapStar Disclosure Letter, the AGH Disclosure
Letter, the Confidentiality Agreement and the other agreements entered into in
connection with the Merger constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, between the
parties with respect to the subject matter of this Agreement and are not
intended to confer upon any person other than the parties hereto any rights or
remedies.
10.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, REGARDLESS OF THE LAWS
THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS
THEREOF, EXCEPT TO THE EXTENT THAT THE LAWS OF THE STATE OF MARYLAND OR
DELAWARE ARE MANDATORILY APPLICABLE.
10.7 Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned or delegated, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
10.8 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any federal court located in the
Southern District of New York or in any state court located in New York state
court, this being in addition to any other remedy to which they are entitled
at law or in equity. In addition, each of the parties hereto (a) consents to
submit itself (without making such submission exclusive) to the personal
jurisdiction of any federal court located in the Southern District of New York
or any state court located in New York in the event any dispute arises out of
this Agreement or any of the transactions contemplated by this Agreement and
(b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court.
10.9 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
A-47
<PAGE>
IN WITNESS WHEREOF, the AGH Parties and the CapStar Parties have caused this
Agreement to be signed by their respective officers thereunto duly authorized
all as of the date first written above.
ATTEST: American General Hospitality
Corporation, a Maryland corporation
/s/ Bruce G. Wiles
By: _________________________________ /s/ Steven D. Jorns
Assistant Secretary By: _________________________________
Name: Steven D. Jorns
Title: Chairman, Chief Executive
Officer and President
American General Hospitality
Operating Partnership, L.P.,
By: AGH GP, Inc., its general
partner
/s/ Bruce G. Wiles /s/ Steven D. Jorns
By: _________________________________ By: _________________________________
Assistant Secretary Name: Steven D. Jorns
Title: Chairman, Chief Executive
Officer and President
ATTEST: Capstar Hotel Company, a Delaware
corporation
/s/ William H. Diamond /s/ Paul W. Whetsell
By: _________________________________ By: _________________________________
Assistant Secretary Name: Paul W. Whetsell
Title: Chief Executive Officer and
President
Capstar Management Company, L.P.,
By: CapStar Hotel Company, its
general partner
/s/ William H. Diamond /s/ Paul W. Whetsell
By: ________________________________ By: _________________________________
Assistant Secretary Name: Paul W. Whetsell
Title: Chief Executive Officer and
President
Capstar Management Company II, L.P.,
By: CapStar General Corp., its
general partner
/s/ William H. Diamond /s/ Paul W. Whetsell
By: _________________________________ By: _________________________________
Assistant Secretary Name: Paul W. Whetsell
Title: Chief Executive Officer and
President
A-48
<PAGE>
APPENDIX B
[LETTERHEAD OF SALOMON SMITH BARNEY]
March 15, 1998
The Board of Directors
American General Hospitality Corporation 5605 MacArthur BoulevardIrving, Texas
75038
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to American General Hospitality Corporation ("AGHC") of the Exchange
Ratios (as defined below) set forth in the Agreement and Plan of Merger, dated
as of March 15, 1998 (the "Merger Agreement"), by and among AGHC, American
General Hospitality Operating Partnership, L.P. ("AGH OP" and, together with
AGHC, "American General"), CapStar Hotel Company ("CHC"), CapStar Management
Company, L.P. ("CapStar Management I") and CapStar Management Company II, L.P.
("CapStar Management II" and, together with CHC and CapStar Management I,
"CapStar"). As more fully described in the Merger Agreement, (i) CHC will be
merged with and into AGHC (the "Merger"), (ii) each outstanding share of the
common stock, par value $0.01 per share, of CHC (the "CHC Common Stock") will
be converted into the right to receive 1.0 (the "CHC Exchange Ratio") share of
the common stock, par value $0.01 per share, of AGHC (the "AGHC Common Stock")
and (iii) each outstanding share of AGHC Common Stock will be converted into
the right to receive 0.8475 (the "AGHC Exchange Ratio" and, together with the
CHC Exchange Ratio, the "Exchange Ratios") of a share of AGHC Common Stock. We
have been advised by representatives of American General that, in connection
with the transactions contemplated by the Merger, (a) CapStar will contribute
or transfer all of its management agreements and substantially all of its
leasehold interests to a newly formed Delaware limited partnership ("CapStar
Management OP"), the general partner of which will be a newly formed Delaware
corporation and wholly owned subsidiary of CHC ("OpCo") and, immediately prior
to the Merger, CHC will distribute the stock of OpCo to its stockholders (the
"Spin-Off"), (b) CapStar will contribute or transfer all of its hotel assets
to a newly formed Delaware limited partnership ("CapStar Hotel OP") and,
concurrently with the Merger, CapStar and American General will effect a
business combination of CapStar Hotel OP with AGH OP, with AGH OP as the
surviving entity (the "OP Reorganization"), (c) prior to giving effect to the
OP Reorganization, American General will enter into an Exchange Rights
Agreement with certain holders of limited partnership interests in CapStar
Hotel OP (the "Exchange") and (d) immediately following the Spin-Off and the
Merger, CapStar Management OP will purchase (i) certain partnership interests
in AGH Leasing, L.P. and (ii) substantially all of the assets of AGH
Management, Inc. (the "Asset Purchase" and, together with the Spin-Off, the OP
Reorganization and the Exchange, the "Related Transactions").
In arriving at our opinion, we reviewed the Merger Agreement and certain
related documents, and held discussions with certain senior officers,
directors and other representatives and advisors of American General and
certain senior officers and other representatives and advisors of CapStar
concerning the businesses, operations and prospects of American General and
CapStar. We examined certain publicly available business and financial
information relating to American General and CapStar as well as certain
financial forecasts and other information and data for American General and
CapStar which were provided to or otherwise discussed with us by the
respective managements of American General and CapStar, including information
relating to certain strategic implications and operational benefits
anticipated to result from the Merger. We reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of the AGHC
Common Stock and CHC Common Stock; the historical and projected earnings and
other operating data of American General and CapStar; and the capitalization
and financial condition of American General and CapStar. We analyzed certain
financial, stock
<PAGE>
market and other publicly available information relating to the businesses of
other companies whose operations we considered relevant in evaluating those of
American General and CapStar. We also evaluated the potential pro forma
financial impact of the Merger on American General. In addition to the
foregoing, we conducted such other analyses and examinations and considered
such other financial, economic and market criteria as we deemed appropriate in
arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with
us, we have been advised by the managements of American General and CapStar
that such forecasts and other information and data were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
managements of American General and CapStar as to the future financial
performance of American General and CapStar and the strategic implications and
operational benefits anticipated to result from the Merger. We have assumed,
with your consent, that the Related Transactions will be effected in
accordance with the terms contemplated thereby and, to the extent relevant to
our analysis, have evaluated American General and CapStar after giving effect
to such transactions. We also have assumed, with your consent, that the Merger
will be treated as a tax-free reorganization for federal income tax purposes
and that the Merger and the transactions contemplated thereby, including the
Related Transactions, will not adversely affect the real estate investment
trust status of the combined entity resulting from the Merger. Our opinion, as
set forth herein, relates to the relative values of American General and
CapStar. We are not expressing any opinion as to what the value of the AGHC
Common Stock actually will be when issued pursuant to the Merger or the price
at which the AGHC Common Stock will trade subsequent to the Merger. We have
not made or been provided with an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of American General or CapStar
nor have we made any physical inspection of the properties or assets of
American General or CapStar. We were not requested to consider, and our
opinion does not address, the relative merits of the Merger as compared to any
alternative business strategies that might exist for American General or the
effect of any other transaction in which American General might engage. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Smith Barney Inc. and Salomon Brothers Inc (collectively doing business as
Salomon Smith Barney) have acted as financial advisors to AGHC in connection
with the proposed Merger and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the
Merger. We also will receive a fee upon the delivery of this opinion. In the
ordinary course of our business, we and our affiliates may actively trade or
hold the securities of AGHC and CHC for our own account or for the account of
our customers and, accordingly, may at any time hold a long or short position
in such securities. We have in the past provided investment banking services
to AGHC and CHC unrelated to the proposed Merger, for which services we have
received and will receive compensation. In addition, we and our affiliates
(including Travelers Group Inc. and its affiliates) may maintain relationships
with AGHC, CHC and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of AGHC in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
any matter relating to the proposed Merger. Our opinion may not be published
or otherwise used or referred to, nor shall any public reference to Salomon
Smith Barney be made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Exchange Ratios are fair,
from a financial point of view, to AGHC.
Very truly yours,
SALOMON SMITH BARNEY
B-2
<PAGE>
[LETTERHEAD OF LEHMAN BROTHERS]
APPENDIX C
March 16, 1998
Board of Directors
CapStar Hotel Company
1010 Wisconsin Avenue, N.W.
Washington, DC 20007
Members of the Board:
We understand that the CapStar Hotel Company (the "Company") is proposing to
enter into a merger agreement with American General Hospitality Corporation
("American General") pursuant to which: (i) the Company will be merged with
and into American General (the "Merger"), and each outstanding share of common
stock of the Company (the "Company Shares") will be converted into the right
to receive 1.0 share of common stock of the surviving company in the Merger
(the "REIT") (the "Merger Consideration") and each outstanding share of common
stock of American General will be converted in the right to receive 0.8475
shares of common stock of the REIT; and (ii) prior to the Merger, the Company
will spin-off its hotel operating and management business ("OpCo") to the
Company's current shareholders (the "Spin-off" and, together with the Merger,
the "Proposed Transaction"), with the shareholders of the Company receiving
1.0 shares of common stock of OpCo for each share of common stock of the
Company (the "Spin-off Consideration" and, together with the Merger
Consideration, the "Consideration"). The terms and conditions of the Proposed
Transaction are set forth in more detail in the Agreement and Plan of Merger,
dated March 15, 1998, between the Company, CapStar Management, L.P. and
CapStar Management Company II, L.P., on the one hand, and American General and
American General Hospitality Operating Partnership, L.P. on the other hand
(the "Merger Agreement"). It is our further understanding that, following the
Spin-off, OpCo intends to acquire all of the assets, business and properties
of American General Hospitality, Inc. and all of the limited partnership
interests in AGH Leasing, L.P. (such entities, collectively, the
"Lessee/Manager") for $95.0 million in cash and common shares of OpCo (the
"Lessee/Manager Acquisition"). The terms and conditions of the Lessee/Manager
Acquisition are set forth in more detail in the agreement dated March 15, 1998
between CapStar Management, L.P. on the one hand, and American General
Hospitality, Inc. and AGH Leasing, L.P., on the other hand (the "Acquisition
Agreement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to
the shareholders of the Company of the Consideration to be offered to such
shareholders in the Proposed Transaction. We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's
underlying business decision to proceed with or effect the Proposed
Transaction.
In arriving at our opinion, we reviewed and analyzed: (i) the Merger
Agreement and the specific terms of the Proposed Transaction, including with
respect to the corporate governance and management of the REIT following
consummation of the Merger; (ii) publicly available information concerning the
Company and American General that we believe to be relevant to our analysis;
(iii) financial and operating information with respect to the business,
operations, properties and prospects of the Company, OpCo and American General
furnished to us by the Company and American General; (iv) a trading history of
the Company's common stock from September 1996 to present, and a comparison of
that trading history with those of other companies that we deemed relevant;
(v) a trading history of American General's common stock from September 1996
to present, and a comparison of that trading history with those of other
companies that we deemed relevant; (vi) a comparison of the historical
financial results and present financial conditions of the Company and OpCo
with those of other companies that we deemed relevant; (vii) a comparison of
the historical financial results and present financial condition of American
General with those of other companies that we deemed relevant; (viii) a
comparison of the financial terms of the Proposed Transaction with the
financial terms of certain other completed
<PAGE>
transactions that we deemed relevant and with strategic alternatives available
to the Company on a stand alone basis; (ix) the relative contributions of the
Company and American General, on a pro forma basis, to the historical and
projected funds from operations and cash flow of the REIT; and (x) the
potential pro forma impact of the Proposed Transaction on the REIT, including
the cost savings, operating synergies and strategic benefits expected by
management of the Company to result from a combination of the applicable
businesses. In addition, we have had discussions with the management of the
Company concerning the businesses, operations, assets, financial conditions
and prospects of the Company and OpCo and with the management of American
General concerning their respective business, operations, assets, financial
condition and prospects, both individually and on a combined pro forma basis
after giving effect to the transactions contemplated by the Merger Agreement,
and have undertaken such other studies, analyses and investigations as we
deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information
and have further relied upon the assurances of the management of the Company
and American General that they are not aware of any facts or circumstances
that would make such information inaccurate or misleading. With respect to the
financial projections of the Company, OpCo, American General and the REIT,
upon advice of the Company and American General, we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the managements of the Company
and American General, as the case may be, as to the future financial
performance of the Company, OpCo, American General and the REIT, and that the
Company and American General would perform, and OpCo and the REIT will
perform, substantially in accordance with such projections. In arriving at our
opinion, we have conducted only a limited physical inspection of certain of
the properties of the Company and American General and have not made or
obtained any evaluations or appraisals of the assets or liabilities of the
Company or American General. Upon advice of the Company and its legal and
accounting advisors, we have assumed that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, and therefore as a tax-free transaction to the
shareholders of the Company. We have assumed, with your consent, that the
transactions contemplated by the Merger Agreement will comply with applicable
laws, including, without limitations, laws relating to the payment of
dividends, bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer or other similar laws now or hereafter in effect affecting
creditors' rights generally. Our opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of,
the date of this letter.
In addition, we express no opinion as to the prices at which shares of
common stock of the REIT or OpCo actually will trade following the
consummation of the Spin-off and the Merger. The process by which securities
trading markets establish a market price for any security is complex,
involving the interaction of numerous factors, and market prices will
fluctuate with changes in, among other things, the financial condition,
business and prospects of the issuer and comparable companies and economic and
financial market conditions. In addition, trading in shares of OpCo will
likely be characterized by a period of redistribution among the Company's
shareholders who receive such shares in the Spin-off (especially in light of
the taxable nature of the Spin-off) which may temporarily depress the market
price of such shares during such period. Accordingly, this opinion should not
be viewed as providing any assurance that the combined market value of the
shares of common stock of the REIT and the shares of common stock of OpCo to
be received by a shareholder of the Company pursuant to the Proposed
Transaction will be in excess of the current market value of the shares of
common stock of the Company owned by such shareholder at any time prior to
announcement or consummation of the Proposed Transaction.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Consideration to be
offered to the shareholders of the Company in the Proposed Transaction is fair
to such shareholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services, a substantial
portion of which is contingent upon the consummation of the Proposed
Transaction. In addition, the Company has agreed to indemnify us for certain
liabilities that may arise
C-2
<PAGE>
out of the rendering of this opinion. We also have performed various
investment banking services for the Company and have acted as lender to the
Company in the past and have received customary fees for such services. In the
ordinary course of our business, we actively trade in the securities of the
Company and American General for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any shareholder of the Company as
to how such shareholder should vote with respect to the Proposed transaction.
Very truly yours,
LEHMAN BROTHERS
C-3
<PAGE>
APPENDIX D
- -------------------------------------------------------------------------------
Goldman, Sachs & Co. I 85 Broad Street I New York, New York
10004
Tel: 212-902-1000
- -------------------------------------------------------------------------------
PERSONAL AND CONFIDENTIAL
March 15, 1998
Board of Directors
CapStar Hotel Company
1010 Wisconsin Avenue, N.W.
Suite 650
Washington, D.C. 20007
Gentlemen:
We understand that CapStar Hotel Company (the "Company"), CapStar Management
Company, L.P. and CapStar Management Company II, L.P., on the one hand, and
American General Hospitality Corporation ("American General") and American
General Hospitality Operating Partnership, L.P., on the other hand are
proposing to enter into an Agreement and Plan of Merger, dated the date hereof
(the "Merger Agreement") pursuant to which, among other things: (i) the
Company will be merged with and into American General (the "Merger"), and each
outstanding share of common stock of the Company (the "Shares") will be
converted into the right to receive 1.0 share of common stock of the surviving
company (the "Surviving Corporation") in the Merger (such conversion ratio
being hereinafter referred to as the "Exchange Ratio") and each outstanding
share of common stock of American General (the "American General Shares") will
be converted into the right to receive 0.8475 shares of common stock of the
Surviving Corporation; and (ii) prior to the Merger, the Company will spin-off
its hotel operating and management business ("OpCo") to the Company's current
shareholders (the "Spin-Off"), with the shareholders of the Company receiving
1.0 share of common stock of OpCo for each Company Share that they own. The
terms and conditions of the Merger, the Spin-Off and the other transactions
contemplated by the Merger Agreement and related agreements (together, the
"Transactions") are set forth in more detail in the Merger Agreement and
related agreements. It is our further understanding that, following the Spin-
Off, OpCo intends to acquire all of the assets, business and properties of
American General Hospitality, Inc. and all of the limited partnership
interests in AGH Leasing, L.P. (such entities, collectively, the
"Lessee/Manager") for $95.0 million in cash and common shares of OpCo (the
"Lessee/Manager Acquisition"). The terms and conditions of the Lessee/Manager
Acquisition are set forth in more detail in the agreement dated the date
hereof among OpCo, CMC Operating Partnership, L.P., a limited partnership
whose general partner, after consummation of the Spin-Off, will be OpCo,
American General Hospitality, Inc., AGHL GP, Inc. and certain other parties
thereto.
<PAGE>
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the Shares of the Exchange Ratio to be received in the
Merger pursuant to the Merger Agreement. Our opinion does not address, and we
are not opining upon, the prices at which shares of common stock of the
Surviving Corporation and shares of common stock of OpCo will trade following
the consummation of the Transactions, nor upon any of the Transactions
contemplated by the Merger Agreement and the related agreements other than the
fairness, from a financial point of view, of the Exchange Ratio to the holders
of Shares. We note that the distribution of OpCo's common stock to holders of
the Shares in connection with the Spin-Off will be effected on a pro rata
basis.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We are familiar with the Company having provided certain investment
banking services to the Company from time to time, including having acted as
(i) a co-managing underwriter of the initial public offering of the Shares on
August 20, 1996, (ii) a co-managing underwriter of a public offering of the
Shares on March 12, 1997, (iii) a co-managing underwriter of a public offering
of the Company's 4.75% Convertible Subordinated Notes due 2004 and the Shares
on October 9, 1997, and (iv) having acted as its financial advisor in
connection with, and having participated in certain of the negotiations
leading to, the Merger Agreement. In addition, Goldman, Sachs & Co. is a full
service securities firm and in the ordinary course of its trading activities
it may from time to time effect transactions, for its own account or the
account of customers, and hold positions in securities or options on
securities of the Company and American General.
In connection with this opinion, we have reviewed, among other things, the
Merger Agreement and the form of Intercompany Agreement among the Surviving
Corporation, OpCo and CMC Operating Partnership, L.P.; the Company's
Registration Statements as amended and supplemented by the Company since the
initial public offering of the Shares and American General's Registration
Statements as amended and supplemented by American General since the initial
public offering of the American General Shares; Annual Reports to Stockholders
and Annual Reports on Form 10-K of the Company for the two years ended
December 31, 1997 and Annual Reports to Stockholders and Annual Reports on
Form 10-K of American General for the year ended December 31, 1996 and a draft
Annual Report on Form 10-K of American General for the year ended December 31,
1997; certain interim reports to stockholders and Quarterly Reports on Form
1O-Q of the Company and American General; certain other communications from
the Company and American General to their respective stockholders; certain
internal financial analyses and forecasts for the Company and American General
prepared by their respective managements and certain pro forma financial
information and forecasts for the Surviving Corporation prepared by the
Company and reviewed by American General, which financial information and
forecasts take into account the effects of the Transactions. We also have held
discussions with members of the senior management of the Company and American
General regarding the past and current business operations, financial
condition and future prospects of their respective companies, both
individually and on a combined pro forma basis after giving effect to the
Transactions and the strategic rationale for, and the potential benefits of,
the Transactions. The financial prospects discussed included future potential
acquisitions and synergies in operations and costs of financing. In addition,
we have reviewed the reported price and trading activity for the Shares and
the American General Shares, compared certain financial and stock market
information for the Company and American General with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the lodging
industry specifically and in other industries generally and performed such
other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. With respect to the
financial forecasts furnished by the Company and American General, we have
assumed, with your consent, that they have been reasonably prepared and
reflect the best currently available estimates and judgment of the Company's
and American General's management as to the expected future financial
performance of the
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Company and American General, as the case may be, both individually and, in
the case of the Surviving Corporation, on a pro forma basis after giving
effect to the Transactions. We have assumed, with your consent, that the
Transactions will comply with any applicable laws, including, without
limitation, laws relating to the payment of dividends, bankruptcy, insolvency,
reorganization, fraudulent conveyance, fraudulent transfer or other similar
laws now or hereafter in effect affecting creditors' rights generally. In
addition, we have not made an independent evaluation or appraisal of the
assets and liabilities of the Company or American General or any of their
subsidiaries and we have not been furnished with any such evaluation or
appraisal. Our opinion is necessarily based upon financial, economic, market
and other conditions as they exist and can be evaluated on the date hereof.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the Merger and such opinion does not
constitute a recommendation as to how any holder of Shares should vote with
respect to the Merger.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio pursuant to the Merger Agreement is fair, from a financial
point of view, to the holders of Shares.
Very truly yours,
/s/ Goldman, Sachs & Co.
(GOLDMAN, SACHS & CO.)
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APPENDIX E
AMERICAN GENERAL HOSPITALITY CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
THIS IS TO CERTIFY THAT:
FIRST: American General Hospitality Corporation, a Maryland corporation (the
"Corporation"), desires to amend and restate its charter as currently in
effect and as hereinafter amended.
SECOND: The following provisions are all the provisions of the charter
currently in effect and as hereinafter amended:
ARTICLE I
The undersigned, Tracy A. Bacigalupo, whose address is c/o Ballard Spahr
Andrews & Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland 21202,
being at least eighteen (18) years of age, does hereby form a corporation
under the general laws of the State of Maryland.
ARTICLE II
Name
The name of the corporation (hereinafter, the "Corporation") is
American General Hospitality Corporation
ARTICLE III
Purposes
The purpose for which the Corporation is formed is to engage in any lawful
act or activity for which corporations may be organized under the general laws
of the State of Maryland now or hereafter in force. Subject to, and not in
limitation of the authority of the preceding sentence, the Corporation intends
to engage in business as a real estate investment trust (a "REIT") qualifying
as such under Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended, or any successor statute (the "Code").
ARTICLE IV
Principal Office in Maryland and Resident Agent
The address of the principal office of the Corporation in the State of
Maryland is 300 East Lombard Street, Baltimore, Maryland 21202, Attention:
Tracy A. Bacigalupo, Esq. The name of the resident agent of the Corporation in
the State of Maryland is Tracy A. Bacigalupo, c/o Ballard Spahr Andrews &
Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202.
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ARTICLE V
Shares of Stock
SECTION 1. AUTHORIZED SHARES OF STOCK
Authorized Shares. The total number of shares of stock of all classes that
the Corporation has authority to issue is 350,000,000, consisting of
250,000,000 shares of Common Stock, $0.01 par value per share (the "Common
Stock"), and 100,000,000 shares of preferred stock, $.01 par value per share
(the "Preferred Stock"). The aggregate par value of all authorized shares of
stock having par value is $3,500,000. To the extent permitted by Maryland law
and notwithstanding Article V, Section 2.E., the Board of Directors, without
any action by the stockholders of the Corporation, may amend the charter from
time to time to increase or decrease the aggregate number of shares of stock
or the number of shares of stock of any class or series that the Corporation
has authority to issue.
SECTION 2. REIT-RELATED RESTRICTIONS AND LIMITATIONS ON THE EQUITY STOCK
The Corporation shall seek to elect and maintain status as a REIT under the
Code. Until such time as Article V shall have been amended in accordance with
Section 2(E) of this Article V in order to terminate the REIT status of the
Corporation, it shall be the duty of the Board of Directors to use
commercially reasonable efforts to ensure that the Corporation satisfies the
requirements for qualification as a REIT under the Code, including, but not
limited to, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount and timing of its distributions to
the Corporation's stockholders (the "Stockholders").
A. Restrictions on Transfer.
1. Definitions. For purposes of this Article V, the following terms shall
have the following meanings set forth below:
"American General Hospitality Operating Partnership Agreement" shall mean
the First Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, as it may be amended or restated from time to time.
"Beneficial Ownership" shall mean ownership of shares of Equity Stock by a
Person who would be treated as an owner of such shares of Equity Stock either
directly or indirectly through the application of Section 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns," "Beneficially Own," and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by
the Corporation as the beneficiary or beneficiaries of such Trust, in
accordance with the provisions of Section 2(B)(1) of Article V hereof.
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Constructive Ownership" shall mean ownership of shares of Equity Stock by a
Person who would be treated as an owner of such shares of Equity Stock either
directly or indirectly through the application of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns," and "Constructively Owned" shall have correlative
meanings.
"Equity Stock" shall mean Common Stock of the Corporation. The term "Equity
Stock" shall include all shares of Common Stock of the Corporation that are
held as Shares-in-Trust in accordance with the provisions of Section 2(B) of
Article V hereof.
"Initial Public Offering" means the sale of shares of Common Stock pursuant
to the Corporation's first effective registration statement for such shares of
Common Stock filed under the Securities Act of 1933, as amended.
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"Look-Through Entity" shall mean an entity (i) that is looked through for
purposes of the "closely held" test in Section 856(h) of the Code and (ii)
each beneficial owner of which would satisfy the Ownership Limit if such
beneficial owner owned directly its proportionate share of the shares of
Equity Stock that are held by the Look-Through Entity, which, by way of
example, could include (i) a pension trust that qualifies for look-through
treatment under Section 856(h)(3) of the Code, (ii) an entity that qualifies
as a regulated investment company under Section 851 of the Code, or (iii) a
corporation.
"Look-Through Ownership Limit" shall mean 15% of the number of outstanding
shares of any class of Equity Stock.
"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Equity Stock are
not listed or admitted to trading on the New York Stock Exchange, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
shares of Equity Stock are listed or admitted to trading or, if the shares of
Equity Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price, or if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
or, if such system is no longer in use, the principal other automated
quotations system that may then be in use or, if the shares of Equity Stock
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in
the shares of Equity Stock selected by the Board of Directors.
"Non-Transfer Event" shall mean an event, other than a purported Transfer,
that would cause any Person to Beneficially Own or Constructively Own shares
of Equity Stock in excess of the Ownership Limit or Look-Through Ownership
Limit, as applicable, including, but not limited to, the granting of any
option or entering into any agreement for the sale, transfer or other
disposition of shares of Equity Stock or the sale, transfer, assignment or
other disposition of any securities or rights convertible into or exchangeable
for shares of Equity Stock.
"Operating Partnership" shall mean American General Hospitality Operating
Partnership, L.P., a Delaware limited partnership.
"Ownership Limit" shall mean 9.8% of the number of outstanding shares of any
class of Equity Stock.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 2(B)(5) of Article V
hereof.
"Person" shall mean an individual, corporation, partnership, estate, trust,
a portion of a trust permanently set aside for or to be used exclusively for
the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company or other entity and also includes a "group" as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended.
"Prohibited Owner" shall mean, with respect to any purported Transfer or
Non-Transfer Event, any Person who, but for the provisions of Section 2(A)(3)
of Article V hereof, would own record title to shares of Equity Stock.
"Restriction Termination Date" shall mean the first day after the date of
the Initial Public Offering on which this Article V has been amended in
accordance with Section 2(E) of this Article V in order to terminate the REIT
status of the Corporation.
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"Shares-in-Trust" shall mean any shares of Equity Stock designated Shares-
in-Trust pursuant to Section 2(A)(3) of Article V hereof.
"Trading Day" shall mean a day on which the principal national securities
exchange on which the shares of Equity Stock are listed or admitted to trading
is open for the transaction of business or, if the shares of Equity Stock are
not listed or admitted to trading on any national securities exchange, shall
mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift, assignment,
devise or other disposition of shares of Equity Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise. "Transfer" (as a verb) shall have the
correlative meaning.
"Trust" shall mean any separate trust created pursuant to Section 2(A)(3) of
Article V hereof and administered in accordance with the terms of Section 2(B)
of Article V hereof, for the exclusive benefit of any Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner, such Trustee to be designated by the
Corporation to act as trustee of any Trust, or any successor trustee thereof.
2. Restriction on Transfers.
a. Subject to Section 2(A)(8) of Article V hereof, and except as provided in
Section 2(A)(7) of Article V hereof, from the date of the Initial Public
Offering and prior to the Restriction Termination Date, (i) no Person shall
Beneficially Own or Constructively Own outstanding shares of Equity Stock in
excess of the Ownership Limit; provided, however, a Look-Through Entity may
Beneficially Own or Constructively Own outstanding shares of Equity Stock in
an amount not to exceed the Look-Through Ownership Limit, and (ii) any
Transfer that, if effective, would result in any Person Beneficially Owning or
Constructively Owning shares of Equity Stock in excess of the Ownership Limit
or the Look-Through Ownership Limit, as applicable, shall be void ab initio as
to the Transfer of that number of shares of Equity Stock which would be
otherwise Beneficially Owned or Constructively Owned by such Person in excess
of the Ownership Limit or the Look-Through Ownership Limit, as applicable, and
the intended transferee shall acquire no rights in such excess shares of
Equity Stock.
b. Subject to Section 2(A)(8) of Article V hereof, and except as provided in
Section 2(A)(7) of Article V hereof, from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer that, if
effective, would result in shares of Equity Stock being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution) shall be void ab initio as to the Transfer of that number of
shares which would be otherwise beneficially owned (determined without
reference to any rules of attribution) by the transferee, and the intended
transferee shall acquire no rights in such shares of Equity Stock.
c. From the date of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer of shares of Equity Stock that, if effective,
would result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code shall be void ab initio as to the Transfer of that
number of shares of Equity Stock which would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code, and the
intended transferee shall acquire no rights in such shares of Equity Stock.
d. From the date of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer of shares of Equity Stock that, if effective,
would cause the Corporation to Constructively Own 9.9% or more of the
ownership interests in a tenant of the real property of the Corporation, the
Operating Partnership or any direct or indirect subsidiary (including, without
limitation, partnerships and limited liability companies) of the Corporation
or the Operating Partnership (a "Subsidiary"), within the meaning of Section
856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that
number of shares of Equity Stock which would cause the Corporation to
Constructively Own 9.9% or more of the ownership interests in a tenant of the
Corporation's, the
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Operating Partnership's or a Subsidiary's real property, within the meaning of
Section 856(d)(2)(B) of the Code, and the intended transferee shall acquire no
rights in such excess shares of Equity Stock.
3. Transfer to Trust.
a. If, notwithstanding the other provisions contained in this Section 2(A)
of Article V, at any time after the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit (or, in the case of a
Look-Through Entity, either Beneficially Own or Constructively Own shares of
Equity Stock in excess of the Look-Through Ownership Limit), then, (i) except
as otherwise provided in Section 2(A)(7) of Article V hereof, the purported
transferee shall acquire no right or interest (or, in the case of a Non-
Transfer Event, the Person holding record title to the shares of Equity Stock
Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such number
of shares of Equity Stock which would cause such Beneficial Owner or
Constructive Owner to Beneficially Own or Constructively Own shares of Equity
Stock in excess of the Ownership Limit or the Look-Through Ownership Limit, as
applicable, (ii) such number of shares of Equity Stock in excess of the
Ownership Limit or the Look-Through Ownership Limit, as applicable (rounded up
to the nearest whole share) shall be designated Shares-in-Trust and, in
accordance with the provisions of Section 2(B) of Article V hereof,
transferred automatically and by operation of law to the Trust to be held in
accordance with that Section 2(B) of Article V, and (iii) the Prohibited Owner
shall submit such number of shares of Equity Stock to the Corporation for
registration in the name of the Trustee. Such transfer to a Trust and the
designation of shares as Shares-in-Trust shall be effective as of the close of
business on the business day prior to the date of the Transfer or Non-Transfer
Event, as the case may be.
b. If, notwithstanding the other provisions contained in this Section 2(A)
of Article V, at any time after the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event that, if effective, would (i) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (ii) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, or (iii) cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's, the Operating Partnership's or a Subsidiary's
real property, within the meaning of Section 856(d)(2)(B) of the Code, then
(x) the purported transferee shall not acquire any right or interest (or, in
the case of a Non-Transfer Event, the Person holding record title of the
shares of Equity Stock with respect to which such Non-Transfer Event occurred,
shall cease to own any right or interest) in such number of shares of Equity
Stock, the ownership of which by such purported transferee or record holder
would (A) result in the shares of Equity Stock being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution), (B) result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, or (C) cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's, the Operating Partnership's or a Subsidiary's real property,
within the meaning of Section 856(d)(2)(B) of the Code, (y) such number of
shares of Equity Stock (rounded up to the nearest whole share) shall be
designated Shares-in-Trust and, in accordance with the provisions of Section
2(B) of Article V hereof, transferred automatically and by operation of law to
the Trust to be held in accordance with that Section 2(B) of Article V, and
(z) the Prohibited Owner shall submit such number of shares of Equity Stock to
the Corporation for registration in the name of the Trustee. Such transfer to
a Trust and the designation of shares as Shares-in-Trust shall be effective as
of the close of business on the business day prior to the date of the Transfer
or Non-Transfer Event, as the case may be.
4. Remedies For Breach. If the Corporation, or its designees, shall at any
time determine in good faith that a Transfer has taken place in violation of
Section 2(A)(2) of Article V hereof or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Equity Stock in violation of Section 2(A)(2) of Article V hereof,
the Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition, including, but not
limited to, refusing to give effect to such Transfer on the books of the
Corporation or instituting proceedings to enjoin such Transfer or acquisition.
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5. Notice of Restricted Transfer. Any Person who acquires or attempts to
acquire shares of Equity Stock in violation of Section 2(A)(2) of Article V
hereof, or any Person who owned shares of Equity Stock that were transferred
to the Trust pursuant to the provisions of Section 2(A)(3) of Article V
hereof, shall immediately give written notice to the Corporation of such event
and shall provide to the Corporation such other information as the Corporation
may request in order to determine the effect, if any, of such Transfer or Non-
Transfer Event, as the case may be, on the Corporation's status as a REIT.
6. Owners Required to Provide Information. From the date of the Initial
Public Offering and prior to the Restriction Termination Date:
a. Every Beneficial Owner or Constructive Owner of more than 5%, or such
lower percentages as required pursuant to regulations under the Code
(currently Regulation (S)1.857-8(d)), of the outstanding shares of all
classes of stock of the Corporation shall, within 30 days after January 1
of each year, provide to the Corporation a written statement or affidavit
stating the name and address of such Beneficial Owner or Constructive
Owner, the number of shares of Equity Stock Beneficially Owned or
Constructively Owned, and a description of how such shares are held. Each
such Beneficial Owner or Constructive Owner shall provide to the
Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership or
Constructive Ownership on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit or the Look-Through Ownership Limit, as
applicable.
b. Each Person who is a Beneficial Owner or Constructive Owner of shares
of Equity Stock and each Person (including the stockholder of record) who
is holding shares of Equity Stock for a Beneficial Owner or Constructive
Owner shall provide to the Corporation a written statement or affidavit
stating such information as the Corporation may request in order to
determine the Corporation's status as a REIT and to ensure compliance with
the Ownership Limit or the Look-Through Ownership Limit, as applicable.
7. Exception. The Ownership Limit or the Look-Through Ownership Limit, as
applicable, shall not apply to the acquisition of shares of Equity Stock by an
underwriter that participates in a public offering of such shares for a period
of 90 days following the purchase by such underwriter of such shares provided
that the restrictions contained in Section 2(A)(2) of Article V hereof will
not be violated following the distribution by such underwriter of such shares.
In addition, the Board of Directors, in its sole discretion and upon receipt
of a ruling from the Internal Revenue Service or an opinion of counsel, in
either case in form and substance satisfactory to the Board of Directors as it
may deem necessary or desirable in order to maintain the Corporation's status
as a REIT, may exempt a Person from the Ownership Limit or the Look-Through
Ownership Limit, if (i) such Person is not (A) an individual for purposes of
Code Section 542(a)(2), as modified by Code Section 856(h) or (B) treated as
the owner of such stock for purposes of Code Section 542(a)(2), as modified by
Code Section 856(h) and the Board of Directors obtains such representations
and undertakings from such Person as are reasonably necessary to ascertain
that no Person's Beneficial or Constructive Ownership of such shares of Equity
Stock will violate Section 2(A)(2)(b), 2(A)(2)(c) or 2(A)(2)(d) of Article V
hereof, (ii) such Person does not and represents that it will not
Constructively Own shares of Equity Stock to the extent that such Constructive
Ownership of Equity Stock would result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, or otherwise failing to
qualify as a REIT (including, but not limited to, Beneficial or Constructive
Ownership that would result in the Corporation Constructively Owning an
interest in a tenant of the Corporation (or a tenant of any entity owned or
controlled by the Corporation) that would cause the Corporation, the Operating
Partnership or a Subsidiary to Constructively Own more than a 9.9% interest in
such tenant), and the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain this
fact, and (iii) such Person agrees that any violation or attempted violation
of such representations or undertakings (or other action which is contrary to
the restrictions contained in Sections 2(A)(2) through 2(A)(6) of this Article
V) will result in such shares of Equity Stock that are in excess of the
Ownership Limit or Look-Through Ownership Limit, as the case may be, being
designated as Shares-in-Trust in accordance with the provisions of Section
2(A)(3) of Article V hereof.
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8. New York Stock Exchange Transactions. Notwithstanding any provision
contained herein to the contrary, nothing in these Articles of Amendment and
Restatement shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange, Inc. The fact that the
settlement of any transaction occurs shall not negate the effect of any other
provision of this Article V and any transferee in such a transaction shall be
subject to all of the provisions and limitations set forth in this Article.
B. Shares-in-Trust.
1. Trust. Any shares of Equity Stock transferred to a Trust and designated
Shares-in-Trust pursuant to Section 2(A)(3) of Article V hereof shall be held
for the exclusive benefit of the Beneficiary. The Corporation shall name a
Beneficiary for each Trust within five days after the establishment thereof.
Any transfer to a Trust, and subsequent designation of shares of Equity Stock
as Shares-in-Trust, pursuant to Section 2(A)(3) of Article V hereof shall be
effective as of the close of business on the business day prior to the date of
the Transfer or Non-Transfer Event that results in the transfer to the Trust.
Shares-in-Trust shall remain issued and outstanding shares of Equity Stock of
the Corporation and shall be entitled to the same rights and privileges on
identical terms and conditions as are all other issued and outstanding shares
of Equity Stock of the same class and series. When transferred to a Permitted
Transferee in accordance with the provisions of Section 2(B)(5) of Article V
hereof, such Shares-in-Trust shall cease to be designated as Shares-in-Trust.
2. Dividend Rights. The Trust, as record holder of Shares-in-Trust, shall be
entitled to receive all dividends and distributions as may be authorized by
the Board of Directors on such shares of Equity Stock and shall hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay to the Trust the
amount of any dividends or distributions received by it that (i) are
attributable to any shares of Equity Stock designated Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or
distribution paid to a Prohibited Owner, including, if necessary, withholding
any portion of future dividends or distributions payable on shares of Equity
Stock Beneficially Owned or Constructively Owned by the Person who, but for
the provisions of Section 2(A)(3) of Article V hereof, would Constructively
Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably
practicable following the Corporation's receipt or withholding thereof, paying
over to the Trust for the benefit of the Beneficiary the dividends so received
or withheld, as the case may be.
3. Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of, or any distribution of the assets
of, the Corporation, each holder of Shares-in-Trust shall be entitled to
receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class or series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding-up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section 2(B)(3) of Article V in excess of, in the
case of a purported Transfer in which the Prohibited Owner gave value for
shares of Equity Stock and which Transfer resulted in the transfer of the
shares to the Trust, the price per share, if any, such Prohibited Owner paid
for the shares of Equity Stock and, in the case of a Non-Transfer Event or
Transfer in which the Prohibited Owner did not give value for such shares
(e.g., if the shares were received through a gift or devise) and which Non-
Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer. Any remaining amount in such Trust
shall be distributed to the Beneficiary.
4. Voting Rights. The Trustee shall be entitled to vote all Shares-in-Trust.
Any vote by a Prohibited Owner as a holder of shares of Equity Stock prior to
the discovery by the Corporation that the shares of Equity Stock are Shares-
in-Trust shall, subject to applicable law, be rescinded and be void ab initio
with respect to such Shares-in-Trust and be recast by the Trustee, in its sole
and absolute discretion; provided, however, that if the Corporation has
already taken irreversible corporate action based on such vote, then the
Trustee shall not have the authority to rescind and recast such vote. The
Prohibited Owner shall be deemed to have given, as of the
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close of business on the business day prior to the date of the purported
Transfer or Non-Transfer Event that results in the transfer to the Trust of
shares of Equity Stock under Section 2(A)(3) of Article V hereof, an
irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in
which the Trustee, in its sole and absolute discretion, desires.
5. Designation of Permitted Transferee. The Trustee shall have the exclusive
and absolute right to designate a Permitted Transferee of any and all Shares-
in-Trust. In an orderly fashion so as not to materially adversely affect the
Market Price of the Shares-in-Trust, the Trustee shall designate any Person as
Permitted Transferee, provided, however, that (i) the Permitted Transferee so
designated purchases for valuable consideration (whether in a public or
private sale) the Shares-in-Trust and (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition resulting
in a transfer to a Trust and the redesignation of such shares of Equity Stock
so acquired as Shares-in-Trust under Section 2(A)(3) of Article V hereof. Upon
the designation by the Trustee of a Permitted Transferee in accordance with
the provisions of this Section 2(B)(5) of Article V, the Trustee shall (i)
cause to be transferred to the Permitted Transferee that number of Shares-in-
Trust acquired by the Permitted Transferee, (ii) cause to be recorded on the
books of the Corporation that the Permitted Transferee is the holder of record
of such number of shares of Equity Stock, (iii) cause the Shares-in-Trust to
be canceled, and (iv) distribute to the Beneficiary any and all amounts held
with respect to the Shares-in-Trust after making the payment to the Prohibited
Owner pursuant to Section 2(B)(6) of Article V hereof.
6. Compensation to Record Holder of Shares of Equity Stock that Become
Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery
of the Shares-in-Trust and subsequent designation of the Permitted Transferee
in accordance with Section 2(B)(5) of Article V hereof or following the
acceptance of the offer to purchase such shares in accordance with Section
2(B)(7) of Article V hereof) to receive from the Trustee following the sale or
other disposition of such Shares-in-Trust the lesser of (i) in the case of (a)
a purported Transfer in which the Prohibited Owner gave value for shares of
Equity Stock and which Transfer resulted in the transfer of the shares to the
Trust, the price per share, if any, such Prohibited Owner paid for the shares
of Equity Stock, or (b) a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or Transfer,
as the case may be, resulted in the transfer of shares to the Trust, the price
per share equal to the Market Price on the date of such Non-Transfer Event or
Transfer, and (ii) the price per share received by the Trustee from the sale
or other disposition of such Shares-in-Trust in accordance with Section
2(B)(5) or 2(B)(6) of Article V hereof. Any amounts received by the Trustee in
respect of such Shares-in-Trust and in excess of such amounts to be paid the
Prohibited Owner pursuant to this Section 2(B)(6) shall be distributed to the
Beneficiary in accordance with the provisions of Section 2(B)(5) of Article V
hereof. Each Beneficiary and Prohibited Owner waive any and all claims that
they may have against the Trustee and the Trust arising out of the disposition
of Shares-in-Trust, except for claims arising out of the gross negligence or
willful misconduct of, or any failure to make payments in accordance with this
Section 2(B), by such Trustee or the Corporation.
7. Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to
have been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer
Event, the Market Price at the time of such devise, gift or Non-Transfer
Event) and (ii) the Market Price on the date the Corporation, or its designee,
accepts such offer. Subject to Section 2(B)(6) of Article V hereof, the
Corporation shall have the right to accept such offer for a period of ninety
days after the later of (i) the date of the Non-Transfer Event or purported
Transfer which resulted in such Shares-in-Trust and (ii) the date the
Corporation determines in good faith that a Transfer or Non-Transfer Event
resulting in Shares-in-Trust has occurred, if the Corporation does not receive
a notice of such Transfer or Non-Transfer Event pursuant to Section 2(A)(5) of
Article V hereof.
C. Remedies Not Limited. Subject to Section 2(A)(8) of Article V hereof,
nothing contained in this Article V shall limit the authority of the
Corporation to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders by preservation
of the Corporation's status as a REIT and to ensure compliance with the
Ownership Limit or the Look-Through Ownership Limit, as applicable.
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D. Legend. Each certificate for shares of Equity Stock shall bear
substantially the following legend:
"The shares of Common Stock represented by this certificate are subject to
restrictions on transfer for the purpose of the Corporation's maintenance
of its status as a real estate investment trust under the Internal Revenue
Code of 1986, as amended (the "Code"). No Person may (i) Beneficially Own
or Constructively Own shares of Equity Stock in excess of 9.8% of the
number of outstanding shares of any class of Equity Stock (or, in the case
of a Look-Through Entity, in excess of 15% of the number of outstanding
shares of any class of Equity Stock), (ii) beneficially own shares of
Equity Stock that would result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference
to any rules of attribution), (iii) Beneficially Own shares of Equity Stock
that would result in the Corporation being "closely held" under Section
856(h) of the Code, or (iv) Constructively Own shares of Equity Stock that
would cause the Corporation to Constructively Own more than 9.9% or more of
the ownership interests in a tenant of the Corporation's, the Operating
Partnership's or a Subsidiary's real property, within the meaning of
Section 856(d)(2)(B) of the Code. Any Person who attempts to Beneficially
Own or Constructively Own shares of Equity Stock in excess of the above
limitations must immediately notify the Corporation in writing. If the
restrictions above are violated, the shares of Equity Stock represented
hereby will be transferred automatically and by operation of law to a Trust
and shall be designated Shares-in-Trust. All capitalized terms in this
legend have the meanings defined in the Corporation's charter, as the same
may be further amended from time to time, a copy of which, including the
restrictions on transfer, will be sent without charge to each Stockholder
who so requests."
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability on request and without charge.
E. Amendment. Notwithstanding any other provisions of the charter or the
Bylaws of the Corporation (and notwithstanding that some lesser percentage may
be specified by law, the charter or the Bylaws of the Corporation), the
provisions of this Article V shall not be amended, altered, changed or
repealed without the affirmative vote of all of the Independent Directors and
the holders of not less than two-thirds of the outstanding shares of stock of
the Corporation entitled to vote generally in the election of directors,
voting together as a single class.
SECTION 3. COMMON STOCK.
Subject to the provisions of Sections 2 and 4 of this Article V, the Common
Stock shall have the following preferences, rights, powers, restrictions,
limitations and qualifications, and such others as may be afforded by law:
A. Voting Rights. Except as may otherwise be required by law, each holder
of Common Stock shall have one vote in respect of each share of Common
Stock held of record on all matters to be voted upon by the Stockholders.
B. Dividend Rights. The holders of Common Stock shall be entitled to
receive, ratably in proportion to the number of shares of Common Stock held
by them, such dividends as may be authorized from time to time by the Board
of Directors out of assets legally available therefor.
C. Liquidation Rights. In the event of the voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, all of the
assets of the Corporation, if any, remaining, of whatever kind available
for distribution to Stockholders after the foregoing distributions have
been made shall be distributed to the holders of the Common Stock, ratably
in proportion to the number of shares of Common Stock held by them.
SECTION 4. PREFERRED STOCK.
The Board of Directors may classify any unissued shares of Preferred Stock
and reclassify any previously classified but unissued shares of Preferred
Stock of any series from time to time, in one or more classes or series of
stock.
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SECTION 5. CLASSIFIED OR RECLASSIFIED SHARES.
Prior to issuance of classified or reclassified shares of any class or
series, the Board of Directors by resolution shall: (a) designate that class
or series to distinguish it from all other classes and series of stock of the
Corporation; (b) specify the number of shares to be included in the class or
series; (c) set or change, subject to the provisions of Article V and subject
to the express terms of any class or series of stock of the Corporation
outstanding at the time, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each class or
series; and (d) cause the Corporation to file articles supplementary with the
State Department of Assessments and Taxation of Maryland ("SDAT"). Any of the
terms of any class or series of stock set or changed pursuant to clause (c) of
this Section 5 may be made dependent upon facts or events ascertainable
outside the charter (including determinations by the Board of Directors or
other facts or events within the control of the Corporation) and may vary
among holders thereof, provided that the manner in which such facts, events or
variations shall operate upon the terms of such class or series of stock is
clearly and expressly set forth in the articles supplementary filed with the
SDAT.
SECTION 6. GENERAL PROVISIONS.
A. Interpretation and Ambiguities. The Board shall have the power to
interpret and to construe the provisions of this Article V, and in the case of
an ambiguity in the application of any of the provisions of this Article V,
including any definition contained in Section 1(A), the Board shall have the
power to determine the application of the provisions of this Article V with
respect to any situation based on the facts known to it, and any such
interpretation, construction or determination shall be final and binding on
all interested parties, including the Stockholders.
B. Severability. If any provision of this Article V or any application of
any such provision is determined to be void, invalid or unenforceable by any
court having jurisdiction over the issue, the validity and enforceability of
the remaining provisions shall not be affected and other applications of such
provision shall be affected only to the extent necessary to comply with the
determination of such court.
ARTICLE VI
The Board of Directors
SECTION 1. AUTHORIZED NUMBER AND INITIAL DIRECTORS.
The business and affairs of the Corporation shall be managed under the
direction of the Board of Directors. The authorized number of directors of the
Corporation initially shall consist of not less than three, the minimum number
required by the MGCL, and not more than 15 persons, which number may be
increased or decreased pursuant to the Bylaws of the Corporation.
SECTION 2. CLASSIFIED BOARD.
The directors of the Corporation shall be and are hereby divided into three
Classes, designated "Class I," "Class II" and "Class III," respectively. The
number of directors in each such class shall be as nearly equal in number as
possible. Each director shall serve for a term ending on the date of the third
Annual Meeting of Stockholders following the Annual Meeting at which such
director was elected, provided, however, that each initial director in Class I
shall serve for a term ending on the date of the Annual Meeting held in 1997;
each initial director in Class II shall serve for a term ending on the date of
the Annual Meeting held in 1998; and each initial director in Class III shall
serve for a term ending on the date of the Annual Meeting held in 1999.
SECTION 3. GENERAL TERM OF OFFICE.
Notwithstanding the provisions of Section 2 of this Article VI, each
director shall serve until such director's successor is elected and qualifies
or until such director's death, retirement, resignation or removal.
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SECTION 4. REMOVAL OF DIRECTORS.
A director may be removed, with or without cause, by the affirmative vote of
at least 75% of the votes entitled to be cast for the election of directors at
an annual meeting or at a special meeting of the stockholders called for the
purpose of removing such director.
SECTION 5. INDEPENDENT DIRECTORS.
A. Notwithstanding anything herein to the contrary, at all times (except
during a period not to exceed 60 days following the death, resignation,
incapacity or removal from office of a director prior to expiration of the
director's term of office), a majority of the Board of Directors shall be
comprised of persons (each such person an "Independent Director") who are not
officers or employees of the Corporation or the Operating Partnership or
Affiliates (as hereinafter defined) of (i) any officers or employees of the
Corporation or the Operating Partnership or of any advisor to the Corporation
or the Operating Partnership under an advisory agreement, (ii) any lessee or
contract manager of any property of the Corporation or the Operating
Partnership or their respective subsidiaries, (iii) any subsidiary of the
Corporation or the Operating Partnership, or (iv) any Person that is an
Affiliate of the Corporation or the Operating Partnership.
B. For purposes of this Section 5, "Affiliate" of a Person shall mean (i)
any Person that, directly or indirectly, controls or is controlled by or is
under the common control with such other Person, (ii) any Person that owns,
beneficially, directly or indirectly, five percent or more of the outstanding
stock of such other Person, or (iii) any officer, director, employee, partner
or trustee of such other Person or of any or of any Person controlling,
controlled by or under common control with such Person (excluding directors
and Persons serving in similar capacities who are not otherwise an Affiliate
of such Person). The term "Person" means and includes any natural person,
corporation, partnership, association, trust, limited liability company or any
other legal entity. For purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, through the ownership of voting
securities, partnership interests or other equity interests.
C. Notwithstanding anything herein to the contrary, no term or provision of
this Section 5 of Article VI may be added, amended or repealed in any respect
without the affirmative vote of all the Independent Directors.
SECTION 6. BOARD AUTHORIZATION OF STOCK ISSUANCES.
The Board of Directors of the Corporation may authorize the issuance from
time to time of shares of stock of any class, whether now or hereafter
authorized, or securities convertible into shares of any class or series,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable, subject to such restrictions or limitations, if
any, as may be set forth in the charter.
SECTION 7. CERTAIN OTHER DETERMINATIONS BY THE BOARD OF DIRECTORS.
The determination as to any of the following matters, made in good faith by
or pursuant to the direction of the Board of Directors consistent with the
charter and in the absence of actual receipt of an improper benefit in money,
property or services or active and deliberate dishonesty established by a
court, shall be final and conclusive and shall be binding upon the Corporation
and every holder of shares of its stock: the amount of the net income of the
Corporation for any period and the amount of assets at any time legally
available for the payment of dividends, redemption of shares or the payment of
other distributions on shares; the amount of paid-in surplus, net assets,
other surplus, annual or other net profit, net assets in excess of capital,
undivided profits or excess of profits over losses on sales of assets; the
amount, purpose, time of creation, increase or decrease, alteration or
cancellation of any reserves or charges and the propriety thereof (whether or
not any obligation or liability for which such reserves or charges shall have
been created shall have been paid or discharged); the fair value, or any sale,
bid or asked price to be applied in determining the fair value, of any asset
owned or held by the Corporation; and any matters relating to the acquisition,
holding and disposition of any assets, of the Corporation.
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SECTION 8. RESERVED POWERS OF THE BOARD OF DIRECTORS.
The enumeration and definition of particular powers of the Board of
Directors included in this Article VI shall in no way be limited or restricted
by reference to or inference from the terms of any other clause of this or any
other provision of the charter of the Corporation, or construed or deemed by
inference or otherwise in any manner to exclude or limit the powers conferred
upon the Board of Directors under the general laws of the State of Maryland as
now or hereafter in force.
ARTICLE VII
Provisions for Defining, Limiting and Regulating
Certain Powers of the Corporation and of the
Stockholders and Directors
SECTION 1. NO PREEMPTIVE RIGHTS.
Except as may be specifically provided by the Board of Directors, no holder
of shares of stock of the Corporation, shall, as such holder, have any
preemptive right to purchase or subscribe for any additional shares of the
Corporation or any other security of the Corporation which it may issue or
sell.
SECTION 2. ADVISOR AGREEMENTS.
Subject to such approval of Stockholders and other conditions, if any, as
may be required by applicable statute, rule or regulation, the Board of
Directors may authorize the execution and performance by the Corporation of
one or more agreements with any Person (as defined in Article VI Section 5(B))
whereby, subject to the supervision of the Board of Directors, any such other
person, corporation, association, company, trust, partnership (limited or
general) or other organization shall render or make available to the
Corporation managerial, investment, advisory and/or related services, office
space and other services and facilities (including, if deemed advisable by the
Board of Directors, the management or supervision of the investments of the
Corporation) upon such terms and conditions as may be provided in such
agreement or agreements (including, if deemed fair and equitable by the Board
of Directors, the compensation payable thereunder by the Corporation).
SECTION 3. OTHER ACTIVITIES OF MANAGEMENT.
Certain of the officers and directors of the Corporation and their
affiliates are continuously engaged in acquiring, developing, constructing,
operating and managing real property. By virtue of these activities,
opportunities to acquire, develop and own properties will become available to
the officers and directors of the Corporation and their affiliates in the
future. Any of the officers and directors of the Corporation and their
affiliates may continue to engage in such activities, independently or with
others, and the officers and directors of the Corporation and their affiliates
shall have no obligation to make any such business opportunities available to
the Corporation. The Corporation shall have no interest in any such business
opportunities other than business opportunities which the officers and
directors of the Corporation and their affiliates, in their sole discretion,
have made available to the Corporation and in which the Corporation has
invested.
SECTION 4. REIT QUALIFICATION.
The Board of Directors shall use commercially reasonable efforts to cause
the Corporation and its Stockholders to qualify for U.S. federal income tax
treatment in accordance with the provisions of the Code applicable to a REIT.
In furtherance of the foregoing, the Board of Directors shall use commercially
reasonable efforts to take such actions as are necessary, and may take such
actions as in its sole judgment and discretion are desirable, to preserve the
status of the Corporation as a REIT, provided, however, that if Article V has
been amended in accordance with Section 2(E) of Article V in order to
terminate the REIT status of the Corporation, the Board of Directors shall
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code.
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SECTION 5. STOCKHOLDER VOTING REQUIREMENTS.
Notwithstanding any provision of law to the contrary, except as otherwise
specifically provided herein, the affirmative vote of holders of shares
entitled to cast a majority of all votes entitled to be cast on any matter or
act requiring approval of the Stockholders of the Corporation shall be
sufficient, valid and effective, after due authorization, approval or advice
by the Board of Directors, to approve and authorize such matter or act.
ARTICLE VIII
Indemnification, Advance of Expenses
and Limitation of Liability of Officers and Directors
SECTION 1. INDEMNIFICATION AND ADVANCE OF EXPENSES.
A. Mandatory Indemnification and Advance of Expenses. To the fullest extent
permitted by Maryland law in effect from time to time, the Corporation shall
indemnify and, without requiring a preliminary determination of the ultimate
entitlement to indemnification, shall pay on behalf of or reimburse reasonable
expenses in advance of final disposition of a proceeding any person (or the
estate of any person) who is or was a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding,
whether or not by or in the right of the Corporation, and whether civil,
criminal, administrative, investigative or otherwise, by reason of the fact
that such person is or was a director or officer of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, trustee,
partner, member, agent or employee of another corporation, partnership,
limited liability company, association, joint venture, trust or other
enterprise. To the fullest extent permitted by Maryland law, the
indemnification provided herein shall include reasonable expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement. The
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advancement of expenses as set forth in the first sentence
of this Section 1(A) of this Article VIII to a person who served a predecessor
of the Corporation in any of the capacities described in the first sentence of
this Section 1(A) of this Article VIII and to agents and employees of the
Corporation and any predecessor Corporation.
B. Insurance. The Corporation may, to the fullest extent permitted by law,
purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person, as described in Section
1(A) of this Article VIII, and on any obligation of the Corporation to
indemnify or advance expenses pursuant to the charter or Bylaws of the
Corporation or any resolution of the Board of Directors or contract to which
the Corporation is a party.
C. Non-Exclusivity. The rights provided herein shall not be deemed to limit
the right of the Corporation to indemnify or advance expenses to any other
person to the fullest extent permitted by law, nor shall it be deemed
exclusive of any other rights to which any person seeking indemnification or
advances of expenses from the Corporation may be entitled under any agreement,
the Bylaws of the Corporation, a resolution of Stockholders or the Board of
Directors, or otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office.
SECTION 2. LIMITATION OF LIABILITY.
To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers, no director or officer
of the Corporation shall be liable to the Corporation or its Stockholders for
money damages.
SECTION 3. EFFECT OF AMENDMENT.
Neither the amendment nor repeal of this Article VIII, nor the adoption or
amendment of any other provision of the charter or the Bylaws of the
Corporation inconsistent with this Article VIII, shall apply to or affect in
any respect the applicability of the provisions of this Article VIII with
respect to any act or failure to act which occurred prior to such amendment,
repeal or adoption.
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ARTICLE IX
Amendments
A. Right to Amend Articles. Subject to the provisions hereof, the
Corporation reserves the right at any time, and from time to time, to amend,
alter, repeal, or rescind any provision contained herein, including but not
limited to the provisions setting forth the terms or the contract and other
rights of the issued and outstanding stock of the Corporation of any class or
series, in the manner now or hereafter prescribed by law, and other provisions
authorized by the laws of the State of Maryland at the time in force may be
added or inserted, in the manner now or hereafter prescribed by law; and all
contract or other rights, preferences and privileges of whatsoever nature
conferred upon Stockholders, directors, officers, employees or any other
persons whomsoever by and pursuant to the charter of the Corporation, in its
present form or as hereafter amended, are granted subject to this reservation.
B. Certain Amendments Requiring Special Stockholder Vote. Any provision of
the charter of the Corporation to the contrary notwithstanding:
1. no term or provision of the charter of the Corporation may be added,
amended or repealed in any respect that would, in the determination of the
Board of Directors, cause the Corporation not to qualify as a REIT under
the Code;
2. Article VI, Section 2 (classification of directors), Section 4
(removal of directors), Section 5 (independent directors); Article VII,
Section 1 (no preemptive rights); Article VIII (indemnification, advance of
expenses and limitation of liability of officers); and this Article IX
(amendments) shall not be amended or repealed; and
3. no provisions imposing cumulative voting in the election of directors
may be added to the charter of the Corporation;
unless in each such case, such action is approved by the affirmative vote of
the holders of not less than two-thirds of all of the votes entitled to be
cast on the matter.
THIRD: The amendment to and restatement of the charter as hereinabove set
forth have been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation
within the State of Maryland is c/o Ballard Spahr Andrews & Ingersoll, 300
East Lombard Street, Baltimore, Maryland 21202, Attention: Tracy A.
Bacigalupo, Esq.
FIFTH: The name and address of the Corporation's current resident agent is
Tracy A. Bacigalupo, whose address is c/o Ballard Spahr Andrews & Ingersoll,
300 East Lombard Street, Baltimore, Maryland 21202.
SIXTH: The number of directors of the Corporation is currently five and the
names of the directors currently in office are as follows: Steven D. Jorns, H.
Cabot Lodge III, James R. Worms, James McCurry and Kent R. Hance.
SEVENTH:
(a) The total number of shares of stock of all classes which the Corporation
had authority to issue immediately prior to this amendment and restatement was
100,000,000 shares of Common Stock, $.01 par value per share. The aggregate
par value of all shares of stock having par value was $1,000,000.
(b) The total number of shares of all classes of stock which the Corporation
has authority to issue pursuant to the foregoing amendment and restatement of
the charter is 350,000,000, consisting of 250,000,000 shares of
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Common Stock, $0.01 par value per share, and 100,000,000 shares of Preferred
Stock, $.01 par value per share. The aggregate par value of all shares of
stock having par value is $3,500,000.
The undersigned President acknowledges these Articles of Amendment and
Restatement to be the corporate act of the Corporation and as to all matters
or facts required to be verified under oath, the undersigned President
acknowledges that to the best of his knowledge, information and belief, these
matters and facts are true in all material respects and that this statement is
made under the penalties for perjury.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
and Restatement to be signed in its name and on its behalf by its President
and attested to by its Secretary on this day of , 1998.
ATTEST: American General
Hospitality Corporation
(SEAL)
_____________________________________ By: _________________________________
KENNETH E. BARR STEVEN D. JORNS
SECRETARY CHAIRMAN OF THE BOARD,CHIEF
EXECUTIVE OFFICER AND PRESIDENT
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APPENDIX F
MERISTAR HOSPITALITY CORPORATION
INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE I DEFINITIONS................................................. F-1
1.1 Affiliate................................................... F-1
1.2 AGHI........................................................ F-1
1.3 Agreement................................................... F-1
1.4 Award....................................................... F-1
1.5 Board....................................................... F-1
1.6 Code........................................................ F-1
1.7 Committee................................................... F-1
1.8 Common Stock................................................ F-1
1.9 Company..................................................... F-1
1.10 Exchange Act................................................ F-1
1.11 Fair Market Value........................................... F-1
1.12 Incentive Award............................................. F-1
1.13 Lessee...................................................... F-1
1.14 OpCo........................................................ F-1
1.15 Option...................................................... F-1
1.16 Participant................................................. F-2
1.17 Performance Shares.......................................... F-2
1.18 Permitted Family Members.................................... F-2
1.19 Plan........................................................ F-2
1.20 Stock Award................................................. F-2
1.21 Ten Percent Shareholder..................................... F-2
ARTICLE II PURPOSES.................................................... F-2
ARTICLE III ADMINISTRATION.............................................. F-2
ARTICLE IV ELIGIBILITY................................................. F-3
ARTICLE V STOCK SUBJECT TO PLAN....................................... F-3
5.1 Shares Issued............................................... F-3
5.2 Aggregate Limit............................................. F-3
5.3 Reallocation of Shares...................................... F-4
ARTICLE VI OPTIONS..................................................... F-4
6.1 Award....................................................... F-4
6.2 Option Price................................................ F-4
6.3 Maximum Option Period....................................... F-4
6.4 Nontransferability.......................................... F-4
6.5 Transferable Options........................................ F-4
6.6 Employee Status............................................. F-4
6.7 Exercise.................................................... F-5
6.8 Payment..................................................... F-5
6.9 Shareholder Rights.......................................... F-5
6.10 Disposition of Stock........................................ F-5
ARTICLE VII STOCK AWARDS................................................ F-5
7.1 Award ...................................................... F-5
7.2 Vesting..................................................... F-5
7.3 Performance Objectives...................................... F-5
7.4 Employee Status............................................. F-6
7.5 Shareholder Rights.......................................... F-6
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE VIII PERFORMANCE SHARE AWARDS................................. F-6
8.1 Award ................................................... F-6
8.2 Earning the Award........................................ F-6
8.3 Payment.................................................. F-6
8.4 Shareholder Rights....................................... F-6
8.5 Nontransferability....................................... F-7
8.6 Transferable Performance Shares.......................... F-7
8.7 Employee Status.......................................... F-7
ARTICLE IX INCENTIVE AWARDS......................................... F-7
9.1 Award ................................................... F-7
9.2 Terms and Conditions..................................... F-7
9.3 Nontransferability....................................... F-7
9.4 Transferable Incentive Awards............................ F-7
9.5 Employee Status.......................................... F-8
9.6 Shareholder Rights....................................... F-8
ARTICLE X ACCELERATION UPON CERTAIN EVENTS......................... F-8
ARTICLE XI ADJUSTMENT UPON CHANGE IN COMMON STOCK................... F-8
ARTICLE XII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES;
GOVERNING LAW............................................ F-9
ARTICLE XIII GENERAL PROVISIONS....................................... F-9
13.1 Effect on Employment and Service......................... F-9
13.2 Unfunded Plan............................................ F-9
13.3 Rules of Construction.................................... F-9
ARTICLE XIV AMENDMENT................................................ F-9
ARTICLE XV DURATION OF PLAN......................................... F-10
ARTICLE XVI EFFECTIVE DATE OF PLAN................................... F-10
</TABLE>
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ARTICLE I
Definitions
1.1 Affiliate means any "subsidiary" or "parent" corporation (within the
meaning of Section 424 of the Code) of the Company.
1.2 AGHI means American General Hospitality, Inc., a Texas corporation.
1.3 Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of a Stock Award, an award of Performance Shares or an Option
or Incentive Award granted to such Participant.
1.4 Award means any of an Incentive Award, an Option, an award of
Performance Shares, or a Stock Award.
1.5 Board means the Board of Directors of the Company.
1.6 Code means the Internal Revenue Code of 1986, and any amendments
thereto.
1.7 Committee means the Compensation Committee of the Board or a
subcommittee thereof comprised of at least two (2) directors each of whom is a
non-employee director within the meaning of Securities and Exchange Commission
Rule 16b-3.
1.8 Common Stock means the common stock, $0.01 par value, of the Company.
1.9 Company means MeriStar Hospitality Corporation, a Maryland corporation.
1.10 Exchange Act means the Securities Exchange Act of 1934, as amended and
as in effect on the effective date of this Plan.
1.11 Fair Market Value means, on any given date, the current fair market
value of the shares of Common Stock as determined below:
If the Common Stock is not listed on an established stock exchange, the Fair
Market Value shall be the average of the final bid and asked quotations on the
over-the-counter market in which the Common Stock is traded or, if applicable,
the reported "closing" price of a share of Common Stock in the New York over-
the-counter market as reported by the National Association of Securities
Dealers, Inc. If the Common Stock is listed on one or more established stock
exchanges, Fair Market Value shall be deemed to be the highest closing price
of a share of Common Stock reported on any such exchange. In any case, if no
sale of Common Stock is made on any stock exchange or over-the-counter market
on that date, then Fair Market Value shall be determined as of the next
preceding day on which there was a sale. If the Common Stock is not traded,
Fair Market Value shall be determined by the Board using any reasonable method
in good faith.
1.12 Incentive Award means an award which, subject to such terms and
conditions as may be prescribed by the Administrator, entitles the Participant
to receive a cash payment from the Company or an Affiliate.
1.13 Lessee means AGH Leasing, L.P., a Delaware limited partnership.
1.14 OpCo means MeriStar Hotels & Resorts, Inc., a Delaware corporation.
1.15 Option means a stock option that entitles the holder to purchase from
the Company a stated number of shares of Common Stock at the price set forth
in an Agreement.
<PAGE>
1.16 Participant means an employee of the Company or an Affiliate, including
an employee who is a member of the Board, or an individual whose efforts
contribute to the performance or success of the Company or an Affiliate, who
satisfies the requirements of Article IV and is selected by the Committee to
receive a Stock Award, an Option, an Incentive Award, an award of Performance
Shares or a combination thereof.
1.17 Performance Shares means an award, in the amount determined by the
Committee and specified in an Agreement, stated with reference to a specified
number of shares of Common Stock, that entitles the holder to receive a
payment for each specified share equal to the Fair Market Value of Common
Stock on the date of payment.
1.18 Permitted Family Members shall have the meaning set forth in Section
6.5 hereof.
1.19 Plan means the MeriStar Hospitality Corporation Incentive Plan.
1.20 Stock Award means Common Stock awarded to a Participant under Article
VIII.
1.21 Ten Percent Shareholder means any individual owning more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or of an Affiliate. An individual shall be considered to own any
voting stock owned (directly or indirectly) by or for his brothers, sisters,
spouse, ancestors or lineal descendants and shall be considered to own
proportionately any voting stock owned (directly or indirectly) by or for a
corporation, partnership, estate or trust of which such individual is a
shareholder, partner or beneficiary.
ARTICLE II
Purposes
The Plan is intended to assist the Company and its Affiliates in recruiting
and retaining individuals with ability and initiative by enabling such persons
to participate in the future success of the Company and its Affiliates and to
associate their interests with those of the Company and its stockholders. The
Plan is intended to permit the grant of both Options qualifying under Section
422 of the Code ("incentive stock options") and Options not so qualifying, and
the grant of Stock Awards, Performance Shares and Incentive Awards. No Option
that is intended to be an incentive stock option shall be invalid for failure
to qualify as an incentive stock option. The proceeds received by the Company
from the sale of Common Stock pursuant to this Plan shall be used for general
corporate purposes.
ARTICLE III
Administration
The Plan shall be administered by the Committee. The Committee shall have
authority to grant Stock Awards, Performance Shares, Incentive Awards and
Options upon such terms (not inconsistent with the provisions of this Plan) as
the Committee may consider appropriate. Such terms may include conditions (in
addition to those contained in this Plan) on the exercisability of all or any
part of an Option or on the transferability or forfeitability of a Stock
Award, Incentive Award or Performance Shares. Notwithstanding any such
conditions, the Committee may, in its discretion, accelerate the time at which
any Option may be exercised, or the time at which a Stock Award may become
transferable or nonforfeitable or the time at which an Incentive Award or
Performance Shares may be settled. In addition, the Committee shall have
complete authority to interpret all provisions of this Plan; to prescribe the
form of Agreements; to adopt, amend, and rescind rules and regulations
pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of this Plan. The
express grant in the Plan of any specific power to the Committee shall not be
construed as limiting any power or authority of the Committee. Any decision
made, or
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action taken, by the Committee or in connection with the administration of
this Plan shall be final and conclusive. Neither the Committee nor any member
of the Committee shall be liable for any act done in good faith with respect
to this Plan or any Agreement, Option, Stock Award, Incentive Award or award
of Performance Shares. All expenses of administering this Plan shall be borne
by the Company.
The Committee, in its discretion, may delegate to one or more officers of
the Company all or part of the Committee's authority and duties with respect
to grants and awards to individuals who are not subject to the reporting and
other provisions of Section 16 of the Exchange Act; provided, however, the
Committee shall not delegate its authority (i) to appoint delegates or its
authority to amend or revoke any delegation, (ii) under s XI and XII hereof
and (iii) to accelerate the exercisability of Options, the transferability of
Stock Awards or the time at which Incentive Awards or awards of Performance
Shares may be settled. The Committee may revoke or amend the terms of a
delegation at any time but such action shall not invalidate any prior actions
of the Committee's delegate or delegates that were consistent with the terms
of the Plan.
ARTICLE IV
Eligibility
Any employee of the Company or an Affiliate (including a corporation that
becomes an Affiliate after the adoption of this Plan) or a person whose
efforts contribute to the performance or success of the Company or an
Affiliate (including a corporation that becomes an Affiliate after the
adoption of this Plan) (other than a Board member or an employee of the
Lessee, AGHI or OpCo, in each case, who is not also an employee of the Company
or an Affiliate) is eligible to participate in this Plan if the Committee, in
its sole discretion, determines that such person has contributed significantly
or can be expected to contribute significantly to the profits or growth of the
Company or an Affiliate. Directors of the Company who are employees of the
Company or an Affiliate may be selected to participate in this Plan.
ARTICLE V
Stock Subject to Plan
5.1 Shares Issued. Upon the award of shares of Common Stock pursuant to a
Stock Award or the settlement of a Performance Share award, the Company may
issue shares of Common Stock from its authorized but unissued Common Stock.
Upon the exercise of an Option, the Company may deliver to the Participant (or
the Participant's broker if the Participant so directs), shares of Common
Stock from its authorized but unissued Common Stock.
5.2 Aggregate Limit. With respect to calendar year 1997, the maximum number
of shares of Common Stock that may be issued pursuant to Awards granted under
the Plan shall be the total of (i) ten (10%) percent of the number of shares
of Common Stock that were outstanding as of , 1997 (rounded downward if
necessary to eliminate fractional shares), minus (ii) the number of shares
subject to Awards which were granted prior to , 1997, plus (iii) the
number of shares with respect to which previously granted Awards have expired.
Thereafter, at any given time, the maximum number of shares of Common Stock
that may be issued pursuant to Awards granted under the Plan shall be the
total of (i) ten (10%) percent of the number of shares of Common Stock that
were outstanding as of the end of the immediately preceding calendar year
(rounded downward if necessary to eliminate fractional shares), minus (ii) the
number of shares subject to Awards which were granted under the Plan through
the last day of the immediately preceding calendar year, plus (iii) as of the
last day of the immediately preceding calendar year, the number of shares with
respect to which previously granted Awards have expired. In addition to the
foregoing, in no event may the total number of shares of Common Stock covered
by outstanding Incentive Stock Options granted under the Plan, plus the number
of shares of Common Stock issued pursuant to the exercise of Incentive Stock
Options, whenever granted under the Plan, exceed [1,400,000] shares. The
maximum aggregate number of shares that may be issued under this Plan shall be
subject to adjustment as provided in XI.
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<PAGE>
5.3 Reallocation of Shares. If an Award is terminated (for any reason other
than its exercise), forfeited or expires unexercised, the number of shares of
Common Stock allocated to the Award or portion thereof which was terminated,
forfeited or expired unexercised may be reallocated to other Awards to be
granted under this Plan.
ARTICLE VI
Options
6.1 Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom an Option is to be granted and will
specify the number of shares of Common Stock covered by such awards; provided,
however, that no individual may be granted Options in any calendar year
covering more than 750,000 shares of Common Stock.
6.2 Option Price. The price per share for Common Stock purchased on the
exercise of an Option shall be determined by the Committee on the date of
grant; provided, however, that the price per share for Common Stock purchased
on the exercise of any Option shall not be less than the Fair Market Value on
the date of grant or, with respect to Options granted in connection with the
initial employment of an individual, eighty-five (85%) percent of the Fair
Market Value on the date the Option is granted; provided, however, that no
more than ten percent (10%) of the shares of Common Stock issued under the
Plan be may granted at less than one hundred percent (100%) of Fair Market
Value. Notwithstanding the preceding sentence, the price per share for Common
Stock purchased on the exercise of any Option that is an incentive stock
option shall not be less than the Fair Market Value on the date the Option is
granted or, in the case of an incentive stock option granted to an individual
who is a Ten Percent Shareholder on the date such option is granted, shall not
be less than one hundred ten percent (110%) of the Fair Market Value on the
date the Option is granted.
6.3 Maximum Option Period. The maximum period in which an Option may be
exercised shall be determined by the Committee on the date of grant, except
that no Option that is an incentive stock option shall be exercisable after
the expiration of ten years from the date such Option was granted. In the case
of an incentive stock option that is granted to a Participant who is a Ten
Percent Shareholder on the date of grant, such Option shall not be exercisable
after the expiration of five years from the date of grant. The terms of any
Option that is an incentive stock option may provide that it is exercisable
for a period less than such maximum period.
6.4 Nontransferability. Except as provided in Section 6.5 hereof, each
Option granted under this Plan shall be nontransferable except by will or by
the laws of descent and distribution. During the lifetime of the Participant
to whom the option is granted, the Option may be exercised only by the
Participant. No right or interest of a Participant in any Option shall be
liable for, or subject to, any lien, obligation, or liability of such
Participant.
6.5 Transferable Options. Section 6.4 hereof to the contrary
notwithstanding, if the Agreement provides, an Option that is not an incentive
stock option may be transferred by a Participant to the Participant's
children, grandchildren, spouse, one or more trusts for the benefit of such
family members or a partnership in which such family members are the only
partners (collectively, "Permitted Family Members"); provided, however, that
the Participant may not receive any consideration for the transfer. The holder
of an Option transferred pursuant to this section shall be bound by the same
terms and conditions that governed the Option during the period that it was
held by the Participant.
6.6 Employee Status. For purposes of determining the applicability of
Section 422 of the Code (relating to incentive stock options), or in the event
that the terms of any Option provide that it may be exercised only during
employment or within a specified period of time after termination of
employment, the Committee may decide to what extent leaves of absence for
governmental or military service, illness, temporary disability, or other
reasons, shall not be deemed interruptions of continuous employment.
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<PAGE>
6.7 Exercise. Subject to the provisions of this Plan and the applicable
Agreement, an Option shall become exercisable in such installments (which need
not be equal) and at such times as may be designated by the Committee and set
forth in the Agreement; provided, however, that incentive stock options
(granted under the Plan and all plans of the Company and its Affiliates) may
not be first exercisable in a calendar year for stock having a Fair Market
Value (determined as of the date an option is granted) exceeding $100,000. To
the extent not exercised, installments shall accumulate and be exercisable, in
whole or in part, at any time after becoming exercisable, but not later than
the date the Option expires in accordance with Section 6.3 hereof. An Option
granted under this Plan may be exercised with respect to any number of whole
shares less than the full number for which the Option could be exercised. A
partial exercise of an Option shall not affect the right to exercise the
Option from time to time in accordance with this Plan and the applicable
Agreement with respect to the remaining shares subject to the Option.
6.8 Payment. Unless otherwise provided by the Agreement, payment of the
Option price shall be made in cash or a cash equivalent acceptable to the
Committee. If the Agreement provides, payment of all or part of the Option
price may be made by surrendering shares of Common Stock to the Company. If
Common stock is used to pay all or part of the Option price, the sum of the
cash and cash equivalent and the Fair Market Value (determined as of the day
preceding the date of exercise) of the shares surrendered must not be less
than the Option price of the shares for which the Option is being exercised.
In addition, a Participant may provide instructions to the Company that upon
receipt of the Option price in cash from a broker or dealer acting at the
direction of the Participant in payment for any shares of Common Stock
pursuant to the exercise of an Option, the Company shall issue such shares of
Common Stock directly to the designated broker or dealer.
6.9 Shareholder Rights. No Participant shall have any rights as a
shareholder with respect to shares subject to his Option until the date of
exercise of such Option.
6.10 Disposition of Stock. A Participant shall notify the Company of any
sale or other disposition of Common Stock acquired pursuant to an Option that
was an incentive stock option if such sale or disposition occurs:
(i) within two years of the grant of an Option or
(ii) within one year of the issuance of the Common Stock to the
Participant.
Such notice shall be in writing and directed to the Secretary of the
Company.
ARTICLE VII
Stock Awards
7.1 Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom a Stock Award is to be made and will
specify the number of shares of Common Stock covered by such awards; provided,
however, that no individual may receive Stock Awards with respect to more than
50,000 shares of Common Stock in any calendar year.
7.2 Vesting. The Committee, on the date of the award, may prescribe that a
Participant's rights in the Stock Award shall be forfeitable or otherwise
restricted for a period of time or subject to such conditions as may be set
forth in the Agreement. Except with respect to Stock Awards any portion of
which are immediately vested, the period of restriction shall be at least
three years; provided, however, that the minimum period of restriction shall
be at least one year in the case of (i) the restricted portion of a Stock
Award with an immediately vested portion and (ii) a Stock Award that will
become transferable and nonforfeitable on account of the satisfaction of
performance objectives prescribed by the Committee.
7.3 Performance Objectives. In accordance with Section 7.2 hereof, the
Committee may prescribe that Stock Awards will be vested immediately upon
grant or will become vested or transferable or both based on
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<PAGE>
objectives stated with respect to the Company's, an Affiliate's or an
operating unit's return on equity, earnings per share, total earnings,
earnings growth, return on capital, return on assets, funds from operations or
Fair Market Value. If the Committee, on the date of award, prescribes that a
Stock Award shall become nonforfeitable and transferable only upon the
attainment of performance objectives stated with respect to one or more of the
foregoing criteria, the shares subject to such Stock Award shall become
nonforfeitable and transferable only to the extent that the Committee
certifies that such objectives have been achieved.
7.4 Employee Status. In the event that the terms of any Stock Award provide
that shares may become transferable and nonforfeitable thereunder only after
completion of a specified period of employment, the Committee may decide in
each case to what extent leaves of absence for governmental or military
service, illness, temporary disability, or other reasons shall not be deemed
interruptions of continuous employment.
7.5 Shareholder Rights. Prior to their forfeiture (in accordance with the
applicable Agreement and while the shares of Common Stock granted pursuant to
the Stock Award may be forfeited or are nontransferable), a Participant will
have all rights of a shareholder with respect to a Stock Award, including the
right to receive dividends and vote the shares; provided, however, that during
such period (i) a Participant may not sell, transfer, pledge, exchange,
hypothecate, or otherwise dispose of shares of Common Stock granted pursuant
to a Stock Award, (ii) the Company shall retain custody of the certificates
evidencing shares of Common Stock granted pursuant to a Stock Award, and (iii)
the Participant will deliver to the Company a stock power, endorsed in blank,
with respect to each Stock Award. The limitations set forth in the preceding
sentence shall not apply after the shares of Common Stock granted under the
Stock Award are transferable and are no longer forfeitable.
ARTICLE VIII
Performance Share Awards
8.1 Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom an award of Performance Shares is to be
made and will specify the number of shares of Common Stock covered by such
awards; provided, however, that no Participant may receive an award of
Performance Shares in any calendar year for more than 12,500 shares of Common
Stock.
8.2 Earning the Award. The Committee, on the date of the grant of an award,
may prescribe that the Performance Shares, or portion thereof, will be earned,
and the Participant will be entitled to receive payment pursuant to the award
of Performance Shares only upon the satisfaction of certain requirements or
the attainment of certain objectives. By way of example and not of limitation,
the restrictions may provide that Performance Shares will be forfeited without
payment if the Participant separates from the service of the Company and its
Affiliates before the expiration of a stated term or unless the Company, an
Affiliate or an operating unit achieves objectives stated with reference to
the Company's, an Affiliate's or an operating unit's return on equity,
earnings per share, total earnings, earnings growth, return on capital, return
on assets, funds from operations or Fair Market Value. If the Committee, on
the date of award, prescribes that no payments will be made with respect to
Performance Shares unless performance objectives stated with respect to the
foregoing criteria are attained, no such payment will be made unless, and then
only to the extent that, the Committee certifies that such objectives have
been achieved.
8.3 Payment. In the discretion of the Committee, the amount payable when an
award of Performance Shares is earned may be settled in cash, by the issuance
of Common Stock or a combination of cash and Common Stock. A fractional share
shall not be deliverable when an award of Performance Shares is earned, but a
cash payment will be made in lieu thereof.
8.4 Shareholder Rights. No Participant shall, as a result of receiving an
award of Performance Shares, have any rights as a shareholder until and to the
extent that the award of Performance Shares is earned and settled by the
issuance of Common Stock. After an award of Performance Shares is earned, if
settled completely or partially in Common Stock, a Participant will have all
the rights of a shareholder with respect to such Common Stock.
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8.5 Nontransferability. Except as provided in Section 8.6 hereof,
Performance Shares granted under this Plan shall be nontransferable except by
will or by the laws of descent and distribution. No right or interest of a
Participant in any Performance Shares shall be liable for, or subject to, any
lien, obligation, or liability of such Participant.
8.6 Transferable Performance Shares. Section 8.5 hereof to the contrary
notwithstanding, the Committee may grant Performance Shares which are
transferable to Permitted Family Members to the extent that, and on such terms
and conditions as may be permitted by, Securities Exchange Commission Rule
16b-3 as in effect from time to time. The holder of Performance Shares
transferred pursuant to this section shall be bound by the same terms and
conditions that governed the Performance Shares during the period that they
were held by the Participant.
8.7 Employee Status. In the event that the terms of any Performance Share
award provide that no payment will be made unless the Participant completes a
stated period of employment, the Committee may decide to what extent leaves of
absence for government or military service, illness, temporary disability, or
other reasons shall not be deemed interruptions of continuous employment.
ARTICLE IX
Incentive Awards
9.1 Award. In accordance with the provisions of Article IV, the Committee
shall designate Participants to whom Incentive Awards are made. All Incentive
Awards shall be finally determined exclusively by the Committee under the
procedures established by the Committee; provided, however, that no
Participant may receive an Incentive Award payment in any calendar year that
exceeds the lesser of (i) one hundred (100%) percent of the Participant's base
salary (prior to any salary reduction or deferral elections) as of the date of
grant of the Incentive Award or (ii) $250,000.
9.2 Terms and Conditions. The Committee, at the time an Incentive Award is
made, shall specify the terms and conditions which govern the award. Such
terms and conditions shall prescribe that the Incentive Award shall be earned
only to the extent that the Company, an Affiliate or an operating unit, during
a performance period of at least one year, achieves objectives stated with
respect to the Company's, an Affiliate's or an operating unit's return on
equity, earnings per share, total earnings, earnings growth, return on
capital, return on assets, funds from operations or Fair Market Value. Such
terms and conditions also may include other limitations on the payment of
Incentive Awards including, by way of example and not of limitation,
requirements that the Participant complete a specified period of employment
with the Company or an Affiliate or that the Company, an Affiliate, or the
Participant attain stated objectives or goals (in addition to those prescribed
in accordance with the preceding sentence) as a prerequisite to payment under
an Incentive Award. The Committee, at the time an Incentive Award is made,
shall also specify when amounts shall be payable under the Incentive Award and
whether amounts shall be payable in the event of the Participant's death,
disability, or retirement. No payment shall be made under an Incentive Award
except to the extent that the Committee certifies that the objectives
governing such award have been achieved.
9.3 Nontransferability. Except as provided in Section 9.4 hereof, Incentive
Awards granted under this Plan shall be nontransferable except by will or by
the laws of descent and distribution. No right or interest of a Participant in
an Incentive Award shall be liable for, or subject to, any lien, obligation,
or liability of such Participant.
9.4 Transferable Incentive Awards. Section 9.3 hereof to the contrary
notwithstanding, the Committee may grant Incentive Awards which are
transferable to Permitted Family Members to the extent that, and on such terms
and conditions as may be permitted by, Securities Exchange Commission Rule
16b-3 as in effect from
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<PAGE>
time to time. The holder of an Incentive Award transferred pursuant to this
section shall be bound by the same terms and conditions that governed the
Incentive Award during the period that it was held by the Participant.
9.5 Employee Status. If the terms of an Incentive Award provide that a
payment will be made thereunder only if the Participant completes a stated
period of employment, the Committee may decide to what extent leaves of
absence for governmental or military service, illness, temporary disability or
other reasons shall not be deemed interruptions of continuous employment.
9.6 Shareholder Rights. No Participant shall, as a result of receiving an
Incentive Award, have any rights as a shareholder of the Company or any
Affiliate on account of such award.
ARTICLE X
Acceleration Upon Certain Events
In the event (i) of the commencement of a public tender offer for all or any
portion of the Common Stock, (ii) a proposal to merge, consolidate or
otherwise combine with another company is submitted to the stockholders of the
Company for approval, or (iii) the Board approves any transaction or event
that would constitute a change of control of the Company of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
the Securities Exchange Act of 1934, as amended, all outstanding Options and
awards shall become fully vested or exercisable, as the case may be, in each
case as of the date of the consummation of such tender offer or other
transaction or event.
ARTICLE XI
Adjustment Upon Change in Common Stock
The maximum number of shares as to which Options, Stock Awards and
Performance Shares may be granted under this Plan, the terms of outstanding
Stock Awards, Options, Performance Share awards and Incentive Awards, and the
per individual limitations on the number of shares for which Options, Stock
Awards and Performance Shares may be granted, shall be adjusted as the
Committee shall determine to be equitably required in the event that there is
an increase or reduction in the number of shares of Common Stock, or any
change (including, but not limited to, a change in value) in the shares of
Common Stock or exchange of shares of Common Stock for a different number or
kind of shares or other securities of the Company by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, subdivision or consolidation of shares, extraordinary
dividend, change in corporate structure or otherwise. Any determination made
under this Article XI by the Committee shall be final and conclusive.
The issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
maximum number of shares as to which Options, Stock Awards and Performance
Shares may be granted, the per individual limitations on the number of shares
for which Options, Stock Awards and Performance Shares may be granted or the
terms of outstanding Stock Awards, Options, Incentive Awards or Performance
Shares.
The Committee may make Stock Awards and may grant Options, Incentive Awards
and Performance Shares in substitution for performance shares, phantom shares,
stock awards, stock options, stock appreciation rights, or similar awards held
by an individual who becomes an employee of the Company or an Affiliate in
connection with a transaction described in the first paragraph of this Article
XI. Notwithstanding any provision of the Plan (other than the limitation of
Section 5.2 hereof), the terms of such substituted Stock Awards, Option,
Incentive Awards or Performance Share grants shall be as the Committee, in its
discretion, determines is appropriate.
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ARTICLE XII
Compliance With Law and
Approval of Regulatory Bodies; Governing Law
No Option shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment
shall be made under this Plan except in compliance with all applicable federal
and state laws and regulations (including, without limitation, withholding tax
requirements), any listing agreement to which the Company is a party, and the
rules of all domestic stock exchanges on which the Company's shares may be
listed. The Company shall have the right to rely on an opinion of its counsel
as to such compliance. Any share certificate issued to evidence Common Stock
when a Stock Award is granted or for which an option is exercised or a
Performance Share settled may bear such legends and statements as the
Committee may deem advisable to assure compliance with federal and state laws
and regulations. No Option shall be exercisable, no Stock Award shall be
granted, no Common Stock shall be issued, no certificate for shares shall be
delivered, and no payment shall be made under this Plan until the Company has
obtained such consent or approval as the Committee may deem advisable from
regulatory bodies having jurisdiction over such matters. Except as to matters
of federal law, this Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the State of
Texas without giving effect to conflicts of law principles.
ARTICLE XIII
General Provisions
13.1 Effect on Employment and Service. Neither the adoption of this Plan,
its operation, nor any documents describing or referring to this Plan (or any
part thereof) shall confer upon any individual any right to continue in the
employ or service of the Company or an Affiliate or in any way affect any
right and power of the Company or an Affiliate to terminate the employment or
service of any individual at any time with or without assigning a reason
therefor.
13.2 Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that
may at any time be represented by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
13.3 Rules of Construction. Headings are given to the articles and sections
of this Plan solely as a convenience to facilitate reference. The reference to
any statute, regulation, or other provision of law shall be construed to refer
to any amendment to or successor of such provision of law.
ARTICLE XIV
Amendment
The Board may amend or terminate this Plan from time to time; provided,
however, that no amendment may become effective until shareholder approval is
obtained if the amendment materially (i) increases the aggregate number of
shares of Common Stock that may be issued under the Plan, (ii) changes the
class of individuals eligible to become Participants or (iii) increases the
benefits that may be provided under the Plan. No amendment shall, without a
Participant's consent, adversely affect any rights of such Participant under
any outstanding Stock Award, Option, Incentive Award or Performance Share
award outstanding at the time such amendment is made.
F-9
<PAGE>
ARTICLE XV
Duration of Plan
No Stock Award, Option, Incentive Award or Performance Share award may be
granted under this Plan more than ten years after the earlier of the date this
Plan was adopted by the Board or the date this Plan was originally approved by
stockholders, as reflected in Article XVI. Stock Awards, Options, Incentive
Awards and Performance Share awards granted before that date shall remain
valid in accordance with their terms.
ARTICLE XVI
Effective Date of Plan
The Plan was originally adopted by the Board on July 11, 1996, and approved
by shareholders on July 15, 1996.
F-10
<PAGE>
APPENDIX G
MERISTAR HOSPITALITY CORPORATION
NON-EMPLOYEE DIRECTORS' INCENTIVE PLAN
<PAGE>
ARTICLE I
Definitions
1.1 Award Date means the first business day following the Company's annual
meeting of stockholders, beginning with the annual meeting of stockholders in
1999.
1.2 Board means the Board of Directors of the Company.
1.3 Committee means the Board or the committee appointed by the Board to
administer the Plan.
1.4 Common Stock means the common stock of the Company.
1.5 Company means MeriStar Hospitality Corporation, a Maryland corporation.
1.6 Fair Market Value means, on any given date: if the Common Stock is not
listed on an established stock exchange, Fair Market Value shall be the
average of the final bid and asked quotations on the over-the-counter market
in which the Common Stock is traded or, if applicable, the reported "closing"
price of a share of Common Stock in the New York over-the-counter market as
reported by the National Association of Securities Dealers, Inc. If the Common
Stock is listed on one or more established stock exchanges, Fair Market Value
shall be deemed to be the highest closing price of a share of Common Stock
reported on any of such exchanges. In any case, if no sale of Common Stock is
made on any stock exchange or over-the-counter market on that date, then Fair
Market Value shall be determined as of the next preceding day on which there
was a sale.
1.7 First Award Date means the date following the consummation of the merger
contemplated by the Agreement and Plan of Merger among American General
Hospitality Corporation and American General Hospitality Operating
Partnership, L.P., and Capstar Hotel Company, Capstar Management Company, L.P.
and Capstar Management Company II, L.P., dated as of March 15, 1998, upon
which the Participant commences service as a member of the Board, whether by
election or appointment.
1.8 Internal Revenue Code means the Internal Revenue Code of 1986, as
amended.
1.9 Option means a stock option that entitles the holder to purchase shares
of Common Stock from the Company on the terms set forth in Article IV of this
Plan.
1.10 Participant means a member of the Board who, on the First Award Date or
applicable Award Date, is not an employee or officer of the Company or any
"subsidiary" or "parent" corporation of the Company within the meaning of
Section 424 of the Internal Revenue Code.
1.11 Plan means the MeriStar Hospitality Corporation Non-Employee Directors'
Incentive Plan.
ARTICLE II
Purposes
The Plan is intended to (i) assist the Company in recruiting and retaining
non-employee directors and (ii) promote a greater identity of interest between
Participants and stockholders by enabling Participants to participate in the
Company's future success.
ARTICLE III
Administration
The Plan shall be administered by the Committee. The Committee shall have
complete authority to interpret all provisions of the Plan; to adopt, amend,
and rescind rules and regulations pertaining to the administration of
<PAGE>
the Plan and to make all other determinations necessary or advisable for the
administration of the Plan. The express grant in the Plan of any specific
power to the Committee shall not be construed as limiting any power or
authority of the Committee. Any decision made, or action taken, by the
Committee in connection with the administration of the Plan shall be final and
conclusive. No member of the Committee shall be liable for any act done in
good faith with respect to the Plan. All expenses of administering the Plan
shall be borne by the Company.
ARTICLE IV
Options
4.1 Grant of Options. Each Participant shall be granted an Option for 7,500
shares of Common Stock on the applicable First Award Date. Thereafter, each
Participant shall receive an annual grant of an Option to purchase 5,000
shares of Common Stock on each Award Date. All Options shall be evidenced by
Agreements that shall be subject to the applicable provisions of this Plan and
to such other provisions as the Committee may adopt which are not inconsistent
with the provisions of this Plan.
4.2 Option Price. The price per share of Common Stock purchased on the
exercise of an Option shall be the Fair Market Value on the date that the
Option is granted.
4.3 Maximum Option Period. The maximum period during which an Option may be
exercised shall be ten years from the date of grant.
4.4 Exercise of Options. All Options granted under the Plan shall vest in
three annual installments beginning on the date of grant and on subsequent
anniversaries thereof (each, a "Vesting Date"), provided the Participant
continues to serve as a director of the Company on such Vesting Date.
4.5 Effect of Termination of Services or Death. If a Participant ceases to
serve as a director of the Company for any reason, the Options that have been
previously granted to that Participant and that are not vested as of that date
shall be forfeited. Options that have vested as of the date of such cessation
of services may be exercised by the Participant, in accordance with and
subject to the terms of the Plan, after the date such Participant ceases to be
a director of the Company. If a Participant dies, the Options that have been
previously granted to that Participant and that are vested as of the date of
death may be exercised by the administrator of the Participant's estate, or by
the person to whom such Options are transferred by will or the laws of descent
and distribution. In no event, however, may any Option be exercised after the
expiration date of such Option. Any Option or portion thereof that is not
exercised during the applicable time period specified above shall be deemed
terminated at the end of the applicable time period for purposes of Article VI
hereof.
4.6 Effect of a Change in Control. All Options granted pursuant to this Plan
shall immediately vest upon a Change in Control of the Company. For purposes
of the Plan, a "Change in Control" shall mean (i) the commencement of a public
tender offer for all or any portion of the Common Stock, (ii) a proposal to
merge, consolidate or otherwise combine with another company is submitted to
the stockholders of the Company for approval, or (iii) the Board approves any
transaction or event that would constitute a change of control of the Company
of a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of the Securities Exchange Act of 1934, as amended.
4.7 Payment of Option Price. Payment of the Option price shall be made in
cash, cash equivalent acceptable to the Committee, Company Common Stock, or a
combination thereof. In addition, a Participant may provide instructions to
the Company that upon receipt of the Option price in cash from a broker or
dealer acting at the direction of the Participant in payment for any shares of
Common Stock pursuant to the exercise of an Option, the Company shall issue
such shares of Common Stock directly to the designated broker or dealer. If
shares of Common Stock are surrendered in payment of the Option price, the
shares surrendered must have an
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<PAGE>
aggregate Fair Market Value (determined as of the day preceding the exercise
date) that, together with any cash or cash equivalent paid, is not less than
the Option price for the number of shares of Common Stock for which this
Option is being exercised.
4.8 Nontransferability. Each Option granted under this Plan shall be
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom an Option is granted, the
Option may be exercised only by the Participant. No right or interest of a
Participant in any Option shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
4.9 Transferable Options. Section 4.8 hereof to the contrary
notwithstanding, an Option that is not an incentive stock option may be
transferred by a Participant to the Participant's children, grandchildren,
spouse, one or more trusts for the benefit of such family members or a
partnership in which such family members are the only partners; provided,
however, that the Participant may not receive any consideration for the
transfer. The holder of an Option transferred pursuant to this section shall
be bound by the same terms and conditions that governed the Option during the
period that it was held by the Participant.
4.10 Stockholder Rights. No Participant shall have any rights as a
stockholder with respect to shares of Common Stock subject to his or her
Option until the date of exercise of such option.
ARTICLE V
Shares in Lieu of Fees
5.1 Each Participant shall have the right to elect to receive payment of any
or all director fees in shares of Common Stock rather than cash. Unless a
Participant elects otherwise, fees paid in shares of Common Stock will be paid
at the same time as are fees paid in cash.
ARTICLE VI
Stock Subject to Plan
6.1 Shares Issued. Upon the exercise of an Option, the Company may deliver
to the Participant (or the Participant's broker if the Participant so
directs), shares of Common Stock from its authorized but unissued Common
Stock.
6.2 Aggregate Limit. The maximum aggregate number of shares of Common Stock
that may be issued under this Plan is 125,000 shares. The maximum aggregate
number of shares that may be issued under this Plan shall be subject to
adjustment as provided in Article VII.
6.3 Reallocation of Shares. If an Option is terminated, in whole or in part,
for any reason other than its exercise, the number of shares of Common Stock
allocated to the Option or portion thereof may be reallocated to other Options
to be granted under this Plan.
ARTICLE VII
Adjustment Upon Change in Common Stock
The provisions of this Plan and the terms of outstanding Options shall be
adjusted as the Committee shall determine to be equitably required in the
event that there is an increase or reduction in the number of shares of Common
Stock, or any change (including, but not limited to, a change in value) in the
shares of Common Stock or exchange of shares of Common Stock for a different
number or kind of shares or other securities of the
G-3
<PAGE>
Company by reason of a reclassification, recapitalization, merger,
consolidation, reorganization, spin-off, split-up, subdivision or
consolidation of shares, extraordinary dividend, change in corporate structure
or otherwise. Any determination made under this Article VII by the Committee
shall be final and conclusive.
The issuance by the Company of shares of any class, or securities
convertible into shares of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants
to subscribe therefor, or upon conversion of shares of obligations of the
Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the
provisions of this Plan or the terms of outstanding Options.
ARTICLE VIII
Compliance With Law and
Approval of Regulatory Bodies; Governing Law
No Common Stock shall be issued and no certificates for shares of Common
Stock shall be delivered under the Plan except in compliance with all
applicable federal and state laws and regulations, any listing agreement to
which the Company is a party, and the rules of all domestic stock exchanges on
which the Company's Common Stock may be listed. The Company shall have the
right to rely on an opinion of its counsel as to such compliance. Any
certificate issued to evidence Common Stock issued upon the exercise of an
Option granted under the Plan may bear such legends and statements as the
Committee may deem advisable to assure compliance with federal and state laws
and regulations. No Common Stock shall be issued and no certificate for shares
of Common Stock shall be delivered upon the exercise of an Option granted
under the Plan until the Company has obtained such consent or approval as the
Committee may deem advisable from regulatory bodies having jurisdiction over
such matters. Except as to matters of federal law, this Plan and the rights of
all persons claiming hereunder shall be construed and determined in accordance
with the laws of the State of Texas without giving effect to conflicts of law
principles.
ARTICLE IX
General Provisions
9.1 Unfunded Plan. The Plan, insofar as it provides for awards, shall be
unfunded, and the Company shall not be required to segregate any assets that
may at any time be represented by awards under the Plan. Any liability of the
Company to any person with respect to any award to be made under the Plan
shall be based solely upon any contractual obligations that may be created
pursuant to the Plan. No such obligation of the Company shall be deemed to be
secured by any pledge of, or other encumbrance on, any property of the
Company.
9.2 Rules of Construction. Headings are given to the articles and sections
of the Plan solely as a convenience to facilitate reference. The reference to
any statute, regulation, or other provision of law shall be construed to refer
to any amendment to or successor of such provision of law.
ARTICLE X
Amendment
The Board may amend from time to time or terminate the Plan at any time;
provided, however, that no amendment may become effective until stockholder
approval is obtained if the amendment (i) materially increases the aggregate
number of shares of Common Stock that may be issued under this Plan or (ii)
stockholder approval would be required for compliance with stock exchange
rules. No amendment shall, without a Participant's consent, adversely affect
any rights of such Participant under any outstanding Option.
G-4
<PAGE>
ARTICLE XI
Duration of Plan
No Option may be made under this Plan after December 31, 2008. Options made
before that date shall remain valid in accordance with their terms.
ARTICLE XII
Effective Date of Plan
The Plan was originally adopted by the Board on July 11, 1996 and approved
by shareholders on July 15, 1996.
G-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The AGH Charter
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The AGH Charter obligates it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding whether or not by
or in the right of AGH, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of AGH, or is or was serving at the request of AGH as a
director, officer, trustee, partner, member, agent or employee of another
corporation, partnership, limited liability company, association, joint
venture, trust or other enterprise. The AGH Charter also permits AGH to
indemnify and advance expenses to any person who served a predecessor of AGH
in any of the capacities described above and to any employee or agent of AGH
or a predecessor of AGH.
The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the AGH Charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the defense of any
Maryland proceeding to which he is made a party by reason of his service in
that capacity. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, the MGCL requires AGH, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by AGH as authorized by the bylaws and
(b) a written statement by or on his behalf to repay the amount paid or
reimbursed by AGH if it shall ultimately be determined that the standard of
conduct was not met.
AGH has purchased director and officer liability insurance for the purpose
of providing a source of funds to pay any indemnification described above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration Statement
or incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of March 15, 1998, by and
among the Registrant and American General Hospitality Operating
Partnership, L.P., on the one hand, and CapStar Hotel Company,
CapStar Management Company, L.P., and CapStar Management Company
II, L.P., on the other hand (Attached as Appendix A to the Joint
Proxy Statement/Prospectus).
3.1 Articles of Incorporation of the Registrant (Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11, No. 333-4568).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.2 Articles of Amendment and Restatement of the Registrant
(Incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form S-
11, No. 333-4568).
3.3 Bylaws of the Registrant (Incorporated by reference to Exhibit 3.3
to the Registrant's Registration Statement on Form S-11, No. 333-
4568).
3.4 Form of Second Articles of Amendment and Restatement (Incorporated
by reference to the Registrant's Registration Statement on Form S-
11, No. 333-4568)
3.5 Form of Articles of Amendment and Restatement of the Registrant
(Attached as Appendix E to the Joint Proxy Statement/Prospectus).
3.6 Form of Amended Bylaws of the Registrant.**
4.1 Form of Common Stock Certificate for the Registrant (Incorporated
by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-11, No. 333-4568).
5.1 Opinion of Battle Fowler LLP regarding the status of the
Registrant as a REIT and American General Hospitality Operating
Partnership, L.P. as a partnership.**
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding
certain principals of Maryland law.**
5.3 Opinion of Morris, Nichols, Arsht & Tunnell regarding certain
principals of Delaware law.**
8.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the
qualification of the Merger as a reorganization under the Internal
Revenue Code of 1986, as amended.**
10.1 Form of MeriStar Incentive Plan (Attached hereto as Appendix F to
the Joint Proxy Statement/Prospectus).+
10.2 Form of MeriStar Non-Employee Directors' Incentive Plan (Attached
hereto as Appendix G to the Joint Proxy Statement/Prospectus).+
10.3 Form of Employment Agreement between MeriStar Hospitality
Corporation and Paul W. Whetsell.**
10.4 Form of Employment Agreement between MeriStar Hospitality
Corporation and Steven D. Jorns.**
10.5 Form of Employment Agreement between MeriStar Hospitality
Corporation and John Emery.**
10.6 Form of Employment Agreement between MeriStar Hospitality
Corporation and Bruce G. Wiles.**
10.7 Form of Employment Agreement between MeriStar Hospitality
Corporation and Kenneth E. Barr.**
10.8 Form of Exchange Rights Agreement, by and among MeriStar
Hospitality Corporation, MeriStar Hospitality Operating
Partnership, L.P., and the Persons set forth therein (Incorporated
by reference to Exhibit 99.4 to the Registrant's Current Report on
Form 8-K, dated March 17, 1998, No. 1-11903).
10.9 Form of Voting Agreement between Paul W. Whetsell and Steven D.
Jorns (Incorporated by reference to Exhibit 99.4 to the
Registrant's Current Report on Form 8-K, dated March 17, 1998, No.
1-11903).
10.10 Form of Affiliate Agreement (Incorporated by reference to Exhibit
99.4 to the Registrant's Current Report on Form 8-K, dated March
17, 1998, No. 1-11903).
10.11 Form of Contribution, Assumption and Indemnity Agreement between
CapStar Hotel Company and CMC Operating Company (Incorporated by
reference to Exhibit 99.4 to the Registrant's Current Report on
Form 8-K, dated March 17, 1998, No. 1-11903).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.12 Form of Intercompany Agreement, among MeriStar Hospitality
Corporation, MeriStar Hospitality Operating Partnership, L.P., CMC
Operating Company and CMC Operating Partnership, L.P.
(Incorporated by reference to Exhibit 99.4 to the Registrant's
Current Report on Form 8-K, dated March 17, 1998, No. 1-11903).
10.13 Form of Operating Lease (Incorporated by reference to Exhibit 99.4
to the Registrant's Current Report on Form 8-K, dated March 17,
1998, No. 1-11903).
21.1 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form 10-K, dated
March 31, 1998, No. 1-11903).
23.1 Consent of Battle Fowler LLP (Contained in Exhibit 5.1).**
23.2 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (Contained in
Exhibit 8.1).**
23.3 Consent of Ballard Spahr Andrews & Ingersoll, LLP (Contained in
Exhibit 5.2).**
23.4 Consent of Morris, Nichols, Arsht & Tunnell (Contained in Exhibit
5.3).**
23.5 Consent of Coopers & Lybrand, L.L.P.*
23.6 Consent of KPMG Peat Marwick LLP.*
23.7 Consent of Bruce G. Wiles.*
23.8 Consent of Paul W. Whetsell.**
23.9 Consent of Daniel Doctoroff.**
23.10 Consent of William Janes.**
23.11 Consent of James F. Dannhauser.**
24.1 Power of Attorney (Contained on the Signature Page hereto).*
99.1 Proxy for the Registrant.*
99.2 Proxy for CapStar.*
99.3 Consent of Salomon Smith Barney.**
99.4 Consent of Goldman, Sachs & Co.**
99.5 Consent of Lehman Brothers Inc.**
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
+Management contract or compensatory plan or arrangement.
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) of this Form.
(c) The Opinion of Salomon Smith Barney is attached as Appendix B to the Joint
Proxy Statement/Prospectus. The Opinion of Goldman, Sachs & Co. is
attached to Appendix C to the Joint Proxy Statement/Prospectus. The
Opinion of Lehman Brothers Inc. is attached as Appendix D to the Joint
Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and
where applicable, each filing of an employee's benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act of 1934) that is incorporated by
reference in the registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange
Commission such
II-3
<PAGE>
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question 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.
(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for the by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act of 1933 and
is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and
will be governed by the final adjudication of such issue.
Each of the undersigned registrants hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
Each of the undersigned registrants hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF IRVING, TEXAS, ON THE
7TH DAY OF APRIL, 1998.
American General Hospitality
Corporation
/s/ Steven D. Jorns
By: _________________________________
NAME: STEVEN D. JORNS
TITLE: CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Steven D.
Jorns and Kenneth E. Barr, and each or either of them, his true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities to sign any and
all amendments (including post-effective amendments) to this Registration
Statement and to cause the same to be filed, with all exhibits thereto and the
other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting to said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
whatsoever requisite or desirable to be done, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND THE FOREGOING POWER OF ATTORNEY HAS BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Steven D. Jorns Chairman of the April 7, 1998
- ------------------------------------- Board, Chief
STEVEN D. JORNS Executive Officer,
President and
Director
/s/ Kenneth E. Barr Executive Vice April 7, 1998
- ------------------------------------- President, Chief
KENNETH E. BARR Financial Officer,
Secretary,
Treasurer and
Principal
Accounting Officer
/s/ H. Cabot Lodge Director April 7, 1998
- -------------------------------------
H. CABOT LODGE III
/s/ James R. Worms Director April 7, 1998
- -------------------------------------
JAMES R. WORMS
/s/ James B. McCurry Director April 7, 1998
- -------------------------------------
JAMES B. MCCURRY
/s/ Kent R. Hance Director April 7, 1998
- -------------------------------------
KENT R. HANCE
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of March 15, 1998, by and
among the Registrant and American General Hospitality Operating
Partnership, L.P., on the one hand, and CapStar Hotel Company,
CapStar Management Company, L.P., and CapStar Management Company
II, L.P., on the other hand (Attached as Appendix A to the Joint
Proxy Statement/Prospectus).
3.1 Articles of Incorporation of the Registrant (Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11, No. 333-4568).
3.2 Articles of Amendment and Restatement of the Registrant
(Incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form S-
11, No. 333-4568).
3.3 Bylaws of the Registrant (Incorporated by reference to Exhibit 3.3
to the Registrant's Registration Statement on Form S-11, No. 333-
4568).
3.4 Form of Second Articles of Amendment and Restatement (Incorporated
by reference to the Registrant's Registration Statement on Form S-
11, No. 333-4568)
3.5 Form of Articles of Amendment and Restatement of the Registrant
(Attached as Appendix E to the Joint Proxy Statement/Prospectus).
3.6 Form of Amended Bylaws of the Registrant.**
4.1 Form of Common Stock Certificate for the Registrant (Incorporated
by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-11, No. 333-4568).
5.1 Opinion of Battle Fowler LLP regarding the status of the
Registrant as a REIT and American General Hospitality Operating
Partnership, L.P. as a partnership.**
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding
certain principals of Maryland law.**
5.3 Opinion of Morris, Nichols, Arsht & Tunnell regarding certain
principals of Delaware law.**
8.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the
qualification of the Merger as a reorganization under the Internal
Revenue Code of 1986, as amended.**
10.1 Form of MeriStar Incentive Plan (Attached hereto as Appendix F to
the Joint Proxy Statement/Prospectus).+
10.2 Form of MeriStar Non-Employee Directors' Incentive Plan (Attached
hereto as Appendix G to the Joint Proxy Statement/Prospectus).+
10.3 Form of Employment Agreement between MeriStar Hospitality
Corporation and Paul W. Whetsell.**
10.4 Form of Employment Agreement between MeriStar Hospitality
Corporation and Steven D. Jorns.**
10.5 Form of Employment Agreement between MeriStar Hospitality
Corporation and John Emery.**
10.6 Form of Employment Agreement between MeriStar Hospitality
Corporation and Bruce G. Wiles.**
10.7 Form of Employment Agreement between MeriStar Hospitality
Corporation and Kenneth E. Barr.**
10.8 Form of Exchange Rights Agreement, by and among MeriStar
Hospitality Corporation, MeriStar Hospitality Operating
Partnership, L.P., and the Persons set forth therein (Incorporated
by reference to Exhibit 99.4 to the Registrant's Current Report on
Form 8-K, dated March 17, 1998, No. 1-11903).
10.9 Form of Voting Agreement between Paul W. Whetsell and Steven D.
Jorns (Incorporated by reference to Exhibit 99.4 to the
Registrant's Current Report on Form 8-K, dated March 17, 1998, No.
1-11903).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.10 Form of Affiliate Agreement (Incorporated by reference to Exhibit
99.4 to the Registrant's Current Report on Form 8-K, dated March
17, 1998, No. 1-11903).
10.11 Form of Contribution, Assumption and Indemnity Agreement between
CapStar Hotel Company and CMC Operating Company (Incorporated by
reference to Exhibit 99.4 to the Registrant's Current Report on
Form 8-K, dated March 17, 1998, No. 1-11903).
10.12 Form of Intercompany Agreement, among MeriStar Hospitality
Corporation, MeriStar Hospitality Operating Partnership, L.P., CMC
Operating Company and CMC Operating Partnership, L.P.
(Incorporated by reference to Exhibit 99.4 to the Registrant's
Current Report on Form 8-K, dated March 17, 1998, No. 1-11903).
10.13 Form of Operating Lease (Incorporated by reference to Exhibit 99.4
to the Registrant's Current Report on Form 8-K, dated March 17,
1998, No. 1-11903).
21.1 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form 10-K, dated
March 31, 1998, No. 1-11903).
23.1 Consent of Battle Fowler LLP (Contained in Exhibit 5.1).**
23.2 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (Contained in
Exhibit 8.1).**
23.3 Consent of Ballard Spahr Andrews & Ingersoll, LLP (Contained in
Exhibit 5.2).**
23.4 Consent of Morris, Nichols, Arsht & Tunnell (Contained in Exhibit
5.3).**
23.5 Consent of Coopers & Lybrand, L.L.P.*
23.6 Consent of KPMG Peat Marwick LLP.*
23.7 Consent of Bruce G. Wiles.*
23.8 Consent of Paul W. Whetsell.**
23.9 Consent of Daniel Doctoroff.**
23.10 Consent of William Janes.**
23.11 Consent of James F. Dannhauser.**
24.1 Power of Attorney (Contained on the Signature Page hereto).*
99.1 Proxy for the Registrant.*
99.2 Proxy for CapStar.*
99.3 Consent of Salomon Smith Barney.**
99.4 Consent of Goldman, Sachs & Co.**
99.5 Consent of Lehman Brothers, Inc.**
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
+Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Joint Proxy
Statement/Prospectus of American General Hospitality Corporation on Form S-4
being filed under the Securities Act of 1933 (i) of our report dated January
26, 1998, except for Note 11, as to which the date is March 16, 1998, on our
audits of the consolidated financial statements and financial statement
schedules of American General Hospitality Corporation as of December 31, 1997
and 1996, and for the year ended December 31, 1997 and the period from July
31, 1996 (inception of operations) through December 31, 1996, and our report
dated January 30, 1998, except for Note 6, as to which the date is March 16,
1998, on our audits of the consolidated financial statements of AGH Leasing,
L.P. as of December 31, 1997 and 1996, and for the year ended December 31,
1997 and the period from July 31, 1996 (inception of operations) through
December 31, 1996, which reports are included in the Annual Report on Form 10-
K; (ii) dated December 19, 1997, of our audit of the combined financial
statements of Prime Portfolio Acquisitions Hotels except for Note 7 as to
which the date is January 9, 1998; dated October 22, 1997, of our audit of the
financial statements of Holiday Inn O'Hare International Hotel; dated January
15, 1998, of our audit of the combined financial statements of FSA Portfolio
Acquisition Hotels; and dated November 3, 1997 of our audit of the combined
financial statements of Potomac Portfolio Acquisition Hotels included in the
Report on Form 8-K dated January 23, 1998; and (iii) dated April 2, 1998 of
our audit of the combined and combining financial statements of Prime
Portfolio Acquisition Hotels included in the Report on 8-K dated April 6,
1998.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 6, 1998
<PAGE>
EXHIBIT 23.6
ACCOUNTANTS' CONSENT
The Board of Directors
CapStar Hotel Company:
We consent to incorporation by reference in the registration statement on Form
S-4 of American General Hospitality Corporation of our report dated February
6, 1998 related to the consolidated balance sheets of CapStar Hotel Company
and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and partners'
capital, and cash flows for each of the years in the three-year period ended
December 31, 1997 and the supplementary schedule and our report dated March
30, 1998 related to the combined balance sheets of the management and leasing
business of CapStar Hotel Company and subsidiaries ("OpCo") as of December 31,
1997 and 1996 and the related combined statements of operations, owner's
equity and cash flows for each of the years in the three-year period ended
December 31, 1997.
We also consent to the reference to our firm under the heading "Experts" in
the registration statement.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
April 7, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF BRUCE G. WILES
I hereby consent to being named a proposed director of MeriStar Hospitality
Corporation and to the use of my name wherever it appears in the Registration
Statement filed by American General Hospitality Corporation ("AGH") on Form S-
4 and the Joint Proxy Statement/Prospectus for AGH and CapStar Hotel Company,
which forms a part of the Registration Statement, and any amendments thereto.
Dated: April 6, 1998
/s/ Bruce G. Wiles
By___________________________________
Bruce G. Wiles
<PAGE>
Exhibit 99.1
AMERICAN GENERAL HOSPITALITY CORPORATION
1998 ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
AMERICAN GENERAL HOSPITALITY CORPORATION
The undersigned appoints Steven D. Jorns and Kenneth E. Barr, and each
of them, attorneys and agents with full power of substitution to vote all shares
of common stock, par value $.01 per share ("AGH Common Stock") of American
General Hospitality Corporation ("AGH") which the undersigned would be entitled
to vote if personally present at the 1998 Annual Meeting of Stockholders of AGH,
and including at any adjournments or postponements thereof as follows:
THE BOARD OF DIRECTORS OF AGH RECOMMENDS A VOTE FOR THE ELECTION OF THE
PROPOSALS SET FORTH BELOW UNDER ITEMS 1-6.
1. To consider and vote upon a proposal (the "Merger Proposal" or "Proposal
One") to approve and adopt an Agreement and Plan of Merger, dated as of March
15, 1998, among AGH, American General Hospitality Operating Partnership, L.P.,
a Delaware limited partnership, CapStar Hotel Company, a Delaware corporation
("CapStar"), CapStar Management Company, L.P., a Delaware limited partnership,
and CapStar Management Company II, L.P., a Delaware limited partnership.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To consider and vote upon a proposal to amend AGH's Charter to: (i)
increase the number of authorized shares of stock and authorized number of
shares of AGH Common Stock, (ii) authorize the issuance of shares of
preferred stock having such preferences, rights and other terms as the Board
of Directors may determine from time to time, and (iii) to the extent
permitted under applicable Maryland law, permit the Board of Directors to
increase or decrease the number of authorized shares of stock of AGH without
stockholder approval ("Proposal Two").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To consider and vote upon a proposal to approve the amendment and
restatement of the American General Hospitality Corporation Non-Employee
Directors' Incentive Plan ("Proposal Three").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To consider and vote upon a proposal to approve the amendment and
restatement of the American General Hospitality Corporation 1996 Incentive
Plan ("Proposal Four").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Election of Directors FOR [ ] WITHHELD [ ]
Nominees: H. Cabot Lodge III, Janes R. Worms,
Paul W. Whetsell, Daniel L. Doctoroff, William S. Janes,
Bruce G. Wiles, James F. Dannhauser and [additional director]
FOR, except vote withheld from the following nominee(s):
--------------------------------------------------------
6. To consider and vote upon such other business that may properly come
before the Annual Meeting or any adjournments or postponements thereof.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(continued on reverse side)
<PAGE>
(continued from other side)
The undersigned hereby revokes any other proxy or proxies heretofore given to
vote or act with respect to the shares of AGH Common Stock held by the
undersigned, and hereby ratifies and confirms all action the herein named
attorneys and proxies, their substitutes, or any of them may lawfully take by
virtue hereof. If properly executed, this proxy will be voted as directed above.
If a proxy is submitted and no directions are given, the proxy will be voted for
the approval of the Merger Proposal and for the additional Proposals referred to
herein. Nonvoting shares (including broker non-votes) and abstentions will have
the effect of a vote against the Merger Proposal and Proposal Two and will have
no effect on the votes to approve Proposals Three, Four and Five.
You may revoke your proxy at any time before it is voted.
This proxy will be valid until the sooner of one year from the date indicated
below and the completion of the Special Meeting.
DATED:______________________________________, 1998
PLEASE SIGN EXACTLY AS NAME APPEARS ON THIS PROXY.
__________________________________________________
(Signature)
__________________________________________________
(Signature, if held jointly)
__________________________________________________
(Title)
WHEN SHARES ARE HELD JOINTLY, JOINT OWNERS SHOULD
EACH SIGN. EXECUTORS, ADMINISTRATORS, TRUSTEES,
ETC., SHOULD INDICATE THE CAPACITY IN WHICH
SIGNING.
- --------------------------------------------------------------------------------
IMPORTANT: PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE!
IF YOU NEED ASSISTANCE WITH THIS PROXY CARD, PLEASE CALL _______________________
(___) ___-____ (CALL COLLECT)
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 99.2
CAPSTAR HOTEL COMPANY
1998 SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF CAPSTAR HOTEL COMPANY
The undersigned, as a holder of common stock, par value $.01 per share
("CapStar Common Stock"), of CapStar Hotel Company ("CapStar"), hereby appoints
Paul W. Whetsell and John Emery, and each of them, attorneys and agents with
full power of substitution to vote all shares of CapStar Common Stock which the
undersigned would be entitled to vote if personally present at the 1998 Special
Meeting of Stockholders of CapStar, and including at any adjournments or
postponements thereof, as follows:
THE BOARD OF DIRECTORS OF CAPSTAR RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER
PROPOSAL SET FORTH BELOW
To consider and vote upon a proposal (the "Merger Proposal") to approve
and adopt an Agreement and Plan of Merger, dated as of March 15, 1998 (the
"Merger Agreement"), among American General Hospitality Corporation, a Maryland
corporation ("AGH"), American General Hospitality Operating Partnership, L.P., a
Delaware limited partnership, CapStar, CapStar Management Company, L.P., a
Delaware limited partnership, and CapStar Management Company II, L.P., a
Delaware limited partnership.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(continued on reverse side)
<PAGE>
(continued from other side)
The undersigned hereby revokes any other proxy or proxies heretofore given to
vote or act with respect to the shares of CapStar Common Stock held by the
undersigned, and hereby ratifies and confirms all action the herein named
attorneys and proxies, their substitutes, or any of them may lawfully take by
virtue hereof. If properly executed, this proxy will be voted as directed
above. If a proxy is given and no directions are given, the proxy will be voted
for the approval of the Merger Proposal. Nonvoting shares and abstentions
will have the effect of a vote against the Merger Proposal.
You may revoke your proxy at any time before it is voted.
This proxy will be valid until the sooner of one year from the date indicated
below and the completion of the Special Meeting.
DATED:______________________________________, 1998
PLEASE SIGN EXACTLY AS NAME APPEARS ON THIS PROXY.
__________________________________________________
(Signature)
__________________________________________________
(Signature, if held jointly)
__________________________________________________
(Title)
WHEN SHARES ARE HELD JOINTLY, JOINT OWNERS SHOULD
EACH SIGN. EXECUTORS, ADMINISTRATORS, TRUSTEES,
ETC., SHOULD INDICATE THE CAPACITY IN WHICH
SIGNING.
- --------------------------------------------------------------------------------
IMPORTANT: PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE!
IF YOU NEED ASSISTANCE WITH THIS PROXY CARD, PLEASE CALL _______________________
(___) ___-____ (CALL COLLECT)
- --------------------------------------------------------------------------------
