AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CAPSTAR HOTEL INVESTORS, INC.
(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 INVESTORS, INC.
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: / /
-------------------
CALCULATION OF REGISTRATION FEE
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C>
TITLE OF CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) FEE
Common Stock, $.01 par value 10,637,500 $21 $223,387,500 $77,030
</TABLE>
(1) Includes 1,387,500 shares as to which the Underwriters have been granted an
option to cover over-allotments.
(2) Estimated pursuant to Rule 457(a) solely for purposes of calculating the
registration fee.
-------------------
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>
CAPSTAR HOTEL INVESTORS, INC.
CROSS-REFERENCE SHEET SHOWING THE LOCATION IN THE PROSPECTUS
OF THE INFORMATION REQUIRED BY THE ITEMS OF PART I OF FORM S-1
<TABLE><CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ----------------------------------------- -----------------------------------------
<C> <S> <C>
1 Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Front Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front and Outside Back Cover Pages
of Prospectus
3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... Prospectus Summary; Risk Factors
4 Use of Proceeds.......................... Prospectus Summary; Use of Proceeds
5 Determination of Offering Price.......... Front Cover Page of Prospectus;
Underwriting
6 Dilution................................. Dilution
7 Selling Security Holders................. Not Applicable
8 Plan of Distribution..................... Underwriting
9 Description of Securities to be
Registered............................... Dividend Policy; Description of Capital
Stock
10 Interests of Named Experts and Counsel... Not Applicable
11 Information with Respect to the
Registrant.............................. Prospectus Summary; The Company; The
Formation Transactions; Dividend
Policy; Capitalization; Selected
Financial and Other Data; Unaudited Pro
Forma Financial Statements;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; The Company; Business and
Properties; Management; Principal
Stockholders and Selling Stockholder;
Certain Relationships and Related
Transactions; Shares Available For
Future Sale; Financial Statements
12 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 21, 1996
PROSPECTUS
9,250,000 SHARES
[LOGO] CAPSTAR HOTEL INVESTORS, INC.
COMMON STOCK
-------------------
CapStar Hotel Investors, Inc. ("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 48 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, 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 $ - and $ - . See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
The Company has applied to list the Common Stock 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
14.
-------------------
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.
<TABLE><CAPTION>
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
Underwriters (as defined herein) 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 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 the Company will be $ - , $ - and $ - , respectively. See
"Underwriting."
-------------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, 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 & CO.
MERRILL LYNCH & CO.
SMITH BARNEY INC.
-------------------
- , 1996.
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 TO COME]
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 Investors, Inc. 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 their respective
subsidiaries. The offering by the Company and the Selling Stockholder of an
aggregate of 9,250,000 shares of Common Stock 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 provided any form
of consultation, advice or counsel regarding any aspect of the Offering, and
Smith Travel Research 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 48 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. 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. The following table sets forth revenues, gross
operating profit, average occupancy, average daily rate ("ADR") and revenue per
available room ("RevPAR") for the Owned Hotels as of the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------- PERCENTAGE
1996 1995 INCREASE
------- ------- ----------
<S> <C> <C> <C>
Revenues (in thousands)....................... $25,590 $23,403 9.3%
Gross operating profit (in thousands)......... $ 7,395 $ 6,305 17.3%
Average Occupancy............................. 70.7% 67.9% 4.1%
ADR........................................... $ 78.22 $ 73.31 6.7%
RevPAR........................................ $ 55.30 $ 49.78 11.1%
</TABLE>
The 11.1% increase in RevPAR for the Owned Hotels compares favorably with
the 4.9% increase for all upscale hotels over the comparable period as reported
by Smith Travel Research.
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
3
<PAGE>
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 own an aggregate of 7.8% of the Company's equity. 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 12 months ended March 31, 1996, the Company spent a
total of $8.4 million on renovations at the Owned Hotels and intends to spend an
additional $21.4 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,
full-service hotels afford greater intrinsic 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 are
currently managed by the Company. Since assuming management of these four hotels
in 1991, 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 $3.1 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 the closing will occur. See "Risk Factors--Risks
Associated with Expansion" and "Business and Properties--The Properties--The
Additional Hotels."
4
<PAGE>
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 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. 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.
Geographic Diversification. The Company seeks to maintain a geographically
diverse portfolio of hotels to offset the effects of regional economic cycles.
HOTEL CRITERIA
Location and Market Appeal. The Company seeks to acquire upscale,
full-service hotels that are located near both business and leisure centers
which generate a broad base of demand for hotel accommodations and facilities.
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.
Potential Performance Improvements. The Company seeks to acquire
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. The Company's ability to
improve operations is demonstrated by the fact that RevPAR at the Owned Hotels
increased 11.1% from the three month period ended March 31, 1995 to the three
month period
5
<PAGE>
ended March 31, 1996, as compared to an increase of only 4.9% for the upscale,
full-service hotel segment as reported by Smith Travel Research.
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 will have
substantial capital available under the $175 million Credit Facility (as defined
herein) to pursue acquisitions and make capital investments in subsequently
acquired hotels. The Company currently expects to retain earnings for future
acquisitions and the renovation and maintenance of the hotels owned by the
Company.
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.
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.
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.
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 to
identifying and targeting segments of demand for each Hotel in order to maximize
market penetration. 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.
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 12 months
ended March 31, 1996, the Company spent a total of $8.4 million on renovations
at the Owned Hotels and currently intends to spend an additional $21.4 million
6
<PAGE>
completing the renovation programs. Capital spending decisions are based on both
strategic needs and the 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.
Emphasis on Food and Beverage. Management believes innovative 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.
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 plans include room and facilities refurbishments, renovations and
furniture and equipment replacements that are designed to maintain attractive
accommodations, updated restaurants and modern equipment.
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. 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. The Company's practice of tracking customer
comments allows investment in services and amenities where they are most
effective.
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.
7
<PAGE>
THE PROPERTIES
The following table sets forth certain information for each of the Owned
Hotels and the Additional Hotels for the 12 months ended March 31, 1996:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1996
--------------------
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY
- --------------------------------------------- --------------------- ----- ------- ---------
<S> <C> <C> <C> <C>
OWNED HOTELS
Hilton Hotel................................. Irvine, CA 290 $ 71.01 65.2%
Sheraton Hotel............................... Colorado Springs, CO 502 61.80 67.6
Georgetown Latham............................ Washington, DC 143 100.36 73.4
Atlanta Airport Westin....................... Atlanta, GA 496 70.02 82.8
Radisson Hotel............................... Schaumburg, IL 202 69.65 65.6
Marriott Hotel............................... Somerset, NJ 434 92.94 73.1
Sheraton Airport Plaza....................... Charlotte, NC 226 76.10 75.2
Holiday Inn.................................. Cleveland, OH 237 65.42 75.1
Hilton Hotel................................. Arlington, TX 310 76.63 74.8
Salt Lake Airport Hilton..................... Salt Lake City, UT 287 72.39 71.5
Renaissance(R) Hotel......................... Arlington, VA 209 103.64 73.1
Hilton Hotel................................. Bellevue, WA 180 84.80 77.5
----- ------- ---
Total/Weighted Average--Owned Hotels........ 3,516 $ 76.66 73.1%
ADDITIONAL HOTELS
Hilton Hotel................................. Sacramento, CA 326 $ 73.46 71.7%
Santa Barbara Inn............................ Santa Barbara, CA 71 122.56 81.7
Holiday Inn.................................. Colorado Springs, CO 201 53.55 70.9
Embassy Row Hotel............................ Washington, DC 195 112.02 58.6
Hilton Hotel & Towers........................ Lafayette, LA 328 66.62 72.1
----- ------- ---
Total/Weighted Average--Additional Hotels... 1,121 $ 77.04 70.1%
----- ------- ---
Total/Weighted Average 4,637 $ 76.75 72.4%
----- ------- ---
----- ------- ---
</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.
8
<PAGE>
STRUCTURE OF THE COMPANY
Upon consummation of the Formation Transactions, the Company's structure
will be as follows:
CAPSTAR HOTEL
INVESTORS, INC
G.P.
100%
NON-AFFILIATED CAPSTAR
LIMITED PARTNERS (1) LP CORPORATION
L.P. L.P.
CAPSTAR MANAGEMENT
COMPANY, L.P.
(THE "OPERATING
PARTNERSHIP")
100%
THE
OWNED HOTELS (2)
- ------------
(1) 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.
(2) Immediately following the closing of the Offering, all of the Owned Hotels
(except the Atlanta Airport Westin) will be wholly-owned by the Company
through separate limited liability company and partnership subsidiaries. The
Atlanta Airport Westin is majority-owned by the Company through a
partnership in which the Company holds an 84.6% limited partner interest, 1%
general partner interest and a mortgage which together provide the Company a
92% economic interest in the hotel.
9
<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, together with a portion of the proceeds
of the Credit Facility and certain escrowed funds,
will be used to repay the Company's currently
outstanding indebtedness under a credit facility (to
be retired in connection with the Offering) 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."
10
<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 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 March 31,
1996, the Company acquired 10 hotels on various dates. Thus, the historical
financial statements for the period ended December 31, 1995 and the three months
ended March 31, 1996 and 1995 reflect differing numbers of Owned Hotels
throughout the periods. The unaudited pro forma financial statements for 1995
and the three months ended March 31, 1996 reflect the operations of the Owned
Hotels and the Additional Hotels for the entire periods.
11
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ----------------------------
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 $ 90,563 $ 592 $ 10,714 $ 21,247
Food, beverage and other
hotel departments....... 0 0 0 0 7,471 51,692 194 6,283 12,452
Management services and
other revenues.......... 2,692 3,479 4,234 4,418 4,436 3,274 996 1,037 831
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total revenues....... 2,692 3,479 4,234 4,418 26,363 145,529 1,782 18,034 34,530
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating costs and
expenses:
Departmental expenses:
Rooms.................... 0 0 0 0 4,190 23,902 155 2,907 5,663
Food, beverage and other
hotel departments....... 0 0 0 0 5,437 40,249 137 4,214 9,258
Undistributed operating
costs:
Selling, general and
administrative.......... 2,239 2,836 4,065 4,508 8,078 31,732 1,140 4,769 8,327
Property operating
costs................... 0 0 0 0 3,934 21,454 115 2,325 4,893
Depreciation and
amortization............ 16 12 14 23 2,098 10,820 59 1,672 2,777
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total operating costs
and expenses........ 2,255 2,848 4,079 4,531 23,737 128,157 1,606 15,887 30,918
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating income/(loss)... 437 631 155 (113) 2,626 17,372 176 2,147 3,612
Interest expense, net..... 28 0 0 0 2,413 9,138 80 2,783 2,321
Provision for income
taxes(B).................. 0 0 0 0 0 3,216 0 0 483
Income/(loss) before
extraordinary item and
minority interest...... 409 631 155 (113) 213 4,824 95 (636) 725
Extraordinary item(C)..... 0 0 0 0 (888) 0 0 0 0
Net income/(loss)......... 409 631 155 (113) (657) 4,824 95 (642) 725
------ ------ ------ ------ --------- --------- ------- -------- ---------
------ ------ ------ ------ --------- --------- ------- -------- ---------
Net income per common
share.................... -- -- -- -- -- $ 0.38 -- -- $ 0.06
OTHER FINANCIAL DATA:
EBITDA(D)................. 453 643 169 (90) 4,724 28,192 235 3,819 6,389
Net cash provided by (used
in) operating
activities............... 182 87 (101) 66 4,357 -- -- 2,373 --
Net cash used in investing
activities............... (16) (65) (24) (41) (116,573) -- -- (68,307) --
Net cash provided by (used
in) financing
activities............... 19 (219) 244 0 119,048 -- -- 67,023 --
BALANCE SHEET DATA:
Property and equipment,
gross.................... $ 98 $ 110 $ 134 $ 176 $ 110,883 -- $14,658 $168,502 $ 272,054
Total assets.............. 740 586 1,458 1,232 132,650 -- 19,097 205,585 303,412
Long term obligations..... 219 0 0 0 73,574 -- 9,866 140,710 115,598
</TABLE>
12
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
FISCAL YEAR ENDED DECEMBER 31, 31,
---------------------------------------------------------- ---------------------------
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 -- 10 17
Number of guest
rooms............... -- -- -- -- 2,101 4,637 -- 2,997 4,637
Total revenues (in
thousands).......... -- -- -- -- $ 21,927 $ 142,255 -- $16,997 $ 33,700
Average occupancy.... -- -- -- -- 72.3% 67.8% -- 70.5% 70.7%
ADR(E)............... -- -- -- -- $ 71.58 $ 79.57 -- $ 76.92 $ 78.22
RevPAR(F)............ -- -- -- -- $ 51.75 $ 53.95 -- $ 54.23 $ 55.30
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 three
months ended March 31, 1996 and for the year ended December 31, 1995 have been prepared
as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels
and the Additional Hotels had been consummated at the beginning of the periods
presented, and the pro forma Balance Sheet Data as of March 31, 1996 has been prepared
as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels
and the Additional Hotels 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.
(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>
13
<PAGE>
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.
14
<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. The Company has also entered into a
contract to acquire the 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
Neither the Company's Certificate of Incorporation nor its By-laws will
limit the amount of indebtedness the Company may incur. The Company has entered
negotiations regarding a new senior secured revolving line of credit in the
amount of $175 million (the "Credit Facility") to be provided by a
15
<PAGE>
financial institution to fund the acquisition of hotels (including debt incurred
in connection with completing the acquisition of the Additional Hotels),
renovations and capital improvements to hotels and general working capital
needs. On a pro forma basis, upon completion of the Formation Transactions and
the Offering, the Company will have $47.2 million of outstanding indebtedness.
Subject to limitations in its debt instruments, including those under 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 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 is
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.
All of the Company's outstanding indebtedness upon completion of the
Offering, including 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 "Principal and Selling Stockholders." So long as Acadia
Partners and such members of management beneficially own a 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.
16
<PAGE>
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
owners of five of these Managed Hotels (the "Affiliated Owners") through their
ownership of certain entities which serve as general partners of such entities.
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 36 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 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. During 1995, the
Company's revenue from Management Agreements was $3.3 million constituting 2.3%
of the Company's total revenue for such period on a pro forma basis. 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
17
<PAGE>
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.
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.
18
<PAGE>
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 $7.07 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."
19
<PAGE>
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.
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"): (i) a limited partner of CapStar Management will contribute its
partnership interest in CapStar Management to the Company in exchange for shares
of Common Stock, (ii) the Company will contribute such partnership interest to
CapStar LP Corporation, a wholly-owned subsidiary of the Company ("CapStar
Sub"), (iii) 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, (iv) the Company
will contribute all the assets of EquiStar to CapStar Management and CapStar
Management will assume all of the liabilities of EquiStar, and (v) 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 a 100% beneficial interest in a $17 million mortgage note secured by the
Atlanta Airport Westin hotel (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 84.6% limited partnership interest. The Pre-Closing Transactions, the
Atlanta Mortgage Acquisition and the Company's initial borrowing of
approximately $46.1 million under the Credit Facility are together referred to
as the "Formation Transactions."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $123.8 million (approximately $149 million if the over-allotment
option is exercised in full), assuming an initial public offering price of $20
per share and after giving effect to estimated underwriting discounts and
commissions and offering expenses payable by the Company. The 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 $123.8 million from the
Offering, together with approximately $42.8 million from the Credit Facility and
$18.2 million of the Company's existing escrowed funds, to repay approximately
$184.8 million of outstanding indebtedness under a credit facility (to be
retired in connection with the Offering) 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 March 31, 1996 of 11.3%, and matures at
various times through March 1999, with a weighted average maturity at March 31,
1996 of two years and nine 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 restricts 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.
21
<PAGE>
DILUTION
The net tangible book value of the Company, as adjusted to give effect to
the Pre-Closing Transactions, at March 31, 1996 was $43.4 million, or
approximately $7.24 per share of Common Stock. 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 March 31, 1996 would have been $164.9
million, or $12.93 per share. This represents an immediate increase in net
tangible book value of $5.69 per share of Common Stock to existing stockholders
and an immediate dilution of approximately $7.07 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:
Assumed initial public offering price per share............ $20.00
Net tangible book value per share after the Pre-Closing
Transactions as of March 31, 1996......................... $7.24
Increase per share attributable to new investors........... 5.69
-----
Pro forma net tangible book value per share after the
Formation Transactions and the Offering................... 12.93
------
Dilution per share to new investors........................ $ 7.07
------
------
The following table summarizes, on a pro forma basis as of March 31, 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% $ 47,824 27.9% $ 7.96
New Investors.............................. 6,750,000 52.9 123,745 72.1 18.33
---------- ------- -------- ------- ---------
Total................................ 12,754,321 100.0% $171,569 100.0% $ 13.45
---------- ------- -------- ------- ---------
---------- ------- -------- ------- ---------
</TABLE>
22
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 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 MARCH 31, 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............................... $145,126 $ 47,198 $ 115,598
Minority interest.................................. 685 685 685
STOCKHOLDERS' EQUITY:
Common Stock ($.01 par value, 50,000,000 shares
authorized, 12,754,321 shares issued and
outstanding)..................................... -- 125 125
Preferred Stock ($.01 par value, 25,000,000 shares
authorized, no shares issued or outstanding)..... -- -- --
Additional paid-in capital......................... 49,123 172,743 172,743
Retained earnings (deficit)........................ (1,299) (3,702) (3,702)
-------- ---------- ---------------
-------- ---------- ---------------
Total stockholders' equity................... 47,824 169,166 169,166
-------- ---------- ---------------
Total capitalization......................... $193,635 $217,049 $ 285,449
-------- ---------- ---------------
-------- ---------- ---------------
</TABLE>
23
<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 pro forma financial statements and notes
thereto included elsewhere in this Prospectus. The selected financial data of
the Company as of March 31, 1996 and December 31, 1995 and 1994 and for the
three months ended March 31, 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 March 31, 1995
and December 31, 1993, 1992 and 1991 and for the statements of income and cash
flows for the three months ended March 31, 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 three months ended March
31, 1996 and for the year ended December 31, 1995 have been prepared as if the
Offering, the Formation Transactions and the acquisition of the Owned Hotels and
the Additional Hotels had been consummated at the beginning of the periods
presented, and the pro forma balance sheet data as of March 31, 1996 have been
prepared as if the Offering, the Formation Transactions and the acquisition of
the Owned Hotels and the Additional Hotels 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.
24
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ----------------------------
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 $ 90,563 $ 592 $ 10,714 $ 21,247
Food, beverage and other
hotel departments....... 0 0 0 0 7,471 51,692 194 6,283 12,452
Management services and
other revenues.......... 2,692 3,479 4,234 4,418 4,436 3,274 996 1,037 831
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total revenues....... 2,692 3,479 4,234 4,418 26,363 145,529 1,782 18,034 34,530
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating costs and
expenses:
Departmental expenses:
Rooms.................... 0 0 0 0 4,190 23,902 155 2,907 5,663
Food, beverage and other
hotel departments........ 0 0 0 0 5,437 40,249 137 4,214 9,258
Undistributed operating
costs: Selling, general
and administrative....... 2,239 2,836 4,065 4,508 8,078 31,732 1,140 4,769 8,327
Property operating
costs................... 0 0 0 0 3,934 21,454 115 2,325 4,893
Depreciation and
amortization............ 16 12 14 23 2,098 10,820 59 1,672 2,777
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total operating costs
and expenses........ 2,255 2,848 4,079 4,531 23,737 128,157 1,606 15,887 30,918
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating income/(loss)... 437 631 155 (113) 2,626 17,372 176 2,147 3,612
Interest expense, net..... 28 0 0 0 2,413 9,138 80 2,783 2,321
Provision for income
taxes(B)................. 0 0 0 0 0 3,216 0 0 483
Income/(loss) before
extraordinary item and
minority interest....... 409 631 155 (113) 213 4,824 95 (636) 725
Extraordinary item(C)..... 0 0 0 0 (888) 0 0 0 0
Net income/(loss)......... 409 631 155 (113) (657) 4,824 95 (642) 725
------ ------ ------ ------ --------- --------- ------- -------- ---------
------ ------ ------ ------ --------- --------- ------- -------- ---------
Net income per common
share.................... -- -- -- -- -- $ 0.38 -- -- $ 0.06
OTHER FINANCIAL DATA:
EBITDA(D)................. 453 643 169 (90) 4,724 28,192 235 3,819 6,389
Net cash provided by (used
in) operating
activities............... 182 87 (101) 66 4,357 -- -- 2,373 --
Net cash used in investing
activities............... (16) (65) (24) (41) (116,573) -- -- (68,307) --
Net cash provided by (used
in) financing
activities............... 19 (219) 244 0 119,048 -- -- 67,023 --
BALANCE SHEET DATA:
Property and equipment,
gross.................... $ 98 $ 110 $ 134 $ 176 $ 110,883 -- $14,658 $168,592 $ 272,054
Total assets.............. 740 586 1,458 1,232 132,650 -- 19,097 205,585 303,412
Long term obligations..... 219 0 0 0 73,574 -- 9,866 140,710 115,598
</TABLE>
25
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
FISCAL YEAR ENDED DECEMBER 31, 31,
---------------------------------------------------------- ---------------------------
PRO PRO
FORMA 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 -- 10 17
Number of guest
rooms.............. -- -- -- -- 2,101 4,637 -- 2,997 4,637
Total revenues (in
thousands).......... -- -- -- -- $ 21,927 $ 142,255 -- $16,997 $ 33,700
Average occupancy.... -- -- -- -- 72.3% 67.8% -- 70.5% 70.7%
ADR(E)............... -- -- -- -- $ 71.58 $ 79.57 -- $ 76.92 $ 78.22
RevPAR(F)............ -- -- -- -- $ 51.75 $ 53.95 -- $ 54.23 $ 55.30
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 three
months ended March 31, 1996 and for the year ended December 31, 1995 has been prepared
as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels
and the Additional Hotels had been consummated at the beginning of the periods
presented, and the pro forma Balance Sheet Data as of March 31, 1996 has been prepared
as if the Formation Transactions, the Offering and the acquisition of the Owned Hotels
and the Additional Hotels 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.
(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>
26
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited Pro Forma Balance Sheet of the Company as of March 31, 1996 is
presented assuming: (i) the Formation Transactions, the Offering and the
application of the net proceeds had been completed on March 31, 1996; and (ii)
the Owned Hotels and the Additional Hotels were owned on March 31, 1996.
The unaudited Pro Forma Statements of Operations of the Company for the
three months ended March 31, 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 and the Offering 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 and the Offering 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.
27
<PAGE>
CAPSTAR HOTEL INVESTORS, INC.
PRO FORMA BALANCE SHEET
MARCH 31, 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.................... $ 7,920,761 2,000,000 (1,335,363)(C) 8,585,398 8,585,398
Escrows and restricted
funds.................. 19,639,903 2,961,588 (18,150,000)(D) 4,451,491 -- 4,451,491
Property and equipment,
net:
Land................... 35,287,661 6,028,446 -- 41,316,107 19,824,546 61,140,653
Buildings and
improvements.......... 108,174,567 26,823,617 -- 134,998,184 45,874,825 180,873,009
Furniture, fixtures and
equipment............. 19,732,631 3,650,230 -- 23,382,861 3,711,636 27,094,497
Construction-in-progress.... 2,162,197 -- -- 2,162,197 -- 2,162,197
------------ ----------- ------------ -------------- ----------- -----------------
Total property and
equipment, net......... 165,357,056 36,502,293 201,859,349 69,411,007 271,270,356
Other assets............ 12,667,033 4,546,075 (151,000)(E) 17,062,108 2,043,153 19,105,261
------------ ----------- ------------ -------------- ----------- -----------------
Total assets............ $205,584,753 46,009,956 (19,636,363) 231,958,346 71,454,160 303,412,506
------------ ----------- ------------ -------------- ----------- -----------------
------------ ----------- ------------ -------------- ----------- -----------------
LIABILITIES, MINORITY
INTERESTS AND EQUITY
Other liabilities....... 11,949,473 2,960,504 -- 14,909,977 3,054,160 17,964,137
Long-term debt:
Notes payable.......... 143,791,055 43,049,452 (138,746,000)(D) 47,197,507 68,400,000 115,597,507
(897,000)(F)
Capital lease
obligations........... 1,335,363 -- (1,335,363)(C) -- -- --
------------ ----------- ------------ -------------- ----------- -----------------
Total liabilities....... 157,075,891 46,009,956 (140,978,363) 62,107,484 71,454,160 133,561,644
Minority interests...... 684,823 -- -- 684,823 -- 684,823
------------ ----------- ------------ -------------- ----------- -----------------
Equity.................. 47,824,039 -- 121,342,000(G) 169,166,039 -- 169,166,039
------------ ----------- ------------ -------------- ----------- -----------------
Total liabilities,
minority interests and
equity................ $205,584,753 46,009,956 (19,636,363) 231,958,346 71,454,160 303,412,506
------------ ----------- ------------ -------------- ----------- -----------------
------------ ----------- ------------ -------------- ----------- -----------------
</TABLE>
28
<PAGE>
CAPSTAR HOTEL INVESTORS, INC.
NOTES TO PRO FORMA BALANCE SHEET
MARCH 31, 1996
<TABLE>
<C> <S>
(A) Reflects the historical combined balance sheet of EquiStar and CapStar Management as of
March 31, 1996.
(B) Reflects the following: (i) EquiStar's cost basis and financing for two hotels acquired
subsequent to March 31, 1996 (Hilton Hotel, Arlington, Texas acquired on April 17, 1996
and Renaissance Hotel, Arlington, Virginia which was placed under contract to be
purchased on June 14, 1996).
(C) Reflects the repayment of capital lease obligations subsequent to the Offering
($1,335,363).
(D) A reconciliation of gross proceeds from the Offering to net proceeds is as follows:
</TABLE>
<TABLE>
<S> <C> <C>
Gross proceeds.............................................. $ 135,000,000
Underwriting, advisory and other transaction expenses....... (11,255,000)
-------------
Net cash proceeds from Offering............................. $ 123,745,000
-------------
A schedule of sources and uses of funds related to the Offering and the Formation
Transactions are as follows:
SOURCES
Net proceeds from Offering.................................. $ 123,745,000
Release of escrow funds related to certain existing debt
facilities................................................. 18,150,000
Proceeds from the Credit Facility........................... 46,097,507
-------------
Total sources............................................... $ 187,992,507
-------------
USES
Repayment of outstanding amounts on certain existing debt
facilities................................................. $(184,843,507)
Payment of prepayment penalties on existing debt to be paid
off........................................................ (299,000)
Payment of closing costs for Credit Facility................ (2,850,000)
-------------
Total uses.................................................. $(187,992,507)
-------------
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)........................ $ 186,840,507
Less: Existing debt to be repaid............................................ (184,843,507)
Accrued financing fees on existing debt to be forgiven.................. (897,000)
-------------
Existing debt to remain in place........................................ 1,100,000
Add: Proceeds from Credit Facility 46,097,507
-------------
Pro forma long-term debt before purchase of Additional
Hotels..................................................... $ 47,197,507
</TABLE>
<TABLE>
<C> <S>
(E) Reflects write-off of deferred financing fees ($3,001,000) related to existing debt
facilities to be paid off and deferral of financing fees paid ($2,850,000) 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......................... $ 123,745,000
Add: Forgiven accrued financing fees........................ 897,000
Less: Write off of deferred financing fees.................. (3,001,000)
Prepayment penalties.................................... (299,000)
-------------
Total adjustment........................................ $ 121,342,000
-------------
</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>
29
<PAGE>
CAPSTAR HOTEL INVESTORS, INC.
PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 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........................ $10,714,167 5,373,714 -- 16,087,881 5,158,962 21,246,843
Food and beverage............ 4,755,339 2,795,514 -- 7,550,853 2,567,767 10,118,620
Other revenue................ 1,527,366 423,861 -- 1,951,227 383,022 2,334,249
Hotel management and other
fees......................... 1,037,066 -- (39,581)(C) 997,485 (166,895) 830,590
----------- ----------- ------------ ----------- ----------- --------------
Total revenue................. 18,033,938 8,593,089 (39,581) 26,587,446 7,942,856 34,530,302
----------- ----------- ------------ ----------- ----------- --------------
Hotel operating expenses by
department:
Rooms........................ 2,907,133 1,394,730 4,301,863 1,361,223 5,663,086
Food and beverage............ 3,781,670 2,332,255 -- 6,113,925 2,238,050 8,351,975
Other operating
departments................. 432,562 256,411 -- 688,973 216,663 905,636
Undistributed operating
expenses:
Administrative and general... 4,768,757 1,806,976 325,000(D) 6,900,733 1,425,918 8,326,651
Management fees.............. -- 276,540 (276,540)(E) -- -- --
Property operating costs..... 1,532,558 687,803 -- 2,220,361 1,106,018 3,326,379
Property taxes, insurance and
other....................... 792,275 458,935 -- 1,251,210 315,981 1,567,191
Depreciation and
amortization................ 1,671,612 635,772 (601)(F) 2,306,783 470,000 2,776,783
----------- ----------- ------------ ----------- ----------- --------------
Total operating expenses...... 15,886,567 7,849,422 47,859 23,783,848 7,133,853 30,917,701
----------- ----------- ------------ ----------- ----------- --------------
Interest expense, net of
interest income............... 2,783,095 1,113,966 (2,958,178)(G) 938,883 1,382,000 2,320,883
Equity in income of
partnerships................ -- 4,687 -- 4,687 -- 4,687
----------- ----------- ------------ ----------- ----------- --------------
Total expenses................ 18,669,662 8,968,075 (2,910,319) 24,727,418 8,515,853 33,243,271
----------- ----------- ------------ ----------- ----------- --------------
Income (loss) before minority
interests and income taxes... (635,724) (374,986) 2,870,738 1,860,028 (572,997) 1,287,031
Minority interests............ 6,405 -- 72,500(H) 78,905 -- 78,905
----------- ----------- ------------ ----------- ----------- --------------
Income (loss) before income
taxes........................ (642,129) (374,986) 2,798,238 1,781,123 (572,997) 1,208,126
Income taxes.................. -- -- 712,449(I) 712,449 (229,000) 483,449
----------- ----------- ------------ ----------- ----------- --------------
Net income (loss)............. $ (642,129) (374,986) 2,085,789 1,068,674 (343,997) 724,677
----------- ----------- ------------ ----------- ----------- --------------
----------- ----------- ------------ ----------- ----------- --------------
Pro forma income per share.... 0.06
Pro forma weighted average
shares outstanding........... 12,754,321
</TABLE>
30
<PAGE>
CAPSTAR HOTEL INVESTORS, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<C> <S>
During the twelve month period subsequent to the Formation Transactions and the
Offering, 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 ($3,001,000). 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.
(A) Reflects historical combined statement of operations of EquiStar and CapStar Management
for the three months ended March 31, 1996.
(B) Reflects the pre-acquisition operations of the Owned Hotels to provide a full three
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.
(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............ $ (635,772)
Depreciation on hotels for pre-acquisition period based on EquiStar's cost
basis...................................................................... 617,171
Elimination of amortization of deferred financing costs on existing debt
facilities to be repaid.................................................... (220,000)
Amortization of deferred financing costs related to the Credit Facility..... 238,000
-----------
Net adjustment.............................................................. $ (601)
-----------
</TABLE>
(G) Reflects the net of the following adjustments:
<TABLE>
<S> <C>
Elimination of interest on existing debt facilities to be paid off and
interest from pre- acquisition operations.................................. $(3,941,564)
Interest on $46,097,507 outstanding under the Credit Facility at interest
rate of LIBOR plus 2% (average rate for three months was 8.13 percent) plus
Credit Facility maintenance fee of $44,000................................. 983,386
-----------
Net adjustment.............................................................. $(2,958,178)
-----------
</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 Atlanta Airport Westin. After the adjustments, minority
interest is calculated as follows:
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
INCOME BEFORE
MINORITY PERCENTAGE
INTEREST MINORITY MINORITY
AND INCOME TAXES INTEREST INTEREST
---------------- ---------- --------
<S> <C> <C> <C>
Atlanta Airport Westin................................ $547,954 14.4% $ 78,905
</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 three months.
(J) Reflects the historical operations of the Additional Hotels adjusted for (i)
depreciation on the new cost basis ($470,000), (ii) interest on the debt to finance the
purchase ($1,382,000), and (iii) income taxes ($229,000 benefit). Also reflects the
elimination of management fee income earned by CapStar Management for managing four of
the five Additional Hotels in 1996 ($166,895). Historical operations of the Additional
Hotels before adjustments were obtained from the hotels' audited combined financial
statements included elsewhere in this Prospectus.
</TABLE>
31
<PAGE>
CAPSTAR HOTEL INVESTORS, INC.
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 54,180,629 68,637,016 21,925,991 90,563,007
Food and beverage........... 5,900,238 27,829,525 33,729,763 10,442,474 44,172,237
Other revenue............... 1,570,295 4,335,818 5,906,113 1,613,934 7,520,047
Hotel management and other
fees........................ 4,436,428 -- (235,524)(C) 4,200,904 (926,737) 3,274,167
----------- ----------- ----------- ----------- ----------- --------------
Total revenue................ 26,363,348 86,345,972 (235,524) 112,473,796 33,055,662 145,529,458
----------- ----------- ----------- ----------- ----------- --------------
Hotel operating expenses by
department:
Rooms....................... 4,190,299 13,959,847 -- 18,150,146 5,751,406 23,901,552
Food and beverage........... 4,923,790 22,432,673 -- 27,356,463 9,198,740 36,555,203
Other operating
departments................ 512,791 2,276,848 -- 2,789,639 904,143 3,693,782
Undistributed operating
expenses:
Administrative and
general.................... 8,078,304 16,691,140 1,300,000(D) 26,069,444 5,662,170 31,731,614
Management fees............. -- 3,103,406 (3,103,406)(E) -- -- --
Property operating costs.... 2,623,626 6,863,382 -- 9,487,008 4,407,863 13,894,871
Property taxes, insurance
and other................. 1,310,517 4,858,999 -- 6,169,516 1,390,174 7,559,690
Depreciation and
amortization............... 2,097,512 7,267,137 (423,811)(F) 8,940,838 1,879,198 10,820,036
----------- ----------- ----------- ----------- ----------- --------------
Total operating expenses..... 23,736,839 77,453,432 (2,227,217) 98,963,054 29,193,694 128,156,748
----------- ----------- ----------- ----------- ----------- --------------
Interest expense, net of
interest income............. 2,413,348 11,152,294 (9,886,288)(G) 3,679,354 5,458,320 9,137,674
Equity in income of
partnerships............... (36,510) (36,510) (36,510)
----------- ----------- ----------- ----------- ----------- --------------
Total expenses............... 26,150,187 88,569,216 (12,113,505) 102,605,898 34,652,014 137,257,912
----------- ----------- ----------- ----------- ----------- --------------
Income (loss) before minority
interests and income taxes.. 213,161 (2,223,244) 11,877,981 9,867,898 (1,596,352) 8,271,546
Minority interests........... (17,415) (24,985) 273,334(H) 230,934 -- 230,934
----------- ----------- ----------- ----------- ----------- --------------
Income (loss) before income
taxes....................... 230,576 (2,198,259) 11,604,647 9,636,964 (1,596,352) 8,040,612
Income taxes................. -- -- 3,854,786(I) 3,854,786 (638,541) 3,216,245
----------- ----------- ----------- ----------- ----------- --------------
Net income (loss)............ $ 230,576 (2,198,259) 7,749,861 5,782,178 (957,811) 4,824,367
----------- ----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- ----------- --------------
Pro forma income per share... 0.38
Pro forma weighted average
shares outstanding.......... 12,754,321
</TABLE>
32
<PAGE>
CAPSTAR HOTEL INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<C> <S>
During the twelve month period subsequent to the Formation Transactions and the
Offering, 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 ($3,001,000). 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.
(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..................................................................... 5,976,862
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............................................................ $ (423,811)
------------
</TABLE>
(G) Reflects the net of the following adjustments:
<TABLE>
<S> <C>
Elimination of interest on existing debt facilities to be paid off and
interest from pre- acquisition operations................................. $(13,755,828)
Interest on $46,097,507 outstanding on the Credit Facility at an interest
rate of LIBOR
plus 2% (average rate for 1995 was 7.98%) plus the Credit Facility
maintenance fee of
$175,000.................................................................. 3,869,540
------------
Net adjustment............................................................ $ (9,886,288)
------------
</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 Atlanta Airport Westin. After the adjustments, minority
interest is calculated as follows:
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA INCOME
BEFORE
MINORITY PERCENTAGE
INTEREST MINORITY MINORITY
AND INCOME TAXES INTEREST INTEREST
---------------- ---------- --------
<S> <C> <C> <C>
Atlanta Airport Westin.................................... $1,539,564 15% $230,934
</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 ($1,879,198) (ii) interest on the debt to finance
the purchase ($5,458,320), and (iii) income taxes ($638,461 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>
33
<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 March 31, 1996, the Company acquired
10 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 and March 8, 1996. Thus, the historical financial
statements for the year ended December 31, 1995 and the three months ended March
31, 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 three months ended March
31, 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 quarter 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 $145.5 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.
34
<PAGE>
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 $128.2 million for 1995 from $23.7 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 $28.2 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.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
1995
Total revenues increased to $18.0 million in the three months ended March
31, 1996 from $1.8 million in the three months ended March 31, 1995. Room
revenues for the three months ended March 31, 1996 increased to $10.7 million
from $0.6 million while food, beverage and other department revenues increased
to $6.3 million from $0.2 million predominantly due to the acquisition of nine
Owned Hotels and the inclusion of a tenth Owned Hotel acquired on March 3, 1995
for the entire 1996 period.
Operating costs and expenses increased to $15.9 million in the three months
ended March 31, 1996 from $1.6 million in the three months ended March 31, 1995,
resulting from the acquisition of nine Owned Hotels and the inclusion of a tenth
hotel for the entire 1996 period. The costs related to management of the Managed
Hotels remained relatively constant.
Operating income increased to $2.1 million for the three months ended March
31, 1996 from $0.2 million for the three months ended March 31, 1995. Operating
income as a percentage of revenue increased to 11.9% for the three months ended
March 31, 1996 from 9.9% for the three months ended March 31, 1995, resulting
from increased operating efficiencies.
Net interest expense increased to $2.8 million in the three months ended
March 31, 1996 from $0.1 million in the three months ended March 31, 1995,
resulting from the debt incurred related to the acquisition of nine Owned Hotels
and the inclusion of a tenth hotel acquired on March 3, 1995 for the entire 1996
period.
The net loss of $0.6 million for the three months ended March 31, 1996 is a
decrease from the net income of $0.1 million for the three months ended March
31, 1995 and is due to the acquisition of nine Owned Hotels. This loss was
caused primarily by increased interest expense incurred to acquire the
properties and seasonal factors.
EBITDA increased to $3.8 million for the three months ended March 31, 1996
from $0.2 million for the three months ended March 31, 1995. EBITDA as
percentage of revenue increased to 21.2% for the three months ended March 31,
1996 from 13.2% for the three months ended March 31, 1995.
35
<PAGE>
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.
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 Atlanta Airport
Westin 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 March 31, 1996, the Company had $7.9 million in cash and cash
equivalents, an increase of $1.1 million from the balance of $6.8 million on
December 31, 1995. During the twelve months ended March 31, 1996, the Company
invested $8.4 million in capital improvements in connection with renovations of
the Owned Hotels. The Company plans to spend an additional $19.3 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 $3.1 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
36
<PAGE>
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.
Prior to the completion of the offering, the Company expects to have the
Credit Facility in place in an aggregate amount of $175 million. On a pro forma
basis, approximately $42.8 million of this facility will be used at closing to
retire existing debt. Remaining amounts under the Credit Facility will be
available to finance future acquisitions. The Company believes that it has
sufficient funds available to complete the acquisition of the Additional Hotels
and other future acquisitions as well.
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.
37
<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 48 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. 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. The following table sets
forth certain information for the Owned Hotels as of the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
PERCENTAGE
1996 1995 INCREASE
------- --------- ----------
<S> <C> <C> <C>
Revenues (in thousands)........................ $25,590 $23,403 9.3%
Gross operating profit (in thousands).......... $ 7,395 $ 6,305 17.3%
Average Occupancy.............................. 70.7% 67.9% 4.1%
ADR............................................ $ 78.22 $ 73.31 6.7%
RevPAR......................................... $ 55.30 $ 49.78 11.1%
</TABLE>
The 11.1% increase in RevPAR for the Owned Hotels compares favorably with
the 4.9% increase for all upscale hotels over the comparable period as reported
by Smith Travel Research.
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 hold, directly or
indirectly, an aggregate of 7.8% of the Company's equity. 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 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 12 months ended
38
<PAGE>
March 31, 1996, the Company spent a total of $8.4 million on renovations at the
Owned Hotels and currently intends to spend an additional $21.4 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, full-service
hotels afford greater intrinsic 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 are currently managed by the Company. Since assuming management of these
four hotels in 1991, 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 $3.1 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.
39
<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 11.1%
from the three month period ended March 31, 1995 to the three month period
ended March 31, 1996, as compared to an increase of only 4.9% for the
upscale, full-service hotel segment as reported by Smith Travel Research.
40
<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 will have
substantial capital available under the $175 million Credit Facility to pursue
acquisitions and make capital investments in subsequently acquired hotels. The
Company currently expects to retain earnings for future acquisitions and the
renovation and maintenance of the hotels owned by the Company.
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
systems to manage each Hotel's use of the various distribution channels in the
lodging industry.
41
<PAGE>
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 12 months
ended March 31, 1996, the Company spent a total of $8.4 million on renovations
at the Owned Hotels and currently intends to spend an additional $21.4 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 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.
42
<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
PERCENTAGE OF GUEST ROOMS-- OWNED
NUMBER OF NUMBER OF COMPANY'S TOTAL HOTELS AND
FRANCHISE HOTELS(1) GUEST ROOMS(1) GUEST ROOMS(1) ADDITIONAL HOTELS(2)
- --------------------------------- --------- -------------- --------------- --------------------
<S> <C> <C> <C> <C>
Hilton........................... 6 1,721 19.4% 37.1%
Sheraton......................... 4 1,137 12.8 15.7
Holiday Inn...................... 7 1,132 12.8 9.4
Best Western(R).................. 6 728 8.2 --
Ramada(R)........................ 4 725 8.2 --
Westin........................... 1 496 5.6 10.7
Marriott......................... 1 434 4.9 9.4
Radisson......................... 2 328 3.7 4.4
Days Inn(R)...................... 2 277 3.1 --
Quality(R)....................... 2 277 3.1 --
Renaissance...................... 1 209 2.4 4.5
Doubletree(R).................... 1 208 2.4 --
Clarion(R)....................... 1 194 2.2 --
Comfort Suites(R)................ 1 119 1.3 --
Residence Inn(R)................. 1 104 1.2 --
Independent...................... 8 760 8.6 8.8
--
----- ----- -----
Total............................ 48 8,849 100.0% 100.0%
--
--
----- ----- -----
----- ----- -----
</TABLE>
-------------------
(1) Excludes the one Additional Hotel that the Company does not currently
manage.
(2) Includes the one Additional Hotel that the Company does not currently
manage.
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
43
<PAGE>
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 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 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:
Atlanta Airport Westin. 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
44
<PAGE>
includes a $7.1 million renovation program that is expected to be substantially
completed by November 1996.
<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 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. Improve profitability by . Install computer network Gross operating profit margin
eliminating non-essential for more efficient increased from 34.0% for the
job functions. management oversight. three months ended March 31,
1995 to 37.6% for the three
months ended March 31, 1996.
6. 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. The hotel had a conservative marketing strategy that did not
penetrate the multiple demand segments that the Company believed the hotel could
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. Since acquiring the hotel in October
1995, the Company has implemented an operating strategy (outlined in the chart
45
<PAGE>
below) which includes a $3.3 million renovation program that is expected to be
substantially completed by October 1996.
<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
more aggressive 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 Gross operating profit margin
by restructuring staff and for more efficient increased from 27.6% for the
training programs. management oversight. three months ended March 31,
1995 to 32.3% for the three
months ended March 31, 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
46
<PAGE>
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.
<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 31.7%
guest premium program. for the three months ended
March 31, 1995 to 38.4% for
the three months ended March
31, 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.
47
<PAGE>
The following table sets forth certain information with respect to the Owned
Hotels and the Additional Hotels for the 12 months ended March 31, 1996:
<TABLE>
<CAPTION>
PLANNED OR TWELVE MONTHS ENDED MARCH
COMPLETED 31, 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
Hilton Hotel......... Irvine, CA 290 1976 2/96 $ 2,006 65.2% $71.01 $ 46.32
Sheraton Hotel....... Colorado Springs, CO 502 1974 6/95 3,393 67.6 61.80 41.77
Georgetown Latham.... Washington, DC 143 1981 3/96 802 73.4 100.36 73.64
Atlanta Airport
Westin(3)........... Atlanta, GA 496 1982 11/95 7,100 82.8 70.02 58.00
Radisson Hotel....... Schaumburg, IL 202 1979 6/95 1,652 65.6 69.65 45.70
Marriott Hotel....... Somerset, NJ 434 1978 10/95 3,311 73.1 92.94 67.92
Sheraton Airport
Plaza............... Charlotte, NC 226 1985 2/96 1,529 75.2 76.10 57.25
Holiday Inn.......... Cleveland, OH 237 1978 2/96 2,900 75.1 65.42 49.15
Hilton Hotel......... Arlington, TX 310 1983 4/96 2,700 74.8 76.63 57.35
Salt Lake Airport
Hilton.............. Salt Lake City, UT 287 1980 3/95 1,823 71.5 72.39 51.78
Renaissance Hotel.... Arlington, VA 209 1990 6/96 1,500 73.1 103.64 75.76
Hilton Hotel......... Bellevue, WA 180 1979 8/95 1,063 77.5 84.80 65.71
--- ------ --- ------ ---------
Total/Weighted Average--Owned Hotels..... 3,516 $ 29,779 73.1% $76.66 $ 56.05
ADDITIONAL HOTELS
Hilton Hotel......... Sacramento, CA 326 1983 12/96 750 71.7% $73.46 $ 52.70
Santa Barbara Inn.... Santa Barbara, CA 71 1959 12/96 419 81.7 122.56 100.08
Holiday Inn.......... Colorado Springs, CO 201 1974 12/96 200 70.9 53.55 37.99
Embassy Row Hotel.... Washington, DC 195 1969 12/96 1,500 58.6 112.02 65.69
Hilton Hotel &
Towers.............. Lafayette, LA 328 1981 12/96 249 72.1 66.62 48.03
--- ------ --- ------ ---------
Total/Weighted Average--Additional
Hotels................................. 1,121 $ 3,118 70.1% $77.04 $ 53.97
Total/Weighted Average................... 4,637 $ 32,897 72.4% $76.75 $ 55.55
--- ------ --- ------ ---------
--- ------ --- ------ ---------
</TABLE>
- ------------
(1) Represents the total planned or completed capital expenditures at each
hotel. As of March 31, 1996, $8.4 million had been spent and an additional
$21.4 million was planned for the Owned Hotels and $3.1 million was planned
for the Additional Hotels.
(2) Represents total room revenue divided by total available rooms.
(3) The Atlanta Airport Westin is majority-owned by the Company through a
partnership in which the Company holds an 84.6% 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:
Hilton Hotel, 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 March 31, 1996, the Company had spent $0.1 million
on renovations at the hotel with an additional $1.9 million planned.
48
<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
March 31, 1996, the Company had spent $2.5 million on renovations at the hotel
with an additional $0.9 million planned.
Georgetown Latham, 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 19,000 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
March 31, 1996, the Company had spent $0.1 million on renovations at the hotel
with an additional $0.7 million planned.
Atlanta Airport Westin. 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 this 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. As of March 31, 1996, the Company had spent $1.2 million on
renovations at the hotel with an additional $5.9 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
March 31, 1996, the Company had spent $1.3 million on renovations at the hotel
with an additional $0.4 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 9,000 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,
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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. As of March 31, 1996, the Company had spent $0.6 million on
renovations at the hotel with an additional $2.7 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 March 31, 1996, the Company had spent $0.2 million on renovations at the
hotel with an additional $1.3 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 March 31, 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 March 31, 1996, the Company had allocated $2.7
million for renovations at the hotel.
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 March 31, 1996, the Company had
spent $1.6 million on renovations at the hotel with an additional $0.2 million
planned.
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Renaissance 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, 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
Westin License Company to reflag the hotel as a Westin. 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 March 31, 1996, the
Company had spent $0.7 million on renovations at the hotel with an additional
$0.4 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 are currently managed by the Company.
Since assuming management of these four hotels in 1991, 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
$3.1 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 well-known
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 $0.4 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.
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Such growth is attributable to a number of factors, including the region's low
average cost of living and 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 will assume management of the hotel in July 1996 and plans to spend
$1.5 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 36 Managed Hotels containing approximately 5,300 rooms.
Of the Managed Hotels, 24 are full-service properties, nine are limited-service
properties and three are extended stay properties. 29 of the Managed Hotels are
operated under nationally-recognized brand names and seven 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. During 1995, the
Company's revenue from Management Agreements was $3.3 million constituting 2.3%
of the Company's total revenue for such period on a pro forma basis. 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.
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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 rapid increase in room supply during
the 1980s that drove ADRs and industry profitability down, but 1993 marked a
reversal of this trend. The following chart demonstrates the rise that has
occurred in hotel industry average ADRs since 1993:
[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. Industry reports indicate
that these trends are expected to continue, with demand projected to increase at
2.4% annually through 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. 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 the lower consumer price elasticity in the full-service segment as
a result of customer emphasis on service and brand loyalty and 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 March 31, 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(R) ARE REGISTERED TRADEMARKS OF HILTON HOTELS
CORPORATION ("HILTON HOTELS"). NEITHER HILTON HOTELS NOR ANY OF ITS OFFICERS,
DIRECTORS, AGENTS OR EMPLOYEES SHALL IN ANY WAY BE DEEMED AN ISSUER OR
UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAS HILTON HOTELS
ENDORSED OR APPROVED THE OFFERING. THE HILTON HOTELS 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 HEREBY. A GRANT OF A HILTON
FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT
BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HILTON
HOTELS (OR ANY OF ITS 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 EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
RADISSON HOTELS (OR
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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 SHERATON INNS, 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 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 SHERATON INNS, INC. (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 LICENSE COMPANY, 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 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 LICENSE COMPANY (OR ANY OF ITS
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
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
Joseph McCarthy........................... 64 Director
William S. Janes.......................... 43 Director
Independent Director (to be named)........ Director
Independent Director (to be named)........ Director
Independent Director (to be named)........ 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.
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
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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.
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. Prior to that, from 1986 to 1989, Mr. George
served as Vice President for Sheraton Hotels in Toronto.
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 serves as a Principal and Director of RMB Realty, Inc., an
affiliate of Keystone, Inc. of Fort Worth, Texas and an affiliate of Acadia
Partners. 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. Prior to joining RMB Realty, Inc., Mr. Janes served as Regional
General Partner of Lincoln Property Company from 1984 to 1989. Mr. Janes
maintains professional affiliations as a member of NAREIT, SIOR 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.
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
David E. McCaslin..................... Chief Operating Officer and Director $215,000
William M. Karnes..................... Senior Executive Vice President,
Finance and Chief Financial Officer $215,000(2)
John E. Plunket....................... Executive Vice President, Finance and
Development $150,000
Michael T. George..................... Senior Vice President, Operations $132,000
</TABLE>
(Footnotes on following page)
57
<PAGE>
(Footnotes for preceding page)
- ------------
(1) Pursuant to the Management Bonus Plan (as defined below), such executive
officers are also eligible to earn bonuses of up to 100% of their annual
base salary. Under the terms of the Management Bonus Plan, the total of such
bonuses may not exceed $300,000 during 1996. See "--Compensation
Plans--Management Bonus Plan."
(2) 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.
At the time of 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."
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.
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 has established a bonus plan (the
"Management Bonus Plan") under which key management employees of the Company are
eligible to receive bonuses based upon achievement of specified targets and
goals for the Company and the individual employee. Bonus awards may not exceed
100% of the executive's annual base salary, which will be subject to certain
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<PAGE>
restrictions and forfeiture provisions. Total bonus awards for 1996 may not
exceed 10% of the aggregate base salary of the executives that are eligible in
1996 for bonuses under the Management Bonus Plan.
Stock Purchase Plan. Each full-time employee of the Company (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, subject to certain limitations
arising under the Internal Revenue Code of 1986 (the "Code"), 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 salary, which amounts will be held in the participating employee's
account and used to purchase Common Stock from the Company on a monthly basis at
a price equal to a designated percentage from 85% to 100% of the average closing
sales price for Common Stock as reported on the Composite Transactions Tape of
the New York Stock Exchange (except as described below). The designated
percentage will be established annually by the Compensation Committee which is
responsible for the administration of the Stock Purchase Plan, except that for
the period ending December 31, 1996 the price will be the greater of (i) the
initial offering price or (ii) 85% of the average market price of the Common
Stock for such period.
The Stock Purchase Plan reserves 500,000 shares of authorized but unissued
or reacquired Common Stock for purchase thereunder. The Stock Purchase Plan will
remain in effect until terminated at any time by the Board, except that such
termination will be subject to employees' rights to purchase shares in any
outstanding monthly offering period.
The Stock Purchase Plan may be amended from time to time by the Board. No
amendment will increase the aggregate number of shares of Common Stock that may
be issued and sold under the Stock Purchase Plan (except for authorizations
pursuant to the anti-dilution provisions of the Stock Purchase Plan) without
further approval by the Company's shareholders. Furthermore, no amendment that
would cause the Stock Purchase Plan to fail to meet the requirements of Section
423 of the Code will be adopted without shareholder approval.
Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the "Equity
Incentive Plan") is designed to attract and retain qualified officers and other
key employees of the Company. The Equity Incentive Plan authorizes the grant of
options to purchase shares of Common Stock ("Option Rights"), stock appreciation
rights ("Appreciation Rights"), restricted shares ("Restricted Shares"),
deferred shares ("Deferred Shares"), performance shares ("Performance Shares")
and performance units ("Performance Units"). The Compensation Committee
administers the Equity Incentive Plan and determines to whom Option Rights,
Appreciation Rights, Restricted Shares, Deferred Shares, Performance Shares and
Performance Units are to be granted and the terms and conditions thereof,
including the number of shares and the period of exerciseability.
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, which may be shares of original issuance or
treasury shares or a combination thereof. Officers, including officers who are
members of the Board, and other key employees of and consultants to the Company
and its subsidiaries may be selected by the Compensation Committee to receive
benefits under the Equity Incentive Plan.
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 vest immediately upon their grant, while the remaining
options will vest in three equal annual installments.
The Compensation Committee may grant Option Rights that entitle the optionee
to purchase shares of Common Stock at a price equal to or greater or less than
market value on the date of grant, and the Option Rights may be conditioned on
the achievement of specified performance objectives
59
<PAGE>
("Management Objectives"). Subject to adjustment as provided in the Equity
Incentive Plan, no participant shall be granted Option Rights and Appreciation
Rights, in the aggregate, for more than 100,000 shares during any calendar year.
The Compensation Committee may provide that the option price is payable at the
time of exercise (i) in cash, (ii) by the transfer to the Company of
nonforfeitable, nonrestricted shares of Common Stock that are already owned by
the optionee, (iii) with any other legal consideration the Compensation
Committee may deem appropriate, or (iv) by any combination of the foregoing
methods of payment. Any grant may provide for deferred payment of the option
price from the proceeds of sale through a broker on the date of exercise of some
or all of the shares of Common Stock to which the exercise relates. Any grant
may provide for automatic grant of reload option rights upon the exercise of
Option Rights, including reload option rights, for shares of Common Stock or any
other non-cash consideration authorized under the Equity Incentive Plan, except
that the term of any reload option right shall not extend beyond the term of the
Option Right originally exercised. The Compensation Committee has the authority
to specify at the time Option Rights are granted that shares of Common stock
will not be accepted in payment of the option price until they have been owned
by the optionee for a specified period; however, the Equity Incentive Plan does
not require any such holding period and would permit immediate sequential
exchanges of shares of Common Stock at the time of exercise of Option Rights.
Option Rights granted under the Equity Incentive Plan may be Option Rights that
are intended to qualify as "incentive stock options" within the meaning of
Section 422 of the Code, or option Rights that are not intended to so qualify.
Any grant may provide for the payment of dividend equivalents to the optionee on
a current, deferred or contingent basis or may provide that dividend equivalents
be credited against the option price. No Option Right may be exercised more than
ten years from the date of grant. Each grant must specify the period of
continuous employment with, or continuous engagement of consulting services by,
the Company or any subsidiary that is necessary before the Option Rights will
become exercisable and may provide for the earlier exercise of the Option Rights
in the event of a change of control of the Company or other similar transaction
or event. Successive grants may be made to the same optionee regardless of
whether Option Rights previously granted to him or her remain unexercised.
Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Option rights. An Appreciation Right represents the right to receive
from the Company the difference (the "Spread"), or a percentage thereof not in
excess of 100%, between the base price per share of Common Stock in the case of
a free-standing Appreciate 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 or greater or less than the fair market value of a share
of Common Stock on the date of grant, must specify the period of continuous
employment, or continuous engagement on consulting services, that is necessary
before the Appreciation Right becomes exercisable (except that it may provide
for its earlier exercise in the event of a change in control of the Company or
other similar transaction or event) and may not be exercised more than ten years
from the date of grant. Any grant of Appreciation Rights may specify that the
amount payable by the Company upon exercise may be paid in cash, Common Stock or
a combination thereof and may either (i) grant to the recipient or retain in the
Compensation Committee the right to elect among those alternatives or (ii)
preclude the right of the participant to receive, and the Company to issue,
Common Stock or other equity securities in lieu of cash. In addition, any grant
may specify that the Appreciation Right may be exercised only in the event of a
change in control of the company. Subject to adjustment as provided in the
Equity Incentive Plan, no participant shall be granted Option Rights and
Appreciation Rights, in the aggregate, for more than 100,000 shares during any
calendar year. The Compensation Committee may condition the award of
Appreciation Rights on the achievement of one or more Management
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<PAGE>
Objectives and may provide with respect to any grant of Appreciation Rights for
the payment of dividend equivalents thereon in cash or Common Stock on a
current, deferred or contingent basis.
An award of Restricted Shares involves the immediate transfer by the Company
to a participant of ownership of a specific number of shares of Common Stock in
consideration of the performance of services. The participant is entitled
immediately to voting, dividend and other ownership rights in the shares. The
transfer may be made without additional consideration or for consideration in an
amount that is less than the market value of the shares on the date of grant, as
the Compensation Committee may determine. The Compensation Committee may
condition the award on the achievement of specified Management Objectives.
Restricted Shares must be subject to a "substantial risk of forfeiture" within
the meaning of Section 83 of the Code for a period to be determined by the
Compensation Committee. An example would be a provision that the Restricted
Shares would be forfeited if the participant ceased to serve the Company as an
officer or other salaried employee during a specified period of years. In order
to enforce these forfeiture provisions, the transferability of Restricted Shares
will be prohibited or restricted in a manner and to the extend prescribed by the
Compensation Committee for the period during which the forfeiture provisions are
to continue. The Compensation Committee may provide for a shorter period during
which the forfeiture provisions are to apply in the event of a change in control
of the Company or other similar transaction or event.
An award of Deferred Shares constitutes an agreement by the Company to
deliver shares of Common Stock to the participant in the future in consideration
of the performance of service, subject to the fulfillment of such conditions
during the Deferral Period (as defined in the Equity Incentive Plan) as the
Compensation Committee may specify. During the Deferral Period, the participant
has no right to transfer any rights covered by the award and no right to vote
the shares covered by the award. On or after the date of any grant of Deferred
Shares, the Compensation Committee may authorize the payment of dividend
equivalents thereon on a current, deferred or contingent basis in either cash or
additional shares of Common Stock. Grants of Deferred Shares may be made without
additional consideration or for consideration in an amount that is less than the
market value of the shares on the date of grant. Deferred Shares must be subject
to a Deferral Period, as determined by the Compensation Committee on the date of
grant, except that the Compensation Committee may provide for a shorter Deferral
Period in the event of a change in control of the Company or other similar
transaction or event. The Compensation Committee may condition the award of
Deferred Shares on the achievement of one or more Management Objectives.
A Performance Share is the equivalent of one share of Common Stock, and a
Performance Unit is the equivalent of $1.00. A participant may be granted any
number of Performance Shares or Performance Units, which shall be specified in
any such grant. The participant will be given one or more Management Objectives
to meet within a specified period (the "Performance Period"). The specified
Performance Period may be subject to earlier termination in the event of a
change in control of the Company or other similar transaction or event. A
minimum level of acceptable achievement will also be established by the
Compensation Committee. If by the end of the Performance Period the participant
has achieved the specified Management Objectives, the participant will be deemed
to have fully earned the Performance Shares or Performance Units. If the
participant has not achieved the Management Objectives but has attained or
exceeded the predetermined minimum level of acceptable achievement, the
participant will be deemed to have partly earned the Performance Shares or
Performance Units in accordance with a predetermined formula. To the extent
earned, the Performance Shares or Performance Units will be paid to the
participant at the time and in the manner determined by the Compensation
Committee in cash, shares of Common Stock or any combination thereof. Management
Objectives may be described in terms of either Company-wide objectives or
objectives that are related to the performance of the division, subsidiary,
department or function within the Company or a subsidiary in which the
participant is employed or with respect to which the participant provides
consulting services. The Compensation Committee may adjust any Management
Objectives and the related minimum level of acceptable achievement if, in its
judgment, transactions or events have occurred after the date of
61
<PAGE>
grant that are unrelated to the participant's performance and result in
distortion of the Management Objectives or the related minimum level of
acceptable achievement.
No Option Right, Appreciation Right or other "derivative security" within
the meaning of Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), is transferable by a participant except
by will or the laws of descent and distribution. Option Rights and Appreciation
Rights may not be exercised during a participant's lifetime except by the
participant or, in the event of the participant's incapacity, by the
participant's guardian or legal representative acting in a fiduciary capacity on
behalf of the participant under state law and court supervision. Notwithstanding
the foregoing, the Compensation Committee, in its sole discretion, may provide
for the transferability of the particular awards under the Equity Incentive Plan
so long as such provisions will not disqualify the exemption for other awards
under Rule 16b-3, if such rule is then applicable to awards under the plan. The
Compensation Committee may specify at the date of grant that all or any part of
the shares of Common Stock that are to be issued or transferred by the Company
upon the exercise of Option Rights or Appreciation Rights, upon the termination
of the Deferral Period applicable to Deferred Shares or upon payment under any
grant of Performance Shares or Performance Units, or are to be no longer subject
to the substantial risk of forfeiture and restrictions on transfer referred to
in the Equity Incentive Plan with respect to Restricted Shares, are subject to
further restrictions on transfer.
The maximum number of shares that may be issued or transferred under the
Equity Incentive Plan, the number of shares covered by outstanding Option Rights
or Appreciation Rights and the option prices or base prices per share applicable
thereto, and the number of shares covered by outstanding grants of Deferred
Shares and Performance Shares, are subject to adjustment in the event of stock
dividends, stock splits, combinations of shares, recapitalizations, mergers,
consolidations, spin-offs, reorganizations, liquidations, issuances of rights or
warrants, and similar transactions or events. In the event of any such
transaction or event, the Compensation Committee may in its discretion provide
in substitution for any or all outstanding awards under the Equity Incentive
Plan such alternative consideration as it may in good faith determine to be
equitable in the circumstances and may require the surrender of all awards so
replaced. The Compensation Committee may also, as it determines to be
appropriate in order to reflect any such transaction or event, make or provide
for such adjustments in the number of shares that may be issued or transferred
and covered by outstanding awards granted under the Equity Incentive Plan and
the number of shares permitted to be covered by Option Rights and Appreciation
Rights granted to any one participant during any calendar year.
The Compensation Committee must consist of not less than three Independent
Directors who are "disinterested persons" within the meaning of Rule 16b-3. In
connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan and
related agreements and other documents. The Compensation Committee may make
grants to participants under any or a combination of all of the various
categories of awards that are authorized under the Equity Incentive Plan and may
condition the grant of awards on the surrender or deferral by the participant of
the participant's right to receive a cash bonus or other compensation otherwise
payable by the Company or a subsidiary to the participant. The Equity Incentive
Plan may be amended from time to time by the Compensation Committee but, without
further approval by the shareholders of the Company, no such amendment may (i)
increase the aggregate number of shares of Common Stock that may be issued or
transferred and covered by outstanding awards or increase the number of shares
which may be granted to any participant in any calendar year or (ii) otherwise
cause Rule 16b-3 to cease to be applicable to the Equity Incentive Plan.
EMPLOYMENT AGREEMENTS
Each of Paul Whetsell, David McCaslin, William Karnes and John Plunket are
parties to employment agreements with the Company.
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<PAGE>
Under the employment agreements of Messrs. Whetsell and McCaslin, each is
entitled to receive (i) a lump sum payment equal to three times his total cash
compensation for the previous fiscal year if his employment is terminated by the
Company without cause 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
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.
These employment agreements also provide that if (i) the executive elects to
terminate his employment within six months of certain changes in control of the
Company and (ii) within two years 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 five
times his total cash compensation for the previous fiscal year. 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 continue to receive his annual base salary plus, in the case of Mr.
Karnes, $30,000 per year, for the remaining unexpired term of employment, if his
employment is terminated by the Company without cause, or by the executive for
Good Reason. These employment agreements also provide that if the executive
elects to terminate his employment within thirty days of certain changes in
control of the Company, the executive is entitled to continue to receive his
annual base salary plus, in the case of Mr. Karnes, $30,000 per year, for a
period of two years. These employment agreements restrict the executives' use
and disclosure of confidential information about the Company.
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<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 (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.
<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............. 3,824,201 63.7% 2,500,000 1,324,201 10.4%
Paul W. Whetsell(2)................ 989,517 16.5% -- 989,517 7.8%
David E. McCaslin(3)............... 462,729 7.7% -- 462,729 3.6%
John E. Plunket(3)................. 462,729 7.7% -- 462,729 3.6%
William M. Karnes(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
(12 persons)..................... - - - - -
</TABLE>
- ------------
(1) Includes 3,771,133 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 457,652 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 457,652 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) Does not include shares indirectly owned through interests in entities which
own shares of Common Stock.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITIONS
In March 1996, the Company acquired the Georgetown 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 84.6% of the limited
partnership interests in the partnership that owns the Atlanta Airport Westin
("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 Atlanta
Airport Westin. All of the compensation paid or payable to affiliates of Mr.
Roskind in connection with the Atlanta Airport Westin 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 such 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.
65
<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 securities
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.
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 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 prior to the date of this Prospectus. 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.
66
<PAGE>
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 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.
67
<PAGE>
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 the "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, exercisable after
one year from the Closing, 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 $5 million. The management-controlled
entities will not be entitled to request or participate in any such registration
prior to one year from the Closing.
68
<PAGE>
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 a 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, the LLC Registration and Piggyback
Registrations, other than underwriting discounts and commissions.
TRANSFER AGENT AND REGISTRAR
The Company has appointed - as the transfer agent and registrar for the
Common Stock.
69
<PAGE>
UNDERWRITING
The underwriters of the Offering (the "Underwriters"), for whom Lehman,
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Smith Barney Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the conditions contained in the Underwriting
Agreement (the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part), to purchase from the Company
and the Company has agreed to sell to each Underwriter, the aggregate number of
shares of Common Stock set forth opposite the name of each such Underwriter.
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------- ---------
Lehman Brothers Inc.............................................. -
Goldman, Sachs & Co.............................................. -
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................... -
Smith Barney Inc................................................. -
---
Total.................................................
---
---
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to certain
conditions, and that if any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all of the shares agreed to
be purchased by the Underwriters under the Underwriting Agreement must be so
purchased.
The Company has been advised that the Underwriters propose to offer shares
of Common Stock directly to the public initially at the initial public offering
price set forth on the cover page of this Prospectus, and to certain selected
dealers who may include the Underwriters at such initial public offering price
less a selling concession not in excess of $ - per share. The selected dealers
may reallow a concession not in excess of $ - per share to certain brokers or
dealers. After the Offering, the initial public offering price, the concession
to selected dealers, and the reallowance may be changed by the Representatives.
The Company has agreed to indemnify the Underwriters against certain
labilities, 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 Underwriters an option to purchase up to an
additional 1,387,500 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
option may be exercised at any time within 30 days after the date of the
Underwriting Agreement. To the extent that such option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional shares of Common Stock proportionate to such
Underwriter'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."
70
<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 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 Underwriters. 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 ($127,221,001 was outstanding
thereunder as of March 31, 1996), which facility is expected to be retired with
the net proceeds of the Offering. See "Use of Proceeds."
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 Section 44(c)(8) of the Rules of
Fair Practice and the applicable provisions of Schedule E to the By-Laws 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 Schedule E. 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 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.
71
<PAGE>
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 '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.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P.
Independent Auditors' Report......................................................... F-4
Combined Balance Sheets as of March 31, 1996 and December 31, 1995................... F-5
Combined Statements of Operations for the three months ended March 31, 1996 and for
the period from January 12, 1995 (date of inception) to December 31, 1995........... F-6
Combined Statements of Partners' Capital for the three months ended March 31, 1996
and for the period from January 12, 1995 (date of inception) to December 31,
1995............................................................................... F-7
Combined Statements of Cash Flows for the three months ended March 31, 1996 and for
the period from January 12, 1995 (date of inception) to December 31, 1995........... F-8
Notes to the Combined Financial Statements........................................... F-9
CAPSTAR MANAGEMENT COMPANY, L.P.
Independent Auditors' Report......................................................... F-17
Balance Sheet as of December 31, 1994................................................ F-18
Statements of Operations and Changes in Management Operations' Equity for the years
ended December 31, 1994 and 1993.................................................... F-19
Statements of Cash Flows for the years ended December 31, 1994 and 1993.............. F-20
Notes to Financial Statements........................................................ F-21
RADISSON PLAZA HOTEL
Independent Auditors' Report......................................................... F-23
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-24
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-25
Notes to Financial Statements........................................................ F-26
COLORADO SPRINGS SHERATON HOTEL
Independent Auditors' Report......................................................... F-28
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-29
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-30
Notes to Financial Statements........................................................ F-31
GEORGETOWN LATHAM HOTEL
Independent Auditors' Report......................................................... F-32
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-33
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-34
Notes to Financial Statements........................................................ F-35
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
ATLANTA RENAISSANCE HOTEL (ATLANTA AIRPORT WESTIN)
Independent Auditors' Report......................................................... F-37
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-38
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-39
Notes to Financial Statements........................................................ F-40
SOMERSET MARRIOTT HOTEL
Independent Auditors' Report......................................................... F-42
Statements of Operations for the fiscal years ended September 30, 1995, 1994 and
1993................................................................................ F-43
Statements of Cash Flows for the fiscal years ended September 30, 1995, 1994 and
1993................................................................................ F-44
Notes to Financial Statements........................................................ F-45
CHARLOTTE SHERATON AIRPORT PLAZA
Independent Auditors' Report......................................................... F-47
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-48
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-49
Notes to Financial Statements........................................................ F-50
CLEVELAND HOLIDAY INN AND AFFILIATE
Independent Auditors' Report......................................................... F-52
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-53
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-54
Notes to Combined Financial Statements............................................... F-55
ARLINGTON HILTON HOTEL
Independent Auditors' Report......................................................... F-57
Balance Sheets as of March 31, 1996, December 31, 1995 and 1994...................... F-58
Statements of Operations for the three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-59
Statements of Partners' Capital (Deficit) for the three months ended March 31, 1996
and the years ended December 31, 1995, 1994 and 1993............................... F-60
Statements of Cash Flows for the three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-61
Notes to Financial Statements........................................................ F-62
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
SALT LAKE AIRPORT HILTON
Independent Auditors' Report......................................................... F-64
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-65
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-66
Notes to Financial Statements........................................................ F-67
BALLSTON HOTEL LIMITED PARTNERSHIP (RENAISSANCE HOTEL, ARLINGTON, VA)
Independent Auditors' Report......................................................... F-69
Balance Sheets as of March 31, 1996 and December 31, 1995 and 1994................... F-70
Statements of Operations for the three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-71
Statements of Partners' Deficit for the three months ended March 31, 1996 and the
years ended December 31, 1995, 1994 and 1993....................................... F-72
Statements of Cash Flows for the three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-73
Notes to Financial Statements........................................................ F-74
BELLEVUE HILTON HOTEL
Independent Auditors' Report......................................................... F-79
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-80
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-81
Notes to Financial Statements........................................................ F-82
ADDITIONAL HOTELS
Independent Auditors' Report......................................................... F-84
Combined Balance Sheets as of March 31, 1996, December 31, 1995 and 1994............. F-85
Combined Statements of Operations for the three months ended March 31, 1996 and the
years ended December 31, 1995, 1994 and 1993........................................ F-86
Combined Statements of Owners' Capital for the three months ended March 31, 1996 and
the years ended December 31, 1995, 1994 and 1993.................................... F-87
Combined Statements of Cash Flows for the three months ended March 31, 1996 and the
years ended December 31, 1995, 1994 and 1993........................................ F-88
Notes to Combined Financial Statements............................................... F-89
</TABLE>
F-3
<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 March 31, 1996 and December 31, 1995
and the related combined statements of operations, partners' capital, and cash
flows for the three months ended March 31, 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 March 31, 1996 and December 31, 1995, and the results of their combined
operations and their combined cash flows for the three months ended March 31,
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.
May 10, 1996
F-4
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 7,920,761 6,831,983
Accounts receivable, net of allowance for doubtful accounts of
$125,000 in 1996 and $91,000 in 1995........................... 5,245,651 2,748,909
Deposits, including restricted deposits of $1,000,000 in 1996
and $2,023,307 in 1995........................................ 2,608,720 3,515,332
Prepaid expenses and other...................................... 1,031,753 265,260
Inventory....................................................... 437,635 173,514
------------ -----------
Total current assets............................................ 17,244,520 13,534,998
Property and equipment:
Land.......................................................... 35,287,661 12,767,661
Buildings and improvements.................................... 109,490,282 84,545,420
Furniture, fixtures and equipment............................. 21,561,810 11,353,507
Construction-in-progress...................................... 2,162,197 2,216,174
------------ -----------
168,501,950 110,882,762
Accumulated depreciation...................................... (3,144,894) (1,756,412)
------------ -----------
Total property and equipment, net............................... 165,357,056 109,126,350
Deferred costs, net of accumulated amortization of $553,998 in
1996 and $271,496 in 1995..................................... 4,343,274 2,637,754
Restricted cash................................................. 18,639,903 7,351,128
------------ -----------
$205,584,753 132,650,230
------------ -----------
------------ -----------
LIABILITIES, MINORITY INTEREST AND PARTNERS' CAPITAL
Accounts payable................................................ $ 4,170,708 2,329,034
Accrued expenses and other liabilities.......................... 7,395,746 4,320,320
Due to CapStar Equity Associates, G.P........................... 383,019 305,077
Long-term debt, current portion................................. 4,416,733 2,668,121
------------ -----------
Total current liabilities....................................... 16,366,206 9,622,552
Long-term debt.................................................. 140,709,685 73,574,038
------------ -----------
Total liabilities............................................... 157,075,891 83,196,590
Minority interest............................................... 684,823 815,918
Partners' capital--General Partners............................. 2,413,875 2,431,589
Partners' capital--Limited Partners............................. 45,410,164 46,206,133
------------ -----------
205,584,753 132,650,230
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
FOR THE PERIOD FROM JANUARY 12, 1995
(DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Revenue from hotel operations:
Rooms........................................................... $10,714,167 14,456,387
Food and beverage............................................... 4,755,339 5,900,238
Other operating departments..................................... 889,818 1,122,361
Lease revenue................................................... 637,548 447,934
Hotel management and other fees from third parties................ 791,223 3,331,846
Hotel management and other fees from affiliates................... 245,843 1,104,582
----------- ----------
Total revenue..................................................... 18,033,938 26,363,348
----------- ----------
Hotel operating expenses by department:
Rooms........................................................... 2,907,133 4,190,299
Food and beverage............................................... 3,781,670 4,923,790
Other operating departments..................................... 432,562 512,791
Undistributed operating expenses:
Administrative and general...................................... 4,768,757 8,078,304
Property operating costs........................................ 1,532,558 2,623,626
Property taxes, insurance and other............................. 792,275 1,310,517
Depreciation and amortization................................... 1,671,612 2,097,512
----------- ----------
Total operating expenses.......................................... 15,886,567 23,736,839
----------- ----------
Interest expense.................................................. 2,850,844 2,673,365
Interest income................................................... (67,749) (260,017)
----------- ----------
Total expenses.................................................... 18,669,662 26,150,187
----------- ----------
Income (loss) before minority interest and extraordinary item..... (635,724) 213,161
Minority interest in subsidiary................................... 6,405 (17,415)
----------- ----------
Income (loss) before extraordinary item........................... (642,129) 230,576
Extraordinary item--loss on early extinguishment of debt.......... -- (887,631)
----------- ----------
Net loss.......................................................... $ (642,129) (657,055)
----------- ----------
----------- ----------
Net loss attributable to General Partners......................... $ (15,469) (87,254)
----------- ----------
----------- ----------
Net loss attributable to Limited Partners......................... $ (626,660) (569,801)
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED STATEMENTS OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 1996.... (642,129) (15,469) (626,660)
----------- ---------- ----------
----------- ---------- ----------
Partners' capital at March 31, 1996................... $47,824,039 2,413,875 45,410,164
----------- ---------- ----------
----------- ---------- ----------
</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 CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND FOR THE
PERIOD FROM JANUARY 12, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (642,129) (657,055)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................ 1,671,612 2,097,512
Loss on early extinguishment of debt..................... -- 617,730
Minority interest in consolidated subsidiary............. 6,405 (17,415)
Changes in working capital:
Accounts receivable, net............................... (2,496,742) (2,748,909)
Deposits............................................... (116,695) (1,492,025)
Prepaid expenses and other............................. (766,493) (223,260)
Inventory.............................................. (264,121) (173,514)
Accounts payable....................................... 1,841,674 2,329,034
Accrued expenses and other liabilities................. 3,075,426 4,320,320
Due to CapStar Equity Associates, G.P.................. 77,942 305,077
------------ ------------
Net cash provided by operating activities...................... 2,386,879 4,357,495
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment.......................... (56,894,884) (109,221,935)
Purchase of minority interest................................ (33,333) --
Additions to restricted cash for capital improvements and
other, net................................................. (11,288,775) (7,351,128)
------------ ------------
Net cash used by investing activities.......................... (68,216,992) (116,573,063)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt................................. 67,870,152 98,057,709
Payments on long-term debt................................... (24,469) (23,095,559)
Principal repayments on capital leases....................... (24,708) (37,888)
Release of (additions to) restricted deposits for hedge
agreement.................................................. 1,023,307 (2,023,307)
Deferred costs............................................... (1,649,670) (3,000,181)
Capital contributions........................................ -- 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...................... 66,918,891 119,047,551
------------ ------------
Net increase in cash and cash equivalents...................... 1,088,778 6,831,983
Cash and cash equivalents at beginning of period............... 6,831,983 --
------------ ------------
Cash and cash equivalents at end of period..................... $ 7,920,761 6,831,983
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 2,008,689 2,383,299
Capitalized interest costs................................... 76,000 67,000
Capital lease additions...................................... 724,932 721,494
Deferred financing fees not yet paid......................... 338,352 596,403
Prepaid expenses contributed by limited partner.............. -- 42,000
Furniture and equipment contributed by limited partner....... -- 106,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to combined financial statements.
F-8
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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.......... Renaissance Hotel, Atlanta, GA 496 21,200,000
February 2, 1996........... Sheraton Hotel, Charlotte, NC 226 18,500,000
February 16, 1996.......... Holiday Inn, Cleveland, OH 237 9,300,000
February 22, 1996.......... Radisson Plaza Hotel, Irvine, CA 290 19,400,000
March 8, 1996.............. Georgetown Latham, Washington, DC 143 12,500,000
</TABLE>
Separate wholly-owned limited liability companies ("LLCs") were established
to directly own the above hotels. However, for the Atlanta Renaissance Hotel,
LLCs were established to purchase and hold EquiStar's 1% general partner
interest and the 84.6% 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.
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-9
<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 three months
ended March 31, 1996 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 $18,639,903 and $7,351,128
at March 31, 1996 and December 31, 1995, respectively.
Minority Interest
Minority interest represents the limited partnership interests in the
partnership which owns the Atlanta Renaissance 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
Atlanta Renaissance was leased to a third-party operator and revenue related to
this hotel was recorded as lease revenue. On February 29, 1996, the Company
assumed operations of the hotel upon termination of the lease.
F-10
<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)
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.
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 three months ended
March 31, 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 March 31, 1996 and December 31, 1995, EquiStar had made required deposits
of $1,000,000 and $2,023,307 to the collateral escrow account, respectively,
which are recorded as restricted deposits.
F-11
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) HEDGE AGREEMENT--(CONTINUED)
The unrealized loss on this agreement at March 31, 1996 and December 31, 1995
was $102,000 and $1,546,000, respectively.
On May 6, 1996, EquiStar sold its interest in the swap agreement.
(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 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. At March 31, 1996 and 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 March 31, 1996 and December 31, 1995, total
borrowings under the Master Agreement were $127,221,001 and $59,975,900, of
which $90,763,145 and $55,840,900 were made from the senior loan facility and
$36,457,856 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 $897,570 and $596,403 at March 31, 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 March 31, 1996 and December 31, 1995, the outstanding balance
on this note was $9,865,675 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 $3,706,809 and $4,181,809 at March 31,
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
F-12
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT--(CONTINUED)
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
on July 12, 1997.
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 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 March 31, 1996 and December 31, 1995, were
$1,335,363 and $647,903, respectively, and are included in long-term debt.
Interest costs on long-term debt for the Partnerships were $2,926,844 for
the three months ended March 31, 1996 and $2,740,365 for 1995.
Aggregate maturities of the above obligations are as follows:
PERIOD
- ------------------------------------------------------------
From April 1 to December 31
1996...................................................... $ 4,497,661
Year ending December 31
1997...................................................... 934,919
1998...................................................... 1,351,982
1999...................................................... 137,901,718
2000 and thereafter....................................... 440,138
-------------
$ 145,126,418
-------------
-------------
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 $245,843 for the three
F-13
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) RELATED-PARTY TRANSACTIONS--(CONTINUED)
months ended March 31, 1996 and $1,104,582 in 1995. At March 31, 1996 and
December 31, 1995, the amount due from these properties was $134,715 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 $383,019 at
March 31, 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' 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 Atlanta Renaissance Hotel 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 Atlanta
Renaissance. 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) COMMITMENT 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.
(8) PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma summary presents information as if hotel
acquisitions made from inception of the Partnerships through March 31, 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.
F-14
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(8) PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED JANUARY 12, 1995 TO
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -------------------
<S> <C> <C>
Total revenue............................ $ 22,214,514 94,791,068
------------------ -------------------
Net loss before extraordinary item....... $ (1,271,256) (2,693,090)
------------------ -------------------
Net loss................................. $ (1,271,256) (3,580,721)
------------------ -------------------
</TABLE>
(9) SUBSEQUENT EVENTS
On April 16, 1996, EquiStar purchased the Hilton Hotel, Arlington, Texas.
The Hilton is a full-service hotel with 289 rooms and was purchased for
$18,350,000.
On January 18, 1996, EquiStar entered into a letter of intent to acquire a
60% interest in a partnership that owns the Renaissance Hotel, Arlington,
Virginia for $4,500,000.
F-15
<PAGE>
SCHEDULE III
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
MARCH 31, 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...................... $ 9,865,675 770,000 12,827,670 580 138,015 770,580 12,965,685
Radisson Hotel,
Schaumburg, IL............ 5,380,000 1,080,000 5,131,399 1,361 3,144 1,081,361 5,134,543
Sheraton Hotel, Colorado
Springs, CO.............. 16,270,799 1,071,394 14,591,596 678 112,196 1,072,072 14,703,792
Hilton Hotel, Bellevue,
WA...................... 10,788,713 5,210,695 6,766,323 4,590 8,596 5,215,285 6,774,919
Marriott Hotel, Somerset,
NJ...................... 18,565,600 1,977,509 23,001,126 854 36,360 1,978,363 23,037,486
Renaissance Hotel,
Atlanta, GA............. 23,609,456 2,650,000 15,926,116 -- 80,980 2,650,000 16,007,096
Sheraton Hotel,
Charlotte, NC............. 15,659,014 4,700,000 11,056,927 -- 90,024 4,700,000 11,146,951
Holiday Inn, Cleveland,
OH...................... 9,809,540 1,330,000 6,353,249 -- 53,716 1,330,000 6,406,965
Radisson Plaza Hotel,
Irvine, CA................ 16,674,449 9,990,000 7,993,137 -- -- 9,990,000 7,993,137
Georgetown Latham,
Washington, DC........... 11,463,430 6,500,000 5,319,708 -- -- 6,500,000 5,319,708
------------ ---------- ------------ ----- ------ ---------- ------------
$138,086,676 35,279,598 108,967,251 8,063 523,031 35,287,661 109,490,282
------------ ---------- ------------ ----- ------ ---------- ------------
------------ ---------- ------------ ----- ------ ---------- ------------
<CAPTION>
ACCUMULATED YEAR OF DATE
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED LIFE
- -------------------------- ----------- ------------ -------- ----
<S> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton,
UT...................... 351,154 1980 03/03/95 40
Radisson Hotel,
Schaumburg, IL.......... 96,309 1974 06/30/95 40
Sheraton Hotel, Colorado
Springs, CO.............. 275,696 1979 06/30/95 40
Hilton Hotel, Bellevue,
WA...................... 112,915 1979 08/04/95 40
Marriott Hotel, Somerset,
NJ...................... 287,968 1978 10/03/95 40
Renaissance Hotel,
Atlanta, GA............. 168,563 1982 11/15/95 40
Sheraton Hotel,
Charlotte, NC........... 46,446 1985 02/02/96 40
Holiday Inn, Cleveland,
OH...................... 20,022 1985 02/16/96 40
Radisson Plaza Hotel,
Irvine, CA.............. 20,815 1976 02/22/96 40
Georgetown Latham,
Washington, DC........... 11,083 1978 03/08/96 40
-----------
1,390,971
-----------
-----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) As of March 31, 1996, hotel property and equipment have a cost
of $167,954,992 for federal income tax purposes. Land 35,287,661 --
Hotel furniture and equipment....
21,014,852 1,718,098
Construction in progress......... 2,162,197 --
------------ -----------
Total hotel property and
equipment....................... $167,954,992 $3,109,069
------------ -----------
<CAPTION>
(1) As of March 31, 1996
<CAPTION>
of $167,954,992 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...................................................................... 52,668,726 104,238,519
Improvements and construction-in-progress......................................... 4,832,102 6,215,645
------------ -----------
Balance at end of period............................................................. 167,954,992 110,454,164
------------ -----------
Accumulated depreciation:
Balance at beginning of period...................................................... 1,742,573 --
Additions--depreciation expense..................................................... 1,366,496 1,742,573
------------ -----------
3,109,069 1,742,573
------------ -----------
Net hotel property and equipment at end of period.................................... $164,845,923 108,711,591
------------ -----------
------------ -----------
</TABLE>
F-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Radisson Plaza Hotel (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 Radisson Plaza Hotel'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-23
<PAGE>
RADISSON PLAZA HOTEL
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-24
<PAGE>
RADISSON PLAZA HOTEL
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-25
<PAGE>
RADISSON PLAZA HOTEL
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 Radisson Plaza Hotel (the "Hotel") is located near the Orange County
Airport in Irvine, California, approximately 45 miles from Los Angeles. The
Hotel opened in 1976. 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-26
<PAGE>
RADISSON PLAZA HOTEL
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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying statements of operations and cash flows of
the Atlanta Renaissance Hotel (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 Atlanta Renaissance Hotel'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-37
<PAGE>
ATLANTA RENAISSANCE HOTEL
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-38
<PAGE>
ATLANTA RENAISSANCE HOTEL
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-39
<PAGE>
ATLANTA RENAISSANCE HOTEL
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 Atlanta Renaissance (the "Hotel") is located near Atlanta Hartsfield
International Airport. 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.
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-40
<PAGE>
ATLANTA RENAISSANCE HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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-41
<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 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 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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying balance sheets of Arlington Hilton Hotel
(the "Hotel") as of March 31, 1996, December 31, 1995 and 1994 and the related
statements of operations, partners' capital (deficit), and cash flows for the
three months ended March 31, 1996 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 financial position of the Arlington Hilton Hotel's
as of March 31, 1996, December 31, 1995 and 1994 and the results of its
operations and its cash flows for the three months ended March 31, 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-57
<PAGE>
ARLINGTON HILTON HOTEL
BALANCE SHEETS
MARCH 31, 1996, DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 1,303,629 946,895 1,761,178
Accounts receivable................................ 603,899 344,817 385,876
Inventory and other assets......................... 137,481 59,080 170,022
------------ ----------- -----------
Total current assets............................... 2,045,009 1,350,792 2,317,076
------------ ----------- -----------
Property and equipment:
Land............................................. 2,000,000 2,000,000 2,000,000
Building......................................... 12,768,851 12,768,851 12,768,851
Furniture, fixtures and equipment................ 9,370,630 9,374,051 8,713,692
------------ ----------- -----------
24,139,481 24,142,902 23,482,543
Less--accumulated depreciation................... (13,719,723) (13,511,842) (12,688,428)
------------ ----------- -----------
Total property and equipment....................... 10,419,758 10,631,060 10,794,115
Restricted cash.................................... -- -- 215,868
------------ ----------- -----------
$ 12,464,767 11,981,852 13,327,059
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses.............. $ 541,458 457,035 1,484,950
Capital lease obligation........................... 68,067 81,509 122,771
Notes payable--general partner (note 4)............ -- -- 182,055
Notes payable (note 3)............................. -- -- 19,156,349
------------ ----------- -----------
Total liabilities.................................. 609,525 538,544 20,946,125
Partners' capital (deficit)........................ 11,855,242 11,443,308 (7,619,066)
------------ ----------- -----------
$ 12,464,767 11,981,852 13,327,059
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE>
ARLINGTON HILTON HOTEL
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rooms....................................... $1,663,094 6,309,256 5,875,281 5,453,149
Food and beverage........................... 707,634 2,846,102 2,755,550 2,708,330
Other operating departments................. 168,265 639,420 505,739 553,640
---------- --------- --------- ---------
2,538,993 9,794,778 9,136,570 8,715,119
---------- --------- --------- ---------
Operating costs and expenses:
Rooms....................................... 366,836 1,526,054 1,361,027 1,342,080
Food and beverage........................... 553,879 2,225,510 2,072,864 2,137,821
Other operating departments................. 93,271 351,577 301,793 276,276
Undistributed operating expenses:
Administrative and general.................. 241,304 1,044,680 1,347,488 1,252,493
Sales and marketing......................... 187,725 646,496 510,261 501,991
Management fees............................. 76,196 313,579 90,998 86,165
Property operating costs.................... 261,699 1,004,445 871,365 1,006,770
Property taxes, insurance and other......... 138,268 645,504 479,755 475,144
Depreciation and amortization............... 207,881 823,414 794,256 794,600
Interest expense............................ -- 257,494 927,325 337,114
---------- --------- --------- ---------
2,127,059 8,838,753 8,757,132 8,210,454
---------- --------- --------- ---------
Net income.................................... $ 411,934 956,025 379,438 504,665
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
ARLINGTON HILTON HOTEL
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
GENERAL AND
LIMITED PARTNERS LENDER
---------------- ----------
<S> <C> <C>
Balance at December 31, 1992...................................... $ (8,503,169) --
Net income...................................................... 504,665 --
---------------- ----------
Balance at December 31, 1993...................................... $ (7,998,504) --
Net income...................................................... 379,438 --
---------------- ----------
Balance at December 31, 1994...................................... $ (7,619,066) --
Net income through March 7, 1995................................ 175,661 --
---------------- ----------
Balance at March 7, 1995.......................................... $ (7,443,405) --
Transfer to Lender upon foreclosure on March 8, 1995............ 7,443,405 (7,443,405)
Conversion of notes payable to equity........................... -- 19,338,404
Distributions................................................... -- (1,232,055)
Net income from March 8 to December 31, 1995.................... -- 780,364
---------------- ----------
Balance at December 31, 1995...................................... $ -- 11,443,308
Net income...................................................... -- 411,934
---------------- ----------
Balance at March 31, 1996......................................... $ -- 11,855,242
---------------- ----------
---------------- ----------
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
ARLINGTON HILTON HOTEL
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 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................................ $ 411,934 956,025 379,438 504,665
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization......... 207,881 823,414 794,256 794,600
Interest added to loan payable to
General Partner...................... -- -- 18,777 13,482
Decrease (increase) in accounts
receivable........................... (259,082) 41,059 (9,969) 47,634
Decrease (increase) in inventory and
other assets......................... (78,401) 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........ 84,423 (1,027,915) 284,120 231,758
---------- ---------- --------- ----------
Total adjustments......................... (45,179) 163,368 1,546,918 1,049,815
---------- ---------- --------- ----------
Net cash provided by operating activities... 366,755 1,119,393 1,926,356 1,554,480
---------- ---------- --------- ----------
Cash flows from investing
activities--deletions (purchases) of
furniture and equipment..................... 3,421 (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................................. 356,734 (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...................................... $1,303,629 946,895 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-61
<PAGE>
ARLINGTON HILTON HOTEL
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996, DECEMBER 31, 1995 AND 1994
(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 balance
sheets and 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.
Cash and Cash Equivalents
The Hotel considers all instruments with an original maturity date of three
months or less to be cash equivalents.
Inventories
Inventories, consisting primarily of food and beverage, are stated at lower
of cost or net realizable value, using the first-in, first-out ("FIFO") method
of inventory valuation.
Property and Equipment
Property and equipment are reflected at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Building and building improvements............................... 25 years
Furniture and equipment.......................................... 5 years
</TABLE>
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.
F-62
<PAGE>
ARLINGTON HILTON HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
(3) LONG-TERM DEBT
As of March 31, 1996 and December 31, 1995, there is no long-term debt
related to the Hotel, as the property had been foreclosed upon on March 7, 1995.
At that date, the note was converted to equity and the holders of the note,
Arlington Investors, took possession of the property until April 16, 1996 when
the property was sold to EquiStar.
(4) 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 16, 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-63
<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-64
<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-65
<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-66
<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
Venturers, L.P., a limited partnership ("Airport Venturers"). 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
Venturers. 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-67
<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-68
<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 March 31, 1996 and December 31, 1995 and
1994, and the related statements of operations, partners' deficit, and cash
flows for the three months ended March 31, 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 the Ballston Hotel Limited
Partnership as of March 31, 1996 and December 31, 1995 and 1994, and the results
of its operations and its cash flows for the three months ended March 31, 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.
April 30, 1996
F-69
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 625,538 501,433 98,904
Certificate of deposit (note 7)....................... 105,596 101,833 250,000
Hotel inventory, at cost.............................. 52,544 51,635 52,794
Accounts receivable:
Trade............................................... 263,067 174,833 369,961
Affiliates (note 6)................................. -- -- 757,624
----------- ---------- ----------
Total accounts receivable, net........................ 263,067 174,833 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
$2,111,030 in 1996, $2,029,714 in 1995 and
$1,704,449 in 1994.................................... 10,899,602 10,980,918 11,306,183
Furniture, fixtures and equipment, net of
accumulated depreciation of $1,111,577 in 1996,
$1,060,156 in 1995 and $854,609 in 1994........... 1,932,307 1,983,728 1,742,714
Initial hotel supplies, net of accumulated
amortization of $190,556 in 1996, $183,187 in 1995
and $153,713 in 1994.............................. 251,557 258,926 288,400
Conversion costs, net of accumulated amortization of
$102,836 in 1996, $98,491 in 1995 and $81,111 in
1994............................................. 157,878 162,223 179,603
----------- ---------- ----------
Total hotel property.................................. 15,314,667 15,459,118 15,590,223
Investment in partnership (note 5).................... 2,263,748 2,259,061 2,332,760
Other Assets.......................................... 131,375 131,409 144,842
----------- ---------- ----------
$18,756,535 18,679,322 19,597,108
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses:
Affiliates (note 6)................................. $ 2,225,849 2,163,011 1,855,114
Trade............................................... 465,241 338,665 340,846
----------- ---------- ----------
Total accounts payable and accrued expenses........... 2,691,090 2,501,676 2,195,960
Notes payable (notes 4 and 6):
Financial institution............................... 17,079,121 17,079,121 17,201,202
Affiliates.......................................... 2,437,377 2,437,377 3,340,277
----------- ---------- ----------
Total notes payable................................... 19,516,498 19,516,498 20,541,479
----------- ---------- ----------
Total liabilities..................................... 22,207,588 22,018,174 22,737,439
Partners' deficit (note 3)............................ (3,451,053) (3,338,852) (3,140,331)
----------- ---------- ----------
Commitments (notes 4 and 7)........................... $18,756,535 18,679,322 19,597,108
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 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................................. $1,363,915 5,820,170 5,408,935 5,116,700
Food and beverage sales..................... 445,468 2,000,110 2,045,750 1,792,965
Telephone and other......................... 64,137 303,194 260,190 269,030
---------- --------- --------- ---------
Total hotel operating revenue................. 1,873,520 8,123,474 7,714,875 7,178,695
---------- --------- --------- ---------
Hotel operating expenses:
Department expenses......................... 731,008 3,140,757 3,100,077 2,810,690
Energy and engineering...................... 157,150 602,512 574,578 518,924
Sales and marketing......................... 162,556 659,284 604,457 629,567
General and administrative (note 6)......... 214,871 981,849 927,024 907,215
Management fee (note 7)..................... 56,206 243,704 231,446 215,359
Other....................................... 39,127 138,551 84,534 66,640
---------- --------- --------- ---------
Total hotel operating expenses................ 1,360,918 5,766,657 5,522,116 5,148,395
---------- --------- --------- ---------
Income from hotel operations.................. 512,602 2,356,817 2,192,759 2,030,300
---------- --------- --------- ---------
Fixed charges:
Financial costs (note 6).................... 370,682 1,571,261 1,438,463 1,327,641
Depreciation and amortization............... 144,759 611,645 700,566 723,020
Property insurance and taxes................ 72,586 266,115 249,394 251,608
Parking costs............................... 16,684 99,093 103,057 106,833
---------- --------- --------- ---------
Total fixed charges........................... 604,711 2,548,114 2,491,480 2,409,102
---------- --------- --------- ---------
Other income (expense):
Interest income............................. 3,786 40,169 15,010 12,228
Equity in income of partnership (note 5).... 4,687 36,510 41,105 31,309
Other....................................... (28,565) (83,903) (6,908) (80)
---------- --------- --------- ---------
Total other income (expense), net............. (20,092) (7,224) 49,207 43,457
---------- --------- --------- ---------
Net loss...................................... $ (112,201) (198,521) (249,514) (335,345)
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 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 loss............................................... (112,201) (1,122) (111,079)
----------- ------- ----------
Balance at March 31, 1996................................ $(3,451,053) (55,243) (3,395,810)
----------- ------- ----------
----------- ------- ----------
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 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 loss..................................... $(112,201) (198,521) (249,514) (335,345)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Depreciation and amortization............ 144,759 611,645 700,566 723,020
Increase (decrease) in provision for
doubtful accounts....................... 414 (8,072) 11,323 (1,375)
Decrease (increase) in certificates of
deposit................................. (3,763) 148,167 -- --
Equity in income of partnership.......... (4,687) (36,510) (41,105) (31,309)
Decrease (increase) in accounts
receivable.............................. (88,648) 960,824 (789,828) (87,582)
Decrease (increase) in hotel inventory... (909) 1,159 (930) (9,997)
Decrease (increase) in other assets...... (274) (20,258) (58,614) 42,031
Increase in accounts payable and accrued
expenses................................ 189,414 305,716 375,580 320,816
--------- ---------- --------- ---------
Total adjustments............................ 236,306 1,962,671 196,992 955,604
--------- ---------- --------- ---------
Net cash provided (used) by operating
activities.................................... 124,105 1,764,150 (52,522) 620,259
--------- ---------- --------- ---------
Cash flows from investing activities:
Additions to hotel property.................. -- (446,849) (133,901) (195,323)
Distributions from investee partnership...... -- 110,209 120,694 204,761
--------- ---------- --------- ---------
Net cash provided (used) by investing
activities.................................... -- (336,640) (13,207) 9,438
--------- ---------- --------- ---------
Cash flows from financing activities:
Principal payments on notes payable.......... -- (1,024,981) (110,072) (818,644)
Borrowings on notes payable.................. -- -- -- 20,000
--------- ---------- --------- ---------
Net cash used by financing activities.......... -- (1,024,981) (110,072) (798,644)
--------- ---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 124,105 402,529 (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..... $ 625,538 501,433 98,904 274,705
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Supplemental disclosure of cash flow
information:
Cash paid for interest....................... $ 307,844 1,263,364 1,135,123 1,120,853
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 operates as the Arlington
Renaissance Hotel at Ballston Metro Center (the "Hotel").
(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-74
<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.
Certificate of Deposit
The certificate of deposit is recorded at cost which approximates market
value and matures May 1996.
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:
General partner..................................................... 1.0%
Limited partners.................................................... 99.0
-----
100.0%
-----
-----
(4) NOTES PAYABLE
Notes payable at March 31, 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............................................... 2,437,377 2,437,377 3,340,277
----------- ----------- -----------
$19,516,498 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 and continues
to negotiate with the lender to refinance the note.
F-75
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE--(CONTINUED)
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.
(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 March 31,
1996 and December 31, 1995 and 1994, and the results of its operations for the
three months ended March 31, 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 35.25%, 35.48% and 35.60% as of
March 31, 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
<S> <C> <C> <C>
1996 1995 1994
---------- --------- ---------
<CAPTION>
<S> <C> <C> <C>
ASSETS
Cash................................................... $ 97,765 4,263 3,055
Accounts receivable.................................... 30,759 31,200 27,080
Garage property, net of accumulated depreciation....... 4,175,301 4,224,801 4,359,801
Other assets........................................... 4,521 4,521 4,203
---------- --------- ---------
$4,308,346 4,264,785 4,394,139
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND EQUITY
Total accounts payable and accrued liabilities......... $ 7,971 6,121 7,000
Equity:
The Partnership...................................... 1,511,396 1,501,136 1,552,543
Other partners....................................... 2,788,979 2,757,528 2,834,596
---------- --------- ---------
$4,308,346 4,264,785 4,394,139
---------- --------- ---------
---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
1996 1995 1994 1993
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Parking revenue...................................... $140,803 538,898 520,479 538,047
Loss on sales of parking spaces...................... (7,000) (7,000) (3,329) (20,149)
-------- ------- ------- -------
Total income......................................... 133,803 531,898 517,150 517,898
Operating expenses................................... 92,092 353,490 333,542 333,149
-------- ------- ------- -------
Net income........................................... $ 41,711 178,408 183,608 184,749
-------- ------- ------- -------
-------- ------- ------- -------
Equity in net income:
The Partnership.................................... $ 10,260 58,802 63,397 53,601
Other partners..................................... 31,451 119,606 120,211 131,148
-------- ------- ------- -------
$ 41,711 178,408 183,608 184,749
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
F-76
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PARTNERSHIP--(CONTINUED)
Note to Condensed Financial Statements
Contributed property is recorded at fair value at the date of contribution
as agreed to by the partners.
Reconciliation of Investment in Partnership and Equity in Income
The following is a reconciliation of the Partnership's investment in
partnership as of March 31, 1996 and December 31, 1995 and 1994 and equity in
income for the three months ended March 31, 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........................... $1,511,396 1,501,136 1,552,543 10,260 58,802 63,397 53,601
Adjustment for costs incurred in
excess of agreed-upon basis in
property............................ 752,352 757,925 780,217 (5,573) (22,292) (22,292) (22,292)
---------- --------- --------- ------ ------- ------- -------
$2,263,748 2,259,061 2,332,760 4,687 36,510 41,105 31,309
---------- --------- --------- ------ ------- ------- -------
---------- --------- --------- ------ ------- ------- -------
</TABLE>
(6) RELATED-PARTY TRANSACTIONS
Interest expense of approximately $63,000 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 $2,225,849, $2,163,011 and
$1,855,114 as of March 31, 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 $9,368 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;
F-77
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS--(CONTINUED)
(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.
Base management fees of $56,206 in 1996, $243,704 in 1995, $231,446 in 1994
and $215,359 in 1993 and reservation and advertising fees of $61,414 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.
In addition, the Partnership must fund a reserve account for capital
replacement at 3% of the Hotel's gross revenue annually. Funds set aside for
this reserve have been placed in a certificate of deposit.
F-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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 March 31, 1996, December 31, 1995 and 1994 and
related combined statements of operations, owners' capital and cash flows for
the three months ended March 31, 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 March 31, 1996, December 31, 1995 and 1994, and the
results of their combined operations and their combined cash flows for the three
months ended March 31, 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.
May 24, 1996
F-84
<PAGE>
ADDITIONAL HOTELS
COMBINED BALANCE SHEETS
MARCH 31, 1996, DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 2,694,965 2,100,027 1,795,991
Accounts receivable................................ 1,084,588 1,009,479 1,347,062
Inventory and other assets......................... 958,565 1,004,098 1,100,562
------------ ----------- -----------
Total current assets............................... 4,738,118 4,113,604 4,243,615
------------ ----------- -----------
Property and equipment:
Land............................................. 14,454,496 14,454,496 14,454,496
Building......................................... 48,818,317 48,816,467 48,792,386
Furniture, fixtures and equipment................ 20,054,004 19,968,593 18,993,252
------------ ----------- -----------
83,326,817 83,239,556 82,240,134
Less--accumulated depreciation................... (33,455,760) (32,623,613) (29,307,378)
------------ ----------- -----------
Total net property and equipment................... 49,871,057 50,615,943 52,932,756
------------ ----------- -----------
Total assets....................................... $ 54,609,175 54,729,547 57,176,371
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES AND OWNERS' CAPITAL
Accounts payable and accrued expenses.............. $ 2,953,396 2,778,452 3,022,008
Advance deposits................................... 100,764 41,927 45,436
------------ ----------- -----------
Total liabilities.................................. 3,054,160 2,820,379 3,067,444
Owners' capital.................................... 51,555,015 51,909,168 54,108,927
------------ ----------- -----------
Total liabilities and owners' capital.............. $ 54,609,175 54,729,547 57,176,371
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-85
<PAGE>
ADDITIONAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rooms.................................... $5,158,962 21,925,991 21,147,009 21,059,634
Food and beverage........................ 2,567,767 10,442,474 10,513,519 10,699,483
Other operating departments.............. 383,022 1,613,934 1,591,255 1,689,678
---------- ---------- ---------- ----------
8,109,751 33,982,399 33,251,783 33,448,795
---------- ---------- ---------- ----------
Operating costs and expenses:
Rooms.................................... 1,361,223 5,751,406 5,673,951 5,840,918
Food and beverage........................ 2,238,050 9,198,740 9,407,042 9,737,488
Other operating departments.............. 216,663 904,143 933,992 985,047
Undistributed operating expenses:
Administrative and general............... 823,812 3,342,110 3,314,554 3,431,329
Sales and marketing...................... 602,106 2,320,060 2,343,494 2,436,334
Management fees.......................... 181,554 1,065,175 1,051,710 1,260,199
Property operating costs................. 1,106,018 4,407,863 4,353,126 4,067,892
Property taxes, insurance and other...... 315,981 1,390,174 1,519,555 2,574,155
Depreciation and amortization............ 832,147 3,316,235 4,451,660 4,656,873
---------- ---------- ---------- ----------
7,677,554 31,695,906 33,049,084 34,990,235
---------- ---------- ---------- ----------
Net income (loss).......................... $ 432,197 2,286,493 202,699 (1,541,440)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-86
<PAGE>
ADDITIONAL HOTELS
COMBINED STATEMENTS OF OWNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 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............................................................... (875,000)
Net income.................................................................. 432,197
-----------
Balance at March 31, 1996..................................................... $51,555,015
-----------
-----------
</TABLE>
See accompanying notes to combined financial statements.
F-87
<PAGE>
ADDITIONAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 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)......................... $ 432,197 2,286,493 202,699 (1,541,440)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization......... 832,147 3,316,235 4,451,660 4,656,873
Decrease (increase) in accounts
receivable........................... (75,109) 337,583 (77,086) 119,328
Decrease (increase) in inventory and
other assets......................... 45,533 96,464 22,741 (18,439)
Decrease (increase) in notes
receivable.......................... -- -- 100,000 (100,000)
Increase (decrease) in accounts
payable and accrued expenses........ 174,944 (243,556) (312,119) (661,001)
Increase (decrease) in advance
deposits............................ 58,837 (3,509) (10,866) (115,904)
---------- ---------- ---------- ----------
Total adjustments......................... 1,036,352 3,503,217 4,174,330 3,880,857
---------- ---------- ---------- ----------
Net cash provided by operating activities... 1,468,549 5,789,710 4,377,029 2,339,417
---------- ---------- ---------- ----------
Cash flows from investing activities--
purchases of furniture and equipment........ (87,261) (999,422) (2,285,579) (1,737,036)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Capital contributions..................... 88,650 215,327 1,485,114 --
Capital distributions..................... (875,000) (4,701,579) (2,725,000) (658,109)
---------- ---------- ---------- ----------
Net cash used by financing activities....... (786,350) (4,486,252) (1,239,886) (658,109)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................ 594,938 304,036 851,564 (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...................................... $2,694,965 2,100,027 1,795,991 944,427
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-88
<PAGE>
ADDITIONAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 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 letters of intent 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-89
<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 $166,895 in 1996, $926,737 in 1995, $929,013 in 1994 and
$1,008,719 in 1993.
F-90
<PAGE>
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS 9,250,000 SHARES
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 [LOGO]
ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE CAPSTAR HOTEL
UNLAWFUL. NEITHER THE DELIVERY OF THIS INVESTORS, INC.
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, CAPSTAR HOTEL UNDER ANY COMMON STOCK
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS ----------------------
DATE. PROSPECTUS
------------------- - , 1996
TABLE OF CONTENTS ----------------------
-------------------
PAGE
---- LEHMAN BROTHERS
Prospectus Summary............... 3 GOLDMAN, SACHS & CO.
Risk Factors..................... 14 MERRILL LYNCH & CO.
Formation Transactions........... 20 SMITH BARNEY INC.
Use of Proceeds.................. 21
Dividend Policy.................. 21
Dilution......................... 22
Capitalization................... 23
Selected and Other Financial
Data........................... 24
Unaudited Pro Forma Financial
Statements..................... 27
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 34
The Company...................... 38
Business and Properties.......... 39
Management....................... 56
Principal Stockholders and Selling
Stockholder...................... 64
Certain Relationships and Related
Transactions..................... 65
Shares Available for Future Sale. 66
Description of Capital Stock..... 67
Underwriting..................... 70
Legal Matters.................... 71
Experts.......................... 71
Additional Information........... 72
UNTIL - (25 CALENDAR
DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN
THE COMMON STOCK WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
<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................................................. -
Blue Sky Fees and Expenses....................................... -
Accounting Fees and Expenses..................................... -
Legal Fees and Expenses.......................................... -
Printing and Engraving Expenses.................................. -
Registrar and Transfer Agent's Fees.............................. -
Miscellaneous Fees and Expenses.................................. -
Total........................................................ -
</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.
II-1
<PAGE>
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.
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* -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation of the Company
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 * -- Credit Facility
11* -- Computation of earnings per share
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)
24 -- Power of Attorney (see signature pages)
27 -- Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, New York, on
the 21st day of June, 1996.
CAPSTAR HOTEL INVESTORS, INC.
By: /s/ PAUL W. WHETSELL
..................................
Name: Paul W. Whetsell
Title: President, Chief Executive
Officer and Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul W. Whetsell and William M. Karnes, such
person's true and lawful attorney-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement or any Registration
Statement filed pursuant to Rule 462 under the Securities Act of 1933, and to
file the same with all exhibits thereto, and the other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and things requisite and necessary to be done, as
fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agents, or
any of them, or their or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and the foregoing Power of Attorney has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ PAUL W. WHETSELL President, Chief Executive Officer June 21, 1996
..................................... and Chairman of the Board
Paul W. Whetsell (Principal Executive Officer)
/s/ DAVID E. MCCASLIN Chief Operating Officer and Director June 21, 1996
.....................................
David E. McCaslin
/s/ WILLIAM M. KARNES Senior Executive Vice President, June 21, 1996
..................................... Finance and Chief Financial Officer
William M. Karnes (Principal Financial and Accounting
Officer)
/s/ DANIEL L. DOCTOROFF Director June 21, 1996
.....................................
Daniel L. Doctoroff
/s/ BRADFORD E. BERNSTEIN Director June 21, 1996
.....................................
Bradford E. Bernstein
/s/ JOSEPH MCCARTHY Director June 21, 1996
.....................................
Joseph McCarthy
/s/ WILLIAM S. JANES Director June 21, 1996
.....................................
William S. Janes
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NO.
- ----------- ------------------------------------------------------- --------
<S> <C> <C> <C>
1* -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation of the Company
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 * -- Credit Facility
11* -- Computation of earnings per share
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)
24 -- Power of Attorney (see signature pages)
27 -- Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
of
CAPSTAR HOTEL INVESTORS, INC.
The undersigned President and Chief Executive Officer, and Executive
Vice President, Finance and Chief Financial Officer of CapStar Hotel Investors,
Inc., a corporation organized and existing under the laws of the State of
Delaware, hereby certifies as follows:
1. The Corporation's name is CapStar Hotel Investors, Inc. The date
of filing of its original Certificate of Incorporation with the Secretary of
State was May 29, 1996.
2. The Amended and Restated Certificate of Incorporation amends the
Certificate of Incorporation of the Corporation, as now in effect, to increase
its authorized capital stock, and restates and integrates into a single
instrument all of the provisions as so amended. The Amended and Restated
Certificate of Incorporation was proposed by the Board of Directors and adopted
by the sole stockholder of the Corporation in the manner and by the vote
prescribed by Section 242 of the General Corporation Law of the State of
Delaware, the written consent of the sole stockholder having been given in
accordance with Section 228 of such Law, and is as follows:
1. Name. The name of the corporation is CapStar Hotel Investors,
----
Inc. (the "Corporation").
<PAGE>
2. Address; Registered Office and Agent. The address of the
------------------------------------
Corporation's registered office is Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801; and its registered agent at such address is The
Corporation Trust Company.
3. Purposes. The purpose of the Corporation is to engage in any
--------
lawful act or activity for which corporations may be organized under the General
Corporation Law.
4. Number of Shares. The total number of shares of stock that the
----------------
Corporation shall have authority to issue is seventy-four million (74,000,000)
shares, consisting of forty-nine million (49,000,000) shares of Common Stock,
par value of one cent ($0.01) per share (the "Common Stock") and twenty-five
million (25,000,000) shares of Preferred Stock, par value of one cent ($0.01)
per share (the "Preferred Stock").
5. Designation of Classes; Relative Rights, Etc. The designation,
---------------------------------------------
relative rights, preferences and limitations of the shares of each class are as
follows:
5.1 Preferred Stock. The shares of Preferred Stock may be
---------------
issued from time to time in one or more series of any number of shares, provided
that the aggregate number of shares issued and not canceled of any and all such
series shall not exceed the total number of shares of Preferred Stock
hereinabove authorized, and with such powers, preferences, rights and
qualifications, limitations or restrictions thereof, and such distinctive serial
designations, all as shall hereafter be stated and expressed in the resolution
or resolutions adopted by the Board of Directors of the Corporation (the "Board
of Directors") providing for the issue of such shares of Preferred Stock from
time to time pursuant to authority to do so which is hereby vested in the Board
of Directors. Each series of shares of Preferred Stock (a) may have such voting
rights or powers, full or limited, or may be without voting rights or powers;
(b) may be subject to redemption at such time or times and at such prices;
(c) may be entitled to receive dividends (which may be cumulative or non-
cumulative) at such rate or rates, on such conditions and at such times, and
payable in preference to, or in such relation to, the dividends payable on any
other class or classes or series of stock; (d) may have such rights upon the
voluntary or involuntary liquidation, winding up or dissolution of, or upon any
distribution of the assets of,
2
<PAGE>
the Corporation; (e) may be made convertible into or exchangeable for, shares of
any other class or classes or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments; (f) may be entitled to the benefit of a
sinking fund to be applied to the purchase or redemption of shares of such
series in such amount or amounts; (g) may be entitled to the benefit of
conditions and restrictions upon the creation of indebtedness of the Corporation
or any subsidiary, upon the issue of any additional shares (including additional
shares of such series or of any other series) and upon the payment of dividends
or the making of other distributions on, and the purchase, redemption or other
acquisition by the Corporation or any subsidiary of, any outstanding shares of
the Corporation and (h) may have such other relative, participating, optional or
other special rights, qualifications, limitations or restrictions thereof; all
as shall be stated in said resolution or resolutions providing for the issue of
such shares of Preferred Stock. Any of the voting powers, designations,
preferences, rights and qualifications, limitations or restrictions of any such
series of Preferred Stock may be made dependent upon facts ascertainable outside
of the resolution or resolutions adopted by the Board of Directors providing for
the issue of such Preferred Stock pursuant to the authority vested in the Board
by this Section 5.1, provided that the manner in which such facts shall operate
upon the voting powers, designations, preferences, rights and qualifications,
limitations or restrictions of such series of Preferred Stock is clearly and
expressly set forth in the resolution or resolutions providing for the issue of
such Preferred Stock. The term "facts" as used in the preceding sentence shall
have the meaning given to it in section 151(a) of the Delaware General
Corporation Law. Shares of Preferred Stock of any series that have been
redeemed (whether through the operation of a sinking fund or otherwise) or that
if convertible or exchangeable have been converted into or exchanged for shares
of any other class or classes, shall have the status of authorized and unissued
shares of Preferred Stock undesignated as to series and may be reissued as a
part of the series of which they were originally a part or as part of a new
series of shares of Preferred Stock to be created by resolution or resolutions
of the Board of Directors or as part of any other series of shares of Preferred
Stock, all subject to any conditions or restrictions on issuance set forth in
the resolution or resolutions adopted by the Board of Directors providing for
the issue of any series of shares of Preferred Stock.
3
<PAGE>
5.2 Common Stock. Subject to the provisions of any applicable
------------
law or of the By-laws of the Corporation, as from time to time amended, with
respect to the closing of the transfer books or the fixing of a record date for
the determination of stockholders entitled to vote and except as otherwise
provided by law or by the resolution or resolutions providing for the issue of
any series of shares of Preferred Stock, the holders of outstanding shares of
Common Stock shall exclusively possess voting power for the election of
directors and for all other purposes, each holder of record of shares of Common
Stock being entitled to one vote for each share of Common Stock standing in his
or her name on the books of the Corporation. Except as otherwise provided by
the resolution or resolutions providing for the issue of any series of shares of
Preferred Stock, the holders of shares of Common Stock shall be entitled, to the
exclusion of the holders of shares of Preferred Stock of any and all series, to
receive such dividends as from time to time may be declared by the Board of
Directors. In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment shall have been
made to the holders of shares of Preferred Stock of the full amount to which
they shall be entitled pursuant to the resolution or resolutions providing for
the issue of any series of shares of Preferred Stock, the holders of shares of
Common Stock shall be entitled, to the exclusion of the holders of shares of
Preferred Stock of any and all series, to share, ratably according to the number
of shares of Common Stock held by them, in all remaining assets of the
Corporation available for distribution to its stockholders.
5.3 Consideration. Subject to the provisions of this
-------------
Certificate of Incorporation and except as otherwise provided by law, the stock
of the Corporation, regardless of class, may be issued for such consideration
and for such corporate purposes as the Board of Directors may from time to time
determine.
6. Election of Directors;. Members of the Board of Directors of the
----------------------
Corporation (the "Board") may be elected either by written ballot or by voice
vote.
7. Limitation of Liability. No director of the Corporation shall be
-----------------------
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that this provision shall
not eliminate or limit the liability of a director (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions
4
<PAGE>
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) under section 174 of the General Corporation Law or (d) for any
transaction from which the director derived any improper personal benefits.
Any repeal or modification of the foregoing provision shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
8. Indemnification.
---------------
8.1 To the extent not prohibited by law, the Corporation shall
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees, disbursements and other
charges). Persons who are not directors or officers of the Corporation (or
otherwise entitled to indemnification pursuant to the preceding sentence) may
be similarly indemnified in respect of service to the Corporation or to an Other
Entity at the request of the Corporation to the extent the Board at any time
specifies that such persons are entitled to the benefits of this Section 8.
8.2 The Corporation shall, from time to time, reimburse or
advance to any director or officer or other person entitled to indemnification
hereunder the funds necessary for payment of expenses, including attorneys' fees
and disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
-------- -------
the General Corporation Law, such expenses incurred by or on behalf of any
director or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation of an under-
taking, by or on behalf of such director or officer (or other person indemnified
hereunder), to repay any such amount so advanced if it shall
5
<PAGE>
ultimately be determined by final judicial decision from which there is no
further right of appeal that such director, officer or other person is not
entitled to be indemnified for such expenses.
8.3 The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Section 8
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or reimbursement or advancement of expenses may have or here-
after be entitled under any statute, this Certificate of Incorporation, the By-
laws of the Corporation (the "By-laws"), any agreement, any vote of stockholders
or disinterested directors or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office.
8.4 The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Section 8
shall continue as to a person who has ceased to be a director or officer (or
other person indemnified hereunder) and shall inure to the benefit of the
executors, administrators, legatees and distributees of such person.
8.5 The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of an Other Entity, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Section 8, the By-laws or under section 145 of the
General Corporation Law or any other provision of law.
8.6 The provisions of this Section 8 shall be a contract between
the Corporation, on the one hand, and each director and officer who serves in
such capacity at any time while this Section 8 is in effect and any other person
entitled to indemnification hereunder, on the other hand, pursuant to which the
Corporation and each such director, officer, or other person intend to be, and
shall be, legally bound. No repeal or modification of this Section 8 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or thereafter arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
6
<PAGE>
8.7 The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Section 8
shall be enforceable by any person entitled to such indemnification or
reimbursement or advancement of expenses in any court of competent jurisdiction.
The burden of proving that such indemnification or reimbursement or advancement
of expenses is not appropriate shall be on the Corporation. Neither the failure
of the Corporation (including its Board, its independent legal counsel and its
stockholders) to have made a determination prior to the commencement of such
action that such indemnification or reimbursement or advancement of expenses is
proper in the circumstances nor an actual determination by the Corporation
(including its Board, its independent legal counsel and its stockholders) that
such person is not entitled to such indemnification or reimbursement or
advancement of expenses shall constitute a defense to the action or create a
presumption that such person is not so entitled. Such a person shall also be
indemnified for any expenses incurred in connection with successfully establish-
ing his or her right to such indemnification or reimbursement or advancement of
expenses, in whole or in part, in any such proceeding.
8.8 Any director or officer of the Corporation serving in any
capacity (a) another corporation of which a majority of the shares entitled to
vote in the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.
8.9 Any person entitled to be indemnified or to reimbursement or
advancement of expenses as a matter of right pursuant to this Section 8 may
elect to have the right to indemnification or reimbursement or advancement of
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the applicable Proceeding,
to the extent permitted by law, or on the basis of the applicable law in effect
at the time such indemnification or reimbursement or advancement of expenses is
sought. Such election shall be made, by a notice in writing to the Corporation,
at the time indemnification or reimbursement or advancement of expenses is
sought; provided, however, that if no such notice is given, the right to
-------- -------
to indemnification or reimbursement or advancement of expenses shall be
determined by the law in effect at the time indemnification or reimbursement
or advancement of expenses is sought.
7
<PAGE>
9. Adoption, Amendment and/or Repeal of By-Laws. The Board may from
--------------------------------------------
time to time adopt, amend or repeal the By-laws of the Corporation; provided,
--------
however, that any By-laws adopted or amended by the Board may be amended or
- -------
repealed, and any By-laws may be adopted, by the stockholders of the Corporation
by vote of a majority of the holders of shares of stock of the Corporation
entitled to vote in the election of directors of the Corporation.
IN WITNESS WHEREOF, the undersigned have signed this instrument the
21st day of June, 1996.
/s/ Paul W. Whetsell
------------------------------
Paul W. Whetsell
President and
Chief Executive Officer
Attest: /s/ William M. Karnes
------------------------------
William M. Karnes
Senior Vice President, Finance
and Chief Financial Officer
8
EXHIBIT 3.2
BY-LAWS
of
CAPSTAR HOTEL INVESTORS, INC.
(A Delaware Corporation)
________________________
ARTICLE 1
DEFINITIONS
-----------
As used in these By-laws, unless the context otherwise requires, the
term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as
amended from time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "Chairman" means the Chairman of the Board of Directors of the
Corporation.
1.7 "Corporation" means CapStar Hotel Investors, Inc.
1.8 "Directors" means directors of the Corporation.
<PAGE>
2
1.9 "Entire Board" means all directors of the Corporation in office,
whether or not present at a meeting of the Board, but disregarding vacancies.
1.10 "General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended from time to time.
1.11 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.12 "President" means the President of the Corporation.
1.13 "Secretary" means the Secretary of the Corporation.
1.14 "Stockholders" means stockholders of the Corporation.
1.15 "Treasurer" means the Treasurer of the Corporation.
1.16 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
------------
2.1 Place of Meetings. Every meeting of stockholders shall be held
-----------------
at the office of the Corporation or at such other place within or without the
State of Delaware as shall be specified or fixed in the notice of such meeting
or in the waiver of notice thereof.
<PAGE>
3
2.2 Annual Meeting. A meeting of stockholders shall be held annually
--------------
for the election of Directors and the transaction of other business at such hour
and on such business day in January or February or as may be determined by the
Board and designated in the notice of meeting.
2.3 Deferred Meeting for Election of Directors, Etc. If the annual
------------------------------------------------
meeting of stockholders for the election of Directors and the transaction of
other business is not held within the months specified in Section 2.2 hereof,
the Board shall call a meeting of stockholders for the election of Directors and
the transaction of other business as soon thereafter as convenient.
2.4 Other Special Meetings. A special meeting of stockholders (other
----------------------
than a special meeting for the election of Directors), unless otherwise
prescribed by statute, may be called at any time by the Board or by the
President or by the Secretary. At any special meeting of stockholders only such
business may be transacted as is related to the purpose or purposes of such
meeting set forth in the notice thereof given pursuant to Section 2.6 hereof or
in any waiver of notice thereof given pursuant to Section 2.7 hereof.
2.5 Fixing Record Date. For the purpose of (a) determining the
------------------
Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders
or any adjournment thereof, (ii) unless otherwise provided in the Certificate of
Incorporation to express consent to corporate action in
<PAGE>
4
writing without a meeting or (iii) to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock; or (b) any other lawful
action, the Board may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date was adopted by the Board
and which record date shall not be (x) in the case of clause (a)(i) above, more
than sixty nor less than ten days before the date of such meeting, (y) in the
case of clause (a)(ii) above, more than 10 days after the date upon which the
resolution fixing the record date was adopted by the Board and (z) in the case
of clause (a)(iii) or (b) above, more than sixty days prior to such action. If
no such record date is fixed:
2.5.1 the record date for determining Stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the
day on which the meeting is held;
2.5.2 the record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting (unless
otherwise provided in the Certificate of Incorporation), when no prior
action by the Board is required under the General
<PAGE>
5
Corporation Law, shall be the first day on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders
are recorded; and when prior action by the Board is required under the
General Corporation Law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall
be at the close of business on the date on which the Board adopts the
resolution taking such prior action; and
2.5.3 the record date for determining stockholders for any
purpose other than those specified in Sections 2.5.1 and 2.5.2 shall be at
the close of business on the day on which the Board adopts the resolution
relating thereto.
When a determination of Stockholders entitled to notice of or to vote at any
meeting of Stockholders has been made as provided in this Section 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting. Delivery made to the Corporation's
registered office in accordance with
<PAGE>
6
Section 2.5.2 shall be by hand or by certified or registered mail, return
receipt requested.
2.6 Notice of Meetings of Stockholders. Except as otherwise provided
----------------------------------
in Sections 2.5 and 2.7 hereof, whenever under the provisions of any statute,
the Certificate of Incorporation or these By-laws, Stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten nor more than sixty days before the date of the meeting, to each
Stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the Stockholder at his or her address as it
appears on the records of the Corporation. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the Corporation that the notice
required by this Section 2.6 has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. When a meeting is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
<PAGE>
7
adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted at the meeting as originally called.
If, however, the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each Stockholder of record entitled to
vote at the meeting.
2.7 Waivers of Notice. Whenever the giving of any notice is required
-----------------
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the Stockholder or Stockholders entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a Stockholder at a meeting shall
constitute a waiver of notice of such meeting except when the Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Stockholders need be
specified in any written waiver of notice unless so required by statute, the
Certificate of Incorporation or these By-laws.
2.8 List of Stockholders. The Secretary shall prepare and make, or
--------------------
cause to be prepared and made, at least ten days before every meeting of
Stockholders, a complete
<PAGE>
8
list of the Stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each Stockholder and the number
of shares registered in the name of each Stockholder. Such list shall be open
to the examination of any Stockholder, the Stockholder's agent, or attorney, at
the Stockholder's expense, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any Stockholder who is present. The Corporation shall maintain the
Stockholder list in written form or in another form capable of conversion into
written form within a reasonable time. Upon the willful neglect or refusal of
the Directors to produce such a list at any meeting for the election of
Directors, they shall be ineligible for election to any office at such meeting.
The stock ledger shall be the only evidence as to who are the Stockholders
entitled to examine the stock ledger, the list of Stockholders or the books of
the Corporation, or to vote in person or by proxy at any meeting of
Stockholders.
2.9 Quorum of Stockholders; Adjournment. Except as otherwise
-----------------------------------
provided by any statute, the Certificate of
<PAGE>
9
Incorporation or these By-laws, the holders of one-third of all outstanding
shares of stock entitled to vote at any meeting of Stockholders, present in
person or represented by proxy, shall constitute a quorum for the transaction of
any business at such meeting. When a quorum is once present to organize a
meeting of Stockholders, it is not broken by the subsequent withdrawal of any
Stockholders. The holders of a majority of the shares of stock present in
person or represented by proxy at any meeting of Stockholders, including an
adjourned meeting, whether or not a quorum is present, may adjourn such meeting
to another time and place. Shares of its own stock belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
-------- -------
Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
2.10 Voting; Proxies. Unless otherwise provided in the Certificate
---------------
of Incorporation, every Stockholder of record shall be entitled at every meeting
of Stockholders to one vote for each share of capital stock standing in his or
her name on the record of Stockholders determined in accordance with Section 2.5
hereof. If the Certificate of
<PAGE>
10
Incorporation provides for more or less than one vote for any share on any
matter, each reference in the By-laws or the General Corporation Law to a
majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock. The provisions of Sections 212 and 217
of the General Corporation Law shall apply in determining whether any shares of
capital stock may be voted and the persons, if any, entitled to vote such
shares; but the Corporation shall be protected in assuming that the persons in
whose names shares of capital stock stand on the stock ledger of the Corporation
are entitled to vote such shares. Holders of redeemable shares of stock are not
entitled to vote after the notice of redemption is mailed to such holders and a
sum sufficient to redeem the stocks has been deposited with a bank, trust
company, or other financial institution under an irrevocable obligation to pay
the holders the redemption price on surrender of the shares of stock. At any
meeting of Stockholders (at which a quorum was present to organize the meeting),
all matters, except as otherwise provided by statute or by the Certificate of
Incorporation or by these By-laws, shall be decided by a majority of the votes
cast at such meeting by the holders of shares present in person or represented
by proxy and entitled to vote thereon, whether or not a quorum is present when
the vote is taken. All elections of Directors shall be by written ballot unless
otherwise provided in
<PAGE>
11
the Certificate of Incorporation. In voting on any other question on which a
vote by ballot is required by law or is demanded by any Stockholder entitled to
vote, the voting shall be by ballot. Each ballot shall be signed by the
Stockholder voting or the Stockholder's proxy and shall state the number of
shares voted. On all other questions, the voting may be viva voce. Each
---- ----
Stockholder entitled to vote at a meeting of Stockholders or to express consent
or dissent to corporate action in writing without a meeting may authorize
another person or persons to act for such Stockholder by proxy. The validity
and enforceability of any proxy shall be determined in accordance with Section
212 of the General Corporation Law. A Stockholder may revoke any proxy that is
not irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or by delivering a proxy in accordance
with applicable law bearing a later date to the Secretary.
2.11 Voting Procedures and Inspectors of Election at Meetings of
-----------------------------------------------------------
Stockholders. The Board, in advance of any meeting of Stockholders, may appoint
- ------------
one or more inspectors to act at the meeting and make a written report thereof.
The Board may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate has been appointed
or is able to act at a meeting, the person presiding at the meeting may appoint,
and on the request of any Stockholder entitled to
<PAGE>
12
vote thereat shall appoint, one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall (a) ascertain the number of shares outstanding and the voting power of
each, (b) determine the shares represented at the meeting and the validity of
proxies and ballots, (c) count all votes and ballots, (d) determine and retain
for a reasonable period a record of the disposition of any challenges made to
any determination by the inspectors, and (e) certify their determination of the
number of shares represented at the meeting and their count of all votes and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of their duties. Unless otherwise
provided by the Board, the date and time of the opening and the closing of the
polls for each matter upon which the Stockholders will vote at a meeting shall
be determined by the person presiding at the meeting and shall be announced at
the meeting. No ballot, proxies or votes, or any revocation thereof or change
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery of the State of Delaware upon application by a
Stockholder shall determine otherwise.
<PAGE>
13
2.12 Organization. At each meeting of Stockholders, the President,
------------
or in the absence of the President, the Chairman, or if there is no Chairman or
if there be one and the Chairman is absent, a Vice President, and in case more
than one Vice President shall be present, that Vice President designated by the
Board (or in the absence of any such designation, the most senior Vice
President, based on age, present), shall act as chairman of the meeting. The
Secretary, or in his or her absence one of the Assistant Secretaries, shall act
as secretary of the meeting. In case none of the officers above designated to
act as chairman or secretary of the meeting, respectively, shall be present, a
chairman or a secretary of the meeting, as the case may be, shall be chosen by a
majority of the votes cast at such meeting by the holders of shares of capital
stock present in person or represented by proxy and entitled to vote at the
meeting.
2.13 Order of Business. The order of business at all meetings of
-----------------
Stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
2.14 Written Consent of Stockholders Without a Meeting. Unless
-------------------------------------------------
otherwise provided in the Certificate of
<PAGE>
14
Incorporation, any action required by the General Corporation Law to be taken at
any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered (by hand or by
certified or registered mail, return receipt requested) to the Corporation by
delivery to its registered office in the State of Delaware, its principal place
of business, or an officer or agent of the Corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Every
written consent shall bear the date of signature of each stockholder who signs
the consent and no written consent shall be effective to take the corporate
action referred to therein unless, within 60 days of the earliest dated consent
delivered in the manner required by this Section 2.14, written consents signed
by a sufficient number of holders to take action are delivered to the
Corporation as aforesaid. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
Stockholders who have not consented in writing.
<PAGE>
15
ARTICLE 3
Directors
---------
3.1 General Powers. Except as otherwise provided in the Certificate
--------------
of Incorporation, the business and affairs of the Corporation shall be managed
by or under the direction of the Board. The Board may adopt such rules and
regulations, not inconsistent with the Certificate of Incorporation or these By-
laws or applicable laws, as it may deem proper for the conduct of its meetings
and the management of the Corporation. In addition to the powers expressly
conferred by these By-laws, the Board may exercise all powers and perform all
acts that are not required, by these By-laws or the Certificate of Incorporation
or by statute, to be exercised and performed by the Stockholders.
3.2 Number; Term of Office. The Board shall consist of one or more
----------------------
members. The number of Directors shall be fixed initially by the incorporator
and may thereafter be changed from time to time by action of the stockholders or
by action of the Board. Directors need not be stockholders. Each Director
shall hold office until a successor is elected and qualified or until the
Director's death, resignation or removal.
3.3 Election. Directors shall, except as otherwise required by
--------
statute or by the Certificate of Incorporation, be elected by a plurality of the
votes cast
<PAGE>
16
at a meeting of stockholders by the holders of shares entitled to vote in the
election.
3.4 Newly Created Directorships and Vacancies. Unless otherwise
-----------------------------------------
provided in the Certificate of Incorporation, newly created Directorships
resulting from an increase in the number of Directors and vacancies occurring in
the Board for any other reason, including the removal of Directors without
cause, may be filled by the affirmative votes of a majority of the entire Board,
although less than a quorum, or by a sole remaining Director, or may be elected
by a plurality of the votes cast by the holders of shares of capital stock
entitled to vote in the election at a special meeting of stockholders called for
that purpose. A Director elected to fill a vacancy shall be elected to hold
office until a successor is elected and qualified, or until the Director's
earlier death, resignation or removal.
3.5 Resignation. Any Director may resign at any time by written
-----------
notice to the Corporation. Such resignation shall take effect at the time
therein specified, and, unless otherwise specified in such resignation, the
acceptance of such resignation shall not be necessary to make it effective.
3.6 Removal. Subject to the provisions of Section 141(k) of the
-------
General Corporation Law, any or all of the Directors may be removed with or
without cause by vote
<PAGE>
17
of the holders of a majority of the shares then entitled to vote at an election
of Directors.
3.7 Compensation. Each Director, in consideration of his or her
------------
service as such, shall be entitled to receive from the Corporation such amount
per annum or such fees for attendance at Directors' meetings, or both, as the
Board may from time to time determine, together with reimbursement for the rea-
sonable out-of-pocket expenses, if any, incurred by such Director in connection
with the performance of his or her duties. Each Director who shall serve as a
member of any committee of Directors in consideration of serving as such shall
be entitled to such additional amount per annum or such fees for attendance at
committee meetings, or both, as the Board may from time to time determine,
together with reimbursement for the reasonable out-of-pocket expenses, if any,
incurred by such Director in the performance of his or her duties. Nothing
contained in this Section 3.7 shall preclude any Director from serving the
Corporation or its subsidiaries in any other capacity and receiving proper
compensation therefor.
3.8 Times and Places of Meetings. The Board may hold meetings, both
----------------------------
regular and special, either within or without the State of Delaware. The times
and places for holding meetings of the Board may be fixed from time to time by
resolution of the Board or (unless contrary to a resolution of the Board) in the
notice of the meeting.
<PAGE>
18
3.9 Annual Meetings. On the day when and at the place where the
---------------
annual meeting of stockholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, for the purposes of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
may be held at any other time and place specified in a notice given as provided
in Section 3.11 hereof for special meetings of the Board or in a waiver of
notice thereof.
3.10 Regular Meetings. Regular meetings of the Board may be held
----------------
without notice at such times and at such places as shall from time to time be
determined by the Board.
3.11 Special Meetings. Special meetings of the Board may be called
----------------
by the Chairman, the President or the Secretary or by any two or more Directors
then serving on at least one day's notice to each Director given by one of the
means specified in Section 3.14 hereof other than by mail, or on at least three
days' notice if given by mail. Special meetings shall be called by the
Chairman, President or Secretary in like manner and on like notice on the
written request of any two or more of the Directors then serving.
3.12 Telephone Meetings. Directors or members of any committee
------------------
designated by the Board may participate in a meeting of the Board or of such
committee by means of
<PAGE>
19
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 3.12 shall constitute presence in person at
such meeting.
3.13 Adjourned Meetings. A majority of the Directors present at any
------------------
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. At least one day's
notice of any adjourned meeting of the Board shall be given to each Director
whether or not present at the time of the adjournment, if such notice shall be
given by one of the means specified in Section 3.14 hereof other than by mail,
or at least three days' notice if by mail. Any business may be transacted at an
adjourned meeting that might have been transacted at the meeting as originally
called.
3.14 Notice Procedure. Subject to Sections 3.11 and 3.17 hereof,
----------------
whenever, under the provisions of any statute, the Certificate of Incorporation
or these By-laws, notice is required to be given to any Director, such notice
shall be deemed given effectively if given in person or by telephone, by mail
addressed to such Director at such Director's address as it appears on the
records of the Corporation, with postage thereon prepaid, or by telegram, telex,
telecopy or similar means addressed as aforesaid.
<PAGE>
20
3.15 Waiver of Notice. Whenever the giving of any notice is required
----------------
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the person or persons entitled to said notice, whether
before or after the event as to which such notice is required, shall be deemed
equivalent to notice. Attendance by a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Directors or a committee of Directors
need be specified in any written waiver of notice unless so required by statute,
the Certificate of Incorporation or these By-laws.
3.16 Organization. At each meeting of the Board, the Chairman, or in
------------
the absence of the Chairman the President, or in the absence of the President a
chairman chosen by a majority of the Directors present, shall preside. The
Secretary shall act as secretary at each meeting of the Board. In case the
Secretary shall be absent from any meeting of the Board, an Assistant Secretary
shall perform the duties of secretary at such meeting; and in the absence from
any such meeting of the Secretary and all
<PAGE>
21
Assistant Secretaries, the person presiding at the meeting may appoint any
person to act as secretary of the meeting.
3.17 Quorum of Directors. The presence in person of a majority of
-------------------
the entire Board shall be necessary and sufficient to constitute a quorum for
the transaction of business at any meeting of the Board, but a majority of a
smaller number may adjourn any such meeting to a later date. 3.18
Action by Majority Vote. Except as otherwise expressly required by statute, the
- -----------------------
Certificate of Incorporation or these By-laws, the act of a majority of the
Directors present at a meeting at which a quorum is present shall be the act of
the Board.
3.19 Action Without Meeting. Unless otherwise restricted by the
----------------------
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all Directors or members of such committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
ARTICLE 4
COMMITTEES OF THE BOARD
-----------------------
The Board may, by resolution passed by a vote of the entire Board,
designate one or more committees, each committee to consist of one or more of
the Directors of the Corporation. The Board may designate one or more Directors
<PAGE>
22
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. If a member of a
committee shall be absent from any meeting, or disqualified from voting thereat,
the remaining member or members present and not disqualified from voting,
whether or not such member or members constitute a quorum, may, by a unanimous
vote, appoint another member of the Board to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board passed as aforesaid, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be impressed on all papers that may require it, but no such
committee shall have the power or authority of the Board in reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation under section 251 or section 252 of the General Corporation Law,
recommending to the stockholders (a) the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, or (b) a dissolution
of the Corporation or a revocation of a dissolution, or amending the By-laws of
the Corporation; and, unless the resolution designating it expressly so
provides, no such committee shall have the power and authority to declare a
dividend, to authorize the issuance
<PAGE>
23
of stock or to adopt a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law. Unless otherwise specified in the
resolution of the Board designating a committee, at all meetings of such
committee a majority of the total number of members of the committee shall
constitute a quorum for the transaction of business, and the vote of a majority
of the members of the committee present at any meeting at which there is a
quorum shall be the act of the committee. Each committee shall keep regular
minutes of its meetings. Unless the Board otherwise provides, each committee
designated by the Board may make, alter and repeal rules for the conduct of its
business. In the absence of such rules each committee shall conduct its
business in the same manner as the Board conducts its business pursuant to
Article 3 of these By-laws.
ARTICLE 5
OFFICERS
--------
5.1 Positions. The officers of the Corporation shall be a President,
---------
a Secretary, a Treasurer and such other officers as the Board may appoint,
including a Chairman, one or more Vice Presidents and one or more Assistant
Secretaries and Assistant Treasurers, who shall exercise such powers and perform
such duties as shall be determined from time to time by the Board. The Board
may designate one or more Vice Presidents as Executive Vice Presidents and may
use descriptive words or phrases to
<PAGE>
24
designate the standing, seniority or areas of special competence of the Vice
Presidents elected or appointed by it. Any number of offices may be held by the
same person unless the Certificate of Incorporation or these By-laws otherwise
provide.
5.2 Appointment. The officers of the Corporation shall be chosen by
-----------
the Board at its annual meeting or at such other time or times as the Board
shall determine.
5.3 Compensation. The compensation of all officers of the
------------
Corporation shall be fixed by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that the officer
is also a Director.
5.4 Term of Office. Each officer of the Corporation shall hold
--------------
office for the term for which he or she is elected and until such officer's
successor is chosen and qualifies or until such officer's earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. Such resignation shall take effect at the date of receipt
of such notice or at such later time as is therein specified, and, unless
otherwise specified, the acceptance of such resignation shall not be necessary
to make it effective. The resignation of an officer shall be without prejudice
to the contract rights of the Corporation, if any. Any officer elected or
appointed by the Board may be removed at any
<PAGE>
25
time, with or without cause, by vote of a majority of the entire Board. Any
vacancy occurring in any office of the Corporation shall be filled by the Board.
The removal of an officer without cause shall be without prejudice to the
officer's contract rights, if any. The election or appointment of an officer
shall not of itself create contract rights.
5.5 Fidelity Bonds. The Corporation may secure the fidelity of any
--------------
or all of its officers or agents by bond or otherwise.
5.6 Chairman. The Chairman, if one shall have been appointed, shall
--------
preside at all meetings of the Board and shall exercise such powers and perform
such other duties as shall be determined from time to time by the Board.
5.7 President. The President shall be the Chief Executive Officer of
---------
the Corporation and shall have general supervision over the business of the
Corporation, subject, however, to the control of the Board and of any duly
authorized committee of Directors. The President shall preside at all meetings
of the Stockholders and at all meetings of the Board at which the Chairman (if
there be one) is not present. The President may sign and execute in the name of
the Corporation deeds, mortgages, bonds, contracts and other instruments except
in cases in which the signing and execution thereof shall be expressly delegated
by the Board or by these By-laws to some other officer or agent of the
<PAGE>
26
Corporation or shall be required by statute otherwise to be signed or executed
and, in general, the President shall perform all duties incident to the office
of President of a corporation and such other duties as may from time to time be
assigned to the President by the Board.
5.8 Vice Presidents. At the request of the President, or, in the
---------------
President's absence, at the request of the Board, the Vice Presidents shall (in
such order as may be designated by the Board or, in the absence of any such
designation, in order of seniority based on age) perform all of the duties of
the President and, in so performing, shall have all the powers of, and be
subject to all restrictions upon, the President. Any Vice President may sign
and execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments, except in cases in which the signing and execution thereof
shall be expressly delegated by the Board or by these By-laws to some other
officer or agent of the Corporation, or shall be required by statute otherwise
to be signed or executed, and each Vice President shall perform such other
duties as from time to time may be assigned to such Vice President by the Board
or by the President.
5.9 Secretary. The Secretary shall attend all meetings of the Board
---------
and of the Stockholders and shall record all the proceedings of the meetings of
the Board and of the stockholders in a book to be kept for that purpose,
<PAGE>
27
and shall perform like duties for committees of the Board, when required. The
Secretary shall give, or cause to be given, notice of all special meetings of
the Board and of the stockholders and shall perform such other duties as may be
prescribed by the Board or by the President, under whose supervision the
Secretary shall be. The Secretary shall have custody of the corporate seal of
the Corporation, and the Secretary, or an Assistant Secretary, shall have
authority to impress the same on any instrument requiring it, and when so
impressed the seal may be attested by the signature of the Secretary or by the
signature of such Assistant Secretary. The Board may give general authority to
any other officer to impress the seal of the Corporation and to attest the same
by such officer's signature. The Secretary or an Assistant Secretary may also
attest all instruments signed by the President or any Vice President. The
Secretary shall have charge of all the books, records and papers of the
Corporation relating to its organization and management, shall see that the
reports, statements and other documents required by statute are properly kept
and filed and, in general, shall perform all duties incident to the office of
Secretary of a corporation and such other duties as may from time to time be
assigned to the Secretary by the Board or by the President.
5.10 Treasurer. The Treasurer shall have charge and custody of, and
---------
be responsible for, all funds,
<PAGE>
28
securities and notes of the Corporation; receive and give receipts for moneys
due and payable to the Corporation from any sources whatsoever; deposit all such
moneys and valuable effects in the name and to the credit of the Corporation in
such depositaries as may be designated by the Board; against proper vouchers,
cause such funds to be disbursed by checks or drafts on the authorized
depositaries of the Corporation signed in such manner as shall be determined by
the Board and be responsible for the accuracy of the amounts of all moneys so
disbursed; regularly enter or cause to be entered in books or other records
maintained for the purpose full and adequate account of all moneys received or
paid for the account of the Corporation; have the right to require from time to
time reports or statements giving such information as the Treasurer may desire
with respect to any and all financial transactions of the Corporation from the
officers or agents transacting the same; render to the President or the Board,
whenever the President or the Board shall require the Treasurer so to do, an
account of the financial condition of the Corporation and of all financial
transactions of the Corporation; exhibit at all reasonable times the records and
books of account to any of the Directors upon application at the office of the
Corporation where such records and books are kept; disburse the funds of the
Corporation as ordered by the Board; and, in general, perform all duties
incident to the office of Treasurer of a
<PAGE>
29
corporation and such other duties as may from time to time be assigned to the
Treasurer by the Board or the President.
5.11 Assistant Secretaries and Assistant Treasurers. Assistant
----------------------------------------------
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the President.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
----------------------------------------------
6.1 Execution of Contracts. The Board, except as otherwise provided
----------------------
in these By-laws, may prospectively or retroactively authorize any officer or
officers, employee or employees or agent or agents, in the name and on behalf of
the Corporation, to enter into any contract or execute and deliver any
instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
6.2 Loans. The Board may prospectively or retroactively authorize
-----
the President or any other officer, employee or agent of the Corporation to
effect loans and advances at any time for the Corporation from any bank, trust
company or other institution, or from any firm, corporation or individual, and
for such loans and advances the person so authorized may make, execute and
deliver promissory notes, bonds or other certificates or evidences of
indebtedness of the Corporation, and, when authorized by
<PAGE>
30
the Board so to do, may pledge and hypothecate or transfer any securities or
other property of the Corporation as security for any such loans or advances.
Such authority conferred by the Board may be general or confined to specific
instances, or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
--------------------
payment of money out of the funds of the Corporation and all evidences of
indebtedness of the Corporation shall be signed on behalf of the Corporation in
such manner as shall from time to time be determined by resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the order of the Corporation with such
banks, trust companies, investment banking firms, financial institutions or
other depositaries as the Board may select or as may be selected by an officer,
employee or agent of the Corporation to whom such power to select may from time
to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
-------------------
7.1 Certificates Representing Shares. The shares of capital stock of
--------------------------------
the Corporation shall be represented by certificates in such form (consistent
with the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by
<PAGE>
31
the Chairman, the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be
impressed with the seal of the Corporation or a facsimile thereof. The
signatures of the officers upon a certificate may be facsimiles, if the
certificate is countersigned by a transfer agent or registrar other than the
Corporation itself or its employee. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may, unless otherwise
ordered by the Board, be issued by the Corporation with the same effect as if
such person were such officer, transfer agent or registrar at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
------------------
Corporation shall be made only on the books of the Corporation by the holder
thereof or by the holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent of the
Corporation, and on surrender of the certificate or certificates representing
such shares of capital stock properly endorsed for transfer and upon payment of
all necessary transfer taxes. Every certificate exchanged, returned or
surrendered to the Corporation shall be marked "Cancelled," with the date of
cancellation, by the
<PAGE>
32
Secretary or an Assistant Secretary or the transfer agent of the Corporation. A
person in whose name shares of capital stock shall stand on the books of the
Corporation shall be deemed the owner thereof to receive dividends, to vote as
such owner and for all other purposes as respects the Corporation. No transfer
of shares of capital stock shall be valid as against the Corporation, its
stockholders and creditors for any purpose, except to render the transferee
liable for the debts of the Corporation to the extent provided by law, until
such transfer shall have been entered on the books of the Corporation by an
entry showing from and to whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to
----------------------------
time maintain one or more transfer offices or agents and registry offices or
agents at such place or places as may be determined from time to time by the
Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder
--------------------------------------------------
of any shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his or her legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft or mutilation and to
advertise such fact in such manner as the Board may require, and to give the
Corporation and its transfer agents and registrars, or such of them as the Board
may require, a bond in such form, in such sums and with such surety or sureties
as the Board may direct, to indemnify the Corporation and its transfer agents
and registrars against any claim that may be made against any of them on account
of the continued existence of any such certificate so alleged to have been lost,
destroyed,
<PAGE>
33
stolen or mutilated and against any expense in connection with such claim.
7.5 Rules and Regulations. The Board may make such rules and
---------------------
regulations as it may deem expedient, not inconsistent with these By-laws or
with the Certificate of Incorporation, concerning the issue, transfer and
registration of certificates representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the
--------------------------------
transfer or registration of transfer of capital stock of the Corporation, if
permitted by Section 202 of the General Corporation Law and noted conspicuously
on the certificate representing such capital stock, may be enforced against the
holder of the restricted capital stock or any successor or transferee of the
holder, including an
<PAGE>
34
executor, administrator, trustee, guardian or other fiduciary entrusted with
like responsibility for the person or estate of the holder. Unless noted
conspicuously on the certificate representing such capital stock, a restriction,
even though permitted by Section 202 of the General Corporation Law, shall be
ineffective except against a person with actual knowledge of the restriction. A
restriction on the transfer or registration of transfer of capital stock of the
Corporation may be imposed either by the Certificate of Incorporation or by an
agreement among any number of stockholders or among such stockholders and the
Corporation. No restriction so imposed shall be binding with respect to capital
stock issued prior to the adoption of the restriction unless the holders of such
capital stock are parties to an agreement or voted in favor of the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the
------------------------
Certificate of Incorporation and of law, the Board:
7.7.1 may declare and pay dividends or make other
distributions on the outstanding shares of capital stock in such amounts
and at such time or times as it, in its discretion, shall deem advisable
giving due consideration to the condition of the affairs of the
Corporation;
<PAGE>
35
7.7.2 may use and apply, in its discretion, any of the
surplus of the Corporation in purchasing or acquiring any shares of capital
stock of the Corporation, or purchase warrants therefor, in accordance with
law, or any of its bonds, debentures, notes, scrip or other securities or
evidences of indebtedness; and
7.7.3 may set aside from time to time out of such surplus
or net profits such sum or sums as, in its discretion, it may think proper,
as a reserve fund to meet contingencies, or for equalizing dividends or for
the purpose of maintaining or increasing the property or business of the
Corporation, or for any purpose it may think conducive to the best
interests of the Corporation.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 Indemnity Undertaking. To the extent not prohibited by law, the
---------------------
Corporation shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the
<PAGE>
36
legal representative, is or was a Director or officer of the Corporation, or, at
the request of the Corporation, is or was serving as a director or officer of
any other corporation or in a capacity with comparable authority or
responsibilities for any partnership, joint venture, trust, employee benefit
plan or other enterprise (an "Other Entity"), against judgments, fines,
penalties, excise taxes, amounts paid in settlement and costs, charges and
expenses (including attorneys' fees, disbursements and other charges). Persons
who are not directors or officers of the Corporation (or otherwise entitled to
indemnification pursuant to the preceding sentence) may be similarly indemnified
in respect of service to the Corporation or to an Other Entity at the request of
the Corporation to the extent the Board at any time specifies that such persons
are entitled to the benefits of this Article 8.
8.2 Advancement of Expenses. The Corporation shall, from time to
-----------------------
time, reimburse or advance to any Director or officer or other person entitled
to indemnification hereunder the funds necessary for payment of expenses,
including attorneys' fees and disbursements, incurred in connection with any
Proceeding, in advance of the final disposition of such Proceeding; provided,
--------
however, that, if required by the General Corporation Law, such expenses
- -------
incurred by or on behalf of any Director or officer or other person may be paid
in advance of the final
<PAGE>
37
disposition of a Proceeding only upon receipt by the Corporation of an under-
taking, by or on behalf of such Director or officer (or other person indemnified
hereunder), to repay any such amount so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right of
appeal that such Director, officer or other person is not entitled to be
indemnified for such expenses.
8.3 Rights Not Exclusive. The rights to indemnification and
--------------------
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or reimbursement or advancement of expenses may
have or hereafter be entitled under any statute, the Certificate of
Incorporation, these By-laws, any agreement, any vote of stockholders or
disinterested Directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
8.4 Continuation of Benefits. The rights to indemnification and
------------------------
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall continue as to a person who has ceased to be a Director or
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
<PAGE>
38
8.5 Insurance. The Corporation shall have power to purchase and
---------
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Article 8, the Certificate of
Incorporation or under section 145 of the General Corporation Law or any other
provision of law.
8.6 Binding Effect. The provisions of this Article 8 shall be a
--------------
contract between the Corporation, on the one hand, and each Director and officer
who serves in such capacity at any time while this Article 8 is in effect and
any other person entitled to indemnification hereunder, on the other hand,
pursuant to which the Corporation and each such Director, officer or other
person intend to be, and shall be legally bound. No repeal or modification of
this Article 8 shall affect any rights or obligations with respect to any state
of facts then or theretofore existing or thereafter arising or any proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
<PAGE>
39
8.7 Procedural Rights. The rights to indemnification and
-----------------
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall be enforceable by any person entitled to such
indemnification or reimbursement or advancement of expenses in any court of
competent jurisdiction. The burden of proving that such indemnification or
reimbursement or advancement of expenses is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, its independent legal counsel and its stockholders) to have made a
determination prior to the commencement of such action that such indemnification
or reimbursement or advancement of expenses is proper in the circumstances nor
an actual determination by the Corporation (including its Board of Directors,
its independent legal counsel and its stockholders) that such person is not
entitled to such indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a presumption that such
person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.
8.8 Service Deemed at Corporation's Request. Any Director or officer
---------------------------------------
of the Corporation serving in any
<PAGE>
40
capacity (a) another corporation of which a majority of the shares entitled to
vote in the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.
8.9 Election of Applicable Law. Any person entitled to be indemni-
--------------------------
fied or to reimbursement or advancement of expenses as a matter of right
pursuant to this Article 8 may elect to have the right to indemnification or
reimbursement or advancement of expenses interpreted on the basis of the
applicable law in effect at the time of the occurrence of the event or events
giving rise to the applicable Proceeding, to the extent permitted by law, or on
the basis of the applicable law in effect at the time such indemnification or
reimbursement or advancement of expenses is sought. Such election shall be
made, by a notice in writing to the Corporation, at the time indemnification or
reimbursement or advancement of expenses is sought; provided, however, that if
-------- -------
no such notice is given, the right to indemnification or reimbursement or
advancement of expenses shall be determined by the law in effect at the time
indemnification or reimbursement or advancement of expenses is sought.
<PAGE>
41
ARTICLE 9
BOOKS AND RECORDS
-----------------
9.1 Books and Records. There shall be kept at the principal office
-----------------
of the Corporation correct and complete records and books of account recording
the financial transactions of the Corporation and minutes of the proceedings of
the stockholders, the Board and any committee of the Board. The Corporation
shall keep at its principal office, or at the office of the transfer agent or
registrar of the Corporation, a record containing the names and addresses of all
stockholders, the number and class of shares held by each and the dates when
they respectively became the owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in
---------------
the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
written form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by
-------------------------------
law, the Board shall determine from time to time whether, and, if allowed, when
and under what
<PAGE>
42
conditions and regulations, the accounts, books, minutes and other records of
the Corporation, or any of them, shall be open to the stockholders for
inspection.
ARTICLE 10
SEAL
----
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
ARTICLE 11
FISCAL YEAR
-----------
The fiscal year of the Corporation shall be fixed, and may be changed,
by resolution of the Board.
ARTICLE 12
PROXIES AND CONSENTS
--------------------
Unless otherwise directed by the Board, the Chairman, the President,
any Vice President, the Secretary or the Treasurer, or any one of them, may
execute and deliver on behalf of the Corporation proxies respecting any and all
shares or other ownership interests of any Other Entity owned by the Corporation
appointing such person or persons as the officer executing the same shall deem
proper to represent and vote the shares or other ownership interests so owned at
any and all meetings of holders of shares or other ownership interests, whether
general or special, and/or to execute and deliver consents respecting such
shares or other ownership interests; or any of the aforesaid officers may attend
any meeting of the holders of
<PAGE>
43
shares or other ownership interests of such Other Entity and thereat vote or
exercise any or all other powers of the Corporation as the holder of such shares
or other ownership interests.
ARTICLE 13
EMERGENCY BY-LAWS
-----------------
Unless the Certificate of Incorporation provides otherwise, the
following provisions of this Article 13 shall be effective during an emergency,
which is defined as when a quorum of the Corporation's Directors cannot be
readily assembled because of some catastrophic event. During such emergency:
13.1 Notice to Board Members. Any one member of the Board or any one
-----------------------
of the following officers: Chairman, President, any Vice President, Secretary,
or Treasurer, may call a meeting of the Board. Notice of such meeting need be
given only to those Directors whom it is practicable to reach, and may be given
in any practical manner, including by publication and radio. Such notice shall
be given at least six hours prior to commencement of the meeting.
13.2 Temporary Directors and Quorum. One or more officers of the
------------------------------
Corporation present at the emergency Board
<PAGE>
44
meeting, as is necessary to achieve a quorum, shall be considered to be
Directors for the meeting, and shall so serve in order of rank, and within the
same rank, in order of seniority. In the event that less than a quorum of the
Directors are present (including any officers who are to serve as Directors for
the meeting), those Directors present (including the officers serving as
Directors) shall constitute a quorum.
13.3 Actions Permitted To Be Taken. The Board as constituted in
-----------------------------
Section 13.2, and after notice as set forth in Section 13.1 may:
13.3.1 prescribe emergency powers to any officer of the
Corporation;
13.3.2 delegate to any officer or Director, any of the powers of
the Board;
13.3.3 designate lines of succession of officers and agents, in
the event that any of them are unable to discharge their duties;
13.3.4 relocate the principal place of business, or designate
successive or simultaneous principal places of business; and
13.3.5 take any other convenient, helpful or necessary action to
carry on the business of the Corporation.
<PAGE>
45
ARTICLE 14
AMENDMENTS
----------
These By-laws may be amended or repealed and new By-laws may be
adopted by a vote of the holders of shares entitled to vote in the election of
Directors or by the Board. Any By-laws adopted or amended by the Board may be
amended or repealed by the Stockholders entitled to vote thereon.
EXHIBIT 10.1
FORMATION AGREEMENT
dated as of June 20, 1996
among
CAPSTAR HOTEL INVESTORS, INC.
and
The Parties Identified on the Signature Pages Hereof
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . 2
ARTICLE II. THE PLAN OF EXCHANGE . . . . . . . . . . . 5
2.1 Adoption . . . . . . . . . . . . . . . . . . . 5
2.2 The Exchange . . . . . . . . . . . . . . . . . 5
2.3 Effect of Exchange . . . . . . . . . . . . . . 6
2.4 Contribution of EquiStar Assets . . . . . . . . 7
2.5 General Authorization Regarding Documents . . . 7
2.6 Power of Attorney . . . . . . . . . . . . . . . 7
ARTICLE III. ALLOCATIONS . . . . . . . . . . . . . . . 8
3.1 Agreement Regarding Share Allocations . . . . 8
3.2 Special Adjustment for Organizational
Capitalization . . . . . . . . . . . . . . . 8
ARTICLE IV. REPRESENTATIONS AND WARRANTIES . . . . . . 8
4.1 Representations and Warranties of
Certain Parties . . . . . . . . . . . . . . . 8
(a) Organization . . . . . . . . . . . . . . . 8
(b) Authority . . . . . . . . . . . . . . . . 8
(c) No Conflicts . . . . . . . . . . . . . . . 8
(d) Suits Affecting the Closing . . . . . . . 9
(e) Ownership of Interests . . . . . . . . . . 10
(f) Offering Memorandum . . . . . . . . . . . 10
(g) No Reliance . . . . . . . . . . . . . . . 10
(h) Investment Intent . . . . . . . . . . . . 11
(i) Restricted Securities . . . . . . . . . . 11
4.2 General Representations and Warranties of the
Exchanging Entities and CHI . . . . . . . . . . 12
(a) Organization . . . . . . . . . . . . . . . 12
(b) Authority . . . . . . . . . . . . . . . . 12
(c) No Conflicts . . . . . . . . . . . . . . . 12
(d) Suits Affecting the Closing . . . . . . . 12
(e) Brokers . . . . . . . . . . . . . . . . . 13
(f) Tax Classification . . . . . . . . . . . . 13
4.3 Specific Representations and Warranties
of CHI . . . . . . . . . . . . . . . . . . 13
(a) CHI Common Stock . . . . . . . . . . . . . 13
(b) Investment Intent . . . . . . . . . . . . 13
(c) Control . . . . . . . . . . . . . . . . . 13
4.4 Representations and Warranties Exclusive. . . . 13
i
<PAGE>
Page
----
ARTICLE V. COVENANTS AND ACKNOWLEDGMENTS. . . . . . . . . . 14
5.1 Conduct of Business . . . . . . . . . . . . . . 14
5.2 Updated Information . . . . . . . . . . . . . . 14
5.3 Information for Filings . . . . . . . . . . . . 14
5.4 Agreements Related to Initial Public Offering . 14
5.5 Transfers Prior to Closing . . . . . . . . . . 14
5.6 Actions Required for Closing . . . . . . . . . 15
5.7 Characterization for Federal Income
Tax Purposes . . . . . . . . . . . . . . . . . 15
ARTICLE VI. INDEMNIFICATION . . . . . . . . . . . . . . . 15
6.1 General Indemnity . . . . . . . . . . . . . . . 15
6.2 Indemnity by CHI . . . . . . . . . . . . . . . 15
6.3 Survival of Representations and Warranties . . 16
6.4 Indemnification Procedures . . . . . . . . . . 16
6.5 Third Party Claims . . . . . . . . . . . . . . 16
6.6 Limitation on Liability . . . . . . . . . . . . 17
ARTICLE VII. CONDITIONS TO CLOSING . . . . . . . . . . . . 17
7.1 General Closing Conditions . . . . . . . . . . . 17
(a) Accuracy of Representations and Warranties . 18
(b) Performance of Covenants . . . . . . . . . . 18
(c) Bankruptcy . . . . . . . . . . . . . . . . . 18
(d) No Orders . . . . . . . . . . . . . . . . . 18
(e) Other Third Party Consents . . . . . . . . . 18
7.2 Specific Closing Condition . . . . . . . . . . . 18
ARTICLE VIII. THE CLOSING . . . . . . . . . . . . . . . . 19
8.1 Effective Time . . . . . . . . . . . . . . . . 19
8.2 Closing Executions and Deliveries . . . . . . . 19
ARTICLE IX. MISCELLANEOUS . . . . . . . . . . . . . . . . 20
9.1 Parties to Agreement . . . . . . . . . . . . . 20
9.2 Captions, Etc . . . . . . . . . . . . . . . . . 20
9.3 Termination . . . . . . . . . . . . . . . . . . 20
9.4 Expenses . . . . . . . . . . . . . . . . . . . 20
9.5 GOVERNING LAW . . . . . . . . . . . . . . . . . 21
9.6 Further Action . . . . . . . . . . . . . . . . 21
9.7 Entire Agreement . . . . . . . . . . . . . . . 21
9.8 Counterparts . . . . . . . . . . . . . . . . . 21
9.9 Binding Effect . . . . . . . . . . . . . . . . 21
9.10 Third Party Beneficiaries . . . . . . . . . . . 21
9.11 Notices . . . . . . . . . . . . . . . . . . . . 21
ii
<PAGE>
FORMATION AGREEMENT
This Formation Agreement (the "Agreement"), dated as of June 20, 1996, is
among CapStar Hotel Investors, Inc., a Delaware corporation ("CHI"), the
Exchanging Entities, the Existing Owners, (as such terms are defined in Article
I), and the other parties identified on the signature pages hereof.
WHEREAS, the parties to this Agreement wish to effect certain exchanges and
other transactions on the terms and conditions set forth in this Agreement
(collectively, the "Formation"), pursuant to which a reconstituted limited
partnership in which CHI will be the sole general partner and CapStar LP
Corporation, a wholly owned subsidiary of CHI ("CapStar LP Corp."), will be the
initial limited partner (the "Operating Partnership") will succeed to the hotel
ownership, hotel management and related business operations conducted previously
by EquiStar Hotel Investors, L.P., a Delaware limited partnership ("EquiStar"),
and CapStar Management Company, L.P., a Delaware limited partnership (the
"Partnership");
WHEREAS, the Exchanging Entities are the sole owners of Partnership
Interests in EquiStar and the Partnership and will exchange such interests for
shares of CHI Common Stock;
WHEREAS, the parties have agreed that an aggregate of 6,004,321 shares of
CHI Common Stock (the "Formation Shares") will be allocated to the Exchanging
Entities; and
WHEREAS, the Parties have agreed that 697,498 Formation Shares shall be
allocated to the Partnership (the "Partnership Allocation"), and that the
remaining Formation Shares shall be allocated to EquiStar (the "EquiStar
Allocation"); and
WHEREAS, concurrently with the Closing, certain of the Exchanging Entities
will be liquidated, and the shares of CHI Common Stock allocated to such
Exchanging Entities will be distributed to such Exchanging Entities' Existing
Owners;
NOW, THEREFORE, in consideration of the mutual agreements set forth herein,
the parties hereto agree as follows:
<PAGE>
2
ARTICLE I.
DEFINITIONS
-----------
For purposes of this Agreement, and except as may be otherwise specified in
this Agreement, the following terms shall have the meanings indicated:
"Business Day" shall mean a day, other than a Saturday or Sunday, on which
--------------
commercial banks are open for business with the public in New York, New York.
"CapStar LP Corp." shall mean CapStar LP Corporation, a Delaware
------------------
corporation and a wholly owned subsidiary of CHI.
"CHI" shall mean CapStar Hotel Investors, Inc., a Delaware
-----
corporation.
"CHI Common Stock" shall mean the Common Stock, par value $.01 per share,
------------------
of CHI.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
------
"Claim Notice" shall have the meaning set forth in Article VI.
--------------
"Closing" shall mean the closing of the Formation, as described in
---------
Article VIII.
"Damage" shall have the meaning set forth in Article VI.
--------
"DGCL" shall mean the Delaware General Corporation Law.
------
"Dispute Notice" shall have the meaning set forth in Article VI.
----------------
"Effective Time" shall mean the date and time of the Closing, as more fully
----------------
described in Section 8.1.
"Entities" shall mean the Partnership, EquiStar, the Exchanging Entities,
----------
CHI and CapStar LP Corp..
"EquiStar" shall mean EquiStar Hotel Investors, L.P., a Delaware limited
----------
partnership.
"EquiStar Allocation" *shall mean 5,306,823 Formation Shares, which shares
--------------------
are to be issued by CHI in exchange for the Exchanging Entities' Partnership
Interests in EquiStar.
<PAGE>
3
"Exchange" shall mean the transfer by the Exchanging Entities of their
---------
respective Partnership Interests to CHI in exchange for CHI Common Stock,
pursuant to the Plan of Exchange.
"Exchanging Entities" shall mean the following entities:
---------------------
Acadia/EquiStar Partners, L.P., a Delaware limited partnership;
New EquiStar Associates, L.L.C., a Delaware limited liability company;
Cherwell Investors, Inc., a Delaware corporation;
WMB Hotel Associates, L.L.C., a Delaware limited liability company;
CapStar Executive Investors I, L.L.C., a Delaware limited liability
company;
Penobscot/CapStar Partners, L.P., a Delaware limited partnership;
New Management Associates, L.L.C., a Delaware limited liability company;
MC Investment Corporation, a Delaware corporation;
CapStar Equity Associates, a Delaware general partnership;
CapStar GP Corp., a Delaware corporation; and
CapStar Executive Investors II, L.L.C., a Delaware limited liability
company.
"Existing Owners" shall mean a member or partner, general or limited, of a
-----------------
Liquidating Entity, each such Existing Owner being identified as such on the
signature pages hereto.
"Existing Partnerships" shall mean the Partnership and EquiStar. Each of
-----------------------
the Partnership and EquiStar is an "Existing Partnership."
----------------------
"Formation" shall have the meaning set forth in the recitals to this
-----------
Agreement. The Formation shall be effected through the Exchange and the other
transactions described in this Agreement (including in the recitals to this
Agreement). The Formation shall result in CHI's (or, as applicable, a subsidiary
of CHI's) succession to the assets and liabilities of EquiStar and the
Partnership.
"Formation Shares" shall mean an aggregate of 6,004,321 shares of CHI
------------------
Common Stock, which shares are to be issued by CHI in exchange for the
Exchanging Entities' Partnership Interests in the Existing Partnerships.
"Governmental Body" shall mean any governmental or quasi-governmental
-------------------
agency, authority, commission, board or other body.
"Indemnified Party" shall have the meaning set forth in Article VI.
-------------------
"Indemnitor" shall have the meaning set forth in Article VI.
------------
<PAGE>
4
"Initial Public Offering" shall have the meaning set forth in*
-------------------------
Section 7.2.
"Liquidating Entities" shall mean the following Exchanging Entities:
----------------------
Acadia/EquiStar Partners, L.P.;
New EquiStar Associates, L.L.C.;
Penobscot/CapStar Partners, L.P.;
New Management Associates, L.L.C.; and
CapStar Equity Associates
"Offering Memorandum" shall mean the Confidential Offering Memorandum of
---------------------
CHI dated June 20, 1996, relating to the Formation, together with the exhibits
and other attachments to such Memorandum.
"Operating Partnership" shall mean CapStar Management Company, L.P., a
-----------------------
Delaware limited partnership, after the Effective Time and the amendment and
restatement of the such partnership's Agreement of Limited Partnership, as
contemplated in Section 2.6(d).
"Order" shall mean any order, injunction, decree, writ, judgment,
-------
determination or award of any court, arbitrator or Governmental Body.
"Ownership Interest" shall mean the ownership interest of an Existing Owner
--------------------
in a Liquidating Entity. Set forth on Exhibit B hereto is a list of owners of
Ownership Interests in each Liquidating Entity.
"Partnership" shall mean CapStar Management Company, L.P., a Delaware
-------------
limited partnership, prior to the Effective Time and the amendment and
restatement of its Agreement of Limited Partnership, as contemplated by Section
2.6(d).
"Partnership Allocation" shall mean 697,498 Formation Shares, which shares
------------------------
are to be issued by CHI in exchange for the Exchanging Entities' Partnership
Interests in the Partnership.
"Partnership Interest" shall mean the ownership interests of an Exchanging
----------------------
Entity in an Existing Partnership, as set forth in the respective Limited
Partnership Agreements of the Existing Partnerships. Set forth on Exhibit A
hereto is a list of owners of Partnership Interests in each Existing
Partnership.
"Permit" shall mean any permit, license, authorization, approval,
--------
certification, franchise or other right issued by any Governmental Body.
<PAGE>
5
"Person" shall mean any individual, corporation, partnership, joint
--------
venture, business association, trust or other business entity.
"Plan of Exchange" shall mean the Plan of Exchange set forth in Sections
------------------
2.2 through 2.6, inclusive.
"Registration Rights Agreement" shall mean the Registration Rights
-------------------------------
Agreement substantially in the form of Exhibit C.
"Securities Act" shall mean the Securities Act of 1933, as amended.
----------------
ARTICLE II.
THE PLAN OF EXCHANGE
-------------------
2.1 Adoption. By its execution and delivery of this Agreement, each
---------
Exchanging Entity hereby adopts the Plan of Exchange set forth below in this
Article II. In addition, each Exchanging Entity that is the holder of a
Partnership Interest in the Partnership, hereby consents to and approves the
prior transfers contemplated by Sections 2.2(a) and (b) hereof and agrees that
upon the transfer contemplated by the first sentence of Section 2.2(b), CHI
shall become the sole general partner of the Partnership. Each Exchanging Entity
hereby gives such other consents, waivers or approvals as may be necessary under
the terms of the agreement of limited partnership of the Existing Partnership in
which it owns a Partnership Interest to permit each other partner of such
Existing Partnership to consummate the transactions contemplated by this
Agreement. By its execution and delivery of this Agreement, each Existing Owner
hereby irrevocably approves of and irrevocably consents to the Plan of Exchange.
2.2 The Exchange.
------------
(a) Preliminary Transactions. Immediately prior to the Effective Time
-------------------------
and the consummation of the transactions contemplated by Section 2.2(b), CapStar
Executive Investors II, L.L.C. shall contribute its Partnership Interest in the
Partnership to CHI in exchange for the issuance to it by CHI at the Effective
Time of shares of CHI Common Stock representing that percentage of the
Partnership Allocation (rounded to the nearest full share) as is set forth
beside such Exchanging Entity's name on Exhibit A. Also, immediately prior to
the Effective Time and the consummation of the transactions contemplated by
Section 2.2(b) (but after the contribution of the Partnership Interest described
in the first sentence of this Section 2.2(a)), CHI shall transfer to CapStar LP
Corp., as a capital contribution, the Partnership Interest in the Partnership
contributed to CHI pursuant to the first sentence of this Section 2.2(a).
<PAGE>
6
(b) Pre-Effective Time Transactions. Immediately prior to the Effective
--------------------------------
Time (but following the contribution of the Partnership Interest described in
Section 2.2(a)), (i) the Partnership Interest of each Exchanging Entity holding
a Partnership Interest in the Partnership (a "Partnership Exchanging Entity")
(other than CapStar Executive Investors II, L.L.C.) shall be contributed to CHI
in exchange for the issuance by CHI at the Effective Time of the number of
shares of CHI Common Stock representing that percentage of the Partnership
Allocation (rounded to the nearest full share) set forth beside the name of such
Partnership Exchanging Entity on Exhibit A, and (ii) the Partnership Interest of
each Exchanging Entity holding a Partnership Interest in EquiStar (an "EquiStar
Exchanging Entity") shall be contributed to CHI in exchange for the issuance by
CHI at the Effective Time of the number of shares of CHI Common Stock
representing that percentage of the EquiStar Allocation (rounded to the nearest
full share) set forth beside the name of such EquiStar Exchanging Entity on
Exhibit A.
(c) Effective Time Transactions. At the Effective Time (and immediately
----------------------------
following the contribution of the Partnership Interests described in Section
2.2(b)), CHI shall issue to each Exchanging Entity that is not a Liquidating
Entity and to the Existing Owners of each Liquidating Entity the shares of CHI
Common Stock contemplated by Sections 2.2(a) and (b). The shares of CHI Common
Stock to be issued in exchange for the Partnership Interest of each Exchanging
Entity that is a Liquidating Entity shall be issued to the Existing Owners of
such Liquidating Entity in connection with the liquidation of such Liquidating
Entity. Set forth beside the name of each Existing Owner on Exhibit B is the
percentage of the Formation Shares which are allocated to the Liquidating Entity
in which it is an Existing Owner which are to be issued to such Existing Owner
(except that with respect to the Existing Owners of Acadia/EquiStar Partners
L.P., Exhibit B indicates the method by which the Formation Shares which are
allocated to such Liquidating Entity are to be allocated among such Existing
Owners).
2.3 Effect of Exchange. At the Effective Time, as a result of the
-------------------
transactions contemplated by Section 2.2 hereof:
(a) CHI shall be the sole general partner of the Partnership and
CapStar LP Corp. shall be the sole limited partner of the Partnership;
(b) EquiStar shall be immediately dissolved, wound up and terminated
and CHI, as the sole holder of Partnership Interests of such Existing
Partnership prior to such dissolution winding up and termination, shall hold by
automatic succession under operation of law all rights, titles and interests to
all tangible and intangible property and assets owned by EquiStar. Such tangible
or intangible property and assets shall be vested in CHI without reversion or
impairment, without the need or requirement of further act or deed, subject only
to existing liens and other encumbrances thereon. In addition, through the
Exchange, the other
<PAGE>
7
transactions contemplated hereby and such dissolution, winding up and
termination, CHI shall be liable for the liabilities and obligations of
EquiStar; and
(c) Each of the Liquidating Entities shall be dissolved, wound-up and
terminated and as a result thereof each Existing Owner shall receive the number
of shares of CHI Common Stock corresponding to the percentage set forth beside
such Existing Owner's name on Exhibit B as a liquidating distribution in
connection with the dissolution and winding-up of the Liquidating Entities.
2.4 Contribution of EquiStar Assets. Immediately after the Effective Time,
--------------------------------
CHI shall cause all assets and properties previously owned by EquiStar (along
with all liabilities of EquiStar) to be contributed, transferred and assigned to
the Operating Partnership. As a result of the contributions, transfers and
assignments described in this Section 2.4, immediately following the Effective
Time, the Operating Partnership shall possess all assets and liabilities held by
EquiStar immediately prior to the Effective Time.
2.5 General Authorization Regarding Documents. At and after the Effective
------------------------------------------
Time, each of the parties to this Agreement agrees to execute and deliver such
instruments, agreements and other documents, if any, as CHI determines to be
necessary or appropriate to effect this Plan of Exchange.
2.6 Power of Attorney. Each of the parties to this Agreement hereby
------------------
irrevocably makes, constitutes and appoints CHI (acting alone, with full power
of substitution and resubstitution) as its or his or her true and lawful
attorney to make, execute, consent to, acknowledge, swear to, deliver, record,
or file any certificate or other instrument, agreement or document that CHI,
EquiStar, any of the Exchanging Entities, or such other party may be required to
file in connection with or as a result of the Exchange and the other
transactions contemplated hereby under the applicable laws of any jurisdiction
or that CHI determines to be necessary or appropriate to effect or reflect the
transfers occasioned by this Plan of Exchange and the other transactions
contemplated hereby. The grant of the power of attorney in this Section 2.6 is
coupled with an interest, is irrevocable and shall survive death, legal
incompetency, disability, dissolution, termination or bankruptcy of the grantor.
Without limiting the foregoing, at and after the Effective Time, CHI may so
execute and deliver any and all documents necessary or appropriate to reflect
(a) CHI's ownership of any property, interests and rights owned immediately
prior to the Formation by EquiStar, (b) the contribution by CHI to the Operating
Partnership of any or all property owned, interests and rights immediately prior
to the Formation by EquiStar, (c) the dissolution, winding up and termination of
EquiStar and the Liquidating Entities, and (d) the adoption of an Amended and
Restated Agreement of Limited Partnership of the Operating Partnership and the
ownership of Partnership Interests therein to CHI and CapStar LP Corp.
<PAGE>
ARTICLE III.
ALLOCATIONS
-----------
3.1 Agreement Regarding Share Allocations. Each Exchanging Entity and
--------------------------------------
Existing Owner has carefully reviewed Exhibits A and B, and by executing and
---------- -
delivering this Agreement hereby irrevocably consents thereto, subject to the
provisions of Section 3.2 hereof.
3.2 Special Adjustment for Organizational Capitalization. Cherwell
-----------------------------------------------------
Investors, Inc., which owns 100 shares of CHI Common Stock as of the date of
this Agreement for which it paid $100, hereby agrees to accept 100 fewer shares
of CHI Common Stock in the Formation than would otherwise be issued to it
pursuant to Exhibit A.
---------
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
-----------------------------
4.1 Representations and Warranties of Certain Parties. Each Exchanging
--------------------------------------------------
Entity, severally, as to itself, and each Existing Owner, severally, as to
itself, hereby represents and warrants as follows:
(a) Organization. Such Person, if not an individual, is a corporation,
-------------
limited liability company or partnership duly formed, validly existing and in
good standing under the laws of its jurisdiction of incorporation.
(b) Authority. Such Person has the requisite power and authority to
----------
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby to be consummated by him, her or it, as applicable. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate, company, partnership or other applicable action on the
part of such Person, if not an individual. This Agreement constitutes the legal,
valid and binding agreement of such Person, enforceable against such Person in
accordance with its terms.
(c) No Conflicts. Except for such consents, notices and other actions
-------------
as have been obtained or will be obtained at or prior to the Closing, the
execution, delivery and performance of this Agreement by such Person do not
violate any provision of the articles of incorporation, bylaws, agreement of
partnership or agreement of limited liability company (each if and as
applicable) of such Person or any applicable law, rule, regulation, order or
comparable requirement.
<PAGE>
9
(d) Suits Affecting the Closing. No suit, action or other legal or
----------------------------
administrative proceeding has been instituted, or claim or demand made, against
such Person seeking to restrain or prohibit any portion of the Formation or that
questions the validity or legality of any portions of the Formation. Such Person
has no knowledge of any actual or pending litigation or proceeding against it
with respect to or against its Partnership Interest or Ownership Interests in
any Existing Partnership or Liquidating Entity (as applicable to each).
(e) Ownership of Interests. (i) If an Exchanging Entity, such
-----------------------
Exchanging Entity is the record and beneficial Owner of a Partnership Interest
in the Existing Partnership identified in Exhibit A and now owns and immediately
prior to the contribution of such equity interest to CHI pursuant to Section 2.2
will own such equity interests free and clear of all liens, claims and
encumbrances. To the knowledge of each Exchanging Entity that is a general
partner of an Existing Partnership, no Person who is not listed on Schedule A
owns or asserts ownership of any Partnership Interest or any warrants, options
or other equity interests in the Existing Partnership of which it is the general
partner. Each Exchanging Entity hereby waives any claim to record or beneficial
ownership of any Partnership Interest, warrants, options or other equity
interests in any Existing Partnership other than the ownership set forth for
such Exchanging Entity in Exhibit A.
(ii) If an Existing Owner, such Existing Owner is the record and
beneficial owner of the equity interests in the Liquidating Entities described
with respect to such Existing Owner and now owns and immediately prior to the
Closing will own such equity interests free and clear of all liens, claims and
encumbrances. To the knowledge of each Existing Owner that is a general partner
of a Liquidating Entity, no Person who is not listed on Schedule B owns or
asserts ownership of any Ownership Interests in the Liquidating Entity of which
it is a general partner, or any warrants, options or other equity interests in
any the Liquidating Entity. Each Existing Owner hereby waives any claim to
record or beneficial ownership of Ownership Interests, warrants, options or
other equity interests in any of the Liquidating Entities other than the
ownership set forth for such Existing Owner in Exhibit B.
(f) Offering Memorandum. Such Person has received and carefully
--------------------
reviewed the Offering Memorandum, INCLUDING THE SECTIONS THEREOF CAPTIONED
"RISKS FACTORS" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," the
historical financial statements of certain of the Existing Partnerships
contained therein, the historical and pro forma financial statements of CHI
contained herein, and such other documents and information relating to CHI and
the other Entities as such Person has requested. Such Person has had an
opportunity to ask questions of, and has received satisfactory answers from, the
management of CHI and the other Entities concerning their businesses, financial
condition, prospects and the terms and conditions of the Formation. Such Person
is familiar with and understands the terms of the offering, and has such
knowledge and
<PAGE>
10
experience in financial and business matters that it is capable of evaluating
the merits and risks of an investment in the securities to be issued to it in
the Formation.
(g) No Reliance. Such Person acknowledges that (i) the transaction
------------
contemplated by this Agreement involve complex tax consequences for such Person
(including its partners or members) and such Person is relying solely on the
advice of their own tax advisors in evaluating such consequences, (ii) neither
CHI, the Existing Partnerships nor the Operating Partnership has made (or shall
be deemed to have made) any representations or warranties as to the tax
consequences or other economic considerations of the transactions contemplated
hereby to such Person (or to its partners or members) Such Person remains solely
responsible for considering and assessing all tax matters relating to itself
(and its partners or members) and has relied on the advice of, or has consulted
with, its own professional advisors with respect thereto.
(h) Investment Intent. Such Person was not formed for the purpose of
------------------
participating in the Formation and is acquiring the CHI Common Stock, if any, to
be issued to such Person in the Formation for investment and not with a view to
the distribution thereof except in compliance with the Securities Act and any
applicable state securities laws. Without limiting the foregoing, such Person
(other than a Liquidating Entity) is not under a binding commitment to sell or
otherwise dispose of the CHI Common Stock to be received in the Formation and
has no plan to sell or otherwise dispose of such CHI Common Stock for a period
of at least one year from the Effective Time; provided, however, that shares of
------------------
CHI Common Stock may be pledged to secure (x) the indebtedness of any Exchanging
Entity or Existing Owner outstanding on the date hereof and currently secured by
such Exchanging Entity's Partnership Interest or such Existing Owner's Ownership
Interest, or (y) any refinancing subsequent to the date hereof of any
indebtedness described in clause (x) hereof; provided, further, that an
------------------
aggregate of up to 2,500,000 Formation Shares (but in no event more Formation
Shares than will represent in the aggregate 19.9% of the outstanding shares of
CHI Common Stock immediately following the IPO closing) may be sold by parties
hereto in a public offering registered together with the IPO.
(i) Restricted Securities. Such Person understands and agrees
----------------------
that (i) the shares of CHI Common Stock, if any, to be issued to such Person in
the Formation will be "restricted securities" within the meaning of the
Securities Act, (ii) the holding period applicable to such shares under Rule
144 under the Securities Act will not begin earlier than the Effective Time,
and may not begin until the "purchase price" of such shares is paid in full,
(iii) in the absence of a registration statement filed pursuant to the
Registration Rights Agreement or otherwise in accordance with the Securities
Act and applicable state securities laws, or an exemption from the registration
requirements of such securities laws, such shares or units may not be offered
or sold to any Person and (iv) such certificate representing such shares or
units will bear the following legend:
<PAGE>
11
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE APPLICABLE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, AND MAY NOT BE SOLD,
ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT IN
COMPLIANCE WITH THE REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION."
Such Person understands that an investment in the securities to be received by
such Person in the Formation involves a high degree of risk. Such Person is able
to bear the economic risks of such investment for an indefinite period of time
and has no current need for liquidity in such investment. Such Person further
understands that the Company is relying upon representations and warranties of
such Person set forth herein in proceeding with the transactions contemplated
hereby and that the Company will make certain representations to the
underwriters in the Initial Public Offering in reliance on the representation
and warranties of such Person set forth herein.
4.2 General Representations and Warranties of the Exchanging Entities and
--------------------------------------------------------------------
CHI. Each of the Exchanging Entities hereby represents and warrants to CHI with
- ----
respect to the Existing Partnership in which it owns a Partnership Interest,
each of the Existing Owners that is a general partner or managing member of a
Liquidating Entity hereby represents and warrants to CHI with respect to such
Liquidating Entity, and CHI hereby represents and warrants to the Exchanging
Entities and the Existing Owners, with respect to itself, as follows:
(a) Organization. Such Entity is a corporation, limited liability
-------------
company or partnership duly formed, validly existing and in good standing under
the laws of the State of Delaware.
(b) Authority. Such Entity has the requisite corporate, company or
----------
partnership power and authority (i) to own and operate its properties, (ii) to
carry on its business as now conducted and as currently proposed to be conducted
and (iii) to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby to be performed by it. The execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby to be performed by it have been duly and validly authorized
by all necessary corporate or partnership action on the part of such Entity.
This Agreement constitutes the legal, valid and binding agreement of such
Entity, enforceable against such entity in accordance with its terms.
(c) No Conflicts. The execution, delivery and performance of this
-------------
Agreement by such Entity do not violate any provision of the articles or
certificate of incorporation, by-laws, limited liability company agreement or
<PAGE>
12
partnership agreement (as applicable) of such Entity or any applicable law,
rule, regulation, Order or comparable requirement, which violation would have a
material adverse effect on the business, financial condition or results of
operations of CHI on a consolidated basis (giving effect tot the Formation on a
pro forma basis).
(d) Suits Affecting the Closing. No suit, action or other legal or
-------------------------------
administrative proceeding has been instituted, or claim or demand made, against
such Entity seeking to restrain or prohibit any portion of the Formation or that
questions the validity or legality of any portion of the Formation.
(e) Brokers. No commission or other brokerage fees are owing in
--------
connection with the transactions contemplated hereby arising from the acts or
omissions of such Exchanging Entity.
(f) Tax Classification. With respect to each Existing Partnership, for
-------------------
the period of its existence (through the Effective Time), such entity has been
properly classified as a partnership for federal income tax purposes. Each
Existing Partnership has paid all income taxes to which it is subject, except
where the failure to so pay would not have a material adverse effect on the
business, financial condition or results of operations of CHI on a consolidated
basis (giving effect to the Formation on a pro forma basis).
4.3 Specific Representations and Warranties of CHI. CHI hereby represents
-----------------------------------------------
and warrants to the Exchanging Entities and the Existing Owners as follows:
(a) CHI Common Stock. When issued and delivered at the Closing in
-----------------
accordance with this Agreement, the Formation Shares to be issued at the
Effective Time will be duly authorized, validly issued, fully paid and
nonassessable and, free of any preemptive or other similar rights of any Person.
(b) Investment Intent. CHI is accepting the Partnership Interests to be
------------------
received by it in the Exchange for its own account, for investment and not with
a view to the sale or distribution thereof.
(c) Control. CHI has no plan or intent to issue additional CHI Common
--------
Stock or shares of stock of a different class in CHI, such that the parties
receiving CHI Common Stock pursuant to the Formation, and the Initial Public
Offering would no longer satisfy the control requirement of Code Sections 35
1(a) and 368(c).
4.4 Representations and Warranties Exclusive. EACH PARTY (INCLUDING CHI)
-----------------------------------------
ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE IV AND IN THE
DOCUMENTS TO BE EXECUTED AND DELIVERED AT THE CLOSING, THE OTHER PARTIES
<PAGE>
13
HAVE MADE NO REPRESENTATION OR WARRANTY REGARDING THE FORMATION OR ITS
CONSTITUENT TRANSACTIONS, AND SUCH FORMER PARTY IS NOT RELYING ON ANY OTHER
REPRESENTATION OR WARRANTY MADE BY ANY PERSON ACTING ON ANY OTHER PARTY'S
BEHALF. EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE IV AND IN THE DOCUMENTS TO
BE EXECUTED AND DELIVERED AT THE CLOSING, EACH PARTY (INCLUDING CHI)
ACKNOWLEDGES THAT THE FORMATION AND ITS CONSTITUENT TRANSACTIONS WILL OCCUR ON
AN "AS IS, WHERE IS" BASIS.
ARTICLE V.
COVENANTS AND ACKNOWLEDGMENTS
----------------------------
5.1 Conduct of Business. Except as contemplated by the Offering Memorandum
--------------------
or this Agreement, between the date of this Agreement and the Closing each
Liquidating Entity shall conduct its business in the ordinary course,
substantially consistent with past practice.
5.2 Updated Information. Each party covenants to immediately notify the
--------------------
other parties if any representation or warranty made by such party in Article IV
---------
becomes, or will become, untrue before the Effective Time.
5.3 Information for Filings. Each party shall furnish the other parties
------------------------
hereto with all information concerning such party as may be required for
inclusion in any application or filing required to be made by such other party
with any Governmental Body in connection with the Formation.
5.4 Agreements Related to Initial Public Offering. Each party hereby
----------------------------------------------
irrevocably consents and agrees that (i) its name may be disclosed in a
registration statement proposed to be prepared and filed by CHI in connection
with the Initial Public Offering, (ii) any information provided pursuant to this
Agreement to CHI, or representations and warranties made herein by any party,
may be disclosed in such registration statements, (iii) to the extent required
by federal or other applicable securities laws, a copy of this Agreement (and
any and all amendments and exhibits hereto) may be attached as an exhibit to
such registration statements and (iv) that the underwriters in the Initial
Public Offering may rely upon, and shall be deemed a beneficiary of the
representations and warranties of such party contained herein. In addition, each
party agrees to supply such additional information regarding its financial
condition, results of operations, cash flows and equity ownership as CHI may
reasonably require in connection with the Initial Public Offering, including for
use in the completion of any audits required in connection with the Initial
Public Offering.
<PAGE>
14
5.5 Transfers Prior to Closing. Except as contemplated by the Offering
---------------------------
Memorandum, this Agreement or in connection with a pledge by certain or all of
the Existing Owners of their Ownership Interests in any Liquidating Entity, each
Exchanging Entity and each Existing Owner hereby agrees that, between the date
of this Agreement and the Closing (or, in the case of each Exchanging Entity,
the time of the contribution of its Partnership Interest to CHI pursuant to
Section 2.2 hereof), such Exchanging Entity or Existing Owner, as the case may
be, shall not sell, transfer or assign, directly or indirectly or as collateral,
to any Person any equity interest in any Existing Partnership or Liquidating
Entity.
5.6 Actions Required for Closing. Each party agrees to take all reasonable
-----------------------------
actions within its control to cause the conditions to the consummation of the
Formation set forth in Article VI to be satisfied; provided, however, that
------------------
nothing in this Section 5.6 shall obligate CHI to consummate the Initial Public
Offering if in CHI's sole discretion the terms thereof are not satisfactory to
CHI.
5.7 Characterization for Federal Income Tax Purposes. Each party receiving
-------------------------------------------------
CHI Common Stock pursuant to the Plan of Exchange acknowledges that such
exchanges, together with the issuance of CHI Common Stock pursuant to the
Initial Public Offering, are intended to collectively constitute transactions
qualifying under Section 35 1 of the Code. Each of such parties agrees to report
the transactions contemplated by this Agreement consistent with the provisions
of such section and the Treasury Regulations promulgated thereunder and not to
take any action that would cause such transactions not so to qualify.
ARTICLE VI.
INDEMNIFICATION
--------------
6.1 General Indemnity. From and after the Closing, each party making a
------------------
representation or warranty in Article IV (the "Indemnitor") shall indemnify each
party to whom he, she or it makes such representation or warranty (including
each underwriter in the Initial Public Offering) (and, in the case of any
indemnity benefitting CHI, any officer, director and control person of CHI
(within the meaning of Section 15 of the Securities Act)) (the "Indemnified
Parties"), from and against any and all liabilities, costs, losses, lawsuits,
damages and expenses, whether or not arising out of third-party claims
(including, without limitation, interest and penalties), and all amounts paid in
defense or settlement thereof (collectively, "Damage"), arising out of,
resulting from or incident to, any breach of such representation or warranty.
6.2 Indemnity by CHI. From and after the Closing, CHI, for itself and its
-----------------
successors and assigns (the "Indemnitor"), shall indemnify each Existing Owner
and each Existing Owner's partners, owners, subsidiaries and affiliates, and
<PAGE>
15
each of their respective officers, directors, employees, shareholders, partners,
agents, representatives and advisors (collectively, the "Indemnified Parties")
from and against any and all Damage arising solely out of third-party claims and
resulting from the Formation or any one or more of its constituting transactions
(but in either case excluding (i) any taxes payable by an Indemnified Party as a
result of the Formation, (ii) costs and expenses expressly stated herein to be
borne or paid by such Indemnified Party and (iii) other amounts that such
Indemnified Party in this Agreement or otherwise has agreed to pay); provided,
--------
however, that this Section 6.2 shall not create rights to indemnity in favor of
- --------
an Indemnified Party for a matter (a) in respect of which such Indemnified Party
is in breach of a representation or warranty made by him, her or it, as
applicable, in Article IV (or would so be in breach but for (i) the
-------
qualification of such representation or warranty as to knowledge or (ii) the
expiration and termination of such representation or warranty pursuant to
Section 6.3) or (b) in respect of which such Indemnified Party was grossly
negligent or engaged in willful misconduct.
For purposes of this Section 6.2, a "third-party claim" shall mean a claim
alleged or asserted by any Person or Persons other than (w) an Existing Owner,
(x) a Liquidating Entity or any other party to this agreement, and (y) a direct
or indirect partner, member, stockholder or affiliate (as such term is defined
in Rule 405 promulgated under the Securities Act) of any of the foregoing.
6.3 Survival of Representations and Warranties. It is the express intention
-------------------------------------------
and agreement of the parties that the representations and warranties set forth
in Article IV shall survive the consummation of the Formation for a period of
one year, except that the representation and warranty (a) set forth in Section
4.2(e) shall survive for the applicable limitations period, and (b) set forth in
Section 4.1(e) shall survive indefinitely. At the expiration of the applicable
period such representations and warranties shall expire and be terminated and
extinguished forever, except with respect to claims asserted pursuant hereto
(subject to the limitations of Section 6.6) by written notice at any time within
one year from the Closing. Any written notice given within such one-year period
must set forth specifically the nature and details of the claim.
6.4 Indemnification Procedures. If any Indemnified Party seeks
---------------------------
indemnification hereunder then it shall give the applicable Indemnitor a notice
(a "Claim Notice") describing in reasonable detail the facts giving rise to any
claims for indemnification hereunder and the amount or method of computation of
the amount of such claim, and a reference to the provision of this Agreement or
any agreement, document or instrument executed pursuant hereto or in connection
herewith upon which such claim is based; provided, however, that failure to give
------------------
such notice shall not relieve the Indemnitor of its obligations hereunder. The
Indemnitor shall have thirty (30) days after the giving of any Claim Notice
pursuant hereto to (a) agree to the amount or method of determination set forth
in the Claim Notice and pay such amount or method of determination set forth in
the Claim Notice and pay such
<PAGE>
16
amount to the Indemnified Party in immediately available funds, or (b) provide
the Indemnified Party with notice that it disputes the amount or method of
determination set forth in the Claim Notice (the "Dispute Notice"). Within
fifteen (15) days after the giving of the Dispute Notice, a representative of
the Indemnitor and a representative of the Indemnified Party shall negotiate in
a bona fide attempt to resolve the matter. If the dispute is not resolved within
thirty (30) days of the giving of the Dispute Notice, then the parties shall be
free to pursue whatever remedies are available to them at law or equity.
6.5 Third Party Claims. If a claim by a third person is made against an
-------------------
Indemnified Party, and if such party intends to seek indemnity with respect
thereto under this Article VI, then such Indemnified Party shall promptly notify
the applicable Indemnitor in writing of such claim, setting forth such claim in
reasonable detail. The Indemnitor shall have ten (10) days after receipt of such
notice to elect to undertake, conduct and control, through counsel of its own
choosing and at its own expense, the settlement or defense thereof, and the
Indemnified Party shall cooperate with it in connection therewith; provided,
--------
however, that the Indemnified Party may participate in such settlement or
- --------
defense through counsel chosen by such Indemnified Party; provided, further,
-----------------
however, that if in the reasonable judgment of the Indemnified Party there
- --------
exists a conflict between the Indemnified Party and the Indemnitor, then the
Indemnitor shall bear all costs and expenses of the Indemnified Party's separate
counsel of choice. So long as the Indemnitor is reasonably contesting any such
claim in good faith, the Indemnified Party shall not pay or settle any such
claim without the consent of the Indemnitor. If the Indemnitor does not notify
the Indemnified Party within ten (10) days after receipt of the Indemnified
Party's notice of a claim of indemnity hereunder that it elects to undertake the
defense thereof, then the Indemnified Party shall have the right to contest,
settle or compromise the claim and shall be entitled to indemnification for all
fees, costs and expenses incurred in connection therewith. The Indemnitor shall
not, except with the consent of each Indemnified Party, enter into any
settlement that does not include as an unconditional term thereof the giving by
the person or persons asserting such claim to all Indemnified Parties of an
unconditional release from all liability with respect to such claim or consent
to entry of any judgment. The Indemnitor shall not be liable for Damages
relating to any settlement entered into without the Indemnitor's consent.
6.6 Limitation on Liability. Notwithstanding anything to the contrary
------------------------
contained in this Agreement or otherwise, except as otherwise provided in this
Section 6.6, the liability of an Existing Owner for the breach of any
representation or warranty and for any indemnification obligation arising from
any such breach shall be limited solely to the product of (x) the number of
shares of CHI Common Stock to be received by such Person in the Formation and
(b) the per share price to public paid by purchasers in the Initial Public
Offering. The parties hereto acknowledge and agree that no party shall have
recourse against any of the general partners of any Exchanging Entities or any
Existing Owner or against any of the assets of any of the general partners of
any Exchanging Entities or any Existing Owner with respect to the
<PAGE>
17
liabilities and obligations of any Exchanging Entities or any Existing Owner
hereunder or in connection herewith.
ARTICLE VII.
CONDITIONS TO CLOSING
--------------------
7.1 General Closing Conditions. The obligation of a party to consummate the
---------------------------
Formation is subject to the satisfaction at or prior to the Closing of each of
the following conditions, any one or more of which may be waived in whole or
part by such party:
(a) Accuracy of Representations and Warranties. Each of the
-------------------------------------------
representations and warranties of the other parties contained in Article IV
shall be true and correct in all material respects on and as of the Effective
Time as if made on and as of such time, except where the failure of the same to
be true and correct would not have a material adverse effect on the business,
financial condition or results of operation of CHI on a consolidated basis,
giving pro forma effect to the Formation.
(b) Performance of Covenants. Each other party shall have performed and
-------------------------
complied in all material respects with each covenant and agreement contained in
this Agreement that is required to be performed or complied with by such other
party on or prior to the Closing, except where the failure of the same to be so
performed or complied with would not have a material adverse effect on the
business, financial condition or results of operation of CHI on a consolidated
basis, giving pro forma effect to the Formation.
(c) Bankruptcy. No other party will have filed a voluntary petition in
-----------
bankruptcy, and no involuntary petition in bankruptcy will have been filed
against any other party that is not controverted within ten Business Days, or
dismissed within 60 days, after commencement.
(d) No Orders. There will not be issued and in effect at the Closing
----------
any Order restraining, prohibiting or delaying consummation of the Formation.
(e) Other Third Party Consents. Each other party will have obtained all
---------------------------
material consents, authorizations and approvals from all Governmental Bodies and
other Persons required to be obtained by such other party for the consummation
of the Formation, except where the same would not have a material adverse effect
on the business, financial condition or results of operation of CHI on a
consolidated basis, giving pro forma effect to the Formation.
<PAGE>
18
7.2 Specific Closing Condition. The obligation of a party to consummate the
---------------------------
Formation is subject to the condition that on or about the Effective Time, CHI
shall have consummated an initial public offering of CHI Common Stock resulting
in gross proceeds to CHI of not less than $100 million (the "Initial Public
Offering").
ARTICLE VIII.
THE CLOSING
----------
8.1 Effective Time. Unless this Agreement is terminated before the Closing
---------------
pursuant to Section 9.3, the Closing of the Exchange and, except as expressly
provided below, the other transactions constituting the Formation, will occur at
the same date and time (the "Effective Time") as the closing of the Initial
Public Offering. The transfers described in Sections 2.2(a) shall become
effective immediately prior to the transfers described in Section 2.2(b), which
shall in turn become effective immediately prior to the Effective Time.
8.2 Closing Executions and Deliveries. At the Closing:
----------------------------------
(a) CHI shall issue to each Exchanging Entity and each Existing Owner
receiving CHI Common Stock in the Formation a certificate or certificates for
the number of shares of CHI Common Stock to be issued to such Exchanging Entity
or Existing Owner in accordance with Exhibits A or B, as applicable, each
bearing the legends set forth in Section 4.1 (i). Absent any mutually
satisfactory other arrangement, each such certificate, duly executed, shall be
delivered to such Existing Owner at the Closing, or, if its, his or her
representative does not attend the Closing, to its or his or her address shown
on the signature pages to this Agreement.
(b) Each of CHI, CapStar Executive Investor I, L.L.C., CapStar Executive
Investor II, L.L.C., CapStar GP Corp., WMB Hotel Associates, L.L.C., and the
Existing Owners shall execute and deliver the Registration Rights Agreement.
(c) CHI shall execute, for filing with the Secretary of State of the
State of Delaware, a certificate of cancellation with respect to EquiStar and a
certificate of amendment with respect to the Operating Partnership. CHI, as
attorney in fact for each Existing Owner, shall execute, for filing with the
Secretary of State of the State of Delaware, a certificate of cancellation,
dissolution, termination or other appropriate document with respect to each
Liquidating Entity.
<PAGE>
19
(d) CHI shall execute and deliver such instruments of transfer as shall
be necessary to evidence the contributions to capital to be made by it pursuant
to this Agreement.
ARTICLE IX.
MISCELLANEOUS
------------
9.1 Parties to Agreement. Notwithstanding the Persons listed on the
---------------------
signature pages hereto, all references herein to "the parties," i.e., the
parties to this Agreement, refer only to those Persons who have executed and
delivered this Agreement.
9.2 Captions, Etc. The Article and Section headings in this Agreement are
--------------
for convenience of reference only and shall not affect the construction of this
Agreement. All references in this Agreement to Articles, Sections and Exhibits
refer to the Articles, Sections and Exhibits of this Agreement, respectively,
unless the context requires otherwise. All references to a party or parties
refer to a party or parties to this Agreement, unless the context otherwise
requires. All uses of the word "including" shall be construed to mean
"including, without limitation."
9.3 Termination. If the Closing has not occurred by March 31, 1997, then
------------
this Agreement shall terminate automatically, without any further act or
instrument. CHI may terminate this Agreement at any time by notice given to the
other parties if it determines in its sole discretion that the Initial Public
Offering may not be consummated on terms satisfactory to it.
9.4 Expenses. CHI shall be responsible for any documentary transfer taxes
---------
and any sales, use or other taxes (other than income taxes), escrow fees,
recording, transfer or filing fees (and any deficiency, interest or penalty
asserted with respect thereto) incurred in connection with the transfers made by
each Exchanging Entity in the Formation.
Each party to this Agreement shall pay its own legal, accounting and other
professional fees and expenses in connection with the preparation and
negotiation of this Agreement and the Registration Rights Agreement.
With respect to all other fees, expenses and costs not provided for above in
this Section 9.4, the parties agree to in good faith determine the beneficiary
or beneficiaries thereof and allocate responsibility for such fees, expenses and
costs accordingly.
The provisions of this Section 9.4 shall survive any termination of this
Agreement.
<PAGE>
2O
9.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
--------------
ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PRINCIPLE OR RULE THAT WOULD
CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.
9.6 Further Action. The parties hereto agree to execute such documents and
---------------
certificates and take such further actions as may be reasonably required or
desirable to carry out the provisions of this Agreement and consummate the
Formation and its constituent transactions. Without limiting the foregoing, to
the extent that the consummation of the Formation or any constituent transaction
thereof or hereof requires a consent or approval of, or a waiver by, a party to
this Agreement, then this Agreement constitutes such consent, approval or waiver
(all of which shall be irrevocable).
9.7 Entire Agreement. This Agreement and the Exhibits hereto supersede any
-----------------
other agreements, whether written or oral, that may have been made or entered
into by the parties hereto relating to the matters contemplated hereby. This
Agreement and the Exhibits hereto constitute the entire agreement among the
parties with respect to the subject matter of this Agreement, and there are no
agreements, commitments, representations, warranties or covenants relating
thereto except as expressly set forth herein.
9.8 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same agreement.
9.9 Binding Effect. This Agreement will be binding upon and inure to the
---------------
benefit of the parties hereto and their respective successors and assigns. CHI
may, on or after the Effective time, assign as collateral its rights under this
Agreement as security for its obligations under a credit agreement contemplated
to be entered into among CHI and certain lenders; each other party hereby agrees
with and consents to any such assignment as collateral.
9.10 Third Party Beneficiaries. Nothing in this Agreement is intended or
--------------------------
should be construed to give any person, other than the parties hereto, any legal
or equitable fight, remedy or claim under or in respect of this Agreement or any
provision of this Agreement.
9.11 Notices. Any notice or other communication required or permitted under
--------
this Agreement shall be by facsimile actually received or in writing and mailed
by certified or registered mail, return receipt requested, postage prepaid. Any
such notice shall be deemed given upon its receipt at the following addresses:
<PAGE>
21
(a) If to CHI:
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Attention: President
Fax: (202) 965-4445
(b) If to any other party, at the address of such party given by
written notice to CHI at the time of execution by such party of this Agreement.
Any party may, by notice given in accordance with this section to the other
parties, designate another address or person for receipt of notices hereunder.
IN WITNESS HEREOF, the parties have executed a counterpart signature page of
this Agreement as of the date first above written.
CHI: CAPSTAR HOTEL INVESTORS, INC.
By: /s/Paul W. Whetsell
--------------------
Paul W. Whetsell
President
Exchanging Entities: ACADIA/EQUISTAR PARTNERS, L.P.,
By: Acadia Partners, L.P.,
General Partner
By: Acadia FW Partners, L.P.,
General Partner
By: Acadia MGP Inc.,
Managing General Partner
By: /s/Daniel L. Doctoroff
Daniel L. Doctoroff
Executive Vice President
<PAGE>
22
NEW EQUISTAR ASSOCIATES, L.L.C.
By: New CapStar Group I, L.L.C.,
Member
By: /s/Paul W. Whetsell
Paul W. Whetsell
Managing Member
By: Acadia/EquiStar Partners, L.P.,
Member
By: Acadia Partners, L.P.,
General Partner
By: Acadia FW Partners, L.P.,
General Partner
By: Acadia MGP, Inc.,
Managing General Partner
By: /s/Daniel L. Doctoroff
-------------------------
Daniel L. Doctoroff
Executive Vice President
CHERWELL INVESTORS, INC.
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Vice President
WMB HOTEL ASSOCIATES, L.L.C.
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
Managing Member
<PAGE>
23
CAPSTAR EXECUTIVE INVESTORS I, L.L.C.
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
Managing Member
PENOBSCOT/CAPSTAR PARTNERS, L.P.
By: Penobscot Partners, L.P.,
General Partner
By: PTJ Merchant Banking Partners, L.P.,
General Partner
By: PTJ, Inc.,
Managing General Partner
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
NEW MANAGEMENT ASSOCIATES, L.L.C.
By: New CapStar Group II, L.L.C.,
Member
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
Managing Member
By: Penobscot/CapStar Partners, L.P.,
Member
By: Penobscot Partners, L.P.,
General Partner
By: PTJ Merchant Banking Partners, L.P.,
General Partner
By: PTJ, Inc.,
Managing General Partner
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
<PAGE>
24
MC INVESTMENT CORPORATION
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
CAPSTAR EQUITY ASSOCIATES
By: CapStar Hotels, Inc.,
Partner
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
President
By: Latham Hotels, Inc.,
Partner
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
President
CAPSTAR GP CORP.
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
President
CAPSTAR EXECUTIVE INVESTORS II, L.L.C.
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
Managing Member
<PAGE>
25
Existing Owners: PENOBSCOT/CAPSTAR PARTNERS, L.P.,
By: Penobscot Partners, L.P.,
General Partner
By: PTJ Merchant Banking Partners, L.P.,
General Partner
By: PTJ, Inc.,
Managing General Partner
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
OHP EQUISTAR, L.P.
By: Oak Hill Partners, Inc.,
General Partner
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
OHP EQUISTAR II, L.P.
By: Oak Hill Partners, Inc.
General Partner
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
PENOBSCOT PARTNERS, L.P.
By: PTJ Merchant Banking Partners, L.P.,
General Partner
By: PTJ, Inc.,
Managing General Partner
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
<PAGE>
26
FWHY COINVESTMENTS VIII PARTNERS, L.P.
By: Group 31, Inc.,
General Partner
By: /s/ W. Robert Cotham
-----------------------
W. Robert Cotham
Vice President
ACADIA/EQUISTAR PARTNERS, L.P.
By: Acadia Partners, L.P.,
General Partner
By: Acadia FW Partners, L.P.,
General Partner
By: Acadia MGP, Inc.,
Managing General Partner
By: /s/Daniel L. Doctoroff
-----------------------
Daniel L. Doctoroff
Executive Vice President
CAPSTAR HOTELS, INC.
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
President
LATHAM HOTELS, INC.
By: /s/Paul W. Whetsell
-----------------------
Paul W. Whetsell
President
<PAGE>
INDEX TO EXHIBITS*
A Exchanging Entities
B Existing Owners
C Form of Registration Rights Agreement
<PAGE>
EXHIBIT A
EXCHANGING ENTITIES
------------------
A. CAPSTAR MANAGEMENT COMPANY, L.P.
-------------------------------
Exchanging Entity % of Partnership
----------------- ---------------
Allocation
---------
Penobscot/CapStar Partners L.P. 44.2346
New Management Associates, L.L.C. 29.4529
MC Investment Corporation .0056
CapStar Equity Associates 23.8751
CapStar GP Corp. .8566
CapStar Executive Investors II, L.L.C. 1.575
B. EQUISTAR HOTEL INVESTORS, L.P.
Exchanging Entity %of EquiStar
----------------- -----------
Allocation
---------
Acadia/EquiStar Partners, L.P. 83.8
New EquiStar Associates, L.L.C. 4.878
Cherwell Investors Inc. 1.0
WMB Hotel Associates, L.L.C. 1.8095
CapStar Executive Investors I, L.L.C. 8.5125
<PAGE>
EXHIBIT B
EXISTING OWNERS
--------------
A. NEW EQUISTAR ASSOCIATES, L.L.C.
Existing Owner % of Liquidating
-------------- ---------------
Entity's Allocation
------------------
New CapStar Group I, L.L.C. 64.807
Acadia/EquiStar Partners, L.P. 35.193
B. ACADIA/EQUISTAR PARTNERS, L.P.
A number of Shares allocable to Acadia/EquiStar Partners, L.P. determined
by dividing the "Preferred Amount" (as defined below) by the price per
share to public in the Initial Public Offering shall be allocated to Acadia
Partners, L.P. and the balance of the shares allocable to Acadia/EquiStar
Partners, L.P. shall be allocated to its Existing Owners (including Acadia
Partner, L.P.) as follows:
Existing Owner % of Remainder of
-------------- ----------------
Liquidating Entity's
-------------------
Allocation
---------
OHP EquiStar, L.P. 16.20
OHP EquiStar II, L.P. 1.30
Acadia Partners, L.P. 65.00
FWHY Coinvestments VIII Partners, L.P. 17.50
For purposes hereof, the "Preferred Amount" shall mean $46,930,887.04, plus
interest accrued thereon from June 30, 1996 at an annual rate of 14%,
compounded quarterly, as of the last day of the month immediately preceding
the month in which the Closing takes place.
<PAGE>
C. NEW MANAGEMENT ASSOCIATES, L.L.C.
Existing Owner % of Liquidating
-------------- ---------------
Entity's Allocation
------------------
New CapStar Group II, L.L.C. 44.05
Penobscot/CapStar Partners, L.P. 55.95
D. PENOBSCOT/CAPSTAR PARTNERS, L.P.
Existing Owner % of Liquidating
-------------- ---------------
Entity' s Allocation
-------------------
OHP EquiStar, L.P. 0.0014
OHP EquiStar II, L.P. 17.4986
Penobscot Partners, L.P. 65.00
FWHY Coinvestments VIII Partners, L.P. 17.50
E. CAPSTAR EQUITY ASSOCIATES
Existing Owner % of Liquidating
-------------- ---------------
Entity's Allocation
------------------
CapStar Hotels, Inc. 85.0
Latham Hotels, Inc. 15.0
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
dated as of , 1996
-------------
among
CAPSTAR HOTEL INVESTORS, INC. and
The Other Parties Listed on the Signature Pages Hereto
<PAGE>
TABLE OF CONTENTS
Page No.
1. Definitions . . . . . . . . . . . . . . . . . . . . 1
2. Executive Investor Entities Registration . . . . . . 3
(a) Request for Registration . . . . . . . . . . . . 3
(b) Filing and Effectiveness . . . . . . . . . . . . 3
3. Demand Registration . . . . . . . . . . . . . . . . 4
(a) Requests for Registration . . . . . . . . . . . . 4
(c) Filing and Effectiveness. . . . . . . . . . . . . 4
(d) Priority on Demand Registration . . . . . . . . . 5
(e) Postponement of Demand Registration . . . . . . . 6
4. Piggyback Registration . . . . . . . . . . . . . . . 6
(a) Right to Piggyback . . . . . . . . . . . . . . . 6
(b) Priority on Piggyback Registrations . . . . . . . 6
5. Restrictions on Sale by Holders of Registrable
Securities . . . . . . . . . . . . . . . . . . . 7
6. Registration Procedures . . . . . . . . . . . . . . 7
7. Registration Expenses . . . . . . . . . . . . . . 12
8. Indemnification . . . . . . . . . . . . . . . . . 13
(a) Indemnification by the Company . . . . . . . 13
(b) Indemnification by Holders of Registrable
Securities . . . . . . . . . . . . . . . . 14
(c) Conduct of Indemnification Proceedings . . . 15
(d) Contribution . . . . . . . . . . . . . . . . 15
9. Rule 144 . . . . . . . . . . . . . . . . . . . . . 16
10. Underwritten Registrations . . . . . . . . . . . . 16
<PAGE>
Page No.
-------
11. Miscellaneous . . . . . . . . . . . . . . . . . . . 17
(a) Remedies . . . . . . . . . . . . . . . . . . . . 17
(b) No Inconsistent Agreements . . . . . . . . . 17
(c) Amendments and Waivers . . . . . . . . . . . . 17
(d) Notices . . . . . . . . . . . . . . . . . . . 17
(e) Owner of Registrable Securities . . . . . . . 18
(f) Successors and Assigns . . . . . . . . . . . 18
(g) Counterparts . . . . . . . . . . . . . . . . . 18
(h) Headings . . . . . . . . . . . . . . . . . . 18
(i) Governing Law . . . . . . . . . . . . . . . . 18
(j) Severability . . . . . . . . . . . . . . . . 18
(k) Entire Agreement . . . . . . . . . . . . . . . 19
(l) Attorneys' Fees . . . . . . . . . . . . . . . 19
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and entered
into as of , 1996, by and among Capstar Hotel
----------------------------
Investors, Inc., a Delaware corporation (the "Company"), and the other parties
signatory hereto.
RECITALS
-------
The initial parties hereto have entered into, or are equity owners in
entities that have entered into, other agreements which contemplate, among other
things, the execution and delivery of this Agreement by the parties hereto.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
1. Definitions: For purposes of this Agreement, the following terms have
------------
the following meanings when used herein with initial capital letters:
"Advice" shall have the meaning set forth in Section 6 hereof.
--------
"Common Stock" shall mean the Common Stock, par value $0.01 per share, of
--------------
the Company.
"Demand Notice" shall have the meaning set forth in Section 3 hereof.
---------------
"Demand Registration" shall have the meaning set forth in Section 3
---------------------
hereof.
"Executive Investor Entities" shall mean each of the following Delaware
-----------------------------
limited liability companies:
WMB Hotel Associates, L.L.C.;
CapStar GP Corp.
CapStar Executive Investors I, L.L.C.;
CapStar Executive Investors II, L.L.C.;
New CapStar Group I, L.L.C.;
New CapStar Group II, L.L.C.;
CapStar Hotels, Inc.; and
Latham Hotels, Inc.
"Executive Investor Shares" shall mean Registrable Securities which, on the
---------------------------
date hereof, are owned by an Executive Investor Entity.
<PAGE>
2
"Losses" shall have the meaning set forth in Section 8 hereof.
--------
"Operating Partnership" shall mean CapStar Management Company, L.P., a
-----------------------
Delaware limited partnership.
"Piggyback Registration" shall have the meaning set forth in Section 4
------------------------
hereof.
"Prospectus" shall mean the prospectus included in any Registration
------------
Statement (including without limitation a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" shall mean each of the Shares, until, in the case
------------------------
of any such Share, (i) it is effectively registered under the Securities Act and
disposed of in accordance with the Registration Statement covering it, (ii) it
is saleable by the holder thereof pursuant to Rule 144(k), or (iii) it is
distributed to the public by the holder thereof pursuant to Rule 144; provided,
--------
however, that for purposes of Sections 3(a), 3(d) and 4(a), Registrable Shares
- --------
shall not include any Shares that are subject to a lock-up agreement during the
period in which disposition of such Shares would violate the terms of such lock-
up agreement.
"Registration Expenses" shall have the meaning set forth in Section 4
-----------------------
hereof.
"Registration Statement" shall mean any registration statement of the
------------------------
Company under the Securities Act that covers any of the Registrable Securities
pursuant to the provisions of this Agreement, including the related Prospectus,
all amendments and supplements to such registration statement (including post-
effective amendments), all exhibits and all material incorporated by reference
or deemed to be incorporated by reference in such registration statement.
"Rule 144" shall mean Rule 144 promulgated by the SEC under the Securities
----------
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC.
"SEC" shall mean the Securities and Exchange Commission.
-----
"Securities Act" shall mean the Securities Act of 1933, as amended.
----------------
<PAGE>
3
"Shares" shall mean all shares of Common Stock acquired by any party hereto
--------
(other than the Company) pursuant to the Formation Agreement as of June 20,
1996, among the Company and the other parties identified on the signature pages
thereof, and any subsequent holder of any such Shares that acquired such Shares
in a transaction exempt from registration under the Securities Act.
"Special Counsel" shall have the meaning set forth in Section 7(b)
-----------------
hereof.
"Underwritten registration or underwritten offering" shall mean a sale of
----------------------------------------------------
securities of the Company to an underwriter for reoffering to the public
pursuant to a Registration Statement filed by the Company with the SEC under the
Securities Act.
"Units" shall mean units representing limited partnership ownership
-------
interests in the Operating Partnership, which interests may be redeemed, under
certain circumstances for Shares.
2. Executive Investor Entities Registration.
----------------------------------------
(a) Request for Registration. Unless the Company has theretofore filed
-------------------------
a registration with respect to a Special Demand Registration (as defined in
Section 3(b)), at any time after the date that is one year following the date
hereof, any or all of the Executive Investor Entities, will have the right,
exercisable one time by written notice to the Company (an "Executive Investor
Entity Notice"), to require the Company to file with the SEC a registration
statement under the Securities Act (an "Executive Investor Entity Registration")
registering the distribution of the Registrable Securities held by such
Executive Investor Entity to direct or indirect owners of equity interests in
such Executive Investor Entity, whether pursuant to the dissolution of such
Executive Investor Entity or otherwise, under and in accordance with the
provisions of the Securities Act (an "Equity Holder Distribution"). If, in the
view of the Company's legal counsel a registration statement relating to an
Equity Holder Distribution will not result in the shares to be distributed
pursuant thereto to persons other than affiliates of the Company being freely
tradable by such non-affiliates under the Securities Act, the Company shall not
be required to prepare and file such registration statement and the Company
shall so notify the Executive Investor Entities.
(b) Filing and Effectiveness. Subject to the last sentence of Section
-------------------------
2(a) hereof, the Company will file a Registration Statement relating to an
Executive Investor Entity Registration within 60 calendar days of the date on
which the Executive Investor Notice is given an will use all reasonable efforts
to cause the same to be declared effective by the SEC within 120 calendar days
of the date on which the Executive Investor Notice is first given. Any request
made pursuant to this Section 2 will specify the number of Registrable
Securities to be registered and will also specify the intended method of
distribution thereof.
<PAGE>
4
3. Demand Registration.
-------------------
(a) Requests for Registration. At any time and from time to time after
--------------------------
the date that is 180 days following the date of this Agreement, one or more
holders of Registrable Securities will have the right, by written notice
delivered to the Company (a "Demand Notice"), to require the Company to register
(a "Demand Registration") Registrable Securities under and in accordance with
the provisions of the Securities Act; provided, however, that (i) no such Demand
------------------
Registration may be required unless the total amount of Registrable Securities
sought to be included in such Demand Registration has a market value of at least
$10 million (calculated based on the closing sale price of such securities on
the principal securities exchange on which such securities are listed on the
business day immediately preceding the date of the Demand Notice) as of the time
a Demand Notice is given and (ii) no Demand Notice may be given prior to six
months after the effective date of the immediately preceding Demand
Registration. Notwithstanding the foregoing, a good faith decision by a holder
to withdraw Registrable Securities from registration will not affect the
Company's obligations hereunder even if the amount remaining to be registered
has a market value of less than $10 million (calculated as aforesaid). Subject
to the foregoing, there shall be no limit on the number of Demand Registrations
that may be required pursuant to this Agreement.
(b) Request for Special Demand Registration. At any time after the date
----------------------------------------
that is one year following the date of this Agreement, one or more holders of
Executive Investor Shares will have the right, exercisable one time only by
written notice delivered to the Company (a "Special Demand Notice"), to require
the Company to register (a "Special Demand Registration") Executive Investor
Shares under and in accordance with the provisions of the Securities Act;
provided, however., that (i) no such Special Demand Registration may be required
- -------------------
unless the total amount of Executive Investor Shares sought to be included in
such Demand Registration has a market value of at least $5 million (calculated
based on the closing sale price of such securities on the principal securities
exchange on which such securities are listed on the business day immediately
preceding the date of the Demand Notice) as of the time a Special Demand Notice
is given, and (ii) no Special Demand Notice may be given prior to six months
after :the effective date of any Demand Registration. Notwithstanding the
foregoing, a good faith decision by a holder of Executive Investor Shares to
withdraw its Executive Investor Shares will not affect the Company's obligation
hereunder even if the amount remaining to be registered has a market value of
less than $5 million (calculated as aforesaid) provided that the market value of
the amount remaining to be registered is at least $3 million.
(c) Filing and Effectiveness. The Company will file a Registration
-------------------------
Statement relating to any Demand Registration (including a Special Demand
Registration) as soon as possible after the date on which the Demand Notice is
given (but in no event later than 60 calendar days after receipt of such Demand
<PAGE>
5
Notice) and will use all reasonable efforts to cause the same to be declared
effective by the SEC within 120 calendar days of the date on which the holders
of Registrable Securities first give the Demand Notice required by Section 3(a)
hereof or the Special Demand Notice required by Section 3(b) hereof, as the case
may be, with respect to such Demand Registration.
All requests made pursuant to this Section 3 will specify the number of
Registrable Securities to be registered and will also specify the intended
methods of disposition thereof.
If any Demand Registration is requested to be effected as a "shelf"
registration by the holders of Registrable Securities demanding such Demand
Registration, the Company will keep the Registration Statement filed in respect
thereof effective for a period of up to six months from the date on which the
SEC declares such Registration Statement effective (subject to extension
pursuant to Sections 5 and 6 hereof) or such shorter period that will terminate
when all Registrable Securities covered by such Registration Statement have been
sold pursuant to such Registration Statement.
Within ten calendar days after receipt of such Demand Notice, the Company
will serve written notice thereof (the "Notice") to all other holders of
Registrable Securities and will, subject to the provisions of Section 3(d)
hereof, include in such registration all Registrable Securities with respect to
which the Company receives written requests for inclusion therein within 20
calendar days after the receipt of the Notice by the applicable holder. The
holders of Registrable Securities will be permitted to withdraw in good faith
all or part of the Registrable Securities from a Demand Registration at any time
prior to the effective date of such Demand Registration, in which event the
Company will promptly amend or, if applicable, withdraw the related Registration
Statement.
(d) Priority on Demand Registration. If Registrable Securities are to
--------------------------------
be registered pursuant to a Demand Registration (including a Special Demand
Registration), the Company shall provide written notice to the other holders of
Registrable Securities and will permit all such holders who request to be
included in the Demand Registration to include any or all Registrable Securities
held by such holders in such Demand Registration. Notwithstanding the foregoing,
if the managing underwriter or underwriters of an underwritten offering to which
such Demand Registration relates advises the holders of Registrable Securities
that the total amount of Registrable Securities that such holders intend to
include in such Demand Registration is in the aggregate such as to materially
and adversely affect the success of such offering, then (i) in the case of a
Demand Registration pursuant to Section 3(a) hereof, the number of Registrable
Securities to be included in such Demand Registration will, if necessary, be
reduced and there will be included in such underwritten offering the number of
Registrable Securities that, in the opinion of such managing underwriter or
underwriters, can be sold without materially and adversely
<PAGE>
6
affecting the success of such offering, allocated pro rata among the holders of
--------
Registrable Securities on the basis of the amount of Registrable Securities
requested to be included therein by each such holder, and (ii) in the case of a
Special Demand Registration, the amount of Registrable Securities other than
Executive Investor Shares (allocated pro rata among such holders on the basis of
--------
the Registrable Securities other than Executive Investor Securities requested to
be included therein by each such holder) shall be reduced (to zero if necessary)
to reduce the total amount of securities to be included in such offering to the
amount recommended by such managing underwriter or underwriters.
(e) Postponement of Demand Registration. The Company will be entitled
------------------------------------
to postpone the filing period of any Demand Registration for a reasonable period
of time not in excess of 90 calendar days, if the Company determines, in the
good faith exercise of the business judgment of its Board of Directors, that
such registration and offering could materially interfere with bona fide
--------
financing plans of the Company or would require disclosure of information, the
premature disclosure of which could materially and adversely affect the Company.
If the Company postpones the filing of a Registration Statement, it will
promptly notify the holders of Registrable Securities in writing when the events
or circumstances permitting such postponement have ended.
4. Piggyback Registration.
----------------------
(a) Right to Piggyback. If at any time the Company proposes to file a
-------------------
registration statement under the Securities Act with respect to a primary
offering of any class of equity securities (or securities convertible into,
exchangeable for or exercisable for a class of equity securities of the Company)
by the Company (other than a registration statement (i) on Form S-4, S-8 or any
successor form thereto, (ii) filed in connection with an exchange offer or an
offering of securities solely to the Company's existing stockholders or (iii)
filed solely in connection with an offering made solely to employees of the
Company or in connection with an Executive Investor Entity Registration), then
the Company will give written notice of such proposed filing to the holders of
Registrable Securities at least 30 calendar days before the anticipated filing
date. Such notice will offer such holders the opportunity to register such
amount of Registrable Securities as each such holder may request (a "Piggyback
Registration"). Subject to Section 4(b) hereof, the Company will include in each
such Piggyback Registration all Registrable Securities with respect to which the
Company has received written requests for inclusion therein. The holders of
Registrable Securities will be permitted to withdraw all or part of the
Registrable Securities from a Piggyback Registration at any time prior to the
effective date of such Piggyback Registration.
(b) Priority on Piggyback Registrations. The Company will cause the
------------------------------------
managing underwriter or underwriters of a proposed underwritten offering on
behalf of the Company to permit holders of Registrable Securities requested to
be
<PAGE>
7
included in the registration for such offering to include therein all such
Registrable Securities requested to be so included on the same terms and
conditions as any securities of the Company included therein. Notwithstanding
the foregoing, if the managing underwriter or underwriters of such offering
deliver an opinion to the holders of Registrable Securities to the effect that
the total amount of securities which such holders and the Company propose to
include in such offering is such as to materially and adversely affect the
success of such offering, then the amount of securities to be included therein
for the account of holders of Registrable Securities (allocated pro rata among
--------
such holders on the basis of the Registrable Securities requested to be included
therein by each such holder) will be reduced (to zero if necessary) to reduce
the total amount of securities to be included in such offering to the amount
recommended by such managing underwriter or underwriters. The managing
underwriter or underwriters, applying the same standard, may also exclude
entirely from such offering all Registrable Securities proposed to be included
in such offering to the extent the Registrable Securities are not of the same
class as securities of the Company included in such offering.
5. Restrictions on Sale by Holders of Registrable Securities. Each holder
----------------------------------------------------------
of Registrable Securities agrees, if such holder is so requested (pursuant to a
timely written notice) by the managing underwriter or underwriters in an
underwritten offering of any class of securities that constitutes Registrable
Securities, not to effect any public sale or distribution of any of the
Company's securities of such class (except as part of such underwritten
offering), including a sale pursuant to Rule 144, during the 10-calendar day
period prior to, and during the 90-calendar day period beginning on, the closing
date of such underwritten offering.
6. Registration Procedures. In connection with the Company's registration
------------------------
obligations pursuant to Sections 2, 3 and 4 hereof, the Company will effect such
registrations to permit the sale of such Registrable Securities in accordance
with the intended method or methods of disposition thereof, and pursuant thereto
the Company will as expeditiously as possible, in each case, to the extent
applicable:
(a) Prepare and file with the SEC a Registration Statement or
Registration Statements on any appropriate form under the Securities Act
available for the sale of the Registrable Securities by the holders thereof in
accordance with the intended method or methods of distribution thereof, and
cause each such Registration Statement to become effective and remain effective
as provided herein; provided, however, that before filing a Registration
------------------
Statement or Prospectus or any amendments or supplements thereto (including
documents that would be incorporated or deemed to be incorporated therein by
reference) the Company will furnish to the holders of the Registrable Securities
covered by such Registration Statement, the Special Counsel and the managing
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be subject to review of such holders, the Special Counsel and
such underwriters, and the Company will not file any such Registration Statement
or amendment thereto or any Prospectus or any supplement thereto (including such
<PAGE>
8
documents which, upon filing, would or would be incorporated or deemed to be
incorporated by reference therein) to which the holders of a majority of the
Registrable Securities covered by such Registration Statement, the Special
Counsel or the managing underwriter, if any, shall reasonably object on a timely
basis.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the applicable period
specified in Section 3; cause the related Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 (or any similar provision then in force) under the Securities Act; and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement as so amended or to such
Prospectus as so supplemented.
(c) Notify the selling holders of Registrable Securities, the Special
Counsel and the managing underwriters, if any, promptly, and (if requested by
any such person) confirm such notice in writing, (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and, with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the SEC or any other federal
or state governmental authority for amendments or supplements to a Registration
Statement or related Prospectus or for additional information, (iii) of the
issuance by the SEC or any other federal or state governmental authority of any
stop order suspending the effectiveness of a Registration Statement or the
initiation of any proceedings for that purpose, (iv) if at any time the
representations and warranties of the Company contained in any agreement
contemplated by Section 6(m) hereof (including any underwriting agreement) cease
to be true and correct, (v) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose, (vi) of the
occurrence of any event which makes any statement made in such Registration
Statement or related Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or which
requires the making of any changes in a Registration Statement, Prospectus or
documents so that, in the case of the Registration Statement, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and, in the case of the Prospectus, it will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and
(vii) of the Company's reasonable determination that a post-effective amendment
to a Registration Statement would be appropriate.
<PAGE>
9
(d) Use every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of any
of the Registrable Securities for sale in any jurisdiction, at the earliest
possible moment.
(e) If requested by the managing underwriters, if any, or the holders
of a majority of the Registrable Securities being registered, (i) promptly
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters, if any, and such holder agree should
be included therein as may be required by applicable law and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company will not be required to take any
------------------
actions under this Section 6(e) that are not, in the opinion of counsel for the
Company, in compliance with applicable law.
(f) Furnish to each selling holder of Registrable Securities, the
Special Counsel and each managing underwriter, if any, without charge, at least
one conformed copy of the Registration Statement and any post-effective
amendment thereto, including financial statements (but excluding schedules, all
documents incorporated or deemed incorporated therein by reference and all
exhibits, unless requested in writing by such holder, counsel or underwriter).
(g) Deliver to each selling holder of Registrable Securities, the
Special Counsel and the underwriters, if any, without charge, as many copies of
the Prospectus or Prospectuses relating to such Registrable Securities
(including each preliminary prospectus) and any amendment or supplement thereto
as such persons may request; and the Company hereby consents to the use of such
Prospectus or each amendment or supplement thereto by each of the selling
holders or Registrable Securities and the underwriters, if any, in connection
with the offering and sale of the Registrable Securities covered by such
Prospectus or any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, to register
or qualify or cooperate with the selling holders of Registrable Securities, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions within the United States as
any seller or underwriter reasonably requests in writing; use all reasonable
efforts to keep each such registration or qualification (or exemption therefrom)
effective during the period such Registration Statement is required to be kept
effective and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdiction of the Registrable Securities
covered by the applicable Registration Statement; provided, however, that the
------------------
Company will not be required to (i) qualify general to do business in any
jurisdiction
<PAGE>
10
in which it is not then so qualified or (ii) take any action that would subject
it to general service of process in any such jurisdiction in which it is not
then so subject.
(i) Cooperate with the selling holders of Registrable Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and
enable such Registrable Securities to be in such denominations and registered in
such names as the managing underwriters, if any, shall request at least two
business days prior to any sale of Registrable Securities to the underwriters.
(j) Use all reasonable efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the United
States except as may be required solely as a consequence of the nature of such
selling holder's business, in which case the Company will cooperate in all
reasonable respects with the filing of such Registration Statement and the
granting of such approvals as may be necessary to enable the seller or sellers
thereof or the underwriters, if any, to consummate the disposition of such
Registrable Securities.
(k) Upon the occurrence of any event contemplated by Section 6(c)(vi)
or 6(c)(vii) hereof, prepare a supplement or post-effective amendment to each
Registration Statement or a supplement to the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not 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, in light of the circumstances under
which they were made, not misleading.
(l) Use all reasonable efforts to cause all Registrable Securities
covered by such Registration Statement to be listed on each securities exchange,
if any, on which similar securities issued by the Company are then listed.
(m) Enter into such agreements (including, in the event of an
underwritten offering, an underwriting agreement in form, scope and substance as
is customary in underwritten offerings) and take all such other actions in
connection therewith (including those requested by the holders of a majority of
the Registrable Securities being sold or, in the event of an underwritten
offering, those requested by the managing underwriters) in order to expedite or
facilitate the disposition of such Registrable Securities and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration, (i) make such
representations and warranties to the holders of such Registrable Securities and
the underwriters, if any, with respect to the business of the Company and its
subsidiaries, the Registration Statement, Prospectus and documents incorporated
by reference or deemed incorporated by reference, if any, in each case,
<PAGE>
11
in form, substance and scope as are customarily made by issuers to underwriters
in underwritten offerings and confirm the same if and when requested; (ii)
obtain opinions of counsel to the Company and updates thereof (which counsel and
opinions (in form, scope and substance) shall be reasonably satisfactory to the
managing underwriters, if any, and the holders of a majority of the Registrable
Securities being sold) addressed to such selling holder of Registrable
Securities and each of the underwriters, if any, covering the matters
customarily covered in opinions requested in underwritten offerings and such
other matters as may be reasonably requested by such holders and underwriters,
including without limitation the matters referred to in Section 6(M)(i) hereof;
(iii) use its best efforts to obtain "comfort" letters and updates thereof from
the independent certified public accountants of the Company (and, if necessary,
any other certified public accountants of any subsidiary of the Company or of
any business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to each selling holder of Registrable Securities and each
of the underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "comfort" letters in connection with
underwritten offerings; and (iv) deliver such documents and certificates as may
be requested by the holders of a majority of the Registrable Securities being
sold, the Special Counsel and the managing underwriters, if any, to evidence the
continued validity of the representations and warranties of the Company and its
subsidiaries made pursuant to clause (i) above and to evidence compliance with
any customary conditions contained in the underwriting agreement or similar
agreement entered into by the Company. The foregoing actions will be taken in
connection with each closing under such underwriting or similar agreement as and
to the extent required thereunder.
(n) Make available for inspection by a representative of the holders of
Registrable Securities being sold, any underwriter participating in any
disposition of Registrable Securities, and any attorney or accountant retained
by such selling holders or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and cause the officers, directors and employees of the Company and
its subsidiaries to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with such
Registration Statement; provided, however, that any records, information or
------------------
documents that are designated by the Company in writing as confidential at the
time of delivery of such records, information or documents will be kept
confidential by such persons unless (i) such records, information or documents
are in the public domain or otherwise publicly available, (ii) disclosure of
such records, information or documents is required by court or administrative
order or is necessary to respond to inquiries of regulatory authorities, or
(iii) disclosure of such records, information or documents, in the opinion of
counsel to such person, is otherwise required by law (including, without
limitation, pursuant to the requirements of the Securities Act).
<PAGE>
12
(o) Comply with all applicable rules and regulations of the SEC and
make generally available to its security holders earning statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act) no later than 45
calendar days after the end of any 12-month period (or 90 calendar days after
the end of any 12-month period if such period is a fiscal year) (i) commencing
at the end of any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm commitment or best efforts underwritten offering, and
(ii) if not sold to underwriters in such an offering, commencing on the first
day of the first fiscal quarter of the Company, after the effective date of a
Registration Statement, which statements shall cover said 12-month period.
(p) In connection with any underwritten offering, cause appropriate
members of its management to cooperate and participate on a reasonable basis in
the underwriters' "road show" conferences related to such offering.
The Company may require each seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such Registrable Securities as the Company may,
from time to time, reasonably request in writing and the Company may exclude
from such registration the Registrable Securities of any seller who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
Each holder of Registrable Securities will be deemed to have agreed by
virtue of its acquisition of such Registrable Securities that, upon receipt of
any notice from the Company of the occurrence of any event of the kind described
in Section 6(c)(ii), 6(c)(iii), 6(c)(v), 6(c)(vi) or 6(c)(vii) hereof, such
holder will forthwith discontinue disposition of such Registrable Securities
covered by such Registration Statement or Prospectus until such holder's receipt
of the copies of the supplemented or amended Prospectus contemplated by Section
6(k) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and has received
copies of any additional or supplemental filings that are incorporated or deemed
to be incorporated by reference in such Prospectus. In the event the Company
shall give any such notice, the time period prescribed in Section 3(a) hereof
will be extended by the number of days during the time period from and including
the date of the giving of such notice to and including the date when each seller
of Registrable Securities covered by such Registration Statement shall have
received (x) the copies of the supplemented or amended Prospectus contemplated
by Section 6(k) hereof or (y) the Advice.
7. Registration Expenses.
---------------------
(a) All fees and expenses incident to the performance of or compliance
with this Agreement by the Company will be borne by the Company whether or not
any of the Registration Statements become effective. Such fees and
<PAGE>
13
expenses will include, without limitation, (i) all registration and filing fees
(including without limitation fees and expenses (x) with respect to filings
required to be made with the National Association of Securities Dealers, Inc.
and (y) of compliance with securities or "blue sky" laws (including without
limitation fees and disbursements of counsel for the underwriters or selling
holders in connection with "blue sky" qualifications of the Registrable
Securities and determination of the eligibility of the Registrable Securities
for investment under the laws of such jurisdictions as the managing
underwriters, if any, or holders of a majority of the Registrable Securities
being sold may designate)), (ii) printing expenses (including without limitation
expenses of printing certificates for Registrable Securities in a form eligible
for deposit with The Depository Trust Company and of printing prospectuses if
the printing of prospectuses is requested by the holders of a majority of the
Registrable Securities included in any Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and the Special Counsel for the sellers of the Registrable Securities,
(v) fees and disbursements of all independent certified public accountants
referred to in Section 6(m)(iii) hereof (including the expenses of any special
audit and "comfort" letters required by or incident to such performance), (vi)
any fees and expenses of any "qualified independent underwriter" or other
independent appraiser participating in an offering pursuant to Section 3 of
Schedule E to the By-laws of the National Association of Securities Dealers,
Inc., (vii) Securities Act liability insurance if the Company so desires such
insurance, and (viii) fees and expenses of all other persons retained by the
Company. In addition, the Company will pay its internal expenses (including
without limitation all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the securities to
be registered on any securities exchange on which similar securities issued by
the Company are then listed and the fees and expenses of any person, including
special experts, retained by the Company. In no event, however, will the Company
be responsible for any underwriting discount or selling commission with respect
to any sale of Registrable Securities pursuant to this Agreement.
(b) In connection with any Demand Registration (including a Special Demand
Registration) or Piggyback Registration hereunder, the Company will reimburse
the holders of the Registrable Securities being registered in such registration
for the reasonable fees and disbursements of not more than one counsel (the
"Special Counsel"), together with appropriate local counsel, chosen by the
holders of a majority of the Registrable Securities being registered.
8. Indemnification.
---------------
(a) Indemnification by the Company. The Company will, without
-------------------------------
limitation as to time, indemnify and hold harmless, to the fullest extent
permitted by law, each holder of Registrable Securities registered pursuant to
this Agreement, the officers, directors and agents and employees of each of
them, each
<PAGE>
14
person who controls such holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and the officers, directors,
agents and employees of any such controlling person, from and against all
losses, claims, damages, liabilities, costs (including without limitation the
costs of investigation and attorneys' fees) and expenses (collectively,
"Losses"), as incurred, arising out of or based upon any untrue or alleged
untrue statement of a material fact contained in any Registration Statement,
Prospectus or form of Prospectus or in any amendment or supplement thereto or in
any preliminary prospectus, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are based solely upon information furnished in writing to the Company
by such holder expressly for use therein; provided, however, that the Company
------------------
will not be liable to any holder of Registrable Securities to the extent that
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any preliminary
prospectus if either (A) (i) such holder failed to send or deliver a copy of the
Prospectus with or prior to the delivery of written confirmation of the sale by
such holder of a Registrable Security to the person asserting the claim from
which such Losses arise and (ii) the Prospectus would have completely corrected
such untrue statement or alleged untrue statement or such omission or alleged
omission; or (B) such untrue statement or alleged untrue statement, omission or
alleged omission is completely corrected in an amendment or supplement to the
Prospectus previously furnished by or on behalf of the Company with copies of
the Prospectus as so amended or supplemented, and such holder thereafter fails
to deliver such Prospectus as so amended or supplemented prior to or
concurrently with the sale of a Registrable Security to the person asserting the
claim from which such Losses arise.
(b) Indemnification by Holders of Registrable Securities. In connection
-----------------------------------------------------
with any Registration Statement in which a holder of Registrable Securities is
participating, such holder of Registrable Securities will furnish to the Company
in writing such information as the Company reasonably requests for use in
connection with any Registration Statement or Prospectus and will indemnify, to
the fullest extent permitted by law, the Company, its directors and officers,
agents and employees, each person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling persons, from and
against all Losses arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, Prospectus or preliminary
prospectus or arising out of or based upon any omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such holder
to the Company expressly for use in such Registration Statement or Prospectus
and was relied upon by the Company in the preparation of such Registration
Statement, Prospectus or preliminary prospectus. In no event will the liability
of any selling holder of Registrable Securities hereunder be greater in amount
<PAGE>
15
than the dollar amount of the proceeds (net of payment of all expenses) received
by such holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any person shall become
---------------------------------------
entitled to indemnity hereunder (an "indemnified party"), such indemnified party
shall give prompt notice to the party from which such indemnity is sought (the
"indemnifying party") of any claim or of the commencement of any action or
proceeding with respect to which such indemnified party seeks indemnification or
contribution pursuant hereto; provided, however, that the failure to so notify
------------------
the indemnifying party will not relieve the indemnifying party from any
obligation or liability except to the extent that the indemnifying party has
been prejudiced materially by such failure. All fees and expenses (including any
fees and expenses incurred in connection with investigating or preparing to
defend such action or proceeding) will be paid to the indemnified party, as
incurred, within five calendar days of written notice thereof to the
indemnifying party (regardless of whether it is ultimately determined that an
indemnified party is not entitled to indemnification hereunder). The
indemnifying party will not consent to entry of any judgment or enter into any
settlement or otherwise seek to terminate any action or proceeding in which any
indemnified party is or could be a party and as to which indemnification or
contribution could be sought by such indemnified party under this Section 8,
unless such judgment, settlement or other termination includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release, in form and substance satisfactory to the
indemnified party, from all liability in respect of such claim or litigation for
which such indemnified party would be entitled to indemnification hereunder.
(d) Contribution. If the indemnification provided for in this Section 8 is
-------------
unavailable to an indemnified party under Section 8(a) or 8(b) hereof in respect
of any Losses or is insufficient to hold such indemnified party harmless, then
each applicable indemnifying party, in lieu of indemnifying such indemnified
party, will, jointly and severally, contribute to the amount paid or payable by
such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party or
indemnifying parties, on the one hand, and such indemnified party, on the other
hand, in connection with the actions, statement or omissions that resulted in
such Losses as well as any other relevant equitable considerations. The relative
fault of such indemnifying party or indemnifying parties, on the one hand, and
such indemnified party, on the other hand, will be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of a
material fact, has been taken or made by, or related to the information supplied
by, such indemnifying party or indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action, statement or omission. The amount paid or payable by a party
<PAGE>
16
as a result of any Losses will be deemed to include any legal or other fees or
expenses incurred by such party in connection with any action or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8(d) were determined by pro rata
-------
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provision of this Section 8(d), an indemnifying party that
is a selling holder of Registrable Securities will not be required to contribute
any amount in excess of the amount by which the total price at which the
Registrable Securities sold by such indemnifying party and distributed to the
public were offered to the public exceed the amount of any damages which such
indemnifying party has otherwise been required to pay by reason of such 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) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
The indemnity, contribution and expense reimbursement obligations of the
Company hereunder will be in addition to any liability the Company may otherwise
have hereunder or otherwise. The provisions of this Section 8 will survive so
long as Registrable Securities remain outstanding, notwithstanding any transfer
of the Registrable Securities by any holder thereof or any termination of this
Agreement.
9. Rule 144. The Company will file the reports required to be filed by it
---------
under the Securities Act and the Exchange Act, and will cooperate with any
holder of Registrable Securities (including without limitation by making such
representations as any such holder may reasonably request), all to the extent
required from time to time to enable such holder to sell Registrable Securities
without registration under the Securities Act within the limitations of the
exemptions provided by Rule 144. Upon the request of any holder of Registrable
Securities, the Company will deliver to such holder a written statement as to
whether it has complied with such filing requirements. Notwithstanding the
foregoing, nothing in this Section 9 will be deemed to require the Company to
register any of its securities under any section of the Exchange Act.
10. Underwritten Registrations. If any of the Registrable Securities covered
---------------------------
by any Demand Registration are to be sold in an underwritten offering, the
investment banker or investment bankers and manager or managers that will manage
the offering will be selected by the holders of a majority of the Registrable
Securities included in the Demand Notice; provided, that such investment banker
---------
or manager shall be reasonably satisfactory to the Company. If any Piggyback
Registration is an underwritten offering, the Company will have the right to
select the investment banker or investment bankers and managers to administer
the offering.
<PAGE>
17
11. Miscellaneous.
-------------
(a) Remedies. In the event of a breach by the Company of its
---------
obligations under this Agreement, each holder of Registrable Securities, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of any
of the provisions of this Agreement and hereby further agrees that, in the event
of any action for specified performance in respect of such breach, it will waive
the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company has not, as of the date
---------------------------
hereof, and will not, on or after the date hereof, enter into any agreement with
respect to its securities which is inconsistent with the rights granted to the
holders of Registrable Securities in this Agreement or otherwise conflicts with
the provisions hereof.
(c) Amendments and Waivers. The provisions of this Agreement,
-----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of the
holders of 90% of the then-outstanding Registrable Securities. Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of holders of
Registrable Securities whose securities are being sold pursuant to a
Registration Statement and that does not directly or indirectly affect the
rights of other holders of Registrable Securities may be given by holders of at
least 75 % of the Registrable Securities being sold by such holders; provided,
--------
however, that the provisions of this sentence may not be amended, modified, or
- --------
supplemented except in accordance with the provisions of the immediately
preceding sentence.
(d) Notices. All notices and other communications provided for or
--------
permitted hereunder shall be made in writing and will be deemed given (i) when
made, if made by hand delivery, (ii) upon confirmation, if made by telecopier,
or (iii) one business day after being deposited with a reputable next-day
courier, to the parties as follows:
(x) if to the Company, initially at 1010 Wisconsin Avenue, N.W.,
Washington, D.C. 20007, Telecopier (202) 965-4455, Attention: President, and
thereafter at such other address, notice of which is given to the holders of
Registrable Securities in accordance with the provisions of this Section 11(e);
and
<PAGE>
18
(y) if to any holder of Registrable Securities, at the most
current address given by such holder to the Company in accordance with the
provisions of this Section 11(e).
(e) Owner of Registrable Securities. The Company will maintain, or will
--------------------------------
cause its registrar and transfer agent to maintain, a stock book with respect to
the Common Stock, in which all transfers of Registrable Securities of which the
Company has received notice will be recorded. The Company may deem and treat the
person in whose name Registrable Securities are registered in the stock book of
the Company as the owner thereof for all purposes, including without limitation
the giving of notices under this Agreement.
(f) Successors and Assigns. This Agreement will inure to the benefit
-----------------------
of and be binding upon the successors and assigns of each of the parties
(including any pledgee acquiring securities by foreclosure) and will inure to
the benefit of each holder of any Registrable Securities. Notwithstanding the
foregoing, no transferee will have any of the rights granted under this
Agreement (i) until such transferee shall have acknowledged its rights and
obligations hereunder by a signed written statement of such transferee's
acceptance of such rights and obligations, (ii) if the transferor notifies the
Company in writing on or prior to such transfer that the transferee shall not
have such rights, or (iii) if such transferee was not a party to this Agreement
on the date hereof (or an affiliate of a party hereto) and acquired Registrable
Securities in open-market purchases or pursuant to an underwritten public
offering.
(g) Counterparts. This Agreement may be executed in any number of
-------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed will be deemed to be an original and all of which taken
together will constitute one and the same instrument.
(h) Headings. The headings in this Agreement are for convenience of
---------
reference only and will not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
--------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS.
(j) Severability. If any term, provision, covenant or restriction of
-------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein will remain in full force and effect and will in
no way be affected, impaired or invalidated, and the parties hereto will use
their best efforts to
<PAGE>
19
find and employ an alternative means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention of the
parties that they would have executed the remaining terms, provisions, covenants
and restrictions without including any of such which may be hereafter declared
invalid, void or unenforceable.
(k) Entire Agreement. This Agreement is intended by the parties as a
-----------------
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the registration rights granted by the Company with respect to the
Registrable Securities. This Agreement supersedes all prior agreements and
understandings among the parties with respect to such registration rights.
(l) Attorneys' Fees. In any action or proceeding brought to enforce
----------------
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by the court, will be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
(m) Termination. This Agreement shall terminate, and thereby become
------------
null and void, on the tenth anniversary of the date hereof; provided, however,
that the provisions of Section 8 and Sections 11 (i) and (1) shall survive the
termination of this Agreement.
IN WITNESS HEREOF, the parties have executed a counterpart signature page of
this Agreement as of the date first above written.
CAPSTAR HOTEL INVESTORS, INC.
By:
--------------------------------------
Name:
Title:
CHERWELL INVESTORS, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
20
WMB HOTEL ASSOCIATES, L.L.C.
By:
-----------------------------
Name:
Managing Member
CAPSTAR EXECUTIVE INVESTORS I, L.L.C.
By:
-----------------------------
Name:
Managing Member
MC INVESTMENT CORPORATION
By:
-----------------------------
Name:
Title:
CAPSTAR HOTELS, INC.
By:
------------------------------
Name:
Title:
LATHAM HOTELS, INC.,
By:
------------------------------
Name:
Title:
<PAGE>
21
CAPSTAR GP CORP.
By:
------------------------------
Name:
Title:
CAPSTAR EXECUTIVE INVESTORS II, L.L.C.
By:
------------------------------
Name:
Managing Member
OHP EQUISTAR, L.P.
By: Oak Hill Partners, Inc.,
General Partner
By:
------------------------------
Name:
Title:
OHP EQUISTAR II, L.P.
By: Oak Hill Partners, Inc.,
General Partner
By:
------------------------------
Name:
Title:
PENOBSCOT PARTNERS, L.P.
By: PTJ Merchant Banking Partners, L.P.,
General Partner
By: PTJ, Inc.,
Managing General Partner
By:
------------------------------
Name:
Title:
<PAGE>
22
FWHY COINVESTMENTS VIII PARTNERS, L.P.
By: Group 31, Inc.,
General Partner
By:
------------------------------
Name:
Title:
EXHIBIT 21
Jurisdiction of
Incorporation or Doing
Name Organization Business As
---- ------------ ----------
1. CMC Airport, Inc. New York --
2. EquiStar Acquisition Delaware
Corporation
3. EquiStar Arlington Partners, Delaware Arlington Hilton Hotel
L.P.
4. EquiStar Atlanta Company, Delaware --
L.L.C.
5. EquiStar Atlanta GP Delaware --
Company, L.L.C.
6. EquiStar Atlanta LP Delaware --
Company, L.L.C.
7. EquiStar Ballston Company, Delaware Arlington Renaissance Hotel
L.L.C.
8. EquiStar Bellevue Company, Delaware Bellevue Hilton Hotel
L.L.C.
9. EquiStar Charlotte Company, Delaware Charlotte Sheraton Airport
L.L.C. Plaza
10. EquiStar Cleveland Company, Delaware Cleveland Holiday Inn
L.L.C.
11. EquiStar Colorado Company, Delaware Colorado Springs Sheraton
L. L.C. Hotel
12. EquiStar Irvine Company, Delaware Irvine Hilton Hotel
L.L.C.
13. EquiStar Latham Company, Delaware Georgetown Latham Hotel
L.L.C.
14. EquiStar Salt Lake Company, Delaware Salt Lake Airport Hilton
L.L.C.
15. EquiStar Schaumberg Delaware Schaumberg Radisson Hotel
Company, L.L.C.
16. EquiStar Somerset Company, Delaware Somerset Marriott Hotel
L.L.C,
17. Leperq Atlanta Renaissance Delaware Atlanta Airport Westin
Partners, L.P.
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.
June 21, 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
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
June 21, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CAPSTAR HOTEL INVESTORS, INC.
FINANCIAL DATA SCHEDULE
AT DECEMBER 31, 1995 AND MARCH 31, 1996
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEETS OF EQUISTAR HOTEL INVESTORS, L.P. AND SUBSIDIARIES AND CAPSTAR
MANAGEMENT COMPANY, L.P. AS OF MARCH 31, 1996 AND DECEMBER 31, 1995 AND THE
RELATED COMBINED STATEMENTS OF OPERATIONS, PARTNERS' CAPITAL, AND CASH FLOWS FOR
THE THREE MONTHS ENDED MARCH 31, 1996 AND FOR THE PERIOD FROM JANUARY 12, 1995
(DATE OF INCEPTION) TO DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<CASH> 7,920,761 6,831,983
<SECURITIES> 0 0
<RECEIVABLES> 5,370,651 2,839,909
<ALLOWANCES> 125,000 91,000
<INVENTORY> 437,635 173,514
<CURRENT-ASSETS> 17,244,520 13,534,998
<PP&E> 168,591,950 110,882,762
<DEPRECIATION> 3,144,894 1,756,412
<TOTAL-ASSETS> 205,674,753 132,650,230
<CURRENT-LIABILITIES> 16,352,039 9,622,552
<BONDS> 140,709,685 73,574,038
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 47,824,039 48,637,722
<TOTAL-LIABILITY-AND-EQUITY> 205,674,753 132,650,230
<SALES> 0 0
<TOTAL-REVENUES> 18,033,938 26,363,348
<CGS> 0 0
<TOTAL-COSTS> 7,121,365 9,626,880
<OTHER-EXPENSES> 11,548,297 16,523,307
<LOSS-PROVISION> 34,000 91,000
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (635,724) 213,161
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (635,724) 213,161
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (887,631)
<CHANGES> 0 0
<NET-INCOME> (642,129) (657,055)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
