AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1996
REGISTRATION NO. 333-6583
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CAPSTAR HOTEL COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7011 52-1979383
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</TABLE>
-------------------
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, DC 20007
(202) 965-4455
(Address and telephone number of Registrant's principal executive offices)
-------------------
PAUL W. WHETSELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAPSTAR HOTEL COMPANY
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, DC 20007
(202) 965-4455
(Name, address and telephone number of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD S. BORISOFF, ESQ. J. WARREN GORRELL, JR., ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON ALAN L. DYE, ESQ.
1285 AVENUE OF THE AMERICAS HOGAN & HARTSON L.L.P.
NEW YORK, NEW YORK 10019-6064 555 THIRTEENTH STREET, N.W.
(212) 373-3000 WASHINGTON, DC 20004-1109
(202) 637-5600
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
-------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to a public
offering in the United States and Canada (the "U.S. Offering") of an aggregate
of 7,400,000 shares of common stock (the "Common Stock") of CapStar Hotel
Company together with separate Prospectus pages relating to a concurrent
offering outside the United States and Canada of an aggregate of 1,850,000
shares of Common Stock (the "International Offering"). The complete Prospectus
for the U.S. Offering follows immediately. After such Prospectus are the
following alternate pages for the International Offering: a front cover page and
a back cover page. All other pages of the Prospectus for the U.S. Offering are
to be used for both the U.S. Offering and the International Offering.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
PROSPECTUS
9,250,000 SHARES
N87305BE.G01,2160,360,H
COMMON STOCK
-------------------
CapStar Hotel Company ("CapStar" or the "Company") is a hotel investment and
management company which acquires, owns, renovates, repositions and manages
hotels throughout the United States. CapStar owns 12 upscale, full-service
hotels (the "Owned Hotels") which contain 3,516 rooms. The Company has entered
into a contract to acquire five additional hotels (the "Additional Hotels")
which contain 1,121 rooms. Including the Owned Hotels, the Company manages 49
hotels (the "Hotels") with 9,044 rooms. The Company's business strategy is to
identify and acquire hotel properties 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.
Of the 9,250,000 shares of common stock, par value $.01 per share (the
"Common Stock") offered hereby, 1,850,000 shares are initially being offered
outside the United States and Canada (the "International Offering") by the
International Managers (as defined herein) and 7,400,000 shares are being
offered in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined herein). See "Underwriting". Of the shares of Common
Stock offered, 6,750,000 are being sold by the Company and 2,500,000 are being
sold by the Selling Stockholder (as defined herein). See "Principal Stockholders
and Selling Stockholder." Prior to the Offering (as defined herein), there has
been no public market for the Common Stock. It is currently estimated that the
initial public offering price per share will be between $17 and $20. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE"), under the symbol "CHO," subject to official notice of
issuance.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE
11.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
[CAPTION]
<TABLE>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share....... $ - $ - $ - $ -
Total(3)........ $ - $ - $ - $ -
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the several
U.S. Underwriters and International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ - .
(3) The Company has granted the U.S. Underwriters and the International Managers
a 30-day option to purchase up to 1,387,500 additional shares on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will be
$ - , $ - and $ - , respectively. See "Underwriting."
-------------------
The shares of Common Stock offered by this Prospectus are offered by the
several U.S. Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain further conditions. It is expected that
delivery of the shares will be made at the offices of Lehman Brothers Inc., in
New York, New York on or about - , 1996.
-------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SMITH BARNEY INC.
-------------------
- , 1996.
<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.
<PAGE>
[PHOTOGRAPHS/MAPS AND CAPTIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes (i) the
completion of the Formation Transactions (as defined herein) and (ii) that the
over-allotment option granted to the Underwriters will not be exercised. Unless
the context otherwise requires, references herein to "CapStar" or the "Company"
include CapStar Hotel Company and its subsidiaries, and, for the periods prior
to the Formation Transactions, CapStar Management Company, L.P. ("CapStar
Management"), EquiStar Hotel Investors, L.P. ("EquiStar") and the limited
liability companies and limited partnerships that own the Owned Hotels (as
defined herein). The offering by the Company and the Selling Stockholder of an
aggregate of 9,250,000 shares of Common Stock in the U.S. Offering and
International Offering is referred to herein as the "Offering." All statistics
in this Prospectus relating to the lodging industry generally (other than
Company statistics) are from, or have been derived from, information published
or provided by Smith Travel Research, an independent industry research
organization. Smith Travel Research has not consented to the use of the data
presented in this Prospectus. Smith Travel Research has not provided any form of
consultation, advice or counsel regarding any aspect of the Offering, and is in
no way associated with the Offering.
THE COMPANY
CapStar is a hotel investment and management company which acquires, owns,
renovates, repositions and manages hotels throughout the United States. CapStar
owns 12 upscale, full-service hotels (the "Owned Hotels") which contain 3,516
rooms. Including the Owned Hotels, the Company manages 49 hotels (the "Hotels")
with 9,044 rooms. The Company's business strategy is to identify and acquire
hotel properties 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. Each of the Owned
Hotels is located in a market which has recently experienced strong economic
growth, including Atlanta, Charlotte, Chicago, Cleveland, Dallas, Los Angeles,
Salt Lake City, Seattle and Washington, D.C. The Owned Hotels include hotels
operated under nationally recognized brand names such as Hilton(R), Sheraton(R),
Westin(R), Marriott(R), Holiday Inn(R) and Radisson(R), and one hotel operated
under an independent brand name. In the six months ended June 30, 1996, the
operating performance of the Owned Hotels improved significantly, as
demonstrated by the 7.5% increase in revenues, 14.1% increase in gross operating
profit, and 12.5% increase in revenue per available room ("RevPAR") over the
comparable year earlier period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------- PERCENTAGE
1996 1995 INCREASE
------- ------- ----------
<S> <C> <C> <C>
Revenues (in thousands)....................... $58,099 $54,036 7.5%
Gross operating profit (in thousands)......... $17,594 $15,415 14.1%
Average Occupancy............................. 73.3% 71.9% 1.9%
Average Daily Rate ("ADR").................... $ 82.47 $ 74.73 10.4%
RevPAR........................................ $ 60.45 $ 53.73 12.5%
</TABLE>
Additionally, the performance of the Owned Hotels compares favorably with
that of the industry in general. For the five months ended May 31, 1996 (the
most recent period for which industry information is currently available),
RevPAR for the Owned Hotels increased 12.6%, while RevPAR for all upscale
hotels, as reported by Smith Travel Research, increased 5.8%.
As a fully integrated owner and manager, CapStar intends to capitalize on
its management experience and expertise by continuing to make opportunistic
acquisitions of full-service hotels, securing
3
<PAGE>
additional management contracts and improving the operating performance of the
Hotels. The Company's senior management team has successfully managed hotels in
all segments of the lodging industry, with particular emphasis on upscale,
full-service hotels. Senior management has an average of approximately 19 years
of experience in the hotel industry. Since the inception of the Company's
management business in 1987, the Company has achieved consistent growth, even
during periods of relative industry weakness. The Company attributes its
management success to its ability (i) to analyze each hotel as a unique property
and identify those particular cash flow growth opportunities which each hotel
presents, (ii) to create and implement marketing plans that properly position
each hotel within its local market, and (iii) to develop management programs
that emphasize guest service, labor productivity, revenue yield and cost
control. The Company has a distinct management culture that stresses creativity,
loyalty and entrepreneurship and was developed to emphasize operations from an
owner's perspective. This culture is reinforced by the fact that 33 members of
management will own an aggregate of 7.7% of the Company's equity upon completion
of the Offering. See "Principal Stockholders and Selling Stockholder."
The Company is in the process of renovating and repositioning the Owned
Hotels based on strategic plans designed to address the opportunities presented
by each hotel and local market. Management selects renovations intended to
result in a high return on investment and to extend the Owned Hotels' appeal to
a broader range of market segments. Examples of these revenue generating
renovations include the following: enhancing meeting and banquet facilities to
attract lucrative group conferences and conventions; upgrading guest rooms to
meet the needs of business travelers and to increase ADRs; renovating
restaurants and introducing new food and beverage concepts to attract additional
guests and local patrons; and completing necessary repairs and upgrades of
interior and exterior spaces to ensure high levels of quality and guest
satisfaction. During the 18 months ended June 30, 1996, the Company spent a
total of $14.0 million on renovations at the Owned Hotels and intends to spend
an additional $15.8 million completing the renovation programs.
The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to acquire, own and manage
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, the Company 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. Third,
because full-service hotels have a higher proportion of fixed costs to variable
costs than other segments of the lodging industry, full-service hotels afford
greater operating leverage than limited-service hotels, resulting in
increasingly higher profit margins as revenues increase. Finally, full-service
hotels require a greater depth of management expertise than limited-service
hotels, and the Company believes that its superior management skills provide it
with a significant competitive advantage in their operation.
In connection with its growth strategy, the Company has entered into a
binding contract with MBL Life Assurance Corporation ("MBL") to acquire five
upscale, full-service hotels (the "Additional Hotels") which contain 1,121
rooms, for a purchase price of $68.4 million. Four of the Additional Hotels have
been managed by the Company since 1991. Since assuming management of these four
hotels, the Company has improved the operating performance of the properties.
However, the Company believes that, with appropriate capital spending, the
Additional Hotels can achieve further improvements in revenue and cash flow. The
Company plans to spend approximately $3.7 million subsequent to the acquisition
to renovate and reposition the Additional Hotels. The acquisition is scheduled
to close, subject to customary closing conditions, in December 1996. There can
be no assurance, however, that
4
<PAGE>
the closing will occur. See "Risk Factors--Risks Associated with Expansion" and
"Business and Properties--The Properties--The Additional Hotels."
BUSINESS AND PROPERTIES
The Company seeks to increase shareholder value by (i) continuing to acquire
upscale, full-service hotels below replacement cost in selected markets
throughout the United States and (ii) implementing its operating strategy to
improve hotel operations and increase cash flow.
ACQUISITION STRATEGY
The Company intends to continue acquiring upscale, full-service hotels. In
addition to the direct acquisition of hotels, the Company anticipates that it
may make investments in hotels through joint ventures with strategic business
partners or through equity contributions or secured loans. The Company
identifies acquisition candidates located in markets with economic, demographic
and supply dynamics favorable to hotel owners and operators. Through its
extensive due diligence process, the Company chooses those acquisition targets
where it believes selective capital improvements and intensive management will
increase the hotel's ability to attract key demand segments, enhance hotel
operations and increase long-term value. In order to evaluate the relative
merits of each investment opportunity, senior management and individual
operations teams create detailed plans covering all areas of renovation and
operation. These plans serve as the basis for the Company's acquisition
decisions and guide subsequent renovation and operating plans. At the Owned
Hotels, the Company has been able to implement these plans and apply its system
of management to create improvements in revenue and profitability.
The Company expects that its relationships throughout the industry and its
acquisition staff located on both coasts of the United States will continue to
provide it with a competitive advantage in identifying, evaluating and
purchasing hotels which meet its acquisition criteria. The Company has a record
of successfully renovating and repositioning hotels, both at the Owned Hotels
and at the Hotels that are managed, but not owned, by the Company (the "Managed
Hotels"), varying in levels of service, room rates and market types. As a public
company, the Company believes it will have improved access to various debt and
equity financing sources to fund acquisitions. In addition, in consummating
acquisitions the Company expects that it will benefit from its ability to
utilize units of limited partnership interest in its subsidiary Operating
Partnership (as defined herein) as an alternative to cash. The Company is
currently negotiating with Bankers Trust Company ("Bankers Trust"), The First
National Bank of Boston and Wells Fargo Bank (together the "Banks") to obtain a
new $225 million revolving credit facility (the "Credit Facility"), under which
capital will be available to pursue acquisitions and make capital investments in
subsequently acquired hotels. See "Risk Factors--Risk of Debt Financing; No
Limits on Indebtedness." The Company currently expects to retain earnings for
future acquisitions and the renovation and maintenance of the hotels it owns.
OPERATING STRATEGY
The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with
high-quality service and value. The Company seeks to achieve these objectives by
creating and executing management plans that are specifically tailored for each
individual Hotel rather than by implementing an operating strategy that is
designed to maintain a uniform corporate image or brand. The Company believes
that its custom-tailored business plans are the most effective means of
addressing the needs of a given hotel or market. The Company believes that
skilled management of hotel operations is the most critical element in
maximizing revenue and cash flow in full-service hotels.
5
<PAGE>
The Company's corporate headquarters carries out financing and acquisition
activities and provides services to support as well as monitor the Company's
on-site operating executives. Each of the Company's executive departments,
including Sales and Marketing, Human Resources and Training, Food and Beverage,
Technical Services, Development, and Corporate Finance, is headed by an
executive with significant experience in that area. These departments support
decentralized decision-making by the hotel operating executives by providing
accounting and budgeting services, property management software and other
resources which cannot be economically maintained at the individual Hotels.
THE PROPERTIES
The following table sets forth certain information for each of the Owned
Hotels and the Additional Hotels for the 12 months ended June 30, 1996:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30, 1996
--------------------
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY
- --------------------------------------------- --------------------- ----- ------- ---------
<S> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton................. Irvine, CA 290 $ 73.61 65.1%
Sheraton Hotel............................... Colorado Springs, CO 502 63.57 68.5
The Latham Hotel............................. Washington, DC 143 102.60 73.2
The Westin Hotel, Atlanta Airport............ Atlanta, GA 496 71.64 84.1
Radisson Hotel............................... Schaumburg, IL 202 69.23 62.7
Marriott Hotel............................... Somerset, NJ 434 96.49 72.3
Sheraton Airport Plaza....................... Charlotte, NC 226 79.02 73.9
Holiday Inn.................................. Cleveland, OH 237 66.96 75.2
Hilton Hotel................................. Arlington, TX 310 79.01 75.1
Salt Lake Airport Hilton..................... Salt Lake City, UT 287 75.13 71.3
Hilton Hotel................................. Arlington, VA 209 105.35 76.3
Hilton Hotel................................. Bellevue, WA 180 86.31 78.1
----- ------- ---
Total/Weighted Average--Owned Hotels........ 3,516 $ 78.89 73.2%
ADDITIONAL HOTELS
Hilton Hotel................................. Sacramento, CA 326 $ 74.53 71.2%
Santa Barbara Inn............................ Santa Barbara, CA 71 125.13 84.0
Holiday Inn.................................. Colorado Springs, CO 201 56.54 72.3
Embassy Row Hotel............................ Washington, DC 195 113.88 58.0
Hilton Hotel & Towers........................ Lafayette, LA 328 67.90 72.3
----- ------- ---
Total/Weighted Average--Additional Hotels... 1,121 $ 78.72 70.3%
----- ------- ---
Total/Weighted Average 4,637 $ 78.85 72.5%
----- ------- ---
----- ------- ---
</TABLE>
The Company's principal executive offices are located at 1010 Wisconsin
Avenue, N.W., Suite 650, Washington, DC 20007, and its telephone number is (202)
965-4455.
6
<PAGE>
STRUCTURE OF THE COMPANY
Upon consummation of the Formation Transactions, the Company's structure
will be as follows:
CAPSTAR HOTEL COMPANY(1)
NON-AFFILIATED
LIMITED PARTNERS
0% L.P.(2) 100% General and Limited
Partner Interest
CAPSTAR MANAGEMENT COMPANY, L.P.
("CAPSTAR MANAGEMENT" OR THE "OPERATING PARTNERSHIP")
1001%
THE OWNES HOTELS(3)
- ------------
(1) For a description of the transactions relating to the organization of the
Company and its structure, see "Formation Transactions."
(2) Immediately following the Formation Transactions, no limited partnership
units will be held by non-affiliated limited partners. However, in the
future, the Company may seek to acquire additional properties and issue
limited partnership units in payment of some or all of the purchase price
therefor. Such units may be redeemed, subject to certain conditions, for
cash or shares of Common Stock.
(3) Immediately following the closing of the Offering, all of the Owned Hotels
(except The Westin Hotel, Atlanta Airport (the "Westin Atlanta Airport"))
will be wholly-owned by the Company through separate limited liability
company and partnership subsidiaries. The Westin Atlanta Airport is
majority-owned by the Company through a partnership in which the Company
holds an 85.2% limited partner interest, 1% general partner interest and a
mortgage which together provide the Company a 92% economic interest in the
hotel.
7
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered by the
Company............................. 6,750,000 shares
Common Stock Offered by the
Selling Stockholder............... 2,500,000 shares(1)
Common Stock to be Outstanding after
the Offering........................ 12,754,321 shares(2)
Use of Proceeds..................... The net proceeds of the Offering to be received by
the Company will be used to repay a portion of the
Company's currently outstanding indebtedness under a
credit facility that was provided by Lehman Brothers
Holdings, Inc. ("Lehman Holdings"), an affiliate of
Lehman Brothers Inc. ("Lehman").
NYSE Symbol......................... "CHO"
</TABLE>
- ------------
(1) The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Stockholder in the Offering.
(2) Does not include up to 1,387,500 shares of Common Stock subject to an
over-allotment option granted to the Underwriters. See "Underwriting."
8
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION
Prior to the Formation Transactions and the Offering, the business of the
Company was conducted through EquiStar Hotel Investors, L.P. ("EquiStar"), which
owned 11 of the Owned Hotels, and CapStar Management Company, L.P. ("CapStar
Management"), which managed the Hotels. CapStar Management has been in the hotel
management business since 1987. EquiStar, however, was not formed until January
12, 1995 and the Company did not own any hotels in any prior periods. Therefore,
the Company's financial statements prior to 1995 reflect only the management
business of CapStar Management. In 1994, the Company began to invest in
additional professional staff and incurred related costs in order to position
itself to acquire hotel properties. From January 12, 1995 through June 30, 1996,
the Company acquired 11 hotels on various dates. Thus, the historical financial
statements for the period ended December 31, 1995 and the six months ended June
30, 1996 and 1995 reflect differing numbers of Owned Hotels throughout the
periods. The unaudited pro forma financial statements for 1995 and the six
months ended June 30, 1996 reflect the operations of the Owned Hotels and the
Additional Hotels for the entire periods.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- ----------------------------
PRO PRO
FORMA FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------ ------ ------ ------ --------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms.......................... $ 0 $ 0 $ 0 $ 0 $ 14,456 $ 91,861 $ 1,929 $ 28,121 $ 49,642
Food, beverage and other....... 0 0 0 0 7,471 51,919 754 16,049 26,768
Management services and other
revenues........................ 2,692 3,479 4,234 4,418 4,436 3,274 2,128 2,087 1,681
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total revenues............. 2,692 3,479 4,234 4,418 26,363 147,054 4,811 46,257 78,091
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating costs and expenses:
Departmental expenses:
Rooms.......................... 0 0 0 0 4,190 24,214 528 7,365 12,613
Food, beverage and other....... 0 0 0 0 5,437 40,790 506 11,391 20,476
Undistributed operating costs:
Selling, general and
administrative.................. 2,239 2,836 4,065 4,508 8,078 31,808 2,463 9,457 15,600
Property operating costs....... 0 0 0 0 3,934 21,681 511 7,497 12,381
Depreciation and
amortization.................... 16 12 14 23 2,098 11,867 303 3,919 5,979
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total operating costs and
expenses........................ 2,255 2,848 4,079 4,531 23,737 130,360 4,311 39,629 67,049
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating income/(loss)......... 437 631 155 (113) 2,626 16,694 500 6,628 11,042
Interest expense, net........... 28 0 0 0 2,413 10,433 334 7,290 5,166
Minority interest............... 0 0 0 0 (17) (59) 0 (68) (31)
Provision for income taxes(B)... 0 0 0 0 0 2,528 0 0 2,363
Income/(loss) before
extraordinary item.............. 409 631 155 (113) 230 3,792 166 (594) 3,544
Extraordinary item(C)........... 0 0 0 0 (887) 0 0 0 0
Net income/(loss)............... 409 631 155 (113) (657) 3,792 166 (594) 3,544
------ ------ ------ ------ --------- --------- ------- -------- ---------
------ ------ ------ ------ --------- --------- ------- -------- ---------
Net income per common share..... -- -- -- -- -- $ 0.30 -- -- $ .28
OTHER FINANCIAL DATA:
EBITDA(D)....................... $ 453 $ 643 $ 169 $ (90) $ 4,724 $ 28,561 $ 803 $ 10,547 $ 17,021
Net cash provided by (used in)
operating activities........... 182 87 (101) 66 4,357 19,721 90 3,891 11,338
Net cash used in investing
activities...................... (16) (65) (24) (41) (116,573) (282,963) (46,108) (95,625) (173,741)
Net cash provided by (used in)
financing activities........... 19 (219) 244 0 119,048 282,809 47,900 89,809 173,370
BALANCE SHEET DATA:
Property and equipment, gross... $ 98 $ 110 $ 134 $ 176 $ 110,883 -- $40,703 $195,304 $ 283,558
Total assets.................... 740 586 1,458 1,232 132,650 -- 54,113 231,736 308,420
Long term obligations........... 219 0 0 0 73,574 -- 25,680 164,892 126,957
</TABLE>
9
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- -------- -------- -------- -------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Owned Hotels:
Number of hotels........... -- -- -- -- 6 17 3 11 17
Number of guest rooms...... -- -- -- -- 2,101 4,637 991 3,307 4,637
Total revenues (in
thousands).................. -- -- -- -- $ 21,927 $ 143,780 $ 2,683 $44,170 $76,410
Average occupancy.......... -- -- -- -- 72.3% 71.8% 76.8% 72.7% 73.0%
ADR(E)..................... -- -- -- -- $ 71.58 $ 75.59 $ 72.28 $ 80.56 $ 81.99
RevPAR(F).................. -- -- -- -- $ 51.75 $ 54.27 $ 55.51 $ 58.57 $ 59.85
All Hotels(G):
Number of hotels(H)........ 23 34 34 39 46 -- -- -- --
Number of guest rooms(H)... 3,893 5,918 5,971 5,847 7,895 -- -- -- --
Total revenues (in
thousands).................. $65,405 $109,837 $123,124 $128,151 $170,888 -- -- -- --
Certain Managed Hotels(I):
Number of hotels........... -- -- 18 18 18 -- -- -- --
Number of guest rooms...... -- -- 2,967 2,967 2,967 -- -- -- --
Total revenues (in
thousands).................. -- -- $ 40,691 $ 44,453 $ 46,905 -- -- -- --
Average occupancy.......... -- -- 69.7% 70.6% 70.7% -- -- -- --
ADR(E)..................... -- -- $ 56.99 $ 60.33 $ 63.71 -- -- -- --
RevPAR(F).................. -- -- $ 39.72 $ 42.59 $ 45.04 -- -- -- --
</TABLE>
- ------------
<TABLE>
<C> <S>
(A) The pro forma Operating Results, Other Financial Data and Operating Data for the six
months ended June 30, 1996 and for the year ended December 31, 1995 have been prepared
as if the Formation Transactions, the Offering, the acquisition of the Owned Hotels and
the Additional Hotels, and the execution of the Credit Facility had been consummated at
the beginning of the periods presented, and the pro forma Balance Sheet Data as of June
30, 1996 has been prepared as if the Formation Transactions, the Offering, the
acquisition of the Owned Hotels and the Additional Hotels, and the execution of the
Credit Facility had been consummated on such date.
(B) No provision for federal income taxes is included in the historical data because CapStar
Management and EquiStar are partnerships and all federal income tax liabilities were
passed through to the individual partners.
(C) During 1995, the Company's loan facility was refinanced, and the write-off of deferred
costs associated with the prior facility was recorded as an extraordinary loss.
(D) EBITDA represents earnings before interest expense, income taxes, depreciation and
amortization. Management believes that EBITDA is a useful measure of operating
performance because it is industry practice to evaluate hotel properties based on
operating income before interest, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the
property owner. EBITDA does not represent cash flow from operations as defined by
generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash
available to fund all cash flow needs and should not be considered as an alternative to
net income under GAAP for purposes of evaluating the Company's results of operations.
(E) Represents total room revenues divided by total number of rooms occupied by hotel guests
on a paid basis.
(F) Represents total room revenues divided by total available rooms, net of rooms out of
service due to significant renovations.
(G) Represents operating data for all hotels managed by the Company during all or a portion
of the periods presented.
(H) As of December 31 for the periods presented.
(I) Represents operating data for those hotels managed by the Company during all of the
periods presented.
</TABLE>
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RISK FACTORS
An investment in the Common Stock involves material risks. In addition to
general investment risk and those factors set forth elsewhere in this
Prospectus, prospective investors should carefully consider, among other things,
the following risks before making an investment.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
Operating Risks. The Company's business is subject to all of the operating
risks inherent in the lodging industry. These risks include the following:
changes in general and local economic conditions; cyclical overbuilding in the
lodging industry; varying levels of demand for rooms and related services;
competition from other hotels, motels and recreational properties; changes in
travel patterns; the recurring need for renovations, refurbishment and
improvements of hotel properties; changes in governmental regulations that
influence or determine wages, prices and construction and maintenance costs; and
changes in interest rates and the availability of credit. Demographic,
geographic or other changes in one or more of the Company'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.
Competition in the Lodging Industry. The lodging industry is highly
competitive. There is no single competitor or small number of competitors of the
Company that are dominant in the industry. The Hotels operate in areas that
contain numerous competitors, many of which have substantially greater resources
than the Company. 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 Hotels compete, thereby
adversely affecting the Company's operations.
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. This seasonality can be expected to cause quarterly
fluctuations in the revenues of the Company. Quarterly earnings also may be
adversely affected by events beyond the Company's control, such as extreme
weather conditions, economic factors and other considerations affecting travel.
Franchise Agreements. Upon completion of the Offering, all but one of the
Owned Hotels will be operated pursuant to existing franchise or license
agreements (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 the Company's philosophy
of creating specific business plans tailored to each Owned 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. In connection
with changing the franchise affiliation of an Owned Hotel or a subsequently
acquired hotel, the Company may be required to incur significant expenses or
capital expenditures. The Franchise Agreements covering the 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.
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<PAGE>
RISKS ASSOCIATED WITH EXPANSION
Competition for Expansion Opportunities. The Company competes for the
acquisition of hotels with entities that have substantially greater financial
resources than the Company. The Company 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 recent
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.
Failure to Consummate Acquisitions. The Company has entered into a binding
contract to acquire the Additional Hotels and in the future may enter into
contracts to acquire other hotels as well. There can be no assurance that the
Company will be able to consummate the acquisition of any such hotels. Failure
to consummate such acquisitions could affect the Company's ability to implement
its acquisition strategy.
Integration Risks. To successfully implement its acquisition strategy, the
Company must be able to continue to successfully integrate new hotels into its
existing operations. The consolidation of functions and integration of
departments, systems and procedures of the new hotels with the Company's
existing operations presents a significant management challenge, and the failure
to integrate new hotels into the Company's management and operating structures
could have a material adverse effect on the results of operations and financial
condition of the Company. There can be no assurance that the Company will be
able to achieve operating results in its new hotels comparable to the historical
performance of its hotels.
RISKS ASSOCIATED WITH OWNING REAL ESTATE
The Company currently owns 12 hotels and has entered into a contract to
acquire the five Additional Hotels. Accordingly, the Company will be subject to
varying degrees of risk generally incident to the ownership of real estate.
These risks include, among other things, 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 uninsured casualty and other losses, the impact of present or
future environmental legislation and adverse changes in zoning laws and other
regulations. Many of these risks are beyond the control of the Company. In
addition, real estate investments are relatively illiquid, resulting in a
limited ability of the Company to vary its portfolio of hotels in response to
changes in economic and other conditions.
HOTEL RENOVATION RISKS
The renovation of hotels involves risks associated with construction and
renovation of real property, including the possibility of construction cost
overruns and delays due to various factors (including the inability to obtain
regulatory approvals, inclement weather, labor or material shortages and the
unavailability of construction and permanent financing) and market or site
deterioration after acquisition or renovation. Any unanticipated delays or
expenses in connection with the renovation of hotels could have an adverse
effect on the results of operations and financial condition of the Company.
RISK OF DEBT FINANCING; NO LIMITS ON INDEBTEDNESS
As described under "Use of Proceeds," the Company will use substantially all
of the net proceeds of the Offering to repay a portion of its outstanding
indebtedness to Lehman Holdings. After giving effect to such repayment, the
Company's outstanding indebtedness to Lehman Holdings will be approximately
$55.7 million. Under the terms of its agreement with Lehman Holdings, such
remaining indebtedness will be due 90 days following the closing of the
Offering, which may be extended for an
12
<PAGE>
additional 60 days by the Company if it is not in default. The Company has
entered into negotiations with the Banks to obtain the Credit Facility in the
maximum principal amount of $225 million. Borrowings under the Credit Facility
will be used by the Company to repay existing indebtedness owed to Lehman
Holdings, to fund the acquisition of hotels (including completing the
acquisition of the Additional Hotels), to fund renovations and capital
improvements to hotels and for general working capital needs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance that the
Company's negotiations with the Banks will ultimately be successfully concluded.
Failure to enter into the Credit Facility or to obtain other financing required
to repay the Company's indebtedness to Lehman Holdings could have a material
adverse effect on the Company and could result in the Company being required to
liquidate one or more of its hotel investments and/or risk loss of some or all
of its assets which secure its obligations.
Neither the Company's Certificate of Incorporation nor its By-laws limit the
amount of indebtedness that the Company may incur. Subject to limitations in its
debt instruments, including those expected to be included in the Credit
Facility, the Company expects to incur additional debt in the future to finance
acquisitions and renovations. The Company's continuing substantial indebtedness
could increase its vulnerability to general economic and lodging industry
conditions (including increases in interest rates) and could impair the
Company's ability to obtain additional financing in the future and to take
advantage of significant business opportunities that may arise. The Company's
indebtedness is, and will likely continue to be, secured by mortgages on all of
the Owned Hotels and by the equity of certain subsidiaries of the Company. There
can be no assurances that the Company will be able to meet its debt service
obligations and, to the extent that it cannot, the Company risks the loss of
some or all of its assets, including the Owned Hotels and the Additional Hotels,
to foreclosure. Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable. In such circumstances, if the
Company 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
hotels at times which may not permit realization of the maximum return on such
investments.
It is anticipated that the Credit Facility will contain a number of
significant covenants that, among other things, restrict the ability of the
Company and its subsidiaries to (i) acquire or dispose of assets or businesses,
(ii) incur additional indebtedness, (iii) make capital expenditures, (iv) pay
dividends, (v) create liens on assets, (vi) enter into leases, investments or
acquisitions, (vii) engage in mergers or consolidations, or (viii) engage in
certain transactions with subsidiaries and affiliates, and otherwise restrict
corporate activities of the Company (including its ability to acquire additional
hotels, hotel businesses or assets, certain changes of control and asset sale
transactions) without the consent of the lenders. In addition, the Company will
be required to maintain specified financial ratios and comply with tests,
including minimum interest coverage ratios, maximum leverage ratios, minimum net
worth and minimum equity capitalization requirements.
Upon completion of the Offering, all of the Company's outstanding
indebtedness will bear interest at a variable rate. It is also anticipated that
the Company's indebtedness under the Credit Facility will bear interest at a
variable rate. Economic conditions could result in higher interest rates, which
could increase debt service requirements on variable rate debt and could reduce
the amount of cash available for various corporate purposes. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CONTROLLING STOCKHOLDERS
Upon consummation of the Offering, Acadia Partners, L.P., a private
investment partnership, and related entities ("Acadia Partners"), and certain
members of management will beneficially own an aggregate of 27.5% (24.8% if the
over-allotment option is exercised in full) of the issued and outstanding shares
of Common Stock. See "Formation Transactions--Background" and "Principal and
Selling Stockholders." So long as Acadia Partners and such members of management
beneficially own a
13
<PAGE>
substantial interest in the Company, they may have the ability to elect or
remove members of the Board of Directors of the Company (the "Board"), and
thereby control the management and affairs of the Company, and may have the
power to approve or block most actions requiring approval of the stockholders of
the Company. See "Principal Stockholders and Selling Stockholder" and
"Description of Capital Stock."
SUBSTANTIAL RELIANCE ON KEY PERSONNEL
The Company will place substantial reliance on the lodging industry
knowledge and experience and the continued services of its senior management,
led by Paul W. Whetsell and David E. McCaslin. The Company's future success and
its ability to manage future growth depend in large part upon the efforts of
these persons and on the Company's ability to attract and retain other highly
qualified personnel. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel. The loss of services of Messrs. Whetsell or McCaslin or the
Company's inability to attract and retain other highly qualified personnel may
adversely affect the results of operations and financial condition of the
Company. The Company currently has employment agreements with Messrs. Whetsell
and McCaslin for terms of three years each, which contain certain non-compete
clauses. See "Management--Employment Agreements."
POTENTIAL FOR CONFLICTS OF INTEREST
Mr. Whetsell and Mr. McCaslin and corporations owned by them own, directly
or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in one
of the Managed Hotels and (ii) minority equity interests in eight of the Managed
Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the
entities that own five of these Managed Hotels (the "Affiliated Owners") through
their ownership of certain entities which serve as general partners of the
Affiliated Owners. Such interests were acquired prior to the formation of
EquiStar and CapStar Management. During 1995, the Company received approximately
$826,000 in management fees from the nine hotels in which Messrs. Whetsell and
McCaslin own an equity interest, including approximately $630,000 in management
fees from the Affiliated Owners.
Conflicts may arise in the future between the Company and the Affiliated
Owners with respect to certain Management Agreements (as defined below) between
the Company and such Affiliated Owners. These conflicts may arise in connection
with the exercise of any rights or the conduct of any negotiations to extend,
renew, terminate or amend such agreements. There can be no assurance that such
conflicts will be resolved in favor of the Company. Transactions involving the
Company and the Affiliated Owners will be passed on for the Company by a
majority of the Independent Directors (as defined herein) of the Board.
Although none of the Managed Hotels owned by Affiliated Owners now competes
with the Owned Hotels, the Company may in the future acquire a hotel in a market
in which a hotel owned by an Affiliated Owner now operates. See "Certain
Relationships and Related Transactions--Ownership Interests in Certain Managed
Hotels."
Under the terms of their employment agreements, Messrs. Whetsell and
McCaslin are prohibited from hereafter acquiring any interests in hotels or
hotel management companies while they serve as officers of the Company. See
"Management--Employment Agreements."
TERMINATION OF MANAGEMENT AGREEMENTS
The Company operates the 37 Managed Hotels pursuant to third party
management agreements (the "Management Agreements") with the owners of such
Managed Hotels. The Management Agreements have remaining terms ranging from one
month to nine years. Substantially all of the Management Agreements permit the
owners of the Managed Hotels to terminate such agreements prior to the stated
expiration dates if the applicable hotel is sold, and several of the Management
Agreements
14
<PAGE>
permit the owners of the Managed Hotels to terminate such agreements prior to
the stated expiration date without cause or by reason of the failure of the
applicable hotel to obtain specified levels of performance. For 1995, the
Company's pro forma revenue from Management Agreements was $3.3 million
constituting 2.3% of the Company's total revenue for such period. No single
Management Agreement currently accounts for more than 5% of the total revenue
from the Management Agreements on a pro forma basis. Additionally, no group of
Management Agreements for hotels under common ownership or control currently
accounts for more than 13% of the total revenue from the Management Agreements
on a pro forma basis. The early termination of the Management Agreements or the
inability of the Company to negotiate renewals of Management Agreements upon the
expiration of their stated terms would have an adverse impact on the revenues
received by the Company from its management business.
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, the Company 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 two of
the Owned Hotels.
All of the Owned Hotels have undergone Phase I environmental site
assessments ("Phase Is"), which generally provide a 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 Is is
to identify potential sources of contamination for which the Owned Hotels may be
responsible and to assess the status of environmental regulatory compliance. The
Phase Is have not revealed any environmental liability or compliance concerns
that the Company believes would have a material adverse effect on the Company's
results of operation or financial condition, nor is the Company aware of any
such liability or concerns.
In addition, the 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. Limited quantities of ACMs are present in various building materials
such as sprayed-on ceiling treatments, roofing materials or floor tiles at the
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
the Company and its lenders, the Company believes that the presence of ACMs in
its Owned Hotels will not have a material adverse effect on the Company'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
the Company's results of operations or financial condition.
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<PAGE>
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. The Company
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 Owned Hotels and could
otherwise adversely affect the Company'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 Owned Hotels, a determination that the Company 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. The Company is
likely to incur additional costs of complying with the ADA; however, such costs
are not expected to have a material adverse effect on the Company's results of
operations or financial condition.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY IN STOCK PRICE
The initial public offering price has been determined by negotiations among
the Company and the representatives of the several Underwriters and may not be
indicative of the market price of the Common Stock after the Offering. Prior to
the Offering, there has been no public market for the Common Stock. Accordingly,
there can be no assurance that an active trading market for the Common Stock
will develop and continue upon consummation of the Offering or that the market
price of the Common Stock will not decline below the initial public offering
price. Following consummation of the Offering, the market price of the Common
Stock could be subject to significant fluctuations in response to variations in
results of operations, general economic and market conditions and other factors.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock sold in the Offering will experience
immediate dilution of $6.31 per share in the net tangible book value per share
of Common Stock from the initial public offering price. See "Dilution."
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock (including shares issuable upon
the exercise of stock options), or the perception that such sales could occur,
could adversely affect prevailing market prices for the Common Stock. Upon
consummation of the Offering, the Company will have outstanding 12,754,321
shares of Common Stock (assuming no exercise of the over-allotment option).
Except for the 9,250,000 shares sold in the Offering, all of these shares will
be Restricted Securities (as defined below) under Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"). The Company has granted certain
registration rights to the recipients of restricted securities issued in
connection with the Formation Transactions, which registration rights cover all
of the securities issued in connection with the Formation Transactions. The
Company and Acadia Partners (who beneficially owns 2,514,804 shares of Common
Stock) have agreed not to offer, sell, contract to sell or otherwise dispose of
any such shares of Common Stock or any securities convertible into or
exercisable for Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Lehman. Certain entities
controlled by members of management (who beneficially own an aggregate of
989,517 shares of Common Stock) have agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable for Common Stock for a period of 360 days after the date of
this Prospectus without the prior written consent of Lehman. There can be no
assurance that Lehman will not grant any such consent. See "Shares Available for
Future Sale."
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THE FORMATION TRANSACTIONS
BACKGROUND
CapStar Hotels, Inc. ("CHI"), a hotel management and investment company, was
founded in 1987 by Paul W. Whetsell and certain other investors. Acadia Partners
was formed in 1987 by a group of institutional investors, including commercial
banks, insurance companies and money managers. Acadia Partners pursues both
leveraged acquisitions and selected securities investments. Since its inception,
Acadia Partners has sponsored or co-sponsored 25 leveraged acquisitions with a
combined value of $7 billion in a variety of industries including financial
services, insurance, food and consumer products, retailing information services
and industrial manufacturing. Acadia Partners also manages active portfolios of
public high-yield bonds, common stock and distressed securities in excess of $1
billion.
In January 1995, CHI, Acadia Partners and their respective affiliates formed
EquiStar and CapStar Management. EquiStar was formed to acquire upscale,
full-service hotels throughout the United States and completed its first
acquisition in March 1995. CapStar Management was formed to acquire and continue
the hotel management business of CHI and its affiliates. In connection with the
formation of CapStar Management, all of the Management Agreements of CHI and its
affiliates were assigned to CapStar Management. Prior to the completion of
Formation Transactions, CapStar Management was owned approximately 61% by Acadia
Partners and approximately 39% by entities owned by members of Company
management, and EquiStar was owned approximately 87% by Acadia Partners and
approximately 13% by entities owned by members of Company management.
FORMATION TRANSACTIONS
Pursuant to agreements executed prior to the initial filing of the Company's
Registration Statement with respect to the Offering, each of the following
events will occur immediately prior to the closing of the Offering (the
"Closing"):
. a limited partner of CapStar Management will contribute its partnership
interest in CapStar Management to the Company in exchange for shares of
Common Stock;
. the Company will contribute such partnership interest to CapStar LP
Corporation, a wholly-owned subsidiary of the Company ("CapStar Sub");
. the remaining partners of CapStar Management (including its general
partner but not including CapStar Sub) and the partners of EquiStar will
contribute their respective partnership interests in CapStar Management
and EquiStar to the Company in exchange for shares of Common Stock;
. the Company will contribute all the assets of EquiStar to CapStar
Management and CapStar Management will assume all of the liabilities of
EquiStar; and
. the Agreement of Limited Partnership of CapStar Management will be amended
and restated to reflect the fact that CapStar Management has succeeded to
the business of EquiStar and as otherwise necessary to permit it to
function as the Company's operating partnership (the "Operating
Partnership").
As a result of these transactions (the "Pre-Closing Transactions"), the
Company and CapStar Sub will be the sole partners of the Operating Partnership
and the Operating Partnership will own (directly or indirectly) all of the
assets currently owned by EquiStar and CapStar Management. Simultaneously with
the Closing, the Company will acquire (i) by a deed in lieu of foreclosure, the
Hilton Hotel, Arlington, Virginia, which is currently encumbered by a
mortgage owned by the Company (the "Arlington Acquisition"), and (ii) a 100%
beneficial interest in a $24 million mortgage note secured by the Westin Atlanta
Airport (the "Atlanta Mortgage Acquisition") which mortgage ranks senior to the
equity interest of the partners of the limited partnership that owns such hotel,
including the Company's 1% general partnership interest and 85.2% limited
partnership interest. The Pre-Closing Transactions, the Arlington Acquisition
and the Atlanta Mortgage Acquisition are together referred to as the "Formation
Transactions."
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $114.2 million (approximately $138.0 million if the over-allotment
option is exercised in full), assuming an initial public offering price of
$18.50 per share and after giving effect to estimated underwriting discounts and
commissions and offering expenses payable by the Company. The Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Stockholder in the Offering.
The Company expects to use the net proceeds of $114.2 million from the
Offering to repay a portion of the outstanding indebtedness under a credit
facility that is provided by Lehman Holdings, an affiliate of Lehman.
The indebtedness to be repaid bears interest at fixed and variable rates,
with a weighted average annual rate at June 30, 1996 of 11.5%, and matures at
various times through March 1999, with a weighted average maturity at June 30,
1996 of two years and six months. All of the indebtedness being repaid was
incurred since March 3, 1995 to finance the acquisition and renovation of the
Owned Hotels.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock and does not
anticipate that it will do so in the foreseeable future. The Company intends to
retain earnings to provide funds for the continued growth and development of the
Company's business. The Credit Facility is expected to restrict the Company's
ability to pay dividends on the Common Stock. Any determination to pay cash
dividends in the future will be at the discretion of the Board and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board.
18
<PAGE>
DILUTION
The net tangible book value of the Company, as adjusted to give effect to
the Pre-Closing Transactions, at June 30, 1996 was $42.4 million, or
approximately $7.07 per share of Common Stock based on 6,004,321 shares
outstanding. Net tangible book value per share represents the amount of tangible
assets of the Company, less total liabilities and minority interest, divided by
the number of shares of Common Stock outstanding prior to the Offering. After
giving effect to the Formation Transactions, including the sale by the Company
and the Selling Stockholder of the 9,250,000 shares of Common Stock offered
hereby (after deduction of underwriting discounts and commissions and other
estimated offering expenses and the application of the estimated net proceeds
therefrom), the pro forma net tangible book value of the Company at June 30,
1996 would have been $155.4 million, or $12.19 per share. This represents an
immediate increase in net tangible book value of $5.12 per share of Common Stock
to existing stockholders and an immediate dilution of approximately $6.31 per
share to new investors purchasing shares in the Offering. The sale of shares of
Common Stock by the Selling Stockholder in the Offering will have no effect on
dilution. The following table illustrates the per share dilution to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $18.50
Net tangible book value per share after the Pre-Closing
Transactions as of June 30, 1996........................... $7.07
Increase per share attributable to new investors........... 5.12
-----
Pro forma net tangible book value per share after the
Formation Transactions and the Offering.................... 12.19
------
Dilution per share to new investors........................ $ 6.31
------
------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the difference between the number of shares of Common Stock held by the existing
equity holders and the net book value of the assets and liabilities contributed
by the existing equity holders in the Pre-Closing Transactions, in the aggregate
and on a per share basis, and the number of shares of Common Stock purchased by
the investors in this Offering and the consideration paid, in the aggregate and
on a per share basis, by the investors purchasing shares of Common Stock in this
Offering (after deducting underwriting discounts and commissions and estimated
Offering expenses):
<TABLE>
<CAPTION>
NET BOOK VALUE OF
ASSETS
SHARES HELD OR OR CASH
ACQUIRED (IN THOUSANDS) AVERAGE
--------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Equity Holders.................... 6,004,321 47.1% $ 47,872 29.6% $ 7.97
New Investors.............................. 6,750,000 52.9 114,172 70.4 16.91
---------- ------- -------- ------- ---------
Total................................ 12,754,321 100.0% $162,044 100.0% $ 12.71
---------- ------- -------- ------- ---------
---------- ------- -------- ------- ---------
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996 and the pro forma capitalization of the Company before and
after the acquisition of the Additional Hotels. The information below should be
read in conjunction with the combined financial statements and notes thereto and
the pro forma financial statements and notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
(IN THOUSANDS)
-------------------------------------------------
PRO FORMA AFTER
PRO FORMA BEFORE ACQUISITION OF
ACQUISITION OF THE THE ADDITIONAL
ACTUAL ADDITIONAL HOTELS HOTELS
-------- ------------------ ---------------
<S> <C> <C> <C>
DEBT:
Total long-term debt............................... $168,112 $ 58,557 $ 126,957
Minority interest.................................. 576 576 576
STOCKHOLDERS' EQUITY:
Preferred Stock ($.01 par value, 25,000,000 shares
authorized, no shares issued or outstanding)....... -- -- --
Common Stock ($.01 par value, 49,000,000 shares
authorized, 12,754,321 shares issued and
outstanding)....................................... -- 127 127
Additional paid-in capital......................... 49,123 164,155 164,155
Retained earnings (deficit)........................ (1,251) (4,288) (4,288)
-------- ---------- ---------------
-------- ---------- ---------------
Total stockholders' equity................... 47,872 159,994 159,994
-------- ---------- ---------------
Total capitalization......................... $216,560 $219,127 $ 287,527
-------- ---------- ---------------
-------- ---------- ---------------
</TABLE>
20
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected historical and pro forma financial
information for the Company. The following information should be read in
conjunction with the historical combined financial statements and notes thereto
for the Company, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the unaudited pro forma financial statements and
notes thereto included elsewhere in this Prospectus. The selected financial data
of the Company as of June 30, 1996 and December 31, 1995 and 1994 and for the
six months ended June 30, 1996, the period from January 12, 1995 to December 31,
1995 and the years ended December 31, 1994 and 1993, have been derived from
audited financial statements which are included elsewhere in this Prospectus.
The comparable data for the balance sheets of the Company as of June 30, 1995
and December 31, 1993, 1992 and 1991 and for the statements of income and cash
flows for the six months ended June 30, 1995 and the years ended December 31,
1992 and 1991 have been derived from financial statements that are not required
to be included in this Prospectus.
The pro forma operating data and other data for the six months ended June
30, 1996 and for the year ended December 31, 1995 have been prepared as if the
Offering, the Formation Transactions, the acquisition of the Owned Hotels and
the Additional Hotels, and the execution of the Credit Facility had been
consummated at the beginning of the periods presented, and the pro forma balance
sheet data as of June 30, 1996 has been prepared as if the Offering, the
Formation Transactions, the acquisition of the Owned Hotels and the Additional
Hotels, and the execution of the Credit Facility had been consummated on such
date. The pro forma financial information is not necessarily indicative of what
the actual financial position and results of operations of the Company would
have been as of and for the periods indicated, nor does it purport to represent
the Company's future financial position and results of operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- ----------------------------
PRO PRO
FORMA FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------ ------ ------ ------ --------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms.......................... $ 0 $ 0 $ 0 $ 0 $ 14,456 $ 91,861 $ 1,929 $ 28,121 $ 49,642
Food, beverage and other....... 0 0 0 0 7,471 51,919 754 16,049 26,768
Management services and other
revenues........................ 2,692 3,479 4,234 4,418 4,436 3,274 2,128 2,087 1,681
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total revenues............. 2,692 3,479 4,234 4,418 26,363 147,054 4,811 46,257 78,091
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating costs and expenses:
Departmental expenses:
Rooms.......................... 0 0 0 0 4,190 24,214 528 7,365 12,613
Food, beverage and other....... 0 0 0 0 5,437 40,790 506 11,391 20,476
Undistributed operating costs:
Selling, general and
administrative.................. 2,239 2,836 4,065 4,508 8,078 31,808 2,463 9,457 15,600
Property operating costs....... 0 0 0 0 3,934 21,681 511 7,497 12,381
Depreciation and
amortization.................... 16 12 14 23 2,098 11,867 303 3,919 5,979
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total operating costs and
expenses........................ 2,255 2,848 4,079 4,531 23,737 130,360 4,311 39,629 67,049
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating income/(loss)......... 437 631 155 (113) 2,626 16,694 500 6,628 11,042
Interest expense, net........... 28 0 0 0 2,413 10,433 334 7,290 5,166
Minority interest............... 0 0 0 0 (17) (59) 0 (68) (31)
Provision for income taxes(B)... 0 0 0 0 0 2,528 0 0 2,363
Income/(loss) before
extraordinary item.............. 409 631 155 (113) 230 3,792 166 (594) 3,544
Extraordinary item(C)........... 0 0 0 0 (887) 0 0 0 0
Net income/(loss)............... 409 631 155 (113) (657) 3,792 166 (594) 3,544
------ ------ ------ ------ --------- --------- ------- -------- ---------
------ ------ ------ ------ --------- --------- ------- -------- ---------
Net income per common share..... -- -- -- -- -- $ 0.30 -- -- $ .28
OTHER FINANCIAL DATA:
EBITDA(D)....................... $ 453 $ 643 $ 169 $ (90) $ 4,724 $ 28,561 $ 803 $ 10,547 $ 17,021
Net cash provided by (used in)
operating activities........... 182 87 (101) 66 4,357 19,721 90 3,891 11,338
Net cash used in investing
activities...................... (16) (65) (24) (41) (116,573) (282,963) (46,108) (95,625) (173,741)
Net cash provided by (used in)
financing activities........... 19 (219) 244 0 119,048 282,809 47,900 89,809 173,370
BALANCE SHEET DATA:
Property and equipment, gross... $ 98 $ 110 $ 134 $ 176 $ 110,883 -- $40,703 $195,304 $ 283,558
Total assets.................... 740 586 1,458 1,232 132,650 -- 54,113 231,736 308,420
Long term obligations........... 219 0 0 0 73,574 -- 25,680 164,892 126,957
</TABLE>
21
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- -------- -------- -------- -------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Owned Hotels:
Number of hotels........... -- -- -- -- 6 17 3 11 17
Number of guest rooms...... -- -- -- -- 2,101 4,637 991 3,307 4,637
Total revenues (in
thousands).................. -- -- -- -- $ 21,927 $ 143,780 $ 2,683 $44,170 $76,410
Average occupancy.......... -- -- -- -- 72.3% 71.8% 76.8% 72.7% 73.0%
ADR(E)..................... -- -- -- -- $ 71.58 $ 75.59 $ 72.28 $ 80.56 $ 81.99
RevPAR(F).................. -- -- -- -- $ 51.75 $ 54.27 $ 55.51 $ 58.57 $ 59.85
All Hotels(G):
Number of hotels(H)........ 23 34 34 39 46 -- -- -- --
Number of guest rooms(H)... 3,893 5,918 5,971 5,847 7,895 -- -- -- --
Total revenues (in
thousands).................. $65,405 $109,837 $123,124 $128,151 $170,888 -- -- -- --
Certain Managed Hotels(I):
Number of hotels........... -- -- 18 18 18 -- -- -- --
Number of guest rooms...... -- -- 2,967 2,967 2,967 -- -- -- --
Total revenues (in
thousands).................. -- -- $ 40,691 $ 44,453 $ 46,905 -- -- -- --
Average occupancy.......... -- -- 69.7% 70.6% 70.7% -- -- -- --
ADR(E)..................... -- -- $ 56.99 $ 60.33 $ 63.71 -- -- -- --
RevPAR(F).................. -- -- $ 39.72 $ 42.59 $ 45.04 -- -- -- --
</TABLE>
- ------------
<TABLE>
<C> <S>
(A) The pro forma Operating Results, Other Financial Data and Operating Data for the six
months ended June 30, 1996 and for the year ended December 31, 1995 have been prepared
as if the Formation Transactions, the Offering, the acquisition of the Owned Hotels and
the Additional Hotels, and the execution of the Credit Facility had been consummated at
the beginning of the periods presented, and the pro forma Balance Sheet Data as of June
30, 1996 has been prepared as if the Formation Transactions, the Offering, the
acquisition of the Owned Hotels and the Additional Hotels, and the execution of the
Credit Facility had been consummated on such date.
(B) No provision for federal income taxes is included in the historical data because CapStar
Management and EquiStar are partnerships and all federal income tax liabilities were
passed through to the individual partners.
(C) During 1995, the Company's loan facility was refinanced, and the write-off of deferred
costs associated with the prior facility was recorded as an extraordinary loss.
(D) EBITDA represents earnings before interest expense, income taxes, depreciation and
amortization. Management believes that EBITDA is a useful measure of operating
performance because it is industry practice to evaluate hotel properties based on
operating income before interest, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the
property owner. EBITDA does not represent cash flow from operations as defined by
generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash
available to fund all cash flow needs and should not be considered as an alternative to
net income under GAAP for purposes of evaluating the Company's results of operations.
(E) Represents total room revenues divided by total number of rooms occupied by hotel guests
on a paid basis.
(F) Represents total room revenues divided by total available rooms, net of rooms out of
service due to significant renovations.
(G) Represents operating data for all hotels managed by the Company during all or a portion
of the periods presented.
(H) As of December 31 for the periods presented.
(I) Represents operating data for those hotels managed by the Company during all of the
periods presented.
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited Pro Forma Balance Sheet of the Company as of June 30, 1996 is
presented assuming: (i) the Formation Transactions, the Offering and the
application of the net proceeds, and the execution of the Credit Facility, had
been completed on June 30, 1996; and (ii) the Owned Hotels and the Additional
Hotels were owned on June 30, 1996.
The unaudited Pro Forma Statements of Operations of the Company for the six
months ended June 30, 1996 and for the year ended December 31, 1995 present the
results of operations of the Company assuming: (i) all of the Owned Hotels and
the Additional Hotels had been acquired at the beginning of the periods
presented; and (ii) the Formation Transactions, the Offering and the execution
of the Credit Facility were completed as of the beginning of the periods
presented.
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 unaudited Pro Forma Financial Statements.
The unaudited Pro Forma Financial Statements are not necessarily indicative
of what the Company's financial position or results of operations actually would
have been if all the Owned Hotels and Additional Hotels were, in fact, acquired
on such dates and if the Formation Transactions, the Offering, and the execution
of the Credit Facility had, in fact, occurred on such dates. Additionally, the
pro forma information does not purport to project the Company's financial
position or results of operations at any future date or for any future period.
The unaudited Pro Forma Financial Statements should be read in conjunction with
the audited historical combined financial statements and related notes thereto
of EquiStar and CapStar Management, which are included elsewhere in this
Prospectus.
23
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
(B) PRO FORMA (H)
OWNED OFFERING AND BEFORE ADDITIONAL PRO FORMA
HOTELS PRO OTHER PRO ACQUISITION OF HOTELS AFTER
(A) FORMA FORMA ADDITIONAL PRO FORMA ACQUISITION OF
HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS ADDITIONAL HOTELS
------------ ----------- ------------ -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 4,907,234 -- (857,304)(C) 4,049,930 -- 4,049,930
Escrows and restricted
funds................... 18,793,399 -- (14,943,227)(D) 3,850,172 -- 3,850,172
Property and equipment,
net:
Land................... 37,142,485 2,731,142 -- 39,873,627 19,822,514 59,696,141
Buildings and
improvements............ 125,072,821 14,826,199 -- 139,899,020 45,870,124 185,769,144
Furniture, fixtures and
equipment............... 21,786,534 1,950,816 -- 23,737,350 3,711,255 27,448,605
Construction-in-progress.... 6,321,996 -- -- 6,321,996 -- 6,321,996
------------ ----------- ------------ -------------- ----------- -----------------
Total property and
equipment, net.......... 190,323,836 19,508,157 209,831,993 69,403,893 279,235,886
Other assets............ 17,711,578 2,549,268 (932,500)(E) 19,328,346 1,956,141 21,284,487
------------ ----------- ------------ -------------- ----------- -----------------
Total assets............ $231,736,047 22,057,425 (16,733,031) 237,060,441 71,360,034 308,420,475
------------ ----------- ------------ -------------- ----------- -----------------
------------ ----------- ------------ -------------- ----------- -----------------
LIABILITIES, MINORITY
INTEREST AND EQUITY
Other liabilities....... 15,175,635 2,757,425 -- 17,933,060 2,960,034 20,893,094
Long-term debt:
Notes payable.......... 167,254,954 19,300,000 (126,991,227)(D) 58,556,727 68,400,000 126,956,727
(1,007,000)(F)
Capital lease
obligations............. 857,304 -- (857,304)(C) -- -- --
------------ ----------- ------------ -------------- ----------- -----------------
Total liabilities....... 183,287,893 22,057,425 (128,855,531) 76,489,787 71,360,034 147,849,821
Minority interest....... 576,314 -- -- 576,314 -- 576,314
------------ ----------- ------------ -------------- ----------- -----------------
Equity.................. 47,871,840 -- 112,122,500(G) 159,994,340 -- 159,994,340
------------ ----------- ------------ -------------- ----------- -----------------
Total liabilities,
minority interest and
equity.................. $231,736,047 22,057,425 (16,733,031) 237,060,441 71,360,034 308,420,475
------------ ----------- ------------ -------------- ----------- -----------------
------------ ----------- ------------ -------------- ----------- -----------------
</TABLE>
24
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO PRO FORMA BALANCE SHEET
JUNE 30, 1996
<TABLE>
<C> <S>
(A) Reflects the historical combined balance sheet of EquiStar and CapStar Management as of
June 30, 1996.
(B) Reflects the following: EquiStar's cost basis and financing for one hotel acquired
subsequent to June 30, 1996 (Hilton Hotel, Arlington, Virginia).
(C) Reflects the repayment of capital lease obligations subsequent to the Offering
($857,304).
(D) A reconciliation of gross proceeds from the Offering to net proceeds is as follows:
</TABLE>
<TABLE>
<S> <C> <C>
Gross proceeds at $18.50 per share.......................... $ 124,875,000
Underwriting, advisory and other transaction expenses....... (10,703,000)
-------------
Net cash proceeds from Offering............................. $ 114,172,000
-------------
A schedule of sources and uses of funds related to the Offering and the Formation
Transactions are as follows:
SOURCES
Net proceeds from Offering.................................. $ 114,172,000
Release of escrow funds related to existing debt
facilities.................................................. 14,943,227
Proceeds from notes receivable from management for capital
contributions............................................... 987,500
Proceeds from the Credit Facility........................... 58,556,727
-------------
Total sources............................................... $ 188,659,454
-------------
USES
Repayment of outstanding amounts on certain existing debt
facilities.................................................. $(185,547,954)
Payment of prepayment penalties on existing debt to be paid
off......................................................... (299,000)
Payment of closing costs for Credit Facility................ (2,812,500)
-------------
Total uses.................................................. $(188,659,454)
-------------
A reconciliation of existing debt facilities to be repaid to pro forma
long-term debt is as follows:
Total notes payable outstanding immediately preceding the Offering (Columns
(A) and (B) from unaudited Pro Forma Balance Sheet)........................ $ 186,554,954
Less: Existing debt to be repaid............................................ (185,547,954)
Accrued financing fees on existing debt to be forgiven.................. (1,007,000)
-------------
Existing debt to remain in place........................................ --
Add: Proceeds from Credit Facility 58,556,727
-------------
Pro forma long-term debt before purchase of Additional
Hotels...................................................... $ 58,556,727
</TABLE>
<TABLE>
<C> <S>
The Pro forma balance sheet assumes that the proceeds from the Credit Facility are
drawn on June 30, 1996. The Company expects the borrowings under the existing debt
facility with Lehman Holdings will remain in place for up to 90 days after the closing
of the Offering.
(E) Reflects write-off of deferred financing fees ($3,745,000) related to existing debt
facilities to be paid off and deferral of financing fees paid ($2,812,500) for the
Credit Facility.
(F) Reflects lender's forgiveness of accrued financing fees on existing debt facilities.
(G) The components of the adjustment are as follows:
</TABLE>
<TABLE>
<S> <C> <C>
Net cash proceeds from the Offering......................... $ 114,172,000
Add: Forgiven accrued financing fees........................ 1,007,000
Repayment of notes receivable from management for capital
contributions.............................................. 987,500
Less: Write off of deferred financing fees.................. (3,745,000)
Prepayment penalties.................................... (299,000)
-------------
Total adjustment........................................ $ 112,122,500
-------------
</TABLE>
<TABLE>
<C> <S>
(H) Reflects the estimated cost basis and financing for the Additional Hotels which
EquiStar has under contract to purchase for $68,400,000.
</TABLE>
25
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
(B) BEFORE (J) PRO FORMA
OWNED OFFERING AND ACQUISITION ADDITIONAL AFTER
HOTELS PRO OTHER PRO OF HOTELS PRO ACQUISITION OF
(A) FORMA FORMA ADDITIONAL FORMA ADDITIONAL
HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS HOTELS
----------- ----------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from hotel
operations:
Rooms....................... $28,120,664 9,622,905 -- 37,743,569 11,898,784 49,642,353
Food and beverage........... 12,988,951 4,287,691 -- 17,276,642 5,580,911 22,857,553
Other revenue............... 3,059,994 18,568 -- 3,078,562 831,891 3,910,453
Hotel management and other
fees......................... 2,086,931 -- (39,581)(C) 2,047,350 (366,456) 1,680,894
----------- ----------- ------------ ----------- ----------- --------------
Total revenue................ 46,256,540 13,929,164 (39,581) 60,146,123 17,945,130 78,091,253
----------- ----------- ------------ ----------- ----------- --------------
Hotel operating expenses by
department:
Rooms....................... 7,364,570 2,300,265 9,664,835 2,947,864 12,612,699
Food and beverage........... 10,302,012 3,603,560 -- 13,905,572 4,654,082 18,559,654
Other operating
departments.................. 1,089,381 382,136 -- 1,471,517 444,994 1,916,511
Undistributed operating
expenses:
Administrative and
general...................... 9,457,210 2,742,002 500,000(D) 12,699,212 2,901,110 15,600,322
Management fees............. -- 439,660 (439,660)(E) -- -- --
Property operating costs.... 5,380,675 1,117,620 -- 6,498,295 2,317,051 8,815,346
Property taxes, insurance
and other.................... 2,116,498 776,400 -- 2,892,898 673,014 3,565,912
Depreciation and
amortization................. 3,919,035 968,127 146,817(F) 5,033,979 944,599 5,978,578
----------- ----------- ------------ ----------- ----------- --------------
Total operating expenses..... 39,629,381 12,329,770 207,157 52,166,308 14,882,714 67,049,022
----------- ----------- ------------ ----------- ----------- --------------
Interest expense, net........ 7,290,258 1,772,503 (6,642,966)(G) 2,419,795 2,746,260 5,166,055
----------- ----------- ------------ ----------- ----------- --------------
Total expenses............... 46,919,639 14,102,273 (6,435,809) 54,586,103 17,628,974 72,215,077
----------- ----------- ------------ ----------- ----------- --------------
Income (loss) before minority
interests and income
taxes....................... (663,099) (173,109) 6,396,228 5,560,020 316,156 5,876,176
Minority interests........... (68,771) -- 37,761(H) (31,010) -- (31,010)
----------- ----------- ------------ ----------- ----------- --------------
Income (loss) before income
taxes....................... (594,328) (173,109) 6,358,467 5,591,030 316,156 5,907,186
Income taxes................. -- -- 2,236,412(I) 2,236,412 126,661 2,363,073
----------- ----------- ------------ ----------- ----------- --------------
Net income (loss)............ $ (594,328) (173,109) 4,122,055 3,354,618 189,495 3,544,113
----------- ----------- ------------ ----------- ----------- --------------
----------- ----------- ------------ ----------- ----------- --------------
Pro forma income per share... 0.28
Pro forma weighted average
shares outstanding.......... 12,754,321
</TABLE>
26
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
During the twelve month period subsequent to the Formation Transactions, the
Offering and the execution of the Credit Facility, the Company expects to incur
prepayment penalties to repay existing debt ($299,000) and expenses associated
with the write-off of deferred financing costs related to existing debt to be
repaid ($3,745,000). These non-recurring costs are expected to be charged to
operations as incurred. Such costs have not been included in the unaudited Pro
Forma Statements of Operations.
<TABLE>
<C> <S>
(A) Reflects historical combined statement of operations of EquiStar and CapStar Management
for the six months ended June 30, 1996.
(B) Reflects the pre-acquisition operations of the Owned Hotels to provide a full six
months of hotel operations for the unaudited Pro Forma Statement of Operations. For
each Owned Hotel, the 1996 pre-acquisition operations were obtained from the hotel's
audited pre-acquisition financial statements included elsewhere in this Prospectus.
Also reflects adjustments to (i) include the operations of the Westin Atlanta Airport
during the period from January 1, 1996 through February 29, 1996, when this hotel was
leased to a third-party operator, and (ii) eliminate the related lease revenue earned
by EquiStar during this period. On February 29, 1996, the lease was terminated and
EquiStar assumed management of hotel operations.
(C) Reflects the elimination of management fee income for the Owned Hotels managed by
CapStar Management prior to acquisition ($39,581).
(D) Reflects the estimated incremental general and administrative expenses associated with
public ownership. These additional expenses include insurance, additional executive
salaries, directors' fees and related expenses, legal expenses, expenses associated
with preparing quarterly and annual reports, and other miscellaneous expenses.
(E) Management services for the Owned Hotels are provided by the Company and any
intercompany management fee charges will be eliminated for financial reporting
purposes.
(F) Reflects the net of the following adjustments:
</TABLE>
<TABLE>
<S> <C>
Elimination of depreciation on hotels for pre-acquisition period............ $ (968,127)
Depreciation on hotels for pre-acquisition period based on EquiStar's cost
basis...................................................................... 1,213,820
Elimination of amortization of deferred financing costs on existing debt
facilities to be repaid..................................................... (573,876)
Amortization of deferred financing costs related to the Credit Facility..... 475,000
-----------
Net adjustment.............................................................. $ 146,817
-----------
</TABLE>
<TABLE>
<C> <S>
(G) Reflects the net of the following adjustments:
</TABLE>
<TABLE>
<S> <C>
Elimination of interest on existing debt facilities to be paid off and
interest from pre-acquisition operations................................... $(9,154,018)
Interest on $58,556,727 outstanding under the Credit Facility at interest
rate of LIBOR plus 2.25% (average rate for six months was 8.03 percent)
plus Credit Facility maintenance fee of $160,000............................ 2,511,052
-----------
Net adjustment.............................................................. $(6,642,966)
-----------
</TABLE>
<TABLE>
<C> <S>
(H) Reflects the effect of the other pro forma adjustments on the interest of minority
owners in pro forma income before minority interest and income taxes for the
partnership that owns the Westin Atlanta Airport. After the adjustments, minority
interest is calculated as follows:
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
LOSS BEFORE
MINORITY PERCENTAGE
INTEREST MINORITY MINORITY
AND INCOME TAXES INTEREST INTEREST
---------------- ---------- --------
<S> <C> <C> <C>
Westin Atlanta Airport.................................. $ (224,710) 13.8% $(31,010)
</TABLE>
<TABLE>
<C> <S>
(I) Historical combined financial data does not include a provision for income taxes
because both EquiStar and CapStar Management were partnerships not subject to income
taxes. The pro forma adjustment reflects federal and state income taxes (assuming a 40%
combined effective rate) as if these entities had been taxed as a C-corporation during
the six months.
(J) Reflects the historical operations of the Additional Hotels adjusted for (i)
depreciation on the new cost basis ($944,599), (ii) interest on the debt to finance the
purchase ($2,746,260), and (iii) income taxes ($126,661). Also reflects the elimination
of management fees earned by CapStar Management for managing four of the five
Additional Hotels in 1996 ($366,456). Historical operations of the Additional Hotels
before adjustments were obtained from the hotels' audited combined financial statements
included elsewhere in this Prospectus.
</TABLE>
27
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
(B) OFFERING BEFORE (J) PRO FORMA
OWNED AND ACQUISITION ADDITIONAL AFTER
HOTELS PRO OTHER PRO OF HOTELS PRO ACQUISITION OF
(A) FORMA FORMA ADDITIONAL FORMA ADDITIONAL
HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS HOTELS
----------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from hotel
operations:
Rooms....................... $14,456,387 55,478,217 69,934,604 21,925,991 91,860,595
Food and beverage........... 5,900,238 28,426,328 34,326,566 10,442,474 44,769,040
Other revenue............... 1,570,295 3,966,397 5,536,692 1,613,934 7,150,626
Hotel management and other
fees......................... 4,436,428 -- (235,524)(C) 4,200,904 (926,737) 3,274,167
----------- ----------- ----------- ----------- ----------- --------------
Total revenue................ 26,363,348 87,870,942 (235,524) 113,998,766 33,055,662 147,054,428
----------- ----------- ----------- ----------- ----------- --------------
Hotel operating expenses by
department:
Rooms....................... 4,190,299 14,271,915 -- 18,462,214 5,751,406 24,213,620
Food and beverage........... 4,923,790 22,926,491 -- 27,850,281 9,198,740 37,049,021
Other operating
departments.................. 512,791 2,324,689 -- 2,837,480 904,143 3,741,623
Undistributed operating
expenses:
Administrative and
general...................... 8,078,304 17,005,542 1,062,000(D) 26,145,846 5,662,170 31,808,016
Management fees............. -- 3,152,729 (3,152,729)(E) -- -- --
Property operating costs.... 2,623,626 7,002,261 -- 9,625,887 4,407,863 14,033,750
Property taxes, insurance
and other................. 1,310,517 4,946,569 -- 6,257,086 1,390,174 7,647,260
Depreciation and
amortization................. 2,097,512 7,267,137 613,267(F) 9,977,916 1,889,198 11,867,114
----------- ----------- ----------- ----------- ----------- --------------
Total operating expenses..... 23,736,839 78,897,333 (1,477,462) 101,156,710 29,203,694 130,360,404
----------- ----------- ----------- ----------- ----------- --------------
Interest expense, net........ 2,413,348 11,115,784 (8,726,610)(G) 4,802,522 5,630,540 10,433,062
----------- ----------- ----------- ----------- ----------- --------------
Total expenses............... 26,150,187 90,013,117 (10,204,072) 105,959,232 34,834,234 140,793,466
----------- ----------- ----------- ----------- ----------- --------------
Income (loss) before minority
interest and income taxes.... 213,161 (2,142,175) 9,968,548 8,039,534 (1,778,572) 6,260,962
Minority interest............ (17,415) (24,985) (16,636)(H) (59,036) -- (59,036)
----------- ----------- ----------- ----------- ----------- --------------
Income (loss) before income
taxes........................ 230,576 (2,117,190) 9,985,184 8,098,570 (1,778,572) 6,319,998
Income taxes................. -- -- 3,239,428 3,239,428 (711,429) 2,527,999
----------- ----------- ----------- ----------- ----------- --------------
Net income (loss)............ $ 230,576 (2,117,190) 6,745,756 4,859,142 (1,067,143) 3,791,999
----------- ----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- ----------- --------------
Pro forma income per share... 0.30
Pro forma weighted average
shares outstanding.......... 12,754,321
</TABLE>
28
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
During the twelve month period subsequent to the Formation Transactions, the
Offering and the execution of the Credit Facility, the Company expects to incur
prepayment penalties to repay existing debt ($299,000) and expenses associated
with the write-off of deferred financing costs related to existing debt to be
repaid ($3,745,000). These non-recurring costs are expected to be charged to
operations as incurred. Such costs have not been included in the unaudited Pro
Forma Statements of Operations.
<TABLE>
<C> <S>
(A) Reflects historical combined statement of operations of EquiStar and CapStar Management
for the year ended December 31, 1995.
(B) Reflects the pre-acquisition operations of the Owned Hotels to provide a full year of
hotel operations for the unaudited Pro Forma Statement of Operations. For each hotel,
except for the Radisson Hotel, Schaumburg, Illinois, the 1995 pre-acquisition
operations were obtained from the hotel's audited pre-acquisition financial statements
included elsewhere in this Prospectus. As the financial records of the Radisson Hotel,
Schaumburg, Illinois were not available, its pre-acquisition operations ($2,501,548 of
revenues and $2,605,619 of expenses) were estimated based on the hotel's operating
budget for the same period in 1996.
(C) Reflects the elimination of management fee income for the Owned Hotels managed by
CapStar Management prior to acquisition ($235,524).
(D) Reflects the estimated incremental general and administrative expenses associated with
public ownership. These additional expenses include insurance, additional executive
salaries, directors' fees and related expenses, legal expenses, expenses associated
with preparing quarterly and annual reports, and other miscellaneous expenses.
(E) Management services for the Owned Hotels are provided by the Company and any
intercompany management fee charges will be eliminated for financial reporting
purposes.
(F) Reflects the net of the following adjustments:
</TABLE>
<TABLE>
<S> <C>
Elimination of depreciation on hotels for pre-acquisition period........... $ (7,267,137)
Depreciation on hotels for pre-acquisition period based on EquiStar's cost
basis...................................................................... 7,013,940
Elimination of amortization of deferred financing fees on existing debt
facilities to be repaid.................................................... (83,536)
Amortization of deferred financing costs related to the Credit Facility.... 950,000
------------
Net adjustment............................................................ $ 613,267
------------
</TABLE>
<TABLE>
<C> <S>
(G) Reflects the net of the following adjustments:
</TABLE>
<TABLE>
<S> <C>
Elimination of interest on existing debt facilities to be paid off and
interest from pre- acquisition operations................................. $(13,865,828)
Interest on $58,556,727 outstanding on the Credit Facility at an interest
rate of LIBOR
plus 2.25% (average rate for 1995 was 8.23%) plus the Credit Facility
maintenance fee of
$320,000.................................................................. 5,139,218
------------
Net adjustment............................................................ $ (8,726,610)
------------
</TABLE>
<TABLE>
<C> <S>
(H) Reflects the effect of the other pro forma adjustments on the interest of minority
owners in pro forma income before minority interest and income taxes for the
partnership that owns the Westin Atlanta Airport. After the adjustments, minority
interest is calculated as follows:
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
LOSS BEFORE
MINORITY PERCENTAGE
INTEREST MINORITY MINORITY
AND INCOME TAXES INTEREST INTEREST
---------------- ---------- --------
<S> <C> <C> <C>
Westin Atlanta Airport.................................... $ (393,575) 15% $(59,036)
</TABLE>
<TABLE>
<C> <S>
(I) Historical combined financial data does not include a provision for income taxes
because both EquiStar and CapStar Management were partnerships not subject to income
taxes. The pro forma adjustment reflects federal and state income taxes (assuming a 40%
combined effective rate) as if these entities had been taxed as a C-corporation in
1995.
(J) Reflects the historical operations of the Additional Hotels adjusted for (i)
depreciation on the new cost basis ($1,889,198) (ii) interest on the debt to finance
the purchase ($5,630,540), and (iii) income taxes ($711,429 benefit). Also reflects the
elimination of management fee income earned by CapStar Management for managing four of
the five Additional Hotels in 1995 ($926,737). Historical operations of the Additional
Hotels before adjustments were obtained from the hotels' audited combined financial
statements included elsewhere in this Prospectus.
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Prior to the Formation Transactions and the Offering, the business of the
Company was conducted through EquiStar, which owned the Owned Hotels, and
CapStar Management, which managed the Hotels. CapStar Management has been in the
hotel management business since 1987. EquiStar, however, was not formed until
January 12, 1995 and the Company did not own any hotels in any prior periods.
Therefore, the Company's financial statements prior to 1995 reflect only the
management business of CapStar Management. The economics of the management
business are based on fees paid to the Company for management services and the
costs related to the performance of these services. The fee management business
is labor intensive and requires relatively little capital.
Beginning in 1994, the Company began to invest in additional professional
staff and incurred related costs in order to position itself to acquire hotel
properties. From January 12, 1995 through June 30, 1996, the Company acquired 11
hotels on the following dates: March 3, 1995; June 30, 1995 (two hotels), August
4, 1995, October 3, 1995, November 15, 1995, February 2, 1996, February 16,
1996, February 22, 1996, March 8, 1996 and April 17, 1996. Thus, the historical
financial statements for the year ended December 31, 1995 and the six months
ended June 30, 1996 and 1995 reflect differing numbers of Owned Hotels
throughout the periods. The economics associated with the acquisition and
ownership of hotels is significantly different from the fee management business
in that capital is required to both acquire and maintain hotels. Due to the
timing and magnitude of the acquisitions made in 1995 and 1996, it is difficult
to compare results of these periods either to each other or to prior years.
The pro forma financial statements for 1995 and the six months ended June
30, 1996 reflect the operations of the Owned Hotels and the Additional Hotels
for the entire periods. For some or all of such periods, such hotels were owned
and/or operated by other companies. Furthermore, it is the Company's policy to
seek to acquire underperforming hotels where intensive management and selective
capital improvements can increase revenue and cash flow. Therefore, the Company
does not believe it is meaningful to compare its results of operations for 1995
and the first six months of 1996 with comparable prior periods. Except as noted
in the following period to period comparison discussions, the changes in
historical income statement items between periods are attributable to the
changes in the Company's business.
RESULTS OF OPERATIONS
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED
WITH THE HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
On a pro forma basis, after giving effect to the acquisition of the Owned
Hotels and the Additional Hotels and the Offering, pro forma total revenues
increased to $147.1 million for 1995 from $26.4 million for the same historical
period. The increase resulted from the recognition of revenue for the Owned
Hotels and Additional Hotels as if they had been acquired at the beginning of
the period. Management services and other revenues are reduced by $1.2 million
to reflect the elimination of management fee revenues from the Owned Hotels
prior to acquisition and from those Additional Hotels which were managed by the
Company during that period. The pro forma revenues for the period prior to
acquiring each Owned Hotel and the Additional Hotels (except for the Radisson
Hotel, Schaumburg, Illinois, where such revenues were estimated based on the
hotel's operating budget for 1996) reflect the actual revenues of the previous
owners.
Pro forma expenses give effect to the acquisition of the Owned Hotels and
the Additional Hotels and the Offering. Total pro forma operating expenses
increased to $130.4 million for 1995 from $23.7
30
<PAGE>
million for the same historical period. Departmental, selling, general,
administrative and other operating expenses reflect the actual costs incurred by
the previous owners prior to each acquisition and the actual costs incurred by
the Company thereafter. Depreciation, amortization, interest and income taxes
reflect the expenses that would have been incurred by the Company if the
Offering and the Formation Transactions had taken place at the beginning of the
period.
Pro forma EBITDA improved to $28.6 million for 1995 from $4.7 million for
the same historical period. Pro forma EBITDA as a percentage of revenue
increased to 19.4% for 1995 from 17.9% for the same historical period.
Management believes that EBITDA is a useful measure of operating performance
because it is industry practice to evaluate hotel properties based on operating
income before interest, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure
of the property owner. EBITDA does not represent cash flow from operations as
defined by GAAP, and is not necessarily indicative of cash available to fund all
cash flow needs and should not be considered as an alternative to net income
under GAAP for purposes of evaluating the Company's operating performance.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995
Total revenues increased to $46.3 million in the six months ended June 30,
1996 from $4.8 million in the six months ended June 30, 1995. Room revenues for
the six months ended June 30, 1996 increased to $28.1 million from $1.9 million
while food, beverage and other department revenues increased to $16.0 million
from $0.7 million predominantly due to the acquisition of 10 Owned Hotels and
the inclusion of an eleventh Owned Hotel acquired on March 3, 1995 for the
entire 1996 period.
Operating costs and expenses increased to $39.6 million in the six months
ended June 30, 1996 from $4.3 million in the six months ended June 30, 1995,
resulting from the acquisition of 10 Owned Hotels and the inclusion of an
eleventh hotel for the entire 1996 period. The costs related to management of
the Managed Hotels remained relatively constant.
Operating income increased to $6.6 million for the six months ended June 30,
1996 from $0.5 million for the six months ended June 30, 1995. Operating income
as a percentage of revenue increased to 14.3% for the six months ended June 30,
1996 from 10.4% for the six months ended June 30, 1995, resulting from increased
operating efficiencies.
Net interest expense increased to $7.3 million in the six months ended June
30, 1996 from $0.3 million in the six months ended June 30, 1995, resulting from
the debt incurred related to the acquisition of 10 Owned Hotels and the
inclusion of an eleventh hotel acquired on March 3, 1995 for the entire 1996
period.
The net loss of $0.6 million for the six months ended June 30, 1996 is a
decrease from the net income of $0.2 million for the six months ended June 30,
1995 and is due to the acquisition of 10 Owned Hotels. This loss was caused
primarily by increased interest expense incurred to acquire the properties.
EBITDA increased to $10.6 million for the six months ended June 30, 1996
from $0.8 million for the six months ended June 30, 1995. EBITDA as percentage
of revenue increased to 22.8% for the six months ended June 30, 1996 from 16.7%
for the six months ended June 30, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
Total revenues increased to $26.4 million in 1995 from $4.4 million in 1994.
Room revenues and food, beverage and other hotel department revenues for 1995
reflect the operating revenues of five Owned Hotels acquired during the period.
There were no Owned Hotels acquired during 1994.
31
<PAGE>
Operating costs and expenses increased to $23.7 million in 1995 from $4.5
million in 1994. Departmental expenses and property operating costs for 1995
reflect the operations of five Owned Hotels acquired during the period. Selling,
general and administrative costs and depreciation expense reflect increases due
to the acquisition of five Owned Hotels and the interest in the Westin Atlanta
Airport during 1995. The costs related to management of the Managed Hotels
remained relatively constant between the periods.
Operating income increased to $2.6 million for the period from 1995 from a
loss of $0.1 million in 1994. The increase from 1994 is due to the operating
income by the Owned Hotels and to increased efficiencies in the management of
the Managed Hotels.
Net interest expense of $2.4 million for 1995 results from the debt incurred
related to the acquisition of the Owned Hotels.
The Company incurred an extraordinary loss on extinguishment of debt during
1995 from the write-off of deferred financing fees in connection with a
refinancing transaction.
The net loss increased to $0.7 million for 1995 from $0.1 million for 1994.
The primary reason for the extraordinary loss was the extinguishment of debt.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993
Management services and other revenues increased to $4.4 million in 1994
from $4.2 million in 1993, due to the improved performance of the Managed
Hotels. The Management Agreements provide for incentive payments based on the
favorable performance of the Managed Hotels.
Operating costs and expenses increased to $4.5 million in 1994 from $4.1
million in 1993. Selling, general and administrative costs reflect increases due
to the addition of development, accounting and administrative personnel and
leased office space as the Company began to actively seek acquisitions of hotel
properties.
The net loss for 1994 was $0.1 million compared to net income of $0.2
million in 1993. The variance in net operating results was due to the additional
operating costs incurred.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash
generated from operations and borrowings under credit facilities as well as the
proceeds from the Offering. The Company's continuing operations are funded
through cash generated from hotel operations. Hotel acquisitions are financed
through a combination of internally generated cash and borrowings under credit
facilities.
At June 30, 1996, the Company had $4.9 million in cash and cash equivalents,
a decrease of $1.9 million from the balance of $6.8 million on December 31,
1995. During the 18 months ended June 30, 1996, the Company invested $14.0
million in capital improvements in connection with renovations of the Owned
Hotels. The Company plans to spend an additional $13.7 million in 1996 and $2.1
million in 1997 for the completion of the renovation of the Owned Hotels.
Renovations on the Additional Hotels will commence after consummation of their
acquisition at the end of 1996 and are projected to total $3.7 million. Capital
for renovation work has been and will be provided by a combination of internally
generated cash and borrowings under credit facilities. The Company is committed
to reinvesting adequate capital on an ongoing basis to maintain the quality of
the hotels it owns. Once existing planned renovation programs are complete, the
Company expects to spend approximately 4% of revenues on an annual basis for
ongoing capital expenditures, including room and facilities refurbishments,
renovations and furniture and equipment replacements. The Company believes that
these investments will enhance the Company's competitive position.
32
<PAGE>
The Company has entered into negotiations with the Banks, led by Bankers
Trust, to obtain the Credit Facility in the maximum principal amount of $225
million. Borrowings under the Credit Facility will be used by the Company to
repay existing indebtedness (including $55.7 million of indebtedness owed to
Lehman Holdings that will remain outstanding following consummation of the
Offering and the application of proceeds therefrom), to acquire and renovate
upscale, full-service hotels in the United States, and for other corporate
purposes. It is anticipated that the Company's ability to borrow under the
Credit Facility will be subject, among other things, to a borrowing base test
calculated with the reference to the cash flow from hotel properties, the
relative contribution to the borrowing base of the values attributable to the
different hotel properties, the appraised values of such hotel properties and
certain other factors.
It is anticipated that the term of the Credit Facility will be three years,
subject to two one-year extensions upon the satisfaction of certain conditions.
The Company anticipates that it will not be entitled to borrow additional
advances or reborrow during the extension period. The Company will be required
to pay customary fees in connection with the structuring of the Credit Facility,
a commitment fee on the unused portion of the Credit Facility and a fee on
outstanding letters of credit.
It is anticipated that the Credit Facility will be a direct obligation of
CapStar Management and will be fully and unconditionally guaranteed by the
Company and certain subsidiaries of CapStar Management, including the
subsidiaries owning hotel properties. It is anticipated that the Credit Facility
will be secured by substantially all the real and personal property of CapStar
Management and its subsidiaries.
The Credit Facility will contain convenants that impose certain limitations
on the Company in respect of, among other things, (i) the payment of dividends
and other distributions, (ii) acquisitions of additional hotel properties, (iii)
the creation or incurrence of liens, (iv) the incurrence of indebtedness, lease
obligations or contingent liabilities, (v) the acquisition of investments in and
securities issued by joint ventures and other entities, (vi) transactions with
affiliates, (vii) management or similar agreements delegating to another person
substantial authority over the operation or maintenance of its hotel properties,
(viii) mergers, acquisitions, divestitures or reorganizations, (ix) the issuance
of preferred stock and (x) sale leaseback transactions involving any of its
hotel properties. The Credit Facility will also contain covenants that will
subject the Company to certain operating requirements and that require the
maintenance of certain financial levels, such as consolidated net worth, and
certain financial ratios, such as consolidated hotel indebtedness to market
equity capitalization and shareholders' equity, consolidated cash flow to
interest and consolidated total indebtedness to consolidated cash flow.
While the Company expects to enter into the Credit Facility following the
consummation of the Offering, and prior to the maturity of its indebtedness to
Lehman Holdings, there can be no assurance that the Company will be successful
in entering into the Credit Facility and, if so, on the terms described above or
otherwise. See "Risk Factors--Risk of Debt Financing; No Limit on Indebtedness."
SEASONALITY
Demand at many of the Hotels is affected by recurring seasonal patterns.
Demand is lower in the winter months due to decreased travel and higher in the
spring and summer months during peak travel season. Accordingly, the Company's
operations are seasonal in nature, with lower revenue, operating profit and cash
flow in the first and fourth quarters and higher revenue, operating profit and
cash flow in the second and third quarters.
INFLATION
The rate of inflation has not had a material effect on the revenues or
operating results of the Company during the three most recent fiscal years.
33
<PAGE>
THE COMPANY
CapStar is a hotel investment and management company which acquires, owns,
renovates, repositions and manages hotels throughout the United States. CapStar
owns 12 upscale, full-service Owned Hotels which contain 3,516 rooms. Including
the Owned Hotels, the Company manages 49 Hotels with 9,044 rooms. The Company's
business strategy is to identify and acquire hotel properties 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. Each of the Owned Hotels is located in a market which has
recently experienced strong economic growth, including Atlanta, Charlotte,
Chicago, Cleveland, Dallas, Los Angeles, Salt Lake City, Seattle and Washington,
D.C. The Owned Hotels include hotels operated under nationally recognized brand
names such as Hilton, Sheraton, Westin, Marriott, Holiday Inn and Radisson, and
one hotel operated under an independent brand name. In the six months ended June
30, 1996, the operating performance of the Owned Hotels improved significantly,
as demonstrated by the 7.5% increase in revenues, 14.1% increase in gross
operating profit, and 12.5% increase in RevPAR over the comparable year earlier
period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
PERCENTAGE
1996 1995 INCREASE
------- --------- ----------
<S> <C> <C> <C>
Revenues (in thousands)........................ $58,099 $54,036 7.5%
Gross operating profit (in thousands).......... $17,594 $15,415 14.1%
Average Occupancy.............................. 73.3% 71.9% 1.9%
ADR............................................ $ 82.47 $ 74.33 10.4%
RevPAR......................................... $ 60.45 $ 53.73 12.5%
</TABLE>
Additionally, the performance of the Company's Owned Hotels compares
favorably with that of the industry in general. For the five months ended May
31, 1996 (the most recent period for which industry information is currently
available), RevPAR for the Owned Hotels increased 12.6%, while RevPAR for all
upscale hotels, as reported by Smith Travel Research, increased 5.8%.
As a fully integrated owner and manager, CapStar intends to capitalize on
its management experience and expertise by continuing to make opportunistic
acquisitions of full-service hotels, securing additional management contracts
and improving the operating performance of the hotels. The Company's senior
management team has successfully managed hotels in all segments of the lodging
industry, with particular emphasis on upscale, full-service hotels. Senior
management has an average of approximately 19 years of experience in the hotel
industry. Since the inception of the Company's management business in 1987, the
Company has achieved consistent growth, even during periods of relative industry
weakness. The Company attributes its management success to its ability (i) to
analyze each hotel as a unique property and identify those particular cash flow
growth opportunities which each hotel presents, (ii) to create and implement
marketing plans that properly position each hotel within its local market, and
(iii) to develop management programs that emphasize guest service, labor
productivity, revenue yield and cost control. The Company has a distinct
management culture that stresses creativity, loyalty and entrepreneurship and
was developed to emphasize operations from an owner's perspective. This culture
is reinforced by the fact that 33 members of management will hold, directly or
indirectly, an aggregate of 7.7% of the Company's equity upon completion of the
Offering. See "Principal and Selling Stockholders."
The Company is in the process of renovating and repositioning the Owned
Hotels based on strategic plans designed to address the opportunities presented
by each hotel and local market. Management selects renovations intended to
result in a high return on investment and to extend the Owned Hotels' appeal to
a broader range of market segments. Examples of these revenue generating
renovations include the following: enhancing meeting and banquet facilities to
attract lucrative group conferences and conventions; upgrading guest rooms to
meet the needs of business travelers and to
34
<PAGE>
increase ADRs; renovating restaurants and introducing new food and beverage
concepts to attract additional guests and local patrons; and completing
necessary repairs and upgrades of interior and exterior spaces to ensure high
levels of quality and guest satisfaction. During the 18 months ended June 30,
1996, the Company spent a total of $14.0 million on renovations at the Owned
Hotels and currently intends to spend an additional $15.8 million completing the
renovation programs.
The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to acquire, own and manage
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, the Company 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 business
executives and upscale leisure travelers, customers who are generally less price
sensitive than travelers who use limited-service hotels. Third, because
full-service hotels have a higher proportion of fixed costs to variable costs
than other segments of the lodging industry, full-service hotels afford greater
operating leverage than limited-service hotels, resulting in increasingly higher
profit margins as revenues increase. Finally, full-service hotels require a
greater depth of management expertise than limited-service hotels, and the
Company believes that its superior management skills provide it with a
significant competitive advantage in their operation.
In connection with its growth strategy, the Company has entered into a
binding contract with MBL to acquire the five Additional Hotels which contain
1,121 rooms, for a purchase price of $68.4 million. Four of the Additional
Hotels have been managed by the Company since 1991. Since assuming management of
these four hotels, the Company has improved the operating performance of the
properties. The Company, however, believes that with appropriate capital
spending the Additional Hotels can achieve further improvements in revenue and
cash flow. The Company plans to spend approximately $3.7 million subsequent to
the acquisition to renovate and reposition the Additional Hotels. The
acquisition is scheduled to close in December 1996. There can be no assurance,
however, that the closing will occur. See "Risk Factors--Risks Associated with
Expansion" and "Business and Properties--The Properties--The Additional Hotels."
BUSINESS AND PROPERTIES
The Company seeks to increase shareholder value by (i) continuing to acquire
upscale, full-service hotels below replacement cost in selected markets
throughout the United States and (ii) implementing its operating strategy to
improve hotel operations and increase cash flow.
ACQUISITION STRATEGY
The Company intends to continue acquiring upscale, full-service hotels. In
addition to the direct acquisition of hotels, the Company anticipates that it
may make investments in hotels through joint ventures with strategic partners or
through equity contributions or secured loans. The Company identifies
acquisition candidates located in markets with economic, demographic and supply
dynamics favorable to hotel owners and operators. Through its extensive due
diligence process, the Company chooses those acquisition targets where it
believes selective capital improvements and intensive management will increase
the hotel's ability to attract key demand segments, enhance hotel operations and
increase long-term value. In order to evaluate the relative merits of each
investment opportunity, senior management and individual operations teams create
detailed plans covering all areas of renovation and operation. These plans serve
as the basis for the Company's acquisition decisions and guide subsequent
renovation and operating plans. At the Owned Hotels, the Company has been able
to implement these plans and apply its system of management to create
improvements in revenue and profitability.
35
<PAGE>
The Company will seek to acquire and invest in hotels that meet the
following criteria:
MARKET CRITERIA
Economic Growth. The Company focuses on metropolitan areas that are
approaching, or have already entered, periods of economic growth. Such areas
generally show above average growth in the business community as measured by (i)
job formation rates, (ii) population growth rates, (iii) tourism and convention
activity, (iv) airport traffic volume, (v) local commercial real estate
occupancy, and (vi) retail sales volume. Markets that exhibit these
characteristics typically have strong demand for hotel facilities and services.
Supply Constraints. The Company seeks lodging markets with favorable supply
dynamics for hotel owners and operators, including an absence of current new
hotel development and barriers to future development such as zoning constraints,
the need to undergo lengthy local development approval processes and a limited
number of suitable sites. Other factors limiting the supply of new hotels are
the current lack of financing available for new development and the inability to
generate adequate returns on investment to justify new development.
Geographic Diversification. The Company seeks to maintain a geographically
diverse portfolio of hotels to offset the effects of regional economic cycles.
The Hotels are located in 23 states across the nation, with 11 Hotels located in
California, four in Virginia, three in Colorado, three in Maryland, three in New
Jersey, two in Arizona, two in Indiana, two in Louisiana, two in New York, two
in Washington, D.C., two in Pennsylvania and one Hotel each in 12 additional
states.
HOTEL CRITERIA
Location and Market Appeal. The Company seeks to acquire upscale,
full-service hotels that are situated near both business and leisure centers
which generate a broad base of demand for hotel accommodations and facilities.
These demand generators include (i) business parks, (ii) airports, (iii)
shopping centers and other retail areas, (iv) convention centers, (v) sports
arenas and stadiums, (vi) major highways, (vii) tourist destinations, (viii)
major universities, and (ix) cultural and entertainment centers with nightlife
and restaurants. The confluence of nearby business and leisure centers enables
the Company to attract both weekday business travelers and weekend leisure
guests. Attracting a balanced mix of business, group and leisure guests to the
Hotels helps to maintain stable occupancy rates and high ADRs.
Size and Facilities. The Company seeks to acquire well-constructed hotels
that are less than 20 years old, contain 200 to 500 guest rooms and include
accommodations and facilities that are, or are capable of being made, attractive
to key demand segments such as business, group and leisure travelers. These
facilities typically include large, upscale guest rooms, food and beverage
facilities, extensive meeting and banquet space, and amenities such as health
clubs, swimming pools and adequate parking.
Potential Performance Improvements. The Company seeks to acquire
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. Underperforming hotels
typically serve less than their "fair share" of lodging industry demand (as
measured by RevPAR), achieve lower profit margins than the Company believes it
can maintain and receive inadequate funding to make needed capital improvements.
These hotels represent opportunities where a systematic management approach and
targeted renovations should result in improvements in revenue and cash flow. The
Company's ability to improve operations is demonstrated by the fact that RevPAR
at the Owned Hotels increased 12.6% from the five month period ended May 31,
1995 to the five month period ended May 31, 1996, as compared to an increase of
only 5.8% for the upscale, full-service hotel segment as reported by Smith
Travel Research over the comparable period (the most recent industry information
available).
36
<PAGE>
The Company expects that its relationships throughout the industry and its
acquisition staff located on both coasts of the United States will continue to
provide it with a competitive advantage in identifying, evaluating and
purchasing hotels which meet its acquisition criteria. The Company has a record
of successfully renovating and repositioning hotels, both at the Owned Hotels
and at the Managed Hotels (varying in levels of service, room rates and market
types). As a public company, the Company believes it will have improved access
to various debt and equity financing sources to fund acquisitions. In addition,
in consummating acquisitions the Company expects that it will benefit from its
ability to utilize units of limited partnership interest in its subsidiary
Operating Partnership as an alternative to cash. The Company is currently
negotiating with the Banks, led by Bankers Trust, to obtain the new $225 million
Credit Facility, under which capital will be available to pursue acquisitions
and make capital investments in subsequently acquired hotels. See "Risk
Factors--Risks of Debt Financing; No Limits on Indebtedness." The Company
currently expects to retain earnings for future acquisitions and the renovation
and maintenance of the hotels it owns.
OPERATING STRATEGY
The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with
high-quality service and value. The Company seeks to achieve these objectives by
creating and executing management plans that are specifically tailored for each
individual Hotel rather than by implementing an operating strategy that is
designed to maintain a uniform corporate image or brand. Management believes
that its custom-tailored business plans are the most effective means of
addressing the needs of a given hotel or market. The Company believes that
skilled management of hotel operations is the most critical element in
maximizing revenue and cash flow in full-service hotels.
The Company's corporate headquarters carries out financing and acquisition
activities and provides services to support as well as monitor the Company's
on-site hotel operating executives. Each of the Company's executive departments,
including Sales and Marketing, Human Resources and Training, Food and Beverage,
Technical Services, Development, and Corporate Finance, is headed by an
executive with significant experience in that area. These departments support
decentralized decision-making by the hotel operating executives by providing
accounting and budgeting services, property management software and other
resources which cannot be economically maintained at the individual Hotels.
Key elements of the Company's management programs include the following:
Comprehensive Budgeting and Monitoring. The Company's operating strategy
begins with an integrated budget planning process that is implemented by
individual on-site managers and monitored by the Company's corporate staff.
Management sets targets for cost and revenue categories at each of the Hotels
based on historical operating performance, planned renovations, operational
efficiencies and local market conditions. On-site managers coordinate with the
central office staff to ensure that such targets are realistic. Through
effective and timely use of its comprehensive financial information and
reporting systems, the Company can monitor actual performance and rapidly adjust
prices, staffing levels and sales efforts to take advantage of changes in the
market and to improve yield.
Targeted Sales and Marketing. The Company employs a systematic approach
toward identifying and targeting segments of demand for each Hotel in order to
maximize market penetration. Executives at the Company's corporate headquarters
and property-based managers divide such segments into smaller subsegments,
typically ten or more for each Hotel, and develop narrowly tailored marketing
plans to suit each such segment. The Company supports each Hotel's local sales
efforts with corporate sales executives who develop new marketing concepts and
monitor and respond to specific market needs and preferences. These executives
are active in implementing on-site marketing programs developed in the central
management office. The Company employs computerized revenue yield management
37
<PAGE>
systems to manage each Hotel's use of the various distribution channels in the
lodging industry. Management control over those channels, which include
franchisor reservation systems and "800" numbers, travel agent and airline
global distribution systems, corporate travel offices and office managers, and
convention and visitor bureaus, enables the Company to maximize revenue yields
on a day-to-day basis. Sales teams are recruited locally and receive
incentive-based compensation bonuses. All of the Company's sales managers
complete a highly developed sales training program.
Strategic Capital Improvements. The Company plans renovations primarily to
enhance a Hotel's appeal to targeted market segments, thereby attracting new
customers and generating increased revenue and cash flow. During the 18 months
ended June 30, 1996, the Company spent a total of $14.0 million on renovations
at the Owned Hotels and currently intends to spend an additional $15.8 million
completing the renovation programs. For example, at all of the Owned Hotels, the
Company has renovated banquet and meeting spaces and upgraded guest rooms with
computer ports and comfortable work spaces to better accommodate the needs of
business travelers and to increase ADRs. Capital spending decisions are based on
both strategic needs and potential rate of return on a given capital investment.
Selective Use of Multiple Brand Names. The Company believes that the
selection of an appropriate franchise brand is essential in positioning a hotel
optimally within its local market. The Company selects brands based on local
market factors such as local presence of the franchisor, brand recognition,
target demographics and efficiencies offered by franchisors. The Company
believes that its relationships with many major hotel franchisors, established
both as a manager and an owner of hotels operated under their respective
franchises, places the Company in a favorable position when dealing with those
franchisors and allows it to negotiate favorable franchise agreements with
franchisors. The Company believes that its growth through acquisition of
additional hotels will further strengthen its relationship with franchisors.
38
<PAGE>
The following chart summarizes certain information with respect to the
national franchise affiliations of the Hotels and the Additional Hotels:
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY'S TOTAL
GUEST ROOMS--
PERCENTAGE OF OWNED
NUMBER OF NUMBER OF COMPANY'S TOTAL HOTELS AND
FRANCHISE HOTELS GUEST ROOMS GUEST ROOMS ADDITIONAL HOTELS
- ------------------------------------ --------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
Hilton.............................. 7 1,930 21.3% 41.6%
Sheraton............................ 4 1,137 12.6 15.7
Holiday Inn......................... 7 1,132 12.6 9.4
Best Western(R)..................... 6 728 8.0 --
Ramada(R)........................... 4 725 8.0 --
Westin.............................. 1 496 5.5 10.7
Marriott............................ 1 434 4.8 e4
Radisson............................ 2 328 3.6 4.4
Days Inn(R)......................... 2 277 3.1 --
Quality(R).......................... 2 277 3.1 --
Doubletree(R)....................... 1 208 2.3 --
Clarion(R).......................... 1 194 2.1 --
Comfort Suites(R)................... 1 119 1.3 --
Residence Inn(R).................... 1 104 1.1 --
Independent......................... 9 955 10.6 8.8
--
----- ----- -----
Total............................... 49 9,044 100.0% 100.0%
--
--
----- ----- -----
----- ----- -----
</TABLE>
Emphasis on Food and Beverage. Management believes popular food and beverage
ideas are a critical component in the overall success of a hotel. The Company
utilizes its food and beverage operations to create local awareness of its hotel
facilities, to improve the profitability of its hotel operations and to enhance
customer satisfaction. The Company is committed to competing for patrons with
restaurants and catering establishments by offering high-quality restaurants
that garner positive reviews and strong local and/or national reputations. The
Company has engaged food and beverage experts to develop several proprietary
restaurant concepts. The Owned Hotels contain restaurants ranging from Michel
Richard's highly acclaimed CITRONELLE(R), to Morgan's, a Company-designed
concept which offers popular, moderately-priced American cuisine. The Company
has also successfully placed national food franchises such as Starbuck's
Coffee(R) and "TCBY"(R) Yogurt in casual, delicatessen-style restaurants in
several of the Owned Hotels. Popular food concepts have strengthened the
Company's ability to attract business travelers and group meetings and improved
the name recognition of the Owned Hotels.
Commitment to Reinvestment. The Company is committed to reinvesting adequate
capital on an ongoing basis to maintain the quality of the hotels it owns.
Reinvestment is expected to include room and facilities refurbishments,
renovations and furniture and equipment replacements that are designed to
maintain attractive accommodations, updated restaurants and modern equipment.
The Company believes that these investments will enhance the Company's
competitive position.
Computerized Reporting Systems. The Company employs computerized reporting
systems at each of the Hotels and at its corporate offices to monitor the
financial and operating performance of the Hotels. Management information
services have been fully integrated through the installation of Novell and Unix
networks. Management also utilizes programs like Data Plus(R) and cc:Mail(R) to
facilitate daily communication. Such programs have enabled the Company to create
and implement detailed reporting systems at each of the Hotels and its corporate
headquarters. Corporate executives utilize information systems that track each
of the Hotel's daily occupancy, ADR, and revenue from rooms, food and
39
<PAGE>
beverage. By having the latest hotel operating information available at all
times, management is better able to respond to changes in the market of each
Hotel.
Commitment to Service and Value. The Company is dedicated to providing
exceptional service and value to its customers on a consistent basis. The
Company conducts extensive employee training programs to ensure personalized
service at the highest levels. Programs such as "Be A Star" have been created
and implemented by the Company to ensure the efficacy and uniformity of its
employee training. The Company's practice of tracking customer comments, through
the recording of guest comment cards and the direct solicitation (during
check-in and check-out) of guest opinions regarding specific items, allows
investment in services and amenities where they are most effective. The
Company's focus on these areas has enabled it to attract lucrative group
business.
Distinct Management Culture. The Company has a distinct management culture
that stresses creativity, loyalty and entrepreneurship and was developed to
emphasize operations from an owner's perspective. Management believes in
realistic solutions to problems, and innovation is always encouraged. Incentive
programs and awards have been established to encourage individual property
managers to seek new ways of increasing revenues and operating cash flow. This
creative, entrepreneurial spirit is prevalent from the corporate staff and the
general managers down to the operations staff. Individual general managers work
closely with the corporate staff and they and their employees are rewarded for
achieving target operating and financial goals.
IMPLEMENTATION OF STRATEGIES
Since January 1, 1995, CapStar has implemented its acquisition and operating
strategies by acquiring and assuming management of 12 upscale, full-service
hotels containing approximately 3,500 rooms and contracting to acquire
Additional Hotels containing approximately 1,125 rooms. The Company believes
that it has improved the performance of each of the Owned Hotels since acquiring
them between March 1995 and June 1996. The following three examples illustrate
the manner in which the Company has implemented its acquisition and operating
strategies at the Owned Hotels:
Westin Atlanta Airport. Built in 1982, the 496-room hotel is located on
Interstate 85 near Interstate 285, Atlanta's central highway, and adjacent to
Hartsfield International Airport (the nation's third busiest airport). After
acquiring the hotel, the Company began the process of converting the franchise
affiliation from Renaissance to Westin. It is expected that the conversion will
be completed by July 1996. The hotel's facilities and amenities feature over
15,000 square feet of meeting and banquet space, an indoor/outdoor pool, a
health club, a voice mail telephone answering system, a gift shop, a business
center, a club lounge, two restaurants, a lounge and a nightclub. The economy of
greater Atlanta, host of the 1996 Summer Olympic Games, is among the strongest
in the nation.
Prior to the Company's acquisition, the hotel had been leased to a tenant
that was involved in prolonged disputes with the hotel's owners, which had
resulted in inadequate maintenance of the hotel's physical plant and generally
poor employee morale. The Company acquired the first mortgage loan on this hotel
from a major insurance company during 1995 and in November 1995 acquired a
majority limited partnership interest and the sole general partner interest in
the limited partnership that owns the hotel (the limited partnership was in its
fourth year of Chapter 11 reorganization at the time). The Company took over
management of the hotel in March 1996 after confirmation of the hotel's
reorganization plan and has implemented an operating strategy (outlined in the
chart below) which includes a $7.1 million renovation program that is expected
to be substantially completed by November 1996.
40
<PAGE>
<TABLE>
<CAPTION>
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
1. Change franchise brand . Complete property Westin franchise is expected
affiliation from improvements specified by to become effective in July
Renaissance(R) to Westin. Westin. 1996.
2. Replace property . Install new management New general manager and
management committee to team. executive staff installed.
facilitate shift in
marketing and management
direction.
3. Shift demand segment from . Renovate 250 guest rooms to Club room and telephone
heavily-discounted airline Westin Premier(R) standard system installed. Westin
crew business to premium and install Guest Office Premier rooms completed and
business and leisure features. remaining rooms in process of
travelers. . Install dedicated club room being renovated (as airline
for top tier guests. contracts expire).
. Upgrade remaining guest
rooms.
. Replace telephone system.
. Repair health club
equipment and pool area.
4. Increase group meeting . Renovate meeting and Renovations complete and
use. banquet space in marketing plan under way.
coordination with local and
national Westin sales office
system.
5. Execute accelerated . Repair and upgrade HVAC and Deferred maintenance programs
capital improvement plan to mechanical system. underway.
address defined maintenance . Refinish guest room
program. corridors.
. Repair building exterior
and grounds.
</TABLE>
Marriott Hotel, Somerset, NJ. Built in 1978, the 434-room hotel is centrally
located on Interstate 287, approximately 25 miles from Newark International
Airport, 40 minutes from midtown Manhattan and convenient to all major traffic
arteries in Northern New Jersey. The hotel's facilities and amenities feature
over 9,000 square feet of meeting and banquet space, tennis courts, volleyball
courts, an indoor/outdoor pool, a sauna/whirlpool, an exercise room, a
shuffleboard/badminton court, two restaurants and a pool-side bar. The hotel is
surrounded by a significant number of corporate headquarters, commercial office
buildings, retail centers, an affluent residential community and extensive,
well-maintained local highways and road systems. Somerset and its neighboring
communities have been experiencing moderate economic growth in recent years.
Prior to the Company's acquisition, a widely syndicated investment
partnership owned the hotel and contracted the management to Marriott
International, Inc. That owner limited the amount of capital for building
renovations available to Marriott International, Inc., which necessitated a
marketing strategy that did not allow management to penetrate the multiple
demand segments that the Company believes the hotel can successfully serve. Data
from Smith Travel Research indicated that the hotel was operating at above its
fair share of demand among the competitive set of area hotels during 1994 and
1995, but at a significantly lower premium than it had consistently maintained
during prior years, which the Company believes was a direct result of inadequate
on-going capital investment. Since acquiring the hotel in October 1995, the
Company has implemented an operating strategy (outlined in the chart below)
which includes a $3.3 million renovation program that is expected to be
substantially completed by October 1996.
41
<PAGE>
<TABLE>
<CAPTION>
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
1. Pursue higher ADR through . Convert 180 guest rooms to Renovations and conversions
modified room rate Marquis(R) level. to be completed by August
structure in premium . Redecorate the lobby and 1996 (time table based on
commercial segment. the corporate club. vacancy patterns so that
. Reduce number of premium premium room service
guest rooms available at interruption is minimized).
discounts.
2. Increase weekend . Target leisure demand Direct sales and marketing
occupancy. segment with direct sales plans in place.
and advertising.
3. Pursue higher food and . Convert formal dining room Renovations completed.
beverage sales. to banquet space to attract
local catering demand.
. Enlarge cocktail lounge to
attract non-restaurant
demand.
4. Reduce operating expenses . Install computer network Achieved gross operating
by restructuring staff and for more efficient profit margin of 34.5% for
training programs. management oversight. the six months ended June 30,
1996.
5. Execute accelerated . Replace HVAC units in 140 Deferred maintenance programs
capital improvement plan to guest rooms. underway.
address deferred . Refinish corridors.
maintenance program. . Install fire sprinkler
system.
</TABLE>
Salt Lake Airport Hilton. Built in 1980, the 287-room hotel is centrally
located within a commercial office park, approximately five minutes from the
Salt Lake City International Airport and 15 minutes from downtown Salt Lake
City. The hotel's facilities and amenities feature 10,000 square feet of meeting
and banquet facilities, indoor and outdoor pools, a basketball court, lake and
dock facilities, a putting green, a health club, a video room and a restaurant
and lounge with 150 seats. The hotel is well-positioned to serve strong business
segment demand generated by the commercial office park, as well as leisure
segment demand from visitors to nearby attractions like the Mormon Temple, the
Great Salt Lake and seven world-class ski resorts in the Wasatch Range of the
Rocky Mountains. Salt Lake City has experienced strong economic growth in recent
years as a result of a growing high-tech business community, the renovation and
expansion of the Salt Palace Convention Center and the selection of the city as
the site of the 2002 Winter Olympic Games.
Prior to the Company's acquisition, the Salt Lake Airport Hilton was owned
and operated by its original developer, a local development company that owned
no other hotel properties. The hotel's first mortgage had passed its original
maturity date. The hotel suffered from deferred maintenance, a deteriorating
market share and low employee morale. Specific operational deficiencies included
the lack of a yield management system, a low operating margin in the rooms
department and an inefficient marketing plan that failed to attract upscale
business travelers and group business. Data from Smith Travel Research indicated
that the hotel was operating at approximately 83% of its fair share of demand
among its competitive set of area hotels during 1994. However, the Company felt
that the hotel had a fundamentally sound physical plant, facilities and
amenities to serve a full range of lodging demand segments and strong marketing
support from the Hilton reservation system. Since acquiring the hotel in March
1995, the Company has implemented an operating strategy (outlined in the chart
below) which includes a $1.8 million renovation program that is substantially
completed.
42
<PAGE>
<TABLE>
<CAPTION>
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
1. Recapture business . Upgrade 48 guest rooms to Renovations completed and new
travelers in premium rate create corporate floor with restaurant operating.
segment during peak business services and
business periods. dedicated club room.
. Redecorate lobby and small
meeting rooms.
. Install new restaurant.
2. Generate higher revenues . Fully renovate meeting Renovations completed and
from group demand segment facilities. local/corporate sales program
in rooms and food & . Install cocktail lounge. continuing.
beverage department. . Upgrade VIP and hospitality
suites.
3. Apply yield management . Install new computer system Completed and in effect.
practices. and upgrade software.
4. Reduce Rooms Department . Reduce payroll costs. Rooms Department profit
expense margin. . Scale back on excessive margin increased from 34.4%
guest premium program. for the six months ended June
30, 1995 to 36.9% for the six
months ended June 30, 1996.
5. Eliminate unproductive . Redirect promotional Program underway.
promotional costs. dollars to priority business
plan items.
</TABLE>
THE PROPERTIES
The Owned Hotels and the Additional Hotels feature, or after the Company's
renovation program has been completed will feature, comfortable, modern guest
rooms, extensive meeting and convention facilities and full-service restaurant
and catering facilities that attract meeting and convention functions from
groups and associations, upscale business and vacation travellers as well as
banquets and receptions from the local community.
43
<PAGE>
The following table sets forth certain information with respect to the Owned
Hotels and the Additional Hotels for the 12 months ended June 30, 1996:
<TABLE>
<CAPTION>
PLANNED OR TWELVE MONTHS ENDED
COMPLETED JUNE 30, 1996
NUMBER OF RENOVATION ----------------------------
GUEST YEAR MONTH EXPENDITURE(1) AVERAGE
HOTEL LOCATION ROOMS BUILT ACQUIRED (000'S) OCCUPANCY ADR REVPAR(2)
- --------------------------------- ----------------- --------- ----- -------- -------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton..... Irvine, CA 290 1976 2/96 $ 2,006 65.1% $73.61 $ 47.92
Sheraton Hotel................... Colorado Springs,
CO 502 1974 6/95 3,393 68.5 63.57 43.55
The Latham Hotel................. Washington, DC 143 1981 3/96 802 73.2 102.60 75.10
Westin Atlanta Airport(3)........ Atlanta, GA 496 1982 11/95 7,100 84.1 71.64 60.25
Radisson Hotel................... Schaumburg, IL 202 1979 6/95 1,652 62.7 69.23 43.41
Marriott Hotel................... Somerset, NJ 434 1978 10/95 3,311 72.3 96.49 69.76
Sheraton Airport Plaza........... Charlotte, NC 226 1985 2/96 1,529 73.9 79.02 58.40
Holiday Inn...................... Cleveland, OH 237 1978 2/96 2,900 75.2 66.96 50.35
Hilton Hotel..................... Arlington, TX 310 1983 4/96 2,700 75.1 79.01 59.34
Salt Lake Airport Hilton......... Salt Lake City,
UT 287 1980 3/95 1,823 71.3 75.13 53.57
Hilton Hotel..................... Arlington, VA 209 1990 6/96 1,500 76.3 105.35 80.38
Hilton Hotel..................... Bellevue, WA 180 1979 8/95 1,063 78.1 86.31 67.41
--
--- ------ ------ ---------
Total/Weighted Average--Owned Hotels............. 3,516 $ 29,779 73.2% $78.89 $ 57.75
ADDITIONAL HOTELS
Hilton Hotel..................... Sacramento, CA 326 1983 12/96 $ 750 71.2% $74.53 $ 53.07
Santa Barbara Inn................ Santa Barbara, CA 71 1959 12/96 450 84.0 125.13 105.11
Holiday Inn...................... Colorado Springs,
CO 201 1974 12/96 200 72.3 56.54 40.88
Embassy Row Hotel................ Washington, DC 195 1969 12/96 2,033 58.0 113.88 66.05
Hilton Hotel & Towers............ Lafayette, LA 328 1981 12/96 249 72.3 67.90 49.09
--
--- ------ ------ ---------
Total/Weighted Average--Additional Hotels........ 1,121 $ 3,682 70.3% $78.72 $ 55.34
Total/Weighted Average........................... 4,637 $ 33,461 72.5% $78.85 $ 57.17
--
--
--- ------ ------ ---------
--- ------ ------ ---------
</TABLE>
- ------------
(1) Represents the total planned or completed capital expenditures at each
hotel. As of June 30, 1996, $14.0 million had been spent and an additional
$15.8 million was planned for the Owned Hotels and $3.7 million was planned
for the Additional Hotels.
(2) Represents total room revenue divided by total available rooms, net of rooms
out of service due to significant renovations.
(3) The Westin Atlanta Airport is majority-owned by the Company through a
partnership in which the Company holds an 85.2% limited partner interest, 1%
general partner interest and a mortgage which together provide the Company a
92% economic interest in the hotel.
THE OWNED HOTELS
The following is a brief description of each of the Owned Hotels and their
respective locations:
Orange County Airport Hilton, Irvine, CA. Built in 1976, the 290-room hotel
is centrally located across the street from the John Wayne International Airport
in an area densely developed with Class A commercial office space, upscale
retail establishments and high density residential housing. The hotel's
facilities and amenities feature over 11,000 square feet of banquet and meeting
space, an outdoor pool, two tennis courts, a health and fitness center, a
business center, valet services, a gift shop and a grill restaurant. Orange
County has experienced minimal economic growth during the 1990s and has trailed
the national average during that time due to (i) the negative impact of cutbacks
in defense spending and (ii) sharp declines in the value of certain investments
that led Orange County to seek bankruptcy protection. The Company believes that
Orange County and nearby Los Angeles are currently emerging from recession,
demonstrated by the fact that these counties are projected to lead the state in
job growth during 1996. As of June 30, 1996, the Company had spent $0.2 million
on renovations at the hotel with an additional $1.8 million planned.
44
<PAGE>
Sheraton Hotel, Colorado Springs, CO. Built in 1974, the 502-room hotel is
centrally located approximately eight miles from Colorado Springs International
Airport, three miles from downtown Colorado Springs and adjacent to Interstate
25. The hotel's facilities and amenities feature over 42,000 square feet of
meeting and banquet space (one of the largest meeting and banquet facilities in
Colorado), a health club, a putting green, three pools, two restaurants and a
lobby bar. Colorado Springs has experienced strong economic growth in recent
years which has led to a major airport expansion program which was completed in
1995. Such growth is attributable to a number of factors, including a low
regional average cost of living and a rapidly expanding, young population. As of
June 30, 1996, the Company had spent $2.8 million on renovations at the hotel
with an additional $0.6 million planned.
The Latham Hotel, Washington, D.C. Built in 1981, the 143-room hotel is
located in the center of Georgetown, an historic district in central Washington,
D.C. The hotel is approximately 15 minutes from Washington National Airport and
convenient to several of Washington's commercial office concentrations,
particularly those in the area of Georgetown, the West End and the Golden
Triangle. The hotel's facilities and amenities feature 3,400 square feet of
meeting and banquet space, valet services, secretarial services, concierge
services, a roof top pool and deck and the renowned CITRONELLE restaurant. The
hotel is also surrounded by upscale retail establishments, restaurants,
galleries, museums and historic homes, making it broadly appealing to business
travelers, as well as group meetings and leisure travelers. The economy of the
Washington, D.C. metropolitan area is currently among the strongest in the
nation and economic growth is forecast to continue into the near future. A major
new convention center downtown is expected to open within four years. As of June
30, 1996, the Company had spent $0.2 million on renovations at the hotel with an
additional $0.6 million planned.
Westin Atlanta Airport. Built in 1982, the 496-room hotel is located on
Interstate 85 near Interstate 285, Atlanta's central highway, and adjacent to
Hartsfield International Airport (the nation's third busiest airport). After
acquiring the hotel, the Company completed extensive renovations which enabled a
Westin franchise to become effective as of July 9, 1996. The hotel's facilities
and amenities feature over 15,000 square feet of meeting and banquet space, an
indoor/outdoor pool, a health club, a voice mail telephone answering system, a
gift shop, a business center, a club lounge, two restaurants, a lounge and a
nightclub. The economy of greater Atlanta, host of the 1996 Summer Olympic
Games, is among the strongest in the nation. As of June 30, 1996, the Company
had spent $4.7 million on renovations at the hotel with an additional $2.4
million planned.
Radisson Hotel, Schaumburg, IL. Built in 1979, the 202-room hotel is
centrally located on an important arterial road a quarter mile west of
interstate 290, approximately 20 minutes from O'Hare International Airport (the
nation's busiest airport) and 40 minutes from downtown Chicago. The hotel's
facilities and amenities feature over 7,400 square feet of meeting and banquet
space (with the addition of new space planned), a complimentary breakfast
buffet, complimentary airport and local transportation service, valet parking
and dry cleaning, an outdoor pool and whirlpool, a fitness center, a jogging
trail, a restaurant and a sports bar/dance club. After Chicago, Schaumburg
contains the second highest concentration of commercial, office, retail and
residential space in the Midwest. The suburban areas surrounding Schaumburg have
experienced strong economic growth in recent years, based on employment figures,
office space occupancy rates, air traffic levels and retail sales volume. As of
June 30, 1996, the Company had spent $1.4 million on renovations at the hotel
with an additional $0.3 million planned.
Marriott Hotel, Somerset, NJ. Built in 1978, the 434-room hotel is centrally
located on Interstate 287, approximately 25 miles from Newark International
Airport, 40 minutes from midtown Manhattan and convenient to all major traffic
arteries in Northern New Jersey. The hotel's facilities and amenities feature
over 12,000 square feet of meeting and banquet space, tennis courts, an
indoor/outdoor pool, a sauna/whirlpool, volleyball courts, an exercise room, a
shuffleboard/badminton court, two restaurants and a pool-side bar. The hotel is
surrounded by a significant number of corporate headquarters, commercial office
buildings, retail centers, an affluent residential community and extensive,
well-maintained local highways and road systems. Somerset and its neighboring
communities have been
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experiencing moderate economic growth in recent years. As of June 30, 1996, the
Company had spent $1.4 million on renovations at the hotel with an additional
$1.9 million planned.
Sheraton Airport Plaza, Charlotte, NC. Built in 1985, the 226-room hotel is
the only upscale, full-service hotel at Charlotte Douglas International Airport
(which is USAir's main operating hub and the nation's 14th busiest airport). The
hotel is located north of the airport, approximately five miles from the
Charlotte Coliseum and seven miles from downtown Charlotte. The hotel's
facilities and amenities feature over 12,500 square feet of meeting and banquet
space, airport shuttle service, a fitness center, a pool with sauna and
whirlpool, a restaurant and a lounge/nightclub. The Charlotte region has grown
in recent years to become the second largest financial center in the U.S. (after
New York City) and has experienced a continued influx of foreign companies
establishing U.S. operations. Economic growth has been strong over the past
fifteen years due to Charlotte's attractive climate, low cost of living, young
and well-educated workforce and accessibility by all forms of transportation. As
of June 30, 1996, the Company had spent $0.5 million on renovations at the hotel
with an additional $1.0 million planned.
Holiday Inn, Cleveland, OH. Built in 1978, the 237-room hotel is located on
Interstate 71 in Middleburg Heights, approximately three miles from Cleveland's
Hopkins International Airport and approximately 15 miles from downtown
Cleveland. The hotel's facilities and amenities feature over 14,000 square feet
of meeting and banquet space, an indoor pool, a fitness spa, 24-hour airport
shuttle service and a restaurant specializing in seafood and regional cuisine.
The Cleveland metropolitan area and the cities surrounding the airport have
experienced strong economic growth in recent years as the greater Cleveland
economy has shifted from an economic base weighted toward heavy manufacturing to
one focused on services, technology and manufacturing. As of June 30, 1996, the
Company had spent $0.1 million on renovations at the hotel with an additional
$2.8 million planned.
Hilton Hotel, Arlington, TX. Built in 1983, the 310-room hotel is located at
the intersection of Interstate 30 and Route 360, near the center of the
Dallas/Fort Worth Metroplex. The hotel is well-positioned to serve both business
and leisure segments due to its proximity to (i) a surrounding commercial
development, (ii) nearby leisure attractions, including The Ballpark at
Arlington and the original Six Flags amusement park, (iii) a regional convention
center located one mile away, and (iv) the Dallas/Fort Worth International
Airport (the nation's second busiest), approximately eight miles away. The
commercial office concentrations of downtown Dallas and Fort Worth are each
approximately 15 miles away. The Dallas-Forth Worth Metroplex is the sixth most
populous metropolitan area in the U.S. and, notwithstanding a state recession in
the 1980s caused by the collapse of oil prices and a nationwide recession during
the early 1990s, has been experiencing strong economic growth in recent years,
as measured by airport activity, office space occupancy rates, employment rates
and population figures. As of June 30, 1996, the Company had spent $0.1 million
on renovations with an additional $2.6 million planned.
Salt Lake Airport Hilton. Built in 1980, the 287-room hotel is centrally
located within a commercial office park, approximately five minutes from the
Salt Lake City International Airport and 15 minutes from downtown Salt Lake
City. The hotel's facilities and amenities feature 10,000 square feet of meeting
and banquet facilities, indoor and outdoor pools, a basketball court, lake and
dock facilities, a putting green, a health club, a video room and a restaurant
and lounge with 150 seats. The hotel is well-positioned to serve strong business
segment demand generated by the commercial office park, as well as leisure
segment demand from visitors to nearby attractions like the Mormon Temple, the
Great Salt Lake and seven world-class ski resorts in the Wasatch Range of the
Rocky Mountains. Salt Lake City has experienced strong economic growth in recent
years as a result of a growing high-tech business community, the renovation and
expansion of the Salt Palace Convention Center and the selection of the city as
the site of the 2002 Winter Olympic Games. As of June 30, 1996, the Company had
spent $1.7 million on renovations at the hotel with an additional $0.1 million
planned.
Hilton Hotel, Arlington, VA. Built in 1990, the 209-room hotel is part of
Ballston Metro Center, a mixed use development consisting of hotel, residential
condominium, office, retail and parking uses,
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which is located approximately four miles outside of downtown Washington, D.C.
in the Interstate 66 corridor. Ballston Metro Center incorporates the Ballston
station of Washington's 100 mile regional subway system. The hotel's facilities
and amenities feature more than 7,500 square feet of banquet and meeting space,
garage parking, a restaurant and lounge, a club floor with deluxe guest rooms
and special services available, an indoor pool with exercise and health
facilities, an atrium walkway leading to the integrated office building and
retail outlets, and an enclosed connection to the office building across the
street and the regional mall one block away. The Company has a commitment from
Hilton Hotels Corporation to reflag the hotel (which was operated as a
Renaissance hotel prior to the Company's acquisition) as a Hilton. In connection
with the reflagging, the Company intends to spend an additional $1.5 million on
renovations at the hotel.
Hilton Hotel, Bellevue, WA. Built in 1979, the 180-room hotel is centrally
located approximately 13 miles from Seattle-Tacoma International Airport, nine
miles from downtown Seattle and blocks from downtown Bellevue. The hotel's
facilities and amenities feature over 7,750 square feet of meeting and banquet
space, an indoor pool with a jacuzzi and sauna, a fitness club, laundry/valet
services, a business center and a restaurant and lounge. After Seattle, Bellevue
contains the highest concentration of commercial, office, retail and residential
space in Washington and has been experiencing economic growth above the national
average. Economic growth in the Bellevue market area has been strong over the
last 15 years as numerous computer, aerospace and communications companies,
including Microsoft Corporation, have located there. As of June 30, 1996, the
Company had spent $0.9 million on renovations at the hotel with an additional
$0.2 million planned.
THE ADDITIONAL HOTELS
The Company has entered into a binding contract with MBL to acquire the
Additional Hotels which contain 1,121 rooms, for a purchase price of $68.4
million. Four of the Additional Hotels have been managed by the Company since
1991. Since assuming management of these four hotels, the Company has improved
the performance of the properties. However, the Company believes that, with
appropriate capital spending, the Additional Hotels can achieve further
improvements in revenue and cash flow. The Company plans to spend approximately
$3.7 million subsequent to the acquisition to renovate and reposition the
Additional Hotels. The acquisition is scheduled to close in December 1996.
The following is a brief description of each of the Additional Hotels and
their respective locations:
Hilton Hotel, Sacramento, CA. Built in 1983, the 326-room hotel is located
in suburban Sacramento, near the interchange of Interstate 80 and Route 160 in
an area which is well developed with commercial office space, upscale retail and
residential uses. The hotel's facilities and amenities feature over 17,000
square feet of banquet and meeting space, an indoor-outdoor pool, volleyball
courts, a health and fitness center, a business center, valet services, a gift
shop and two restaurants. The greater Sacramento market has experienced strong
economic growth during the 1990s. The Company plans to spend $0.8 million on
renovations.
Santa Barbara Inn, Santa Barbara, CA. Built in 1959, the 71-room hotel is
located on the Pacific Coast Highway directly across from a wide, publicly
maintained beach. The hotel's facilities and amenities feature the renowned
CITRONELLE restaurant, two meeting rooms, an outdoor pool and deck, tennis
courts and valet services. The Santa Barbara market is a popular residential and
resort area. The Company plans to spend $0.5 million on renovations at the
hotel.
Holiday Inn, Colorado Springs, CO. Built in 1974, the 201-room hotel is
located on Interstate 25, approximately five miles north of downtown Colorado
Springs and approximately eight miles north of an Owned Hotel, the Sheraton
Hotel, Colorado Springs. The hotel's facilities and amenities feature more than
8,700 square feet of banquet and meeting space, a health club and jogging track,
an outdoor pool, tennis courts, a restaurant, a gift shop and valet services.
Colorado Springs has experienced strong economic growth in recent years which
has led to a major airport expansion program completed in 1995. Such growth is
attributable to a number of factors, including the region's low average cost of
living and
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a rapidly expanding, young population. The Company plans to spend $0.2 million
on renovations at the hotel.
The Embassy Row Hotel, Washington, D.C. Built in 1969, the 195-room hotel is
located in downtown Washington, D.C. on Massachusetts Avenue, which is known as
"Embassy Row" because of the many embassies, chanceries and offices of foreign
governments located in the area. The hotel's facilities and amenities feature
over 7,500 square feet of banquet and meeting space, a rooftop pool and deck, a
health and fitness center, a business center, valet services and a restaurant. A
major new convention center is expected to open in downtown within four years.
The Company assumed management of the hotel in July 1996 and plans to spend $2.0
million on renovations after acquiring the hotel. In conjunction with the
renovation, the Company plans to obtain a franchise for the hotel.
Hilton Hotel & Towers, Lafayette, LA. Built in 1981, the 328-room hotel is
centrally located on Pinhook Road, a major business artery linking downtown
Lafayette with the local airport. The hotel's facilities and amenities feature
over 17,000 square feet of banquet and meeting space, an outdoor pool, an
exercise room, a business center, valet services, a gift shop and a restaurant.
Lafayette serves as a major center for offshore oil drilling and production, and
has experienced strong job growth during the 1990s. The Company plans to spend
$0.2 million on renovations at the hotel.
THE MANAGED HOTELS
The Company operates 37 Managed Hotels containing 5,528 rooms. Of the
Managed Hotels, 25 are full-service properties, nine are limited-service
properties and three are extended stay properties. 31 of the Managed Hotels are
operated under nationally-recognized brand names and six are independent
properties. The brand names of the Managed Hotels include Hilton, Sheraton,
Clarion and Holiday Inn. See "Certain Relationships and Related Transactions"
and "Risk Factors--Potential Conflicts of Interest."
The Management Agreements have remaining terms ranging from one month to
nine years. Substantially all of the Management Agreements permit the owners of
the Managed Hotels to terminate such agreements prior to the stated expiration
dates if the applicable hotel is sold and several of the Management Agreements
permit the owners of the Managed Hotels to terminate such agreements prior to
the stated expiration date without cause or by reason of the failure of the
applicable hotel to obtain specified levels of performance. For 1995, the
Company's pro forma revenue from Management Agreements was $3.3 million
constituting 2.3% of the Company's total revenue for such period. No single
Management Agreement currently accounts for more than 5% of the total revenue
from the Management Agreements on a pro forma basis. Additionally, no group of
Management Agreements for hotels under common ownership or control currently
accounts for more than 13% of the total revenue from the Management Agreements
on a pro forma basis. See "Risk Factors-- Termination of Management Agreements."
The Company intends to continue its efforts to add to its portfolio of
Managed Hotels by aggressively pursuing new management agreements. The Company
believes that, in addition to adding to the Company's revenues and profits, the
business of operating hotels for third parties benefits the Company by (i)
increasing the Company's operating experience in, and knowledge of, hotel
markets throughout the United States, (ii) broadening the Company's
relationships with hotel owners and thus enhancing the Company's opportunities
to identify, evaluate and negotiate hotel acquisitions prior to the active
marketing of a hotel for sale, and (iii) improving the Company's ability to
attract, train and retain highly-qualified operating employees by offering them
the opportunity to work in a broader variety of hotels and markets.
THE HOTEL INDUSTRY
The hotel industry is currently recovering from a period of low demand and
high supply that led to industry-wide decreases in ADRs, numerous hotel failures
and decreased levels of profit. It was the
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rapid increase in room supply during the 1980s that drove ADRs and industry
profitability down, but 1991 marked a reversal of this trend. The following
charts, based on data provided by Smith Travel Research, demonstrate the rise
that has occurred in hotel industry average occupancy and ADRs since 1991:
[GRAPH]
The hotel industry is one of the most management intensive sectors of the
real estate industry. The last 15 years have been characterized by increased
product segmentation and greater marketing and cost control sophistication. Even
as the importance of sophisticated management has increased, however, hotel
owners have continued to rely upon fee-based third parties to manage their
hotels. As an integrated owner and operator focused on maximizing long-term
asset value and increasing profit, the Company believes that it distinguishes
itself from those owners who do not possess in-house management capabilities.
The lodging industry as a whole has shown significant improvement in recent
years. Industry reports indicate that the lodging industry marked its third
consecutive year of profitability in 1995, earning pre-tax profits of $5.5
billion. The improved profitability resulted from a favorable industry
supply/demand relationship, with increases in room demand exceeding supply
growth in 1992, 1993, 1994 and 1995. This excess of demand growth over supply
growth has given the lodging industry a significant and increasing degree of
pricing power. This pricing power has resulted in significant industry-wide
growth in average room rate from 1992 through 1995. According to Coopers &
Lybrand's "Hospitality Directions", these trends are expected to continue, with
demand projected to increase at 2.4% annually from 1995 to 1998 compared to only
a 1.8% growth in supply. This favorable supply/demand position is projected to
lead to growth of 4% to 5% in average room rate annually through 1998 (a rate
that is projected to exceed the inflation rate), coupled with an increase in
average occupancy rate from 65.4% in 1995 to 70% by 1998. Average RevPAR is
expected to increase 6.8% annually from 1995 to 1998. However, demand
historically has been sensitive to shifts in economic activity which has
resulted in cyclical room and occupancy rates and there is no assurance that
industry projections will be met.
The Company believes that the lodging industry pricing power described above
is likely to be strongest and most sustained in the full-service segment in
which the Company operates. Two primary factors underlying this projected
strength are (i) the lower consumer sensitivity to increases in room rates in
the full-service segment due to customer emphasis on service and brand loyalty
and (ii) an expectation by industry experts that there will be no significant
additions to the full-service room base over the next few years. No significant
increase in the full-service sector's room base is projected because (i) the
cost of constructing hotels in the full-service segment is substantially higher
than other industry segments, (ii) financing available for full-service hotel
construction projects is generally higher in cost and more limited in nature,
(iii) construction of full-service hotels involves longer lead times, and (iv)
construction cost for new hotels, in most cases, remain substantially higher
than the costs of acquiring existing full-service hotels.
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COMPETITION
The Company competes primarily in the upscale and mid-priced sectors of the
full-service segment of the lodging industry. In each geographic market in which
the Hotels are located, there are other full-and limited-service hotels that
compete with the Hotels. In addition, the Company's food and beverage operations
compete with local free-standing restaurants and bars. Competition in the U.S.
lodging industry is based generally on convenience of location, price, range of
services and guest amenities offered and quality of customer service and overall
product.
EMPLOYEES
As of June 30, 1996, the Company employed approximately 5,325 persons, of
whom approximately 4,431 were compensated on an hourly basis. Approximately 58
employees work at the corporate headquarters.
Employees at five of the Hotels are represented by labor unions. Management
believes that labor relations with its employees are good.
TRADEMARKS
The Company employs a flexible branding strategy based on a particular
Hotel's market environment and the Hotel's unique characteristics. Accordingly,
the Company uses various national trade names pursuant to licensing arrangements
with national franchisors.
HILTON(R) AND THE STYLIZED "H" ARE REGISTERED TRADEMARKS OF HILTON HOTELS
CORPORATION ("HILTON HOTELS"). NEITHER HILTON INNS, INC. ("HILTON INNS") NOR
HILTON HOTELS, NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES (COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN
ISSUER OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAVE ANY
OF THE HILTON ENTITIES ENDORSED OR APPROVED THE OFFERING. THE HILTON ENTITIES
HAVE NOT ASSUMED AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY FOR ANY
FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY
PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER
HEREOF. A GRANT OF A HILTON INNS FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS
NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY ANY OF THE HILTON ENTITIES (OR ANY OF THEIR
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.
HOLIDAY INN(R) IS A REGISTERED TRADEMARK OF HOLIDAY INNS FRANCHISING, INC.
("HOLIDAY INNS"). HOLIDAY INNS HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY
OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS NOR DOES
HOLIDAY INNS HAVE ANY INTEREST IN THE COMPANY OR THE COMMON STOCK OFFERED
HEREBY, EXCEPT AS A FRANCHISOR. A GRANT OF A HOLIDAY INN FRANCHISE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY INNS (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.
RADISSON(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL, INC.
("RADISSON HOTELS"), WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
RADISSON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN
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EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY RADISSON HOTELS (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.
MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL, INC., WHICH
HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A MARRIOTT FRANCHISE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR
ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON
STOCK OFFERED HEREBY.
SHERATON(R) IS A REGISTERED TRADEMARK OF ITT SHERATON CORPORATION, WHICH HAS
NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A SHERATON FRANCHISE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY ITT SHERATON CORPORATION (OR ANY
OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.
WESTIN(R) IS A REGISTERED TRADEMARK OF WESTIN HOTEL COMPANY AND IS LICENSED
THROUGH WESTIN LICENSE COMPANY. NEITHER WESTIN HOTEL COMPANY NOR WESTIN LICENSE
COMPANY HAS ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF
THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A WESTIN FRANCHISE LICENSE
FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS,
AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY WESTIN HOTEL COMPANY OR WESTIN
LICENSE COMPANY (OR ANY OF THEIR RESPECTIVE AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course of
business. The Company believes that the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company.
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. The Company
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 Owned Hotels and could
otherwise adversely affect the Company's operations.
Under 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 Owned Hotels, a determination that
the Company 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. The Company is likely to incur additional costs of complying with the
ADA; however, such costs are not expected to have a material adverse effect on
the Company's results of operations or financial condition. See "Risk
Factors--Governmental Regulation."
For a description of certain environmental regulations to which the Company
is subject, see "Risk Factors--Environmental Risks."
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MANAGEMENT
The following table sets forth certain information with respect to the
Company's directors and executive officers as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Paul W. Whetsell.......................... 45 President, Chief Executive Officer and
Chairman of the Board
David E. McCaslin......................... 39 Chief Operating Officer and Director
William M. Karnes......................... 50 Senior Executive Vice President, Finance
and Chief Financial Officer
John E. Plunket........................... 40 Executive Vice President, Finance and
Development
John Emery................................ 32 Treasurer and Secretary
Michael T. George......................... 37 Senior Vice President, Operations
D. Scott Livchak.......................... 41 Senior Vice President, Operations
Robert Gauthier........................... 42 Senior Vice President, Operations
Daniel L. Doctoroff....................... 37 Director
Bradford E. Bernstein..................... 29 Director
William S. Janes.......................... 43 Director
Joseph McCarthy........................... 64 Director
Edward L. Cohen........................... 50 Director
Edwin T. Burton, III...................... 54 Director
Edward P. Dowd............................ 53 Director
</TABLE>
Paul W. Whetsell has served as President and Chief Executive Officer of the
Company 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.
David E. McCaslin has served as Chief Operating Officer of the Company since
1994. Mr. McCaslin joined the Company 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.
William M. Karnes has served as Senior Executive Vice President, Finance and
Chief Financial Officer of the Company since April 1996. From 1994 to April
1996, Mr. Karnes served as Senior Vice President and Chief Financial Officer of
Tucker Properties Corporation, a publicly traded real estate investment trust.
From 1991 to 1994, Mr. Karnes served as Senior Vice President Finance and
Administration for Banyan Management Corp., a company that provides management
services for five public real estate investment trusts and three master limited
partnerships. Prior to that, from 1989 to 1991, Mr. Karnes served as Chief
Operating Officer of Miglin-Beitler, Inc., a private real estate development,
management and leasing firm.
John E. Plunket has served as Executive Vice President, Finance and
Development 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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John Emery has served as Treasurer and Secretary of the Company since March
1996. From September 1995 to March 1996, he served as Director of Finance of the
Company. 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.
Michael T. George has served as Senior Vice President, Operations since
1995. From 1992 to 1995, Mr. George served as Chief Operating Officer for Devon
Hotels in Montreal. From 1989 to 1992, Mr. George served as Vice President for
Radisson Hotels International, Inc. Prior to that, from 1986 to 1989, Mr. George
served as Vice President for Sheraton Hotels in Toronto.
D. Scott Livchak has served as Senior Vice President, Operations since 1990.
From 1985 to 1989 Mr. Livchak served as a General Manager for The Adam's Mark
Hotel in Washington, DC, owned by HBE Corporation. From 1983 to 1985, Mr.
Livchak worked for the Sheraton Atlanta Hotel in the capacity of Resident
Manager. From 1977 to 1983, Mr. Livchak held various management positions with
Sheraton Corporation.
Robert Gauthier has served as Senior Vice President, Operations and General
Manager of the Sheraton, Colorado Springs since 1996. From 1993 to 1996, he
served as Vice President, Operations for CapStar Management. Prior to that, from
1987 to 1993, Mr. Gauthier served as Area Manager and General Manager for Drexel
Burnham Lambert Realty, Inc.
Daniel L. Doctoroff has been Managing Director of Oak Hill Partners, Inc.
(Acadia Partners' investment advisor) 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, National Re Corporation, Transport Holdings, Inc., Kemper
Corporation and Specialty Foods Corporation.
Bradford E. Bernstein has served as a Vice President and an Associate of Oak
Hill Partners, Inc. (Acadia Partners' investment advisor) since 1992. From 1991
until 1992, Mr. Bernstein worked at Patricof & Co. Ventures. Prior to that, from
1989 to 1991, he worked at Merrill, Lynch & Co. Mr. Bernstein serves as a
director of Pinnacle Brands, Inc. and Payroll Transfers, Inc.
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.
Joseph McCarthy has been retired since 1994. From 1993 to 1994 he has 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.
Edward L. Cohen has served as an Executive Officer of Lerner Corporation, a
real estate management and leasing company located in Bethesda, Maryland, since
1985. Mr. Cohen is also a Principal of Lerner Enterprises, a real estate
development and investment company. Prior to his participation with the Lerner
organization, he was a lawyer in private practice in Washington, D.C.
Edwin T. Burton, III has served as President of Windermere Consulting
Company since April 1995 and Trustee of the Commonwealth of Virginia Retirement
System since March 1994. From 1994 to April 1995, he served as Managing Director
and a member of the Board of Interstate Johnson
53
<PAGE>
Lane, Inc. Prior to that, from 1987 to 1993, he was President of Rothschild
Financial Services, Inc. Mr. Burton is a Visiting Professor of Economics at the
University of Virginia in Charlotesville, Virginia.
Edward P. Dowd has served as Senior Vice President of John Hancock Real
Estate Investment Group of John Hancock Financial Services since 1992. Prior to
that, from 1970 to 1992, Mr. Dowd served in various capacities at John Hancock
Realty. Mr. Dowd serves as Director of John Hancock Realty Investors, Inc., John
Hancock Realty Services Inc. and Maritime Life Assurance Co.
EXECUTIVE COMPENSATION
The following table sets forth the annual base salaries that the Company
intends to pay in 1996 to its Chief Executive Officer and the four most highly
compensated executive officers during such year:
<TABLE>
<CAPTION>
NAME POSITION BASE SALARY(1)
- -------------------------------------- -------------------------------------- --------------
<S> <C> <C>
Paul W. Whetsell...................... President, Chief Executive Officer and
Chairman of the Board $225,000(2)
David E. McCaslin..................... Chief Operating Officer and Director $215,000(2)
William M. Karnes..................... Senior Executive Vice President,
Finance and Chief Financial Officer $215,000(3)
John E. Plunket....................... Executive Vice President, Finance and
Development $150,000(2)
Michael T. George..................... Senior Vice President, Operations $132,000
</TABLE>
- ------------
(1) Pursuant to Compensation Committee policy, such executive officers are also
eligible to earn bonuses of up to 100% of their annual base salary. Under
the terms of such policy the total of such bonuses may not exceed $300,000
during 1996.
(2) Under the terms of their employment agreement Messrs. Whetsell, McCaslin and
Plunket will also be paid a minimum bonus in 1996 of $30,000, $15,000 and
$4,500, respectively.
(3) Under the terms of his employment agreement, Mr. Karnes will also be paid a
minimum bonus of $30,000 in 1996 and will be reimbursed by the Company for
certain moving expenses.
Following the Offering, Messrs. Whetsell, McCaslin, Plunket, Karnes and
George also will receive options to purchase 150,000, 87,500, 73,129, 50,000 and
18,282 shares of Common Stock, respectively. The terms of such options are
described under "--Compensation Plans--Equity Incentive Plan." All of such
options will vest over three years, except 10,000 of the options granted to Mr.
Plunket, which will vest immediately upon their grant.
COMPENSATION OF DIRECTORS
Any director who is not an employee of the Company will be paid an annual
fee of $12,000. In addition, each such director will be paid $750 for attendance
at each meeting of the Board and $500 for attendance at each meeting of a
committee of the Board of which such director is a member. Directors who are
employees of the Company will not receive any fees for their service on the
Board or a committee thereof. In addition, the Company will reimburse directors
for their out-of-pocket expenses in connection with their service on the Board.
Upon the effectiveness of the Registration Statement, each director who is not
an employee of the Company (an "Independent Director") will be granted options
to purchase 5,000 shares of Common Stock at the initial public offering price.
Thereafter, on the date of the annual meeting of the Company's shareholders
beginning with the annual meeting held in 1997, each Independent Director will
be granted options to purchase 5,000 shares of Common Stock at the then current
market price. All options granted to directors will vest over three years. Any
non-employee director who ceases to be a director will forfeit the right to
receive any options not previously vested or granted.
54
<PAGE>
COMMITTEES
The Board will initially have an Audit Committee, a Compensation Committee
and an Investment Committee, the members of which will be determined at the
first meeting of the Board following completion of the Offering. The Audit
Committee will consist of three Independent Directors. The Audit Committee will
make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and non-audit fees and review
the adequacy of the Company's internal accounting controls. The Compensation
Committee will consist of three Independent Directors and will determine
compensation of the Company's executive officers and administer the Company's
Equity Incentive Plan (as defined below). The Investment Committee will consist
of the Chairman of the Board and three Independent Directors, and will review
and approve investments proposed to be made by the Company.
COMPENSATION PLANS
Management Bonus Plan. The Company and the Compensation Committee may award
bonuses to certain employees of the Company from time to time.
Stock Purchase Plan. Each employee of the Company customarily employed at
least 20 hours or more per week by the Company or an affiliate (as defined in
the Stock Purchase Plan), other than an employee who owns beneficially 5% or
more of the outstanding Common Stock, is eligible to participate in the
Company's stock purchase plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan, participating employees may elect to authorize the Company to
withhold a minimum of $200 per quarter and a maximum of 8% or $25,000 (whichever
is less) of the participating employee's base pay, which amounts will be used to
purchase Common Stock from the Company on a monthly basis. The purchase price of
Common Stock will equal a designated percentage from 85% to 100% of the closing
sales price for Common Stock as reported on the Composite Transactions Tape of
the NYSE (except as described below) on the first trading day of the month or on
the last trading day of the month, whichever is less. The designated percentage
will be established annually by the Compensation Committee which is responsible
for the administration of the Stock Purchase Plan.
The Company has reserved 500,000 shares of Common Stock for issuance under
the Stock Purchase Plan. Such shares may be from authorized and unissued shares,
treasury shares or a combination thereof. The Stock Purchase Plan will remain in
effect until terminated by the Board, or until all shares authorized for
issuance thereunder have been issued. The Stock Purchase Plan may be amended
from time to time by the Board. No amendment will increase the aggregate number
of shares of Common Stock that may be issued and sold under the Stock Purchase
Plan (except for authorizations pursuant to the anti-dilution provisions of the
Stock Purchase Plan) without further approval by the Company's shareholders.
Equity Incentive Plan. The Company's Equity Incentive Plan (the "Equity
Incentive Plan") is designed to attract and retain qualified directors, officers
and other key employees of the Company and its affiliates (as defined in the
Equity Incentive Plan). The Equity Incentive Plan authorizes the grant of
options to purchase shares of Common Stock ("Options"), stock appreciation
rights ("Appreciation Rights") and restricted shares ("Restricted Shares"). The
Compensation Committee administers the Equity Incentive Plan and determines to
whom Options, Appreciation Rights and Restricted Shares are to be granted and
the terms and conditions thereof, including the number of shares relating to
each award and the period of exerciseability or restricted period, as the case
may be. Notwithstanding the foregoing, the Board may resolve to administer the
Equity Incentive Plan itself, in which case the term Compensation Committee
shall be deemed to mean the Board.
55
<PAGE>
Subject to adjustment as provided in the Equity Incentive Plan, the number
of shares of Common Stock that may be issued or transferred and covered by
outstanding awards granted under the Equity Incentive Plan may not in the
aggregate exceed 1,740,000 shares. To the extent that an award is canceled,
terminates, expires or lapses for any reason without the payment of
consideration, any shares of Common Stock subject to the award will again be
available for the grant of awards. Common Stock subject to Appreciation Rights
that are settled in cash will thereafter be available for the grant of awards.
Common Stock issued under the Equity Incentive Plan may be from authorized and
unissued shares, treasury shares or a combination thereof. Awards may
be granted to directors, officers or other key employees of the Company or an
affiliate, as determined by the Compensation Committee.
At the time of the Offering, the Company intends to grant to certain
executive officers and other members of management options to purchase up to
745,254 shares of Common Stock at the initial public offering price. Certain of
these options will be exercisable immediately upon their grant, while the
remaining options will become exercisable in three annual installments.
The Compensation Committee may grant Options at a per share price equal
to, greater than or less than fair market value of the Common Stock on the date
of grant. The exercisability of Options may be conditioned on continued service
and/or the achievement of specified performance objectives ("Management
Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted awards relating to more than 200,000 shares during
any calendar year. The Compensation Committee shall determine the method of
exercising options and the form of payment, which may include, without
limitation, cash, shares of Common Stock that are already owned by the optionee,
other property or "cashless exercise" arrangements. Any grant may provide for
automatic "reload option rights", except that the term of any reload options
shall not extend beyond the term of the Options originally exercised. The
Compensation Committee may specify at the time Options are granted that
shares of Common Stock will not be accepted in payment of the option price until
they have been owned by the optionee for a specified period; however, the Equity
Incentive Plan does not require any such holding period. Options granted under
the Equity Incentive Plan may be intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Code, or Options that are not
intended to so qualify. No incentive stock option may be exercised more than ten
years from the date of grant. Each grant must specify the period, if any, of
continuous service with the Company or any affiliate that is necessary before
the Options will become exercisable and may provide for the earlier exercise of
the Options in the event of a change of control of the Company or other event.
More than one grant may be made to the same optionee.
Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Options. An Appreciation Right represents the right to receive from
the Company the difference (the "Spread"), or a percentage thereof not in excess
of 100%, between the base price per share of Common Stock in the case of a
free-standing Appreciation Right, or the option price of the related Option
Right in the case of a tandem Appreciation Right, and the market value of the
Common Stock on the date of exercise of the Appreciation Right. Tandem
Appreciation Rights may only be exercised at a time when the related Option
Right is exercisable and the Spread is positive, and the exercise of a tandem
Appreciation Right requires the surrender of the related Option Right for
cancellation. A free-standing Appreciation Right must specify a base price,
which may be equal to, greater than or less than the fair market value of a
share of Common Stock on the date of grant, must specify the period of
continuous service that is necessary before the Appreciation Right becomes
exercisable (except that it may provide for its earlier exercise in the event of
a change in control of the Company or other event) and, in the case of an
Appreciation Right awarded in tandem with an incentive stock option, may not be
exercised more than ten years from the date of grant. Any grant of Appreciation
Rights may specify that the amount payable by the Company upon exercise may be
paid in cash, Common Stock or a combination thereof. In addition, any grant may
specify that an Appreciation Right may be exercised only in the event of a
change in control
56
<PAGE>
of the Company. The Compensation Committee may condition the award of
Appreciation Rights on continued service and/or the achievement of one or more
Management Objectives.
The Compensation Committee may award Restricted Shares to participants in
such amounts and subject to such terms and conditions as may be determined by
the Compensation Committee. The participant may be entitled to voting, dividend
and other ownership rights prior to the vesting of the shares. The Compensation
Committee may condition the vesting of an award on the achievement of specified
Management Objectives.
No Options, Appreciation Rights or other awards are transferable by a
participant except by will or the laws of descent and distribution. Options and
Appreciation Rights may not be exercised during a participant's lifetime except
by the participant or, in the event of the participant's incapacity, by the
participant's guardian or legal representative acting in a fiduciary capacity on
behalf of the participant under state law and court supervision.
In the event of certain stock dividends, stock splits, combinations
of shares, recapitalizations, mergers, consolidations, spin-offs,
reorganizations, liquidations, issuances of rights or warrants, and similar
transactions or events, the Compensation Committee in its sole discretion,
may adjust (i) the maximum number of shares that may be issued or transferred
under the Equity Incentive Plan, (ii) the number of shares covered by
outstanding awards, (iii) the exercise price of outstanding options and (iv)
base prices of outstanding SARs. The Compensation Committee may also, as it
determines to be appropriate in order to reflect any such transaction or event,
make or provide for such adjustments in the number of shares that may be issued
or transferred and covered by outstanding awards granted under the Equity
Incentive Plan and the number of shares permitted to be covered by Options and
Appreciation Rights granted to any one participant during any calendar year.
In connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan,
related agreements and other documents. With the approval of the Board, the
Equity Incentive Plan may be amended from time to time by the Compensation
Committee but, without further approval by the shareholders of the Company, no
such amendment may (i) increase the total number of shares of Common Stock that
may be issued under the Equity Incentive Plan (except as otherwise provided in
the plan), (ii) modify the Equity Incentive Plan's eligibility requirements or
(iii) materially increase the benefits accruing to participants under the Equity
Incentive Plan.
EMPLOYMENT AGREEMENTS
Each of Paul Whetsell, David McCaslin, William Karnes and John Plunket are
parties to employment agreements with the Company which will expire on December
31, 1999. Mr. Whetsell's and Mr. McCaslin's agreements provide for automatic one
year extensions thereafter unless either the executive or the Company gives
notice to the other at least 120 days prior to the end of any such period that
he or it, as the case may be, does not wish to extend the agreement for an
additional period. The employment agreements provide for annual base salaries of
$225,000, in the case of Mr. Whetsell, $215,000, in the case of Mr. McCaslin and
Mr. Karnes, and $150,000, in the case of Mr. Plunket, subject, in each such
case, to periodic increases. Each executive will be eligible to receive annual
bonuses and will be entitled to participate in all existing or future plans for
the benefit of the Company's employees and management, on the same basis as
other senior executive officers of the Company.
Under the employment agreements of Messrs. Whetsell and McCaslin, each is
entitled to receive (i) a lump sum payment equal to the product of (a) his total
cash compensation for the previous fiscal year and (b) the greater of (1) the
number of full and fractional years remaining in the agreement and (2) the
number two, if his employment is terminated by the Company without Cause (as
defined below) or is terminated by the executive for Good Reason (as defined
below), or (ii) a lump sum payment equal to two times his total cash
compensation for the previous fiscal year if the Company elects not to extend
57
<PAGE>
his contract for an additional year at the end of its initial term (which ends
December 31, 1999) or any subsequent term. The events constituting "Good Reason"
include the assignment to the executive of duties materially inconsistent with
his position and a material breach of the employment agreement by the Company.
As used in the employment agreements of Messrs. Whetsell and McCaslin, the term
"Cause" includes (i) the executive's willful and intentional failure or refusal
to perform or observe any of his material duties set forth in his employment
agreement, if such breach is not cured within 30 days of notice from the
Company; (ii) any willful and intentional act of the executive involving theft,
fraud, embezzlement or dishonesty affecting the Company; and (iii) the
executive's conviction of an offense which is a felony in the jurisdiction
involved. Messrs. Whetsell's and McCaslin's employment agreements also provide
that if (i) the executive elects to terminate his employment within six months
of a Change in Control (as defined below) of the Company or (ii) within one year
of any such change in control, the executive is terminated without Cause or the
executive terminates his employment for Good Reason, the executive is entitled
to receive a lump sum payment equal to the product of (a) his total cash
compensation for the previous fiscal year and (b) the greater of (1) the number
of full and fractional years remaining in the agreement and (2) the number
three. As used in the employment agreements of Messrs. Whetsell and McCaslin,
the term "Change in Control" means the occurrence of one of the following
events: (i) any person or entity other than Acadia Partners becoming beneficial
owner of greater than 35% of the Common Stock; (ii) the Company adopts a plan of
liquidation; (iii) the Company merges or combines with another company and,
immediately thereafter, the stockholders of the Company prior to the merger or
combination hold 50% or less of the Common Stock; (iv) the Company sells all or
substantially all of its assets; or (v) the Company ceases to act as general
partner of CapStar Management. Amounts received by the executive upon
termination of employment will increase to compensate the executive for any
excise tax payable by him under the Code. These employment agreements prohibit
the executives from using or disclosing any confidential information about the
Company and its operations for a period of three years after the term of
employment and from engaging in any competitive hotel business for a period of
one year after the term of employment.
Under the employment agreements of Messrs. Karnes and Plunket, each is
entitled to receive a lump some payment equal to his annual base salary for the
greater of one year or the remaining unexpired term of employment, if his
employment is terminated by the Company without Cause (as defined below). Each
of these executives will be entitled receive his annual base salary for a period
of two years if his employment is terminated by the executive as a result of the
occurrence of a Material Adverse Change (as defined below) or likely occurrence
of a Material Adverse Change following a Change in Control (as defined below).
The events constituting "Cause" under the employment agreements of Messrs.
Karnes and Plunket include: (i) the executive's inability to perform his duties
under the agreement for more than a 120-day period, whether or not continuous,
during any 365-day period; (ii) acts of willful misfeasance or gross negligence
in connection with the executive's employment; (iii) the executive's conviction
of (or plea of no contest to) an offense which is a felony in the jurisdiction
involved; (iv) repeated failure, after written notice thereof, by the executive
to perform any of his duties under the employment agreement; and (v) a breach of
a specific provision of the employment agreement and, if such breach is curable,
failure to cure same within 30 days of written notice thereof. As used in the
employment agreements of Messrs. Karnes and Plunket, the term "Change in
Control" means: any person or entity, other than Acadia Partners, becoming
beneficial owner of greater than 35% of the Common Stock, so long as no Change
in Control will be deemed to have occurred if the executive continues to report
to Paul W. Whetsell. As used in the employment agreements of Messrs. Karnes and
Plunket, the term "Material Adverse Change" means a material reduction or
material adverse change in the executive's working conditions if, after such
reduction or change, the executive's authority or working conditions are not
commensurate with those of executives holding chief financial officer positions
at companies comparable to the Company in the lodging industry.
58
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of the Offering and as adjusted to reflect the sale
of 9,250,000 shares of Common Stock by the Company, and Acadia Partners, L.P.
(the "Selling Stockholder") in the Offering by (i) all persons known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii)
each director who is a stockholder, (iii) each of the named executive officers,
(iv) all directors and executive officers as a group, and (v) the Selling
Stockholder. Information set forth with respect to Acadia Partners, L.P. is
based on an assumed offering price of $18.50 per share. If the actual offering
price differs, the number of shares set forth for Acadia Partners, L.P. will
differ.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
----------------------- SHARES BEING -----------------------
NAME & ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE
- ------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Acadia Partners, L.P.(1)
201 Main Street
Suite 3100
Fort Worth, TX 76102............. 3,901,151 65.0% 2,500,000 1,401,151 11.0%
Paul W. Whetsell(2)................ 970,503 16.2% -- 970,503 7.6%
David E. McCaslin(3)............... 472,236 7.7% -- 472,236 3.6%
John E. Plunket(3)................. 462,729 7.7% -- 462,729 3.6%
William M. Karnes(4)............... 0 -- -- 0 --
John Emery(4)...................... 0 -- -- 0 --
Michael T. George(4)............... 0 -- -- 0 --
D. Scott Livchak(4)................ 0 -- -- 0 --
Robert Gauthier(4)................. 0 -- -- 0 --
Daniel L. Doctoroff(4)............. 0 -- -- 0 --
Bradford E. Bernstein(4)........... 0 -- -- 0 --
William S. Janes(4)................ 0 -- -- 0 --
Joseph McCarthy(4)................. 0 -- -- 0 --
All directors and executive
officers as a group
(15 persons)..................... 980,010 16.3% -- 980,010 7.7%
</TABLE>
- ------------
(1) Includes 3,848,083 shares owned prior to the offering by Acadia Partners,
L.P. and 53,068 shares owned by Cherwell Investors, Inc., a wholly owned
subsidiary of Acadia Partners, L.P. ("Cherwell"). The general partner of
Acadia Partners, L.P. is Acadia FW Partners, L.P., the managing general
partner of which is Acadia MGP, Inc. ("Acadia MGP"). J. Taylor Crandall is
the sole stockholder of Acadia MGP and may be deemed to beneficially own the
shares owned by Acadia Partners, L.P. and Cherwell. In addition, Mr.
Crandall is the sole stockholder of each of PTJ, Inc. ("PTJ") and Group 31,
Inc. ("Group 31"). PTJ is the managing general partner of PTJ Merchant
Banking Partners, L.P., which is the general partner of Penobscot Partners,
L.P. ("Penobscot"), which together with MC Investment Corporation ("MC
Investment"), Penobscot's wholly owned subsidiary, owns 275,299 shares.
Group 31 is the general partner of FWHY Coinvestments VIII Partners, L.P.
("FWHY"), which owns 419,177 shares. As a result of his ownership of PTJ and
Group 31, Mr. Crandall may also be deemed to beneficially own the 732,951
shares owned by Penobscot, MC Investment and FWHY, which shares are not
included in the number of shares set forth as being owned by Acadia
Partners, L.P. in the Principal Stockholders and Selling Stockholder chart,
above. Mr. Crandall's address is 201 Main Street, Suite 3100 Fort Worth, TX
76102. The number of shares set forth as being owned by Acadia Partners,
L.P. in the Principal Stockholders and Selling Stockholder chart above also
excludes 419,177 shares held by OHP EquiStar Partners, L.P. ("OHP") and OHP
EquiStar Partners II, L.P. ("OHP II"). Oak Hill Partners, Inc., which is the
investment advisor to Acadia Partners, L.P., is the general partner of each
of OHP and OHP II.
(2) Includes shares held by entities over which Mr. Whetsell has beneficial
ownership within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended ("Rule 13d-3").
(3) Includes shares held by entities over which Messrs. McCaslin and Plunket
have beneficial ownership within the meaning of Rule 13d-3.
(4) Such individuals own interests in entities which own shares of Common Stock,
but these individuals do not have beneficial ownership of such shares of
Common Stock within the meaning of Rule 13d-3.
59
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITIONS
In March 1996, the Company acquired The Latham Hotel in Washington, D.C. for
a purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the
time of the acquisition, the general partner of LCP was Latham Hotels, Inc.
("LHI"), a corporation owned 80% by Paul W. Whetsell, President and Chief
Executive Officer of the Company, and 10% by David E. McCaslin, Chief Operating
Officer of the Company. Including their interests in LHI, Mr. Whetsell and Mr.
McCaslin owned, directly or indirectly, 9.18% and 0.52%, respectively, of the
beneficial interest in LCP and received $763,000 and $42,000, respectively, of
the net proceeds of the purchase price paid to LCP. The purchase price for the
Latham Georgetown was determined through arm's-length negotiations between the
Company, on the one hand, and representatives of the holders of the majority of
the beneficial interests in LCP, on the other hand; such representatives are not
affiliated with the Company.
Since November 1995, the Company has acquired 85.2% of the limited
partnership interests in the partnership that owns the Westin Atlanta Airport
("Atlanta Partners"). In November 1995, the Company acquired, for a purchase
price of $56,000, the 1% general partnership interest in Atlanta Partners
previously held by a corporation in which E. Robert Roskind owned an equity
interest ("LHP"). At the time of such acquisition Mr. Roskind was a principal of
both CapStar Management and EquiStar. LHP was also paid a fee of $893,000 in
connection with the acquisition of the partnership interests in Atlanta
Partners, and is entitled to an additional $161,000 upon the ultimate
disposition of Atlanta Partners. The LCP Group, L.P., in which Mr. Roskind owns
an equity interest is entitled to an annual fee of $30,000 for providing certain
administrative services relating to the outside limited partners of the Westin
Atlanta Airport. All of the compensation paid or payable to affiliates of Mr.
Roskind in connection with the Westin Atlanta Airport transaction was negotiated
at arms-length between Mr. Roskind, on the one hand, and other principals of
EquiStar, on the other hand. Mr. Roskind is no longer associated with the
Company.
OWNERSHIP INTERESTS IN CERTAIN MANAGED HOTELS
Mr. Whetsell and Mr. McCaslin and corporations owned by them own, directly
or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in one
of the Managed Hotels and (ii) minority equity interests in eight of the Managed
Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the
Affiliated Owners of five of these Managed Hotels through their ownership of
certain entities which serve as general partners of the Affiliated Owners. Such
interests were acquired prior to the formation of EquiStar and CapStar
Management. During 1995, the Company received approximately $826,000 in
management fees from those Managed Hotels in which Messrs. Whetsell and McCaslin
own an equity interest, including approximately $630,000 in management fees from
the Affiliated Owners. Under the terms of their employment agreements, Messrs.
Whetsell and McCaslin are prohibited from hereafter acquiring any interests in
hotels or hotel management companies while they serve as officers of the
Company. See "Management--Employment Agreements."
INDEBTEDNESS OF CERTAIN MEMBERS OF MANAGEMENT
In connection with the initial formation and capitalization of EquiStar,
CapStar Management made loans to certain directors and executive officers of the
Company, which loans were used by such individuals to make capital contributions
to EquiStar. Such loans were made from August 1995 through April 1996 and bore
interest at the prime rate through December 31, 1995 and at a rate of 1.5% above
the prime rate thereafter. The largest aggregate amounts of the loans to such
directors and executive officers outstanding at any time (where such aggregate
amount exceeded $60,000) were $300,000 to Mr. Whetsell and $147,500 to Mr.
McCaslin. All such loans will be repaid immediately prior to the Offering.
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<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offering (assuming the over-allotment option is not
exercised), the Company will have 12,754,321 shares of Common Stock outstanding.
Of these shares, all of the shares of Common Stock sold in the Offering will be
freely transferable by persons other than "affiliates" of the Company without
restriction or limitation under the Securities Act. The remaining 3,504,321
shares are "restricted securities" within the meaning of Rule 144 under the
Securities Act (the "Restricted Shares") and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption contained in Rule 144. The Company has
granted certain registration rights to the recipients of Restricted Shares
issued in connection with the Formation Transactions, which registration rights
cover all of the securities issued in connection with the Formation
Transactions.
In general, under Rule 144, if two years have elapsed since the later of the
date of acquisition of Restricted Shares from the Company or any "affiliate" of
the Company, as that term is defined under the Securities Act, the acquiror or
subsequent holder thereof is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the Common Stock then
outstanding or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. If three years have elapsed since
the date of acquisition of Restricted Shares from the Company or from any
"affiliate" of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements. The
Securities and Exchange Commission has proposed amendments to Rule 144 to reduce
the two and three year holding periods to one and two years, respectively.
The Company and Acadia Partners (who beneficially owns 2,514,804 shares of
Common Stock) have agreed that, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of Lehman, offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable for Common Stock. Certain entities
controlled by members of management (who beneficially own an aggregate of
989,517 shares of Common Stock) have agreed that, for a period of 360 days from
the date of this Prospectus, they will not, without the prior written consent of
Lehman, offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable for Common Stock.
There can be no assurance that Lehman will not grant any such consent. In
connection with the Offering, certain directors and executive officers of the
Company, who were recipients of Restricted Shares, will pledge Restricted Shares
as guarantees for loans to be made to them by Lehman. These loans will be made
in connection with the repayment of loans previously made to such individuals by
CapStar Management. The Company has agreed that Lehman will be entitled to
exercise registration rights in respect of any Restricted Shares that may be
acquired by Lehman in the event of a default on a loan to any such individual.
Prior to the Offering, there has been no public market for the Common Stock.
The Company can make no predictions as to the effect, if any, that future sales
of Restricted Shares, or the availability of such Restricted Shares for sale, or
the issuance of shares of Common Stock upon the exercise of options or
otherwise, or the perception that such sales or exercises could occur, will have
on the market price prevailing from time to time. Sales of substantial amounts
of Restricted Shares in the public market could have an adverse effect on the
market price of the Common Stock.
The Company has adopted an Equity Incentive Plan and Stock Purchase Plan for
the purpose of attracting, retaining and motivating executive officers of the
Company, other key employees and
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<PAGE>
directors. The Company has reserved 1,740,000 shares of Common Stock for
issuance under such plans. The Board expects to grant options to purchase an
aggregate of 745,254 shares of Common Stock at the initial public offering price
under the Equity Incentive Plan to certain key personnel. The Company intends to
file a registration statement under the Securities Act to register shares of
Common Stock issuable upon the exercise of stock options granted under the
Equity Incentive Plan or the Stock Purchase Plan. Shares issued upon exercise of
stock options after the effective date of such registration statement generally
will be available for sale in the open market.
DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and By-laws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
The authorized capital stock of the Company consists of 49,000,000 shares of
Common Stock, par value $.01 per share, and 25,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"), of which 6,004,321 shares
of Common Stock and no shares of Preferred Stock are outstanding. Upon
completion of the Offering, 12,754,321 shares of Common Stock and no shares of
Preferred Stock will be outstanding.
Prior to the Offering, there has been no public market for the Common Stock.
See "Risk Factors-- Absence of Prior Public Market."
COMMON STOCK
Voting Rights. The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The stockholders are not entitled to vote
cumulatively for the election of directors.
Dividends. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board. Under Delaware law, a corporation may declare
and pay dividends out of surplus, or if there is no surplus, out of net profits
for the fiscal year in which the dividend is declared and/or the preceding year.
No dividends may be declared, however, if the capital of the corporation has
been diminished by depreciation in the value of its property, losses or
otherwise to an amount less than the aggregate amount of capital represented by
any issued and outstanding stock having a preference on the distribution of
assets. See "Dividend Policy."
Other Rights. Stockholders of the Company have no preemptive or other rights
to subscribe for additional shares. Subject to any rights of the holders of any
Preferred Stock that may be issued subsequent to the Offering, all holders of
Common Stock are entitled to share equally on a share-for-share basis in any
assets available for distribution to stockholders on liquidation, dissolution or
winding up of the Company. No shares of Common Stock are subject to redemption
or a sinking fund. All outstanding shares of Common Stock are, and the Common
Stock to be outstanding upon completion of the Offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company's Board is authorized to issue, without further authorization
from stockholders, up to 25,000,000 shares of Preferred Stock in one or more
series and to determine, at the time of creating each series, the distinctive
designation of, and the number of shares in, the series, its dividend rate, the
number of votes, if any, for each share of such series, the price and terms on
which such shares may be redeemed, the terms of any applicable sinking fund, the
amount payable upon liquidation, dissolution or winding up, the conversion
rights, if any, and such other rights, preferences and priorities of such series
as the Board may be permitted to fix under the laws of the State of Delaware as
in effect at the time
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<PAGE>
such series is created. The issuance of Preferred Stock could adversely affect
the voting power of the holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no current plan to issue any shares of Preferred Stock.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware General Corporation Law (the "Delaware Law")
prohibits publicly held Delaware corporations from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date of the transaction in which the person or entity became an
interested stockholder, unless (i) prior to such date, either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder is approved by the Board, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the outstanding
voting stock of the corporation (excluding for this purpose certain shares owned
by persons who are directors and also officers of the corporation and by certain
employee benefit plans) or (iii) on or after such date the business combination
is approved by the Board and by the affirmative vote (and not by written
consent) of at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder. For the purposes of Section 203, a "business
combination" is broadly defined to include mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within the immediately preceding three years did own) 15%
or more of the corporation's voting stock.
REGISTRATION RIGHTS
Contemporaneously with the Formation Transactions, the Company will enter
into a registration rights agreement with persons receiving shares of Common
Stock in connection with the Formation Transactions (the "Registration Rights
Agreement"), pursuant to which the Company will agree (subject to certain
limitations and under certain circumstances) to register for sale any shares of
Common Stock that are held by the parties thereto (collectively, the
"Registrable Securities"). See "Formation Transactions." All of the shares of
Common Stock issued in the Formation Transactions will be Registrable
Securities. The Registration Rights Agreement provides that any holder of
Registrable Securities may require the Company to register such Registrable
Securities for sale (a "Demand Registration"), provided that the total amount of
Registrable Securities to be included in the Demand Registration has a market
value of at least $10 million and provided that notice is not given prior to six
months after the effective date of a previous Demand Registration. If
Registrable Securities are going to be registered by the Company pursuant to a
Demand Registration, the Company must provide written notice to the other
holders of Registrable Securities and permit them to include any or all
Registrable Securities that they hold in the Demand Registration, provided that
the amount of Registrable Securities requested to be registered may be limited
by the underwriters in an underwritten offering based on such underwriters'
determination that inclusion of the total amount of Registrable Securities
requested for registration would materially and adversely affect the success of
the offering. Upon notice of a Demand Registration, the Company is required to
file a registration statement within 60 days of the date on which notice is
given, although the Company may postpone the filing for up to 90 days under
certain circumstances. Subject to the conditions stated or referred to above,
the holders of Registrable Securities may request an unlimited number of Demand
Registrations. Acadia Partners and its affiliates that will receive shares in
the Formation Transactions have agreed not to exercise any Demand Registration
rights for a period of six months from the date of execution of the Registration
Rights Agreement. Certain management-controlled entities that will receive
shares in the Formation Transactions have a one-time right to require the
Company to register the Registrable Securities that they hold in connection with
the distribution of the Registrable Securities to their members or in connection
with a resale of such shares. In order to demand any such registration the
market value of the securities to be sold by such entities must be at least $2
million. The management-controlled entities will not be entitled to include
their Registrable Securities in any such registration prior to one year from
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<PAGE>
the Closing, although a pledgee of such Registrable Securities may, upon a
default by a management-controlled entity under a loan secured by the pledge,
exercise the management-controlled entity's registration rights during such
one-year period.
The Registration Rights Agreement also provides that, subject to certain
exceptions, in the event the Company proposes to file a registration statement
with respect to an offering of any class of equity securities, other than an LLC
Registration and certain other types of registrations, the Company will offer
the holders of Registrable Securities the opportunity to register the number of
Registrable Securities they request to include (the "Piggyback Registration"),
provided that the amount of Registrable Securities requested to be registered
may be limited by the underwriters in an underwritten offering based on such
underwriters' determination that inclusion of the total amount of Registrable
Securities requested for registration would materially and adversely affect the
success of the offering. The Company is generally required to pay all of the
expenses of Demand Registrations, an LLC Registration and Piggyback
Registrations, other than underwriting discounts and commissions.
TRANSFER AGENT AND REGISTRAR
The Company has appointed The First National Bank of Boston as the transfer
agent and registrar for the Common Stock.
UNDERWRITING
The Underwriters of the U.S. Offering of Common Stock (the "U.S.
Underwriters"), for whom Lehman, Goldman, Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Smith Barney Inc. are serving as representatives
(the "Representatives") have severally agreed, subject to the terms and
conditions of the underwriting agreement, the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part (the
"U.S. Underwriting Agreement"), to purchase from the Company and the Selling
Stockholder, and the Company and the Selling Stockholder have agreed to sell to
the U.S. Underwriters, the aggregate number of shares of Common Stock set forth
opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
- ---------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers Inc.............................................
Goldman, Sachs & Co.............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
Smith Barney Inc................................................
---------
Total........................................................... 7,400,000
---------
---------
</TABLE>
The managers of the International Offering named below (the "International
Managers") for whom Lehman Brothers International (Europe), Goldman Sachs
International, Merrill Lynch International Limited, and Smith Barney Inc. are
acting as lead managers, have severally agreed, subject to the terms and
conditions of the International Underwriting Agreement, the form of which has
been filed as an exhibit to the Registration Statement (the "International
Underwriting Agreement"), to purchase from the Company and the Selling
Stockholder, and the Company and the Selling Stockholder have agreed to sell to
the International Managers, the aggregate number of shares of Common Stock set
forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
- ---------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers International (Europe).......................... -
Goldman Sachs International..................................... -
Merrill Lynch International Limited............................. -
Smith Barney Inc. .............................................. -
---------
Total..................................................... 1,850,000
---------
---------
</TABLE>
64
<PAGE>
The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers, respectively, to purchase
shares of Common Stock, are subject to the approval of certain legal matters by
counsel and to certain other conditions and that if any of the shares of Common
Stock are purchased by the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement or by the International Managers pursuant to the International
Underwriting Agreement, all the shares of Common Stock agreed to be purchased by
either the U.S. Underwriters or the International Managers, as the case may be,
pursuant to their respective Underwriting Agreements, must be so purchased. The
offering price and underwriting discounts and commissions for the U.S. Offering
and the International Offering are identical. The closing of the International
Offering is a condition to the closing of the U.S. Offering and the closing of
the U.S. Offering is a condition to the closing of the International Offering.
The Company has been advised that the U.S. Underwriters and the
International Managers propose to offer shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain selected dealers (who may include the U.S.
Underwriters and International Managers) at such public offering price less a
selling concession not to exceed $ - per share. The selected dealers may reallow
a concession not to exceed $ - per share. After the initial offering of the
Common Stock, the concession to selected dealers and the reallowance to other
dealers may be changed by the U.S. Underwriters and the International Managers.
The U.S. Underwriters and the International Managers have entered into an
Agreement Among U.S. Underwriters and International Managers (the "Agreement
Among") pursuant to which each U.S. Underwriter has agreed, that, as part of the
distribution of the shares of Common Stock offered in the U.S. Offering, (a) it
is not purchasing any of such shares for the account of anyone other than a U.S.
or Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the U.S. Offering outside the
United Sates or Canada or to anyone other than a U.S. or Canadian Person. In
addition, pursuant to the Agreement Among, each International Manager has agreed
that, as part of the distribution of the shares of Common Stock offered in the
International Offering, (a) it is not purchasing any of such shares for the
account of any U.S. or Canadian Person and (b) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the International Offering
within the United States or Canada or to any U.S. or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Underwriting Agreements and the Agreement
Among, including: (i) certain purchases and sales between the U.S. Underwriters
and the International Managers; (ii) certain offers, sales, resales, deliveries
or distributions to or through investment advisors or other persons exercising
investment discretion; (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as an International Manager or by an International Manager
who also is acting as a U.S. Underwriter; and (iv) other transactions
specifically approved by the U.S. Underwriters and International Managers. As
used herein, "U.S. or Canadian Person" means any resident or citizen of the
United States or Canada, any corporation, pension, profit sharing or other trust
or other entity organized under or governed by the laws of the United States or
Canada or any political subdivision thereof (other than the foreign branch of
the United States or Canadian Person), any estate or trust the income of which
is subject to United States or Canadian federal income taxation regardless of
the source of its income, and any United States or Canadian branch of a person
other than a United States or Canadian Person. The term "United States" means
the United States of America (including the states thereof and the District of
Columbia) and its territories, its possessions and other areas subject to its
jurisdiction. The term "Canada" means the provinces of Canada, its territories,
its possessions and other areas subject to its jurisdiction.
Pursuant to the Agreement Among, sales may be made among the U.S.
Underwriters and the International Managers of such number of shares of Common
Stock as may be mutually agreed. The
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<PAGE>
price of any shares so sold shall be the public offering price as then in effect
for Common Stock being sold by the U.S. Underwriters and International Managers,
less an amount not greater than the selling concession unless otherwise
determined by mutual agreement. To the extent that there are sales pursuant to
the Agreement Among, the number of shares initially available for sale by the
U.S. Underwriters and the International Managers may be more or less than the
amount specified on the cover page of this Prospectus.
Each International Manager has represented and agreed that: (i) it has not
offered or sold and, prior to the date six months after the date of issuance of
the shares of Common Stock, will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act of 1986 with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on, and
will only issue or pass on, to any person in the United Kingdom, any document
received by it in connection with the issuance of the Common Stock if that
person is of a kind described in Article 11(3) of the Financial Services Act of
1986 (Investment Advertisements) (Exemptions) Order 1995.
Purchasers of the shares offered pursuant to the Offerings may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the offering price set forth on the
cover page hereof.
The Company has agreed to indemnify the U.S. Underwriters and International
Managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to the payments they may be required to make in respect
thereto.
The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an additional 1,110,000 and 277,500 shares of
Common Stock, at the initial public offering price, less the aggregate
underwriting discounts and commissions, shown on the cover page of this
Prospectus, solely to cover over-allotments, if any. Such options may be
exercised at any time within 30 days after the date of the Underwriting
Agreement. To the extent the U.S. Underwriters or International Managers
exercise such options, each of the U.S. Underwriters and International Managers,
as the case may be, will be committed, subject to certain conditions, to
purchase a number of the additional shares of Common Stock proportionate to such
U.S. Underwriter's or International Manager's initial commitment as indicated in
the preceding table.
In connection with the Offering, the Company and Acadia Partners have agreed
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable for Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Lehman. In addition, certain entities controlled by members
of management have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable for Common Stock for a period of 360 days after the date of this
Prospectus without the prior written consent of Lehman. Such restriction will
not apply to any shares purchased in the Offering or otherwise on the open
market. See "Risk Factors--Shares Available for Future Sale."
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<PAGE>
The Common Stock has been approved for listing on the NYSE subject to
official notice of issuance. To meet one of the requirements for listing on the
NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a
minimum of 2,000 beneficial owners.
The U.S. Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
Prior to the Offering, there has been no active market for the Common Stock.
The initial public offering price was determined by negotiations among the
Company and the Representatives. Among the factors considered in such
negotiations are the Company's recent results of operations, the future
prospects of the Company and its industry in general, the price-earnings ratios
and market prices of securities of companies engaged in activities similar to
those of the Company and prevailing conditions in the securities markets.
On December 21, 1995, Lehman Holdings, an affiliate of Lehman, provided to
the Company a $202,500,000 credit facility ($151,815,394 was outstanding
thereunder as of June 30, 1996), which facility is expected to be partially
repaid with the net proceeds of the Offering. See "Use of Proceeds." In
connection with the formation of EquiStar, CapStar Management made loans to
certain directors and executive officers of the Company, which loans currently
total approximately $1.0 million. Lehman has agreed to extend loans to these
directors and executive officers to repay CapStar Management all amounts
currently outstanding under the loans. The loans from Lehman will be guaranteed
by pledges of Common Stock held by such directors and executive officers. See
"Shares Available for Future Sale."
An affiliate of Lehman owns a minority equity interest in Acadia Partners.
Because an affiliate of Lehman will receive more than 10% of the net
proceeds of the Offering in repayment of currently outstanding indebtedness, the
Offering is being conducted in accordance with Rule 2710(c)(8) of the Conduct
Rules of the National Association of Securities Dealers, Inc. In accordance with
these requirements, Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Independent Underwriter") is assuming the responsibilities of acting as
"qualified independent underwriter" and will recommend the maximum initial
public offering price for the shares of Common Stock in compliance with the
requirements of the Conduct Rules. In connection with the Offering, the
Independent Underwriter is performing due diligence investigations and is
reviewing and participating in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part. The initial public
offering price of the Common Stock will be no higher than the price recommended
by the Independent Underwriter.
LEGAL MATTERS
The validity of the Common Stock will be passed upon for the Company by
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Hogan & Hartson L.L.P.,
Washington, D.C.
EXPERTS
The financial statements and schedule included herein and in the
Registration Statement, to the extent and for the periods indicated therein,
have been included in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.
The combined financial statements of the Holiday Inn, Cleveland, Ohio for
the period from January 1, 1996 to February 16, 1996 and the years ended
December 31, 1995, 1994 and 1993 included
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<PAGE>
herein and in the Registration Statement have been audited by Bober, Markey &
Company, independent certified public accountants, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which is a part of the
Registration Statement, omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement and the exhibits
and schedules thereto for further information with respect to the Company and
the Common Stock offered hereby. Statements contained herein concerning the
provisions of any documents are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference. The Registration Statement, including exhibits and schedules filed
therewith, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and will also be available for inspection and copying at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of such site
is "http://www.sec.gov".
Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. The Company intends to furnish to its
stockholders annual reports containing consolidated financial statements
certified by its independent accountants and quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
CAPSTAR HOTEL COMPANY
Independent Auditors' Report......................................................... F-4
Balance Sheet and Notes to Balance Sheet as of June 30, 1996......................... F-5
EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P.
Independent Auditors' Report......................................................... F-6
Combined Balance Sheets as of June 30, 1996 and December 31, 1995.................... F-7
Combined Statements of Operations for the six months ended June 30, 1996 and for the
period from January 12, 1995 (date of inception) to December 31, 1995................ F-8
Combined Statements of Partners' Capital for the six months ended June 30, 1996 and
for the period from January 12, 1995 (date of inception) to December 31, 1995...... F-9
Combined Statements of Cash Flows for the six months ended June 30, 1996 and for the
period from January 12, 1995 (date of inception) to December 31, 1995................ F-10
Notes to the Combined Financial Statements........................................... F-11
CAPSTAR MANAGEMENT COMPANY, L.P.
Independent Auditors' Report......................................................... F-18
Balance Sheet as of December 31, 1994................................................ F-19
Statements of Operations and Changes in Management Operations' Equity for the years
ended December 31, 1994 and 1993..................................................... F-20
Statements of Cash Flows for the years ended December 31, 1994 and 1993.............. F-21
Notes to Financial Statements........................................................ F-22
ORANGE COUNTY AIRPORT HILTON
Independent Auditors' Report......................................................... F-24
Statements of Operations for the period from January 1, 1996 to February 22, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-25
Statements of Cash Flows for the period from January 1, 1996 to February 22, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-26
Notes to Financial Statements........................................................ F-27
COLORADO SPRINGS SHERATON HOTEL
Independent Auditors' Report......................................................... F-29
Statements of Operations for the period from January 1, 1995 to June 30, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-30
Statements of Cash Flows for the period from January 1, 1995 to June 30, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-31
Notes to Financial Statements........................................................ F-32
GEORGETOWN LATHAM HOTEL
Independent Auditors' Report......................................................... F-33
Statements of Operations for the period from January 1, 1996 to March 8, 1996 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1995, 1994 and 1993................................................................ F-34
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flows for the period from January 1, 1996 to March 8, 1996 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1995, 1994 and 1993................................................................ F-35
Notes to Financial Statements........................................................ F-36
WESTIN ATLANTA AIRPORT
Independent Auditors' Report......................................................... F-38
Statements of Operations for the period from January 1, 1995 to November 15, 1995
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1994 and 1993......................................................... F-39
Statements of Cash Flows for the period from January 1, 1995 to November 15, 1995
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1994 and 1993........................................................... F-40
Notes to Financial Statements........................................................ F-41
SOMERSET MARRIOTT HOTEL
Independent Auditors' Report......................................................... F-43
Statements of Operations for the fiscal years ended September 30, 1995, 1994 and
1993................................................................................. F-44
Statements of Cash Flows for the fiscal years ended September 30, 1995, 1994 and
1993................................................................................. F-45
Notes to Financial Statements........................................................ F-46
CHARLOTTE SHERATON AIRPORT PLAZA
Independent Auditors' Report......................................................... F-48
Statements of Operations for the period from January 1, 1996 to February 2, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-49
Statements of Cash Flows for the period from January 1, 1996 to February 2, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-50
Notes to Financial Statements........................................................ F-51
CLEVELAND HOLIDAY INN AND AFFILIATE
Independent Auditors' Report......................................................... F-53
Combined Statements of Income for the period from January 1, 1996 to February 16,
1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-54
Combined Statements of Cash Flows for the period from January 1, 1996 to February 16,
1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993..................................................... F-55
Notes to Combined Financial Statements............................................... F-56
ARLINGTON HILTON HOTEL
Independent Auditors' Report......................................................... F-58
Statements of Operations for the period from January 1, 1996 to April 17, 1996 and
the years ended December 31, 1995, 1994 and 1993................................... F-59
Statements of Cash Flows for the period from January 1, 1996 to April 17, 1996 and
the years ended December 31, 1995, 1994 and 1993................................... F-60
Notes to Financial Statements........................................................ F-61
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
SALT LAKE AIRPORT HILTON
Independent Auditors' Report......................................................... F-63
Statements of Operations for the period from January 1, 1995 to March 3, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-64
Statements of Cash Flows for the period from January 1, 1995 to March 3, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-65
Notes to Financial Statements........................................................ F-66
BALLSTON HOTEL LIMITED PARTNERSHIP (HILTON HOTEL, ARLINGTON, VA)
Independent Auditors' Report......................................................... F-68
Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994.................... F-69
Statements of Operations for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993..................................................... F-70
Statements of Partners' Deficit for the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-71
Statements of Cash Flows for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993..................................................... F-72
Notes to Financial Statements........................................................ F-73
BELLEVUE HILTON HOTEL
Independent Auditors' Report......................................................... F-78
Statements of Operations for the period from January 1, 1995 to August 4, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-79
Statements of Cash Flows for the period from January 1, 1995 to August 4, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-80
Notes to Financial Statements........................................................ F-81
ADDITIONAL HOTELS
Independent Auditors' Report......................................................... F-83
Combined Balance Sheets as of June 30, 1996, December 31, 1995 and 1994.............. F-84
Combined Statements of Operations for the six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993....................................... F-85
Combined Statements of Owners' Capital for the six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993......................................... F-86
Combined Statements of Cash Flows for the six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993....................................... F-87
Notes to Combined Financial Statements............................................... F-88
</TABLE>
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapStar Hotel Company:
We have audited the accompanying balance sheet of CapStar Hotel Company (the
"Company") as of June 30, 1996. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the balance
sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of CapStar Hotel Company as of June
30, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
July 26, 1996
F-4
<PAGE>
CAPSTAR HOTEL COMPANY
BALANCE SHEET
JUNE 30, 1996
<TABLE>
<S> <C>
Asset--cash........................................................................... $ 1
---
---
Stockholder's Equity:
Preferred Stock ($.01 par value, 25,000,000 shares authorized, no shares issued or
outstanding).......................................................................... --
---
Common stock ($.01 par value, 49,000,000 shares authorized, 100 shares issued and
outstanding).......................................................................... $ 1
$ 1
---
---
</TABLE>
NOTES TO BALANCE SHEET
(1) ORGANIZATION
CapStar Hotel Company (the "Company") was incorporated under Delaware
General Corporation Law on May 29, 1996. The authorized capital stock of the
Company consists of 49,000,000 shares of Common Stock having a par value of $.01
per share and 25,000,000 shares of Preferred Stock having a par value of $.01
per share. Each holder of Common Stock shall be entitled to one vote for each
share held. No Preferred Stock is issued or outstanding at June 30, 1996.
(2) FORMATION OF THE COMPANY
EquiStar Hotel Investors, L.P. (EquiStar) and CapStar Management Company,
L.P. (CapStar Management) were formed on January 12, 1995. The entities are
under common ownership. The principal activity of EquiStar is to acquire and own
upscale full-service hotels in the United States. At June 30, 1996, EquiStar
owned 11 hotels. CapStar Management operates 48 hotels throughout the United
States on behalf of third-party and affiliate owners.
Pursuant to certain agreements, the Company expects the partners of CapStar
Management and EquiStar to contribute their partnership interests in these
entities to the Company in exchange for shares of Common Stock. The Company also
expects to (i) contribute certain limited partnership interests in CapStar
Management to CapStar L.P. Corporation, a wholly-owned subsidiary, and (ii)
contribute all of the assets of EquiStar to CapStar Management. CapStar
Management will assume all of the liabilities of EquiStar and function as the
Company's operating partnership. As a result of these transactions, the Company
and CapStar L.P. Corporation will own (directly or indirectly) all of the assets
currently owned by CapStar Management and EquiStar.
The Company and a stockholder intend to offer 6,750,000 and 2,500,000 shares
of Common Stock, respectively, in an initial public offering.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P.:
We have audited the accompanying combined balance sheets of EquiStar Hotel
Investors, L.P. and subsidiaries and CapStar Management Company, L.P.
(collectively, the "Partnerships") as of June 30, 1996 and December 31, 1995 and
the related combined statements of operations, partners' capital, and cash flows
for the six months ended June 30, 1996 and for the period from January 12, 1995
(date of inception) to December 31, 1995, and the supplementary schedule. These
combined financial statements and schedule are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
combined financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of EquiStar
Hotel Investors, L.P. and subsidiaries and CapStar Management Company, L.P. as
of June 30, 1996 and December 31, 1995, and the results of their combined
operations and their combined cash flows for the six months ended June 30, 1996
and for the period from January 12, 1995 (date of inception) to December 31,
1995, in conformity with generally accepted accounting principles, and the
supplementary schedule, in our opinion, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Washington, D.C.
July 18, 1996
F-6
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 4,907,234 6,831,983
Accounts receivable, net of allowance for doubtful accounts of
$131,000 in 1996 and $91,000 in 1995............................ 6,947,529 2,748,909
Deposits, including restricted deposits of $2,023,307 in 1995... 3,863,123 3,515,332
Prepaid expenses and other...................................... 837,045 265,260
Inventory....................................................... 618,573 173,514
------------ -----------
Total current assets............................................ 17,173,504 13,534,998
Property and equipment:
Land.......................................................... 37,142,485 12,767,661
Buildings and improvements.................................... 127,244,333 84,545,420
Furniture, fixtures and equipment............................. 24,594,853 11,353,507
Construction-in-progress...................................... 6,321,996 2,216,174
------------ -----------
195,303,667 110,882,762
Accumulated depreciation...................................... (4,979,831) (1,756,412)
------------ -----------
Total property and equipment, net............................... 190,323,836 109,126,350
Deferred costs, net of accumulated amortization of $967,112 in
1996 and $271,496 in 1995..................................... 5,445,308 2,637,754
Restricted cash................................................. 18,793,399 7,351,128
------------ -----------
$231,736,047 132,650,230
------------ -----------
------------ -----------
LIABILITIES, MINORITY INTEREST AND PARTNERS' CAPITAL
Accounts payable................................................ $ 4,436,619 2,329,034
Accrued expenses and other liabilities.......................... 10,409,654 4,320,320
Due to CapStar Equity Associates, G.P........................... 329,362 305,077
Long-term debt, current portion................................. 3,220,336 2,668,121
------------ -----------
Total current liabilities....................................... 18,395,971 9,622,552
Long-term debt.................................................. 164,891,922 73,574,038
------------ -----------
Total liabilities............................................... 183,287,893 83,196,590
Minority interest............................................... 576,314 815,918
Partners' capital--General Partners............................. 2,467,442 2,431,589
Partners' capital--Limited Partners............................. 45,404,398 46,206,133
------------ -----------
$231,736,047 132,650,230
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 12
PERIOD FROM (DATE OF
SIX MONTHS JANUARY 12 INCEPTION)
ENDED TO TO
JUNE 30, JUNE 30, DECEMBER 31,
----------- ----------- ------------
1996 1995 1995
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue from hotel operations:
Rooms........................................ $28,120,664 1,928,837 14,456,387
Food and beverage............................ 12,988,951 559,632 5,900,238
Other operating departments.................. 2,422,446 193,595 1,122,361
Lease revenue................................ 637,548 -- 447,934
Hotel management and other fees................ 2,086,931 2,128,493 4,436,428
----------- ----------- ------------
Total revenue.................................. 46,256,540 4,810,557 26,363,348
----------- ----------- ------------
Hotel operating expenses by department:
Rooms........................................ 7,364,570 528,120 4,190,299
Food and beverage............................ 10,302,012 425,087 4,923,790
Other operating departments.................. 1,089,381 79,866 512,791
Undistributed operating expenses:
Administrative and general................... 9,457,210 2,463,242 8,078,304
Property operating costs..................... 5,380,675 426,417 2,623,626
Property taxes, insurance and other.......... 2,116,498 84,967 1,310,517
Depreciation and amortization................ 3,919,035 302,802 2,097,512
----------- ----------- ------------
Total operating expenses....................... 39,629,381 4,310,501 23,736,839
----------- ----------- ------------
Net operating income........................... 6,627,159 500,056 2,626,509
Interest expense............................... 7,374,163 346,523 2,673,365
Interest income................................ (83,905) (12,109) (260,017)
----------- ----------- ------------
Income (loss) before minority interest and
extraordinary item............................. (663,099) 165,642 213,161
Minority interest in subsidiary................ (68,771) -- (17,415)
----------- ----------- ------------
Income (loss) before extraordinary item........ (594,328) 165,642 230,576
Extraordinary item--loss on early
extinguishment of debt....................... -- -- (887,631)
----------- ----------- ------------
Net income (loss).............................. $ (594,328) 165,642 (657,055)
----------- ----------- ------------
----------- ----------- ------------
Net income (loss) attributable to General
Partners....................................... $ 38,098 21,533 (87,254)
----------- ----------- ------------
----------- ----------- ------------
Net income (loss) attributable to Limited
Partners....................................... $ (632,426) 144,109 (569,801)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes to combined financial statements.
F-8
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED STATEMENTS OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
FOR THE PERIOD FROM JANUARY 12, 1995
(DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNERS PARTNERS
----------- ---------- ----------
<S> <C> <C> <C>
Initial capital contributions on January 12, 1995..... $ 1,773,304 88,765 1,684,539
Capital contributions................................. 48,624,696 2,431,235 46,193,461
Capital distributions................................. (115,723) (1,157) (114,566)
Net loss for the period from inception to December 31,
1995.................................................. (657,055) (87,254) (569,801)
----------- ---------- ----------
49,625,222 2,431,589 47,193,633
Less--notes receivable from management for capital
contributions......................................... (987,500) -- (987,500)
----------- ---------- ----------
Partners' capital at December 31, 1995................ 48,637,722 2,431,589 46,206,133
----------- ---------- ----------
----------- ---------- ----------
Capital distributions................................. (171,554) (2,245) (169,309)
Net loss for the six months ended June 30, 1996....... (594,328) 38,098 (632,426)
----------- ---------- ----------
----------- ---------- ----------
Partners' capital at June 30, 1996.................... $47,871,840 2,467,442 45,404,398
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-9
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
SIX MONTHS JANUARY 12 JANUARY 12 TO
ENDED JUNE 30, TO JUNE 30, DECEMBER 31,
-------------- -------------- -------------
1996 1995 1995
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ (594,328) 165,642 (657,055)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 3,919,035 302,802 2,097,512
Loss on early extinguishment of debt........ -- -- 617,730
Minority interest in consolidated
subsidiary........................................ (68,771) -- (17,415)
Changes in working capital:
Accounts receivable, net.................. (4,198,620) (1,219,488) (2,748,909)
Deposits.................................. (2,371,098) (874,117) (1,492,025)
Prepaid expenses and other................ (571,785) (93,124) (223,260)
Inventory................................. (445,059) (28,176) (173,514)
Accounts payable.......................... 2,107,585 502,959 2,329,034
Accrued expenses and other liabilities.... 6,089,334 1,333,929 4,320,320
Due to CapStar Equity Associates, G.P..... 24,285 -- 305,077
-------------- -------------- -------------
Net cash provided by operating activities......... 3,890,578 90,427 4,357,495
-------------- -------------- -------------
Cash flows from investing activities:
Purchases of property and equipment............. (84,115,843) (40,023,370) (109,221,935)
Purchase of minority interest................... (66,666) -- --
Additions to restricted cash for capital
improvements and
other, net.................................... (11,442,271) (6,084,208) (7,351,128)
-------------- --------------
Net cash used by investing activities............. (95,624,780) (46,107,578) (116,573,063)
-------------- -------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt.................... 91,307,685 25,875,000 98,057,709
Payments on long-term debt...................... (58,056) (23,285) (23,095,559)
Principal repayments on capital leases.......... (95,661) (15,377) (37,888)
Release of (additions to) restricted deposits
for hedge agreement........................... 2,023,307 -- (2,023,307)
Deferred costs.................................. (3,092,101) (1,567,382) (3,000,181)
Capital contributions........................... -- 23,631,539 50,250,000
Loans to management............................. -- -- (987,500)
Capital distributions........................... (171,554) -- (115,723)
Distributions to minority interest.............. (104,167) -- --
-------------- -------------- -------------
Net cash provided by financing activities......... 89,809,453 47,900,495 119,047,551
-------------- -------------- -------------
Net increase (decrease) in cash and cash
equivalents....................................... (1,924,749) 1,883,344 6,831,983
Cash and cash equivalents at beginning of
period............................................ 6,831,983 -- --
-------------- -------------- -------------
Cash and cash equivalents at end of period........ $ 4,907,234 1,883,344 6,831,983
-------------- -------------- -------------
-------------- -------------- -------------
Supplemental disclosure of cash flow information:
Interest paid................................... $ 5,694,077 261,213 2,383,299
Capitalized interest costs...................... 209,682 -- 67,000
Capital lease additions......................... 305,062 253,952 721,494
Deferred financing fees not yet paid............ 411,069 -- 596,403
Prepaid expenses contributed by limited
partner........................................... -- 42,000 42,000
Furniture and equipment contributed by limited
partner........................................... -- 106,000 106,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-10
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996 AND DECEMBER 31, 1995
(1) ORGANIZATION
EquiStar Hotel Investors, L.P. ("EquiStar") was formed on January 12, 1995.
The principal activity of EquiStar is to acquire and own upscale, full-service
hotels throughout the continental United States. As of June 30, 1996, EquiStar
had acquired and owned the following hotels:
<TABLE>
<CAPTION>
ACQUISITION TOTAL
DATE NAME ROOMS COST
- --------------------------- ------------------------------------------ ----- -----------
<S> <C> <C> <C>
March 3, 1995.............. Salt Lake Airport Hilton, UT 287 $14,600,000
June 30, 1995.............. Radisson Hotel, Schaumburg, IL 202 9,000,000
June 30, 1995.............. Sheraton Hotel, Colorado Springs, CO 502 17,600,000
August 4, 1995............. Hilton Hotel, Bellevue, WA 180 12,500,000
October 3, 1995............ Marriott Hotel, Somerset, NJ 434 25,800,000
November 15, 1995.......... Westin Atlanta Airport, Atlanta, GA 496 21,200,000
February 2, 1996........... Sheraton Airport Plaza, Charlotte, NC 226 18,500,000
February 16, 1996.......... Holiday Inn, Cleveland, OH 237 9,300,000
February 22, 1996.......... Orange County Airport Hilton, Irvine, CA 290 19,400,000
March 8, 1996.............. The Latham Hotel, Washington, DC 143 12,500,000
April 17, 1996............. Hilton Hotel, Arlington, TX 289 18,350,000
</TABLE>
Separate wholly-owned limited liability companies ("LLCs") were established
to directly own the above hotels. However, for the Westin Atlanta Airport, LLCs
were established to purchase and hold EquiStar's 1% general partner interest and
the 85.2% limited partner interest in the partnership that owns the hotel. Due
to the significance of these LLCs' partnership interests, the partnership's
operations are consolidated.
CapStar Management Company, L.P. ("CapStar Management") operates 48 hotels
throughout the continental United States on behalf of third-party and affiliate
owners. The partnership was formed on January 12, 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accounts of EquiStar and CapStar Management (collectively, the
"Partnerships") have been combined in these financial statements as the
Partnerships are under common ownership. All material intercompany transactions
and balances have been eliminated in combination.
The combined financial statements for the six months ended June 30, 1995 are
unaudited; however, in the opinion of management all adjustments for the fair
presentation of the combined financial statements for this period have been
included.
Cash and Cash Equivalents
The Partnerships consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Deposits
Deposits represent refundable amounts escrowed during the negotiation of
potential hotel acquisitions, certain amounts held for future hotel renovations
and the amounts held in escrow related to a hedge agreement (see note 4).
F-11
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventory
Inventories, which consist primarily of hotel food and beverage stock, are
recorded at the lower of cost or market using the first-in, first-out ("FIFO")
valuation method.
Deferred Costs
Organizational costs incurred in the formation of the Partnerships are
amortized over five years using the straight-line method. Costs associated with
the acquisition of debt are amortized over the lives of the related debt
instruments using a method that approximates the interest method.
Property and Equipment
Buildings and building improvements are depreciated over 40 years.
Furniture, fixtures and equipment purchases are stated at cost and depreciated
over estimated useful lives of five to seven years or, for capital leases, the
related lease terms. Furniture and equipment contributed is stated at its fair
value at the time it was contributed. All property and equipment balances are
depreciated using the straight-line method.
Management plans to hold all hotel assets long-term. Management evaluates
potential permanent impairment of the net carrying value of its hotel assets on
a quarterly basis. For each hotel asset, the expected undiscounted future cash
flows for the asset are compared to its net carrying value. If the net carrying
value of the hotel exceeds the undiscounted cash flows, management estimates the
fair value of the assets based on recent appraisals, if available, or by
discounting expected future cash flows using prevailing market discount rates.
If the net carrying value of the hotel exceeds its fair value, the excess is
charged to operations. No impairment losses were recorded for the six months
ended June 30, 1996 and 1995 (unaudited) or in 1995.
Restricted Cash
EquiStar is required to maintain certain levels of restricted cash in order
to comply with the terms of its debt agreements. Restricted cash reserved
primarily for future hotel capital improvements was $18,793,399 and $7,351,128
at June 30, 1996 and December 31, 1995, respectively.
Minority Interest
Minority interest represents the limited partnership interests in the
partnership which owns the Westin Atlanta Airport which are not owned by
EquiStar.
Revenues
Revenue is earned primarily through the operations and management of the
hotel properties and is recognized when earned. Until February 29, 1996, the
Westin Atlanta Airport was leased to a third-party operator and revenue related
to this hotel was recorded as lease revenue. On February 29, 1996, EquiStar
assumed the operations of the hotel upon termination of the lease.
Income Taxes
The combined financial statements contain no provision for federal income
taxes since both entities are partnerships and, therefore, all federal income
tax liabilities are passed through to the individual partners in accordance with
the Partnership Agreements and Internal Revenue Code.
F-12
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Partners' Capital Contributions, Distributions and Profit and Loss Allocations
The individual partnership agreements of the Partnerships specify the
required capital contributions of the partners and the procedures for the
allocation of profit and loss and for distributions to partners. Generally,
these items are allocated in proportion to the respective ownership percentages
of the partners.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these combined financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
(3) NOTES RECEIVABLE FROM MANAGEMENT
Pursuant to the terms of an agreement dated January 4, 1995, certain members
of management borrowed $987,500 from CapStar Management to fund capital
contributions to EquiStar. The notes are secured by the borrowers' interest in
EquiStar and are personally guaranteed by the individual note holders. During
1995, these notes earned interest at the prime rate. For the six months ended
June 30, 1996 and thereafter, these notes will earn interest at prime (as of
January 1996) plus 1.5%. Outstanding principal balances are to be repaid within
five years of the individual loan dates but may be repaid earlier through
certain CapStar Management or EquiStar distributions as defined in the related
agreements. Interest is due semi-annually on June 30 and December 31.
(4) HEDGE AGREEMENT
In August 1995, EquiStar entered into an agreement with Salomon Brothers
Holding Company Inc. ("Salomon") to hedge against the impact that interest rate
fluctuations may have on EquiStar's various floating rate debt instruments.
Gains and losses resulting from this agreement are not recorded in the financial
statements until realized.
The hedge agreement is a two-year forward swap that is effective June 30,
1997 and that matures on June 30, 2007. The agreement requires EquiStar to pay a
fixed rate of 7.095% and receive a floating interest rate based on the
three-month London Interbank Offered Rate ("LIBOR"), on a notional amount of
$25,000,000. The agreement required EquiStar to make an initial collateral
deposit of $1,000,000 and provides for required additions or reductions to the
collateral escrow account by EquiStar and Salomon in $500,000 increments based
on changes in the market value of this agreement.
At December 31, 1995, EquiStar had made required deposits totaling
$1,000,000 to the collateral escrow account which are recorded as restricted
deposits. The unrealized loss on this agreement at December 31, 1995 was
$1,546,000.
On May 6, 1996, EquiStar sold its interest in the swap agreement. The gain
on sale of $536,000 has been deferred for financial statement purposes.
(5) LONG-TERM DEBT
Salomon Long-term Debt--Prior to December 21, 1995, EquiStar had a loan
facility with Salomon to fund the acquisition of hotels. At December 21, 1995,
$22,690,000 was outstanding on this
F-13
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT--(CONTINUED)
loan facility. Interest-only payments were required under this loan facility at
a floating rate based on LIBOR. This debt was refinanced with Lehman Brothers
Holding, Inc. ("Lehman Holdings").
Lehman Long-term Debt--On December 21, 1995, EquiStar entered into a
$202,500,000 Master Mortgage Loan Facility Agreement (the "Master Agreement")
with Lehman Holdings to facilitate the repayment of the existing $22,690,000 in
debt and hotel acquisitions. Under the Master Agreement, 50% of total
acquisition capital, not to exceed $125,000,000, may be funded through a senior
loan facility. An additional 27.5% of acquisition capital, not to exceed
$75,000,000, may be borrowed through a mezzanine loan facility. Certain fees
incurred by EquiStar related to these borrowings may also be financed through
the Master Agreement, up to a maximum of $2,500,000. Separate loans are obtained
under the Master Agreement for each hotel acquired. The loans are
cross-collateralized and cross-defaulted and are secured by first and second
liens on EquiStar's real and personal property.
Loans obtained under the senior loan facility bear interest at variable
rates that are based on one-month LIBOR. For the six months ended June 30, 1996
and for the year ended December 31, 1995, interest rates on the loans under the
senior facility were between 9.625% and 10%. Loans obtained under the mezzanine
loan facility bear interest at a fixed rate of 16%. Interest payments of 10% are
required with the remaining 6% accruing to principal. All loans require
interest-only payments monthly. All of the loans mature January 1, 1999. At June
30, 1996 and December 31, 1995, total borrowings under the Master Agreement were
$151,815,394 and $59,975,900, of which $101,753,393 and $55,840,900 were made
from the senior loan facility and $50,062,001 and $4,135,000 were made from the
mezzanine loan facility, respectively.
Under the Master Agreement, EquiStar is required to pay financing fees upon
the repayment of each loan. These deferred financing fees payable, which are
included in long-term debt, totaled $1,007,472 and $596,403 at June 30, 1996 and
December 31, 1995, respectively.
Wells Fargo Long-term Debt--On March 2, 1995, EquiStar borrowed $9,960,000
from Wells Fargo Bank, National Association ("Wells Fargo") to finance the
purchase of the Salt Lake Airport Hilton (all other hotel loans are under the
Master Agreement). The loan matures on March 1, 1999 and provides for a one-year
extension at the option of the borrower. Interest, which is payable monthly, is
recorded at the one-month LIBOR plus 4.25%, as adjusted for certain provisions
in the loan agreement. The debt is secured by certain real and personal property
of the hotel. At June 30, 1996 and December 31, 1995, the outstanding balance on
this note was $9,832,088 and $9,890,144, respectively.
Wells Fargo Line of Credit--EquiStar has an unsecured $5,000,000 revolving
credit facility with Wells Fargo to support operations as needed. Amounts
outstanding on this line of credit were $2,500,000 and $4,181,809 at June 30,
1996 and December 31, 1995, respectively. Interest accrues at either LIBOR plus
2.25% or the Prime rate plus 1%, depending on the nature of the advance. Prime
rate based interest payments are due quarterly while LIBOR based interest is
payable over various periods not to exceed six months. Borrowings expected to be
repaid within one year are classified as current liabilities. The full amount
outstanding is expected to be repaid upon the termination of the credit
facility.
Notes Payable--During 1995, in order to fund the loans to management (see
note 3), CapStar Management borrowed $950,000 from Acadia Partners, L.P.
("Acadia Partners"), an affiliate of the Partnerships. In January 1996, CapStar
Management borrowed an additional $150,000 from Acadia Partners under this note
agreement to prepay a consulting fee. The note bears fixed interest at the prime
rate (as of January 1996) plus 1.5% and is secured by interests in and liens on
certain of CapStar
F-14
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT--(CONTINUED)
Management's real and personal property. Principal payments are scheduled for
August 31, 1996 and upon maturity on August 31, 1997. Interest is payable
semi-annually beginning February 29, 1996.
In March 1996, EquiStar entered into an unsecured note agreement for
$1,000,000 with LCP Hotel Ventures, L.P., an affiliate of the Partnerships and
the seller of the Georgetown Latham Hotel, to finance the purchase of that hotel
(see note 6). The note requires interest only payments quarterly, and bears
interest at a rate of 10%. All principal and accrued interest is due in full on
January 1, 1999.
Capital Leases--The Partnerships have entered into several capital leases
for hotel and office equipment that expire between 1997 and 2000. The total
capital lease obligations at June 30, 1996 and December 31, 1995, were $857,304
and $647,903, respectively, and are included in long-term debt.
Interest costs on long-term debt for the Partnerships were $7,583,845 and
$346,523 (unaudited) for the six months ended June 30, 1996 and 1995,
respectively, and $2,740,365 for 1995.
Aggregate maturities of the above obligations are as follows:
<TABLE>
<CAPTION>
PERIOD
- ------------------------------------------------------------
<S> <C>
From July 1 to December 31
1996...................................................... $ 3,045,107
Year ending December 31
1997...................................................... 1,062,222
1998...................................................... 1,297,655
1999...................................................... 162,533,716
2000 and thereafter....................................... 173,558
-------------
$ 168,112,258
-------------
-------------
</TABLE>
Management has determined that the outstanding balance of the Partnerships'
long-term debt approximates fair value by discounting the future cash flows
under the debt arrangements using rates currently available for debt with
similar terms and maturities.
(6) RELATED-PARTY TRANSACTIONS
CapStar Management manages hotels that are owned in part by affiliates or
officers of CapStar Management. Revenue associated with the management of these
hotels was $494,191 and $539,509 (unaudited) for the six months ended June 30,
1996 and 1995, respectively, and $1,104,582 in 1995. At June 30, 1996 and
December 31, 1995, the amount due from these properties was $128,820 and
$237,029, respectively. Management believes these contracts are at prevailing
market rates.
Upon formation of CapStar Management, certain receivables of CapStar Equity
Associates, G.P. ("CEA"), a limited partner, were assigned to CapStar
Management. Amounts collected under these receivables are to be paid to CEA when
CapStar Management achieves a minimum level of liquidity as defined in the
Contribution Agreement. Amounts collected under this agreement, which are
recorded as due to CapStar Equity Associates, G.P., amounted to $329,362 at June
30, 1996 and $305,077 at December 31, 1995. Management believes that the balance
will be repaid to CEA within one year.
On March 8, 1996, EquiStar acquired the Georgetown Latham Hotel for a
purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the time
of the acquisition, the general partner of LCP, Latham Hotels, Inc., was
wholly-owned by certain members of the Partnerships'
F-15
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) RELATED-PARTY TRANSACTIONS--(CONTINUED)
management. Directly or indirectly, these members of management owned a 9.7%
beneficial interest in LCP and received $806,000 of the net proceeds of the
purchase price paid to LCP. Management believes that the purchase price was
determined through arm's-length negotiations between EquiStar and
representatives of the holders of the majority of the beneficial interests in
the LCP.
On November 15, 1995, EquiStar acquired its 1% general partner interest in
the Westin Atlanta Airport from LHP, a corporation in which an individual who,
at the time, was a principal of the Partnerships, owned an equity interest. LHP
was paid a fee of $893,000 in connection with EquiStar's acquisition of the
general and limited partner interests and is entitled to an additional $161,000
upon the ultimate disposition of the partnership that owns the Westin Atlanta
Airport. Another affiliate of the former principal, LCP Group, L.P., is entitled
to an annual fee of $30,000 to provide certain administrative services related
to the outside limited partners. Management believes that these fees were
negotiated at arm's-length between the former principal and the other principals
of EquiStar.
(7) COMMITMENTS AND CONTINGENCIES
CapStar Management has entered into two operating leases for office space
which expire in October 1998. Lease payments will be approximately $250,000
annually through expiration.
EquiStar is involved in various litigation through the normal course of
business which management believes will not have a material adverse effect on
the combined financial statements.
On June 14, 1996, EquiStar entered into a binding contract to purchase the
Renaissance Hotel, Arlington, Virginia for $19,300,000. EquiStar intends to
operate the hotel under a franchise agreement with Hilton Hotels Corporation to
be entered into in August 1996. The hotel is a full-service hotel with 209
rooms.
On June 20, 1996 EquiStar entered into a binding contract to purchase five
upscale, full service hotels which contain 1,121 rooms, for a purchase price of
$68,400,000.
(8) PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma summary presents information as if hotel
acquisitions made from inception of the Partnerships through June 30, 1996, had
been made at inception of the Partnerships. The pro forma information is
provided for informational purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the
Partnerships.
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED JANUARY 12, 1995 TO
JUNE 30, 1996 DECEMBER 31, 1995
------------------ -------------------
<S> <C> <C>
Total revenue............................ $ 55,933,151 106,558,750
------------------ -------------------
Net loss before extraordinary item....... $ (2,184,158) (4,914,034)
------------------ -------------------
Net loss................................. $ (2,184,158) (5,801,665)
------------------ -------------------
</TABLE>
F-16
<PAGE>
SCHEDULE III
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
JUNE 30, 1996
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
COSTS SUBSEQUENT TO CARRIED AT CLOSE OF
PERIOD
INITIAL COST TO COMPANY ACQUISITION -------------------------
------------------------- -------------------- (1)
BUILDING AND BUILDING AND (1) BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------------------------- ------------ ---------- ------------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton,
UT........................ $ 9,832,088 770,000 12,827,670 580 758,467 770,580 13,586,137
Radisson Hotel,
Schaumburg, IL............ 8,368,664 1,080,000 5,131,399 13,378 954,936 1,093,378 6,086,335
Sheraton Hotel, Colorado
Springs, CO.............. 16,413,685 1,071,394 14,591,596 678 841,753 1,072,072 15,433,349
Hilton Hotel, Bellevue,
WA........................ 10,865,360 5,210,695 6,766,323 4,590 459,749 5,215,285 7,226,072
Marriott Hotel, Somerset,
NJ........................ 22,559,130 1,977,509 23,001,126 854 46,160 1,978,363 23,047,286
Westin Atlanta Airport,
Atlanta, GA............... 23,677,187 2,650,000 15,926,116 -- 344,727 2,650,000 16,270,843
Sheraton Hotel,
Charlotte, NC............. 15,795,668 4,700,000 11,056,927 -- 13,406 4,700,000 11,070,333
Holiday Inn, Cleveland,
OH........................ 9,878,786 1,330,000 6,353,249 -- 58,581 1,330,000 6,411,830
Orange County Airport
Hilton, Irvine, CA....... 16,762,455 9,990,000 7,993,137 6,635 48,820 9,996,635 8,041,957
The Latham Hotel,
Washington, DC............ 11,518,688 6,500,000 5,319,708 -- 17,648 6,500,000 5,337,356
Hilton Hotel, Arlington,
TX........................ 16,975,771 1,836,172 14,689,379 -- 43,456 1,836,172 14,732,835
------------ ---------- ------------ ----- ------------ ---------- ------------
162,647,482 37,115,770 123,656,630 26,715 3,587,703 37,142,485 127,244,333
------------ ---------- ------------ ----- ------------ ---------- ------------
------------ ---------- ------------ ----- ------------ ---------- ------------
<CAPTION>
ACCUMULATED YEAR OF DATE
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED LIFE
- -------------------------- ----------- ------------ -------- ----
<S> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton,
UT........................ 434,128 1980 03/03/95 40
Radisson Hotel,
Schaumburg, IL............ 131,374 1974 06/30/95 40
Sheraton Hotel, Colorado
Springs, CO.............. 369,875 1979 06/30/95 40
Hilton Hotel, Bellevue,
WA........................ 156,668 1979 08/04/95 40
Marriott Hotel, Somerset,
NJ........................ 431,983 1978 10/03/95 40
Westin Atlanta Airport,
Atlanta, GA............... 269,432 1982 11/15/95 40
Sheraton Hotel,
Charlotte, NC............. 115,875 1985 02/02/96 40
Holiday Inn, Cleveland,
OH........................ 60,081 1985 02/16/96 40
Orange County Airport
Hilton, Irvine, CA....... 70,925 1976 02/22/96 40
The Latham Hotel,
Washington, DC............ 108,459 1978 03/08/96 40
Hilton Hotel, Arlington,
TX........................ 22,712 1983 04/17/96 40
-----------
2,171,512
-----------
-----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) As of June 30, 1996, hotel property and equipment have a cost
of $194,718,048 for federal income tax purposes. Land 37,142,485 --
Hotel furniture and equipment....
24,009,234 2,735,224
Construction in progress......... 6,321,996 --
------------ -----------
Total hotel property and
equipment........................ $194,718,048 $4,906,736
------------ -----------
(1) As of June 30, 1996,
of $194,718,048 for
</TABLE>
A reconciliation of the Partnerships' investment in hotel property and
equipment and related accumulated depreciation is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Hotel property and equipment:
Balance at beginning of period...................................................... $110,454,164 --
Additions during period:
Acquisitions...................................................................... 70,561,215 104,238,519
Improvements and construction-in-progress......................................... 13,702,669 6,215,645
------------ -----------
Balance at end of period............................................................. 194,718,048 110,454,164
------------ -----------
Accumulated depreciation:
Balance at beginning of period...................................................... 1,742,573 --
Additions--depreciation expense..................................................... 3,164,163 1,742,573
------------ -----------
4,906,736 1,742,573
------------ -----------
Net hotel property and equipment at end of period.................................... $189,811,312 108,711,591
------------ -----------
------------ -----------
</TABLE>
F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Partners
CapStar Management Company, L.P.:
We have audited the accompanying balance sheet of CapStar Management
Company, L.P. ("CapStar Management") as of December 31, 1994, and the related
statements of operations and changes in management operations' equity and cash
flows for the years ended December 31, 1994 and 1993. These financial statements
are the responsibility of the management of CapStar Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Management Company,
L.P. as of December 31, 1994, and the results of its operations and its cash
flows for the years ended December 31, 1994 and 1993 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
May 7, 1996
F-18
<PAGE>
CAPSTAR MANAGEMENT
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 157,151
Accounts receivable.......................................................... 946,717
Prepaid expenses............................................................. 22,157
----------
Total current assets........................................................... 1,126,025
Furniture and equipment, net of accumulated depreciation of $69,804............ 105,772
----------
$1,231,797
----------
----------
LIABILITIES AND MANAGEMENT OPERATIONS' EQUITY
Accounts payable and accrued expenses.......................................... $ 823,637
Due to affiliates.............................................................. 203,140
Management operations' equity.................................................. 205,020
----------
$1,231,797
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
CAPSTAR MANAGEMENT
STATEMENTS OF OPERATIONS AND CHANGES IN MANAGEMENT OPERATIONS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
Revenue:
Management fees................................................... $3,823,166 3,918,576
Accounting fees and other income.................................. 594,756 315,566
---------- ---------
Total revenue....................................................... 4,417,922 4,234,142
---------- ---------
Expenses:
Salaries, wages and benefits...................................... 2,311,569 1,988,282
Other overhead, general and administrative........................ 2,196,251 2,076,385
Depreciation...................................................... 22,639 14,349
---------- ---------
Total expenses...................................................... 4,530,459 4,079,016
---------- ---------
Net income (loss)................................................... (112,537) 155,126
Management operations' equity (deficit), beginning of year.......... 317,557 (81,820)
Capital contributions............................................... -- 244,251
---------- ---------
Management operations' equity, end of year.......................... $ 205,020 317,557
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
CAPSTAR MANAGEMENT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Net income (loss)..................................................... $(112,537) 155,126
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation...................................................... 22,639 14,349
Changes in working capital:
Accounts receivable............................................. 249,284 (738,337)
Prepaid expenses................................................ 20,339 (4,463)
Accounts payable................................................ (114,628) 361,377
Accrued expenses................................................ 1,213 110,624
--------- --------
Cash provided (used) by operating activities.......................... 66,310 (101,324)
--------- --------
Cash flows from investing activities--purchases of furniture and
equipment............................................................. (41,257) (24,475)
--------- --------
Cash flows from financing activities--capital contributions........... -- 244,251
--------- --------
Net increase in cash.................................................. 25,053 118,452
Cash at beginning of year............................................. 132,098 13,646
--------- --------
Cash at end of year................................................... $ 157,151 132,098
--------- --------
--------- --------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
CAPSTAR MANAGEMENT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) ORGANIZATION
For the period from January 1, 1993 through December 31, 1994, CapStar
Hotels, Inc. and subsidiaries ("CHI") provided hotel management services to
hotels throughout the continental United States on behalf of third-party and
affiliate owners. At December 31, 1994, CHI had contracts to manage 41 hotels.
On January 4, 1995, CHI assigned the hotel management contracts and certain
assets and liabilities related to its hotel management operations to CapStar
Equity Associates, G.P. ("CEA"). On January 12, 1995, CEA, in turn, assigned the
same to CapStar Management Company, L.P.
For purposes of these financial statements, the hotel management operations
accounts are presented as if they were a separate and distinct legal entity
(CapStar Management).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements have been prepared on the accrual basis of
accounting and in accordance with generally accepted accounting principles.
Revenues and Accounts Receivable
CapStar Management receives fees for the performance of management,
accounting and other services in accordance with the agreements entered into
with individual hotels. All revenues are recognized as the related services are
performed.
Generally, management fees are equal to 2% to 4% of the gross monthly
revenue of each hotel. Additional incentive management fees are earned when a
hotel's operating performance exceeds levels specified in the management
contract.
The collectibility of accounts receivable is evaluated periodically during
the year. CapStar Management uses the direct write-off method to record bad debt
expense for amounts deemed uncollectible.
Furniture and Equipment
Furniture and equipment purchases are stated at cost. These assets are
depreciated using the straight-line method over an estimated useful life of
seven years.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements. Actual results could differ
from those estimates.
Income Taxes
No provision has been made for income taxes in the financial statements, as
any taxable income or loss of CapStar Management is included in the income tax
returns of CHI for the years ended December 31, 1994 and 1993.
F-22
<PAGE>
CAPSTAR MANAGEMENT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) RELATED-PARTY TRANSACTIONS
Certain of the hotels managed are owned by affiliates of CHI. Revenue earned
by CapStar Management from these hotels was approximately $2,830,177 in 1994 and
$2,812,653 in 1993. Accounts receivable associated with hotels owned by
affiliates was $481,561 at December 31, 1994.
Due to affiliates primarily represents amounts collected by CapStar
Management on behalf of the hotels it manages which have not yet been disbursed
to the hotels.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Orange County Airport Hilton (the "Hotel") for the period from January 1,
1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors,
L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the Hotel's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Orange County Airport Hilton's
operations and its cash flows for the period from January 1, 1996 to February
22, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 20, 1996
F-24
<PAGE>
ORANGE COUNTY AIRPORT HILTON
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rooms................................. $ 854,685 4,564,294 3,479,926 3,137,865
Food and beverage..................... 409,200 2,554,156 2,188,612 2,204,286
Other operating departments........... 48,828 314,723 239,755 183,980
---------- ----------- ----------- -----------
1,312,713 7,433,173 5,908,293 5,526,131
---------- ----------- ----------- -----------
Operating costs and expenses:
Rooms................................. 254,389 1,302,612 1,009,792 875,825
Food and beverage..................... 346,563 1,882,782 1,617,235 1,543,846
Other operating departments........... 23,005 147,896 116,224 84,197
Undistributed operating expenses:
Administrative and general............ 222,566 1,050,388 1,022,104 869,499
Sales and marketing................... 126,979 692,052 452,070 449,615
Management fees....................... 35,000 210,000 197,500 150,000
Property operating costs.............. 96,410 763,258 704,873 691,160
Property taxes, insurance and other... 57,301 342,177 386,464 467,055
Depreciation and amortization......... 112,129 832,958 798,442 854,566
Interest expense...................... 608,294 3,510,997 2,688,580 2,193,590
---------- ----------- ----------- -----------
Total expenses.......................... 1,882,636 10,735,120 8,993,284 8,179,353
---------- ----------- ----------- -----------
Net loss................................ $ (569,923) (3,301,947) (3,084,991) (2,653,222)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
ORANGE COUNTY AIRPORT HILTON
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(569,923) (3,301,947) (3,084,991) (2,653,222)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization......... 112,129 832,958 798,442 854,566
Decrease (increase) in accounts
receivable.................................. (56,580) (198,792) (27,765) 203,192
Decrease (increase) in other assets... 67,637 (42,736) 26,502 38,421
Increase (decrease) in accounts
payable and accrued expenses........ 296,914 540,514 11,866 (12,467)
Increase in accrued interest.......... 358,294 3,010,996 2,568,580 2,167,618
--------- ---------- ---------- ----------
Total adjustments......................... 778,394 4,142,940 3,377,625 3,251,330
--------- ---------- ---------- ----------
Net cash provided by operating activities... 208,471 840,993 292,634 598,108
--------- ---------- ---------- ----------
Cash flows used by investing activities--
additions to hotel.......................... -- (76,435) (54,925) (17,811)
--------- ---------- ---------- ----------
Cash flows from financing activities:
Repayments of note payable................ -- (30,099) (55,000) --
Capital distributions..................... (43,445) (896,802) (274,594) (397,073)
Increase (decrease) in bank overdrafts.... (165,026) 162,343 91,885 (183,224)
--------- ---------- ---------- ----------
Net cash used by financing activities....... (208,471) (764,558) (237,709) (580,297)
--------- ---------- ---------- ----------
Net increase in cash........................ -- -- -- --
Cash at beginning of period................. -- -- -- --
--------- ---------- ---------- ----------
Cash at end of period....................... $ -- -- -- --
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Supplemental disclosure of cash flow
information:
Cash paid for interest.................... $ 250,000 500,000 120,000 25,972
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
ORANGE COUNTY AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(1) ORGANIZATION
The Orange County Airport Hilton (the "Hotel") is located near the Orange
County Airport in Irvine, California, approximately 45 miles from Los Angeles.
The Hotel opened in 1976 and was operated under a franchise agreement with
Radisson Hotels International, Inc. during the periods under audit. Since April
1, 1996, the Hotel has been operating as a Hilton. The Hotel has 290 rooms, an
outdoor pool and jacuzzi, fitness center and same day valet service. The dining
facilities include Mimi's Grill and The Promenade Lounge. The Hotel has
approximately 30,000 square feet of meeting space.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of GMY
Investment Company ("GMY"), a limited partnership which owned the Hotel until it
was sold to EquiStar on February 22, 1996 for $19,200,000. The accompanying
statements of operations and cash flows include the accounts of the Hotel only,
as if it were a separate legal entity, and have been prepared using the accrual
basis of accounting.
Depreciation
Depreciation is computed on the cost of hotel property and equipment using
the Modified Accelerated Cost Recovery method over 39 and 31.5 years for the
building and building improvements and over 5 to 7 years for furniture, fixtures
and equipment.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities were passed through to the individual partners in accordance with
the partnership agreement and the Internal Revenue Code.
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
F-27
<PAGE>
ORANGE COUNTY AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) INTEREST EXPENSE
GMY entered into a promissory note with an original balance of $19,000,000
in June 1989. Interest accrued at 10% for the first year, and then adjusted to
the Bank of America National Trust and Savings Association prime rate as
announced from time to time. On December 1, 1991, GMY stopped making scheduled
interest and principal payments and the note was in default. From the default
date, interest was computed using the prime rate plus four percentage points on
the outstanding balance plus any accrued interest.
(4) RELATED-PARTY TRANSACTIONS
The Hotel incurred management fees of $35,000, $210,000, $197,500 and
$150,000 for the period from January 1, 1996 to February 22, 1996 and the years
ended December 31, 1995, 1994 and 1993, respectively. The management fees were
paid to an affiliate of the Hotel.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Colorado Springs Sheraton Hotel (the "Hotel") for the period from January 1,
1995 to June 30, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.)
and the years ended December 31, 1994 and 1993. These financial statements are
the responsibility of the Hotel's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Colorado Springs Sheraton Hotel's
operations and its cash flows for the period from January 1, 1995 to June 30,
1995, and the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 26, 1996
F-29
<PAGE>
COLORADO SPRINGS SHERATON HOTEL
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Revenue:
Rooms................................................. $3,058,060 7,381,231 6,306,143
Food and beverage..................................... 1,450,753 3,476,833 2,930,970
Other operating departments........................... 217,547 534,042 491,097
---------- ---------- ---------
4,726,360 11,392,106 9,728,210
---------- ---------- ---------
Operating costs and expenses:
Rooms................................................. 950,418 1,956,592 1,720,992
Food and beverage..................................... 1,325,154 2,751,933 2,383,324
Other operating departments........................... 140,610 305,426 260,327
Undistributed operating expenses:
Administrative and general............................ 612,704 1,606,117 1,163,407
Sales and marketing................................... 483,000 889,803 853,153
Property operating costs.............................. 560,029 1,220,401 1,150,870
Management fees....................................... 137,852 284,803 291,736
Property taxes, insurance and other................... 290,750 498,989 549,725
Depreciation and amortization......................... 545,685 1,123,249 1,076,652
---------- ---------- ---------
5,046,202 10,637,313 9,450,186
---------- ---------- ---------
Net income (loss)....................................... $ (319,842) 754,793 278,024
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
COLORADO SPRINGS SHERATON HOTEL
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(319,842) 754,793 278,024
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization...................... 545,685 1,123,249 1,076,652
Decrease (increase) in accounts receivable......... (222,962) 216,504 (252,683)
Decrease (increase) in inventory and other
assets................................................... 132,255 (136,067) 21,999
Increase (decrease) in accounts payable and accrued
expenses................................................. (361,807) (60,970) 161,062
--------- ---------- ---------
Net cash provided (used) by operating activities......... (226,671) 1,897,509 1,285,054
--------- ---------- ---------
Cash flows used by investing activities--purchases of
furniture, fixtures and equipment........................ (18,014) (113,743) (324,601)
--------- ---------- ---------
Cash flows from financing activities:
Capital distributions.................................. -- (2,153,816) (777,181)
Capital contributions.................................. 425,146 -- --
Increase (decrease) in bank overdrafts................. (180,461) 196,509 (9,731)
--------- ---------- ---------
Net cash flows provided (used) by financing activities... 244,685 (1,957,307) (786,912)
--------- ---------- ---------
Net increase in cash..................................... -- (173,541) 173,541
Cash at beginning of year................................ -- 173,541 --
--------- ---------- ---------
Cash at end of year...................................... $ -- -- 173,541
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
COLORADO SPRINGS SHERATON HOTEL
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(1) ORGANIZATION
The Colorado Springs Sheraton Hotel (the "Hotel") is a 502 room full-service
hotel located in Colorado Springs, Colorado. The Hotel is near Colorado Springs
Airport and is about an hour from Denver. The Hotel has a restaurant, a snack
bar/coffee shop, a lounge/ lobby bar, an exercise facility and an indoor/outdoor
swimming pool. The Hotel is currently undergoing major renovations (budgeted at
$2.7 million).
For the period ended June 30, 1995 and for the years ended December 31, 1994
and 1993, the Hotel was owned by CIGNA.
The Hotel was sold on June 30, 1995 to EquiStar for a purchase price of
$17,250,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of CIGNA.
The accompanying statements of operations and cash flows include the accounts of
the Hotel only, as if it were a separate legal entity, and have been prepared
using the accrual basis of accounting.
Depreciation
Depreciation is computed on the cost of the Hotel property and equipment
using the straight-line method over 40 years for the building, over 15 years for
building improvements and over five years for furniture, fixtures and equipment.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and is
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel does not pay any taxes directly. All taxes are the responsibility of
the parent company, CIGNA.
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Georgetown Latham Hotel (the "Hotel") for the period from January 1, 1996 to
March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Hotel's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Georgetown Latham Hotel's
operations and its cash flows for the period from January 1, 1996 to March 8,
1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 12, 1996
F-33
<PAGE>
GEORGETOWN LATHAM HOTEL
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rooms.................................... $ 612,857 3,790,580 3,764,567 3,784,884
Food and beverage........................ 628,269 3,699,257 3,448,669 3,192,731
Other operating departments.............. 81,116 360,958 419,968 374,672
---------- ---------- ---------- ----------
1,322,242 7,850,795 7,633,204 7,352,287
---------- ---------- ---------- ----------
Operating costs and expenses:
Rooms.................................... 187,244 1,081,472 1,069,864 1,177,839
Food and beverage........................ 553,396 3,268,979 3,095,593 3,032,272
Other operating departments.............. 50,228 313,870 272,476 185,028
Undistributed operating expenses:
Administrative and general............... 110,613 996,666 795,642 663,466
Sales and marketing...................... 94,903 511,975 478,520 606,068
Management fees.......................... 39,581 235,523 248,270 288,779
Property operating costs................. 105,258 649,576 672,065 585,158
Property taxes, insurance and other...... 65,278 328,299 244,123 328,451
Depreciation and amortization............ 81,782 674,537 637,614 574,751
Interest expense......................... 87,771 476,901 5,265 --
---------- ---------- ---------- ----------
1,376,054 8,537,798 7,519,432 7,441,812
---------- ---------- ---------- ----------
Net income (loss).......................... $ (53,812) (687,003) 113,772 (89,525)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
GEORGETOWN LATHAM HOTEL
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $(53,812) (687,003) 113,772 (89,525)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............ 81,782 674,537 637,614 574,751
Decrease (increase) in accounts
receivable..................................... (26,055) 43,384 83,943 (305,105)
Decrease (increase) in other assets...... (29,166) 121,568 (311,111) (184,175)
Increase (decrease) in accounts payable
and accrued expenses................... 165,028 42,727 (384,682) 450,341
Increase in interest payable............. -- 33,880 5,265 --
-------- ---------- ---------- --------
Net cash provided by operating activities...... 137,777 229,093 144,801 446,287
-------- ---------- ---------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment...................................... (18,907) (262,176) -- (276,520)
Proceeds from sale of furniture, fixtures and
equipment...................................... -- -- 91,933 --
-------- ---------- ---------- --------
Net cash provided (used) by investing
activities..................................... (18,907) (262,176) 91,933 (276,520)
-------- ---------- ---------- --------
Cash flows from financing activities:
Principal repayments on capital leases....... (3,770) (21,857) -- --
Proceeds from note payable................... -- -- 4,500,000 --
Principal payments on note payable........... (6,849) (35,573) -- --
Advances to affiliate........................ -- -- (3,825,000) --
Repayments of advances to affiliate.......... -- 3,825,000 -- --
Capital distributions........................ -- (4,206,759) (593,312) (134,115)
-------- ---------- ---------- --------
Net cash provided (used) by financing
activities..................................... (10,619) (439,189) 81,688 (134,115)
-------- ---------- ---------- --------
Net increase (decrease) in cash................ 108,251 (472,272) 318,422 35,652
Cash at beginning of year...................... 32,193 504,465 186,043 150,391
-------- ---------- ---------- --------
Cash at end of year............................ $140,444 32,193 504,465 186,043
-------- ---------- ---------- --------
-------- ---------- ---------- --------
Supplemental disclosure of cash flow
information:
Cash paid for interest....................... $118,085 443,021 -- --
Additions to capital lease obligations....... -- -- 71,004 --
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
GEORGETOWN LATHAM HOTEL
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(1) ORGANIZATION
The Georgetown Latham Hotel (the "Hotel") is located on 3000 M Street in
Washington, D.C. It is close to the Smithsonian, embassies, monuments, the
Kennedy Center and the downtown business district, and caters mainly to tourists
and business travelers. The Hotel has 143 rooms; fine dining in the CITRONELLE
restaurant; meeting and banquet facilities; an outdoor pool; business center;
limousine rental service; and valet parking.
Until 1993, the Hotel was owned by Muben/LCP Hotel Partners, L.P.
("Muben/LCP"), a limited partnership which owned 9 hotels. On October 1, 1993,
LCP Hotel Ventures, L.P., a partner in Muben/LCP ("LCP Ventures"), conveyed its
10% interest in Muben/LCP for 100% ownership of the Hotel.
The Hotel was sold on March 8, 1996 to EquiStar for a purchase price of
$12,000,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of
Muben/LCP and then LCP Ventures, as described above, until the Hotel was sold to
EquiStar. The accompanying statements of operations and cash flows include the
accounts of the Hotel only, as if it were a separate legal entity, and have been
prepared using the accrual basis of accounting.
Depreciation
Depreciation is computed on the cost of the Hotel property and equipment
using the straight-line method over 31.5 years for the building and building
improvements and over five years for furniture, fixtures and equipment.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities are passed through to the individual partners in accordance with the
partnership agreement and the Internal Revenue Code.
F-36
<PAGE>
GEORGETOWN LATHAM HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) INTEREST EXPENSE
On December 23, 1994, the Hotel obtained financing from CPC Advisors No. 3,
L.L.C. The original note balance was $4,500,000 and had a fixed interest rate of
10.53%. Principal and interest payments were due monthly. The note was scheduled
to mature on December 27, 1999.
(4) RELATED-PARTY TRANSACTIONS
The Hotel was managed by an affiliate of LCP Ventures. For the period from
January 1, 1993 through September 30, 1993 the Hotel incurred management fees of
4% of gross revenue, as defined in the management agreement. For the remainder
of 1993 through March 8, 1996 the Hotel incurred base management fees of 3% and
an incentive management fee equal to 5% of the amount by which the net operating
income exceeds the amount of preferred return, as defined in the management
agreement. Management fees incurred during 1996, 1995, 1994 and 1993 were
$39,581, $235,523, $248,270 and $288,779, respectively. No incentive management
fees were earned.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Westin Atlanta Airport (the "Hotel") for the period from January 1, 1995 to
November 15, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and
the years ended December 31, 1994 and 1993. These financial statements are the
responsibility of the Hotel's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Westin Atlanta Airport's operations
and its cash flows for the period from January 1, 1995 to November 15, 1995 and
the years ended December 31, 1994 and 1993 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 5, 1996
F-38
<PAGE>
WESTIN ATLANTA AIRPORT
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rooms................................................ $9,069,888 8,640,768 7,839,244
Food and beverage.................................... 4,054,054 4,342,750 3,828,053
Other operating departments.......................... 689,834 637,278 571,756
---------- ---------- ----------
13,813,776 13,620,796 12,239,053
---------- ---------- ----------
Operating costs and expenses:
Rooms................................................ 2,199,381 2,106,483 1,899,024
Food and beverage.................................... 3,220,403 3,392,581 3,096,841
Other operating departments.......................... 363,698 377,110 398,384
Undistributed operating expenses:
Administrative and general........................... 1,175,803 1,142,701 1,178,117
Sales and marketing.................................. 1,049,508 1,064,740 1,004,350
Management fees...................................... 498,791 500,769 263,775
Property operating costs............................. 1,029,636 1,193,688 1,157,683
Property taxes, insurance and other.................. 1,286,750 1,232,672 1,100,168
Depreciation and amortization........................ 981,547 1,254,302 1,439,270
Interest expense..................................... 2,290,924 2,618,358 2,641,131
---------- ---------- ----------
14,096,441 14,883,404 14,178,743
---------- ---------- ----------
Net loss............................................... $ (282,665) (1,262,608) (1,939,690)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
WESTIN ATLANTA AIRPORT
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (282,665) (1,262,608) (1,939,690)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 981,547 1,254,302 1,439,270
Decrease (increase) in accounts receivable.... (464,896) (474,273) 216,891
Decrease (increase) in other assets........... 33,045 (50,994) 22,875
Decrease in inventory......................... 8,531 16,061 13,530
Increase in accounts payable and accrued
expenses............................................ 267,755 83,237 96,551
Decrease in interest payable.................. (108,653) (1,319) (1,193)
Increase (decrease) in other liabilities...... 173,892 (13,781) 237,001
Increase in intercompany payable.............. 458,419 897,156 1,041,316
---------- ---------- ----------
Net cash provided by operating activities........... 1,066,975 447,781 1,126,551
---------- ---------- ----------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment..... (117,392) (43,179) --
Proceeds from sale of furniture, fixtures and
equipment........................................... -- -- 16,240
---------- ---------- ----------
Net cash provided (used) by investing activities.... (117,392) (43,179) 16,240
---------- ---------- ----------
Cash flows from financing activities--decrease in
notes payable..................................... (159,594) (158,265) (143,264)
---------- ---------- ----------
Net increase in cash and cash equivalents........... 789,989 246,337 999,527
Cash and cash equivalents at beginning of period.... 1,967,782 1,721,445 721,918
---------- ---------- ----------
Cash and cash equivalents at end of period.......... $2,757,771 1,967,782 1,721,445
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $2,399,577 2,619,677 2,642,324
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
WESTIN ATLANTA AIRPORT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(1) ORGANIZATION
The Westin Atlanta Airport (the "Hotel") is located near Atlanta Hartsfield
International Airport. For the periods presented, the Hotel was operated as a
Renaissance hotel. The Hotel has 496 rooms and suites, a health club, whirlpool,
sundeck, indoor and outdoor swimming pool and sauna. The dining and
entertainment facilities include the Le Cafe Restaurant, Atrium Lounge and
Studebaker's. The Hotel's business is generated from its proximity to the
Atlanta Hartsfield International Airport and the Georgia International
Convention Center.
On November 15, 1995, EquiStar purchased a 1% general partnership interest
and an 84.6% limited partnership interest in Lepercq Atlanta Renaissance
Partners, L.P. ("Atlanta Partners"), the owner of the Hotel.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Through November 15, 1995, Atlanta Partners leased the Hotel operations to a
third party. The accompanying statements of operations and cash flows include
the accounts of the Hotel and the accounts of Atlanta Partners. Atlanta
Partners' operations related primarily to the Hotel. All intercompany
transactions between the Hotel and Atlanta Partners have been eliminated.
Depreciation
Depreciation is computed on the building using the straight-line method over
a useful life of 31.5 years. Building improvements are depreciated using the
straight-line method over seven to 31.5 years while furniture, fixtures and
equipment are depreciated straight-line over three to ten years. Costs for
supplies, maintenance and repairs are charged to expense as incurred.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
Atlanta Partners is a partnership and, therefore, all federal income tax
liabilities are passed through to the individual partners in accordance with the
partnership agreement and the Internal Revenue Code.
F-41
<PAGE>
WESTIN ATLANTA AIRPORT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) MORTGAGE NOTE PAYABLE
Through November 15, 1995, the Hotel was encumbered by a nonrecourse
mortgage loan from the Travelers Insurance Company in the amount of $24,725,000.
The loan was secured by a mortgage on the Hotel and an assignment of the lease.
The mortgage loan had an interest rate of 10% per annum and required monthly
payments of principal and interest of $216,980 through July 1, 1999.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Somerset Marriott Hotel (the "Hotel") for the fiscal years ended September
30, 1995, 1994 and 1993. These financial statements are the responsibility of
the Hotel's owners. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Somerset Marriott Hotel's
operations and its cash flows for the fiscal years ended September 30, 1995,
1994 and 1993, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 26, 1996
F-43
<PAGE>
SOMERSET MARRIOTT HOTEL
STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rooms............................................... $10,280,997 9,104,957 9,138,730
Food and beverage................................... 5,249,474 4,816,344 5,100,830
Other operating departments......................... 802,637 682,877 668,821
----------- ---------- ----------
16,333,108 14,604,178 14,908,381
----------- ---------- ----------
Operating costs and expenses:
Rooms............................................... 2,766,075 2,552,776 2,425,536
Food and beverage................................... 4,241,806 4,041,375 4,136,987
Other operating departments......................... 239,993 292,510 332,098
Undistributed operating expenses:
Administrative and general.......................... 1,622,395 1,647,152 1,723,724
Sales and marketing................................. 1,075,845 852,599 1,034,166
Management fees..................................... 710,174 640,793 648,515
Property operating costs............................ 1,498,497 1,586,722 1,794,374
Property taxes, insurance and other................. 637,759 566,615 753,345
Depreciation and amortization....................... 1,519,441 1,531,226 1,541,746
Interest expense.................................... 1,753,095 1,828,501 1,857,388
Impairment of long lived assets..................... -- -- 2,007,000
----------- ---------- ----------
16,065,080 15,540,269 18,254,879
----------- ---------- ----------
Net income (loss)..................................... $ 268,028 (936,091) (3,346,498)
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
SOMERSET MARRIOTT HOTEL
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 268,028 (936,091) (3,346,498)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 1,519,441 1,531,226 1,541,746
Decrease (increase) in accounts receivable....... 8,484 413,140 (510,947)
Decrease (increase) in intercompany receivable... (47,684) 3,565,876 7,118,692
Decrease (increase) in other assets.............. 36,364 252,389 (182,467)
Impairment of long lived assets.................. -- -- 2,007,000
Decrease in accounts payable..................... (62,243) (4,073,542) (4,498,773)
Increase in interest payable..................... 2,023 4,226 2,000
----------- ---------- ----------
Net cash provided by operating activities.............. 1,724,413 757,224 2,130,753
----------- ---------- ----------
Cash flows from investing activities--acquisition of
furniture, fixtures and equipment...................... (2,092,043) (1,528,971) (309,311)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from notes payable.......................... -- 242,628 --
Principal payments on notes payable.................. (170,249) -- (92,260)
Principal repayments on capital leases............... (45,693) -- --
----------- ---------- ----------
Net cash provided (used) by financing activities....... (215,942) 242,628 (92,260)
----------- ---------- ----------
Net increase (decrease) in cash........................ (583,572) (529,119) 1,729,182
Cash at beginning of period............................ 1,187,792 1,716,911 (12,271)
----------- ---------- ----------
Cash at end of period.................................. $ 604,220 1,187,792 1,716,911
----------- ---------- ----------
----------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest............................... $ 1,751,072 1,824,275 1,855,388
Additions to capital lease obligations............... -- 363,872 --
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
SOMERSET MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(1) ORGANIZATION
The Somerset Marriott Hotel (the "Hotel") is centrally located in Somerset,
New Jersey, about 25 miles from the Newark Airport. The Hotel has 434 rooms,
fine dining in Allie's restaurant, meeting and banquet facilities, an
indoor/outdoor pool, business center, exercise room and volleyball courts.
The Hotel was owned by MRI Business Properties Fund, Ltd., II ("MRI") until
it was sold on October 3, 1995 to EquiStar for a purchase price of $24,950,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of MRI. The
accompanying statements of operations and cash flows include the accounts of the
Hotel only, as if it were a separate legal entity, and have been prepared using
the accrual basis of accounting.
Depreciation
Depreciation is computed on the cost of hotel property and equipment using
the straight-line method over 23 to 39 years for the building and building
improvements and over five to seven years for furniture, fixtures and equipment.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivables and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities are passed through to the individual partners in accordance with the
partnership agreement and the Internal Revenue Code.
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) INTEREST EXPENSE
Private investors provided financing for the Hotel and improvements through
two separate loans made on September 26, 1985 and August 26, 1988. Both notes
had a fixed interest rate of 8.25%. Principal and interest payments were due
monthly. Marriott provided the Hotel with a renovation loan
F-46
<PAGE>
SOMERSET MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) INTEREST EXPENSE--(CONTINUED)
on October 24, 1990 for $650,000 bearing interest at 8.00% with interest
payments due monthly. All notes were repaid when the Hotel was purchased by
EquiStar on October 5, 1995.
(4) PROVISIONS FOR IMPAIRMENT OF VALUE
Due to the deterioration of the economic market in Somerset, New Jersey and
projected future operational cash flows, recovery of the carrying value of the
Hotel was not likely and a provision for impairment of value of $2,007,000 was
recognized in 1993.
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Charlotte Sheraton Airport Plaza (the "Hotel") for the period from January
1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors,
L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the Hotel's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Charlotte Sheraton Airport Plaza's
operations and its cash flows for the period from January 1, 1996 to February 2,
1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
March 29, 1996
F-48
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rooms........................................ $404,646 4,353,741 4,279,608 3,764,540
Food and beverage............................ 330,471 3,136,701 2,698,709 2,625,091
Other operating departments.................. 21,096 609,342 861,007 779,557
-------- --------- ---------- ---------
756,213 8,099,784 7,839,324 7,169,188
-------- --------- ---------- ---------
Operating costs and expenses:
Rooms........................................ 111,163 1,067,053 1,151,114 976,178
Food and beverage............................ 258,901 2,101,504 1,906,329 1,854,924
Other operating departments.................. 13,740 114,588 82,500 80,354
Undistributed operating expenses:
Administrative and general................... 73,487 375,920 263,728 254,309
Sales and marketing.......................... 90,546 922,890 927,186 863,274
Management fees.............................. 22,497 269,689 391,966 358,459
Property operating costs..................... 67,286 618,771 556,634 519,500
Property taxes, insurance and other.......... 41,126 425,563 404,523 356,690
Depreciation and amortization................ 49,600 595,522 603,543 587,150
Interest expense............................. -- 689,563 3,378,933 1,466,088
-------- --------- ---------- ---------
728,346 7,181,063 9,666,456 7,316,926
-------- --------- ---------- ---------
Net income (loss).............................. $ 27,867 918,721 (1,827,132) (147,738)
-------- --------- ---------- ---------
-------- --------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 27,867 918,721 (1,827,132) (147,738)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization........... 49,600 595,522 603,543 587,150
Decrease (increase) in accounts
receivable.................................... 70,128 (86,461) (45,518) (44,970)
Increase in intercompany receivable..... (450,000) (1,444,939) (1,937,634) (263,645)
Decrease (increase) in other assets..... 50,127 87,415 (5,447) 40,469
Increase (decrease) in accounts payable
and accrued expenses.......................... (80,687) 165,657 193,488 75,714
Increase in interest payable............ -- 689,563 3,378,346 92,000
-------- ---------- ---------- ---------
Net cash provided (used) by operating
activities.................................... (332,965) 925,478 359,646 338,980
-------- ---------- ---------- ---------
Cash flows from investing
activities--purchases of furniture, fixtures
and equipment................................. (57,124) (257,302) (346,957) (133,901)
-------- ---------- ---------- ---------
Cash flows from financing
activities--principal payments on note
payable....................................... -- -- -- (203,839)
-------- ---------- ---------- ---------
Net increase (decrease) in cash............... (390,089) 668,176 12,689 1,240
Cash at beginning of period................... 712,894 44,718 32,029 30,789
-------- ---------- ---------- ---------
Cash at end of period......................... 322,805 712,894 44,718 32,029
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
Supplemental disclosure of cash flow
information:
Cash paid for interest...................... $ -- -- 587 1,374,088
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(1) ORGANIZATION
The Charlotte Sheraton Airport Plaza (the "Hotel") is a 226 room,
full-service hotel located near the Charlotte Douglas International Airport. The
Hotel was constructed in 1985.
The Hotel was owned by Krisch Realty Associates, L.P. ("Krisch Realty")
during 1993, 1994 and through March 7, 1995, when it was conveyed to the lender.
The Hotel was sold on February 2, 1996 to EquiStar for a purchase price of
$18,000,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of Krisch
Realty, which owned the Hotel until it was conveyed to the lender. The
accompanying statements of operations and cash flows include the accounts of the
Hotel only, as if it were a separate legal entity, and have been prepared on the
accrual basis of accounting.
Depreciation
Depreciation is computed on the cost of hotel property and equipment using
the straight-line method over 45 years for the building, 10 years for most
building improvements, and five to eight years for furniture, fixtures and
equipment.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivables and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the hotel and
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities are passed through to the individual partners in accordance with the
Partnership Agreement and the Internal Revenue Code.
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
F-51
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) INTEREST EXPENSE
For the period from January 1, 1995 to February 2, 1995, and during 1994 and
1993, financing for the Hotel was provided through a two-tier loan. The first
tier loan, which had an original principal balance of $12,523,925, had an
interest rate of prime plus 1%. Principal and interest payments on the first
tier loan were due monthly. The second tier loan, which had an original
principal balance of $7,444,062, required interest payments based on the Hotel's
cash flow.
During January 1994, the owner ceased making payments on the loan and the
loan went into default. From that point, the first and second tiers of the loan
accrued interest at the default rate of 16% until March 7, 1995, when the Hotel
was conveyed to the lender.
(4) OTHER RELATED-PARTY TRANSACTIONS
Krisch Hotels, Inc. ("Krisch"), an affiliate of the Hotel's owner, managed
the Hotel until March 7, 1995, and charged the Hotel base management fees of 3%
of gross revenues. The Hotel management agreement also provided for incentive
management fees to be paid to Krisch of 10% of net operating income, as defined
in the agreement. After March 7, 1995, the Hotel incurred only base management
fees of 3% of gross revenues. For the period from January 1, 1996 to February 2,
1996, and for 1995, 1994 and 1993, base and incentive management fees incurred
by the Hotel totaled $22,497, $269,689, $391,966 and $358,459, respectively.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying combined statements of income and cash
flows of the Cleveland Holiday Inn and Affiliate for the period from January 1,
1996 to February 16, 1996 (date of Acquisition by EquiStar Hotel, Investors,
L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Cleveland
Holiday Inn and Affiliate's operations and their cash flows for the period from
January 1, 1996 to February 16, 1996 and the years ended December 31, 1995, 1994
and 1993, in conformity with generally accepted accounting principles.
Bober, Markey & Company
Akron, Ohio
April 30, 1996
F-53
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE
COMBINED STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Rooms..................................... $474,517 $4,209,885 $3,940,430 $3,588,454
Food and beverage......................... 274,472 2,559,215 2,435,422 2,280,071
Other operating departments............... 40,419 246,911 209,456 205,464
-------- ---------- ---------- ----------
789,408 7,016,011 6,585,308 6,073,989
Cost of sales
Rooms..................................... 158,211 1,122,963 1,064,500 949,018
Food and beverage......................... 237,095 2,055,813 1,964,550 1,803,837
Other operating departments............... 44,467 59,012 57,080 59,001
-------- ---------- ---------- ----------
439,773 3,237,788 3,086,130 2,811,856
-------- ---------- ---------- ----------
Operating income............................ 349,635 3,778,223 3,499,178 3,262,133
Other expenses
Selling, general and administrative
expenses.................................... 281,426 2,142,371 2,001,877 1,860,957
Interest.................................. 51,005 347,276 364,500 380,044
Depreciation and amortization............. 39,621 321,859 247,377 272,176
Management fees--related entity 47,060 421,554 382,604 353,763
-------- ---------- ---------- ----------
419,112 3,233,060 2,996,358 2,866,940
-------- ---------- ---------- ----------
Net income (loss)........................... $(69,477) $ 545,163 $ 502,820 $ 395,193
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................. $ (69,477) $ 545,163 $ 502,820 $ 395,193
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities
Depreciation and amortization............. 39,621 321,859 247,377 272,176
Gain (loss) on equipment disposal......... (235) 35,961 33,202 6,248
Decrease (increase) in accounts
receivable...................................... 30,835 (39,803) (34,335) (4,105)
Decrease (increase) in accounts
receivable-- affiliates................. -- 1,542 (1,222) (53,624)
Decrease (increase) in other assets....... 5,868 (4,087) (4,499) 4,038
Increase (decrease) in accounts payable
and accrued expenses.................... (49,238) 161,865 33,007 (130,830)
Increase (decrease) in advances from
related entities........................ -- 266,500 (9,350) (2,211)
--------- ---------- --------- ---------
Net cash provided (used) by operating
activities...................................... (42,626) 1,289,000 767,000 486,885
Cash flows from investing activities
Cash payments for the purchase of property,
plant and equipment............................. (2,836) (680,006) (273,411) (76,419)
Cash proceeds on sale of property, plant and
equipment....................................... 4,242 1,100 4,530 2,965
Payment of franchise fee...................... -- (71,100) -- --
--------- ---------- --------- ---------
Net cash provided (used) by investing
activities...................................... 1,406 (750,006) (268,881) (73,454)
Cash flows from financing activities
Principal payments on long-term debt.......... (37,788) (473,718) (217,981) (199,257)
Issuance of note payable-related party........ -- 75,000 -- --
Capital distributions......................... (24,000) (144,000) (243,000) (204,000)
(Decrease) increase in escrowed funds......... -- 8,652 (2,871) 642
--------- ---------- --------- ---------
Net cash used by financing activities........... (61,788) (534,066) (463,852) (402,615)
--------- ---------- --------- ---------
Net increase (decrease) in cash................. (103,008) 4,928 34,267 10,816
Cash at beginning of year....................... 336,806 331,878 297,611 286,795
--------- ---------- --------- ---------
Cash at end of year............................. $ 233,798 $ 336,806 $ 331,878 $ 297,611
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Supplemental disclosure of cash flow information
Interest paid................................. $ 45,610 $ 348,276 $ 361,786 $ 379,664
Income taxes paid............................. $ 239 $ 2,385 $ 1,850 $ 3,168
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(1) ORGANIZATION
The Company is engaged in the operation of a hotel in Middleburg Heights,
Ohio, which is located in close proximity to the Cleveland Hopkins International
Airport. The hotel was opened in June, 1978. The hotel has 242 rooms, a cocktail
lounge, restaurant, sauna, pool and approximately 13,800 square feet of meeting
space.
Bagley Road Properties (a division of Rockside Properties) is a Partnership
which held the assets of the Cleveland Holiday Inn until substantially all of
the Company's assets were sold to EquiStar Hotel Investors, L.P. (EquiStar) for
a purchase price of $9,183,249 on February 16, 1996.
The hotel and restaurant operations are reflected within Bagley Road
Operating Corporation, an S-corporation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include the accounts of
Bagley Road Operating Corporation and Bagley Road Properties (a division of
Rockside Properties), as they are under common control and collectively
represent the Cleveland Holiday Inn. For purposes of these financial statements,
the entities are collectively referred to as the "Cleveland Holiday Inn and
Affiliate" and/or the "Company".
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
Depreciation
Depreciation is computed for financial reporting purposes using the cost of
the property and equipment using the straight line method over 19 to 40 years
for the building and building improvements and over 5 to 10 years for the
furniture, fixtures and equipment.
Bad Debt Expense
Management reviews accounts receivable on a regular basis for any
potentially uncollectible accounts. The uncollectible accounts are directly
written off, as deemed necessary.
Revenue Recognition
Revenue is earned primarily through the operations of the hotel and is
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Company's property is maintained in a partnership which is not subject to
federal income taxes. Instead, its earnings and losses are passed though to the
individual partners in accordance with the partnership agreement and the
Internal Revenue Code. In addition, the Company's operations are maintained in
an S-corporation and therefore, the income is also taxed at the shareholder
level.
F-56
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) INTEREST EXPENSE
On July 22, 1976, the Company obtained financing from a real estate
investment corporation. The mortgage has a fixed interest rate of 10.25%, with
principal and interest payments due monthly. The principal balance was
$2,641,541, $2,679,329, $2,893,047, and $3,086,028 as of February 16, 1996 and
December 31, 1995, 1994 and 1993, respectively. The loan requires additional
interest payments equal to 1% of the year's gross room revenue. The note is
scheduled to mature October, 2003.
On May 18, 1995, the Company obtained financing of $75,000 from a related
party. Interest is being accrued at the applicable federal rates (5.65% at
December 31, 1995).
On various dates, the Company obtained financing from a bank. The principal,
was $50,000, $50,000, $75,000 and $85,000, as of February 16, 1996, and December
31, 1995, 1994 and 1993, respectively, is due on demand and the interest is
payable monthly at prime plus 1% (9.5% at December 31, 1995).
All of the financing notes above were paid off subsequent to the date of
sale of the hotel to EquiStar Hotel Investors, L.P.
(4) RELATED-PARTY TRANSACTIONS
The hotel and restaurant operations are managed by a related entity. The
Management Agreement provides for payment of a management fee of approximately
six percent of room rentals, restaurant and bar receipts. Management fees
totaled $47,060, $421,554, $382,604, and $353,763 for the period from January 1,
1996 to February 16, 1996 and for the years 1995, 1994 and 1993, respectively.
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Arlington Hilton Hotel (the "Hotel") for the period from January 1, 1996 to
April 17, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Hotel's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Arlington Hilton Hotel's operations
and its cash flows for the period from January 1, 1996 to April 17, 1996 and the
years ended December 31, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
July 18, 1996
F-58
<PAGE>
ARLINGTON HILTON HOTEL
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rooms....................................... $1,907,168 6,309,256 5,875,281 5,453,149
Food and beverage........................... 824,816 2,846,102 2,755,550 2,708,330
Other operating departments................. 195,137 639,420 505,739 553,640
---------- --------- --------- ---------
2,927,121 9,794,778 9,136,570 8,715,119
---------- --------- --------- ---------
Operating costs and expenses:
Rooms....................................... 420,844 1,526,054 1,361,027 1,342,080
Food and beverage........................... 654,451 2,225,510 2,072,864 2,137,821
Other operating departments................. 115,854 351,577 301,793 276,276
Undistributed operating expenses:
Administrative and general.................. 250,896 1,044,680 1,347,488 1,252,493
Sales and marketing......................... 195,671 646,496 510,261 501,991
Management fees............................. 87,814 313,579 90,998 86,165
Property operating costs.................... 296,643 1,004,445 871,365 1,006,770
Property taxes, insurance and other......... 160,884 645,504 479,755 475,144
Depreciation and amortization............... 242,528 823,414 794,256 794,600
Interest expense............................ -- 257,494 927,325 337,114
---------- --------- --------- ---------
2,425,585 8,838,753 8,757,132 8,210,454
---------- --------- --------- ---------
Net income.................................... $ 501,536 956,025 379,438 504,665
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
ARLINGTON HILTON HOTEL
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 501,536 956,025 379,438 504,665
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization......... 242,528 823,414 794,256 794,600
Interest added to loan payable to
General Partner............................. -- -- 18,777 13,482
Decrease (increase) in accounts
receivable.................................. (107,923) 41,059 (9,969) 47,634
Decrease (increase) in inventory and
other assets................................ (90,676) 110,942 (17,697) 6,803
Decrease (increase) in restricted
funds....................................... -- 215,868 477,431 (44,462)
Increase (decrease) in accounts
payable and accrued expenses........ 120,770 (1,027,915) 284,120 231,758
---------- ---------- --------- ----------
Total adjustments......................... 164,699 163,368 1,546,918 1,049,815
---------- ---------- --------- ----------
Net cash provided by operating activities... 666,235 1,119,393 1,926,356 1,554,480
---------- ---------- --------- ----------
Cash flows used by investing activities--
purchase of furniture and equipment......... (15,499) (660,359) (232,583) (178,368)
---------- ---------- --------- ----------
Cash flows from financing activities:
Principal payments on capital lease
obligations................................. (13,442) (41,262) (36,415) (27,314)
Repayments of note payable................ -- -- (357,390) (1,532,401)
Capital distribution...................... -- (1,232,055) -- --
---------- ---------- --------- ----------
Net cash used by financing activities....... (13,442) (1,273,317) (393,805) (1,559,715)
---------- ---------- --------- ----------
Net increase (decrease) in cash and cash
equivalents................................. 637,294 (814,283) 1,299,968 (183,603)
Cash and cash equivalents at beginning of
period...................................... 946,895 1,761,178 461,210 644,813
---------- ---------- --------- ----------
Cash and cash equivalents at end of
period...................................... $1,584,189 946,895 1,761,178 461,210
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Supplemental disclosure of cash flow
information:
Cash paid for interest.................... $ 2,570 13,612 18,459 337,114
Additions to property and equipment
through capital leases...................... -- -- -- 101,765
Conversion of notes payable to equity..... -- 19,338,404 -- --
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
ARLINGTON HILTON HOTEL
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996 (DATE OF ACQUISITION BY
EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND
1993
(1) ORGANIZATION
The Arlington Hilton Hotel (the "Hotel") is located near the Dallas/Fort
Worth Airport, adjacent to Six Flags over Texas theme park. The Hotel opened in
1984. The Hotel has 310 rooms, one restaurant, one nightclub/bar, meeting
facilities for up to 400, a business center, an indoor/outdoor pool and a
fitness center.
Until March 7, 1995, the Hotel was owned by Hotel Associates of Arlington
Limited Partnership ("Hotel Associates"). On March 7, 1995, the Hotel was
conveyed through bankruptcy to the holders of the note, Arlington Hotel
Investors, LTD ("Arlington Investors").
The Hotel was sold on April 17, 1996 to EquiStar for a purchase price of
$18,200,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of its
various owners until the Hotel was sold to EquiStar. The accompanying statements
of operations and cash flows include the accounts of the Hotel only, as if it
were a separate legal entity, and have been prepared using the accrual basis of
accounting.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivables and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities were passed through to the individual partners in accordance with
the partnership agreement and the Internal Revenue Code.
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Depreciation
Depreciation is computed on the cost of the hotel property and equipment
using the straight-line method over 25 years for building and building
improvements, and five years for furniture and equipment.
F-61
<PAGE>
ARLINGTON HILTON HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) RELATED-PARTY TRANSACTIONS
Prior to March 7, 1995 (the date the lenders took possession of the Hotel),
the Hotel was managed by Capitol Hotel Group, Inc. ("CHG"), an affiliate of the
owners, for a 1% management fee based on gross revenues. For the period from
March 7, 1995 through April 17, 1996 (date of acquisition by EquiStar), the
Hotel was managed by DePalma Hotel Corporation, an affiliate of the lenders, for
a 3% management fee based on gross revenues.
Upon foreclosure on the property, the loan and all related accrued interest
payable to the general partner of Hotel Associates was converted to equity in
the statement of partners' capital.
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Salt Lake Airport Hilton (the "Hotel") for the period from January 1, 1995
to March 3, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1994 and 1993. These financial statements are the
responsibility of the Hotel's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Salt Lake Airport Hilton's
operations and its cash flows for the period from January 1, 1995 to March 3,
1995 and the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 19, 1996
F-63
<PAGE>
SALT LAKE AIRPORT HILTON
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Rooms.................................................. $ 890,777 4,992,835 4,371,476
Food and beverage...................................... 299,340 1,922,403 1,652,443
Other operating departments............................ 56,364 261,667 259,080
---------- --------- ---------
1,246,481 7,176,905 6,282,999
---------- --------- ---------
Operating costs and expenses:
Rooms.................................................. 287,299 1,932,546 1,359,691
Food and beverage...................................... 274,434 1,346,960 1,366,367
Other operating departments............................ 43,230 224,564 152,836
Undistributed operating expenses:
Administrative and general............................. 153,391 991,058 801,238
Sales and marketing.................................... 76,761 350,199 330,216
Property operating costs............................... 108,327 745,650 915,665
Property taxes, insurance and other.................... 30,112 324,944 325,044
Depreciation and amortization.......................... 104,996 630,200 528,089
Interest Expense....................................... 176,766 1,597,597 1,226,162
---------- --------- ---------
1,255,316 8,143,718 7,005,308
---------- --------- ---------
Net loss................................................. $ (8,835) (966,813) (722,309)
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE>
SALT LAKE AIRPORT HILTON
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (8,835) (966,813) (722,309)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization........................ 104,996 630,200 528,089
Decrease (increase) in accounts receivable........... 57,808 (176,471) 204,118
Decrease (increase) in inventory and other assets.... 5,100 233,040 (144,857)
Increase (decrease) in accounts payable and accrued
expenses................................................... 144,597 84,908 (36,031)
Increase in interest payable......................... -- 510,270 40,010
-------- --------- ---------
Net cash provided (used) by operating activities........... 303,666 315,134 (130,980)
-------- --------- ---------
Cash flows from investing activities--purchases of
furniture, fixtures and equipment........................ (5,530) (914,264) (117,908)
-------- --------- ---------
Cash flows from financing activities:
Repayments of notes payable.............................. (4,316) (764,498) (394,450)
Proceeds from mortgage loans and notes payable........... -- 1,182,000 541,344
Capital contributions.................................... -- 225,463 --
Increase (decrease) in bank overdrafts................... (68,085) (43,835) 101,994
-------- --------- ---------
Net cash flows provided (used) by financing activities..... (72,401) 599,130 248,888
-------- --------- ---------
Net increase in cash....................................... 225,735 -- --
Cash at beginning of period................................ -- -- --
-------- --------- ---------
Cash at end of period...................................... $225,735 -- --
-------- --------- ---------
-------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $176,766 1,087,327 1,186,152
-------- --------- ---------
-------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
SALT LAKE AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(1) ORGANIZATION
The Salt Lake Airport Hilton (the "Hotel") is a full service hotel located
near the Salt Lake City International Airport. The hotel has 287 rooms,
complimentary shuttle service to and from the airport, indoor and outdoor pools,
a fitness room, outdoor putting green and an outdoor sports court. The Hotel was
constructed in two phases. The first phase was constructed in 1980 and consists
of public areas including a conference center, recreational amenities and guest
rooms on a three level portion of the structure known as the low-rise. In 1984,
99 rooms were added with the construction of the high-rise section of the Hotel.
For the period from January 1, 1995 through March 3, 1995 and for the years
ended December 31, 1994 and 1993, the Hotel was owned by Airport Hilton
Ventures, L.P., a limited partnership ("Airport Ventures"). The Hotel was sold
on March 3, 1995 to EquiStar for a purchase price of $14,350,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of Airport
Ventures. The accompanying statements of operations and cash flows include the
accounts of the Hotel only, as if it were a separate legal entity, and have been
prepared using the accrual basis of accounting.
Depreciation
Depreciation is computed on the cost of the Hotel property and equipment
using the straight-line method over 40 years for the building, over 15 years for
building improvements and over five years for furniture, fixtures and equipment.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and is
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities were passed through to the individual partners in accordance with
the partnership agreement and the Internal Revenue Code.
F-66
<PAGE>
SALT LAKE AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) INTEREST EXPENSE
The Hotel had mortgage loans payable to two lenders of approximately
$5,400,000 and $4,200,000 through March 3, 1995. The loans required
interest-only payments monthly and had fixed interest rates of 9% and 10%,
respectively.
The Hotel also had notes payable outstanding with various third parties and
affiliates. Total amounts outstanding on these notes payable ranged from
approximately $2,958,000 to approximately $3,486,000 from January 1, 1993 to
March 3, 1995. During the same period, interest rates on these notes ranged from
7% to 10%. Included in notes payable from January 1, 1993 to March 3, 1995 was a
note payable to the Boyer Company, an affiliate of the Hotel. During this
period, the amount outstanding on this note ranged from approximately $470,000
to approximately $1,652,000 and the interest rate ranged from 7% to 8.25%.
F-67
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying balance sheets of Ballston Hotel Limited
Partnership (the "Partnership") as of June 30, 1996 and December 31, 1995 and
1994, and the related statements of operations, partners' deficit, and cash
flows for the six months ended June 30, 1996 and for the years ended December
31, 1995, 1994 and 1993. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ballston Hotel Limited
Partnership as of June 30, 1996 and December 31, 1995 and 1994, and the results
of its operations and its cash flows for the six months ended June 30, 1996 and
for the years ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in note 4 to the
financial statements, the Partnership's note payable to a financial institution
is in default and may be called at any time. This raises substantial doubt about
the Partnership's ability to continue as a going concern. Management's plans in
regard to this matter are also described in note 4. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
Washington, D.C.
July 11, 1996
F-68
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 271,215 501,433 98,904
Certificate of deposit................................ -- 101,833 250,000
Hotel inventory, at cost.............................. 37,481 51,635 52,794
Accounts receivable:
Trade............................................... 293,251 174,833 369,961
Affiliates (note 6)................................. -- -- 757,624
----------- ---------- ----------
Total accounts receivable, net........................ 293,251 174,833 1,127,585
----------- ---------- ----------
Hotel property (notes 4 and 7):
Land................................................ 2,073,323 2,073,323 2,073,323
Building, net of accumulated depreciation of
$2,192,347 in 1996, $2,029,714 in 1995 and
$1,704,449 in 1994.................................... 10,818,285 10,980,918 11,306,183
Furniture, fixtures and equipment, net of
accumulated depreciation of $1,163,947 in 1996,
$1,060,156 in 1995 and $854,609 in 1994........... 1,889,117 1,983,728 1,742,714
Initial hotel supplies, net of accumulated
amortization of $197,924 in 1996, $183,187 in 1995
and $153,713 in 1994.............................. 244,189 258,926 288,400
Conversion costs, net of accumulated amortization of
$107,181 in 1996, $98,491 in 1995 and $81,111 in
1994.................................................. 153,533 162,223 179,603
----------- ---------- ----------
Total hotel property.................................. 15,178,447 15,459,118 15,590,223
Investment in partnership (note 5).................... 2,189,989 2,259,061 2,332,760
Other Assets.......................................... 77,609 131,409 144,842
----------- ---------- ----------
$18,047,992 18,679,322 19,597,108
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses:
Affiliates (note 6)................................. $ 2,283,784 2,163,011 1,855,114
Trade............................................... 473,641 338,665 340,846
----------- ---------- ----------
Total accounts payable and accrued expenses........... 2,757,425 2,501,676 2,195,960
Notes payable (notes 4 and 6):
Financial institution............................... 17,079,121 17,079,121 17,201,202
Affiliates.......................................... 1,468,891 2,437,377 3,340,277
----------- ---------- ----------
Total notes payable................................... 18,548,012 19,516,498 20,541,479
----------- ---------- ----------
Total liabilities..................................... 21,305,437 22,018,174 22,737,439
Partners' deficit (note 3)............................ (3,257,445) (3,338,852) (3,140,331)
----------- ---------- ----------
Commitments (notes 4 and 7)...........................
$18,047,992 18,679,322 19,597,108
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Hotel operating revenue:
Room rental................................. $3,173,738 5,820,170 5,408,935 5,116,700
Food and beverage sales..................... 950,778 2,000,110 2,045,750 1,792,965
Telephone and other......................... 128,037 303,194 260,190 269,030
---------- --------- --------- ---------
Total hotel operating revenue................. 4,252,553 8,123,474 7,714,875 7,178,695
---------- --------- --------- ---------
Hotel operating expenses:
Department expenses......................... 1,538,843 3,140,757 3,100,077 2,810,690
Energy and engineering...................... 351,538 602,512 574,578 518,924
Sales and marketing......................... 327,356 659,284 604,457 629,567
General and administrative (note 6)......... 458,119 981,849 927,024 907,215
Management fee (note 7)..................... 127,547 243,704 231,446 215,359
Other....................................... 99,892 138,551 84,534 66,640
---------- --------- --------- ---------
Total hotel operating expenses................ 2,903,295 5,766,657 5,522,116 5,148,395
---------- --------- --------- ---------
Income from hotel operations.................. 1,349,258 2,356,817 2,192,759 2,030,300
---------- --------- --------- ---------
Fixed charges:
Financial costs (note 6).................... 739,867 1,571,261 1,438,463 1,327,641
Depreciation and amortization............... 290,467 611,645 700,566 723,020
Property insurance and taxes................ 146,248 266,115 249,394 251,608
Parking costs............................... 42,733 99,093 103,057 106,833
---------- --------- --------- ---------
Total fixed charges........................... 1,219,315 2,548,114 2,491,480 2,409,102
---------- --------- --------- ---------
Other income (expense):
Interest income............................. 8,153 40,169 15,010 12,228
Equity in income of partnership (note 5).... 15,355 36,510 41,105 31,309
Other....................................... (72,044) (83,903) (6,908) (80)
---------- --------- --------- ---------
Total other income (expense), net............. (48,536) (7,224) 49,207 43,457
---------- --------- --------- ---------
Net income (loss)............................. $ 81,407 (198,521) (249,514) (335,345)
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNER PARTNERS
----------- ------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992............................. $(2,555,472) (46,288) (2,509,184)
Net loss............................................... (335,345) (3,353) (331,992)
----------- ------- ----------
Balance at December 31, 1993............................. $(2,890,817) (49,641) (2,841,176)
Net loss............................................... (249,514) (2,495) (247,019)
----------- ------- ----------
Balance at December 31, 1994............................. $(3,140,331) (52,136) (3,088,195)
Net loss............................................... (198,521) (1,985) (196,536)
----------- ------- ----------
Balance at December 31, 1995............................. $(3,338,852) (54,121) (3,284,731)
Net income............................................. 81,407 8,141 73,266
----------- ------- ----------
Balance at June 30, 1996................................. $(3,257,445) (45,980) (3,211,465)
----------- ------- ----------
----------- ------- ----------
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ 81,407 (198,521) (249,514) (335,345)
Adjustments to reconcile net income (loss) to
cash provided (used) by operating
activities:
Depreciation and amortization............ 290,467 611,645 700,566 723,020
Increase (decrease) in provision for
doubtful accounts.............................. 397 (8,072) 11,323 (1,375)
Decrease in certificates of deposit...... 101,833 148,167 -- --
Equity in income of partnership.......... (15,355) (36,510) (41,105) (31,309)
Decrease (increase) in accounts
receivable..................................... (118,815) 960,824 (789,828) (87,582)
Decrease (increase) in hotel inventory... 14,154 1,159 (930) (9,997)
Decrease (increase) in other assets...... 53,800 (20,258) (58,614) 42,031
Increase in accounts payable and accrued
expenses....................................... 255,749 305,716 375,580 320,816
--------- ---------- --------- ---------
Total adjustments............................ 582,230 1,962,671 196,992 955,604
--------- ---------- --------- ---------
Net cash provided (used) by operating
activities..................................... 663,637 1,764,150 (52,522) 620,259
--------- ---------- --------- ---------
Cash flows from investing activities:
Additions to hotel property.................. (9,796) (446,849) (133,901) (195,323)
Distributions from investee partnership...... 84,427 110,209 120,694 204,761
--------- ---------- --------- ---------
Net cash provided (used) by investing
activities..................................... 74,631 (336,640) (13,207) 9,438
--------- ---------- --------- ---------
Cash flows from financing activities:
Principal payments on notes payable.......... (968,486) (1,024,981) (110,072) (818,644)
Borrowings on notes payable.................. -- -- -- 20,000
--------- ---------- --------- ---------
Net cash used by financing activities.......... (968,486) (1,024,981) (110,072) (798,644)
--------- ---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (230,218) 402,529 (175,801) (168,947)
Cash and cash equivalents at beginning of
period......................................... 501,433 98,904 274,705 443,652
--------- ---------- --------- ---------
Cash and cash equivalents at end of period..... $ 271,215 501,433 98,904 274,705
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Supplemental disclosure of cash flow
information:
Cash paid for interest....................... $ 619,094 1,263,364 1,135,123 1,120,853
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(1) ORGANIZATION
Ballston Hotel Limited Partnership (the "Partnership") was formed on January
1, 1988 pursuant to the Commonwealth of Virginia Uniform Limited Partnership
Act. The principal business activity of the Partnership is the development and
operation of a hotel complex as part of the mixed-use Ballston Metro Center
project (the "Project") located in Arlington, Virginia. Ballston Condo Limited
Partnership ("BCLP") and Ballston Office Limited Partnership ("BOLP"),
affiliates of the Partnership, constructed the condominium and office building
components of the Project, respectively.
The hotel opened on October 5, 1989 and operated as the Arlington
Renaissance Hotel at Ballston Metro Center (the "Hotel"). Management intends to
operate the hotel under a franchise agreement with Hilton Hotels Corporation to
be entered into in August 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Records and Income Taxes
The Partnership maintains its accounting records on the accrual basis for
both financial statement and federal income tax reporting purposes. Federal and
state income taxes accrue to the individual partners; accordingly, no federal
and state income taxes have been provided in the accompanying financial
statements.
Building and Land
Contributed land is recorded at the fair value at the date of contribution
as agreed to by the partners. Purchased land and building costs are recorded at
cost. The building is depreciated over 40 years using the straight-line method.
Hotel Furniture, Fixtures and Equipment
Hotel furniture, fixtures and equipment are recorded at cost and are
depreciated over their estimated useful lives using the straight-line method.
Initial Hotel Supplies
Initial hotel supplies required for the Hotel's operations, such as linens,
china, silverware and other expendable supplies, are recorded at cost and are
being amortized over 15 years using the straight-line method. Additional
purchases of linens, china, silverware and other expendable supplies are
expensed when purchased.
Conversion Costs
Conversion costs were incurred to convert the Ramada Hotel into a
Renaissance Hotel. These costs are recorded at cost and are being amortized over
15 years using the straight-line method.
Investment in Partnership
Investment in partnership is accounted for under the equity method.
Accordingly, the investment is stated at cost and adjusted for the Partnership's
share of earnings or loss and distributions of the investee partnership.
F-73
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash Equivalents
For financial statement purposes, the Partnership considers investments with
an original maturity date of three months or less to be cash equivalents.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosures of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
(3) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES
All profits and losses are allocated in proportion to each partner's
respective percentage interest in the Partnership as follows:
<TABLE>
<S> <C>
General partner..................................................... 1.0%
Limited partners.................................................... 99.0
-----
100.0%
-----
-----
</TABLE>
(4) NOTES PAYABLE
Notes payable at June 30, 1996 and December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Financial institution--prime rate plus 1% or a
LIBOR/CD rate option note, secured by a first deed
of trust on land and improvements of hotel complex
and the shared improvements of the condominium
constructed by BCLP and an assignment of existing
and future revenue derived from the collateral;
interest only payable monthly, principal payable
annually, based on 30-year amortization, with
remaining principal and interest due October 5,
1995................................................ $17,079,121 17,079,121 17,201,202
Limited partner--prime rate plus 2% unsecured
note................................................ 1,468,891 2,437,377 3,340,277
----------- ----------- -----------
$18,548,012 19,516,498 20,541,479
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Ballston Hotel, Inc., the general partner, and IDI, L.C. (formerly IDI
Associates), IDI Financial Associates and Ballston Realty, Inc., affiliates of
the Partnership, jointly and severally guarantee the financial institution note
payable.
The note payable to the financial institution, which matured on October 5,
1995, is in default. The Partnership has been unable thus far to refinance the
note but continues to make the regular monthly interest payments.
Given the status of the note payable with the financial institution and the
nature of the terms of the note payable to the limited partner, management is
unable to determine the fair value of the notes payable.
F-74
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PARTNERSHIP
Financial Statement Summary
The following is a summary of the assets, liabilities and equity of the
unconsolidated partnership, Ballston Parking Associates ("BPA") as of June 30,
1996 and December 31, 1995 and 1994, and the
results of its operations for the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993. The unconsolidated partnership was
formed primarily to operate the hotel and office building parking garage of the
Project. The Partnership's interest in the unconsolidated partnership was
35.02%, 35.48% and 35.60% as of June 30, 1996 and December 31, 1995 and 1994,
respectively. The percentage of the Partnership interest in BPA will decrease in
accordance with BPA's partnership agreement based upon the number of parking
space easements sold.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash................................................... $ 1,267 4,263 3,055
Accounts receivable.................................... 29,250 31,200 27,080
Garage property, net of accumulated depreciation....... 4,125,801 4,224,801 4,359,801
Other assets........................................... 4,521 4,521 4,203
---------- --------- ---------
$4,160,839 4,264,785 4,394,139
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND EQUITY
Total accounts payable and accrued liabilities......... $ -- 6,121 7,000
Equity:
The Partnership...................................... 1,443,210 1,501,136 1,552,543
Other partners....................................... 2,717,629 2,757,528 2,834,596
---------- --------- ---------
$4,160,839 4,264,785 4,394,139
---------- --------- ---------
---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
1996 1995 1994 1993
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Parking revenue...................................... $288,562 538,898 520,479 538,047
Loss on sales of parking spaces...................... (9,080) (7,000) (3,329) (20,149)
-------- ------- ------- -------
Total income......................................... 279,482 531,898 517,150 517,898
Operating expenses................................... 187,642 353,490 333,542 333,149
-------- ------- ------- -------
Net income........................................... $ 91,840 178,408 183,608 184,749
-------- ------- ------- -------
-------- ------- ------- -------
Equity in net income:
The Partnership.................................... $ 26,501 58,802 63,397 53,601
Other partners..................................... 65,339 119,606 120,211 131,148
-------- ------- ------- -------
$ 91,840 178,408 183,608 184,749
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
Note to Condensed Financial Statements
Contributed property is recorded at fair value at the date of contribution
as agreed to by the partners.
F-75
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PARTNERSHIP--(CONTINUED)
Reconciliation of Investment in Partnership and Equity in Income
The following is a reconciliation of the Partnership's investment in
partnership as of June 30, 1996 and December 31, 1995 and 1994 and equity in
income for the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, as indicated above, to the amounts reported in the
accompanying financial statements.
<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME
---------------------------------- -------------------------------------
1996 1995 1994 1996 1995 1994 1993
---------- --------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance per condensed financial
statements.......................... $1,443,210 1,501,136 1,552,543 26,501 58,802 63,397 53,601
Adjustment for costs incurred in
excess of agreed-upon basis in
property............................ 746,779 757,925 780,217 (11,146) (22,292) (22,292) (22,292)
---------- --------- --------- ------- ------- ------- -------
$2,189,989 2,259,061 2,332,760 15,355 36,510 41,105 31,309
---------- --------- --------- ------- ------- ------- -------
---------- --------- --------- ------- ------- ------- -------
</TABLE>
(6) RELATED-PARTY TRANSACTIONS
Interest expense of approximately $121,000 in 1996, $308,000 in 1995,
$303,000 in 1994 and $294,000 in 1993 was incurred on note payable to BCA, L.P.,
the limited partner, and are included in financial costs in the accompanying
financial statements. Accrued interest payable of $2,283,784, $2,163,011 and
$1,855,114 as of June 30, 1996 and December 31, 1995 and 1994, respectively, is
recorded as accounts payable to affiliates in the accompanying financial
statements.
The Partnership entered into an agreement with IDI Management, Inc., an
affiliate of the Partnership, to perform administrative services for the Hotel
effective January 1, 1991. The administrative fee is based on 0.5% of the gross
revenues of the Partnership except for any distributions from BPA related to
parking. The Partnership incurred administrative fees of $21,257 in 1996,
$41,952 in 1995, $39,771 in 1994 and $37,103 in 1993. These fees are included in
general and administrative expenses in the accompanying financial statements.
The Partnership has advanced funds to affiliates. Advances outstanding were
$757,624 at December 31, 1994.
(7) COMMITMENTS
Hotel Management Agreement
The Partnership has entered into a 20-year agreement with Renaissance Hotel
Operating Company ("Renaissance") for the management of the Hotel. The
Partnership has committed to pay the following management fees:
(1) base management fee equal to 3% of the Hotel's gross revenue, as
defined in the agreement, payable monthly;
(2) reservation and advertising fees equal to 4.5% of the Hotel's gross
room revenue, as defined in the agreement, payable monthly; and
(3) incentive management fee equal to 10% of the Hotel's gross operating
profit, as defined in the agreement, earned and payable annually if certain
cash flow requirements are met.
F-76
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS--(CONTINUED)
Base management fees of $127,547 in 1996, $243,704 in 1995, $231,446 in 1994
and $215,359 in 1993 and reservation and advertising fees of $142,818 in 1996,
$261,908 in 1995, $243,402 in 1994 and $230,252 in 1993 were incurred by the
Partnership. No incentive management fees were incurred since none of the cash
flow requirements were met.
F-77
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Bellevue Hilton Hotel (the "Hotel") for the period from January 1, 1995 to
August 4, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1994 and 1993. These financial statements are the
responsibility of the Hotel's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Bellevue Hilton Hotel's operations
and its cash flows for the period from January 1, 1995 to August 4, 1995, and
the years ended December 31, 1994 and 1993 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 5, 1996
F-78
<PAGE>
BELLEVUE HILTON HOTEL
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Rooms.................................................. $2,410,592 3,669,316 3,217,466
Food and beverage...................................... 1,038,893 1,761,230 1,575,901
Other operating departments............................ 173,258 316,254 280,040
---------- --------- ---------
3,622,743 5,746,800 5,073,407
---------- --------- ---------
Operating costs and expenses:
Rooms.................................................. 647,515 1,072,831 1,016,798
Food and beverage...................................... 904,803 1,523,578 1,404,418
Other operating departments............................ 117,590 191,894 153,628
Undistributed operating expenses:
Administrative and general............................. 397,972 703,739 584,237
Sales and marketing.................................... 192,476 292,142 222,708
Management fees........................................ -- 113,948 100,989
Property operating costs............................... 280,436 493,633 458,288
Property taxes, insurance and other.................... 130,437 230,020 218,177
Depreciation and amortization.......................... 284,191 486,813 466,957
Interest expense....................................... 171,493 305,496 402,676
---------- --------- ---------
3,126,913 5,414,094 5,028,876
---------- --------- ---------
Income before extraordinary item......................... 495,830 332,706 44,531
Extraordinary item--loss on early extinguishment of
debt..................................................... -- 59,242 --
---------- --------- ---------
Net income............................................... $ 495,830 273,464 44,531
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
BELLEVUE HILTON HOTEL
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 495,830 273,464 44,531
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization..................... 284,191 486,813 466,957
Increase in accounts receivable................... (90,295) (40,935) (61,931)
Decrease (increase) in other assets............... 49,326 11,792 (7,731)
Increase (decrease) in due from affiliates........ 952,205 (514,384) 8,041
Increase in accounts payable and accrued
expenses................................................ 55,205 2,604 360,821
---------- ---------- ----------
Total adjustments..................................... 1,250,632 (54,110) 766,157
---------- ---------- ----------
Net cash provided by operating activities............... 1,746,462 219,354 810,688
---------- ---------- ----------
Cash flows from investing activities:
Additions to hotel.................................... (50,165) (199,320) (2,771,413)
Purchases of furniture and fixtures................... 3,909 (129) 162
---------- ---------- ----------
Net cash used in investing activities................... (46,256) (199,449) (2,771,251)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from note payable--affiliates................ -- 3,885,000 --
Repayments of note payable............................ -- (3,901,274) (178,298)
Capital distributions................................. (1,642,623) -- --
Capital contributions................................. -- -- 2,155,312
---------- ---------- ----------
Net cash provided (used) by financing activities........ (1,642,623) (16,274) 1,977,014
---------- ---------- ----------
Net increase in cash and cash equivalents............... 57,583 3,631 16,451
Cash and cash equivalents at beginning of period........ 88,411 84,780 68,329
---------- ---------- ----------
Cash and cash equivalents at end of period.............. $ 145,994 88,411 84,780
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 171,493 297,592 398,369
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE>
BELLEVUE HILTON HOTEL
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(1) ORGANIZATION
The Bellevue Hilton Hotel (the "Hotel") is located approximately ten miles
east of downtown Seattle, across Lake Washington. The Hotel opened in March
1980. The Hotel has 180 rooms and complimentary privileges at Bally's Pacific
West health club, as well as an indoor pool, jacuzzi and sauna, business center
and same day valet service. The dining facilities include Sam's Restaurant,
Sam's Lounge and Azteca Restaurant. The Hotel has over 7,746 square feet of
meeting space. The Hotel's business is generated mainly from the local corporate
market. The corporate headquarters of a number of notable high-tech companies
are located in Bellevue or nearby, including Microsoft, Nintendo, AT&T Wireless
Systems, Aldus and Microrim.
The Hotel was sold on August 4, 1995 to EquiStar for a purchase price of
$12,300,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotel were included in the financial records of
Chrisbell Hospitality Company, a limited partnership which owned the Hotel until
it was sold to EquiStar. The accompanying statements of operations and cash
flows include the accounts of the Hotel only, as if it were a separate legal
entity, and have been prepared using the accrual basis of accounting.
Depreciation
Depreciation is computed on the cost of hotel property and equipment using
the straight-line method over 35 years for the building, over 20 years for most
building improvements and over four to five years for furniture, fixtures and
equipment.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivables and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
Income Taxes
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities were passed through to the individual partners in accordance with
the partnership agreement and the Internal Revenue Code.
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
F-81
<PAGE>
BELLEVUE HILTON HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) INTEREST EXPENSE
Prudential Realty Group ("Prudential") provided permanent financing for the
Hotel in March of 1980. The original note balance was $5,300,000 and had a fixed
interest rate of 10%. Principal and interest payments were due monthly.
On February 15, 1994 the remaining balance on the Prudential note was paid
off using $3,929,037 of the proceeds from a $66,000,000 note between Washington
Square, Inc. (an affiliate) and Connecticut General Life Insurance Co.
Interest-only payments were required monthly. The note had an interest rate of
7.60%. The Hotel paid interest to Washington Square, Inc. related to the portion
of the proceeds used to pay off the Prudential note.
The Hotel incurred a prepayment penalty on the pay-off of the Prudential
note in 1994 of $59,242, which is recorded as an extraordinary item in the
accompanying statement of operations.
(4) RELATED-PARTY TRANSACTIONS
During 1994 and 1993, the owner charged the Hotel management fees of 2% of
gross revenue. Management fees incurred during 1994 and 1993 were $110,598 and
$100,989, respectively. No management fees were charged by the owner in 1995.
(5) COMMITMENTS
For the period from January 1, 1995 through August 4, 1995 and during 1994
and 1993, certain space in the Hotel was leased to the Azteca Restaurant. Azteca
made monthly lease payments of $11,625 to the Hotel in accordance with the
lease, which has an expiration date of March 31, 2005. Azteca also paid a
portion of the Hotel real estate taxes and common area expenses.
F-82
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying combined balance sheets of the Additional
Hotels (the "Hotels") as of June 30, 1996, December 31, 1995 and 1994 and
related combined statements of operations, owners' capital and cash flows for
the six months ended June 30, 1996 and the years ended December 31, 1995, 1994
and 1993. These combined financial statements are the responsibility of the
Hotels' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Additional Hotels as of June 30, 1996, December 31, 1995 and 1994, and the
results of their combined operations and their combined cash flows for the six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
July 18, 1996
F-83
<PAGE>
ADDITIONAL HOTELS
COMBINED BALANCE SHEETS
JUNE 30, 1996, DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 2,249,541 2,100,027 1,795,991
Accounts receivable................................ 1,182,989 1,009,479 1,347,062
Inventory and other assets......................... 773,152 1,004,098 1,100,562
------------ ----------- -----------
Total current assets............................... 4,205,682 4,113,604 4,243,615
------------ ----------- -----------
Property and equipment:
Land............................................. 14,454,496 14,454,496 14,454,496
Building......................................... 48,821,317 48,816,467 48,792,386
Furniture, fixtures and equipment................ 20,074,640 19,968,593 18,993,252
------------ ----------- -----------
83,350,453 83,239,556 82,240,134
Less--accumulated depreciation................... (34,286,904) (32,623,613) (29,307,378)
------------ ----------- -----------
Total net property and equipment................... 49,063,549 50,615,943 52,932,756
------------ ----------- -----------
Total assets....................................... $ 53,269,231 54,729,547 57,176,371
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES AND OWNERS' CAPITAL
Accounts payable and accrued expenses.............. $ 2,842,132 2,778,452 3,022,008
Advance deposits................................... 117,902 41,927 45,436
------------ ----------- -----------
Total liabilities.................................. 2,960,034 2,820,379 3,067,444
Owners' capital.................................... 50,309,197 51,909,168 54,108,927
------------ ----------- -----------
Total liabilities and owners' capital.............. $ 53,269,231 54,729,547 57,176,371
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-84
<PAGE>
ADDITIONAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rooms................................... $11,898,784 21,925,991 21,147,009 21,059,634
Food and beverage....................... 5,580,911 10,442,474 10,513,519 10,699,483
Other operating departments............. 831,891 1,613,934 1,591,255 1,689,678
----------- ---------- ---------- ----------
18,311,586 33,982,399 33,251,783 33,448,795
----------- ---------- ---------- ----------
Operating costs and expenses:
Rooms................................... 2,947,864 5,751,406 5,673,951 5,840,918
Food and beverage....................... 4,654,082 9,198,740 9,407,042 9,737,488
Other operating departments............. 444,994 904,143 933,992 985,047
Undistributed operating expenses:
Administrative and general.............. 1,686,225 3,342,110 3,314,554 3,431,329
Sales and marketing..................... 1,214,885 2,320,060 2,343,494 2,436,334
Management fees......................... 404,220 1,065,175 1,051,710 1,260,199
Property operating costs................ 2,317,051 4,407,863 4,353,126 4,067,892
Property taxes, insurance and other..... 673,014 1,390,174 1,519,555 2,574,155
Depreciation and amortization........... 1,663,291 3,316,235 4,451,660 4,656,873
----------- ---------- ---------- ----------
16,005,626 31,695,906 33,049,084 34,990,235
----------- ---------- ---------- ----------
Net income (loss)......................... $ 2,305,960 2,286,493 202,699 (1,541,440)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-85
<PAGE>
ADDITIONAL HOTELS
COMBINED STATEMENTS OF OWNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1992.................................................. $57,345,663
Distributions............................................................... (658,109)
Net loss.................................................................... (1,541,440)
-----------
Balance at December 31, 1993.................................................. $55,146,114
Contributions............................................................... 1,485,114
Distributions............................................................... (2,725,000)
Net income.................................................................. 202,699
-----------
Balance at December 31, 1994.................................................. $54,108,927
Contributions............................................................... 215,327
Distributions............................................................... (4,701,579)
Net income.................................................................. 2,286,493
-----------
Balance at December 31, 1995.................................................. $51,909,168
Contributions............................................................... 88,650
Distributions............................................................... (3,994,581)
Net income.................................................................. 2,305,960
-----------
Balance at June 30, 1996...................................................... $50,309,197
-----------
-----------
</TABLE>
See accompanying notes to combined financial statements.
F-86
<PAGE>
ADDITIONAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $2,305,960 2,286,493 202,699 (1,541,440)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization......... 1,663,291 3,316,235 4,451,660 4,656,873
Decrease (increase) in accounts
receivable.................................. (173,510) 337,583 (77,086) 119,328
Decrease (increase) in inventory and
other assets................................ 230,946 96,464 22,741 (18,439)
Decrease (increase) in notes
receivable.................................. -- -- 100,000 (100,000)
Increase (decrease) in accounts
payable and accrued expenses........ 63,680 (243,556) (312,119) (661,001)
Increase (decrease) in advance
deposits.................................... 75,975 (3,509) (10,866) (115,904)
---------- ---------- ---------- ----------
Total adjustments......................... 1,860,382 3,503,217 4,174,330 3,880,857
---------- ---------- ---------- ----------
Net cash provided by operating activities... 4,166,342 5,789,710 4,377,029 2,339,417
---------- ---------- ---------- ----------
Cash flows from investing activities--
purchases of furniture and equipment........ (110,897) (999,422) (2,285,579) (1,737,036)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Capital contributions..................... 88,650 215,327 1,485,114 --
Capital distributions..................... (3,994,581) (4,701,579) (2,725,000) (658,109)
---------- ---------- ---------- ----------
Net cash used by financing activities....... (3,905,931) (4,486,252) (1,239,886) (658,109)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................. 149,514 304,036 851,564 (55,728)
Cash and cash equivalents at beginning of
period...................................... 2,100,027 1,795,991 944,427 1,000,155
---------- ---------- ---------- ----------
Cash and cash equivalents at end of
period...................................... $2,249,541 2,100,027 1,795,991 944,427
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-87
<PAGE>
ADDITIONAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996, DECEMBER 31, 1995 AND 1994
(1) ORGANIZATION
The Additional Hotels (the "Hotels") consists of five hotels which are part
of MBL Life Assurance Corporation. Two of the hotels are in California
(Sacramento Hilton and Santa Barbara Inn); one is in Louisiana (Lafayette
Hilton), one is in Colorado (Holiday Inn) and the other is in Washington, D.C.
(Embassy Row).
EquiStar has entered into a binding contract to purchase the Hotels for
approximately $68,400,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounts of the Hotels are included in the financial records of MBL Life
Assurance Corporation. The accompanying combined financial statements include
the accounts of the Hotels only, as if they were a separate legal entity, and
have been prepared using the accrual basis of accounting.
Cash and Cash Equivalents
The Hotels consider all highly liquid instruments with an original maturity
date of three months or less to be cash equivalents.
Inventories
Inventories, consisting primarily of china, tableware, linens and food and
beverage items, are stated at cost, using the first-in, first-out ("FIFO")
method of inventory valuation.
Property and Equipment
Property and equipment are reflected in the balance sheets at their fair
value at the time of contribution. Depreciation is computed on the buildings and
building improvements using the straight-line method over their useful lives of
18 to 39 years. Furniture, fixtures and equipment are depreciated using the
straight-line method over five years.
Bad Debt Expense
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
Revenue
Revenue is earned primarily through the operations of the hotel and
recognized when earned.
Income Taxes
The combined financial statements contain no provision for federal income
taxes since the Hotels do not pay any taxes directly. All taxes are the
responsibility of the parent company MBL Life Assurance Corporation.
F-88
<PAGE>
ADDITIONAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
Management has made a number of estimates and assumptions to prepare these
combined financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) RELATED-PARTY TRANSACTIONS
All of the hotels except for Embassy Row are managed by CapStar Management.
The Hotels managed by CapStar Management paid base management fees based on
gross revenue plus incentive management fees if the Hotels' operating results
exceeded levels specified in the management contract. The four hotels incurred
management fees of $366,456 in 1996, $926,737 in 1995, $929,013 in 1994 and
$1,008,719 in 1993.
F-89
<PAGE>
This Page Intentionally Left Blank
<PAGE>
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY 9,250,000 SHARES
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON [CAPSTAR HOTEL COMPANY LOGO]
AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, TO COMMON STOCK
ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors..........................11
The Formation Transactions............17
Use of Proceeds.......................18
Dividend Policy.......................18
Dilution..............................19 ----------------------
Capitalization........................20 PROSPECTUS
Selected Financial and Other Data.....21 - , 1996
Unaudited Pro Forma Financial ----------------------
Statements..........................23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................30
The Company...........................34
Business and Properties...............35
Management............................52
Principal Stockholders and Selling
Stockholder.........................60
Certain Relationships and Related
Transactions........................61
Shares Available for Future Sale......62
Description of Capital Stock..........63
Underwriting..........................65
Legal Matters.........................68
Experts...............................68
Additional Information................69
-------------------
UNTIL - (25 CALENDAR DAYS
AFTER THE DATE OF THIS PROSPECTUS), ALL LEHMAN BROTHERS
DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK WHETHER OR NOT GOLDMAN, SACHS & CO.
PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. MERRILL LYNCH & CO.
THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN SMITH BARNEY INC.
ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
<PAGE>
[Alternate International Prospectus Cover]
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
PROSPECTUS
9,250,000 SHARES
N87305AA.G01,2160,360,H
COMMON STOCK
-------------------
CapStar Hotel Company ("CapStar" or the "Company") is a hotel investment and
management company which acquires, owns, renovates, repositions and manages
hotels throughout the United States. CapStar owns 12 upscale, full-service
hotels (the "Owned Hotels") which contain 3,516 rooms. The Company has entered
into a contract to acquire five additional hotels (the "Additional Hotels")
which contain 1,121 rooms. Including the Owned Hotels, the Company manages 49
hotels (the "Hotels") with 8,849 rooms. The Company's business strategy is to
identify and acquire hotel properties 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.
Of the 9,250,000 shares of common stock, par value $.01 per share (the
"Common Stock") offered hereby, 1,850,000 shares are initially being offered
outside the United States and Canada (the "International Offering") by the
International Managers (as defined herein) and 7,400,000 shares are being
offered in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined herein). See "Underwriting." Of the shares of Common
Stock offered, 6,750,000 are being sold by the Company and 2,500,000 are being
sold by the Selling Stockholder (as defined herein). See "Principal Stockholders
and Selling Stockholder." Prior to the Offering (as defined herein), there has
been no public market for the Common Stock. It is currently estimated that the
initial public offering price per share will be between $17 and $20. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE") under the symbol "CHO," subject to official notice of
issuance.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE
11.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
[CAPTION]
<TABLE>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share....... $ - $ - $ - $ -
Total(3)........ $ - $ - $ - $ -
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the several
U.S. Underwriters and International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ - .
(3) The Company has granted the International Managers and the U.S. Underwriters
a 30-day option to purchase up to 1,387,500 additional shares on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$ - , $ - and $ - , respectively. See "Underwriting."
-------------------
The shares of Common Stock offered by this Prospectus are offered by the
Managers subject to prior sale, to withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain further conditions. It is expected that delivery of the shares will
be made at the offices of Lehman Brothers Inc., in New York, New York on or
about - , 1996.
-------------------
LEHMAN BROTHERS
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL LIMITED
SMITH BARNEY INC.
-------------------
- , 1996.
<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.
<PAGE>
[Alternate Cov - International Pros.]
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY 9,250,000 SHARES
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR [CAPSTAR HOTEL COMPANY LOGO]
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE INTERNATIONAL MANAGERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN COMMON STOCK
OFFER OF ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors..........................11
The Formation Transactions............17
Use of Proceeds.......................18
Dividend Policy.......................18 ----------------------
Dilution..............................19 PROSPECTUS
Capitalization........................20 - , 1996
Selected Financial and Other Data.....21 ----------------------
Unaudited Pro Forma Financial
Statements..........................23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................30
The Company...........................34
Business and Properties...............35
Management............................52
Principal Stockholders and Selling
Stockholder.........................60
Certain Relationships and Related
Transactions........................61
Shares Available for Future Sale......62
Description of Capital Stock..........63
Underwriting..........................65
Legal Matters.........................68
Experts...............................68
Additional Information................69
-------------------
UNTIL - (25 CALENDAR DAYS
AFTER THE DATE OF THIS PROSPECTUS), ALL LEHMAN BROTHERS
DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK WHETHER OR NOT GOLDMAN SACHS INTERNATIONAL
PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. MERRILL LYNCH INTERNATIONAL LIMITED
THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN SMITH BARNEY INC.
ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses payable in connection
with the Offering of the Common Stock being registered hereby, other than
underwriting discounts and commissions. All the amounts shown are estimates,
except the Securities and Exchange Commission registration fee and the NASD
filing fee. All of such expenses are being borne by the Company.
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 77,030
NASD Filing Fee................................................ 22,839
NYSE Listing Fee............................................... 140,000
Blue Sky Fees and Expenses..................................... 45,000
Accounting Fees and Expenses................................... 400,000
Legal Fees and Expenses........................................ 950,000
Printing and Engraving Expenses................................ 250,000
Registrar and Transfer Agent's Fees............................ 15,000
Miscellaneous Fees and Expenses................................ 62,131
Total...................................................... $1,962,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware Law permits a provision in the certificate
of incorporation of each corporation organized thereunder, eliminating or
limiting, with certain exceptions, the personal liability of a director to the
corporation or its stockholders for monetary damages for certain breaches of
fiduciary duty as a director. The Certificate of Incorporation of the Company
eliminates the personal liability of directors to the fullest extent permitted
by the Delaware Law.
Section 145 of the Delaware Law ("Section 145"), in summary, empowers a
Delaware corporation, within certain limitations, to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
Article Eight of the Certificate of Incorporation of the Company provides
for the indemnification of officers and directors and certain other parties (the
"Indemnitees") of the Company to the fullest extent permitted under the Delaware
Law; provided, that except in the case of proceedings to enforce rights to
indemnification, the Company shall indemnify such Indemnitee in connection with
a proceeding initiated by such Indemnitee only if such proceeding was authorized
by the Board.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, and persons who control the Company
within the meaning of Section 15 of the Securities Act for certain liabilities,
including liabilities arising thereunder.
II-1
<PAGE>
Each of the employment agreements described in "Management--Employment
Agreements" contains provisions entitling the executive to indemnification for
losses incurred in the course of service to the Company or its subsidiaries,
under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 1996, the Company issued 100 shares of Common Stock to Cherwell
Investors, Inc., a wholly-owned subsidiary of Acadia Partners, for nominal
consideration. The shares were issued without registration under the Securities
Act pursuant to the exemption from registration afforded by Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder.
See "The Formation Transactions" for information regarding shares of Common
Stock to be issued in connection with the Formation Transactions, the purchasers
thereof and the consideration therefor. Such issuances will be made without
registration under the Securities Act pursuant to exemptions from registration
afforded by Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ----------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of U.S. Underwriting Agreement (as revised)
1.2 -- Form of International Underwriting Agreement
3.1.1* -- Amended and Restated Certificate of Incorporation of the Company
3.1.2* -- Amendment to Amended and Restated Certificate of Incorporation of the
Company
3.1.3 -- Second Amendment to Amended and Restated Certificate of Incorporation
3.2* -- By-laws of the Company
4* -- Specimen Common Stock certificate
5* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
10.1* -- Formation Agreement, dated as of June 20, 1996, among CapStar Hotel
Investors, Inc. and the several other parties thereto
10.2* -- Form of Registration Rights Agreement
10.3* -- Agreement of Sale and Purchase, dated as of June 20, 1996, between MBL Life
Assurance Corporation and EquiStar Hotel Investors, L.P.
10.4* -- Agreement of Sale and Purchase, dated as of June 14, 1996, between Ballston
Hotel Limited Partnership and EquiStar Hotel Investors, L.P.
10.5* -- Form of Employment Agreement between the Company and Paul W. Whetsell
10.6* -- Form of Employment Agreement between the Company and David E. McCaslin
10.7* -- Form of Employment Agreement between the Company and William M. Karnes
10.8* -- Form of Employment Agreement between the Company and John E. Plunket
10.9 -- Form of Amended and Restated Master Mortgage Loan Facility Agreement,
between CapStar Management Company, L.P. and Lehman Brothers Holdings, Inc.
10.10* -- Form of Amended and Restated Agreement of Limited Partnership of CapStar
Management Company, L.P.
10.11 -- Form of Equity Incentive Plan of the Company
10.12 -- Form of Employee Stock Purchase Plan of the Company
21* -- List of Subsidiaries of the Company
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bober, Markey & Company
23.3* -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5)
23.4* -- Consent of Edward L. Cohen to be named as a director
23.5* -- Consent of Edwin T. Burton, III to be named as a director
23.6 -- Consent of Edward P. Dowd to be named as a director
24* -- Power of Attorney (see signature pages)
27* -- Financial Data Schedule
</TABLE>
- ------------
* Previously Filed.
II-2
<PAGE>
(b) Financial Statement Schedules.
No schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission are required under the related
instructions or are applicable or the information is contained in the financial
statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-laws, the Underwriting
Agreement or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, New York, on the 15th day of August, 1996.
CAPSTAR HOTEL COMPANY
By: /s/ PAUL W. WHETSELL
..................................
Name: Paul W. Whetsell
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- ------------------------------------------------
<S> <C>
/s/ PAUL W. WHETSELL President, Chief Executive Officer and Chairman
........................................ of the Board (Principal Executive Officer)
Paul W. Whetsell
* Chief Operating Officer and Director
........................................
David E. McCaslin
* Senior Executive Vice President, Finance and
........................................ Chief Financial Officer (Principal Financial
William M. Karnes and Accounting Officer)
* Director
........................................
Daniel L. Doctoroff
* Director
........................................
Bradford E. Bernstein
* Director
........................................
Joseph McCarthy
* Director
........................................
William S. Janes
........................................ Director
Edward L. Cohen
........................................ Director
Edwin T. Burton, III
........................................ Director
Edward P. Dowd
*By: /s/ PAUL W. WHETSELL
........................
Name: Paul W. Whetsell
Title: Attorney-in-Fact
Dated: August 15, 1996
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ----------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of U.S. Underwriting Agreement (as revised)
1.2 -- Form of International Underwriting Agreement
3.1.1* -- Amended and Restated Certificate of Incorporation of the Company
3.1.2* -- Amendment to Amended and Restated Certificate of Incorporation of the
Company
3.1.3 -- Second Amendment to Amended and Restated Certificate of Incorporation
3.2* -- By-laws of the Company
4* -- Specimen Common Stock certificate
5* -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
10.1* -- Formation Agreement, dated as of June 20, 1996, among CapStar Hotel
Investors, Inc. and the several other parties thereto
10.2* -- Form of Registration Rights Agreement
10.3 * -- Agreement of Sale and Purchase, dated as of June 20, 1996, between MBL Life
Assurance Corporation and EquiStar Hotel Investors, L.P.
10.4 * -- Agreement of Sale and Purchase, dated as of June 14, 1996, between Ballston
Hotel Limited Partnership and EquiStar Hotel Investors, L.P.
10.5 * -- Form of Employment Agreement between the Company and Paul W. Whetsell
10.6 * -- Form of Employment Agreement between the Company and David E. McCaslin
10.7 * -- Form of Employment Agreement between the Company and William M. Karnes
10.8 * -- Form of Employment Agreement between the Company and John E. Plunket
10.9 -- Form of Amended and Restated Master Mortgage Loan Facility Agreement,
between CapStar Management Company, L.P. and Lehman Brothers Holdings, Inc.
10.10* -- Form of Amended and Restated Agreement of Limited Partnership of CapStar
Management Company, L.P.
10.11 -- Form of Equity Incentive Plan of the Company
10.12 -- Form of Employee Stock Purchase Plan of the Company
21* -- List of Subsidiaries of the Company
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bober, Markey & Company
23.3 * -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5)
23.4 * -- Consent of Edward L. Cohen to be named as a director
23.5 * -- Consent of Edwin T. Burton, III to be named as a director
23.6 -- Consent of Edward P. Dowd to be named as a director
24* -- Power of Attorney (see signature pages)
27* -- Financial Data Schedule
</TABLE>
- ------------
* Previously Filed.
EXHIBIT 1.1
7,400,000 Shares
CAPSTAR HOTEL COMPANY
Common Stock
(Par Value $.01 Per Share)
U.S. UNDERWRITING AGREEMENT
---------------------------
_____ __, 1996
LEHMAN BROTHERS INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
CapStar Hotel Company, a Delaware corporation (the "Company"),
together with Acadia Partners, L.P. (the "Selling Stockholder"), propose to sell
an aggregate of 7,400,000 shares (the "Firm Stock") of the Company's Common
Stock, par value $.01 per share (the "Common Stock"). Of the 7,400,000 shares
of the Firm Stock, 5,400,000 are being sold by the Company and 2,000,000 by the
Selling Stockholder. In addition, the Company proposes to grant to the
Underwriters named in Schedule 1 hereto (the "Underwriters") an option to
purchase up to an additional 1,110,000 shares of the Common Stock on the terms
and for the purposes set forth in Section 3 (the "Option Stock"). The Firm
Stock and the Option Stock, if purchased, are hereinafter collectively called
the "Stock." This is to confirm the agreement concerning the purchase of the
Stock from the Company and the Selling Stockholder by the Underwriters named in
Schedule 1 hereto (the "Underwriters").
It is understood by all parties that the Company and the Selling
Stockholder are concurrently entering into an agreement dated the date hereof
(the "International Underwriting Agreement") providing for the sale by the
Company and the Selling Stockholder of an aggregate of 1,850,000 shares of
Common Stock (the "International Firm Stock"), together with an over-allotment
option thereunder to purchase up to an additional 277,500 shares of Common Stock
from the Company
<PAGE>
(the "International Option Stock"; the International Firm Stock and
International Option Stock, if purchased, are hereinafter collectively called
"International Stock") through arrangements with certain underwriters outside
the United States (the "International Managers"), for whom Lehman Brothers
International, Goldman Sachs International, Merrill Lynch International Limited,
and Smith Barney, Inc. are acting as lead managers. The U.S. Underwriters and
the International Managers simultaneously are entering into an agreement among
the U.S. and international underwriting syndicates (the "Agreement Between U.S.
Underwriters and International Managers") which provides for, among other
things, the transfer of shares of Common Stock between the two syndicates. Two
forms of prospectus are to be used in connection with the offering and sale of
shares of Common Stock contemplated by the foregoing, one relating to the Stock
and the other relating to the International Stock. The latter form of
prospectus will be identical to the former except for certain substitute pages
as included in the registration statement and amendments thereto referred to
below. Except as used in Sections 3, 4, 5, 12, and 13 herein, and except as the
context may otherwise require, references herein to the Stock shall include all
the shares of the Common Stock which may be sold pursuant to either this
Agreement or the International Underwriting Agreement, and references herein to
any prospectus whether in preliminary or final form, and whether as amended or
supplemented, shall include both the U.S. and the international versions
thereof.
At or prior to the First Delivery Date (as defined in Section 6
hereof), the Company will complete a series of transactions described in each
Preliminary Prospectus and the Prospectus (as hereinafter defined), under the
heading "The Formation Transactions." As part of these transactions, the
Company and CapStar LP Corporation ("CapStar Sub") will become the sole partners
of CapStar Management Company, L.P., as governed by an amended and restated
Agreement of Limited Partnership (the "Operating Partnership"), and the
Operating Partnership will be restructured to own, directly or indirectly, all
of the properties and other assets currently owned, directly or indirectly, by
EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P. (as
constituted as of the date hereof, "CapStar Management"), and their respective
subsidiaries, including twelve owned hotel properties (the "Properties") or
interests therein and management agreements with a total of 48 hotels
(collectively, the "Hotels"). As used herein the term "Formation Transactions"
shall mean the occurrence of all the events described in the Prospectus under
the heading "The Formation Transactions," the execution of acquisition
agreements for the Additional Hotels (as defined in the Prospectus) and the
other transactions related thereto, the term "Formation Documents" shall mean
all the material contracts, agreements and other documents executed in
connection with the Formation Transactions set forth in Schedule 2 hereto, and
the term "Predecessor Entities" shall mean the subsidiaries of EquiStar Hotel
Investors, L.P. together with CapStar Management and its subsidiaries for all
periods prior to the consummation of the Formation Transactions.
2
<PAGE>
1. Representations, Warranties and Agreements of the Company and the
Operating Partnership. The Company and the Operating Partnership, jointly and
severally, represent, warrant and agree that:
(a) A registration statement on Form S-1 (333-6583), and amendments
thereto, with respect to the Stock has (i) been prepared by the
Company in conformity with the requirements of the United States
Securities Act of 1933 (the "Securities Act") and the rules and
regulations (the "Rules and Regulations") of the United States
Securities and Exchange Commission (the "Commission") thereunder,
(ii) been filed with the Commission under the Securities Act and
(iii) become effective under the Securities Act. Copies of such
registration statement and the amendments thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-
effective amendment thereto, if any, was declared effective by
the Commission; "Effective Date" means the date of the Effective
Time; "Preliminary Prospectus" means each prospectus included in
such registration statement, or amendments thereof, before it
became effective under the Securities Act and any prospectus
filed with the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations
in accordance with Section hereof and deemed to be a part of the
registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and
"Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the
Rules and Regulations. Any registration statement (including any
amendment or supplement thereto or information which is deemed
part thereof) filed by the Company to register additional shares
of Common Stock of the Company under Rule 462(b) of the
Securities Act ("Rule 462(b) Registration Statement") shall be
deemed a part of the Registration Statement. Any prospectus
(including any amendment or supplement thereto or information
which is deemed to part thereof) included in a Rule 462(b)
Registration Statement and any term sheet as contemplated by Rule
434 of the Rules and Regulations (a "Term Sheet") shall be deemed
to
3
<PAGE>
be part of the Prospectus. The Commission has not issued any
order preventing or suspending the use of any Preliminary
Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement
or the Prospectus will, when they become effective or are filed
with the Commission, as the case may be, conform in all material
respects to the requirements of the Securities Act and the Rules
and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto) contain
an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that no
representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section
18) and each Predecessor Entity have been duly organized and are
validly existing as corporations, general or limited partnerships
or limited liability companies, as the case may be, in good
standing under the laws of their respective jurisdictions of
organization, are duly qualified to do business and are in good
standing as foreign corporations, limited partnerships or limited
liability companies, as the case may be, in each jurisdiction in
which their respective ownership or lease of property or the
conduct of their respective businesses requires such
qualification, and have all power and authority necessary to own
or hold their respective properties and to conduct the businesses
in which they are engaged;
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; and all of the shares of
Common Stock (other than the Stock to be offered and sold by the
Company hereunder) that are outstanding or will be issued on or
prior to the First Delivery Date were or will be offered and sold
in compliance with all applicable laws (including, without
4
<PAGE>
limitation, federal and state securities laws); and all of the
issued shares of capital stock, partnership interests or limited
liability company membership interests, as the case may be, of
each subsidiary of the Company have been duly and validly
authorized and issued and (except for partnership interests of
general partners) are fully paid and non-assessable and are owned
directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims except for liens in favor
of [Lehman Brothers Holdings, Inc.] to secure indebtedness.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment
therefor as provided herein will be duly and validly issued,
fully paid and non-assessable; and the Stock will conform to the
descriptions thereof contained in the Prospectus.
(f) The partnership interests of the Operating Partnership ("Units")
to be transferred to the Company and CapStar Sub in connection
with the Formation Transactions, have been duly authorized for
issuance by the Operating Partnership, and at the closing of the
Formation Transactions will be the only Units outstanding and
will be validly issued and fully paid.
(g) This Agreement has been duly authorized, executed and delivered
by the Company and the Operating Partnership.
(h) The execution, delivery and performance of this Agreement by the
Company and the Operating Partnership, the consummation of the
transactions contemplated hereby and the consummation of the
Formation Transactions will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which
the Company or any of its subsidiaries or any Predecessor Entity
is a party or by which the Company or any of its subsidiaries or
any Predecessor Entity is bound or to which any of the property
or assets of the Company or any of its subsidiaries or any
Predecessor Entity is subject, nor will such actions result in
any violation of the provisions of the charter, by-laws,
partnership agreement or operating agreement of the Company, any
of its subsidiaries or any Predecessor Entity or any statute or
any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the
5
<PAGE>
Company, any of its subsidiaries or any Predecessor Entity or any
of their properties or assets; and except for the registration of
the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be
required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental
agency or body or any other person is required for the execution,
delivery and performance of this Agreement by the Company or the
Operating Partnership, the consummation of the transactions
contemplated hereby and the consummation of the Formation
Transactions.
(i) Except as set forth in the Prospectus, there are no preemptive or
other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any unissued shares of the Stock
to be issued and sold by the Company to the Underwriters
hereunder pursuant to the Company's charter or by-laws or any
agreement or other instrument;
(j) Upon consummation of the Formation Transaction, and except as set
forth in the Prospectus, there will be no preemptive or other
rights to subscribe for or to purchase, nor any restriction upon
the voting of, any of the partnership interests in the Operating
Partnership pursuant to the Operating Partnership's Agreement of
Limited Partnership, as restated and amended, or any agreement or
other instrument to which the Company is a party;
(k) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right (other than rights which have been
waived or satisfied) to require the Company to file a
registration statement under the Securities Act with respect to
any securities of the Company owned or to be owned by such person
or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or
in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities
Act.
(l) Except as described in the Prospectus, the Company has not sold
or issued any shares of Common Stock during the six-month
6
<PAGE>
period preceding the date of the Prospectus, including any sales
pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act, other than shares issued pursuant to employee
benefit plans, qualified stock options plans or other employee
compensation plans or pursuant to outstanding options, rights or
warrants.
(m) None of the Company, any of its subsidiaries or any Predecessor
Entity has sustained, since the date of the latest audited
financial statements included in the Prospectus, any material
loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, other than as set forth or
contemplated in the Prospectus, (i) there has been no material
adverse change in the financial condition, results of operation
or business of the Company, the Operating Partnership, any
subsidiary of the Company or any Predecessor Entity, whether or
not arising in the ordinary course of business, (ii) no material
casualty loss or material condemnation or other material adverse
event with respect to any Property has occurred, (iii) there have
been no transactions or acquisition agreements entered into by
the Company, the Operating Partnership or any subsidiary of the
Company other than those in the ordinary course of business,
which are material with respect to such entity, except in
connection with the Formation Transactions, (iv) there has been
no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock or by the Operating
Partnership with respect to its partnership interests and (v)
there has been no change in the capital stock of the Company or
the partnership interests of the Operating Partnership, or any
increase in the indebtedness of the Company, the Operating
Partnership or any subsidiary, except in connection with the
Formation Transactions.
(n) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement
or included in the Prospectus present fairly the financial
condition and results of operations of the entities purported to
be shown thereby, at the dates and for the periods indicated, and
have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout
the periods involved, except as otherwise stated herein.
7
<PAGE>
(o) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and the Predecessor Entities, whose
reports appear in the Prospectus and who have delivered the
initial letter referred to in Section 10(g) hereof, are
independent public accountants as required by the Securities Act
and the Rules and Regulations; and Bober, Markey and Company,
whose report appears in the Prospectus and who have delivered the
initial letter referred to in Section 10(h) hereof, were
independent accountants as required by the Securities Act and the
Rules and Regulations during the periods covered by the financial
statements on which they reported contained in the Prospectus.
(p) The Company and each of its subsidiaries have or will have on the
First Delivery Date good and marketable title in fee simple to
all real property and good and marketable title to all personal
property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not materially interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and all real property and buildings held under
lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases, in each case free and
clear of all liens, encumbrances and defects except such as are
described in the Prospectus or with such exceptions as are not
material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its
subsidiaries. There shall be issued and outstanding with respect
to each of the Owned Hotels (as defined in the Prospectus) an
ALTA form of owner's title insurance policy (or local equivalent
with respect to those Owned Hotels located in jurisdictions where
an ALTA form of owner's title insurance policy is not available)
insuring the fee simple estate of the applicable subsidiary of
the Company in the Owned Hotel owned by such subsidiary in an
amount at least equal to the acquisition price of such Owned
Hotel and each such title insurance policy will continue to be in
full force and effect immediately following the consummation of
the Formation Transactions.
(q) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the
8
<PAGE>
value of their respective properties and as is customary for
companies engaged in similar businesses in similar industries.
(r) Each of the Company, its subsidiaries and the Predecessor
Entities possesses such certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory
agencies or bodies necessary to conduct the business now operated
by them, except where the failure to possess such certificates,
authorizations or permits would not have a material adverse
effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the
Company and its subsidiaries (a "Material Adverse Effect") and
none of the Company, any of its subsidiaries or any Predecessor
Entity has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling, or finding, would have a Material
Adverse Effect.
(s) The Company, each of its subsidiaries and each Predecessor Entity
own or possess adequate rights to use all material patents,
patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, franchises,
copyrights and licenses necessary for the conduct of their
respective businesses and have no reason to believe that the
conduct of their respective businesses will conflict with, and
have not received any notice of any claim of conflict with, any
such rights of others.
(t) There are no legal or governmental proceedings pending to which
the Company, any of its subsidiaries or any Predecessor Entity is
a party or of which any property or assets of the Company, any of
its subsidiaries or any Predecessor Entity is the subject which
could reasonably be expected to have a Material Adverse Effect;
and to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others.
(u) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or
filed as exhibits to the Registration Statement.
9
<PAGE>
(v) No relationship, direct or indirect, exists between or among the
Company, the Operating Partnership, any subsidiary of the
Company, or any Predecessor Entity, on the one hand, and the
directors, officers, stockholders of the Company, or customers or
suppliers of the Company, or customers or suppliers of the
Operating Partnership, on the other hand, which is required to be
described in the Prospectus which is not so described.
(w) There is (i) no material unfair labor practice complaint pending
against the Company, its subsidiaries or any Predecessor Entity
nor, to the best knowledge of the Company, threatened against any
of them before the National Labor Relations Board or any state or
local labor relations board, and no significant grievance or
significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the
Company, its subsidiaries or any Predecessor Entity or, to the
best knowledge of the Company, threatened against any of them,
(ii) no material strike, labor dispute, slowdown or stoppage
pending against the Company, its subsidiaries or any Predecessor
Entity nor, to the best knowledge of the Company, threatened
against the Company, its subsidiaries or any Predecessor Entity
which might be expected to have a Material Adverse Effect.
(x) None of the Company, any subsidiary or any Predecessor Entity has
violated any safety or similar law applicable to its business nor
any federal, state or local law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal
or state wages and hours laws which in each case might result in
a Material Adverse Effect.
(y) The Company, its subsidiaries and each Predecessor Entity are in
compliance in all material respects with all presently applicable
provisions of the Employee Retirement Income Security Act of
1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company, any of its
subsidiaries or any Predecessor Entity would have any liability;
the Company, its subsidiaries and each Predecessor Entity have
not incurred and do not expect to incur liability under (i) Title
IV of ERISA with respect to termination of, or withdrawal from,
any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the
10
<PAGE>
"Code"); and each "pension plan" for which the Company, any of
its subsidiaries or any Predecessor Entity would have any
liability that is intended to be qualified under Section 401(a)
of the Code is so qualified in all material respects and nothing
has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(z) The Company, each of its subsidiaries and each Predecessor Entity
has filed all federal, state and local income and franchise tax
returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined
adversely to the Company, any of its subsidiaries or any
Predecessor Entity which has had (nor does the Company have any
knowledge of) any tax deficiency which, if determined adversely
to the Company, any of its subsidiaries or any Predecessor
Entity, might have a Material Adverse Effect; the amounts
currently set up as provisions for taxes or otherwise by the
Company and its subsidiaries on their books and records are
sufficient for the payment of all their unpaid federal, foreign,
state, county and local taxes accrued through the dates as of
which they speak, and for which the Company and its subsidiaries
may be liable in their own right or as a transferee of the assets
of, or as successor to any other corporation, association,
partnership, joint venture or other entity.
(aa) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed
in the Prospectus, the Company and its subsidiaries have not (i)
issued or granted any securities, (ii) incurred any liability or
obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on its
capital stock.
(ab) The Company, its subsidiaries, and the Predecessor Entities (i)
make and keep accurate books and records and (ii) maintain
internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as
necessary to permit preparation of their financial statements and
to maintain accountability for their assets, (C) access to their
books, records and accounts is permitted only in accordance with
management's authorization and (D) the
11
<PAGE>
reported accountability for their assets is compared with
existing assets at reasonable intervals.
(ac) None of the Company, any of its subsidiaries or any Predecessor
Entity is, or will be, immediately following consummation of the
Formation Transactions, (i) in violation of its charter, by-laws,
partnership agreement or operating agreement, (ii) in default in
any material respect, and no event has or will have occurred
which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to
which any of its properties or assets is subject or (iii) in
violation of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject
or has or will have failed to obtain any material license,
permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its
property or to the conduct of its business, which violation or
failure could reasonably be expected to have a Material Adverse
Effect.
(ad) None of the Company, any of its subsidiaries or any Predecessor
Entity, or any director, officer, agent, employee or other person
associated with or acting on behalf of the Company, any of its
subsidiaries or any Predecessor Entity, has used any corporate,
partnership or limited liability company funds for any unlawful
contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977; or
made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(ae) There has been no storage, disposal, generation, manufacture,
refinement, installation, transportation, handling or treatment
of toxic wastes, medical wastes, hazardous wastes, petroleum or
petroleum products (including crude oil or any fraction thereof),
hazardous substances or any other substances which pose a hazard
to human health, safety, natural resources, industrial hygiene or
the environment or which cause or threaten to cause a nuisance by
the Company, any of its subsidiaries, or any Predecessor Entity
(or, to the knowledge of the Company, by any
12
<PAGE>
of their predecessors in interest or by any other entity) at,
upon or from any of the property now or previously owned or
leased by the Company, its subsidiaries or any Predecessor Entity
except to the extent commonly used in the normal operations of
such property, in violation of any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit or which
would require investigation, monitoring, removal action,
corrective action, remedial action or other response action
("response action") under any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit, except for any
violation or response action which would not have, or could not
be reasonably likely to have, singularly or in the aggregate with
all such violations and response actions, a Material Adverse
Effect; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release or threatened
release of any kind onto such property or into the environment
surrounding such property of any toxic wastes, medical wastes,
solid wastes, hazardous wastes, petroleum or petroleum products
(including crude oil or any fraction thereof), hazardous
substances or any other substances which pose a hazard to human
health, safety, natural resources, industrial hygiene or the
environment or which cause or threaten to cause a nuisance,
except for any such spill, discharge, leak, emission, injection,
escape, dumping or release or threatened release which would not
have or would not be reasonably likely to have, singularly or in
the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings, releases and threatened releases,
a Material Adverse Effect; and the terms "hazardous wastes,"
"solid wastes," "toxic wastes," "hazardous substances,"
"petroleum," "petroleum products" and "medical wastes" shall have
the meanings specified in any applicable local, state, federal
and foreign laws or regulations with respect to environmental
protection.
(af) Neither the Company nor any subsidiary is, or will be as a result
of the offer and sale of the Stock hereunder, an "investment
company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the
Commission thereunder.
(ag) All of the representation and warranties of the Company, its
subsidiaries and the Predecessor Entities contained in the
Formation Documents set forth in Schedule 2 hereof are true and
correct in all material respects.
13
<PAGE>
2. Representations, Warranties and Agreements of the Selling
Stockholder. The Selling Stockholder represents, warrants and agrees that:
(a) The Selling Stockholder has, and immediately prior to the First
Delivery Date the Selling Stockholder will have, good and valid
title to the shares of Stock to be sold by the Selling
Stockholder hereunder on such date, free and clear of all liens,
encumbrances, equities or claims; and upon delivery of such
shares and payment therefor pursuant hereto, good and valid title
to such shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement") with [insert name of
custodian], as custodian (the "Custodian"), for delivery under
this Agreement, certificates in negotiable form (with signature
guaranteed by a commercial bank or trust company having an office
or correspondent in the United States or a member firm of the New
York or American Stock Exchanges) representing the shares of
Stock to be sold by the Selling Stockholder hereunder.
(c) The Selling Stockholder has full right, power and authority to
enter into this Agreement and the Custody Agreement; the
execution, delivery and performance of this Agreement and the
Custody Agreement by the Selling Stockholder and the consummation
by the Selling Stockholder of the transactions contemplated
hereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage deed of trust, loan agreement or
other agreement or instrument to which the Selling Stockholder is
a party or by which the Selling Stockholder is bound or to which
any of the property or assets of the Selling Stockholder is
subject, nor will such actions result in any violation of the
provisions of the agreement of limited partnership of the Selling
Stockholder or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over
the Selling Stockholder or the property or assets of the Selling
Stockholder; and, except for the registration of the Stock under
the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection
with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental
agency or body is required for
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<PAGE>
the execution, delivery and performance of this Agreement or the
Custody Agreement by the Selling Stockholder and the consummation
by the Selling Stockholder of the transactions contemplated
hereby.
(d) The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, do not and will not, as of the
applicable effective date (as to the Registration Statement and
any amendment thereto) and as of the applicable filing date (as
to the Prospectus and any amendment or supplement thereto)
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that no
representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein.
(e) The Selling Stockholder has no reason to believe that the
representations and warranties of the Company and the Operating
Partnership contained in Section 1 hereof are not true and
correct in all material respects, is familiar with the
Registration Statement and the Prospectus (as amended or
supplemented) and has no knowledge of any material fact,
condition or information not disclosed in the Registration
Statement, as of the effective date, or the Prospectus (or any
amendment or supplement thereto), as of the applicable filing
date, which has adversely affected or may reasonably be expected
to adversely affect the business of the Company and is not
prompted to sell shares of Common Stock by any information
concerning the Company which is not set forth in the Registration
Statement and the Prospectus.
(f) The Selling Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or
result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
shares of the Stock.
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<PAGE>
3. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 5,400,000 shares of
the Firm Stock and the Selling Stockholder agrees to sell 2,000,000 shares of
the Firm Stock, severally and not jointly, to the several Underwriters and each
of the Underwriters, severally and not jointly, agrees to purchase the number of
shares of the Firm Stock set opposite that Underwriter's name in Schedule 1
hereto. Each Underwriter shall be obligated to purchase from the Company, and
from the Selling Stockholder, that number of shares of the Firm Stock which
represents the same proportion of the number of shares of the Firm Stock to be
sold by the Company, and by the Selling Stockholder, as the number of shares of
the Firm Stock set forth opposite the name of such Underwriter in Schedule 1
represents of the total number of shares of the Firm Stock to be purchased by
all of the Underwriters pursuant to this Agreement. The respective purchase
obligations of the Underwriters with respect to the Firm Stock shall be rounded
among the Underwriters to avoid fractional shares, as the Representatives may
determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 1,110,000 shares of Option Stock. Such option is granted solely
for the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 6 hereof. Shares of Option Stock shall be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts. The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company and the Selling Stockholder shall not be obligated to
deliver any of the Stock to be delivered on the First Delivery Date or the
Second Delivery Date (as hereinafter defined), as the case may be, except upon
payment for all the Stock to be purchased on such Delivery Date as provided
herein.
4. Retention of Qualified Independent Underwriters. The Company
hereby confirms its engagement of Merrill Lynch, Pierce, Fenner & Smith
Incorporated as, and Merrill Lynch, Pierce Fenner & Smith Incorporated hereby
confirms its agreement with the Company to render services as, "qualified
independent underwriter" within the meaning of Section 2720 of the Conduct Rules
of the National Association of Securities Dealers, Inc. with respect to the
offering and sale of Shares. Merrill Lynch, Pierce, Fenner & Smith
Incorporated, solely in its capacity as qualified independent underwriter and
not otherwise, is referred to herein as the "Independent Underwriter."
5. Offering of Stock by the Underwriters. Upon authorization by the
Representatives of the release of the Firm Stock, the several Underwriters to
16
<PAGE>
offer the Firm Stock for sale upon the terms and conditions set forth in the
Prospectus.
6. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the offices of Lehman Brothers Inc. at 10:00
A.M., New York City time, on the fourth full business day following the date of
this Agreement or at such other date or place as shall be determined by
agreement between the Representatives and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company and the Selling Stockholder shall deliver or cause to be delivered
certificates representing the Firm Stock to the Representatives for the account
of each Underwriter against payment to or upon the order of the Company and the
Selling Stockholder of the purchase price by wire transfer of federal (same-day)
funds to an account or accounts previously designated in writing to Lehman
Brothers Inc. by the Company and the Selling Stockholder. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Firm Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company and the Selling Stockholder shall make the certificates representing
the Firm Stock available for inspection by the Representatives in New York, New
York, not later than 2:00 P.M., New York City time, on the business day prior to
the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 3 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 6
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered
17
<PAGE>
the certificates representing the Option Stock to the Representatives for the
account of each Underwriter against payment to or upon the order of the Company
of the purchase price by wire transfer of federal (same-day) funds to an account
or accounts previously designated in writing to Lehman Brothers Inc. by the
Company Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each Underwriter hereunder. Upon delivery, the Option Stock shall be registered
in such names and in such denominations as the Representatives shall request in
the aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company shall make the
certificates representing the Option Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the Second Delivery Date.
7. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule
424(b) under the Securities Act not later than Commission's close
of business on the second business day following the execution
and delivery of this Agreement or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Securities
Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted
herein; to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to
advise the Representatives, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or
of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the
Prospectus or suspending any such qualification, to use promptly
its best efforts to obtain its withdrawal;
18
<PAGE>
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement
as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and
exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto
(in each case excluding exhibits other than this Agreement) and
(ii) each Preliminary Prospectus, the Prospectus and any amended
or supplemented Prospectus; and, if the delivery of a prospectus
is required at any time after the Effective Time in connection
with the offering or sale of the Stock or any other securities
relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities
Act, to notify the Representatives and, upon their request, to
prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as the Representatives may
from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or
omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested
by the Commission;
(e) To the extent practicable, prior to filing with the Commission
any amendment to the Registration Statement or supplement to the
Prospectus or any Prospectus pursuant to Rule 424 of the Rules
and Regulations, and to the extent not practicable, immediately
thereafter, to furnish a copy thereof to the Representatives and
counsel for the Underwriters and to consult with the
Representatives prior to the filing;
19
<PAGE>
(f) As soon as practicable after the Effective Date, but in any event
not later than 410 or, if the fourth quarter following the fiscal
quarter that includes the Effective Date is the last fiscal
quarter of the Company's fiscal year, 455 days after the end of
the Company's current fiscal quarter, to make generally available
to the Company's security holders and to deliver to the
Representatives an earning statement of the Company and its
subsidiaries (which need not be audited) complying with Section
11(a) of the Securities Act and the Rules and Regulations
(including, at the option of the Company, Rule 158);
(g) Until the earlier of the expiration of the period of five years
following the Effective Date and the date on which the Company
ceases to be subject to the reporting requirements of the
Exchange Act, to furnish to the Representatives copies of all
materials furnished by the Company to its shareholders and all
public reports and all reports and financial statements furnished
by the Company to the principal national securities exchange upon
which the Common Stock may be listed pursuant to requirements of
or agreements with such exchange or to the Commission pursuant to
the Exchange Act or any rule or regulation of the Commission
thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions
as the Representatives may request and to comply with such laws
so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete
the distribution of the Stock, provided that in connection
therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of
process in any jurisdiction;
(i) Except as described in the Prospectus, for a period of 180 days
from the date of the Prospectus, not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected
to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock and
shares issued pursuant to employee benefit plans, qualified stock
option plans or other employee compensation plans existing on the
date hereof or pursuant to currently outstanding options,
warrants or rights), or sell or grant options, rights or warrants
with respect to any shares of Common Stock (other
20
<PAGE>
than the grant of options pursuant to option plans existing on
the date hereof), without the prior written consent of Lehman
Brothers Inc.; and to cause each of CapStar Executive Investors
I, L.L.C., New CapStar Group I, L.L.C., New CapStar Group II,
L.L.C., CapStar GP Corp., CapStar Executive Investors II, L.L.C.
CapStar Hotels, Inc., Latham Hotels, Inc., Paul W. Whetsell,
David E. McCaslin and Daniel A. Burack to furnish to the
Representatives, prior to the First Delivery Date, a letter or
letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not
to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common
Stock for a period of 360 days from the date of the Prospectus,
without the prior written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the listing of the
Stock on the New York Stock Exchange, Inc. and to use its best
efforts to complete that listing, subject only to official notice
of issuance and evidence of satisfactory distribution, prior to
the First Delivery Date;
(k) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a
copy thereof to the counsel for the Underwriters and receive and
consider its comments thereon, and to deliver promptly to the
Representatives a signed copy of each report on Form SR filed by
it with the Commission;
(l) To apply the net proceeds from the sale of the Stock being sold
by the Company as set forth in the Prospectus; and
(m) To take such steps as shall be necessary to ensure that neither
the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the
Commission thereunder.
8. Further Agreements of the Selling Stockholder. The Selling
Stockholder agrees:
(a) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, offer for sale, sell or otherwise dispose
of (or enter into any transaction or device which is designed to,
or
21
<PAGE>
could be expected to, result in the disposition by any person at
any time in the future of) any shares of Common Stock (other than
the Stock), without the prior written consent of Lehman Brothers
Inc.
(b) That the Stock to be sold by the Selling Stockholder hereunder
which is represented by the certificates held in custody for the
Selling Stockholder, is subject to the interest of the
Underwriters, that the arrangements made by the Selling
Stockholder for such custody are to that extent irrevocable, and
that the obligations of the Selling Stockholder hereunder shall
not be terminated by any act of the Selling Stockholder, by
operation of law or the occurrence of any other event.
(c) To deliver to the Representatives prior to the First Delivery
Date a properly completed and executed United States Treasury
Department Form W-9.
9. Expenses. The Company agrees to pay (a) the costs incident to
the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of producing and distributing
this Agreement and any other related documents in connection with the offering,
purchase, sale and delivery of the stock; (e) the costs of delivering and
distributing the Custody Agreement; (f) the fees (including reasonable
attorneys' fees) and expenses incident to securing any required review by the
National Association of Securities Dealers, Inc. of the terms of sale of the
Stock; (g) any applicable listing or other fees; (h) the fees and expenses of
qualifying the Stock under the securities laws of the several jurisdictions as
provided in Section 7(h) and of preparing, printing and distributing a Blue Sky
Memorandum (including related fees and expenses of counsel to the Underwriters);
and (j) all other costs and expenses incident to the performance of the
obligations of the Company and the Selling Stockholder under this Agreement;
provided that, except as provided in this Section 9 and in Section 14 the
Underwriters shall pay their own costs and expenses, including the costs and
expenses of their counsel, any transfer taxes on the Stock which they may sell
and the expenses of advertising any offering of the Stock made by the
Underwriters.
10. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
22
<PAGE>
and on each Delivery Date, of the representations and warranties of the Company
and the Selling Stockholder contained herein, to the performance by the Company
and the Selling Stockholder of their obligations hereunder, and to each of the
following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 7(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and any
request of the Commission for inclusion of additional information
in the Registration Statement or the Prospectus or otherwise
shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the Company
on or prior to such Delivery Date that the Registration Statement
or the Prospectus or any amendment or supplement thereto contains
an untrue statement of a fact which, in the opinion of Hogan &
Hartson L.L.P., counsel for the Underwriters, is material or
omits to state a fact which, in the opinion of such counsel, is
material and is required to be stated therein or is necessary to
make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Custody
Agreement, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for
the Underwriters, and the Company and the Selling Stockholder
shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to
pass upon such matters.
(d) Paul, Weiss, Rifkind, Wharton and Garrison shall have furnished
to the Representatives their written opinion, as counsel to the
Company, addressed to the Underwriters and dated such Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
(i) The Company and each of its subsidiaries have been
duly formed and are validly existing as corporations, limited
partnerships or limited liability companies, as the case may be,
in good standing under the laws of their respective jurisdictions
23
<PAGE>
of organization, are duly qualified to do business and are in
good standing as foreign corporations, limited partnerships or
limited liability companies, as the case may be, in each
jurisdiction in which their respective ownership or lease of
property or the conduct of their respective businesses requires
such qualification and have all corporate, partnership or limited
liability company, as the case may be, power and authority
necessary to own or hold their respective properties and conduct
the businesses in which they are engaged as described in the
Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of Stock being
delivered on such Delivery Date) have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectus;
and (assuming that all representations and warranties contained
in all documents delivered in connection with the Formation
Transaction are true and correct) all of the shares of Common
Stock (other than the Stock to be offered and sold by the Company
to the Underwriters hereunder) that are outstanding were offered
and sold in transactions exempt from the registration
requirements of the Securities Act and in compliance with all
applicable provisions of the General Corporation Law of the State
of Delaware (the "Delaware Corporation Law") and all of the
issued shares of capital stock, partnership interests or limited
liability company membership interests, as the case may be, of
each subsidiary of the Company have been duly and validly
authorized and issued and (with the exception of partnership
interests of general partners) are fully paid, non-assessable and
are owned directly or indirectly by the Company, to such
counsel's knowledge free and clear of all liens, encumbrances, or
claims except for liens in favor of [Lehman Brothers Holdings,
Inc.] to secure indebtedness;
(iii) Except as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor
any restriction upon the voting or transfer of, any unissued
shares of the Stock to be issued and sold by the Company to the
Underwriters hereunder pursuant to the Company's charter or by-
laws or any agreement or other instrument known to such counsel;
(iv) Except as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor
24
<PAGE>
any restriction upon the voting or transfer of, any of the
partnership interests in the Operating Partnership pursuant to
the Operating Partnership's Agreement of Limited Partnership, as
amended, or, to such counsel's knowledge, any agreement or other
instrument to which the Company is a party;
(v) To the best of such counsel's knowledge, based
solely on a review of such counsel's internal litigation docket,
and other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property or assets
of the Company or any of its subsidiaries is the subject which
could be expected to have a Material Adverse Effect; and, to the
best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vi) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceeding for that purpose is pending or
threatened by the Commission;
(vii) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the financial statements
and related schedules therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the requirements of the Securities Act and the Rules and
Regulations;
(viii) To the best of such counsel's knowledge, there are
no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to
the Registration Statement;
(ix) This Agreement has been duly authorized, executed
and delivered by the Company;
25
<PAGE>
(x) The amended and restated Agreement of Limited
Partnership of the Operating Partnership has been duly
authorized, executed and delivered by the Company and CapStar Sub
and constitutes the valid and binding agreement of each such
party, enforceable against each such party in accordance with its
terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium
or other similar laws affecting the rights and remedies of
creditors generally and except as may be subject to general
principles of equity (regardless of whether such agreement is
considered in a proceeding in equity or at law), and except as
rights to indemnity thereunder may be limited by applicable law
and public policy;
(xi) The Registration Rights Agreement has been duly
authorized, executed and delivered by the Company and constitutes
the valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, liquidation, moratorium or other similar laws
affecting the rights and remedies of creditors generally and
except as may be subject to general principles of equity
(regardless of whether such agreement is considered in a
proceeding in equity or at law), and except as rights to
indemnity thereunder may be limited by applicable law and public
policy, and, except that no opinion is expressed as to the
enforceability of the choice of law provision thereof;
(xii) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company and the Operating Partnership with all of the
provisions of this Agreement and the consummation of the
transactions contemplated hereby and the Formation Transactions
will not conflict with or result in a material breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its
subsidiaries is subject which breach is reasonably likely to have
a Material Adverse Effect, nor will such actions result in any
violation of the provisions of the charter, by-laws, limited
partnership agreement or operating agreement of the Company or
any of its subsidiaries or any statute or any order,
26
<PAGE>
rule or regulation known to such counsel of any court or
governmental agency or body of the United States, the State of
New York or established pursuant to the Delaware Corporation Law
having jurisdiction over the Company or any of its subsidiaries
or any of their properties or assets; except for the registration
of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may
be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution
of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any
such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated
hereby, including the Formation Transactions;
(xiii) Except as set forth in the Prospectus, to the best
of such counsel's knowledge, there are no contracts, agreements
or understandings between the Company and any person granting
such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration
statement under the Securities Act with respect to any securities
of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act;
(xiv) Neither the Company nor any of its subsidiaries is,
after giving effect to the Formation Transactions, an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended;
(xv) The Company, its subsidiaries and the Predecessor
Entities hold and after consummation of the Formation
Transactions will continue to hold all state food, beverage and
liquor licenses necessary or required for such corporations,
partnerships and limited liability companies to conduct their
business as currently conducted in each state;
(xvi) The Operating Partnership will be treated as a
partnership, and not as an "association" or "publicly traded
partnership" taxable as a corporation, for federal income tax
purposes; and
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(xvii) The statements under the captions "Certain
Relationships and Related Transactions" and "Description of
Capital Stock" in the Prospectus, insofar as such statements
constitute a summary of legal matters, documents or proceedings
referred to therein are correct in all material respects.
In rendering such opinion, such counsel may (i) state that their
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of New York and
the Delaware Corporation Law and that such counsel is not
admitted in the State of Delaware; and (ii) in giving the
opinions referred to in Section 10(d)(i) (solely with regard to
organization and qualification of the Company's subsidiaries),
Section 10(d)(ii) (solely with regard to capital stock,
partnership interests or limited liability company membership
interests, as the case may be, of subsidiaries of the Company
being duly and validly authorized and issued and fully paid and
non-assessable), and Section 10(d)(xv), state that they are
relying on an opinion or opinions of other counsel as to such
matters, provided that the Underwrites shall have received such
opinion or opinions, in form and substance satisfactory to
Underwriter's counsel, of other counsel reasonably acceptable to
Underwriters' counsel. Such counsel shall also have furnished to
the Representatives a written statement, addressed to the
Underwriters and dated such Delivery Date, in form and substance
satisfactory to the Representatives, to the effect that (x) in
connection with the preparation of the Registration Statement and
the Prospectus, such counsel have participated in conferences
with certain officers and other representatives of the Company,
at which the contents of the Registration Statement and the
Prospectus and related matters were discussed, and (y) based on
such participation, no facts have come to the attention of such
counsel which lead them to believe that the Registration
Statement (except for financial statements and schedules and
other statistical data included therein or omitted therefrom, as
to which such counsel need make no statement), as of the
Effective Date, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein not
misleading, or that the Prospectus (except for financial
statements and schedules and other statistical data included
therein or omitted therefrom, as to which such counsel need make
no statement) contains any untrue statement of a material fact or
omits to state a material fact required to be
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stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading. The foregoing statement may be qualified
by a statement to the effect that such counsel does not assume
any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the
Prospectus except for the statements made in the Prospectus under
the caption "Description of Capital Stock," insofar as such
statements relate to the Stock and concern legal matters.
(e) The counsel for the Selling Stockholder shall have furnished to
the Representatives its written opinion, as counsel to the
Selling Stockholder, addressed to the Underwriters and dated the
First Delivery Date, in form and substance reasonably
satisfactory to the Representatives, to the effect that:
(i) Selling Stockholder has full right, power and
authority to enter into this Agreement and the Custody Agreement;
the execution, delivery and performance of this Agreement and the
Custody Agreement by the Selling Stockholder and the consummation
by the Selling Stockholder of the transactions contemplated
hereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which the
Selling Stockholder is a party or by which the Selling
Stockholder is bound or to which any of the property or assets of
the Selling Stockholder is subject, nor will such actions result
in any violation of the provisions of the agreement of limited
partnership of the Selling Stockholder or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Selling
Stockholder or the property or assets of the Selling Stockholder;
and, except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection
with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and
performance of this Agreement or the Custody Agreement by the
Selling Stockholder and the
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consummation by the Selling Stockholder of the transactions
contemplated hereby;
(ii) This Agreement has been duly authorized, executed
and delivered by or on behalf of the Selling Stockholder;
(iii) The Custody Agreement has been duly authorized,
executed and delivered by the Selling Stockholder and constitute
valid and binding agreements of the Selling Stockholder,
enforceable in accordance with their respective terms;
(iv) Immediately prior to the First Delivery Date, the
Selling Stockholder had good and valid title to the shares of
Stock to be sold by the Selling Stockholder under this Agreement,
free and clear of all liens, encumbrances, equities or claims,
and full right, power and authority to sell, assign, transfer and
deliver such shares to be sold by the Selling Stockholder
hereunder; and
(v) Good and valid title to the shares of Stock to be
sold by the Selling Stockholder under this Agreement, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters.
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of Texas and the
Revised Limited Uniform Partnership Act of Delaware and that such
counsel is not admitted in the State of Delaware and (ii) in
rendering the opinion in Section 10(e)(iv) above, rely upon a
certificate of the Selling Stockholder in respect of matters of
fact as to ownership of and liens, encumbrances, equities or
claims on the shares of Stock sold by the Selling Stockholder,
provided that such counsel shall furnish copies thereof to the
Representatives and state that it believes that both the
Underwriters and it are justified in relying upon such
certificate. Such counsel shall also have furnished to the
Representatives a written statement, addressed to the
Underwriters and dated the First Delivery Date, in form and
substance satisfactory to the Representatives, to the effect that
(x) such counsel has acted as counsel to the Selling Stockholder
on a regular basis and has acted as counsel to the Selling
Stockholder in connection with the preparation of the
Registration Statement, and (y) based on the foregoing, no facts
have come to the attention of such counsel which lead it to
30
<PAGE>
believe that the Registration Statement, as of the Effective
Date, contained any untrue statement of a material fact relating
to the Selling Stockholder or omitted to state such a material
fact required to be stated therein or necessary in order to make
the statements therein not misleading, or that the Prospectus
contains any untrue statement of a material fact relating to the
Selling Stockholder or omits to state such a 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. The foregoing opinion and
statement may be qualified by a statement to the effect that such
counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus.
(f) The Representatives shall have received from Hogan & Hartson
L.L.P., counsel for the Underwriters, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale
of the Stock, the Registration Statement, the Prospectus and
other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel
such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the Representatives
shall have received from KPMG Peat Marwick a letter, in form and
substance satisfactory to the Representatives, addressed to the
Underwriters and dated the date hereof (i) confirming that they
are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as
of the date hereof (or, with respect to matters involving changes
or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date
not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(h) At the time of execution of this Agreement, the Representatives
shall have received from Bober, Markey & Company a letter in form
and substance satisfactory to the Representatives, addressed to
the Underwriters and dated the date hereof
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(i) confirming that they are independent public accountants
within the meaning of the Securities Act and are in compliance
with Rule 2-01 of Regulation S-X of the Commission, (ii) stating,
as of the date hereof (or, with respect to matters involving
changes or developments since the respective dates as of which
specified financial information is in the Prospectus, as of a
date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(i) With respect to the letters of KPMG Peat Marwick and Bober,
Markey & Company referred to in clauses (g) and (h) hereof and
delivered to the Representatives concurrently with the execution
of this Agreement (the "initial letters"), the Company shall have
furnished to the Representatives letters (the "bring-down
letters") of such accountants, addressed to the Underwriters and
dated such Delivery Date (i) confirming that they are independent
public accountants within the meaning of the Securities Act and
are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-
X of the Commission, (ii) stating, as of the date of the bring-
down letters (or, with respect to matters involving changes or
developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date
not more than five days prior to the date of the bring-down
letters), the conclusions and findings of such firms with respect
to the financial information and other matters covered by the
initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(j) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the
Board, its President or a Vice President and its chief financial
officer stating that:
(i) The representations, warranties and agreements of
the Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 10(a) and 10(l)
have been fulfilled; and
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(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and Prospectus did not
include any untrue statement of a material fact and did not omit
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
(k) The Selling Stockholder (or the Custodian) shall have furnished
to the Representatives on the First Delivery Date a certificate,
dated the First Delivery Date, signed by, or on behalf of, the
Selling Stockholder (or the Custodian) stating that the
representations, warranties and agreements of the Selling
Stockholder contained herein are true and correct as of the First
Delivery Date and that the Selling Stockholder has complied with
all agreements contained herein to be performed by the Selling
Stockholder at or prior to the First Delivery Date.
(l) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as
set forth or contemplated in the Prospectus or (ii) since such
date there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and
its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described
in clause (i) or (ii), is, in the judgment of the
Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering
or the delivery of the Stock being delivered on such Delivery
Date on the terms and in the manner contemplated in the
Prospectus.
(m) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the
American Stock Exchange or in the over-the-counter market, or
trading in any securities of the Company on any exchange or in
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<PAGE>
the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such
market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction,
(ii) a banking moratorium shall have been declared by Federal or
state authorities, (iii) the United States shall have become
engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been
a declaration of a national emergency or war by the United States
or (iv) there shall have occurred such a material adverse change
in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in
the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters,
impracticable or inadvisable to proceed with the public offering
or delivery of the Stock being delivered on such Delivery Date on
the terms and in the manner contemplated in the Prospectus.
(n) There shall be issued and outstanding with respect to each of the
Owned Hotels (as defined in the Prospectus) an ALTA form of
owner's title insurance policy (or local equivalent with respect
to those Owned Hotels located in jurisdictions where an ALTA form
of owner's title insurance is not available) insuring the fee
simple estate of the applicable subsidiary of the Company in the
Owned Hotel owned by such subsidiary in an amount at least equal
to the acquisition price of such Owned Hotel and each such title
insurance policy will continue to be in full force and effect
immediately following the consummation of the Formation
Transactions.
(o) The New York Stock Exchange, Inc. shall have approved the Stock
for listing, subject only to official notice of issuance and
evidence of satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
11. Indemnification and Contribution.
(a) The Company and the Operating Partnership, jointly and severally,
shall indemnify and hold harmless each Underwriter, its officers
and employees and each person, if any, who controls
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any Underwriter within the meaning of the Securities Act, from
and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not
limited to, any loss, claim, damage, liability or action relating
to purchases and sales of Stock), to which that Underwriter,
officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i)
any untrue statement or alleged untrue statement of a material
fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or
supplement thereto or (B) in any blue sky application or other
document prepared or executed by the Company (or based upon any
written information furnished by the Company) specifically for
the purpose of qualifying any or all of the Stock under the
securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a
"Blue Sky Application"), (ii) the omission or alleged omission to
state in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or in any amendment or supplement thereto, or
in any Blue Sky Application any material fact required to be
stated therein or necessary to make the statements therein not
misleading or (iii) any act or failure to act or any alleged act
or failure to act by any Underwriter in connection with, or
relating in any manner to, the Stock or the offering contemplated
hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based
upon matters covered by clause (i) or (ii) above (provided that
the Company and the Operating Partnership shall not be liable
under this clause (iii) to the extent that it is determined in a
final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from
any such acts or failures to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or willful
misconduct), and shall reimburse each Underwriter and each such
officer, employee or controlling person promptly upon demand for
any legal or other expenses reasonably incurred by that
Underwriter, officer, employee or controlling person in
connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company and
the Operating Partnership shall not be liable in any such case to
the extent that any such loss, claim, damage, liability or action
arises out of, or is based upon, any untrue statement or alleged
untrue statement or omission or alleged
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omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any such amendment or
supplement, or in any Blue Sky Application, in reliance upon and
in conformity with written information concerning such
Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion
therein. The foregoing indemnity agreement is in addition to any
liability which the Company or the Operating Partnership may
otherwise have to any Underwriter or to any officer, employee or
controlling person of that Underwriter.
The Company and the Operating Partnership, jointly and severally,
also will indemnify and hold harmless the Independent Underwriter
and each person, if any, who controls the Independent Underwriter
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and judgments incurred as a
result of the Independent Underwriter's participation as a
"qualified independent underwriter" within the meaning of Section
2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. in connection with the offering of the
Stock, except for any losses, claims, damages, liabilities and
judgments resulting from the Independent Underwriter's or such
controlling person's willful misconduct or gross negligence.
(b) The Selling Stockholder shall indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any,
who controls any Underwriter within the meaning of the Securities
Act, from and against any loss, claim, damage or liability, joint
or several, or any action in respect thereof (including, but not
limited to, any loss, claim, damage, liability or action relating
to purchases and sales of Stock), to which that Underwriter,
officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i)
any untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement
thereto or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, Registration Statement or the Prospectus,
or in any amendment or supplement thereto, any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse each Underwriter, its
officers and employees and
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each such controlling person for any legal or other expenses
reasonably incurred by that Underwriter, its officers and
employees or controlling person in connection with investigating
or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred;
provided, however, that the Selling Stockholder shall not be
liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any
untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any such amendment
or supplement in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company
through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein. The foregoing indemnity
agreement is in addition to any liability which the Selling
Stockholder may otherwise have to any Underwriter or any officer,
employee or controlling person of that Underwriter.
(c) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of
its directors (including any person who, with his or her consent,
is named in the Registration Statement as about to become a
director of the Company), the Selling Stockholder and each
person, if any, who controls the Company within the meaning of
the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to
which the Company or any such director, officer or controlling
person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises
out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any
Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in
any Blue Sky Application or (ii) the omission or alleged omission
to state in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact
required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information concerning such Underwriter furnished to the
Company through the
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Representatives by or on behalf of that Underwriter specifically
for inclusion therein, and shall reimburse the Company and any
such director, officer or controlling person for any legal or
other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with
investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses
are incurred. The foregoing indemnity agreement is in addition
to any liability which any Underwriter may otherwise have to the
Company, the Selling Stockholder or any such director, officer,
employee or controlling person.
(d) Promptly after receipt by an indemnified party under this Section
11 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Section 11, notify
the indemnifying party in writing of the claim or the
commencement of that action; provided, however, that the failure
to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 11 except to the
extent it has been materially prejudiced by such failure and,
provided further, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have
to an indemnified party otherwise than under this Section 11. If
any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and,
to the extent that it wishes, jointly with any other similarly
notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of
its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party
under this Section 11 for any legal or other expenses
subsequently incurred by the indemnified party in connection with
the defense thereof other than reasonable costs of investigation;
provided, however, that the Representatives shall have the right
to employ counsel to represent jointly the Representatives and
those other Underwriters and their respective officers, employees
and controlling persons who may be subject to liability arising
out of any claim in respect of which indemnity may be sought by
the Underwriters against the Company, the Operating Partnership
or the Selling Stockholder under this Section 11 if, in the
reasonable judgment of the Representatives, it is advisable for
the Representatives and
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those Underwriters, officers, employees and controlling persons
to be jointly represented by separate counsel, and in that event
the fees and expenses of one such separate counsel shall be paid
by the Company, the Operating Partnership and the Selling
Stockholder; provided further, that, if indemnity is sought
pursuant to the second paragraph of Section 11(a), then, in
addition to such counsel for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate counsel (in addition to
any necessary local counsel) for the Independent Underwriter in
its capacity as a "qualified independent underwriter" and all
persons, if any, who control the Independent Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, if, in the reasonable judgment of the
Independent Underwriter there may exist a conflict of interest
between the Independent Underwriter and the other indemnified
parties. In the case of any such separate counsel for the
Independent Underwriter and such control persons of the
Independent Underwriter, such counsel shall be designated in
writing by the Independent Underwriter. No indemnifying party
shall (i) without the prior written consent of the indemnified
parties (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action) unless
such settlement, compromise or consent includes an unconditional
release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for
any settlement of any such action effected without its written
consent (which consent shall not be unreasonably withheld), but
if settled with the consent of the indemnifying party or if there
be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by
reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 11 shall for
any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 11(a), 11(b) or 11(c) in respect
of any loss, claim, damage or liability, or any action in respect
thereof, referred to therein, then each indemnifying party shall,
in lieu of indemnifying such indemnified party, contribute to the
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amount paid or payable by such indemnified party as a result of
such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company, the
Operating Partnership and the Selling Stockholder on the one hand
and the Underwriters on the other from the offering of the Stock
or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company, the
Operating Partnership, and the Selling Stockholder on the one
hand and the Underwriters on the other with respect to the
statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits
received by the Company, the Operating Partnership, and the
Selling Stockholder on the one hand and the Underwriters on the
other with respect to such offering shall be deemed to be in the
same proportion as the total net proceeds from the offering of
the Stock purchased under this Agreement (before deducting
expenses) received by the Company, the Operating Partnership, and
the Selling Stockholder, on the one hand, and the total
underwriting discounts and commissions received by the
Underwriters with respect to the shares of the Stock purchased
under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this
Agreement, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault shall be determined
by reference to whether the untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the
Operating Partnership, the Selling Stockholders or the
Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or
prevent such statement or omission. For purposes of the
preceding two sentences, the net proceeds deemed to be received
by the Company shall be deemed to be also for the benefit of the
Operating Partnership and information supplied by the Company
shall also be deemed to have been supplied by the Operating
Partnership. The Company and the Underwriters agree that Merrill
Lynch, Pierce, Fenner & Smith Incorporated will not receive any
additional benefits hereunder for serving as the Independent
Underwriter in connection with the offering and sale of the
Stock. The Company, the Operating Partnership, the Selling
Stockholder and the Underwriters
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further agree that it would not be just and equitable if
contributions pursuant to this Section were to be determined by
pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation
which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section
shall be deemed to include, for purposes of this Section 11(e),
any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this
Section 11(e), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which
the Stock underwritten by it and distributed to the public was
offered to the public exceeds the amount of any damages which
such Underwriter has otherwise paid or become liable to pay by
reason of-any untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this
Section 11(e) are several in proportion to their respective
underwriting obligations and not joint.
(f) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the
Stock by the Underwriters set forth on the cover page of, the
legend concerning over-allotments on the inside front cover page
of and the concession and reallowance figures appearing under the
caption "Underwriting" in, the Prospectus are correct and
constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration
Statement and the Prospectus.
12. Defaulting Underwriters. If, on either Delivery Date, any
Underwriter defaults in the performance of its obligations under this Agreement,
the remaining non-defaulting Underwriters shall be obligated to purchase the
Stock which the defaulting Underwriter agreed but failed to purchase on such
Delivery Date in the respective proportions which the number of shares of the
Firm Stock set opposite the name of each remaining non-defaulting Underwriter in
Schedule 1 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting Underwriters in Schedule
1 hereto; provided,
41
<PAGE>
however, that the remaining non-defaulting Underwriters shall not be obligated
to purchase any of the Stock on such Delivery Date if the total number of shares
of the Stock which the defaulting Underwriter or Underwriters agreed but failed
to purchase on such date exceeds 9.09% of the total number of shares of the
Stock to be purchased on such Delivery Date, and any remaining non-defaulting
Underwriter shall not be obligated to purchase more than 110% of the number of
shares of the Stock which it agreed to purchase on such Delivery Date pursuant
to the terms of Section 3. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company or the Selling
Stockholder, except that the Company will continue to be liable for the payment
of expenses to the extent set forth in Sections 9 and 14. As used in this
Agreement, the term "Underwriter" includes, for all purposes of this Agreement
unless the context requires otherwise, any party not listed in Schedule 1 hereto
who, pursuant to this Section 12, purchases Firm Stock which a defaulting
Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholder for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
13. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company and the Selling Stockholder prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections 10(l)
or 10(m), shall have occurred or if the Underwriters shall decline to purchase
the Stock for any reason permitted under this Agreement.
14. Reimbursement of Underwriters' Expenses. If (a) the Company or
the Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholder to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
42
<PAGE>
hereunder required to be fulfilled by the Company or the Selling Stockholder is
not fulfilled, the Company and the Selling Stockholder will reimburse the
Underwriters for all reasonable out-of-pocket expenses (including fees and
disbursements of counsel) incurred by the Underwriters in connection with this
Agreement and the proposed purchase of the Stock, and upon demand the Company
and the Selling Stockholder shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 12 by
reason of the default of one or more Underwriters, neither the Company nor the
Selling Stockholder shall be obligated to reimburse any defaulting Underwriter
on account of those expenses.
15. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any
notice pursuant to Section 11(d), to the Director of Litigation,
Office of the General Counsel, Lehman Brothers Inc., 3 World
Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company or to the Operating Partnership, shall be
delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement,
Attention: Paul W. Whetsell (Fax: 202-965-4445);
(c) if to the Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to Acadia Partners, L.P.,
201 Main Street, Suite 3100, Fort Worth, Texas 76102, Attention:
__________ (Fax: _______), with a copy to John H. Fant, Esq.,
Kelly, Hart & Hallman, 2500 Texas Commerce Tower, 201 Main
Street, Fort Worth, Texas 71602 (Fax: 817-878-9280);
provided, however, that any notice to an Underwriter pursuant to Section 11(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholder shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the Representatives and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholder by the
Custodian.
43
<PAGE>
16. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, the
Selling Stockholder and their respective successors. This Agreement and the
terms and provisions hereof are for the sole benefit of only those persons,
except that (A) the representations, warranties, indemnities and agreements of
the Company and he Selling Stockholders contained in this Agreement shall also
be deemed to be for the benefit of the person or persons, if any, who control
any Underwriter within the meaning of Section 15 of the Securities Act and (B)
the indemnity agreement of the Underwriters contained in Section 11(c) of this
Agreement shall be deemed to be for the benefit of directors of the Company,
officers of the Company who have signed the Registration Statement and any
person controlling the Company within the meaning of Section 15 of the
Securities Act. Nothing in this Agreement is intended or shall be construed to
give any person, other than the persons referred to in this Section 16, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
17. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Operating Partnership, the Selling
Stockholder and the Underwriters contained in this Agreement or made by or on
behalf on them, respectively, pursuant to this Agreement, shall survive the
delivery of and payment for the Stock and shall remain in full force and effect,
regardless of any investigation made by or on behalf of any of them or any
person controlling any of them.
18. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means any day on which York Stock
Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set
forth in Rule 405 of the Rules and Regulations.
19. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the state of New York without regard to the
principles of conflicts of laws thereof.
20. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
21. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
44
<PAGE>
If the foregoing correctly sets forth the agreement Operating
Partnership among the Company, the Operating Partnership, the Selling
Stockholder and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
CapStar Hotel Company
By:
--------------------------------------------
Paul W. Whetsell, President and Chief Executive
Officer
CapStar Management Company, L.P.
By:
--------------------------------------------
CapStar GP Corp., its general partner
By:
--------------------------------------------
Paul W. Whetsell, President
Acadia Partners L.P.
The Selling Stockholder:
By:
--------------------------------------------
Acadia FW Partners, L.P., its general partner
By:
--------------------------------------------
Acadia MGP Inc., its managing general partner
By:
--------------------------------------------
45
<PAGE>
Accepted:
LEHMAN BROTHERS INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By:
---------------------------
Authorized Representative
46
<PAGE>
SCHEDULE 1
Number of
Underwriters Shares
- ------------ ----------
Lehman Brothers Inc. . . . . . . . . . . . . . . .
Goldman, Sachs & Co. . . . . . . . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Smith Barney Inc. . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
47
<PAGE>
SCHEDULE 2
Formation Documents
- -------------------
1. Formation Agreement, dated as of June 20, 1996, among CapStar Hotel
Investors, Inc. and the several other parties thereto.
2. Registration Rights Agreement
3. Employment Agreements between the Company and
(a) Paul W. Whetsell;
(b) David E. McCaslin;
(c) William M. Karnes; and
(d) John E. Plunket
4. [Credit Facility Agreement]
5. Agreement of Sale and Purchase, dated as of June 20, 1996, between MBL Life
Assurance Corporation and EquiStar Hotel Investors, L.P.
6. Agreement of Sale and Purchase, dated as of June 14, 1996, between Ballston
Hotel Limited Partnership and EquiStar Hotel Investors, L.P.
48
Exhibit 1.2
DRAFT: 8/15/96
1,850,000 Shares
CAPSTAR HOTEL COMPANY
Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
_____ __, 1996
LEHMAN BROTHERS INTERNATIONAL.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL LIMITED
SMITH BARNEY INC.
As Lead Managers of the several
International Managers named in Schedule 1,
c/o Lehman Brothers International
1 Broadgate, London
EC2M 7HA England
Dear Sirs:
CapStar Hotel Company, a Delaware corporation (the "Company"),
together with Acadia Partners, L.P. (the "Selling Stockholder"), propose to
sell an aggregate of 1,850,000 shares (the "Firm Stock") of the Company's
Common Stock, par value $.01 per share (the "Common Stock"). Of the 1,850,000
shares of the Firm Stock, 1,350,000 are being sold by the Company and 500,000
by the Selling Stockholder. In addition, the Company proposes to grant to the
International Managers named in Schedule 1 hereto (the "International
Managers") an option to purchase up to an additional 277,500 shares of the
Common Stock on the terms and for the purposes set forth in Section 3 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company and the Selling
Stockholder by the International Managers named in Schedule 1 hereto (the
"International Managers").
It is understood by all parties that the Company and the Selling
Stockholder are concurrently entering into an agreement dated the date hereof
(the "U.S. Underwriting Agreement") providing for the sale by the Company and
the Selling Stockholder of an aggregate of 7,400,000 shares of Common Stock (the
"U.S. Firm Stock"), together with an over-allotment option thereunder to
purchase up to
<PAGE>
an additional 1,110,000 shares of Common Stock from the Company (the "U.S.
Option Stock"; the U.S. Firm Stock and U.S. Option Stock, if purchased, are
hereinafter collectively called "U.S. Stock") through arrangements with certain
underwriters in the United States and Canada (the "U.S. Underwriters"), for
whom Lehman Brothers Inc., Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Smith Barney Inc. are acting as representatives. The
U.S. Underwriters and the International Managers simultaneously are entering
into an agreement among the U.S. and international underwriting syndicates (the
"Agreement Between U.S. Underwriters and International Managers") which
provides for, among other things, the transfer of shares of Common Stock
between the two syndicates. Two forms of prospectus are to be used in
connection with the offering and sale of shares of Common Stock contemplated
by the foregoing, one relating to the Stock and the other relating to the U.S.
Stock. The latter form of prospectus will be identical to the former except
for certain substitute pages as included in the registration statement and
amendments thereto referred to below. Except as used in Sections 3, 4, 5, 12,
and 13 herein, and except as the context may otherwise require, references
herein to the Stock shall include all the shares of the Common Stock which
may be sold pursuant to either this Agreement or the U.S. Underwriting
Agreement, and references herein to any prospectus whether in preliminary
or final form, and whether as amended or supplemented, shall include both
the U.S. and the international versions thereof.
At or prior to the First Delivery Date (as defined in Section 6
hereof), the Company will complete a series of transactions described in each
Preliminary Prospectus and the Prospectus (as hereinafter defined), under the
heading "The Formation Transactions." As part of these transactions, the
Company and CapStar LP Corporation ("CapStar Sub") will become the sole
partners of CapStar Management Company, L.P., as governed by an amended
and restated Agreement of Limited Partnership (the "Operating Partnership"),
and the Operating Partnership will be restructured to own, directly or
indirectly, all of the properties and other assets currently owned,
directly or indirectly, by EquiStar Hotel Investors, L.P. and CapStar
Management Company, L.P. (as constituted as of the date hereof, "CapStar
Management"), and their respective subsidiaries, including twelve owned
hotel properties (the "Properties") or interests therein and management
agreements with a total of 48 hotels (collectively, the "Hotels"). As used
herein the term "Formation Transactions" shall mean the occurrence of all the
events described in the Prospectus under the heading "The Formation
Transactions," the execution of acquisition agreements for the Additional
Hotels (as defined in the Prospectus) and the other transactions related
thereto, the term "Formation Documents" shall mean all the material contracts,
agreements and other documents executed in connection with the Formation
Transactions set forth in Schedule 2 hereto, and the term "Predecessor
Entities" shall mean the subsidiaries of EquiStar Hotel Investors, L.P.
together with CapStar Management and its subsidiaries for all periods prior
to the consummation of the Formation Transactions.
2
<PAGE>
1. Representations, Warranties and Agreements of the Company and
the Operating Partnership. The Company and the Operating Partnership, jointly
and severally, represent, warrant and agree that:
(a) A registration statement on Form S-1 (333-6583), and amendments
thereto, with respect to the Stock has (i) been prepared by the
Company in conformity with the requirements of the United States
Securities Act of 1933 (the "Securities Act") and the rules and
regulations (the "Rules and Regulations") of the United States
Securities and Exchange Commission (the "Commission") thereunder,
(ii) been filed with the Commission under the Securities Act and
(iii) become effective under the Securities Act. Copies of such
registration statement and the amendments thereto have been
delivered by the Company to you as the lead managers (the "Lead
Managers") of the International Managers. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-
effective amendment thereto, if any, was declared effective by
the Commission; "Effective Date" means the date of the Effective
Time; "Preliminary Prospectus" means each prospectus included in
such registration statement, or amendments thereof, before it
became effective under the Securities Act and any prospectus
filed with the Commission by the Company with the consent of the
Lead Managers pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations
in accordance with Section hereof and deemed to be a part of the
registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and
"Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the
Rules and Regulations. Any registration statement (including any
amendment or supplement thereto or information which is deemed
part thereof) filed by the Company to register additional shares
of Common Stock of the Company under Rule 462(b) of the
Securities Act ("Rule 462(b) Registration Statement") shall be
deemed a part of the Registration Statement. Any prospectus
(including any amendment or supplement thereto or information
which is deemed to part thereof) included in a Rule 462(b)
Registration Statement and any term sheet as contemplated by Rule
434 of the Rules and Regulations (a "Term Sheet") shall be deemed
to be part of the Prospectus. The Commission has not
3
<PAGE>
issued any order preventing or suspending the use of any
Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement
or the Prospectus will, when they become effective or are filed
with the Commission, as the case may be, conform in all material
respects to the requirements of the Securities Act and the Rules
and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto) contain
an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that no
representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information
furnished to the Company through the Lead Managers by or on
behalf of any Underwriter or International Manager specifically
for inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section
18) and each Predecessor Entity have been duly organized and are
validly existing as corporations, general or limited partnerships
or limited liability companies, as the case may be, in good
standing under the laws of their respective jurisdictions of
organization, are duly qualified to do business and are in good
standing as foreign corporations, limited partnerships or limited
liability companies, as the case may be, in each jurisdiction in
which their respective ownership or lease of property or the
conduct of their respective businesses requires such
qualification, and have all power and authority necessary to own
or hold their respective properties and to conduct the businesses
in which they are engaged;
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; and all of the shares of
Common Stock (other than the Stock to be offered and sold by the
Company hereunder) that are outstanding or will be issued on or
prior to the First Delivery Date were or will be offered and sold
in compliance with all applicable laws (including, without
4
<PAGE>
limitation, federal and state securities laws); and all of the
issued shares of capital stock, partnership interests or limited
liability company membership interests, as the case may be, of
each subsidiary of the Company have been duly and validly
authorized and issued and (except for partnership interests of
general partners) are fully paid and non-assessable and are owned
directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims except for liens in favor
of [Lehman Brothers Holdings, Inc.] to secure indebtedness.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the International Managers hereunder and the U.S.
Underwriters under the U.S. Underwriting Agreement have been duly
and validly authorized and, when issued and delivered against
payment therefor as provided herein will be duly and validly
issued, fully paid and non-assessable; and the Stock will conform
to the descriptions thereof contained in the Prospectus.
(f) The partnership interests of the Operating Partnership ("Units")
to be transferred to the Company and CapStar Sub in connection
with the Formation Transactions, have been duly authorized for
issuance by the Operating Partnership, and at the closing of the
Formation Transactions will be the only Units outstanding and
will be validly issued and fully paid.
(g) This Agreement and the U.S. Underwriting Agreement have been duly
authorized, executed and delivered by the Company and the
Operating Partnership.
(h) The execution, delivery and performance of this Agreement and the
U.S. Underwriting Agreement by the Company and the Operating
Partnership, the consummation of the transactions contemplated
hereby and thereby and the consummation of the Formation
Transactions will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company
or any of its subsidiaries or any Predecessor Entity is a party
or by which the Company or any of its subsidiaries or any
Predecessor Entity is bound or to which any of the property or
assets of the Company or any of its subsidiaries or any
Predecessor Entity is subject, nor will such actions result in
any violation of the provisions of the charter,
5
<PAGE>
by-laws, partnership agreement or operating agreement of the
Company, any of its subsidiaries or any Predecessor Entity or any
statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company,
any of its subsidiaries or any Predecessor Entity or any of their
properties or assets; and except for the registration of the
Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be
required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
International Managers and the U.S. Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body or any other
person is required for the execution, delivery and performance of
this Agreement or the U.S. Underwriting Agreement by the Company
or the Operating Partnership, the consummation of the
transactions contemplated hereby and the consummation of the
Formation Transactions.
(i) Upon consummation of the Formation Transaction, and except as set
forth in the Prospectus, there will be no preemptive or other
rights to subscribe for or to purchase, nor any restriction upon
the voting of, any unissued shares of the Stock to be issued and
sold by the Company to the International Managers hereunder
pursuant to the Company's charter or by-laws or any agreement or
other instrument;
(j) Except as set forth in the Prospectus, there are no preemptive or
other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any of the partnership interests
in the Operating Partnership pursuant to the Operating
Partnership's Agreement of Limited Partnership, as restated and
amended, or any agreement or other instrument to which the
Company is a party;
(k) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right (other than rights which have been
waived or satisfied) to require the Company to file a
registration statement under the Securities Act with respect to
any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in
the securities registered pursuant to the Registration Statement
6
<PAGE>
or in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities
Act.
(l) Except as described in the Prospectus, the Company has not sold
or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales
pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act, other than shares issued pursuant to employee
benefit plans, qualified stock options plans or other employee
compensation plans or pursuant to outstanding options, rights or
warrants.
(m) None of the Company, any of its subsidiaries or any Predecessor
Entity has sustained, since the date of the latest audited
financial statements included in the Prospectus, any material
loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, other than as set forth or
contemplated in the Prospectus, (i) there has been no material
adverse change in the financial condition, results of operation
or business of the Company, the Operating Partnership, any
subsidiary of the Company or any Predecessor Entity, whether or
not arising in the ordinary course of business, (ii) no material
casualty loss or material condemnation or other material adverse
event with respect to any Property has occurred, (iii) there have
been no transactions or acquisition agreements entered into by
the Company, the Operating Partnership or any subsidiary of the
Company other than those in the ordinary course of business,
which are material with respect to such entity, except in
connection with the Formation Transactions, (iv) there has been
no dividend or distribution of any kind declared, paid or made
by the Company on any class of its capital stock or by the
Operating Partnership with respect to its partnership interests
and (v) there has been no change in the capital stock of the
Company or the partnership interests of the Operating
Partnership, or any increase in the indebtedness of the
Company, the Operating Partnership or any subsidiary, except
in connection with the Formation Transactions.
(n) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration
Statement or included in the Prospectus present fairly the
7
<PAGE>
financial condition and results of operations of the entities
purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis
throughout the periods involved, except as otherwise stated
herein.
(o) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and the Predecessor Entities, whose
reports appear in the Prospectus and who have delivered the
initial letter referred to in Section 10(g) hereof, are
independent public accountants as required by the Securities Act
and the Rules and Regulations; and Bober, Markey and Company,
whose report appears in the Prospectus and who have delivered
the initial letter referred to in Section 10(h) hereof, were
independent accountants as required by the Securities Act and
the Rules and Regulations during the periods covered by the
financial statements on which they reported contained in the
Prospectus.
(p) The Company and each of its subsidiaries have or will have on
the First Delivery Date good and marketable title in fee simple
to all real property and good and marketable title to all
personal property owned by them, in each case free and clear
of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially
affect the value of such property and do not materially
interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and all real
property and buildings held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and
enforceable leases, in each case free and clear of all liens,
encumbrances and defects except such as are described in the
Prospectus or with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries.
There shall be issued and outstanding with respect to each of
the Owned Hotels (as defined in the Prospectus) an ALTA form of
owner's title insurance policy (or local equivalent with respect
to those Owned Hotels located in jurisdictions where an ALTA
form of owner's title insurance policy is not available)
insuring the fee simple estate of the applicable subsidiary of
the Company in the Owned Hotel owned by such subsidiary in an
amount at least equal to the acquisition price of such Owned
Hotel and each such title insurance policy will continue to be
in full force and
8
<PAGE>
effect immediately following the consummation of the Formation
Transactions.
(q) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the
value of their respective properties and as is customary for
companies engaged in similar businesses in similar industries.
(r) Each of the Company, its subsidiaries and the Predecessor
Entities possesses such certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory
agencies or bodies necessary to conduct the business now
operated by them, except where the failure to possess such
certificates, authorizations or permits would not have a
material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries (a "Material
Adverse Effect"), and none of the Company, any of its
subsidiaries or any Predecessor Entity has received any
notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling, or finding, would have a Material
Adverse Effect.
(s) The Company, each of its subsidiaries and each Predecessor
Entity own or possess adequate rights to use all material
patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations,
franchises, copyrights and licenses necessary for the conduct
of their respective businesses and have no reason to believe
that the conduct of their respective businesses will conflict
with, and have not received any notice of any claim of conflict
with, any such rights of others.
(t) There are no legal or governmental proceedings pending to which
the Company, any of its subsidiaries or any Predecessor Entity
is a party or of which any property or assets of the Company,
any of its subsidiaries or any Predecessor Entity is the
subject which could reasonably be expected to have a Material
Adverse Effect; and to the best of the Company's knowledge, no
such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
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<PAGE>
(u) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or
filed as exhibits to the Registration Statement.
(v) No relationship, direct or indirect, exists between or among the
Company, the Operating Partnership, any subsidiary of the
Company, or any Predecessor Entity, on the one hand, and the
directors, officers, stockholders of the Company, or customers
or suppliers of the Company, or customers or suppliers of the
Operating Partnership, on the other hand, which is required to
be described in the Prospectus which is not so described.
(w) There is (i) no material unfair labor practice complaint pending
against the Company, its subsidiaries or any Predecessor Entity
nor, to the best knowledge of the Company, threatened against
any of them before the National Labor Relations Board or any
state or local labor relations board, and no significant
grievance or significant arbitration proceeding arising out of
or under any collective bargaining agreement is so pending
against the Company, its subsidiaries or any Predecessor Entity
or, to the best knowledge of the Company, threatened against
any of them, (ii) no material strike, labor dispute, slowdown
or stoppage pending against the Company, its subsidiaries or any
Predecessor Entity nor, to the best knowledge of the Company,
threatened against the Company, its subsidiaries or any
Predecessor Entity which might be expected to have a Material
Adverse Effect.
(x) None of the Company, any subsidiary or any Predecessor Entity has
violated any safety or similar law applicable to its business nor
any federal, state or local law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal
or state wages and hours laws which in each case might result in
a Material Adverse Effect.
(y) The Company, its subsidiaries and each Predecessor Entity are in
compliance in all material respects with all presently applicable
provisions of the Employee Retirement Income Security Act of
1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company, any of its
subsidiaries or any Predecessor Entity would have any
10
<PAGE>
liability; the Company, its subsidiaries and each Predecessor
Entity have not incurred and do not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971
of the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company, any of
its subsidiaries or any Predecessor Entity would have any
liability that is intended to be qualified under Section 401(a)
of the Code is so qualified in all material respects and nothing
has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(z) The Company, each of its subsidiaries and each Predecessor Entity
has filed all federal, state and local income and franchise tax
returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined
adversely to the Company, any of its subsidiaries or any
Predecessor Entity which has had (nor does the Company have any
knowledge of) any tax deficiency which, if determined adversely
to the Company, any of its subsidiaries or any Predecessor
Entity, might have a Material Adverse Effect; the amounts
currently set up as provisions for taxes or otherwise by the
Company and its subsidiaries on their books and records are
sufficient for the payment of all their unpaid federal, foreign,
state, county and local taxes accrued through the dates as of
which they speak, and for which the Company and its subsidiaries
may be liable in their own right or as a transferee of the assets
of, or as successor to any other corporation, association,
partnership, joint venture or other entity.
(aa) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed
in the Prospectus, the Company and its subsidiaries have not (i)
issued or granted any securities, (ii) incurred any liability or
obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on its
capital stock.
(ab) The Company, its subsidiaries, and the Predecessor Entities (i)
make and keep accurate books and records and (ii) maintain
internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with
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<PAGE>
management's authorization, (B) transactions are recorded as
necessary to permit preparation of their financial statements and
to maintain accountability for their assets, (C) access to their
books, records and accounts is permitted only in accordance with
management's authorization and (D) the reported accountability
for their assets is compared with existing assets at reasonable
intervals.
(ac) None of the Company, any of its subsidiaries or any Predecessor
Entity is, or will be, immediately following consummation of the
Formation Transactions, (i) in violation of its charter, by-laws,
partnership agreement or operating agreement, (ii) in default in
any material respect, and no event has or will have occurred
which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to
which any of its properties or assets is subject or (iii) in
violation of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject
or has or will have failed to obtain any material license,
permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its
property or to the conduct of its business, which violation or
failure could reasonably be expected to have a Material Adverse
Effect.
(ad) None of the Company, any of its subsidiaries or any Predecessor
Entity, or any director, officer, agent, employee or other person
associated with or acting on behalf of the Company, any of its
subsidiaries or any Predecessor Entity, has used any corporate,
partnership or limited liability company funds for any unlawful
contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977; or
made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(ae) There has been no storage, disposal, generation, manufacture,
refinement, installation, transportation, handling or treatment
of toxic wastes, medical wastes, hazardous wastes, petroleum or
petroleum products (including crude oil or any fraction thereof),
12
<PAGE>
hazardous substances or any other substances which pose a hazard
to human health, safety, natural resources, industrial hygiene or
the environment or which cause or threaten to cause a nuisance by
the Company, any of its subsidiaries, or any Predecessor Entity
(or, to the knowledge of the Company, by any of their
predecessors in interest or by any other entity) at, upon or from
any of the property now or previously owned or leased by the
Company, its subsidiaries or any Predecessor Entity except to the
extent commonly used in the normal operations of such property,
in violation of any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit or which would require
investigation, monitoring, removal action, corrective action,
remedial action or other response action ("response action")
under any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit, except for any violation or response
action which would not have, or could not be reasonably likely to
have, singularly or in the aggregate with all such violations and
response actions, a Material Adverse Effect; there has been no
material spill, discharge, leak, emission, injection, escape,
dumping or release or threatened release of any kind onto such
property or into the environment surrounding such property of any
toxic wastes, medical wastes, solid wastes, hazardous wastes,
petroleum or petroleum products (including crude oil or any
fraction thereof), hazardous substances or any other substances
which pose a hazard to human health, safety, natural resources,
industrial hygiene or the environment or which cause or threaten
to cause a nuisance, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release or threatened
release which would not have or would not be reasonably likely to
have, singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings,
releases and threatened releases, a Material Adverse Effect; and
the terms "hazardous wastes," "solid wastes," "toxic wastes,"
"hazardous substances," "petroleum," "petroleum products" and
"medical wastes" shall have the meanings specified in any
applicable local, state, federal and foreign laws or regulations
with respect to environmental protection.
(af) Neither the Company nor any subsidiary is, or will be as a result
of the offer and sale of the Stock hereunder, an "investment
company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the
Commission thereunder.
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<PAGE>
(ag) All of the representation and warranties of the Company, its
subsidiaries and the Predecessor Entities contained in the
Formation Documents set forth in Schedule 2 hereof are true and
correct in all material respects.
2. Representations, Warranties and Agreements of the Selling
Stockholder. The Selling Stockholder represents, warrants and agrees that:
(a) The Selling Stockholder has, and immediately prior to the First
Delivery Date the Selling Stockholder will have, good and valid
title to the shares of Stock to be sold by the Selling
Stockholder hereunder on such date, free and clear of all liens,
encumbrances, equities or claims; and upon delivery of such
shares and payment therefor pursuant hereto, good and valid title
to such shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several International
Managers.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement") with [insert name of
custodian], as custodian (the "Custodian"), for delivery under
this Agreement and the U.S. Underwriting Agreement, certificates
in negotiable form (with signature guaranteed by a commercial
bank or trust company having an office or correspondent in the
United States or a member firm of the New York or American Stock
Exchanges) representing the shares of Stock to be sold by the
Selling Stockholder hereunder and thereunder.
(c) The Selling Stockholder has full right, power and authority to
enter into this Agreement, the U.S. Underwriting Agreement and
the Custody Agreement; the execution, delivery and performance of
this Agreement, the U.S. Underwriting Agreement and the Custody
Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage deed of trust, loan agreement or other
agreement or instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder is bound or to which
any of the property or assets of the Selling Stockholder is
subject, nor will such actions result in any violation of the
provisions of the agreement of limited partnership of the Selling
Stockholder or any statute or any order, rule or regulation of
any court or governmental agency or
14
<PAGE>
body having jurisdiction over the Selling Stockholder or the
property or assets of the Selling Stockholder; and, except for
the registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase
and distribution of the Stock by the International Managers, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement, the U.S. Underwriting Agreement or the Custody
Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby.
(d) The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with
the Commission, as the case may be, do not and will not, as of
the applicable effective date (as to the Registration Statement
and any amendment thereto) and as of the applicable filing date
(as to the Prospectus and any amendment or supplement thereto)
contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided that no
representation or warranty is made as to information contained
in or omitted from the Registration Statement or the Prospectus
in reliance upon and in conformity with written information
furnished to the Company through the Lead Managers by or on
behalf of any International Manager specifically for inclusion
therein.
(e) The Selling Stockholder has no reason to believe that the
representations and warranties of the Company and the Operating
Partnership contained in Section 1 hereof are not true and
correct in all material respects, is familiar with the
Registration Statement and the Prospectus (as amended or
supplemented) and has no knowledge of any material fact,
condition or information not disclosed in the Registration
Statement, as of the effective date, or the Prospectus (or any
amendment or supplement thereto), as of the applicable filing
date, which has adversely affected or may reasonably be expected
to adversely affect the business of the Company and is not
prompted to sell shares of Common Stock by any
15
<PAGE>
information concerning the Company which is not set forth in the
Registration Statement and the Prospectus.
(f) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected
to cause or result in the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or
resale of the shares of the Stock.
3. Purchase of the Stock by the International Managers. On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell 1,350,000
shares of the Firm Stock and the Selling Stockholder agrees to sell 500,000
shares of the Firm Stock, severally and not jointly, to the several
International Managers and each of the International Managers, severally and not
jointly, agrees to purchase the number of shares of the Firm Stock set opposite
that International Manager's name in Schedule 1 hereto. Each International
Manager shall be obligated to purchase from the Company, and from the Selling
Stockholder, that number of shares of the Firm Stock which represents the same
proportion of the number of shares of the Firm Stock to be sold by the Company,
and by the Selling Stockholder, as the number of shares of the Firm Stock set
forth opposite the name of such International Manager in Schedule 1 represents
of the total number of shares of the Firm Stock to be purchased by all of the
International Managers pursuant to this Agreement. The respective purchase
obligations of the International Managers with respect to the Firm Stock shall
be rounded among the International Managers to avoid fractional shares, as the
Lead Managers may determine.
In addition, the Company grants to the International Managers an
option to purchase up to 277,500 shares of Option Stock. Such option is granted
solely for the purpose of covering over-allotments in the sale of Firm Stock and
is exercisable as provided in Section 6 hereof. Shares of Option Stock shall be
purchased severally for the account of the International Managers in proportion
to the number of shares of Firm Stock set opposite the name of such
International Managers in Schedule 1 hereto. The respective purchase
obligations of each International Manager with respect to the Option Stock shall
be adjusted by the Lead Managers so that no International Manager shall be
obligated to purchase Option Stock other than in 100 share amounts. The price
of both the Firm Stock and any Option Stock shall be $_____ per share.
The Company and the Selling Stockholder shall not be obligated to
deliver any of the Stock to be delivered on the First Delivery Date or the
Second Delivery Date (as hereinafter defined), as the case may be, except upon
payment for all the Stock to be purchased on such Delivery Date as provided
herein.
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<PAGE>
4. Retention of Qualified Independent Underwriters. The Company
hereby confirms its engagement of Merrill Lynch, Pierce, Fenner & Smith
Incorporated as, and Merrill Lynch, Pierce Fenner & Smith Incorporated hereby
confirms its agreement with the Company to render services as, "qualified
independent underwriter" within the meaning of Section 2720 of the Conduct Rules
of the National Association of Securities Dealers, Inc. with respect to the
offering and sale of Shares. Merrill Lynch, Pierce, Fenner & Smith
Incorporated, solely in its capacity as qualified independent underwriter and
not otherwise, is referred to herein as the "Independent Underwriter."
5. Offering of Stock by the International Managers. Upon
authorization by the Lead Managers of the release of the Firm Stock, the several
International Managers to offer the Firm Stock for sale upon the terms and
conditions set forth in the Prospectus.
6. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the offices of Lehman Brothers Inc. at 10:00
A.M., New York City time, on the fourth full business day following the date of
this Agreement or at such other date or place as shall be determined by
agreement between the Lead Managers and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company and the Selling Stockholder shall deliver or cause to be delivered
certificates representing the Firm Stock to the Lead Managers for the account of
each International Manager against payment to or upon the order of the Company
and the Selling Stockholder of the purchase price by wire transfer of federal
(same-day) funds to an account or accounts previously designated in writing to
Lehman Brothers Inc. by the Company and the Selling Stockholder. Time shall be
of the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each International Manager
hereunder. Upon delivery, the Firm Stock shall be registered in such names and
in such denominations as the Lead Managers shall request in writing not less
than two full business days prior to the First Delivery Date. For the purpose
of expediting the checking and packaging of the certificates for the Firm Stock,
the Company and the Selling Stockholder shall make the certificates representing
the Firm Stock available for inspection by the Lead Managers in New York, New
York, not later than 2:00 P.M., New York City time, on the business day prior to
the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 3 may be exercised by written notice
being given to the Company by the Lead Managers. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Lead Managers, when the shares of Option
Stock
17
<PAGE>
are to be delivered; provided, however, that this date and time shall not be
earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 6
(or at such other place as shall be determined by agreement between the Lead
Managers and the Company) at 10:00 A.M., New York City time, on the Second
Delivery Date. On the Second Delivery Date, the Company shall deliver or cause
to be delivered the certificates representing the Option Stock to the Lead
Managers for the account of each International Manager against payment to or
upon the order of the Company of the purchase price by wire transfer of federal
(same-day) funds to an account or accounts previously designated in writing to
Lehman Brothers Inc. by the Company Time shall be of the essence, and delivery
at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each International Manager hereunder. Upon
delivery, the Option Stock shall be registered in such names and in such
denominations as the Lead Managers shall request in the aforesaid written
notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the Option Stock available for inspection by the Lead Managers in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the Second Delivery Date.
7. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the Lead Managers
and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on
the second business day following the execution and delivery of
this Agreement or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Securities Act; to make no
further amendment or any supplement to the Registration Statement
or to the Prospectus except as permitted herein; to advise the
Lead Managers, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or
any amended Prospectus has been filed and to furnish the Lead
Managers with copies thereof; to advise the Lead Managers,
promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or
suspending the use of any
18
<PAGE>
Preliminary Prospectus or the Prospectus, of the suspension of
the qualification of the Stock for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the
Prospectus or suspending any such qualification, to use promptly
its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Lead Managers and to counsel
for the International Managers a signed copy of the Registration
Statement as originally filed with the Commission, and each
amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Lead Managers such number of the
following documents as the Lead Managers shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto
(in each case excluding exhibits other than this Agreement) and
(ii) each Preliminary Prospectus, the Prospectus and any amended
or supplemented Prospectus; and, if the delivery of a prospectus
is required at any time after the Effective Time in connection
with the offering or sale of the Stock or any other securities
relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities
Act, to notify the Lead Managers and, upon their request, to
prepare and furnish without charge to each International Manager
and to any dealer in securities as many copies as the Lead
Managers may from time to time reasonably request of an amended
or supplemented Prospectus which will correct such statement or
omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
19
<PAGE>
Lead Managers, be required by the Securities Act or requested by
the Commission;
(e) To the extent practicable, prior to filing with the Commission
any amendment to the Registration Statement or supplement to the
Prospectus or any Prospectus pursuant to Rule 424 of the Rules
and Regulations, and to the extent not practicable, immediately
thereafter, to furnish a copy thereof to the Lead Managers and
counsel for the International Managers and to consult with the
Lead Managers prior to the filing;
(f) As soon as practicable after the Effective Date, but in any event
not later than 410 or, if the fourth quarter following the fiscal
quarter that includes the Effective Date is the last fiscal
quarter of the Company's fiscal year, 455 days after the end of
the Company's current fiscal quarter, to make generally available
to the Company's security holders and to deliver to the Lead
Managers an earning statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the
Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) Until the earlier of the expiration of the period of five years
following the Effective Date and the date on which the Company
ceases to be subject to the reporting requirements of the
Exchange Act, to furnish to the Lead Managers copies of all
materials furnished by the Company to its shareholders and all
public reports and all reports and financial statements furnished
by the Company to the principal national securities exchange upon
which the Common Stock may be listed pursuant to requirements of
or agreements with such exchange or to the Commission pursuant to
the Exchange Act or any rule or regulation of the Commission
thereunder;
(h) Promptly from time to time to take such action as the Lead
Managers may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Lead Managers may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Stock, provided that in connection therewith
the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in
any jurisdiction;
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<PAGE>
(i) Except as described in the Prospectus, for a period of 180 days
from the date of the Prospectus, not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected
to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock and
shares issued pursuant to employee benefit plans, qualified stock
option plans or other employee compensation plans existing on the
date hereof or pursuant to currently outstanding options,
warrants or rights), or sell or grant options, rights or warrants
with respect to any shares of Common Stock (other than the grant
of options pursuant to option plans existing on the date hereof),
without the prior written consent of Lehman Brothers Inc.; and to
cause each of CapStar Executive Investors I, L.L.C., CapStar
Executive Investors II, L.L.C., CapStar GP Corp., CapStar Hotels,
Inc., Latham Hotels, Inc., New CapStar Group I, L.L.C., New
CapStar Group II, L.L.C., Paul W. Whetsell, David E. McCaslin,
and Daniel A. Burack to furnish to the Lead Managers, prior to
the First Delivery Date, a letter or letters, in form and
substance satisfactory to counsel for the International Managers,
pursuant to which each such person shall agree not to, directly
or indirectly, offer for sale, sell or otherwise dispose of (or
enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at
any time in the future of) any shares of Common Stock for a
period of 360 days from the date of the Prospectus, without the
prior written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the listing of the
Stock on the New York Stock Exchange, Inc. and to use its best
efforts to complete that listing, subject only to official notice
of issuance and evidence of satisfactory distribution, prior to
the First Delivery Date;
(k) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a
copy thereof to the counsel for the International Managers and
receive and consider its comments thereon, and to deliver
promptly to the Lead Managers a signed copy of each report on
Form SR filed by it with the Commission;
(l) To apply the net proceeds from the sale of the Stock being sold
by the Company as set forth in the Prospectus; and
21
<PAGE>
(m) To take such steps as shall be necessary to ensure that neither
the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the
Commission thereunder.
8. Further Agreements of the Selling Stockholder. The Selling
Stockholder agrees:
(a) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, offer for sale, sell or otherwise dispose
of (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person
at any time in the future of) any shares of Common Stock (other
than the Stock), without the prior written consent of Lehman
Brothers Inc.
(b) That the Stock to be sold by the Selling Stockholder hereunder
which is represented by the certificates held in custody for the
Selling Stockholder, is subject to the interest of the
International Managers, that the arrangements made by the Selling
Stockholder for such custody are to that extent irrevocable, and
that the obligations of the Selling Stockholder hereunder shall
not be terminated by any act of the Selling Stockholder, by
operation of law or the occurrence of any other event.
(c) To deliver to the Lead Managers prior to the First Delivery Date
a properly completed and executed United States Treasury
Department Form W-9.
9. Expenses. The Company agrees to pay (a) the costs incident to
the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of producing and distributing
this Agreement and any other related documents in connection with the offering,
purchase, sale and delivery of the stock; (e) the costs of delivering and
distributing the Custody Agreement; (f) the fees (including reasonable
attorneys' fees) and expenses incident to securing any required review by the
National Association of Securities Dealers, Inc. of the terms
22
<PAGE>
of sale of the Stock; (g) any applicable listing or other fees; (h) the fees and
expenses of qualifying the Stock under the securities laws of the several
jurisdictions as provided in Section 7(h) and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the International Managers); and (j) all other costs and expenses
incident to the performance of the obligations of the Company and the Selling
Stockholder under this Agreement; provided that, except as provided in this
Section 9 and in Section 14 the International Managers shall pay their own costs
and expenses, including the costs and expenses of their counsel, any transfer
taxes on the Stock which they may sell and the expenses of advertising any
offering of the Stock made by the International Managers.
10. Conditions of International Managers' Obligations. The
respective obligations of the International Managers hereunder are subject to
the accuracy, when made and on each Delivery Date, of the representations and
warranties of the Company and the Selling Stockholder contained herein, to the
performance by the Company and the Selling Stockholder of their obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 7(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and any
request of the Commission for inclusion of additional information
in the Registration Statement or the Prospectus or otherwise
shall have been complied with.
(b) No International Manager shall have discovered and disclosed to
the Company on or prior to such Delivery Date that the
Registration Statement or the Prospectus or any amendment or
supplement thereto contains an untrue statement of a fact which,
in the opinion of Hogan & Hartson L.L.P., counsel for the
International Managers, is material or omits to state a fact
which, in the opinion of such counsel, is material and is
required to be stated therein or is necessary to make the
statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Custody
Agreement, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for
the International Managers, and the Company and the Selling
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<PAGE>
Stockholder shall have furnished to such counsel all documents
and information that they may reasonably request to enable them
to pass upon such matters.
(d) Paul, Weiss, Rifkind, Wharton and Garrison shall have furnished
to the Lead Managers their written opinion, as counsel to the
Company, addressed to the International Managers and dated such
Delivery Date, in form and substance reasonably satisfactory to
the Lead Managers, to the effect that:
(i) The Company and each of its subsidiaries have been duly
formed and are validly existing as corporations, limited
partnerships or limited liability companies, as the case may be,
in good standing under the laws of their respective jurisdictions
of organization, are duly qualified to do business and are in
good standing as foreign corporations, limited partnerships or
limited liability companies, as the case may be, in each
jurisdiction in which their respective ownership or lease of
property or the conduct of their respective businesses requires
such qualification and have all corporate, partnership or limited
liability company, as the case may be, power and authority
necessary to own or hold their respective properties and conduct
the businesses in which they are engaged as described in the
Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of Stock being
delivered on such Delivery Date) have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectus;
and (assuming that all representations and warranties contained
in all documents delivered in connection with the Formation
Transaction are true and correct) all of the shares of Common
Stock (other than the Stock to be offered and sold by the Company
to the International Managers hereunder) that are outstanding
were offered and sold in transactions exempt from the
registration requirements of the Securities Act and in compliance
with all applicable provisions of the General Corporation Law of
the State of Delaware (the "Delaware Corporation Law"), and all
of the issued shares of capital stock, partnership interests or
limited liability company membership interests, as the case may
be, of each subsidiary of the Company have been duly and validly
authorized and issued and (with the exception of partnership
interests of general partners) are fully paid, non-assessable and
are owned directly or indirectly by the
24
<PAGE>
Company, to such counsel's knowledge free and clear of all liens,
encumbrances, or claims except for liens in favor of [Lehman
Brothers Holdings, Inc.] to secure indebtedness;
(iii) Except as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor
any restriction upon the voting or transfer of, any unissued
shares of the Stock to be issued and sold by the Company to the
International Managers hereunder pursuant to the Company's
charter or by-laws or any agreement or other instrument known to
such counsel;
(iv) Except as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor
any restriction upon the voting or transfer of, any of the
partnership interests in the Operating Partnership pursuant to
the Operating Partnership's Agreement of Limited Partnership, as
amended, or, to such counsel's knowledge, any agreement or other
instrument to which the Company is a party;
(v) To the best of such counsel's knowledge, based solely
on a review of such counsel's internal litigation docket, and
other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property or assets of
the Company or any of its subsidiaries is the subject which could
be expected to have a Material Adverse Effect; and, to the best
of such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by
others;
(vi) The Registration Statement was declared effective under
the Securities Act as of the date and time specified in such
opinion, the Prospectus was filed with the Commission pursuant to
the subparagraph of Rule 424(b) of the Rules and Regulations
specified in such opinion on the date specified therein and, to
the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and
no proceeding for that purpose is pending or threatened by the
Commission;
(vii) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the financial statements
and related schedules therein, as to which such
25
<PAGE>
counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and
the Rules and Regulations;
(viii) To the best of such counsel's knowledge, there are
no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to
the Registration Statement;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company;
(x) The amended and restated Agreement of Limited
Partnership of the Operating Partnership has been duly
authorized, executed and delivered by the Company and CapStar
Sub, and constitutes the valid and binding agreement of each such
party, enforceable against each such party in accordance with its
terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium
or other similar laws affecting the rights and remedies of
creditors generally and except as may be subject to general
principles of equity (regardless of whether such agreement is
considered in a proceeding in equity or at law), and except as
rights to indemnity thereunder may be limited by applicable law
and public policy;
(xi) The Registration Rights Agreement has been duly
authorized, executed and delivered by the Company and constitutes
the valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, liquidation, moratorium or other similar laws
affecting the rights and remedies of creditors generally and
except as may be subject to general principles of equity
(regardless of whether such agreement is considered in a
proceeding in equity or at law), and except as rights to
indemnity thereunder may be limited by applicable law and public
policy, and, except that no opinion is expressed as to the
enforceability of the choice of law provision thereof;
(xii) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company and the Operating Partnership with
26
<PAGE>
all of the provisions of this Agreement and the consummation of
the transactions contemplated hereby and the Formation
Transactions will not conflict with or result in a material
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound
or to which any of the property or assets of the Company or any
of its subsidiaries is subject which breach is reasonably likely
to have a Material Adverse Effect, nor will such actions result
in any violation of the provisions of the charter, by-laws,
limited partnership agreement or operating agreement of the
Company or any of its subsidiaries or any statute or any order,
rule or regulation known to such counsel of any court or
governmental agency or body of the United States, the State of
New York or established pursuant to Delaware Corporation Law
having jurisdiction over the Company or any of its subsidiaries
or any of their properties or assets; except for the registration
of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may
be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution
of the Stock by the International Managers, no consent, approval,
authorization or order of, or filing or registration with, any
such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement and the
U.S. Underwriting Agreement by the Company and the consummation
of the transactions contemplated hereby, including the Formation
Transactions;
(xiii) Except as set forth in the Prospectus, to the best
of such counsel's knowledge, there are no contracts, agreements
or understandings between the Company and any person granting
such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration
statement under the Securities Act with respect to any securities
of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act;
27
<PAGE>
(xiv) Neither the Company nor any of its subsidiaries
is, after giving effect to the Formation Transactions, an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(xv) The Company, its subsidiaries and the Predecessor
Entities hold and after consummation of the Formation
Transactions will continue to hold all state food, beverage and
liquor licenses necessary or required for such corporations,
partnerships and limited liability companies to conduct their
business as currently conducted in each state;
(xvi) The Operating Partnership will be treated as a
partnership, and not as an "association" or "publicly traded
partnership" taxable as a corporation, for federal income tax
purposes; and
(xvii) The statements under the captions "Certain
Relationships and Related Transactions" and "Description of
Capital Stock" in the Prospectus, insofar as such statements
constitute a summary of legal matters, documents or proceedings
referred to therein are correct in all material respects.
In rendering such opinion, such counsel may (i) state that their
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of New York and
the Delaware Corporation Law and that such counsel is not
admitted in the State of Delaware; and (ii) in giving the
opinions referred to in Section 10(d)(i) (solely with regard to
organization and qualification of the Company's subsidiaries),
Section 10(d)(ii) (solely with regard to capital stock,
partnership interests or limited liability company membership
interests, as the case may be, of subsidiaries of the Company
being duly and validly authorized and issued and fully paid and
non-assessable), and Section 10(d)(xv), state that they are
relying on an opinion or opinions of other counsel as to such
matters, provided that the International Managers shall have
received such opinion or opinions, in form and substance
satisfactory to International Manager's counsel, of other counsel
reasonably acceptable to International Managers' counsel. Such
counsel shall also have furnished to the Lead Managers a written
statement, addressed to the International Managers and dated such
Delivery Date, in form and substance satisfactory to the Lead
Managers, to the effect that (x) in connection with the
28
<PAGE>
preparation of the Registration Statement and the Prospectus,
such counsel have participated in conferences with certain
officers and other Lead Managers of the Company, at which the
contents of the Registration Statement and the Prospectus and
related matters were discussed, and (y) based on such
participation, no facts have come to the attention of such
counsel which lead them to believe that the Registration
Statement (except for financial statements and schedules and
other statistical data included therein or omitted therefrom, as
to which such counsel need make no statement), as of the
Effective Date, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein not
misleading, or that the Prospectus (except for financial
statements and schedules and other statistical data included
therein or omitted therefrom, as to which such counsel need make
no statement) contains any untrue statement of a material fact or
omits to state a 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.
The foregoing statement may be qualified by a statement to the
effect that such counsel does not assume any responsibility for
the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus except
for the statements made in the Prospectus under the caption
"Description of Capital Stock," insofar as such statements relate
to the Stock and concern legal matters.
(e) The counsel for the Selling Stockholder shall have furnished to
the Lead Managers its written opinion, as counsel to the Selling
Stockholder, addressed to the International Managers and dated
the First Delivery Date, in form and substance reasonably
satisfactory to the Lead Managers, to the effect that:
(i) Selling Stockholder has full right, power and authority
to enter into this Agreement, the U.S. Underwriting Agreement and
the Custody Agreement; the execution, delivery and performance of
this Agreement, the U.S. Underwriting Agreement and the Custody
Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument
29
<PAGE>
known to such counsel to which the Selling Stockholder is a party
or by which the Selling Stockholder is bound or to which any of
the property or assets of the Selling Stockholder is subject, nor
will such actions result in any violation of the provisions of
the agreement of limited partnership of the Selling Stockholder
or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Selling Stockholder or the property or
assets of the Selling Stockholder; and, except for the
registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase
and distribution of the Stock by the International Managers, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement, the U.S. Underwriting Agreement or the Custody
Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby;
(ii) This Agreement and the U.S. Underwriting Agreement has
been duly authorized, executed and delivered by or on behalf of
the Selling Stockholder;
(iii) The Custody Agreement has been duly authorized,
executed and delivered by the Selling Stockholder and constitute
valid and binding agreements of the Selling Stockholder,
enforceable in accordance with their respective terms;
(iv) Immediately prior to the First Delivery Date, the
Selling Stockholder had good and valid title to the shares of
Stock to be sold by the Selling Stockholder under this Agreement,
free and clear of all liens, encumbrances, equities or claims,
and full right, power and authority to sell, assign, transfer and
deliver such shares to be sold by the Selling Stockholder
hereunder; and
(v) Good and valid title to the shares of Stock to be sold
by the Selling Stockholder under this Agreement, free and clear
of all liens, encumbrances, equities or claims, has been
transferred to each of the several International Managers.
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<PAGE>
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of Texas and the
Revised Limited Uniform Partnership Act of Delaware and that such
counsel is not admitted in the State of Delaware and (ii) in
rendering the opinion in Section 10(e)(iv) above, rely upon a
certificate of the Selling Stockholder in respect of matters of
fact as to ownership of and liens, encumbrances, equities or
claims on the shares of Stock sold by the Selling Stockholder,
provided that such counsel shall furnish copies thereof to the
Lead Managers and state that it believes that both the
International Managers and it are justified in relying upon such
certificate. Such counsel shall also have furnished to the Lead
Managers a written statement, addressed to the International
Managers and dated the First Delivery Date, in form and substance
satisfactory to the Lead Managers, to the effect that (x) such
counsel has acted as counsel to the Selling Stockholder on a
regular basis and has acted as counsel to the Selling Stockholder
in connection with the preparation of the Registration Statement,
and (y) based on the foregoing, no facts have come to the
attention of such counsel which lead it to believe that the
Registration Statement, as of the Effective Date, contained any
untrue statement of a material fact relating to the Selling
Stockholder or omitted to state such a material fact required to
be stated therein or necessary in order to make the statements
therein not misleading, or that the Prospectus contains any
untrue statement of a material fact relating to the Selling
Stockholder or omits to state such a 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. The foregoing opinion and statement may be
qualified by a statement to the effect that such counsel does not
assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus.
(f) The Lead Managers shall have received from Hogan & Hartson
L.L.P., counsel for the International Managers, such opinion or
opinions, dated such Delivery Date, with respect to the issuance
and sale of the Stock, the Registration Statement, the Prospectus
and other related matters as the Lead Managers may reasonably
require, and the Company shall have furnished to such counsel
such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
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(g) At the time of execution of this Agreement, the Lead Managers
shall have received from KPMG Peat Marwick a letter, in form and
substance satisfactory to the Lead Managers, addressed to the
International Managers and dated the date hereof (i) confirming
that they are independent public accountants within the meaning
of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as
of the date hereof (or, with respect to matters involving changes
or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date
not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(h) At the time of execution of this Agreement, the Lead Managers
shall have received from Bober, Markey & Company a letter in form
and substance satisfactory to the Lead Managers, addressed to the
International Managers and dated the date hereof (i) confirming
that they are independent public accountants within the meaning
of the Securities Act and are in compliance with Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date
hereof (or, with respect to matters involving changes or
developments since the respective dates as of which specified
financial information is in the Prospectus, as of a date not more
than five days prior to the date hereof), the conclusions and
findings of such firm with respect to the financial information
and other matters ordinarily covered by accountants' "comfort
letters" to underwriters in connection with registered public
offerings.
(i) With respect to the letters of KPMG Peat Marwick and Bober,
Markey & Company referred to in clauses (g) and (h) hereof and
delivered to the Lead Managers concurrently with the execution of
this Agreement (the "initial letters"), the Company shall have
furnished to the Lead Managers letters (the "bring-down letters")
of such accountants, addressed to the International Managers and
dated such Delivery Date (i) confirming that they are independent
public accountants within the meaning of the Securities Act and
are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-
X of the Commission, (ii) stating, as of the date of the bring-
down letters (or, with respect to matters
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<PAGE>
involving changes or developments since the respective dates as
of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the
date of the bring-down letters), the conclusions and findings of
such firms with respect to the financial information and other
matters covered by the initial letter and (iii) confirming in all
material respects the conclusions and findings set forth in the
initial letter.
(j) The Company shall have furnished to the Lead Managers a
certificate, dated such Delivery Date, of its Chairman of the
Board, its President or a Vice President and its chief financial
officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 10(a) and 10(l)
have been fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective
Date, the Registration Statement and Prospectus did not include
any untrue statement of a material fact and did not omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (B) since the
Effective Date no event has occurred which should have been set
forth in a supplement or amendment to the Registration Statement
or the Prospectus.
(k) The Selling Stockholder (or the Custodian) shall have furnished
to the Lead Managers on the First Delivery Date a certificate,
dated the First Delivery Date, signed by, or on behalf of, the
Selling Stockholder (or the Custodian) stating that the
representations, warranties and agreements of the Selling
Stockholder contained herein are true and correct as of the First
Delivery Date and that the Selling Stockholder has complied with
all agreements contained herein to be performed by the Selling
Stockholder at or prior to the First Delivery Date.
(l) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute
33
<PAGE>
or court or governmental action, order or decree, otherwise than
as set forth or contemplated in the Prospectus or (ii) since such
date there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and
its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described
in clause (i) or (ii), is, in the judgment of the Lead Managers,
so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery
of the Stock being delivered on such Delivery Date on the terms
and in the manner contemplated in the Prospectus.
(m) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the
American Stock Exchange or in the over-the-counter market, or
trading in any securities of the Company on any exchange or in
the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such
market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction,
(ii) a banking moratorium shall have been declared by Federal or
state authorities, (iii) the United States shall have become
engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been
a declaration of a national emergency or war by the United States
or (iv) there shall have occurred such a material adverse change
in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in
the United States shall be such) as to make it, in the judgment
of a majority in interest of the several International Managers,
impracticable or inadvisable to proceed with the public offering
or delivery of the Stock being delivered on such Delivery Date on
the terms and in the manner contemplated in the Prospectus.
(n) There shall be issued and outstanding with respect to each of the
Owned Hotels (as defined in the Prospectus) an ALTA form of
owner's title insurance policy (or local equivalent with respect
to those Owned Hotels located in jurisdictions where an ALTA form
of owner's title insurance is not available) insuring the fee
simple estate of the applicable subsidiary of the Company in the
34
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Owned Hotel owned by such subsidiary in an amount at least equal
to the acquisition price of such Owned Hotel and each such title
insurance policy will continue to be in full force and effect
immediately following the consummation of the Formation
Transactions.
(o) The New York Stock Exchange, Inc. shall have approved the Stock
for listing, subject only to official notice of issuance and
evidence of satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the International Managers.
11. Indemnification and Contribution.
(a) The Company and the Operating Partnership, jointly and severally,
shall indemnify and hold harmless each International Manager, its
officers and employees and each person, if any, who controls any
International Manager within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not
limited to, any loss, claim, damage, liability or action relating
to purchases and sales of Stock), to which that International
Manager, officer, employee or controlling person may become
subject, under the Securities Act or otherwise, insofar as such
loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment
or supplement thereto or (B) in any blue sky application or other
document prepared or executed by the Company (or based upon any
written information furnished by the Company) specifically for
the purpose of qualifying any or all of the Stock under the
securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a
"Blue Sky Application"), (ii) the omission or alleged omission to
state in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or in any amendment or supplement thereto, or
in any Blue Sky Application any material fact required to be
stated therein or necessary to make the statements therein not
misleading or (iii) any act or failure to act or any alleged act
or failure to act by any International Manager in connection
with, or relating in
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<PAGE>
any manner to, the Stock or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company
and the Operating Partnership shall not be liable under this
clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss,
claim, damage, liability or action resulted directly from any
such acts or failures to act undertaken or omitted to be taken by
such International Manager through its gross negligence or
willful misconduct), and shall reimburse each International
Manager and each such officer, employee or controlling person
promptly upon demand for any legal or other expenses reasonably
incurred by that International Manager, officer, employee or
controlling person in connection with investigating or defending
or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred; provided,
however, that the Company and the Operating Partnership shall not
be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of, or is based
upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such
amendment or supplement, or in any Blue Sky Application, in
reliance upon and in conformity with written information
concerning such International Manager furnished to the Company
through the Lead Managers by or on behalf of any International
Manager specifically for inclusion therein. The foregoing
indemnity agreement is in addition to any liability which the
Company or the Operating Partnership may otherwise have to any
International Manager or to any officer, employee or controlling
person of that International Manager.
The Company and the Operating Partnership, jointly and severally,
also will indemnify and hold harmless the Independent Underwriter
and each person, if any, who controls the Independent Underwriter
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and judgments incurred as a
result of the Independent Underwriter's participation as a
"qualified independent underwriter" within the meaning of Section
2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. in connection with the offering of the
Stock, except for any losses, claims, damages, liabilities and
judgments resulting from the
36
<PAGE>
Independent Underwriter's or such controlling person's willful
misconduct or gross negligence.
(b) The Selling Stockholder shall indemnify and hold harmless each
International Manager, its officers and employees, and each
person, if any, who controls any International Manager within the
meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to
which that International Manager, officer, employee or
controlling person may become subject, under the Securities Act
or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement
or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto or (ii) the
omission or alleged omission to state in any Preliminary
Prospectus, Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and shall reimburse each International Manager, its
officers and employees and each such controlling person for any
legal or other expenses reasonably incurred by that International
Manager, its officers and employees or controlling person in
connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Selling
Stockholder shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out
of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in
any such amendment or supplement in reliance upon and in
conformity with written information concerning such International
Manager furnished to the Company through the Lead Managers by or
on behalf of any International Manager specifically for inclusion
therein. The foregoing indemnity agreement is in addition to any
liability which the Selling Stockholder may otherwise have to any
International Manager or any officer, employee or controlling
person of that International Manager.
(c) Each International Manager, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and
37
<PAGE>
employees, each of its directors (including any person who, with
his or her consent, is named in the Registration Statement as
about to become a director of the Company), the Selling
Stockholder and each person, if any, who controls the Company
within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action
in respect thereof, to which the Company or any such director,
officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission
or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material
fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the
extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in
conformity with written information concerning such International
Manager furnished to the Company through the Lead Managers by or
on behalf of that International Manager specifically for
inclusion therein, and shall reimburse the Company and any such
director, officer or controlling person for any legal or other
expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred. The
foregoing indemnity agreement is in addition to any liability
which any International Manager may otherwise have to the
Company, the Selling Stockholder or any such director, officer,
employee or controlling person.
(d) Promptly after receipt by an indemnified party under this Section
11 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Section 11, notify
the indemnifying party in writing of the claim or the
commencement of that action; provided, however, that the failure
to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 11 except to the
extent it has been materially prejudiced by such failure and,
38
<PAGE>
provided further, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have
to an indemnified party otherwise than under this Section 11. If
any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and,
to the extent that it wishes, jointly with any other similarly
notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of
its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party
under this Section 11 for any legal or other expenses
subsequently incurred by the indemnified party in connection with
the defense thereof other than reasonable costs of investigation;
provided, however, that the Lead Managers shall have the right to
employ counsel to represent jointly the Lead Managers and those
other International Managers and their respective officers,
employees and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be
sought by the International Managers against the Company, the
Operating Partnership or the Selling Stockholder under this
Section 11 if, in the reasonable judgment of the Lead Managers,
it is advisable for the Lead Managers and those International
Managers, officers, employees and controlling persons to be
jointly represented by separate counsel, and in that event the
fees and expenses of one such separate counsel shall be paid by
the Company, the Operating Partnership and the Selling
Stockholder; provided further, that, if indemnity is sought
pursuant to the second paragraph of Section 11(a), then, in
addition to such counsel for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate counsel (in addition to
any necessary local counsel) for the Independent Underwriter in
its capacity as a "qualified independent underwriter" and all
persons, if any, who control the Independent Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, if, in the reasonable judgment of the
Independent Underwriter there may exist a conflict of interest
between the Independent Underwriter and the other indemnified
parties. In the case of any such separate counsel for the
Independent Underwriter and such control persons of the
Independent Underwriter, such counsel shall be designated in
writing by the Independent Underwriter. No indemnifying party
shall (i) without the prior written
39
<PAGE>
consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to
such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit
or proceeding, or (ii) be liable for any settlement of any such
action effected without its written consent (which consent shall
not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and
against any loss or liability by reason of such settlement or
judgment.
(e) If the indemnification provided for in this Section 11 shall for
any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 11(a), 11(b) or 11(c) in respect
of any loss, claim, damage or liability, or any action in respect
thereof, referred to therein, then each indemnifying party shall,
in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of
such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company, the
Operating Partnership and the Selling Stockholder on the one hand
and the International Managers on the other from the offering of
the Stock or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to
in clause (i) above but also the relative fault of the Company,
the Operating Partnership, and the Selling Stockholder on the one
hand and the International Managers on the other with respect to
the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits
received by the Company, the Operating Partnership, and the
Selling Stockholder on the one hand and the International
Managers on the other with respect to such offering shall be
deemed to be in the same proportion as the total net proceeds
from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company, the
40
<PAGE>
Operating Partnership, and the Selling Stockholder, on the one
hand, and the total underwriting discounts and commissions
received by the International Managers with respect to the shares
of the Stock purchased under this Agreement, on the other hand,
bear to the total gross proceeds from the offering of the shares
of the Stock under this Agreement, in each case as set forth in
the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to whether the untrue or
alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information
supplied by the Company, the Operating Partnership, the Selling
Stockholders or the International Managers, the intent of the
parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission.
For purposes of the preceding two sentences, the net proceeds
deemed to be received by the Company shall be deemed to be also
for the benefit of the Operating Partnership and information
supplied by the Company shall also be deemed to have been
supplied by the Operating Partnership. The Company and the
International Managers agree that Merrill Lynch, Pierce, Fenner &
Smith Incorporated will not receive any additional benefits
hereunder for serving as the Independent Underwriter in
connection with the offering and sale of the Stock. The Company,
the Operating Partnership, the Selling Stockholder and the
International Managers further agree that it would not be just
and equitable if contributions pursuant to this Section were to
be determined by pro rata allocation (even if the International
Managers were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the
equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to
above in this Section shall be deemed to include, for purposes of
this Section 11(e), any legal or other expenses reasonably
incurred by such indemnified party in connection with
investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 11(e), no
International Manager shall be required to contribute any amount
in excess of the amount by which the total price at which the
Stock underwritten by it and distributed to the public was
offered to the public exceeds the amount of any damages which
such International Manager has otherwise paid or become liable to
pay by reason of-any untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of
41
<PAGE>
Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation. The International Managers'
obligations to contribute as provided in this Section 11(e) are
several in proportion to their respective underwriting
obligations and not joint.
(f) The International Managers severally confirm and the Company
acknowledges that the statements with respect to the public
offering of the Stock by the International Managers set forth on
the cover page of, the legend concerning over-allotments on the
inside front cover page of and the concession and reallowance
figures appearing under the caption "Underwriting" in, the
Prospectus are correct and constitute the only information
concerning such International Managers furnished in writing to
the Company by or on behalf of the International Managers
specifically for inclusion in the Registration Statement and the
Prospectus.
12. Defaulting International Managers. If, on either Delivery Date,
any International Manager defaults in the performance of its obligations under
this Agreement, the remaining non-defaulting International Managers shall be
obligated to purchase the Stock which the defaulting International Manager
agreed but failed to purchase on such Delivery Date in the respective
proportions which the number of shares of the Firm Stock set opposite the name
of each remaining non-defaulting International Manager in Schedule 1 hereto
bears to the total number of shares of the Firm Stock set opposite the names of
all the remaining non-defaulting International Managers in Schedule 1 hereto;
provided, however, that the remaining non-defaulting International Managers
shall not be obligated to purchase any of the Stock on such Delivery Date if the
total number of shares of the Stock which the defaulting International Manager
or International Managers agreed but failed to purchase on such date exceeds
9.09% of the total number of shares of the Stock to be purchased on such
Delivery Date, and any remaining non-defaulting International Manager shall not
be obligated to purchase more than 110% of the number of shares of the Stock
which it agreed to purchase on such Delivery Date pursuant to the terms of
Section 3. If the foregoing maximums are exceeded, the remaining non-defaulting
International Managers, or those other underwriters satisfactory to the Lead
Managers who so agree, shall have the right, but shall not be obligated, to
purchase, in such proportion as may be agreed upon among them, all the Stock to
be purchased on such Delivery Date. If the remaining International Managers or
other underwriters satisfactory to the Lead Managers do not elect to purchase
the shares which the defaulting International Manager or International Managers
agreed but failed to purchase on such Delivery Date, this Agreement (or, with
respect to the Second Delivery Date, the obligation of the International
Managers to purchase, and of the Company to sell, the Option Stock)
42
<PAGE>
shall terminate without liability on the part of any non-defaulting
International Manager or the Company or the Selling Stockholder, except that the
Company will continue to be liable for the payment of expenses to the extent set
forth in Sections 9 and 14. As used in this Agreement, the term "International
Manager" includes, for all purposes of this Agreement unless the context
requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to
this Section 12, purchases Firm Stock which a defaulting International Manager
agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting International
Manager of any liability it may have to the Company and the Selling Stockholder
for damages caused by its default. If other underwriters are obligated or agree
to purchase the Stock of a defaulting or withdrawing International Manager,
either the Lead Managers or the Company may postpone the Delivery Date for up to
seven full business days in order to effect any changes that in the opinion of
counsel for the Company or counsel for the International Managers may be
necessary in the Registration Statement, the Prospectus or in any other document
or arrangement.
13. Termination. The obligations of the International Managers
hereunder may be terminated by the Lead Managers by notice given to and received
by the Company and the Selling Stockholder prior to delivery of and payment for
the Firm Stock if, prior to that time, any of the events described in Sections
10(l) or 10(m), shall have occurred or if the International Managers shall
decline to purchase the Stock for any reason permitted under this Agreement.
14. Reimbursement of International Managers' Expenses. If (a) the
Company or the Selling Stockholder shall fail to tender the Stock for delivery
to the International Managers by reason of any failure, refusal or inability on
the part of the Company or the Selling Stockholder to perform any agreement on
its part to be performed, or because any other condition of the International
Managers' obligations hereunder required to be fulfilled by the Company or the
Selling Stockholder is not fulfilled, the Company and the Selling Stockholder
will reimburse the International Managers for all reasonable out-of-pocket
expenses (including fees and disbursements of counsel) incurred by the
International Managers in connection with this Agreement and the proposed
purchase of the Stock, and upon demand the Company and the Selling Stockholder
shall pay the full amount thereof to the Lead Managers. If this Agreement is
terminated pursuant to Section 12 by reason of the default of one or more
International Managers, neither the Company nor the Selling Stockholder shall be
obligated to reimburse any defaulting International Manager on account of those
expenses.
15. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the International Managers, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc.,
43
<PAGE>
Three World Financial Center, New York, New York 10285,
Attention: Syndicate Department (Fax: 212-526-6588), with a
copy, in the case of any notice pursuant to Section 11(d), to the
Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY
10285;
(b) if to the Company or to the Operating Partnership, shall be
delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement,
Attention: Paul W. Whetsell (Fax: 202-965-4445);
(c) if to the Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to Acadia Partners, L.P.,
201 Main Street, Suite 3100, Fort Worth, Texas 76102, Attention:
__________ (Fax: _______), with a copy to John H. Fant, Esq.,
Kelly, Hart & Hallman, 2500 Texas Commerce Tower, 201 Main
Street, Fort Worth, Texas 71602 (Fax: 817-878-9280);
provided, however, that any notice to an International Manager pursuant to
Section 11(d) shall be delivered or sent by mail, telex or facsimile
transmission to such International Manager at its address set forth in its
acceptance telex to the Lead Managers, which address will be supplied to any
other party hereto by the Lead Managers upon request. Any such statements,
requests, notices or agreements shall take effect at the time of receipt
thereof. The Company and the Selling Stockholder shall be entitled to act and
rely upon any request, consent, notice or agreement given or made on behalf of
the International Managers by Lehman Brothers Inc. on behalf of the Lead
Managers and the Company and the International Managers shall be entitled to act
and rely upon any request, consent, notice or agreement given or made on behalf
of the Selling Stockholder by the Custodian.
16. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the International Managers, the
Company, the Selling Stockholder and their respective successors. This
Agreement and the terms and provisions hereof are for the sole benefit of only
those persons, except that (A) the representations, warranties, indemnities and
agreements of the Company and he Selling Stockholders contained in this
Agreement shall also be deemed to be for the benefit of the person or persons,
if any, who control any International Manager within the meaning of Section 15
of the
44
<PAGE>
Securities Act and (B) the indemnity agreement of the International Managers
contained in Section 11(c) of this Agreement shall be deemed to be for the
benefit of directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 16, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
17. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Operating Partnership, the Selling
Stockholder and the International Managers contained in this Agreement or made
by or on behalf on them, respectively, pursuant to this Agreement, shall survive
the delivery of and payment for the Stock and shall remain in full force and
effect, regardless of any investigation made by or on behalf of any of them or
any person controlling any of them.
18. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means any day on which York Stock
Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set
forth in Rule 405 of the Rules and Regulations.
19. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the state of New York without regard to the
principles of conflicts of laws thereof.
20. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
21. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
45
<PAGE>
If the foregoing correctly sets forth the agreement Operating
Partnership among the Company, the Operating Partnership, the Selling
Stockholder and the International Managers, please indicate your acceptance in
the space provided for that purpose below.
Very truly yours,
CapStar Hotel Company
By:
-----------------------------
Paul W. Whetsell, President and
Chief Executive Officer
CapStar Management Company, L.P.
By:
-----------------------------
CapStar GP Corp., its general
partner
By:
-----------------------------
Paul W. Whetsell, President
Acadia Partners L.P.
The Selling Stockholder:
By:
-----------------------------
Acadia FW Partners, L.P., its
general partner
By:
-----------------------------
Acadia MGP Inc., its managing
general partner
By:
-----------------------------
46
<PAGE>
Accepted:
Lehman Brothers Inc.
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Smith Barney Inc.
For themselves and as Lead Managers
of the several International Managers named
in Schedule 1 hereto
By Lehman Brothers Inc.
By:
------------------------------------------
Authorized Lead Manager
47
<PAGE>
SCHEDULE 1
Number of
International Managers Shares
- ---------------------- ----------
Lehman Brothers Inc. . . . . . . . . . . . . . .
Goldman, Sachs & Co. . . . . . . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Smith Barney Inc. . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
48
<PAGE>
SCHEDULE 2
Formation Documents
-------------------
1. Formation Agreement, dated as of June 20, 1996, among
CapStar Hotel Investors, Inc. and the several other parties
thereto.
2. Registration Rights Agreement
3. Employment Agreements between the Company and
(a) Paul W. Whetsell;
(b) David E. McCaslin;
(c) William M. Karnes; and
(d) John E. Plunket
4. [Credit Facility Agreement]
5. Agreement of Sale and Purchase, dated as of June 20, 1996,
between MBL Life Assurance Corporation and EquiStar Hotel
Investors, L.P.
6. Agreement of Sale and Purchase, dated as of June 14, 1996,
between Ballston Hotel Limited Partnership and EquiStar
Hotel Investors, L.P.
49
Exhibit 3.1.3
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CAPSTAR HOTEL COMPANY
______________________________________
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
______________________________________
CapStar Hotel Company, a Delaware corporation (hereinafter called
the "Corporation"), does hereby certify as follows:
FIRST: Article 6 of the Corporation's Amended and Restated
Certificate of Incorporation, as amended on July 18, 1996 (the "Amended
and Restated Certificate of Incorporation"), is hereby further amended to
read in its entirety as set forth below:
6. Election of Directors; Classes. Members of the Board
------------------------------
of Directors of the Corporation (the "Board") may be
elected either by written ballot or by voice vote. The
Board shall consist of a single class of Directors
unless the By-laws of the Corporation shall provide for
the Board to be divided into two or three classes,
provided that in any event the Board may not be divided
into more than three classes.
SECOND: The foregoing amendment was duly adopted in accor-
dance with Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, Paul W. Whetsell has caused this Certificate to
be duly executed in its corporate named this 19th day of August, 1996.
CAPSTAR HOTEL COMPANY
By: /s/ Paul W. Whetsell
-----------------------------------------
President and Chief Executive Officer
EXHIBIT 10.9
AMENDED AND RESTATED
MASTER MORTGAGE LOAN FACILITY AGREEMENT
AMONG
CAPSTAR HOTEL COMPANY,
CAPSTAR MANAGEMENT COMPANY, L.P.,
THE AFFILIATED BORROWERS
AND
LEHMAN BROTHERS HOLDINGS INC.
DATED AS OF AUGUST , 1996
Maximum Facility Amount of $85,000,000.00
- --------------------------------------------------------------------------------
<PAGE>
THIS AMENDED AND RESTATED MASTER MORTGAGE LOAN FACILITY
AGREEMENT, dated as of August , 1996, among CAPSTAR HOTEL
COMPANY, a Delaware corporation, CAPSTAR MANAGEMENT COMPANY,
L.P., a Delaware limited partnership ("CMC"), the AFFILIATE
BORROWERS (as hereinafter defined), and LEHMAN BROTHERS HOLDINGS
INC., a Delaware corporation (the "Lender").
PRELIMINARY STATEMENT
---------------------
CMC (by way of its assumption of all of the liabilities of EquiStar
Hotel Investors, L.P. ("EHI")) is a party to a certain Master Mortgage Loan
Facility Agreement dated as of December 21, 1995 (the "Prior Credit Agreement")
pursuant to which certain loans were made to the Affiliate Borrowers.
Lender is the current owner and holder of the Prior Credit Agreement.
On , 1996, EHI, CHC and CMC consummated a transaction pursuant
--------
to which all of the partnership interests of EHI and CMC were contributed to
CHC in exchange for shares of the common stock of CHC. Concurrent with such
exchange, CHC has contributed all the assets of EHI to CMC and CMC has assumed
all of the liabilities of EHI.
CMC, the Affiliate Borrowers and Lender hereby desire to amend and
restate in its entirety the Prior Credit Agreement pursuant to which CMC, the
Affiliated Borrowers and Lender agrees to restructure the terms of the Prior
Credit Agreement and the obligations of CMC and the Affiliate Borrowers under
the Prior Credit Agreement and Lender agrees to restructure the terms of the
Prior Credit Agreement, all subject to and upon the terms and conditions of this
Agreement.
WHEREAS, CHC and CMC have requested the Lender to establish this master
mortgage loan facility for the purpose of providing financing to Affiliate
Borrowers for the acquisition or refinancing of full-service hotel properties,
and the financing of capital improvements attendant to hotel properties secured
under this Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable
<PAGE>
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto covenant and agree as follows:
A. Neither this Agreement nor anything contained herein shall be
construed as a substitution or novation of the indebtedness evidenced hereby or
of the Prior Credit Agreement, which shall remain in full force and effect, as
supplemented, amended and restated as provided herein.
B. All of the terms, provisions and obligations contained in the Prior
Credit Agreement are hereby supplemented, amended and restated in their entirety
to read as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
have the following meanings:
"Affiliate": with respect to any Person, any Person that directly or
indirectly through one or more intermediaries controls or is controlled by or is
under common control with such Person.
"Affiliate Borrower": each entity listed on Schedule 1 hereto, and
----------
otherwise an Affiliate of CMC (a) which is designated as an Affiliate Borrower
by CMC with the consent of the Lender and (b) which has delivered to the Lender
an Affiliate Borrower Request.
"Affiliate Borrower Notice and Designation": a notice and designation,
substantially in the form of Exhibit A hereto, which may be delivered by CMC to
the Lender and which shall identify an Affiliate Borrower and shall be
accompanied by an Affiliate Borrower Loan Request.
"Affiliate Borrower Loan Request": a request for a Loan in the form of
Exhibit B hereto delivered by an Affiliate Borrower to the Lender.
- ---------
"Affiliate Borrower's Obligations": with respect to each Affiliate
Borrower, the unpaid principal of, interest on (including, without limitation,
interest accruing after the maturity of the Loan made to such Affiliate Borrower
and interest accruing after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, relating to
such Affiliate Borrower, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), and all other obligations and
liabilities of such Affiliate Borrower to the Lender, whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection
2
<PAGE>
with, this Agreement or any Loan Document, whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, or expenses
(including, without limitation, all fees, charges and disbursements of counsel
to the Lender that are required to be paid by such Affiliate Borrower pursuant
to this Agreement, or any Loan Document or otherwise).
"Aggregate Outstanding Eurodollar Loans": at any time, the aggregate
principal amount of all Eurodollar Loans made by the Lender then outstanding.
"Agreement": this Amended and Restated Master Mortgage Loan Facility
Agreement, as amended, supplemented or otherwise modified from time to time.
"Applicable Eurodollar Spread": as defined in Section 2.4 (b) hereof.
"Assignee": as defined in Section 10.7 hereof.
"Available Eurodollar Commitment": at any time of determination, an
amount equal to the Lender's Eurodollar Commitment at such time minus the
Aggregate Outstanding Eurodollar Loans at such time.
"Business Day": a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close, except that, when used in connection with a Eurodollar Loan with respect
to which LIBOR is determined based upon the Wall Street Journal Rate in
accordance with the definition of LIBOR, "Business Day" shall mean any Business
Day on which dealings in foreign currencies and exchange between banks may be
carried on in London, England and New York, New York.
"Capital Lease": with respect to any Person, any obligation of such
Person to pay rent or other amounts under a lease with respect to any property
(whether real, personal or mixed) acquired or leased by such Person that is
required to be accounted for as a liability on a balance sheet of such Person in
accordance with GAAP.
"Closing": shall mean the execution and delivery of the Loan Documents
for, and the funding of, a particular Loan.
"Closing Date": the day on which the Closing of a particular Loan
occurs, which day shall be a Business Day.
"CMC's Obligations": all obligations and liabilities of CMC and CHC to
the Lender, whether direct or indirect, absolute or contingent, due or to become
due, or now existing or hereafter incurred, which may arise under, out of, or in
connection with, this Agreement or
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any other document made, delivered or given in connection herewith or therewith,
whether on account of principal, interest, reimbursement obligations, fees,
indemnities, costs, or expenses (including, without limitation, all fees,
charges and disbursements of counsel to the Lender that are required to be paid
by CMC and CHC pursuant to this Agreement or otherwise).
"Commitment Period": the period from and including the date hereof to
but not including the Commitment Termination Date or such earlier date on which
the Eurodollar Commitment shall terminate as provided herein.
"Commitment Termination Date": 75 days from the date hereof.
"Debt Service": the payments of principal (other than the principal
balance at maturity, unless past due) and interest due under the Loan Agreements
and the Notes for all of the Loans collectively for the 12 calendar month period
immediately following the calculation (including past due amounts, if any).
"Default": any of the events specified in Section 8 hereof, whether or
not any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Default Rate": as defined in Section 2.4 (d) hereof.
"Deferred Interest": as defined in Section 2.4 (c) hereof.
"Distribution": any dividends, distributions, return of capital to any
stockholders, general or limited partners or members, other payments,
distributions or delivery of property or cash to stockholders, general or
limited partners or members, or any redemption, retirement, purchase or other
acquisition, directly or indirectly, of any shares of any class of capital stock
now or hereafter outstanding (or any options or warrants issued with respect to
capital stock), any general or limited partnership interest, or the setting
aside of any funds for the foregoing.
"Dollars" and "$": dollars in lawful currency of the United States of
America.
"EBITDA": with respect to any Person for any period, earnings (or
losses) before interest and taxes of such Person and its Affiliates for such
period plus, to the extent deducted in computing such earnings (or losses)
before interest and taxes, depreciation and amortization expense, all as
determined on a consolidated basis with respect to such Person and its
Affiliates in accordance with GAAP; provided, however, EBITDA shall exclude
earnings or losses resulting from (i) cumulative changes in accounting
practices, (ii) discontinued
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operations, (iii) extraordinary items, (iv) net income of any entity or property
for the period prior to acquisition, (v) net income not readily convertible into
Dollars or remittable to the United States of America, and (vi) net income from
corporations, partnerships, associations, joint ventures or other entities in
which such Person or its Affiliates has a minority interest, except to the
extent actually received.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended
from time to time, and the rules and regulations promulgated thereunder, as from
time to time in effect.
"Eurodollar Commitment": the obligation of the Lender to make Eurodollar
Loans to Affiliate Borrowers hereunder in an aggregate principal amount up to
Eighty Five Million and 00/100 Dollars ($85,000,000.00).
"Eurodollar Loan": any loan made by the Lender hereunder on which the
rate of interest applicable thereto is based upon LIBOR.
"Eurodollar Note": a promissory note executed and delivered by an
Affiliate Borrower to the Lender evidencing such Affiliate Borrower's obligation
to repay a Eurodollar Loan to it hereunder.
"Event of Default": any of the events specified in Section 8 hereof,
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"Excess Proceeds": the excess, if any, of the Net Proceeds of a
Mortgaged Property over the aggregate amount of the Obligations of the Affiliate
Borrower (excluding Obligations related to Mortgaged Properties not owned by
such Affiliate Borrower and existing solely by reason of the
cross-collateralization provisions of Section 4 hereof) selling or refinancing
such Mortgaged Property which are paid and discharged in connection with the
sale or refinancing.
"Fixed Charges": means real property taxes and assessments, insurance
costs, servicing fees, Capital Leases, and preferred stock dividends.
"GAAP": generally accepted accounting principles in the United States of
America in effect from time to time.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
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"Indebtedness": with respect to any Person, without duplication, (a) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, (b) obligations, contingent or otherwise, of such
Person in connection with (i) letter of credit or bankers' acceptance facilities
and (ii) interest rate swap agreements, interest rate cap agreements or similar
arrangements used by a Person to fix or cap a floating rate of interest to a
negotiated maximum rate or amount, or other similar facilities including
currency swaps, (c) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, (d) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even though the rights and remedies of the
seller or lender under such agreement in the event of default may be limited to
repossession or sale of such property), (e) all obligations of such Person to
pay rent or other amounts under a Capital Lease, (f) all indebtedness referred
to in clause (a), (b), (c), (d) or (e) above secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien upon or in property owned by such Person, even though such
Person has not assumed or become liable for the payment of such indebtedness,
and (g) all Indebtedness of others guaranteed by such Person. For purposes of
this Agreement, the amount of any Indebtedness referred to in clause (b)(ii) of
the preceding sentence shall be the amounts, including any termination payments,
required to be paid to a counterparty rather than any notional amount with
regard to which payments may be calculated.
"Interest Payment Date": the last day of each Interest Period and the
date on which payment in full of the unpaid principal amount of a Loan is to be
made.
"Interest Period": with respect to each Loan (a) in the case of the
first Interest Period, the period commencing on the Closing Date of such Loan
and ending on the first day of the calendar month following the date thereof,
and (b) in the case of all other Interest Periods, beginning on the last day of
the immediately preceding Interest Period and ending on first day of the
following calendar month, provided that:
(i) if any Interest Period would otherwise end on a day that is
not a Business Day, such Interest Period shall be extended to the next
succeeding Business Day; and
(ii) any Interest Period that would otherwise extend beyond the
Maturity Date shall end on the Maturity Date.
"LIBOR", with respect to the relevant Interest Period, the rate per
annum (rounded upwards, if necessary, to the nearest one-sixteenth (1/16) of one
(1%) percent) reported on the date two Business Days prior to the first day of
such Interest Period, in The Wall Street
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Journal as the London Interbank Offered Rate for U.S. dollar deposits having a
term comparable to such Interest Period and in an amount of $1,000,000 or more
(or if The Wall Street Journal shall cease to be publicly available or if the
information contained in The Wall Street Journal, in the Lender's reasonable
judgment, shall cease to accurately reflect such London Interbank Offered Rate,
then LIBOR shall be as reported by any publicly available source of similar
market data selected by the Lender that, in the Lender's reasonable judgment,
accurately reflects such London Interbank Offered Rate).
"Lien": with respect to any asset, any mortgage, pledge, security
interest, lien, charge or other encumbrance whatsoever.
"Loan": a Eurodollar Loan.
"Loan Agreement": the Loan Agreement for each Loan referred to in
Section 3.4 (a) hereof.
"Loan Documents": with respect to any particular Loan, as defined in the
Loan Agreement for such Loan.
"Material Adverse Effect": a material adverse effect on (a) the
financial condition or business prospects of CMC, CHC or the Affiliate Borrowers
(or any of them), as the case may be or (b) the validity or enforceability of
this Agreement or the transactions contemplated hereby
"Maturity Date": the ninetieth (90th) day following the date hereof;
provided, however, the maturity date may be extended for an additional sixty
(60) days (i) provided that no Event of Default has occurred and is continuing,
(ii) provided that CHC, CMC and each Affiliate Borrower provides written notice
of its election to extend the maturity date at least thirty (30) days prior to
the original maturity date, and (iii) at the time such extension notice is
given, Lender is paid an extension fee equal to One (1%) Percent of the maximum
Eurodollar Commitment.
"Mortgage": with respect to any particular Loan, the Mortgage, Deed of
Trust, Assignment of Leases and Rents and Security Agreement given to the Lender
to secure such Loan, as required by Section 3.4 (b) hereof.
"Mortgaged Property": with respect to any particular Loan, as defined in
the Loan Agreement for such Loan.
"Net Proceeds":with respect to the sale or refinancing of a Mortgaged
Property, the
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aggregate amount of consideration paid therefor (which consideration shall
consist solely of cash), in the case of a sale, or the aggregate principal
amount of the new loan or loans secured thereby, in the case of a refinancing,
in each case less the reasonable out-of-pocket costs and expenses of the
transaction actually incurred by the applicable Affiliate Borrower. The term
"reasonable out-of-pocket costs and expenses of the transaction" shall include
brokerage commissions and expenses, marketing expenses, the fees and expenses of
attorneys, accountants, appraisers, surveyors and other professionals providing
necessary services, state and municipal transfer taxes and recording fees in
connection with a sale, mortgage recording taxes and recording fees in
connection with a refinancing, title search costs and title insurance premiums
in connection with a sale or refinancing, reserves for capital improvements and
replacements of furniture, fixtures and equipment required by the lender
providing refinancing to the extent such reserves exceed the amount of reserves
for such items then required or held by the Lender, commitment and other loan
fees, to the extent actually deducted from the proceeds of a refinancing, and
any other expenses reasonably approved by the Lender, all of which items shall
be reasonable or customary in amount.
"Non-Excluded Taxes": as defined in Section 2.9 hereof.
"Note": a Eurodollar Note.
"Obligations": the Affiliate Borrower's Obligations and CMC's
Obligations, or any of them.
"Participant": as defined in Section 10.6 hereof.
"Payee": with respect to any Note, the Lender or any subsequent holder
of the Note.
"Person": an individual, partnership, limited liability company,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of whatever
nature.
"Prepayment Date": as defined in Section 2.5 hereof.
"Prime Rate": the rate of interest per annum publicly announced from
time to time by Citibank, N.A. as its base rate in effect at its principal
office in New York City (each change in the Prime Rate to be effective on the
date such change is publicly announced). If Citibank N.A. ceases to announce a
base rate, Prime Rate shall mean the rate of interest published in The Wall
Street Journal from time to time as the Prime Rate. If more than one Prime Rate
is published in The Wall Street Journal for a day, the average of the Prime
Rates shall be used, and such average shall be rounded up to the nearest
one-quarter of one percent (1/4%).
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"Release Price": the amount required to be paid to the Lender in
connection with the sale or refinancing of a Mortgaged Property, which amount
shall be the greatest of (i) 100% of the Net Proceeds of the sale or
refinancing, and (ii) 125% of the then unpaid principal balance of the Loan
secured by the Mortgage affecting such Mortgaged Property.
"Requirement of Law": as to any Person, the Certificate of Incorporation
and By-Laws or other organizational or governing documents of such Person, and
any law, treaty, rule or regulation or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable to or binding upon such
Person or to which any of its property or assets is subject.
"Responsible Officer": (i) in the case of a corporation, the President
or Chief Executive Officer, the Chief Financial Officer, the Vice President and
Treasurer or the Vice President and Controller, (ii) in the case of a
partnership, a general partner, and (iii) in the case of a limited liability
company, a managing member; provided, however, that the foregoing shall be
treated as Responsible Officers only to the extent they are authorized to
undertake the actions required of such Responsible Officers under this
Agreement.
"Securities": as defined in Section 10.16(b) hereof.
"Servicer": any servicer of the Loans selected by the Lender (including
any successor servicer).
"Transactions": as defined in Section 5.2 hereof.
"Transferee": as defined in Section 10.8 hereof.
1.2 Other Definitional Provisions. (a) Unless otherwise specified
therein, all terms defined in this Agreement shall have the defined meanings
when used in any instrument, certificate or other document made or delivered
pursuant hereto.
(b) As used herein and in any instrument, certificate or other document
made or delivered pursuant hereto, accounting terms relating to CHC, CMC and the
Affiliate Borrowers not defined in Section 1.1 and accounting terms partly
defined in Section 1.1, to the extent not defined, shall have the respective
meanings given to them under GAAP unless otherwise indicated.
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. Section, Schedule and Exhibit
references are to this Agreement unless otherwise
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specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF MASTER MORTGAGE LOAN FACILITY
2.1 Commitment. Subject to the terms and conditions hereof, the Lender
agrees to make Eurodollar Loans in an aggregate principal amount up to
EIGHTY-FIVE MILLION DOLLARS ($85,000,000. Eurodollar Loans paid or prepaid
hereunder may not be reborrowed.
2.2 Amount and Types of Loans; Frequency of Borrowing. Each Eurodollar
Loan shall be in a principal amount requested by the Affiliate Borrower, which
shall be in the aggregate minimum amount of Five Million Dollars ($5,000,000.00)
or any integral multiple of One Hundred Thousand Dollars ($100,000.00) in excess
thereof. A particular Affiliate Borrower may borrow only one Eurodollar Loan
with respect to a Mortgaged Property; except, that, additional Eurodollar Loans
may be made to an Affiliate Borrower to finance approved capital improvements.
No Eurodollar Loan shall be made after the Commitment Termination Date.
2.3 Repayment of Principal; Evidence of Debt. (a) Each Loan hereunder
shall be stated to mature and the principal amount thereof shall be repayable in
full on the Maturity Date.
(b) An Affiliate Borrower's obligation to repay each Eurodollar Loan
made to it hereunder shall be evidenced by a Eurodollar Note, with appropriate
insertions therein.
2.4 Interest Rates and Payment Dates. (a) Each Eurodollar Loan shall
bear interest for each day during each Interest Period at a rate per annum equal
to LIBOR determined for such Interest Period plus the Applicable Eurodollar
Spread. Interest on each Eurodollar Loan shall be calculated on the basis of a
year of 360-days for actual days elapsed. Interest shall accrue from and
including the first day of an Interest Period to but excluding the last day of
such Interest Period and shall be payable in arrears on each Interest Payment
Date, provided that interest accruing pursuant to Section 2.4 (d) shall be
payable from time to time on demand. .
(b) As used herein, the term "Applicable Eurodollar Spread" shall mean
225 basis points (2.25%).
(c) INTENTIONALLY OMITTED
(d) Upon the occurrence and continuance of any Event of Default, the
Eurodollar Loan, and all other amounts due on the CMC Obligations and the
Affiliate Borrower Obligations
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shall bear interest at a rate per annum equal to the lesser of (i) the maximum
rate permitted by applicable law; and (ii) the greater of (A) the rate which
would otherwise be applicable hereunder plus three percent (3%) or (B) the Prime
Rate plus four percent (4%) (the lesser of such rates in (i) or (ii), the
"Default Rate"). This provision shall not be construed as an agreement or
privilege to extend the date of the payment of any Loan or any of the CMC
Obligations or the Affiliate Borrower Obligations, nor as a waiver of any other
right or remedy accruing to the Lender by reason of the occurrence of any Event
of Default.
(e) The Lender shall as soon as practicable notify the relevant
Affiliate Borrower of each determination of a Eurodollar Rate, which
determination shall be conclusive and binding on the Affiliate Borrowers and CMC
in the absence of manifest error.
2.5 Optional Prepayments. Subject to the provisions of the Loan
Agreement relating thereto and Section 4.2 hereof, the principal balance of any
Eurodollar Note hereunder may be prepaid, in whole or part, upon: (a) not less
than 10 days notice to the holder of such Notes specifying the scheduled payment
date on which prepayment is to be made (the "Prepayment Date"); (b) payment of
accrued interest on the Note to and including the Prepayment Date; and (c)
payment of all other sums then due under the Note and on any CMC Obligations and
Affiliate Borrower Obligations in connection with the Loan evidenced by such
Note (excluding Obligations related to Mortgaged Properties not owned by such
Affiliate Borrower and existing solely by reason of the cross-collateralization
provisions of Section 4 hereof). If a notice of prepayment is given to the
Lender, such notice shall be irrevocable and the applicable Loan (or portion
thereof in the case of a partial prepayment) shall be due and payable on the
Prepayment Date, as if such date were the Maturity Date hereunder.
2.6 Acceleration Deemed Prepayment. If following the occurrence of any
Event of Default, an Affiliate Borrower tenders payment of an amount sufficient
to satisfy all amounts due under each Note made by it at any time prior to a
judicial or non-judicial foreclosure sale or sale pursuant to a power of sale
under or in connection with any of the Loan Documents (as defined in the Loan
Agreement relating to the Loan evidenced by such Notes) and prior to the time
prepayment of the principal balance of such Notes is permitted hereunder, such
Affiliate Borrower shall, in addition to such amounts due under said Notes, also
pay to the holder of such Notes an amount equal to the sum of all sums payable
under Section 2.5 hereof.
2.7 INTENTIONALLY OMITTED.
2.8 Payments. (a) All payments (including prepayments) to be made by an
Affiliate Borrower or CMC in connection herewith, whether on account of
principal, interest, fees or otherwise, shall be made without set off or
counterclaim and shall be made prior to 12:00 Noon, New York City time, on the
due date thereof to the Lender, at the Lender's office at 3
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World Financial Center, New York, New York 10285, or, if Lender so elects, to
the Servicer at a location designated by the Servicer, in Dollars and in
immediately available funds. If any payment hereunder becomes due and payable on
a day other than a Business Day, such payment shall be extended to the next
succeeding Business Day, and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension.
2.9 Taxes. (a) Unless otherwise required by applicable law, all payments
made by the CMC and the Affiliate Borrowers under this Agreement shall be made
free and clear of, and without deduction or withholding for or on account of,
any present or future income, stamp or other taxes, levies, imposes, duties,
charges, fees, deductions or withholdings, now or hereafter imposed, levied,
collected, withheld or assessed by any Governmental Authority, excluding net
income taxes and franCHCse taxes imposed on the Lender or any Transferee as a
result of a present or former connection between the Lender (or Transferee) and
the jurisdiction of the Governmental Authority imposing such tax or any
political subdivisions or taxing authority thereof or therein (other than any
such connection arising solely from the Lender (or Transferee) having executed,
delivered or performed its obligations or received a payment under, or enforced,
this Agreement, any Loan Document or any documents in connection therewith). If
any such non-excluded taxes, levies, imposes, duties, charges, fees deductions
or withholdings ("Non-Excluded Taxes") are required to be withheld from any
amounts payable to the Lender (or Transferee) hereunder, the amount so payable
to the Lender (or Transferee) shall be increased to the extent necessary to
yield to the Lender (or Transferee) (after payment of all Non-Excluded Taxes)
interest or any such other amounts payable hereunder at the rates or in the
amounts specified in this Agreement; provided, however, that the amounts payable
pursuant to this sentence to any Transferee shall in no event exceed the amounts
that would have been payable pursuant to this sentence to the Lender. Whenever
any Non-Excluded Taxes are payable by CMC or any Affiliate Borrower, as promptly
as possible thereafter CMC or such Affiliate Borrower shall indemnify the Lender
(or Transferee) for any incremental taxes, interest or penalties that may become
payable by the Lender (or Transferee) as a result of any such failure. The
obligations contained in this Section 2.9 shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
SECTION 3. BORROWING PROCEDURES AND REQUIREMENTS
3.1 Affiliate Borrower Notice and Designation; Affiliate Borrower Loan
Request. If CMC desires the Lender to make a Loan hereunder to an Affiliate
Borrower, CMC shall deliver to the Lender an Affiliate Borrower Notice and
Designation for the Affiliate Borrower for which such Loan is requested. Any
such Affiliate Borrower Notice and Designation shall be deemed conclusive
evidence of CHC's and the Affiliate Borrowers' approval of the making of the
Loan corresponding to such request and no further consent shall be required from
such
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entities. Such Notice and Designation shall be accompanied by an Affiliate
Borrower Loan Request, signed by a Responsible Officer of the Affiliate
Borrower.
3.2 Lender's Review Procedure. Upon receipt of an Affiliate Borrower
Loan Request, the Lender shall promptly commence its review of the proposed Loan
and the property proposed to be acquired, refinanced or improved with the
proceeds thereof. CMC and the Affiliate Borrower requesting the Loan shall
cooperate with the Lender in its review process and shall promptly deliver to
the Lender such information and copies of all documents relating to the proposed
transaction that are required to be delivered pursuant to this Section 3 or
which the Lender may request. Provided that CMC and the Affiliate Borrower so
cooperate with the Lender and promptly deliver all required or requested
information and documents, the Lender shall use reasonable efforts to complete
its review process within thirty (30) days after receipt of the Affiliate
Borrower Loan Request (provided, however, that the Lender shall have no
liability to the Borrower for any failure to complete such review within such
period).
3.3 Conditions Precedent to the Making of Loans. The Lender's obligation
to make a Loan to an Affiliate Borrower is conditioned on the following:
a. The execution and delivery of the documents listed in Section 3.4.
b. The review and approval by the Lender and its counsel of the
following:
1. all leases, licenses and other agreements for the occupancy
of all or any part of the Mortgaged Property;
2. the hotel management agreement for the Mortgaged Property (if
any);
3. any contracts relating to the operation of the Mortgaged
Property and capital improvements thereto;
4. the franchise agreement for the Mortgaged Property;
5. a "comfort letter" from the franchisor (if any) with respect
to the Mortgaged Property;
6. all financial statements, operating information and operating
and capital budgets for the Mortgaged Property;
7. title materials (including copies of any easements, covenants
and restrictions affecting the Mortgaged Property), the adequacy
of ingress to and egress from
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the Mortgaged Property, and the necessity for and sufficiency of
any easements; and
8. any other information, documents, reports and papers relating
to the Mortgaged Property or the Loan as the Lender or its
counsel deems necessary or desirable in connection with a Loan.
c. Receipt by the Lender of (i) copies of the Affiliate Borrower's
organizational documents and other documents evidencing the Affiliate Borrower's
ownership structure, (ii) satisfactory documentation confirming that the
Affiliate Borrower is a duly formed legal entity having the power to enter into
the transaction, and that the Loan Documents for the Loan have been duly
authorized by the Affiliate Borrower.
d. The Lender's receipt and approval of a Phase I environmental
assessment of the Mortgaged Property, (and, if required by the Lender upon its
review of the Phase I assessment, a Phase II environmental assessment of the
Mortgaged Property) which assessment(s), to the extent appropriate for a Phase I
or Phase II assessment, as the case may be, shall (i) disclose any existing or
potential hazardous material contamination and physical conditions that may
result in such contamination at the Mortgaged Property, (ii) include the results
of all sampling or monitoring to determine the nature and scope of existing or
potential hazardous material contamination at the Mortgaged Property, including
the results of leak detection tests for each underground storage tank at the
Mortgaged Property, (iii) describe response actions appropriate to remedy any
existing or potential hazardous material contamination, and (iv) estimate the
cost of such response actions. If any such report discloses the presence of any
such hazardous materials, the Lender shall not be required to make the Loan.
e. The Lender's receipt of an ALTA lender's policy of title insurance in
the principal amount of the Loan (with such co-insurance and/or reinsurance as
the Lender may require), together with such endorsements as the Lender may
require (to the extent the same are available), in favor of and satisfactory to
the Lender, from an insurer or insurers satisfactory to the Lender. Such policy
shall certify that the Affiliate Borrower is the owner of a fee simple or
leasehold interest in the Mortgaged Property, as applicable, shall insure that
the Mortgage constitutes a first lien on the Mortgaged Property, and shall
contain no exceptions to title other than those approved by the Lender and its
counsel.
f. The receipt and approval by the Lender and its counsel of a current
ALTA survey of the Mortgaged Property, prepared by and certified to the Lender
by a licensed surveyor satisfactory to the Lender, with the certificate dated
not more than thirty days prior to the Closing Date.
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g. Receipt by the Lender of evidence that the Property is not located in
a special flood hazard area.
h. If requested, the Lender's receipt and approval of a report from a
licensed soil engineer describing the soil conditions at the Property.
i. Satisfactory evidence of utility access and the Mortgaged Property's
compliance with all laws, rules, and requirements of governmental authorities
(including those relating to health and safety, building codes, environmental
matters, zoning, and disabled persons).
j. The Lender's receipt and approval of such information as it may
require as to the physical condition of the Mortgaged Property (including
environmental conditions), including such arCHItects' and engineers' reports as
the Lender may request.
k. Receipt by the Lender of the insurance policies or certificates of
insurance issued by the carrier(s) with respect to the required insurance
coverage set forth in the Loan Documents.
l. The Lender's receipt of satisfactory opinions of counsel (i)
covering, among other things, (A) the validity and enforceability of the
obligations of the Affiliate Borrower and CMC under the Loan Documents, (B) the
legal status of the Affiliate Borrower and CMC, and (C) the due authorization,
execution and delivery by the Affiliate Borrower of the Loan Documents, (ii)
stating, without qualification, to counsel's best knowledge, after appropriate
inquiry, that the Affiliate Borrower's and CMC's execution and delivery of the
Loan Documents and the performance of their respective obligations thereunder
shall not violate or cause the Affiliate Borrower or CMC to be in default under
any other instrument or document to which it is a party, and (iii) stating,
without qualification, that the Loan does not violate any usury laws.
m. The Lender's determination that from and after the date of the most
recent financial statements reviewed by the Lender, there has been no material
adverse change in the business, operations or financial condition of the
Borrower, the Affiliate Borrower or the Mortgaged Property.
n. All taxes and assessments affecting the Mortgaged Property which are
due and payable as of the Closing Date, whether or not the same are payable in
installments or constitute a lien, shall have been paid in full.
o. All representations and warranties contained in this Agreement and
the Loan Documents for the Loan then being made shall be true and correct in all
material respects as of
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the Closing Date. No Default or Event of Default shall have occurred and be
continuing on such Closing Date or shall occur after giving effect to the
borrowing of the Loan requested to be made on such Closing Date.
p. The conditions precedent concerning CMC in Section 6 hereof shall
have been satisfied.
q. Any other requirements or conditions contained in any of the Loan
Documents shall have been satisfied.
All of the foregoing items shall be satisfactory in form and substance
to the Lender and its counsel. The cost of any item referred to in this Section
3.3 shall be paid or reimbursed by the Affiliate Borrower .
In the case of a Loan with respect to a Mortgaged Property which was
previously acquired or refinanced with the proceeds of an outstanding Eurodollar
Loan and which is made to finance approved capital improvements, the foregoing
clauses (b) (1), (2), (4), (5) ,(7), (d), (f), (g), (h), and (i) shall not
apply, clause (c)(i) shall apply only to documents entered into subsequent to
the date of the applicable Eurodollar Loan, and the conditions contained in
clause (e) shall be satisfied by the delivery to the Lender of a new title
insurance policy (or an endorsement to the Lender's existing title insurance
policy) dated as of the date of the additional Loan and containing no additional
exceptions other than those contained in the title insurance policy previously
delivered to the Lender or otherwise approved by the Lender.
3.4 Loan Documents for each Loan. At the Closing of a Loan, the
Affiliate Borrower and any other applicable party shall execute, acknowledge (to
the extent required) and deliver to the Lender the following Loan Documents with
respect to such Loan:
(a) the Loan Agreement between the Lender and the Affiliate Borrower;
(b) the Mortgage, Deed of Trust, Assignment of Leases and Rents and
Security Agreement by the Affiliate Borrower, as mortgagor, to the Lender, as
mortgagee;
(c) the Note evidencing the Loan made by the Affiliate Borrower, as
maker, to the order of the Lender, as payee;
(d) Assignment of Leases and Rents from the Affiliate Borrower, as
assignor, to the Lender, as assignee;
(e) Security Agreement between the Lender and the Affiliate Borrower;
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(f) appropriate UCC-1 financing statements, executed by the Affiliate
Borrower, as debtor, and the Lender, as secured party;
(g) Environmental Indemnity Agreement among the Affiliate Borrower, CMC
and the Lender;
(h) Assignment of Contracts, Licenses, Permits, Agreements, Warranties
and Approvals from the Affiliate Borrower, as assignor, to the Lender, as
assignee;
(i) Consent, Subordination and Recognition Agreement (Management
Agreement) among the Affiliate Borrower, the Lender and the manager with respect
to the management agreement for the Mortgaged Property; and
(j) any other instruments or documents with respect to the Loan that may
be reasonably required by the Lender or its counsel.
The Documents referred to in clauses (a) through (e) and (g) through (i)
above shall be substantially in the form previously adopted by Lender under the
Prior Credit Agreement, with such changes (i) as may be necessary or desirable
under the laws of the state in which the Mortgaged Property is located or which
are requested by the Lender's local counsel in such state, or (ii) which may be
reasonably required by the Lender or its counsel in light of the amendments
contained herein and the particular Mortgaged Property being financed. All other
instruments and documents shall be in form and substance reasonably satisfactory
to the Lender and its counsel.
3.5 Brokerage Commissions. CHC, CMC and the applicable Affiliate
Borrower, jointly and severally, shall indemnify and hold the Lender harmless
from and against any loss, damage, claim, liability and expense (including,
without limitation, attorneys' fees and expenses) arising out of, or in
connection with, brokerage commissions or finder's fees (and any expenses
claimed by any broker or finder) due or alleged to be due in connection with a
Loan. The provisions of this Section 3.5 shall survive the making and repayment
of such Loan and the termination of this Agreement.
3.6 Lender's Discretion. Except as may be expressly provided to the
contrary and except to the extent inconsistent with the foregoing provisions of
this Section 3, all decisions or determinations to be made by the Lender under
this Section 3 shall be at the Lender's sole and absolute discretion.
SECTION 4. CROSS-COLLATERALIZATION AND RELEASES
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4.1 Cross-Collateralization. Each of the Mortgages and related security
documents shall secure (i) all of CMC's Obligations, and (ii) the Obligations of
all of the Affiliate Borrowers. Upon the occurrence of an Event of Default or a
default beyond any applicable grace period under any Loan Document relating to
any Loan, the Lender may exercise its rights and remedies under this Agreement
and/or under the Mortgage and the other Loan Documents relating to any one or
more of the Loans, and may proceed against any one or more of the Mortgaged
Properties in one or more parcels and in such manner and order as the Lender may
elect. CHC, CMC and each Affiliate Borrower hereby irrevocably releases and
waives, to the extent permitted by law, any right to have any Mortgaged Property
(or any portion thereof) marshaled upon the foreclosure of any of the Mortgages
or the exercise of any other rights or remedies available to the Lender.
4.2. Right to Release of a Mortgaged Property. In connection with a
bona-fide sale or refinancing of a Mortgaged Property in a transaction with an
unaffiliated third party, an Affiliate Borrower shall be entitled to the release
of such Mortgaged Property from the provisions of Section 4.1 of this Agreement
and the lien of the Mortgage and related security documents for other Loans,
upon receipt by the Lender of the Release Price for such Mortgaged Property,
provided that the Affiliate Borrower which owns such Mortgaged Property shall
give the Lender at least 10 days' prior written notice of the requested release
of such Mortgaged Property (which notice shall constitute a prepayment notice
for the purpose of Section 2.5 hereof).
4.3. INTENTIONALLY OMITTED.
SECTION 5. REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to make the Loans,
CHC and CMC hereby represent and warrant, and each Affiliate Borrower by its
execution and delivery of a Affiliate Borrower Loan Request represents and
warrants (to the extent specifically applicable to such Affiliate Borrower), to
the Lender that:
5.1 Organization; Powers. CHC, CMC and each Affiliate Borrower (a) is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (b) has all requisite power and authority to
own its property and assets and to carry on its business in all material
respects as now conducted and as proposed to be conducted, (c) is qualified to
do business in every jurisdiction where such qualification is required, and (d)
has the power and authority to execute, deliver and perform its obligations
under this Agreement, any Loan Document and each other agreement or instrument
contemplated hereby to which it is or will be a party and to borrow hereunder.
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5.2 Authorization. The execution, delivery and performance by CHC, CMC
and each Affiliate Borrower of this Agreement and the Loan Documents and the
borrowings and other transactions contemplated hereby (collectively, the
"Transactions") (a) have been duly authorized by all requisite corporate or
other organizational action and, if required, stockholder, partner or member
action and (b) will not (i) violate (A) any provision of law, statute, material
rule or material regulation, or of the certificate or articles of incorporation,
partnership agreement or certificate, operating agreement or other constitutive
documents of CHC, CMC or any Affiliate Borrower, (B) any material order of any
Governmental Authority or (C) any provision of any material indenture, material
agreement or other material instrument to which CHC, CMC or any Affiliate
Borrower is a party or by which any of them or any of their property is or may
be bound, (ii) be in conflict with, result in a breach of or constitute (alone
or with notice or lapse of time or both) a default under any such indenture,
agreement or other instrument or (iii) except as contemplated hereby or by the
Loan Documents, result in the creation or imposition of any Lien upon or with
respect to any property or assets now owned or hereafter acquired by CHC, CMC or
any Affiliate Borrower, as applicable.
5.3 Enforceability. This Agreement has been duly executed and delivered
by CHC, CMC and each Affiliate Borrower and constitutes a legal, valid and
binding obligation of CHC, CMC and each Affiliate Borrower enforceable against
CHC, CMC and each Affiliate Borrower in accordance with its terms, except as
enforceability may be limited by (a) any applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer, or similar laws relating to or
affecting creditors' rights generally and (b) general principles of equity.
5.4 Governmental Approvals. No action, consent or approval of,
registration or filing with, or any other action by, any Governmental Authority
is or will be required in connection with the Transactions, except such as have
been made or obtained and are in full force and effect.
5.5 Financial Statements. CHC and CMC have heretofore furnished to the
Lender its audited consolidated financial statement for the quarter-annual
period ended June 30, 1996 and such financial statements present fairly the
financial position, results of operations, cash flows and changes in equity of
CHC and CMC and its consolidated subsidiaries in accordance with GAAP.
5.6 No Material Adverse Change. There has been no development or
event which has had a Material Adverse Effect on CHC or CMC since the end of
the quarter-annual period referred to in Section 5.5.
5.7 No Material Litigation, etc. No litigation, investigation or
proceeding of or before
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any arbitrator or Governmental Authority is pending or, to the knowledge of CHC,
CMC and each Affiliate Borrower, threatened by or against CHC, CMC or any of the
Affiliate Borrowers or against any of its or their respective properties, assets
or revenues as of the date hereof (a) with respect to this Agreement or any of
the Transactions, or (b) which involves a material risk of an adverse decision
which would materially restrict the ability of CHC, CMC or any Affiliate
Borrower to comply with its respective obligations under this Agreement or any
of the Loan Documents.
(b) None of CHC, CMC or the Affiliate Borrowers is in violation of any
law, rule or regulation, or in default with respect to any order, judgment,
writ, injunction or decree of any Governmental Authority, where such violation
or default has resulted or could reasonably be expected to result, individually
or in the aggregate, in a Material Adverse Effect.
5.8 Investment Company Act, etc. Neither CHC, CMC nor any Affiliate
Borrower is (a) an "investment company" as defined in, or subject to regulation
under, the Investment Company Act of 1940 or (b) a "holding company" as defined
in the Public Utility Holding Company Act of 1935 or subject to regulation under
such Act or the Federal Power Act.
5.9 Tax Returns. Each of CHC, CMC and the Affiliate Borrowers has filed
or caused to be filed all Federal, state and local tax returns required to have
been filed by it and has paid or caused to be paid all taxes shown to be due and
payable on such returns or on any assessments received by it except taxes,
assessments, fees, liabilities, penalties or charges that are being contested in
good faith by appropriate proceedings and for which CHC, CMC or an Affiliate
Borrower shall have set aside on its books reserves in accordance with GAAP.
5.10 No Material Misstatements. No written information, report,
financial statement, exhibit or schedule furnished by or on behalf of CHC, CMC
or any Affiliate Borrower to the Lender in connection with this Agreement or the
Transactions or included herein or delivered pursuant hereto contained, contains
or will contain any material misstatement of fact or omitted, omits or will omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were, are or will be made, not
materially misleading.
5.11 ERISA. CHC, CMC and each Affiliate Borrower is in compliance with
all material provisions of ERISA, except to the extent that all failures to be
in compliance could not, in the aggregate, reasonably be expected to have a
Material Adverse Effect.
5.12 Use of Proceeds. Except as otherwise contemplated by the Loan
Documents, the proceeds of all Loans will be used by the Affiliate Borrower for
the acquisition or refinancing of hotel properties or loans secured by hotel
properties, and the making of capital
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improvements to the Mortgaged Properties.
5.13 Stock. CHC lists all of its outstanding shares of stock on the New
York Stock Exchange. SECTION 6. CONDITIONS PRECEDENT CONCERNING CMC
6.1 Conditions to Initial Loan. The agreement of the Lender to make
Loans requested to be made by it is subject to the satisfaction, on or prior to
the date of such Loan, of the following conditions precedent:
(a) Organizational Documents. The Lender shall have received true and
complete copies of the organizational documents of CHC and CMC.
(b) Legal Opinions. The Lender shall have received a favorable opinion
concerning the execution, delivery and perform of CHC's and CMC's Obligations
hereunder from counsel to CHC and CMC in form an substance satisfactory to the
Lender and its counsel.
SECTION 7. COVENANTS
7.1 Covenants Generally. CHC, CMC and each Affiliate Borrower by its
execution and delivery of an Affiliate Borrower Loan Request agrees that, so
long as the Commitment remains in effect, any Loan remains outstanding and
unpaid or any other amount is owing to the Lender hereunder, it shall:
(a) Existence; Business and Properties. (i) Do or cause to be done all
things necessary to preserve, renew and keep in full force and effect its legal
existence, except as would not cause or result in a Default or Event of Default
under this Agreement.
(ii) Do or cause to be done all things reasonably necessary to preserve
and keep in full force and effect the rights, licenses, permits, franchises,
authorizations, patents, copyrights, trademarks and trade names material to the
conduct of its business.
(b) Financial Statement, Reports, etc. Furnish to the Lender the
financial statements and other information required to be delivered under the
Loan Agreements for particular Loans and other information regarding the
operations, business affairs and financial condition of CHC, CMC or any
Affiliate Borrower, or compliance with the terms of this Agreement, as the
Lender may reasonably request. Without limiting the generality of the foregoing,
CHC and CMC shall deliver to the Lender (i) within 50 days of the end of each
calendar quarter, quarterly consolidated financial statements of CHC and CMC
(including a balance sheet, statement of profit and loss and any other quarterly
financial statements prepared by CMC)
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certified by a senior financial officer of CHC as true, correct and complete as
of the end of and for such period (subject to normal year-end adjustments), and
having been prepared in accordance with GAAP, consistently applied, and (ii)
within 100 days after the end of each fiscal year of CHC and CMC, annual
consolidated financial statements of CHC and CMC (including a balance sheet,
statement of profit and loss and any other annual financial statements prepared
by CMC) prepared by an independent certified public accountant acceptable to
Lender. Such annual financial statements of CHC and CMC shall be prepared in
accordance with GAAP, consistently applied, and certified on an audit basis by
such independent certified public accountant.
(c) Notices. Promptly give notice to the Lender of the occurrence of any
Default or Event of Default.
7.2 Appraisal. If the Lender elects in its sole discretion to obtain one
or more appraisals of a particular Mortgaged Property, the Affiliate Borrower
which owns such Mortgaged Property shall pay the cost of the first appraisal of
such Mortgaged Property.
7.2 Stock. CHC shall maintain in good standing its listing of all
outstanding shares of stock on the New York Stock Exchange.
7.3 Minimum Net Worth. The minimum net worth of CHC shall at all times
be equal to at least $125,000,000.00, plus 75% of the aggregate proceeds
received from subsequent equity offerings by CMC or its Affiliates, calculated
on a GAAP basis.
7.4 Dividends/Distributions. CHC and its Affiliates shall not make any
Distributions during any period that the Obligations remain outstanding.
7.5 Maximum Total Indebtedness. The maximum combined total indebtedness
of CHC and its Affiliates (as determined on a consolidated basis in accordance
with GAAP) shall not exceed at any time 50% of the lesser of (i) the gross book
value of CHC's and its Affiliates' assets (as reflected on CHC's consolidated
financial statements, calculated in accordance with GAAP), or (ii) the market
value of the combined assets of CHC and its Affiliates, calculated as cash and
cash equivalents, plus actual trailing twelve month EBITDA of the Mortgaged
Properties (adjusted to include replacement reserves of 4% of gross hotel
revenues) divided by an appropriate capitalization rate determined by Lender.
7.6 Coverage Ratios. (a) The ratio of (x) actual consolidated EBITDA of
CHC its Affiliates (without duplication) for any period of twelve consecutive
months (less minimum replacement reserves of 4% of gross hotel revenues) to (y)
Debt Service, shall not be less than 2.0 to 1.0.
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(b) The ratio of (x) actual consolidated EBITDA (adjusted to include
minimum replacement reserves of 4% of gross hotel revenues) of CHC and its
Affiliates for any period of twelve consecutive months to (y) the sum of Debt
Service plus Fixed Charges of CHC and its Affiliates for such period shall not
be less than 1.75 to 1.0.
7.7 Other Debt. CMC, CHC and the Affiliated Borrowers shall not create,
incur, assume or suffer to exist, directly or indirectly, any guaranteed,
recourse or unsecured debt in excess of Five Million Dollars ($5,000,000.00).
7.8 CHC Operations. All business operations of CHC shall be performed
solely through CMC. All net proceeds derived from an equity or debt offering of
CHC shall be promptly distributed to CMC.
7.9 Organizational Documents. Until all Obligations are paid in full,
CMC, CHC and the Affiliate Borrowers shall not amend or modify any of their
respective organizational documents after the date hereof without first
obtaining the written consent of Lender, which may be granted or denied in
Lender's sole and absolute discretion.
7.10 Restriction on Fundamental Changes. Without the prior written
consent of Lender, which consent may be withheld in the sole and absolute
discretion of Lender, (a) CMC shall not, nor will CMC permit any Affiliate to
enter into any merger, consolidation, reorganization, liquidation, transfer or
otherwise dispose of greater than an aggregate of 5% of their properties or
properties which contribute greater than an aggregate of 5% of the consolidated
net income in any year ("Substantial Properties"), except for transactions
between CMC and subsidiaries wholly owned by CMC, (b) CMC shall not, nor will
CMC permit any Affiliate to sell or transfer any Substantial Property (whether
in single or multiple transactions) in order to lease as lessee such Substantial
Property, or other property similar to such Substantial Property, (c) CMC and
CHC shall not, nor will CMC or CHC permit any Affiliate to acquire, own,
operate, develop, or manage properties other than hospitality properties, and
(d) CHC shall not enter into any merger or consolidation following which CHC or
an entity wholly owned by CHC is no longer the sole general partner and majority
shareholder of CMC, or a merger or consolidation where CHC shall own less than a
51% direct or indirect interest in CMC.
SECTION 8. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) (i) CHC, CMC or any Affiliate Borrower shall (A) fail to pay any
principal of any Loan when due or (B) fail to pay any interest on any Loan, or
any fee or other amount payable
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hereunder or under any Loan Document, within ten Business Days after any such
interest, fee or other amount becomes due in accordance with the terms hereof or
thereof; or
(b) Any representation or warranty made or deemed made by EHI, CHC, CMC
or any Affiliate Borrower herein, in any Loan Document, or which is contained in
any certificate, document or financial or other statement furnished by it at any
time pursuant to or in connection with this Agreement shall prove to have been
incorrect in any material respect on or as of the date made or deemed made, or
CHC, CMC or any other party to the Loan shall fail to perform or observe any
agreement, covenant or obligation arising under Section 7 of this Agreement; or
(c) CHC, CMC or any Affiliate Borrower shall default in the observance
or performance of any other agreement contained in this Agreement and such
default shall continue unremedied for a period of 30 days after written notice
thereof shall have been given to CHC, CMC or such Affiliate Borrower by the
Lender (or, if such default is not reasonably susceptible of cure within 30
days, for such longer period, not to exceed an additional 60 days, as may be
reasonably required therefor, provided that CHC, CMC or such Affiliate Borrower,
as the case may be, commences the cure of such default within such 30 day period
and thereafter diligently and continuously prosecutes such cure to completion);
or
(d) If an Event of Default shall occur under any other Loan Document;
or
(e) CHC, CMC or any Affiliate Borrower shall default in the payment of
any principal or interest, regardless of amount, due in respect of any
Indebtedness in an aggregate principal amount of $250,000 or more, when and as
the same shall become due and payable (after the expiration of any applicable
grace period); or
(f) An involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i) relief
in respect of CMC, CHC or any Affiliate Borrower, or of a substantial part of
the property or assets of CMC, CHC or any Affiliate Borrower, under Title 11 of
the United States Code, as now constituted or hereafter amended, or any other
Federal, state or foreign bankruptcy, insolvency, receivership or similar law,
(ii) the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for CMC, CHC or any Affiliate Borrower or for a
substantial part of the property or assets of CMC, CHC or any Affiliate Borrower
or (iii) the winding-up or liquidation of CMC, CHC or any Affiliate Borrower;
and such proceeding or petition shall continue undismissed for 90 days or a
final non-appealable order or decree approving or ordering any of the foregoing
shall be entered; or
(g) CMC, CHC or any Affiliate Borrower shall (i) voluntarily commence
any
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proceeding or file any petition seeking relief under Title II of the United
States Code, as now constituted or hereafter amended, or any other Federal,
state or foreign bankruptcy, insolvency, receivership or similar law, (ii)
consent to the institution of, or fail to contest in a timely and appropriate
manner, any proceeding or the filing of any petition described in paragraph (f)
of this Section 8, (iii) apply for or consent to the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for CMC, CHC
or any Affiliate Borrower or for a substantial part of the property or assets of
CMC, CHC or any Affiliate Borrower, (iv) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (v) make a
general assignment for the benefit of creditors, or (vi) take any action for the
purpose of effecting any of the foregoing; or
(h) One or more final, non-appealable judgments for the payment of money
in an aggregate amount of $250,000 or more shall be rendered by a court of
competent jurisdiction against CHC, CMC or any Affiliate Borrower or any
combination of CHC, CMC and any Affiliate Borrower and the same shall remain
undischarged for a period of 30 days during which execution shall not be
effectively stayed, or any action shall be legally taken by a judgment creditor
to levy upon assets or properties of CHC, CMC or any Affiliate Borrower to
enforce any such judgment; or
(i) The guarantee contained in Section 9 shall cease, for any reason, to
be in full force and effect or CHC or CMC shall so assert;
then, and in any such event, (A) if such event is an Event of Default specified
in paragraph (f) or (g) above with respect to CHC and CMC, automatically the
Commitments shall immediately terminate and the Loans (with accrued interest
thereon) and all fees and other amounts owing under this Agreement shall
immediately become due and payable, and (B) if such event is any other Event of
Default, either or both of the following actions may be taken: (i) the Lender
may, by notice to CHC or CMC declare the Commitment to be terminated forthwith,
whereupon the Commitment shall immediately terminate, and (ii) the Lender may,
by notice to CHC and CMC and any or all of the Affiliate Borrowers, declare all
of CMC's Obligations and any or all of the Affiliate Borrower's Obligations
(including the Loans and all fees and other amounts owing under this Agreement
and the Loan Documents) to be due and payable forthwith, whereupon the same
shall immediately become due and payable. Except as expressly provided above in
this Section 8, presentment, demand, protest and all other notices of any kind
are hereby expressly waived.
SECTION 9. GUARANTEE
9.1 Guarantee. (a) In order to induce the Lender to execute and deliver
this Agreement and to make or maintain the Loans, and in consideration thereof,
CHC and CMC
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hereby jointly and severally, unconditionally and irrevocably guarantee, each as
primary obligor and not merely as surety, to the Lender, the prompt and complete
payment and performance by each Affiliate Borrower when due (whether at stated
maturity, by acceleration or otherwise) of the Affiliate Borrower's Obligations,
and CHC and CMC further agree to pay any and all expenses which may be paid or
incurred by the Lender in enforcing, or obtaining advice of counsel in respect
of, any of their rights under the guarantee contained in this Section 9. The
guarantee contained in this Section 9 shall remain in full force and effect
until the Affiliate Borrower's Obligations are paid in full and the Commitment
is terminated, notwithstanding that from time to time prior thereto any
Affiliate Borrower may not be obligated to the Lender.
(b) No partner or principal of CHC or CMC shall become personally liable
for the payment of CMC's obligations under this Section 9 and the Lender agrees
that in no event shall any monetary or deficiency judgment be sought or secured
against any such partner or principal.
9.2 No Subrogation, Contribution, Reimbursement or Indemnity.
Notwithstanding anything to the contrary in the Section 9, CHC and CMC hereby
irrevocably waive all rights which may have arisen in connection with the
guarantee contained in this Section 9 to be subrogated to any of the rights
(whether contractual, under the Bankruptcy Code, under common law or otherwise)
of the Lender against any Affiliate Borrower. So long as the Affiliate
Borrower's Obligations remain outstanding, if any amount shall be paid by or on
behalf of any Affiliate Borrower or any other Person to CHC or CMC on account of
any of the rights waived in this Section 9.2, such amount shall be held by CHC
or CMC in trust, segregated from other funds of CHC and CMC, and shall,
forthwith upon receipt by CHC or CMC, be turned over to the Lender, to be
applied against the Affiliate Borrower's Obligations, whether matured or
unmatured, in such order as the Lender may determine. The provisions of this
Section 9.2 shall survive the term of the guarantee contained in this Section 9
and the payment in full of the Affiliate Borrower's Obligations and the
termination of the Commitments.
9.3 Amendments, etc. with respect to the Affiliate Borrower Obligations.
CHC and CMC shall remain obligated under this Section 9 notwithstanding that,
without any reservation of rights against CHC or CMC, and without notice to or
further by CHC or CMC, the liability of any other party upon or for any part of
an Affiliate Borrower's Obligations, or any collateral security or guarantee
therefor or right of offset with respect thereto, may, from time to time, in
whole or in part, be renewed, extended, amended, modified, accelerated,
compromised, waived, surrendered or released by the Lender, and this Agreement
and any other documents execute and delivered in connection herewith may be
amended, modified, supplemented or terminated, in whole or in part, as the
Lender may deem advisable from time to time, and any collateral security,
guarantee or right of offset at any time held by the Lender
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for the payment of the Affiliate Borrower's Obligations may be sold, exchanged,
waived, surrendered or released. The Lender shall not have any obligation to
protect, secure, perfect or insure any lien at any time held by it as security
for the Affiliate Borrower's Obligations or for the guarantee contained in this
Section 9 or any property subject thereto.
9.4 Guarantee Absolute and Unconditional. CHC and CMC waive any and all
notice of the creation, renewal, extension or accrual of any of the Affiliate
Borrower's Obligations and notice of or proof of reliance by the Lender upon the
guarantee contained in this Section 9 or acceptance of the guarantee contained
in this Section 9; the Affiliate Borrower's Obligations, and each of them, shall
conclusively be deemed to have been created, contracted or incurred, or renewed,
extended, amended or waived in reliance upon the guarantee contained in this
Section 9; and all dealings between CHC, CMC or the Affiliate Borrowers, on the
one hand, and the Lender, on the other, shall likewise be conclusively presumed
to have been had or consummated in reliance upon the guarantee contained in this
Section 9. CHC, CMC waives diligence, presentment, protest, demand for payment
and notice of default or nonpayment to or upon CHC, CMC or any Affiliate
Borrower with respect to the Affiliate Borrower's Obligations. The guarantee
contained in this Section 9 shall be construed as a continuing, absolute and
unconditional guarantee of payment without regard to (a) the validity or
enforceability of this Agreement, any of the Affiliate Borrower's Obligations or
any collateral security therefor or guarantee or right of offset with respect
thereto at any time or from time to time held by the Lender, (b) the legality
under applicable Requirements of Law of repayment by the relevant Affiliate
Borrower of any the Affiliate Borrower's Obligations or the adoption of any
Requirement of Law purporting to render any of the Affiliate Borrower's
Obligations null and void, (c) any defense, set-off or counterclaim (other than
a defense of payment or performance by the applicable Affiliate Borrower) which
may at any time be available to or be asserted by CHC or CMC against the Lender,
or (d) any other circumstance whatsoever (with or without notice to or knowledge
of CHC, CMC or any Affiliate Borrower) which constitutes, or might be construed
to constitute, an equitable or legal discharge of any Affiliate Borrower for any
of the Affiliate Borrower's Obligations, or of CHC, or of CMC under the
guarantee contained in this Section 9, in bankruptcy or in any other instance.
When the Lender is pursuing its rights and remedies under this Section 9 against
CHC or CMC, the Lender may, but shall be under no obligation to, pursue such
rights and remedies as it may have against any Affiliate Borrower or any other
Person or against any collateral security or guarantee of the Affiliate
Borrower's Obligations or any rights of offset with respect thereto, and any
failure by the Lender to pursue such other rights or remedies or to collect any
payments from any Affiliate Borrower or any such other Person or to realize upon
any such collateral security or guarantee or to exercise any such right of
offset, or any release of any Affiliate Borrower or any such other Person or of
any such collateral security, guarantee or right of offset, shall not relieve
CHC and CMC of any liability under this Section 9, and shall not impair or
affect the rights and remedies, whether express, implied or available as a
matter
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law, of the Lender against CHC and CMC.
9.5 Reinstatement. The guarantee contained in this Section 9 shall
continue to be effective, or be reinstated, as the case may be, if at any time
payment, or part thereof, of any of the Affiliate Borrower's Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of any
Affiliate Borrower or upon or as a result of the appointment of a receiver,
intervenor or conservator of, or trustee or similar officer for, any Affiliate
Borrower or any substantial part of its property, or otherwise, all as though
such payments had not been made.
9.6 Payments. CHC and CMC hereby agree that any payments in respect of
any Affiliate Borrower's Obligations pursuant to this Section 9 will be paid to
the Lender without setoff or counterclaim at the office of the Lender located at
3 World Financial Center, New York, New York 10285 or as Lender may otherwise
direct.
9.7 Independent Obligations. The obligations of CHC and CMC under the
guarantee contained in this Section 9 are independent of the obligations of each
Affiliate Borrower, and a separate action or actions may be brought and
prosecuted against CHC and CMC whether or not the relevant Affiliate Borrower be
joined in any such action or actions. CHC and CMC waive, to the full extent
permitted by law, the benefit of any statute of limitations affecting its
liability hereunder or the enforcement thereof. Any payment by the relevant
Affiliate Borrower or other circumstance which operates to toll any statute of
limitations as to such Affiliate Borrower shall operate to toll the statute of
limitations as to CHC and CMC.
9.8 Joint and Several. This guarantee is the joint and several
obligation and liability of CHC and CMC.
SECTION 10. MISCELLANEOUS
10.1 Amendments and Waivers. This Agreement, and any provisions hereof,
may not be modified, amended, waived, extended, changed, discharged or
terminated orally or by any act or failure to act on the part of CHC, CMC or any
Affiliate Borrower or the Lender, but only by an agreement in writing signed by
the party against whom enforcement of any modification, amendment, waiver,
extension, change, discharge or termination is sought.
10.2 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
telecopy), and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered by hand, or three Business Days
after being sent by registered or certified mail, postage prepaid, or one
Business Day after delivery to a reputable overnight courier service, or, in the
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case of telecopy notice, when received, addressed as follows in the case of CHC,
CMC and the Lender, as set forth in the relevant Affiliate Borrower Notice and
Designation in the case of the Affiliate Borrowers or to such other address as
may be hereafter notified by the respective parties hereto and any future
holders of the obligations owning hereunder:
CHC/CMC: CapStar Management Company, L.P.
[c/o CapStar Hotels, Inc.
1010 Wisconsin Avenue, N.W., Suite 650
Washington, DC 20007
Attention: Mr. Paul Whetsell]
Lender: LEHMAN BROTHERS HOLDINGS INC.
3 World Financial Center
New York, New York 10285
Attention: Mr. Joseph J. Flannery
10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay
in exercising, on the part of the Lender any right, remedy or power or privilege
hereunder shall operate as a waiver thereof; nor shall nay single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, power and privileges herein provided are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
10.4 Survival of Representations and Warranties. All representations and
warranties made hereunder and in any document, certificate or statement
delivered pursuant hereto or in connection herewith shall survive the execution
and delivery of this Agreement and the making of the Loans hereunder.
10.5 Payment of Expenses. Each of CHC, CMC, and as applicable, each
Affiliate Borrower agrees (a) to pay or reimburse the Lender for all its
reasonable out-of-pocket costs and expenses incurred in connection with the
development, preparation and execution of, and any amendment, supplement or
modification to, this Agreement and any other documents prepared in connection
herewith, and the consummation and administration of the transactions
contemplated hereby and thereby (including, without limitation, the fees and
disbursements of the Servicer and of counsel to the Lender, (b) to pay or
reimburse the Lender for all its reasonable costs and expenses incurred in
connection with the enforcement or preservation of any rights under or relating
to this Agreement and the Loans, and (c) to pay, indemnify, and hold the Lender
harmless from, any and all recording and filing fees and any and all liabilities
with respect to, or resulting from any delay in paying, stamp, excise and other
similar taxes, if
29
<PAGE>
any, which may be payable or determined to be payable in connection with the
execution and delivery of, or consummation or administration of any of the
transactions contemplated by, or any amendment, supplement or modification of,
or any waiver or consent under or in respect of, this Agreement, any such other
documents and the Loan Documents, and (d) to pay, indemnify, and hold the Lender
harmless from and against any and all other liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements,
including reasonable fees and disbursements of counsel incurred by or asserted
against such Lender which arise out of or in connection with any claim,
litigation or proceeding relating to this Agreement, any Loan, any such other
documents, any actual or proposed use of proceeds of any Loan or any of the
Transactions (all the foregoing in this clause (d), collectively, the
"indemnified liabilities"), provided, that neither CHC, CMC nor any Affiliate
Borrower shall have any obligation hereunder to the Lender with respect to
indemnified liabilities arising from the gross negligence or willful misconduct
of the Lender, its agents, servants or employees. The agreements in this Section
10.5 shall survive the termination of this Agreement and repayment of the Loans
and the payment of all other amounts payable hereunder.
10.6 Participations. The Lender may, in the ordinary course of its
business and in accordance with applicable law, at any time sell to one or more
Persons (each, a "Participant") participating interests in any Loan hereunder or
any other interest of the Lender hereunder. In the event of any such sale by the
Lender of a participating interest to a Participant, the Lender's obligations
under this Agreement to the other parties to this Agreement shall remain
unchanged. The Lender shall remain solely responsible for the performance hereof
and shall remain the holder of any such obligation owing to it hereunder for all
purposes under this Agreement, and CHC, CMC and the Affiliate Borrowers shall
continue, and shall have the right to continue, to deal solely and directly with
the Lender in connection with the Lender's rights and obligations under this
Agreement. Each Affiliate Borrower agrees that, while an Event of Default shall
have occurred and be continuing, if amounts outstanding under this Agreement are
due or unpaid, or shall have been declared or shall have become due and payable
upon the occurrence of an Event of Default, each Participant shall be deemed to
have the right of set off in respect of its participating interest in amounts
owing under this Agreement and the Loan Documents to the same extent as if the
amount of its participating interest were owing directly to it as a lender under
this Agreement.
10.7 Assignments. The Lender may, in the ordinary course of its business
and in accordance with applicable law, at any time and from time to time assign
to any other Person (each, an "Assignee") all or any part of its rights (but not
its obligations) under this Agreement and the Loans.
10.8 Delivery of Information to Transferees. CHC, CMC and each Affiliate
Borrower
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authorizes the Lender to disclose to any Participant, or Assignee (each, a
"Transferee") and any prospective Transferee (whether or not, in the case of any
Person that is a prospective Transferee, such Person in fact becomes a
Transferee), any and all financial information, operating and other information
in the Lender's possession concerning CHC, CMC and the Affiliate Borrowers which
has been delivered to the Lender by or on behalf of CHC, CMC or any of the
Affiliate Borrowers pursuant to this Agreement or which has been delivered to
the Lender in connection with the Lender's credit evaluation of CHC, CMC, the
Affiliate Borrowers and the Transactions.
10.9 Counterparts. This Agreement may be executed by one or more of the
parties to this Agreement on any number of separate counterparts (including by
telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. A set of the copies of this Agreement
signed by all the parties shall be lodged with CMC and the Lender.
10.10 Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.11 Integration. This Agreement, together with the Loan Documents,
represents the agreement of CHC, CMC, the Affiliate Borrowers and the Lender
with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Lender relative to subject
matter hereof not expressly set forth or referred to herein or in the Loan
Documents.
10.12 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
10.13 Submission To Jurisdiction; Waivers. CHC, CMC and each Affiliate
Borrower hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement, or for recognition and
enforcement of any judgement in respect thereof, to the non-exclusive
general jurisdiction of the Courts of the State of New York, the courts
of the United States of America for the Southern District of New York,
and appellate courts from any thereof;
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(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have
to the venue of any such action or proceeding in any such or that such
action or proceeding was brought in an inconvenient court and agrees not
to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such Borrower at its address referred to in Section 10.2
hereof or at such other address of which the Lender shall have been
notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or proceeding
referred to in this Section any special, exemplary, punitive or
consequential damages.
10.14 Acknowledgments. CHC, CMC and each Affiliate Borrower hereby
acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement:
(b) the Lender has no fiduciary relationship with or duty to CHC,
CMC or any Affiliate Borrower arising out of or in connection with this
Agreement, and the relationship between Lender, on one hand, and CHC,
CMC and the Affiliate Borrowers, on the other hand, in connection
herewith or therewith is solely that of debtor and creditor; and
(c) the Lender, by entering into this Agreement or by taking any
action hereunder, shall not be deemed a partner of or joint venturer
with CHC, CMC or any Affiliate Borrower. CHC, CMC and the Affiliate
Borrowers shall indemnify and hold the Lender harmless from all costs,
expenses, damages, losses and liabilities resulting from any
interpretation of the relationship of such parties and the Lender which
is inconsistent with the foregoing. The provisions of this Section 10.14
(c) shall survive the making and repayment of any Loan and the
termination of this Agreement.
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10.15 WAIVERS OF JURY TRIAL. EACH OF CHC, CMC, THE AFFILIATE BORROWERS
AND THE LENDER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN
LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY AND FOR ANY COUNTERCLAIM THEREIN.
10.16 Confidentiality. The Lender agrees to keep confidential any
written or oral non-public information (a) provided to it by or on behalf of
CHC,CMC or any Affiliate Borrower pursuant to or in connection with this
Agreement or (b) obtained by the Lender based on a review of the books and
records of CHC, CMC or any Affiliate Borrower; provided that nothing herein
shall prevent the Lender from disclosing any such information (i) to any
Transferee or prospective Transferee so long as delivery of such information is
made subject to the requirement that such information be kept confidential in
the manner contemplated by this Section 10.16, (ii) to its employees involved in
the administration of this Agreement and its directors, agents, attorneys,
accountants and other professional advisors (each of which shall be instructed
to hold the same in confidence), (iii) upon the request or demand of any
Governmental Authority having jurisdiction over the Lender, (iv) in response to
any order of any court or other Governmental Authority or as may otherwise be
required pursuant to any Requirement of Law, (v) which has been publicly
disclosed other than in breach of this Agreement, or (vi) in connection with the
exercise of any of the Lender's remedies hereunder.
10.16 Further Assurances. (a) CHC, CMC and each Affiliate Borrower
shall, at its expense and without expense to the Lender, execute, acknowledge
and deliver such further instruments, assignments, notices and assurances as the
Lender shall, from time to time, require for the better assuring, assigning, and
confirming to the Lender the rights granted to the Lender hereunder and under
the Loan Documents, or for carrying out the intention or facilitating the
performance of the terms of this Agreement.
(b) CHC, CMC and the Affiliate Borrowers acknowledge that the Lender may
sell or otherwise transfer one or more of the Loans to a party who may pool the
Loan with a number of other loans and to have the holder of such loans grant
participations therein or issue one or more classes of Mortgage Backed,
Pass-Through Certificates or other securities evidencing a beneficial interest
in a rated or unrated public offering or private placement (the "Securities").
The Securities may be rated by one or more national rating agencies. In this
regard, CHC, CMC and the Affiliate Borrowers agree to make available to the
Lender all information concerning their business and operations which the Lender
reasonably requests. The Lender may share such information with the investment
banking firms, rating agencies, accounting firms, law firms and other
third-party advisory firms involved with the pertinent Loan or Loans or the
Securities. It is understood that the information so provided to the Lender may
ultimately be incorporated into the offering documents for the Securities and
thus such
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<PAGE>
information may be disclosed to various investors. The Lender and all of the
aforesaid third-party advisors and professional firms shall be entitled to rely
on the information supplied by, or on behalf of, CHC, CMC and the Affiliate
Borrowers.
10.17 Binding Effect; Successors and Assigns. (a) This Agreement shall
be binding upon and inure to the benefit of CHC, CMC, the Affiliate Borrowers
and the Lender, all future permitted holders of the obligations hereunder and
their respective successors and permitted assigns, except that neither CHC, CMC
nor any Affiliate Borrower may assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of the
Lender.
[remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
CAPSTAR HOTEL COMPANY
[provide signature block]
CAPSTAR MANAGEMENT COMPANY, L.P.
[provide signature block]
EQUISTAR LATHAM COMPANY, L.L.C.
EQUISTAR BELLEVUE COMPANY, L.L.C.
EQUISTAR COLORADO COMPANY, L.L.C.
EQUISTAR SCHAUMBURG COMPANY, L.L.C.
EQUISTAR CLEVELAND COMPANY, L.L.C.
EQUISTAR IRVINE COMPANY, L.L.C.
EQUISTAR BALLSTON COMPANY, L.L.C.
EQUISTAR ATLANTA COMPANY, L.L.C.
EQUISTAR ATLANTA GP COMPANY, L.L.C.
EQUISTAR ATLANTA LP COMPANY, L.L.C.
EQUISTAR SOMERSET COMPANY, L.L.C.
By: [provide signature block]
LEPERCQ ATLANTA RENAISSANCE PARTNERS, L.P.
[provide signature block]
EQUISTAR ARLINGTON PARTNERS, L.P.
[provide signature block]
LEHMAN BROTHERS HOLDINGS INC.
By:___________________________
Name:
Title:
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<PAGE>
ACKNOWLEDGMENTS
36
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EXHIBIT A
AFFILIATE BORROWER NOTICE AND DESIGNATION
-----------------------------------------
To: LEHMAN BROTHERS HOLDINGS INC.
From: CAPSTAR MANAGEMENT COMPANY, L.P.
Date:
1. This Affiliate Borrower Notice and Designation is being delivered to
you pursuant to Section 3.1 of the Amended and Restated Master Mortgage Loan
Facility Agreement, dated as of August __ , 1996, among CAPSTAR HOTEL COMPANY,
CAPSTAR MANAGEMENT COMPANY, L.P., each Affiliate Borrower (as defined therein)
and LEHMAN BROTHERS HOLDINGS INC (as the same may be amended, supplemented or
otherwise modified from time to time, the "Master Agreement"). Terms defined in
the Master Agreement and used herein shall have the meanings given to them in
the Master Agreement.
2. The effective date of this Affiliate Borrower Notice and Designation
will be __________________, 199_ .
4. Please be advised that the following CMC Affiliate is hereby
designated as a Affiliate Borrower and such Affiliate Borrower is authorized to
use the loan facilities provided for under the Master Agreement up to the
aggregate amount set forth opposite its name below:
Name and Address
of Affiliate Borrower Maximum Borrowing Amount
- --------------------- ------------------------
<PAGE>
CAPSTAR MANAGEMENT COMPANY, L.P.
By:
a General Partner
By:___________________________
Name:
Title:
2
<PAGE>
EXHIBIT B
AFFILIATE BORROWER LOAN REQUEST
To: LEHMAN BROTHERS HOLDINGS INC.
From: [NAME OF AFFILIATE BORROWER]
Date:
1. This Affiliate Borrower Loan Request is being delivered to you
pursuant to the Amended and Restated Master Mortgage Loan Facility Agreement,
dated as of August __, 1996, among CAPSTAR HOTEL COMPANY, CAPSTAR MANAGEMENT
COMPANY, L.P., each Affiliate Borrower (as defined therein) and LEHMAN BROTHERS
HOLDINGS INC (as the same may be amended, supplemented or otherwise modified
from time to time, the "Master Agreement"). Terms defined in the Master
Agreement and used herein shall have the meanings given to them in the Master
Agreement.
2. The undersigned refers to the Affiliate Borrower Notice and
Designation effective ______________, 19__ (the "Effective Date") delivered by
CMC to you in which the undersigned is designated an Affiliate Borrower and
hereby confirms that by its execution of this Affiliate Borrower Loan Request,
the undersigned acknowledges that it has received a copy of the Master
Agreement, confirms that the representations and warranties contained in the
Master Agreement are true and correct as to the undersigned as of the Effective
Date hereof and agrees that, from and after the Effective Date, it shall be a
party to the Credit Agreement and shall to be bound, as an "Affiliate Borrower",
by all of the provisions thereof.
3. Proposed Loan Amount: $_________________
4. Description of Mortgaged Property:
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
5. Anticipated Closing Date: ________________, 199_.
[NAME OF AFFILIATE BORROWER]
By: ___________________________
Title:___________________________
<PAGE>
SCHEDULE 1
----------
CURRENT AFFILIATE BORROWERS
---------------------------
EQUISTAR LATHAM COMPANY, L.L.C.
EQUISTAR BELLEVUE COMPANY, L.L.C.
EQUISTAR COLORADO COMPANY, L.L.C.
EQUISTAR SCHAUMBURG COMPANY, L.L.C.
EQUISTAR CLEVELAND COMPANY, L.L.C.
EQUISTAR IRVINE COMPANY, L.L.C.
EQUISTAR BALLSTON COMPANY, L.L.C.
EQUISTAR ATLANTA GP COMPANY, L.L.C.
EQUISTAR ATLANTA COMPANY, L.L.C.
EQUISTAR ATLANTA LP COMPANY, L.L.C.
EQUISTAR SOMERSET COMPANY, L.L.C.
LEPERCQ ATLANTA RENAISSANCE PARTNERS, L.P.
EQUISTAR ARLINGTON PARTNERS, L.P.
EXHIBIT 10.11
CAPSTAR HOTEL COMPANY
EQUITY INCENTIVE PLAN
<PAGE>
ARTICLE I
PURPOSE
- -------
1.1 General.
The purpose of the CapStar Hotel Company Equity Incentive Plan (the "Plan")
is to promote the success, and enhance the value, of CapStar Hotel Company (the
"Company"), by linking the personal interests of its qualified officers,
directors and other key employees and the employees, officers, and directors of
any Affiliated Entity to those of Company stockholders and by providing its
qualified officers, directors and other key employees and the employees,
officers, and directors of any Affiliated Entity with an incentive for
outstanding performance. The Plan is further intended to provide flexibility to
the Company in its ability to motivate, attract, and retain the services of
employees upon whose judgment, interest, and special effort the successful
conduct of the Company's operation is largely dependent. Accordingly, the Plan
permits the grant of incentive awards from time to time to directors, selected
officers and key employees.
ARTICLE 2
EFFECTIVE DATE
- --------------
2.1 Effective Date.
The Plan shall be effective as of August 8th, 1996 (the "Effective Date"),
subject to approval by the stockholders of the Company. The Plan will be deemed
to be approved by the stockholders if it receives the affirmative vote of the
holders of a majority of the shares of stock of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable provisions of the Laws of the State of Delaware and the Bylaws of the
Company. Any Awards granted under the Plan prior to stockholder approval are
effective when granted (unless the Committee specifies otherwise at the time of
grant), but no Award may be exercised or settled and no restrictions relating to
any Award may lapse before such stockholder approval is obtained. If the
stockholders fail to approve the Plan within twelve (12) months of the Effective
Date, any Award previously made shall be automatically canceled without any
further act and without payment of consideration.
ARTICLE 3DEFINITIONS
-----------
3.1 Definitions.
When appearing in this Plan with the initial letter capitalized, and the
word or phrase does not commence a sentence, the word or phrase shall generally
be given the meaning ascribed to it in this Section or in Sections 1.1 or 2.1,
unless a different meaning
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<PAGE>
is required by the context. The following words and phrases shall have the
following meanings:
(a) "Affiliated Entity" means any corporation or partnership of which a
majority of the outstanding voting stock or voting power is beneficially
owned directly or indirectly by the Company, or any partnership of which
the Company is the general partner.
(b) "Award" means any Option, Stock Appreciation Right, or Restricted
Stock Award granted to a Participant under the Plan.
(c) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(f) "Committee" means the committee of the Board described in Article 4.
(g) "Company" means CapStar Hotel Company, a Delaware corporation.
(h) "Disability" shall mean any illness or other physical or mental
condition of a Participant that renders the Participant incapable of
performing his customary and usual duties for the Company, or any medically
determinable illness or other physical or mental condition resulting from a
bodily injury, disease or mental disorder which, in the judgment of the
Committee, is expected to be permanent and continuous in nature. The
Committee may require such medical or other evidence as it deems necessary
to judge the nature and permanency of the Participant's condition. Such
disability determination shall be made in accordance with Code section
22(e)(3).
(i) "Effective Date" has the meaning assigned such term in Section 2.1.
(j) "Fair Market Value" means with respect to Stock or any other property,
the Fair Market Value of such Stock or other property determined by such
methods or procedures as may be established from time to time by the
Committee. Unless otherwise determined by the Committee, the Fair Market
Value of Stock as of any date will be the average of the high and low price
of shares of Stock traded on the New York Stock Exchange (or such other
exchange on which the Stock shall be principally traded) on such date, as
reported in the composite transactions quoted in The Wall Street Journal
(New York City edition) or, if no shares of Stock were traded on such day,
on the next preceding day on which such shares were traded.
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<PAGE>
(k) "Incentive Stock Option" means an Option that is intended to meet the
requirements of Section 422 of the Code or any successor provision thereto.
(l) "Non-Qualified Stock Option" means an Option that is not an Incentive
Stock Option.
(m) "Option" means a right granted to a Participant under Article 7 of the
Plan to purchase Stock at a specified price during specified time periods.
An Option may be either an Incentive Stock Option or a Non-Qualified Stock
Option.
(n) "Participant" means a person who, as an officer, director or key
employee of the Company or any Affiliated Entity, has been granted an Award
under the Plan.
(o) "Plan" means the CapStar Hotel Company Equity Incentive Plan, as
amended from time to time.
(p) "Restricted Stock Award" means Stock granted to a Participant under
Article 9 that is subject to certain restrictions and/or to a risk of
forfeiture.
(q) "Retirement" means a Participant's termination of employment with the
Company after attaining any normal or early retirement age specified in any
pension, profit sharing or other tax-qualified retirement program sponsored
by the Company and covering the Participant.
(r) "Stock" means the $0.01 per share par value common stock of the Company
and such other securities of the Company as may be substituted for Stock
pursuant to Article 11.
(s) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Article 8 to receive a payment equal to the difference
between the Fair Market Value of a share of Stock as of the date of
exercise of the SAR and the grant price of the SAR, as determined pursuant
to Article 8.
(t) "1933 Act" means the Securities Act of 1933, as amended from time to
time.
(u) "1934 Act" means the Securities Exchange Act of 1934, as amended from
time to time.
4
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ARTICLE 4
ADMINISTRATION
- --------------
4.1 Committee.
The Plan shall be administered by a Committee of the Board. The Committee
shall consist solely of two or more members of the Board who are intended to be
(i) "outside directors" as that term is used in Section 162(m) of the Code and
the regulations promulgated thereunder, and (ii) "non-employee directors" as
such term is defined in Rule 16b-3 promulgated under Section 16 of the 1934 Act
or any successor provision, in each case to the extent applicable. However, the
mere fact that a Committee member shall fail to qualify under either of the
foregoing requirements shall not invalidate any Award made by the Committee
which Award is otherwise validly made under the Plan. The members of the
Committee shall be appointed by, and may be changed at any time in the
discretion of the Board.
4.2 Action by the Committee.
For purposes of administering the Plan, the following rules of procedure
shall govern the Committee. A majority of the Committee shall constitute a
quorum. The acts of a majority of the members present at any meeting at which a
quorum is present and acts approved in writing by the unanimous consent of the
members of the Committee in lieu of a meeting shall be deemed the acts of the
Committee. Each member of the Committee is entitled, in good faith, to rely or
act upon any report or other information furnished to that member by any officer
or other employee of the Company or any Affiliated Entity, the Company's
independent certified public accountants, or any executive compensation
consultant or other professional retained by the Company to assist in the
administration of the Plan. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any Award
hereunder.
4.3 Authority of Committee.
The Committee shall have the exclusive power, authority and discretion to:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to each
Participant;
(c) Determine the number of Awards to be granted and the number of shares
of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted under the Plan,
including but not limited to, the exercise price, grant price, or purchase
price, any restrictions or limitations on the Award, any schedule for lapse
of forfeiture
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restrictions or restrictions on the exercisability of an Award, and
accelerations or waivers thereof, based in each case on such considerations as
the Committee in its sole discretion determines;
(e) Determine whether, to what extent, and under what circumstances an
Award may be granted, or the exercise price of an Award may be paid in
(cash, Stock, other Awards, or other property), or an Award may be
canceled, forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement, which need not be identical
for each Participant;
(g) Exercise all of the powers granted to it under the Plan; construe,
interpret and implement the Plan and any Awards granted; correct any
defect, supply any omission and reconcile any inconsistency in the Plan or
any Award; and decide all other matters that must be determined in
connection with the Plan or an Award;
(h) Establish, adopt or revise any rules and regulations as it may deem
necessary or advisable to administer the Plan; and
(i) Make all other decisions and determinations that may be required under
the Plan or as the Committee deems necessary or advisable to administer the
Plan.
4.4. Decisions Binding.
The Committee is hereby granted discretionary authority to construe and
interpret the provisions of the Plan. The Committee's interpretation of the
Plan, any Awards granted under the Plan, any Award Agreement and all decisions
and determinations by the Committee with respect to the Plan shall be final,
binding, and conclusive on all parties.
4.5. Authority of Board.
Notwithstanding anything to the contrary contained herein (i) until the
Board shall appoint the members of the Committee, the Plan shall be administered
by the Board and (ii) the Board may, in its sole discretion, at any time from
time to time, resolve to administer the Plan. In either of the foregoing
events, the term Committee as used herein shall be deemed to mean the Board.
4.6. Authority With Respect to Formula Grants.
Notwithstanding Sections 4.3 and 4.4, to the extent provided in Section
7.4, the Committee shall have no discretion with respect to Formula Grants, as
described in Section 7.4.
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ARTICLE 5
SHARES SUBJECT TO THE PLAN
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5.1. Number of Shares.
Subject to adjustment as provided in Section 11.1, the aggregate number of
shares of Stock reserved and available for Awards or which may be used to
provide a basis of measurement for or to determine the value of an Award (such
as with a Stock Appreciation Right) shall be 1,740,000.
5.2. Lapsed Awards.
To the extent that an Award is canceled, terminates, expires or lapses for
any reason without the payment of consideration, any shares of Stock subject to
the Award will again be available for the grant of an Award under the Plan.
Stock subject to SARs settled in cash will be available for the grant of an
Award under the Plan.
5.3. Stock Distributed.
Any Stock distributed pursuant to an Award may consist, in whole or in
part, of authorized and unissued Stock, or treasury Stock.
5.4. Limitation on Number of Shares Subject to Awards.
Notwithstanding any provision in the Plan to the contrary, the maximum
number of shares of Stock with respect to which Awards may be granted under the
Plan to any one Participant during any one calendar year shall be 200,000.
ARTICLE 6
ELIGIBILITY
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6.1. General.
Awards may be granted only to individuals who are officers, directors or
other key employees of the Company or an Affiliated Entity, selected by the
Committee.
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ARTICLE 7
STOCK OPTIONS
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7.1. General.
The Committee is authorized to grant Options to Participants on the
following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock under an Option
shall be determined by the Committee.
(b) Time and Conditions of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part. The
Committee also shall determine the performance or other conditions, if any,
that must be satisfied before all or part of an Option may be exercised.
(c) Payment. The Committee shall determine the methods by which the
exercise price of an Option may be paid, the form of payment, including,
without limitation, cash, shares of Stock (whether or not held by the
grantee for the period required to avoid a charge to earnings for financial
reporting purposes), or other property (including "cashless exercise"
arrangements), and the methods by which shares of Stock shall be delivered
or deemed to be delivered to Participants. Without limiting the power and
discretion conferred on the Committee pursuant to the preceding sentence,
the Committee may, in the exercise of its discretion, but need not, allow a
Participant to pay the Option price by directing the Company to withhold
from the shares of Stock that would otherwise be issued upon exercise of
the Option that number of shares having a Fair Market Value on the exercise
date equal to the Option price, all as maybe determined pursuant to rules
and procedures established by the Committee.
(d) Evidence of Grant. All Options shall be evidenced by a written Award
Agreement between the Company and the Participant. The Award Agreement
shall include such provisions consistent with the Plan, as may be specified
by the Committee.
7.2. Incentive Stock Options.
The terms of any Incentive Stock Options granted under the Plan must comply
with the following additional rules:
(a) Exercise Price. The exercise price per share of Stock shall be set by
the Committee, provided that the exercise price for any Incentive Stock
Option shall not be less than the Fair Market Value as of the date of the
grant.
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(b) Exercise. In no event may any Incentive Stock Option be exercisable for
more than ten (10) years from the date of its grant.
(c) Affiliated Entity. In order for a grantee to receive special tax
treatment with respect to Stock acquired under an Incentive Stock Option,
the grantee of such Incentive Stock Option must be, at all times during the
period beginning on the date of grant and ending on the day three (3)
months before the date of exercise of such option, an employee of the
Company or any of the Company's parent or subsidiary corporations (within
the meaning of Code Section 424), or of a corporation or a parent or
subsidiary corporation of such corporation issuing or assuming a stock
option in a transaction to which Code section 424(a) applies.
(d) Individual Dollar Limitation. The aggregate Fair Market Value
(determined at the time an Award is made) of all shares of Stock with
respect to which Incentive Stock Options are first exercisable by a
Participant in any calendar year may not exceed $100,000.00.
(e) Ten Percent Owners. No Incentive Stock Option shall be granted to any
individual who, at the date of grant, owns stock possessing more than ten
(10) percent of the total combined voting power of all classes of stock of
the Company or any Affiliated Entity unless the exercise price per share of
such Option is at least 110% of the Fair Market Value per share of Stock at
the date of grant and the Option expires no later than five (5) years after
the date of grant.
(f) Expiration of Incentive Stock Options. No Award of an Incentive Stock
Option may be made pursuant to the Plan ten (10) years from the date the
plan is adopted, or the date such plan is approved by the stockholders,
whichever is earlier.
7.3. Lapse of Option.
Unless an Award Agreement otherwise provides, an Option shall terminate at
the earliest of the following circumstances:
(a) The date that is ten (10) years after the Option is granted;
(b) The date that is three (3) months after the Participant's termination
of employment, for any reason other than as provided in paragraph
(c), (d) or (e) below;
(c) The date that is twelve (12) months after employment ceases due to the
Disability, but in no event later than the date his Option would have
expired under paragraph (a) or (b) if he had not become Disabled;
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(d) the date the Participant's employment is terminated for cause;
(e) the date twelve (12) months after the Participant's death, but in no
event later than the date his Option would have expired under paragraph
(a), (b) or (c) if he had not died; and
(f) in the case of an Option granted in tandem with an SAR, the date of
the exercise of the related SAR.
7.4. Formula Grants.
As of the date of the initial public offering of Company Stock, each
director who is not then an employee of the Company will be granted a Non-
Qualified Stock Option to purchase 5,000 shares of Stock at the initial public
offering price. Thereafter, at each annual meeting of the Company's shareholders
at which directors are elected, each such nonemployee director elected or
reelected at that time will receive an additional Option to purchase 5,000
shares of the Stock. Options granted under this Section 7.4 shall have the
following terms:
(a) Vesting Schedule: Each Option granted under this Section 7.4 shall
vest over three years. On the first anniversary of the grant of the Option,
a portion of the Option will vest with rights to 1,667 shares of Stock. On
the second anniversary of the date of the grant of the Option, a portion of
the Option will vest with rights to 1,667 shares of Stock. On the third
anniversary of the grant of the Option, the final portion of the Option
will vest with rights to 1,666 shares of Stock. The above vesting schedule
is contingent on the nonemployee director being a director of the Company
on such date.
(b) Term of the Option: Each Option granted under this Section 7.4 shall
expire ten (10) years from the date of grant, subject to the early
termination provisions of this Section.
(c) Exercise Price: The exercise price of all Options granted under this
Section 7.4 shall be the price of the Stock at the close of business on the
New York Stock Exchange (or such other exchange on which the Stock shall be
principally traded) on the date of the grant of the Option.
(d) Payment of Exercise Price: The exercise price will be payable in cash,
or shares of Stock (valued at the close of business on the New York Stock
Exchange (or such other exchange on which the Stock shall be principally
traded) on the date of exercise) held by the grantee for the period
required to avoid a charge to earnings for financial reporting purposes.
(e) Transfer: Each Option granted hereunder will be subject to the
transferability limitations of Section 10.5.
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(f) Termination/Lapse: If a nonemployee director ceases to be a director
other than by reason of removal for cause, death or Disability, any
exercisable Options held by that director will terminate three (3) months
after the director ceases to serve as a director. If a nonemployee
director is removed for cause, all outstanding Options held by that
director will terminate immediately upon the director's removal.
(g) Death or Disability: Upon a nonemployee director's death or Disability,
all outstanding Options held by that director will become immediately
exercisable, and remain exercisable for twelve (12) months, after which
time they will terminate.
7.5 Nonconforming Incentive Stock Options.
All Options when granted are intended to be Non-Qualified Stock Options,
unless the applicable Award Agreement explicitly states that the Option is
intended to be an Incentive Stock Option. If an Option is intended to be an
Incentive Stock Option, and if for any reason such Option (or any portion
thereof) shall not qualify as an Incentive Stock Option, then, to the extent of
such nonqualification, such Option (or portion) shall be regarded as a Non-
Qualified Stock Option appropriately granted under the Plan provided that such
Option (or portion) otherwise meets the Plan's requirements relating to Non-
Qualified Stock Options.
ARTICLE 8
STOCK APPRECIATION RIGHTS
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8.1. Grant of SARs.
The Committee is authorized to grant SARs to Participants on the following
terms and conditions:
(a) Right to Payment. Upon the exercise of a SAR, the Participant to whom
it is granted has the right to receive all or a percentage of:
(1) The Fair Market Value of one share of Stock on the date of
exercise, minus,
(2) The grant price of the SAR as determined by the Committee. In the case
of a SAR offered in tandem with an Incentive Stock Option, the per share
grant price of the SAR shall not be less than the Fair Market Value of one
share of Stock on the date of grant.
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(b) Tandem Awards. SARs may be granted alone or in tandem with options. If a
SAR is granted in tandem with an Option, the SAR may only be exercised at a time
when the related Option is exercisable and the difference between the Fair
Market Value and the grant price is a positive number. The exercise of the
tandem SAR requires the surrender of the related Option for cancellation.
(c) Other Terms. Each SAR shall be evidenced by an Award Agreement. The
terms, methods of exercise, methods of settlement, form of consideration
payable in settlement, and any other terms and conditions of any SAR shall
be determined by the Committee at the time of the grant of the Award and
shall be reflected in the Award Agreement.
ARTICLE 9
RESTRICTED STOCK AWARDS
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9.1. Grant of Restricted Stock.
The Committee is authorized to make Awards of Restricted Stock to
Participants in such amounts and subject to such terms and conditions as may be
determined by the Committee. Each Award of Restricted Stock shall be evidenced
by an Award Agreement.
9.2. Issuance and Restrictions.
Restricted Stock shall be subject to such restrictions as the Committee may
choose to impose. These restrictions may lapse separately or in combination at
such times, under such circumstances, in such installments, or otherwise, as the
Committee may determine at the time of the grant of the Award or thereafter. An
Award of Restricted Stock will provide the Participant with voting, dividend and
other ownership rights prior to the vesting thereof, only to the extent provided
in the Award Agreement.
9.3. Forfeiture.
Except as otherwise determined by the Committee at the time of the grant of
Restricted Stock, upon termination of service with the Company and its
Affiliated Entities during the applicable restriction period, Restricted Stock,
that is at that time subject to restrictions, shall be forfeited and reacquired
by the Company.
9.4. Certificates for Restricted Stock.
Restricted Stock granted under the Plan may be evidenced in such manner as
the Committee shall determine. If certificates representing shares of
Restricted Stock are
registered in the name of the Participant, certificates must bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, and
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the Company shall retain physical possession of the certificates until such
time as all applicable restrictions lapse.
ARTICLE 10
PROVISIONS APPLICABLE TO AWARDS
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10.1. Stand-Alone, Tandem and Substitute Awards.
Awards granted under the Plan may, in the discretion of the Committee, be
granted either alone or in addition to, in tandem with, or in substitution for,
any other Awards granted under the Plan. If an Award is granted in substitution
for another Award, the Committee may require the surrender of such other Award
in consideration of the grant of the new Award. Awards granted in addition to or
in tandem with other Awards may be granted either at the same time as or at
different times from the grant of such other Awards.
10.2. Exchange Provisions.
The Committee may at any time offer to exchange or buy out any previously
granted Award for a payment in cash, Stock, or another Award (subject to Section
11.1), based on the terms and conditions the Committee determines and
communicates to the
Participant at the time the offer is made. Pursuant to Agreement, the Committee
may accelerate the exercisability of an Award.
10.3. Term of Award.
The term of each Award shall be for the period as determined by the
Committee, provided that in no event shall the term of any Incentive Stock
Option or a Stock Appreciation Right granted in tandem with the Incentive Stock
Option exceed a period of
ten years from the date of its grant.
10.4. Form of Payment for Awards.
Subject to the terms of the Plan, the Award Agreement or any applicable
law, payments or transfers to be made by the Company or an Affiliated Entity on
the vesting or exercise of an Award may be made in such form as the Committee
determines at the time of grant, including without limitation, cash, Stock,
other Awards, or other property, or any combination, and may be made in a single
payment or transfer, in installments, or on a deferred basis, in each case
determined in accordance with rules adopted by, and at the discretion of,
the Committee.
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10.5. Limits on Transfer.
No right or interest of a Participant in any Award may be encumbered or
pledged to or in favor of any party other than the Company or an Affiliated
Entity, or shall be subject to any lien, obligation, or liability of such
Participant to any other party other than the Company or an Affiliated Entity.
No Award shall be assignable or transferable by a Participant other than by will
or the laws of descent and distribution or, other than in the case of an
Incentive Stock Option, pursuant to a qualified domestic relations order as
defined in Section 414(p)(1)(B) of the Code, if the order satisfies Section
414(p)(1)(A) of the Code.
10.6. Beneficiaries.
Notwithstanding Section 10.5, a Participant may, in the manner determined
by the Committee, designate a beneficiary to exercise the rights of the
Participant and to receive any distribution with respect to any Award upon the
Participant's death. A beneficiary, legal guardian, legal representative, or
other person claiming any rights under the Plan is subject to all terms and
conditions of the Plan and any Award Agreement applicable to the Participant,
except to the extent the Plan and Award Agreement otherwise provide. If no
beneficiary has been designated or survives the Participant, payment shall be
made to the person entitled thereto under the Participant's will or the laws of
descent and distribution. Subject to the foregoing, a beneficiary designation
may be changed or revoked by a Participant at any time provided the change or
revocation is filed in a manner to be determined by the Committee.
10.7. Stock Certificates.
All Stock certificates delivered under the Plan are subject to any stop-
transfer orders and other restrictions as the Company deems necessary or
advisable to comply with federal or state securities laws, rules and regulations
and the rules of any national securities exchange or automated quotation system
on which the Stock is listed, quoted, or traded. The Company may place legends
on any Stock certificate to reference any restrictions applicable to the Stock
issued under the Plan.
10.8. Acceleration Upon Certain Events.
In the event 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 1934 Act, all
outstanding Options and SARs shall become fully exercisable, and/or all
outstanding Restricted Stock shall vest, in each case as of the date of the
consummation of such tender offer or other transaction or event.
14
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ARTICLE 11
CHANGES IN CAPITAL STRUCTURE
- ----------------------------
11.1. General.
In the event a stock dividend is declared upon the Stock, the shares of
Stock then subject to each Award shall be increased proportionately without any
change in the aggregate purchase price, if any, therefor. In the event the
Stock shall be changed into or
exchanged for a different number or class of shares of stock or securities of
the Company or of another company, whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation, there shall be substituted for each such share of Stock then
subject to each Award the number and class of shares into which each outstanding
share of Stock shall be so exchanged, all without any change in the aggregate
purchase price for the shares then subject to each Award.
11.2 Adjustments on Account of Corporate Events.
The maximum number of shares that may be issued or transferred under the
Plan (or to any person in any calendar year), the number of shares covered by
outstanding Awards, the exercise prices of outstanding Options and base prices
of outstanding SARs are subject to adjustment in the event of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, spin off, reorganization, liquidation, issuance of rights or
warrants or similar transaction or event, to the extent determined by the
Committee in its sole discretion.
ARTICLE 12
AMENDMENT, MODIFICATION AND TERMINATION
- ---------------------------------------
12.1. Amendment, Modification and Termination.
With the approval of the Board, at any time and from time to time, the
Committee may terminate, amend or modify the Plan. However, to the extent
required by the Code, by the insider trading rules of Section 16 of the 1934
Act, by any national securities exchange on which the Stock is listed or
reported, or by a regulatory body having jurisdiction, without approval of the
stockholders of the Company or other conditions no such termination, amendment,
or modification may:
(a) Increase the total number of shares of Stock that may be issued under
the Plan, except as provided in Section 11.1;
(b) Modify the eligibility requirements for participation in the Plan; or
(c) Materially increase the benefits accruing to Participants under the
Plan.
12.2 Awards Previously Granted.
No termination, amendment, or modification of the Plan shall adversely
affect any Award previously granted under the Plan, without the written consent
of the Participant.
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ARTICLE 13
GENERAL PROVISIONS
- ------------------
13.1. No Rights to Awards.
No person shall have any claim to be granted any Award under the Plan, and
neither the Company nor the Committee shall be obligated to treat any persons
uniformly, except as provided in Section 7.4.
13.2. No Stockholder Rights.
No Award shall give a Participant any of the rights of a stockholder of the
Company unless and until shares of Stock are in fact issued to such person in
connection with such Award.
13.3. Withholding.
The Company or any Affiliated Entity shall have the authority and the right
to deduct or withhold, or require a Participant to remit to the Company, an
amount sufficient to satisfy federal, state, and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising as a result of the Plan. With respect to withholding
required upon any taxable event under the Plan, the Committee may, at the time
the Award is granted or thereafter, require that any such withholding
requirement be satisfied, in whole or in part, by withholding shares of Stock
having a Fair Market Value on the date of withholding equal to the amount to be
withheld for tax purposes, all in accordance with such procedures as the
Committee may establish.
13.4. No Right to Employment.
Nothing in the Plan or any Award Agreement shall interfere with or limit in
any way the right of the Company or any Affiliated Entity to terminate any
Participant's service with the Company or any Affiliated Entity at any time, or
confer upon any Participant any right to continue in the service of the Company
or any Affiliated Entity.
13.5. Indemnification.
To the extent allowable under applicable law, each member of the Committee
shall be indemnified and held harmless by the Company from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by such
member in connection with or resulting from any claim, action, suit, or
proceeding to which such member may be a party or in which he may be involved by
reason of any action or failure to act under the Plan and against and from any
and all amounts paid by such member in satisfaction of judgment in such action,
suit, or proceeding against him provided he gives the Company an opportunity, at
its own expense, to handle and defend the same before he undertakes to handle
and defend it on his own behalf. The foregoing right of indemnification shall
not
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be exclusive of any other rights of indemnification to which such persons may be
entitled under the By-Laws of the Company or as a matter of law, or otherwise,
or any power that the Company may have to indemnify them or hold them harmless.
13.6. Relationship to Other Benefits.
No payment under the Plan shall be taken into account in determining any
benefits under any pension, retirement, savings, profit sharing, group
insurance, welfare or benefit plan of the Company or any Affiliated Entity,
except as such other plan may expressly provide.
13.7. Expenses.
The expenses of administering the Plan shall be borne by the Company and
its Subsidiaries.
13.8. Titles and Headings.
The titles and headings of the Sections in the Plan are for convenience of
reference only, and in the event of any conflict, the text of the Plan, rather
than such titles or headings, shall control.
13.9. Gender and Number.
Except where otherwise indicated by the context, any masculine term used
herein also shall include the feminine; the plural shall include the singular
and the singular shall
include the plural.
13.10. Fractional Shares.
No fractional shares of Stock shall be issued and the Committee shall
determine, in its discretion, whether cash shall be paid in lieu of fractional
shares or whether such fractional shares shall be eliminated.
13.11. Securities Law Compliance.
With respect to any person who is, on the relevant date, obligated to file
reports under Section 16 of the 1934 Act, transactions under the Plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the 1934 Act. To the extent any provision of the Plan or
action by the Committee fails to so comply, it shall be voidable as deemed
advisable by the Committee.
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13.12. Government and Other Regulations.
The obligation of the Company to make payment of Awards in Stock or
otherwise shall be subject to all applicable laws, rules, and regulations, and
to such approvals by government agencies as may be required. The Company shall
be under no obligation to register under the 1933 Act, any of the shares of
Stock paid under the Plan. If the shares paid under the Plan may in certain
circumstances be exempt from registration under the 1933 Act, the Company may
restrict the transfer of such shares in such manner as it deems advisable to
ensure the availability of any such exemption.
13.13. Governing Law.
To the extent not governed by federal law, the Plan and all Award
Agreements shall be construed in accordance with and governed by the laws of the
State of Delaware.
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EXHIBIT 10.12
CAPSTAR HOTEL COMPANY
EMPLOYEE STOCK PURCHASE PLAN
1
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ARTICLE I -- PURPOSE
1.01. Purpose
The CapStar Hotel Company Employee Stock Purchase Plan (the "Plan") is
intended to provide a method whereby eligible employees of CapStar Hotel Company
(hereinafter referred to, unless the context otherwise requires, as the
"Company") and any Affiliated Entity will have an opportunity to acquire a
proprietary interest in the Company through the purchase of shares of the common
stock of the Company.
ARTICLE II -- DEFINITIONS
2.01. Affiliated Entity
"Affiliated Entity" means any corporation or partnership of which a majority
of the outstanding voting stock or voting power is beneficially owned directly
or indirectly by the Company, or any partnership in which the Company is the
general partner.
2.02. Base Pay
"Base Pay" means base salary paid in each Offer Period. Eligible
compensation does not include overtime, bonuses, severance pay, incentive pay,
shift premium differentials, pay in lieu of vacation, imputed income for income
tax purposes, patent and award fees, awards and prizes, back pay awards,
reimbursement of expenses and living allowances, educational allowances, expense
allowances, disability benefits under any insurance program, fringe benefits,
deferred compensation, compensation under the Company's stock plans, amounts
paid for services as an independent contractor, or any other compensation
excluded by the Board of Directors in its discretion. Compensation shall be
determined before giving effect to any salary reduction agreement pursuant to a
qualified cash or deferred arrangement within the meaning of Section 401(k) of
the Code or to any similar reduction agreement pursuant to any cafeteria plan
(within the meaning of Section 125 of the Code).
2.03. Committee
"Committee" means the individuals described in Article XI.
2.04. Employee
"Employee" means, subject to Section 3.02, any person employed by the
Company whose customary employment is for twenty (20) or more hours per week for
the Company or any Affiliated Entity.
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2.05. Offer Date
"Offer Date" means the date described in Section 4.02.
2.06. Offer Period
"Offer Period" means the period described in Section 4.02.
2.07. Offering Termination Date
"Offering Termination Date" means the date described in Section 4.02.
2.08. Option Percentage
"Option Percentage" means the amount determined annually by the Committee
pursuant to Section 6.01.
2.09. Option Value
"Option Value" means the amount determined under Section 6.01.
2.10. Participant
"Participant" means any Employee who completes an authorization for payroll
deductions on a form provided by the Company and files it with the Chief
Financial Officer of the Company or his designee.
2.11. Trading Day
"Trading Day" has the meaning ascribed by Section 4.02.
ARTICLE III -- ELIGIBILITY AND PARTICIPATION
3.01. Initial Eligibility.
Any Employee who shall have completed ninety (90) days' employment and shall
be employed by the Company on the date his participation in the Plan is to
become effective shall be eligible to participate in offerings under the Plan
which commence on or after such ninety day period has concluded.
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3.02. Leave of Absence.
For purposes of participation in the Plan, a person on leave of absence shall
be deemed to be an Employee for the first ninety (90) days of such leave of
absence and such employee's employment shall be deemed to have terminated at the
close of business on the 90th day of such leave of absence unless such employee
shall have returned to regular full-time or part-time employment (as the case
may be) prior to the close of business on such 90th day. Termination by the
Company of any employee's leave of absence, other than termination of such leave
of absence on return to full time or part time employment, shall terminate an
employee's employment for all purposes of the Plan and shall terminate such
employee's participation in the Plan and right to exercise any option.
3.03. Restrictions on Participation.
Notwithstanding any provisions of the Plan to the contrary, no Employee shall
be granted an option under the Plan:
(a) if, immediately after the grant, such Employee would own stock, and/or
hold outstanding options to purchase stock, possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or any of its parent or any Affiliated Entity; or
(b) which permits his rights to purchase stock under all employee stock
purchase plans of the Company to accrue at a rate which exceeds $25,000 in fair
market value of the stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding.
3.04. Commencement of Participation.
An eligible Employee may become a Participant by completing an authorization
for payroll deductions on the form provided by the Company and filing it with
the office of the Chief Financial Officer of the Company on or before the first
day of the month in which participation is to commence. Payroll deductions for
a Participant shall become effective as of the first payroll period ending in
the month in which participation commences and shall remain in effect until
modified or revoked by the Participant pursuant to Section 5.03 and Article
VIII.
ARTICLE IV -- OFFERINGS
4.01. Number of Shares to be Offered.
The maximum number of shares of common stock of the Company that may be
purchased under the Plan is 500,000. Such shares may be treasury shares or
authorized and unissued shares as the Committee may determine in its discretion.
The Company, by
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action of its Board of Directors upon the advice of the Committee and subject to
stockholder approval, may increase the number of shares reserved under the Plan.
4.02. Offer Date
The Offer Date shall be the first Trading Day of every month and the Offer
Period will last for the duration of that calendar month, ending on the last
Trading Day of that month (the "Offering Termination Date"). Upon the Offer
Date, the Company will issue to each then eligible employee, an option to
purchase, based upon the amount of the Employee's Base Pay to be reduced during
the Offer Period, the number of full shares of common stock (the "Offering") as
determined and limited by the Section 6.01. For purposes of this Plan, a Trading
Day is a day on which shares of common stock of the Company are traded on the
New York Stock Exchange (or such other exchange on which the Company's common
stock shall be principally traded).
ARTICLE V -- PAYROLL DEDUCTIONS
5.01. Amount of Deduction.
At the time a Participant files his authorization for payroll deduction, he
shall elect to have deductions made from his Base Pay on each payday during the
time he is a Participant in an Offering at the rate of 1, 2, 3, 4, 5, 6, 7 or 8%
of his Base Pay paid during an Offer Period, except that there shall be a
minimum authorization of $200 per calendar quarter.
Notwithstanding these limits, until year end December 31, 1996, up to twenty-
four percent (24%) of salary paid during the Offer Period may be authorized for
payroll deductions.
5.02. Participant's Account.
All payroll deductions made for a Participant shall be credited to his account
under the Plan. The Participant's account will consist of a bookkeeping entry
in the Company's financial records. A Participant may not make any separate cash
payment into such account except when on leave of absence and then only as
provided in Section 5.04.
5.03. Changes in Payroll Deductions.
A Participant may discontinue his participation in the Plan as described in
Article VIII, but no other change can be made with regard to an Offer Period
and, specifically, a Participant may not alter the amount of his payroll
deductions for that Offer Period. Except as provided in Article VIII, a
Participant may modify or revoke an authorization for payroll deductions only
with respect to future Offer Periods.
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5.04. Leave of Absence.
If a Participant goes on an approved leave of absence, such Participant
shall have the right to elect:
(a) to withdraw the balance in his or her account pursuant to Section 8.01;
(b) to discontinue contributions to the Plan but remain a Participant in the
Plan; or
(c) remain a Participant in the Plan during such leave of absence,
authorizing deductions to be made from payments by the Company to the
Participant during such leave of absence and undertaking to make cash payments
to the Company at the end of each payroll period to the extent that amounts
payable by the Company to such Participant are insufficient to meet such
Participant's authorized payroll deductions.
Any payment made to the Company under this Section will be reflected as a
credit to the Participant's account in accord with Section 5.02.
ARTICLE VI -- GRANTING OF OPTION
6.01. Number of Option Shares.
On each Offer Date, participating Employees shall be deemed to have been
granted options to purchase shares of common stock of the Company equal to the
number of full shares determined by dividing the amount of the employee's
payroll deductions authorized to be made during the Offer Period, plus any
carryovers, by the Option Value of the common stock of the Company.. The Option
Value for the Offer Period shall be the Option Percentage, multiplied by the
lesser of the closing price of a share of common stock on the New York Stock
Exchange (or such other exchange on which the Company's common stock shall be
principally traded) on the first Trading Day of the Offer Period, or the closing
price of a share of common stock on the New York Stock Exchange (or such other
exchange on which the Company's common stock shall be principally traded) on the
Offering Termination Date.
The Option Percentage shall be eighty-five percent (85%) upon the Effective
Date of the Plan. The Committee, in its discretion, may amend the Option
Percentage to any percentage between 85% and 100% from time to time as is deemed
appropriate.
Any amount credited to a Participant's account that will not purchase a full
share or is in excess of the amount needed to fully exercise the Employee's
option for that Offer Period will be carried forward to the next Offer Period.
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6.02. Option Price.
The option price of stock purchased with payroll deductions made during such
monthly offering for a Participant therein shall be the lesser of:
(a) the Option Percentage multiplied by the closing price of the stock on the
Offer Date or
(b) the Option Percentage multiplied by the closing price of the stock on the
Offering Termination Date.
6.03. Common Stock Valuation
If the common stock of the Company is not traded on a public market on any of
the aforesaid dates for which closing prices of the stock are to be determined,
such price shall be deemed to be the fair market value of the stock on that
date, as determined by the Committee.
6.04. Maximum Number of Shares per Offer Period
In no event, may more than 1,000 shares be purchased by any one Participant
in any one Offer Period.
ARTICLE VII -- EXERCISE OF OPTION
7.01. Automatic Exercise.
Unless a Participant gives written notice to the Company as hereinafter
provided, his option to purchase stock with payroll deductions made during each
Offer Period will be deemed to have been exercised automatically on the Offering
Termination Date (as defined in Section 6.02) applicable to such offering, for
the purchase of the number of full shares of stock which the accumulated payroll
deductions and carryovers in his account at that time will purchase at the
applicable option price (but not in excess of the number of shares for which
options have been granted to the Employee pursuant to Article VI).
7.02. Fractional Shares.
Fractional shares will not be issued under the Plan and any accumulated
payroll deductions which would have been used to purchase fractional shares will
be carried over to the next Offer Period pursuant to Section 6.01.
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7.03. Transfer of Option.
During a Participant's lifetime, options held by such Participant shall be
exercisable only by that Participant.
7.04. Delivery of Stock.
As promptly as practicable after the Offering Termination Date of each
Offering, the Company will deliver to each Participant, as appropriate,
certificates for the shares of stock purchased upon exercise of his option.
ARTICLE VIII -- WITHDRAWAL
8.01. In General.
By written notice to the Chief Financial Officer of the Company at any time
prior to two days prior to the Offering Termination Date applicable to any
Offering, a Participant may elect to withdraw all (but not less than all) of the
accumulated payroll deductions in his account (including any carryovers) at such
time. Payment of the Participant's payroll deductions credited to his account
will be paid to him promptly after receipt of his notice of withdrawal, and no
further payroll deductions will be made from his pay during such Offering. The
Committee may, at its option, treat any attempt to borrow by an Employee on the
security of his accumulated payroll deductions as an election to withdraw such
deductions.
8.02. Effect on Subsequent Participation.
A Participant's withdrawal of his account will not have any effect upon his
eligibility to participate in any succeeding Offering or in any similar plan
which may hereafter be adopted by the Company.
8.03. Termination of Employment.
Upon termination of the Participant's employment for any reason, including
retirement (but excluding death while in the employ of the Company or
continuation of a leave of absence for a period beyond ninety (90) days), the
payroll deductions credited to his account will be deducted from his account and
paid to him, or, in the case of his death subsequent to the termination of his
employment, to the person or persons entitled thereto under Section 12.01 and
the option granted to him for such Offer Period shall automatically terminate.
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8.04. Termination of Employment Due to Death.
Upon termination of the Participant's employment on account of his death, his
beneficiary (as defined in Section 12.01) shall have the right to elect, by
written notice given to the Chief Financial Officer of the Company prior to two
days before the Offering Termination Date either:
(a) to withdraw all of the payroll deductions credited to the Participant's
account under the Plan in which case the Participant's option shall
automatically expire, or
(b) to exercise the Participant's option for the purchase of stock on the
Offering Termination Date next following the date of the Participant's death for
the purchase of the number of full shares of stock which the accumulated payroll
deductions in the Participant's account at the date of the Participant's death
will purchase at the applicable option price (but not in excess of the number of
shares for which options have been granted to the Employee pursuant to Article
VI), and any excess credited to such account will be paid to said beneficiary,
without interest.
In the event that no such written notice of election shall be duly received
by the Chief Financial Officer of the Company (or his designee), the beneficiary
shall automatically be deemed to have elected, pursuant to paragraph (b), to
exercise the Participant's option.
ARTICLE IX -- INTEREST
9.01. Payment of Interest.
No interest will be paid on any amounts deducted from a Participant's pay or
credited to the account of any Participant.
ARTICLE X -- STOCK
10.01. Maximum Shares.
If the total number of shares for which options are exercised on any Offering
Termination Date in accordance with Article VI exceeds the maximum number of
authorized shares remaining for purchase under Section 4.01, the Committee shall
make a pro rata allocation (based on the amounts deducted from pay) of the
shares available for delivery and distribution in as nearly a uniform manner as
shall be practicable and as it shall determine to be equitable, and the balance
of payroll deductions credited to the account of each Participant under the Plan
shall be returned to him as promptly as possible.
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10.02. Participant's Interest in Option Stock.
The Participant will have no interest in any shares of stock covered by his
option until such option has been exercised and shares have been issued to the
Participant.
10.03. Registration of Stock.
Stock to be delivered to a Participant under the Plan will be registered in
the name of the Participant, or, if the Participant so directs by written notice
to the Chief Financial Officer of the Company prior to the Offering Termination
Date applicable thereto, in the names of the Participant and one such other
person as may be designated by the Participant, as joint tenants with rights of
survivorship to the extent permitted by applicable law.
10.04. Restrictions on Exercise.
The Board of Directors may, in its discretion, require as conditions to the
exercise of any option that the shares of common stock reserved for issuance
upon the exercise of the option shall have been duly listed, upon official
notice of issuance, upon a stock exchange, and that either:
(a) a Registration Statement under the Securities Act of 1933, as amended,
with respect to said shares shall be effective, or
(b) the Participant shall have represented at the time of purchase, in form
and substance satisfactory to the Company, that it is his intention to purchase
the shares for investment and not for resale or distribution.
ARTICLE XI -- ADMINISTRATION
11.01. Appointment of Committee
The Board of Directors shall appoint a committee of two or more directors
(the "Committee") to administer the Plan, which shall consist of no fewer than
two members of the Board of Directors. No member of the Committee shall be an
Employee eligible to purchase stock under the Plan.
11.02. Authority of Committee
Subject to the express provisions of the Plan, the Committee shall have
plenary authority in its discretion to interpret and construe any and all
provisions of the Plan, to adopt rules and regulations for administering the
Plan, and to make all other determinations deemed necessary or advisable for
administering the Plan. The Committee's determination on the foregoing matters
shall be conclusive.
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11.03. Rules Governing the Administration of the Committee
The Board of Directors may from time to time appoint members of the Committee
in substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee may select one of its
members as its Chairman and shall hold its meetings at such times and places as
it shall deem advisable and may hold telephonic meetings. A majority of its
members shall constitute a quorum. All determinations of the Committee shall be
made by a majority of its members. The Committee may correct any defect or
omission or reconcile any inconsistency in the Plan, in the manner and to the
extent it shall deem desirable and in accordance with applicable law. Any
decision or determination reduced to writing and signed by all of the members of
the Committee shall be as fully effective as if it had been made by a majority
vote at a meeting duly called and held. The Committee may appoint a secretary
and shall make such rules and regulations for the conduct of its business as it
shall deem advisable.
ARTICLE XII -- MISCELLANEOUS
12.01. Designation of Beneficiary.
A Participant may file a written designation of one or more beneficiaries who
is to receive any stock and/or cash issuable or payable, as the case may be,
after the Participant's death. Such designation of beneficiary may be changed by
the Participant at any time by written notice delivered prior to the
Participant's death to the Chief Financial Officer of the Company. Upon the
death of a Participant, if the Company has received a valid designation of
beneficiary and receives sufficient proof of such beneficiary's identity, the
Company shall deliver such stock and/or cash to such beneficiary. In the event
of the death of a Participant and in the absence of a living, validly designated
beneficiary, the Company shall deliver such stock and/or cash to the executor or
administrator of the estate of the Participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Committee, in its discretion, may cause the Company to deliver such stock and/or
cash to the spouse or to any one or more dependents of the Participant as the
Company may designate. No beneficiary shall, prior to the death of the
Participant by whom he has been designated, acquire any interest in the stock or
cash credited to the Participant under the Plan.
12.02. Transferability.
Neither payroll deductions credited to a Participant's account nor any rights
with regard to the exercise of an option or to receive stock under the Plan may
be assigned, transferred, pledged, or otherwise disposed of in any way by the
Participant other than by will or the laws of descent and distribution. Any such
attempted assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 8.01.
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12.03. Use of Funds.
All payroll deductions received or held by the Company under this Plan may be
used by the Company for any corporate purpose and the Company shall not be
obligated to segregate such payroll deductions.
12.04. Adjustment Upon Changes in Capitalization.
(a) If, while any options are outstanding, the outstanding shares of common
stock of the Company have increased, decreased, changed into, or been exchanged
for a different number or kind of shares or securities of the Company without
the receipt of consideration through reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split or similar transaction,
appropriate and proportionate adjustments may be made by the Committee in the
number and/or kind of shares which are subject to purchase under outstanding
options and on the option exercise price applicable to such outstanding options.
In addition, in any such event, the number and/or kind of shares which may be
offered in the Offerings described in Article IV hereof shall also be
proportionately adjusted. No adjustments shall be made for stock dividends. For
the purposes of this Paragraph, any distribution of shares to shareholders in an
amount aggregating 20% or more of the outstanding shares shall be deemed a stock
split and any distributions of shares aggregating less than 20% of the
outstanding shares shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, the holder of each option then outstanding under the Plan
will thereafter be entitled to receive at the next Offering
Termination Date upon the exercise of such option for each share as to which
such option shall be exercised, as nearly as reasonably may be determined, the
cash, securities and/or property which a holder of one share of the common stock
was entitled to receive upon and at the time of such transaction. The Board of
Directors shall take such steps in connection with such transactions as the
Board shall deem necessary to assure that the provisions of this Section 12.04
shall thereafter be applicable, as nearly as reasonably may be determined, in
relation to the said cash, securities and/or property as to which such holder of
such option might thereafter be entitled to receive.
12.05. Amendment and Termination.
The Board of Directors shall have complete power and authority to terminate
or amend the Plan; provided, however, that the Board of Directors shall not,
without the approval of the stockholders of the Corporation (i) increase the
maximum number of shares which may be issued under any Offering; (ii) or amend
the requirements as to the class of employees eligible to purchase stock under
the Plan. No termination, modification, or
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amendment of the Plan may, without the consent of an Employee then having an
option under the Plan to purchase stock, adversely affect the rights of such
Employee under such option.
12.06. Effective Date.
The Plan shall become effective as of the first day of the month after its
adoption and approval by the Company through its Board of Directors and
shareholders (the "Effective Date").
12.07. No Employment Rights.
The Plan does not, directly or indirectly, create in any employee or class of
employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an employee's employment at any time.
12.08. Effect of Plan.
The provisions of the Plan shall, in accordance with its terms, be binding
upon, and inure to the benefit of all Employees and all beneficiaries of
Employees participating in the Plan, including, without limitation, each such
Employee's estate and the executors, administrators or trustees thereof, heirs
and legatees.
12.09. Governing Law.
The law of the State of Delaware will govern all matters relating to this
Plan except to the extent it is superseded by the laws of the United States.
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EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Partners
EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P.:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Washington, D.C.
August 15, 1996
EXHIBIT 23.2
[BOBER, MARKEY & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the use of our report dated April
30, 1996 with respect to the Cleveland Holiday Inn and Affiliate in this
Amendment No. 1 to Registration Statement on Form S-1 filed by CapStar Hotel
Investors, Inc. We also consent to the reference to us under the heading
"Experts" in the Prospectus, which is part of such Registration Statement.
/s/ BOBER, MARKEY & COMPANY
BOBER, MARKEY & COMPANY
Akron, Ohio
August 15, 1996
EXHIBIT 23.6
July 30, 1996
To Whom it May Concern:
I hereby consent to the use of my name as a person to be named to the Board of
Directors of CapStar Hotel Company (the "Company"), on the Company's Form S-1,
and any amendments thereto, in connection with the Company's registration
statement related to the initial public offering of common stock by the
Company.
- ------------------------------------------------------------------------------
Printed Name Signature
/s/ Edward P. Dowd
