<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1997
REGISTRATION NO. 333-22073
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CAPSTAR HOTEL COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7011 52-1979383
(State of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification No.)
</TABLE>
------------------------------
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, DC 20007
(202) 965-4455
(Address and telephone number of Registrant's principal executive offices)
------------------------------
PAUL W. WHETSELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAPSTAR HOTEL COMPANY
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, DC 20007
(202) 965-4455
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD S. BORISOFF, ESQ. J. WARREN GORRELL, JR., ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON ALAN L. DYE, ESQ.
1285 AVENUE OF THE AMERICAS HOGAN & HARTSON L.L.P.
NEW YORK, NEW YORK 10019-6064 555 THIRTEENTH STREET, N.W.
(212) 373-3000 WASHINGTON, DC 20004-1109
(202) 637-5600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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>
SUBJECT TO COMPLETION, DATED FEBRUARY 26, 1997
PROSPECTUS
5,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
CapStar Hotel Company ("CapStar" or the "Company") is a hotel management and
investment company which acquires, renovates, repositions and manages hotels
throughout the United States. CapStar owns and manages 22 upscale, full-service
hotels (the "Owned Hotels") which contain 5,981 rooms and manages an additional
31 hotels owned by third parties which contain 5,488 rooms (the "Managed
Hotels"). CapStar's portfolio of Owned Hotels and Managed Hotels includes 53
hotels which contain 11,469 rooms (the "Hotels"). The Company has entered into
contracts to acquire a portfolio of six hotels which contain 1,358 rooms (the
"Highgate Portfolio") and two additional hotels containing 367 rooms (the
"Additional Acquisitions"). 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.
All of the 5,000,000 shares of common stock, par value $.01 per share (the
"Common Stock") offered hereby, are being offered by the Company. The Common
Stock is listed on the New York Stock Exchange ("NYSE"), under the symbol "CHO."
On February 25, 1997, the last reported sale price of the Common Stock was
$24 1/8.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE
11.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total(3)........................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters 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
750,000 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 $ .
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 , 1997.
-------------------
LEHMAN BROTHERS
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
SMITH BARNEY INC.
-------------------
, 1997.
<PAGE>
[PHOTOGRAPHS/MAPS AND CAPTIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS WILL NOT BE EXERCISED. UNLESS
THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO "CAPSTAR" OR THE "COMPANY"
INCLUDE CAPSTAR HOTEL COMPANY AND ITS SUBSIDIARIES (INCLUDING THE COMPANY'S
SUBSIDIARY OPERATING PARTNERSHIP, CAPSTAR MANAGEMENT COMPANY, L.P., THROUGH
WHICH THE COMPANY OPERATES ALL OF ITS BUSINESSES). THE OFFERING BY THE COMPANY
OF 5,000,000 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 CONSENTED TO THE USE OF THE DATA
PRESENTED IN THIS PROSPECTUS AND HAS NOT PROVIDED ANY FORM OF CONSULTATION,
ADVICE OR COUNSEL REGARDING ANY ASPECT OF THE OFFERING.
THE COMPANY
CapStar is a hotel management and investment company which acquires,
renovates, repositions and manages hotels throughout the United States. CapStar
owns and manages 22 upscale, full-service hotels (the "Owned Hotels") which
contain 5,981 rooms and manages an additional 31 hotels owned by third parties
which contain 5,488 rooms (the "Managed Hotels"). CapStar's portfolio of Owned
Hotels and Managed Hotels includes 53 hotels which contain 11,469 rooms (the
"Hotels"). The Company's business strategy is to 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. The Owned Hotels are located in markets which have
recently experienced strong economic growth, including Albuquerque, Atlanta,
Charlotte, Chicago, Cleveland, Denver, Houston, Los Angeles, Salt Lake City,
Seattle and Washington, D.C. The Owned Hotels include hotels operated under
nationally recognized brand names such as Hilton-TM-,
Sheraton-Registered Trademark-, Westin-TM-, Marriott-Registered Trademark-,
Doubletree-TM- and Embassy Suites-Registered Trademark-. For the year ended
December 31, 1996, on a pro forma basis, the operating performance of the Owned
Hotels (excluding the ten hotels purchased since September 30, 1996) improved
significantly, as demonstrated by the following table:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER
31,
---------------------- PERCENTAGE
1995 1996 INCREASE
---------- ---------- -------------
<S> <C> <C> <C>
Revenues (in thousands)............................... $ 109,798 $ 118,329 7.8%
Gross Operating Profit (in thousands)................. $ 30,947 $ 37,909 22.5%
Average Occupancy..................................... 72.4% 72.9% 0.7%
Average Daily Rate ("ADR")............................ $ 75.25 $ 83.82 11.4%
Revenue Per Available Room ("RevPAR")................. $ 54.44 $ 61.11 12.3%
</TABLE>
Additionally, the performance of the Owned Hotels compares favorably with that
of the industry in general. For the year ended December 31, 1996, RevPAR for the
Owned Hotels (excluding the ten hotels purchased since September 30, 1996)
increased 12.3%, while RevPAR for all upscale hotels, as reported by Smith
Travel Research, increased 5.4%. For the year ended December 31, 1996, RevPAR at
all of the Owned Hotels (including the ten hotels purchased since September 30,
1996) increased 10.1%.
The Company completed its initial public offering (the "IPO") in August
1996. Since the IPO, the Company has significantly expanded its portfolio by
completing the purchase of ten upscale, full-service hotels containing 2,465
rooms for an aggregate total acquisition cost, including estimated closing
costs, planned renovations and initial working capital ("Total Acquisition
Cost"), of $181.6 million. The Company has also entered into a contract with
Highgate Hotels, Inc. and certain affiliated entities ("Highgate Hotels") to
acquire a portfolio of six upscale, full-service hotels containing 1,358 rooms
(the "Highgate Portfolio") for a Total Acquisition Cost of approximately $104.7
million. See "Recent Developments--The
3
<PAGE>
Highgate Portfolio." The Company has also entered into contracts to acquire two
additional hotels containing 367 rooms for a Total Acquisition Cost of $26.7
million (the "Additional Acquisitions"). In addition to the acquisition of these
hotels, since the IPO the Company has invested in a joint venture which owns the
456-room Holiday Inn Riverfront in St. Louis, Missouri and has entered into
three new long-term management agreements.
During the year ended December 31, 1996, the Company spent a total of $21.6
million on renovations at the Owned Hotels and intends to spend an additional
$21.7 million completing the renovation programs (including approximately $8.4
million to renovate and reposition the Highgate Portfolio and the Additional
Acquisitions). See "Special Note Regarding Forward-Looking Statements."
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 20 years of experience in the hotel
industry. Since the inception of the Company's management business in 1987, the
Company has achieved consistent growth, even during periods of relative industry
weakness. The Company attributes its management success to its ability (i) to
analyze each hotel as a unique property and identify those particular cash flow
growth opportunities which each hotel presents, (ii) to create and implement
marketing plans that properly position each hotel within its local market, and
(iii) to develop management programs that emphasize guest service, labor
productivity, revenue yield and cost control. The Company has a distinct
management culture that stresses creativity, loyalty and entrepreneurship and
was developed to emphasize operations from an owner's perspective. This culture
is reinforced by the fact that 33 members of management will hold, directly or
indirectly, an aggregate of 5.5% of the Common Stock upon completion of the
Offering. See "Principal Stockholders."
The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to acquire, own and manage
hotels and further believes that there are currently many attractive
opportunities to acquire properties in this segment of the industry at prices
below replacement cost. The upscale, full-service segment is attractive for
several reasons. First, the Company expects that there will be no significant
increases in the supply of upscale, full-service hotels in the next several
years because the cost of new construction generally does not justify new hotel
development. Second, upscale, full-service hotels appeal to a wide variety of
customers, thus reducing the risk of decreasing demand from any particular
customer group. Additionally, such hotels have particular appeal to both
business executives and upscale leisure travelers, customers who are generally
less price sensitive than travelers who use limited-service hotels. Third,
because full-service hotels have a higher proportion of fixed costs to variable
costs than other segments of the lodging industry, full-service hotels afford
greater operating leverage than limited-service hotels, resulting in
increasingly higher profit margins as revenues increase. Finally, full-service
hotels require a greater depth of management expertise than limited-service
hotels, and the Company believes that its superior management skills provide it
with a significant competitive advantage in their operation.
4
<PAGE>
RECENT DEVELOPMENTS
In August 1996, the Company completed its IPO at a price of $18 per share,
generating net proceeds of approximately $110 million to the Company. Since
completing the IPO, the Company has continued to execute the hotel acquisition
and operating strategies that it had pursued prior to the IPO which has resulted
in significant growth in the Company's hotel portfolio. The Company's
acquisition, financing, and management activities since the IPO are discussed
below.
POST-IPO ACQUISITIONS
At the time of the IPO, the Company owned 12 upscale, full-service hotels,
containing 3,516 rooms. Since the IPO, the Company has acquired ten additional
upscale, full-service hotels containing 2,465 rooms. These newly acquired hotels
are operated under nationally recognized brand names such as Hilton, Doubletree,
Embassy Suites and Holiday Inn-Registered Trademark-. The Company expects to
improve the operating performance of these newly acquired hotels by implementing
the detailed management plans that have been created for each property as part
of its operation strategy. The Company believes that all of its post-IPO
acquisitions represent attractive investment opportunities because (i) they are
located in major metropolitan or growing secondary markets and are well-located
within these markets (ii) they were acquired at an average cost of approximately
$74,000 per room, which represents more than a 30% discount to replacement cost
and (iii) they have attractive current returns and potential for significant
revenue and cash flow growth through implementation of the Company's operating
strategy.
THE HIGHGATE PORTFOLIO
The Company has entered into a contract with Highgate Hotels to acquire the
Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358
rooms for a Total Acquisition Cost of approximately $104.7 million. The
acquisition will be financed with $75.2 million in cash and $29.5 million of
units in the Company's subsidiary operating partnership ("OP Units"). See
"Recent Developments--The Highgate Portfolio." The Highgate Portfolio hotels are
operated under nationally recognized brand names including Sheraton, Doubletree,
Radisson-Registered Trademark-, Ramada-Registered Trademark- and Holiday Inn,
and are located in Dallas, Indianapolis, Calgary and Vancouver. The Highgate
Portfolio enhances the Company's geographic diversity by expanding its portfolio
into Canada and, in connection with the acquisition of the Highgate Portfolio,
the Company has entered into agreements to manage two additional hotels owned by
principals of Highgate Hotels: the 414-room Pontchartrain-Crowne Plaza in
Detroit, Michigan and the 393-room Four Points Hotel in suburban Atlanta. The
Company believes that the acquisition of the Highgate Portfolio and the
establishment of a strategic alliance with Highgate Hotels (one of the
principals of which the Company has agreed to nominate to a new seat on its
board of directors) will provide significant benefits to its on-going
acquisition and corporate development activities. A portion of the net proceeds
from the Offering will be used by the Company to consummate the acquisition of
the Highgate Portfolio. The Company expects to complete the acquisition of the
Highgate Portfolio in April 1997. There can be no assurance, however, that the
closing will occur. See "Risk Factors--Risks Associated with Expansion" and
"Special Note Regarding Forward-Looking Statements."
THE ADDITIONAL ACQUISITIONS
The Company has also entered into contracts to acquire the Additional
Acquisitions: the 213-room Four Points Hotel in Cherry Hill, New Jersey for a
Total Acquisition Cost of $8.2 million and the 154-room Great Valley Sheraton in
Frazer, Pennsylvania for a Total Acquisition Cost of $18.5 million.
MANAGEMENT AGREEMENTS/JOINT VENTURES
In January 1997, the Company invested in a joint venture with Hallmark
Investment Corp. which owns the Holiday Inn Riverfront, located in downtown St.
Louis at the base of the Gateway Arch. In connection
5
<PAGE>
with the joint venture, the Company has signed a long-term agreement to manage
the 456-room property. Since August 1996 the Company has entered into
significant new long-term management agreements with three other hotel owners.
The Company expects to form additional joint ventures and strategic alliances
with institutional and private hotel owners to invest in future acquisitions and
sale and leaseback transactions, and to secure additional fee management
arrangements. See "Special Note Regarding Forward-Looking Statements."
FINANCING ACTIVITIES
In September 1996, the Company entered into a $225 million revolving credit
facility (the "Credit Facility") led by Bankers Trust Company ("Bankers Trust"),
as agent, to fund post-IPO acquisitions, to repay outstanding indebtedness and
for general corporate purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
In December 1996, the Company modified the terms of the Credit Facility to
increase the Company's permitted nonrecourse indebtedness from $25 million to
$50 million and to permit it to incur up to $100 million of subordinated
indebtedness. In December 1996, the Company borrowed $50 million of subordinated
indebtedness (the "Subordinated Debt") to provide additional funding for
acquisitions and for general corporate purposes.
6
<PAGE>
THE PROPERTIES
The following table sets forth certain information for each of the Owned
Hotels, the Highgate Portfolio and the Additional Acquisitions for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
------------------------
<S> <C> <C> <C> <C>
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY
- ---------------------------------------------------------- ------------------------- ----------- --------- -------------
<CAPTION>
<S> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton.............................. Irvine, CA 290 $ 78.48 66.0%
Hilton Hotel.............................................. Sacramento, CA 326 75.89 71.7
Santa Barbara Inn......................................... Santa Barbara, CA 71 129.86 85.1
Hilton Hotel.............................................. San Pedro, CA 226 67.23 62.3
Holiday Inn............................................... Colorado Springs, CO 201 60.57 72.6
Sheraton Hotel............................................ Colorado Springs, CO 502 65.95 70.1
Embassy Suites Denver..................................... Englewood, CO 236 102.57 74.1
Embassy Row Hilton........................................ Washington, DC 195 111.24 60.8
The Latham Hotel.......................................... Washington, DC 143 108.17 72.0
Westin Atlanta Airport.................................... Atlanta, GA 496 79.44 79.3
Radisson Hotel............................................ Schaumburg, IL 202 75.54 66.1
Hilton Hotel & Towers..................................... Lafayette, LA 328 70.05 74.1
Marriott Hotel............................................ Somerset, NJ 434 104.36 72.4
Doubletree Hotel.......................................... Albuquerque, NM 294 77.12 66.6
Sheraton Airport Plaza.................................... Charlotte, NC 226 83.97 70.8
Holiday Inn............................................... Cleveland, OH 237 70.11 73.1
Hilton Hotel.............................................. Arlington, TX 310 81.03 73.3
Southwest Hilton.......................................... Houston, TX 293 72.17 53.9
Westchase Hilton.......................................... Houston, TX 295 89.87 77.9
Salt Lake Airport Hilton.................................. Salt Lake City, UT 287 79.18 75.5
Hilton Hotel.............................................. Arlington, VA 209 109.21 74.5
Hilton Hotel.............................................. Bellevue, WA 180 91.70 80.8
----- --------- ---
Subtotal/Weighted Average--Owned Hotels................. 5,981 $ 83.02 71.3%
HIGHGATE PORTFOLIO
Doubletree Guest Suites................................... Indianapolis, IN 137 $ 79.53 73.5%
Holiday Inn Select........................................ Dallas, TX 348 59.04 61.7
Radisson Hotel............................................ Dallas, TX 305 60.69 74.6
Holiday Inn Calgary Airport............................... Calgary, Alberta 170 53.09 59.3
Sheraton Hotel............................................ Guildford, B.C. 280 69.17 75.2
Ramada Vancouver Centre................................... Vancouver, B.C. 118 70.40 79.4
----- --------- ---
Subtotal/Weighted Average--Highgate Portfolio........... 1,358 $ 64.35 69.8%
ADDITIONAL ACQUISITIONS
Four Points Hotel......................................... Cherry Hill, NJ 213 $ 73.40 61.8%
Great Valley Sheraton..................................... Frazer, PA 154 88.80 72.0
----- --------- ---
Subtotal/Weighted Average--Additional Acquisitions 367 $ 80.43 66.1%
----- --------- ---
Total/Weighted Average.................................. 7,706 $ 79.64 70.8%
----- --------- ---
----- --------- ---
</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.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company........................... 5,000,000 shares
Common Stock to be Outstanding after
the Offering...................... 17,754,321 shares(1)(2)
Use of Proceeds..................... The net proceeds of the Offering will be used to fund
the acquisition of the Highgate Portfolio and the
Additional Acquisitions, to retire outstanding
balances under the Credit Facility and for general
corporate purposes.
NYSE Symbol......................... "CHO"
</TABLE>
- ------------------------
(1) Does not include up to 750,000 shares of Common Stock subject to an
over-allotment option granted to the Underwriters. See "Underwriting."
(2) Does not include 1,201,680 shares of Common Stock issuable upon the
conversion of 809,523 Common OP Units (as defined herein) and 392,157
Preferred OP Units (as defined herein). See "Recent Developments--The
Highgate Portfolio." Also does not include 1,740,000 shares of Common Stock
reserved for issuance under the Equity Incentive Plan (as defined herein)
under which the Company has currently granted 745,254 options to purchase
shares of Common Stock. See "Management--Compensation of Directors,"
"--Stock Option Grants" and "--Compensation Plans."
8
<PAGE>
Summary Financial and Other Information
Prior to the IPO, the business of the Company was conducted through EquiStar
Hotel Investors, L.P. ("EquiStar") and CapStar Management Company, L.P.
("CapStar Management"). 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 December 31,
1996, the Company acquired 19 hotels on various dates. Thus, the historical
financial statements for the years ended December 31, 1996 and 1995 reflect
differing numbers of hotels owned throughout the periods. The unaudited pro
forma financial statements for the year ended December 31, 1996 assume 30 hotels
owned.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, PRO
---------------------------------------------------------- FORMA
1992 1993 1994 1995 1996 1996(A)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms............................. $ 0 $ 0 $ 0 $ 14,456 $ 68,498 $ 158,293
Food, beverage and other.......... 0 0 0 7,471 36,949 81,543
Management services and other
revenues........................ 3,479 4,234 4,418 4,436 4,345 3,169
---------- ---------- ---------- ---------- ---------- ----------
Total revenues................ 3,479 4,234 4,418 26,363 109,792 243,005
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Departmental expenses:
Rooms............................. 0 0 0 4,190 17,509 39,732
Food, beverage and other.......... 0 0 0 5,437 27,102 60,496
Undistributed operating expenses:
Selling, general and
administrative.................. 2,836 4,065 4,508 8,078 20,448 43,450
Property operating costs.......... 0 0 0 3,934 17,151 39,769
Depreciation and amortization..... 12 14 23 2,098 8,248 18,801
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses...... 2,848 4,079 4,531 23,737 90,458 202,248
---------- ---------- ---------- ---------- ---------- ----------
Operating income/(loss)............. 631 155 (113) 2,626 19,334 40,757
Interest expense, net............... 0 0 0 2,413 12,346 16,843
Minority interest................... 0 0 0 17 39 (1,663)
Provision for income taxes(B)....... 0 0 0 0 2,674 8,901
Income/(loss) before extraordinary
item.............................. 631 155 (113) 230 4,353 13,350
Extraordinary item(C)............... 0 0 0 (887) (1,956) 0
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss)............... 631 155 (113) (657) 2,397 13,350
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Earnings per share before
extraordinary item(D)............. $ -- $ -- $ -- $ -- $ 0.31 $ 0.75
Number of shares of common stock and
common stock equivalents
outstanding....................... -- -- -- -- 12,754,321 18,563,844
OTHER FINANCIAL DATA:
EBITDA(E)........................... $ 643 $ 169 $ (90) $ 4,741 $ 27,621 $ 57,895
Net cash provided by (used in)
operating activities.............. 87 (101) 66 4,357 13,373 33,164
Net cash used in investing
activities........................ (65) (24) (41) (116,573) (225,251) (403,077)
Net cash provided by (used in)
financing activities.............. (219) 244 0 119,048 226,830 389,514
BALANCE SHEET DATA:
Property and equipment, gross....... $ 110 $ 134 $ 176 $ 110,883 $ 343,092 $ 520,657
Total assets........................ 586 1,458 1,232 132,650 379,161 542,749
Long term obligations............... 0 0 0 73,574 200,361 219,470
</TABLE>
9
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, PRO
---------------------------------------------------------- FORMA
1992 1993 1994 1995 1996 1996(A)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Owned Hotels:
Number of hotels.................. -- -- -- 6 19 30
Number of guest rooms............. -- -- -- 2,101 5,166 7,706
Total revenues (in thousands)..... -- -- -- $ 21,927 $ 105,447 $ 239,836
Average occupancy................. -- -- -- 72.3% 71.6% 70.8%
ADR(F)............................ -- -- -- $ 71.58 $ 82.84 $ 79.64
RevPAR(G)......................... -- -- -- $ 51.75 $ 59.31 $ 56.39
All Hotels(H):
Number of hotels(I)............... 34 34 39 46 47 --
Number of guest rooms(I).......... 5,918 5,971 5,847 7,895 9,785 --
Total revenues (in thousands)..... $ 109,837 $ 123,124 $ 128,151 $ 170,888 $ 193,092 --
</TABLE>
- ------------------------------
(A) The pro forma Operating Results, Other Financial Data and Operating Data for
the year ended December 31, 1996 have been prepared as if the Offering and
the acquisition of the Owned Hotels, the Highgate Portfolio and the
Additional Acquisitions had been consummated at the beginning of 1996, and
the pro forma Balance Sheet Data as of December 31, 1996 has been prepared
as if the Offering and the acquisition of the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions had been consummated on such date.
(B) No provision for federal income taxes is included in the historical data
other than for 1996 because CapStar Management and EquiStar were
partnerships and all federal income tax liabilities were passed through to
the individual partners.
(C) During 1995 and 1996, certain loan facilities were refinanced and the
write-offs of deferred costs associated with the prior facilities were
recorded as extraordinary losses.
(D) Earnings per share before extraordinary item for the historical year ended
December 31, 1996 is based on earnings for the period from the IPO on August
20, 1996 through December 31, 1996.
(E) 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, income taxes,
depreciation and amortization, which is generally equivalent to EBITDA, and
EBITDA is unaffected by the debt and equity structure of the property owner.
EBITDA 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.
(F) Represents total room revenues divided by total number of rooms occupied by
hotel guests on a paid basis.
(G) Represents total room revenues divided by total available rooms, net of
rooms out of service due to significant renovations.
(H) Represents operating data for all hotels managed by the Company during all
or a portion of the periods presented.
(I) As of December 31 for the periods presented.
10
<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 two of the
Owned Hotels, the Highgate Portfolio hotels and the Additional Acquisitions 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 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.
11
<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 binding
contracts to acquire the Highgate Portfolio and the Additional Acquisitions 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 and could have a
material adverse effect on the company's results of operations.
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 22 hotels and has entered into contracts to
acquire the Highgate Portfolio and the Additional Acquisitions. 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 limit the
amount of indebtedness that the Company may incur. Subject to limitations in its
debt instruments, 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
12
<PAGE>
in the future and to take advantage of significant business opportunities that
may arise. The Company's indebtedness is, and will likely continue to be,
secured by mortgages on all of the Owned Hotels and by the equity of certain
subsidiaries of the Company. There can be no assurances that the Company will be
able to meet its debt service obligations and, to the extent that it cannot, the
Company risks the loss of some or all of its assets, including the Owned Hotels,
the Highgate Portfolio and the Additional Acquisitions, 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.
The Credit Facility and the Subordinated Debt contain a number of
significant covenants that, among other things, restrict the ability of the
Company and its subsidiaries to (i) acquire or dispose of assets or businesses,
(ii) incur additional indebtedness, (iii) make capital expenditures, (iv) pay
dividends, (v) create liens on assets, (vi) enter into leases, investments or
acquisitions, (vii) engage in mergers or consolidations, or (viii) engage in
certain transactions with subsidiaries and affiliates, and otherwise restrict
corporate activities of the Company (including its ability to acquire additional
hotels, hotel businesses or assets, certain changes of control and asset sale
transactions) without the consent of the lenders. In addition, the Company will
be required to maintain specified financial ratios and comply with tests,
including minimum interest coverage ratios, maximum leverage ratios, minimum net
worth and minimum equity capitalization requirements.
The Company's outstanding indebtedness under the Credit Facility and the
Subordinated Debt bears 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources."
CONTROLLING STOCKHOLDERS
Acadia Partners, L.P., a private investment partnership, and related
entities ("Acadia Partners"), and certain members of management will
beneficially own an aggregate of 19.7% of the issued and outstanding shares of
Common Stock upon completion of the Offering. See "Principal 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 "Description of Capital Stock."
SUBSTANTIAL RELIANCE ON KEY PERSONNEL
The Company will place substantial reliance on the lodging industry
knowledge and experience and the continued services of its senior management,
led by Paul W. Whetsell and David E. McCaslin. The Company's future success and
its ability to manage future growth depend in large part upon the efforts of
these persons and on the Company's ability to attract and retain other highly
qualified personnel. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel. The loss of services of Messrs. Whetsell or McCaslin or the
Company's inability to attract and retain other highly qualified personnel may
adversely affect the results of operations and financial condition of the
Company. The Company currently has employment agreements with Messrs. Whetsell
and McCaslin for terms of three years each expiring in December 1999, which
contain certain non-compete clauses. See "Management--Employment Agreements."
13
<PAGE>
POTENTIAL FOR CONFLICTS OF INTEREST
Mr. Whetsell and Mr. McCaslin and entities owned by them own, directly or
indirectly, (i) a leasehold interest, expiring on December 31, 2001, in two of
the Managed Hotels and (ii) minority equity interests in eight of the Managed
Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the
entities that own four of these Managed Hotels (the "Affiliated Owners") through
their ownership of certain entities which serve as general partners of the
Affiliated Owners. Such interests were acquired prior to the formation of
EquiStar and CapStar Management. During 1996, the Company received approximately
$824,070 in management fees from the eight hotels in which Messrs. Whetsell and
McCaslin own an equity interest, including approximately $554,896 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 31 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. For 1996, the
Company's pro forma revenue from Management Agreements was $3.2 million
constituting 1.3% of the Company's total pro forma revenue for such period. No
single Management Agreement (or group of Management Agreements for hotels under
common ownership or control) currently accounts for more than 0.5% of the total
revenue of the Company on a pro forma basis. The early termination of the
Management Agreements or the inability of the Company to negotiate renewals of
Management Agreements upon the expiration of their stated terms would have an
adverse impact on the revenues received by the Company from its management
business.
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to properly remediate such
contaminated property, may adversely affect the owner's ability to sell or rent
such real property or to borrow using such real property as collateral. Persons
who arrange for the disposal
14
<PAGE>
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.
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.
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock (including shares issuable upon
the exercise of stock options or the conversion of OP Units), or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. See "Management--Stock Option Grants" and
15
<PAGE>
"The Operating Partnership." Upon consummation of the Offering, the Company will
have outstanding 17,754,321 shares of Common Stock (assuming no exercise of the
over-allotment option). 3,504,321 of these shares are "restricted securities"
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
such restricted securities which were issued in connection with the formation
transactions that occurred immediately prior to the closing of the IPO (the
"Formation Transactions"). See "Description of Capital Stock--Registration
Rights." In connection with the Offering, the Company has 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 Brothers Inc. ("Lehman"). Certain entities controlled by members of
management (who beneficially own an aggregate of 980,010 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 180 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."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $ million (approximately $ million if the over-allotment
option is exercised in full) after giving effect to estimated underwriting
discounts and commissions and offering expenses payable by the Company.
The net proceeds are expected to be used as follows: (i) $70.8 million to
fund the cash portion of the acquisition of the Highgate Portfolio; (ii) $21.8
million to fund the acquisition of the Additional Acquisitions; and (iii) the
remainder will be available to retire outstanding balances under the Credit
Facility and for general corporate purposes.
PRICE RANGE OF COMMON STOCK
The Common Stock has been listed on the NYSE since August 20, 1996 under the
symbol "CHO." The following table sets forth for the periods indicated the high
and low closing sale prices for the Common Stock on the NYSE.
<TABLE>
<CAPTION>
PRICE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1997:
First Quarter (through February 25, 1997)................................ $ 24 3/4 $ 19 3/8
1996:
Fourth Quarter (ended December 31, 1996)................................. 19 5/8 16 7/8
Third Quarter (ended September 30, 1996)................................. 18 3/8 16 1/2
</TABLE>
The last reported sale price of the Common Stock on the NYSE on February 25,
1997 was $24 1/8. As of February 25, 1997, there were approximately 49 holders
of record of the Common Stock.
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 and Subordinated Debt restrict the
Company's ability to pay dividends on the Common Stock. Any determination to pay
cash dividends in the future will be at the discretion of the Board and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board.
17
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of December 31, 1996 and as adjusted to give effect to the acquisition of three
Owned Hotels since December 31, 1996, the Highgate Portfolio and the Additional
Acquisitions, and the Offering. The information below should be read in
conjunction with the consolidated financial statements and notes thereto and the
pro forma financial statements and notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------
<S> <C> <C>
HISTORICAL AS ADJUSTED
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Total long-term debt..................................................................... $ 200,361 $ 219,470
Minority interest........................................................................ 606 30,136
STOCKHOLDERS' EQUITY:
Preferred Stock ($.01 par value, 25,000,000 shares authorized, no shares issued or
outstanding)........................................................................... -- --
Common Stock ($.01 par value, 49,000,000 shares authorized, 12,754,321 shares issued and
outstanding)........................................................................... 128 178
Additional paid-in capital............................................................... 158,533 272,265
Retained earnings........................................................................ 2,054 2,054
---------- -----------
Total stockholders' equity......................................................... 160,715 274,497
---------- -----------
Total capitalization............................................................... $ 361,682 $ 524,103
---------- -----------
---------- -----------
</TABLE>
18
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected historical and pro forma financial
information for the Company. The Balance Sheet Data of the Company as of
December 31, 1996, 1995, and 1994, and the Operating Results and Other Financial
Data for the years ended December 31, 1996, 1995, 1994, and 1993, have been
derived from the audited financial statements which are included elsewhere in
this Prospectus. The other comparable data as of, and for the years ended,
December 31, 1993 and 1992 have been derived from financial statements that are
not required to be included in this Prospectus. The following information should
be read in conjunction with the historical consolidated financial statements and
notes thereto for the Company, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the unaudited pro forma
financial statements and notes thereto included elsewhere in this Prospectus.
The pro forma operating data and other data for the year ended December 31,
1996 has been prepared as if the Offering and the acquisition of the Owned
Hotels, the Highgate Portfolio and the Additional Acquisitions had been
consummated at the beginning of 1996, and the pro forma balance sheet data as of
December 31, 1996 has been prepared as if the Offering and the acquisition of
the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions 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 year ended December
31, 1996, nor does it purport to represent the Company's future financial
position and results of operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms................................................ $ 0 $ 0 $ 0 $ 14,456 $ 68,498
Food, beverage and other............................. 0 0 0 7,471 36,949
Management services and other revenues............... 3,479 4,234 4,418 4,436 4,345
------------ ------------ ------------ ------------ ------------
Total revenues................................... 3,479 4,234 4,418 26,363 109,792
------------ ------------ ------------ ------------ ------------
Operating expenses:
Departmental expenses:
Rooms................................................ 0 0 0 4,190 17,509
Food, beverage and other............................. 0 0 0 5,437 27,102
Undistributed operating expenses:
Selling, general and administrative.................. 2,836 4,065 4,508 8,078 20,448
Property operating costs............................. 0 0 0 3,934 17,151
Depreciation and amortization........................ 12 14 23 2,098 8,248
------------ ------------ ------------ ------------ ------------
Total operating expenses......................... 2,848 4,079 4,531 23,737 90,458
------------ ------------ ------------ ------------ ------------
Operating income/(loss)................................ 631 155 (113) 2,626 19,334
Interest expense, net.................................. 0 0 0 2,413 12,346
Minority interest...................................... 0 0 0 17 39
Provision for income taxes(B).......................... 0 0 0 0 2,674
Income/(loss) before extraordinary item................ 631 155 (113) 230 4,353
Extraordinary item(C).................................. 0 0 0 (887) (1,956)
------------ ------------ ------------ ------------ ------------
Net income/(loss)................................ 631 155 (113) (657) 2,397
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Earnings per share before extraordinary item(D)........ $ -- $ -- $ -- $ -- $ 0.31
Number of shares of common stock and common stock
equivalents outstanding.............................. -- -- -- -- 12,754,321
OTHER FINANCIAL DATA:
EBITDA(E).............................................. $ 643 $ 169 $ (90) $ 4,741 $ 27,621
Net cash provided by (used in) operating activities.... 87 (101) 66 4,357 13,373
Net cash used in investing activities.................. (65) (24) (41) (116,573) (225,251)
Net cash provided by (used in) financing activities.... (219) 244 0 119,048 226,830
BALANCE SHEET DATA:
Property and equipment, gross.......................... $ 110 $ 134 $ 176 $ 110,883 343,092
Total assets........................................... 586 1,458 1,232 132,650 379,161
Long term obligations.................................. 0 0 0 73,574 200,361
<CAPTION>
PRO FORMA
<S> <C>
1996(A)
------------
<S> <C>
OPERATING RESULTS:
Revenues:
Rooms................................................ $ 158,293
Food, beverage and other............................. 81,543
Management services and other revenues............... 3,169
------------
Total revenues................................... 243,005
------------
Operating expenses:
Departmental expenses:
Rooms................................................ 39,732
Food, beverage and other............................. 60,496
Undistributed operating expenses:
Selling, general and administrative.................. 43,450
Property operating costs............................. 39,769
Depreciation and amortization........................ 18,801
------------
Total operating expenses......................... 202,248
------------
Operating income/(loss)................................ 40,757
Interest expense, net.................................. 16,843
Minority interest...................................... (1,663)
Provision for income taxes(B).......................... 8,901
Income/(loss) before extraordinary item................ 13,350
Extraordinary item(C).................................. 0
------------
Net income/(loss)................................ 13,350
------------
------------
Earnings per share before extraordinary item(D)........ $ 0.75
Number of shares of common stock and common stock
equivalents outstanding.............................. 18,563,844
OTHER FINANCIAL DATA:
EBITDA(E).............................................. $ 57,895
Net cash provided by (used in) operating activities.... 33,164
Net cash used in investing activities.................. (403,077)
Net cash provided by (used in) financing activities.... 389,514
BALANCE SHEET DATA:
Property and equipment, gross.......................... 520,657
Total assets........................................... 542,749
Long term obligations.................................. 219,470
</TABLE>
19
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, PRO FORMA
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996(A)
--------- --------- --------- --------- --------- -----------
OPERATING DATA:
Owned Hotels:
Number of hotels........................................ -- -- -- 6 19 30
Number of guest rooms................................... -- -- -- 2,101 5,166 7,706
Total revenues (in thousands)........................... -- -- -- $ 21,927 $ 105,447 $ 239,836
Average occupancy....................................... -- -- -- 72.3% 71.6% 70.8%
ADR(F).................................................. -- -- -- $ 71.58 $ 82.84 $ 79.64
RevPAR(G)............................................... -- -- -- $ 51.75 $ 59.31 $ 56.39
All Hotels(H):
Number of hotels(I)..................................... 34 34 39 46 47 --
Number of guest rooms(I)................................ 5,918 5,971 5,847 7,895 9,785 --
Total revenues (in thousands)........................... $ 109,837 $ 123,124 $ 128,151 $ 170,888 $ 193,092 --
</TABLE>
- ------------------------------
(A) The pro forma Operating Results, Other Financial Data and Operating Data for
the year ended December 31, 1996 have been prepared as if the Offering and
the acquisition of the Owned Hotels, the Highgate Portfolio and the
Additional Acquisitions had been consummated at the beginning of 1996, and
the pro forma Balance Sheet Data as of December 31, 1996 has been prepared
as if the Offering and the acquisition of the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions had been consummated on such date.
(B) No provision for federal income taxes is included in the historical data
other than for 1996 because CapStar Management and EquiStar were
partnerships and all federal income tax liabilities were passed through to
the individual partners.
(C) During 1995 and 1996, certain loan facilities were refinanced and the
write-offs of deferred costs associated with the prior facilities were
recorded as extraordinary losses.
(D) Earnings per share before extraordinary item for the historical year ended
December 31, 1996 is based on earnings for the period from the IPO on August
20, 1996 through December 31, 1996.
(E) 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 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.
(F) Represents total room revenues divided by total number of rooms occupied by
hotel guests on a paid basis.
(G) Represents total room revenues divided by total available rooms, net of
rooms out of service due to significant renovations.
(H) Represents operating data for all hotels managed by the Company during all
or a portion of the periods presented.
(I) As of December 31 for the periods presented.
20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited Pro Forma Balance Sheet of the Company as of December 31, 1996
is presented assuming: (i) the Offering and the application of the net proceeds
had been completed on December 31, 1996; and (ii) the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions were owned on December 31, 1996.
The unaudited Pro Forma Statement of Operations of the Company for the year
ended December 31, 1996 presents the results of operations of the Company
assuming: (i) all of the Owned Hotels, the Highgate Portfolio and the Additional
Acquisitions had been acquired at the beginning of 1996; and (ii) the Offering
was completed as of the beginning of 1996.
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, the Highgate Portfolio and the Additional
Acquisitions were, in fact, acquired on such date and if the Offering occurred
on such date. 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 consolidated financial
statements and related notes thereto of the Company, which are included
elsewhere in this Prospectus.
21
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
AFTER
OFFERING, HIGHGATE OFFERING AND
PORTFOLIO AND ACQUISITION
OWNED ADDITIONAL OF HIGHGATE
HOTELS ACQUISITIONS PRO PORTFOLIO AND
PRO FORMA FORMA ADDITIONAL
HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) ACQUISITIONS
------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash.......................................... $ 21,784 $ (6,189) $ (7,223) $ 8,372
Property and equipment, net
Land........................................ 58,127 4,834 12,199 75,160
Building and improvements................... 244,367 45,088 97,596 387,051
Furniture, fixtures and equipment........... 28,066 5,649 12,199 45,914
Construction-in-progress.................... 3,891 -- -- 3,891
------------- ------- -------- -------------
Total property and equipment, net............. 334,451 55,571 121,994 512,016
Other assets.................................. 22,926 (1,515) 950 22,361
------------- ------- -------- -------------
Total assets.................................. $ 379,161 $ 47,867 $ 115,721 $ 542,749
------------- ------- -------- -------------
------------- ------- -------- -------------
LIABILITIES, MINORITY INTEREST AND EQUITY
Other liabilities............................. $ 17,479 $ 367 $ 800 $ 18,646
Long-term debt................................ 200,361 47,500 (28,391)(D) 219,470
------------- ------- -------- -------------
Total liabilities............................. 217,840 47,867 (27,591) 238,116
Minority interest............................. 606 -- 29,530(E) 30,136
Equity........................................ 160,715 -- 113,782(D) 274,497
------------- ------- -------- -------------
Total liabilities, minority interest and
equity...................................... $ 379,161 $ 47,867 $ 115,721 $ 542,749
------------- ------- -------- -------------
------------- ------- -------- -------------
</TABLE>
<TABLE>
<C> <S>
(A) Reflects the historical consolidated balance sheet of the Company as of December 31, 1996.
(B) Reflects the Company's cost basis and financing for three Owned Hotels acquired subsequent to December 31,
1996.
(C) Reflects the estimated cost basis and financing for the Highgate Portfolio and the Additional Acquisitions.
The estimated acquisition cost of the Highgate Portfolio is $100,338 plus $4,350 for renovations. The
estimated acquisition cost of the Additional Acquisitions is $22,606 plus $4,094 in renovations and other
costs.
(D) A reconciliation of gross proceeds from the Offering to net proceeds is as follows:
</TABLE>
<TABLE>
<S> <C> <C>
Gross proceeds at $24.125 per share.................................................... $ 120,625
Underwriting, advisory and other transaction expenses.................................. (6,843)
---------
Net cash proceeds from Offering........................................................ $ 113,782
---------
A schedule of sources and uses of funds related to the Offering are as follows:
SOURCES
Net cash proceeds from Offering........................................................ $ 113,782
Cash on hand........................................................................... 7,223
---------
Total sources.......................................................................... $ 121,005
---------
USES
Repayment of outstanding amounts on certain existing debt facilities................... $ (28,391)
Purchase of Highgate Portfolio and Additional Acquisitions............................. (92,614)
---------
Total uses............................................................................. $(121,005)
---------
</TABLE>
<TABLE>
<S> <S>
The Pro forma balance sheet assumes that the proceeds from the Credit Facility are drawn on December 31,
1996.
(E) Represents 809,523 Common OP Units convertible into an equal number of shares of Common Stock and 392,157
Preferred OP Units convertible into an equal number of shares of Common Stock.
</TABLE>
22
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
OFFERING, AFTER OFFERING
HIGHGATE AND
PORTFOLIO AND ACQUISITION OF
ADDITIONAL HIGHGATE
OWNED HOTELS ACQUISITIONS PORTFOLIO
PRO FORMA PRO FORMA AND ADDITIONAL
HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) ACQUISITIONS
------------ --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Rooms.................................................... $ 68,498 $ 60,370 $ 29,425 $ 158,293
Food and beverage........................................ 30,968 22,889 13,207 67,064
Other revenue............................................ 5,981 3,853 4,645 14,479
Hotel management, accounting and other................... 4,345 (1,040) (136) 3,169
------------ ------- ------- -----------------
Total Revenue.......................................... 109,792 86,072 47,141 243,005
------------ ------- ------- -----------------
Hotel operating expenses by department:
Rooms.................................................... 17,509 14,954 7,269 39,732
Food and beverage........................................ 24,589 18,518 10,322 53,429
Other operating departments.............................. 2,513 2,124 2,430 7,067
Undistributed operating expenses:
Selling, general and administrative...................... 20,448 15,424 7,578 43,450
Property operating costs................................. 12,586 10,270 4,478 27,334
Property taxes, insurance and other...................... 4,565 4,055 3,815 12,435
Depreciation and amortization............................ 8,248 6,361 4,192 18,801
------------ ------- ------- -----------------
Total operating expenses............................... 90,458 71,706 40,084 202,248
------------ ------- ------- -----------------
Interest expense, net...................................... 12,346 6,594 (2,097) 16,843
------------ ------- ------- -----------------
Total expenses............................................. 102,804 78,300 37,987 219,091
------------ ------- ------- -----------------
Income before minority interest and
income taxes............................................. 6,988 7,772 9,154 23,914
Minority interest.......................................... 39 (38) (1,664) (1,663)
------------ ------- ------- -----------------
Income before income taxes................................. 7,027 7,734 7,490 22,251
Income tax provision....................................... 2,674 3,231 2,996 8,901
------------ ------- ------- -----------------
Net income............................................. $ 4,353 $ 4,503 $ 4,494 $ 13,350
------------ ------- ------- -----------------
------------ ------- ------- -----------------
Pro forma earnings per share(D)............................ $ 0.75
Pro forma weighted average shares outstanding.............. 18,563,844
</TABLE>
<TABLE>
<S> <C> <C>
(A) Reflects historical consolidated statement of operations of the Company for the year ended December 31, 1996.
Reflects the pre-acquisition operations of the Owned Hotels to provide a full year of hotel operations for
(B) the unaudited Pro Forma Statement of Operations. For each Owned Hotel, the 1996 pre-acquisition operations
were obtained from the hotel's pre-acquisition financial statements. Also reflects adjustments to (i) include
the operations of the Westin Atlanta Airport during the period from January 1, 1996 through February 29,
1996, when this hotel was leased to a third-party operator, (ii) eliminate the related lease revenue earned
by the Company during this period (on February 29, 1996, the lease was terminated and the Company assumed
management of hotel operations), (iii) eliminate management fee charges for the Owned Hotels for services
that were provided by the Company, (iv) reflect federal and state income taxes (assuming a 40% combined
effective rate), (v) reflect 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), (vi) reflect the effect of the other pro forma adjustments on the interest of
minority owners in pro forma income before minority interest and income taxes for the partnership that owns
the Westin Atlanta Airport and (vii) reflect pro forma depreciation and interest expense as if the hotels had
been acquired as of the beginning of the period presented as follows:
Elimination of depreciation on hotels for pre-acquisition period................................ $ (3,298)
Depreciation on hotels for pre-acquisition period based on the Company's cost basis............. 8,529
Amortization of deferred financing costs related to the Credit Facility......................... 1,130
-----------
Net depreciation and amortization adjustment.................................................... $ 6,361
-----------
-----------
Elimination of interest from pre-acquisition operations......................................... $ (5,003)
Interest on hotels for pre-acquisition period based on the terms of the Credit Facility......... 11,597
-----------
Net interest adjustment......................................................................... $ 6,594
-----------
-----------
</TABLE>
<TABLE>
<S> <C> <C>
(C) Reflects the historical operations of the Highgate Portfolio and the Additional Acquisitions adjusted for (i)
depreciation on the new cost basis, (ii) reduction of interest on debt to be paid with proceeds from the
Offering, (iii) minority interest and (iv) income taxes. Also reflects the elimination of management fees
earned by the Company for managing one of the Additional Acquisitions in 1996 ($136). Historical operations
of the Highgate Portfolio were obtained from the hotels' audited combined financial statements included
elsewhere in this Prospectus.
(D) In computing earnings per share, net income has been adjusted for certain minority interests.
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED HEREIN AND ELSEWHERE IN THIS PROSPECTUS WHICH
ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES REFERENCED ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" AND
"SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
GENERAL
Prior to the IPO, 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 December 31, 1996, the Company
acquired 19 hotels. Thus, the historical financial statements for the year ended
December 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.
RESULTS OF OPERATIONS
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED
WITH THE
HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
On a pro forma basis, after giving effect to the Offering, the acquisition
of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions, pro
forma total revenues increased to $243.0 million for 1996 from $109.8 million
for the same historical period. The increase resulted from the recognition of
revenue for the Owned Hotels, the Highgate Portfolio and the Additional
Acquisitions 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 certain Owned Hotels prior to
their acquisition. The pro forma revenues for the period prior to acquiring each
Owned Hotel, the Highgate Portfolio and the Additional Acquisitions reflect the
actual revenues of the previous owners.
Pro forma expenses reflect the acquisition of the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions, and the Offering. Total pro forma
operating expenses increased to $202.2 million for 1996 from $90.5 million for
the same historical period. Departmental, selling, general, administrative and
other operating expenses of the hotels 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 acquisition of the Owned Hotels, the Highgate Portfolio and
the Additional Acquisitions had taken place at the beginning of the period.
Pro forma EBITDA improved to $57.9 million for 1996 from $27.6 million for
the same historical period. Pro forma EBITDA as a percentage of revenue
decreased to 23.8% for 1996 from 25.2% 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,
24
<PAGE>
income taxes, depreciation and amortization, which is generally equivalent to
EBITDA, and EBITDA is unaffected by the debt and equity structure of the
property owner. EBITDA 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Total revenues increased to $109.8 million in 1996 from $26.4 million in
1995. The Company purchased its first hotel in March 1995 and owned five hotels
as of the end of 1995. During 1996, the Company purchased an additional 14
hotels. The growth in revenues between 1995 and 1996 reflects this significant
growth in the number of hotels owned.
Operating costs and expenses increased to $90.5 million in 1996 from $23.7
million in 1995. Departmental expenses, property operating costs, selling,
general and administrative costs and depreciation and amortization increased in
1996 over 1995. All of these increases reflect the growth in the number of owned
hotels from five to nineteen. The costs related to management of the Managed
Hotels remained stable between the periods.
Operating income increased to $19.3 million in 1996 from $2.6 million in
1995. The increase from 1995 is due to the operating income generated by
additional hotels and to increased efficiencies in the management of the Managed
Hotels.
Net interest expense of $12.3 million for 1996 increased from $2.4 million
in 1995 due to the additional debt incurred related to the hotels acquired in
1996.
The extraordinary loss of $2.0 million in 1996 reflects the write-off of
deferred financing fees of $3.3 million, net of a deferred tax benefit of $1.3
million. The financing fees written-off were unamortized fees associated with a
credit facility which was refinanced prior to maturity. The Company also
incurred an extraordinary loss on extinguishment of debt during 1995 from the
write-off of deferred financing fees in connection with a refinancing
transaction.
Net income increased to $2.4 million for 1996 from a net loss of $0.7
million for 1995. The primary reason for the increase is due to increased
operating income generated by hotels acquired during 1996 and improvements in
operating income from hotels acquired in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
Total revenues increased to $26.4 million in 1995 from $4.4 million in 1994.
Room revenues and food, beverage and other hotel department revenues for 1995
reflect the operating revenues of five Owned Hotels acquired during the period.
There were no Owned Hotels acquired during 1994.
Operating costs and expenses increased to $23.7 million in 1995 from $4.5
million in 1994. Departmental expenses and property operating costs for 1995
reflect the operations of five Owned Hotels acquired during the period. Selling,
general and administrative costs and depreciation expense reflect increases due
to the acquisition of five Owned Hotels and the interest in the Westin Atlanta
Airport during 1995. The costs related to management of the Managed Hotels
remained relatively constant between the periods.
Operating income increased to $2.6 million in 1995 from a loss of $0.1
million in 1994. The increase from 1994 is due to the operating income of 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.
25
<PAGE>
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 loss was the early extinguishment of debt.
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 and joint
venture investments are financed through a combination of internally generated
cash, external borrowings and the issuance of OP Units and/or Common Stock.
At December 31, 1996, the Company had $21.8 million in cash and cash
equivalents, an increase of $15.0 million from the balance of $6.8 million on
December 31, 1995. During the year ended December 31, 1996, the Company invested
$21.6 million in capital improvements in connection with renovations of the
Owned Hotels. The Company expects to spend an additional $13.3 million to
complete the renovation of the Owned Hotels. Renovations for the Highgate
Portfolio and the Additional Acquisitions will commence after consummation of
their acquisitions and are projected to total $8.4 million. Capital for
renovation work has been and will be provided by a combination of internally
generated cash and external borrowings. The Company is committed to reinvesting
adequate capital on an ongoing basis to maintain the quality of the hotels it
owns. Once existing planned renovation programs are complete, the Company
expects to spend approximately 4% of revenues on an annual basis for ongoing
capital expenditures, including room and facilities refurbishments, renovations
and furniture and equipment replacements. The Company believes that these
investments will enhance the Company's competitive position.
On September 24, 1996, the Company entered into the Credit Facility which
provides for a maximum borrowing capacity of $225 million bearing interest at a
rate of LIBOR plus 2% per annum. Borrowings under this Credit Facility have been
used by the Company to repay previously existing indebtedness, to acquire and
renovate upscale, full service hotels and for general corporate purposes. The
Company's ability to borrow under the Credit Facility is subject, among other
things, to a borrowing base test calculated with reference to the cash flow from
hotel properties, the relative contribution to the borrowing base of the values
attributable to the different hotel properties, the appraised values of such
hotel properties and certain other factors. As of December 31, 1996
approximately $177 million was available for borrowing under the Credit
Facility, of which $149 million had been borrowed. The Credit Facility permits
the Company to incur an additional $50 million of subordinated indebtedness as
of December 31, 1996.
The term of the Credit Facility is three years, subject to two one-year
extensions upon the satisfaction of certain conditions. Under the Credit
Facility, the Company is entitled to borrow additional advances or reborrow
during the extension period. The Company was required to pay customary fees in
connection with the structuring of the Credit Facility, a commitment fee on the
unused portion of the Credit Facility and a fee on outstanding letters of credit
under the Credit Facility.
The Credit Facility is a direct obligation of CapStar Management and is
fully and unconditionally guaranteed by the Company and certain subsidiaries of
CapStar Management, including the subsidiaries which own the hotel properties.
The Credit Facility is secured by substantially all the real and personal
property of CapStar Management and its subsidiaries.
The Credit Facility contains convenants that impose certain limitations on
the Company in respect of, among other things, (i) the payment of dividends and
other distributions, (ii) acquisitions of additional hotel properties, (iii) the
creation or incurrence of liens, (iv) the incurrence of indebtedness, lease
obligations or contingent liabilities, (v) the acquisition of investments in and
securities issued by joint ventures and other entities, (vi) transactions with
affiliates, (vii) management or similar agreements
26
<PAGE>
delegating to another person substantial authority over the operation or
maintenance of its hotel properties, (viii) mergers, acquisitions, divestitures
or reorganizations, (ix) the issuance of preferred stock and (x) sale leaseback
transactions involving any of its hotel properties. The Credit Facility and the
Subordinated Debt also contain covenants that will subject the Company to
certain operating requirements and that require the maintenance of certain
financial levels, such as consolidated net worth, and certain financial ratios,
such as consolidated hotel indebtedness to market equity capitalization and
shareholders' equity, consolidated cash flow to interest and consolidated total
indebtedness to consolidated cash flow. In February 1997, in accordance with
certain of these covenants, the Company entered into interest rate protection
agreements.
On December 13, 1996, the Company modified the terms of the Credit Facility
to increase the Company's permitted nonrecourse indebtedness from $25 million to
$50 million and to permit it to incur up to $100 million of subordinated
indebtedness. In December 1996, the Company borrowed the Subordinated Debt. The
Subordinated Debt was used to finance the acquisition of the five hotels
purchased from MBL Life Assurance Corporation and for general corporate
purposes. The Subordinated Debt bears interest at a rate of LIBOR plus 4% per
annum. The term of the Subordinated Debt is three years, subject to two one year
extensions upon satisfaction of certain covenants. The Company was required to
pay customary fees in connection with the structuring of this debt. The
Subordinated Debt is a direct obligation of CapStar Management and its
subsidiaries which own the hotel properties. The Subordinated Debt contains
covenants similar to those contained in the Credit Facility.
Management believes that the Company will have access to sufficient capital
resources to fund its operating and administrative expenses, to continue to
service its debt obligations and to acquire additional hotel properties.
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.
27
<PAGE>
THE COMPANY
CapStar is a hotel management and investment company which acquires,
renovates, repositions and manages hotels throughout the United States. CapStar
owns and manages 22 upscale, full-service Owned Hotels which contain 5,981 rooms
and manages an additional 31 Managed Hotels owned by third parties which contain
5,488 rooms. CapStar's portfolio of Owned Hotels and Managed Hotels includes 53
hotels which contain 11,469 rooms. The Company's business strategy is to 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. The Owned Hotels
are located in markets which have recently experienced strong economic growth,
including Albuquerque, Atlanta, Charlotte, Chicago, Cleveland, Denver, Houston,
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, Doubletree and Embassy Suites. For the year ended
December 31, 1996, on a pro forma basis, the operating performance of the Owned
Hotels (excluding the ten hotels purchased since September 30, 1996) improved
significantly, as demonstrated by the following table:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER
31,
----------------------
<S> <C> <C> <C>
PERCENTAGE
1995 1996 INCREASE
---------- ---------- -------------
<CAPTION>
<S> <C> <C> <C>
Revenues (in thousands).............................. $ 109,798 $ 118,329 7.8%
Gross Operating Profit (in thousands)................ $ 30,947 $ 37,909 22.5%
Average Occupancy.................................... 72.4% 72.9% 0.7%
ADR.................................................. $ 75.25 $ 83.82 11.4%
RevPAR............................................... $ 54.44 $ 61.11 12.3%
</TABLE>
Additionally, the performance of the Owned Hotels compares favorably with that
of the industry in general. For the year ended December 31, 1996, RevPAR for the
Owned Hotels (excluding the ten hotels purchased since September 30, 1996)
increased 12.3%, while RevPAR for all upscale hotels, as reported by Smith
Travel Research, increased 5.4%. For the year ended December 31, 1996, RevPAR at
all of the Owned Hotels (including the ten hotels purchased since September 30,
1996) increased 10.1%.
The Company completed its IPO in August 1996. Since the IPO, the Company has
significantly expanded its portfolio by completing the purchase of ten upscale,
full-service hotels containing 2,465 rooms for an aggregate Total Acquisition
Cost of $181.6 million. The Company has also entered into a contract with
Highgate Hotels to acquire a portfolio of six upscale, full-service hotels
containing 1,358 rooms for a Total Acquisition Cost of approximately $104.7
million. See "Recent Developments--The Highgate Portfolio." The Company has also
entered into contracts to acquire the Additional Acquisitions containing 367
rooms for a Total Acquisition Cost of $26.7 million. In addition to the
acquisition of these hotels, the Company has entered into a joint venture to
acquire the 456-room Holiday Inn Riverfront in St. Louis, Missouri and has
entered into three new long-term management agreements.
During the year ended December 31, 1996, the Company spent a total of $21.6
million on renovations at the Owned Hotels and intends to spend an additional
$21.7 million completing its renovation programs (including $8.4 million to
renovate and reposition the Highgate Portfolio and the Additional Acquisitions).
See "Special Note Regarding Forward--Looking Statements."
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 20 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
28
<PAGE>
attributes its management success to its ability (i) to analyze each hotel as a
unique property and identify those particular cash flow growth opportunities
which each hotel presents, (ii) to create and implement marketing plans that
properly position each hotel within its local market, and (iii) to develop
management programs that emphasize guest service, labor productivity, revenue
yield and cost control. The Company has a distinct management culture that
stresses creativity, loyalty and entrepreneurship and was developed to emphasize
operations from an owner's perspective. This culture is reinforced by the fact
that 33 members of management will hold, directly or indirectly, an aggregate of
5.5% of the Common Stock upon completion of the Offering. See "Principal
Stockholders."
The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to acquire, own and manage
hotels and further believes that there are currently many attractive
opportunities to acquire properties in this segment of the industry at prices
below replacement cost. The upscale, full-service segment is attractive for
several reasons. First, the Company expects that there will be no significant
increases in the supply of upscale, full-service hotels in the next several
years because the cost of new construction generally does not justify new hotel
development. Second, upscale, full-service hotels appeal to a wide variety of
customers, thus reducing the risk of decreasing demand from any particular
customer group. Additionally, such hotels have particular appeal to business
executives and upscale leisure travelers, customers who are generally less price
sensitive than travelers who use limited-service hotels. Third, because
full-service hotels have a higher proportion of fixed costs to variable costs
than other segments of the lodging industry, full-service hotels afford greater
operating leverage than limited-service hotels, resulting in increasingly higher
profit margins as revenues increase. Finally, full-service hotels require a
greater depth of management expertise than limited-service hotels, and the
Company believes that its superior management skills provide it with a
significant competitive advantage in their operation.
RECENT DEVELOPMENTS
In August 1996, the Company completed its IPO at a price of $18 per share,
generating net proceeds of approximately $110 million to the Company. Since
completing the IPO, the Company has continued to execute the hotel acquisition
and operating strategies that it had pursued prior to the IPO which has resulted
in significant growth in the Company's hotel portfolio. The Company's
acquisition, financing, and management activities since the IPO are discussed
below.
POST-IPO ACQUISITIONS
At the time of the IPO, the Company owned 12 upscale, full-service hotels,
containing 3,516 rooms. Since the IPO, the Company has acquired ten additional
upscale, full-service Owned Hotels containing 2,465 rooms. These newly acquired
hotels are operated under nationally recognized brand names such as Hilton,
Doubletree, Embassy Suites and Holiday Inn. The Company expects to improve the
operating performance of these newly acquired hotels by implementing the
detailed management plans that have been created for each property as part of
its operating strategy. The Company believes that all of its post-IPO
acquisitions represent attractive investment opportunities because (i) they are
located in major metropolitan or growing secondary markets and are well-located
within these markets (ii) they were acquired at an average cost of approximately
$74,000 per room, which represents a more than a 30% discount to replacement
cost and (iii) they have attractive current returns and potential for
significant revenue and cash flow growth through implementation of the Company's
operating strategy.
THE HIGHGATE PORTFOLIO
The Company has entered into a contract with Highgate Hotels to acquire the
Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358
rooms for a Total Acquisition Cost of approximately $104.7 million. The
acquisition will be financed with $75.2 million in cash and $29.5 million of OP
Units. The Company will issue to the sellers (i) 809,523 common OP Units
("Common OP Units") which
29
<PAGE>
are convertible at the sellers' election into an equal number of shares of
Common Stock (or, at the Company's option, cash in an amount equal to the market
price of such shares) and (ii) 392,157 preferred OP Units ("Preferred OP
Units"), with a 6.5% cumulative annual preferred return and a liquidating
preference of $25.50 per OP Unit. The Preferred OP Units are convertible on or
after August 23, 1997 at the sellers' election into an equal number of shares of
Common Stock (or, at the Company's option, cash in an amount equal to the market
price of such shares) and redeemable after three years at the Company's election
for an amount equal to $25.50 per Preferred OP Unit (or, at the Company's
option, shares of Common Stock bearing a market price equal to such amount).
The Highgate Portfolio hotels are operated under nationally recognized brand
names including Sheraton, Doubletree, Radisson, Ramada and Holiday Inn, and are
located in Dallas, Indianapolis, Calgary and Vancouver. The Highgate Portfolio
enhances the Company's geographic diversity by expanding its portfolio into
Canada. In connection with the acquisition of the Highgate Portfolio, the
Company has entered into agreements to manage two additional hotels owned by
Highgate Hotels: the 414-room Pontchartrain-Crowne Plaza in Detroit, Michigan
and the 393-room Four Points Hotel in Suburban Atlanta. The Company believes
that the acquisition of the Highgate Portfolio and the establishment of a
strategic alliance with Highgate Hotels (one of the principals of which the
Company has agreed to nominate to a new seat on its board of directors) will
provide significant benefits to its on-going acquisition and corporate
development activities. A portion of the net proceeds from the Offering will be
used to consummate the acquisition of the Highgate Portfolio. The Company
expects to complete the acquisition of the Highgate Portfolio by April 1997.
There can be no assurance, however, that the closing will occur. See "Risk
Factors--Risks Associated with Expansion" and "Special Note Regarding Forward-
Looking Statements."
THE ADDITIONAL ACQUISITIONS
The Company has also entered into contracts to acquire the two Additional
Acquisitions: the 213-room Four Points Hotel in Cherry Hill, New Jersey for a
Total Acquisition Cost of $8.2 million and the 154-room Great Valley Sheraton in
Frazer, Pennsylvania for a Total Acquisition Cost of $18.5 million.
MANAGEMENT AGREEMENTS/JOINT VENTURES
In January 1997, the Company invested in a joint venture with Hallmark
Investment Corp. which owns the Holiday Inn Riverfront, located in downtown St.
Louis at the base of the Gateway Arch. In connection with the joint venture, the
Company has signed a long-term agreement to manage the 456-room property. Since
August 1996 the Company has entered into significant new long-term management
agreements with three other hotel owners. The Company expects to form joint
ventures and strategic alliances with institutional and private hotel owners to
invest in future acquisitions and sale and leaseback transactions, and to secure
additional fee management arrangements. See "Special Note Regarding
Forward-Looking Statements."
FINANCING ACTIVITIES
In September 1996, the Company entered into the $225 million Credit Facility
led by Bankers Trust, as agent, to fund post-IPO acquisitions, to repay
outstanding indebtedness and for general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In December 1996, the Company modified the terms of the Credit Facility to
increase the Company's permitted nonrecourse indebtedness from $25 million to
$50 million and to permit it to incur up to $100 million of subordinated
indebtedness. In December 1996, the Company borrowed the Subordinated Debt to
provide additional funding for acquisitions and for general corporate purposes.
See "Management's
30
<PAGE>
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
BUSINESS AND PROPERTIES
The Company seeks to increase shareholder value by (i) continuing to acquire
upscale, full-service hotels at prices below replacement cost in selected
markets throughout the United States, (ii) implementing its operating strategy
to improve hotel operations and increase cash flow and (iii) expanding its
management business.
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, sale and leasebacks 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. 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 26 states across the nation and the District of
Columbia, with eight Hotels located in California, four in Colorado, three in
Georgia, three in Maryland, three in Texas, three in Virginia, three in
Washington, D.C., two in Arizona, two in Louisiana, two in Missouri, two in New
Jersey, two in New York, two in Pennsylvania and one Hotel each in 14 additional
states.
31
<PAGE>
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 (excluding the ten hotels purchased since September 30,
1996) increased 12.3% from the year ended December 31, 1995 to the year ended
December 31, 1996, as compared to an increase of only 5.4% for the upscale,
full-service hotel segment as reported by Smith Travel Research over the
comparable period. For the year ended December 31, 1996, RevPAR at all of the
Owned Hotels (including the ten hotels purchased since September 30, 1996)
increased 10.1%
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 has 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 OP Units or Common Stock as an alternative to cash. The
Company currently expects to retain earnings for future acquisitions and the
renovation and maintenance of the hotels it owns.
OPERATING STRATEGY
The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with
high-quality service and value. The Company seeks to achieve these objectives by
creating and executing management plans that are specifically tailored for each
individual Hotel rather than by implementing an operating strategy that is
designed to maintain a uniform corporate image or brand. Management believes
that its custom-tailored business plans are the most effective means of
addressing the needs of a given hotel or market. The Company believes that
skilled management of hotel operations is the most critical element in
maximizing revenue and cash flow in full-service hotels.
The Company's corporate headquarters carries out financing and acquisition
activities and provides services to support as well as monitor the Company's
on-site hotel operating executives. Each of the Company's executive departments,
including Sales and Marketing, Human Resources and Training, Food
32
<PAGE>
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. Management control over those channels, which include
franchisor reservation systems and toll-free 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 year ended
December 31, 1996, the Company spent a total of $21.6 million on renovations at
the Owned Hotels and currently intends to spend an additional $21.7 million
completing the renovation programs (including approximately $8.4 million to
renovate and reposition the Highgate Portfolio and the Additional Acquisitions).
For example, at all of the Owned Hotels, the Company has renovated banquet and
meeting spaces and upgraded guest rooms with computer ports and comfortable work
spaces to better accommodate the needs of business travelers and to increase
ADRs. Capital spending decisions are based on both strategic needs and potential
rate of return on a given capital investment.
SELECTIVE USE OF MULTIPLE BRAND NAMES. The Company believes that the
selection of an appropriate franchise brand is essential in positioning a hotel
optimally within its local market. The Company selects brands based on local
market factors such as local presence of the franchisor, brand recognition,
target demographics and efficiencies offered by franchisors. The Company
believes that its relationships with many major hotel franchisors, established
both as a manager and an owner of hotels operated under their respective
franchises, places the Company in a favorable position when dealing with those
franchisors and allows it to negotiate favorable franchise agreements with
franchisors. The Company believes that its growth through acquisition of
additional hotels will further strengthen its relationship with franchisors.
33
<PAGE>
The following chart summarizes certain information with respect to the
national franchise affiliations of the Hotels, the Highgate Portfolio and the
Additional Acquisitions:
<TABLE>
<CAPTION>
OWNED HOTELS, HIGHGATE PORTFOLIO
AND ADDITIONAL ACQUISITIONS MANAGED HOTELS
----------------------------------------- ---------------------------------------
NUMBER OF NUMBER OF
GUEST NUMBER OF % OF GUEST NUMBER OF % OF
FRANCHISE ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS
- ------------------------------------------ ----------- --------------- ----------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Hilton.................................... 2,939 11 38.1% -- -- --%
Sheraton.................................. 1,162 4 15.0 -- -- --
Holiday Inn............................... 608 3 7.9 883 4 16.1
Radisson.................................. 507 2 6.6 126 1 2.3
Westin.................................... 496 1 6.4 -- -- --
Marriott.................................. 434 1 5.6 288 1 5.3
Holiday Select-Registered Trademark-...... 348 1 4.5 -- -- --
Doubletree................................ 294 1 3.8 208 1 3.8
Embassy Suites............................ 236 1 3.1 -- -- --
Independent............................... 214 2 2.8 830 6 15.1
Four Points-Registered Trademark-......... 213 1 2.8 589 2 10.7
Doubletree Guest
Suites-Registered Trademark-............. 137 1 1.8 -- -- --
Ramada.................................... 118 1 1.5 457 3 8.3
Best Western-Registered Trademark-........ -- -- -- 562 3 10.3
Crowne Plaza-Registered Trademark-........ -- -- -- 414 1 7.5
Days Inn-Registered Trademark-............ -- -- -- 277 2 5.1
Comfort Suites-Registered Trademark-...... -- -- -- 244 2 4.5
Clarion-Registered Trademark-............. -- -- -- 194 1 3.5
Quality Suites-Registered Trademark-...... -- -- -- 177 1 3.2
Residence Inn-Registered Trademark-....... -- -- -- 104 1 1.9
Quality Inn-Registered Trademark-......... -- -- -- 100 1 1.8
Holiday Inn
Express-Registered Trademark-............ -- -- -- 35 1 0.6
-- --
----- ----------- ----- ---------
7,706 30 100.0% 5,488 31 100.0%
-- --
-- --
----- ----------- ----- ---------
----- ----------- ----- ---------
</TABLE>
EMPHASIS ON FOOD AND BEVERAGE. Management believes popular food and
beverage ideas are a critical component in the overall success of a hotel. The
Company utilizes its food and beverage operations to create local awareness of
its hotel facilities, to improve the profitability of its hotel operations and
to enhance customer satisfaction. The Company is committed to competing for
patrons with restaurants and catering establishments by offering high-quality
restaurants that garner positive reviews and strong local and/or national
reputations. The Company has engaged food and beverage experts to develop
several proprietary restaurant concepts. The Owned Hotels contain restaurants
ranging from Michel Richard's highly acclaimed CITRONELLE-Registered Trademark-,
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-Registered Trademark- and
"TCBY"-Registered Trademark- 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.
34
<PAGE>
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-Registered Trademark-
and cc:Mail-Registered Trademark- to facilitate daily communication. Such
programs have enabled the Company to create and implement detailed reporting
systems at each of the Hotels and its corporate headquarters. Corporate
executives utilize information systems that track each 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, through
the recording of guest comment cards and the direct solicitation (during
check-in and check-out) of guest opinions regarding specific items, allows
investment in services and amenities where they are most effective. The
Company's focus on these areas has enabled it to attract lucrative group
business.
DISTINCT MANAGEMENT CULTURE. The Company has a distinct management culture
that stresses creativity, loyalty and entrepreneurship and was developed to
emphasize operations from an owner's perspective. Management believes in
realistic solutions to problems, and innovation is always encouraged. Incentive
programs and awards have been established to encourage individual property
managers to seek new ways of increasing revenues and operating cash flow. This
creative, entrepreneurial spirit is prevalent from the corporate staff and the
general managers down to the operations staff. Individual general managers work
closely with the corporate staff and they and their employees are rewarded for
achieving target operating and financial goals.
THE PROPERTIES
The Owned Hotels, the Highgate Portfolio and the Additional Acquisitions
feature, or after the Company's renovation programs have 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 travelers as well as banquets and receptions from the local
community.
35
<PAGE>
The following table sets forth certain information with respect to the Owned
Hotels, the Highgate Portfolio and the Additional Acquisitions for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
PLANNED OR
COMPLETED
NUMBER OF RENOVATION
GUEST YEAR MONTH EXPENDITURE(1)
HOTEL LOCATION ROOMS BUILT ACQUIRED (000'S)
- ----------------------------------- -------------------------- ------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton....... Irvine, CA 290 1976 2/96 $ 2,006
Hilton Hotel....................... Sacramento, CA 326 1983 12/96 750
Santa Barbara Inn.................. Santa Barbara, CA 71 1959 12/96 450
Hilton Hotel....................... San Pedro, CA 226 1989 1/97 1,500
Holiday Inn........................ Colorado Springs, CO 201 1974 12/96 200
Sheraton Hotel..................... Colorado Springs, CO 502 1974 6/95 3,393
Embassy Suites Denver.............. Englewood, CO 236 1986 12/96 500
Embassy Row Hilton................. Washington, DC 195 1969 12/96 2,033
The Latham Hotel................... Washington, DC 143 1981 3/96 802
Westin Atlanta Airport(3).......... Atlanta, GA 496 1982 11/95 7,100
Radisson Hotel..................... Schaumburg, IL 202 1979 6/95 1,652
Hilton Hotel & Towers.............. Lafayette, LA 328 1981 12/96 249
Marriott Hotel..................... Somerset, NJ 434 1978 10/95 3,311
Doubletree Hotel................... Albuquerque, NM 294 1974 1/97 1,500
Sheraton Airport Plaza............. Charlotte, NC 226 1985 2/96 1,529
Holiday Inn........................ Cleveland, OH 237 1978 2/96 2,900
Hilton Hotel....................... Arlington, TX 310 1983 4/96 2,700
Southwest Hilton................... Houston, TX 293 1979 10/96 1,072
Westchase Hilton................... Houston, TX 295 1980 1/97 415
Salt Lake Airport Hilton........... Salt Lake City, UT 287 1980 3/95 1,823
Hilton Hotel....................... Arlington, VA 209 1990 8/96 1,500
Hilton Hotel....................... Bellevue, WA 180 1979 8/95 1,063
----- -------
Subtotal/Weighted Average--Owned Hotels.................... 5,981 $ 38,448
HIGHGATE PORTFOLIO
Doubletree Guest Suites............ Indianapolis, IN 137 1987 4/97 $ 1,000
Holiday Inn Select................. Dallas, TX 348 1974 4/97 300
Radisson Hotel..................... Dallas, TX 305 1972 4/97 1,500
Holiday Inn Calgary Airport........ Calgary, Alberta 170 1981 4/97 350
Sheraton Hotel..................... Guildford, B.C. 280 1992 4/97 700
Ramada Vancouver Centre............ Vancouver, B.C. 118 1968 4/97 500
----- -------
Subtotal/Weighted Average--Highgate Portfolio.............. 1,358 $ 4,350
ADDITIONAL ACQUISITIONS
Four Points Hotel.................. Cherry Hill, NJ 213 1991 3/97 $ 850
Great Valley Sheraton.............. Frazer, PA 154 1971 5/97 3,244
----- -------
Subtotal/Weighted Average--Additional Acquisitions......... 367 $ 4,094
Total/Weighted Average..................................... 7,706 $ 46,892
----- -------
----- -------
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-------------------------------------
AVERAGE
HOTEL OCCUPANCY ADR REVPAR(2)
- ----------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton....... 66.0% $ 78.48 $ 51.80
Hilton Hotel....................... 71.7 75.89 54.41
Santa Barbara Inn.................. 85.1 129.86 110.51
Hilton Hotel....................... 62.3 67.23 41.88
Holiday Inn........................ 72.6 60.57 43.97
Sheraton Hotel..................... 70.1 65.95 46.23
Embassy Suites Denver.............. 74.1 102.57 76.00
Embassy Row Hilton................. 60.8 111.24 67.63
The Latham Hotel................... 72.0 108.17 77.88
Westin Atlanta Airport(3).......... 79.3 79.44 63.00
Radisson Hotel..................... 66.1 75.54 49.93
Hilton Hotel & Towers.............. 74.1 70.05 51.91
Marriott Hotel..................... 72.4 104.36 75.56
Doubletree Hotel................... 66.6 77.12 51.36
Sheraton Airport Plaza............. 70.8 83.97 59.45
Holiday Inn........................ 73.1 70.11 51.25
Hilton Hotel....................... 73.3 81.03 59.39
Southwest Hilton................... 53.9 72.17 38.90
Westchase Hilton................... 77.9 89.87 70.01
Salt Lake Airport Hilton........... 75.5 79.18 59.78
Hilton Hotel....................... 74.5 109.21 81.36
Hilton Hotel....................... 80.8 91.70 74.09
--- --------- -----------
Subtotal/Weighted Average--Owne 71.3% $ 83.02 $ 59.19
HIGHGATE PORTFOLIO
Doubletree Guest Suites............ 73.5% $ 79.53 $ 58.45
Holiday Inn Select................. 61.7 59.04 36.43
Radisson Hotel..................... 74.6 60.69 45.27
Holiday Inn Calgary Airport........ 59.3 53.09 31.48
Sheraton Hotel..................... 75.2 69.17 52.02
Ramada Vancouver Centre............ 79.4 70.40 55.90
--- --------- -----------
Subtotal/Weighted Average--High 69.8% $ 64.35 $ 44.92
ADDITIONAL ACQUISITIONS
Four Points Hotel.................. 61.8% $ 73.40 $ 45.36
Great Valley Sheraton.............. 72.0 88.80 63.94
--- --------- -----------
Subtotal/Weighted Average--Addi 66.1% $ 80.43 $ 53.16
Total/Weighted Average......... 70.8% $ 79.64 $ 56.39
--- --------- -----------
--- --------- -----------
</TABLE>
- ------------------------------
(1) Represents the total planned or completed capital expenditures at each
hotel. For the year ended December 31, 1996, $21.6 million had been spent
and an additional $21.7 million was planned.
(2) Represents total room revenue divided by total available rooms, net of rooms
out of service due to significant renovations.
(3) The Westin Atlanta Airport is majority-owned by the Company through a
partnership in which the Company holds an 85.2% limited partner interest, 1%
general partner interest and a mortgage which together provide the Company a
92% economic interest in the hotel.
36
<PAGE>
POST-IPO ACQUISITIONS
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.
SANTA BARBARA INN, SANTA BARBARA, CA. Built in 1959, the 71-room hotel is
located on the Pacific Coast Highway directly across from the Pacific Ocean and
a wide, publicly maintained beach. The hotel's facilities and amenities feature
the renowned CITRONELLE restaurant, two meeting rooms, an outdoor pool and deck,
tennis courts and valet services. The Santa Barbara market is a popular
residential and resort area.
HILTON HOTEL, SAN PEDRO, CA. Built in 1989, the 226-room hotel is located
in Los Angeles County between Long Beach and Palos Verdes, approximately 12
miles south of Los Angeles International Airport. The hotel's facilities and
amenities feature over 14,000 square feet of banquet and meeting space, a
swimming pool, a spa, two tennis courts and a grill restaurant. San Pedro is
located within five miles of the Port of Long Beach and within two miles of the
Port of Los Angeles, which together handle nearly two-thirds of the Western
United States' cargo. Los Angeles County is currently experiencing increased
economic growth as it emerges from the recession of the early- and mid-1990s.
Upon acquisition in February 1997, the hotel was reflagged as a Hilton.
HOLIDAY INN, COLORADO SPRINGS, CO. Built in 1974 and renovated in 1990, the
201-room hotel is located on Interstate 25, approximately five miles north of
downtown Colorado Springs and approximately eight miles north of another Owned
Hotel, the Sheraton Hotel, Colorado Springs. The hotel's facilities and
amenities feature more than 8,700 square feet of banquet and meeting space, a
health club and jogging track, an outdoor pool, tennis courts, a restaurant, a
gift shop and valet services. Colorado Springs has experienced strong economic
growth in recent years which has led to a major airport expansion program
completed in 1995. Such growth is attributable to a number of factors, including
the region's low average cost of living and a rapidly expanding, young
population.
EMBASSY SUITES DENVER, DENVER, CO. Built in 1986, the 236-room hotel is
located in South Denver within a concentration of office and industrial parks
known as the Denver Tech Center. The hotel's facilities and amenities feature
over 5,000 square feet of banquet and meeting space, an indoor pool, an upgraded
fitness center, a business center, valet services, a gift shop and a restaurant.
Denver has experienced significant development and growth during the 1990s as
the economic and cultural center of the rapidly expanding Mountain region.
THE EMBASSY ROW HILTON, WASHINGTON, D.C. Built in 1969 and renovated in
1994, the 195-room hotel is located in downtown Washington, D.C. on
Massachusetts Avenue, which is known as "Embassy Row" because of the many
embassies, chanceries and offices of foreign governments located in the area.
The hotel's facilities and amenities feature over 7,500 square feet of banquet
and meeting space, a rooftop pool and deck, a health and fitness center, a
business center, valet services and a restaurant. A major new convention center
is expected to open in downtown within four years. The Company assumed
management of the hotel in July 1996. Upon acquisition in December 1996, the
hotel was reflagged as a Hilton.
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.
37
<PAGE>
DOUBLETREE HOTEL, ALBUQUERQUE, NM. Built in 1975, the 294-room hotel is
located in downtown Albuquerque, adjacent to the Convention Center and the
subterranean Galleria Shopping Center. The hotel's facilities and amenities
feature over 10,000 square feet of meeting and banquet space, an outdoor heated
pool, an exercise room, a gift shop, an airline desk, two restaurants, two
lobbies and a garden foyer. The region has experienced consistent growth
throughout the 1990s, in part because of the increased presence of high
technology businesses in Albuquerque. The Company plans to spend $1.5 million on
renovations at the hotel.
SOUTHWEST HILTON, HOUSTON, TX. Built in 1981, the 293-room hotel is located
in the Southwest area of Houston on the Southwest Freeway, one of the city's
busiest roads. The hotel's facilities and amenities feature over 15,000 square
feet of banquet and meeting space, an outdoor pool, a fitness center, a business
center, valet services a gift shop and a restaurant. Houston is the nation's
fourth largest metro area with a population over 3.8 million and the region is a
national leader in economic growth and job growth. The Company plans to spend
$1.1 million on renovations at the hotel.
WESTCHASE HILTON, HOUSTON, TX. Built in 1981, the 295-room hotel is located
within blocks of the freeway to the Houston International Airport and convenient
to the commercial and retail concentration known as the Galleria area. The
hotel's facilities and amenities feature over 13,000 square feet of banquet and
meeting space, a landscaped outdoor pool with a deck and hot tub, a fitness
center, a beauty salon, a gift shop and a restaurant. Houston is the nation's
fourth largest metro area with a population over 3.8 million and the region is a
national leader in economic growth and job growth.
THE HIGHGATE PORTFOLIO
DOUBLETREE GUEST SUITES, INDIANAPOLIS, IN. Built in 1987, the 137-room
hotel is located on busy North Meridian Street on the north side of the suburb
of Carmel. The hotel is located within a commercial concentration of insurance
companies and national companies such as Lucent Technologies, Thompson Consumer
Electronics, GTE, Eli Lilly and Hewlett Packard. The hotel's facilities and
amenities feature over 1,000 square feet of banquet and meeting space, an
indoor/outdoor pool, a fitness center, a whirlpool, a gift shop and a
restaurant.
HOLIDAY INN SELECT, DALLAS, TX. Built in 1974 and renovated in 1988 and
1995, the 348-room hotel is located at the intersection of Interstate 35 and
Mockingbird Lane, within easy access to the market areas of Las Colinas,
Stemmons Corridor/Market Center, Love Field and Central Business
District/Convention Center. The hotel's facilities and amenities feature over
13,560 square feet of banquet and meeting space, an outdoor pool and sundeck, a
health club, a business center, a gift shop and a restaurant.
RADISSON HOTEL, DALLAS, TX. Built in 1972, the 305-room hotel is located on
West Mockingbird Lane, within easy access to Interstate 35 and the market areas
of Love Field, Stemmons Corridor/Market Center, Parkland/Medical Center and the
Central Business District/Convention Center. The hotel's facilities and
amenities feature over 16,000 square feet of banquet and meeting space, and
outdoor pool, a health club, two racquetball courts, a jogging track, sand
volleyball courts, a whirlpool, a sauna, a gift shop and two restaurants.
HOLIDAY INN CALGARY AIRPORT, CALGARY, ALBERTA. Built in 1981, the 170-room
hotel is located between Calgary's International Airport and central business
district, near such tourist attractions as the Calgary Zoo and Prehistoric Park,
Devonian Garden, the Saddledome (home of the NHL Calgary Flames), Stampede Park,
Canada Olympic Park, the Olympic Hall of fame, Heritage Park, Eau Clair Market
and the IMAX theatre. The hotel's facilities and amenities feature over 2,040
square feet of banquet and meeting space, an indoor pool, two saunas, guest
privileges at a nearby health club and a restaurant.
SHERATON HOTEL, GUILDFORD, B.C. Built in 1992, the 280-room hotel is
located in the Guildford Area of the City of Surrey, the geographic center of
the Greater Vancouver region. The hotel's facilities and
38
<PAGE>
amenities feature over 18,000 square feet of banquet and meeting space, an
outdoor pool, an exercise room, a sauna, a gift shop and a restaurant. Surrey
has experienced significant expansion in recent years and is a leader in
economic growth and job growth within the Province of British Columbia.
RAMADA VANCOUVER CENTRE, VANCOUVER, B.C. Built in 1968 and renovated in
1989 and 1994, the 118-room hotel is located on West Broadway, one block from
the Vancouver Hospital & Health Science Centre and minutes from downtown
Vancouver. Nearby tourist attractions include the Queen Elizabeth Theatre and
the Ford Centre for the Performing Arts, Vancouver International Airport, Canada
Place/ Convention Centre, B.C. Place, General Motors Place, Granville Island
Market, the University of British Columbia, Chinatown and Japantown.
THE ADDITIONAL ACQUISITIONS
FOUR POINTS HOTEL, CHERRY HILL, NEW JERSEY. Built in 1971, the 213-room
hotel is located on Route 70 East, off I-295, nine miles from the Philadelphia
Convention Center and near several major corporate office parks in the Cherry
Hill/Mount Laurel area. The hotel's facilities and amenities feature 16,288
square feet of banquet and meeting space, a large outdoor courtyard with pool,
exercise room, two tennis courts, gift shop, a Morgan's restaurant and a lobby
bar.
GREAT VALLEY SHERATON, FRAZER, PENNSYLVANIA. Built in 1991, the 154-room
hotel is located at the intersection of Route 202 and Lancaster Pike in historic
Chester County, Pennsylvania. The hotel's facilities and amenities include 7,852
square feet of meeting and banquet space, an indoor pool, the White Horse Tavern
and Chesterfield's Piano Lounge. The "202 Corridor" has experienced significant
growth in recent years.
THE MANAGED HOTELS
The Company operates 31 Managed Hotels owned by third parties containing
5,488 rooms. Of the Managed Hotels, 23 are full-service properties, seven are
limited-service properties and one is an extended stay property. Of the Managed
Hotels, 25 are operated under nationally-recognized brand names and six are
independent properties. The brand names of the Managed Hotels include Sheraton,
Clarion, Holiday Inn and Best Western. See "Certain Relationships and Related
Transactions" and "Risk Factors--Potential Conflicts of Interest."
The Management Agreements have remaining terms ranging from one month to
nine years. Substantially all of the Management Agreements permit the owners of
the Managed Hotels to terminate such agreements prior to the stated expiration
dates if the applicable hotel is sold and several of the Management Agreements
permit the owners of the Managed Hotels to terminate such agreements prior to
the stated expiration date without cause or by reason of the failure of the
applicable hotel to obtain specified levels of performance. For 1996, the
Company's pro forma revenue from Management Agreements was $3.2 million
constituting 1.3% of the Company's total pro forma revenue for such period. No
single Management Agreement (or group of Management Agreements for hotels under
common ownership or control) currently accounts for more than 0.5% of the total
revenue of the Company 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.
39
<PAGE>
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, brand
affiliation, price, range of services and guest amenities offered and quality of
customer service and overall product.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 6,200 persons,
of whom approximately 5,200 were compensated on an hourly basis. Approximately
65 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.
DOUBLETREE-TM-, EMBASSY SUITES-Registered Trademark-, HILTON-TM- HOLIDAY
INN-Registered Trademark-, MARRIOTT-Registered Trademark-, RADISSON-TM-,
SHERATON-Registered Trademark- AND WESTIN-TM- ARE REGISTERED TRADEMARKS OF THIRD
PARTIES, NONE OF WHICH SHALL BE DEEMED AN ISSUER OR UNDERWRITER OF THE SHARES OF
COMMON STOCK OFFERED HEREBY NOR HAVE ANY OF SUCH FRANCHISORS ENDORSED OR
APPROVED THE OFFERING. SUCH FRANCHISORS HAVE NOT ASSUMED AND SHALL NOT HAVE ANY
LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL STATEMENTS OR OTHER FINANCIAL
INFORMATION CONTAINED HEREIN OR ANY PROSPECTUS OR ANY WRITTEN OR ORAL
COMMUNICATIONS REGARDING THE SUBJECT MATTER HEREOF. A GRANT OF ANY SUCH
FRANCHISE LICENSE FOR CERTAIN OF THE COMPANY'S HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
ANY OF SUCH FRANCHISORS (OR ANY OF THEIR 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.
40
<PAGE>
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."
THE OPERATING PARTNERSHIP
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE
PROVISIONS OF CAPSTAR MANAGEMENT'S LIMITED PARTNERSHIP AGREEMENT, A COPY OF
WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART.
Substantially all of the Company's assets are held indirectly by and
operated through CapStar Management, the Company's subsidiary operating
partnership. The Company is the sole general partner of CapStar Management, and
the Company and CapStar LP Corporation, a wholly-owned subsidiary of the
Company, are the sole limited partners of CapStar Management. The partnership
agreement of CapStar Management gives the general partner full control over the
business and affairs of CapStar Management. The general partner is also given
the right, in connection with the contribution of property to CapStar Management
or otherwise, to issue additional partnership interests in CapStar Management in
one or more classes or series, with such designations, preferences and
participating or other special rights and powers (including rights and powers
senior to those of the existing partners) as the general partner may determine.
In connection with the acquisition of the Highgate Portfolio, the Company
has agreed to issue limited partnership interests in CapStar Management to
Highgate Hotels. Upon the closing of the acquisition of the Highgate Portfolio,
the partnership agreement of CapStar Management will be amended to provide for
two classes of partnership interests, Common OP Units and Preferred OP Units,
and the partners of CapStar Management will own the following numbers of such OP
Units: (i) the Company and CapStar LP Corporation--a number of Common OP Units
equal to the number of issued and outstanding shares of Common Stock (including
those issued in the Offering); and (ii) Highgate Hotels--809,523 Common OP Units
and 392,157 Preferred OP Units. The Preferred OP Units will pay a 6.5%
cumulative annual preferred return, compounded quarterly to the extent not paid
on a current basis, and will be entitled to a liquidation preference of $25.50
per Preferred OP Unit. All net income and capital proceeds earned by CapStar
Management, after payment of the annual preferred return and, if applicable, the
liquidation preference, will be shared by the holders of the Common OP Units in
proportion to the number of Common OP Units owned by each such holder.
Each OP Unit held by Highgate Hotels will be convertible by the holder on or
after August 23, 1997 for one share of Common Stock of the Company (or, at the
Company's option, for cash in an amount equal to the market value of a share of
Common Stock). In addition, the Preferred OP Units will be redeemable by CapStar
Management at a price of $25.50 per Preferred OP Unit (or, at the Company's
option, for a number of shares of Common Stock having a value equal to such
redemption price) at any time after the third anniversary of the acquisition of
the Highgate Portfolio.
41
<PAGE>
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.................................... 46 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..................................... 41 Executive Vice President, Finance and Development
John Emery.......................................... 32 Treasurer and Secretary
Michael T. George................................... 38 Senior Vice President, Operations
D. Scott Livchak.................................... 42 Senior Vice President, Operations
Robert Gauthier..................................... 43 Senior Vice President, Operations
Daniel L. Doctoroff................................. 38 Director
Bradford E. Bernstein............................... 30 Director
William S. Janes.................................... 43 Director
Joseph McCarthy..................................... 64 Director
Edward L. Cohen..................................... 51 Director
Edwin T. Burton, III................................ 54 Director
Edward P. Dowd...................................... 54 Director
Mahmood Khimji...................................... 36 Proposed 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
42
<PAGE>
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.
JOHN EMERY has served as Treasurer and Secretary of the Company since March
1996. From September 1995 to March 1996, he served as Director of Finance of the
Company. Prior to that, from January 1987 to September 1995, he worked for
Deloitte & Touche LLP in various capacities, culminating with Senior Manager for
the hotel and real estate industries.
MICHAEL T. GEORGE has served as Senior Vice President, Operations since
1995. From 1990 to 1995, Mr. George served as Vice President of Operations and
ultimately as Chief Operating Officer for Devon Hotels Ltd. in Montreal. From
1989 to 1990, Mr. George served as a General Manager and Vice President for
Radisson Hotels International, Inc. Prior to that, from 1986 to 1989, Mr. George
served in various capacities with Radisson Hotels, Hilton Hotels and Sheraton
Hotels.
D. SCOTT LIVCHAK has served as Senior Vice President, Operations since 1990.
From 1985 to 1989 Mr. Livchak served as a General Manager for The Adam's Mark
Hotel in Washington, DC, owned by HBE Corporation. From 1983 to 1985, Mr.
Livchak worked for the Sheraton Atlanta Hotel in the capacity of Resident
Manager. From 1977 to 1983, Mr. Livchak held various management positions with
Sheraton Corporation.
ROBERT GAUTHIER has served as Senior Vice President, Operations and General
Manager of the Sheraton, Colorado Springs since 1996. From 1993 to 1996, he
served as Vice President, Operations for CapStar Management. Prior to that, from
1987 to 1993, Mr. Gauthier served as Area Manager and General Manager for Drexel
Burnham Lambert Realty, Inc.
DANIEL L. DOCTOROFF has been Managing Director of Oak Hill Partners, Inc.
(Acadia Partners' investment advisor) and its predecessor since August 1987;
Vice President and Director of Acadia Partners MGP, Inc. since March 1992; Vice
President of Keystone, Inc. since March, 1992; and a Managing Partner of
Insurance Partners Advisors, L.P. since February 1994. All of such entities are
affiliates of Acadia Partners. Mr. Doctoroff is also a Director of Bell & Howell
Holdings Company, 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., Payroll Transfers, Inc. and Caliber Collision
Centers, Inc.
WILLIAM S. JANES has served as a Principal and Director of RMB Realty, Inc.
since 1990. Prior to that, from 1984 to 1989, Mr. Janes served as Regional
General Partner of Lincoln Property Company. Mr. Janes serves as a Director of
Paragon Group, Inc., a publicly-traded real estate investment trust, as well as
Brazos Asset Management, Brazos Fund, Paragon Property Services, Inc. and Carr
Real Estate Services. Mr. Janes maintains professional affiliations as a member
of the National Association of Real Estate Investment Trusts, the Society of
Industrial and Office Realtors and the Urban Land Institute.
JOSEPH MCCARTHY has been retired since 1994. From 1993 to 1994 he has served
as Chairman of the Board for Motel 6. From 1985 to 1993, he served as President
and Chief Executive Officer for Motel 6. From 1980 to 1985, he served as
President and Chief Executive Officer of Lincoln Hotels. From 1976 to 1980, he
served as President and Chief Executive Officer of Quality Inns International.
Prior to that, from 1971 to 1976, he served as Senior Vice President of the
Sheraton Corporation.
EDWARD L. COHEN has served as an Executive Officer of Lerner Corporation, a
real estate management and leasing company located in Bethesda, Maryland, since
1985. Mr. Cohen is also a Principal of Lerner Enterprises, a real estate
development and investment company. Prior to his participation with the Lerner
organization, he was a lawyer in private practice in Washington, D.C.
43
<PAGE>
EDWIN T. BURTON, III has served as President of Windermere Consulting
Company since April 1995 and Trustee of the Commonwealth of Virginia Retirement
System since March 1994. From 1994 to April 1995, he served as Managing Director
and a member of the Board of Interstate Johnson Lane, Inc. Prior to that, from
1987 to 1993, he was President of Rothschild Financial Services, Inc. Mr. Burton
is a Visiting Professor of Economics at the University of Virginia in
Charlotesville, Virginia.
EDWARD P. DOWD has served as Senior Vice President of John Hancock Real
Estate Investment Group of John Hancock Financial Services since 1992. Prior to
that, from 1970 to 1992, Mr. Dowd served in various capacities at John Hancock
Realty. Mr. Dowd serves as Director of John Hancock Realty Investors, Inc., John
Hancock Realty Services Inc. and Maritime Life Assurance Co.
MAHMOOD KHIMJI has served as Senior Vice President of Highgate Hotels, Inc.,
an owner and operator of hotel and commercial properties throughout North
America, since 1988. Prior to that, from 1986 to 1988, Mr. Khimji was an
associate at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr.
Khimji serves as a Director of the Texas Hotel/Motel Association.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Company during
1996 with respect to the Chief Executive Officer and the four most highly
compensated executive officers (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ----------------------------------------- ---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Paul W. Whetsell......................... $ 215,081 $ -- $ 2,312 150,000 --
President, Chief Executive Officer
and Chairman of the Board
David E. McCaslin........................ 179,748 30,000 2,312 87,500 --
Chief Operating Officer and Director
William M. Karnes........................ 154,549 30,000 -- 50,000 --
Senior Executive Vice President
and Chief Financial Officer
John E. Plunket.......................... 185,691 10,000 -- 73,129 --
Executive Vice President, Finance and
Development
Michael T. George........................ 132,000 13,000 20,500 18,282 --
Senior Vice President, Operations
</TABLE>
44
<PAGE>
STOCK OPTION GRANTS
The following table sets forth certain information with respect to the
options granted to the Named Executive Officers during 1996.
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
POTENTIAL
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN OR EXPIRATION --------------------------
NAME GRANTED(1) 1996 FISCAL YEAR BASE PRICE DATE 5% 10%
- ----------------------- ----------- ----------------- ------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Paul W. Whetsell....... 150,000 20.1% $ 18 August 20, 2006 $ 1,698,015 $ 4,303,105
David E. McCaslin...... 87,500 11.7 18 August 20, 2006 990,509 2,510,144
John E. Plunket........ 73,129 9.8 18 August 20, 2006 827,828 2,097,878
William M. Karnes...... 50,000 6.7 18 August 20, 2006 566,005 1,434,368
Michael T. George...... 18,282 2.5 18 August 20, 2006 206,954 524,462
</TABLE>
- ------------------------
(1) All of these options vest in equal installments over three years except
10,000 of the options granted to Mr. Plunket which vested immediately upon
their grant.
(2) In accordance with rules of the Securities and Exchange Commission, these
amounts are the hypothetical gains or "option spreads" that would exist for
the respective options based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over the
full option term.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company ("Independent Directors") are
paid an annual fee of $12,000. In addition, each Independent Director is 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 do not receive any fees for their
service on the Board or a committee thereof. The Company reimburses directors
for their out-of-pocket expenses in connection with their service on the Board.
In connection with the IPO, each Independent Director was granted options to
purchase 5,000 shares of Common Stock at the initial public offering price of
$18 per share. 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 in equal installments
over three years ending in August 1999. 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 currently has an Audit Committee, a Compensation Committee and an
Investment Committee. The Audit Committee consists of three Independent
Directors. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans and results of the audit engagement, approves professional
services provided by the independent public accountants, review the independence
of the independent public accountants, considers the range of audit and
non-audit fees and reviews the adequacy of the Company's internal accounting
controls. The Compensation Committee consists of three Independent Directors and
determines compensation of the Company's executive officers and administers the
Company's Equity Incentive Plan (as defined below). The Investment Committee
consists of the Chairman of the Board and
45
<PAGE>
three Independent Directors, and reviews and approves investments proposed to be
made by the Company.
COMPENSATION PLANS
MANAGEMENT BONUS PLAN. The Company has established a management bonus plan
(the "Management Bonus Plan") under which certain officers and employees of the
Company, including the Named Executive Officers, are eligible to receive cash
bonuses based upon the achievement of specific goals both for the Company and
the individual officer or employee. Bonuses awarded under the Management Bonus
Plan may not exceed 66% of the officer or employee's annual base salary. The
Management Bonus Plan is administered by the Compensation Committee.
STOCK PURCHASE PLAN. Each employee of the Company customarily employed at
least 20 hours or more per week by the Company or an affiliate (as defined in
the Stock Purchase Plan), other than an employee who owns beneficially 5% or
more of the outstanding Common Stock, is eligible to participate in the
Company's stock purchase plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan, participating employees may elect to authorize the Company to
withhold a minimum of $200 per quarter and a maximum of 8% or $25,000 (whichever
is less) of the participating employee's base pay, which amounts will be used to
purchase Common Stock from the Company on a monthly basis. The purchase price of
Common Stock will equal a designated percentage from 85% to 100% of the closing
sales price for Common Stock as reported on the Composite Transactions Tape of
the NYSE (except as described below) on the first trading day of the month or on
the last trading day of the month, whichever is less. The designated percentage
will be established annually by the Compensation Committee which is responsible
for the administration of the Stock Purchase Plan.
Common Stock purchased under the Stock Purchase Plan is held in custodial
accounts until sold or distributed at the participant's request. The custodian
may charge a fee for the execution of any such sale or for the delivery of share
certificates. The participant may not elect to purchase stock under the Stock
Purchase Plan for three months after a withdrawal or sale of Common Stock under
the Stock Purchase Plan. Shares purchased under the Stock Purchase Plan may not
be sold for six months after their purchase. Any cash dividends paid on Common
Stock held in a participant's account will be reinvested in additional Common
Stock (at 100% of fair market value). Non-cash distributions on Common Stock
held in a participant's account will be distributed to the participant.
The Company has reserved 500,000 shares of Common Stock for issuance under
the Stock Purchase Plan. Such shares may be from authorized and unissued shares,
treasury shares or a combination thereof. The Stock Purchase Plan will remain in
effect until terminated by the Board, or until all shares authorized for
issuance thereunder have been issued. The Stock Purchase Plan may be amended
from time to time by the Board. No amendment will increase the aggregate number
of shares of Common Stock that may be issued and sold under the Stock Purchase
Plan (except for authorizations pursuant to the anti-dilution provisions of the
Stock Purchase Plan) without further approval by the Company's shareholders.
EQUITY INCENTIVE PLAN. The Company's Equity Incentive Plan (the "Equity
Incentive Plan") is designed to attract and retain qualified directors, officers
and other key employees of the Company and its affiliates (as defined in the
Equity Incentive Plan). The Equity Incentive Plan authorizes the grant of
options to purchase shares of Common Stock ("Options"), stock appreciation
rights ("Appreciation Rights") and restricted shares ("Restricted Shares"). The
Compensation Committee administers the Equity Incentive Plan and determines to
whom Options, Appreciation Rights and Restricted Shares are to be granted and
the terms and conditions thereof, including the number of shares relating to
each award and the period of exerciseability or restricted period, as the case
may be. Notwithstanding the foregoing, the Board may resolve to administer the
Equity Incentive Plan itself, in which case the term Compensation Committee
shall be deemed to mean the Board.
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<PAGE>
Subject to adjustment as provided in the Equity Incentive Plan, the number
of shares of Common Stock that may be issued or transferred and covered by
outstanding awards granted under the Equity Incentive Plan may not in the
aggregate exceed 1,740,000 shares. To the extent that an award is canceled,
terminates, expires or lapses for any reason without the payment of
consideration, any shares of Common Stock subject to the award will again be
available for the grant of awards. Common Stock subject to Appreciation Rights
that are settled in cash will thereafter be available for the grant of awards.
Common Stock issued under the Equity Incentive Plan may be from authorized and
unissued shares, treasury shares or a combination thereof. Awards may be granted
to directors, officers or other key employees of the Company or an affiliate, as
determined by the Compensation Committee.
In connection with the IPO, the Company granted 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 of $18 per share. Certain of
these options were exercisable immediately upon their grant, while the remaining
options will become exercisable in three annual installments.
The Compensation Committee may grant Options at a per share price equal to,
greater than or less than fair market value of the Common Stock on the date of
grant. The exercisability of Options may be conditioned on continued service
and/or the achievement of specified performance objectives ("Management
Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted awards relating to more than 200,000 shares during
any calendar year. The Compensation Committee shall determine the method of
exercising options and the form of payment, which may include, without
limitation, cash, shares of Common Stock that are already owned by the optionee,
other property or "cashless exercise" arrangements. Any grant may provide for
automatic "reload option rights", except that the term of any reload options
shall not extend beyond the term of the Options originally exercised. The
Compensation Committee may specify at the time Options are granted that shares
of Common Stock will not be accepted in payment of the option price until they
have been owned by the optionee for a specified period; however, the Equity
Incentive Plan does not require any such holding period. Options granted under
the Equity Incentive Plan may be intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Code, or Options that are not
intended to so qualify. No incentive stock option may be exercised more than ten
years from the date of grant. Each grant must specify the period, if any, of
continuous service with the Company or any affiliate that is necessary before
the Options will become exercisable and may provide for the earlier exercise of
the Options in the event of a change of control of the Company or other event.
More than one grant may be made to the same optionee.
Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Options. An Appreciation Right represents the right to receive from
the Company the difference (the "Spread"), or a percentage thereof not in excess
of 100%, between the base price per share of Common Stock in the case of a
free-standing Appreciation Right, or the option price of the related Option
Right in the case of a tandem Appreciation Right, and the market value of the
Common Stock on the date of exercise of the Appreciation Right. Tandem
Appreciation Rights may only be exercised at a time when the related Option
Right is exercisable and the Spread is positive, and the exercise of a tandem
Appreciation Right requires the surrender of the related Option Right for
cancellation. A free-standing Appreciation Right must specify a base price,
which may be equal to, greater than or less than the fair market value of a
share of Common Stock on the date of grant, must specify the period of
continuous service that is necessary before the Appreciation Right becomes
exercisable (except that it may provide for its earlier exercise in the event of
a change in control of the Company or other event) and, in the case of an
Appreciation Right awarded in tandem with an incentive stock option, may not be
exercised more than ten years from the date of grant. Any grant of Appreciation
Rights may specify that the amount payable by the Company upon exercise may be
paid in cash, Common Stock or a combination thereof. In addition, any grant may
specify that an Appreciation Right may be exercised only in the event of a
change in control of the Company. The Compensation
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<PAGE>
Committee may condition the award of Appreciation Rights on continued service
and/or the achievement of one or more Management Objectives.
The Compensation Committee may award Restricted Shares to participants in
such amounts and subject to such terms and conditions as may be determined by
the Compensation Committee. The participant may be entitled to voting, dividend
and other ownership rights prior to the vesting of the shares. The Compensation
Committee may condition the vesting of an award on the achievement of specified
Management Objectives.
No Options, Appreciation Rights or other awards are transferable by a
participant except by will or the laws of descent and distribution. Options and
Appreciation Rights may not be exercised during a participant's lifetime except
by the participant or, in the event of the participant's incapacity, by the
participant's guardian or legal representative acting in a fiduciary capacity on
behalf of the participant under state law and court supervision.
In the event of certain stock dividends, stock splits, combinations of
shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations,
liquidations, issuances of rights or warrants, and similar transactions or
events, the Compensation Committee, in its sole discretion, may adjust (i) the
maximum number of shares that may be issued or transferred under the Equity
Incentive Plan, (ii) the number of shares covered by outstanding awards, (iii)
the exercise price of outstanding options and (iv) base prices of outstanding
SARs. The Compensation Committee may also, as it determines to be appropriate in
order to reflect any such transaction or event, make or provide for such
adjustments in the number of shares that may be issued or transferred and
covered by outstanding awards granted under the Equity Incentive Plan and the
number of shares permitted to be covered by Options and Appreciation Rights
granted to any one participant during any calendar year.
In connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan,
related agreements and other documents. With the approval of the Board, the
Equity Incentive Plan may be amended from time to time by the Compensation
Committee but, without further approval by the shareholders of the Company, no
such amendment may (i) increase the total number of shares of Common Stock that
may be issued under the Equity Incentive Plan (except as otherwise provided in
the plan), (ii) modify the Equity Incentive Plan's eligibility requirements or
(iii) materially increase the benefits accruing to participants under the Equity
Incentive Plan.
EMPLOYMENT AGREEMENTS
Each of Paul Whetsell, David McCaslin, William Karnes and John Plunket are
parties to employment agreements with the Company which will expire on December
31, 1999. Mr. Whetsell's and Mr. McCaslin's agreements provide for automatic one
year extensions thereafter unless either the executive or the Company gives
notice to the other at least 120 days prior to the end of any such period that
he or it, as the case may be, does not wish to extend the agreement for an
additional period. The employment agreements provide for annual base salaries of
$225,000, in the case of Mr. Whetsell, $215,000, in the case of Mr. McCaslin and
Mr. Karnes, and $150,000, in the case of Mr. Plunket, subject, in each such
case, to periodic increases. Each executive will be eligible to receive annual
bonuses and will be entitled to participate in all existing or future plans for
the benefit of the Company's employees and management, on the same basis as
other senior executive officers of the Company.
Under the employment agreements of Messrs. Whetsell and McCaslin, each is
entitled to receive (i) a lump sum payment equal to the product of (a) his total
cash compensation for the previous fiscal year and (b) the greater of (1) the
number of full and fractional years remaining in the agreement and (2) the
number two, if his employment is terminated by the Company without Cause (as
defined below) or is terminated by the executive for Good Reason (as defined
below), or (ii) a lump sum payment equal to two times his total cash
compensation for the previous fiscal year if the Company elects not to extend
his contract for an additional year at the end of its initial term (which ends
December 31, 1999) or any
48
<PAGE>
subsequent term. The events constituting "Good Reason" include the assignment to
the executive of duties materially inconsistent with his position and a material
breach of the employment agreement by the Company. As used in the employment
agreements of Messrs. Whetsell and McCaslin, the term "Cause" includes (i) the
executive's willful and intentional failure or refusal to perform or observe any
of his material duties set forth in his employment agreement, if such breach is
not cured within 30 days of notice from the Company; (ii) any willful and
intentional act of the executive involving theft, fraud, embezzlement or
dishonesty affecting the Company; and (iii) the executive's conviction of an
offense which is a felony in the jurisdiction involved. Messrs. Whetsell's and
McCaslin's employment agreements also provide that if (i) the executive elects
to terminate his employment within six months of a Change in Control (as defined
below) of the Company or (ii) within one year of any such change in control, the
executive is terminated without Cause or the executive terminates his employment
for Good Reason, the executive is entitled to receive a lump sum payment equal
to the product of (a) his total cash compensation for the previous fiscal year
and (b) the greater of (1) the number of full and fractional years remaining in
the agreement and (2) the number three. As used in the employment agreements of
Messrs. Whetsell and McCaslin, the term "Change in Control" means the occurrence
of one of the following events: (i) any person or entity other than Acadia
Partners becoming beneficial owner of greater than 35% of the Common Stock; (ii)
the Company adopts a plan of liquidation; (iii) the Company merges or combines
with another company and, immediately thereafter, the stockholders of the
Company prior to the merger or combination hold 50% or less of the Common Stock;
(iv) the Company sells all or substantially all of its assets; or (v) the
Company ceases to act as general partner of CapStar Management. Amounts received
by the executive upon termination of employment will increase to compensate the
executive for any excise tax payable by him under the Code. These employment
agreements prohibit the executives from using or disclosing any confidential
information about the Company and its operations for a period of three years
after the term of employment and from engaging in any competitive hotel business
for a period of one year after the term of employment.
Under the employment agreements of Messrs. Karnes and Plunket, each is
entitled to receive a lump some payment equal to his annual base salary for the
greater of one year or the remaining unexpired term of employment, if his
employment is terminated by the Company without Cause (as defined below). Each
of these executives will be entitled receive his annual base salary for a period
of two years if his employment is terminated by the executive as a result of the
occurrence of a Material Adverse Change (as defined below) or likely occurrence
of a Material Adverse Change following a Change in Control (as defined below).
The events constituting "Cause" under the employment agreements of Messrs.
Karnes and Plunket include: (i) the executive's inability to perform his duties
under the agreement for more than a 120-day period, whether or not continuous,
during any 365-day period; (ii) acts of willful misfeasance or gross negligence
in connection with the executive's employment; (iii) the executive's conviction
of (or plea of no contest to) an offense which is a felony in the jurisdiction
involved; (iv) repeated failure, after written notice thereof, by the executive
to perform any of his duties under the employment agreement; and (v) a breach of
a specific provision of the employment agreement and, if such breach is curable,
failure to cure same within 30 days of written notice thereof. As used in the
employment agreements of Messrs. Karnes and Plunket, the term "Change in
Control" means: any person or entity, other than Acadia Partners, becoming
beneficial owner of greater than 35% of the Common Stock, so long as no Change
in Control will be deemed to have occurred if the executive continues to report
to Paul W. Whetsell. As used in the employment agreements of Messrs. Karnes and
Plunket, the term "Material Adverse Change" means a material reduction or
material adverse change in the executive's working conditions if, after such
reduction or change, the executive's authority or working conditions are not
commensurate with those of executives holding chief financial officer positions
at companies comparable to the Company in the lodging industry.
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<PAGE>
PRINCIPAL STOCKHOLDERS
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 5,000,000 shares of Common Stock by the Company in the Offering by (i) all
persons known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each director who is a stockholder, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
-------------------------- --------------------------
NAME & ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------------------------------------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Acadia Partners, L.P.(1)....................................... 1,426,102 11.2% 1,426,102 8.0%
RCM Capital Management, L.L.C.(2).............................. 1,424,500 11.2 1,424,500 8.0
LaSalle Advisors Limited Partnership and ABKB/LaSalle
Securities Limited Partnership (3)........................... 1,154,700 9.1 1,154,700 6.5
Franklin Resources, Inc.(4).................................... 987,500 7.7 987,500 5.6
Paul W. Whetsell(5)............................................ 970,503 7.6 970,503 5.5
David E. McCaslin(6)........................................... 472,236 3.7 472,236 2.7
John E. Plunket(6)............................................. 462,729 3.6 462,729 2.6
William M. Karnes(7)........................................... 0 -- 0 --
John Emery(7).................................................. 0 -- 0 --
Michael T. George(7)........................................... 0 -- 0 --
D. Scott Livchak(7)............................................ 0 -- 0 --
Robert Gauthier(7)............................................. 0 -- 0 --
Daniel L. Doctoroff(7)......................................... 0 -- 0 --
Bradford E. Bernstein(7)....................................... 0 -- 0 --
William S. Janes(7)............................................ 0 -- 0 --
Joseph McCarthy(7)............................................. 0 -- 0 --
Edward L. Cohen................................................ 0 -- 0 --
Edwin T. Burton, III........................................... 0 -- 0 --
Edward P. Dowd................................................. 0 -- 0 --
All directors and executive officers as a group (15 persons)... 980,010 7.6% 980,010 5.5%
</TABLE>
- --------------------------
(1) The business address of Acadia Partners, L.P. is 201 Main Street, Suite
3100, Fort Worth, TX 76102. Includes 1,373,034 shares owned by Acadia
Partners, L.P. and 53,068 shares owned by Cherwell Investors, Inc.
("Cherwell"), a wholly owned subsidiary of Acadia Partners. 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 406,702 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 chart, above. The number of
shares set forth as being owned by Acadia Partners, L.P. in the Principal
Stockholders chart above also excludes 406,701 shares held by OHP EquiStar
Partners, L.P. ("OHP") and OHP EquiStar Partners II, L.P. ("OHP II"). Oak
Hill Partners, Inc. ("Oak Hill Partners"), which is the investment advisor
to Acadia Partners, L.P., is the general partner of each of OHP and OHP II.
(2) The business address of RCM Capital Management, L.L.C. ("RCM Capital") is
Four Embarcadero Center, Suite 2900, San Francisco, CA 94111. The Managing
Agent of RCM Capital is RCM Limited L.P. ("RCM Limited"). The General
Partner of RCM Limited is RCM General Corporation ("RCM General"). As such,
RCM Limited and RCM General may be deemed to beneficially own such shares
within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934,
as amended ("Rule 13d-3"). In addition, RCM Capital is a wholly-owned
subsidiary of Dresdner Bank AG ("Dresdner"). As such, Dresdner Bank also may
be deemed to beneficially own the shares held by RCM Limited.
(3) The business address of La Salle Advisors Limited Partnership and
ABKB/LaSalle Securities Limited Partnership (collectively, the "LaSalle
Partnerships") is 11 South LaSalle Street, Chicago, IL 60603. The LaSalle
Partnerships are registered investment advisors and may be deemed to
beneficially own such shares within the meaning of Rule 13d-3. William K.
Morrill, Jr. and Keith R. Pauley are employees of the LaSalle Partnerships
and, in such capacity, also may be deemed to beneficially own such shares
within the meaning of Rule 13d-3.
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(4) The business address of Franklin Resources, Inc. ("FRI") is 777 Mariners
Island Blvd., San Mateo, CA 94404. Such shares are owned by one or more open
or closed-ended investment companies or other managed accounts which are
advised by direct or indirect advisory subsidiares of FRI. Such advisory
subsidiaries may be deemed to beneficially own such shares within the
meaning of Rule 13d-3. Charles B. Johnson and Rupert H. Johnson, Jr. each
own in excess of 10% of FRI and, as such, also may be deemed to own such
shares held, directly or indirectly, by FRI within the meaning of Rule
13d-3.
(5) Includes shares held by entities over which Mr. Whetsell has beneficial
ownership within the meaning of Rule 13d-3.
(6) Includes shares held by entities over which Messrs. McCaslin and Plunket
have beneficial ownership within the meaning of Rule 13d-3.
(7) Such individuals own interests in entities which own shares of Common Stock,
but these individuals do not have beneficial ownership of such shares of
Common Stock within the meaning of Rule 13d-3.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITIONS
In March 1996, the Company acquired The Latham Hotel in Washington, D.C. for
a purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the
time of the acquisition, the general partner of LCP was Latham Hotels, Inc.
("LHI"), a corporation owned 80% by Paul W. Whetsell, President and Chief
Executive Officer of the Company, and 10% by David E. McCaslin, Chief Operating
Officer of the Company. Including their interests in LHI, Mr. Whetsell and Mr.
McCaslin owned, directly or indirectly, 9.18% and 0.52%, respectively, of the
beneficial interest in LCP and received $763,000 and $42,000, respectively, of
the net proceeds of the purchase price paid to LCP. The purchase price for the
Latham Georgetown was determined through arm's-length negotiations between the
Company, on the one hand, and representatives of the holders of the majority of
the beneficial interests in LCP, on the other hand; such representatives are not
affiliated with the Company.
Since November 1995, the Company has acquired 85.2% of the limited
partnership interests in the partnership that owns the Westin Atlanta Airport
("Atlanta Partners"). In November 1995, the Company acquired, for a purchase
price of $56,000, the 1% general partnership interest in Atlanta Partners
previously held by a corporation in which E. Robert Roskind owned an equity
interest ("LHP"). At the time of such acquisition Mr. Roskind was a principal of
both CapStar Management and EquiStar. LHP was also paid a fee of $893,000 in
connection with the acquisition of the partnership interests in Atlanta
Partners, and is entitled to an additional $161,000 upon the ultimate
disposition of Atlanta Partners. The LCP Group, L.P., in which Mr. Roskind owns
an equity interest is entitled to an annual fee of $30,000 for providing certain
administrative services relating to the outside limited partners of the Westin
Atlanta Airport. All of the compensation paid or payable to affiliates of Mr.
Roskind in connection with the Westin Atlanta Airport transaction was negotiated
between Mr. Roskind, on the one hand, and other principals of EquiStar, on the
other hand, who believed the compensation to have been at fair market value. 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 two
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 four of these Managed Hotels through their ownership of
certain entities which serve as general partners of the Affiliated Owners. Such
interests were acquired prior to the formation of EquiStar and CapStar
Management. During 1996, the Company received approximately $824,070 in
management fees from those Managed Hotels in which Messrs. Whetsell and McCaslin
own an equity interest, including approximately $554,896 in management fees from
the Affiliated Owners. Under the terms of their employment agreements, Messrs.
Whetsell and McCaslin are prohibited from hereafter
51
<PAGE>
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 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 were repaid in September 1996.
SUBORDINATED DEBT
One member of the syndicate of lenders of the $50 million Subordinated Debt
is Oak Hill Securities Fund, L.P. ("Oak Hill Securities"). The investment
advisor to Oak Hill Securities is Oak Hill Advisors, Inc., one of the principal
stockholders of which is Daniel L. Doctoroff, a director of the Company. Mr.
Doctoroff is also a principal stockholder of Oak Hill Partners which is the
investment advisor to Acadia Partners, a principal stockholder of the Company.
The Company has borrowed an aggregate of $25 million from Oak Hill Securities.
See "Principal Stockholders."
SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offering (assuming the over-allotment option is not
exercised), the Company will have 17,754,321 shares of Common Stock outstanding.
14,250,000 of these shares, will be freely transferable by persons other than
"affiliates" of the Company without restriction or limitation under the
Securities Act. The remaining 3,504,321 shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act (the "Restricted
Shares") and may not be sold in the absence of registration under the Securities
Act unless an exemption from registration is available, including the exemption
contained in Rule 144. The Company has granted certain registration rights to
the recipients of Restricted Shares issued in connection with the Formation
Transactions, which registration rights cover all of the securities issued in
connection with the Formation Transactions. See "Description of Capital
Stock--Registration Rights."
In general, under Rule 144, if one year has 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 two years have elapsed since
the date of acquisition of Restricted Shares from the Company or from any
"affiliate" of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
The Company has 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
980,010 shares of Common
52
<PAGE>
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. There can be no
assurance that Lehman will not grant any such consent.
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 granted options
to purchase an aggregate of 745,254 shares of Common Stock at the initial public
offering price under the Equity Incentive Plan to certain key personnel. The
Company filed 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 generally will be available for sale in the open
market. See "Management--Stock Option Grants."
In connection with the acquisition of the Highgate Portfolio, the Company
will issue to the sellers 809,523 Common OP Units and 392,157 Preferred OP
Units. Within certain limitations, such OP Units are convertible at the sellers'
election into an equal number of shares of Common Stock (or, at the Company's
election, cash in an amount equal to the market price of such shares). See
"Recent Developments--The Highgate Portfolio."
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
the conversion of OP Units, or the perception that such sales, exercises or
conversions could occur, will have on the market price prevailing from time to
time. Sales of substantial amounts of such Common Stock in the public market
could have an adverse effect on the market price of the Common Stock. See "Risk
Factors--Shares Available for Future Sale."
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, 17,754,321 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."
53
<PAGE>
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.
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
The Company has entered into registration rights agreements with (i) persons
receiving shares of Common Stock in connection with the Formation Transactions
and (ii) the principals of Highgate Hotels receiving OP Units which, under
certain circumstances, may be converted into Common Stock (the "Registration
Rights Agreements"), pursuant to which the Company has agreed (with certain
limitations) to register for sale any shares of Common Stock that are held by
the parties thereto (collectively, the "Registrable Securities"). The
Registration Rights Agreements provide 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
54
<PAGE>
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. Certain management-controlled entities that received shares in the
Formation Transactions have a one-time right to require the Company to register
the Registrable Securities that they hold in connection with the distribution of
the Registrable Securities to their members or in connection with a resale of
such shares. In order to demand any such registration the market value of the
securities to be sold by such entities must be at least $2 million. The
management-controlled entities will not be entitled to include their Registrable
Securities in any such registration prior to one year from the date of the IPO,
although a pledgee of such Registrable Securities may, upon a default by a
management-controlled entity under a loan secured by the pledge, exercise the
management-controlled entity's registration rights during such one-year period.
The Registration Rights Agreements also provide that, with certain limited
exceptions, in the event the Company proposes to file a registration statement
with respect to an offering of any class of equity securities 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 and Piggyback Registrations, other than
underwriting discounts and commissions.
TRANSFER AGENT AND REGISTRAR
The Company has appointed The First National Bank of Boston as the transfer
agent and registrar for the Common Stock.
55
<PAGE>
UNDERWRITING
The Underwriters of the Offering of Common Stock (the "Underwriters"), for
whom Lehman, BT Securities Corporation, Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Montgomery Securities and Smith Barney Inc.
are serving as representatives (the "Representatives") have severally agreed,
subject to the terms and conditions of the underwriting agreement, the form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part (the "Underwriting Agreement"), to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the aggregate
number of shares of Common Stock set forth opposite their respective names
below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc..............................................................
BT Securities Corporation........................................................
Goldman, Sachs & Co..............................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................................
Montgomery Securities............................................................
Smith Barney Inc.................................................................
----------
Total............................................................................
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to the approval of certain legal
matters by counsel and to certain other conditions and that if any of the shares
of Common Stock are purchased by the Underwriters pursuant to the Underwriting
Agreement, all the shares of Common Stock agreed to be purchased by the
Underwriters pursuant to 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 public offering price
set forth on the cover page of this Prospectus and to certain selected dealers
(who may include the Underwriters) at such public offering price less a selling
concession not to exceed $ per share. The selected dealers may reallow a
concession not to exceed $ per share. After the initial offering of the Common
Stock, the concession to selected dealers and the reallowance to other dealers
may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
the payments they may be required to make in respect thereto.
The Company has granted to the Underwriters an option to purchase up to an
additional 750,000 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 the Underwriters exercise such option, each of the
Underwriters 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 has 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 180 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."
56
<PAGE>
The U.S. Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
In connection with the formation of EquiStar, CapStar Management made loans
to certain directors and executive officers of the Company. Lehman has extended
loans to these directors and executive officers to repay CapStar Management all
amounts previously outstanding under the loans. The loans from Lehman, which
currently total approximately $1.1 million, are guaranteed by pledges of Common
Stock held by such directors and executive officers. See "Shares Available for
Future Sale."
An affiliate of Lehman owns a minority equity interest in Acadia Partners.
In September 1996, the Company entered into the $225 million Credit Facility
led by Bankers Trust, an affiliate of BT Securities Corporation, one of the
Representatives. The Credit Facility bears interest at a rate of LIBOR plus 2%
per annum. The Company expects that it may use as much as approximately $28.4
million of the proceeds of the Offering to retire a portion of the approximately
$183.8 million currently outstanding under the Credit Facility. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." In addition, an
affiliate of Bankers Trust owns approximately 337,500 shares of Common Stock.
Because an affiliate of BT Securities Corporation may receive more than 10%
of the net proceeds of the Offering in repayment of outstanding balances under
the Credit Facility, the Offering is being conducted in accordance with Rule
2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, Inc.
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the headings "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "The
Company," "Recent Developments," "Business and Properties" and elsewhere in this
Prospectus constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performances or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the ability of the Company to successfully
implement its acquisition strategy and operating strategy; the Company's ability
to manage rapid expansion; changes in economic cycles; competition from other
hospitality companies; and changes in the laws and government regulations
applicable to the Company.
57
<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 World Wide Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of such site
is http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. The Company intends to furnish to its
stockholders annual reports containing consolidated financial statements
certified by its independent accountants and quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CAPSTAR HOTEL COMPANY
Independent Auditors' Report......................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-4
Consolidated Statements of Operations for the years ended December 31, 1996 and
1995............................................................................... F-5
Consolidated Statements of Stockholders' Equity and Partners' Capital for the years
ended December 31, 1996 and 1995................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and
1995............................................................................... F-7
Notes to the Consolidated Financial Statements....................................... F-8
CAPSTAR MANAGEMENT
Independent Auditors' Report......................................................... F-18
Balance Sheet as of December 31, 1994................................................ F-19
Statements of Operations and Changes in Management Operations' Equity for the years
ended December 31, 1994 and 1993................................................... F-20
Statements of Cash Flows for the years ended December 31, 1994 and 1993.............. F-21
Notes to Financial Statements........................................................ F-22
HIGHGATE PORTFOLIO
Independent Auditors' Report......................................................... F-24
Combined Balance Sheet as of December 31, 1996....................................... F-25
Combined Statement of Operations for the year ended December 31, 1996................ F-26
Combined Statement of Owners' Deficit for the year ended December 31, 1996........... F-27
Combined Statement of Cash Flows for the year ended December 31, 1996................ F-28
Notes to Combined Financial Statements............................................... F-29
ORANGE COUNTY AIRPORT HILTON
Independent Auditors' Report......................................................... F-32
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-33
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-34
Notes to Financial Statements........................................................ F-35
GEORGETOWN LATHAM HOTEL
Independent Auditors' Report......................................................... F-37
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-38
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-39
Notes to Financial Statements........................................................ F-40
CHARLOTTE SHERATON AIRPORT PLAZA
Independent Auditors' Report......................................................... F-42
Statements of Operations for the period from January 1, 1996 to February 2, 1996
(date of the acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-43
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statement 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-44
Notes to Financial Statements........................................................ F-45
ARLINGTON HILTON HOTEL
Independent Auditors' Report......................................................... F-47
Statements of Operations for the period from January 1, 1996 to April 17, 1996 and
the years ended December 31, 1995, 1994 and 1993................................... F-48
Statements of Cash Flows for the period from January 1, 1996 to April 17, 1996 and
the years ended December 31, 1995, 1994 and 1993................................... F-49
Notes to Financial Statements........................................................ F-50
BALLSTON HOTEL LIMITED PARTNERSHIP (HILTON HOTEL, ARLINGTON, VA)
Independent Auditors' Report......................................................... F-52
Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994.................... F-53
Statements of Operations for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993................................................... F-54
Statements of Partners' Deficit for the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-55
Statements of Cash Flows for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993................................................... F-56
Notes to Financial Statements........................................................ F-57
MUBEN HOTELS
Independent Auditors' Report......................................................... F-62
Combined Balance Sheets as of September 30, 1996, December 31, 1995 and 1994......... F-63
Combined Statements of Operations for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994......................................... F-64
Combined Statements of Owners' Capital for the nine months ended September 30, 1996
and the years ended December 31, 1995 and 1994..................................... F-65
Combined Statements of Cash Flows for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994......................................... F-66
Notes to Combined Financial Statements............................................... F-67
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapStar Hotel Company:
We have audited the accompanying consolidated balance sheets of CapStar
Hotel Company and subsidiaries (formerly EquiStar Hotel Investors, L.P. and
CapStar Management Company, L.P., the "Company") as of December 31, 1996 and
1995 and the related consolidated statements of operations, stockholders' equity
and partners' capital, and cash flows for the years then ended, and the
supplementary schedule. These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Hotel Company and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 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.
February 14, 1997
F-3
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $ 21,784 6,832
Accounts receivable, net of allowance for doubtful accounts of $189 in 1996 and $91 in
1995.................................................................................... 8,109 2,749
Deposits, including restricted deposits of $2,023 in 1995................................. 3,167 3,515
Prepaid expenses and other................................................................ 1,454 265
Inventory................................................................................. 1,321 174
---------- ----------
Total current assets...................................................................... 35,835 13,535
Property and equipment:
Land.................................................................................... 58,127 12,768
Buildings............................................................................... 248,376 84,545
Furniture, fixtures and equipment....................................................... 32,698 11,354
Construction-in-progress................................................................ 3,891 2,216
---------- ----------
343,092 110,883
Accumulated depreciation................................................................ (8,641) (1,757)
---------- ----------
Total property and equipment, net......................................................... 334,451 109,126
Deferred costs, net of accumulated amortization of $802 in 1996 and $271 in 1995.......... 8,225 2,638
Investments in partnerships............................................................... 650 --
Restricted cash........................................................................... -- 7,351
---------- ----------
$ 379,161 132,650
---------- ----------
---------- ----------
LIABILITIES, MINORITY INTEREST, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Accounts payable.......................................................................... $ 4,125 2,329
Accrued expenses and other liabilities.................................................... 10,737 4,626
Income tax payable........................................................................ 1,436 --
Long-term debt, current portion........................................................... 498 2,668
---------- ----------
Total current liabilities................................................................. 16,796 9,623
Deferred tax liability.................................................................... 1,181 --
Long-term debt............................................................................ 199,863 73,574
---------- ----------
Total liabilities......................................................................... 217,840 83,197
Minority interest......................................................................... 606 815
Partners' capital......................................................................... -- 48,638
Common stock (49,000,000 shares authorized, at $.01 par value, 12,754,321 issued and
outstanding at December 31, 1996)....................................................... 128 --
Paid in capital........................................................................... 158,533 --
Retained earnings......................................................................... 2,054 --
---------- ----------
$ 379,161 132,650
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Revenue from hotel operations:
Rooms.................................................................................... $ 68,498 14,456
Food and beverage........................................................................ 30,968 5,900
Other operating departments.............................................................. 5,981 1,571
Hotel management and other fees............................................................ 4,345 4,436
---------- ---------
Total revenue.............................................................................. 109,792 26,363
---------- ---------
Hotel operating expenses by department:
Rooms.................................................................................... 17,509 4,190
Food and beverage........................................................................ 24,589 4,924
Other operating departments.............................................................. 2,513 513
Undistributed operating expenses:
Administrative and general............................................................... 20,448 8,078
Property operating costs................................................................. 12,586 2,624
Property taxes, insurance and other...................................................... 4,565 1,310
Depreciation and amortization............................................................ 8,248 2,097
---------- ---------
Total operating expenses................................................................... 90,458 23,736
---------- ---------
Net operating income....................................................................... 19,334 2,627
Interest expense........................................................................... 12,784 2,673
Interest income............................................................................ (438) (259)
---------- ---------
Income before minority interest, income taxes, and extraordinary loss...................... 6,988 213
Minority interest.......................................................................... 39 18
---------- ---------
Income before income taxes and extraordinary loss.......................................... 7,027 231
Income taxes............................................................................... 2,674 --
---------- ---------
Income before extraordinary loss........................................................... 4,353 231
Extraordinary loss on early extinguishment of debt, net of tax benefit of $1,304 for
1996..................................................................................... (1,956) (888)
---------- ---------
Net income (loss).......................................................................... $ 2,397 (657)
---------- ---------
---------- ---------
Earnings per share:
Primary
Income before extraordinary loss....................................................... $ 0.31 --
Extraordinary loss..................................................................... (0.15) --
---------- ---------
Net income............................................................................. 0.16 --
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED GENERAL LIMITED
SHARES AMOUNT CAPITAL EARNINGS PARTNERS PARTNERS TOTAL
------------ ----------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK
$.01 PAR VALUE
Initial capital contributions
on January 12, 1995.......... -- $ -- -- -- 89 1,684 $ 1,773
Capital contributions.......... -- -- -- -- 2,431 46,194 48,625
Capital distributions.......... -- -- -- -- (1) (115) (116)
Net loss for the year ended
December 31, 1995............ -- -- -- -- (87) (570) (657)
------------ ----- ---------- ----------- --------- ---------- ----------
-- -- -- -- 2,432 47,193 49,625
Less--notes receivable from
management for capital
contributions................ -- -- -- -- -- (987) (987)
------------ ----- ---------- ----------- --------- ---------- ----------
Partners' capital at December
31, 1995..................... -- -- -- -- 2,432 46,206 $ 48,638
------------ ----- ---------- ----------- --------- ---------- ----------
Capital distributions.......... -- -- -- -- (2) (170) (172)
Repayment of notes receivable
from management.............. -- -- -- -- -- 987 987
Net income for period from
January 1, 1996 through
August 19, 1996.............. -- -- -- -- 45 298 343
------------ ----- ---------- ----------- --------- ---------- ----------
Partners' capital at August 19,
1996......................... -- -- -- -- 2,475 47,321 49,796
Shares sold on August 20,
1996......................... 6,750,000 68 110,044 -- -- -- 110,112
Shares issued for partners'
capital on August 20, 1996... 6,004,321 60 49,736 -- (2,475) (47,321) --
Deferred tax liability assumed
from partners on August 20,
1996......................... -- -- (1,247) -- -- -- (1,247)
Net income for period from
August 20, 1996 through
December 31, 1996............ -- -- -- 2,054 -- -- 2,054
------------ ----- ---------- ----------- --------- ---------- ----------
Stockholders' equity at
December 31, 1996............ 12,754,321 $ 128 158,533 2,054 -- -- $ 160,715
------------ ----- ---------- ----------- --------- ---------- ----------
------------ ----- ---------- ----------- --------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................................... $ 2,397 (657)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization......................................................... 8,248 2,097
Loss on early extinguishment of debt.................................................. 3,260 618
Minority interest in consolidated subsidiary.......................................... (39) (18)
Changes in working capital:
Accounts receivable, net............................................................ (5,360) (2,749)
Deposits, prepaid expenses and other, and inventory................................. (4,011) (1,889)
Accounts payable.................................................................... 1,797 2,329
Accrued expenses and other liabilities.............................................. 5,711 4,626
Income taxes payable................................................................ 1,436 --
Deferred tax liability.............................................................. (66) --
---------- ----------
Net cash provided by operating activities................................................. 13,373 4,357
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment..................................................... (231,885) (109,223)
Purchases of investments in partnerships................................................ (650) --
Purchases of minority interest.......................................................... (67) --
Release of (additions to) restricted cash for capital improvements and other, net....... 7,351 (7,351)
---------- ----------
Net cash used by investing activities..................................................... (225,251) (116,574)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt............................................................ 372,778 98,058
Payments on long-term debt, line of credit, and capital leases.......................... (248,387) (23,133)
Release of (additions to) restricted deposits for hedge agreement....................... 2,559 (2,023)
Deferred costs.......................................................................... (10,943) (3,000)
Capital contributions................................................................... -- 50,250
Repayments from (loans to) management................................................... 987 (987)
Net proceeds from issuance of common stock.............................................. 110,112 --
Capital distributions................................................................... (172) (116)
Distributions to minority interests..................................................... (104) --
---------- ----------
Net cash provided by financing activities................................................. 226,830 119,049
---------- ----------
Net increase in cash and cash equivalents................................................. 14,952 6,832
Cash and cash equivalents at beginning of year............................................ 6,832 --
---------- ----------
Cash and cash equivalents at end of year.................................................. $ 21,784 6,832
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid........................................................................... $ 12,105 2,383
Income taxes paid....................................................................... 807 --
Capitalized interest costs.............................................................. 461 67
Capital lease additions................................................................. 324 721
Deferred financing fees not yet paid.................................................... -- 596
Prepaid expenses and property contributed by limited partner............................ -- 148
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION
The corporate structure of CapStar Hotel Company and its subsidiaries
(collectively, the "Company") was formed pursuant to a Formation Agreement,
dated June 20, 1996 (the "Formation Agreement"). As a result of the transactions
discussed in Note 3, the consolidated financial statements of the Company as of
December 31, 1996 and 1995, include the historical results of the Company's
predecessor entities, EquiStar Hotel Investors, L.P. and subsidiaries
(collectively, "EquiStar") and CapStar Management Company, L.P. ("CapStar
Management").
The principal activity of the Company is to acquire, renovate, reposition
and manage upscale, full-service hotels. At December 31, 1996, the Company owned
nineteen hotels and managed 27 other hotels on the behalf of third party and
affiliate owners. At December 31, 1996, the owned hotels consisted of:
<TABLE>
<CAPTION>
ACQUISITION DATE NAME ROOMS
- --------------------------------- ------------------------------------------------- -----------
<S> <C> <C>
March 3, 1995.................... Salt Lake Airport Hilton, UT 287
June 30, 1995.................... Radisson Hotel, Schaumburg, IL 202
June 30, 1995.................... Sheraton Hotel, Colorado Springs, CO 502
August 4, 1995................... Hilton Hotel, Bellevue, WA 180
October 3, 1995.................. Marriott Hotel, Somerset, NJ 434
November 15, 1995................ Westin Atlanta Airport, GA 496
February 2, 1996................. Sheraton Airport Plaza, Charlotte, NC 226
February 16, 1996................ Holiday Inn, Cleveland, OH 237
February 22, 1996................ Orange County Airport Hilton, Irvine, CA 290
March 8, 1996.................... The Latham Hotel, Washington, DC 143
April 17, 1996................... Hilton Hotel, Arlington, TX 310
August 23, 1996.................. Hilton Hotel, Arlington, VA 209
October 31, 1996................. Southwest Hilton, Houston, TX 293
December 12, 1996................ Embassy Suites, Denver, CO 236
December 17, 1996................ Hilton Hotel, Sacramento, CA 326
December 17, 1996................ Santa Barbara Inn, CA 71
December 17, 1996................ Holiday Inn, Colorado Springs, CO 201
December 17, 1996................ Embassy Row Hilton, Washington, DC 195
December 17, 1996................ Hilton Hotel & Towers, Lafayette, LA 328
</TABLE>
Separate wholly-owned limited liability companies ("LLCs") or limited
partnerships were established to directly own the above hotels. However, for the
Westin Atlanta Airport, LLCs were established to purchase and hold the Company's
general and limited partner interest in the partnership that owns the hotel (the
"Atlanta Partnership"). At December 31, 1996 and 1995, the Company had a 1%
general partner interest and an 85.2% and 84.6% limited partner interest in the
Atlanta Partnership, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--All material intercompany transactions and
balances have been eliminated in the consolidation of the Company for 1996. The
accounts of EquiStar and CapStar Management have been combined in the 1995
financial statements as the Partnerships were under common ownership. All
material intercompany transactions and balances are eliminated in the
combination for 1995.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
DEPOSITS--Deposits primarily represent refundable amounts escrowed during
the negotiation of potential hotel acquisitions. Additionally, certain amounts
held for future hotel renovations and the amount held in escrow related to a
hedge agreement (see Note 5) were recorded as deposits at December 31, 1995.
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.
PROPERTY AND EQUIPMENT--Buildings and building improvements are stated at
cost and 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 during 1996 or 1995.
DEFERRED COSTS--Organizational costs incurred in the formation of the
Company and its predecessor entities 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.
INVESTMENTS IN PARTNERSHIPS--Based on ownership percentages and a lack of
significant influence, the Company records its interests in partnerships under
the cost method of accounting for investments.
RESTRICTED CASH--Prior to the September 30, 1996 debt refinancing (see Note
6), the Company was required to maintain certain levels of restricted cash to
comply with the terms of its debt agreements. Restricted cash reserved primarily
for future hotel capital improvements was $7,351 at December 31, 1995.
INCOME TAXES--Prior to the Formation Transactions (see Note 3), no provision
for income taxes was made since the Company's predecessor entities were
partnerships, and, therefore, all income, losses, and credits for tax purposes
were passed through to the individual partners. Concurrent with the Formation
Transactions, the Company implemented Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred income taxes reflect
the tax consequences on future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts.
MINORITY INTEREST--Minority interest represents the limited partner
interests in the Atlanta Partnership which are not owned by the Company.
REVENUES--Revenue is earned primarily through the operations and management
of the hotel properties and is recognized when earned. During the period from
its acquisition until February 29, 1996, the Westin Atlanta Airport hotel was
leased to a third-party operator. Related lease revenue is recorded as other
operating departments revenue. On February 29, 1996, the Company assumed the
operations of the hotel upon termination of the lease.
USE OF ESTIMATES--Management has made a number of estimates and assumptions
related to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
3. FORMATION TRANSACTIONS AND INITIAL PUBLIC OFFERING
The following transactions (the "Formation Transactions") occurred prior to
or on August 20, 1996, the date of the Company's initial public offering (the
"IPO"):
- a limited partner of CapStar Management contributed its partnership
interest in CapStar Management to the Company in exchange for shares of
Common Stock;
- the Company contributed such partnership interest to CapStar LP
Corporation, a wholly-owned subsidiary of the Company ("CapStar Sub");
- the remaining partners of CapStar Management (including its general
partner but not including CapStar Sub) and the partners of EquiStar
contributed their respective partnership interest in CapStar Management
and EquiStar to the Company in exchange for shares of Common Stock;
- the Company contributed all the assets of EquiStar to CapStar Management
and CapStar Management assumed all of the liabilities of EquiStar; and
- the Agreement of Limited Partnership of CapStar Management was amended and
restated to reflect the fact that CapStar Management has succeeded the
business of EquiStar and the Company became the general partner of CapStar
Management.
In connection with the Formation Transactions, the Company issued 6,004,321
shares of Common Stock to the partners of EquiStar and CapStar Management.
On August 20, 1996, the Company completed its IPO of 9,250,000 shares of
common stock at a price of $18 per share. The Company sold 6,750,000 of the
initial shares which, after underwriting discounts, commissions and other IPO
expenses, produced net proceeds to the Company of $110,112. The remaining
2,500,000 shares were sold by Acadia Partners, L.P. and certain related entities
("Acadia Partners"), which received 100% of the net proceeds from the sale of
their shares. The Company used the proceeds of the IPO to repay a portion of the
Company's outstanding indebtedness.
4. NOTES RECEIVABLE FROM MANAGEMENT
Pursuant to the terms of an agreement dated January 4, 1995, certain members
of management borrowed $987 from CapStar Management to fund capital
contributions to EquiStar. The notes were secured by the borrowers' interests in
EquiStar and were personally guaranteed by the individual note holders. These
notes earned interest at the prime rate throughout 1995 and at prime plus 1.5%
during 1996 until their repayment on September 13, 1996.
5. HEDGE AGREEMENT
In August 1995, the Company entered into an agreement with Salomon Brothers
Holding Company Inc. ("Salomon") to hedge against the impact that interest rate
fluctuations may have on the Company's various floating rate debt instruments.
Gains and losses resulting from this agreement were not recorded in the
financial statements until realized.
The hedge agreement was a two-year forward swap that was effective June 30,
1997 and was to mature on June 30, 2007. The agreement required the Company to
pay a fixed rate of 7.1% and receive a floating interest rate based on the
three-month London Interbank Offered Rate ("LIBOR"), on a notional amount of
$25,000. The agreement required the Company to make an initial collateral
deposit of $1,000 and
F-10
<PAGE>
5. HEDGE AGREEMENT (CONTINUED)
provided for required additions or reductions to the collateral escrow account
by the Company and Salomon in $500 increments based on changes in the market
value of this agreement.
At December 31, 1995, the Company had made required deposits totaling $1,000
to the collateral escrow account which were recorded as restricted deposits. The
unrealized loss on this agreement at December 31, 1995 was $1,546.
On May 6, 1996, the Company sold its interest in the swap agreement and
received a cash payment of $536. This gain on sale has been deferred for
financial statement purposes.
6. LONG-TERM DEBT
BANKERS TRUST DEBT--On September 30, 1996, the Company entered into a
$225,000 Senior Secured Revolving Credit Facility (the "Credit Facility") with a
group of lenders led by Bankers Trust Company ("Bankers Trust"). The Credit
Facility provides for acquisition loans, working and renovation capital, and
letters of credit. The initial proceeds from the Credit Facility were used to
refinance virtually all existing indebtedness and to fund hotel renovations. The
Credit Facility has an initial term of three years, which can be extended at the
Company's option using two additional one-year periods upon the satisfaction of
certain conditions. The Credit Facility is collateralized by substantially all
of the Company's assets. At December 31, 1996, no letters of credit were
outstanding.
Interest on the Credit Facility is payable monthly at the Company's election
of the Base Rate (lenders' prime rate) plus 1.0% or Eurodollar Option (LIBOR for
periods of one, two, three or six months) plus 2.0%. The interest rate for the
Credit Facility was 7.6% at December 31, 1996.
A commitment fee, which is calculated using an annual rate of 0.25% times
the average unutilized balance on the Credit Facility, is due quarterly. Letter
of credit fees of 2.0% per annum times the average outstanding balances on
letters of credit, if any, are also payable quarterly. The Company incurred $108
in commitment fees, which are recorded as interest expense, and no letter of
credit fees during 1996.
On December 13, 1996, the Company also entered into a $50,000 unsecured
senior subordinated credit facility (the "Subordinated Debt") with Bankers Trust
as agent and arranger. The net proceeds from the Subordinated Debt borrowing
were used to acquire certain of the hotels and for general corporate purposes.
In connection with the closing of the Subordinated Debt, the Credit Facility was
amended to, among other things, permit the Company to incur up to $100,000 of
subordinated indebtedness.
The Subordinated Debt is due on December 31, 1999, and may be extended at
the Company's option for two additional one-year periods upon the satisfaction
of certain conditions. Interest on the Subordinated Debt is payable monthly and
is calculated at the Company's election of the one, two, three, or six month
LIBOR plus 4.0%. At December 31, 1996, the interest rate for the Subordinated
Debt was 9.6%.
Both the Credit Facility and Subordinated Debt agreements contain certain
covenants, including maintenance of certain financial ratios, restrictions on
payments of dividends, certain reporting requirements and other customary
restrictions. The Company's ability to borrow under the Credit Facility is also
subject to a borrowing base test calculated with reference to the cash flow from
hotel properties, the relative contribution to the borrowing base of the values
attributable to the different hotel properties, the appraised value of such
hotel properties and certain other factors. As of December 31, 1996,
approximately $177,000 was available for borrowing under the Credit Facility, of
which $149,000 has been borrowed. Under the Credit Facility, the Company is
permitted to incur an additional $50,000 of subordinated indebtedness as of
December 31, 1996.
LEHMAN DEBT--On December 21, 1995, the Company entered into a $202,500
Master Mortgage Loan Facility Agreement (the "Master Agreement") with Lehman
Brothers Holding, Inc. ("Lehman") to facilitate the repayment of the existing
$22,690 in debt (see "Salomon Debt" below) and to fund hotel
F-11
<PAGE>
6. LONG-TERM DEBT (CONTINUED)
acquisitions. Under the Master Agreement, 50% of total acquisition capital, not
to exceed $125,000, could be funded through a senior loan facility. An
additional 27.5% of acquisition capital, not to exceed $75,000, could be
borrowed through a mezzanine loan facility. Certain fees incurred by the Company
related to these borrowings could also be financed through the Master Agreement,
up to a maximum of $2,500. Separate loans were obtained under the Master
Agreement for each hotel acquired. The loans were cross-collateralized and
cross-defaulted and were secured by first and second liens on the Company's real
and personal property.
Loans obtained under the senior loan facility bore interest at variable
rates that were based on the one-month LIBOR. For the nine months ended
September 30, 1996 (the date of refinancing) and the year ended December 31,
1995, interest rates on the loans under the senior facility were between 9.6%
and 10%, respectively. Loans obtained under the mezzanine loan facility bore
interest at a fixed rate of 16.0%, with monthly interest payments of 10% with
the remaining 6% accruing to principal.
Under the Master Agreement, the Company was required to pay financing fees
upon the repayment of each loan. These deferred financing fees payable, which
were included in long-term debt, totaled $596 at December 31, 1995.
At December 31, 1995, total borrowings under the Master Agreement were
$59,976, of which $55,841 were made from the senior loan facility and $4,135
were made from the mezzanine loan facility. On August 21, 1996, the majority of
the outstanding Lehman debt was repaid with a portion of the Company's IPO
proceeds. All remaining Lehman indebtedness was repaid with proceeds from the
Credit Facility on September 30, 1996.
SALOMON DEBT--During 1995, the Company entered into a loan facility with
Salomon to fund hotel acquisitions. Interest-only payments were required under
this loan facility at a floating rate based on LIBOR. On December 21, 1995, the
$22,690 outstanding balance was repaid with proceeds from the Lehman debt
facility.
WELLS FARGO DEBT--On March 2, 1995, the Company borrowed $9,960 from Wells
Fargo Bank, National Association ("Wells Fargo") to finance the purchase of the
Salt Lake Airport Hilton. Interest, which was payable monthly, was based on the
one-month LIBOR plus 4.25%, as adjusted for certain provisions in the loan
agreement. At December 31, 1995, the outstanding balance on this amortizing note
was $9,890. The note was repaid in 1996.
The Company also entered into an unsecured $5,000 revolving credit facility
with Wells Fargo that was used for general corporate purposes. Interest accrued
at either LIBOR plus 2.25% or the Prime Rate plus 1%, depending on the nature of
the advance. At December 31, 1995, there was $4,181 outstanding under this line.
The outstanding balance was repaid in 1996.
NOTES PAYABLE--In September 1996, the Company entered into a note agreement
to finance a three-year insurance policy. Principal and interest payments are
due monthly. The outstanding balance on the note, which bears interest at 6.0%,
was $665 at December 31, 1996.
During 1995, in order to fund certain loans to management (see Note 4), the
Company borrowed $950 from Acadia Partners. In January 1996, the Company
borrowed an additional $150 under this note agreement. The note, which bore
fixed interest at the Prime Rate plus 1.5%, was repaid on September 13, 1996.
To help finance the March 1996 purchase of The Latham Hotel, the Company
entered into an unsecured $1,000 note agreement with LCP Hotel Ventures, L.P.
("LCP"), the seller of the hotel and an affiliated entity of the Company (see
Note 10). The note, which bore interest at a rate of 10%, was repaid on August
23, 1996.
F-12
<PAGE>
6. LONG-TERM DEBT (CONTINUED)
CAPITAL LEASES--The Company has entered into several capital leases for
hotel and office equipment that expire between 1997 and 2001. The total capital
lease obligations at December 31, 1996 and 1995, were $696 and $648,
respectively, and are included in long-term debt.
At December 31, 1996, long-term debt outstanding under the above facilities
and agreements consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
<S> <C> <C>
1996 1995
---------- -------------
Senior Secured Revolving Credit Facility........................... $ 149,000 --
Senior Subordinated Credit Facility................................ 50,000 --
Mortgage Debt...................................................... -- 74,048
Notes Payable...................................................... 665 950
Capital Leases..................................................... 696 648
Other.............................................................. -- 596
---------- -------------
200,361 76,242
Less Current Portion............................................... (498) (2,668)
---------- -------------
$ 199,863 73,574
---------- -------------
---------- -------------
</TABLE>
Aggregate maturities of the above obligations are as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 498
1998.......................................................... 483
1999.......................................................... 199,285
2000.......................................................... 84
2001.......................................................... 11
Thereafter.................................................... --
-----------
$ 200,361
-----------
-----------
</TABLE>
Management has determined that the outstanding balance of the Company's
long-term debt approximates its fair value by discounting the future cash flows
under the debt arrangements using rates currently available for debt with
similar terms and maturities.
7. INCOME TAXES
Income taxes of the Company are based on pretax income since the Formation
Transactions and the associated change in the Company's tax status to a C
Corporation on August 20, 1996. Pretax income of the Company from August 20
through December 31, 1996 is $3,424. The Company's effective income tax rate is
40%.
Income taxes were allocated as follows for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Income before income taxes and extraordinary loss................... $ 2,674
<S> <C>
Extraordinary loss.................................................. (1,304)
---------
$ 1,370
---------
---------
</TABLE>
F-13
<PAGE>
7. INCOME TAXES (CONTINUED)
Income tax expense attributable to income before income taxes and
extraordinary loss consists of the following for the year ended December 31,
1996:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ------------- ---------
<S> <C> <C> <C>
U.S. federal..................................................... $ 2,118 (51) 2,067
State and local.................................................. 622 (15) 607
--
----------- ---------
$ 2,740 (66) 2,674
--
--
----------- ---------
----------- ---------
</TABLE>
The "expected" tax expense, based on the U.S. federal statutory rate of 34%,
differs from the actual tax expense, calculated at the effective rate of 40%,
due to state and local taxes, net of federal tax benefit.
Upon formation of the Company, the Company assumed certain deferred tax
assets and liabilities from its predecessor entities. The tax effects of
temporary differences that give rise to deferred tax assets and liabilites of
August 20, 1996, and December 31, 1996, are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 20,
1996 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts, recorded for financial statement
purposes only.................................................... $ 75 41
Accrued vacation, recorded for financial statement purposes only... 252 199
Other.............................................................. 7 27
------------ -----------
Total gross deferred tax assets.................................... 334 267
Deferred tax liability--Difference in accumulated depreciation and
amortization for tax purposes and financial statement purposes... (1,515) (1,514)
------------ -----------
Net deferred tax liability......................................... $ (1,181) (1,247)
------------ -----------
------------ -----------
</TABLE>
There is no valuation allowance for deferred tax assets as of August 20,
1996 or as of December 31, 1996, as management believes that it is more likely
than not that these deferred tax assets will be fully realized.
8. EXTRAORDINARY LOSS
On September 30, 1996, the Company recognized an extraordinary loss from the
write-off of deferred financing fees in connection with the refinancing of the
Lehman debt. The recorded loss of $1,956 net of a tax benefit of $1,304 reflects
the write-off of the unamortized balance of deferred financing fees at the time
of the refinancing.
On December 21, 1995, an extraordinary loss was recorded to write-off the
unamortized deferred financing fees related to the Salomon debt. There is no tax
effect on the recorded loss of $888 because the Company's predecessor entities
were not subject to income tax.
9. EARNINGS PER SHARE
The earnings per share have been calculated using actual income before
extraordinary loss, extraordinary loss, and net income amounts for the period
from the IPO on August 20, 1996 through December 31, 1996. Earnings per share is
not presented for periods prior to the IPO because the Company's predecessor
entities were partnerships and were not subject to the provisions of Accounting
Principles Board Opinion No. 15. The weighted average number of common shares
used in the calculations is 12,754,321.
F-14
<PAGE>
10. RELATED-PARTY TRANSACTIONS
The Company manages hotels that are owned in part by affiliates or officers
of the Company. Revenue associated with the management of these hotels was $824
and $1,104 during 1996 and 1995, respectively. At December 31, 1996 and 1995,
the amount due from these properties was $304 and $237, 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 this agreement, which are recorded as a
current liability, amounted to $305,077 at December 31, 1995. During 1996, all
amounts collected under these receivables were repaid to CEA.
On March 8, 1996, the Company acquired The Latham Hotel for a purchase price
of $12,000 from LCP (see Note 6). At the time of the acquisition, the general
partner of LCP, Latham Hotels, Inc., was wholly-owned by certain members of the
Company's management. Directly or indirectly, these members of management owned
a 9.7% beneficial interest in LCP and received $806 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 the Company and
representatives of the holders of the majority of the beneficial interests in
LCP.
On November 15, 1995, the Company acquired its 1% general partner interest
in the Atlanta Partnership from LHP, a corporation in which an individual who,
at the time, was a principal of the Company's predecessor entities, owned an
equity interest. LHP was paid a fee of $893 in connection with the Company's
acquisition of the general and limited partner interests and is entitled to an
additional $161 upon the ultimate disposition of the Atlanta Partnership.
Another affiliate of the former principal, LCP Group, L.P., is entitled to an
annual fee of $30 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.
11. EMPLOYEE BENEFIT PLANS
On August 20, 1996, the Company adopted an equity incentive plan (the
"Equity Incentive Plan"). Pursuant to the terms of its Equity Incentive Plan,
the Company is authorized to issue and award 1,740,000 shares of common stock as
options to purchase shares, stock appreciation rights, or restricted shares.
Awards may be granted to directors, officers or other key employees of the
Company or an affiliate.
On August 20, 1996, in connection with the IPO, the Company granted certain
executive officers and other members of management 745,254 options to purchase
shares of the Company's common stock at the initial public offering price of $18
per share. Of such options, 54,254 were exercisable immediately upon their
grant, although no options were exercised during 1996. The remaining options
will become exercisable in three annual installments. All shares granted lapse
ten years from the date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company applies Accounting Principles Board
Opinion No. 25 in accounting for the Equity Incentive Plan and therefore no
compensation cost has been recognized for the Equity Incentive Plan. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions used for the grants in 1996: risk free interest rate of 5.96%; no
expected dividend yields; expected lives of 3.11 years; expected volatility of
25%. The Company's 1996 pro forma net income and earnings per share as if the
fair value method had been applied, were $2,111 and $0.14, respectively. The
effects of applying SFAS No. 123 for disclosing compensation costs may not be
representative of the effects on reported net income and earnings per share for
future years.
During 1996, the Company adopted a 401(k) plan. All employees are eligible
to participate in the 401(k) plan after one year of service. The cost of
administering the plan was not significant during 1996.
F-15
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into three operating leases for office space which
expire in October 1998. Lease payments will approximate $265 annually through
expiration. The Company leases the ground under the Embassy Row Hilton. Annual
lease payments are $73.
The Company is involved in various litigation through the normal course of
business which management believes will not have a material adverse effect on
the consolidated financial statements.
13. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma summary presents information as if all
hotels owned at December 31, 1996 had been acquired on January 1, 1995 and does
not reflect the repayment of outstanding debt with the proceeds from the IPO.
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 Company.
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Total revenue......................................................... $ 172,653 160,961
---------- ----------
---------- ----------
Net income (loss) before extraordinary loss........................... $ 1,958 (10,861)
---------- ----------
---------- ----------
Net income (loss)..................................................... $ 2 (11,749)
---------- ----------
---------- ----------
</TABLE>
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the Company's quarterly results of operations:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- ----------- ----------- ----------- ----------- -----------
Total revenue................................ $ 18,033 28,223 30,872 32,664 1,782 3,029
Total operating expenses..................... 15,887 23,742 24,018 26,811 1,605 2,705
Net operating income......................... 2,146 4,481 6,854 5,853 177 324
Income (loss) before extraordinary loss...... (642) 48 2,575 2,372 95 71
Net income (loss)............................ (642) 48 619 2,372 95 71
Earnings (loss) per share.................... $ -- -- (0.03) 0.19 -- --
--------- ----------- ----------- ----------- ----- -----
--------- ----------- ----------- ----------- ----- -----
<CAPTION>
<S> <C> <C>
THIRD FOURTH
QUARTER QUARTER
----------- -----------
Total revenue................................ 9,400 12,152
Total operating expenses..................... 7,799 11,627
Net operating income......................... 1,601 525
Income (loss) before extraordinary loss...... 805 (740)
Net income (loss)............................ 805 (1,628)
Earnings (loss) per share.................... -- --
----- -----------
----- -----------
</TABLE>
15. SUBSEQUENT EVENTS
On January 28, 1997, the Company acquired long-term leasehold rights to the
226-room San Pedro Hilton at Cabrillo Marina in San Pedro, California, from U.S.
Bancorp for a purchase price of $7,000. Additionally, the 295 room Westchase
Hilton in Houston, Texas, was purchased from Redstone Group on January 31, 1997
for $28,500. In a separate transaction, the Company also purchased the 294 room
Doubletree Hotel in Albuquerque, New Mexico, on January 31, 1997 from Merv
Griffin Hotels for $19,000. All of these hotel acquisitions were funded through
the Credit Facility and existing working capital.
In February 1997, the Company entered into a contract to acquire the
Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358
rooms for a purchase price of $95,000.
In February 1997, the Company also entered into contracts to purchase the
213-room Four Points Hotel Sheraton in Cherry Hill, New Jersey, for $6,900 and
the 154-room Great Valley Sheraton in Frazer, Pennsylvania, for $14,355.
F-16
<PAGE>
CAPSTAR HOTEL COMPANY
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS
AMOUNT AT
WHICH CAR-
COSTS SUBSEQUENT TO RIED AT
CLOSE OF
INITIAL COST TO COMPANY ACQUISITION PERIOD
--------------------------- ------------------------- -----------
BUILDING AND BUILDING AND
DESCRIPTION ENCUMBRANCES(1) LAND IMPROVEMENTS LAND IMPROVEMENTS LAND(2)
- -------------------------------------- ----------------- ----------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton, UT......... -- 770 12,828 1 797 771
Radisson Hotel, Schaumburg, IL....... -- 1,080 5,131 26 1,090 1,106
Sheraton Hotel, Colorado Springs,
CO.................................. -- 1,071 14,592 1 1,953 1,072
Hilton Hotel, Bellevue, WA........... -- 5,211 6,766 4 478 5,215
Marriott Hotel, Somerset, NJ......... -- 1,978 23,001 9 1,643 1,987
Westin Atlanta Airport, Atlanta,
GA.................................. 23,609 2,650 15,926 (300) 6,461 2,350
Sheraton Hotel, Charlotte, NC........ -- 4,700 11,057 -- 2,179 4,700
Holiday Inn, Cleveland, OH........... -- 1,330 6,353 2 1,545 1,332
Orange County Airport Hilton, Irvine,
CA.................................. -- 9,990 7,993 14 575 10,004
The Latham Hotel, Washington, DC..... 12,000 6,500 5,320 -- 480 6,500
Hilton Hotel, Arlington, TX.......... -- 1,836 14,689 354 1,218 2,190
Hilton Hotel, Arlington, VA.......... 16,210 4,000 15,069 -- 147 4,000
Southwest Hilton, Houston, TX........ -- 2,300 15,665 -- (75) 2,300
Embassy Suites, Englewood, CO........ -- 2,500 20,700 -- 27 2,500
Holiday Inn, Colorado Springs, CO.... -- 1,600 4,232 -- 6 1,600
Embassy Row Hilton, Washington DC.... -- 2,200 13,247 -- 17 2,200
Hilton Hotel, Sacramento, CA......... -- 4,000 16,013 -- 22 4,000
Santa Barbara Inn, Santa Barbara, CA -- 2,600 5,141 -- 9 2,600
Hilton Hotel & Towers, Lafayette,
LA.................................. -- 1,700 16,062 -- 19 1,700
----------------- ----------- -------------- --------- -------------- -----------
51,819 58,016 229,785 111 18,591 58,127
----------------- ----------- -------------- --------- -------------- -----------
----------------- ----------- -------------- --------- -------------- -----------
(1) Listed above are encumbrances incurred by the Company or its subsidiaries under loan facilities which
require the collateralization of certain Hotel Assets. At December 31, 1996, the Company also had other
borrowings that are secured by the general assets of the Company instead of specific Hotel Assets and that
are not included in this schedule.
(2) As of December 31, 1996, hotel property and equipment have a cost of
$342,366 for federal income tax purposes.
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Buildings and improvements............
Land
Hotel furniture and equipment.........
Construction in progress..............
Total hotel property and equipment....
Office furniture and equipment........
Total property and equipment..........
<CAPTION>
BUILDING AND ACCUMULATED YEAR OF DATE
DESCRIPTION IMPROVEMENTS(2) DEPRECIATION CONSTRUCTION ACQUIRED LIFE
- -------------------------------------- ----------------- ------------- --------------- ----------- ---
<S> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton, UT......... 13,625 591 1980 03/03/95 40
Radisson Hotel, Schaumburg, IL....... 6,221 195 1974 06/30/95 40
Sheraton Hotel, Colorado Springs,
CO.................................. 16,545 562 1979 06/30/95 40
Hilton Hotel, Bellevue, WA........... 7,244 233 1979 08/04/95 40
Marriott Hotel, Somerset, NJ......... 24,644 701 1978 10/03/95 40
Westin Atlanta Airport, Atlanta,
GA.................................. 22,387 545 1982 11/15/95 40
Sheraton Hotel, Charlotte, NC........ 13,236 277 1985 02/02/96 40
Holiday Inn, Cleveland, OH........... 7,898 154 1975 02/16/96 40
Orange County Airport Hilton, Irvine,
CA.................................. 8,568 176 1976 02/22/96 40
The Latham Hotel, Washington, DC..... 5,800 114 1978 03/08/96 40
Hilton Hotel, Arlington, TX.......... 15,907 231 1983 04/17/96 40
Hilton Hotel, Arlington, VA.......... 15,216 141 1990 8/23/96 40
Southwest Hilton, Houston, TX........ 15,590 68 1979 10/31/96 40
Embassy Suites, Englewood, CO........ 20,727 21 1986 12/12/96 40
Holiday Inn, Colorado Springs, CO.... 4,238 -- 1974 12/17/96 40
Embassy Row Hilton, Washington DC.... 13,264 -- 1969 12/17/96 40
Hilton Hotel, Sacramento, CA......... 16,035 -- 1983 12/17/96 40
Santa Barbara Inn, Santa Barbara, CA 5,150 -- 1959 12/17/96 40
Hilton Hotel & Towers, Lafayette,
LA.................................. 16,081 -- 1981 12/17/96 40
----------------- -------------
248,376 4,009
----------------- -------------
----------------- -------------
(1) Listed above are encumbrances inc
require the collateralization of
borrowings that are secured by th
are not included in this schedule
(2) As of December 31, 1996, hotel pr
$342,366 for federal income tax pu
ACCUMULATED
COST DEPRECIATION
----------------- -------------
<S> <C> <C> <C> <C> <C>
$ 248,376 4,009
58,127 --
31,972 4,423
3,891 --
----------------- -------------
342,366 8,432
726 209
----------------- -------------
$ 343,092 8,641
----------------- -------------
----------------- -------------
</TABLE>
A reconciliation of the Partnerships' investment in hotel property and
equipment and related accumulated depreciation is as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Hotel property and equipment:
Balance at beginning of period............................................................................... $ 110,455
Additions during period:
Acquisitions............................................................................................... 204,740
Improvements and construction-in-progress.................................................................. 27,171
--------------
Balance at end of period..................................................................................... 342,366
--------------
Accumulated depreciation:
Balance at beginning of period............................................................................... 1,743
Additons--depreciation expense............................................................................... 6,689
--------------
8,432
--------------
Net hotel property and equipment at end of period.............................................................. $ 333,934
--------------
--------------
<CAPTION>
1995
--------------
<S> <C>
Hotel property and equipment:
Balance at beginning of period............................................................................... --
Additions during period:
Acquisitions............................................................................................... 104,239
Improvements and construction-in-progress.................................................................. 6,216
--------------
Balance at end of period..................................................................................... 110,455
--------------
Accumulated depreciation:
Balance at beginning of period............................................................................... --
Additons--depreciation expense............................................................................... 1,743
--------------
1,743
--------------
Net hotel property and equipment at end of period.............................................................. 108,712
--------------
--------------
</TABLE>
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
CapStar Management Company, L.P.:
We have audited the accompanying balance sheet of CapStar Management
Company, L.P. ("CapStar Management") as of December 31, 1994, and the related
statements of operations and changes in management operations' equity and cash
flows for the years ended December 31, 1994 and 1993. These financial statements
are the responsibility of the management of CapStar Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Management Company,
L.P. as of December 31, 1994, and the results of its operations and its cash
flows for the years ended December 31, 1994 and 1993 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
May 7, 1996
F-18
<PAGE>
CAPSTAR MANAGEMENT
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 157,151
Accounts receivable........................................................... 946,717
Prepaid expenses.............................................................. 22,157
---------
Total current assets............................................................ 1,126,025
Furniture and equipment, net of accumulated depreciation of $69,804............. 105,772
---------
$1,231,797
---------
---------
LIABILITIES AND MANAGEMENT OPERATIONS' EQUITY
Accounts payable and accrued expenses........................................... $ 823,637
Due to affiliates............................................................... 203,140
Management operations' equity................................................... 205,020
---------
$1,231,797
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
CAPSTAR MANAGEMENT
STATEMENTS OF OPERATIONS AND CHANGES IN MANAGEMENT OPERATIONS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------ ----------
<S> <C> <C>
Revenue:
Management fees...................................................................... $ 3,823,166 3,918,576
Accounting fees and other income..................................................... 594,756 315,566
------------ ----------
Total revenue.......................................................................... 4,417,922 4,234,142
------------ ----------
Expenses:
Salaries, wages and benefits......................................................... 2,311,569 1,988,282
Other overhead, general and administrative........................................... 2,196,251 2,076,385
Depreciation......................................................................... 22,639 14,349
------------ ----------
Total expenses......................................................................... 4,530,459 4,079,016
------------ ----------
Net income (loss)...................................................................... (112,537) 155,126
Management operations' equity (deficit), beginning of year............................. 317,557 (81,820)
Capital contributions.................................................................. -- 244,251
------------ ----------
Management operations' equity, end of year............................................. $ 205,020 317,557
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
CAPSTAR MANAGEMENT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Net income (loss)........................................................................ $ (112,537) 155,126
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Depreciation......................................................................... 22,639 14,349
Changes in working capital:
Accounts receivable................................................................ 249,284 (738,337)
Prepaid expenses................................................................... 20,339 (4,463)
Accounts payable................................................................... (114,628) 361,377
Accrued expenses................................................................... 1,213 110,624
----------- ----------
Cash provided (used) by operating activities............................................. 66,310 (101,324)
----------- ----------
Cash flows from investing activities--purchases of furniture and equipment............... (41,257) (24,475)
----------- ----------
Cash flows from financing activities--capital contributions.............................. -- 244,251
----------- ----------
Net increase in cash..................................................................... 25,053 118,452
Cash at beginning of year................................................................ 132,098 13,646
----------- ----------
Cash at end of year...................................................................... $ 157,151 132,098
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
CAPSTAR MANAGEMENT
Notes to Financial Statements
December 31, 1994
(1) ORGANIZATION
For the period from January 1, 1993 through December 31, 1994, CapStar
Hotels, Inc. and subsidiaries ("CHI") provided hotel management services to
hotels throughout the continental United States on behalf of third-party and
affiliate owners. At December 31, 1994, CHI had contracts to manage 41 hotels.
On January 4, 1995, CHI assigned the hotel management contracts and certain
assets and liabilities related to its hotel management operations to CapStar
Equity Associates, G.P. ("CEA"). On January 12, 1995, CEA, in turn, assigned the
same to CapStar Management Company, L.P.
For purposes of these financial statements, the hotel management operations
accounts are presented as if they were a separate and distinct legal entity
(CapStar Management).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements have been prepared on the accrual basis of
accounting and in accordance with generally accepted accounting principles.
REVENUES AND ACCOUNTS RECEIVABLE
CapStar Management receives fees for the performance of management,
accounting and other services in accordance with the agreements entered into
with individual hotels. All revenues are recognized as the related services are
performed.
Generally, management fees are equal to 2% to 4% of the gross monthly
revenue of each hotel. Additional incentive management fees are earned when a
hotel's operating performance exceeds levels specified in the management
contract.
The collectibility of accounts receivable is evaluated periodically during
the year. CapStar Management uses the direct write-off method to record bad debt
expense for amounts deemed uncollectible.
FURNITURE AND EQUIPMENT
Furniture and equipment purchases are stated at cost. These assets are
depreciated using the straight-line method over an estimated useful life of
seven years.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements. Actual results could differ
from those estimates.
INCOME TAXES
No provision has been made for income taxes in the financial statements, as
any taxable income or loss of CapStar Management is included in the income tax
returns of CHI for the years ended December 31, 1994 and 1993.
F-22
<PAGE>
CAPSTAR MANAGEMENT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) RELATED-PARTY TRANSACTIONS
Certain of the hotels managed are owned by affiliates of CHI. Revenue earned
by CapStar Management from these hotels was approximately $2,830,177 in 1994 and
$2,812,653 in 1993. Accounts receivable associated with hotels owned by
affiliates was $481,561 at December 31, 1994.
Due to affiliates primarily represents amounts collected by CapStar
Management on behalf of the hotels it manages which have not yet been disbursed
to the hotels.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Capstar Hotel Company:
We have audited the accompanying combined balance sheet of the Highgate
Portfolio (the "Hotels") as of December 31, 1996 and the related combined
statements of operations, owners' deficit and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Highgate Portfolio as of December 31, 1996 and the results of their combined
operations and their combined cash flows for the year ended December 31, 1996,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 7, 1997
F-24
<PAGE>
HIGHGATE PORTFOLIO
COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
ASSETS
Cash and cash equivalents......................................................................... $ 3,093,582
Escrow accounts................................................................................... 265,695
Accounts receivable............................................................................... 1,911,939
Inventory and other assets........................................................................ 547,449
--------------
Total current assets.............................................................................. 5,818,665
--------------
Property and equipment:
Land............................................................................................ 4,852,052
Building........................................................................................ 32,550,978
Furniture, fixtures and equipment............................................................... 16,817,888
--------------
54,220,918
Less--accumulated depreciation.................................................................. (16,638,646)
--------------
Total property and equipment, net................................................................. 37,582,272
Deferred assets, net of accumulated amortization of $983,486...................................... 1,042,224
Advances to related parties....................................................................... 7,297,283
--------------
Total assets...................................................................................... $ 51,740,444
--------------
--------------
LIABILITIES AND OWNERS' DEFICIT
Accounts payable and accrued expenses............................................................. $ 5,231,355
Capital lease obligations, current portion........................................................ 202,980
Notes payable, current portion.................................................................... 1,122,000
--------------
Total current liabilities......................................................................... 6,556,335
--------------
Capital lease obligations, long-term.............................................................. 226,977
Advances from related parties..................................................................... 11,902,144
Notes payable, long-term.......................................................................... 45,074,801
--------------
Total liabilities................................................................................. 63,760,257
Owners' deficit................................................................................... (12,019,813)
--------------
Total liabilities and owners' deficit............................................................. $ 51,740,444
--------------
--------------
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Revenue:
Rooms............................................................................................ $ 22,285,306
Food and beverage................................................................................ 8,194,218
Other operating departments...................................................................... 3,940,775
-------------
34,420,299
-------------
Operating expenses:
Rooms............................................................................................ 5,498,855
Food and beverage................................................................................ 6,672,434
Other operating departments...................................................................... 2,189,072
Undistributed operating expenses:
Administrative and general....................................................................... 2,678,993
Sales and marketing.............................................................................. 2,857,750
Management fees.................................................................................. 1,157,682
Property operating costs......................................................................... 2,870,437
Property taxes, insurance and other.............................................................. 1,973,571
Depreciation and amortization.................................................................... 2,719,401
Interest expense................................................................................. 5,951,317
Foreign currency exchange adjustment............................................................. 1,297
-------------
34,570,809
-------------
Net loss before income taxes..................................................................... (150,510)
Income tax expense............................................................................... 215,700
-------------
Net loss......................................................................................... $ (366,210)
-------------
-------------
</TABLE>
See accompanying notes to combined financial statements.
F-26
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF OWNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Balance, December 31, 1995..................................................... $(11,660,873)
Foreign currency translation adjustment........................................ 7,270
Net loss....................................................................... (366,210)
-----------
Balance, December 31, 1996..................................................... $(12,019,813)
-----------
-----------
</TABLE>
See accompanying notes to combined financial statements.
F-27
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Cash flows from operating activities:
Net loss......................................................................................... $ (366,210)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................................. 2,719,401
Foreign currency translation adjustment........................................................ (7,270)
Increase in escrow accounts.................................................................... (78,953)
Increase in accounts receivable................................................................ (338,313)
Decrease in inventory and other assets......................................................... 79,815
Increase in accounts payable and accrued expenses.............................................. 1,444,744
-------------
Net cash provided by operating activities.......................................................... 3,453,214
-------------
Cash flows from investing activities:
Deferred asset additions......................................................................... (50,000)
Purchases of building improvements............................................................... (998,350)
Net repayments of advances to related parties.................................................... 1,193,230
Purchases of furniture and equipment............................................................. (1,408,204)
-------------
Net cash used by investing activities.............................................................. (1,263,324)
-------------
Cash flows from financing activities:
Repayments of notes payable...................................................................... (409,360)
Advances from related parties.................................................................... 15,352
Repayments of capital lease obligations.......................................................... (137,729)
-------------
Net cash used by financing activities.............................................................. (531,737)
-------------
Net increase in cash and cash equivalents.......................................................... 1,658,153
Cash and cash equivalents at beginning of period................................................... 1,435,429
-------------
Cash and cash equivalents at end of period......................................................... $ 3,093,582
-------------
-------------
Supplemental disclosure of cash flow information:
Interest paid...................................................................................... $ 5,011,517
Additions to capital lease obligations............................................................. 377,081
-------------
-------------
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE>
HIGHGATE PORTFOLIO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION
The Highgate Portfolio (the "Hotels") consists of six hotels which are owned
by partnerships or corporations affiliated with Highgate Hotels, Inc. ("Highgate
Hotels"). Two of the Hotels are located in Dallas (Radisson and Holiday Inn
Select), one hotel is located in Indianapolis (Doubletree), one hotel is located
in Calgary (Holiday Inn), and two hotels are located in Vancouver (Ramada and
Sheraton).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounts of the Hotels are included in the financial records of the
respective partnership or corporation that owns each hotel. 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.
ESCROW ACCOUNTS
Escrow Accounts represent amounts paid into a property tax escrow account.
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 stated at cost. Depreciation is computed on the
buildings and building improvements using the straight-line method over their
useful lives of 15 to 40 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 debts
to establish an allowance for doubtful accounts. Write offs occur when
management deems a receivable uncollectible.
DEFERRED EXPENSES
Deferred expenses consist, primarily, of deferred financing costs which are
amortized on a basis which approximates the interest method, over the term of
the respective loan.
REVENUE
Revenue is earned primarily through the operations of the Hotels and is
recognized when earned.
INCOME TAXES
Four of the Hotels are owned by partnerships, and therefore, any income
taxes are reported by the individual partners. The two remaining hotels are
owned by entities incorporated in Canada (the Canadian Corporations). For the
purposes of these financial statements, the Hotels have calculated the tax
provision for the Canadian Corporations using an effective tax rate of 44%. The
Canadian Corporations' deferred tax assets and liabilities are insignificant to
these financial statements and are therefore not presented.
F-29
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of three hotels, located in Canada, are translated at
the rate of exchange at the balance sheet date; revenue and expenses are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments to assets and liabilities are recorded in the
Combined Statement of Owners' Deficit. Foreign currency translation gains and
losses are recorded in the Combined Statements of Operations.
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
Five of the Hotels are managed by Hospitality Group, Inc. a related party of
Highgate Hotels. The property management agreements provide for management fees
of 3% of Gross Revenues, as defined in the management agreement. In addition,
the management agreements provide for an incentive fee of 2% of Gross Revenues,
as defined in the management agreement, provided that certain net operating
income thresholds are met. The five hotels incurred management fees of
$1,047,730 in 1996.
The Hotels have made advances to various related parties. The total amounts
outstanding on the advances to related parties were $7,297,283 at December 31,
1996. The advances are unsecured, bear no interest and have no terms of
repayment.
The Hotels have received advances from various related parties. The total
amounts outstanding on the advances from related parties were $11,902,144 at
December 31, 1996. The advances are unsecured, bear no interest and have no
terms of repayment. Management does not expect to be required to repay advances
during 1997.
(4) NOTES PAYABLE
Notes Payable consisted of the following on December 31, 1996:
<TABLE>
<S> <C>
RADISSON--DALLAS
Note payable to the Equitable Life Assurance of the United States (Equitable),
collateralized by a deed of trust on the Hotel. Interest payable monthly at
10% with the balance due November 30, 2000................................... $7,407,205
Note payable to Equitable, with no interest due, collateralized by a deed of
trust on the hotel. Balance due November 30, 2000............................ 1,140,020
HOLIDAY INN SELECT--DALLAS
Note payable to Allied Capital Commercial Corporation and Business Mortgage
Investors, Inc., collateralized by a deed of trust on substantially all
assets of the current owner. Principal payments of $25,000 are due monthly
with interest at prime plus 5.25% (13.5% at December 31, 1996). Balance is
due September 30, 1999....................................................... 7,500,000
Note payable to BancOne Capital Partners III Limited Partnership,
collateralized by a pledge and assignment of partnership interests and a
stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at
13%, with Participation Payments, as defined, due 30 days after the end of
each calendar year. Balance is due September 30, 1999........................ 2,500,000
HOLIDAY INN--CALGARY
Note Payable to Hongkong Bank of Canada with interest payable monthly at
5.36%........................................................................ 3,064,575
</TABLE>
F-30
<PAGE>
(4) NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C>
DOUBLETREE--INDIANAPOLIS
Note payable to Lincoln National Life Insurance, collateralized by a deed of
trust on the hotel. Principal payments of $39,935 are due monthly with
interest at 10.50%. Balance is due on January 1, 2005........................ 3,874,866
Note payable to BancOne Capital Partners III Limited Partnership,
collateralized by a pledge and assignment of partnership interests and a
stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at
12%. The balance is due November 30, 2004.................................... 2,430,000
SHERATON HOTEL--VANCOUVER (SURREY)
Note payable to Lehman Brothers Holdings, Inc., collateralized by a deed of
trust on the hotel. Interest is payable monthly at LIBOR plus 13%. The
balance is due September 1, 2000............................................. 11,500,000
RAMADA HOTEL--VANCOUVER
Note payable to Canadian Imperial Bank of Commerce (CIBC), secured by a first
fixed charge against the hotel. Interest is payable monthly at the CIBC prime
rate plus 1.5%. Principal is due monthly, in accordance with the note, with
the balance due February 28, 2000............................................ 6,780,135
----------
Total...................................................................... $46,196,801
----------
----------
</TABLE>
Aggregate maturities of the above notes payable are as follows:
<TABLE>
<CAPTION>
For the year ended
- ---------------------------------------------------------------
<S> <C>
1997........................................................... $1,122,000
1998........................................................... 1,144,047
1999........................................................... 10,267,515
2000........................................................... 26,210,678
2001........................................................... 479,220
Thereafter..................................................... 6,973,341
----------
Total...................................................... $46,196,801
----------
----------
</TABLE>
(5) CAPITAL LEASE OBLIGATIONS
The Hotels lease certain equipment under various capital leases. The leases
require monthly payments totaling $16,915 including interest ranging between
10.5% to 15.5% per annum, with the final lease maturing in February 2000.
Furniture and equipment includes approximately $430,000 for leases that have
been capitalized.
(6) MANAGEMENT AGREEMENT
Property management for the Doubletree hotel is provided by Double Tree
Partners. The management agreement provides for payment of a management fee of
3% of Total Sales, as defined in the management agreement. In addition, the
management agreement provides for an incentive management fee equal to 15% of
the amount, if any, by which the Net Operating Income, as defined in the
management agreement, for any fiscal year exceeds $420,000. Total management
fees under this agreement were $109,952 for 1996. See note 3 for management
agreements related to the other five hotels.
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 Orange County Airport Hilton (the "Hotel") for the period from January 1,
1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors,
L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the Hotel's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Orange County Airport Hilton's
operations and its cash flows for the period from January 1, 1996 to February
22, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
April 20, 1996
F-32
<PAGE>
ORANGE COUNTY AIRPORT HILTON
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Rooms............................................... $ 854,685 4,564,294 3,479,926 3,137,865
Food and beverage................................... 409,200 2,554,156 2,188,612 2,204,286
Other operating departments......................... 48,828 314,723 239,755 183,980
------------ ------------- ------------- -------------
1,312,713 7,433,173 5,908,293 5,526,131
------------ ------------- ------------- -------------
Operating costs and expenses:
Rooms............................................... 254,389 1,302,612 1,009,792 875,825
Food and beverage................................... 346,563 1,882,782 1,617,235 1,543,846
Other operating departments......................... 23,005 147,896 116,224 84,197
Undistributed operating expenses:
Administrative and general.......................... 222,566 1,050,388 1,022,104 869,499
Sales and marketing................................. 126,979 692,052 452,070 449,615
Management fees..................................... 35,000 210,000 197,500 150,000
Property operating costs............................ 96,410 763,258 704,873 691,160
Property taxes, insurance and other................. 57,301 342,177 386,464 467,055
Depreciation and amortization....................... 112,129 832,958 798,442 854,566
Interest expense.................................... 608,294 3,510,997 2,688,580 2,193,590
------------ ------------- ------------- -------------
Total expenses........................................ 1,882,636 10,735,120 8,993,284 8,179,353
------------ ------------- ------------- -------------
Net loss.............................................. $ (569,923) (3,301,947) (3,084,991) (2,653,222)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
ORANGE COUNTY AIRPORT HILTON
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (569,923) (3,301,947) (3,084,991) (2,653,222)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................ 112,129 832,958 798,442 854,566
Decrease (increase) in accounts receivable........... (56,580) (198,792) (27,765) 203,192
Decrease (increase) in other assets.................. 67,637 (42,736) 26,502 38,421
Increase (decrease) in accounts payable and accrued
expenses........................................... 296,914 540,514 11,866 (12,467)
Increase in accrued interest......................... 358,294 3,010,996 2,568,580 2,167,618
----------- ----------- ----------- -----------
Total adjustments........................................ 778,394 4,142,940 3,377,625 3,251,330
----------- ----------- ----------- -----------
Net cash provided by operating activities.................. 208,471 840,993 292,634 598,108
----------- ----------- ----------- -----------
Cash flows used by investing activities--additions to
hotel.................................................... -- (76,435) (54,925) (17,811)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Repayments of note payable............................... -- (30,099) (55,000) --
Capital distributions.................................... (43,445) (896,802) (274,594) (397,073)
Increase (decrease) in bank overdrafts................... (165,026) 162,343 91,885 (183,224)
----------- ----------- ----------- -----------
Net cash used by financing activities...................... (208,471) (764,558) (237,709) (580,297)
----------- ----------- ----------- -----------
Net increase in cash....................................... -- -- -- --
Cash at beginning of period................................ -- -- -- --
----------- ----------- ----------- -----------
Cash at end of period...................................... $ -- -- -- --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 250,000 500,000 120,000 25,972
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
ORANGE COUNTY AIRPORT HILTON
Notes to Financial Statements
For the period from January 1, 1996 to February 22, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1995, 1994 and 1993
(1) ORGANIZATION
The Orange County Airport Hilton (the "Hotel") is located near the Orange
County Airport in Irvine, California, approximately 45 miles from Los Angeles.
The Hotel opened in 1976 and was operated under a franchise agreement with
Radisson Hotels International, Inc. during the periods under audit. Since April
1, 1996, the Hotel has been operating as a Hilton. The Hotel has 290 rooms, an
outdoor pool and jacuzzi, fitness center and same day valet service. The dining
facilities include Mimi's Grill and The Promenade Lounge. The Hotel has
approximately 30,000 square feet of meeting space.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounts of the Hotel were included in the financial records of GMY
Investment Company ("GMY"), a limited partnership which owned the Hotel until it
was sold to EquiStar on February 22, 1996 for $19,200,000. The accompanying
statements of operations and cash flows include the accounts of the Hotel only,
as if it were a separate legal entity, and have been prepared using the accrual
basis of accounting.
DEPRECIATION
Depreciation is computed on the cost of hotel property and equipment using
the Modified Accelerated Cost Recovery method over 39 and 31.5 years for the
building and building improvements and over 5 to 7 years for furniture, fixtures
and equipment.
BAD DEBT EXPENSE
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
REVENUE
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
INCOME TAXES
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities were passed through to the individual partners in accordance with
the partnership agreement and the Internal Revenue Code.
USE OF ESTIMATES
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
F-35
<PAGE>
ORANGE COUNTY AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) INTEREST EXPENSE
GMY entered into a promissory note with an original balance of $19,000,000
in June 1989. Interest accrued at 10% for the first year, and then adjusted to
the Bank of America National Trust and Savings Association prime rate as
announced from time to time. On December 1, 1991, GMY stopped making scheduled
interest and principal payments and the note was in default. From the default
date, interest was computed using the prime rate plus four percentage points on
the outstanding balance plus any accrued interest.
(4) RELATED-PARTY TRANSACTIONS
The Hotel incurred management fees of $35,000, $210,000, $197,500 and
$150,000 for the period from January 1, 1996 to February 22, 1996 and the years
ended December 31, 1995, 1994 and 1993, respectively. The management fees were
paid to an affiliate of the Hotel.
F-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 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-37
<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-38
<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-39
<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-40
<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-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 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-42
<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-43
<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-44
<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-45
<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-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 Arlington Hilton Hotel (the "Hotel") for the period from January 1, 1996 to
April 17, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Hotel's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Arlington Hilton Hotel's operations
and its cash flows for the period from January 1, 1996 to April 17, 1996 and the
years ended December 31, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
July 18, 1996
F-47
<PAGE>
ARLINGTON HILTON HOTEL
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rooms...................................................... $ 1,907,168 6,309,256 5,875,281 5,453,149
Food and beverage.......................................... 824,816 2,846,102 2,755,550 2,708,330
Other operating departments................................ 195,137 639,420 505,739 553,640
------------ ---------- ---------- ----------
2,927,121 9,794,778 9,136,570 8,715,119
------------ ---------- ---------- ----------
Operating costs and expenses:
Rooms...................................................... 420,844 1,526,054 1,361,027 1,342,080
Food and beverage.......................................... 654,451 2,225,510 2,072,864 2,137,821
Other operating departments................................ 115,854 351,577 301,793 276,276
Undistributed operating expenses:
Administrative and general................................. 250,896 1,044,680 1,347,488 1,252,493
Sales and marketing........................................ 195,671 646,496 510,261 501,991
Management fees............................................ 87,814 313,579 90,998 86,165
Property operating costs................................... 296,643 1,004,445 871,365 1,006,770
Property taxes, insurance and other........................ 160,884 645,504 479,755 475,144
Depreciation and amortization.............................. 242,528 823,414 794,256 794,600
Interest expense........................................... -- 257,494 927,325 337,114
------------ ---------- ---------- ----------
2,425,585 8,838,753 8,757,132 8,210,454
------------ ---------- ---------- ----------
Net income................................................... $ 501,536 956,025 379,438 504,665
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
ARLINGTON HILTON HOTEL
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 501,536 956,025 379,438 504,665
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization........................ 242,528 823,414 794,256 794,600
Interest added to loan payable to General Partner.... -- -- 18,777 13,482
Decrease (increase) in accounts receivable........... (107,923) 41,059 (9,969) 47,634
Decrease (increase) in inventory and other assets.... (90,676) 110,942 (17,697) 6,803
Decrease (increase) in restricted funds.............. -- 215,868 477,431 (44,462)
Increase (decrease) in accounts payable and accrued
expenses........................................... 120,770 (1,027,915) 284,120 231,758
------------ ------------ ---------- -----------
Total adjustments........................................ 164,699 163,368 1,546,918 1,049,815
------------ ------------ ---------- -----------
Net cash provided by operating activities.................. 666,235 1,119,393 1,926,356 1,554,480
------------ ------------ ---------- -----------
Cash flows used by investing activities--purchase of
furniture and equipment.................................. (15,499) (660,359) (232,583) (178,368)
------------ ------------ ---------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations.......... (13,442) (41,262) (36,415) (27,314)
Repayments of note payable............................... -- -- (357,390) (1,532,401)
Capital distribution..................................... -- (1,232,055) -- --
------------ ------------ ---------- -----------
Net cash used by financing activities...................... (13,442) (1,273,317) (393,805) (1,559,715)
------------ ------------ ---------- -----------
Net increase (decrease) in cash and cash equivalents....... 637,294 (814,283) 1,299,968 (183,603)
Cash and cash equivalents at beginning of period........... 946,895 1,761,178 461,210 644,813
------------ ------------ ---------- -----------
Cash and cash equivalents at end of period................. $ 1,584,189 946,895 1,761,178 461,210
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 2,570 13,612 18,459 337,114
Additions to property and equipment through capital
leases................................................. -- -- -- 101,765
Conversion of notes payable to equity.................... -- 19,338,404 -- --
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
ARLINGTON HILTON HOTEL
Notes to Financial Statements
For the period from January 1, 1996 to April 17, 1996 (date of acquisition by
EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and
1993
(1) ORGANIZATION
The Arlington Hilton Hotel (the "Hotel") is located near the Dallas/Fort
Worth Airport, adjacent to Six Flags over Texas theme park. The Hotel opened in
1984. The Hotel has 310 rooms, one restaurant, one nightclub/bar, meeting
facilities for up to 400, a business center, an indoor/outdoor pool and a
fitness center.
Until March 7, 1995, the Hotel was owned by Hotel Associates of Arlington
Limited Partnership ("Hotel Associates"). On March 7, 1995, the Hotel was
conveyed through bankruptcy to the holders of the note, Arlington Hotel
Investors, LTD ("Arlington Investors").
The Hotel was sold on April 17, 1996 to EquiStar for a purchase price of
$18,200,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounts of the Hotel were included in the financial records of its
various owners until the Hotel was sold to EquiStar. The accompanying statements
of operations and cash flows include the accounts of the Hotel only, as if it
were a separate legal entity, and have been prepared using the accrual basis of
accounting.
BAD DEBT EXPENSE
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivables and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.
REVENUE
Revenue is earned primarily through the operations of the Hotel and
recognized when earned.
INCOME TAXES
The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities were passed through to the individual partners in accordance with
the partnership agreement and the Internal Revenue Code.
USE OF ESTIMATES
Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
DEPRECIATION
Depreciation is computed on the cost of the hotel property and equipment
using the straight-line method over 25 years for building and building
improvements, and five years for furniture and equipment.
F-50
<PAGE>
ARLINGTON HILTON HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) RELATED-PARTY TRANSACTIONS
Prior to March 7, 1995 (the date the lenders took possession of the Hotel),
the Hotel was managed by Capitol Hotel Group, Inc. ("CHG"), an affiliate of the
owners, for a 1% management fee based on gross revenues. For the period from
March 7, 1995 through April 17, 1996 (date of acquisition by EquiStar), the
Hotel was managed by DePalma Hotel Corporation, an affiliate of the lenders, for
a 3% management fee based on gross revenues.
Upon foreclosure on the property, the loan and all related accrued interest
payable to the general partner of Hotel Associates was converted to equity in
the statement of partners' capital.
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying balance sheets of Ballston Hotel Limited
Partnership (the "Partnership") as of June 30, 1996 and December 31, 1995 and
1994, and the related statements of operations, partners' deficit, and cash
flows for the six months ended June 30, 1996 and for the years ended December
31, 1995, 1994 and 1993. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ballston Hotel Limited
Partnership as of June 30, 1996 and December 31, 1995 and 1994, and the results
of its operations and its cash flows for the six months ended June 30, 1996 and
for the years ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in note 4 to the
financial statements, the Partnership's note payable to a financial institution
is in default and may be called at any time. This raises substantial doubt about
the Partnership's ability to continue as a going concern. Management's plans in
regard to this matter are also described in note 4. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
Washington, D.C.
July 11, 1996
F-52
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 271,215 501,433 98,904
Certificate of deposit................................................ -- 101,833 250,000
Hotel inventory, at cost.............................................. 37,481 51,635 52,794
Accounts receivable:
Trade............................................................... 293,251 174,833 369,961
Affiliates (note 6)................................................. -- -- 757,624
------------- ------------ ------------
Total accounts receivable, net........................................ 293,251 174,833 1,127,585
------------- ------------ ------------
Hotel property (notes 4 and 7):
Land................................................................ 2,073,323 2,073,323 2,073,323
Building, net of accumulated depreciation of $2,192,347 in 1996,
$2,029,714 in 1995 and $1,704,449 in 1994......................... 10,818,285 10,980,918 11,306,183
Furniture, fixtures and equipment, net of accumulated depreciation
of $1,163,947 in 1996, $1,060,156 in 1995 and $854,609 in 1994.... 1,889,117 1,983,728 1,742,714
Initial hotel supplies, net of accumulated amortization of $197,924
in 1996, $183,187 in 1995 and $153,713 in 1994.................... 244,189 258,926 288,400
Conversion costs, net of accumulated amortization of $107,181 in
1996, $98,491 in 1995 and $81,111 in 1994......................... 153,533 162,223 179,603
------------- ------------ ------------
Total hotel property.................................................. 15,178,447 15,459,118 15,590,223
Investment in partnership (note 5).................................... 2,189,989 2,259,061 2,332,760
Other Assets.......................................................... 77,609 131,409 144,842
------------- ------------ ------------
$ 18,047,992 18,679,322 19,597,108
------------- ------------ ------------
------------- ------------ ------------
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses:
Affiliates (note 6)................................................. $ 2,283,784 2,163,011 1,855,114
Trade............................................................... 473,641 338,665 340,846
------------- ------------ ------------
Total accounts payable and accrued expenses........................... 2,757,425 2,501,676 2,195,960
Notes payable (notes 4 and 6):
Financial institution............................................... 17,079,121 17,079,121 17,201,202
Affiliates.......................................................... 1,468,891 2,437,377 3,340,277
------------- ------------ ------------
Total notes payable................................................... 18,548,012 19,516,498 20,541,479
------------- ------------ ------------
Total liabilities..................................................... 21,305,437 22,018,174 22,737,439
Partners' deficit (note 3)............................................ (3,257,445) (3,338,852) (3,140,331)
------------- ------------ ------------
Commitments (notes 4 and 7)...........................................
$ 18,047,992 18,679,322 19,597,108
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Hotel operating revenue:
Room rental................................................ $ 3,173,738 5,820,170 5,408,935 5,116,700
Food and beverage sales.................................... 950,778 2,000,110 2,045,750 1,792,965
Telephone and other........................................ 128,037 303,194 260,190 269,030
------------ ---------- ---------- ----------
Total hotel operating revenue................................ 4,252,553 8,123,474 7,714,875 7,178,695
------------ ---------- ---------- ----------
Hotel operating expenses:
Department expenses........................................ 1,538,843 3,140,757 3,100,077 2,810,690
Energy and engineering..................................... 351,538 602,512 574,578 518,924
Sales and marketing........................................ 327,356 659,284 604,457 629,567
General and administrative (note 6)........................ 458,119 981,849 927,024 907,215
Management fee (note 7).................................... 127,547 243,704 231,446 215,359
Other...................................................... 99,892 138,551 84,534 66,640
------------ ---------- ---------- ----------
Total hotel operating expenses............................... 2,903,295 5,766,657 5,522,116 5,148,395
------------ ---------- ---------- ----------
Income from hotel operations................................. 1,349,258 2,356,817 2,192,759 2,030,300
------------ ---------- ---------- ----------
Fixed charges:
Financial costs (note 6)................................... 739,867 1,571,261 1,438,463 1,327,641
Depreciation and amortization.............................. 290,467 611,645 700,566 723,020
Property insurance and taxes............................... 146,248 266,115 249,394 251,608
Parking costs.............................................. 42,733 99,093 103,057 106,833
------------ ---------- ---------- ----------
Total fixed charges.......................................... 1,219,315 2,548,114 2,491,480 2,409,102
------------ ---------- ---------- ----------
Other income (expense):
Interest income............................................ 8,153 40,169 15,010 12,228
Equity in income of partnership (note 5)................... 15,355 36,510 41,105 31,309
Other...................................................... (72,044) (83,903) (6,908) (80)
------------ ---------- ---------- ----------
Total other income (expense), net............................ (48,536) (7,224) 49,207 43,457
------------ ---------- ---------- ----------
Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345)
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNER PARTNERS
------------- --------- -----------
<S> <C> <C> <C>
Balance at December 31, 1992............................................... $ (2,555,472) (46,288) (2,509,184)
Net loss................................................................. (335,345) (3,353) (331,992)
------------- --------- -----------
Balance at December 31, 1993............................................... $ (2,890,817) (49,641) (2,841,176)
Net loss................................................................. (249,514) (2,495) (247,019)
------------- --------- -----------
Balance at December 31, 1994............................................... $ (3,140,331) (52,136) (3,088,195)
Net loss................................................................. (198,521) (1,985) (196,536)
------------- --------- -----------
Balance at December 31, 1995............................................... $ (3,338,852) (54,121) (3,284,731)
Net income............................................................... 81,407 8,141 73,266
------------- --------- -----------
Balance at June 30, 1996................................................... $ (3,257,445) (45,980) (3,211,465)
------------- --------- -----------
------------- --------- -----------
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345)
Adjustments to reconcile net income (loss) to cash provided
(used) by operating activities:
Depreciation and amortization............................ 290,467 611,645 700,566 723,020
Increase (decrease) in provision for doubtful accounts... 397 (8,072) 11,323 (1,375)
Decrease in certificates of deposit...................... 101,833 148,167 -- --
Equity in income of partnership.......................... (15,355) (36,510) (41,105) (31,309)
Decrease (increase) in accounts receivable............... (118,815) 960,824 (789,828) (87,582)
Decrease (increase) in hotel inventory................... 14,154 1,159 (930) (9,997)
Decrease (increase) in other assets...................... 53,800 (20,258) (58,614) 42,031
Increase in accounts payable and accrued expenses........ 255,749 305,716 375,580 320,816
----------- ----------- ---------- ----------
Total adjustments............................................ 582,230 1,962,671 196,992 955,604
----------- ----------- ---------- ----------
Net cash provided (used) by operating activities............... 663,637 1,764,150 (52,522) 620,259
----------- ----------- ---------- ----------
Cash flows from investing activities:
Additions to hotel property.................................. (9,796) (446,849) (133,901) (195,323)
Distributions from investee partnership...................... 84,427 110,209 120,694 204,761
----------- ----------- ---------- ----------
Net cash provided (used) by investing activities............... 74,631 (336,640) (13,207) 9,438
----------- ----------- ---------- ----------
Cash flows from financing activities:
Principal payments on notes payable.......................... (968,486) (1,024,981) (110,072) (818,644)
Borrowings on notes payable.................................. -- -- -- 20,000
----------- ----------- ---------- ----------
Net cash used by financing activities.......................... (968,486) (1,024,981) (110,072) (798,644)
----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........... (230,218) 402,529 (175,801) (168,947)
Cash and cash equivalents at beginning of period............... 501,433 98,904 274,705 443,652
----------- ----------- ---------- ----------
Cash and cash equivalents at end of period..................... $ 271,215 501,433 98,904 274,705
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest....................................... $ 619,094 1,263,364 1,135,123 1,120,853
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1996 and December 31, 1995 and 1994
(1) ORGANIZATION
Ballston Hotel Limited Partnership (the "Partnership") was formed on January
1, 1988 pursuant to the Commonwealth of Virginia Uniform Limited Partnership
Act. The principal business activity of the Partnership is the development and
operation of a hotel complex as part of the mixed-use Ballston Metro Center
project (the "Project") located in Arlington, Virginia. Ballston Condo Limited
Partnership ("BCLP") and Ballston Office Limited Partnership ("BOLP"),
affiliates of the Partnership, constructed the condominium and office building
components of the Project, respectively.
The hotel opened on October 5, 1989 and operated as the Arlington
Renaissance Hotel at Ballston Metro Center (the "Hotel"). Management intends to
operate the hotel under a franchise agreement with Hilton Hotels Corporation to
be entered into in August 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING RECORDS AND INCOME TAXES
The Partnership maintains its accounting records on the accrual basis for
both financial statement and federal income tax reporting purposes. Federal and
state income taxes accrue to the individual partners; accordingly, no federal
and state income taxes have been provided in the accompanying financial
statements.
BUILDING AND LAND
Contributed land is recorded at the fair value at the date of contribution
as agreed to by the partners. Purchased land and building costs are recorded at
cost. The building is depreciated over 40 years using the straight-line method.
HOTEL FURNITURE, FIXTURES AND EQUIPMENT
Hotel furniture, fixtures and equipment are recorded at cost and are
depreciated over their estimated useful lives using the straight-line method.
INITIAL HOTEL SUPPLIES
Initial hotel supplies required for the Hotel's operations, such as linens,
china, silverware and other expendable supplies, are recorded at cost and are
being amortized over 15 years using the straight-line method. Additional
purchases of linens, china, silverware and other expendable supplies are
expensed when purchased.
CONVERSION COSTS
Conversion costs were incurred to convert the Ramada Hotel into a
Renaissance Hotel. These costs are recorded at cost and are being amortized over
15 years using the straight-line method.
INVESTMENT IN PARTNERSHIP
Investment in partnership is accounted for under the equity method.
Accordingly, the investment is stated at cost and adjusted for the Partnership's
share of earnings or loss and distributions of the investee partnership.
F-57
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
CASH EQUIVALENTS
For financial statement purposes, the Partnership considers investments with
an original maturity date of three months or less to be cash equivalents.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosures of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
(3) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES
All profits and losses are allocated in proportion to each partner's
respective percentage interest in the Partnership as follows:
<TABLE>
<S> <C>
General partner...................................................... 1.0%
Limited partners..................................................... 99.0
---------
100.0%
---------
---------
</TABLE>
(4) NOTES PAYABLE
Notes payable at June 30, 1996 and December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Financial institution--prime rate plus 1% or a LIBOR/CD rate option
note, secured by a first deed of trust on land and improvements of
hotel complex and the shared improvements of the condominium
constructed by BCLP and an assignment of existing and future
revenue derived from the collateral; interest only payable
monthly, principal payable annually, based on 30-year
amortization, with remaining principal and interest due October 5,
1995.............................................................. $ 17,079,121 17,079,121 17,201,202
Limited partner--prime rate plus 2% unsecured note.................. 1,468,891 2,437,377 3,340,277
------------- ------------- -------------
$ 18,548,012 19,516,498 20,541,479
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Ballston Hotel, Inc., the general partner, and IDI, L.C. (formerly IDI
Associates), IDI Financial Associates and Ballston Realty, Inc., affiliates of
the Partnership, jointly and severally guarantee the financial institution note
payable.
The note payable to the financial institution, which matured on October 5,
1995, is in default. The Partnership has been unable thus far to refinance the
note but continues to make the regular monthly interest payments.
Given the status of the note payable with the financial institution and the
nature of the terms of the note payable to the limited partner, management is
unable to determine the fair value of the notes payable.
F-58
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PARTNERSHIP
FINANCIAL STATEMENT SUMMARY
The following is a summary of the assets, liabilities and equity of the
unconsolidated partnership, Ballston Parking Associates ("BPA") as of June 30,
1996 and December 31, 1995 and 1994, and the results of its operations for the
six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993. The unconsolidated partnership was formed primarily to operate the hotel
and office building parking garage of the Project. The Partnership's interest in
the unconsolidated partnership was 35.02%, 35.48% and 35.60% as of June 30, 1996
and December 31, 1995 and 1994, respectively. The percentage of the Partnership
interest in BPA will decrease in accordance with BPA's partnership agreement
based upon the number of parking space easements sold.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
<CAPTION>
<S> <C> <C> <C>
ASSETS
Cash..................................................... $ 1,267 4,263 3,055
Accounts receivable...................................... 29,250 31,200 27,080
Garage property, net of accumulated depreciation......... 4,125,801 4,224,801 4,359,801
Other assets............................................. 4,521 4,521 4,203
--------- --------- ---------
$4,160,839 4,264,785 4,394,139
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND EQUITY
Total accounts payable and accrued liabilities........... $ -- 6,121 7,000
Equity:
The Partnership........................................ 1,443,210 1,501,136 1,552,543
Other partners......................................... 2,717,629 2,757,528 2,834,596
--------- --------- ---------
$4,160,839 4,264,785 4,394,139
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
1996 1995 1994 1993
--------- --------- --------- ---------
<CAPTION>
<S> <C> <C> <C> <C>
Parking revenue........................................ $ 288,562 538,898 520,479 538,047
Loss on sales of parking spaces........................ (9,080) (7,000) (3,329) (20,149)
--------- --------- --------- ---------
Total income........................................... 279,482 531,898 517,150 517,898
Operating expenses..................................... 187,642 353,490 333,542 333,149
--------- --------- --------- ---------
Net income............................................. $ 91,840 178,408 183,608 184,749
--------- --------- --------- ---------
--------- --------- --------- ---------
Equity in net income:
The Partnership...................................... $ 26,501 58,802 63,397 53,601
Other partners....................................... 65,339 119,606 120,211 131,148
--------- --------- --------- ---------
$ 91,840 178,408 183,608 184,749
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE TO CONDENSED FINANCIAL STATEMENTS
Contributed property is recorded at fair value at the date of contribution
as agreed to by the partners.
F-59
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PARTNERSHIP--(CONTINUED)
RECONCILIATION OF INVESTMENT IN PARTNERSHIP AND EQUITY IN INCOME
The following is a reconciliation of the Partnership's investment in
partnership as of June 30, 1996 and December 31, 1995 and 1994 and equity in
income for the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, as indicated above, to the amounts reported in the
accompanying financial statements.
<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME
------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1996 1995 1994 1993
------------ ---------- ---------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance per condensed financial
statements............................. $ 1,443,210 1,501,136 1,552,543 26,501 58,802 63,397 53,601
Adjustment for costs incurred in excess
of agreed-upon basis in property....... 746,779 757,925 780,217 (11,146) (22,292) (22,292) (22,292)
------------ ---------- ---------- --------- --------- --------- ---------
$ 2,189,989 2,259,061 2,332,760 15,355 36,510 41,105 31,309
------------ ---------- ---------- --------- --------- --------- ---------
------------ ---------- ---------- --------- --------- --------- ---------
</TABLE>
(6) RELATED-PARTY TRANSACTIONS
Interest expense of approximately $121,000 in 1996, $308,000 in 1995,
$303,000 in 1994 and $294,000 in 1993 was incurred on note payable to BCA, L.P.,
the limited partner, and are included in financial costs in the accompanying
financial statements. Accrued interest payable of $2,283,784, $2,163,011 and
$1,855,114 as of June 30, 1996 and December 31, 1995 and 1994, respectively, is
recorded as accounts payable to affiliates in the accompanying financial
statements.
The Partnership entered into an agreement with IDI Management, Inc., an
affiliate of the Partnership, to perform administrative services for the Hotel
effective January 1, 1991. The administrative fee is based on 0.5% of the gross
revenues of the Partnership except for any distributions from BPA related to
parking. The Partnership incurred administrative fees of $21,257 in 1996,
$41,952 in 1995, $39,771 in 1994 and $37,103 in 1993. These fees are included in
general and administrative expenses in the accompanying financial statements.
The Partnership has advanced funds to affiliates. Advances outstanding were
$757,624 at December 31, 1994.
(7) COMMITMENTS
HOTEL MANAGEMENT AGREEMENT
The Partnership has entered into a 20-year agreement with Renaissance Hotel
Operating Company ("Renaissance") for the management of the Hotel. The
Partnership has committed to pay the following management fees:
(1) base management fee equal to 3% of the Hotel's gross revenue, as
defined in the agreement, payable monthly;
(2) reservation and advertising fees equal to 4.5% of the Hotel's gross
room revenue, as defined in the agreement, payable monthly; and
F-60
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS--(CONTINUED)
(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 $127,547 in 1996, $243,704 in 1995, $231,446 in 1994
and $215,359 in 1993 and reservation and advertising fees of $142,818 in 1996,
$261,908 in 1995, $243,402 in 1994 and $230,252 in 1993 were incurred by the
Partnership. No incentive management fees were incurred since none of the cash
flow requirements were met.
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
CapStar Hotel Company:
We have audited the accompanying combined balance sheets of the Muben Hotels
(the "Hotels") as of September 30, 1996, December 31, 1995 and 1994 and related
combined statements of operations, owners' capital and cash flows for the nine
months ended September 30, 1996 and the years ended December 31, 1995 and 1994.
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 Muben
Hotels as of September 30, 1996, December 31, 1995 and 1994, and the results of
their combined operations and their combined cash flows for the nine months
ended September 30, 1996 and the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick, LLP
Washington, D.C.
January 10, 1997
F-62
<PAGE>
MUBEN HOTELS
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996, DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 2,540,021 2,100,027 1,795,991
Accounts receivable.............................................. 1,520,016 1,009,479 1,347,062
Inventory and other assets....................................... 1,000,652 1,004,098 1,100,562
-------------- -------------- --------------
Total current assets............................................. 5,060,689 4,113,604 4,243,615
-------------- -------------- --------------
Property and equipment:
Land........................................................... 14,454,496 14,454,496 14,454,496
Building....................................................... 49,190,163 48,816,467 48,792,386
Furniture, fixtures and equipment.............................. 19,744,427 19,968,593 18,993,252
-------------- -------------- --------------
83,389,086 83,239,556 82,240,134
Less -- accumulated depreciation................................. (35,118,050) (32,623,613) (29,307,378)
-------------- -------------- --------------
Total net property and equipment................................. 48,271,036 50,615,943 52,932,756
-------------- -------------- --------------
Total assets..................................................... $ 53,331,725 54,729,547 57,176,371
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND OWNERS' CAPITAL
Accounts payable and accrued expenses............................ $ 3,622,343 2,778,452 3,022,008
Advance deposits................................................. 114,175 41,927 45,436
Intercompany income taxes payable (note 4)....................... 2,485,345 995,677 81,080
-------------- -------------- --------------
Total liabilities................................................ 6,221,863 3,816,056 3,148,524
Owners' capital.................................................. 47,109,862 50,913,491 54,027,847
-------------- -------------- --------------
Total liabilities and owners' capital............................ $ 53,331,725 54,729,547 57,176,371
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to combined financial statements.
F-63
<PAGE>
MUBEN HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEARS ENDED DECEMBER 31,
1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Rooms...................................................... $ 18,337,641 21,925,991 21,147,009
Food and beverage.......................................... 8,117,806 10,442,474 10,513,519
Other operating departments................................ 1,265,677 1,613,934 1,591,255
------------- ------------- -------------
27,721,124 33,982,399 33,251,783
------------- ------------- -------------
Operating costs and expenses:
Rooms.................................................... 4,513,632 5,751,406 5,673,951
Food and beverage........................................ 6,874,250 9,198,740 9,407,042
Other operating departments.............................. 669,595 904,143 933,992
Undistributed operating expenses:
Administrative and general................................. 2,505,580 3,342,110 3,314,554
Sales and marketing........................................ 1,811,948 2,320,060 2,343,494
Management fees (note 3)................................... 628,182 1,065,175 1,051,710
Property operating costs................................... 3,505,572 4,407,863 4,353,126
Property taxes, insurance and other........................ 993,759 1,390,174 1,519,555
Depreciation and amortization.............................. 2,494,437 3,316,235 4,451,660
------------- ------------- -------------
23,996,955 31,695,906 33,049,084
------------- ------------- -------------
Net income before income taxes............................. 3,724,169 2,286,493 202,699
Income taxes (note 4)...................................... 1,489,668 914,597 81,080
------------- ------------- -------------
Net income................................................. $ 2,234,501 1,371,896 121,619
------------- ------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-64
<PAGE>
MUBEN HOTELS
COMBINED STATEMENTS OF OWNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<S> <C>
Balance at December 31, 1993................................................... $55,146,114
Contributions................................................................ 1,485,114
Distributions................................................................ (2,725,000)
Net income................................................................... 121,619
----------
Balance at December 31, 1994................................................... 54,027,847
Contributions................................................................ 215,327
Distributions................................................................ (4,701,579)
Net income................................................................... 1,371,896
----------
Balance at December 31, 1995................................................... 50,913,491
Contributions................................................................ 173,601
Distributions................................................................ (6,211,731)
Net income................................................................... 2,234,501
----------
Balance at September 30, 1996.................................................. $47,109,862
----------
----------
</TABLE>
See accompanying notes to combined financial statements.
F-65
<PAGE>
MUBEN HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 2,234,501 1,371,896 121,619
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.................................... 2,494,437 3,316,235 4,451,660
Decrease (increase) in accounts receivable....................... (510,537) 337,583 (77,086)
Decrease in inventory and other assets........................... 3,446 96,464 22,741
Decrease in notes receivable..................................... -- -- 100,000
Increase (decrease) in accounts payable and accrued expenses..... 843,891 (243,556) (312,119)
Increase (decrease) in advance deposits.......................... 72,248 (3,509) (10,866)
Increase in intercompany income taxes payable.................... 1,489,668 914,597 81,080
------------- ----------- -----------
Total Adjustments.................................................... 4,393,153 4,417,814 4,255,410
------------- ----------- -----------
Net cash provided by operating activities.............................. 6,627,654 5,789,710 4,377,029
------------- ----------- -----------
Cash flows from investing activities--purchases of furniture and
equipment............................................................ (149,530) (999,422) (2,285,579)
------------- ----------- -----------
Cash flows from financing activities:
Capital contributions................................................ 173,601 215,327 1,485,114
Capital distributions................................................ (6,211,731) (4,701,579) (2,725,000)
------------- ----------- -----------
Net cash used by financing activities.................................. (6,038,130) (4,486,252) (1,239,886)
------------- ----------- -----------
Net increase in cash and cash equivalents.............................. 439,994 304,036 851,564
Cash and cash equivalents at beginning of period....................... 2,100,027 1,795,991 944,427
------------- ----------- -----------
Cash and cash equivalents at end of period............................. $ 2,540,021 2,100,027 1,795,991
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-66
<PAGE>
MUBEN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30,1996, DECEMBER 31,1995 AND 1994
(1) ORGANIZATION
The combined financial statements consist of five hotels which are part of
MBL Life Assurance Corporation. This portfolio of hotels is known as the Muben
Hotels (the "Hotels"). 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).
CapStar Hotel Company purchased the Hotels for approximately $68,400,000 on
December 17, 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounts of the Hotels are included in the financial records of the 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 accounts of the Hotels are included in the financial records of the MBL
Life Assurance Corporation and therefore the Hotels were not subject to income
taxes on a separate basis. For purposes of these financial statements, the
Hotels have calculated their tax provision on the separate return basis to
approximate tax expense as if they were a separate legal entity.
F-67
<PAGE>
(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 Hotel
Company. The hotels managed by CapStar Hotel Company paid base management fees
based on gross revenue plus incentive management fees if the hotels' operating
results exceeded levels specified in the management contract. These four hotels
incurred management fees of $563,455 in 1996; $926,737 in 1995; $929,013 in
1994; and $1,008,719 in 1993.
CapStar Hotel Company began managing Embassy Row on September 25, 1996.
(4) INCOME TAXES
The Hotels' income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
Federal........................................................................ $ 1,151,118 706,741 62,653
State and local................................................................ 338,550 207,856 18,427
------------ --------- ---------
$ 1,489,668 914,597 81,080
------------ --------- ---------
------------ --------- ---------
</TABLE>
The "expected" tax expense, based on the U.S. federal statutory rate of 34%
for each of the periods above, differs from the actual tax expense, calculated
at an effective rate of 40%, due to state and local taxes, net of federal tax
benefit.
The Hotels' deferred tax assets and liabilities are insignificant to these
financial statements and are therefore not presented.
F-68
<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 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 any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information contained herein is correct as of any time subsequent to its
date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 11
Use of Proceeds................................. 17
Price Range of Common Stock..................... 17
Dividend Policy................................. 17
Capitalization.................................. 18
Selected Financial and Other Data............... 19
Unaudited Pro Forma Financial Statements........ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
The Company..................................... 28
Recent Developments............................. 29
Business and Properties......................... 31
The Operating Partnership....................... 41
Management...................................... 42
Principal Stockholders.......................... 50
Certain Relationships and Related
Transactions.................................. 51
Shares Available for Future Sale................ 52
Description of Capital Stock.................... 53
Underwriting.................................... 56
Legal Matters................................... 57
Experts......................................... 57
Special Note Regarding Forward-Looking
Statements.................................... 57
Additional Information.......................... 58
Index to Financial Statements................... F-1
</TABLE>
5,000,000 Shares
[LOGO]
Common Stock
--------------------
PROSPECTUS
, 1997
----------------------
LEHMAN BROTHERS
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
SMITH BARNEY INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GRAPHICS APPENDIX
INSIDE FRONT COVER PAGE 1
Map depicting location of the Company's Hotels.
The Company logo.
Photo of the Westchase Hilton, Houston, Texas.
INSIDE FRONT COVER PAGE 2
Under the heading "Growth", the following text appears: "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."
Under the heading "Operating Strategy," the following text appears: "The
Company seeks to achieve its principal operating 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. CapStar believes that skilled
management of hotel operations is the most critical element in maximizing
revenue and cash flow in full-service hotels."
Photos of the Sheraton Hotel Lobby, Colorado Springs, Colorado, the Marriott
Hotel, Somerset, New Jersey, Hilton Los Angeles Worldport, Los Angeles,
California, and Citronelle Restaurant, The Latham Hotel, Washington, D.C.
INSERT FRONT COVER PAGE 3
Under the heading "Acquisition Strategy," the following text appears:
"CapStar seeks to increase shareholder value by continuing to acquire upscale,
full-service hotels below replacement cost in selected markets throughout the
United States and Canada and implementing its operating strategy to improve
hotel operations and increase cash flow."
Photos of the Hilton Hotel, Arlington, Texas, The Westin Hotel, Atlanta
Airport, Atlanta, Georgia, The Sheraton Airport Plaza, Charlotte, North
Carolina, and The Westin Hotel (interior), Atlanta Airport, Atlanta, Georgia.
INSIDE BACK COVER PAGE 1
Photos of the Radisson Hotel, Dallas, Texas (to be acquired), Orange County
Airport Hilton, Irvine, California, The Sheraton Hotel, Vancouver, British
Columbia (to be acquired), The Doubletree Hotel, Albuquerque, New Mexico.
INSIDE BACK COVER PAGE 2
Before and after photos of the Salt Lake Airport Hilton, Salt Lake City,
Utah, and the Hilton Hotel, Bellevue, Washington.
INSIDE BACK COVER PAGE 3
Photos of Hilton Hotel, Arlington, Virginia, Embassy Suites, Denver,
Colorado, Southwest Hilton, Houston, Texas, Radisson Hotel, Schaumburg,
Illinois, Hilton Hotel, Lafayette, Louisiana.
<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............................................ $ 41,600
NASD Filing Fee................................................. 14,228
NYSE Listing Fee................................................ 51,300
Blue Sky Fees and Expenses...................................... 25,000
Accounting Fees and Expenses.................................... 200,000
Legal Fees and Expenses......................................... 200,000
Printing and Engraving Expenses................................. 300,000
Registrar and Transfer Agent's Fees............................. 2,500
Miscellaneous Fees and Expenses................................. 165,372
Total....................................................... $1,000,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware Law permits a provision in the certificate
of incorporation of each corporation organized thereunder, eliminating or
limiting, with certain exceptions, the personal liability of a director to the
corporation or its stockholders for monetary damages for certain breaches of
fiduciary duty as a director. The Certificate of Incorporation of the Company
eliminates the personal liability of directors to the fullest extent permitted
by the Delaware Law.
Section 145 of the Delaware Law ("Section 145"), in summary, empowers a
Delaware corporation, within certain limitations, to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
Article Eight of the Certificate of Incorporation of the Company provides
for the indemnification of officers and directors and certain other parties (the
"Indemnitees") of the Company to the fullest extent permitted under the Delaware
Law; provided, that except in the case of proceedings to enforce rights to
indemnification, the Company shall indemnify such Indemnitee in connection with
a proceeding initiated by such Indemnitee only if such proceeding was authorized
by the Board.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, and persons who control the Company
within the meaning of Section 15 of the Securities Act for certain liabilities,
including liabilities arising thereunder.
II-1
<PAGE>
Each of the employment agreements described in "Management--Employment
Agreements" contains provisions entitling the executive to indemnification for
losses incurred in the course of service to the Company or its subsidiaries,
under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 1996, the Company issued 100 shares of Common Stock to Cherwell
Investors, Inc., a wholly-owned subsidiary of Acadia Partners, for nominal
consideration. The shares were issued without registration under the Securities
Act pursuant to the exemption from registration afforded by Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder.
On June 20, 1996, the Company entered into a Formation Agreement pursuant to
which it became obligated to issue 3,504,221 shares of Common Stock to the
beneficial owners of EquiStar and CapStar Management. In August 1996, in
connection with the IPO, the Company issued 3,504,221 shares of Common Stock to
such beneficial owners. Such issuances were 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>
<S> <C> <C>
1 -- Form of Underwriting Agreement
3.1.1* -- Amended and Restated Certificate of Incorporation of the Company
3.1.2* -- Amendment to Amended and Restated Certificate of Incorporation
3.1.3* -- Second Amendment to Amended and Restated Certificate of Incorporation
3.2* -- By-laws of the Company
4.1* -- Specimen Common Stock certificate
4.2.1** -- Senior Secured Revolving Credit Agreement, dated as of September 24, 1996,
among CapStar Management, the Company, the lenders party thereto and Bankers
Trust
4.2.2 -- Amendment to Senior Secured Revolving Credit Agreement, dated as of December
13, 1996, among CapStar Management, the Company, the lenders party thereto
and Bankers Trust
4.3*** -- Senior Subordinated Credit Agreement, dated December 13, 1996, among CapStar
Management, the Company, the lenders party thereto and Bankers Trust
5 -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
10.1* -- Form of Registration Rights Agreement
10.2 -- Acquisition Agreement, dated as of February 13, 1997, among the Company,
CapStar Management, Highgate Hotels and the several other parties thereto
10.3* -- Form of Employment Agreement between the Company and Paul W. Whetsell
10.4* -- Form of Employment Agreement between the Company and David E. McCaslin
10.5* -- Form of Employment Agreement between the Company and William M. Karnes
10.6* -- Form of Employment Agreement between the Company and John E. Plunket
10.7* -- Form of Amended and Restated Agreement of Limited Partnership of CapStar
Management
10.8 -- Form of First Amendment to Amended and Restated Agreement of Limited
Partnership of CapStar Management
10.9* -- Form of Equity Incentive Plan of the Company
10.10* -- Form of Employee Stock Purchase Plan of the Company
21*** -- List of Subsidiaries of the Company
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5)
23.3*** -- Consent of Mahmood Khimji to be named as proposed director
24*** -- Power of Attorney
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
27*** -- Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-6583), filed with the Securities and Exchange Commission
on June 21, 1996, as amended
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996
*** Previously filed
(b) Financial Statement Schedules.
Schedule 28, Real Estate and Accumulated Depreciation, is set forth on page
F-17 of the Prospectus.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-laws, the Underwriting
Agreement or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Washington, District of Columbia, on the 26th day of February, 1997.
CAPSTAR HOTEL COMPANY
By: /s/ PAUL W. WHETSELL
-----------------------------------
Name: Paul W. Whetsell
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------------- ------------------------------------------------------------
<S> <C>
/s/ PAUL W. WHETSELL President, Chief Executive Officer and Chairman of the Board
- ---------------------------------------- (Principal Executive Officer)
Paul W. Whetsell
* Chief Operating Officer and Director
- ----------------------------------------
David E. McCaslin
* Senior Executive Vice President, Finance and Chief Financial
- ---------------------------------------- Officer (Principal Financial and Accounting Officer)
William M. Karnes
* Director
- ----------------------------------------
Daniel L. Doctoroff
* Director
- ----------------------------------------
Bradford E. Bernstein
* Director
- ----------------------------------------
Joseph McCarthy
* Director
- ----------------------------------------
William S. Janes
* Director
- ----------------------------------------
Edward L. Cohen
* Director
- ----------------------------------------
Edwin T. Burton, III
* Director
- ----------------------------------------
Edward P. Dowd
</TABLE>
*By: /s/ PAUL W. WHETSELL
----------------------------------------
Name: Paul W. Whetsell
Title: Attorney-in-Fact
Dated: February 26, 1997
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENTS
- ----------- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1 -- Form of Underwriting Agreement
3.1.1* -- Amended and Restated Certificate of Incorporation of the Company
3.1.2* -- Amendment to Amended and Restated Certificate of Incorporation
3.1.3* -- Second Amendment to Amended and Restated Certificate of Incorporation
3.2* -- By-laws of the Company
4.1* -- Specimen Common Stock certificate
4.2.1** -- Senior Secured Revolving Credit Agreement, dated as of September 24, 1996, among CapStar
Management, the Company, the lenders party thereto and Bankers Trust
4.2.2 -- Amendment to Senior Secured Revolving Credit Agreement, dated as of December 13, 1996, among
CapStar Management, the Company, the lenders party thereto and Bankers Trust
4.3*** -- Senior Subordinated Credit Agreement, dated December 13, 1996, among CapStar Management, the
Company, the lenders party thereto and Bankers Trust
5 -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
10.1* -- Form of Registration Rights Agreement
10.2 -- Acquisition Agreement, dated as of February 13, 1997, among the Company, CapStar Management,
Highgate Hotels and the several other parties thereto
10.3* -- Form of Employment Agreement between the Company and Paul W. Whetsell
10.4* -- Form of Employment Agreement between the Company and David E. McCaslin
10.5* -- Form of Employment Agreement between the Company and William M. Karnes
10.6* -- Form of Employment Agreement between the Company and John E. Plunket
10.7* -- Form of Amended and Restated Agreement of Limited Partnership of CapStar Management
10.8 -- Form of First Amendment to Amended and Restated Agreement of Limited Partnership of CapStar
Management
10.9* -- Form of Equity Incentive Plan of the Company
10.10* -- Form of Employee Stock Purchase Plan of the Company
21*** -- List of Subsidiaries of the Company
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5)
23.3*** -- Consent of Mahmood Khimji to be named as proposed director
24*** -- Power of Attorney
27*** -- Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-6583), filed with the Securities and Exchange Commission
on June 21, 1996, as amended
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996
*** Previously filed
<PAGE>
EXHIBIT 1
5,000,000 Shares
CAPSTAR HOTEL COMPANY
Common Stock
(Par Value $.01 Per Share)
UNDERWRITING AGREEMENT
March __, 1997
LEHMAN BROTHERS INC.
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MONTGOMERY SECURITIES
SMITH BARNEY INC.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
CapStar Hotel Company, a Delaware corporation (the "Company") proposes to
sell an aggregate of 5,000,000 shares (the "Firm Stock") of the Company's Common
Stock, par value $.01 per share (the "Common Stock"). In addition, the Company
proposes to grant to the Underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional 750,000 shares of the
Common Stock on the terms and for the purposes set forth in Section 2 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company by the Underwriters named
in Schedule 1 hereto (the "Underwriters").
At or prior to August 23, 1996, the Company completed a series of
transactions described under the heading "The Formation Transactions" in that
certain prospectus dated August 20, 1996, relating to the initial public
offering of 9,250,000 shares of Common Stock of the Company (the "IPO
Prospectus"). As part of these transactions, the Company and CapStar LP
Corporation ("CapStar Sub") became the sole partners of CapStar Management
Company, L.P., as governed by an amended and restated Agreement of Limited
Partnership (the "Operating Partnership"), and the Operating Partnership was
restructured to own, directly or
<PAGE>
indirectly, all of the properties and other assets previously owned, directly or
indirectly, by EquiStar Hotel Investors, L.P. and CapStar Management Company,
L.P. (as constituted as of August 20, 1996, "CapStar Management"), and their
respective subsidiaries, including twelve owned hotel properties or interests
therein and management agreements with a total of 48 hotels. As used herein the
term "Formation Transactions" shall mean the occurrence of all the events
described in the IPO Prospectus under the heading "The Formation Transactions,"
the execution of acquisition agreements for the Additional Hotels (as defined in
the IPO Prospectus) and the other transactions related thereto, and the term
"Predecessor Entities" shall mean the subsidiaries of EquiStar Hotel Investors,
L.P. together with CapStar Management and its subsidiaries for all periods prior
to the consummation of the Formation Transactions.
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
OPERATING PARTNERSHIP. The Company and the Operating Partnership, jointly and
severally, represent, warrant and agree that:
(a) A registration statement on Form S-1 (333-22073), and amendments
thereto, with respect to the Stock has (i) been prepared by the
Company in conformity with the requirements of the United States
Securities Act of 1933 (the "Securities Act") and the rules and
regulations (the "Rules and Regulations") of the United States
Securities and Exchange Commission (the "Commission") thereunder,
(ii) been filed with the Commission under the Securities Act and
(iii) become effective under the Securities Act. Copies of such
registration statement and the amendments thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared effective
by the Commission; "Effective Date" means the date of the
Effective Time; "Preliminary Prospectus" means each prospectus
included in such registration statement, or amendments thereof,
before it became effective under the Securities Act and any
prospectus filed with the Commission by the Company with the
consent of the Representatives pursuant to Rule 424(a) of the
Rules and Regulations; "Registration Statement" means such
registration statement, as amended at the Effective Time,
including all information contained in the final prospectus filed
with the Commission pursuant to Rule 424(b) of the Rules and
Regulations in accordance with Section 5(a) hereof and deemed to
be a part of the registration statement as of the Effective Time
pursuant to paragraph (b) of Rule 430A of the Rules and
2
<PAGE>
Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4)
of Rule 424(b) of the Rules and Regulations. Any registration
statement (including any amendment or supplement thereto or
information which is deemed part thereof) filed by the Company to
register additional shares of Common Stock of the Company under
Rule 462(b) of the Securities Act ("Rule 462(b) Registration
Statement") shall be deemed a part of the Registration Statement.
Any prospectus (including any amendment or supplement thereto or
information which is deemed to part thereof) included in a Rule
462(b) Registration Statement and any term sheet as contemplated
by Rule 434 of the Rules and Regulations (a "Term Sheet") shall
be deemed to be part of the Prospectus. The Commission has not
issued any order preventing or suspending the use of any
Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement
or the Prospectus will, when they become effective or are filed
with the Commission, as the case may be, conform in all material
respects to the requirements of the Securities Act and the Rules
and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto) contain
an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading; PROVIDED that no
representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section
15) and each Predecessor Entity have been duly organized and are
validly existing as corporations, general or limited partnerships
or limited liability companies, as the case may be, in good
standing under the laws of their respective jurisdictions of
organization, are duly qualified to do business and are in good
standing as foreign corporations, limited partnerships or limited
liability companies, as the case may be, in each jurisdiction in
which their respective ownership or lease of property or the
conduct of their respective businesses requires such
3
<PAGE>
qualification, and have all power and authority necessary to own
or hold their respective properties and to conduct the businesses
in which they are engaged;
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; and all of the shares of
Common Stock (other than the Stock to be offered and sold by the
Company hereunder) that are outstanding or will be issued on or
prior to the First Delivery Date were or will be offered and sold
in compliance with all applicable laws (including, without
limitation, federal and state securities laws); and all of the
issued shares of capital stock, partnership interests or limited
liability company membership interests, as the case may be, of
each subsidiary of the Company have been duly and validly
authorized and issued and (except for partnership interests of
general partners and except to the extent the limited liability
company agreements governing the respective limited liability
companies provide otherwise) are fully paid and non-assessable
and are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims except for
liens in favor of Bankers Trust Company and/or any of its
affiliates to secure indebtedness.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment
therefor as provided herein will be duly and validly issued,
fully paid and non-assessable; and the Stock will conform to the
descriptions thereof contained in the Prospectus.
(f) The partnership interests of the Operating Partnership ("Units")
transferred to the Company and CapStar Sub in connection with the
Formation Transactions, have been duly authorized for issuance by
the Operating Partnership, at the closing of the Formation
Transactions were the only Units outstanding and are validly
issued and fully paid, and, except as otherwise described in the
Prospectus, are the only Units outstanding.
(g) This Agreement has been duly authorized, executed and delivered
by the Company and the Operating Partnership.
4
<PAGE>
(h) The execution, delivery and performance of this Agreement by the
Company and the Operating Partnership, the consummation of the
transactions contemplated hereby will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which
the Company or any of its subsidiaries or any Predecessor Entity
is a party or by which the Company or any of its subsidiaries or
any Predecessor Entity is bound or to which any of the property
or assets of the Company or any of its subsidiaries or any
Predecessor Entity is subject, nor will such actions result in
any violation of the provisions of the charter, by-laws,
partnership agreement or operating agreement of the Company, any
of its subsidiaries or any Predecessor Entity or any statute or
any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company, any of its
subsidiaries or any Predecessor Entity or any of their properties
or assets; and except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body
or any other person is required for the execution, delivery and
performance of this Agreement by the Company or the Operating
Partnership, the consummation of the transactions contemplated
hereby.
(i) Except as set forth in the Prospectus, there are no preemptive or
other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any unissued shares of the Stock
to be issued and sold by the Company to the Underwriters
hereunder pursuant to the Company's charter or by-laws or any
agreement or other instrument;
(j) Except as set forth in the Prospectus, there will be no
preemptive or other rights to subscribe for or to purchase, nor
any restriction upon the voting of, any of the partnership
interests in the Operating Partnership pursuant to the Operating
Partnership's Agreement of Limited Partnership, as restated and
amended, or any agreement or other instrument to which the
Company is a party;
5
<PAGE>
(k) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right (other than rights which have been
waived or satisfied) to require the Company to file a
registration statement under the Securities Act with respect to
any securities of the Company owned or to be owned by such person
or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or
in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities
Act.
(l) Except as described in the Prospectus, the Company has not sold
or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales
pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act, other than shares issued pursuant to employee
benefit plans, qualified stock options plans or other employee
compensation plans or pursuant to outstanding options, rights or
warrants.
(m) None of the Company, any of its subsidiaries or any Predecessor
Entity has sustained, since the date of the latest audited
financial statements included in the Prospectus, any material
loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, other than as set forth or
contemplated in the Prospectus, (i) there has been no material
adverse change in the financial condition, results of operation
or business of the Company, the Operating Partnership, any
subsidiary of the Company or any Predecessor Entity, whether or
not arising in the ordinary course of business, (ii) no material
casualty loss or material condemnation or other material adverse
event with respect to any Property has occurred, (iii) there have
been no transactions or acquisition agreements entered into by
the Company, the Operating Partnership or any subsidiary of the
Company other than those in the ordinary course of business,
which are material with respect to such entity, (iv) there has
been no dividend or distribution of any kind declared, paid or
made by the Company on any class of its capital stock or by the
Operating Partnership with respect to its partnership interests
and (v) there has been no change in the capital stock of the
Company or the partnership interests of the
6
<PAGE>
Operating Partnership, or any increase in the indebtedness of the
Company, the Operating Partnership or any subsidiary.
(n) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement
or included in the Prospectus present fairly the financial
condition and results of operations of the entities purported to
be shown thereby, at the dates and for the periods indicated, and
have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout
the periods involved, except as otherwise stated herein.
(o) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and the Predecessor Entities, whose
reports appear in the Prospectus and who have delivered the
initial letter referred to in Section 7(f) hereof, are
independent public accountants as required by the Securities Act
and the Rules and Regulations.
(p) The Company and each of its subsidiaries have or will have on the
First Delivery Date good and marketable title in fee simple to
all real property and good and marketable title to all personal
property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not materially interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and all real property and buildings held under
lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases, in each case free and
clear of all liens, encumbrances and defects except such as are
described in the Prospectus or with such exceptions as are not
material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its
subsidiaries. There shall be issued and outstanding with respect
to each of the Owned Hotels (as defined in the Prospectus) an
ALTA form of owner's title insurance policy (or local equivalent
with respect to those Owned Hotels located in jurisdictions where
an ALTA form of owner's title insurance policy is not available)
insuring the fee simple estate of the applicable subsidiary of
the Company in the Owned Hotel owned by such subsidiary in an
amount at least equal to the acquisition price of such Owned
Hotel and each
7
<PAGE>
such title insurance policy will continue to be in full force and
effect immediately following the consummation of the Offering.
(q) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the
value of their respective properties and as is customary for
companies engaged in similar businesses in similar industries.
(r) Each of the Company, its subsidiaries and the Predecessor
Entities possesses such certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory
agencies or bodies necessary to conduct the business now operated
by them, except where the failure to possess such certificates,
authorizations or permits would not have a material adverse
effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the
Company and its subsidiaries (a "Material Adverse Effect"), and
none of the Company, any of its subsidiaries or any Predecessor
Entity has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling, or finding, would have a Material
Adverse Effect.
(s) The Company, each of its subsidiaries and each Predecessor Entity
own or possess adequate rights to use all material patents,
patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, franchises,
copyrights and licenses necessary for the conduct of their
respective businesses and have no reason to believe that the
conduct of their respective businesses will conflict with, and
have not received any notice of any claim of conflict with, any
such rights of others.
(t) There are no legal or governmental proceedings pending to which
the Company, any of its subsidiaries or any Predecessor Entity is
a party or of which any property or assets of the Company, any of
its subsidiaries or any Predecessor Entity is the subject which
could reasonably be expected to have a Material Adverse Effect;
and to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others.
8
<PAGE>
(u) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or
filed as exhibits to the Registration Statement.
(v) No relationship, direct or indirect, exists between or among the
Company, the Operating Partnership, any subsidiary of the
Company, or any Predecessor Entity, on the one hand, and the
directors, officers, stockholders of the Company, or customers or
suppliers of the Company, or customers or suppliers of the
Operating Partnership, on the other hand, which is required to be
described in the Prospectus which is not so described.
(w) There is (i) no material unfair labor practice complaint pending
against the Company, its subsidiaries or any Predecessor Entity
nor, to the best knowledge of the Company, threatened against any
of them before the National Labor Relations Board or any state or
local labor relations board, and no significant grievance or
significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the
Company, its subsidiaries or any Predecessor Entity or, to the
best knowledge of the Company, threatened against any of them,
(ii) no material strike, labor dispute, slowdown or stoppage
pending against the Company, its subsidiaries or any Predecessor
Entity nor, to the best knowledge of the Company, threatened
against the Company, its subsidiaries or any Predecessor Entity
which might be expected to have a Material Adverse Effect.
(x) None of the Company, any subsidiary or any Predecessor Entity has
violated any safety or similar law applicable to its business nor
any federal, state or local law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal
or state wages and hours laws which in each case might result in
a Material Adverse Effect.
(y) The Company, its subsidiaries and each Predecessor Entity are in
compliance in all material respects with all presently applicable
provisions of the Employee Retirement Income Security Act of
1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company, any of its
subsidiaries or any Predecessor Entity would have any
9
<PAGE>
liability; the Company, its subsidiaries and each Predecessor
Entity have not incurred and do not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971
of the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company, any of
its subsidiaries or any Predecessor Entity would have any
liability that is intended to be qualified under Section 401(a)
of the Code is so qualified in all material respects and nothing
has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(z) The Company, each of its subsidiaries and each Predecessor Entity
has filed all federal, state and local income and franchise tax
returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined
adversely to the Company, any of its subsidiaries or any
Predecessor Entity which has had (nor does the Company have any
knowledge of) any tax deficiency which, if determined adversely
to the Company, any of its subsidiaries or any Predecessor
Entity, might have a Material Adverse Effect; the amounts
currently set up as provisions for taxes or otherwise by the
Company and its subsidiaries on their books and records are
sufficient for the payment of all their unpaid federal, foreign,
state, county and local taxes accrued through the dates as of
which they speak, and for which the Company and its subsidiaries
may be liable in their own right or as a transferee of the assets
of, or as successor to any other corporation, association,
partnership, joint venture or other entity.
(aa) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed
in the Prospectus, the Company and its subsidiaries have not (i)
issued or granted any securities, (ii) incurred any liability or
obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on its
capital stock.
(ab) The Company, its subsidiaries, and the Predecessor Entities (i)
make and keep accurate books and records and (ii) maintain
internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with
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management's authorization, (B) transactions are recorded as
necessary to permit preparation of their financial statements and
to maintain accountability for their assets, (C) access to their
books, records and accounts is permitted only in accordance with
management's authorization and (D) the reported accountability
for their assets is compared with existing assets at reasonable
intervals.
(ac) None of the Company, any of its subsidiaries or any Predecessor
Entity is, or will be, (i) in violation of its charter, by-laws,
partnership agreement or operating agreement, (ii) in default in
any material respect, and no event has or will have occurred
which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to
which any of its properties or assets is subject or (iii) in
violation of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject
or has or will have failed to obtain any material license,
permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its
property or to the conduct of its business, which violation or
failure could reasonably be expected to have a Material Adverse
Effect.
(ad) None of the Company, any of its subsidiaries or any Predecessor
Entity, or any director, officer, agent, employee or other person
associated with or acting on behalf of the Company, any of its
subsidiaries or any Predecessor Entity, has used any corporate,
partnership or limited liability company funds for any unlawful
contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977; or
made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(ae) There has been no storage, disposal, generation, manufacture,
refinement, installation, transportation, handling or treatment
of toxic wastes, medical wastes, hazardous wastes, petroleum or
petroleum products (including crude oil or any fraction thereof),
hazardous substances or any other substances which pose a
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hazard to human health, safety, natural resources, industrial
hygiene or the environment or which cause or threaten to cause a
nuisance by the Company, any of its subsidiaries, or any
Predecessor Entity (or, to the knowledge of the Company, by any
of their predecessors in interest or by any other entity) at,
upon or from any of the property now or previously owned or
leased by the Company, its subsidiaries or any Predecessor Entity
except to the extent commonly used in the normal operations of
such property, in violation of any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit or which
would require investigation, monitoring, removal action,
corrective action, remedial action or other response action
("response action") under any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit, except for any
violation or response action which would not have, or could not
be reasonably likely to have, singularly or in the aggregate with
all such violations and response actions, a Material Adverse
Effect; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release or threatened
release of any kind onto such property or into the environment
surrounding such property of any toxic wastes, medical wastes,
solid wastes, hazardous wastes, petroleum or petroleum products
(including crude oil or any fraction thereof), hazardous
substances or any other substances which pose a hazard to human
health, safety, natural resources, industrial hygiene or the
environment or which cause or threaten to cause a nuisance,
except for any such spill, discharge, leak, emission, injection,
escape, dumping or release or threatened release which would not
have or would not be reasonably likely to have, singularly or in
the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings, releases and threatened releases,
a Material Adverse Effect; and the terms "hazardous wastes,"
"solid wastes," "toxic wastes," "hazardous substances,"
"petroleum," "petroleum products" and "medical wastes" shall have
the meanings specified in any applicable local, state, federal
and foreign laws or regulations with respect to environmental
protection.
(af) Neither the Company nor any subsidiary is, or will be as a result
of the offer and sale of the Stock hereunder, an "investment
company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the
Commission thereunder.
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2. PURCHASE OF THE STOCK BY THE UNDERWRITERS. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 5,000,000 shares of
the Firm Stock to the several Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set opposite that Underwriter's name in Schedule 1 hereto. Each
Underwriter shall be obligated to purchase from the Company that number of
shares of the Firm Stock which represents the same proportion of the number of
shares of the Firm Stock to be sold by the Company as the number of shares of
the Firm Stock set forth opposite the name of such Underwriter in Schedule 1
represents of the total number of shares of the Firm Stock to be purchased by
all of the Underwriters pursuant to this Agreement. The respective purchase
obligations of the Underwriters with respect to the Firm Stock shall be rounded
among the Underwriters to avoid fractional shares, as the Representatives may
determine.
In addition, the Company grants to the Underwriters an option to purchase
up to 750,000 shares of Option Stock. Such option is granted solely for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 4 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set opposite the name of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Stock shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be $____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on the First Delivery Date or the Second Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
3. OFFERING OF STOCK BY THE UNDERWRITERS. Upon authorization by the
Representatives of the release of the Firm Stock, the several Underwriters
propose to offer the Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
4. DELIVERY OF AND PAYMENT FOR THE STOCK. Delivery of and payment for
the Firm Stock shall be made at the offices of Lehman Brothers Inc. at 10:00
A.M., New York City time, on the fourth full business day following the date of
this Agreement or at such other date or place as shall be determined by
agreement between the Representatives and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Representatives for the account of each Underwriter against
payment to or upon
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the order of the Company of the purchase price by wire transfer of federal
(same-day) funds to an account or accounts previously designated in writing to
Lehman Brothers Inc. by the Company. Time shall be of the essence, and delivery
at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each Underwriter hereunder. Upon delivery, the
Firm Stock shall be registered in such names and in such denominations as the
Representatives shall request in writing not less than two full business days
prior to the First Delivery Date. For the purpose of expediting the checking
and packaging of the certificates for the Firm Stock, the Company shall make the
certificates representing the Firm Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this Agreement
the option granted in Section 2 may be exercised by written notice being given
to the Company by the Representatives. Such notice shall set forth the
aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business
day after the date on which the option shall have been exercised nor later than
the fifth business day after the date on which the option shall have been
exercised. The date and time the shares of Option Stock are delivered are
sometimes referred to as the "Second Delivery Date" and the First Delivery Date
and the Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 4 (or at
such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver
or cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer of federal
(same-day) funds to an account or accounts previously designated in writing to
Lehman Brothers Inc. by the Company. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a
further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Option Stock shall be registered in such names and in such
denominations as the Representatives shall request in the aforesaid written
notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the Option Stock available for inspection by the Representatives
in
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New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the Second Delivery Date.
5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees:
(a) To prepare the Prospectus in a form approved by the Representatives
and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on the
second business day following the execution and delivery of this
Agreement or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act; to make no further amendment
or any supplement to the Registration Statement or to the Prospectus
except as permitted herein; to advise the Representatives, promptly
after it receives notice thereof, of the time when any amendment to
the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and to furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for
offering or sale in any jurisdiction, of the initiation or threatening
of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to counsel for
the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed
with the Commission, including all consents and exhibits filed
therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request:
(i) conformed copies of the Registration Statement as originally filed
with the Commission and each amendment thereto (in each case excluding
exhibits other than this Agreement) and (ii) each Preliminary
Prospectus, the
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<PAGE>
Prospectus and any amended or supplemented Prospectus; and, if the
delivery of a prospectus is required at any time after the Effective
Time in connection with the offering or sale of the Stock or any other
securities relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Securities Act, to notify the
Representatives and, upon their request, to prepare and furnish
without charge to each Underwriter and to any dealer in securities as
many copies as the Representatives may from time to time reasonably
request of an amended or supplemented Prospectus which will correct
such statement or omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the Registration
Statement or the Prospectus or any supplement to the Prospectus that
may, in the judgment of the Company or the Representatives, be
required by the Securities Act or requested by the Commission;
(e) To the extent practicable, prior to filing with the Commission any
amendment to the Registration Statement or supplement to the
Prospectus or any Prospectus pursuant to Rule 424 of the Rules and
Regulations, and to the extent not practicable, immediately
thereafter, to furnish a copy thereof to the Representatives and
counsel for the Underwriters and to consult with the Representatives
prior to the filing;
(f) As soon as practicable after the Effective Date, but in any event not
later than 410 days or, if the fourth quarter following the fiscal
quarter that includes the Effective Date is the last fiscal quarter of
the Company's fiscal year, 455 days after the end of the Company's
current fiscal quarter, to make generally available to the Company's
security holders and to deliver to the Representatives an earning
statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule
158);
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<PAGE>
(g) Until the earlier of the expiration of the period of five years
following the Effective Date and the date on which the Company ceases
to be subject to the reporting requirements of the Exchange Act, to
furnish to the Representatives copies of all materials furnished by
the Company to its shareholders and all public reports and all reports
and financial statements furnished by the Company to the principal
national securities exchange upon which the Common Stock may be listed
pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder;
(h) Promptly from time to time to take such action as the Representatives
may reasonably request to qualify the Stock for offering and sale
under the securities laws of such jurisdictions as the Representatives
may request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock,
provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(i) Except as described in the Prospectus, for a period of 180 days from
the date of the Prospectus, not to, directly or indirectly, offer for
sale, sell or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any shares of
Common Stock (other than the Stock and shares issued pursuant to
employee benefit plans, qualified stock option plans or other employee
compensation plans existing on the date hereof or pursuant to
currently outstanding options, warrants or rights), or sell or grant
options, rights or warrants with respect to any shares of Common Stock
(other than the grant of options pursuant to option plans existing on
the date hereof), without the prior written consent of Lehman Brothers
Inc.; and to cause each of CapStar Executive Investors I, L.L.C.,
CapStar Executive Investors II, L.L.C., CapStar GP Corp., CapStar
Hotels, Inc., Latham Hotels, Inc., New CapStar Group I, L.L.C., New
CapStar Group II, L.L.C., Paul W. Whetsell, [and] David E. McCaslin
[and Daniel A. Burack] to furnish to the Representatives, prior to the
First Delivery Date, a letter or letters, in form and substance
satisfactory to counsel for the Underwriters, pursuant to which each
such person shall agree not to, directly or indirectly, offer for
sale, sell or
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<PAGE>
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock for a
period of 180 days from the date of the Prospectus, without the prior
written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the listing of the Stock on
the New York Stock Exchange, Inc. and to use its best efforts to
complete that listing, subject only to official notice of issuance and
evidence of satisfactory distribution, prior to the First Delivery
Date;
(k) To apply the net proceeds from the sale of the Stock being sold by the
Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure that neither the
Company nor any subsidiary shall become an "investment company" within
the meaning of such term under the Investment Company Act of 1940 and
the rules and regulations of the Commission thereunder.
6. EXPENSES. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the stock; (e) the fees (including reasonable attorneys' fees) and
expenses incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of sale of the Stock; (f) any applicable
listing or other fees; (g) the fees and expenses of qualifying the Stock under
the securities laws of the several jurisdictions as provided in Section 5(h) and
of preparing, printing and distributing a Blue Sky Memorandum (including related
fees and expenses of counsel to the Underwriters); and (h) all other costs and
expenses incident to the performance of the obligations of the Company under
this Agreement; provided that, except as provided in this Section 6 and in
Section 11 the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters.
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7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations
of the Underwriters hereunder are subject to the accuracy, when made and on each
Delivery Date, of the representations and warranties of the Company contained
herein, to the performance by the Company of their obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission in
accordance with Section 7(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with.
(b) No Underwriter shall have discovered and disclosed to the Company on
or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue
statement of a fact which, in the opinion of Hogan & Hartson L.L.P.,
counsel for the Underwriters, is material or omits to state a fact
which, in the opinion of such counsel, is material and is required to
be stated therein or is necessary to make the statements therein not
misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Stock, the
Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby
shall be reasonably satisfactory in all material respects to counsel
for the Underwriters, and the Company shall have furnished to such
counsel all documents and information that they may reasonably request
to enable them to pass upon such matters.
(d) Paul, Weiss, Rifkind, Wharton and Garrison shall have furnished to the
Representatives their written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the
effect that:
(i) The Company and each of its subsidiaries have been duly
formed and are validly existing as corporations, limited partnerships
or limited liability companies, as the case may be, in good standing
under the laws of their respective jurisdictions
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of organization, are duly qualified to do business and are in good
standing as foreign corporations, limited partnerships or limited
liability companies, as the case may be, in each jurisdiction in which
their respective ownership or lease of property or the conduct of
their respective businesses (as set forth in certificates of officers
of the Company upon which such counsel is relying without independent
investigation) requires such qualification and have all corporate,
partnership or limited liability company, as the case may be, power
and authority necessary to own or hold their respective properties and
conduct the businesses in which they are engaged as described in the
Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company (including the shares of Stock being delivered on such
Delivery Date) have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; and all of the shares of Common Stock
(other than the Stock to be offered and sold by the Company to the
Underwriters hereunder) that are outstanding were offered and sold in
transactions registered pursuant to or exempt from the registration
requirements of the Securities Act and in compliance with all
applicable provisions of the General Corporation Law of the State of
Delaware (the "Delaware Corporation Law") and all of the issued shares
of capital stock, partnership interests or limited liability company
membership interests, as the case may be, of each subsidiary of the
Company (other than Leperq Atlanta Renaissance Partners, L.P. (the
"Atlanta Partnership")) have been duly and validly authorized and
issued and (except for partnership interests of general partners and
except to the extent the limited liability company agreements
governing the respective limited liability companies provide
otherwise) are fully paid, non-assessable and are owned directly or
indirectly by the Company, to such counsel's knowledge free and clear
of all liens, encumbrances, or claims except for liens in favor of
Bankers Trust Company and/or any of its affiliates to secure
indebtedness; with respect to the general and limited partnership
interests of the Atlanta Partnership held by the Company, such
interests are owned directly or indirectly by the Company, to such
counsel's knowledge free and clear of all liens, encumbrances, or
claims except for liens in favor of Lehman Brothers Holdings, Inc.
and/or any of its affiliates to secure indebtedness;
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(iii) Except as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any unissued shares of the
Stock to be issued and sold by the Company to the Underwriters
hereunder pursuant to the Company's charter or by-laws or any
agreement or other instrument known to such counsel;
(iv) Except as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any of the partnership
interests in the Operating Partnership pursuant to the Operating
Partnership's Agreement of Limited Partnership, as amended, or, to
such counsel's knowledge, any agreement or other instrument to which
the Company is a party;
(v) To the best of such counsel's knowledge, based solely on
a review of such counsel's internal litigation docket, and other than
as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property or assets of the Company or any of
its subsidiaries is the subject which could be expected to have a
Material Adverse Effect; and, to the best of such counsel's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(vi) The Registration Statement was declared effective under
the Securities Act as of the date and time specified in such opinion,
the Prospectus was filed with the Commission pursuant to the
subparagraph of Rule 424(b) of the Rules and Regulations specified in
such opinion on the date specified therein and, to the knowledge of
such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that
purpose is pending or threatened by the Commission;
(vii) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to
such Delivery Date (other than the financial statements and related
schedules and statistical data therein, as to which such counsel need
express no opinion) comply as to form in all material respects with
the requirements of the Securities Act and the Rules and Regulations;
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(viii) To the best of such counsel's knowledge, there are no
contracts or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by the
Securities Act or by the Rules and Regulations which have not been
described or filed as exhibits to the Registration Statement;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company;
(x) The amended and restated Agreement of Limited Partnership
of the Operating Partnership has been duly authorized, executed and
delivered by the Company and CapStar Sub and constitutes the valid and
binding agreement of each such party, enforceable against each such
party in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, fraudulent conveyance or
transfer, reorganization, liquidation, moratorium or other similar
laws affecting the rights and remedies of creditors generally and
except as may be subject to general principles of equity (regardless
of whether such agreement is considered in a proceeding in equity or
at law), and except as rights to indemnity and contribution thereunder
may be limited by applicable law and public policy;
[(xi) The Registration Rights Agreements have been duly
authorized, executed and delivered by the Company and constitute the
valid and binding agreement of the Company, enforceable against the
Company in accordance with their terms, except as such enforceability
may be limited by bankruptcy, insolvency, fraudulent conveyance or
transfer, reorganization, liquidation, moratorium or other similar
laws affecting the rights and remedies of creditors generally and
except as may be subject to general principles of equity (regardless
of whether such agreement is considered in a proceeding in equity or
at law), and except as rights to indemnity and contribution thereunder
may be limited by applicable law and public policy, and except that no
opinion is expressed as to the enforceability of the choice of law
provisions thereof;]
(xii) The issue and sale of the shares of Stock being delivered
on such Delivery Date by the Company and the compliance by the Company
and the Operating Partnership with all of the provisions of this
Agreement and the
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consummation of the transactions contemplated hereby will not conflict
with or result in a material breach or violation of any of the terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject which breach is
reasonably likely to have a Material Adverse Effect, nor will such
actions result in any violation of the provisions of the charter,
by-laws, limited partnership agreement or operating agreement of the
Company or any of its subsidiaries or any statute or any order, rule
or regulation known to such counsel of any court or governmental
agency or body of the United States, the State of New York or
established pursuant to the Delaware Corporation Law having
jurisdiction over the Company or any of its subsidiaries or any of
their properties or assets; except for the registration of the Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange
Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions contemplated
hereby;
(xiii) Except as set forth in the Prospectus, to the best of
such counsel's knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such person
the right (other than rights which have been waived or satisfied) to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities Act;
(xiv) Neither the Company nor any of its subsidiaries is an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended;
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<PAGE>
(xv) The Operating Partnership will be treated as a
partnership, and not as an "association" or "publicly traded
partnership" taxable as a corporation, for federal income tax
purposes; and
(xvi) The statements under the captions "Certain Relationships
and Related Transactions" and "Description of Capital Stock" in the
Prospectus, insofar as such statements constitute a summary of legal
matters, documents or proceedings referred to therein are correct in
all material respects.
In rendering such opinion, such counsel may (i) state that their
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of New York and the
Delaware Corporation Law and that such counsel is not admitted in the
State of Delaware; and (ii) in giving the opinions referred to in
Section 7(d)(i) (solely with regard to organization and qualification
of the Company's subsidiaries), Section 7(d)(ii) (solely with regard
to capital stock, partnership interests or limited liability company
membership interests, as the case may be, of subsidiaries of the
Company being duly and validly authorized and issued and fully paid
and non-assessable), state that they are relying on an opinion or
opinions of other counsel as to such matters, provided that the
Underwriters shall have received such opinion or opinions, in form and
substance satisfactory to Underwriter's counsel, of other counsel
reasonably acceptable to Underwriters' counsel. Such counsel shall
also have furnished to the Representatives a written statement,
addressed to the Underwriters and dated such Delivery Date, in form
and substance satisfactory to the Representatives, to the effect that
(x) in connection with the preparation of the Registration Statement
and the Prospectus, such counsel have participated in conferences with
certain officers and other representatives of the Company, at which
the contents of the Registration Statement and the Prospectus and
related matters were discussed, and (y) based on such participation,
no facts have come to the attention of such counsel which lead them to
believe that the Registration Statement (except for financial
statements and schedules and other statistical data included therein
or omitted therefrom, as to which such counsel need make no
statement), as of the Effective Date, contained any untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein
not
24
<PAGE>
misleading, or that the Prospectus (except for financial statements
and schedules and other statistical data included therein or omitted
therefrom, as to which such counsel need make no statement) contains
any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing statement may be qualified
by a statement to the effect that such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus
except for the statements made in the Prospectus under the caption
"Description of Capital Stock," insofar as such statements relate to
the Stock and concern legal matters.
(e) The Representatives shall have received from Hogan & Hartson L.L.P.,
counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request
for the purpose of enabling them to pass upon such matters.
(f) At the time of execution of this Agreement, the Representatives shall
have received from KPMG Peat Marwick a letter, in form and substance
satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective dates
as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date
hereof), the conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(g) With respect to the letter of KPMG Peat Marwick referred to in clause
(f) hereof and delivered to the Representatives concurrently with the
execution of this Agreement (the "initial letter"), the Company shall
have furnished to the
25
<PAGE>
Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants
within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with respect to
matters involving changes or developments since the respective dates
as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of
the bring-down letter), the conclusions and findings of such firm with
respect to the financial information and other matters covered by the
initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(h) The Company shall have furnished to the Representatives a certificate,
dated such Delivery Date, of its Chairman of the Board, its President
or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Sections 7(a) and 7(i) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective Date,
the Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or amendment
to the Registration Statement or the Prospectus.
(i) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated
in the Prospectus or (ii) since such date there shall not have been
any change in the capital stock or
26
<PAGE>
long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is, in the judgment of the Representatives, so material
and adverse as to make it impracticable or inadvisable to proceed with
the public offering or the delivery of the Stock being delivered on
such Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(j) Subsequent to the execution and delivery of this Agreement there shall
not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock
Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal or state authorities, (iii) the United States
shall have become engaged in hostilities, there shall have been an
escalation in hostilities involving the United States or there shall
have been a declaration of a national emergency or war by the United
States or (iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in the
United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(k) There shall be issued and outstanding with respect to each of the
Owned Hotels (as defined in the Prospectus) an ALTA form of owner's
title insurance policy (or local equivalent with respect to those
Owned Hotels located in jurisdictions where an ALTA form of owner's
title insurance is not available) insuring the fee simple estate of
the applicable subsidiary of the Company in the Owned Hotel owned by
such subsidiary in an amount at least equal to the acquisition price
of such Owned Hotel and each
27
<PAGE>
such title insurance policy will continue to be in full force and
effect immediately following the consummation of the Offering.
(l) The New York Stock Exchange, Inc. shall have approved the Stock for
listing, subject only to official notice of issuance and evidence of
satisfactory distribution.
[(m) The Representatives shall have received the written opinion or
opinions or other certification in form and substance acceptable to
Underwriter's counsel, of other counsel reasonably acceptable to
Underwriter's counsel to the effect that the Company, its subsidiaries
and the Predecessor Entities hold and after consummation of the
Highgate Acquisition (as defined in the Prospectus) will continue to
hold all state food, beverage and liquor licenses necessary or
required for such corporations, partnerships and limited liability
companies to conduct their business as currently conducted in each
state.]
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Operating Partnership, jointly and severally,
shall indemnify and hold harmless each Underwriter, its officers and
employees and each person, if any, who controls any Underwriter within
the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to
which that Underwriter, officer, employee or controlling person may
become subject, under the Securities Act or otherwise, insofar as such
loss, claim, damage, liability or action arises out of, or is based
upon, (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or
supplement thereto or (B) in any blue sky application or other
document prepared or executed by the Company (or based upon any
written information furnished by the Company) specifically for the
purpose of qualifying any or all of the Stock under the securities
laws of any state or other jurisdiction (any such application,
document or information being hereinafter called a "Blue Sky
28
<PAGE>
Application"), (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus,
or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the
Stock or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (i) or (ii)
above (provided that the Company and the Operating Partnership shall
not be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or willful
misconduct), and shall reimburse each Underwriter and each such
officer, employee or controlling person promptly upon demand for any
legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company and the Operating
Partnership shall not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of, or is
based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any such amendment or
supplement, or in any Blue Sky Application, in reliance upon and in
conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein. The foregoing
indemnity agreement is in addition to any liability which the Company
or the Operating Partnership may otherwise have to any Underwriter or
to any officer, employee or controlling person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify and hold
harmless the Company, its officers and employees, each of its
directors (including any person who, with his or her consent, is named
in the Registration Statement as about to become a director of the
Company), and each person, if any, who controls the Company within the
meaning of the Securities Act,
29
<PAGE>
from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any
such director, officer or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained (A)
in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in any
Blue Sky Application or (ii) the omission or alleged omission to state
in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any amendment or supplement thereto, or in any Blue
Sky Application any material fact required to be stated therein or
necessary to make the statements therein not misleading, but in each
case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon
and in conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf
of that Underwriter specifically for inclusion therein, and shall
reimburse the Company and any such director, officer or controlling
person for any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in
connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such
expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to
the Company or any such director, officer, employee or controlling
person.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party
in writing of the claim or the commencement of that action; provided,
however, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have under this Section 8
except to the extent it has been materially prejudiced by such failure
and, provided further, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have to an
indemnified party otherwise than under this Section 8. If any such
claim or action shall be brought against an indemnified party, and it
shall notify the indemnifying party thereof, the indemnifying party
shall be entitled to participate
30
<PAGE>
therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under
this Section 8 for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that the
Representatives shall have the right to employ counsel to represent
jointly the Representatives and those other Underwriters and their
respective officers, employees and controlling persons who may be
subject to liability arising out of any claim in respect of which
indemnity may be sought by the Underwriters against the Company, the
Operating Partnership under this Section 8 if, in the reasonable
judgment of the Representatives, it is advisable for the
Representatives and those Underwriters, officers, employees and
controlling persons to be jointly represented by separate counsel, and
in that event the fees and expenses of one such separate counsel shall
be paid by the Company, the Operating Partnership. No indemnifying
party shall (i) without the prior written consent of the indemnified
parties (which consent shall not be unreasonably withheld), settle or
compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding, or
(ii) be liable for any settlement of any such action effected without
its written consent (which consent shall not be unreasonably
withheld), but if settled with the consent of the indemnifying party
or if there be a final judgment of the plaintiff in any such action,
the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of
such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for any
reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 8(a), 8(b) or 8(c) in respect of any
loss, claim, damage or liability, or any action in respect thereof,
referred to therein, then each indemnifying party shall,
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<PAGE>
in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such
loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative
benefits received by the Company and the Operating Partnership on the
one hand and the Underwriters on the other from the offering of the
Stock or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above
but also the relative fault of the Company and the Operating
Partnership on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as
any other relevant equitable considerations. The relative benefits
received by the Company and the Operating Partnership on the one hand
and the Underwriters on the other with respect to such offering shall
be deemed to be in the same proportion as the total net proceeds from
the offering of the Stock purchased under this Agreement (before
deducting expenses) received by the Company and the Operating
Partnership on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of
the Stock purchased under this Agreement, on the other hand, bear to
the total gross proceeds from the offering of the shares of the Stock
under this Agreement, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined
by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company and the Operating
Partnership or the Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct
or prevent such statement or omission. For purposes of the preceding
two sentences, the net proceeds deemed to be received by the Company
shall be deemed to be also for the benefit of the Operating
Partnership and information supplied by the Company shall also be
deemed to have been supplied by the Operating Partnership. The
Company, the Operating Partnership and the Underwriters further agree
that it would not be just and equitable if contributions pursuant to
this Section were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the
equitable considerations referred to herein. The amount
32
<PAGE>
paid or payable by an indemnified party as a result of the loss,
claim, damage or liability, or action in respect thereof, referred to
above in this Section shall be deemed to include, for purposes of this
Section 8(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section
8(d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Stock
underwritten by it and distributed to the public was offered to the
public exceeds the amount of any damages which such Underwriter has
otherwise paid or become liable to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
The Underwriters' obligations to contribute as provided in this
Section 8(d) are several in proportion to their respective
underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges that
the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning
over-allotments on the inside front cover page of and the concession
and reallowance figures appearing under the caption "Underwriting" in,
the Prospectus are correct and constitute the only information
concerning such Underwriters furnished in writing to the Company by or
on behalf of the Underwriters specifically for inclusion in the
Registration Statement and the Prospectus.
8. DEFAULTING UNDERWRITERS. If, on either Delivery Date, any Underwriter
defaults in the performance of its obligations under this Agreement, the
remaining non-defaulting Underwriters shall be obligated to purchase the Stock
which the defaulting Underwriter agreed but failed to purchase on such Delivery
Date in the respective proportions which the number of shares of the Firm Stock
set opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting
33
<PAGE>
Underwriter shall not be obligated to purchase more than 110% of the number of
shares of the Stock which it agreed to purchase on such Delivery Date pursuant
to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company, except that the Company
will continue to be liable for the payment of expenses to the extent set forth
in Sections 6 and 11. As used in this Agreement, the term "Underwriter"
includes, for all purposes of this Agreement unless the context requires
otherwise, any party not listed in Schedule 1 hereto who, pursuant to this
Section 9, purchases Firm Stock which a defaulting Underwriter agreed but failed
to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to effect
any changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
10. TERMINATION. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
prior to delivery of and payment for the Firm Stock if, prior to that time, any
of the events described in Sections 7(i) or 7(j), shall have occurred or if the
Underwriters shall decline to purchase the Stock for any reason permitted under
this Agreement.
11. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the Underwriters for all reasonable
out-of-pocket expenses (including fees and disbursements of counsel) incurred by
the Underwriters in connection with this Agreement and the proposed purchase of
the Stock, and upon demand the Company shall pay the full amount thereof to the
Representatives. If
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<PAGE>
this Agreement is terminated pursuant to Section 9 by reason of the default of
one or more Underwriters, the Company shall not be obligated to reimburse any
defaulting Underwriter on account of those expenses.
12. NOTICES, ETC. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission to Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, Attention: Syndicate Department
(Fax: 212-526-6588), with a copy, in the case of any notice pursuant
to Section 11(d), to the Director of Litigation, Office of the General
Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor,
New York, NY 10285;
(b) if to the Company or to the Operating Partnership, shall be delivered
or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Paul W.
Whetsell (Fax: 202-965-4445);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the
Representatives.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of and be binding upon the Underwriters, the Company and their
respective successors. This Agreement and the terms and provisions hereof are
for the sole benefit of only those persons, except that (A) the representations,
warranties, indemnities and agreements of the Company contained in this
Agreement shall also be deemed to be for the benefit of the person or persons,
if any, who control any Underwriter within the meaning of Section 15 of the
Securities Act and (B) the indemnity agreement of the Underwriters contained in
Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
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<PAGE>
14. SURVIVAL. The respective indemnities, representations, warranties and
agreements of the Company, the Operating Partnership and the Underwriters
contained in this Agreement or made by or on behalf on them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Stock and shall remain in full force and effect, regardless of any investigation
made by or on behalf of any of them or any person controlling any of them.
15. DEFINITION OF THE TERMS "BUSINESS DAY" AND "SUBSIDIARY." For purposes
of this Agreement, (a) "business day" means any day on which York Stock
Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set
forth in Rule 405 of the Rules and Regulations.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of New York without regard to the
principles of conflicts of laws thereof.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. HEADINGS. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
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<PAGE>
If the foregoing correctly sets forth the agreement Operating Partnership
among the Company, the Operating Partnership and the Underwriters, please
indicate your acceptance in the space provided for that purpose below.
Very truly yours,
CapStar Hotel Company
By:
-----------------------------------
Paul W. Whetsell, President and Chief
Executive Officer
CapStar Management Company, L.P.
By:
-----------------------------------
CapStar GP Corp., its general partner
By:
-----------------------------------
Paul W. Whetsell, President
Accepted:
LEHMAN BROTHERS INC.
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MONTGOMERY SECURITIES
SMITH BARNEY INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By:
------------------------------
Authorized Representative
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SCHEDULE 1
Number of
Underwriters Shares
- ------------- ----------
Lehman Brothers Inc. . . . . . . . . ________
BT Securities Corporation . . . . . ________
Goldman, Sachs & Co. . . . . . . . . ________
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . ________
Montgomery Securities . . . . . . . ________
Smith Barney Inc. . . . . . . . . . ________
Total
========
38
<PAGE>
Exhibit 4.2.2
CAPSTAR MANAGEMENT COMPANY, L.P.
CAPSTAR HOTEL COMPANY
FIRST AMENDMENT
TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated
as of December 13, 1996 and entered into by and among CapStar Management
Company, L.P., a Delaware limited partnership (the "BORROWER"), CapStar Hotel
Company, a Delaware corporation ("CAPSTAR"), and Bankers Trust Company, as agent
(the "AGENT"), and, for purposes of Section 4 hereof, the Credit Support Parties
(as defined in Section 4 hereof) listed on the signature pages hereof, and is
made with reference to that certain Senior Secured Revolving Credit Agreement
dated as of September 24, 1996 (as amended, restated, supplemented or otherwise
modified to the date hereof, the "CREDIT AGREEMENT"), by and among the Borrower,
CapStar, the financial institutions party thereto (the "LENDERS") and Agent.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower, CapStar and Agent desire to amend the Credit
Agreement to, among other things, (i) increase the maximum permitted amount of
Pool B Indebtedness, (ii) increase the maximum permitted amount of Subordinated
Indebtedness, (iii) modify certain financial covenants as provided herein, (iv)
modify certain definitions as provided herein, (v) permit Borrower to guaranty
certain lease obligations as provided herein and (vi) make certain other
amendments as set forth below:
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 AMENDMENTS TO SECTION 1: PROVISIONS RELATING
TO DEFINED TERMS
A. The definition of "BORROWING BASE" contained in subsection 1.1 of
the Credit Agreement is hereby amended by deleting clause (ii) therefrom in its
entirety and substituting the following therefor:
"(ii) the amount, if any, by which the sum of the Property Amounts
in respect of Designated Pool A Properties referred to in clause
(ii) of the
1
<PAGE>
definition of Property Amount as of such date of determination
otherwise exceeds (a) with respect to the period from the First
Amendment Effective Date to and including June 30, 1997, 20%, (b)
with respect to the period from July 1, 1997 to and including
December 31, 1997, 15% and (c) with respect to the period from
January 1, 1998 to and including Maturity Date, 10% of the amount
determined pursuant to this definition for such period."
B. The definition of "NET INCOME" contained in subsection 1.1 of the
Credit Agreement is hereby amended by deleting the phrase "any Asset Sale"
therefrom and substituting therefor the phrase "the sale or other disposition of
any asset (including the disposition of a Property pursuant to subsection 7.11
but excluding any gain from the sale of inventory in the ordinary course of
business)."
C. The definition of "NOTES" contained in subsection 1.1 of the
Credit Agreement is hereby amended by (i) deleting the reference to "subsection
2.10 (i)" contained therein and substituting "subsection 2.1E(iv)" therefor and
(ii) deleting the phrase "the last sentence of subsection 10.1B(i)" therefrom
and substituting the phrase "subsection 9.1A" therefor.
D. The definition of "NOTICE OF RENOVATION/RESTORATION" contained in
subsection 1.1 of the Credit Agreement is hereby amended by deleting the
reference to "7.12A" contained therein and substituting "6.12A" therefor.
E. The definition of "PROPERTY AMOUNT" contained in subsection 1.1
of the Credit Agreement is hereby amended by deleting the phrase "two Designated
Pool A Properties" from clause (ii) of such definition and substituting the
phrase "three Designated Pool A Properties (other than the Atlanta Airport
Property)" therefor.
F. The definition of "PROPERTY EBITDA" contained in subsection 1.1
of the Credit Agreement is hereby amended to add the phrase "or 2.9B, as the
case may be," after the phrase "required by subsection 2.9A in clause (w) of the
proviso thereto.
G. The definition of "TOTAL UTILIZATION" contained in subsection 1.1
of the Credit Agreement is hereby amended by (i) deleting the punctuation "."
from the end of clause (vi) of such definition and substituting "; plus"
therefor and (ii) adding the following at the end of such definition:
"(vi) the aggregate maximum potential liability of the
Borrower pursuant to guaranties of lease obligations permitted by
subsection 7.4(viii)."
H. Subsection 1.1 of the Credit Agreement is hereby amended by
inserting the following definitions in such subsection in proper alphabetical
order:
2
<PAGE>
"'FIRST AMENDMENT' means that certain First Amendment to Credit
Agreement dated as of December 13, 1996 by and among Borrower, CapStar,
Agent and, for purposes of Section 4 thereof, the Loan Parties named on
the signature pages thereof."
"'FIRST AMENDMENT EFFECTIVE DATE' means the effective date of
Section 1 of the First Amendment as provided in Section 2 of the First
Amendment."
"'SUBORDINATED CREDIT AGREEMENT' means that certain Senior
Subordinated Credit Agreement dated as of December 13, 1996 by and among
the Borrower, CapStar, the lenders party thereto and Bankers, as arranger
and agent, as such agreement may be amended, restated supplemented or
otherwise modified in accordance with the terms thereof and hereof."
"'SUBORDINATED GUARANTIES' means, collectively (i) that certain
Senior Subordinated CapStar Guaranty dated as of December 13, 1996
executed by CapStar and (ii) that certain Senior Subordinated Affiliated
Guaranty dated as of December 13, 1996 executed by the Loan Parties party
thereto from time to time, as each guaranty may be amended, restated,
supplemented or otherwise modified in accordance with the terms thereof
and hereof."
"'SUBORDINATED INDEBTEDNESS DOCUMENTS' means, collectively the
Subordinated Credit Agreement, the Subordinated Guaranties and each other
indenture, agreement, instrument or other document pursuant to which any
Subordinated Indebtedness is issued or that is executed in connection with
any Subordinated Indebtedness, as each such indenture, agreement,
instrument or document may be amended, restated, supplemented or otherwise
modified in accordance with the terms thereof and hereof."
1.2 AMENDMENTS TO SECTION 6: AFFIRMATIVE COVENANTS
A. Subsection 6.1 of the Credit Agreement is hereby amended by (i)
inserting the phrase "of any Event of Default or Potential Event of Default"
immediately after the word "existence" in clause (2) of subsection 6.1(v) and
(ii) inserting the word "constitute" immediately before the phrase "a default"
in clause (c) of subsection 6.1(xi).
B. Subsection 6.15D of the Credit Agreement is hereby amended by
deleting the date "December 31, 1996" therefrom and substituting "January 31,
1997" therefor.
3
<PAGE>
1.3 AMENDMENTS TO SECTION 7: NEGATIVE COVENANTS
A. Subsection 7.1 of the Credit Agreement is hereby amended by (i)
deleting the number "$25,000,000" from clause (v) thereof and substituting
"$50,000,000" therefor and (ii) deleting the number $25,000,000" from clause
(vi) thereof and substituting $100,000,000" therefor. The Indebtedness incurred
pursuant to the Subordinated Indebtedness Documents is Indebtedness incurred
pursuant to subsection 7.1(vi) of the Credit Agreement.
B. Subsection 7.2 of the Credit Agreement is hereby amended by (i)
deleting the word "and" from the end of clause (iii) of subsection 7.2C and
substituting the punctuation "," therefor; (ii) deleting the punctuation "."
from the end of clause (iv) of subsection 7.2C and adding "and (v) the
Subordinated Credit Agreement" immediately after the phrase "or otherwise" in
such subsection and (iii) adding the phrase ", the Subordinated Credit
Agreement" immediately after the phrase "this Agreement" in subsection 7.2D.
C. Subsection 7.4 of the Credit Agreement is hereby amended by (i)
deleting the word "and" from the end of clause (v) thereof, (ii) deleting the
punctuation "." from the end of clause (vi) thereof and substituting ","
therefor and (iii) adding the following at the end thereof:
"(vii) CapStar and each Loan Party party to the Affiliate
Guaranty may guaranty the obligations of the Borrower under the
Subordinated Credit Agreement pursuant to the Subordinated
Guaranties; and
(viii) the Borrower may guaranty obligations of Pool B
Subsidiaries under leases related to sale and lease-back
transactions permitted pursuant to subsection 7.11; provided that
the maximum aggregate potential liability of the Borrower pursuant
to such guaranties (whether for regularly scheduled lease payments,
any amount due in connection with the termination or expiration of
any lease or any other amount payable in connection with such
leases) shall not exceed $5,000,000 at any time; and provided
further, that the Borrower shall have obtained the Agent's prior
written approval of (x) the terms of the applicable lease (and each
supplement thereto and amendment or modification thereof), (y) the
identity of the lessor and (z) the property subject to such sale and
lease-back transaction."
D. Subsection 7.5 of the Credit Agreement is hereby amended by (i)
deleting the word "and" from the end of clause (ii) thereof, (ii) deleting the
punctuation "." from the end of the clause (iii) thereof and substituting ";
and" therefor and (iii) adding the following at the end of such subsection:
4
<PAGE>
"(iv) as long as no Event of Default has occurred and is
continuing or would result therefrom (and without regard to the
occurrence or continuation of a Potential Event of Default), the
Borrower and the other Loan Parties may make scheduled payments of
interest on account of the Subordinated Indebtedness and Pool B
Indebtedness; provided that, notwithstanding the foregoing, the
Borrower and the other Loan Parties may make scheduled payments of
interest on the Indebtedness incurred pursuant to the Subordinated
Credit Agreement if but only if (a) no default in the payment of any
principal, amounts drawn under letters of credit, interest or
regularly accruing fees on any Obligations has occurred and is
continuing and (b) such payment is not otherwise restricted pursuant
to the subordination provisions contained in Section 8 of the
Subordinated Credit Agreement, as in effect on the date hereof or as
modified in accordance with the terms hereof."
E. Subsection 7.6B of the Credit Agreement is hereby amended by (i)
deleting the percentage "55%" from clause (i) thereof and substituting the
phrase "60% (provided that, if CapStar has an offering of its equity Securities
after the Closing Date, such percentage shall thereafter be 55%)" therefor and
(ii) deleting the percentage "60%" from clause (ii) thereof and substituting the
phrase "65% (provided that, if CapStar has an offering of its equity Securities
after the Closing Date, such percentage shall thereafter be 60%)" therefor.
F. Subsection 7.6E of the Credit Agreement is hereby amended by
deleting the matrix setting forth the maximum ratios of Consolidated Total
Indebtedness to Consolidated EBITDA therefrom and substituting the following
therefor:
5
<PAGE>
========================================= ======================
"PERIOD MAXIMUM LEVERAGE RATIO
- ----------------------------------------- ----------------------
September 30, 1996 to and including the 4.75 to 1.00
First Amendment Effective Date
- ----------------------------------------- ----------------------
the First Amendment Effective Date to 5.50 to 1.00
and including March 31, 1997
- ----------------------------------------- ----------------------
April 1, 1997 to and including June 30, 5.50 to 1.00
1997
- ----------------------------------------- ----------------------
July 1, 1997 to and including 5.25 to 1.00
September 29, 1997
- ----------------------------------------- ----------------------
September 30, 1997 to and including 5.00 to 1.00
December 31, 1997
- ----------------------------------------- ----------------------
January 1, 1998 to and including 5.00 to 1.00
March 31, 1998
- ----------------------------------------- ----------------------
April 1, 1998 to and including June 30, 4.75 to 1.00
1998
- ----------------------------------------- ----------------------
July 1, 1998 to and including 4.50 to 1.00
September 29, 1998
- ----------------------------------------- ----------------------
September 30, 1998 to and including 4.25 to 1.00
September 29, 1999
- ----------------------------------------- ----------------------
if applicable, September 30, 1999 to and 4.00 to 1.00
including September 29, 2000
- ----------------------------------------- ----------------------
if applicable, September 30, 2000 to and 3.75 to 1.00"
including Maturity Date
========================================= ======================
G. Subsection 7.6F of the Credit Agreement is hereby amended by
deleting the matrix setting forth the maximum ratios of Consolidated Total
Indebtedness to Consolidated EBITDA-Cap Ex therefrom and substituting the
following therefor:
6
<PAGE>
========================================= ======================
"PERIOD MAXIMUM LEVERAGE RATIO
- ----------------------------------------- ----------------------
September 30, 1996 to and including the 5.25 to 1.00
First Amendment Effective Date
- ----------------------------------------- ----------------------
the First Amendment Effective Date to 6.00 to 1.00
and including March 31, 1997
- ----------------------------------------- ----------------------
April 1, 1997 to and including June 30, 6.00 to 1.00
1997
- ----------------------------------------- ----------------------
July 1, 1997 to and including 5.75 to 1.00
September 29, 1997
- ----------------------------------------- ----------------------
September 30, 1997 to and including 5.25 to 1.00
December 31, 1997
- ----------------------------------------- ----------------------
January 1, 1998 to and including 5.25 to 1.00
March 31, 1998
- ----------------------------------------- ----------------------
April 1, 1998 to and including June 30, 5.00 to 1.00
1998
- ----------------------------------------- ----------------------
July 1, 1998 to and including 4.75 to 1.00
September 29, 1998
- ----------------------------------------- ----------------------
September 30, 1998 to and including 4.50 to 1.00
September 29, 1999
- ----------------------------------------- ----------------------
if applicable, September 30, 1999 to and 4.25 to 1.00
including September 29, 2000
- ----------------------------------------- ----------------------
if applicable, September 30, 2000 to and 4.00 to 1.00"
including Maturity Date
========================================= ======================
H. Subsection 7.11 of the Credit Agreement is hereby amended by (i)
deleting the phrase "subsection 2.9A" from clause (i) thereof and substituting
"subsection 2.9B" therefor and (ii) adding the following at the end of clause
(iv) thereof:
"provided that the Borrower may guaranty such obligations to
the extent permitted by subsection 7.4(viii);"
I. Subsection 7.20 of the Credit Agreement is hereby amended by
adding the following at the end thereof:
7
<PAGE>
"I. SUBORDINATED INDEBTEDNESS DOCUMENTS. Without the prior
written approval of the Agent, which approval may be granted,
withheld, conditioned or delayed in its sole discretion, the Loan
Parties shall not, and shall not permit any of their respective
Subsidiaries to, amend, restate, supplement or otherwise modify any
provision of any Subordinated Indebtedness Document; provided that
the Loan Parties may (i) amend or modify the Subordinated Credit
Agreement in order to delete any covenant or agreement of any Loan
Party or to make any such covenant or agreement less restrictive on
the Loan Parties and (ii) waive any default or event or default
thereunder; provided further that no such amendment or waiver shall
be adverse to the interests or rights of the Agent or any Lender."
1.4 AMENDMENTS TO SECTION 8: EVENTS OF DEFAULT; REMEDIES.
Subsection 8.2A of the Credit Agreement is hereby amended by
inserting the phrase "and the other Loan Parties" immediately after the phrase
"against the Borrower" in the first sentence of such subsection.
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "FIRST AMENDMENT
EFFECTIVE DATE"):
A. EXECUTED COUNTERPARTS OF AMENDMENT. The Borrower, CapStar, each
other Credit Support Party and the Agent shall have executed counterparts of
this Amendment and the Agent shall have received written or telephone
notification of such execution and authorization of delivery thereof.
B. AMENDMENT FEE. The Agent shall have received for distribution
to Lenders an aggregate amendment fee of $225,000.
C. SUBORDINATED INDEBTEDNESS. The Borrower shall have issued
Subordinated Indebtedness in an aggregate principal amount of $50,000,000 (the
"SPECIFIED SUBORDINATED INDEBTEDNESS") and the Borrower shall have delivered to
the Agent complete and correct copies of all documents, instruments and other
items executed or delivered in connection with the issuance of the Specified
Subordinated Indebtedness, all of which shall be satisfactory in form and
substance to Agent. The Specified Subordinated Indebtedness shall have been
registered as qualified under the applicable federal or state securities laws or
shall be exempt therefrom. In addition, all opinions delivered in connection
with the Specified Subordinated Indebtedness shall be addressed to Agent and
Lenders or accompanied by a written authorization from the
8
<PAGE>
Person delivering such opinion stating that Agent and Lenders may rely on such
document as though it were addressed to them.
D. LEGAL OPINION. Agent and Lenders and their respective counsel
shall have received originally executed copies of one or more favorable written
opinions of counsel for the Borrower and CapStar, in form and substance
reasonably satisfactory to Agent, dated as of the First Amendment Effective
Date.
E. COMPLETION OF PROCEEDINGS. On or before the First Amendment
Effective Date, all corporate and other proceedings taken or to be taken in
connection with the transactions contemplated hereby and all documents
incidental thereto not previously found acceptable by the Agent, acting on
behalf of the Lenders, and its counsel shall be satisfactory in form and
substance to the Agent and such counsel, and the Agent and such counsel shall
have received all such counterpart originals or certified copies of such
documents as the Agent may reasonably request.
SECTION 3. BORROWER'S AND CAPSTAR'S
REPRESENTATIONS AND WARRANTIES
In order to induce the Agent to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, each of the Borrower
and CapStar represents and warrants to the Agent and each Lender that the
following statements are true, correct and complete:
A. POWER AND AUTHORITY. Each of the Borrower and CapStar has all
requisite power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all corporate action on the part of each of the Borrower and
CapStar.
C. NO CONFLICT. The execution and delivery by each of the Borrower
and CapStar of this Amendment and the performance by each of the Borrower and
CapStar of the Amended Agreement do not and will not (i) violate any provision
of any law or any governmental rule or regulation applicable to CapStar or any
of its Subsidiaries, the Certificate or Articles of Incorporation, Bylaws or
other applicable charter document of CapStar or any of its Subsidiaries or any
order, judgment or decree of any court or other agency of government binding on
CapStar or any of its Subsidiaries, (ii) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any
Contractual Obligation of CapStar or any of its Subsidiaries, (iii) result in or
require the creation or imposition of any Lien upon any of the properties or
assets of CapStar or any of its Subsidiaries (other than Liens created
9
<PAGE>
under any of the Loan Documents in favor of Agent on behalf of Lenders), or (iv)
require any approval of stockholders or any approval or consent of any Person
under any Contractual Obligation of CapStar or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by each of the
Borrower and CapStar of this Amendment and the performance by each of the
Borrower and CapStar of the Amended Agreement do not and will not require any
registration with, consent or approval of, or notice to, or other action to,
with or by, any federal, state or other governmental authority or regulatory
body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement have
been duly executed and delivered by each of the Borrower and CapStar and are the
legally valid and binding obligations of each of the Borrower and CapStar,
enforceable against each of the Borrower and CapStar in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally, and by general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or law) and subject
to other qualifications, exceptions and assumptions such as are set forth in the
various legal opinions delivered to the Agent in connection with such documents
or other documents.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Section 5 of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the First Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing
or will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
SECTION 4. ACKNOWLEDGMENT AND CONSENT
The Borrower is a party to the Security Agreement, Trademark
Agreement, Omnibus Management and Liquor License Agreement, the Atlanta
Collateral Assignment, the Cash Management Letters and the Mortgages pursuant to
which the Borrower has pledged and created Liens on certain Collateral to secure
the Obligations. CapStar is a party to the CapStar Guaranty, Security Agreement,
the Trademark Agreement and the Omnibus Management and Liquor License Agreement
pursuant to which CapStar has guaranteed the Obligations and pledged and created
Liens on certain Collateral. The Subsidiaries of CapStar (other than Borrower)
listed on the signature pages hereof (the "SUBSIDIARY GUARANTORS") are parties
to the Affiliate Guaranty,
10
<PAGE>
Security Agreement, the Omnibus Management and Liquor License Agreement and the
Atlanta Documents, as applicable, pursuant to which such Subsidiary Guarantors
have guaranteed the Obligations and pledged and created Liens on certain
collateral to secure the Obligations. CapStar, the Borrower and the Subsidiary
Guarantors are collectively referred to herein as the "CREDIT SUPPORT PARTIES"
and the CapStar Guaranty, the Affiliate Guaranty and the Security Documents are
collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS."
Each Credit Support Party hereby acknowledges that it has reviewed
the terms and provisions of the Credit Agreement and this Amendment and consents
to the amendment of the Credit Agreement effected pursuant to this Amendment.
Each Credit Support Party hereby confirms that each Credit Support Document to
which it is a party or otherwise bound and all Collateral encumbered thereby
will continue to guaranty or secure, as the case may be, to the fullest extent
possible the payment and performance of all Guaranties and Security Documents
for the obligations guarantied or secured, "Obligations," "Guarantied
Obligations" and "Secured Obligations," as the case may be (in each case as such
terms are defined in the applicable Credit Support Document), including without
limitation the payment and performance of all such "Obligations," "Guarantied
Obligations" or "Secured Obligations," as the case may be, in respect of the
Obligations of the Borrower now or hereafter existing under or in respect of the
Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of the
Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties contained in the
Amended Agreement and the Credit Support Documents to which it is a party or
otherwise bound are true, correct and complete in all material respects on and
as of the First Amendment Effective Date to the same extent as though made on
and as of that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Subsidiary Guarantor acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Subsidiary Guarantor is not required by the terms of the Credit Agreement
or any other Loan Document to consent to the amendments to the Credit Agreement
effected pursuant to this Amendment and (ii) nothing in the Credit Agreement,
this Amendment or any other Loan Document shall be deemed to require the consent
of such Subsidiary Guarantor to any future amendments to the Credit Agreement.
11
<PAGE>
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS.
(i) On and after the First Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"herein" or words of like import referring to the Credit Agreement, and
each reference in the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force
and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power or
remedy of Agent or any Lender under, the Credit Agreement or any of the
other Loan Documents.
B. FEES AND EXPENSES. Each of the Borrower and CapStar acknowledges
that all costs, fees and expenses as described in subsection 9.2 of the Credit
Agreement incurred by Agent and its counsel with respect to this Amendment and
the documents and transactions contemplated hereby shall be for the account of
the Borrower and CapStar.
C. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING
WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF
NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This
12
<PAGE>
Amendment (other than the provisions of Section 1 hereof, the effectiveness of
which is governed by Section 2 hereof) shall become effective upon the execution
of a counterpart hereof by the Borrower, CapStar, each Subsidiary Guarantor and
Agent and receipt by the Agent of written or telephonic notification of such
execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
CAPSTAR MANAGEMENT COMPANY, L.P.
By: CAPSTAR HOTEL COMPANY, its
general partner
By: /s/ WILLIAM M. KARNES
------------------------------------
Title:
------------------------------
CAPSTAR HOTEL COMPANY
By: /s/ WILLIAM M. KARNES
------------------------------------
Title:
------------------------------
CAPSTAR HOTEL COMPANY, in its respective capacities
on behalf of the entities listed on Annex A-1
hereto (for purposes of Section 4 only), as a
Credit Support Party
By: /s/ WILLIAM M. KARNES
------------------------------------
Title:
------------------------------
S-1
<PAGE>
EQUISTAR ACQUISITION
CORPORATION, on its own behalf
and in its respective capacities on
behalf of the entities listed on
Annex A-2 hereto (for purposes
of Section 4 only) as a Credit
Support Party
By: /s/ WILLIAM M. KARNES
-------------------------------------
Title:
------------------------------
EQUISTAR SCHAUMBURG BEVERAGE
CORPORATION (for purposes of Section 4
only), as a Credit Support Party
By: /s/ WILLIAM M. KARNES
-------------------------------------
Title:
------------------------------
EQUISTAR TEXAS BEVERAGE
CORPORATION (for purposes of Section 4
only), as a Credit Support Party
By: /s/ ROBERT GANSFUSS
-------------------------------------
Title: President
------------------------------
CMC AIRPORT, INC. (for purposes of
Section 4 only), as a Credit Support Party
By: /s/ WILLIAM M. KARNES
-------------------------------------
Title:
------------------------------
S-2
<PAGE>
BANKERS TRUST COMPANY, as Agent
By: /s/ GARRETT W. THELANDER
-------------------------------------
Title: Vice President
------------------------------
S-3
<PAGE>
PAUL, WEISS, RIFKIND WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
February 26, 1997
CapStar Hotel Company
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
CapStar Hotel Company
Registration Statement on Form S-1
REGISTRATION NO. 333-22073
Ladies and Gentlemen:
In connection with the above-captioned Registration Statement, dated
February 20, 1997, as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations promulgated thereunder (the
"Rules"), we have been requested by CapStar Hotel Company (the "Company"), to
furnish our opinion as to the legality of 5,750,000 shares (the "Shares")
offered by the Company (including up to 750,000 shares issuable by the
Company upon exercise of the Underwriters' over-allotment option) of the
Company's Common Stock, par value $.01 per share ("Common Stock"),
registered for sale thereunder.
In connection with the furnishing of this opinion, we have reviewed
the Registration Statement (including all amendments thereto), the form of the
Underwriting Agreement included as Exhibit 1 to the Registration Statement (the
<PAGE>
CapStar Hotel Company 2
"Underwriting Agreement"), originals, or copies certified or otherwise
identified to our satisfaction, of the Company's Amended and Restated
Certificate of Incorporation and By-laws, each as in effect on the date hereof,
and records of certain of the Company's corporate proceedings. We have also
examined and relied upon representations as to factual matters contained in
certificates of officers of the Company, and have made such other investigations
of fact and law and have examined and relied upon the originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
records, certificates or other instruments, and upon such factual information
otherwise supplied to us, as in our judgment are necessary or appropriate to
render the opinion expressed below. In addition, we have assumed, without
independent investigation, the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity of original
documents to all documents submitted to us as certified, photostatic, reproduced
or conformed copies, the authenticity of all such latter documents and the legal
capacity of all individuals who have executed any of the documents.
Based upon the foregoing, we are of the opinion that the Shares, when
issued, delivered and paid for as contemplated in the Registration Statement and
the Underwriting Agreement, will be duly authorized, validly issued, fully paid
and nonassessable.
<PAGE>
CapStar Hotel Company 3
Our opinion expressed above is limited to the General Corporation Law
of the State of Delaware. Please be advised that no member of this firm is
admitted to practice in the State of Delaware. Our opinion is rendered only
with respect to the laws, and the rules, regulations and orders thereunder,
which are currently in effect.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" contained in the Prospectus included in the Registration Statement. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required by the Act or the Rules.
Very truly yours,
/s/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
Exhibit 10.2
ACQUISITION AGREEMENT
This Acquisition Agreement (the "Agreement") dated as of February
13, 1997, is made by and among Brookriver Hotel Partnership, L.P., a Texas
limited partnership ("BROOKRIVER"), Mockingbird Hotel Properties Joint Venture,
a Texas general partnership ("MOCKINGBIRD"), GQ Indianapolis Hospitality, Ltd.,
a Texas limited partnership ("GQ"), 361719 Alberta Limited, an Alberta
corporation ("CALGARY"), Centennial Hotel Ltd., a British Columbia corporation
("SURREY") (each of the foregoing parties, a "TRANSFEROR", and collectively, the
"TRANSFERORS"), Highgate Hotels, Inc., a Texas corporation ("HIGHGATE"), KFP
Dunwoody, Inc., a Texas corporation ("DUNWOODY"), Pontch Limited Partnership, a
Delaware limited partnership ("PONTCH"), CapStar Management Company, L.P., a
Delaware limited partnership ("CAPSTAR"), and CapStar Hotel Company, a Delaware
corporation ("CAPSTAR CORP.").
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For the purposes of this Agreement, the
following terms shall have the meanings indicated:
(a) "BROOKRIVER" shall mean Brookriver Hotel Partnership, L.P., a
Texas limited partnership.
(b) "BROOKRIVER CONTRIBUTION AGREEMENT" shall mean that certain
Contribution Agreement dated of even date herewith pursuant to which Brookriver
agrees to contribute in part, and to sell in part, the Holiday Select to
CapStar, and CapStar agrees to acquire the Holiday Select on the terms and
subject to the conditions set forth in such contribution agreement.
(c) "CALGARY" shall mean 361719 Alberta Limited, an Alberta
corporation.
(d) "CALGARY CONTRIBUTION AGREEMENT" shall mean that certain
Contribution Agreement dated of even date herewith pursuant to which Calgary
agrees to contribute in part, and to sell in part, the Holiday Airport to
CapStar, and CapStar agrees to acquire the Holiday Airport on the terms and
subject to the conditions set forth in such contribution agreement.
(e) "CAPSTAR" shall mean CapStar Management Company, L.P., a
Delaware limited partnership.
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2
(f) "CAPSTAR CORP." shall mean CapStar Hotel Company, a
Delaware corporation.
(g) "CLOSING" shall mean a meeting at which the actions shall take
place and the executed agreements, documents and instruments shall be exchanged
as necessary to consummate the transaction contemplated by this Agreement and
the Contribution Agreements.
(h) "COMMON STOCK" shall mean the common stock, $0.01 par value, of
CapStar Corp.
(i) "CONTRIBUTION AGREEMENTS" shall mean the Brookriver
Contribution Agreement, the Calgary Contribution Agreement, the GQ Contribution
Agreement, the Mockingbird Contribution Agreement, the Surrey Contribution
Agreement, and the Vancouver Contribution Agreement.
(j) "DOUBLETREE" shall mean the 137 room hotel owned by GQ located
in Indianapolis, Indiana.
(k) "DUNWOODY" shall mean KFP Dunwoody, Inc., a Texas
corporation.
(l) "FIRST AMENDMENT" shall mean the First Amendment to Amended and
Restated Agreement of Limited Partnership of CapStar Management Company, L.P.,
which amendment shall be in the form of Exhibit "A".
(m) "FOUR POINTS" shall mean the 400 room hotel owned by KFP
Dunwoody, Inc. located in Dunwoody, Georgia.
(n) "FOUR POINTS MANAGEMENT AGREEMENT" shall mean the agreement
pursuant to which CapStar will manage the operations of Four Points, which
agreement shall be in the form of Exhibit "B".
(o) "GQ" shall mean GQ Indianapolis Hospitality, Ltd., a Texas
limited partnership.
(p) "GQ CONTRIBUTION AGREEMENT" shall mean that certain Contribution
Agreement dated of even date herewith pursuant to which GQ agrees to contribute
in part, and to sell in part, the Doubletree to CapStar, and CapStar agrees to
acquire the Doubletree on the terms and subject to the conditions set forth in
such contribution agreement.
(q) "HIGHGATE" shall mean Highgate Hotels Inc., a Delaware
corporation, and its successors.
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3
(r) "HOLIDAY SELECT" shall mean the 348 room hotel owned by
Brookriver located in Dallas, Texas.
(s) "HOLIDAY AIRPORT" shall mean the 170 room hotel owned by Calgary
located in Calgary, Alberta.
(t) "MOCKINGBIRD" shall mean Mockingbird Hotel Properties Joint
Venture, a Texas general partnership.
(u) "MOCKINGBIRD CONTRIBUTION AGREEMENT" shall mean that certain
Contribution Agreement dated of even date herewith pursuant to which Mockingbird
agrees to contribute in part, and to sell in part, the Radisson to CapStar, and
CapStar agrees to acquire the Radisson on the terms and subject to the
conditions set forth in such contribution agreement.
(v) "PARTNERSHIP AGREEMENT" shall mean the Amended and Restated
Partnership Agreement of CapStar Management Company, L.P., dated as of August
23, 1996.
(w) "PARTNERSHIP UNIT" shall mean a Partnership Unit, as that term
will be defined in the Partnership Agreement as it is to be amended by the First
Amendment (other than a Preferred Unit).
(x) "PONTCH" shall mean Pontch Limited Partnership, a Delaware
limited partnership.
(y) "PONTCHARTRAIN" shall mean the 400 room hotel owned by Pontch
located in Detroit, Michigan.
(z) "PONTCHARTRAIN MANAGEMENT AGREEMENT" shall mean the agreement
pursuant to which CapStar shall manage the operations of Pontchartrain, which
agreement shall be in the form of Exhibit "C".
(aa) "PREFERRED UNIT" shall mean a Preferred Unit, as that term will
be defined in the Partnership Agreement as it is to be amended by the First
Amendment.
(bb) "PROPERTIES" shall mean the Doubletree, Holiday Select,
Holiday Airport, Radisson, Ramada, and Sheraton.
(cc) "RADISSON" shall mean the 305 room hotel owned by Mockingbird
located in Dallas, Texas.
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4
(dd) "RAMADA" shall mean the 118 room hotel owned by Surrey located
in Surrey, British Columbia.
(ee) "SHERATON" shall mean Continental Pacific Interfund, Ltd., a
British Columbia corporation.
(ff) "SURREY" shall mean Continental Pacific Interfund, Ltd., a
British Columbia corporation.
(gg) "SURREY CONTRIBUTION AGREEMENT" shall mean that certain
Contribution Agreement dated of even date herewith pursuant to which Surrey
agrees to contributed in part, and to sell in part, the Sheraton to CapStar, and
CapStar agrees to acquire the Sheraton o the terms and subject to the conditions
set forth in such contribution agreement.
(hh) VANCOUVER shall mean Centennial Hotel Ltd., a British Columbia
corporation.
(ii) VANCOUVER CONTRIBUTION AGREEMENT shall mean that certain
Contribution Agreement dated of even date herewith pursuant to which Vancouver
agrees to contribute in part, and to sell in part, the Ramada to CapStar, and
CapStar agrees to acquire the Ramada on the terms and subject to the conditions
set forth in such contribution agreement.
ARTICLE II
AGREEMENTS
2.1 TRANSFER OF THE PROPERTIES. At the Closing:
(a) each Transferor will convey to CapStar or its designee, on the
terms and subject to the conditions contained in the
Contribution Agreement to which such Transferor is a party,
the Property which is the subject of such Contribution
Agreement;
(b) Dunwoody will execute and deliver to CapStar the Four Points
management Agreement; and
(c) Pontch will execute and delivery to CapStar the Pontch
Management Agreement.
It is understood and agreed by Dunwoody and CapStar that at or prior to the
Closing, Dunwoody will cause the existing management agreement relating to the
management of the Four Points to be terminated. It is understood and agreed by
Pontch and
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5
CapStar that at or prior to the Closing, Pontch will cause the existing
management agreement relating to the management of the Pontchartrain to be
terminated.
Notwithstanding the provisions of clause (a) of this Section 2.1, if
one or more of Calgary, Surrey, and Vancouver (collectively, the "Canadian
Companies") determines that the prospective economic return of the parties would
be enhanced if CapStar were to acquire all of the outstanding shares of the
capital stock of Calgary, Surrey and/or Vancouver rather than acquiring the
Properties owned by such Transferors directly, CapStar and each of the Canadian
Companies seeking to restructure this Agreement (the "Subject Company") will
negotiate in good faith to modify this Agreement as to such Subject Company to
provide that as a part of CapStar's acquisition of the Property owned by such
Subject Company, CapStar will acquire from the stockholders of such Company all
of the outstanding capital stock of such Subject Company, free and clear of all
liens, claims and encumbrances, on the basis of the following principles:
(i) Neither (a) the consideration to be received by the Transferors
pursuant to Section 2.2 nor (b) CapStar's Canadian tax position shall be
affected by the restructuring of any transaction as to any Subject
Company;
(ii) The Subject Company will have no liabilities or obligations
outstanding as of the Closing Date, other than liabilities and obligations
that would be Permitted Encumbrances (as defined in the Contribution
Agreement to which the Subject Company is a party);
(iii) CapStar will be indemnified by parties reasonably acceptable
to CapStar for any loss, cost or expense that CapStar incurs in connection
with its acquisition and ownership of the capital stock the Subject
Company as a result of any condition existing immediately prior to the
Closing or any event that has occurred prior to the Closing, other than
liabilities and obligations that would be Permitted Encumbrances (as
defined in the Contribution Agreement to which the Subject Company is a
party); and
(iv) The terms and conditions of this Agreement and the Contribution
Agreement to which the Subject Company is a party will be modified as
necessary to provide for and reflect the restructuring of the transaction
as the Subject Company.
2.2 DELIVERY OF CONSIDERATION. In consideration for the transfer of
the Properties as described in the Contribution Agreements, the execution and
delivery of the Four Points Management Agreement and the Pontch Management
Agreement, CapStar agrees:
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6
(a) to pay to the Transferors, the existing manager of the Four
Points, and the existing manager of the Pontchartrain cash in the
aggregate amount of $68,000,000.00; and
(b) issue to the Transferors or their respective designees
809,523.81 Partnership Units and 392,156.86 Preferred Units.
The cash payable to the Transferors, the existing manager of the Four Points,
and the existing manager of the Pontchartrain as set forth in clause (a) of this
Section 2.2 be paid in United States dollars in immediately available funds and
shall be paid by wire transfer to such accounts as the parties to be paid such
cash shall direct CapStar in writing. To the extent that any Property is not
transferred to CapStar or its designee in accordance with the Contribution
Agreement relating thereto and the remainder of the transactions contemplated
hereby and by the remaining Contribution Agreements are consummated, the number
of Partnership Units and the Preferred Units and the amount of cash to be issued
and paid by CapStar hereunder to the Transferors, the existing manager of the
Four Points, and the existing manager of the Pontchartrain shall be reduced by
the amounts to be mutually agreed by CapStar and those Transferors who do
transfer Properties to CapStar, which amounts shall be negotiated by such
parties in good faith.
2.3 ADDITIONAL CONSIDERATION. In connection with the acquisition
of the Properties by CapStar and the issuance of the Partnership Units and the
Preferred Units to the various Transferors, CapStar and CapStar Corp. also agree
as follows:
(a) CapStar and CapStar Corp. agree that prior to the Closing, the
Partnership Agreement shall be amended, and CapStar Corp. agrees to cause
the Partnership Agreement to be amended, by the adoption, execution and
delivery by all of the parties in CapStar of the First Amendment.
(b) CapStar Corp. agrees to grant to each Transferor receiving
Partnership Units and Preferred Units or its designee certain registration
rights and enter into a registration rights agreement with each Transferor
or its designee setting forth the terms and conditions of such
registration rights, which registration rights agreement shall be in the
form of Exhibit "D" (the "REGISTRATION RIGHTS AGREEMENT").
(c) CapStar Corp. agrees that in connection with the annual
election of directors of CapStar at the annual meeting CapStar Corp. that
CapStar Corp. shall:
(1) as long as the parties acquiring the Partnership Units and
Preferred Units in accordance with this Agreement (the "Holders")
continue to hold in the aggregate a number of Partnership Units,
Preferred Units and shares of Common Stock equal to at least 50% of
<PAGE>
7
the aggregate number of Partnership Units and the Preferred Units
issued in accordance with this Agreement, which calculation shall be
made as appropriate to take into account any conversions,
reclassifications, reorganizations, in-kinds dividends, splits, and
reverse splits that may occur with respect to the Partnership Units,
Preferred Units and/or shares of Common Stock after the issuance of
the Partnership Units and Preferred Units hereunder, CapStar Corp.
shall nominate for election as a directors as a part of the
management slate, a person designated by Highgate and shall nominate
for appointment as an advisory, non-voting director of CapStar Corp.
a second person;
(2) as long as the Holders to hold in the aggregate a number of
Partnership Units, Preferred Units and shares of Common Stock equal
to less than 50%, but equal to at least 20% of the aggregate number
of Partnership Units and the Preferred Units issued in accordance
with this Agreement, which calculation shall be made as appropriate
to take into account any conversions, reclassifications,
reorganizations, in-kind dividends, splits, and reverse splits that
may occur with respect to the Partnership Units, Preferred Units
and/or shares of Common Stock after the issuance of the Partnership
Units and Preferred Units hereunder, CapStar Corp. shall nominate
for election as a director as a part of the management slate, one
person designated by Highgate;
(3) provide the same type of support for the election of the
Highgate designee as a director as CapStar Corp., its affiliates and
its management provides to the other persons standing for election
as directors of CapStar Corp. as a part of the management slate; and
(4) if the Board of Directors of CapStar may, consistent with its
certificate of incorporation and its by-laws as in effect on the
date of the Closing, applicable law and the terms of CapStar Corp.'s
listing agreement with, and the rules for listed companies of, the
New York Stock Exchange, elect an additional director of CapStar
Corp. by a vote of the existing directors, CapStar Corp. agrees to
use its best efforts to cause its existing directors to elect the
designee of Highgate as an advisory director of CapStar Corp.
promptly after the Closing. If the board of directors of CapStar
Corp. cannot elect a director by its vote, a second designee of
Highgate will be appointed an advisory director of CapStar Corp. to
serve in such position until the next annual meeting of the
stockholders of CapStar Corp.
Highgate agrees to designate a nominee for election as a director of CapStar
Corp. and a person to be appointed as an advisory director for so long as it
shall be entitled to have a designee nominated for election pursuant to this
Section 2.3. Highgate shall designate its nominees for election as directors and
appointment as advisory directors
<PAGE>
8
of CapStar Corp. by giving written notice of its designation to the Chief
Executive Officer of CapStar Corp. (x) by the Closing Date as to the person to
be elected as a director and the person to be appointed as an advisory director
by the existing directors of CapStar and (y) by no later than February 15 of
each year as to the other elections of directors of CapStar Corp. Such designee
shall be one or more of the following persons: Mahmood Khimji, Mehdi Khimji, and
any of the persons who are from time to time executive officers of Highgate or
any of its affiliates. CapStar Carp. agrees for the benefit of each person who
is a designee of Highgate and is elected as a director of CapStar Corp. and each
person who is a designee of Highgate and who is appointed as an advisory
director of CapStar Corp. to pay each such person the compensation and to
provide each such person with all benefits provided to the directors of CapStar
Corp. who are not employees of CapStar Corp. or its affiliates.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
3.1 REPRESENTATIONS AND WARRANTIES OF CAPSTAR. CapStar represents
and warrants to each of the Transferors as follows:
(a) CapStar Corp. is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware, with all
requisite partnership and other power and authority required to enter into,
execute, and deliver this Agreement and each other agreement, instrument and
other documents to be entered into, executed and delivered pursuant hereto, and
to perform its obligation under this Agreement and under any agreement,
instrument and other documentation entered into, executed, and delivered
pursuant hereto.
(b) The execution and delivery of this Agreement and the other
agreements, documents, and other instruments to be executed and delivered by
CapStar under this Agreement, and the consummation by CapStar of the
transactions contemplated by this Agreement and that will be contemplated by
such other agreements, documents, and other instruments, have been duly
authorized by all necessary and appropriate partnership and other action of
CapStar.
(c) No consent, approval, or authorization of, or any filing with,
any person, entity, or governmental authority is required to be obtained or made
with respect to the execution and delivery by CapStar of this Agreement, the
consummation by CapStar of its obligations under this Agreement, or under any
other agreement, instrument, or other document entered into, executed, and
delivered pursuant hereto except for such consents, approvals, or
authorizations, as shall be obtained, or filings which shall have been made, by
CapStar prior to Closing.
<PAGE>
9
(d) There is no claim, action, litigation, suit, arbitration or
other proceeding pending or, to the knowledge of CapStar, threatened against or
affecting CapStar, at law or in equity, or before or by any federal, state,
municipal or other department, commission, board, bureau, agency or
instrumentality that, if determined adversely to CapStar, would have a
materially adverse effect on the business, assets, properties, operations or
prospects or on the condition, financial or otherwise, of CapStar.
(e) The execution and delivery by CapStar of this Agreement and of
each agreement, document, and instrument to be executed and delivered by CapStar
pursuant to this Agreement, and the consummation of the transactions
contemplated hereby and thereby do not and will not (i) conflict with or violate
the Partnership Agreement as in effect on the date of this Agreement or as the
Partnership Agreement will be amended by the First Amendment, (ii) subject to
the conflict with or violate any laws, rules, or regulations applicable to
CapStar, (iii) subject to the obtaining of the consent, approvals, and
authorizations to be obtained as contemplated by clause (c) of this Section 3.1,
violate, result in any material breach of, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or give
to others rights of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any of the properties or
assets of CapStar, pursuant to the Partnership Agreement, as in effect on the
date of this Agreement or as the Partnership Agreement will be amended by the
First Amendment or any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit franchise or other instrument or obligation of
CapStar, to which CapStar is a party or by or to which CapStar or its assets are
bound or are subject, or (iv) cause CapStar to violate any judgment, order, or
decree of any governmental authority by which CapStar or any of its assets is
bound.
(f) This Agreement and the Contribution Agreements constitute the
legal, valid, and binding agreements of CapStar, enforceable against CapStar in
accordance with their respective terms. Upon their execution and delivery, all
other agreements, documents, and instruments to be executed and delivered by
CapStar under this Agreement will constitute the legal, valid and binding
agreements of CapStar, enforceable against CapStar in accordance with their
respective terms.
(g) Except as set forth in CapStar Corp.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, filed with the Securities and
Exchange Commission (the "10-Q"), the information relating to CapStar contained
in CapStar Corp.'s Prospectus dated as of August 20, 1996, relating to the offer
and sale of 9,250,000 shares of the common stock, $0.01 par value, of CapStar
Corp. and each post-effective amendment thereto (the "Prospectus") and the
information contained therein based on information relating to CapStar did not
contain any misstatement 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 as of the
date of such prospectus.
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10
(h) The information relating to CapStar contained in the 10-Q and
the information contained therein based on information relating to CapStar did
not contain any misstatement 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 as of the
date of the 10- Q.
(i) Since the date of the 10-Q, there has been no material adverse
change in the business, assets, properties, operations or prospects of the
condition, financial or otherwise, of CapStar.
(j) Upon the issuance of the Partnership Units and the Preferred
Units as contemplated by this Agreement and the Contribution Agreements, each of
the Transferors will be a limited partner in CapStar, shall have the rights of a
limited partner holding the Partnership Units and Preferred Units as set forth
in the Partnership Agreement, as it is to be amended by the First Amendment,
shall not be subject to any liabilities of CapStar, except to the extent of the
capital contributed to CapStar by such Transferor, and shall not have any
further obligation to contribute any capital to CapStar, except as may be
required by the Delaware Revised Uniform Limited Partnership Act as in effect
from time to time.
3.2 REPRESENTATIONS AND WARRANTIES OF CAPSTAR CORP. CapStar
Corp. represents and warrants to each of the Transferors as follows:
(a) CapStar is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, with all requisite
corporation and other power and authority required to enter into this Agreement
and other agreements, documents and instruments it is to enter into, execute and
deliver pursuant to this Agreement and to perform its obligation under this
Agreement and under any agreement, instrument and other document entered into,
executed, and delivered pursuant hereto.
(b) The execution and delivery of this Agreement and the other
agreements, documents, and other instruments to be executed and delivered by
CapStar Corp. under this Agreement, and the consummation by CapStar Corp. of the
transactions contemplated by this Agreement and that will be contemplated by
such other agreements, documents, and other instruments, have been duly
authorized by all necessary and appropriate partnership and other action of
CapStar Corp.
(c) No consent, approval, or authorization of, or any filing with,
any person, entity, or governmental authority is required to be obtained or made
with respect to the execution and delivery by CapStar Corp., the consummation by
CapStar Corp. of the transactions contemplated thereby, or the performance by
CapStar Corp. of its obligations under, this Agreement, or under any other
agreement, instrument, or other document entered into, executed, and delivered
pursuant hereto except for such
<PAGE>
11
consents, approvals, or authorizations, as shall be obtained, or filings which
shall have been made, by CapStar Corp. prior to Closing.
(d) There is no claim, action, litigation, suit, arbitration or
other proceeding pending or, to the knowledge of CapStar Corp., threatened
against or affecting CapStar Corp., at law or in equity, or before or by any
federal, state, municipal or other department, commission, board, bureau, agency
or instrumentality that, if determined adversely to CapStar Corp., would have a
materially adverse effect on the business, assets, properties, operations or
prospects or on the condition, financial or otherwise, of CapStar Corp.
(e) The execution and delivery by CapStar Corp. of this Agreement
and of each agreement, documents and instrument to be executed and delivered by
CapStar Corp. pursuant to this Agreement, and the consummation of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or violate the certificate of incorporation or bylaws of CapStar Corp. as
in effect on the date of this Agreement, (ii) subject to the conflict with or
violate any laws, rules, or regulations applicable to CapStar Corp., (iii)
subject to the obtaining of the consent, approvals, and authorizations to be
obtained as contemplated by clause (c) of this Section 3.2, violate, result in
any material breach of, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of CapStar
Corp., pursuant to the certificate of incorporation or bylaws of CapStar Corp.,
or any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit franchise or other instrument or obligation of CapStar Corp., to
which CapStar Corp. is a party or by or to which CapStar Corp. or its assets are
bound or are subject, or (iv) cause CapStar Corp. to violate any judgment,
order, or decree of any governmental authority by which CapStar Corp. or any of
its assets is bound or is subject.
(f) This Agreement constitutes the legal, valid, and binding
agreements of CapStar Corp., enforceable against CapStar Corp. in accordance
with its terms. Upon their execution and delivery, all other agreements,
documents, and instruments to be executed and delivered by CapStar Corp. under
this Agreement will constitute the legal, valid and binding agreements of
CapStar Corp., enforceable against CapStar Corp. in accordance with their
respective terms.
(g) CapStar Corp. has previously provided the Transferors with a
copy of the Prospectus. Except as set forth in the 10-Q, the Prospectus, at the
time it became effective, complied in all material respects with the provisions
of the Securities Act of 1933, as amended, and the rules and regulations of the
Securities and Exchange Commission thereunder as then in effect, did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated
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12
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(h) CapStar Corp. has previously provided the Transferors with a
copy of the 10-Q. The information contained in the 10-Q did not contain any
misstatement 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 as of the date of the
10-Q.
(i) Since the date of the 10-Q, there has been no material adverse
change in the business, assets, properties, operations or prospects of the
condition, financial or otherwise, of CapStar Corp.
(j) Upon the exchange of the Partnership Units or the Preferred
Units for shares of Common Stock upon redemption of the Partnership Units and/or
the Preferred Units as contemplated in the Partnership Agreement, as it is to be
amended by the First Amendment, (1) each person redeeming Partnership Units
and/or Preferred Units will receive good and indefeasible title to that number
of shares of Common Stock issuable as provided in the Partnership Agreement, as
it is to be amended by the First Amendment and (2) the shares of Common Stock so
issued to such person will be validly issued, fully paid, and non-assessable
shares of the Common Stock, not issued in violation of any preemptive or other
rights of any other stockholder or security holder of CapStar Corp. or any other
person, free of any restrictions and encumbrances, except for restrictions on
transferability as imposed on such shares of Common Stock by applicable
securities laws, and not subject to any agreement or understandings among any
persons with respect to the voting or transfer of such shares of Common Stock
except as the Transferors may enter into or become parties.
(k) CapStar Corp. will reserve and have available authorized, but
unissued shares of Common Stock or shares of Common Stock in its treasury as
necessary for CapStar to redeem the Partnership Units and the Preferred Units
upon the exercise of the rights to exchange the Partnership Units and the
Preferred Units for shares of Common Stock in accordance with the terms of the
Partnership Agreement as it is to be amended by the First Amendment.
3.3 REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS, DUNWOODY AND
PONTCH. Each of the Transferors, Dunwoody, and Pontch, severally, but not
jointly, represents and warrants as follows:
(a) It is duly organized, validly existing and in good standing and,
as applicable, in good standing under the laws of the jurisdiction of domicile,
with all requisite corporate partnership power, as the case may be, and other
power and authority required to enter into, execute, and deliver this Agreement
and each other agreement, instrument and other documents to be entered into,
executed, and
<PAGE>
13
delivered pursuant hereto, as to perform its obligations under this Agreement
and under any agreement, instrument and other document entered into, executed,
and delivered pursuant hereto.
(b) Its execution and delivery of this Agreement and the other
agreements, documents, and other instruments to be executed and delivered by it
under this Agreement, and its consummation of the transactions contemplated by
this Agreement and that will be contemplated by such other agreements,
documents, and other instruments, have been duly authorized by all necessary and
appropriate corporate or partnership action, as the case may be, and all other
action necessary for it to take.
(c) No consent, approval, or authorization of, or any filing with,
any person, entity, or governmental authority is required to be obtained or made
with respect to its execution and delivery of this Agreement, its consummation
of the transactions contemplated by, or its performance of its obligations under
this Agreement, or under any other agreement, instrument, or other document
entered into, executed, and delivered by it pursuant hereto except for such
consents, approvals, or authorizations, as shall be obtained, or filings which
shall have been made, by it to Closing.
(d) There is no claim, action, litigation, suit, arbitration or
other proceeding pending or, to its knowledge, threatened against or affecting
it, at law or in equity, or before or by any federal, state, municipal or other
department, commission, commission, board, bureau, agency or instrumentality
that, if determined adversely to it, would have a materially adverse effect on
the business, assets, properties, operations or prospects or on the condition,
financial or otherwise.
(e) Its execution and delivery of this Agreement and of each
agreement, documents and instrument to be executed and delivered by it pursuant
to this Agreement, and the consummation of the transactions contemplated hereby
and thereby do not and will not (i) conflict with or violate its organizational
documents as in effect on the date of this Agreement, (ii) conflict with or
violate any laws, rules or regulations applicable to it, (iii) subject to the
obtaining of the consent, approvals, and authorizations contemplated to be
obtained pursuant to clause (c) of this Section 3.3, violate, result in any
material breach of, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets, pursuant
to its organizational documents or any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit franchise or other instrument or
obligation to which it is a party or by or to which it or its assets are bound
or are subject, or (iv) cause it to violate any judgment, order, or decree of
any governmental authority by which it or any of its assets is bound.
<PAGE>
14
(f) This Agreement and any Contribution Agreement to which it is a
party constitutes its legal, valid, and binding agreements, enforceable against
it in accordance with their respective terms. Upon their execution and delivery,
all other agreements, documents, and instruments to be executed and delivered by
it under this Agreement will constitute its legal, valid and binding agreements,
enforceable against CapStar Corp. in accordance with their respective terms.
3.4 REPRESENTATION OF EACH TRANSFEROR. Each Transferor hereby
represents to CapStar and CapStar Corp. that each person exercising the
authority to cause the representatives of such Transferor to execute and deliver
this Agreement for and on behalf of the Transferor is an "accredited investor"
as that term is defined in Rule 501 of the Securities and Exchange Commission
promulgated under the Securities Act of 1933, as amended.
3.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and Warranties of each of the parties set forth in this Article III shall
service the Closing and the execution and delivery of any document or instrument
delivered pursuant to this Agreement or any Contribution Agreement.
ARTICLE IV
CONDITIONS TO CLOSING
4.1 CONDITIONS PRECEDENT TO CAPSTAR'S AND CAPSTAR CORP.'S
OBLIGATIONS.
(a) The obligation of CapStar to consummate the transactions
contemplated by this Agreement and the obligations of CapStar and CapStar Corp.
to perform their respective obligations under this Agreement are subject to the
satisfaction or waiver of the following conditions as of the Closing Date:
(i) CapStar or the respective Transferor shall not have
terminated the Brookriver Contribution Agreement, the Mockingbird
Contribution Agreement or the Surrey Contribution Agreement pursuant to a
termination right granted in such Contribution Agreement.
(ii) Each of Brookriver, Mockingbird, and Surrey shall have
delivered all of the items required to be delivered in connection with
such Transferors by them as described in Section 5.2(a) of this Agreement.
(iii) Each of the representations and warranties of each of
Brookriver, Mockingbird, and Surrey set forth in Section 4.3 hereof shall
be true, complete, and correct as of the Closing, and each of Brookriver,
<PAGE>
15
Mockingbird, and Surrey shall have provided CapStar and CapStar Corp. a
certificate certifying that such is the case.
(iv) The conditions to the obligation of CapStar to consummate
the transactions contemplated by the Brookriver Contribution Agreement,
the Mockingbird Contribution Agreement and the Surrey Contribution
Agreement as set forth therein shall have been satisfied or waived
by CapStar.
(v) CapStar and CapStar Corp. shall have made all necessary
filings with any governmental authority necessary to be made, and shall
have obtained all necessary governmental and other consents, approvals,
and authorizations required to be obtained, by CapStar and CapStar Corp.
in connection with the consummation of the transactions contemplated by
this Agreement with respect to Brookriver, Mockingbird, and Surrey and as
contemplated by the Brookriver Contribution Agreement, the Mockingbird
Contribution Agreement, and the Surrey Contribution Agreement.
If any of the foregoing conditions have not been satisfied or waived
by CapStar as of the Closing Date, then CapStar shall be entitled to terminate
this Agreement by giving each of the Transferors, Dunwoody, and Pontch written
notice that it is terminating this Agreement, and upon such termination CapStar
and CapStar Corp. shall have no further obligation hereunder. CapStar and
CapStar Corp. shall use their reasonably efforts to make the filings and to
obtain the consent, approvals, and authorizations referred to in clause (a)(v)
of this Section 4.1.
(b) The obligation of CapStar to consummate the transactions
contemplated by this Agreement with respect to a particular Property and the
Contribution Agreement relating thereto and the obligation of CapStar and
CapStar Corp. to perform their respective obligations under this Agreement to
the Transferor with respect to such Property and Contribution Agreement are
subject to the satisfaction or waiver of the following condition as of the
Closing Date:
(i) CapStar or such Transferor shall not have terminated such
Contribution Agreement pursuant to a termination right granted in such
Contribution Agreement.
(ii) Such Transferor shall have delivered all of the items are
to be delivered in connection with such Transferor as described in SECTION
5.2(A) of this Agreement.
(iii) Each of the representations and warranties of such
Transferor set forth in Section 4.3 hereof shall be true, complete, and
correct as of thee Closing, and such Transferor shall have provided
CapStar and CapStar Corp. a certificate certifying that such is the case.
<PAGE>
16
(iv) The conditions to the obligation of CapStar to consummate
the transactions contemplated by such Contribution Agreement as set forth
therein shall have been satisfied or waived by CapStar.
(v) CapStar and CapStar Corp. shall have made all necessary
filings with any governmental authority necessary to be made, and shall
have obtained all necessary governmental and other consents, approvals,
and authorizations required to be obtained, by CapStar and CapStar Corp.
in connection with the consummation of the transactions contemplated by
this Agreement with respect to such Contribution Agreement and such
Contribution Agreement.
If any of the foregoing conditions have not been satisfied or waived
by CapStar as of the Closing Date, then CapStar shall be entitled to terminate
this Agreement as to such Transferor, such Property and such Contribution
Agreement by giving such Transferor written notice that it is terminating this
Agreement as to such Transferor, its Property, and the Contribution Agreement to
which such Transferor is a party, and upon such termination CapStar and CapStar
Corp. shall have no further obligation hereunder to such Transferor. CapStar and
CapStar Corp. shall use their reasonable efforts to make the filings and to
obtain the consent, approvals, and authorizations referred to in clause (b)(v)
of this Section 4.1.
4.2 CONDITIONS PRECEDENT TO TRANSFERORS' OBLIGATIONS. The
obligations of each of the Transferors, Dunwoody, Pontch, and Highgate to
consummate the transactions contemplated by this Agreement to be consummated by
it and to perform its obligations under this Agreement are conditioned upon the
satisfaction of t he following conditions as of the Closing Date:
(a) CapStar or the respective Transferor shall not have terminated
the Brookriver Contribution Agreement, the Mockingbird Contribution Agreement
and the Surrey Contribution Agreement pursuant to a termination right granted in
such agreements;
(b) CapStar and CapStar Corp. shall have delivered all of the items
described in Section 5.2(b) of this Agreement.
(c) Each of the representations and warranties of CapStar set forth
in Section 4.1 hereof shall be true, complete, and correct as of the Closing,
and the General Partner shall have provided each Transferor, Dunwoody, Pontch,
and Highgate a certificate certifying that such is the case.
(d) Each of the representations and warranties of CapStar Corp.
set forth in Section 4.2 hereof shall be true, complete, and correct as of the
Closing, and CapStar Corp. shall have provided each Transferor, Dunwoody, and
Highgate a certificate certifying that such is the case.
<PAGE>
17
(e) Subject to Section 7.10, the Partnership Agreement shall not
have been amended, restated or modified prior to the Closing Date, and no class
or series of Partnership Units or Preferred Units shall have been established
and units thereof issued for less than fair value of such units prior to the
Closing Date.
(f) Each Transferor, Dunwoody, Pontch, and Highgate shall each have
made all necessary filings with any governmental authority necessary to be made
by it, and shall have obtained, by i tin connection with the consummation of the
transactions contemplated to be entered into by it by this Agreement, and as to
each Transferor, by the Contribution Agreement to which it is a party.
(g) Specifically as to the obligations of a Transferor with respect
to its obligations under this Agreement, the conditions to its obligation to
consummate the transactions contemplated by the Contribution Agreement to which
it is a party as set forth in such Contribution Agreement shall have been
satisfied or waived by such Transferor.
If any of the foregoing conditions have not been satisfied or waived
by a Transferor, Dunwoody, Pontch, or Highgate, as the case may be, as of the
Closing Date with respect to its obligations under this Agreement, and as to
each Transferor, the Contribution Agreement to which such Transferor is a party,
then such Transferor, Dunwoody, Pontch, or Highgate, as the case may be, shall
be entitled to terminate this Agreement as to itself by giving CapStar and
CapStar Corp. written notice that it is terminating this Agreement, and upon
such termination such Transferor, Dunwoody, Pontch, or Highgate, as the case may
be, shall have no further obligation hereunder to CapStar or CapStar Corp.
ARTICLE V
CLOSING
5.1 CLOSING DATE. The Closing shall be held at the offices of Hughes
& Luce, L.L.P., Dallas, Texas on April 14, 1997 or such other place and/or date
as Transferors and CapStar shall mutually agree (the "CLOSING DATE").
5.2 CLOSING DOCUMENTS.
(a) At Closing:
(i) Dunwoody will execute and deliver to CapStar the Four
Points Management Agreement;
(ii) Pontch will execute and deliver to CapStar the
Pontchartrain Management Agreement;
<PAGE>
18
(iii) Dunwoody will deliver to CapStar an appropriate
instrument executed by Dunwoody and the current manager of Pontchartrain
pursuant to which the existing management agreement for the Four Points is
terminated as of the Closing Date;
(iv) Pontch will deliver to CapStar an appropriate instrument
executed by Pontch and the current manager of Pontchartrain pursuant to
which the existing management agreement for the Pontchartrain is
terminated as of the Closing Date;
(v) Dunwoody and Pontch will deliver a letter agreement to
CapStar pursuant to which it will guarantee to CapStar the minimum base
management fee of $400,000 in the aggregate under both the Four Points
Management Agreement and the Pontchartrain Management Agreement combined
payable for the 12 months immediately following the Closing Date;
(vi) each Transferor will execute and deliver to CapStar all
agreements, instruments and documents that it is required by the
Contribution Agreement to which it is a party to execute and deliver to
CapStar;
(vii) each party to the Partnership Agreement and the First
Amendment, other than the partners in CapStar immediately prior to the
Closing, shall execute and deliver a counterpart signature page to the
First Amendment to CapStar;
(viii)each party to the Registration Rights Agreement, other
than CapStar Corp., will execute and deliver a counterpart of the
Registration Rights Agreement to CapStar Corp.;
(ix) each of the Transferors shall deliver to CapStar and
CapStar Corp. an executed certificate of the type contemplated by Section
4.1(c);
(x) each party who will become a partner in CapStar and hold
the Partnership Units and Preferred Units to be issued as provided in
Section 2.2 will deliver to CapStar an executed certificate in the form of
Exhibit "E"; and
(xi) Highgate will execute and deliver to CapStar a
counterpart of the development agreement in the form of Exhibit "F".
(b) At Closing, CapStar and CapStar Corp. shall deliver or cause to
be delivered to each of the Transferors, Dunwoody, Pontch, and Highgate, as
appropriate, the following:
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19
(i) the Pontchartrain Management Agreement, duly executed
by CapStar;
(ii) the Four Points Management Agreement, duly executed
by CapStar;
(iii) a true and complete copy of the Partnership Agreement;
(iv) the First Amendment, duly executed by CapStar Corp. as
the general partner of CapStar, and each other partner in CapStar;
(v) $68,000,000.00 of cash a provided in Section 2.2, which
amount of cash shall include the aggregate amount of all earnest money
delivered to the Transferors under the terms of the Contribution
Agreements;
(vi) a legal opinion of Paul, Weiss, Rifkind, Wharton &
Garrison or DeCampo, Diamond & Ash, counsel to CapStar and CapStar Corp.,
addressing such legal matters as are customary in similar transactions and
as the Transferors, Dunwoody, and/or Pontch may reasonably request;
(vii) a certified copy of such corporate or partnership
existence certificates, authorizations, approvals, officers' certificates
and incumbencies of CapStar as Transferors shall reasonably require;
(viii)an executed certificate of CapStar of the type
contemplated by Section 4.2(c);
(ix) an executed certificate of CapStar Corp. of the type
contemplated by Section 4.2(d); and
(x) CapStar will executed and deliver, or, if applicable,
cause its wholly-owned subsidiary which purchases the Ramada to execute
and deliver, to Highgate a counterpart of the development agreement in the
form of Exhibit "F", and, if such a subsidiary is the party to such
development agreement, a guaranty of CapStar guaranteeing to Highgate the
performance of the obligations of such subsidiary under such development
agreement, which guaranty shall be in form and substance reasonably
satisfactory to Highgate.
ARTICLE VI
REMEDIES
6.1 TRANSFERORS' REMEDIES. If CapStar or CapStar Corp. fails to
perform its obligations under this Agreement for any reason except (a) as a
result of
<PAGE>
20
any condition precedent to CapStar's and CapStar Corp.'s obligations under this
Agreement not being satisfied or (b) CapStar's or CapStar Corp.'s termination of
this Agreement in accordance with its terms, then the Transferors shall be
entitled, as their sole and exclusive remedy, to terminate this Agreement as to
one or more of the Contribution Agreements and to terminate such Contribution
Agreements as to which this Agreement is terminated by giving CapStar written
notice of such election prior to or at the Closing Date and the Title Company
shall deliver the earnest money under each of the Contribution Agreements as to
which this Agreement is terminated to the Transferors. Such amounts shall be
paid to the Transferors as liquidated damages and not as a penalty, in full
satisfaction of any claims against CapStar and CapStar Corp. Transferors,
CapStar and CapStar Corp. agree that Transferors' actual damages resulting from
CapStar's and/or CapStar Corp.'s default are difficult to ascertain and the
payment of the earnest money amounts to Transferors as described above is a fair
estimate of those damages.
6.2 CAPSTAR'S REMEDIES. If any the Transferors, Dunwoody, or Pontch
fails to perform its obligations under this Agreement for any reason except (x)
as a result of any condition precedent to such Transferor's obligations under
this Agreement not being satisfied or (y) such Transferor's termination of this
Agreement as to such Transferor in accordance with its terms, then CapStar's and
CapStar Corp.'s sole remedies shall be: (a) as to such Transferor, to terminate
this Agreement and the Contribution Agreement to which such Transferor is a
party by giving such Transferor written notice of such election prior to or at
Closing whereupon the Escrow Agent shall promptly return to CapStar the earnest
money with respect to under the Contribution Agreement of such Transferor; (b)
to waive the default and consummate the transactions with such party; or (c) to
enforce specific performance of the obligations of such party under this
Agreement. In the event, pursuant to the terms of this Agreement, CapStar is
entitled to enforce specific performance of a Transferor's obligations under
this Agreement, any lawsuit for specific performance mus be filed within two
years after the Closing Date or CapStar shall be deemed to have irrevocably
waived such remedy, this Agreement shall terminate and the parties shall have
any further rights or obligations hereunder except as expressly provided herein.
In order for CapStar to have the right to bring such lawsuit for specific
performance, CapStar mus send Transferors notice within 90 days after the
Closing Date that CapStar intends to pursue a claim for specific performance.
ARTICLE VII
MISCELLANEOUS
7.1 ENTIRE AGREEMENT. This Agreement, together with the
Contribution Agreements, contain the entire agreement of the parties hereto with
respect to the subject hereof. There are no other agreements, oral or written,
and this
<PAGE>
21
Agreement can be amended only by written agreement signed by the Transferors,
CapStar and CapStar Corp.
7.2 BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon the heirs, personal representatives, successors and assigns of
each of the parties to this Agreement. CapStar may assign its rights under this
Agreement without Transferor's consent to any partnership or limited liability
company in which CapStar or any entity controlling, controlled by or under
common control with CapStar is a managing partner, general partner, or limited
liability company or to any corporation in which CapStar or any entity
controlling, controlled by or under common control with CapStar owns 50% or more
of the voting stock.
7.3 NOTICES. Any notice, communication, request, reply or advice
(collectively, "NOTICE") provided for or permitted by this Agreement to be made
or accepted by either party must be in writing. Notice may, unless otherwise
provided herein, be given or served by hand delivery, by delivery by overnight
courier or by facsimile transmission. Notice by overnight courier shall be
effective one business day after deposit with the courier service. Notice given
by hand delivery or by facsimile transmission shall be effective on the business
date delivered. For the purposes of Notice, the addresses of the parties shall
be:
Transferors: Highgate Hotels, Inc.
545 E. John Carpenter Freeway, Suite 1400
Irving, Texas 75062
Fax No. (972) 444-9210
Attn: Mahmood Khimji
with a copy to: Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Fax No. (214) 939-6100
Attn: David Newsom
CapStar: CapStar Management Company, L.P.
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Fax No. (202) 965-4445
Attn: Paul W. Whetsell
with a copy to: DeCampo, Diamond & Ash
805 Third Avenue
New York, New York 10022
Fax No. (212) 758-1728
Attn: William H. Diamond, Esq.
<PAGE>
22
The parties shall have the right from time to time to change their respective
addresses for notice by at least five days' written notice to the other party.
7.4 GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of Delaware.
7.5 SECTION HEADINGS. The section headings contained in this
Agreement are for convenience only and shall in no way enlarge or limit the
scope or meaning of the various and several sections of this Agreement.
7.6 OBLIGATIONS. To the extent necessary to carry out the terms and
provisions of this Agreement, the terms, conditions, representations,
obligations, and rights set forth in this Agreement shall not be terminated at
the time of Closing, nor will they merge into the various documents executed and
delivered at the time of Closing.
7.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
7.8 CONFIDENTIALITY. Other than with respect to required
governmental disclosure, or with respect to customary financial reporting the in
the ordinary course of business, and except as otherwise required by law,
neither Transfers nor CapStar shall, without the prior written consent of the
other, disclose to any person or party (except the parties hereto, their
respective legal counsel, brokers, accountants, lenders or the title company
involved in such transaction) the existence of or economic terms of this
Agreement or of the contribution agreements or the identities of the parties
hereto or thereto. This covenant shall survive the termination of this
Agreement.
7.9 SEVERABILITY. If one or more of the provisions contained in this
Agreement or in any document delivered pursuant to this Agreement shall for any
reason, be held to be invalid, illegal, or unenforceable in any respect in any
jurisdiction, such provision shall be ineffective to the extent of such
invalidity, illegality, or unenforceability, and such invalidity, illegality, or
unenforceability of a provision shall not affect or render invalid, illegal or
unenforceable any other provision of this Agreement or any other such document
or affect or render invalid, illegal or unenforceable such provisions of this
Agreement or any other such document in any other jurisdiction.
7.10 POTENTIAL RESTRUCTURING. The Transferors understand that
CapStar Corp. may, in connection with its state and local tax planning, elect to
effect a restructuring of CapStar Corp. and its subsidiaries. Such restructuring
may include the establishment of a second operating partnership (the "New
Operating Partnership") and the transfer to the New Operating Partnership of
certain assets owned by CapStar.
<PAGE>
23
CapStar Corp. agrees that no restructuring that involves a New Operating
Partnership shall be effected prior to the Closing without the prior consent of
the Transferors, which consent shall not be withheld unless such restructuring,
or the modifications hereinafter referred to, would have a material adverse
effect on the Transferors (taking into account, among other relevant factors,
the state and local tax savings resulting from such restructuring). In the event
such restructuring is effected, the parties shall enter into such modifications
to this Agreement and the Contribution Agreements as shall be reasonably
necessary to reflect such restructuring (including, without limitation, if
requested by CapStar Corp., modifications pursuant to which one or more of the
hotels being contributed by the Transferors pursuant to the Contribution
Agreements are contributed to the New operating Partnership rather than
CapStar). CapStar Corp., CapStar, and the Transferors agree that no modification
made to this Agreement and/or any Contribution Agreement or to the terms and
conditions on which the transactions contemplated by this Agreement and the
Contribution Agreements are consummated made in connection with such
restructuring of CapStar Corp. and its subsidiaries will, when considered in the
context of all of the benefits of the restructuring to the holders of the
Partnership Units, the Preferred Units and shares of the Common Stock and the
adverse effects of the restructuring to such holders, result in any reduction or
lessening of any of the benefits to be provided to the Transferors or any of
their respective designees by this Agreement and the Contribution Agreements. If
such restructuring is not effected prior to the Closing, then, at CapStar's
election, the first Amendment shall be modified to impose on the partners of
CapStar the obligations to agree to, and to implement, such restructuring on
terms and conditions consistent with those hereinabove set forth.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
24
IN WITNESS WHEREOF, this Agreement has been duly executed in
multiple counterparts by the parties hereto on the date and year first above
written.
HIGHGATE HOTELS, INC.,
a Delaware Corporation
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
Authorized Signatory
BROOKRIVER HOTEL PARTNERSHIP, L.P.,
a Texas limited partnership
By: Brookriver Hotels, Inc.,
a Texas corporation,
General Partner
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
President
MOCKINGBIRD HOTEL PROPERTIES JOINT
VENTURE, a Texas joint venture
By: Mockingbird Hotel, Inc.,
a Texas corporation,
General Partner
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
President
<PAGE>
25
PONTCH LIMITED PARTNERSHIP,
a Delaware limited partnership
By: Pontch, Inc.,
a Delaware corporation,
General Partner
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
President
KFP DUNWOODY, INC.,
a Texas corporation
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
President
CONTINENTAL PACIFIC INTERFUND, LTD.,
a British Columbia corporation
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
President
GQ INDIANAPOLIS ASSOCIATES, LTD.,
a Texas limited partnership
By: GQ Indianapolis Hospitality, Inc.,
a Texas corporation,
General Partner
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
President
<PAGE>
26
CENTENNIAL HOTEL LIMITED,
a British Columbia corporation
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
Authorized Signatory
361719 ALBERTA LIMITED,
an Alberta corporation
By: /S/MAHMOOD KHIMJI
-----------------------------
Mahmood Khimji
Authorized Signatory
CAPSTAR:
CAPSTAR MANAGEMENT COMPANY, L.P.,
a Delaware limited partnership
By: CapStar Hotel Company,
a Delaware corporation,
General Partner
By: /S/JOHN E. PLUNKET
-----------------------------
John E. Plunket
Executive Vice President
CAPSTAR CORP.:
CAPSTAR HOTEL COMPANY,
a Delaware corporation
By: /S/JOHN E. PLUNKET
-----------------------------
John E. Plunket
Executive Vice President
Exhibit 10.8
CAPSTAR MANAGEMENT COMPANY, L.P.
First Amendment to Amended and
Restated Agreement of Limited Partnership
-----------------------------------------
THIS FIRST AMENDMENT ("Amendment") is entered into as of the _____
day of __________, 1997 by and among CapStar Hotel Company, a Delaware
corporation, as General Partner, and the Persons listed on Exhibit A annexed
hereto, as Limited Partners, for the purpose of amending that certain Amended
and Restated Agreement of Limited Partnership of CapStar Management Company,
L.P. (the "Partnership") dated as of August 23, 1996 (the "Existing Partnership
Agreement"). Capitalized terms used and not otherwise defined herein shall have
the respective meanings given such terms in the Existing Partnership Agreement.
W I T N E S S E T H :
1. The Persons designated as "Contributors" on Exhibit A annexed
hereto are this day making Capital Contributions to the Partnership, which
Capital Contributions are more particularly described in Exhibit A annexed
hereto.
2. The General Partner wishes, in connection with the making of such
Capital Contributions, to admit the Contributors as Additional Limited Partners.
3. The General Partner wishes, pursuant to Section 4.2 of the
Existing Partnership Agreement, to cause the Partnership to issue to the
Contributors Partnership Interests having the rights, preferences and other
privileges hereinafter described.
<PAGE>
2
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Amendments to Existing Partnership Agreement.
---------------------------------------------
1.1 The following changes are hereby made to the definitions set
forth in Article 1 of the Existing Partnership Agreement:
1.1.1 The words "or the Carrying Value of such property as
determined pursuant to Exhibit B hereof, as the case may be" shall be inserted
after the words "704(c) Value of such property" in the definition of "Carrying
Value".
1.1.2 The words "or a Limited Partner" are hereby inserted
after the words "General Partner" in clauses (i)(A) and (i)(B) of the definition
of "Indemnitee".
1.1.3 The language "representing a fractional part of the
Partnership Interests of all Partners," contained in the definition of "Limited
Partner Interest," is hereby deleted.
1.1.4 The first sentence of the definition of "Partnership
Unit" is hereby amended to read as follows:
"Partnership Unit" means (i) a fractional undivided share of the
Partnership Interests of all Partners (other than the Preferred Units);
and (ii) each Preferred Unit.
1.1.5 The following language is hereby inserted after the
words "Partnership Units," each time they appear, in the definition of
"Percentage Interest": "(other than Preferred Units)".
<PAGE>
3
1.1.6 The following definitions are hereby added to Article 1
of the Existing Partnership Agreement:
"Effective Tax Rate" means, for any year, the percentage determined
by the General Partner to be a reasonable estimate of the combined
effective rate of Federal, state and local income tax (giving effect to
the deduction of state and local income taxes, as applicable, for Federal
and state income tax purposes) that would be applicable to the Partnership
if it were a C corporation.
"Final Determination" means (i) a decision, judgment, decree or
other order by a court of original jurisdiction which has become final
(i.e., the time for filing an appeal shall have expired without any appeal
having been filed), (ii) a closing agreement made under Section 7121 of
the Code or any other settlement agreement entered into in connection with
an administrative or judicial proceeding, (iii) the expiration of the time
for instituting a claim for refund, or if a claim was filed, the
expiration of the time for instituting suit with respect thereto, or (iv)
in any case where judicial review shall be unavailable, a decision,
judgment, decree or other order of an administrative official or agency
which has become final.
"Preferred Capital," with respect to each Preferred Unit, means an
amount equal to $25.50.
"Preferred Return," with respect to each Preferred Unit, means a
preferred distribution right at the rate of 6.5% per annum, compounded
quarterly to the extent not distributed pursuant to Section 5.1.A(1), on
the Preferred Capital with respect to such Preferred Unit.
"Preferred Sub-Account," with respect to a Preferred Unitholder,
means an account maintained on the same basis as the Partners' Capital
Accounts, but taking into account only the aggregate Preferred Capital,
allocations of Net Income and Net Loss and distributions with respect to
its Preferred Units (including distributions of Preferred Return).
"Preferred Unit" means a Partnership Unit having the rights,
preferences and privileges assigned to Preferred Units pursuant to the
further provisions of this Agreement. The ownership of Preferred Units by
the Partners is as set forth in Exhibit A annexed hereto, as such Exhibit
may be amended from time to time.
"Preferred Unitholder" means a Limited Partner that holds one or
more Preferred Units.
<PAGE>
4
"Unpaid Preferred Return," with respect to each Preferred Unit,
means an amount equal to the excess, if any, of (x) the aggregate
Preferred Return on the Preferred Capital with respect to such Preferred
Unit over (y) the aggregate of all amounts previously distributed with
respect to such Preferred Unit pursuant to Section 5.1.A(1).
1.2 The penultimate sentence of Section 4.1 of the Existing
Partnership Agreement is hereby amended to read as follows:
A number of Partnership Units held by the General Partner equal to one
percent (1%) of all outstanding Partnership Units (other than Preferred
Units) shall be the General Partner Interest.
1.3 Section 5.1 of the Existing Partnership Agreement is hereby
amended to read as follows:
Section 5.1 Requirement and Characterization of Distributions
----------- -------------------------------------------------
A. Distributions shall be made to the Partners as follows and in
the following order of priority:
(1) First, except to the extent the General Partner, by
resolution of its Board of Directors, determines that the Partnership does
not have cash available for distribution, to the Preferred Unitholders
with respect to their Preferred Units, in proportion to and to the extent
of their respective amounts of Unpaid Preferred Return on such Preferred
Units at such time; and
(2) Thereafter, to the extent that the General Partner
determines that the Partnership has cash available for distribution, to
the Partners in accordance with their respective Percentage Interests.
Distributions made pursuant to clause (1) shall be made on a quarterly
basis.
B. (1) Notwithstanding the provisions of Section 5.1.A, if it is
anticipated that the Partners will recognize taxable income with respect
to the Partnership for any year, the General Partner shall make a good
faith estimate of the amount of such taxable income to be recognized by
each of the Partners (other than any taxable income recognized as a result
of the allocations of Net Income pursuant to Sections 6.1.A(1), (2) and
(3)), and distributions of Partnership cash shall be made to the Partners,
in proportion to their respective Percentage Interests, in an aggregate
amount sufficient to permit each of the Partners to pay taxes (calculated
at a rate equal to the Effective Tax Rate) on their distributive shares of
such taxable income. Distributions
<PAGE>
5
required to be made pursuant to this Section 5.1.B(1) shall be made at
such times as may be appropriate to permit the Partners to make estimated
tax payments.
(2) The computation of the amounts required to be distributed
pursuant to Section 5.1.B(1) for any year shall be adjusted (i) prior to
each distribution for such year, (ii) upon the filing of the Partnership's
Federal income tax return for such year, (iii) upon any Final
Determination of the Partnership's taxable income for such year and (iv)
at any other time when in the good faith judgment of the General Partner
it appears that a prior estimate has been incorrect, in each case so as to
take into account actual determinations and/or revised estimates of the
Partners' shares of taxable income for such year for Federal income tax
purposes. Following any such adjustment, the amounts to be distributed
pursuant to Section 5.1.B(1) shall be adjusted appropriately, or
additional distributions shall be made, so as to give effect to such
actual determinations and/or revised estimates.
1.4 Sections 6.1.A and 6.1.B of the Existing Partnership Agreement
are hereby amended to read as follows:
A. Net Income. After giving effect to the special allocations set
----------
forth in Section 1 of Exhibit C, Net Income shall be allocated as follows
and in the following order of priority:
(1) First, to the General Partner until the aggregate amount
of Net Income allocated to it pursuant to this clause (1) for the current
and all prior years equals the aggregate amount of Net Loss previously
allocated to it pursuant to the proviso of Section 6.1.B(3);
(2) Second, to the Partners, in proportion to and to the
extent of any deficit balances in their respective Capital Accounts;
(3) Third, to the Preferred Unitholders with respect to their
Preferred Units, in proportion to and to the extent of the excess, if any,
of (x) each such Preferred Unitholder's aggregate Preferred Capital with
respect to such Preferred Units over (y) the balance of such Preferred
Unitholder's Preferred Sub-Account; and
(4) Thereafter, to the Partners in accordance with their
respective Percentage Interests.
B. Net Loss. After giving effect to the special allocations set
--------
forth in Section 1 of Exhibit C, Net Loss shall be allocated as follows
and in the following order of priority:
<PAGE>
6
(1) First, to the Partners in proportion to and to the extent
of the excess, if any, of (x) each such Partner's Capital Account balance
over (y) such Partner's aggregate Preferred Capital with respect to such
Partner's Preferred Units (if any);
(2) Second, to the Preferred Unitholders, in proportion to
and to the extent of their remaining Capital Account balances; and
(3) Thereafter, to the Partners in accordance with their
respective Percentage Interests; provided that, to the extent any such
allocation to a Limited Partner would (after giving effect to the
allocations required under Sections 1.A and 1.B of Exhibit C) give such
Limited Partner an Adjusted Capital Account Deficit, such amount of Net
Loss shall instead be allocated to the General Partner.
1.5 The letters "LP" are hereby inserted after the word "CapStar" in
the penultimate sentence of Section 7.5.A of the Existing Partnership Agreement.
1.6 The parties agree that, for purposes of Section 8.6 of the
Partnership Agreement, the date before which the Redemption Right may not be
exercised shall be August 23, 1997. The following language is hereby added at
the end of Section 8.6.A of the Existing Partnership Agreement:
Notwithstanding anything to the contrary set forth above, if any Preferred
Unitholder shall exercise the Redemption Right with respect to any
Preferred Units, the Partnership shall be obligated to pay to such
Preferred Unitholder, together with the Cash Amount, the Unpaid Preferred
Return attributable to the Preferred Units being redeemed as of the date
such payment is made.
1.7 The following language is hereby inserted after the words
"Section 8.6" in Section 8.4 of the Existing Partnership Agreement: "(including
any such right exercised after the giving of a Mandatory Redemption Notice as
provided in Section 8.7)".
<PAGE>
7
1.8 Section 8.5(D) of the Existing Partnership Agreement is hereby
renumbered Section 8.6(D), and the numeral "180" in said Section is hereby
replaced by the numeral "30."
1.9 The following language is inserted at the end of Section 8.6.B
of the Existing Partnership Agreement:
Notwithstanding anything to the contrary contained in the foregoing or in
Section 8.6.A, if the Cash Amount with respect to a redemption of
Partnership Units is, pursuant to Section 8.06.D hereof, paid after the
Specified Redemption Date, then (i) such redemption shall not occur until
the Cash Amount is paid and (ii) the Limited Partner in question (or its
Assignee) shall have the right to continue receiving distributions
hereunder until the date of such redemption.
In addition, notwithstanding anything to the contrary contained in Section
8.6.A, if the General Partner exercises its right to satisfy the
Redemption Right pursuant to this Section 8.6.B, then, if the Redeeming
Partner is a Preferred Unitholder: (i) the General Partner shall be
obligated to pay to such Preferred Unitholder, together with the payment
of the Cash Amount or the delivery of CapStar Shares, an amount equal to
the Unpaid Preferred Return attributable to such Preferred Units as of the
date such payment is made; and (ii) if the General Partner has elected to
deliver CapStar Shares to such Preferred Unitholder, the General Partner
shall have the right to satisfy its obligation under clause (i) of this
sentence by delivering to such Preferred Unitholder a number of CapStar
Shares equal to the amount of such Unpaid Preferred Return divided by the
Value on the Valuation Date of one CapStar Share (rounded down to the
nearest whole number of CapStar Shares if such quotient is not a whole
number).
1.10 The following Section 8.6.E is hereby added to the Existing
Partnership Agreement:
E. Notwithstanding anything to the contrary hereinabove contained, except
as provided in Section 8.7.A, no Limited Partner shall be entitled to
exercise the Redemption Right with respect to any Preferred Unit as to
which the Mandatory Redemption Notice (as hereinafter defined) has been
given.
<PAGE>
8
1.11 The following Section 8.7 is hereby added to the Existing
Partnership Agreement:
Section 8.7 Mandatory Redemption.
----------- ---------------------
A. Except as otherwise provided in the last sentence of this
Section 8.7.A, the Partnership shall have the right ("Mandatory Redemption
Right"), at any time on or after the third anniversary of the date of this
Amendment, to redeem all or any portion of the Preferred Units at a
redemption price equal to $25.50 per Preferred Unit; provided, however,
that any such redemption shall be effected on a pro rata basis among all
of the Preferred Unitholders. The Mandatory Redemption Right shall be
exercised pursuant to a notice (the "Mandatory Redemption Notice")
delivered by the Partnership to the Preferred Unitholders whose Preferred
Units are being redeemed. If the Mandatory Redemption Notice is given to a
Preferred Unitholder, then the redemption of such Preferred Unitholder's
Preferred Units shall take place on the tenth Business Date after the
giving of such Notice. On such tenth Business Day, the Partnership shall
pay to such Preferred Unitholder the redemption price hereinabove provided
for, and such Preferred Unitholder shall deliver to the Partnership such
instruments of transfer as the Partnership shall reasonably require
assigning to the Partnership the Preferred Units being redeemed, free and
clear of all liens and encumbrances. Such Preferred Unitholder shall pay
any state or local property transfer tax payable in connection with such
transfer. Notwithstanding anything to the contrary contained in the
foregoing, if, within 5 Business Days after the giving of the Mandatory
Redemption Notice, any Preferred Unitholder gives the Redemption Notice
with respect to the Preferred Units specified in such Mandatory Redemption
Notice, then such Mandatory Redemption Notice shall be deemed null and
void and the provisions of Section 8.6 shall apply with respect to such
Preferred Units.
B. Notwithstanding anything to the contrary contained in
Section 8.7.A, the General Partner shall have the right to purchase all or
any portion of the Preferred Units in lieu of the Partnership's exercise
of its Mandatory Redemption Right. Any such purchase by the General
Partner of the Preferred Units shall be on the terms and conditions set
forth in Section 8.7.A, with the General Partner performing the
obligations of the Partnership under such section; provided, however, that
the General Partner shall have the right, in lieu of paying to the
Preferred Unitholder in question the redemption price provided for in
Section 8.7.A., to deliver to such Preferred Unitholder a number of
CapStar Shares equal to (i) the number of Preferred Units being purchased,
multiplied by (ii) $25.50, divided by (iii) the Value per CapStar Share on
the Valuation Date (which amount shall be rounded down to the nearest
whole number if it is not a whole number). For
<PAGE>
9
purposes of this Section 8.7, the term "Valuation Date" shall mean the
date on which the Mandatory Redemption Notice is delivered to the
Preferred Unitholder in question or, if such date is not a Business Day,
the first Business Day thereafter. If the General Partner purchases
Preferred Units pursuant to this Section 8.7.B, the General Partner shall
thereafter be treated for all purposes as the owner of such Preferred
Units.
C. If the Mandatory Redemption Right is exercised or the
General Partner purchases Preferred Units pursuant to Section 8.7.B, then
the Partnership or the General Partner, as the case may be, shall be
required to pay to the Preferred Unitholder in question, in addition to
the payment or the delivery of CapStar Shares hereinabove provided for, an
amount equal to the Unpaid Preferred Return (as of the date such payment
is made) attributable to the Preferred Units being so redeemed or
purchased; provided, however, that if the General Partner has elected to
purchase Preferred Units by delivery of CapStar Stock, the General Partner
shall have the right, in lieu of paying an amount equal to such Unpaid
Preferred Return, to deliver to such Preferred Unitholder a whole number
of CapStar Shares equal to the amount of such Unpaid Preferred Return (as
of the date such payment is made) divided by the Value on the Valuation
Date of one CapStar Share (rounded down to the nearest whole number of
CapStar Shares if such quotient is not a whole number).
D. Notwithstanding the foregoing, in no event shall the
Mandatory Redemption Right be exercisable with respect to any Preferred
Unit as to which a Redemption Notice has been given as provided in Section
8.6.
1.12 The words "which has been approved by the requisite
Consent of the Partners pursuant to Section 7.3" are hereby deleted from Section
11.2.B of the Existing Partnership Agreement.
1.13 The words "and Section 11.7" are hereby inserted after
the words "Section 11.3.F" in Section 11.3.A of the Existing Partnership
Agreement.
1.14 The words "or Section 8.7" are hereby inserted after the
words "Section 8.6" in Sections 11.6.A, 11.6.B and 11.6.C of the Existing
Partnership Agreement.
<PAGE>
10
1.15 The words "in connection with" are hereby substituted for
the word ", or" in Section 11.2.D of the Existing Partnership Agreement.
1.16 The words "pursuant to Section 5.1.B" are hereby inserted
in place of (a) the words "of the Partner Distribution Amount attributable to
such Partnership Unit with respect to which the Partnership record date is" and
the words "of the Partner Distribution Amount" in the last sentence of Section
11.6.D of the Existing Partnership Agreement, and (b) the words "of the Partner
Distribution Amount with respect to which the Partnership Record Date is" and
the words "of the Partner Distribution Amount" in the last sentence of Section
12.2.C of the Existing Partnership Agreement.
1.17 The words "but subject to Section 14.1.C" are hereby
inserted after the numeral "14.1.A" in Section 14.1.B of the Existing
Partnership Agreement.
1.18 The words "Section 11.7 (as to any then existing Limited
Partner) or" are hereby inserted after the word "amend" in clause (vi) of
Section 14.1.C of the Existing Partnership Agreement.
1.19 The words ", or (vii) amend Section 2 of Exhibit C in a
manner adverse to such Partner" are hereby added at the end of Section 14.1.C of
the Existing Partnership Agreement.
1.20 A new Section 11.7 is hereby added to the Existing
Partnership Agreement:
Section 11.7 Pledges of Partnership Interests. Except as provided
in Section 11.3.F, no Limited Partner shall pledge, hypothecate or grant a
security interest in all or any portion of its Partnership Interest;
provided,
<PAGE>
11
however that any Limited Partner shall have the right, as security for a
borrowing from a bank, insurance company or other commercial lending
institution (an "Institutional Lender"), to pledge or hypothecate to such
Institutional Lender, or to grant and/or sell to and/or purchase from such
Institutional Lender or an Affiliate thereof an option with respect to, or
grant to such Institutional Lender a security interest in, all or a
portion of its Partnership Units, and any transfer of such pledged
Partnership Units to such Institutional Lender (or to its transferee in
any public or private sale by such Institutional Lender) pursuant or
subsequent to the exercise of rights or remedies in connection with such
pledge or option shall be permitted hereunder.
1.21 The words "or Section 11.7" are hereby inserted after the
words "Section 11.3.F" in Section 11.3.C of the Existing Partnership Agreement.
1.22 The words "or Section 11.7" are hereby inserted after the
words "Section 11.3.F" in Section 11.4.C of the Existing Partnership Agreement.
1.23 The text of Section 13.4 of the Existing Partnership
Agreement is hereby deleted in its entirety, and the words "[Intentionally left
blank]" are inserted in their place.
1.24 The word "for" is hereby substituted for the words
"provisions of" in Section 13.6 of the Existing Partnership Agreement.
1.25 The term "Partnership Interests" is hereby replaced by
the term "Percentage Interests" in the first sentence of Section 14.1.A and the
first sentence of Section 14.2.A of the Existing Partnership Agreement.
1.26 The following changes are hereby made to Section 14.1.C
of the Existing Partnership Agreement: (A) the words "or Mandatory Redemption
Right" are inserted after the words "Redemption Right"; and (B) the word
"Sections" in clause (iv) is changed to "Section", and the language "or 8.7" is
added after the numeral "8.6" in such clause.
<PAGE>
12
1.27 The words "Subject to Section 14.1, the" are hereby
substituted for the word "The" at the beginning of Section 7.3 of the Existing
Partnership Agreement.
1.28 Exhibit A to the Existing Partnership Agreement is hereby
deleted in its entirety and replaced with Exhibit A annexed hereto.
1.29 The words "and if the Regulations currently in effect are
not modified" are hereby inserted immediately after the words "the Code" in
Section 1.C of Exhibit B to the Existing Partnership Agreement.
1.30 The words "and Section 1 of Exhibit C" are hereby
inserted immediately after the reference to Section 6.1 in Section 1.D(1) of
Exhibit B to the Existing Partnership Agreement.
1.31 The last sentence of Section 1.E of Exhibit B to the
Existing Partnership Agreement is hereby deleted in its entirety.
1.32 The first sentence of Section 1.D of Exhibit C to the
Existing Partnership Agreement is hereby amended to read as follows:
Nonrecourse Deductions for any Partnership Year shall be allocated to the
Partners as Net Loss in accordance with Section 6.1.B of the Agreement.
1.33 The following paragraph G is hereby inserted at the end
of Section 1 of Exhibit C to the Existing Partnership Agreement:
G. Regulatory Allocations. The allocations set forth in Sec tions
----------------------
1.A through 1.F (the "Regulatory Allocations") shall be taken into account
in allocating items of income, gain, loss and deduction among the Partners
so that, to the extent possible, the net amount of such allocations of
other items and the Regulatory Allocations to each Partner shall be equal
to the net amount that would have been allocated to each such Partner if
the Regulatory Allocations had not occurred.
<PAGE>
13
1.34 The words ", subject to the following, have the authority
to elect the method to be used by the Partnership and such election shall be
binding on all Partners. With respect to the Contributed Property transferred to
the Partnership on or about the Effective Date, the Partnership shall" shall be
deleted from Section 2.C of Exhibit C to the Existing Partnership Agreement.
1.35 The following paragraph D is hereby inserted at the end
of Section 2 of Exhibit C to the Existing Partnership Agreement:
D. Any foreign or other tax credits of the Partnership shall be
allocated among the Partners in proportion to the allocations of income
with respect to which such credits arose.
1.36 Exhibit D to the Existing Partnership Agreement is hereby
deleted in its entirety and replaced with Exhibit D annexed hereto.
1.37 All capitalized terms defined in the Existing Partnership
Agreement which are no longer used in such Agreement, as amended by this
Amendment, are hereby deleted.
2. Admission of Additional Limited Partners.
----------------------------------------
Each of the Contributors is hereby admitted to the Partnership as a
Limited Partner pursuant to Section 4.2.A of the Existing Partnership Agreement.
Each of the Unitholders has contributed to the Partnership the property
described in Exhibit A annexed hereto, and each Contributor shall receive,
pursuant to this Amendment, the Partnership Units listed opposite such
Contributor in said Exhibit A. Each Contributor hereby agrees to be bound of all
of the provisions of the Existing Agreement, as amended hereby.
<PAGE>
14
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the day and year first above written.
GENERAL PARTNER:
CAPSTAR HOTEL COMPANY
By:
---------------------------
Name:
Title:
LIMITED PARTNERS:
CAPSTAR LP CORPORATION
By:
---------------------------
Name:
Title:
[CONTRIBUTORS]
<PAGE>
EXHIBIT A
PARTNERS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
Name and Address of Partner Partnership Units Partnership Interest
- --------------------------- ----------------- --------------------
General Partner:
- ----------------
<S> <C> <C> <C>
CapStar Hotel Company [1% of total Partnership Units 1%
1010 Wisconsin Avenue, N.W. (other than Preferred Units)]
Suite 650
Washington, D.C. 20007
Limited Partners:
- -----------------
CapStar Hotel Company [Number of issued and [Number of Partnership
1010 Wisconsin Avenue, N.W. outstanding shares of CapStar Units owned divided by
Suite 650 Hotel Company after secondary total number of
Washington, D.C. 20007 offering less 200,881 less Partnership Units (other
number of Partnership Units than Preferred Units)]
held by General Partner]
CapStar LP Corporation 200,881
1010 Wisconsin Avenue, N.W.
Suite 650
Washington, D.C. 20007
[Contributors] 809,523 Number of Partnership
392,157 Preferred Units Units owned (other than
Preferred Units) divided
by total number of
Partnership Units (other
than Preferred Units)
Capital Contributions
Made by Contributors
- --------------------
[As described in Contribution
Agreements]
</TABLE>
<PAGE>
EXHIBIT D
VALUE OF CONTRIBUTED PROPERTY
Underlying Property 704(c) Value Agreed Value
- ------------------- ------------ ------------
[To be agreed upon]
----------------------------
<PAGE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
CapStar Hotel Company
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.
February 26, 1997
