<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996.
REGISTRATION NO. 333-11113
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HOMEGATE HOSPITALITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7011 75-0511313
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S.
JURISDICTION OF CLASSIFICATION CODE NUMBER) EMPLOYER
INCORPORATION OR IDENTIFICATION
ORGANIZATION) NO.)
2001 BRYAN STREET, SUITE 2300
DALLAS, TEXAS 75201
(214) 863-1777
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT A. FAITH
CHIEF EXECUTIVE OFFICER
HOMEGATE HOSPITALITY, INC.
2001 BRYAN STREET, SUITE 2300
DALLAS, TEXAS 75201
(214) 863-1777
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DEREK R. MCCLAIN L. STEVEN LESHIN
VINSON & ELKINS L.L.P. JENKENS & GILCHRIST,
3700 TRAMMELL CROW CENTER A PROFESSIONAL CORPORATION
2001 ROSS AVENUE 1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75201 DALLAS, TEXAS 75202
TELEPHONE: (214) 220-7700 TELEPHONE: (214) 855-4500
----------------
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(c) 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. [X]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share.......................... 4,973,750 $13.00 $64,658,750 $21,757
</TABLE>
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(1) Includes 648,750 as to which the Company has granted the Underwriters an
option to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Paid $17,845 with initial filing.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996
PROSPECTUS
[LOGO] 4,325,000 SHARES
HOMEGATE HOSPITALITY, INC.
COMMON STOCK
-----------------
All of the 4,325,000 shares of Common Stock, $.01 par value (the "Common
Stock"), offered hereby (the "Offering") are being sold by Homegate
Hospitality, Inc. (the "Company"). After the completion of the Formation (as
defined below), but prior to the completion of the Offering, executive
officers, directors and affiliates of the Company will own, in the aggregate,
100% of the outstanding Common Stock. Upon the completion of the Offering, such
parties will own in the aggregate approximately 59.7% and collectively have
control of the Company. See "Risk Factors--Control of the Company by Management
and Principal Stockholders." Prior to the Offering, there has been no public
market for the Common Stock of the Company, and no assurance can be given that
an active trading market for the Common Stock will develop after the Offering.
It is currently anticipated that the initial public offering price will be
between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Company's Common Stock has been approved for quotation on The Nasdaq National
Market, subject to notice of issuance, under the symbol "HMGT."
ANY INVESTMENT IN THE SECURITIES OFFERED HEREIN INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................... $ $ $
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Total(3)........................ $ $ $
</TABLE>
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(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 of the Offering payable by the Company, estimated
at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 648,750 shares of Common Stock on the same terms as the
Common Stock offered hereby, solely to cover over-allotments, if any (the
"Over-Allotment Option"). If the Over-Allotment Option is exercised in
full, the Price to Public, Underwriting Discounts and Commissions, and
Proceeds to the Company will be $ , $ , and $ , respectively. See
"Underwriting."
-----------------
The shares of Common Stock are offered, subject to prior sale, when, as, and
if delivered to and accepted by the Underwriters, and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about October ,
1996, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York,
New York 10167.
-----------------
BEAR, STEARNS & CO. INC. MONTGOMERY SECURITIES
, 1996.
<PAGE>
[PICTURES]
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET
SYSTEM, IN THE OVER-THE-COUNTER MARKET 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 reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this prospectus
(this "Prospectus"). Unless otherwise indicated, the information in this
Prospectus assumes (i) the completion of the formation of the Company and
related transactions (the "Formation," as more specifically defined under "The
Formation Transaction") to occur immediately prior to, or simultaneously with,
the completion of the Offering, (ii) no exercise of the Over-Allotment Option,
and (iii) an initial public offering price of $12.00 per share (which
represents the midpoint of the range on the cover page of this Prospectus and
which affects the number of shares to be received by the parties in the
Formation and the calculation of the proceeds from the Offering). See "The
Formation Transaction," "Underwriting" and "Principal Stockholders." Unless the
context suggests otherwise, references in this Prospectus to (i) the "Company"
mean Homegate Hospitality, Inc. and its predecessors, (ii) the "Crow Family"
include various descendants of Mr. and Mrs. Trammell Crow and various
corporations, partnerships, trusts and other entities beneficially owned or
controlled by such persons, (iii) "TCR" mean Trammell Crow Residential Company
and its affiliates, (iv) "Greystar" mean Greystar Capital Partners, L.P. and
its affiliates, (v) "Crow" mean Crow Realty Investors, L.P. d/b/a Crow
Investment Trust and its affiliates, and (vi) "Wyndham" mean Wyndham Hotel
Corporation and its predecessors and affiliates. "Homegate Studios & Suites"
and "Homegate Studios" are service marks of the Company.
THE COMPANY
Homegate Hospitality, Inc.'s goal is to become a national provider of high
quality extended-stay hotels in strategically selected markets located
throughout the United States. The Company plans to rapidly develop a chain of
midprice extended-stay hotels under the Homegate Studios & Suites brand name to
capitalize on what management believes is a large and underserved market of
guests who desire extended-stay accommodations. This market includes business
travelers, professionals on temporary work assignments, persons between
domestic situations, and persons relocating or purchasing a home, who often
desire accommodations for an extended duration. As of the completion of the
Offering, the Company will own six hotels and have six hotels under
development, and expects to have agreements, letters of intent, contracts or
other arrangements to purchase 13 additional development sites (each a "Planned
Hotel Site"). Of the six hotels under development, three are currently under
construction and three more are expected to be under construction by December
31, 1996. The Company's objective is to have approximately 65 extended-stay
hotels open or under construction by December 31, 1998 (the "Initial Hotel
Program").
The Company was recently founded by management and by affiliates of the
following three entities: Trammell Crow Residential Company, one of the
nation's leading developers of multi-family housing units with 22 regional
offices; Greystar Capital Partners, L.P., a private investment company with
substantial multi-family housing development and construction expertise; and
Crow Investment Trust, the real estate investment arm of the Crow Family. In
TCR, Greystar and Crow, the Company brings together extensive experience in
developing, constructing and managing properties on a national scale and in
structuring, financing and executing national real estate investment programs.
The Company has entered into a master development agreement with a partnership
(the "Developer Partnership"), comprised of TCR and Greystar (the "Developer
Affiliates"), to provide site selection, construction and development services
for the Company's Initial Hotel Program. Management believes the Developer
Affiliates' expertise and local market presence will significantly enhance the
Company's ability to execute its Initial Hotel Program.
The Company has also entered into a master management assistance agreement
(the "Management Agreement") with a subsidiary of Wyndham Hotel Corporation,
which owns, operates or franchises over 70 hotels in North America, to manage
the Company's hotels pursuant to 10-year management contracts. Management
believes that Wyndham's experience in managing and operating one of the
nation's leading hotel chains will facilitate the Company's ability to provide
consistently high quality accommodations and services to
3
<PAGE>
its guests, and that access to Wyndham's resources will minimize the Company's
overhead expenses during its initial phase of operations. Although Wyndham owns
no Common Stock in the Company, over 48% of Wyndham's stock is owned by the
Crow Family. See "Certain Transactions" and "Risk Factors--Reliance upon
Affiliated Companies." Upon completion of the Offering, TCR, Greystar, Crow and
their affiliates will own 59.7% of the outstanding Common Stock. See "Risk
Factors--Control of the Company by Management and Principal Stockholders" and
"Principal Stockholders."
The Company's product strategy is to develop a well-recognized national brand
under the Homegate Studios & Suites name by offering high quality
accommodations in a standard format, providing much of the value offered by
limited service hotels with many of the added features and comforts of
apartment living. Homegate Studios & Suites hotels will feature three
functional room configurations, each with a fully equipped kitchen, upscale
residential-quality finishes and accessories, and separation between the
cooking, living, and sleeping areas, and other amenities, including weekly maid
service, twice-weekly linen service, resident laundry facilities, direct dial
telephone service with voice mail messaging and dataport capabilities, cable
TV, a business center and an exercise facility. See "Business--Product
Concept."
The extended-stay category (defined as hotel suites with full kitchens) is
one of the most rapidly growing sectors of the U.S. lodging industry. From 1990
through 1995, the compounded annual growth rate in occupied rooms in dedicated
extended-stay hotels was 7.2% compared to 2.1% for the overall U.S. lodging
industry, while the compounded annual growth rate in room supply was 5.3%
compared to 1.0% for the overall U.S. lodging industry. However, the vast
majority of dedicated extended-stay rooms developed during this time period
were in the upscale segment of the extended-stay category. Average occupancy
rates for extended-stay hotel chains have exceeded such rates in the overall
U.S. lodging industry for each of the previous six years, and extended-stay
hotel chains have achieved an 80% or greater occupancy level during each of the
past three years. The Company believes that the size of the demand for
extended-stay lodging compares favorably to the limited supply of dedicated
extended-stay rooms, and that this is especially true in the midprice segment
of the extended-stay category. In 1995, extended-stay guests (defined as those
guests staying five or more nights) who were accommodated at hotels accounted
for a total of 137.8 million room nights, or 15.9%, of the approximately 867.7
million room nights occupied in hotel accommodations in the United States. Of
these 137.8 million room nights, only six to nine percent (8.3 million to 12.4
million) were accommodated by extended-stay hotel chains, which management
believes was due in part to the limited number of dedicated extended-stay
facilities in operation in 1995. Of the approximately 3.3 million total
available rooms in the U.S. lodging industry at the end of 1995, approximately
51,100, or only 1.5%, were extended-stay rooms at approximately 445 dedicated
extended-stay facilities. Of these 445 facilities, approximately 25, or 5.6%,
operated in the midprice segment of the extended-stay category. As a result,
management believes that there exist favorable growth opportunities in the
extended-stay category in the near term. The sources of the industry
information set forth above were Smith Travel Research and D. K. Shifflet,
neither of which provided any form of consultation, advice or counsel regarding
any aspect of the Offering, or are in any way associated with the Offering.
Smith Travel Research and D.K. Shifflet have not consented to the use of the
data presented in this Prospectus.
Management believes that the Company's affiliations with TCR, Greystar and
Wyndham will provide significant competitive advantages in achieving its growth
and operating objectives and distinguish the Company from many of its
competitors in the extended-stay market.
DEVELOPMENT, CONSTRUCTION AND LOCAL SITE SELECTION EXPERTISE. TCR and
Greystar have constructed an aggregate of approximately 115,000 multi-
family housing units over the last 14 years, and have extensive experience
in the development of standardized properties nationwide. Management
believes that the construction of multi-family housing units is similar to
construction of the Company's hotels. TCR and Greystar's combined regional
office network will provide the Company with local market knowledge and
site selection, development and construction expertise. As the partners of
the Developer Partnership, TCR and Greystar will identify and evaluate
potential development sites in the markets targeted by the Company. Once
sites are approved by Company management, either TCR or Greystar will
manage site acquisition,
4
<PAGE>
development and construction of the property. The Company believes its
relationships with TCR and Greystar will produce significant competitive
advantages and cost efficiencies, and will minimize the Company's
development and administrative overhead costs during the Initial Hotel
Program.
The Developer Partnership has entered into a master development agreement
to develop and construct up to 60 extended-stay facilities for the Company
by December 31, 1998. Unless extended, the master development agreement
will terminate upon the earlier of the commencement of the 60th project or
December 31, 1998. The Developer Partnership will own 1,073,103 shares of
Common Stock, constituting 10.0% of the Common Stock outstanding after the
Offering, and will distribute a portion of these shares as each project is
completed to the Developer Affiliate that is responsible for the completed
project. The Developer Affiliates have agreed to accept below-market
development fees in exchange for these equity interests in the Company.
Management believes this distribution mechanism will provide the Developer
Affiliates the necessary incentives to assist the Company in achieving its
Initial Hotel Program. See "Certain Transactions," "Risk Factors--Reliance
upon Affiliated Companies" and "Business--Growth Strategy."
HOTEL MANAGEMENT CAPABILITIES. Pursuant to the Management Agreement,
Wyndham has agreed to manage up to 60 Company hotels, each under a 10-year
management contract, and to provide the Company market research, assistance
with interior and exterior design, a preferred vendor program, a
proprietary property management software package and national and local
marketing services. See "Certain Transactions" and "Risk Factors--Reliance
upon Affiliated Companies." Management believes that being able to utilize
Wyndham's expertise will be a competitive advantage and will produce cost
efficiencies in the Company's buying, marketing and development programs.
Unless extended, the Management Agreement will terminate upon the earlier
of the signing of a management contract for the 60th hotel or December 31,
1998. Wyndham has agreed, subject to certain exceptions, not to compete
with Company hotels that it manages. See "Certain Transactions."
SUPERIOR PRICE/VALUE RELATIONSHIP. Based on its expected average weekly
rates of $280 to $350, the quality of its interior design elements and
finishes, the separation between cooking, living and sleeping areas and the
available amenities, management believes that its hotels will offer a
superior price/value relationship and appeal to extended-stay guests of
both upscale and economy extended-stay facilities. The Company has
carefully designed its product and marketing programs to (i) attract guests
who ordinarily patronize higher priced/comparable quality or comparably
priced/lower quality extended-stay or traditional hotel chains in markets
in which the Company competes, and (ii) educate extended-stay guests who
have typically stayed in traditional hotels of the value offered by the
Company's extended-stay facilities.
The Company's first property, which it acquired while under construction, is
located in Grand Prairie, Texas near the Dallas/Fort Worth International
Airport. This 139-unit facility opened on June 17, 1996, under the name "Studio
Suites," and will be renamed "Homegate Studios." The Company has also acquired
beneficial ownership of five extended-stay hotels currently operated under the
name "Westar Suites" (the "Westar Transaction"). See "The Formation
Transaction." The Westar hotels are located in Texas in the cities of San
Antonio (2), El Paso, Amarillo and Irving. Collectively, the Westar hotels
contain an aggregate of 622 units, all of which are similar to the prototype
developed by the Company for its guest rooms. The Westar facilities will be
renovated at an anticipated cost of approximately $4 million in order to
conform to the quality standards of the Homegate Studios & Suites prototype,
and will be operated under the Homegate Studios & Suites brand name.
As of the completion of the Offering, the Company will have begun
construction of three extended-stay hotels--a 139-unit facility in Phoenix,
Arizona, a 143-unit facility in Denver, Colorado and a 117-unit facility in
Lenexa, Kansas, and expects each of these hotels to be operational in the
second or third quarter of 1997. The Company also owns development sites in
Overland Park, Kansas, Dallas, Texas and an additional site in Phoenix,
Arizona, and expects to begin construction of hotels on each of these sites
during the fourth quarter of 1996.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........ 4,325,000 shares
Common Stock to be outstanding after the
Offering(1)............................... 10,725,000 shares
Use of Proceeds............................ To finance the development or
acquisition of additional extended-
stay hotels and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol.............. HMGT
</TABLE>
- --------
(1) Excludes 496,250 shares issuable upon exercise of options to be granted as
of the completion of the Offering under the Company's 1996 Plan (as defined
below), with an exercise price equal to the initial public offering price
shown on the cover page of this Prospectus.
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
--------------------------
EXTENDED STAY
LIMITED
PARTNERSHIP COMPANY
HISTORICAL(1) PRO FORMA(2)
------------- ------------
<S> <C> <C>
OPERATING DATA:
Revenue............................................. $ 26 $ 3,970
Property operating expenses......................... 30 2,504
Corporate operating expenses........................ 204 541
Depreciation and amortization....................... 10 454
Interest expense.................................... 21 934
------- ---------
Net loss............................................ $ (239) $ (463)
======= =========
Net loss per share.................................. $ (0.07)
Weighted average number of shares of common stock
outstanding........................................ 6,400,000
OTHER DATA:
EBITDA(3)........................................... $ (208) $ 925
======= =========
Cash flows provided by (used in):
Operating activities.............................. $ 313 $ 1,110
Investing activities.............................. (8,264) (8,290)
Financing activities.............................. 9,225 9,167
</TABLE>
<TABLE>
<CAPTION>
EXTENDED STAY
LIMITED COMPANY
PARTNERSHIP COMPANY PRO FORMA, AS
HISTORICAL PRO FORMA(2) ADJUSTED(4)
------------- ------------ -------------
<S> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............. $1,274 $ 4,857 $52,624
Property and equipment, net........... 8,201 36,189 36,189
Total assets.......................... 9,725 41,457 89,224
Total debt............................ 2,869 20,896 20,896
Total partners' capital (stockholders'
equity pro forma and as adjusted).... 6,156 19,761 67,528
</TABLE>
- --------
(1) From inception (February 9, 1996) through June 30, 1996. Extended Stay
Limited Partnership ("ESLP") is the predecessor to the Company. The Company
was incorporated on August 16, 1996, to succeed to the business of ESLP,
and prior to the Offering, has minimal assets and no operations of its own.
Immediately prior to or simultaneously with the completion of the Offering,
ESLP will merge into the Company. See "The Formation Transaction."
(2) Giving pro forma effect to the Formation, the Westar Transaction and the
acquisition of three development sites as if such transactions had occurred
as of January 1, 1995 for the purposes of the operating and other data and
as of June 30, 1996 for the purposes of balance sheet data. See the pro
forma financial statements and notes thereto contained elsewhere herein.
(3) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles ("GAAP"), is not to be considered as an alternative
to net income or any other GAAP measurement as a measure of operating
performance and is not necessarily indicative of cash available to fund
cash needs. The Company has included EBITDA herein because the Company
believes that it is one measure used by certain investors to determine
operating cash flow. EBITDA, as calculated above, may not be comparable to
other similarly titled measures of other companies.
(4) Giving pro forma effect to the Formation, the Westar Transaction, the
acquisition of three development sites, and the Offering at an assumed
initial public offering price of $12.00 per share as if such transactions
had occurred on June 30, 1996. See the pro forma financial statements and
notes thereto contained elsewhere herein.
7
<PAGE>
RISK FACTORS
Any investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should read this entire Prospectus carefully and
should consider, among other things, the risks and the speculative factors
inherent in and affecting the Company's business described below and
throughout this Prospectus. This Prospectus contains forward-looking
statements that involve risk and uncertainty. Actual results and the timing of
certain events could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below and other
factors discussed elsewhere in this Prospectus. See "Special Note Regarding
Forward-Looking Statements."
LIMITED OPERATING HISTORY AND COSTS ASSOCIATED WITH EXPANSION
The Company acquired its first extended-stay hotel in May 1996 and
beneficial ownership of five hotels in September 1996. In addition, as of the
completion of the Offering, the Company will have six hotels under development
(three of which will be under construction as of the completion of the
Offering and three more of which the Company expects to begin construction of
during the fourth quarter of 1996). The Company has a limited operating
history upon which investors may evaluate the Company's performance. The
Company has incurred losses to date, and there can be no assurance that the
Company will be profitable in the future. Given the start-up nature of the
Company's operations, it expects to have net losses for the foreseeable
future.
DEVELOPMENT RISKS
The Company intends to grow primarily by developing additional extended-stay
hotels. Development involves substantial risks, including, among others, the
risks that development costs will exceed budgeted or contracted amounts, that
completion of construction will be delayed, that all necessary zoning and
construction permits will not be obtained, that financing might not be
available on favorable terms, that developed properties will not achieve
desired revenue or profitability levels once opened, that competitors with
greater financial resources than the Company will compete for suitable
development sites, that substantial costs will be incurred in the event a
development project must be abandoned prior to completion, that governmental
rules, regulations, and interpretations (including interpretations of the
requirements of the Americans with Disabilities Act of 1990 (the "ADA")) will
change, and that downturns in general economic and business conditions will
occur. The Company intends to manage development to reduce such risks. For
example, the Company will obtain guaranties for certain development cost
overruns from individuals who are affiliated with the Developer Affiliates and
will not acquire development properties until all necessary zoning and
construction permits are reasonably likely to be obtained. However, there can
be no assurance that present or future developments will proceed in accordance
with the Company's expectations. In addition, the development cost overrun
guaranties will be business asset guaranties (i.e., recourse will be limited
to the individual guarantor's interests in TCR or Greystar, as appropriate,
and some of their affiliates). There can be no assurance that such assets will
be sufficient to fund the costs of any specific development cost overrun.
The Company currently owns one extended-stay hotel, and has beneficial
ownership of five additional extended-stay hotels which it acquired in the
Westar Transaction. The Company's objective is to have approximately 65 hotels
open or under construction by December 31, 1998. There can be no assurance,
however, that the Company will complete the development and construction of
the hotels, or will acquire each of the planned properties and complete
development of a Company-owned hotel thereon, or that any such developments
will be completed in a timely manner or within budget. See "Business--Growth
Strategy."
RISKS ASSOCIATED WITH RAPID GROWTH
The Company intends to pursue an aggressive growth strategy through the
development of or acquisition of properties suitable for conversion to
Homegate Studios & Suites hotels; its objective is to have approximately 65
hotels open or under construction by December 31, 1998. The Company's growth
plans will require the implementation of specialized operational and financial
systems and will require additional management, operational, and financial
resources. There can be no assurance that the Company will be able to manage
its expanding operations effectively. See "--Reliance upon Affiliated
Companies," "--New Management" and "Business--Growth Strategy."
8
<PAGE>
The Company has only recently developed its product strategy, which includes
the design of what will be its prototypical hotel and available amenities. See
"Business--Product Strategy." As of the completion of the Offering, the first
three hotels embodying its product strategy will be under construction. The
Company has no history upon which it can gauge consumer acceptance of its
facilities, and there can be no assurance that the Company's hotels will be
readily accepted by guests who are looking for extended-stay hotel
accommodations. Further, the Company's hotels will compete against other
facilities with substantially greater brand recognition.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
Operating Risks. The extended-stay industry in which the Company operates
may be adversely affected by changes in national or local economic conditions
and other local market conditions, such as an oversupply of hotel space or a
reduction in demand for hotel space in a geographic area, corporate
relocations or downsizing that may produce a reduced demand for local hotel
space, changes in travel patterns, extreme weather conditions, the recurring
need for renovation, refurbishment and improvement of lodging properties,
changes in governmental regulations which influence or determine wages,
prices, or construction or maintenance costs, changes in interest rates, the
availability of financing for operating or capital needs, and changes in real
estate tax rates and other operating expenses. In addition, due in part to the
strong correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical change in revenues and
profits. There can be no assurance that downturns or prolonged adverse
conditions in real estate or capital markets, or in national or local
economies, will not have a material adverse impact on the Company. See
"Business--Operations."
Competition in the Lodging Industry. The United States lodging industry is
highly competitive. Competition in the United States lodging industry is based
generally on convenience of location, price, range of services and available
amenities, and quality of customer service. Each of the Company's hotels will
be located in a developed area that includes competing lodging facilities. The
Company believes the location of its hotels, the high quality of its
accommodations, the reasonableness of its room rates, and the services and
guest amenities provided by it will be among the most important factors in its
business. Demographic 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 could adversely affect their operations.
The Company anticipates that competition within the extended-stay industry
segment will increase substantially in the foreseeable future. In the midprice
category of the extended-stay industry segment, a number of other lodging
chains and developers have recently announced plans to develop or are
currently developing extended-stay hotels which may compete with the Company's
hotels. The Company may compete for guests and for new development sites with
certain of these established entities and other entities which have greater
financial resources and brand awareness than the Company and better
relationships with lenders and real estate sellers. Further, there can be no
assurance that new or existing competitors, including traditional hotels with
nationally recognized brand names, will not significantly lower rates or offer
greater convenience, services, or amenities or significantly expand or improve
facilities in a market in which the Company's hotels compete, thereby
adversely affecting the Company's operations. See "Business--Competition."
Seasonality. The lodging industry is seasonal in nature. Quarterly earnings
may be adversely affected by events beyond the Company's control, such as poor
weather conditions, economic factors and other considerations affecting
travel. In addition, occupancy rates and room revenues typically decline
during the fourth calendar quarter as business travel decreases during the
holiday season. The timing of openings of new properties could also lead to
fluctuations in the Company's quarterly earnings.
REAL ESTATE INVESTMENT RISKS
General Risks. The Company's investments will be subject to varying degrees
of risk generally incident to the ownership of real property. The underlying
value of the Company's real estate investments depends significantly upon the
Company's ability to operate its properties in a manner sufficient to maintain
or increase
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cash provided by operations. Income from the properties, and the value of the
properties, may be adversely affected by adverse changes in national, general
or local economic conditions, adverse changes in local market conditions due
to changes in neighborhood characteristics, competition from other lodging
properties, changes in real property tax rates and in the availability, cost
and terms of financing, the impact of present or future environmental
legislation and compliance with environmental laws, the continuing need for
capital improvements, changes in operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes and other natural disasters (which may result in uninsured
losses), acts of war, adverse changes in zoning laws, and other factors which
are beyond the Company's control.
Illiquidity of Real Estate. Real estate investments are relatively illiquid.
The Company's ability to vary its portfolio in response to changes in economic
and other conditions will be limited. There can be no assurance that the
Company will be able to dispose of an investment when it finds disposition
advantageous or necessary or that the sale price of any disposition will
recoup or exceed the amount of the Company's investment.
Losses in Excess of Insurance Coverage. The Company intends to maintain
comprehensive insurance on each of its properties, including liability, fire
and extended coverage, in the types and amounts customarily obtained by an
owner and operator in the Company's industry. Nevertheless, there are certain
types of losses, generally of a catastrophic nature, such as hurricanes,
earthquakes and floods, that may be uninsurable or not economically insurable.
The Company intends to use its discretion in determining amounts, coverage
limits and deductibility provisions of insurance, with a view to obtaining
appropriate insurance on the Company's properties at a reasonable cost and on
suitable terms. This may result in insurance coverage that in the event of a
loss would not be sufficient to pay the full current market value or current
replacement value of the Company's lost investment. Inflation, changes in
building codes and ordinances, environmental considerations and other factors
might also make it infeasible to use insurance proceeds to replace a hotel
after it has been damaged or destroyed.
RELIANCE UPON AFFILIATED COMPANIES
The Company's success will depend, in large part, upon the efforts of TCR,
Greystar and Wyndham, on which the Company will rely to develop, construct,
and manage its extended-stay hotels. The Company has entered into various
agreements with each of these companies which the Company believes will enable
it to successfully achieve its growth objectives. The Company's ability to
control and direct these companies in their performance under such agreements,
however, will be limited. If any of these parties fails to meet its
obligations to the Company, that failure could have a material adverse effect
on the Company's ability to achieve its growth objectives. See "--New
Management" and "--Dealings with Affiliates/Conflicts of Interest."
The Company has entered into a Management Agreement with Wyndham, pursuant
to which the Company will have the right to enter into property-specific
management contracts with Wyndham to manage up to 60 Company hotels. See
"Certain Transactions." While there is significant common ownership of the
Company and Wyndham (over 48% of the outstanding common stock of Wyndham is
owned by the Crow Family), there can be no assurance that Wyndham will enter
into future management contracts or continue to provide the Company market
research, design and other support services after the Management Agreement has
terminated. During the term of the Management Agreement, the Company is
restricted from engaging any other third party to manage its hotels.
Similarly, the Company has entered into a master development agreement with
the Developer Partnership, pursuant to which the Company and the Developer
Partnership have agreed to enter into property-specific development agreements
for up to 60 Company hotels. See "Certain Transactions." While there is
significant common ownership of the Company and the Developer Partnership, and
the Developer Affiliates will own a significant portion of the outstanding
Common Stock, there can be no assurance that the Company and the Developer
Partnership or the Developer Affiliates will enter into new development
agreements that are acceptable to Company management after the master
development agreement has terminated.
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DEALINGS WITH AFFILIATES/CONFLICTS OF INTEREST
Dealings with Affiliates. The Company has engaged and expects to continue to
engage in numerous transactions with affiliates, including the development and
construction of hotels through the Developer Partnership and the management of
hotels through Wyndham. See "--Reliance upon Affiliated Companies,"
"Business--Growth Strategy," "--Operations," and "Certain Transactions." The
Developer Partnership will own 10.0% of the Common Stock outstanding upon
completion of the Offering. While Wyndham does not own any of the outstanding
Common Stock, over 48% of Wyndham's outstanding common stock is owned by the
Crow Family. Additionally, each of the Crow Family and Ron Terwilliger own
approximately 20% of the interests in TCR, Leonard Wood owns zero to 30% of
various divisions of TCR, and a majority of the interests in Greystar is owned
by Robert Faith. Mr. Wood and Mr. Terwilliger are both stockholders of the
Company, Mr. Wood serves as a Director of the Company and Mr. Terwilliger is
an Advisor to the Company. Mr. Faith is the Chairman of the Board, President,
and Chief Executive Officer of the Company. In addition, James Carreker is a
Director of the Company, and is the President and Chairman of the Board of
Wyndham. The Crow Family, through Crow, will also own a significant percentage
of the Common Stock outstanding after the Offering. See "Principal
Stockholders."
While many future transactions with affiliates will be effected pursuant to
existing contracts, the Company may expand its relationships with certain
affiliates to take advantage of such affiliates' capabilities. Although the
Company believes that its transactions with affiliates have been and will
continue to be on terms no less favorable to the Company than those that could
have been obtained from third parties with similar capabilities, there can be
no assurance that its affiliates will continue to transact business with the
Company or that they will not attempt to use their ownership positions in the
Company to influence the terms on which they transact business with the
Company in the future.
Policy with Respect to Related Party Transactions. The Company has
implemented a policy requiring any material transaction (or series of related
transactions) between the Company and related parties to be approved by a
majority of the directors who have no beneficial or economic interest in such
related party (the "Disinterested Directors"), upon such directors'
determination that the terms of the transaction are no less favorable to the
Company than those that could have been obtained from third parties. The
policy defines a material related party transaction (or series of related
transactions) as one involving a purchase, sale, lease or exchange of property
or assets or the making of any investment with a value to the Company in
excess of $1.0 million or a service agreement (or series of related
agreements) with a value in excess of $1.0 million in any fiscal year. There
can be no assurance that this policy will always be successful in eliminating
the influence of conflicts of interest. See "Management--Directors and
Executive Officers" and "Certain Transactions--Policy with Respect to Related
Party Transactions."
NEW MANAGEMENT
Since its formation in February 1996, the Company has recruited a management
team, none of whom have had prior experience in the extended-stay industry
segment in which the Company is engaged. Similarly, neither TCR, Greystar nor
Wyndham have prior experience in the development or management of extended-
stay hotels. The Company's success will depend upon the ability of management,
TCR, Greystar and Wyndham to develop expertise in developing and managing its
extended-stay lodging business. See "Management--Directors and Executive
Officers."
RISK OF BORROWING
The Company expects to borrow substantial capital for its expansion.
Pursuant to a $30 million mortgage loan facility (the "Existing Mortgage
Facility") with Bank One, Arizona, N.A. ("BOA") described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," the Company may currently borrow up to $30
million to finance its acquisition and construction of properties. This
compares to total equity of $67.5 million, assuming net proceeds from the
Offering of $47.8 million based on an assumed initial public offering price of
$12.00 per share. The Company's borrowings under the Existing Mortgage
Facility will be secured by mortgages on the Company's properties and various
accounts and other assets. The Company will be required to procure substantial
additional capital over
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time to complete its Initial Hotel Program, including additional construction
loans to finance the construction of additional extended-stay facilities. The
Company is currently negotiating a $90 million facility to be provided by BOA
to replace the Existing Mortgage Facility. There can be no assurance that such
replacement facility will be obtained. See "--Need for Additional Capital."
Leverage increases the risks to the Company of any variations in its results,
construction cost overruns, or any other factors affecting its cash flow or
liquidity. In addition, the Company's interest costs could increase as the
result of general increases in interest rates. The principal and interest
amounts to be borrowed under the Existing Mortgage Facility will be due two
years from the date of borrowing, but the term of such loans may be extended
for an additional three years if certain conditions are met. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
In addition, Westar (as defined below), which the Company recently acquired
in the Westar Transaction, will have approximately $18 million of mortgage
indebtedness as of the completion of the Offering. This indebtedness is
secured by the five Westar facilities and Westar's various accounts and other
assets, and is due in monthly installments through January 11, 2021.
NEED FOR ADDITIONAL CAPITAL
Although the Company has access to financing under the Existing Mortgage
Facility, the Company will need to procure substantial additional financing
over time to complete its Initial Hotel Program, the amount of which will
depend upon a number of factors including the number of properties the Company
constructs or acquires and the cash flow generated by its properties. Upon
completion of the Offering and including the funds that may be available under
the Existing Mortgage Facility, the Company believes that it will have access
to sufficient resources to fund the development or acquisition of
approximately 20 of the hotels contemplated by the Initial Hotel Program
(including the six existing facilities to be owned upon completion of the
Offering), based on expected development or acquisition costs. The Company's
Initial Hotel Program calls for the Company to have approximately 65 hotels
open or under construction by December 31, 1998. There can be no assurance
regarding the availability or terms of additional financing the Company may be
able to procure over time. The failure of the Company to obtain the required
additional financing needed to complete the Initial Hotel Program would
adversely affect the Company's ability to implement its growth strategy and
would have a material adverse effect on the Company's earnings and results of
operations. In addition, future financing facilities may restrict the ability
of the Company to incur additional debt. The Existing Mortgage Facility and
any future debt financings or issuances of Preferred Stock (as defined below)
by the Company will be senior to the rights of the holders of Common Stock,
and any future issuances of Common Stock will result in the dilution of the
then-existing stockholders' proportionate equity interests in the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
IMPACT OF ENVIRONMENTAL REGULATIONS
The Company's operating costs may be affected by its obligations to pay for
the cost of complying with existing environmental laws, ordinances, and
regulations. 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 remediate properly such contaminated property, may adversely affect the
owner's ability to borrow using such real property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also
may 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. Certain environmental laws and common
law principles could be used to impose liability for releases of hazardous
materials, including asbestos-containing materials ("ACMs"), into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released ACMs
or other hazardous materials. Environmental laws also may impose restrictions
on the manner in which property may be used or transferred or in which
businesses may be operated, and these restrictions may require
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expenditures. In addition, in the event any future legislation is adopted, the
Company may, from time to time, be required to make significant capital and
operating expenditures in response to such legislation. In connection with the
ownership of its properties, the Company may be potentially liable for any
such costs. The cost of defending against claims of liability or remediating
contaminated property and the cost of complying with environmental laws could
materially and adversely affect the Company's results of operations and
financial condition.
The Company attempts to minimize its exposure to potential environmental
liability through its site-selection procedures. The Company typically secures
an option to purchase land subject to certain contingencies. Prior to
exercising such option and purchasing the property, the Company conducts a
Phase I environmental assessment ("Phase I Surveys"), which generally involves
a physical inspection and database search, but not soil or groundwater
analyses. To date, the Phase I Surveys have not revealed any environmental
liability or compliance concern that the Company believes would have a
material adverse effect on the Company's business, assets, results of
operations, or liquidity, and the Company is not aware of any such liability
or concern. Nevertheless, it is possible that Phase I Surveys will not reveal
all environmental liabilities or compliance concerns or that there will be
material environmental liabilities or compliance concerns of which the Company
will not be aware. Moreover, no assurances can be given that (i) future laws,
ordinances, or regulations will not impose any material environmental
liability, or (ii) the current environmental condition of the Company's
existing and future properties will not be affected by the condition of the
neighboring properties (such as the presence of leaking underground storage
tanks) or by third parties unrelated to the Company. Thus, there can be no
assurance that the Company will not incur environmental costs which could have
a material adverse effect on the Company. See "Business--Environmental
Matters."
GOVERNMENT REGULATION AND COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
The lodging industry is subject to numerous federal, state and local
government regulations, including building and zoning requirements. A number
of states also regulate the licensing of hotels by requiring registration,
disclosure statements, and compliance with specific standards of conduct. In
addition, the Company is subject to employment laws, including minimum wage
requirements, overtime, working conditions and work permit requirements.
Recent amendments to the minimum wage laws will go into effect in October
1996, and will increase the Company's labor costs. The Company believes that
the Studio Suites hotel and each of the Westar hotels have the necessary
permits, approvals and licenses to operate their respective business and that
collectively they comply with the applicable employment laws, and the Company
intends to continue to comply with such laws and regulations. A change in such
building, zoning, or licensing requirements or a further increase in the
minimum wage rate, employee benefit costs or other costs associated with
employees could materially and adversely affect the Company.
Under the ADA, all public accommodations are required to meet certain
federal requirements related to access and use by disabled persons. While the
Company believes that its existing hotel and the Westar hotels are
substantially in compliance with these requirements, a determination that the
Company is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use
and operation of the facilities, including changes to building codes and fire
and life-safety codes, may occur. If the Company were required to make
substantial modifications at its facilities to comply with the ADA or other
changes in governmental rules and regulations, the Company's financial
condition and ability to develop new hotels could be materially and adversely
affected.
MARKET CONCENTRATION
The Company's existing six hotels are located in the state of Texas. See
"The Formation Transaction" and "Business--Growth Strategy." While the Company
will be constructing hotels in Phoenix, Arizona, Denver, Colorado and Lenexa,
Kansas as of the completion of the Offering and intends to continue to build
or acquire hotels throughout the United States, adverse events or conditions
which affect Texas particularly (such as natural disasters or adverse changes
in local economic conditions) could have a more pronounced negative impact on
the operations of the Company until such diversification of local market risks
is in fact achieved. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PROPERTY TAX AND INSURANCE RATE FLUCTUATIONS
Each of the Company's properties is subject to real property taxes. Real
property taxes may increase as property tax rates change and as the properties
are assessed or reassessed by taxing authorities. Also, each of the Company's
properties is covered by property and casualty insurance. Property and
casualty insurance rates may increase depending upon claims experience,
insurance market conditions and the replacement value of the hotels.
RISKS ASSOCIATED WITH ACQUISITIONS
Although the Company expects that the construction and development of new
extended-stay hotels will be its primary means of expansion, the Company will,
as part of its growth strategy, consider making future acquisitions of
existing extended-stay hotels or other properties that are suitable for
conversion to the Company's extended-stay concept. The Company regularly
pursues and evaluates acquisition opportunities of extended-stay lodging
facilities or facilities that may be converted to the Company's extended-stay
lodging concept, and at any given time may be in various stages of evaluating
such opportunities. Such stages may take the form of internal property
analysis, preliminary due diligence, the submission of an indication of
interest, preliminary negotiations, negotiation of a letter of intent or
negotiation of a definitive agreement. While the Company is currently
evaluating a number of acquisition opportunities (some of which may be
material in size to the Company), it has not signed a letter of intent, nor
does it have any commitment or understanding, with respect to any material
acquisition and currently has no assurance of completing any particular
material acquisition or of entering into negotiations with respect to any
material acquisition. If the Company does make any such acquisitions, it will
encounter various associated risks, including possible environmental and other
regulatory costs, diversion of management's attention, unanticipated problems
in converting such properties to the quality standards of the Company's
prototype and unanticipated liabilities, some or all of which could have a
material adverse effect on the Company's earnings and operations. See
"Business--Growth Strategy."
RELIANCE ON KEY PERSONNEL
The Company's success will depend to a significant extent upon the efforts
and abilities of its senior management and key employees, particularly Robert
A. Faith, the Chairman of the Board, Chief Executive Officer and President,
and John C. Kratzer, the Executive Vice President and Chief Operating Officer.
The loss of the services of any of these individuals could have a material
adverse effect upon the Company. See "Management--Directors and Executive
Officers." Messrs. Faith and Kratzer have agreed, subject to certain
exceptions and certain limitations, not to compete with the Company. The
Company does not have employment or consulting agreements with any of its
officers other than Mr. Kratzer, nor does it carry key man life insurance on
any of its officers. See "Management--Noncompetition, Employment and Indemnity
Agreements."
CONTROL OF THE COMPANY BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
It is expected that after the completion of the Offering, the officers and
Directors of the Company and TCR, Greystar and Crow and their affiliates will
beneficially own approximately 59.7% of the outstanding shares of Common
Stock. By reason of such holdings, such stockholders acting as a group will be
able to control the affairs and policies of the Company and will be able to
elect a sufficient number of Directors to control the Company's Board of
Directors. In addition, such stockholders acting as a group will be able to
approve or disapprove most matters submitted to a vote of the stockholders.
See "Principal Stockholders." Crow and Greystar have entered into a
Stockholders Agreement by which they have agreed to act in concert with
respect to the election of Company Directors. For information with respect to
the voting agreement, see "Description of Capital Stock--Stockholders'
Agreement."
ANTI-TAKEOVER CONSIDERATIONS
Staggered Board of Directors. The Board of Directors is divided into three
classes serving staggered terms. The terms of the directors will expire in
1997, 1998, and 1999. The staggered terms of Directors may
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limit the ability of holders of Common Stock to change control of the Company
even if a change of control were in such stockholders' best interests. See
"Description of Capital Stock--Anti-takeover Provisions." The foregoing may
discourage offers or other bids for the Common Stock at a premium over the
market price thereof.
Certificate of Incorporation and Bylaws. The ownership positions of the
officers and Directors of the Company and of TCR, Greystar, and Crow and their
affiliates, together with the anti-takeover effect of certain provisions of
the Company's Certificate of Incorporation and Bylaws, may have the effect of
delaying, deterring or preventing a takeover of the Company that stockholders
purchasing shares in the Offering may consider to be in their best interest.
The Company's Certificate of Incorporation requires that any merger or other
business combination involving the Company be approved by at least 66 2/3% of
the shares of Common Stock outstanding, that all stockholder actions must be
effected at a duly-called annual or special meeting of the stockholders, and
that stockholders follow an advance notification procedure for certain
stockholder nominations of candidates for the Board of Directors and for
certain other business to be conducted at any stockholders' meeting. In
addition, the Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 5,000,000 shares of Preferred Stock, having such
rights, preferences and privileges as designated by the Board of Directors,
without stockholder approval. The issuance of such preferred stock could
inhibit a change of control. See "Description of Capital Stock--Anti-takeover
Provisions."
Delaware Anti-takeover Statute. Section 203 of the Delaware General
Corporation Law (the "DGCL"), which is applicable to the Company, restricts
certain business combinations with interested stockholders upon their
acquiring 15% or more of the Common Stock. This statute may have the effect of
inhibiting a non-negotiated merger or other business combination involving the
Company, even if such event would be beneficial to the then-existing
stockholders. See "Description of Capital Stock--Anti-takeover Provisions."
Stockholders' Agreement. Pursuant to a Stockholders' Agreement, each of Crow
and Greystar has certain rights of first refusal with respect to shares of
Common Stock held by the other. In addition, Crow and Greystar have agreed to
act in concert with respect to the election of Company Directors. These
provisions may have the effect of inhibiting a change in control of the
Company. See "Description of Capital Stock--Anti-takeover Provisions--
Stockholders' Agreement."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
As of the date of this Prospectus, the Company has not allocated the net
proceeds from this Offering to any specific use other than to the expansion of
its business. The net proceeds of this Offering may be used to develop
extended-stay hotels and to acquire existing extended-stay hotels or other
properties that are suitable for conversion to the Company's extended-stay
concept, although no such acquisitions are pending. See "Use of Proceeds."
Because management of the Company has not determined as of the date of this
Prospectus the specific projects and properties in which the net proceeds of
this Offering will be invested, management has retained broad discretion as to
the use of proceeds. An investment under such circumstances entails a higher
degree of investment risk, when contrasted with an investment in a company
that has specifically identified the projects in which the net proceeds will
be invested, because investors have no opportunity to assess individual
projects. Accordingly, investors will be reliant on the broad discretion
afforded management in the use of the net proceeds of this Offering.
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public market for shares of the
Common Stock, and there can be no assurance that an active trading market will
develop or, if developed, will be sustained. The Company has been informed by
each of the representatives of the Underwriters that it intends to make a
market in the Common Stock following the Offering, although there can be no
assurance that such representatives will make such a market. The initial
public offering price of the Common Stock will be determined through
negotiations with the representatives of the Underwriters, and there can be no
assurance that future market prices for the Common Stock will equal or exceed
such public offering price. See "Underwriting" for the factors to be
considered in determining the initial public offering price of the shares of
Common Stock in the Offering. After completion of the Offering, the market
price of the Common Stock could be subject to significant fluctuations due to
variations in quarterly operating results and other factors, such as changes
in general conditions in the economy, the financial markets or the lodging
industry, natural disasters or other developments affecting the Company or its
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competitors. In addition, the securities markets have experienced significant
price and volume fluctuations from time to time in recent years. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance,
and these broad fluctuations may materially and adversely affect the market
price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 6,400,000 shares of Common Stock will become eligible for sale
in the public market at various times after the completion of the Offering,
subject to compliance with an exemption from the registration requirements of
the Securities Act of 1933 (the "Securities Act"), such as Rule 144 or Rule
144A. The holders of these shares have agreed that they will not sell any
shares of Common Stock held by them for a period of 360 days from the date of
this Prospectus without the consent of Bear, Stearns & Co. Inc., one of the
representatives of the Underwriters. Such holders have certain rights,
beginning one year after the date of the completion of the Offering, to
request the Company to file a registration statement under the Securities Act
with respect to the resale by such stockholders of all of the shares of Common
Stock owned at that time by such stockholders. Shares so registered could be
sold in the public market by such stockholders at any time on or after the
date such registration statement is declared effective. No predictions can be
made as to the effect, if any, that market sales of such shares or the
availability of such shares for sale will have on the market price for shares
of Common Stock prevailing from time to time. Sales of substantial amounts of
shares of Common Stock in the public market following the Offering could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of equity
securities. See "Shares Eligible for Future Sale."
DILUTION
Investors purchasing shares of Common Stock in the Offering will experience
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. Based on an assumed
initial public offering price of $12.00 per share, as of June 30, 1996, such
dilution, on a pro forma basis, would have been equal to $5.33 per share with
respect to shares purchased in the Offering. See "Dilution."
ABSENCE OF DIVIDENDS
The Company intends to retain its earnings to finance its growth and for
general corporate purposes and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, future financing agreements
will contain limitations on the payment of cash dividends or other
distributions of assets. See "Dividend Policy" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements such as "believe," "anticipate," "expect" and
words of similar import involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of the Company, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
adverse changes in national or local economic conditions, competition from
other lodging properties, changes in real property tax rates and in the
availability, cost and terms of financing, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements, changes in operating expenses, adverse changes
in governmental rules and fiscal policies, civil unrest, acts of God,
including earthquakes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors referenced in this Prospectus. Certain of these factors are discussed
in more detail elsewhere in this Prospectus, including, without limitation,
under the captions "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business." Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to announce publicly
the result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
16
<PAGE>
THE FORMATION TRANSACTION
The Company was incorporated on August 16, 1996 to succeed to the business
of ESLP, which was formed by TCR, Greystar and Crow in February 1996.
Immediately prior to, or simultaneously with, the completion of the Offering,
the current capital partners of ESLP will contribute in cash to ESLP, any
amounts remaining due on their initial obligations to contribute $20 million
to ESLP, and the Company will succeed to all of the assets and liabilities of
ESLP as a result of the merger of ESLP with and into the Company. As of
October 4, 1996, such amounts remaining due were $1.33 million. In
consideration thereof, the Company will issue 6,400,000 shares of Common Stock
to the current partners of ESLP which represents an average price per share of
$3.13. As a result of such transaction, affiliates of Greystar and Crow,
collectively, will acquire 6,400,000 shares of Common Stock which will
constitute in the aggregate 59.7% of the Common Stock outstanding after the
Offering. See "Principal Stockholders." Of such number, the Developer
Partnership will receive 1,073,103 shares of Common Stock, constituting 10.0%
of the Common Stock outstanding after the Offering, in exchange for its
interest in ESLP which the Developer Partnership received as consideration for
its agreement to provide the services under the master development agreement.
See "Certain Transactions." The Developer Partnership will distribute a
portion of these shares as each project is completed to the Developer
Affiliate that is responsible for the completed project. See "Certain
Transactions."
ESLP currently owns the 139-unit Studio Suites hotel (which the Company
intends to rename "Homegate Studios") in Grand Prairie, Texas, and will, as of
the completion of the Offering, have begun construction of a 139-unit hotel in
Phoenix, Arizona, a 143-unit hotel in Denver, Colorado, and a 117-unit hotel
in Lenexa, Kansas. ESLP expects each of these hotels to be operational in the
second or third quarter of 1997. ESLP also will have acquired development
sites in Overland Park, Kansas, Dallas, Texas and an additional site in
Phoenix, Arizona, on each of which it expects to begin construction of an
extended-stay hotel during the fourth quarter of 1996. The Company has entered
into agreements, letters of intent, contracts or other arrangements to acquire
13 other Planned Hotel Sites. The Company's hotels, current development sites
and proposed acquisitions are located in nine states. As of June 30, 1996,
ESLP had incurred indebtedness under the Existing Mortgage Facility of
approximately $2,869,000, which is payable over two years with interest at
either the BOA prime rate plus 0.5% or LIBOR plus 2.25%. At June 30, 1996, the
interest rate was equal to the BOA prime rate plus 0.5%. At October 4, 1996,
the interest rate was equal to LIBOR plus 2.25%.
In addition, in September 1996 ESLP acquired beneficial ownership of five
extended-stay hotels currently operated under the name of "Westar Suites" from
the constituent partners of VPS I, L.P., an unaffiliated Delaware limited
partnership (which is hereinafter referred to as "Westar"). The hotels are
located in Texas in the cities of San Antonio (2), El Paso, Amarillo and
Irving, and contain 622 rooms in the aggregate, all of which are similar to
the prototype developed by the Company for its hotels. In connection with this
acquisition, ESLP acquired all of the outstanding stock of VPS, Inc., a
Delaware corporation and the sole general partner of Westar, and all of the
limited partnership interests in Westar. The aggregate purchase price of the
stock and the partnership interests was approximately $7 million (with $1.5
million of such consideration allocable to the termination of a 20-year
management contract to which the hotels were subject). Westar also has
approximately $18 million of mortgage indebtedness. This debt is payable in
monthly installments through January 11, 2021, with an interest rate of 9.71%
per annum through January 11, 2011 (at which time the annual interest rate
will increase by at least 5% and the loan will become prepayable in full at
the borrower's discretion). The Westar hotels will be renovated at an
aggregate anticipated cost of approximately $4 million to conform to the
quality standards of the Homegate Studios & Suites prototype, and will be
operated under the Homegate Studios & Suites brand name.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $47.8 million ($55.0 million if the Over-Allotment Option is
exercised in full) assuming an initial public offering price of $12.00 per
share and after deduction of the estimated underwriting discounts and
commissions and other offering expenses. The Company intends to use
substantially all of such net proceeds to expand its business by developing
additional extended-stay hotels and for other general corporate purposes. The
Company will also consider future acquisitions of existing extended-stay
hotels or other properties that are suitable for conversion to the Company's
extended-stay concept, although there are no such acquisitions pending.
Pending use of the proceeds as set forth above, they will be invested in
short-term investment-grade, interest bearing investments.
The Company regularly pursues and evaluates acquisition opportunities of
extended-stay lodging facilities or facilities that may be converted to the
Company's extended-stay lodging concept, and at any given time may be in
various stages of evaluating such opportunities. Such stages may take the form
of internal property analysis, preliminary due diligence, the submission of an
indication of interest, preliminary negotiations, negotiation of a letter of
intent or negotiation of a definitive agreement. While the Company is
currently evaluating a number of acquisition opportunities (some of which may
be material in size to the Company), it has not signed a letter of intent, nor
does it have any commitment or understanding, with respect to any material
acquisition and currently has no assurance of completing any particular
material acquisition or of entering into negotiations with respect to any
material acquisition.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock. The Board of
Directors intends to retain earnings to finance its growth and for general
corporate purposes and, therefore, does not anticipate paying any such
dividends in the foreseeable future. In addition, the Company's future
financing agreements may contain net worth and other covenants and limitations
on payment of any cash dividends or other distributions of assets, which
covenants and limitations could restrict the Company's ability to pay
dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
DILUTION
As of June 30, 1996, the net tangible book value of the Company, giving pro
forma effect to the Formation, the Westar Transaction, and the other
transactions (other than the Offering) described in the notes to the pro forma
balance sheet contained elsewhere herein, was approximately $19,651,215, or
$3.07 per share of Common Stock. "Net tangible book value" per share is
determined by dividing the Company's tangible net worth (the Company's assets,
excluding intangible assets, less total liabilities) by the number of shares
of Common Stock outstanding. After giving effect to the sale of shares of
Common Stock in the Offering (at an assumed initial public offering price of
$12.00 per share), and before estimated expenses and underwriting discounts
and commissions, the pro forma net tangible book value of the Company at June
30, 1996 would have been approximately $71,551,215, or $6.67 per share, based
on 10,725,000 shares outstanding after the Offering. This represents an
immediate increase in net tangible book value of $3.60 per share to the
existing stockholders of the Company, and an immediate dilution in net
tangible book value to new investors of $5.33 per share. The following table
illustrates the per share dilution as of June 30, 1996:
<TABLE>
<S> <C> <C>
Initial public offering price.................................. $12.00
------
Pro forma net tangible book value per share before the
Offering.................................................... $3.07
-----
Increase in pro forma net tangible book value per share
attributable to purchase by new stockholders in the
Offering(1)................................................. 3.60
-----
Pro forma net tangible book value per share after the Offering. 6.67
------
Dilution per share to new stockholders......................... $ 5.33
======
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 1996, the
difference between the existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased, the total
consideration paid and the average price per share paid (assuming an initial
public offering price of $12.00 per share):
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(2) CONSIDERATION PAID AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE(2)
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 6,400,000 59.7% $20,000,000 27.8% $ 3.13
New stockholders in the
Offering..................... 4,325,000 40.3% $51,900,000 72.2% $12.00
---------- ----- ----------- -----
Total....................... 10,725,000 100.0% $71,900,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Before deducting underwriting discount and estimated expenses of the
Offering.
(2) Excludes 496,250 shares of Common Stock issuable upon exercise of options
to be granted as of the completion of the Offering under the Company's
1996 Plan, with an exercise price equal to the initial public offering
price shown on the cover page of this Prospectus.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of ESLP as of June 30,
1996, the capitalization of the Company as of June 30, 1996, as adjusted to
give pro forma effect to the Formation, the Westar Transaction and the other
transactions (except for the Offering) described in the notes to the pro forma
balance sheet contained elsewhere herein, and the capitalization of the
Company as of June 30, 1996, as adjusted to give pro forma effect to the
Offering at an assumed initial public offering price of $12.00 per share, less
estimated expenses and underwriting discounts and commissions. This table
should be read in conjunction with the selected financial data, the pro forma
financial statements of the Company, the historical financial statements of
ESLP and the combined historical financial statements of Westar, and the
related notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------
EXTENDED STAY
LIMITED COMPANY
PARTNERSHIP COMPANY PRO FORMA, AS
HISTORICAL(1) PRO FORMA(2) ADJUSTED(3)
------------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Total debt............................ $2,869 $20,896 $20,896
Partners' capital/stockholders'
equity:
Stockholders' equity:
Preferred Stock, par value $.01
per share, 5,000,000 shares
authorized; no shares issued and
outstanding...................... -- -- --
Common Stock, par value $.01 per
share, 20,000,000 shares
authorized; 6,400,000 shares
issued and outstanding on a pro
forma basis; 10,725,000 shares
issued and outstanding on a pro
forma basis, as adjusted for the
Offering......................... -- 64 107
Additional paid-in capital........ -- 19,697 67,421
Partners' capital................... 6,156 -- --
------ ------- -------
Total partners'
capital/stockholders' equity... 6,156 19,761 67,528
------ ------- -------
Total capitalization............ $9,025 $40,657 $88,424
====== ======= =======
</TABLE>
- --------
(1) ESLP is the predecessor to the Company. The Company was incorporated on
August 16, 1996 to succeed to the business of ESLP, and prior to the
Offering, has minimal assets and no operations of its own. Immediately
prior to or simultaneously with the consummation of the Offering, ESLP
will merge into the Company. See "The Formation Transaction."
(2) Giving pro forma effect to the Formation, the Westar Transaction, and the
acquisition of three development sites as if such transactions had
occurred as of June 30, 1996. See the pro forma financial statements and
notes thereto contained elsewhere herein.
(3) Giving pro forma effect to the Formation, the Westar Transaction, the
acquisition of three development sites, and the Offering at an assumed
initial public offering price of $12.00 per share as if such transactions
had occurred as of June 30, 1996. See the pro forma financial statements
and notes thereto contained elsewhere herein.
20
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The selected financial data set forth below has been derived from the pro
forma financial statements of the Company, from the historical financial
statements of ESLP and from the historical combined financial statements of
Westar. The Company was incorporated on August 16, 1996, to succeed to the
business of its predecessor (ESLP), and prior to the Offering, has minimal
assets and no operations of its own. The historical financial statements of
the Company as of August 22, 1996 and ESLP as of June 30, 1996 and for the
period from inception (February 9, 1996) through June 30, 1996 have been
audited by Ernst & Young LLP, independent auditors, whose reports thereon
appear elsewhere herein. The financial data for such period is not necessarily
indicative of results for subsequent periods or the full year. The historical
combined financial statements of Westar for the three years ended December 31,
1993, 1994 and 1995, have been audited by Ernst & Young LLP, independent
auditors, whose report thereon appears elsewhere herein. The pro forma data is
unaudited but, in the opinion of management, all pro forma adjustments
necessary to reflect the effects of these transactions have been made. The
selected financial data of Westar set forth below for the years ended December
31, 1991 and 1992 and for the six month periods ended June 30, 1995 and 1996
have been derived from Westar's unaudited combined financial statements and
reflect all adjustments consisting of normal recurring accruals, which
management considers necessary for a fair presentation of the financial
position and the results of operations for these periods.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the pro forma financial statements and related notes thereto of the Company
and the historical financial statements and related notes thereto of ESLP and
Westar contained elsewhere herein.
THE COMPANY
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
--------------------------
EXTENDED
STAY LIMITED
PARTNERSHIP COMPANY
HISTORICAL(1) PRO FORMA(2)
------------- ------------
<S> <C> <C>
OPERATING DATA:
Revenue............................................. $ 26 $ 3,970
Property operating expenses......................... 30 2,504
Corporate operating expenses........................ 204 541
Depreciation and amortization....................... 10 454
Interest expense.................................... 21 934
------ ---------
Net loss............................................ $ (239) $ (463)
====== =========
Net loss per share.................................. $ (.07)
Weighted average number of shares of common stock
outstanding ....................................... 6,400,000
OTHER DATA:
EBITDA(3)........................................... $ (208) $ 925
====== =========
Cash flows provided by (used in):
Operating activities.............................. $ 313 $ 1,110
Investing activities.............................. (8,264) (8,290)
Financing activities.............................. 9,225 9,167
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXTENDED STAY
LIMITED COMPANY
PARTNERSHIP COMPANY PRO FORMA, AS
HISTORICAL PRO FORMA(2) ADJUSTED(4)
------------- ------------ -------------
<S> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............. $1,274 $ 4,857 $52,624
Property and equipment, net........... 8,201 36,189 36,189
Total assets.......................... 9,725 41,457 89,224
Total debt............................ 2,869 20,896 20,896
Total partners' capital (stockholders'
equity pro forma and as adjusted).... 6,156 19,761 67,528
</TABLE>
WESTAR
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue................. $7,667 $8,294 $8,761 $8,584 $8,439 $ 4,303 $ 3,944
Property operating ex-
penses................. 4,330 4,896 4,922 5,136 5,126 2,372 2,357
Corporate operating ex-
penses................. 627 709 538 930 875 214 337
Depreciation and amorti-
zation................. 696 648 592 611 662 296 305
Interest expense........ 2,625 2,570 2,455 2,375 2,609 1,038 1,210
------ ------ ------ ------ ------ -------- --------
Income (loss) before ex-
traordinary item....... $ (611) $ (529) $ 254 $ (468) $ (833) $ 383 $ (265)
====== ====== ====== ====== ====== ======== ========
OTHER DATA:
EBITDA(3)............... $3,301 $2,518 $2,438 $ 1,717 $ 1,250
====== ====== ====== ======== ========
Cash flows provided by
(used in):
Operating activities.. $ 943 $ 861 $ 213 $ 1,211 $ 616
Investing activities.. (366) (910) (640) (262) (26)
Financing activities.. (482) (202) 673 (812) (58)
</TABLE>
- --------
(1) From inception (February 9, 1996) through June 30, 1996.
(2) Giving pro forma effect to the Formation, the Westar Transaction, and the
acquisition of three development sites as if such transactions had
occurred as of January 1, 1995 for the purposes of the operating and other
data, and as of June 30, 1996 for the purposes of the balance sheet data.
See the pro forma financial statements and notes thereto contained
elsewhere herein.
(3) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement
as a measure of operating performance and is not necessarily indicative of
cash available to fund cash needs. The Company has included EBITDA herein
because the Company believes that it is one measure used by certain
investors to determine operating cash flow. EBITDA, as calculated above,
may not be comparable to other similarly titled measures of other
companies.
(4) Giving pro forma effect to the Formation, the Westar Transaction, the
acquisition of three development sites, and the Offering at an assumed
initial public offering price of $12.00 per share as if such transactions
had occurred as of June 30, 1996. See the pro forma financial statements
and notes thereto contained elsewhere herein.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company was incorporated in August 1996 and, as a result of the
Formation, will succeed to the business of ESLP, which was organized in
February 1996 to become a provider of high quality, midprice extended-stay
hotels. Prior to the Formation (which is expected to occur immediately prior
to, or simultaneously with, the completion of the Offering), all business
activities of the Company have been and will be conducted by ESLP. See "The
Formation Transaction."
During the period from its inception through June 30, 1996, ESLP hired its
initial employees, engaged in concept and product design, market study and
site selection activities, and acquired its first properties. On May 31, 1996,
ESLP purchased Studio Suites, a 139-unit extended-stay facility located in
Grand Prairie, Texas. The property was in the final stages of construction
when acquired and was opened for business on June 17, 1996. Prior to June 30,
1996, ESLP also purchased development sites in Phoenix, Arizona and Denver,
Colorado.
Subsequent to June 30, 1996, ESLP acquired beneficial ownership of five
hotels from the constituent partners of Westar. See "The Formation
Transaction." The hotels are located in Texas in the cities of San Antonio
(2), El Paso, Amarillo and Irving. The hotels contain 622 units in the
aggregate and will be renovated to conform to the quality standards of the
Homegate Studios & Suites prototype. The Westar facilities will then be
operated under the Homegate Studio & Suites brand name.
As of the completion of the Offering, the Company will have commenced
construction of extended-stay hotels on its Phoenix, Arizona (139 units) and
Denver, Colorado (143 units) sites and on a Lenexa, Kansas (117 units) site
acquired subsequent to June 30, 1996. The Company currently owns additional
development sites in Overland Park, Kansas, Dallas, Texas and a second site in
Phoenix, Arizona, on each of which it expects to begin construction of an
extended-stay hotel by the fourth quarter of 1996. At September 30, 1996, ESLP
had agreements, letters of intent, contracts or other arrangements to acquire
13 other Planned Hotel Sites. See "Business-Growth Strategy."
RESULTS OF OPERATIONS
Property Operations
ESLP's results of operations from inception through June 30, 1996 reflect
only 13 days of hotel operations. Occupancy averaged 44.5%. Weekly room rates
averaged $199, reflecting an "opening day" promotion. Property operating
expenses include salaries and benefits, repairs and maintenance, energy,
property taxes and insurance. A management fee of 3% of gross revenues was
paid to Wyndham to manage the property.
The following is a summary of certain historical operating information for
the Westar hotels (dollars in thousands, except for average daily room rate):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average occupancy rate............ 76.0% 74.5% 74.6% 82.9% 83.1%
Average daily room rate........... $ 49.18 $ 49.27 $ 48.54 $ 52.41 $ 50.56
Room revenue...................... 8,466 8,299 8,193 4,222 3,871
Total revenue..................... 8,761 8,584 8,439 4,303 3,944
Property operating expenses....... 4,922 5,136 5,126 2,372 2,357
Property operating expenses as a
percentage of total revenue...... 56.2% 59.8% 60.7% 55.1% 59.8%
</TABLE>
23
<PAGE>
The Westar hotels have not been operated historically as extended-stay
facilities, and therefore the average room rates shown above are daily rates
rather than weekly rates. Room revenue decreased by 2.0% from 1993 to 1994, by
1.3% from 1994 to 1995 and by 8.3% from the six month period ended June 30,
1995 to the comparable period in 1996. Property operating expenses increased
by 4.3% from 1993 to 1994 and decreased by 0.2% from 1994 to 1995. Such
expenses decreased by 0.6% from the six months ended June 30, 1995 to the
comparable period in 1996.
Partnership/Corporate Operations
Partnership/corporate expenses consisted primarily of salaries and benefits,
travel, office supplies, market research, data processing and ESLP formation
costs.
Interest expense of $21,457 was recorded by ESLP for the period on its
borrowings under the Existing Mortgage Facility.
LIQUIDITY AND CAPITAL RESOURCES
ESLP had cash balances of $1,274,000 as of June 30, 1996. In addition,
certain capital partners were obligated to make additional capital
contributions to ESLP in the aggregate amount of $13,605,000. These
contributions will be made prior to or simultaneously with the completion of
the Offering.
Westar owes indebtedness of approximately $18 million on a 9.71% secured
promissory note. This debt is payable on a fixed 25-year amortization schedule
in monthly installments through January 11, 2021, and will be paid from
Westar's operations.
The Company has a $30 million Existing Mortgage Facility with BOA, which
provides the Company with construction financing for new extended-stay hotels.
The Company is permitted to borrow under the Existing Mortgage Facility
through November 30, 1997. Each project may be funded under the Existing
Mortgage Facility through a separate loan, with all loans being cross-
collateralized and cross-defaulted. Initially, such loans will be advanced as
construction loans, payable over twenty-four months (the "Construction Term")
with interest at either the BOA prime rate plus 0.5% or LIBOR plus 2.25%. The
Company must make interest payments on each construction loan for the first
twelve months of the loan, followed by principal and interest payments based
upon a fifteen-year amortization schedule for the remaining twelve months of
the loan. The Company may elect to extend each loan for three additional years
(the "Mini-perm Term") if certain conditions are met and upon payment of a
specified extension fee. If the Company elects to extend the loan as a mini-
permanent financing, the Company will continue to make principal and interest
payments on a fifteen-year amortization schedule during each year of the
three-year extension period, and the interest rate may, in certain
circumstances, be reduced. During the Construction Term, the amount of any
loan may not exceed 55% of the total project costs of the related project.
During the Mini-perm Term, the loan amount to costs-of-project ratio may be
increased to 65% if certain conditions are met. BOA will have full recourse
against the Company for the loans, including environmental indemnities.
As of June 30, 1996, ESLP had incurred indebtedness under the Existing
Mortgage Facility of approximately $2,869,000 bearing interest at the BOA
prime rate plus 0.5%. This debt is due June 1, 1998, and may be extended for
an additional three years as described above. At October 4, 1996, the interest
rate on the Existing Mortgage Facility was equal to LIBOR plus 2.25%.
Although the Company has access to financing under the Existing Mortgage
Facility, the Company will need to procure substantial additional financing
over time to complete its Initial Hotel Program, the amount of which financing
will depend upon a number of factors including the number of properties the
Company constructs or acquires and the cash flow generated by its properties.
Upon completion of the Offering and including the funds that may be available
under the Existing Mortgage Facility, the Company believes that it will have
access to sufficient resources to fund the development or acquisition of
approximately 20 hotels (including the six existing facilities owned at the
completion of the Offering), based on expected development or
24
<PAGE>
acquisition costs. In particular, the Company anticipates spending an
aggregate of approximately $4 million to renovate the Westar facilities to
conform to the Homegate Studios & Suites prototype, and expects that it will
spend between $5 million and $6 million on each developed or acquired hotel.
The Company's Initial Hotel Program calls for 65 hotels to be open or under
construction by December 31, 1998. There can be no assurance regarding the
availability or terms of additional financing the Company may be able to
procure over time. In addition, future financing facilities may restrict the
ability of the Company to incur additional debt in the future. The failure of
the Company to obtain the required additional financing needed to complete the
Initial Hotel Program would adversely affect the Company's ability to
implement its growth strategy and would have a material adverse effect on the
Company's earnings and operations. The Existing Mortgage Facility and any
future debt financings or issuances of Preferred Stock by the Company will be
senior to the rights of the holders of Common Stock, and any future issuances
of Common Stock will result in the dilution of the then-existing stockholders'
proportionate equity interests in the Company. See "Risk Factors--Development
Risks," "--Risks Associated with Acquisitions" and "--Need for Additional
Capital."
The Company is currently negotiating a $90 million master line of credit
(the "Replacement Facility") with BOA to replace the Existing Mortgage
Facility. The Company will be permitted to borrow under the Replacement
Facility for up to two years after the closing of the facility, provided that
in no event may the Company's debt to net worth ratio exceed 1.25:1. The
closing of the Replacement Facility is subject to a variety of conditions,
including the negotiation of definitive documents and the syndication of $60
million of the facility amount. There can be no assurance that the Replacement
Facility can be obtained or, if obtained, that it will be in the anticipated
amount.
SEASONALITY
The lodging industry is seasonal in nature. Quarterly earnings may be
adversely affected by events beyond the Company's control, such as poor
weather conditions, economic factors and other considerations affecting
travel. In addition, occupancy rates and room revenues typically decline
during the fourth calendar quarter as business travel decreases during the
holiday season. The timing of openings of new properties could also lead to
fluctuations in the Company's quarterly earnings.
INFLATION
The rate of inflation as measured by changes in the consumer price index has
not had a material effect on the revenue or operating results of the Company.
There can be no assurance, however, that inflation will not affect future
operating or construction costs. See "Risk Factors--Development Risks."
25
<PAGE>
BUSINESS
OVERVIEW
Homegate Hospitality, Inc.'s goal is to become a national provider of high
quality extended-stay hotels in strategically selected markets located
throughout the United States. The Company plans to rapidly develop a chain of
midprice extended-stay hotels under the Homegate Studios & Suites brand name
to capitalize on what management believes is a large and underserved market
for extended-stay accommodations. This market includes business travelers,
professionals on temporary work assignments, persons between domestic
situations, and persons relocating or purchasing a home, who often desire
accommodations for an extended duration. As of the completion of the Offering,
the Company will own six hotels and have six more hotels under development,
and expects to have agreements, letters of intent, contracts or other
arrangements to purchase 13 additional development sites. Of the six hotels
under development, three are currently under construction and three more are
expected to be under construction by December 31, 1996. The Company's
objective is to have approximately 65 extended-stay hotels open or under
construction by December 31, 1998.
The Company was recently founded by management and by affiliates of the
following three entities: Trammell Crow Residential Company, one of the
nation's leading developers of multi-family housing units with 22 regional
offices; Greystar Capital Partners, L.P., a private investment company with
substantial multi-family housing development and construction expertise; and
Crow Investment Trust, the real estate investment arm of the Crow Family. In
TCR, Greystar and Crow, the Company brings together extensive experience in
developing, constructing and managing properties on a national scale and in
structuring, financing and executing national real estate investment programs.
The Company has entered into a master development agreement with the Developer
Partnership to provide site selection, construction and development services
for the Company's Initial Hotel Program. Management believes the Developer
Affiliates' expertise and local market presence will significantly enhance the
Company's ability to execute its Initial Hotel Program, while minimizing the
Company's development costs and administrative overhead.
The Company also has entered into the Management Agreement with a subsidiary
of Wyndham Hotel Corporation, which owns, operates or franchises over 70
hotels in North America, to manage the Company's hotels pursuant to 10-year
management contracts. Management believes that Wyndham's experience in
managing and operating one of the nation's leading hotel chains will
facilitate the Company's ability to provide consistently high quality
accommodations and services to its guests, and that access to Wyndham's
resources will reduce the Company's overhead expenses during its initial phase
of operations. Although Wyndham owns no Common Stock in the Company, over 48%
of Wyndham's stock is owned by the Crow Family. See "Certain Transactions" and
"Risk Factors--Reliance upon Affiliated Companies." Upon completion of the
Offering, TCR, Greystar, Crow and their affiliates will own 59.7% of the
outstanding Common Stock. See "Risk Factors--Control of the Company by
Management and Principal Stockholders" and "Principal Stockholders."
The Company's product strategy is to develop a well-recognized national
brand under the Homegate Studios & Suites name by offering consistent, high
quality accommodations in a standard format, providing much of the value
offered by limited service hotels with many of the added features and comforts
of apartment living. Homegate Studios & Suites hotels will feature three
functional room configurations, each with a fully equipped kitchen, upscale
residential-quality finishes and accessories, and separation between the
cooking, living, and sleeping areas, and other amenities, such as weekly maid
service, twice-weekly linen service, resident laundry facilities, direct
telephone service with voice mail messaging and dataport capabilities, cable
TV, a business center and an exercise facility. See "--Product Concept."
The Company was incorporated in August 1996 as a Delaware corporation to
succeed to the business of a predecessor partnership. See "The Formation
Transaction." Its executive offices are located at 2001 Bryan Street, Suite
2300, Dallas, Texas 75201, and its telephone number is (214) 863-1777.
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<PAGE>
GROWTH STRATEGY
The Company's growth strategy is to rapidly develop a chain of high quality,
midprice extended-stay hotels by leveraging its relationships with TCR,
Greystar, Crow, and Wyndham. Although the Company expects that the
construction and development of new extended-stay hotels will be its primary
means of expansion, the Company may consider, as part of its growth strategy,
franchising opportunities or future acquisitions of existing extended-stay
hotels or other properties that are suitable for conversion to the Company's
extended-stay concept. The Company regularly pursues and evaluates acquisition
opportunities of extended-stay lodging facilities or facilities that may be
converted to the Company's extended-stay lodging concept, and at any given
time may be in various stages of evaluating such opportunities. While the
Company is currently evaluating a number of acquisition opportunities (some of
which may be material in size to the Company), it has not signed a letter of
intent, nor does it have any commitment or understanding, with respect to any
material acquisition and currently has no assurance of completing any
particular material acquisition or of entering into negotiations with respect
to any material acquisition.
Pursuant to the master development agreement, the Developer Partnership has
agreed to develop up to 60 Homegate Studios & Suites hotels, and that neither
it, its partners, nor their respective affiliates will own, operate or develop
a competing extended-stay facility, subject to certain exceptions,within the
continental United States during the duration of such agreement. This
agreement will terminate upon the earlier of the commencement of the 60th
facility or December 31, 1998. Pursuant to this agreement, the Developer
Affiliates' regional offices will, under the Company's direction, provide site
sourcing, obtain entitlements and building permits, and provide construction,
architectural and engineering oversight. In addition, individual affiliates of
the Developer Affiliates will provide business asset guaranties for
construction cost overruns on each project. The Company believes its
utilization of the regional office network will produce competitive advantages
and cost efficiencies in its site selection, development and construction
operations, by providing local expertise and minimizing the Company's
development and administrative overhead costs during its Initial Hotel
Program.
The Company's development plan calls for identification of multiple markets
in which construction can occur within the Company's targeted time frame and
budget. The Company has developed a list of target markets and submarkets
based upon local hotel market conditions, the availability of development
sites and local construction capabilities, the existence of development
barriers to entry, the overall health and growth trends of the local
economies, and the presence of multiple corporate, residential and leisure
travel demand generators. Having identified its target markets, the Company
reviews each market to determine if it can achieve operational efficiencies by
either locating its hotels in proximity to existing Wyndham-managed hotels or
by clustering two or more Company hotels within the market.
In selecting sites within its targeted markets, the Company considers
demographic analysis, including surrounding population and employment data.
The prototypical site includes the following attributes:
. located close to an employment center (Fortune 500 companies and
corporate headquarters preferred) and to a freeway or major traffic
thoroughfare with good visibility;
. located in a clean, accessible area which provides some buffer from noise
generators and is close to restaurants and retail services;
. located in an area with residential density; and
. site size of approximately 2.5 to 3.0 acres which allows for the
construction of 110 to 150 units.
As of the completion of the Offering, the Company will have begun
construction of three hotels--a 139-unit facility in Phoenix, Arizona, a 143-
unit facility in Denver Colorado, and a 117-unit facility in Lenexa, Kansas--
and expects each of these hotels to be operational in the second or third
quarter of 1997. The Company currently owns development sites in Overland
Park, Kansas, Dallas, Texas, and a second site in Phoenix, Arizona, on each of
which it expects to begin construction of an extended-stay hotel during the
fourth quarter of 1996. As of September 30, 1996, the Company also has entered
into agreements, letters of intent, contracts, or other arrangements to
purchase 13 additional Planned Hotel Sites, as set forth below:
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<PAGE>
<TABLE>
<CAPTION>
LOCATION NUMBER OF SITES
-------- ---------------
<S> <C>
Austin, Texas............................................. 3
Dallas, Texas (second site)............................... 1
Houston, Texas............................................ 2
Orlando, Florida.......................................... 1
Phoenix, Arizona (third site)............................. 1
Portland, Oregon.......................................... 1
Indianapolis, Indiana..................................... 1
Fort Lauderdale, Florida.................................. 1
Raleigh-Durham, North Carolina............................ 1
Chicago, Illinois......................................... 1
</TABLE>
The purchase prices for these Planned Hotel Sites range from $600,000 to
$1,500,000. The arrangements which the Company enters into for the purchase of
potential hotel sites provide for numerous investigations and other diligence,
including environmental studies and title reports, prior to the closing of the
purchase of the real property. The Company reserves the right to terminate
each contract if it is not satisfied with the results of its investigations
and diligence. There can be no assurance that the Company will be successful
in purchasing or developing any of the sites that are under contract or are
subject to a letter of intent or other arrangement. See "Risk Factors--
Development Risks" and "--Real Estate Investment Risks." However, the Company
is currently evaluating a variety of sites for construction of Homegate
hotels, and does not believe that the failure to acquire any or all of the
sites currently under some form of purchase arrangement would have a material
adverse effect upon its ability to complete its Initial Hotel Program.
The Company currently operates one extended-stay hotel in Grand Prairie,
Texas near the Dallas/Fort Worth International Airport. This newly-constructed
139-unit hotel opened on June 17, 1996 under the name of "Studio Suites," and
will be renamed "Homegate Studios." The Company has acquired beneficial
ownership of five additional extended-stay hotels in the Westar Transaction.
See "The Formation Transaction." These hotels are located in Texas in the
cities of San Antonio (2), El Paso, Amarillo and Irving. The Westar hotels
contain an aggregate of 622 units, all of which are similar to the Homegate
Studios & Suites prototype. The Westar hotels will be renovated at an
aggregate anticipated cost of approximately $4 million in order to conform to
the quality standards of the Company's prototype, and will be operated under
the Homegate Studios & Suites brand name. Set forth below is a summary of
certain data regarding these hotels:
<TABLE>
<CAPTION>
1995-
1997 PLANNED 1995 AVG. 1995 AVG. 1995 TOTAL AVERAGE
YEAR MONTH RENOVATION 1995 AVG. DAILY WEEKLY ROOM ROOM
LOCATION TYPE BUILT ACQUIRED EXPENDITURES OCCUPANCY RATE RATE(1) REVENUE REVENUE(3)
- -------- ---------------- ----- --------- ------------ --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Grand Prairie, Texas Studio Suites(2) 1996 May, 96 -- n/a n/a n/a n/a n/a
San Antonio, Texas Westar (Airport) 1986 Sept., 96 $866,050 75.1% $53.66 $375.62 $1,729,733 $40.16
San Antonio, Texas Westar (Fiesta) 1985 Sept., 96 $869,700 63.1% $50.29 $352.03 $1,455,990 $31.66
Irving, Texas Westar 1985 Sept., 96 $918,180 75.7% $46.19 $323.33 $1,604,068 $34.88
El Paso, Texas Westar 1986 Sept., 96 $813,180 80.7% $50.69 $354.83 $1,876,461 $40.80
Amarillo, Texas Westar 1985 Sept., 96 $841,240 78.3% $42.58 $298.06 $1,529,824 $33.26
</TABLE>
- -------
(1) The Westar hotels have not historically been operated as extended-stay
facilities, and therefore charged daily and not weekly room rates. The
amounts shown as weekly room rates reflect the average daily room rate
multiplied by the number of days in a week.
(2) The Studios Suites hotel was opened in June 1996, and accordingly has no
1995 operating history. From the period of its opening through August 31,
1996, the Studio Suites hotel had an average occupancy rate of 46.5%; an
average daily rate of $29.58; an average weekly rate of $207.06; and total
room revenue of $145,197.
(3) Calculated on the basis of dividing 1995 total room revenue by total
available room nights.
PRODUCT CONCEPT
Based on its expected average weekly room rate of $280 to $350, the quality
of its interior design elements and finishes, the separation between cooking,
sleeping and living areas and the available amenities, management
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<PAGE>
believes that its hotels will offer a superior price/value relationship and
appeal to extended-stay guests of both upscale and economy facilities. The
Company believes that the extended-stay industry is currently segmented into
three price categories and that the weekly room rates charged in the various
categories are as follows: less than $280 in the economy or budget category;
greater than $280 and less than $500 in the midprice category; and over $500
in the upscale category. The Company's hotels will generally offer extended-
stay accommodations for average weekly rates between $280 and $350, but room
rates at specific hotels may vary significantly depending upon local market
factors. The Company's hotels will be designed to compete primarily in the
midprice segment of the extended-stay industry segment, and will contain a
variety of features that are attractive to the extended-stay guest, such as
fully equipped kitchens, resident laundry facilities, twice-weekly linen
service, weekly maid service, business centers and exercise facilities. The
facilities will consist of an apartment-style complex with two or three story
buildings containing, on average, approximately 136 guest rooms. The Company
will utilize both interior and exterior corridor building designs, depending
primarily on local market standards, building codes and weather factors.
The hotels will typically feature three functional room configurations:
studio, deluxe, and one bedroom. Management believes that the price/value
relationship of its guest rooms is enhanced by offering the following
features:
. a fully equipped kitchen with full-size refrigerator, stove, microwave,
coffee maker, dishwasher and cooking utensils;
. separate cooking, living and sleeping areas;
. residential-quality interior design elements;
. upscale finishes and accessories;
. an oversized work desk;
. two telephone jacks with dataports;
. direct dial telephone with voice mail messaging;
. fax and copy services available to guests;
. cable TV; and
. a sleeper sofa.
OPERATIONS
The Company's operating objective is to establish a well-recognized national
brand of extended-stay hotels while maximizing operating performance. The
Company intends to achieve these goals by (i) developing and offering
consistent, high quality accommodations; (ii) capitalizing on the attractive
operating characteristics of the extended-stay segment of the lodging
industry; and (iii) leveraging Wyndham's significant hotel management
expertise.
Consistent Lodging Experience. The Company believes it will be able to
create a well-recognized brand under the Homegate Studios & Suites name by
creating a uniform and high quality lodging experience for its guests. Because
the Company will own and Wyndham will manage each hotel, the Company will be
better able to maintain a high level of consistency and quality at its hotels.
Management believes that consistency and reliability in lodging experience are
among the most important factors considered by midprice extended-stay guests
in determining where to stay, and that its focus on these factors will lead to
a higher level of customer satisfaction which will enable the Company to
create a positive brand image for its hotels.
Attractive Extended Stay Operating Characteristics. The Company believes
that the extended-stay industry segment offers superior property-level
operating characteristics when compared to other segments of the lodging
industry. Extended-stay hotels typically experience longer average guest stays
than traditional hotels, resulting in higher average occupancies and a more
stable revenue stream. The Company will require minimum stays of one week at
its hotels, and will provide daily rates only after the minimum stay has been
met.
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<PAGE>
In addition, the staffing levels of extended-stay hotels are much lower than
those of traditional hotels, since many of the labor intensive services
offered by full-service hotels are de-emphasized or excluded entirely,
resulting in lower labor costs. At the Company's hotels, there will be no food
and beverage service and limited common area amenities. The front desk will
typically offer a limited operating schedule (7:00 a.m. to 9:00 p.m. Monday
through Friday plus 9:00 a.m. to 1:00 p.m. on Saturday and 1:00 p.m. to 5:00
p.m. on Sunday). Voice mail messaging will eliminate the need for a telephone
switchboard. The Company has developed a system to allow for after hours
check-in, eliminating the need for 24-hour front desk operations. Housekeeping
services will be offered weekly, and linen service will be available twice
weekly. Several common area amenities that do not substantially increase
operating expenses will be included, such as an exercise room, resident
laundry, and a business center.
Wyndham Hotel Management. Pursuant to the Management Agreement, Wyndham has
agreed to manage up to 60 Company hotels, each pursuant to a 10-year
management contract. Each Company hotel will have a Wyndham hotel manager, who
will share duties with and oversee a Wyndham-employed and -trained staff
generally consisting of approximately 10 employees. Wyndham's hotel managers
typically consist of college educated, career-oriented individuals. The
Company believes that Wyndham-trained hotel managers will provide consistent,
high quality service and will assist the Company in achieving operating
efficiencies. In particular, management believes that Wyndham's expertise will
be particularly beneficial in helping the Company's hotels quickly achieve
normalized occupancy levels. In addition, Wyndham will provide the Company
with market research, a preferred vendor program, a proprietary property
management software system, and national and local marketing efforts. See
"Certain Transactions" and "Risk Factors--Reliance upon Affiliated Companies."
The Company's strategy includes leveraging Wyndham's national and local
marketing efforts to market its hotels. The Company believes that direct sales
will be one of the Company's primary marketing tools, and will utilize
Wyndham's "push-pull" approach to marketing, where appropriate.
. The "push" refers to Wyndham's national marketing efforts, which include,
among other things, calling programs to frequent travelers and national
corporate travel departments, and marketing to major travel agencies. The
Wyndham National Sales Office has over 20 sales people and offices in
Chicago, Los Angeles, Dallas, New York and Washington, D.C., and will
attempt to generate business on behalf of the Company. Wyndham will
provide these services pursuant to the Management Agreement and will
receive a fee for business generated.
. The "pull" refers to property specific marketing efforts both before and
after a facility has opened. Prior to opening, Wyndham will conduct a
marketing program to establish relationships with likely users of the
facility, such as human resource personnel or travel executives at local
corporations, local realtors and other lodging demand generators. After
the grand opening, the manager of each hotel will be responsible for
maintaining these relationships and generating new prospects, as well as
direct mailings, fliers, and local advertising.
In markets with existing Wyndham-managed hotels, each of the Company's local
hotel managers will attend a weekly sales meeting with the sales organization
of the Wyndham hotel. The marketing representatives of the Wyndham hotels will
also be trained to refer extended-stay demand to the Company's hotels, as well
as to refer leads to the Company's local hotel manager.
The Company believes that the management and additional services furnished
by Wyndham will provide it with competitive advantages over other extended-
stay hotel companies, even though the Company's hotels will not be operated
under the Wyndham name.
INDUSTRY OVERVIEW
Traditional Lodging Industry
The U.S. lodging industry is estimated to have generated approximately $52.7
billion in annual room revenues in 1995 and to have had approximately 3.3
million rooms at the end of 1995. Industry statistics, which
30
<PAGE>
the Company believes to be reliable, indicate that the U.S. lodging industry's
performance is strongly correlated to economic activity. Room supply and
demand historically have been sensitive to shifts in economic growth, which
has resulted in cyclical changes in average daily room and occupancy rates.
The recession in 1990 and 1991 compounded the negative effects of the
overbuilding in the mid- and late-1980s, and led to depressed industry
performance and a lack of capital available to the industry in the early-
1990s.
The Company believes that the lodging industry has benefited from a
gradually improving supply and demand balance, evidenced by increased average
daily room and occupancy rates in recent years. Room supply growth in the
lodging industry slowed in the early-1990s and has rebounded in recent years,
but demand continues to grow faster then supply. According to industry
reports, which the Company believes to be reliable, supply growth was 1.1% in
1993, 1.4% in 1994, and 1.6% in 1995. This slow supply growth, coupled with
3.3%, 4.1% and 2.9% increases in demand (measured by occupied rooms) in 1993,
1994 and 1995, respectively, reflects an improved supply and demand balance in
the industry. Management believes that these factors have led to an increase
in average daily room rates from $61.85 in 1993 to $64.24 in 1994 and to
$67.34 in 1995 and increases in the industry average occupancies as shown
below.
Extended-Stay Category
The extended-stay category (defined as hotel suites with full kitchens) is
one of the most rapidly growing sectors of the U.S. lodging industry. From
1990 through 1995, the compounded annual growth rate in occupied rooms in
dedicated extended-stay hotels was 7.2% compared to 2.1% for the overall U.S.
lodging industry, while the compounded annual growth rate in room supply was
5.3% compared to 1.0% for the overall U.S. lodging industry. However, the vast
majority of the dedicated extended-stay hotel rooms developed during this time
period were in the upscale segment of the extended-stay category. As shown
below, average occupancy rates for extended-stay hotel chains have exceeded
such rates in the overall U.S. lodging industry for each of the previous six
years, and extended-stay hotel chains have achieved an 80% or greater
occupancy level during each of the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1990 1991 1992 1993 1994 1995
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Average Occupancy Rates:
Extended-Stay Hotel Chains(1)............... 73.9% 73.4% 76.7% 80.0% 81.3% 80.9%
All U.S. Lodging Industry(2)................ 62.4% 60.6% 61.6% 63.0% 64.6% 65.4%
</TABLE>
- --------
(1) Occupancy rates were provided by Smith Travel Research. Includes Homestead
Village(R) , Villager Lodge(R), Studio Plus(R), Lexington Hotel Suites(R),
Hawthorn Suites(R), Homewood Suites(R), Residence Inn(R), Summerfield
Suites(R) and Woodfin Suites(R).
(2) Occupancy rates were provided by Smith Travel Research.
Based on 1995 industry statistics, which the Company believes to be
reliable, the size of the demand for extended-stay lodging compares favorably
to the limited supply of dedicated extended-stay rooms, especially in the
midprice segment of the extended-stay category. In 1995, extended-stay guests
(defined as those guests staying five or more nights) accounted for a total of
175.1 million room nights, or 15.8% of the total number of room nights that
were accommodated by hotel and non-hotel facilities in the United States. Of
these 175.1 million extended-stay room nights, 79%, or 137.8 million room
nights, were accommodated at hotels, 11%, or 19.1 million room nights, in
apartments or apartment complexes, and 10%, or 18.2 million room nights, in
other types of accommodations, such as bed and breakfast inns, timeshares and
cruises. Of these 137.8 million room nights, only six to nine percent (8.3
million to 12.4 million) of the room nights generated by extended-stay guests
at hotels were accommodated by extended-stay hotel chains. Management believes
that the extended-stay hotel chains' limited penetration of the extended-stay
room demand in 1995 was partly due to the limited number of dedicated
extended-stay facilities in operation in 1995. Of the approximately 3.3
million total available rooms in the U.S. lodging industry at the end of 1995,
approximately 51,100, or only 1.5%, were extended-stay rooms at approximately
445 dedicated extended-stay facilities. Of these 445 dedicated extended-stay
facilities,
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<PAGE>
approximately 320, or 72%, operated in the upscale segment of the extended-
stay market, while approximately 25, or 5.6%, operated in the midprice segment
of the extended-stay category. The sources of the industry information set
forth above were Smith Travel Research and D. K. Shifflet, neither of which
provided any form of consultation, advice or counsel regarding any aspect of
the Offering, or are in any way associated with the Offering. Smith Travel
Research and D.K. Shifflet have not consented to the use of the data presented
in this Prospectus.
In addition, management believes that the disparity between demand and
supply for extended-stay facilities in 1995 was greater for the midprice
segment of the total extended-stay category. In 1995, extended-stay guests who
were accommodated at hotels represented approximately 378,000 daily occupied
rooms, while the total number of available dedicated extended-stay rooms
consisted of only approximately 51,100. Of these 378,000 daily occupied rooms,
approximately 164,000 represented rooms occupied in the midprice range, while
the total number of available dedicated extended-stay, midprice rooms
consisted of only approximately 1,800. As a result, management believes that
there exist favorable growth opportunities in the midprice segment of the
extended-stay category for the near term.
PROPERTY INSURANCE
The Company intends to maintain comprehensive insurance on each of its
properties, including liability, fire and extended coverage, in the types and
amounts customarily obtained by an owner and operator in the Company's
industry. Nevertheless, there are certain types of losses, generally of a
catastrophic nature, such as hurricanes, earthquakes and floods, that may be
uninsurable or not economically insurable. The Company intends to use its
discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to obtaining appropriate insurance on the
Company's properties at a reasonable cost and on suitable terms. This may
result in insurance coverage that in the event of a loss would not be
sufficient to pay the full current market value or current replacement value
of the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations and other factors might also make it
infeasible to use insurance proceeds to replace a hotel after it has been
damaged or destroyed.
COMPETITION
The U.S. lodging industry is highly competitive. Competition in the U.S.
lodging industry is based generally on convenience of location, price, range
of services and guest amenities offered, and quality of customer service. Each
of the Company's facilities will be located in a developed area that includes
competing lodging facilities. The Company believes the location of its hotels,
the high quality of its accommodations, the reasonableness of its room rates,
and its services and guest amenities will be among the most important factors
in its business. Demographic 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 adversely affect their operations.
The Company anticipates that competition within the extended-stay industry
segment will increase substantially in the foreseeable future. In the midprice
category of the extended-stay industry segment, a number of other lodging
chains and developers have recently announced plans to develop or are
currently developing extended-stay hotels which may compete with the Company's
hotels. The Company may compete for guests and for new development sites with
certain of these established entities and other entities which have greater
financial resources and brand awareness than the Company and better
relationships with lenders and real estate sellers. Further, there can be no
assurance that new or existing competitors, including traditional hotels with
nationally recognized brand names, will not significantly lower rates or offer
greater convenience, services, or amenities or significantly expand or improve
facilities in a market in which the Company's facilities compete, thereby
adversely affecting the Company's operations.
ENVIRONMENTAL MATTERS
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose liability without regard to whether the owner knew of, or was
responsible for, the presence of
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<PAGE>
hazardous or toxic substances. Furthermore, a person that arranges for the
disposal of or transports for disposal or treatment a hazardous substance at a
property owned by another may be liable for the costs of removal or
remediation of hazardous substances released into the environment at that
property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances or the failure to remediate
properly such substances, may adversely affect the owner's ability to sell
such real estate or to borrow using such real estate as collateral. In
connection with the ownership and operation of its properties, the Company may
be potentially liable for any such costs.
The Company has obtained recent Phase I Surveys on its existing properties
and intends to obtain Phase I Surveys prior to the purchase of any future
properties. The Phase I Surveys are intended to identify potential
environmental contamination and regulatory compliance concerns. Phase I
Surveys generally include historical reviews of the properties, reviews of
certain public records, preliminary investigations of the sites and
surrounding properties and the preparation and issuance of written reports.
Phase I Surveys generally do not include invasive procedures, such as soil
sampling or ground water analysis.
The Phase I Surveys have not revealed any environmental liability or
compliance concern that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations, or liquidity,
nor is the Company aware of any such liability or concern. Nevertheless, it is
possible that Phase I Surveys will not reveal all environmental liabilities or
compliance concerns or that there will be material environmental liabilities
or compliance concerns of which the Company will not be aware. Moreover, no
assurances can be given that (i) future laws, ordinances, or regulations will
not impose any material environmental liability, or (ii) the current
environmental condition of the Company's existing and future properties will
not be affected by the condition of the neighboring properties (such as the
presence of leaking underground storage tanks) or by third parties unrelated
to the Company.
GOVERNMENTAL REGULATION
The lodging industry is subject to numerous federal, state and local
government regulations including those relating to building and zoning
requirements. A number of states also regulate the licensing of hotels by
requiring registration, disclosure statements, and compliance with specific
standards of conduct. In addition, the Company is subject to employment laws,
including minimum wage requirements, overtime, working conditions and work
permit requirements. Recent amendments to the minimum wage laws will go into
effect in October 1996, and will increase the Company's labor costs. The
Company believes that the Studio Suites hotel and each of the Westar hotels
have the necessary permits, approvals and licenses to operate their respective
business and that collectively they comply with the applicable employment
laws, and the Company intends to continue to comply with such laws and
regulations. A change in such building, zoning, or licensing requirements or a
further increase in the minimum wage rate, employee benefit costs or other
costs associated with employees could materially and adversely affect the
Company.
Under the ADA, all public accommodations are required to meet certain
federal requirements related to access and use by disabled persons. While the
Company believes that the Studio Suites hotel and the Westar hotels are
substantially in compliance with these requirements, a determination that the
Company is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use
and operation of the facilities, including changes to building codes and fire
and life-safety codes, may occur. If the Company were required to make
substantial modifications at its hotels to comply with the ADA or other
governmental rules and regulations, the Company's financial condition and
ability to develop or acquire new hotels could be materially and adversely
affected.
TRADEMARKS
The Company has made application to register its name and logo and its
"Homegate Studios & Suites," "Homegate Studios" and "Homegate Studios Suites"
servicemarks with the United States Patent and Trademark office.
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<PAGE>
LIABILITY INSURANCE
The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company in its business. While management
believes that its insurance coverage is adequate, if the Company were held
liable for amounts exceeding the limits of its insurance coverage or for
claims outside of the scope of its insurance coverage, the Company's business,
results of operations, and financial condition could be materially and
adversely affected.
EMPLOYEES
As of June 30, 1996, the Company employed approximately seven people. The
Company expects that it will significantly increase the number of its
employees as it expands its business. The Company's employees are not subject
to any collective bargaining agreements, and management believes that its
relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is not a party to any litigation or claims, other than routine
matters incidental to the operation of the business of the Company. To date,
no claims have had a material adverse effect on the Company nor does the
Company expect that the outcome of any pending claims will have such an
effect.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
Directors and executive officers, including their respective ages, at June 30,
1996. The Company intends to add two independent Directors no later than 90
days after the date the registration statement of which this Prospectus is a
part (as amended and together with all exhibits and schedules thereto, the
"Registration Statement") is declared effective. Each independent Director
will be a person other than an officer or employee of the Company or any other
individual having a relationship which, in the opinion of the Board of
Directors, would interfere with the exercise of independent judgement in
carrying out the responsibilities of a Director.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert A. Faith......................... 32 Chairman of the Board, Chief
Executive Officer and President
John C. Kratzer......................... 33 Chief Operating Officer and
Executive Vice President
Tim V. Keith............................ 43 Chief Financial Officer and
Treasurer
Anthony W. Dona......................... 37 Senior Vice President and Director
Joel Kinzie Oldham IV................... 34 Senior Vice President and Secretary
James D. Carreker....................... 49 Director
Harlan R. Crow.......................... 46 Director
John J. Moores.......................... 52 Director
Charles E. Noell........................ 44 Director
Leonard W. Wood......................... 49 Director
</TABLE>
ROBERT A. FAITH joined the Company in February 1996 as its Chairman of the
Board, Chief Executive Officer and President. Since August 1991, Mr. Faith has
served as the Chairman of the Board of Faith Holdings, Inc., a private holding
and management company with various business interests. Mr. Faith also
currently serves as the Chairman of the Board of the corporate general partner
of Greystar Capital Partners, L.P., a private holding company with investments
in real estate, apartment buildings and apartment management firms, a position
which he has held since May 1993. In August 1991, Mr. Faith co-founded
Starwood Capital Partners, a private real estate investment firm, for which he
served as Chief Executive Officer until May 1993.
JOHN C. KRATZER is the Chief Operating Officer and Executive Vice President
of the Company. Before joining the Company in February 1996, Mr. Kratzer
served as a Principal with Benton Resources, which invested over $100 million
in land, notes and income producing assets. Mr. Kratzer served in this
capacity from February 1994 to February 1996. From September 1993 to November
1994, Mr. Kratzer served as Vice President of Crow Family, Inc., a private
investment company. From September 1993 to February 1994, Mr. Kratzer served
as Vice President of Mill Spring Holdings, Inc., a private investment company,
and in such capacity served as an asset manager of residential properties held
in a limited partnership. During the period from September 1993 to February
1996, Mill Spring Holdings, Inc. was the general partner of a separate limited
partnership related to commercial properties, which held interests in
approximately 55 partnerships or corporations that filed for protection under
federal bankruptcy laws. In addition, during the same period, Mr. Kratzer was
a general partner, executive officer or director in approximately 15
partnerships or corporations, or affiliates of such partnerships or
corporations, that were placed in receivership. As an asset manager for
residential properties, Mr. Kratzer was not involved in the management of any
commercial properties which filed for bankruptcy or were placed in
receivership. From September 1990 to August 1993, Mr. Kratzer was with
Trammell Crow Realty Advisors, an institutional real estate investment
management company that acquired a multi-asset portfolio of apartments valued
at over $250 million. At the time of his departure, Mr. Kratzer served as the
Director of Multi-Family Acquisitions for Trammell Crow Realty Advisors.
TIM V. KEITH joined the Company in July 1996 as its Chief Financial Officer
and Treasurer. Prior to joining the Company, Mr. Keith served as the
Controller/Treasurer of David Weekley Homes, a private single-family home
builder, from June 1994 to July 1996. From March 1989 to June 1994, Mr. Keith
served as Vice President
35
<PAGE>
of Finance for Coscan Florida Inc., a subsidiary of Coscan Development
Corporation, a Canadian public real estate developer and builder. Mr. Keith
has accumulated 17 years of experience in real estate accounting and finance,
as well as three years in public accounting.
ANTHONY W. DONA is a Senior Vice President and Director of the Company. In
addition, Mr. Dona is the Managing Director of Crow Realty Investors, L.P.,
d/b/a Crow Investment Trust, a position which he has held since 1994, and is a
Director of Trammell Crow Company and TCR. Mr. Dona has served in these
capacities since 1994 and 1996, respectively. In addition, Mr. Dona serves on
the advisory board of Trammell Crow Interest Company. From 1985 until 1994,
Mr. Dona served in various capacities with the Crow entities including Chief
Financial Officer of the Texas region of Trammell Crow Company, a partner in
the Dallas Office Building Division of Trammell Crow Company, Chief Executive
Officer of the Asset Management Group of Trammell Crow Company and Director of
Crow Family Administration. As part of his asset management role, Mr. Dona
managed a large portfolio of distressed real estate partnerships during the
recent real estate down-cycle. In connection with the restructuring of that
portfolio, Mr. Dona has served during the last five years as an officer or
director in approximately 90 partnerships or corporations, or affiliates of
such partnerships or corporations, that filed for protection under federal
bankruptcy laws. In addition, in the past five years, Mr. Dona was an
executive officer or director in approximately 15 partnerships or
corporations, or affiliates of such partnerships or corporations, that were
placed in receivership.
JOEL KINZIE OLDHAM IV joined the Company in February 1996 as a Senior Vice
President and its Secretary. Mr. Oldham is also the Executive Vice President
of Greystar Capital Partners, L.P. Mr. Oldham joined Greystar in May 1993.
Prior to joining Greystar, Mr. Oldham was the Vice President of Starwood
Capital Partners, a position he held from September 1992 to June 1993. Prior
to joining Starwood, Mr. Oldham was a Marketing Director with Trammell Crow
Company, which he joined in 1988.
JAMES D. CARREKER is a Director of the Company. Mr. Carreker has served as
President and Chief Executive Officer of Wyndham since May 1988 and as
Chairman of the Board of Wyndham since February 1996. He also served as Chief
Executive Officer of Trammell Crow Company from August 1994 to December 1995.
Prior to 1988, Mr. Carreker served as President of Burdine's, the Miami-based
division of Federated Department Stores.
HARLAN R. CROW is a Director of the Company. Mr. Crow is the Chief Executive
Officer of Crow Family Holdings, a private investment company managing
investments in a variety of real estate-related and other businesses, a
position he has held since 1986. Mr. Crow currently serves as a Director of
Trammell Crow Company and TCR. In addition, Mr. Crow serves as a Director of
Wyndham. In any given year within the past five years, Mr. Crow has indirectly
owned interests in over 1,000 partnerships (or affiliates of partnerships) or
corporations. In the past five years, Mr. Crow was a general partner, officer
or director in approximately 90 partnerships or corporations, or affiliates of
such partnerships or corporations, that filed for protection under federal
bankruptcy laws. In addition, in the past five years, Mr. Crow was a general
partner, executive officer or director in approximately 15 partnerships or
corporations, or affiliates of such partnerships or corporations, that were
placed in receivership.
JOHN J. MOORES is a Director of the Company. Mr. Moores founded BMC
Software, Inc., a vendor of system software utilities for IBM mainframe
computing environments in 1980. Prior to founding BMC Software, Mr. Moores was
employed by International Business Machines, Inc. and Shell Oil Corporation in
various of their technical divisions. Mr. Moores is Chairman of the Board of
the San Diego Padres, L.P., JMI Services, Inc., a private investment company,
Peregrine Systems, Inc., a computer software designer, and Neon Systems, Inc.,
a computer software designer, all of which are privately-held companies.
CHARLES E. NOELL is a Director of the Company. Mr. Noell is President of JMI
Services, Inc., a private investment company, which he joined in 1992 after 11
years in the corporate finance department of Alex. Brown & Sons Incorporated.
Mr. Noell is the Managing Partner of JMI Equity Fund, L.P., a private equity
investment fund, and is a Director of two publicly-traded companies:
Transactions Systems Architects, Inc. and Expert Software, Inc.
36
<PAGE>
LEONARD W. WOOD is a Director of the Company. Mr. Wood is currently a Group
Managing Partner for TCR, and is responsible for overseeing the activities of
TCR throughout Northern Florida and the Southeastern and Midwestern United
States. Mr. Wood joined TCR in 1982.
The Company's Certificate of Incorporation provides, among other things, for
a Board of Directors divided into three classes, designated Class I, Class II
and Class III. Directors serve for staggered terms of three years each, except
that initially the Class I Directors will serve until the Company's 1997
annual meeting of stockholders, the Class II Directors until the 1998 meeting
and the Class III Directors until the 1999 meeting. The Class I Directors are
Messrs. Carreker and Wood, the Class II Directors are Messrs. Crow and Moores,
and the Class III Directors are Messrs. Faith, Dona and Noell. Class I and
Class II will be expanded by one Director each when the two independent
Directors are elected to the Board of Directors.
The Company does not currently compensate, and does not anticipate
compensating, its Directors for their services as Directors, except that each
of the Company's non-employee Directors will receive certain automatic stock
option grants as described in "Director Compensation" below. In addition, each
of the Company's Directors will receive reimbursement of all ordinary and
necessary expenses incurred in attending any meeting of the Board of Directors
or any committee of the Board of Directors.
ADVISORS
The Company has consulting arrangements with several advisors who are
available to counsel the Company and the Board of Directors. Such advisors
include:
LESLIE V. BENTLEY has been an advisor to the Company since prior to its
formation. Mr. Bentley has been employed by Wyndham since March 1985 and has
served as Executive Vice President and Wyndham Garden Division President of
Wyndham since May 1990.
J. RONALD TERWILLIGER has been an advisor to the Company since prior to its
formation. Mr. Terwilliger has served as Managing Partner of TCR since 1986.
In that capacity, Mr. Terwilliger is responsible for all residential
development and operations conducted by Trammell Crow partners and associates
in 22 offices located throughout the United States. Mr. Terwilliger is also
Vice President, Treasurer and a Trustee of the Urban Land Institute. Mr.
Terwilliger serves as Chairman of the Advisory Board of the Wharton Real
Estate Center at the University of Pennsylvania.
JACK VANHARTESVELT has been an advisor to the Company since prior to its
formation. Mr. vanHartesvelt is the Corporate Vice President of Development
for Wyndham and has 20 years of hotel development experience with Wyndham,
Residence Inn, Hawthorn Suites, and Eagle Hotel Group.
The advisors to the Company will not receive cash compensation for their
services, but may receive grants of unallocated options under the 1996 Plan,
as discussed below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company has established an Audit Committee and
a Compensation Committee. The Audit Committee's functions include recommending
to the Board of Directors the engagement of the Company's independent public
accountants, reviewing with such accountants the plans for and the results and
scope of their auditing engagement and certain other matters relating to their
services provided to the Company, including the independence of such
accountants. The Compensation Committee reviews on behalf of, and makes
recommendations to the Board of Directors with respect to the compensation of
executive officers, and administers the Company's incentive and stock option
plans. The two independent Directors will serve on the Audit Committee.
Messrs. Carreker, Noell and one of the independent Directors will serve on the
Compensation Committee.
Prior to August 16, 1996, Messrs. Faith and Dona approved the terms of
compensation for the Company's executive officers in such officers' capacities
as ESLP employees.
37
<PAGE>
Certain Directors are parties to transactions with the Company, as described
under the caption "Certain Transactions."
EXECUTIVE COMPENSATION
The Company was incorporated in August 1996, to succeed to the business of
ESLP, its predecessor, which was formed in February 1996. Accordingly, the
Company did not conduct any operations prior to February 1996. The Company
anticipates that during 1996 its most highly compensated officers, with
estimated base salary amounts for each such individual on an annualized basis,
will be Mr. Robert A. Faith, $200,000; Mr. John C. Kratzer, $145,000; and Mr.
Tim V. Keith, $110,000 (the "Named Executives"). The Named Executives may be
entitled to performance bonuses of up to 100% of their base salary, as
determined by the Compensation Committee.
NON-COMPETITION, EMPLOYMENT AND INDEMNITY AGREEMENTS
In October 1996, Mr. Faith entered into a non-compete agreement with the
Company. For the longer of (a) a period of 30 months after the date on the
cover page of this Prospectus and (b) so long thereafter as Mr. Faith serves
as an officer or Director, Mr. Faith has agreed not to compete, directly or
indirectly, with the Company in the extended-stay hotel business or serve as
an officer, director, consultant or stockholder of any competing company
engaged in the extended-stay hotel business.
The Company has not entered into any employment agreements with any of its
officers other than John C. Kratzer. Mr. Kratzer entered into a two-year
employment agreement in September 1996 with the Company, pursuant to which Mr.
Kratzer will receive a minimum annual base salary of $145,000. If Mr.
Kratzer's employment is terminated during the term of the agreement by him for
any reason or by the Company for cause, Mr. Kratzer has agreed that he shall
not, directly or indirectly, compete with the Company within a 25-mile radius
of any hotel owned by the Company at the time of termination for a period of
two years from the date of termination. The agreement provides that in the
event Mr. Kratzer's employment is terminated by the Company for any reason
other than for cause or for disability, Mr. Kratzer shall be entitled to
receive an amount equal to his then base salary for the remainder of the term
of the employment agreement.
Pursuant to his employment agreement, Mr. Kratzer has agreed to restrict the
transfer of 158,092 shares of Common Stock owned by him for a period of seven
years. The restrictions will lapse with respect to 50% of such shares if Mr.
Kratzer is employed by the Company at the time of the earlier of the
completion or acquisition by the Company of its 30th hotel or December 31,
1997. The restrictions will lapse with respect to the remainder of the shares
held by Mr. Kratzer if he is employed by the Company at the time of the
earlier of the completion or acquisition by the Company of its 60th hotel or
December 31, 1998.
Prior to completion of the Offering, the Company intends to enter into
indemnification agreements with each of its executive officers and Directors.
Pursuant to such agreements, the Company will, to the extent permitted by
applicable law, indemnify such persons against all expenses, judgments, fines
and penalties incurred in connection with the defense or settlement of any
actions brought against them by reason of the fact that they were Directors or
officers of the Company or assumed certain responsibilities at the direction
of the Company. In addition, the Company's Certificate of Incorporation
provides for certain limitations on Directors' liability. See "Description of
Capital Stock--Limitations on Directors' Liability."
THE 1996 PLAN
The Company has adopted the Homegate Hospitality, Inc. 1996 Long-Term
Incentive Plan (the "1996 Plan") for the purpose of (i) attracting and
retaining employees and advisors with ability and initiative, (ii) providing
incentives to those deemed important to the success of the Company, and (iii)
associating the interests of these individuals with the interests of the
Company and its stockholders through opportunities for increased ownership of
Common Stock. The summary of the 1996 Plan set forth below is qualified in its
entirety by reference to the text of the 1996 Plan, which has been filed as an
exhibit to the Registration Statement.
Administration. The 1996 Plan will be administered by the Compensation
Committee of the Board of Directors. The Compensation Committee consists
solely of non-employee Directors.
38
<PAGE>
Eligibility. Each employee and advisor of the Company or a subsidiary of the
Company, including an employee who is a member of the Board of Directors, is
eligible to participate in the 1996 Plan. The Compensation Committee will
select the persons to be granted awards or options pursuant to the 1996 Plan
(the "Participants"), but no person may be granted awards or options
thereunder while he or she is a member of the Compensation Committee. The
Compensation Committee may, from time to time, grant incentive stock options
("ISOs"), non-qualified stock options or restricted stock awards to
Participants.
Stock Options. Options granted under the 1996 Plan may be ISOs or
nonqualified stock options. A stock option entitles the Participant to
purchase shares of Common Stock from the Company at the option price. The
option price may be paid in cash, with shares of Common Stock or with a
combination of cash and Common Stock. The terms of the option, including the
vesting of such option and the option price, will be fixed by the Compensation
Committee at the time the option is granted, but the option price shall not be
less than the fair market value of the shares at the date of grant (or, in the
case of ISOs issued to a Ten Percent Stockholder, as defined below, 110% of
the fair market value of the shares at the date of grant). A Participant is a
"Ten Percent Stockholder" if he owns, or is deemed to own, more than 10% of
the total combined voting power of all classes of stock of the Company or a
related entity. A Participant is deemed to own any voting stock owned
(directly or indirectly) by the Participant's spouse, siblings, ancestors and
lineal descendants. A Participant and such persons are also considered to own
proportionately any voting stock owned (directly or indirectly) by or for a
corporation, partnership, estate or trust of which the Participant or any such
person is a stockholder, partner or beneficiary. The options will expire
within ten years from the date of grant, except that ISOs issued to Ten
Percent Stockholders will not be longer than five years. In addition, the
Compensation Committee may specify that an option will terminate prior to the
end of its stated term upon termination of employment, disability or death.
Options that contain vesting schedules ordinarily will become fully
exercisable in case of disability or death or if the Company terminates the
employee without cause (as such term is used in the 1996 Plan). Moreover, no
Participant may be granted ISOs which are first exercisable in any calendar
year for stock having an aggregate fair market value (determined as of the
date the ISO was first granted) that exceeds $100,000.
Restricted Stock Awards. Participants may also be awarded shares of Common
Stock pursuant to a stock award. The Compensation Committee, in its
discretion, may prescribe that a Participant's rights in a stock award shall
be nontransferable or forfeitable or both unless certain conditions are
satisfied. These conditions may include, for example, a requirement that the
Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve specified objectives. Any such
restrictions will lapse in accordance with a schedule or such other conditions
as the Compensation Committee determines.
Share Authorization. All awards under the 1996 Plan will be evidenced by
written agreements between the Company and the Participant. The maximum number
of shares of Common Stock that may be issued under the 1996 Plan is initially
750,000 and will automatically increase by 100,000 on each anniversary of the
completion of this Offering through the fifth such anniversary (thereby
increasing to 1,250,000 shares). The share limitation and the terms of
outstanding awards shall be adjusted, as the Compensation Committee deems
appropriate, in the event of a stock dividend, stock split, combination,
reclassification, recapitalization or other similar event.
Nontransferability. Any option granted under the 1996 Plan is
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of a Participant, options may only be exercised by the
Participant. Notwithstanding the foregoing, a Participant may transfer a
nonqualified option with respect to all or part of the shares of Common Stock
subject to such option to the Participant's spouse, children or grandchildren,
to a trust for the benefit of such family members or to a partnership in which
such family members are the only partners if (a) no consideration is received
by the Participant in exchange for the option, (b) the agreement evidencing
the option expressly provides for transfers described herein and is approved
by the Compensation Committee, (c) the option continues to be subject to the
same terms and conditions after the transfer and (d) the transfer is
permissible under Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), as in effect from time to time.
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<PAGE>
Change in Control. In the event the Company undergoes a change in control
(as defined below), all restricted stock shall vest (other than restricted
stock granted within six months of the change in control) and all options
granted under the 1996 Plan shall become exercisable. Amounts payable or
earned as a result of a change in control are subject to certain reductions to
mitigate the effect of section 280G of the Internal Revenue Code of 1986 (the
"Code"). For the purposes of the 1996 Plan, a "change in control" is deemed to
have occurred if:
(a) any acquiring person is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting
power of the then-outstanding voting securities of the Company; or
(b) members of the incumbent Board of Directors cease for any reason to
constitute at least a majority of the Board of Directors; or
(c) a public announcement is made of a tender or exchange offer by any
acquiring person for 50% or more of the outstanding voting securities of
the Company and the Board of Directors approves or fails to oppose that
tender or exchange offer in its statements in Schedule 14D-9 under the
Exchange Act; or
(d) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation or partnership (or, if no such
approval is required, the consummation of such a merger or consolidation of
the Company), other than (i) a merger or consolidation that would result in
the voting securities of the Company outstanding immediately before the
consummation thereof continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity or of a parent of the surviving entity) a majority of the combined
voting power of the voting securities of the surviving entity (or its
parent) outstanding immediately after that merger or consolidation or (ii)
a merger or consolidation of the Company with ESLP; or
(e) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all the Company's assets (or, if no
such approval is required, the consummation of such a liquidation, sale or
disposition in one transaction or series of related transactions) other
than a liquidation, sale or disposition of all or substantially all the
Company's assets in one transaction or a series of related transactions to
a corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of Common
Stock of the Company.
Assumption of Awards. In the event of a merger, consolidation or statutory
share exchange in which the Company either is not the survivor or becomes the
subsidiary of the acquiring entity, or an acquisition of the Company's assets
that results in the Company's going out of business, all awards granted under
the 1996 Plan shall be assumed by the acquiring entity.
Termination and Amendment. No option or stock award may be granted under the
1996 Plan after October 31, 2006. The Board of Directors may amend or
terminate the 1996 Plan at any time, but an amendment will not become
effective without stockholder approval if it changes the eligibility
requirements, increases the benefits that may be provided under the 1996 Plan
or extends the term of the 1996 Plan.
Initial Awards. The Company will grant, on the effective date of this
Registration Statement, options to acquire an aggregate of 496,250 shares of
Common Stock to certain employees and Company advisors. The exercise price for
such stock options will be the initial public offering price of the Common
Stock offered for sale in the Offering. The stock option grants will include
the following grants to Named Executives and Officers of the Company: Mr.
Faith, 125,000 option shares, Mr. Kratzer, 93,750 option shares, Mr. Keith,
62,500 option shares and Mr. Oldham, 40,000 option shares; all of which will
vest ratably over a four-year period. Also included in the option grants will
be options for 175,000 shares of Common Stock granted to employees of Greystar
(25,000 shares), TCR (50,000 shares), Crow (50,000 shares) and Wyndham (50,000
shares) who have served as consultants to the Company. All of such options
will vest ratably over a four-year period. Each of the grantees will receive
an ISO covering the maximum number of shares for which an ISO may be awarded,
given the $100,000 per year annual limitation discussed above, and a
nonqualified stock option covering the remainder of the shares.
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<PAGE>
The Company will also grant, on the effective date of the Registration
Statement, restricted stock awards of 13,334 shares of Common Stock (assuming
an initial offering price of $12.00 per share). The stock awards will include
awards to the following Named Executives and officers of the Company: Mr.
Keith, 4,167 shares, and Mr. Oldham, 4,167 shares.
Stockholder Rights. During the restriction period, the holder of a
restricted stock award may, in the Compensation Committee's discretion, have
certain rights as a stockholder, including the right to vote the stock subject
to the award or to receive dividends on that stock. An optionholder will have
no rights as a stockholder with respect to the shares subject to his or her
option until the option is exercised.
Non-Employee Directors. Each member of the Company's Board of Directors who
is not an employee of the Company (a "Non-Employee Director") will receive
annual grants of options to purchase 5,000 shares of Common Stock at the fair
market value of such shares on the date of grant. Only a Non-Employee Director
who is serving on December 31st of any calendar year is eligible to receive
the annual stock option grant under the 1996 Plan.
In compliance with the Exchange Act, no discretion with respect to any award
under the 1996 Plan shall be afforded to a person who is not a Non-Employee
Director regarding (i) eligibility of a Non-Employee Director to participate,
(ii) the times when elections can be made, when shares of Common Stock will be
issued, or when distributions will be made to a Non-Employee Director, or
(iii) any other decisions under the 1996 Plan required by Rule 16b-3(b) under
the Exchange Act to be afforded exclusively to "disinterested persons" as
defined thereunder.
Federal Income Taxes. No income is recognized by a Participant at the time
an option is granted. If the option is an ISO, no income will be recognized
upon the Participant's exercise of the option, and gain will be recognized by
a Participant when he disposes of shares acquired under an ISO (assuming he
meets certain holding period requirements with respect to the acquired stock).
The exercise of a nonqualified stock option is generally a taxable event that
requires the Participant to recognize, as ordinary income, the difference
between the fair market value of the shares on the date of exercise and the
option price. The Company will generally be entitled to a compensation
deduction for the amount that is included in the Participant's income with
respect to the exercise of nonqualified stock options.
Unless an election is made under section 83(b) of the Code, a Participant
will recognize income on account of a stock award on the first day that the
shares are either transferable or not subject to a substantial risk of
forfeiture. The amount of income recognized by the Participant is equal to the
fair market value of the Common Stock received on that date. The Company will
generally be entitled to a compensation deduction for the amount that is
included in the Participant's income with respect to the stock awards.
401(K) SAVINGS PLAN
The Company intends to sponsor a retirement plan called the Homegate
Employee Savings & Retirement Plan (the "401(k) Plan"), following the
completion of the Offering. The trustee for the 401(k) Plan will be State
Street Bank and Trust Company. Employees (including members of management)
will be eligible to make voluntary contributions of up to fifteen percent
(15%) of their compensation under the 401(k) Plan, subject to the applicable
limitations of the Code. The Company will be permitted to make a discretionary
contribution to the 401(k) Plan each fiscal quarter which will be allocated
among participants as a matching contribution based on their contributions
under the 401(k) Plan. The 401(k) Plan will permit employees to direct
investments of their accounts among a selection of four mutual funds and four
pooled funds. The Company intends to amend the 401(k) Plan in the near future
to also permit employees to direct the investment of some or all of their
accounts to purchase shares of Common Stock, and to permit the Company to make
any contributions to the 401(k) Plan in the form of Common Stock. The 401(k)
Plan is intended to qualify as a profit sharing plan under Sections 401(a) and
401(k) of the Code.
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CERTAIN TRANSACTIONS
In connection with the Formation, the current partners of ESLP will receive
6,400,000 shares of Common Stock, constituting approximately 59.7% of the
outstanding Common Stock after the Offering, as a result of the merger of ESLP
into the Company. Prior to such merger, the partners of ESLP will have
contributed an aggregate of $20 million in capital to ESLP. See "Principal
Stockholders."
In connection with the completion of the Offering, the Company will issue
stock options exercisable for 496,250 shares of Common Stock and restricted
stock awards of 13,333 shares of Common Stock (assuming an initial offering
price of $12.00 per share) to certain employees and Company advisors. See
"Management--The 1996 Plan." The exercise price for such stock options will be
the initial public offering price of the Common Stock shown on the cover page
of this Prospectus. The stock option grants will include the following grants
to Named Executives and officers of the Company: Mr. Faith, 125,000 option
shares, Mr. Kratzer, 93,750 option shares, Mr. Keith, 62,500 option shares and
Mr. Oldham, 40,000 option shares. Also included in the option grants will be
options for 175,000 shares of Common Stock granted to employees of Greystar
(25,000 shares), TCR (50,000 shares), Crow (50,000 shares) and Wyndham (50,000
shares) who have served as consultants to the Company. The restricted stock
awards will include awards to the following Named Executives and officers of
the Company: Mr. Keith 4,167 shares, and Mr. Oldham, 4,167 shares.
The Company has entered into a master development agreement with the
Development Partnership (which is comprised of TCR and Greystar), pursuant to
which the Development Partnership will develop up to 60 hotels on behalf of
the Company. In addition, the Developer Partnership will assist the Company in
locating sites suitable for development of Company hotels in markets
designated by the Company, and has agreed that neither it, its partners, nor
their respective affiliates will own, operate or develop a competing extended-
stay facility, subject to certain exceptions, within the continental United
States during the duration of the master development agreement. Unless
extended, the master development agreement will terminate upon the earlier of
the commencement of construction of the 60th facility or December 31, 1998.
Upon the selection of a site for development, the Company and one of the
Developer Affiliates will enter into a development and construction agreement,
pursuant to which the Developer Affiliate will construct the hotel on the site
in question. Pursuant to the development and construction agreement, the
Developer Affiliate will receive a development fee of $250,000. This
development fee is paid as follows: $50,000 upon approval of the development
budget, development plan and development schedule and commencement of
construction; $150,000, payable in installments each month over the course of
construction based upon the percentage of completion of the hotel; and $50,000
upon completion. The Company believes that $250,000 in development fees for
each project is substantially less than the fees that an unrelated third party
developer would charge the Company for similar services. The Company may
terminate a development and construction agreement if the Developer Affiliate
fails to meet certain performance standards.
Upon the merger of ESLP into the Company, the Developer Partnership will own
1,073,103 shares of Common Stock, constituting 10.0% of the outstanding shares
of Common Stock after the Offering. The Developer Partnership received its
interest in ESLP in exchange for entering into the master development
agreement. Pursuant to its partnership agreement, the Developer Partnership
will distribute one-sixtieth of such Common Stock to a Developer Affiliate for
each facility that the Developer Affiliate constructs. If 60 projects have not
been commenced by the Developer Affiliates by December 31, 1998, then the
remaining shares held by the Developer Partnership (i.e., the product of the
number of shares initially owned by the Developer Partnership, multiplied by a
fraction, the numerator of which equals 60 less the sum of the number of
completed facilities and the number of facilities on which construction has
commenced by December 31, 1998, and the denominator of which is 60) will be
distributed to the Developer Affiliates proportionately, based upon the number
of facilities each affiliate has constructed or commenced prior to December
31, 1998.
The Company has also entered into the Management Agreement with a subsidiary
of Wyndham, pursuant to which Wyndham will manage up to 60 Company hotels and
will provide market research, a preferred vendor program, a proprietary
property management software package and national and local marketing efforts
to the Company. In addition, Wyndham has agreed not to own, operate or develop
a competing extended-stay facility
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within certain specified states that include the Company's target markets
(subject to certain exceptions), for the term of such agreement. Unless
extended, the Management Agreement will terminate upon the earlier of the
execution of a management contract with respect to the 60th Company hotel or
December 31, 1998. The Company shall pay Wyndham a one-time fee of $25,000 for
Wyndham's provision of design services in developing the initial prototype,
certain other fees for the provision of software and other services, and a
commission of 5% of the aggregate purchase price of all items that the Company
purchases through Wyndham's purchasing department. The Company believes that
it will be able to obtain substantial cost savings through the use of
Wyndham's purchasing department, but has retained the right not to use such
department at the Company's sole discretion upon 90-days' notice. The Company
will also reimburse Wyndham for up to $100,000 for the costs incurred in
developing the Company's payroll and accounts payable software and for
developing a marketing database, which costs will be reimbursed ratably upon
the signing of the first 10 management contracts. Wyndham and the Company will
agree upon any fees to be paid with respect to ongoing systems support and
maintenance services. In connection with the execution of the Management
Agreement, CRI/ESH Partners, L.P., Harlan Crow, and Crow Family, Inc. have
agreed to grant Wyndham a right of first refusal affording Wyndham a
preferential right to purchase their shares in connection with any proposed
sale by any of such parties or their affiliates of shares of Common Stock into
the public market pursuant to Rule 144 under the Securities Act or pursuant to
a shelf registration statement filed pursuant to such Act. See "Principal
Stockholders."
Pursuant to each property-specific management contract, Wyndham will manage
and operate the specific Company hotel in exchange for the payment of a base
management fee of 3% of the hotel's gross revenues for the applicable period,
and an incentive management fee equal to (i) 3% of the gross revenues for the
applicable period if the Company's return on costs exceeds 16%, (ii) 2%, if
the Company's return on costs exceeds 13% but is less than 16%, and (iii) 1%,
if the Company's return on costs exceeds 10% but is less than 13%. In
addition, the Company will pay Wyndham a monthly fee of $1,000 (adjusted
annually for inflation) for Wyndham's accounting services, and will reimburse
Wyndham for reimbursable expenses (as defined in the contract) incurred by
Wyndham with respect to the hotel. The management contract also provides that
the Company will contribute 1.5% of the gross room revenues from each hotel
into a marketing and advertising fund to be administered for the benefit of
all Company hotels that are managed by Wyndham, and that Wyndham will not own,
develop, manage or lend money to an extended-stay facility that is similar in
operation and format to the Company's hotel within a five-mile radius thereof,
subject to certain exceptions. This non-competition covenant will survive for
the duration of the applicable management contract. The Company will have the
right to terminate the property-specific management contract if certain
performance standards are not met. In addition, the Company may terminate such
contracts without cause with the payment of a cancellation fee if the Company
desires to manage the hotel internally. The Company believes that the
management fees paid pursuant to the property-specific management contracts
are commensurate with the fees that would be charged by unrelated third
parties to manage the hotels.
In the past, Wyndham has paid certain payroll and other expenses of the
Company and the Company has agreed to reimburse Wyndham for such payments. At
June 30, 1996, ESLP owed Wyndham $89,434 for reimbursement of payroll and
insurance expenditures.
In the past, ESH Partners, L.P. ("ESH"), a limited partner of ESLP,
Greystar, TCR and Wyndham have made certain payments on behalf of the Company
with respect to the acquisition and development of certain properties and the
Company has reimbursed or has agreed to reimburse them for such payments. From
the period of inception through June 30, 1996, the Company has made payments
of $56,312 to Greystar and $94 to TCR in reimbursement of such acquisition and
development expenditures. At June 30, 1996, the Company owed the following to
ESH Partners, L.P., Greystar and Wyndham for reimbursement of such acquisition
and development expenditures: ESH Partners, L.P., $163,001; Greystar, $14,163;
and Wyndham, $13,407.
In the past, Greystar has paid the salary of the Chief Executive Officer of
the Company and the Company has agreed to reimburse Greystar for such
payments. At June 30, 1996, the Company owed Greystar $55,662 for such
payments.
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POLICY WITH RESPECT TO RELATED PARTY TRANSACTIONS
The Company has implemented a policy requiring any material transaction (or
series of related transactions) between the Company and related parties to be
approved by a majority of the disinterested Directors, upon such Directors'
determination that the terms of the transaction are no less favorable to the
Company than those that could have been obtained from unrelated third parties.
The policy defines a material related party transaction (or series of related
transactions) as one involving a purchase, sale, lease or exchange of property
or assets or the making of any investment with a value to the Company in
excess of $1.0 million or a service agreement (or series of related
agreements) with a value in excess of $1.0 million in any fiscal year. There
can be no assurance that this policy will always successfully eliminate the
influence of conflicts of interest. See "Management--Directors and Executive
Officers."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock assuming the Formation occurs on October 23,
1996, and as adjusted to reflect the sale of the Common Stock offered hereby,
by (i) each person known by the Company to own beneficially more than 5% of
any class of the Company's outstanding voting securities, (ii) each of the
Company's Directors, (iii) each Named Executive of the Company and (iv) all
current Directors and executive officers of the Company as a group. Unless
otherwise indicated, the Company believes that each person or entity named
below has sole voting and investment power with respect to all shares shown as
beneficially owned by such person or entity, subject to community property
laws where applicable and the information set forth in the footnotes to the
table below.
<TABLE>
<CAPTION>
PERCENT OF CLASS
--------------------
NUMBER OF SHARES BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
- ------------------------ --------------------- ---------- ---------
<S> <C> <C> <C>
JMI/Greystar Extended Stay Partners, 2,260,200 35.32% 21.07%
L.P. ..............................
Two Riverway, Suite 850
Houston, TX 77056
Developer Extended Stay Partners 1,073,103 16.77% 10.01%
L.P.(2) ...........................
Two Riverway, Suite 850
Houston, TX 77056
CRI/ESH Partners, L.P.(3)........... 2,011,578 31.43% 18.76%
3200 Trammell Crow Center
2001 Ross Avenue
Dallas, TX 75201
Robert A. Faith(4).................. 3,729,885 58.28% 34.78%
Two Riverway, Suite 850
Houston, TX 77056
James D. Carreker................... -- -- --
Harlan R. Crow(5)................... 3,207,595 50.12% 29.91%
Anthony W. Dona..................... 46,657 * *
John J. Moores(6)................... 396,581 6.2% 3.70%
Charles E. Noell.................... -- -- --
Leonard W. Wood..................... 121,175 1.89% 1.13%
John C. Kratzer..................... 233,283 3.65 2.18%
Tim V. Keith........................ 4,167 * *
Directors and Named Executives of
the Company as a group............. 6,278,825 98.11% 58.54%
</TABLE>
- --------
* Less than 1%.
(1) The indicated share numbers assume an initial offering public price of
$12.00 per share. Pursuant to the terms of the Formation a higher or lower
initial offering price will result in adjustments in the number of shares
of Common Stock.
(2) Shares owned by Developer Extended Stay Partners, L.P. will be voted by
its general partner, DESP General Partner, L.L.C., until such time as such
shares are distributed by such partnership to its partners, TCR Extended
Stay I Limited Partnership and Greystar Realty Services, L.P. See "Certain
Transactions."
(3) Crow Investment Trust indirectly owns an approximate 74% limited partner
interest in such partnership.
(4) Includes 2,260,200 shares owned by JMI/Greystar Extended Stay Partners,
L.P. which may be deemed to be beneficially owned by Mr. Faith, who is the
sole stockholder of Greystar Holdings, Inc., the sole general
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partner of such partnership. Mr. Faith disclaims beneficial ownership of
all such shares held by such partnership beyond his percentage ownership
therein. Includes 1,073,103 shares owned by Developer Extended Stay
Partners, L.P. as to which Mr. Faith has shared voting power as a result of
his indirect ownership of a percentage interest in DESP General Partner,
L.L.C., the sole general partner of such partnership. Mr. Faith disclaims
beneficial ownership of all such shares beyond his percentage ownership
therein. Includes 396,581 shares owned by JMI/Greystar Realty Partners,
L.P. as to which Mr. Faith has shared voting power as a result of his being
the sole stockholder of Greystar Holdings, Inc., one of the two general
partners of such partnership. Mr. Faith disclaims beneficial ownership of
all such shares held by such partnership beyond his percentage ownership
therein.
(5) Includes 22,602 shares owned by Crow Family, Inc., of which Mr. Crow is
the sole director. Also includes 2,011,578 shares owned by CRI/ESH
Partners, L.P. and 100,312 shares owned by Crow Hotel Realty Investors,
L.P., as Crow Family, Inc. is the sole general partner of each such
partnership. Also includes 1,073,103 shares owned by Developer Extended
Stay Partners, L.P., as to which Mr. Crow has shared voting power as a
result of Crow Family, Inc.'s ownership of a percentage interest in DESP
General Partner, L.L.C., the sole general partner of such partnership. Mr.
Crow disclaims beneficial ownership of all such shares.
(6) Represents shares owned by JMI/Greystar Realty Partners, L.P., as to which
Mr. Moores has shared voting power as a result of his ownership of JMI
Realty, Inc., one of the two general partners of such partnership. Mr.
Moores disclaims beneficial ownership of all such shares held by such
partnership beyond his percentage ownership therein. Excludes 570,701
shares owned by JMI/Greystar Extended Stay Partners, L.P. attributable to
Mr. Moores' percentage interest in such partnership.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary description is qualified in its entirety by reference
to the Company's Certificate of Incorporation, which is filed as an exhibit to
the Registration Statement. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, par value $.01 per share, and
5,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred
Stock").
The authorized and unissued shares of Common Stock and Preferred Stock may
be used by the Company for various purposes, including possible future
acquisitions. The Company currently does not have any specific plans or
obligations to issue shares of Common Stock or Preferred Stock, other than (i)
the sale of the shares of Common Stock offered hereby and (ii) the issuance of
shares of Common Stock under the Company's benefit plans. See "Management--The
1996 Plan" and "Certain Transactions."
COMMON STOCK
Prior to the completion of the Offering, but after giving effect to the
Formation, the Company will have 6,400,000 shares of Common Stock outstanding,
which will be held by 12 stockholders of record.
The holders of shares of Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of common stockholders. There is
no provision in the Company's Certificate of Incorporation for cumulative
voting with respect to the election of Directors. Accordingly, the holders of
more than 50% of the total voting power of the Common Stock can, if they
choose to do so, elect all of the Directors of the Company. Each share of
Common Stock is entitled to participate equally in dividends, when, as and if
declared by the Board of Directors, and in the distribution of assets in the
event of liquidation, dissolution or winding up of the Company, subject in all
cases to any prior rights of outstanding shares of Preferred Stock. The shares
of Common Stock have no preemptive or conversion rights, redemption rights or
sinking fund provisions and are not subject to calls, assessments or rights of
redemption by the Company. All shares of Common Stock outstanding upon the
closing of this Offering will be duly authorized, validly issued, fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
Company's stockholders, to issue Preferred Stock from time to time in one or
more series and to fix, as to any such series, the voting rights, if any,
applicable to such series and such other designations, preferences and special
rights as the Board of Directors may determine, including dividend,
conversion, redemption and liquidation rights and preferences. Upon the
closing of this Offering, there will be no shares of Preferred Stock
outstanding. The issuance of shares of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or other corporate actions. See "--Anti-takeover
Provisions."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the DGCL which
provides, with certain exceptions, that a Delaware corporation may not engage
in any of a broad range of business combinations, such as mergers,
consolidations and sales of assets, with a person or an affiliate or associate
of such person who is an "Interested Stockholder" (as defined below) for a
period of three years from the date that such person became an Interested
Stockholder unless: (i) the business combination or the transaction resulting
in a person's becoming an Interested Stockholder is approved by the Board of
Directors of the Company before the person becomes an Interested Stockholder,
(ii) upon consummation of the transaction which results in the person becoming
an Interested Stockholder, the Interested Stockholder owned 85% or more of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding shares owned by persons who are both officers and Directors of the
Company and shares held by certain employee stock ownership plans) or (iii) on
or after the date the person became an Interested Stockholder, the business
combination is approved by the Company's
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Board of Directors and by the holders of at least 66 2/3% of the Company's
outstanding voting stock, excluding shares owned by the Interested
Stockholder, at an annual or special meeting. An "Interested Stockholder" is
defined as any person, other than the Company and any direct or indirect
majority-owned subsidiaries of the Company, that is (i) the owner of 15% or
more of the outstanding voting stock of the Company or (ii) an affiliate or
associate of the Company and was the owner of 15% or more of the outstanding
voting stock of the Company at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an Interested Stockholder.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Certificate of Incorporation provides that no Director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a Director, except for
liability (i) for any breach of the Director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases, or
(iv) for any transaction from which the Director derived an improper personal
benefit. The effect of these provisions is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a Director for breach of
fiduciary duty as a Director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
Prior to completion of the Offering, the Company intends to enter into
indemnification agreements with each of its executive officers and Directors.
Pursuant to such agreements, the Company will, to the extent permitted by
applicable law, indemnify such persons against all expenses, judgments, fines
and penalties incurred in connection with the defense or settlement of any
actions brought against them by reason of the fact that they were Directors or
officers of the Company or assumed certain responsibilities at the direction
of the Company.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation, Delaware
law, the 1996 Plan and the Stockholders' Agreement (defined below) summarized
in the following paragraphs may have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider to be in that stockholder's best interests, including attempts that
might result in a premium over the market price to be paid for the shares held
by stockholders.
Certificate of Incorporation
Pursuant to the Company's Certificate of Incorporation, the Company's Board
of Directors by resolution may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock having the number
of shares, designations, relative voting rights, dividend rates, liquidation
and other rights, preferences and limitations that the Board of Directors
fixes without stockholder approval. Any additional issuance of Common Stock or
designation of rights, preferences, privileges and limitations with respect to
Preferred Stock could have the effect of impeding or discouraging the
acquisition of control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of the
Company's management. Specifically, if, in the due exercise of its fiduciary
obligations, the Board of Directors were to determine that a takeover proposal
was not in the Company's best interest, such shares could be issued by the
Board of Directors without stockholder approval in one or more transactions
that might prevent or render more difficult or costly the completion of the
proposed takeover transaction by diluting the voting or other rights of the
proposed acquiror or insurgent stockholder group, by putting a substantial
voting block in institutional or other hands that might undertake to support
the position of the incumbent Board of Directors, by effecting an acquisition
that might complicate or preclude the takeover, or otherwise.
Super-majority Votes
The Certificate of Incorporation requires the affirmative vote of the
holders of at least 66 2/3% of all securities of the Corporation entitled to
vote generally in the election of Directors to adopt an agreement of merger
(other
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<PAGE>
than a merger effected between the Corporation and one of its subsidiaries
under Section 253 of the DGCL) or to approve the sale, lease or exchange of
all or substantially all of the Corporation's property and assets.
Under the Certificate of Incorporation, the Board of Directors is authorized
to adopt, amend or repeal the Bylaws of the Corporation. However, the
stockholders of the Corporation may only amend or repeal the Bylaws with the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
shares of the Corporation entitled to vote generally in the election of
Directors voting together as a single class.
These super-majority voting provisions may have the effect of discouraging
or preventing a tender offer or takeover attempt which a stockholder might
consider to be in that stockholder's best interests.
Classified Board of Directors
The Certificate of Incorporation provides for the Board of Directors to be
divided into three classes of Directors serving staggered three-year terms. As
a result, approximately one-third of the Board of Directors will be elected
each year.
The Board of Directors believes that a classified Board of Directors will
help to assure the continuity and stability of the Board of Directors and the
business strategies and policies of the Company as determined by the Board of
Directors, because the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board of Directors will be enhanced by staggered three-year terms.
The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
the Company, even through such an attempt might be beneficial to the Company
and its stockholders. In addition, the classified board provision could delay
stockholders who do not agree with the policies of the Board of Directors from
removing a majority of the Board for two years. See "--Number of Directors;
Removal; Filling Vacancies."
Number of Directors; Removal; Filling Vacancies
The Certificate of Incorporation provides that the Board of Directors shall
consist of between five and 13 members, the exact number to be fixed from time
to time by resolution adopted by a majority of the Directors then in office.
The Company will have seven Directors prior to the Offering. Further, subject
to the rights of the holders of any series of Preferred Stock then
outstanding, the Certificate of Incorporation authorizes only a majority of
the Directors then in office to fill vacancies, including newly created
directorships. Accordingly, the Board of Directors could prevent a stockholder
from obtaining majority representation on the Board of Directors by enlarging
the Board of Directors and filling the new directorships with its own
nominees. The Certificate of Incorporation also provides that Directors of the
Company may be removed only for cause and, even then, only by the affirmative
vote of holders of a majority of the outstanding shares of stock eligible to
vote in such matters.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
The Certificate of Incorporation establishes an advance notice procedure for
the nomination, other than by or at the discretion of the Board of Directors
or a committee thereof, of candidates for election as Director, as well as for
other stockholder proposals to be considered at an annual stockholders'
meeting.
Notice of stockholder proposals and Director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or the Directors are to be elected. To be
timely, notice must be received at the principal offices of the Company not
less than 60, nor more than 90, days prior to the meeting of stockholders;
provided, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which notice of the date of the meeting was mailed or the
day on which public disclosure was made, whichever first occurs.
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The purpose of requiring advance notice is to afford the Board of Directors
an opportunity to consider the qualifications of the proposed nominees or the
merits of other stockholder proposals and, to the extent deemed necessary or
desirable by the Board of Directors, to inform stockholders about those
matters.
Written Consent; Special Meetings of Stockholders
The Certificate of Incorporation prohibits the taking of stockholder action
by written consent without a meeting. The Certificate of Incorporation
provides that special meetings of the stockholders of the Company may be
called only by the Chairman of the Board or a majority of the members of the
Board of Directors. These provisions will make it more difficult for
stockholders to take action opposed by the Board of Directors.
Amendment of Certain Provisions of the Certificate of Incorporation
The Certificate of Incorporation generally requires the affirmative vote of
the holders of at least 66 2/3% of the outstanding voting stock in order to
amend any provisions of the Certificate of Incorporation concerning (i) the
classified Board of Directors, (ii) the amendment of Bylaws, (iii) any
proposed compromise or arrangement between the Company and its creditors, (iv)
the authority of stockholders to act by written consent, (v) the liability of
Directors, (vi) certain mergers, consolidations and sales, leases and
exchanges of all or substantially all of the Company's property and assets,
(vii) the required vote to amend the Certificate of Incorporation, (viii) the
call of a special meeting of stockholders, (ix) stockholder proposals
concerning business to be conducted at an annual meeting of stockholders, (x)
Director nominations by stockholders, (xi) what considerations the Board of
Directors, a committee of the Board of Directors and each Director may take
into account when discharging their respective duties, (xii) indemnification
of Directors, and (xiii) authorization of the Board of Directors to pursue or
take action with respect to transactions that would result in a change of
control of the Company. These voting requirements will make it more difficult
for minority stockholders to make changes in the Certificate of Incorporation
that could be designed to facilitate the exercise of control over the Company.
In addition, the requirement for approval by at least a 66 2/3% stockholder
vote will enable the holders of a minority of the voting stock of the Company
to prevent the holders of a majority or more of such securities from amending
such provisions of the Certificate of Incorporation.
Stockholders' Agreement
Pursuant to the Stockholders' Agreement, each of Greystar and Crow has
certain rights of first refusal with respect to shares of Common Stock held by
the other. In addition Crow and Greystar have agreed to act in concert with
respect to the election of Company Directors. These provisions may have the
effect of hindering a change in control of the Company. See "--Stockholders'
Agreement."
REGISTRATION RIGHTS
Contemporaneously with the Formation (see "The Formation Transaction"), the
Company will enter into a registration rights agreement with Greystar, Crow
and certain existing holders of Common Stock (the "Registration Rights
Agreement"), pursuant to which the Company will agree, subject to certain
limitations and under certain circumstances, to register for sale any shares
of Common Stock of the Company (and other securities of the Company that are
exercisable to purchase, convertible into or exchangeable for shares of
capital stock of the Company) that are held by the parties thereto
(collectively, the "Registrable Securities"). All of the 6,400,000 shares of
Common Stock issued in the Formation of the Company will be Registrable
Securities. The Registration Rights Agreement provides that any holder of
Registrable Securities may require the Company upon written notice to register
for sale such Registrable Securities (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 $20 million and provided that
notice is not given prior to six months after the effective date of a previous
Demand Registration. If Registrable Securities are going to be registered by
the Company pursuant to a Demand Registration, the Company must provide
written notice to the other holders of Registrable Securities and permit them
to include any or all Registrable Securities that they hold in the Demand
Registration, provided that the amount of Registrable Securities requested to
be registered may be limited by the underwriters in an underwritten offering
based on such underwriters' determination that inclusion of the total amount
of Registrable Securities
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requested for registration would materially and adversely affect the success
of the offering. Upon notice of a Demand Registration, the Company is required
to file a Registration Statement within 60 days of the date on which notice is
given, although the Company may postpone the filing for up to 90 days under
certain circumstances. Subject to the conditions stated or referred to above,
the holders of Registrable Securities may request an unlimited number of
Demand Registrations. The parties to the Registration Rights Agreement have
agreed not to exercise any Demand Registration rights for a period of 12
months from the date of execution of the Registration Rights Agreement.
The Registration Rights Agreement also provides that, subject to certain
exceptions, in the event the Company proposes to file a registration statement
with respect to an offering of any class of equity securities, other than
certain types of registrations, the Company will offer the holders of
Registrable Securities the opportunity to register the number of Registrable
Securities they request to include (the "Piggyback Registration"), provided
that the amount of Registrable Securities requested to be registered may be
limited by the underwriters in an underwritten offering based on such
underwriters' determination that inclusion of the total amount of Registrable
Securities requested for registration would materially and adversely affect
the success of the offering. The Company is generally required to pay all of
the expenses of Demand Registrations and Piggyback Registrations, other than
underwriting discounts and commissions.
STOCKHOLDERS' AGREEMENT
Pursuant to a Stockholders' Agreement among Crow Family, Inc., CRI/ESH
Partners, L.P., J. Ronald Terwilliger, and Leonard W. Wood (collectively, the
"ESH Parties"), JMI/Greystar Extended Stay Partners, L.P. ("JMI/Greystar") and
the Company (the "Stockholders' Agreement"), in connection with any election
of Company Directors, the Company has agreed to nominate as Directors such
number of designees of the ESH Parties and JMI/Greystar as shall be required
in order that the percentage of the entire Board of Directors thereafter
represented by the ESH Parties and JMI/Greystar nominees (taking into account
then sitting Directors who were nominated by the ESH Parties or JMI/Greystar
and assuming the election of the nominees then being designated) is equal to
the nearest whole number determined by multiplying (i) the number of Directors
that is to constitute the entire Board of Directors after giving effect to
such election by (ii) a fraction the numerator of which is the number of
shares of Common Stock owned by the ESH Parties and JMI/Greystar (and their
permitted transferees) and the denominator of which is the total number of
outstanding shares of Common Stock. The ESH Parties and JMI/Greystar have each
agreed to vote in favor of the other's nominees all shares of Common Stock it
owns or has the right to vote. Upon completion of the Offering, the ESH
Parties and JMI/Greystar will own collectively approximately 42.3% of the then
outstanding Common Stock, entitling them to nominate three of the Company's
seven Directors. Within 90 days following the Offering, the Company intends to
appoint to its Board of Directors two additional independent Directors. Upon
the resulting increase in the number of Directors constituting the entire
Board of Directors, such percentage ownership would entitle the ESH Parties
and JMI/Greystar to nominate four of the Company's nine Directors. For
purposes of the provisions described above, Harlan R. Crow, Anthony W. Dona,
John J. Moores and Charles E. Noell are deemed to be nominees of the ESH
Parties and JMI/Greystar. The foregoing provisions of the Stockholder's
Agreement will terminate at such time as the ESH Parties, JMI/Greystar and
their permitted transferees no longer own collectively 20.0% of the
outstanding Common Stock. The rights to nominate Directors are apportioned
among the ESH Parties and JMI/Greystar proportionately based on their
respective stock ownership in the Company.
The Stockholders' Agreement requires that the ESH Parties and JMI/Greystar
first offer their shares to the other before they are permitted to transfer
the shares to a third party in a private transaction or in a registered
underwritten offering. By reason of the right of first offer provisions of the
Stockholders' Agreement, the ESH Parties and JMI/Greystar will have the first
right to purchase shares proposed to be sold in any such transaction by the
other so as to enable them, in such context, to maintain the collective stock
ownership position of these entities in the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have an aggregate of
10,725,000 shares of Common Stock outstanding. Of these shares, the 4,325,000
shares sold in the Offering will be freely transferable without restriction or
further registration under the Securities Act.
SALES OF RESTRICTED SHARES
The 6,400,000 shares of Common Stock held by existing stockholders that were
not purchased in the Offering were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
thus treated as "restricted" securities under Rule 144 promulgated under the
Securities Act ("Rule 144"). In general, under Rule 144 as currently in
effect, a person (or persons whose shares are aggregated), including an
affiliate of the Company, who has beneficially owned restricted securities
within the meaning of Rule 144 for at least two years, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the Company's Common Stock
(approximately 107,250 shares immediately after the Offering) or (ii) the
average weekly trading volume of the Company's Common Stock on Nasdaq during
the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission (the "Commission"). Sales
under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of the Company at any time during the three months
immediately preceding the sale is entitled to sell restricted shares pursuant
to Rule 144(i) without regard to the limitations described above, provided
that three years have expired since the later of the date on which such
restricted shares were acquired from the Company or the date they were
acquired from an affiliate of the Company.
Certain stockholders of the Company hold registration rights. See
"Description of Capital Stock--Registration Rights." However, these
stockholders have entered into certain arrangements with the representatives
of the Underwriters, pursuant to which they have agreed not to offer, sell,
contract to sell or otherwise dispose of their shares of Common Stock for a
period of 360 days after the date of this Prospectus ("Lock-up Arrangements").
See "--Lock-up Arrangement."
LOCK-UP ARRANGEMENT
The Company and certain existing stockholders have agreed, subject to
certain exceptions, to enter into Lock-up Arrangements for a period of 360
days from the date of this Prospectus. Under the Lock-up Arrangements, such
stockholders will not offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible into, or exercisable
or exchangeable for shares of Common Stock without the prior written consent
of Bear Stearns & Co. Inc., one of the representatives of the Underwriters.
Upon the expiration of the Lock-up Arrangements, those shares subject to Lock-
up Arrangements will not, absent registration, be freely tradeable, but will
become eligible for sale under Rule 144 on various dates in the future.
EFFECT OF SALES OF SHARES
Prior to the Offering, there has been no public market for the Common Stock
of the Company and no prediction can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial numbers of shares in the public market could adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise capital through a sale of its equity securities.
52
<PAGE>
UNDERWRITING
The Underwriters of the Offering of Common Stock (the "Underwriters"), for
whom Bear, Stearns & Co. Inc. and Montgomery Securities are acting as
representatives, have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the form of which is filed as an exhibit to the
Company's Registration Statement of which this Prospectus is a part), to
purchase from the Company an aggregate of 4,325,000 shares of Common Stock.
The aggregate number of shares of Common Stock that each Underwriter has
agreed to purchase is set forth opposite its name below. The Underwriters are
committed to purchase and pay for all of such shares of Common Stock if any
are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. .............................................
Montgomery Securities.................................................
---------
Total............................................................... 4,325,000
=========
</TABLE>
The Underwriters have advised the Company that they propose to offer
4,325,000 shares of Common Stock 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 concession not to exceed $ per share. The selected dealers may
reallow a concession to certain other dealers not to exceed $ per share.
After the initial offering to the public, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the representatives. The Common Stock is offered subject to receipt
and acceptance by the Underwriters and to certain other conditions, including
the right to reject orders in whole or in part. The Underwriters have informed
the Company that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Company has granted to the Underwriters an option to purchase up to
648,750 additional shares of Common Stock at the public offering price less
the underwriting discount set forth on the cover page of this Prospectus,
solely to cover over-allotments, if any. This option may be exercised at any
time until 30 days after the date of this Prospectus. If the Underwriters
exercise this option, each of the Underwriters will be committed, subject to
certain conditions, to purchase a number of additional shares proportionate to
such Underwriter's initial commitment as indicated in the preceding table.
Prior to the Offering there has been no public market for the Company's
Common Stock. The initial public offering price set forth on the cover page of
this Prospectus has been determined by negotiations between the Company and
the representatives. In determining such price, consideration was given to
various factors including: (i) the market valuation of comparable companies;
(ii) market conditions for initial public offerings; (iii) the history of and
prospects for the Company's business; (iv) the Company's past and present
operations and earnings; (v) the Company's current financial position; (vi) an
assessment of the Company's management; (vii) the position of the Company in
its industry; and (viii) the market value of the Company's assets.
Consideration also was given to the general condition of the securities
markets, the demand for similar securities of comparable companies and other
market factors.
The Company has agreed not to offer, issue, sell, agree to sell, grant any
option for the sale of or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable
53
<PAGE>
or exchangeable for Common Stock (except for options granted pursuant to the
1996 Plan) for a period of 360 days after the date of this Prospectus without
the prior written consent of the Representatives.
The Company's officers and Directors and certain stockholders have also
agreed with the Underwriters not to offer, sell, agree to sell, grant any
option to purchase or otherwise dispose of any shares owned by them for a
period of 360 days after the date of this Prospectus without the prior written
consent of the Representatives. This agreement may be released without notice
to persons purchasing shares in the Offering and without notice to any market
on which the Common Stock is traded.
The Company has been advised by the representatives of the Underwriters that
they presently intend to make a market in the Common Stock offered hereby;
however, the representatives of the Underwriters are under no obligation to do
so, and any market making activity may be discontinued at any time. There can
be no assurance that an active public market for the Common Stock will develop
and continue after the Offering.
A managing director of Smith Barney, Inc. has an indirect ownership interest
in 11,301 shares of Common Stock and a Vice President of Goldman, Sachs & Co.
has an indirect ownership in 56,505 shares of Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Vinson & Elkins L.L.P. Certain legal matters relating to the
Offering of Common Stock will be passed upon for the Underwriters by Jenkens &
Gilchrist, a Professional Corporation.
EXPERTS
The Company's balance sheet as of August 22, 1996, the financial statements
and schedule of Extended Stay Limited Partnership as of June 30, 1996, and for
the period from inception (February 9, 1996) through June 30, 1996, and the
combined financial statements and schedule of Westar as of December 31, 1994
and 1995, and for the three years ended December 31, 1993, 1994 and 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein.
The information for Extended Stay Limited Partnership as of June 30, 1996,
and for the period from inception (February 9, 1996) through June 30, 1996,
and for Westar for the three years ended December 31, 1993, 1994 and 1995,
under the caption "Selected Financial Data" appearing in this Prospectus and
Registration have been derived from financial statements of Extended Stay
Limited Partnership and the combined financial statements of Westar audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein.
Such financial statements, combined financial statements and selected
financial data are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
54
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement under
the Securities Act with respect to the shares of Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits and schedules filed therewith. Statements contained in
this Prospectus concerning the provisions of any contract, agreement or other
document referred to herein or therein are not necessarily complete, but
contain a summary of the material terms of such contracts, agreements or other
documents. With respect to each contract, agreement or other document filed as
an exhibit to the Registration Statement, reference is made to the exhibit for
the complete contents of the exhibit, and each statement concerning its
provisions is qualified in its entirety by such reference. The Registration
Statement may be inspected, without charge, at the offices of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices
at 7 World Trade Center, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661-2551. Copies of such materials
may also be obtained by mail at prescribed rates from the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such materials may also be obtained from the
web site that the Commission maintains at www.sec.gov.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HOMEGATE HOSPITALITY, INC.
Pro Forma Financial Statements
Pro Forma Balance Sheet as of June 30, 1996........................... F-3
Notes to Pro Forma Balance Sheet...................................... F-4
Pro Forma Statements of Operations for the Six Months Ended June 30,
1996 and for the Year Ended December 31, 1995........................ F-6
Notes to Pro Forma Statements of Operations........................... F-7
Balance Sheet:
Report of Independent Auditors........................................ F-8
Balance Sheet as of August 22, 1996................................... F-9
Notes to Balance Sheet................................................ F-10
EXTENDED STAY LIMITED PARTNERSHIP
Financial Statements:
Report of Independent Auditors........................................ F-11
Balance Sheet as of June 30, 1996..................................... F-12
Statement of Operations for the Period from Inception (February 9,
1996) through June 30, 1996.......................................... F-13
Statement of Changes in Partners' Capital for the Period from
Inception (February 9, 1996) through June 30, 1996................... F-14
Statement of Cash Flows for the Period from Inception (February 9,
1996) through June 30, 1996.......................................... F-15
Notes to Financial Statements......................................... F-16
WESTAR
Combined Financial Statements:
Report of Independent Auditors........................................ F-20
Combined Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996 (unaudited)..................................................... F-21
Combined Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996
(unaudited).......................................................... F-22
Combined Statements of Stockholders' Equity (Deficit) and Partners'
Capital (Deficit) for the Years Ended December 31, 1993, 1994 and
1995 and the Six Months Ended June 30, 1996 (unaudited).............. F-23
Combined Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996
(unaudited).......................................................... F-24
Notes to Combined Financial Statements................................ F-25
</TABLE>
F-1
<PAGE>
HOMEGATE HOSPITALITY, INC.
PRO FORMA BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
The unaudited pro forma balance sheet, as adjusted, of the Company is
presented as if the Formation, the Westar Transaction, the acquisition of
three development sites, and the Offering had occurred on June 30, 1996, and
reflects ESLP at historical values and the Westar acquisition under the
purchase method of accounting. The unaudited pro forma balance sheet should be
read in conjunction with the financial statements listed in the index on page
F-1 of this Prospectus. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The unaudited pro forma balance sheet is not necessarily indicative of what
the actual financial position would have been at June 30, 1996, nor does it
purport to represent the future financial position of the Company.
F-2
<PAGE>
HOMEGATE HOSPITALITY, INC.
PRO FORMA BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION
---------------------- AND COMPANY
FORMATION COMPANY OFFERING PRO FORMA
ESLP WESTAR ELIMINATIONS (A) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ----------- ---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $1,273,882 $ 1,012,683 $(1,012,683) $ 3,583,585 (B) $ 4,857,467 $47,767,000(H) $52,624,467
Accounts receivable... 7,184 225,811 (225,811) 7,184 7,184
Prepaid expenses and
other................ 3,078 217,400 (217,400) 3,078 3,078
---------- ----------- ----------- ----------- ----------- ----------- -----------
Total current assets.. 1,284,144 1,455,894 (1,455,894) 3,583,585 4,867,729 47,767,000 52,634,729
Property and equipment,
net................... 8,200,570 14,237,577 13,750,797 (C) 36,188,944 36,188,944
Receivables from
affiliates............ 675,359 (675,359)
Escrow and reserve
funds................. 194,715 194,715 194,715
Other assets........... 223,524 7,485 (7,485) (35,000)(D) 188,524 188,524
Deferred loan costs.... 17,240 875,272 (875,272) 17,240 17,240
---------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets........... $9,725,478 $17,446,302 $(3,014,010) $17,299,382 $41,457,152 $47,767,000 $89,224,152
========== =========== =========== =========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS'
EQUITY/PARTNERS'
CAPITAL
Current liabilities:
Accounts payable...... $ 305,649 $ 472,938 $ (472,938) $ $ 305,649 $ $ 305,649
Other accrued
expenses............. 45,803 679,532 (679,532) 45,803 45,803
Payables to
affiliates........... 348,789 6,208,789 (6,208,789) 348,789 348,789
Current portion of
obligations under
capital leases....... 130,760 (86,305) 44,455 44,455
Current portion of
long-term debt....... 374,430 374,430 374,430
---------- ----------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities.......... 700,241 7,866,449 (7,447,564) 1,119,126 1,119,126
Mortgage note
payable/long-term
debt, less current
portion............... 2,869,387 18,308,808 (656,058) 20,522,137 20,522,137
Obligations under
capital leases, less
current portion....... 161,654 (106,695) 54,959 54,959
Redeemable preferred
stock................. 500,000 (500,000)
Stockholders'
equity/partners'
capital:
Common stock.......... 531,914 (531,914) 64,000 (E) 64,000 43,250(I) 107,250
Preferred Stock.......
Additional paid-in
capital.............. 19,696,930 (F) 19,696,930 47,723,750(J) 67,420,680
Retained earnings/
accumulated deficit.. (6,059,913) 6,059,913
Partners' capital..... 6,155,850 (3,862,610) 3,862,610 (6,155,850)(G)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Total stockholders'
equity/ partners'
capital............... 6,155,850 (9,390,609) 9,390,609 13,605,080 19,760,930 47,767,000 67,527,930
---------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders'
equity/partners'
capital............... $9,725,478 $17,446,302 $ 680,292 $13,605,080 $41,457,152 $47,767,000 $89,224,152
========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
HOMEGATE HOSPITALITY, INC.
NOTES TO PRO FORMA BALANCE SHEET
(A) Reflects the elimination of assets not acquired and liabilities not
assumed in connection with the purchase of Westar.
(B)Net increase reflects the following:
<TABLE>
<S> <C>
Additional capital contributions by ESLP partners to fund
Westar and land acquisitions................................. $10,021,495
Acquisition of Westar......................................... (6,970,715)
Acquisition of development sites(1)........................... (3,050,780)
Remaining capital contributions from ESLP partners to meet
$20,000,000 commitment....................................... $ 3,583,585
-----------
$ 3,583,585
===========
</TABLE>
--------
(1) Includes the acquisition of sites in Lenexa, Kansas, Overland Park,
Kansas, and Dallas, Texas purchased in July, August, and September
1996.
(C) Increase reflects excess of purchase price over net book value of Westar
assets acquired ($10,665,017) and acquisition of land of ($3,085,780).
(D) Decrease reflects escrow applied to acquisition of the Dallas, Texas site.
(E) Reflects the par value of Common Stock issued to ESLP partners in exchange
for partnership interests.
(F) Net increase reflects the equity of ESLP before the merger ($16,177,345)
plus remaining capital contributions ($3,583,585), less par value of
Common Stock issued ($64,000).
(G) Decrease reflects the following:
<TABLE>
<S> <C>
Additional capital contributions by ESLP partners to fund
Westar and land acquisitions................................ $ 10,021,495
Exchange of ESLP partnership interests for Common Stock...... (19,760,930)
Remaining capital contributions from ESLP partners........... 3,583,585
------------
$ (6,155,850)
============
</TABLE>
(H) Increase reflects the proceeds of Offering ($51,900,000), net of expenses
of the Offering ($4,133,000).
(I) Reflects par value of Common Stock issued in connection with the Offering.
(J) Reflects the proceeds of the Offering in excess of par value of Common
Stock ($51,856,750), net of expenses of the Offering ($4,133,000).
F-4
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
The unaudited pro forma statements of operations, as adjusted, of the
Company are presented as if the Formation, the Westar Transaction, the
acquisition of three development sites, and the Offering had occurred on
January 1, 1995, and reflects ESLP at historical values and the Westar
acquisition under the purchase method of accounting. The unaudited pro forma
statements of operations should be read in conjunction with the financial
statements listed in the index on page F-1 of this Prospectus. In management's
opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The unaudited pro forma statements of operations are not necessarily
indicative of what the actual results of operations of the Company would have
been assuming such transactions had been completed at the beginning of the
period, nor do they purport to represent the results of operations of the
Company for any future periods.
F-5
<PAGE>
HOMEGATE HOSPITALITY, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION
--------------------- AND COMPANY
FORMATION COMPANY OFFERING PRO FORMA
ESLP WESTAR ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
--------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $ 24,803 $3,871,050 $ $3,895,853 $ $3,895,853
Other revenue.......... 1,703 73,027 74,730 74,730
--------- ---------- --------- ---------- --------- -----------
Total revenue........... 26,506 3,944,077 3,970,583 3,970,583
Costs and expenses:
Property operating
expenses.............. 30,313 2,357,259 116,132 (A) 2,503,704 2,503,704
Corporate operating
expenses.............. 204,273 336,948 541,221 208,000 (D) 749,221
Depreciation and
amortization.......... 9,533 305,274 139,476 (B) 454,283 454,283
Interest............... 21,457 1,209,850 (297,376)(C) 933,931 933,931
--------- ---------- --------- ---------- --------- -----------
Total expenses.......... 265,576 4,209,331 (41,768) 4,433,139 208,000 4,641,139
--------- ---------- --------- ---------- --------- -----------
Loss before
extraordinary item..... $(239,070) $ (265,254) $ 41,768 $ (462,556) $(208,000) $ (670,556)
========= ========== ========= ========== ========= ===========
Loss per common share... $ (.07) $ (.06)
========== ===========
Weighted average number
of shares of common
stock outstanding...... 6,400,000 10,725,000
========== ===========
</TABLE>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION AND COMPANY
---------- FORMATION COMPANY OFFERING PRO FORMA
WESTAR ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- --------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $8,193,093 $ $8,193,093 $ $ 8,193,093
Other revenue.......... 245,756 245,756 245,756
---------- --------- ---------- --------- -----------
Total revenue........... 8,438,849 8,438,849 8,438,849
Costs and expenses:
Property operating
expenses.............. 5,126,346 270,793 (A) 5,397,139 5,397,139
Corporate operating
expenses.............. 875,043 875,043 576,000 (D) 1,451,043
Depreciation and
amortization.......... 662,314 181,628 (B) 843,942 843,942
Interest............... 2,608,468 (621,417)(C) 1,987,051 1,987,051
---------- --------- ---------- --------- -----------
Total expenses.......... 9,272,171 (168,996) 9,103,175 576,000 9,679,175
---------- --------- ---------- --------- -----------
Loss before
extraordinary item..... $ (833,322) $ 168,996 $ (664,326) $(576,000) $(1,240,326)
========== ========= ========== ========= ===========
Loss per common share... $ (.10) $ (.12)
========== ===========
Weighted average number
of shares of common
stock outstanding...... 6,400,000 10,725,000
========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
HOMEGATE HOSPITALITY, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
(A) Net increase reflects the following:
Hotel management fee............................... $ 116,132 $ 245,793
One-time fee under Management Agreement............ -- 25,000
--------- ---------
$ 116,132 $ 270,793
========= =========
(B) Increase reflects additional depreciation relating
to purchase price allocation of Westar acquisition,
net of reduction in depreciation expense to reflect
increase in estimated useful lives from 30 to 40
years.............................................. $ 139,476 $ 181,628
========= =========
(C) Decrease reflects reduction in interest expense due
to Westar debt not assumed......................... $(297,376) $(621,417)
========= =========
(D) Increase reflects changes to corporate operating
expenses as follows:
Additional costs of operating as a public company.... $ 208,000 $ 416,000
Compensation relating to the awarding of shares of
common stock........................................ -- 160,000
--------- ---------
$ 208,000 $ 576,000
========= =========
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Homegate Hospitality, Inc.
We have audited the accompanying balance sheet of Homegate Hospitality, Inc.
as of August 22, 1996. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe our audit of the balance sheet provides a reasonable
basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Homegate Hospitality, Inc. as of
August 22, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
August 22, 1996
F-8
<PAGE>
HOMEGATE HOSPITALITY, INC.
BALANCE SHEET
AUGUST 22, 1996
<TABLE>
<S> <C>
Assets:
Cash.................................................................. $1,000
------
Total assets.......................................................... $1,000
======
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued or outstanding................................................ $ --
Common stock, $.01 par value; 20,000,000 shares authorized; 10 shares
issued and outstanding............................................... --
Additional paid-in capital............................................ 1,000
------
Total stockholders' equity............................................ $1,000
======
</TABLE>
See accompanying notes.
F-9
<PAGE>
HOMEGATE HOSPITALITY, INC.
NOTES TO BALANCE SHEET
AUGUST 22, 1996
1. ORGANIZATION
Homegate Hospitality, Inc. (the "Company") was organized in Delaware on
August 16, 1996. The Company is authorized to issue 20,000,000 shares of
common stock (par value--$.01 per share). The Board of Directors of the
Company also has the authority to issue 5,000,000 shares of preferred stock
(par value--$.01 per share). The Company intends to offer for sale common
stock in an initial public offering in the United States (the "Offering"). The
Company was capitalized with the issuance of 10 shares of common stock to
Extended Stay Limited Partnership. Each common stockholder is entitled to one
vote for each share held. As more fully described in the Formation Transaction
in the Registration Statement relating to the Offering, the Company was formed
to continue the extended-stay lodging facility development, acquisition, and
management operations of Extended Stay Limited Partnership, and to acquire,
develop and maintain certain extended-stay lodging facilities throughout the
United States.
Income Taxes
The Company was formed as a Subchapter C corporation and, as such, will be
subject to federal and any applicable state income taxes.
F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Extended Stay Limited Partnership
We have audited the accompanying balance sheet of Extended Stay Limited
Partnership as of June 30, 1996, and the related statements of operations,
changes in partners' capital and cash flows for the period from inception
(February 9, 1996) through June 30, 1996. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Extended Stay Limited
Partnership as of June 30, 1996, and the results of its operations and its
cash flows for the period from inception (February 9, 1996) through June 30,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
August 8, 1996
F-11
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
BALANCE SHEET
JUNE 30, 1996
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents......................................... $1,273,882
Accounts receivable............................................... 7,184
Prepaid expenses.................................................. 3,078
----------
Total current assets............................................ 1,284,144
Property and equipment, net (Notes 2 and 3)......................... 8,200,570
Deferred loan costs................................................. 17,240
Other assets........................................................ 223,524
----------
Total assets........................................................ $9,725,478
==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable.................................................. $ 305,649
Accrued expenses.................................................. 45,803
Payables to affiliates (Note 4)................................... 348,789
----------
Total current liabilities....................................... 700,241
Mortgage note payable (Note 3)...................................... 2,869,387
Partners' capital (Note 5)
Greystar.......................................................... 3,077,925
ESH............................................................... 3,077,925
Limited partners.................................................. --
----------
Total partners' capital......................................... 6,155,850
----------
Total liabilities and partners' capital............................. $9,725,478
==========
</TABLE>
See accompanying notes.
F-12
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (FEBRUARY 9, 1996)
THROUGH JUNE 30, 1996
<TABLE>
<S> <C>
REVENUES
Room revenue........................................................ $ 24,803
Other revenue....................................................... 1,703
---------
26,506
COSTS AND EXPENSES
Property operating expenses......................................... 30,313
Corporate operating expenses........................................ 204,273
Depreciation and amortization....................................... 9,533
Interest............................................................ 21,457
---------
265,576
---------
Net loss............................................................ $(239,070)
=========
</TABLE>
See accompanying notes.
F-13
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIMITED
GREYSTAR ESH PARTNERS TOTAL
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance at inception (February 9,
1996)............................ $ -- $ -- $ -- $ --
Contributions................... 3,197,460 3,197,460 -- 6,394,920
Net loss........................ (119,535) (119,535) -- (239,070)
---------- ---------- ----- ----------
Balance at June 30, 1996.......... $3,077,925 $3,077,925 $ -- $6,155,850
========== ========== ===== ==========
</TABLE>
See accompanying notes.
F-14
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (FEBRUARY 9, 1996)
THROUGH JUNE 30, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss.......................................................... $ (239,070)
Adjustments to reconcile net loss to net cash provided by operat-
ing activities
Depreciation and amortization................................... 9,533
Accrued interest added to mortgage note payable................. 21,457
Changes in operating assets and liabilities:
Accounts receivable........................................... (7,184)
Prepaid expenses.............................................. (3,078)
Accounts payable.............................................. 136,403
Accrued expenses.............................................. 45,803
Payables to affiliates........................................ 348,789
----------
Net cash provided by operating activities......................... 312,653
INVESTING ACTIVITIES
Acquisition of hotel facility..................................... (4,911,486)
Acquisition of land............................................... (2,991,123)
Additions to property and equipment, net of development costs pay-
able............................................................. (133,038)
Additions to other assets......................................... (228,734)
----------
Net cash used in investing activities............................. (8,264,381)
----------
FINANCING ACTIVITIES
Proceeds from mortgage note payable............................... 2,847,930
Payment of deferred loan costs.................................... (17,240)
Contributions from partners....................................... 6,394,920
----------
Net cash provided by financing activities......................... 9,225,610
----------
Net increase in cash and cash equivalents......................... 1,273,882
Cash and cash equivalents at beginning of period.................. --
----------
Cash and cash equivalents at end of period........................ $1,273,882
==========
</TABLE>
See accompanying notes.
F-15
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Extended Stay Limited Partnership, a Delaware limited partnership (the
"Partnership"), was formed on February 9, 1996, by ESH Partners, L.P. ("Crow")
and JMI/Greystar Extended Stay Partners, L.P. ("Greystar"), as the general
partners, and various limited partners, for the purpose of holding,
maintaining, improving, developing, operating, managing, selling, and
exchanging moderately priced extended-stay lodging facilities ("hotel
facilities") throughout the United States. Development and management of the
facilities will be performed by various related entities.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from these estimates.
INCOME TAX MATTERS
Under present income tax laws, the Partnership is not subject to federal
income taxes; therefore, no taxes have been provided in the accompanying
financial statements. The partners are to include their respective share of
Partnership income or losses in their individual tax returns.
REVENUE RECOGNITION
Room revenue and other income are recognized when earned, utilizing the
accrual method of accounting.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.
PROPERTY AND EQUIPMENT
The Partnership capitalizes costs directly related to the acquisition,
renovation or development of property and equipment while maintenance and
repairs are charged to operating expense when incurred. Property and equipment
is recorded at cost. The building and improvements and furniture and fixtures
are depreciated over their estimated useful lives, which are 40 years and 7
years, respectively, using the straight-line method.
DEFERRED LOAN COSTS
The Partnership has incurred costs in obtaining financing. These costs have
been deferred and will be amortized over the life of the loan.
OTHER ASSETS
Other assets include site deposits, preacquisition and development costs,
pre-opening costs, and organization costs. Site deposits have been paid to
escrow agents in conjunction with executed purchase agreements, whereby the
Partnership is considering the purchase of certain land parcels.
F-16
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Preacquisition and development costs related to the acquisition of property
sites are capitalized when it is probable that a site will be acquired and are
reclassified to property and equipment upon acquisition. In the event the
acquisition is not consummated, the costs are expensed.
Compensation, promotional costs and other costs relating to the opening of
new properties are capitalized by the Partnership. Amortization is provided
using the straight line method over a twelve-month period.
Organization costs of $78,158 incurred in conjunction with the formation of
the Partnership have been capitalized and are being amortized over sixty
months using the straight-line method. Accumulated amortization for
organization costs was $5,210 at June 30, 1996.
2. PROPERTY AND EQUIPMENT
At June 30, 1996, property and equipment consists of the following:
<TABLE>
<S> <C>
Land........................................................... $3,825,326
Buildings and improvements..................................... 3,806,052
Furniture, fixtures, and equipment............................. 573,515
----------
8,204,893
Less accumulated depreciation.................................. 4,323
----------
$8,200,570
==========
</TABLE>
On February 15, 1996, the Partnership acquired a land parcel in Phoenix,
Arizona, and on May 24, 1996, acquired a land parcel in Denver, Colorado, for
future development of hotel facilities. Additionally, on May 31, 1996, the
Partnership acquired Studio Suites (the "Hotel") in Grand Prairie, Texas.
Operations of the Hotel commenced during June 1996 and are included in the
accompanying statement of operations.
Long-lived assets are evaluated when indicators of impairment are present
and provisions for possible losses are recorded when the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
3. MORTGAGE NOTE PAYABLE
The Partnership has entered into a Master Loan Agreement (the "Note") with
Bank One, Arizona. The Note provides up to $30 million in construction/mini-
perm mortgage loans for the acquisition and development of land and hotel
facilities for up to five years. A loan of up to $3,448,250 (the "Loan") was
committed under the Note in connection with the acquisition of the Hotel. The
Loan, secured by the Hotel, accrues interest at prime plus .5% (8.75% at June
30, 1996), and requires interest payments for the first twelve months of the
loan, followed by principal and interest payments based upon a fifteen year
amortization until maturity, June 1, 1998. The outstanding balance at June 30,
1996, includes $2,847,930 of original principal borrowed and $21,457 of
accrued interest added from a $70,000 interest reserve.
The Loan requires the Partnership to make payments equal to 4% of the
monthly net operating income, as defined, into a capital replacement reserve,
held by the lender, to establish and maintain a balance of $60,000. No such
payments were due at June 30, 1996.
F-17
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. MORTGAGE NOTE PAYABLE (CONTINUED)
At the time of maturity, the Partnership has an option to extend the loan
for three years, for a fee equal to .375% of the unpaid principal balance.
Principal maturities of the mortgage note payable at June 30, 1996, are as
follows:
<TABLE>
<S> <C>
Six months ending December 31, 1996............................ $ --
1997........................................................... 63,928
1998........................................................... 2,805,459
----------
$2,869,387
==========
</TABLE>
The carrying value of the mortgage note payable as of June 30, 1996
approximates fair value as the interest rate approximates market rate for
similar debt instruments.
4. RELATED PARTY TRANSACTIONS
Wyndham Management Corporation ("Wyndham") an affiliate of Crow, administers
and funds payroll and insurance benefits for all employees of the Partnership
and the Hotel. Payables to affiliates includes $89,434 due to Wyndham at June
30, 1996, for reimbursement of payroll and insurance expenditures.
Wyndham is entitled to receive a management fee equal to 3% of gross
revenues, as defined, for management of the Hotel.
The Partnership reimburses Greystar for a portion of the salary of
Greystar's CEO, based on an allocation of his time incurred on the
Partnership. Payables to affiliates includes $55,662 due to Greystar at June
30, 1996.
Additionally, payables to affiliates includes $163,001, $13,407, and $14,163
due to affiliates of Crow, Wyndham, and Greystar, respectively, at June 30,
1996, for reimbursement of out-of-pocket expenditures incurred in conjunction
with the pursuit and acquisition of land and property.
One of the limited partners has agreed to develop up to 60 hotel facilities
for the Partnership, under an agreement that expires at the earlier of the
completion of the sixtieth hotel or December 31, 1998.
5. PARTNERS' EQUITY
CAPITAL CONTRIBUTIONS
Upon formation of the Partnership, Greystar and Crow each made initial cash
contributions of $750,000. The general partners each made additional capital
contributions of $2,447,460 during the period ended June 30, 1996, and are
each required to contribute an additional $6,802,540.
ALLOCATIONS OF PROFITS AND LOSSES
Net profits and losses are to be allocated in accordance with the
Partnership Agreement, as limited by the provisions of Section 704(b) of the
Internal Revenue Code.
F-18
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PARTNERS' EQUITY (CONTINUED)
CASH DISTRIBUTIONS
Distributions may be made as determined by the Management Committee of the
Partnership and are to be distributed as follows:
. First, to the general partners in payment of their cumulative Preferred
Return equal to 13% on their Capital Contribution Account, as defined,
and in proportion to their cumulative Preferred Return ($75,159 and
$70,066 for Greystar and Crow, respectively, at June 30, 1996); then,
. To the general partners an amount equal to their Capital Contributions
and in proportion to the balances of their Capital Contribution Accounts
($3,197,460 for each of Greystar and Crow as of June 30, 1996); then,
. To the partners in accordance with their Percentage Interests as limited
by the Partnership Agreement.
No distributions were made for the period ended June 30, 1996.
6. SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Partnership purchased two land sites for an
aggregate purchase price of $2,010,780 for future hotel development.
Additionally, the Partnership began the development of one hotel facility.
Total expected development costs for the facility are approximately
$5,400,000.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Westar
We have audited the accompanying combined balance sheets of Westar at
December 31, 1994 and 1995, and the related combined statements of operations,
stockholders' equity (deficit) and partners' capital (deficit), and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 combined financial position of Westar at
December 31, 1994 and 1995, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Antonio, Texas
August 2, 1996
F-20
<PAGE>
WESTAR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
JUNE 30
1994 1995 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................. $ 234,358 $ 480,761 $ 1,012,683
Accounts receivable.................. 275,345 226,800 225,811
Prepaid expenses and other........... 127,940 164,531 217,400
------------ ----------- -----------
Total current assets................... 637,643 872,092 1,455,894
Hotel property and other fixed assets,
net................................... 14,516,183 14,493,834 14,237,577
Net receivables from affiliates........ 577,821 678,654 675,359
Deferred loan costs, net............... 59,542 898,050 875,272
Escrow and reserve funds............... -- 194,715 194,715
Other assets........................... 13,502 3,729 7,485
------------ ----------- -----------
Total assets........................... $ 15,804,691 $17,141,074 $17,446,302
============ =========== ===========
LIABILITIES, STOCKHOLDERS' EQUITY
(DEFICIT) AND PARTNERS' CAPITAL
(DEFICIT)
Current liabilities:
Accounts payable..................... $ 387,633 $ 413,774 $ 472,938
Other accrued liabilities............ 314,674 304,936 679,532
Current portion of obligations under
capital leases...................... 76,321 140,569 130,760
Current portion of long-term debt.... 328,751 332,584 374,430
Notes payable to stockholders and
partners............................ 5,508,162 5,799,138 6,208,789
------------ ----------- -----------
Total current liabilities.............. 6,615,541 6,991,001 7,866,449
Obligations under capital leases, less
current portion....................... 88,201 193,509 161,654
Long-term debt, less current portion... 20,021,219 19,894,994 18,308,808
Redeemable cumulative Preferred Stock;
$10 par value, 1,000,000 shares autho-
rized, 50,000 shares issued and out-
standing at a redemption value of
$10.00 per share...................... 500,000 500,000 500,000
Commitments and contingencies
Stockholders' equity (deficit) and
partners' capital (deficit):
Class A common stock, voting, $1 par
value, 10,000,000 shares authorized,
500,000 shares issued and
outstanding......................... 500,000 500,000 500,000
Class B common stock, nonvoting, $1
par value, 72,500 shares authorized,
31,914 shares issued and
outstanding......................... 31,914 31,914 31,914
Retained earnings (deficit).......... (5,439,375) (5,608,665) (6,059,913)
------------ ----------- -----------
Total stockholders' equity (deficit)... (4,907,461) (5,076,751) (5,527,999)
Partners' capital (deficit)............ (6,512,809) (5,361,679) (3,862,610)
------------ ----------- -----------
Total stockholders' equity (deficit)
and partners' capital (deficit)....... (11,420,270) (10,438,430) (9,390,609)
------------ ----------- -----------
Total liabilities, stockholders' equity
(deficit) and partners' capital
(deficit)............................. $ 15,804,691 $17,141,074 $17,446,302
============ =========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
WESTAR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
--------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Room revenue.......... $8,465,611 $8,299,237 $8,193,093 $ 4,222,107 $ 3,871,050
Other revenue......... 295,405 284,476 245,756 81,349 73,027
---------- ---------- ---------- ------------ ------------
Total revenue........... 8,761,016 8,583,713 8,438,849 4,303,456 3,944,077
Expenses:
Property operating ex-
penses............... 4,921,659 5,135,787 5,126,346 2,371,702 2,357,259
Corporate operating
expenses............. 537,933 930,460 875,043 213,937 336,948
Depreciation and amor-
tization............. 592,176 610,551 662,314 296,519 305,274
Interest.............. 2,454,930 2,375,122 2,608,468 1,038,612 1,209,850
---------- ---------- ---------- ------------ ------------
Total expenses.......... 8,506,698 9,051,920 9,272,171 3,920,770 4,209,331
---------- ---------- ---------- ------------ ------------
Income (loss) before ex-
traordinary gain....... 254,318 (468,207) (833,322) 382,686 (265,254)
Extraordinary gain on
extinguishment of debt. -- -- 1,465,113 -- --
---------- ---------- ---------- ------------ ------------
Net income (loss)....... $ 254,318 $ (468,207) $ 631,791 $ 382,686 $ (265,254)
========== ========== ========== ============ ============
</TABLE>
See accompanying notes.
F-22
<PAGE>
WESTAR
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS' CAPITAL
(DEFICIT)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
RETAINED STOCKHOLDERS' PARTNERS' AND PARTNERS'
COMMON EARNINGS EQUITY CAPITAL CAPITAL
STOCK (DEFICIT) (DEFICIT) (DEFICIT) (DEFICIT)
-------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... $531,914 $(5,746,479) $(4,714,565) $(6,046,701) $(11,261,266)
Net income (loss)...... -- 482,650 482,650 (228,332) 254,318
-------- ----------- ----------- ----------- ------------
Balance at December 31,
1993................... 531,914 (5,263,829) (4,231,915) (6,275,033) (11,006,948)
Net (loss)............. -- (175,546) (175,546) (292,661) (468,207)
Capital contribution... -- -- -- 54,885 54,885
-------- ----------- ----------- ----------- ------------
Balance at December 31,
1994................... 531,914 (5,439,375) (4,407,461) (6,512,809) (11,420,270)
Net income (loss)...... -- (169,290) (169,290) 801,081 631,791
Capital contribution... -- -- -- 350,049 350,049
-------- ----------- ----------- ----------- ------------
Balance at December 31,
1995................... 531,914 (5,608,665) (4,576,751) (5,361,679) (10,438,430)
Net income (loss)...... -- (451,248) (451,248) 185,994 (265,254)
Conversion of long-term
debt into partners'
capital............... -- -- -- 1,383,200 1,383,200
Distributions.......... -- -- -- (70,125) (70,125)
-------- ----------- ----------- ----------- ------------
Balance at June 30, 1996
(Unaudited)............ $531,914 $(6,059,913) $(5,027,999) $(3,862,610) $ (9,390,609)
======== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
WESTAR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
---------------------------------- --------------------------
1993 1994 1995 1995 1996
--------- --------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ 254,318 $(468,207) $ 631,791 $ 382,686 $ (265,254)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and amor-
tization............. 592,176 610,551 662,314 296,519 305,274
Extraordinary gain.... -- -- (1,465,113) -- --
Interest payable to
stockholders and
partners............. 328,911 341,808 345,697 177,848 197,661
Changes in:
Accounts receivable. (135,562) 118,973 48,545 90,128 989
Prepaids and other.. (64,020) 146,165 (36,591) 62,431 (52,869)
Accounts payable.... (120,829) 158,927 26,141 (18,410) 59,164
Other accrued lia-
bilities........... 95,365 (50,103) (9,738) 214,543 374,596
Other............... (7,113) 2,660 9,773 5,770 (3,756)
--------- --------- ------------ ------------ ------------
Net cash provided by op-
erating activities..... 943,246 860,774 212,819 1,211,515 615,805
INVESTING ACTIVITIES
Acquisition of hotel
property and other
fixed assets........... (365,920) (910,165) (639,965) (262,061) (26,239)
--------- --------- ------------ ------------ ------------
Net cash used in invest-
ing activities......... (365,920) (910,165) (639,965) (262,061) (26,239)
FINANCING ACTIVITIES
Borrowings of long-term
debt................... -- -- 19,650,000 -- --
Payments of long-term
debt................... (300,000) (284,861) (18,307,279) (509,494) (161,140)
Advances from (to) af-
filiates............... (236,994) 443,621 (100,833) (51,539) 3,295
Advances from (payments
to) stockholders and
partners............... -- (362,579) (54,721) -- 211,990
Payments on obligations
under capital leases... (54,000) (52,648) (84,000) -- (41,664)
Borrowings on obliga-
tions under capital
leases................. 109,047 -- 253,556 -- --
Capital contributions... -- 54,885 350,049 -- --
Distributions........... -- -- -- -- (70,125)
Deferred loan costs..... -- -- (838,508) -- --
Escrow and reserve
funds.................. -- -- (194,715) (251,264) --
--------- --------- ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............. (481,947) (201,582) 673,549 (812,297) (57,644)
--------- --------- ------------ ------------ ------------
Net change in cash and
cash equivalents....... 95,379 (250,973) 246,403 137,157 531,922
Cash and cash
equivalents at
beginning of year...... 389,952 485,331 234,358 234,358 480,761
--------- --------- ------------ ------------ ------------
Cash and cash equiva-
lents at end of year... $ 485,331 $ 234,358 $ 480,761 $ 371,515 $ 1,012,683
========= ========= ============ ============ ============
Supplemental schedule of
noncash activities:
Conversion of long-
term debt to
partners' capital.... $ -- $ -- $ -- $ -- $ 1,383,200
</TABLE>
See accompanying notes.
F-24
<PAGE>
WESTAR
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(INFORMATION AS TO JUNE 30, 1996 AND THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Westar ("Westar" or "Company") operates and manages five suite hotels and
serves as the general and a limited partner of certain partnerships formed to
develop and own the suite hotels. The accompanying financial statements have
been presented on a combined basis to represent both the ownership and results
of operations of the five hotels. The combined financial statements include
the accounts of Westar, Inc., VPS I, L.P., and five separate limited
partnerships, RHF-Amarillo, Ltd., RHF-El Paso, Ltd., RHF-Irving, Ltd., RHF San
Antonio North, Ltd., and RHF-San Antonio #2, Ltd. Each of these five
partnerships owned one of the hotels until December 29, 1995, at which time
the hotel properties were contributed to VPS I, L.P. (see Note 2). VPS I, L.P.
leases the hotels to Westar, Inc. All intercompany transactions and balances
have been eliminated.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated interim financial statements are unaudited,
but reflect all adjustments (consisting only of normal recurring accruals)
which are, in the opinion of the Company's management, necessary to present
fairly the financial position as of June 30, 1996, and the results of
operations and cash flows for the six months ended June 30, 1995 and 1996. The
results of the six months ended June 30, 1996 are not necessarily indicative
of results to be expected for the full year.
HOTEL PROPERTY AND OTHER FIXED ASSETS
Depreciation of hotel property and other fixed assets is provided by the
straight-line method over the estimated useful lives of the various assets,
generally from three to thirty years. Amortization of capital leases is also
included with depreciation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, money market funds and all highly liquid short-term investments which
have a maturity of three months or less, when purchased, and which are
available for operations and are readily convertible into cash.
INCOME TAXES
Westar accounts for income taxes using Financial Accounting Standards Board
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the years in which the differences are
expected to reverse. Under SFAS 109, changes in tax rates are recognized in
the year the new legislation is enacted.
The partnerships are not subject to federal or state income taxes. The
income or loss of the partnerships is reported by the general and limited
partners of each respective partnership.
F-25
<PAGE>
WESTAR
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and accounts receivable.
Though limited to one geographical area, the concentration of credit risk with
respect to the Company's receivables is minimized due to the large number of
customers, individually small balances, short payment terms, and required
deposits.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. CHANGE IN PARTNERSHIP STRUCTURE AND REFINANCING OF LONG-TERM DEBT
On December 29, 1995, the five separate partnerships which were formed to
develop and own each of the hotels contributed all of their hotel property and
other fixed assets to a newly-formed partnership, VPS I, L.P., at their
historical basis. Simultaneous with these transactions, VPS I, L.P. obtained
new financing which was used to pay the existing mortgage debt of the
individual partnerships. The Company paid approximately $18,112,000 on
December 29, 1995, as complete and final settlement of the existing mortgage
debt which had a carrying value of approximately $19,577,000 (including
capitalized financing fees), resulting in an extraordinary gain on settlement
of debt of $1,465,113. Essentially, the partnerships each contributed their
fixed assets to VPS I, L.P. to serve as collateral for newly-issued debt so
that the Company could consolidate its debt into a single credit agreement.
3. HOTEL PROPERTY AND OTHER FIXED ASSETS
Hotel property and other fixed assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- JUNE 30
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Land.................................... $ 4,474,418 $ 4,649,419 $ 4,649,419
Hotel buildings and improvements........ 13,176,370 13,061,569 13,107,391
Furniture and fixtures.................. 3,337,972 3,888,799 3,893,776
----------- ----------- -----------
20,988,760 21,599,787 21,650,586
Less accumulated depreciation and amor-
tization............................... 6,472,577 7,105,953 7,413,009
----------- ----------- -----------
$14,516,183 $14,493,834 $14,237,577
=========== =========== ===========
</TABLE>
F-26
<PAGE>
WESTAR
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE TO STOCKHOLDERS AND PARTNERS
Notes payable to stockholders and partners consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
JUNE 30
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
10% convertible subordinated notes payable to
primary stockholder, principal and interest
due in varying amounts during 1996,
unsecured, convertible at any time to Class A
common stock at $1 per share................. $ 400,000 $ 400,000 $ 400,000
10% notes payable to primary stockholder,
principal and interest due in 1996,
unsecured.................................... 240,727 186,006 397,996
9% notes payable to limited partners in
partnership, principal and interest due in
varying amounts based on certain cash flow
requirements through 2002, with investments
in partnerships as collateral, subordinated
to other stockholder debt.................... 2,700,000 2,700,000 2,700,000
---------- ---------- ----------
3,340,727 3,286,006 3,497,996
Accrued interest payable...................... 2,167,435 2,513,132 2,710,793
---------- ---------- ----------
$5,508,162 $5,799,138 $6,208,789
========== ========== ==========
</TABLE>
During the years ended 1993, 1994, and 1995, and the six months ended June
30, 1995 and 1996, the Company recorded interest expense on the above notes
and related accrued interest of approximately $329,000, $342,000, $346,000,
$178,000, and $198,000, respectively. Pursuant to agreements with the primary
limited partner and the primary stockholder, (and Company president), so long
as the Company is not otherwise in default with respect to its mortgage and
floating rate debt obligations or obligation to the primary limited partner or
primary stockholder that are due in 1996, no demand will be made on the notes
payable to the limited partner or to the primary stockholder through the
earlier of June 30, 1997, or the date of sale of the five hotels occurs, nor
will such primary stockholder exercise any rights to redeem any of the
Preferred Stock owned by such primary stockholder.
F-27
<PAGE>
WESTAR
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- JUNE 30
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage note due to Nomura Asset Capital
Corporation, with interest at 9.71%
through January 11, 2011 and the greater
of 14.71% or the Treasury Rate plus 9%
thereafter, due in monthly installments
of $160,789, including interest,
commencing February 1996 through January
2021, secured by hotel properties and
improvements (see discussion below)...... $ -- $18,100,000 $18,027,180
Floating rate note due to Nomura Asset
Capital Corporation, with interest at
LIBOR plus 6%, due in January 2001,
secured by hotel properties and
improvements. This debt was converted
into an ownership interest on February
29, 1996 (see discussion below).......... -- 1,400,000 --
Loan agreement with Franklin Federal
Bancorp, with interest at 10%, due in
August 1997 with a balloon payment of the
remaining principal and interest,
guaranteed by hotel properties and
improvement. Debt was paid off on
December 29, 1995........................ 19,765,109 -- --
Note payable to bank, interest due monthly
at a fixed rate of 8.85%, principal due
August 1997, unsecured, guaranteed by
primary stockholder and affiliates....... 300,000 300,000 300,000
Note payable to bank, interest due monthly
at a fixed rate of 8.85%, principal due
August 1997, unsecured, guaranteed by
primary stockholder...................... 200,000 200,000 200,000
Note payable to bank, interest due monthly
at prime plus 1.5%, principal due May
1996, secured by certain securities owned
by a stockholder......................... -- 150,000 150,000
Other bank notes.......................... 84,861 77,578 6,058
----------- ----------- -----------
20,349,970 20,227,578 18,683,238
Less current portion...................... 328,751 332,584 374,430
----------- ----------- -----------
$20,021,219 $19,894,994 $18,308,808
=========== =========== ===========
</TABLE>
The $18,100,000 mortgage note payable to Nomura Asset Capital Corporation
does not allow for prepayment of the debt until January 11, 2011, except by
providing the lender with U.S. obligations that produce payments which
replicate the payment obligations of the Company under the note. This
restriction represents a substantial prepayment penalty. On or after January
11, 2011, the loan can be prepaid at any time with no prepayment penalty.
The note agreement imposes various conditions, restrictions, and limitations
on the Company including those substantially restricting the payment of
dividends or incurring additional debt.
On February 29, 1996, the $1,400,000 note due to Nomura Asset Capital
Corporation was converted into an ownership interest in VPS I, L.P. The then
outstanding note balance of $1,383,200 was converted into 277 Class B
partnership units.
F-28
<PAGE>
WESTAR
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Future annual maturities of long-term debt for the years subsequent to
December 31, 1995 consist of the following:
<TABLE>
<S> <C>
1996............................................................. $ 332,584
1997............................................................. 711,843
1998............................................................. 225,218
1999............................................................. 242,968
2000............................................................. 262,628
Thereafter....................................................... 18,452,337
-----------
$20,227,578
===========
</TABLE>
Cash paid for interest during the years ended December 31, 1993, 1994, and
1995, and the six months ended June 30, 1995 and 1996 was approximately
$2,126,000, $2,033,000, $2,262,000, $861,000, and $1,012,000, respectively.
6. OTHER RELATED PARTY TRANSACTIONS
In addition to the borrowings from the Company's stockholders and partners
discussed above and capital lease obligations discussed in Note 7, the Company
makes noninterest-bearing advances to, and receives noninterest-bearing
advances from, affiliates on a periodic basis as working capital is available
or needed. There are no formal terms related to such advances, the amounts of
which are carried as net receivables from affiliates on the balance sheets.
7. LEASE COMMITMENTS
The Company leases certain equipment and office facilities under long-term
noncancelable leases. Future minimum lease payments for capital and operating
leases at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
---- -------- ---------
<S> <C> <C>
1996..................................................... $177,836 $ 57,441
1997..................................................... 138,991 57,441
1998..................................................... 76,621 57,441
1999..................................................... -- 46,474
2000..................................................... -- 39,218
Thereafter............................................... -- 192,822
-------- --------
Total minimum lease payments............................. 393,448 $450,837
========
Less amount representing interest........................ 59,370
--------
Present value of net minimum lease payments.............. 334,078
Less current portion of capital lease obligations........ 140,569
--------
$193,509
========
</TABLE>
Included in the minimum capital lease obligations is $311,275 for various
furniture and fixtures being leased from the Company's president. The minimum
lease obligation amounts to $130,433, $112,273, and $68,569 for the years
ended December 31, 1996, 1997, and 1998, respectively. Also, included in
operating lease obligations is a lease for the Company's corporate office with
various officers of the Company. The annual minimum lease
F-29
<PAGE>
WESTAR
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS (CONTINUED)
obligation is $39,218 through 2005. The office lease allows for adjustment of
the monthly lease payment for increases in operating costs.
Total rental expense incurred under operating leases was approximately
$151,000, $157,000, and $57,000 for the years ended December 31, 1993, 1994,
and 1995, respectively, and $28,000 for each of the six-month periods ended
June 30, 1995 and 1996. Approximately $40,000 of the expense for each year
relates to leases with related parties.
8. FEDERAL INCOME TAXES
Deferred income taxes for Westar, Inc. reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The provision for federal income taxes does not include the tax impact of
flow-through items of income or loss from the partnerships to its owners other
than Westar, Inc. because such amounts are not determinable due to federal
income tax limitation rules. Significant components of Westar, Inc.'s deferred
tax assets and liabilities at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Deferred tax asset:
Current:
Allowance for doubtful accounts............................. $ 5,643
Noncurrent:
Accrued interest to related parties......................... 166,390
Loss carryforwards.......................................... 1,743,467
Book versus tax basis of depreciable assets................. 22,600
-----------
1,938,100
Less valuation allowance.................................... (1,938,100)
-----------
Net deferred taxes.......................................... $ --
===========
</TABLE>
Results of operations for the year ended December 31, 1995 increased both
the deferred tax assets and the corresponding valuation allowance by $68,848.
Westar, Inc. has net operating loss carryforwards for income tax purposes and
unused investment tax credit carryforwards of approximately $4,650,000 and
$21,000, respectively, which will expire beginning in 1999. The Company's
future utilization of net operating loss carryforwards may be subject to an
annual limitation if there is a "change in ownership" as defined for federal
income tax purposes.
9. STOCKHOLDERS' EQUITY
The Company's 10% cumulative preferred stock is redeemable at the option of
the preferred stockholders in three equal annual installments after December
31, 1994 at a price of $10.00 per share, plus any unpaid dividends. Unpaid
dividends in arrears totaled approximately $240,000 and $290,000 at December
31, 1994 and 1995, respectively.
Under an agreement with the affiliated partnerships' lender, the Company may
not, without prior approval from the lender, redeem or retire any shares of
its capital stock or pay any dividends.
10. SUBSEQUENT EVENT/PENDING TRANSACTION
The stockholders and partners have entered into a letter of intent to sell
all of the hotel properties to an unrelated third party.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS 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 UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Special Note Regarding Forward-Looking Statements......................... 16
The Formation Transaction................................................. 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 26
Management................................................................ 35
Certain Transactions...................................................... 42
Principal Stockholders.................................................... 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 52
Underwriting.............................................................. 53
Legal Matters............................................................. 54
Experts................................................................... 54
Additional Information.................................................... 55
</TABLE>
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REQUIRED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDER-
WRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,325,000 SHARES
HOMEGATE HOSPITALITY, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
MONTGOMERY SECURITIES
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the registrant in connection with the
registration, issuance and distribution of the Common Stock offered hereby,
other than underwriting discounts and commissions, are as follows.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 21,757
Nasdaq National Market System Filing Fee........................ 44,313
--------
NASD Filing Fee................................................. 6,966
Printing and Engraving Expenses................................. 115,000
--------
Legal Fees and Expenses......................................... 200,000
--------
Accounting Fees and Expenses.................................... 165,000
--------
Fees and Expenses of Transfer Agent............................. 2,500
--------
"Blue Sky" Fees and Expenses (including legal fees)............. 5,000
--------
Miscellaneous Expenses.......................................... 25,000
--------
Total....................................................... $585,536
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixteenth of the Certificate of Incorporation of the registrant
provides that the registrant shall indemnify its officers and directors to the
maximum extent allowed by the DGCL. Pursuant to Section 145 of the DGCL, the
registrant generally has the power to indemnify its present and former
directors and officers against expenses and liabilities incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in those positions so long as they acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the registrant, and with respect to any criminal
action, so long as they had no reasonable cause to believe their conduct was
unlawful. With respect to suits by or in the right of the registrant, however,
indemnification is generally limited to attorneys' fees and other expenses and
is not available if the person is adjudged to be liable to the registrant,
unless the court determines that indemnification is appropriate. The statute
expressly provides that the power to indemnify authorized thereby is not
exclusive of any rights granted under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise. The registrant also has
the power to purchase and maintain insurance for its directors and officers.
Additionally, Article Sixteenth of the Certificate of Incorporation provides
that, in the event that an officer or director files suit against the
registrant seeking indemnification of liabilities or expenses incurred, the
burden will be on the registrant to prove that the indemnification would not
be permitted under the DGCL.
The preceding discussion of the registrant's Certificate of Incorporation
and Section 145 of the DGCL is not intended to be exhaustive and is qualified
in its entirety by the Certificate of Incorporation and Section 145 of the
DGCL.
The Company intends to enter into indemnification agreements with the
Company's Directors and officers. Pursuant to such agreements, the Company
will, to the extent permitted by applicable law, indemnify such persons
against all expenses, judgments, fines and penalties incurred in connection
with the defense or settlement of any actions brought against them by reason
of the fact that they were Directors or officers of the Company or assumed
certain responsibilities at the direction of the Company.
II-1
<PAGE>
The form of Underwriting Agreement included as Exhibit 1.1 provides for
indemnification of the registrant and certain controlling persons under
certain circumstances, including indemnification for liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Formation, the current partners of ESLP will receive
6,400,000 shares of Common Stock, constituting approximately 59.67% of the
outstanding Common Stock after the Offering, as a result of the merger of ESLP
into the Company. Such Shares were sold without registration under the
Securities Act, in reliance on Section 4(2) of the Securities Act in a private
placement that was completed for purposes of the Securities Act prior to the
filing of the Registration Statement and will close immediately prior to the
completion of the Offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
+1.1 Form of Underwriting Agreement
+2.1 Form of Plan of Merger between Extended Stay Limited Partnership and
Homegate Hospitality, Inc.
3.1 Certificate of Incorporation
3.2 Bylaws of the Company
+4.1 Form of specimen certificate for the Common Stock
+5.1 Opinion of Vinson & Elkins L.L.P.
+10.1 Master Management Assistance Agreement between Wyndham Hotel Corporation
and Homegate Hospitality, Inc.
10.2 Master Development Agreement between Developer Extended Stay Partners,
L.P. and Homegate Hospitality, Inc.
+10.3 Employment Agreement between John C. Kratzer and Homegate Hospitality,
Inc.
+10.4 Homegate Hospitality, Inc. 1996 Long-term Incentive Plan
+10.5 Form of Non-Competition Agreement between the Company and Robert A.
Faith
+10.6 Form of Indemnity Agreement
10.7 Agreement to Purchase Ownership Interests and Termination of Management
Agreement among RHF-Amarillo, Ltd., RHF-El Paso, Ltd., RHF-Irving, Ltd.,
RHF-San Antonio, Ltd., RHF-San Antonio North, Ltd., Westar Hotels, Inc.
and Extended Stay Limited Partnership
+10.8 Loan Agreement between VPS I, L.P. and Nomura Asset Capital Corporation
10.9 Mortgage Loan Facility between Bank One Arizona, N.A. and
Homegate Hospitality, Inc.
+10.10 Form of Stockholders Agreement between ESH Partners, L.P. and
JMI/Greystar Extended
Stay Partners, L.P.
+10.11 Form of Registration Rights Agreement
10.12 Limited Partnership Agreement of Developer Extended Stay Partners, L.P.
+23.1 Consent of Ernst & Young LLP
+23.2 Consent of Ernst & Young LLP
+23.3 Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1)
24.1 Powers of Attorney
</TABLE>
- --------
+Filed herewith.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule III (Real Estate Investments and Accumulated Depreciation--
Extended-Stay Limited Partnership)
Schedule III (Real Estate Investments and Accumulated Depreciation--Westar)
II-2
<PAGE>
All other schedules are omitted because they are not required under the
applicable instructions, because they are inapplicable or because the
requested information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes to provide to the representatives
of 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
may be permitted to Directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the 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 undersigned registrant hereby undertakes that:
(a) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and this Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF DALLAS, STATE OF TEXAS, ON THE 17TH DAY OF OCTOBER, 1996.
Homegate Hospitality, Inc.
/s/ Robert A. Faith
By:
------------------------------
ROBERT A. FAITH
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Robert A. Faith President, Chief
- ------------------------------------- Executive Officer October 17,
ROBERT A. FAITH and Chairman of the 1996
Board (Principal
Executive Officer)
/s/ Tim V. Keith Chief Financial
- ------------------------------------- Officer (Principal October 17,
TIM V. KEITH Financial and 1996
Accounting Officer)
*James D. Carreker Director
- ------------------------------------- October 17,
JAMES D. CARREKER 1996
/s/ Anthony W. Dona Director
- ------------------------------------- October 17,1996
ANTHONY W. DONA
*Harlan R. Crow Director
- ------------------------------------- October 17,
HARLAN R. CROW 1996
Director
/s/ John J. Moores October 17,
- ------------------------------------- 1996
JOHN J. MOORES
Director
/s/ Charles E. Noell October 17,
- ------------------------------------- 1996
CHARLES E. NOELL
*Leonard W. Wood Director
- ------------------------------------- October 17,
LEONARD W. WOOD 1996
/s/ Anthony W. Dona
- -------------------------------------
*By: ANTHONY W. DONA ATTORNEY-IN-
FACT
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Extended Stay Limited Partnership
We have audited the financial statements of Extended Stay Limited Partnership
as of June 30, 1996, and for the period from inception (February 9, 1996)
through June 30, 1996 and have issued our report thereon dated August 8, 1996
(included elsewhere in this Registration Statement). Our audit also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the management of Extended
Stay Limited Partnership. Our responsibility is to express an opinion based on
our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
August 8, 1996
S-1
<PAGE>
EXTENDED STAY LIMITED PARTNERSHIP
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNTS AT WHICH
INITIAL COST COSTS CARRIED AT JUNE 30, 1996
------------------- CAPITALIZED --------------------------
BUILDINGS SUBSEQUENT BUILDINGS
RELATED AND TO AND ACCUMULATED DATE OF DATE
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ----------- ------ ------------ ----------- ------ ------------ ------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Grand Prairie,
Texas
Studio Suites.... $2,869 $ 834 $4,077 $303 $ 834 $4,380 $5,214 $ 4 5/96 5/96
Denver, Colorado
land............. -- 1,605 -- -- 1,605 -- 1,605 -- (a) 5/96
Phoenix, Arizona
land............. -- 1,386 -- -- 1,386 -- 1,386 -- (a) 2/96
------ ------ ------ ---- ------ ------ ------ ----
Total........... $2,869 $3,825 $4,077 $303 $3,825 $4,380 $8,205 $ 4
====== ====== ====== ==== ====== ====== ====== ====
<CAPTION>
DEPRECIABLE
DESCRIPTION LIVES IN YEARS
----------- --------------
<S> <C>
Grand Prairie,
Texas
Studio Suites.... 7-40
Denver, Colorado
land............. --
Phoenix, Arizona
land............. --
Total...........
</TABLE>
- ----
(a) As of June 30, 1996, development had not commenced.
NOTE TO SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
Changes in real estate investments and accumulated depreciation for the six
months ended June 30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1996
------
<S> <C>
Property and equipment
Balance at beginning of period........................... $ --
Acquisitions........................................... 7,902
Additions and improvements............................. 303
------
Balance at end of period................................. $8,205
======
Accumulated depreciation
Balance at beginning of period........................... $ --
Depreciation........................................... 4
------
Balance at end of period................................. $ 4
======
</TABLE>
S-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Westar
We have audited the financial statements of Westar as of December 31, 1994
and 1995, and for each of the three years in the period ended December 31, 1995
and have issued our report thereon dated August 2, 1996 (included elsewhere in
this Registration Statement). Our audit also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
San Antonio, Texas
August 2, 1996
S-3
<PAGE>
WESTAR
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNTS AT WHICH
INITIAL COST COSTS CARRIED AT DECEMBER 31, 1995
------------------------------ CAPITALIZED --------------------------------------
(1) BUILDINGS FURNITURE, SUBSEQUENT BUILDINGS FURNITURE,
RELATED AND FIXTURES & TO AND FIXTURES & ACCUMULATED
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS EQUIPMENT ACQUISITION LAND IMPROVEMENTS EQUIPMENT TOTAL DEPRECIATION
----------- ------------ ------ ------------ ---------- ----------- ------ ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Suite hotels:
Amarillo, Texas.. $ $ 535 $ 2,513 $ 547 $ 15 $ 604 $ 2,485 $ 521 $ 3,610 $1,254
San Antonio,
Texas
San Antonio #1.. 799 2,598 563 123 857 2,552 674 4,083 1,351
San Antonio #2.. 909 2,785 659 132 1,014 2,752 720 4,486 1,317
Land............ 175 175 175
Irving, Texas.... 1,255 2,758 548 192 1,350 2,752 651 4,753 1,323
El Paso, Texas... 551 2,537 566 176 649 2,493 687 3,829 1,210
------- ------ ------- ------ ---- ------ ------- ------ ------- ------
$18,027 $4,224 $13,191 $2,883 $638 $4,649 $13,034 $3,253 $20,936 $6,455
======= ====== ======= ====== ==== ====== ======= ====== ======= ======
<CAPTION>
DATE OF DATE DEPRECIABLE
DESCRIPTION CONSTRUCTION ACQUIRED LIVES IN YEARS
----------- ------------ -------- --------------
<S> <C> <C> <C>
Suite hotels:
Amarillo, Texas.. 1985 1985 5-40
San Antonio,
Texas
San Antonio #1.. 1985 1985 5-40
San Antonio #2.. 1986 1986 5-40
Land............ 1985
Irving, Texas.... 1985 1985 5-40
El Paso, Texas... 1985 1985 5-40
</TABLE>
- ----
(1) The related encumbrance is collateralized by all properties in Schedule
III.
NOTE TO SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
Changes in real estate investments and accumulated depreciation for the
three years ended December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year............ $19,383 $19,552 $20,325
Additions and improvements............ 366 910 640
Deletions............................. (197) (137) (29)
------- ------- -------
Balance at end of year.................. $19,552 $20,325 $20,936
======= ======= =======
Accumulated depreciation:
Balance at beginning of year............ $ 4,980 $ 5,477 $ 5,916
Depreciation.......................... 497 516 568
Deletions............................. -- (77) (29)
------- ------- -------
Balance at end of year.................. $ 5,477 $ 5,916 $ 6,455
======= ======= =======
</TABLE>
S-4
<PAGE>
Exhibit 1.1
4,325,000 Shares of Common Stock
HOMEGATE HOSPITALITY, INC.
UNDERWRITING AGREEMENT
----------------------
October ____, 1996
BEAR, STEARNS & CO. INC.
MONTGOMERY SECURITIES
As Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
Homegate Hospitality, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") 4,325,000 shares of Common Stock, $0.01 par value per share, of
the Company (the "Common Stock"), which shares of Common Stock are herein
referred to as the "Firm Shares." In addition, for the sole purpose of covering
over-allotments in connection with the sale of the Firm Shares, the Company
proposes to issue and sell to the Underwriters, at the option of the
Underwriters, up to an additional 648,750 shares of Common Stock (the
"Additional Shares"). The Firm Shares and any Additional Shares purchased by
the Underwriters are herein referred to as the "Shares." The Shares are more
fully described in the Registration Statement referred to below.
It is understood that, on or prior to the Closing Date (as defined herein),
the Company and Extended Stay Limited Partnership, a Delaware limited
partnership ("ESLP"), will enter into a series of transactions referred to in
the Prospectus (as defined herein) as the Formation. The merger agreement and
any other agreement, document or instrument entered into in connection with the
Formation are collectively referred to herein as the "Formation Documents" and
each singly as a "Formation Document." Under the terms of the Formation
Documents, the current capital partners of ESLP will contribute in cash any
amounts remaining due on their initial obligations to contribute $20 million to
ESLP, and the Company will succeed to all of the assets and liabilities of ESLP
as a result of the merger of ESLP with and into the Company.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that (in
each of paragraphs (a) through (dd), after giving effect to the Formation):
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed
an amendment or amendments thereto, on Form S-1 (No.333-11113), for the
registration of the offering and sale of the Shares under the Securities Act
of 1933, as amended (the "Act").
<PAGE>
The registration statement, including the prospectus, financial statements
and schedules, exhibits and all other documents filed as a part thereof, as
amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the
Rules and Regulations of the Commission under the Act (the "Regulations"),
is herein referred to as the "Registration Statement," and the prospectus,
in the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) filing is required, is herein called the
"Prospectus." The term "preliminary prospectus" as used herein means a
preliminary prospectus as described in Rule 430 or Rule 430A of the
Regulations.
(b) When the Registration Statement shall become effective, when any
amendment to the Registration Statement becomes effective, when the
Prospectus is first filed with the Commission pursuant to Rule 424(b) of the
Regulations, when any supplement to or amendment of the Prospectus is filed
with the Commission, and at all times subsequent thereto and including the
Closing Date and the Additional Closing Date, if any (as hereinafter
respectively defined), and during such longer period as the Prospectus may
be required to be delivered in connection with sales by the Underwriters or
a dealer, the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto will comply in all material respects with
the applicable provisions of the Act and the Regulations and will contain
all statements that are required to be stated therein in accordance with the
Act and the Regulations, and will not contain an untrue statement of a
material fact and will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, and no event will have occurred that should have been set forth
in an amendment or supplement to the Registration Statement or Prospectus
that has not then been set forth in such an amendment or supplement. When
any related preliminary prospectus was first filed with the Commission
(whether filed as part of the registration statement for the registration of
the offering and sale of the Shares or any amendment thereto or pursuant to
Rule 424(a) of the Regulations) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary prospectus and
any amendments thereof and supplements thereto complied in all material
respects with the applicable provisions of the Act and the Regulations and
did not contain an untrue statement of a material fact and did not omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. No representation and
warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or the
Prospectus or any related preliminary prospectus or any amendment thereof or
supplement thereto in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through you as herein stated expressly for use in connection with the
preparation thereof.
(c) Neither the Commission nor the Blue Sky or securities authority
of any jurisdiction has issued a stop order suspending the effectiveness of
the Registration Statement, preventing or suspending the use of any
preliminary prospectus, the Prospectus, the Registration Statement, or any
amendment or supplement thereto, refusing to permit the effectiveness of the
Registration Statement, or suspending the registration or qualification of
the Shares, nor, to the knowledge of the Company, have any of such
authorities instituted or threatened to institute any proceedings with
respect to a stop order.
(d) To the best knowledge of the Company, Ernst & Young LLP ("E&Y"),
whose reports are filed with the Commission as a part of the Registration
Statement, are independent public accountants with regard to the Company as
required by the Act and the Regulations.
(e) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth
in or contemplated by the Registration Statement and the Prospectus, there
has not been any material adverse change in the business, properties,
financial condition, results of operations or prospects of the Company or
any of its subsidiaries whether or not arising from transactions in the
ordinary course of business, and since the date of the latest balance sheet
included in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries have incurred or undertaken any
liabilities or obligations, direct or contingent, which are material to the
Company and its subsidiaries taken as a whole, except for liabilities and
obligations that are reflected in or contemplated by the Registration
Statement and the Prospectus.
(f) The Company has all necessary corporate power and authority to
execute and deliver this Agreement and perform its obligations hereunder;
this Agreement has been duly and validly authorized, executed
-2-
<PAGE>
and delivered by the Company and is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
except to the extent that rights to indemnity hereunder may be limited by
federal or state securities laws or the public policy underlying such laws.
(g) The execution, delivery, and performance of this Agreement and
each of the Formation Documents and the consummation of the transactions
contemplated hereby and thereby will not (i) conflict with or result in a
breach of any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a
default) or require consent under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company, ESLP or any of their respective subsidiaries, pursuant to the terms
of any agreement, instrument, franchise, license or permit to which the
Company, ESLP or any of their respective subsidiaries is a party or by which
any of such corporations, partnerships or their respective properties or
assets may be bound, or (ii) violate or conflict with any provision of the
Certificate of Incorporation or Bylaws of the Company or any of its
subsidiaries or the partnership agreement of ESLP or any judgment, decree,
order, statute, rule or regulation of any court or any public, governmental
or regulatory agency or body having jurisdiction over the Company, ESLP or
any of their respective subsidiaries or any of their respective properties
or assets. No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company, ESLP or any of their respective subsidiaries or any of their
respective properties or assets is required for the execution, delivery and
performance of this Agreement and each of the Formation Documents and the
consummation of the transactions contemplated hereby and thereby, including
the issuance, sale and delivery of the Shares to be issued, sold and
delivered by the Company hereunder, except (i) the registration under the
Act of the Shares, (ii) such consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters, and (iii) the
filing of the applicable Formation Documents with the Secretary of State of
the State of Delaware in order to effect the Formation.
(h) All of the outstanding shares of capital stock of the Company
are duly and validly authorized and issued, are fully paid and nonassessable
and were not issued in violation of or subject to any preemptive rights. The
Company had, at August 22, 1996, an authorized and outstanding
capitalization as set forth in the Registration Statement and the
Prospectus. The Shares, when delivered and sold in accordance with this
Agreement will be duly and validly issued and outstanding, fully paid and
nonassessable, and will not have been issued in violation of or subject to
any preemptive rights. None of such Shares when delivered will be subject to
any lien, claim, encumbrance, restriction or any other claim of any third
party. The Common Stock, the Firm Shares and the Additional Shares conform
to the descriptions thereof contained in the Registration Statement and the
Prospectus.
(i) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation or partnership in good standing
under the laws of its jurisdiction of incorporation or formation. Each of
the Company and its subsidiaries is duly qualified and in good standing as a
foreign corporation or partnership in each jurisdiction in which the
character or location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which could not
reasonably be expected in the aggregate to have a material adverse effect on
the business, properties, financial condition, results of operations or
prospects of the Company and its subsidiaries taken as a whole (a "Material
Adverse Effect"). Each of the Company and its subsidiaries has all requisite
power and authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and from any
public, regulatory or governmental agencies and bodies, to own, lease and
operate its properties and conduct its business as now being conducted or
proposed to be conducted and as described in the Registration Statement and
the Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. Neither the Company nor any of its
subsidiaries has received any written notice of proceedings relating to the
revocation or modification of any such approvals, authorizations, orders,
registrations, qualifications, licenses and permits which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
could reasonably be expected to result in a Material Adverse Effect. All the
outstanding shares of capital stock or partnership interests of each
subsidiary have been duly authorized and validly issued, are fully paid and
nonassessable, and, as of the Closing Date, will be owned by the Company
directly or indirectly through one or more subsidiaries.
-3-
<PAGE>
(j) The execution and delivery of, and the performance by the
Company and ESLP of their respective obligations under, each Formation
Document will be duly and validly authorized by the Company and ESLP, and
each Formation Document will be duly executed and delivered by the Company
and, as applicable, ESLP on or prior to the Closing Date and each Formation
Document will constitute the legally valid and binding agreement of the
Company and ESLP enforceable against the Company and ESLP in accordance with
its terms.
(k) No income for Federal income tax purposes will be recognized by
the Company or any of its subsidiaries as a result of the consummation of
the Formation. During the terms of its existence ESLP has been properly
classified as a partnership for Federal income tax purposes.
(l) The shares of Common Stock issued in the Formation will be
issued in transactions exempt from the registration requirements of the Act
and under all applicable state securities or Blue Sky laws.
(m) Neither the Company nor any of its subsidiaries (i) is in
violation of its corporate charter or bylaws or partnership agreements, as
applicable, (ii) is in default under any lease, license, indenture,
mortgage, deed of trust, note, bank loan or other evidence of indebtedness
or any other agreement, understanding or instrument to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary or any property of the Company or any such subsidiary may be
bound or affected, which default could reasonably be expected to result in a
Material Adverse Effect, or (iii) is in violation of any law, ordinance,
governmental rule or regulation or court decree to which it may be subject
and has not failed to obtain any 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 result in a Material Adverse Effect.
(n) Except as described in the Registration Statement and the
Prospectus (including the notes to the financial statements included
therein), there are no outstanding warrants, options or rights to purchase
any shares of the capital stock of the Company, or any securities
convertible into shares of the capital stock of the Company, and there are
no preemptive or other rights to subscribe for or to purchase, and no
restrictions upon, any Common Stock pursuant to the Company's Certificate of
Incorporation or Bylaws or any agreement or other instrument to which the
Company is a party or by which it is bound.
(o) There is no litigation or proceeding pending or, to the
knowledge of the Company, threatened, before or by any court or government
agency, authority or body, or any arbitrator against the Company or any of
its subsidiaries that (i) could reasonably be expected to result in a
Material Adverse Effect, or (ii) is required to be disclosed in the
Registration Statement or the Prospectus and is not so disclosed and
adequately summarized therein.
(p) The financial statements (including the related notes and
supporting schedules) included in the Registration Statement and the
preliminary prospectus or the Prospectus present fairly in accordance with
generally accepted accounting principles 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 included in the Registration
Statement, no financial statement schedules of the entities for which
financial statements have been included in the Registration Statement are
required to be filed with the Registration Statement pursuant to Regulation
S-X promulgated by the Commission. The selected financial data for the
Company and the other entities set forth under the captions "Prospectus
Summary-Summary Financial Information" and "Selected Financial Data" in the
Prospectus have been prepared on a basis consistent with the financial
statements of the entities for which financial statements have been included
in the Registration Statement. No other financial statements of the Company
or any other entity are required by the Act or the Regulations to be
included in the Registration Statement or the Prospectus. The pro forma
financial information included in the Registration Statement and the
Prospectus has been prepared in accordance with the applicable requirements
of Rule 3-05 and Article 11 of Regulation S-X, and the assumptions used in
the preparation thereof are, in the opinion of the Company, reasonable.
(q) No relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries or affiliates, on the one hand, and
the directors, officers or shareholders of the Company or any of its
subsidiaries or affiliates on the other hand, which is required by the Act
or by the Regulations to be described in the Registration Statement and the
Prospectus that is not so described or is not adequately described.
-4-
<PAGE>
(r) There are no contracts or other documents that are required to
be filed as exhibits to the Registration Statement by the Act or by the
Regulations, that have not been filed as exhibits to the Registration
Statement, or that are required to be summarized in the Prospectus that are
not so summarized or are not adequately summarized.
(s) No person has the right to request or require the Company or any
of its subsidiaries to register any capital stock for offering and sale
under the Act whether by reason of the filing of the Registration Statement
with the Commission or the issue and sale of the Shares or, except as
discussed in the Registration Statement, otherwise.
(t) The Company has not taken and shall not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or that might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(u) The Common Stock has been authorized for quotation on the Nasdaq
Stock Market's National Market, subject to notice of issuance.
(v) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material trademarks, service marks, trade names,
licenses, copyrights and proprietary or other confidential information
currently employed by them in connection with their respective businesses,
and neither the Company nor any such subsidiary has received any written
notice of infringement of or conflict with asserted rights of any third
party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
could reasonably be expected to result in a Material Adverse Effect.
(w) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they are engaged;
and neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that could
not reasonably be expected to result in a Material Adverse Effect.
(x) No subsidiary of the Company is currently prohibited, directly
or indirectly, from paying any dividends to the Company, from making any
other distribution on such subsidiary's capital stock or partnership
interests, from repaying to the Company any loans or advances to such
subsidiary from the Company or from transferring any of such subsidiary's
property or assets to the Company or any other subsidiary of the Company.
(y) Each of the Company and ESLP has filed all foreign, federal,
state and local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file could
not reasonably be expected to result in a Material Adverse Effect) and has
paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due
and payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as described in or contemplated
by the Prospectus.
(z) The Company and each of its subsidiaries have (i) good and
indefeasible title in fee simple to all real property and the improvements
located thereon reflected as owned in the financial statements hereinabove
described (or elsewhere in the Prospectus) and (ii) good and indefeasible
title to all personal properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
free and clear of all liens, encumbrances, claims, security interests,
restrictions and defects except such as are described in the Prospectus and
such as in the aggregate could not reasonably be expected to result in a
Material Adverse Effect. The Company and its subsidiaries hold its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company. Except as
disclosed in the Prospectus, the Company and its subsidiaries own or lease
all such properties as are necessary to its operations as now conducted. No
person has an option or right of first refusal to purchase all or part of
any real property or improvements located thereon owned by the Company or
any of its subsidiaries or any interest therein. All real property and
improvements located thereon owned by the Company or any of its subsidiaries
comply with all applicable codes, laws and regulations (including, without
limitation, building and zoning codes, laws and
-5-
<PAGE>
regulations and laws relating to access to such properties, except if and to
the extent disclosed in the Prospectus and except for such failure to comply
that could not reasonably be expected to result in a Material Adverse
Effect). Neither the Company nor any of its subsidiaries has knowledge of
any pending or threatened condemnation proceedings, zoning change, or other
proceeding or action that will in any manner affect the size of, use of,
improvements on, construction on or access to any of their properties except
such proceedings or actions that could not be reasonably expected to result
in a Material Adverse Effect.
(aa) Except as otherwise disclosed in the Prospectus, neither the
Company, any of its subsidiaries nor, to the knowledge of the Company or any
of them, any entity ("Selling Entity") from which any of them acquired any
property or from which any of them proposes to acquire any property has
authorized or conducted or has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of
any hazardous substance, hazardous waste, hazardous material, hazardous
constituent, toxic substance, pollutant, contaminant, asbestos, radon,
polychlorinated biphenyls, petroleum product or waste (including crude oil
or any fraction thereof), natural gas, liquefied gas, synthetic gas or other
material defined, regulated, controlled or potentially subject to any
remediation requirement under any environmental law (collectively,
"Hazardous Materials"), on, in, under or affecting any real property leased
or owned or by any means controlled by the Company or any of its
subsidiaries (the "Real Property"), except as in material compliance with
applicable laws; to the knowledge of the Company and its subsidiaries, the
Real Property and the Company's, its subsidiaries' and the Selling Entities'
operations with respect to the Real Property are in material compliance with
all federal, state and local laws, ordinances, rules, regulations and other
governmental requirements relating to pollution, control of chemicals,
management of waste, discharges of materials into the environment, health,
safety, natural resources, and the environment (collectively, "Environmental
Laws"), and the Company, its subsidiaries and the Selling Entities have, and
are in material compliance with, all licenses, permits, registrations and
government authorizations necessary to operate under all applicable
Environmental Laws. Except as otherwise disclosed in the Prospectus, none of
the Company, its subsidiaries or, to the knowledge of the Company or its
subsidiaries, any Selling Entity has received any written or oral notice
from any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company, any of its
subsidiaries or any Selling Entity; alleges that the Company, any of its
subsidiaries or any Selling Entity is a liable party or a potentially
responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S) 9601, et seq. or any state
-- ---
superfund law; has resulted in or could result in the attachment of an
environmental lien on any of the Real Property; or alleges that the Company
or any of its subsidiaries is liable for any contamination of the
environment, contamination of the Real Property, damage to natural
resources, property damage, or personal injury based on their activities or
the activities of their predecessors or third parties (whether at the Real
Property or elsewhere) involving Hazardous Materials, whether arising under
the Environmental Laws, common law principles, or other legal standards.
(bb) None of the Company or any of its subsidiaries is, will become
as a result of the transactions contemplated hereby, or will conduct their
respective businesses in a manner in which any such entity would become, "an
investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(cc) To the knowledge of the Company and its subsidiaries, there is
no material defect in the condition of any Real Property owned by any of
them or to be acquired by any of them in the Formation, the improvements
thereon, the structural elements thereof, or the mechanical systems therein,
nor any material damage from casualty or other cause, nor any soil condition
of any such Real Property that will not support all of the improvements
thereon without the need for unusual or new subsurface excavations, except
for any such defect, damage or condition that has been corrected or will be
corrected in the ordinary course of the business of such Real Property as
part of its scheduled annual maintenance and improvement program. Other than
as set forth in the Registration Statement or Prospectus, none of the
Company or any of its subsidiaries is aware of any material capital
expenditures (other than expenditures for maintenance in the ordinary course
of business) which will be required in connection with any Real Property
owned by any of them.
(dd) As of the Closing Date, the Formation shall have been
consummated as set forth in the Prospectus.
2. Purchase, Sale and Delivery of the Shares.
-6-
<PAGE>
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby agrees to sell the Firm Shares to the several
Underwriters, and each Underwriter, severally and not jointly, agrees to
purchase the number of Firm Shares set opposite that Underwriter's name in
Schedule I hereto, at $ ______per share. The respective purchase obligations
of the Underwriters with respect to the Firm Shares shall be rounded among
the Underwriters to avoid fractional shares, as the Representatives may
determine.
Delivery of certificates, and payment of the purchase price, for the
Firm Shares shall be made at the offices of Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10167, or such other location as may be
mutually acceptable. Such delivery and payment shall be made at 10:00 a.m.,
New York time, on the third full business day (unless postponed in
accordance with the provisions of Section 9 hereof) following the date of
the effectiveness of the Registration Statement (or, if the Company has
elected to rely upon Rule 430A of the Regulations, the third business day
after the determination of the initial public offering price of the Shares
or the fourth business day after the determination of the initial public
offering price of the shares if such determination is made after 4:30 p.m.
E.S.T.), or at such other time as shall be agreed upon by you and the
Company. The time and date of such delivery and payment are herein called
the "Closing Date." Delivery of the certificates for the Firm Shares shall
be made to you for the respective accounts of the several Underwriters
against payment by the several Underwriters through the Representatives of
the purchase price for the Firm Shares to the order of the Company by
certified or official bank checks payable in New York Clearing House funds.
Certificates for the Firm Shares shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date. The Company will
permit you to examine and package such certificates for delivery at least
one full business day prior to the Closing Date.
(b) In addition, the Company hereby grants to the several
Underwriters the option to purchase up to 648,750 Additional Shares at the
same purchase price per share to be paid by the several Underwriters to the
Company for the Firm Shares as set forth in this Section 2, for the sole
purpose of covering over-allotments in the sale of Firm Shares by the
several Underwriters. This option may be exercised at any time (but not more
than once) on or before the thirtieth day following the effective date of
the Registration Statement, by written notice by you to the Company. Such
notice shall set forth the aggregate number of Additional Shares as to which
the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date
and time being herein sometimes referred to as the "Additional Closing
Date"); provided, however, that the Additional Closing Date shall not be
earlier than the Closing Date or earlier than the second full business day
after the date on which the option shall have been exercised nor later than
the eighth full business day after the date on which the option shall have
been exercised (unless such time and date are postponed in accordance with
the provisions of Section 9 hereof). Certificates for the Additional Shares
shall be registered in such name or names and in such authorized
denominations as you may request in writing at least two full business days
prior to the Additional Closing Date. The Company will permit you to examine
and package such certificates for delivery at least one full business day
prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number that bears the same relationship to the aggregate number of
Additional Shares being purchased by the Underwriters as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto
(or such number increased as set forth in Section 9 hereof), bears to the
aggregate number of Firm Shares being purchased hereby, subject, however, to
such adjustments to eliminate any fractional shares as you in your sole
discretion shall make.
Payment for the Additional Shares shall be made by certified or
official bank check, in New York Clearing House funds, payable to the order
of the Company at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167, or such other location as may be mutually
acceptable, upon delivery of the certificates for the Additional Shares to
you for the respective accounts of the Underwriters.
3. Offering. It is understood that after the Registration Statement
becomes effective the several Underwriters propose to offer the Shares for sale
to the public as set forth in the Prospectus.
<PAGE>
4. Covenants of the Company. The Company covenants and agrees with
the several Underwriters that:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is
otherwise required under Rule 424(b), the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to Rule 424(b)
within the prescribed time period and will provide evidence satisfactory to
you of such timely filing. The Company will notify you immediately (i) when
the Registration Statement and any amendments thereto become effective, (ii)
of any request by the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for any additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or of the initiation, or the threatening, of any proceedings
therefor, (iv) of the receipt of any comments from the Commission, and (v)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction
or the initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will
make every reasonable effort to prevent the issuance of any such stop order
and, if issued, to obtain the lifting of such stop order as soon as
possible. The Company will not file any amendment to the Registration
Statement or any amendment of or supplement to the Prospectus before or
after the effective date of the Registration Statement to which you shall
reasonably object in writing after being timely furnished in advance a copy
thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a
result of which the Prospectus as then amended or supplemented includes an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, or if it shall be necessary at any time to amend or supplement
the Prospectus or Registration Statement to comply with the Act or the
Regulations, the Company will notify you promptly and prepare and file with
the Commission an appropriate amendment or supplement (in form and substance
reasonably satisfactory to you) that will correct such statement or omission
and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you two signed copies of
the Registration Statement, including exhibits and all amendments thereto,
and the Company will promptly deliver to each of the several Underwriters
such number of copies of any preliminary prospectus, the Prospectus, the
Registration Statement, and all amendments of and supplements to such
documents, if any, as you may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with
you, at or prior to the time the Registration Statement becomes effective,
to qualify the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares in such jurisdictions as you
may designate and to maintain such qualification in effect for so long as
required for the distribution thereof.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of the 12-month period
beginning after the date the Prospectus is filed with, or mailed for filing
to, the Commission pursuant to Rule 424(b), an earnings statement (which
need not be audited but which shall satisfy the provisions of Section 11(a)
of the Act) covering a period of at least 12 consecutive months beginning
after the effective date of the Registration Statement.
(f) During a period of 360 days from the date of the Prospectus, the
Company will not, without your prior written consent, issue, sell, offer or
agree to sell, or otherwise dispose of, directly or indirectly, any Common
Stock (or any securities convertible into, exercisable for or exchangeable
for Common Stock), and the Company will obtain the undertaking of each of
its officers and directors and such of its shareholders as have been
heretofore designated by you not to engage in any of the aforementioned
transactions on their own behalf, other than (i) the Company's sale of
Shares hereunder, (ii) the Company's issuance of Common Stock upon the
exercise of presently outstanding stock options and (iii) in the case of
such of its shareholders as have heretofore been designated by you, the
transfer of shares of capital stock of the Company to the partners of such
shareholders who are partnerships in
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<PAGE>
respect of their distributive share of such partnership's assets, who
provide to you an undertaking that they will not engage in any of the
aforementioned transactions on their own behalf.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to the Representatives
copies of (i) all reports to its shareholders, and (ii) all reports,
financial statements and proxy or information statements filed by the
Company with the Commission or any national securities exchange or quotation
system upon which the Common Stock may be listed.
(h) The Company will not take, directly or indirectly, any action
that might reasonably be expected to cause or result in (i) stabilization of
the price of the Common Stock to facilitate the sale or resale of the Common
Stock, or (ii) manipulation of the price of the Common Stock.
(i) The Company will take, and will cause its subsidiaries to take,
such action as may be necessary to comply with the rules and regulations of
the Nasdaq Stock Market's National Market in respect of the offering of the
Shares.
(j) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus and will file such
reports with the Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required by Rule 463 under
the Act; provide to the Representatives a draft of each such report prior to
its filing for your approval, and furnish the Representatives with a signed
copy of each report; and 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 Act of 1940,
as amended, and the rules and regulations thereunder.
(k) The Company will use its best efforts to obtain the inclusion of
the Common Stock on the Nasdaq Stock Market's National Market.
5. Payment of Expenses. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed, and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments thereof or supplements thereto, the underwriting documents
(including this Agreement, and the Agreement Among Underwriters) and all other
documents related to the public offering of the Shares (including those supplied
to the Underwriters in quantities as hereinabove stated), (ii) the issuance,
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the qualification of the Shares under
state or foreign securities or Blue Sky laws, including the costs of printing
and mailing a preliminary and final "Blue Sky Survey" and the fees of counsel
for the Underwriters and such counsel's disbursements in relation thereto, (iv)
listing the Shares on the Nasdaq Stock Market's National Market, (v) the review
of the terms of the public offering of the Shares by the National Association of
Securities Dealers, Inc., and (vi) the costs and charges of any transfer agent
and registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company herein contained, as of the date
hereof and as of the Closing Date (or in the case of the Additional Shares as of
the Additional Closing Date), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Jenkens & Gilchrist, a
Professional Corporation ("Underwriters' Counsel"), pursuant to this Section 6
of any misstatement or omission, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective and all
necessary stock exchange approval by the Nasdaq Stock Market's National
Market have been received not later than 5:30 p.m., New York time, on the
date of this Agreement, or at such later time and date as shall have been
consented to in writing by you; if the Company shall have elected to rely
upon Rule 430A of the Regulations, the Prospectus shall have been filed with
the Commission in a timely fashion in accordance with Section 4(a) hereof,
and, at or prior to the Closing Date and the Additional Closing Date, as the
case may be, no stop order suspending the effectiveness of the Registration
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<PAGE>
Statement or any post-effective amendment thereof shall have been issued and
no proceedings therefor shall have been initiated or threatened by the
Commission.
(b) At the Closing Date and the Additional Closing Date, you shall
have received the opinion of Vinson & Elkins L.L.P. counsel for the Company,
dated the Closing Date, or the Additional Closing Date, as the case may be,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of the Company and each of its subsidiaries has
been duly organized and is validly existing as a corporation or
partnership in good standing under the laws of its jurisdiction of
incorporation or formation. Each of the Company and its subsidiaries
is duly qualified and in good standing as a foreign corporation or
partnership in each jurisdiction in which the character or location of
its properties (owned, leased or licensed) or the nature or conduct of
its business makes such qualification necessary, except for those
failures to be so qualified or in good standing that could not
reasonably be expected to result in a Material Adverse Effect. Each of
the Company and its subsidiaries has all requisite corporate or
partnership authority to own, lease and license its respective
properties and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus. All of the
issued and outstanding capital stock or partnership interests of each
subsidiary of the Company is duly and validly issued, is fully paid
and non-assessable, was not issued in violation of any preemptive
rights and is held of record by the Company or another such
subsidiary.
(ii) The Company has authorized capital stock as set
forth in the Registration Statement and the Prospectus. All of the
outstanding shares of capital stock of the Company are duly and
validly authorized and issued, are fully paid and nonassessable and
were not issued in violation of or subject to any preemptive rights.
The Shares to be delivered on the Closing Date, or Additional Closing
Date, as the case may be, have been duly and validly authorized and,
when delivered in accordance with this Agreement, will be duly and
validly issued, fully paid and nonassessable and will not have been
issued in violation of or subject to any preemptive rights. Each of
the Underwriters will receive good, valid and marketable title to the
Firm Shares and the Additional Shares being sold by the Company
hereunder, free and clear of all liens, encumbrances, claims, security
interests, restrictions on transfer, shareholders' agreements, voting
trusts and other defects of title whatsoever.
(iii) The capital stock of the Company, including the
Shares, conforms in all material respects to the description thereof
contained in the Registration Statement and the Prospectus under the
heading entitled "Description of Capital Stock;" the certificates for
the Shares are in proper form under Delaware law.
(iv) The Common Stock has been approved for listing, and
the Shares to be sold under this Agreement to the Underwriters have
been duly authorized for listing, subject to notice of issuance, on
the Nasdaq Stock Market's National Market.
(v) Such counsel does not know of any contracts or other
documents that are required to be filed as exhibits to the
Registration Statement by the Act or by the Regulations that have not
been filed as exhibits to the Registration Statement, or that are
required to be summarized in the Prospectus that are not so
summarized.
(vi) To such counsel's knowledge, the Company is not in
violation of its corporate charter or bylaws and neither the Company
nor any of its subsidiaries is in default under (and no event has
occurred which with notice, lapse of time, or both, would constitute a
breach of, or a default under) any agreement, license, mortgage, deed
of trust, bank loan, credit agreement, indenture or instrument filed
as an exhibit to the Registration Statement, except for such defaults
as would not reasonably be expected to result in a Material Adverse
Effect.
(vii) The Company has all necessary corporate power to
execute and deliver this Agreement and to perform its obligations
(including the issuance, sale and delivery of the Shares to be sold by
the Company) hereunder.
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<PAGE>
(viii) The Company and ESLP have the necessary power and
authority to enter into each of the Formation Documents, and each of
the Formation Documents have been duly authorized, executed and
delivered by the Company and, as applicable, ESLP, and each of the
Formation Documents is a legally valid and binding agreement of the
Company and, as applicable, ESLP, in accordance with its terms. The
Formation has been consummated in compliance with the terms of the
Formation Documents and the applicable provisions of the laws of the
State of Delaware, including the Delaware General Corporation Law and
the Delaware Limited Partnership Act.
(ix) This Agreement has been duly and validly authorized,
executed and delivered by the Company and ESLP.
(x) To such counsel's knowledge, there is no litigation
or governmental or other action, suit, proceeding or investigation
before any court or before or by any public, regulatory or
governmental agency or body pending or threatened against, or
involving the properties or business of, the Company or any of its
subsidiaries, which, if resolved against the Company or such
subsidiary, individually or, to the extent involving related claims or
issues, in the aggregate, is of a character required to be disclosed
in the Registration Statement and the Prospectus, which has not been
properly disclosed therein.
(xi) The execution, delivery, and performance of this
Agreement and the Formation Documents and the consummation of the
transactions contemplated hereby and thereby by the Company, ESLP and
their respective subsidiaries do not and will not (A) conflict with or
result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time,
or both, would constitute a default) or require consent under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, ESLP or any of
their respective subsidiaries pursuant to the terms of any agreement
or instrument filed as an exhibit to the Registration Statement or any
material franchise, license or permit known to such counsel to which
the Company, ESLP or any of their respective subsidiaries is a party
or by which any of such corporations or their respective properties or
assets may be bound, or (B) violate or conflict with any provision of
the certificate of incorporation or bylaws of the Company, the
partnership agreement of ESLP or any of their respective subsidiaries,
or, to the knowledge of such counsel, any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental
or regulatory agency or body having jurisdiction over the Company,
ESLP or any of their respective subsidiaries or any of their
respective properties or assets. To the knowledge of such counsel, no
consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction over
the Company, ESLP or any of their respective subsidiaries or any of
their respective properties or assets is required for the execution,
delivery and performance of this Agreement and the Formation Documents
and the consummation of the transactions contemplated hereby and
thereby, except for (1) such as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters (as to which such counsel need express
no opinion), and (2) such as have been made or obtained under the Act.
(xii) The Registration Statement and the Prospectus and
any amendments thereof or supplements thereto (other than the
financial statements and schedules and other financial and statistical
data included therein, as to which no opinion need be rendered) comply
as to form in all material respects with the requirements of the Act
and the Regulations.
(xiii) The Registration Statement is effective under the
Act, and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any post-effective
amendment thereof has been issued and no proceedings therefor have
been initiated or threatened by the Commission and all filings
required by Rule 424(b) of the Regulations have been made within the
time periods required thereby.
(xiv) No income for Federal income tax purposes will be
recognized by the Company or any of its subsidiaries as a result of
the consummation of the Formation. During the term of its existence
ESLP has been properly classified as a partnership for Federal income
tax purposes.
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<PAGE>
(xv) The shares of Common Stock issued pursuant to the
Formation were issued in transactions exempt from the registration
requirements of the Act and the securities laws of the State of Texas.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the
Company and representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus were discussed and, although such
counsel is not passing upon, and does not assume responsibility for and has
not verified, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, on the basis of
the foregoing (relying as to materiality upon the opinions of officers and
other representatives of the Company) and without independent check or
verification, nothing has come to the attention of such counsel that leads
it to believe that the Registration Statement or any amendment thereto at
the time such Registration Statement or amendment became effective
(including the information deemed to be a part of the Registration Statement
at the time of effectiveness pursuant to Rule 430A(b), if applicable)
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus or any supplement
thereto at the date of such Prospectus or such supplement, and at all times
up to and including the Closing Date or the Additional Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted 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 (it being understood that such counsel need express no
opinion with respect to the financial statements and schedules and other
financial and statistical data included in the Registration Statement or the
Prospectus).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States
and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinion (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and certificates or other written statements of
officers of departments of various jurisdictions having custody of documents
respecting the corporate or partnership existence or good standing of the
Company and its subsidiaries, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinion of
such counsel for the Company shall state that the opinion of any such other
counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon.
(c) At the Closing Date and the Additional Closing Date, you shall
have received a certificate of the President and the Chief Financial Officer
of the Company, dated the Closing Date, or Additional Closing Date, as the
case may be, to the effect that (i) the condition set forth in subsection
(a) of this Section 6 has been satisfied, (ii) as of the date hereof and as
of the Closing Date, or Additional Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 1 hereof
are accurate, (iii) as of the Closing Date, or the Additional Closing Date,
as the case may be, the obligations of the Company to be performed hereunder
on or prior thereto have been duly performed, and (iv) subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company and its subsidiaries have not
sustained any material loss or interference with their respective businesses
or properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any legal
or governmental proceeding, and, except as set forth in or contemplated by
the Registration Statement, there has not been any material adverse change,
or any development involving a material adverse change, in the business,
prospects, properties, operations, condition (financial or other), or
results of operations of the Company and its subsidiaries, taken as a whole.
(d) At the time this Agreement is executed, you shall have received
a letter from E&Y, independent public accountants for the Company, ESLP and
the other entities whose financial statements appear in the Prospectus,
dated as of the date of this Agreement (the "Original Letter") addressed to
the Underwriters and in form and substance satisfactory to you, to the
effect that: (i) they are independent certified public accountants with
respect to the Company, ESLP and the other entities whose financial
statements appear in the Prospectus, within the meaning of the Act and the
Regulations and stating that the answer to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) stating that, in
their opinion, the financial
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statements of the Company, ESLP and the other entities whose financial
statements appear in the Prospectus, included in the Registration Statement
and the Prospectus and covered by their opinions therein, comply as to form
in all material respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations of the Commission
thereunder; (iii) on the basis of procedures, not constituting an
examination in accordance with generally accepted auditing standards, set
forth in detail in the Original Letter, including the procedures specified
by the American Institute of Certified Public Accounts as described in SAS
71, Interim Financial Information, a reading of the minutes of meetings and
-----------------------------
consents of the shareholders and boards of directors of the Company and the
committees of such board subsequent to August 1, 1996, inquiries of officers
and other employees of the Company who have responsibility for financial and
accounting matters of the Company with respect to transactions and events
subsequent to August 1, 1996 and other procedures and inquiries as may be
specified in the Original Letter to a date not more than five days prior to
the date of the Original Letter, nothing has come to their attention that
would cause them to believe that: (A) the unaudited consolidated income
statement data and balance sheet items included in the Prospectus do not
agree with the corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any such
unaudited data and items are not fairly presented in conformity with GAAP
applied on a basis substantially consistent with that of the audited
consolidated financial statements included in the Registration Statement and
the Prospectus; (B) the unaudited consolidated financial statements which
were not included in the Prospectus but from which were derived any
unaudited income statement data and balance sheet items included in the
Prospectus and referred to in Clause (A) were not determined on a basis
substantially consistent with the basis for the audited financial statements
included in the Prospectus; (C) the unaudited pro forma financial statements
included in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the Regulations
or the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements; (D) as of (I)
September 30, 1996 and (II) a specified date not more than five days prior
to the date of the Original Letter, there have been any changes in the
capital stock, notes payable, or other debt or indebtedness of the Company
or decreases in total assets or stockholders' equity of the Company, in each
case as compared with the amounts shown in the most recent balance sheet
presented in the Registration Statement and the Prospectus, except for
changes or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in the Original
Letter; and (E) for the periods from (I) the date of the latest financial
statements included in the Prospectus to September 30, 1996 and (II)
September 30, 1996 to the specified date referred to in Clause (D)(II),
there were any decreases, as compared with the corresponding period in the
prior fiscal year and in the prior fiscal quarter, in total revenues, or
total or per share net income, except for decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which
are set forth in the Original Letter; and (iv) stating that they have
compared specific dollar amounts, numbers of shares, percentages of revenues
and earnings, and other financial information pertaining to the Company and
its subsidiaries set forth in the Registration Statement and the Prospectus,
which have been specified by you prior to the date of this Agreement, to the
extent that such amounts, numbers, percentages, and information may be
derived from the general accounting, financial or other records of the
Company and its subsidiaries or from schedules furnished by the Company, and
excluding any questions requiring an interpretation by legal counsel, with
the results obtained from the application of specified readings, inquiries,
and other appropriate procedures specified by you set forth in such letter,
and found them to be in agreement. At the Closing Date and, as to the
Additional Shares, the Additional Closing Date, E&Y shall have furnished to
you a letter, dated the date of its delivery, which shall confirm, on the
basis of a review in accordance with the procedures set forth in the
Original Letter, that nothing has come to their attention during the period
from the date of the Original Letter referred to in the prior sentence to a
date (specified in the letter) not more than five days prior to the Closing
Date or the Additional Closing Date, as the case may be, which would require
any change in the original Letter if it were required to be dated and
delivered at the Closing Date or the Additional Closing Date, as the case
may be.
(e) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and
the Underwriters shall have received from said Underwriters' Counsel a
favorable opinion, dated as of the Closing Date, and the Additional Closing
Date, as the case may be, with respect to the issuance and sale of the
Shares, the Registration Statement and the Prospectus and such other related
matters, as you may reasonably require, and the Company shall have furnished
to Underwriters' Counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
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(f) You shall have received from each person who is a director or
executive officer of the Company and from each shareholder of the Company as
has been heretofore designated by you an agreement to the effect that such
person will not, directly or indirectly, without your prior written consent,
offer, sell, offer or agree to sell, grant any option to purchase or
otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of any shares of capital stock of the Company
(or any securities convertible into, exercisable for or exchangeable or
exercisable for shares of capital stock of the Company) for a period of 360
days after the date of the Prospectus, other than transfers of shares of
capital stock to partners of such shareholders who are partnerships in
respect of their distributive shares of such partnership's assets who
furnish to you an agreement (in form and substance satisfactory to you) to
the effect that they will not engage in any of the aforementioned
transactions.
(g) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq Stock Market's National Market, subject to notice of
issuance.
(h) The consummation of the Formation shall have occurred prior to
or shall have occurred simultaneously with the closing hereunder.
(i) Prior to the Closing Date and the Additional Closing Date the
Company shall have furnished to you such further information, certificates
and documents as you may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date, and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company and ESLP in writing,
or by telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, its officers, directors, partners, employees, agents and
counsel, and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever (including but not
limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they or
any of them may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus,
or in any supplement thereto or amendment thereof, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that the Company will not be liable in
any such case to the extent but only to the extent that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein, in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through you
expressly for use therein; further, provided, however, that the
indemnification contained in this paragraph (a) with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter (or
to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Shares by such Underwriter to any person if a copy of the Prospectus shall
not have been delivered or sent to such person within the time required by
the Act, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such preliminary prospectus
was corrected in the Prospectus, provided that the Company has delivered the
--------
Prospectus to the several Underwriters, in requisite quantity on a timely
basis to permit such delivery or sending. This indemnity agreement will be
in addition to any liability that the Company may otherwise have, including
under this Agreement.
-14-
<PAGE>
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of
the officers of the Company who shall have signed the Registration
Statement, its employees, agents and counsel, and each other person, if any,
who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against any losses, liabilities, claims,
damages and expenses whatsoever (including but not limited to attorneys'
fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or
any claim whatsoever, and any and all amounts paid in settlement of any
claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the registration statement
for the registration of the Shares, as originally filed or any amendment
thereof, or any related preliminary prospectus or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Underwriter through you expressly for use therein; provided, however, that
in no case shall any Underwriter be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by
such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the
final paragraph of the cover page and in the first two paragraphs under the
caption "Underwriting" in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for use in
the registration statement relating to the Shares as originally filed, or in
any amendment thereof, any related preliminary prospectus or the Prospectus
or in any amendment thereof or supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that
it has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory
to such indemnified party. Notwithstanding the foregoing, the indemnified
party or parties shall have the right to employ its or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the
expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the
indemnifying parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to have charge of the
defense of such action within a reasonable time after notice of commencement
of the action, or (iii) such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them that
are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be
borne by the indemnifying parties. Anything in this Section 7 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7(a) hereof
is for any reason held to be unavailable from the Company, or is insufficient to
hold harmless a party indemnified thereunder, the Company and the Underwriters
shall contribute to the aggregate losses, claims, damages, liabilities and
expenses of the nature contemplated by such indemnification provisions
(including any investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) to
which
-15-
<PAGE>
the Company and one or more of the Underwriters may be subject, in such
proportions as is appropriate to reflect the relative benefits received by the
Company and the Underwriters from the offering of the Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
that resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this Section
8, (i) in no case shall any Underwriter (except as may be provided in the
Agreement Among Underwriters) be liable or responsible for any amount in excess
of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section 8, notify such party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 8 or otherwise. No party shall be liable
for contribution with respect to any action or claim settled without its
consent; provided, however, that such consent was not unreasonably withheld.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made by you
pursuant to subsection (b) below) exceed in the aggregate 10% of the number
of Firm Shares or Additional Shares, as the case may be, which all
Underwriters have agreed to purchase hereunder, then such Firm Shares or
Additional Shares to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to their respective commitments
hereunder.
(b) In the event that such default relates to more than 10% of the
Firm Shares, or Additional Shares, as the case may be, you may in your
discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase
such Firm Shares, or Additional Shares, as the case may be, to which such
default relates, on the terms contained herein. In the event that within
five calendar days after such a default you do not arrange for the purchase
of the Firm Shares or Additional Shares, as the case may be, to which such
default relates as provided in this Section 9, this Agreement or, in the
case of a default with respect to the Additional Shares, the obligations of
the Underwriters to purchase and of the Company to sell the Additional
Shares, shall thereupon terminate, without liability on the part of the
Company with respect thereto (except in each case as provided in Sections 5,
7(a) and 8 hereof) or the several Underwriters, but nothing in this
Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other several Underwriters or the Company
for damages occasioned by its or their default hereunder.
-16-
<PAGE>
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters,
or are to be purchased by another party or parties as aforesaid, you or the
Company shall have the right to postpone the Closing Date, or Additional
Closing Date, as the case may be, for a period, not exceeding five business
days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the
opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include
any party substituted under this Section 9 with like effect as if it had
originally been a party to this Agreement with respect to such Firm Shares
and Additional Shares.
10. Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the several Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8, 11(d) and 14 hereof shall survive the termination of this Agreement
including pursuant to Sections 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective at such time after
notification of the effectiveness of the Registration Statement as you and
the Company shall agree upon the initial public offering price and the
purchase price per Share. If either the initial public offering price or the
purchase price per Share has not been agreed upon prior to 5:00 p.m., New
York time, on the fifth full business day after the Registration Statement
shall have become effective, this Agreement shall thereupon terminate
without liability to the Company or the Underwriters, except as herein
expressly provided. Until this Agreement becomes effective as aforesaid, it
may be terminated by the Company by notifying you or by you notifying the
Company. Notwithstanding the foregoing, the provisions of this Section 11
and of Sections 1, 5, 7, and 8 hereof shall at all times be in full force
and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date, or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing
Date, as the case may be, by giving notice to the Company, if (i) any
domestic or international event or act or occurrence has materially
disrupted, or in your opinion will in the immediate future materially
disrupt, the securities markets; or (ii) if trading on the New York or
American Stock Exchanges or the Nasdaq Stock Market's National Market shall
have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been
required, on the New York or American Stock Exchanges by the New York or
American Stock Exchanges or the Nasdaq Stock Market's National Market or by
order of the Commission or any other governmental authority having
jurisdiction; or (iii) if the United States shall have become involved in a
war or major hostilities; or (iv) if a banking moratorium has been declared
by a state or federal authority, or if a moratorium in foreign exchange
trading by major international banks or persons has been declared; or (v) if
any new restriction materially adversely affecting the distribution of the
Firm Shares, or the Additional Shares, as the case may be, shall have become
effective; or (vi) if the Company shall have sustained a material or
substantial loss, which, whether or not such loss shall have been insured,
in your judgment makes it inadvisable to proceed with the offering, sale, or
delivery of the Firm Shares, or the Additional Shares, as the case may be,
on the terms contemplated by the Prospectus; or (vii) if there shall have
been such change in the market for the Company's securities or securities in
general, or in political, financial or economic conditions as in your
judgment makes it inadvisable to proceed with the offering, sale or delivery
of the Firm Shares, or the Additional Shares, as the case may be, on the
terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be
by telephone, telex, telegraph, or telecopy, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof, or (ii) Sections 9(b) or 11(b) hereof), or
-17-
<PAGE>
if the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the several Underwriters set forth herein is
not satisfied or because of any refusal, inability or failure on the part of
the Company to perform any agreement herein, or comply with any provision
hereof, the Company agrees subject to demand by you, to reimburse the
Underwriters for all out-of-pocket expenses (including the fees and expenses
of their counsel), incurred by the several Underwriters in connection
herewith.
12. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, telexed, telegraphed, or telecopied,
and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10041, Attention: Corporate Finance; if sent to
the Company shall be mailed, delivered, telexed, telegraphed, or telecopied, and
confirmed in writing, in the case of the Company, to the Company, 2001 Bryan
Street, Suite 2300, Dallas, Texas 75201, Attention: Robert A. Faith, Chief
Executive Officer.
13. Parties. You represent that you are authorized to act on behalf
of the several Underwriters named in Schedule I hereto, and the Company shall be
entitled to act and rely on any request, notice, consent, waiver or agreement
purportedly given on behalf of the Underwriters when the same shall have been
given by you on such behalf. This Agreement shall inure solely to the benefit
of, and shall be binding upon, the several Underwriters, the Company and ESLP
and the controlling persons, directors, officers, employees and agents referred
to in Sections 7 and 8, and their respective successors and assigns, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not include
a purchaser, in its capacity as such, of Shares from any of the Underwriters.
14. Agreement of ESLP. If this Agreement shall terminate or shall be
terminated after execution pursuant to any provisions hereof (otherwise than
pursuant to notification by you as provided in Section 11(a) hereof, Section
9(b) or Section 11(b) hereof) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company to
comply with the terms or fulfill any of the conditions of this Agreement, ESLP
agrees to reimburse the Representatives for all reasonable out-of-pocket
expenses (including reasonable fees and expenses of counsel for the
Underwriters) incurred by you in connection with effecting the transactions
contemplated in this Agreement.
15. Construction. This Agreement shall be construed in accordance
with the internal laws of the State of New York, without giving effect to the
rules governing conflicts of laws. Time is of the essence in this agreement.
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<PAGE>
If the foregoing correctly sets forth the understanding among you and
the Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
HOMEGATE HOSPITALITY, INC.
By:
--------------------------------
Print Name:
------------------------
Title:
-----------------------------
EXTENDED STAY LIMITED PARTNERSHIP
a Delaware limited partnership
By: ESH Partners,L.P., a Delaware limited
partnership, its general partner
By: Crow Family, Inc., a Texas
corporation, its general partner
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
By: JMI/Greystar Extended Stay Partners, L.P.
a Delaware limited partnership
By: Greystar Holdings, Inc., a Delaware
corporation, its general partner
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
MONTGOMERY SECURITIES
By: BEAR, STEARNS & CO. INC.
By:
-------------------------------
Print Name:
-----------------------
Title:
----------------------------
On behalf of themselves and the other several Underwriters named in Schedule I
hereto.
-19-
<PAGE>
SCHEDULE I
Number of
Underwriter: Firm Shares
- ----------- -----------
Bear, Stearns & Co. Inc.....................................................
Montgomery Securities.......................................................
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), to be effective as of
October __, 1996, is executed by Homegate Hospitality, Inc., a Delaware
corporation ("Homegate"), and Extended Stay Limited Partnership, a Delaware
limited partnership ("ESLP").
RECITALS:
A. The partners of ESLP and the Board of Directors of Homegate deem it
advisable for ESLP to merge with and into Homegate as authorized by Section 263
of the Delaware General Corporation Law (the "DGCL") and on the terms set forth
herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
covenants and provisions herein contained, the parties hereto agree as follows:
ARTICLE I
The Merger
----------
1.1 Merger. Subject to Section 1.2 hereof, at the Effective Time (as
------
defined in Section 1.3), ESLP shall be merged with and into Homegate, the
separate existence of ESLP shall cease and Homegate, as the surviving entity in
the merger (the "Surviving Entity"), shall continue to exist by virtue of and
shall be governed by the laws of the State of Delaware.
1.2 Condition Precedent. The merger of ESLP with and into Homegate is
-------------------
hereby made expressly contingent upon the execution of a definitive Underwriting
Agreement by and between Homegate and Bear Stearns & Co. Inc. and Montgomery
Securities, as representatives of the several underwriters, with respect to a
firm commitment underwriting of an initial public offering (the "Offering") of
4,325,000 shares of Common Stock, $.01 par value, of Homegate pursuant to that
certain Registration Statement on Form S-1, filed by Homegate with the
Securities and Exchange Commission on August 30, 1996 (File No. 333-11113).
1.3 Effective Time of Merger. Immediately prior to, or substantially
------------------------
simultaneously with, the completion of the Offering, Homegate and ESLP shall
file a Certificate of Merger setting forth the information required by, and
otherwise in compliance with, the DGCL with the Secretary of State of the State
of Delaware. The merger of ESLP with and into Homegate (the "Merger") shall
become effective upon the issuance of a certificate of merger by the Secretary
of State (the time of such effectiveness is herein called the "Effective Time").
<PAGE>
1.4 Effects of Merger. At the Effective Time, Homegate without further
-----------------
action, as provided by the laws of the State of Delaware, shall succeed to and
possess all the rights, privileges, powers and franchises, of a public as well
as of a private nature, of ESLP; and all property, real, personal and mixed, and
all debts due on whatsoever account, including subscriptions to shares, and all
other causes in action, and all and every other interest, of or belonging to or
due to ESLP, shall be deemed to be vested in Homegate without further act or
deed; and the title to any real estate, or any interest therein, vested in
Homegate or ESLP shall not revert or be in any way impaired by reason of the
Merger. Such transfer to and vesting in Homegate shall be deemed to occur by
operation of law and no consent or approval of any other person shall be
required in connection with any such transfer or vesting unless such consent or
approval is specifically required in the event of merger or consolidation by law
or express provision in any contract, agreement, decree, order or other
instrument to which Homegate or ESLP is a party or by which it is bound.
Homegate shall thenceforth be responsible and liable for all debts, liabilities
and duties of ESLP, which may be enforced against Homegate to the same extent as
if said debts, liabilities and duties had been incurred or contracted by it.
Neither the rights of creditors nor any liens upon the property of Homegate or
ESLP shall be impaired by the Merger.
1.5 Articles of Incorporation. The Certificate of Incorporation of
-------------------------
Homegate as in effect at the Effective Time shall be and remain the Certificate
of Incorporation of the Surviving Entity, until the same shall be amended as
provided by law. No changes are to be effected to the Certificate of
Incorporation of the Surviving Entity as a result of the Merger.
1.6 Bylaws. The Bylaws of Homegate as in effect at the Effective Time
------
shall be and remain the Bylaws of the Surviving Entity, until the same shall
thereafter be amended or repealed in accordance with law, the Surviving Entity's
Articles of Incorporation or such Bylaws.
1.7 Officers. The officers of Homegate who are serving as such at the
--------
Effective Time shall be the officers of the Surviving Entity from and after the
Effective Time, each such individual to serve until his or her successor has
been duly elected or appointed and qualified or until his or her earlier death,
resignation or removal in accordance with law, the Surviving Entity's Articles
of Incorporation and its bylaws.
1.8 Directors. The directors of Homegate who are serving as such
---------
immediately prior to the Effective Time shall be the directors of the Surviving
Entity from and after the Effective Time, each such individual to serve until
his or her successor has been duly elected or appointed and qualified or until
his or her earlier death, resignation or removal in accordance with law, the
Surviving Entity's Articles of Incorporation and its bylaws.
ARTICLE II
Merger Consideration
--------------------
<PAGE>
By virtue of the Merger and without any action on the part of any person,
at the Effective Time:
(a) Homegate.
---------
(i) Each share of Common Stock issued and outstanding
immediately prior to the Effective Time shall be cancelled.
(ii) Homegate shall issue an aggregate of 6,386,666 shares
of Common Stock to the partners of ESLP, with such shares being
allocated among the partners of ESLP as follows:
Partner Homegate Shares
------- ---------------
JMI/Greystar Extended Stay Partners, L.P. 2,260,200
ESH Partners, L.P. 2,260,200
Developer Extended Stay Partners, L.P. 1,073,103
Manager Extended Stay Partners, L.P. 466,566
JMI/Greystar Realty Partners, L.P. 163,298
Crow Hotel Realty Investors, L.P. 100,312
Anthony W. Dona 46,657
J. Ronald Terwilliger 8,165
Leonard W. Wood 8,165
The issuance of Homegate shares of Common Stock to the partners of
ESLP shall be deemed to be pursuant to the liquidation of ESLP in
accordance with Article XVII of the Limited Partnership Agreement of
Extended Stay Limited Partnership (the "Partnership Agreement").
(b) ESLP. ESLP shall liquidate in accordance with Article XVII
----
of the Partnership Agreement. In connection with such liquidation, the
partners will receive shares of Common Stock of Homegate, as set forth in
section (a) above.
ARTICLE III
Representations and Warranties
------------------------------
3.1 Representations and Warranties of ESLP. ESLP hereby represents and
--------------------------------------
warrants to Homegate the following:
<PAGE>
(a) (i) ESLP and VPS I, L.P. ("VPS") have been duly organized and are
validly existing as limited partnerships in good standing under the laws of
the State of Delaware, with full power and authority to own or lease their
respective properties and conduct their respective businesses. ESLP and VPS
are duly qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification.
(ii) VPS, Inc. (the "Company"; the Company and VPS are hereinafter
collectively referred to as the "Subsidiaries") has been duly organized and
is validly existing as a corporation in good standing under the laws of the
State of Delaware, with full power and authority to own or lease its
properties and conduct its business. The Company is duly qualified to
transact business in all jurisdictions in which the conduct of its business
requires such qualification.
(b) The Greystar General Partner Representative and the Crow General
Partner Representative, as each are defined in the Partnership Agreement,
have each met in full their initial capital contribution obligations to
ESLP and have consented to the Merger in accordance with Section 10.3 of
the Partnership Agreement, and no other consents or authorizations are
required to enable ESLP to fulfill its obligations hereunder. This
Agreement is a duly authorized and binding obligation of ESLP, enforceable
in accordance with its terms.
(c) The execution and delivery of this Agreement and the consummation
of the transactions herein contemplated and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument to which ESLP or any Subsidiary
is a party, or of the organizational documents of ESLP or any order, rule
or regulation applicable to ESLP or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(d) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by ESLP of this Agreement and the consummation of the transactions herein
contemplated has been obtained or made and is in full force and effect.
3.2 Representations and Warranties of Homegate. Homegate hereby
------------------------------------------
represents and warrants to ESLP the following:
(a) Homegate has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
full power and authority to own or lease its properties and conduct its
business. Homegate is duly qualified to transact business in all
jurisdictions in which the conduct of its business requires such
qualification.
<PAGE>
(b) This Agreement is a duly authorized and binding obligation of
Homegate, enforceable in accordance with its terms.
(c) The execution and delivery of this Agreement and the consummation of
the transactions herein contemplated and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument to which Homegate is a party, or
of the organizational documents of Homegate or any order, rule or
regulation applicable to Homegate of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(d) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by Homegate of this Agreement and the consummation of the transactions
herein contemplated has been obtained or made and is in full force and
effect.
(e) The outstanding shares of Common Stock of Homegate have been duly
authorized and validly issued and are fully paid and non-assessable; the
shares of Common Stock to be issued pursuant to this Agreement have been
duly authorized and, when issued and paid for as contemplated herein, will
be validly issued, fully paid and non-assessable. No preemptive rights of
shareholders exist with respect to any of the shares of Common Stock or the
issue and sale thereof.
ARTICLE IV
Miscellaneous
-------------
4.1 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
collectively shall constitute one and the same instrument.
4.2 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware.
4.3 Section Headings. The section headings contained in this Agreement
----------------
are inserted for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement.
4.4 Termination. This Agreement may be terminated at any time before
-----------
completion of the filing with the Secretary of State pursuant to Section 1.3
hereof by appropriate resolution of the Board of Directors of Homegate for any
reason which it deems appropriate.
<PAGE>
THE SIGNATURE PAGE IS ATTACHED HERETO.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date or dates indicated below, to be effective as of the date first set forth
above.
HOMEGATE HOSPITALITY, INC.,
a Delaware corporation
By:
Robert A. Faith
President
Date: October , 1996
---
EXTENDED STAY LIMITED PARTNERSHIP,
a Delaware limited partnership
By: JMI/GREYSTAR EXTENDED STAY
PARTNERS, L.P., a Delaware limited
partnership, a general partner
By:
-------------------------------
Joel Kinzie Oldham, IV
Vice President
Date: October , 1996
---
By: ESH PARTNERS, L.P., a Texas limited
partnership, a general partner
By:
-------------------------------
Anthony W. Dona
Vice President
Date: October , 1996
---
<PAGE>
EXHIBIT 4.1
[HOMEGATE LOGO APPEARS HERE]
NUMBER HOMEGATE SHARES
Studios & Suites
C HOMEGATE HOSPITATILITY, INC.
COMMON STOCK
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN
DALLAS, TEXAS AND NEW YORK, NEW YORK CUSIP 43740G109
SEE REVERSE FOR CERTAIN DEFINITIONS
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, $.01 PAR VALUE, OF THE COMMON STOCK OF
HOMEGATE HOSPITALITY, INC.
transferable on the books of the Corporation by the holder hereof, in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed or accompanied by the proper assignment. This Certificate and the
shares represented hereby are issued and shall be held subject to all of the
provisions of the Certificate of Incorporation and Bylaws of the Corporation and
all amendments thereof, to all of which the holder by the acceptance hereof
consents. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated: COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER
[CORPORATE SEAL SERVICES, L.L.C.
APPEARS HERE]
TRANSFER AGENT AND REGISTRAR
BY
/s/ Illegible /s/ Illegible
SECRETARY PRESIDENT AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY OCT. 1, 1996 dw
3504 ATLANTIC AVENUE
SUITE 12 046688fc
LONG BEACH, CA 90807
(310) 989-2333
(FAX)(310) 426-7450 METRO proof NEW
------
<PAGE>
HOMEGATE HOSPITALITY, INC.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of the
Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights. A stockholder may make the request to the Transfer
Agent or to the Corporation at its principal executive offices.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by entireties ----- ------
JT TEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts to Minors
tenants in common Act
--------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
----------------------
Please insert Social Security or Other
Identifying Number of Assignee
-----------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
---------------------------------------------
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,
----------------------------
X
NOTICE ----------------------------------
THE SIGNATURE(S) TO THIS ASSIGNMENT (SIGNATURE)
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE X
CERTIFICATE IN EVERY PARTICULAR, ----------------------------------
WITHOUT ALTERATION OR ENLARGEMENT (SIGNATURE)
OR ANY CHANGE WHATEVER.
THE SIGNATURES SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION AS
DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AS
AMENDED
SIGNATURE(S) GUARANTEED BY:
-------------------------------------
AMERICAN BANK NOTE COMPANY OCT 1, 1996 dw
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 046688bk
(310) 989-2333
(FAX) (310) 426-7450 Proof NEW
-------
<PAGE>
[LETTERHEAD OF VINSON & ELKINS] EXHIBIT 5.1
WRITER'S TELEPHONE WRITER'S FAX NUMBER
(214) 220-7700 (214) 999-7700
October 16, 1996
Homegate Hospitality, Inc.
2001 Bryan Street, Suite 2300
Dallas, Texas 75201
Ladies and Gentlemen:
We have acted as counsel to Homegate Hospitality, Inc., a Delaware
corporation (the "Company"), in connection with the Company's registration under
the Securities Act of 1933 (the "Securities Act") of the offer and sale of an
aggregate of 4,973,750 shares (the "Shares") of common stock, par value $.01 per
share (the "Common Stock"), of the Company pursuant to the Company's
Registration Statement on Form S-1 (File No. 333-11113) filed with the
Securities and Exchange Commission (the "Commission") on August 30, 1996, as
amended through the date hereof (the "Registration Statement"). The Shares will
be offered and sold (the "Offering") pursuant to an underwriting agreement (the
"Underwriting Agreement") to be entered into between the Company and Bear
Stearns & Co. Inc. and Montgomery Securities, as representatives of the several
underwriters.
We are rendering this opinion as of the time the Registration Statement
becomes effective in accordance with Section 8(a) of the 1933 Act.
Before rendering the opinions hereinafter set forth, we examined, among
other things, the proposed form of Underwriting Agreement, the Registration
Statement, the Company's Certificate of Incorporation and Bylaws, resolutions of
the Company's Board of Directors, and originals or photostatic or certified
copies of all those corporate records of the Company and of all those
agreements, communications and other instruments, certificates of public
officials, certificates of corporate officials and such other documents as we
have deemed relevant and necessary as a basis for the opinions hereinafter set
forth. As to factual matters, information with respect to which is in the
possession of the Company relevant to the opinions herein stated, we have relied
without investigation, to the extent we deem such reliance proper, upon
certificates or representations made by its duly authorized representatives.
<PAGE>
Homegate Hospitality
October 16, 1996
Page 2
In rendering the opinions set forth below, we have assumed that (i) all
information contained in all documents reviewed by us is true and correct, (ii)
all signatures on all documents reviewed by us are genuine, (iii) all documents
submitted to us as originals are true and complete, (iv) all documents submitted
to us as copies are true and complete copies of the originals thereof and (v)
each natural person signing any document reviewed by us had the legal capacity
to do so.
Based upon the foregoing assumptions, and subject to the qualifications set
forth hereinafter, we are of the opinion that, when (i) the Registration
Statement becomes effective under the 1933 Act, (ii) the final terms of the
Underwriting Agreement and the Offering have been approved by the Board of
Directors (or a duly constituted committee thereof), (iii) the Underwriting
Agreement has been duly executed and delivered by each of the parties thereto,
and (iv) the Shares have been issued and delivered in accordance with the terms
of the Underwriting Agreement (including the receipt by the Company of the
consideration for the Shares described therein), the Shares will be validly
issued, fully paid and non-assessable.
We are counsel admitted to practice law in the State of Texas and this
opinion is limited to the laws of the State of Texas, the General Corporation
Law of the State of Delaware and the federal law of the United States of
America.
We express no opinion as to any matter other than as expressly set forth
above, and no opinion is to or may be inferred or implied herefrom. This
opinion is given as of the date hereof, and we undertake no, and hereby disclaim
any, obligation to advise the Company or anyone else of any change in any matter
set forth herein.
This opinion letter may be filed as an exhibit to the Registration
Statement. Consent is also given to the reference to this firm under the
caption "Legal Matters" in the Registration Statement and in the Prospectus
included in the Registration Statement, as having passed on the validity of the
Shares. In giving this consent, this firm does not thereby admit that it comes
within the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Vinson & Elkins L.L.P.
<PAGE>
EXHIBIT 10.1
EXTENDED-STAY
MANAGEMENT ASSISTANCE AGREEMENT
-------------------------------
This Extended-Stay Management Assistance Agreement (this "Agreement") is
---------
entered into as of August 26, 1996, between EXTENDED STAY LIMITED PARTNERSHIP, a
Delaware limited partnership ("Owner"), and WYNDHAM MANAGEMENT CORPORATION, a
-----
Delaware corporation ("Manager").
-------
RECITALS
--------
Owner intends to acquire and develop mid-priced, extended-stay lodging
facilities ("Hotels") and has requested that Manager enter into certain
------
agreements regarding the provision of services in connection therewith. Manager
desires to manage the Hotels and provide the other services set forth herein.
AGREEMENTS
----------
For valuable consideration, whose receipt and sufficiency are acknowledged,
the parties agree as follows:
1 Term. The term of this Agreement (the "Term") shall begin on the date
---- ----
hereof and continue through the earlier of December 31, 1998, or the date on
which a Management Agreement (defined below) is executed by Owner and Manager
for the 60th Hotel pursuant to the terms hereof; however, if (a) Owner sells all
or substantially all of its assets to a person that is not an Affiliate (defined
below) of Owner or (b) if a person (which is not an Affiliate of the persons
currently owning the beneficial interests in Owner) acquires control of Owner,
directly or indirectly through one or more intermediaries, then either Owner or
Manager may terminate this Agreement by delivering at least 60-days' prior
written notice thereof to the other party. "Affiliate" means another person
---------
that directly or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the person in question. The term
"control" means the possession, direct or indirect, of power to direct or cause
-------
the direction of the management policies of a person, whether through the
ownership of voting securities or otherwise and shall in any event include
ownership or power to vote 50% or more of the outstanding equity interests of
such person, but shall not include, in and of itself, changes in the members of
the board of directors of a person that is a corporation. The term "person"
------
means a person or entity. The extended-stay facility located in Grand Prairie,
Texas and currently operated under the name "Studio Suites" shall be a Hotel for
which a Management Agreement has been entered.
<PAGE>
2 Technical Services. Manager shall assist Owner in developing interior
------------------
and exterior design concepts and detailed purchasing specifications for Owner's
prototype Hotel. Owner and Manager acknowledge the services described in the
previous sentence regarding exterior design have been performed. For such
services, Owner shall pay Manager $25,000 in five installments of $5,000 each,
with one installment being due upon the execution of each of the first five
Management Agreements (defined below). If Owner desires Manager's services in
connection with a material change in the interior or exterior design or
purchasing specifications for its Hotel, then Owner and Manager shall enter into
a technical services agreement, in form and substance reasonably satisfactory to
each party, for such services.
3 Management. If, during the Term, Owner or an Affiliate thereof acquires
----------
a Hotel or acquires land for the construction of a Hotel, then, subject to the
following sentences, Owner and Manager shall enter into a ten-year Management
Agreement for the Hotel in question, whose form is attached as Exhibit A (the
---------
"Management Agreement"); however, the Management Agreements for the five hotels
- ---------------------
owned by VPS I, Ltd. shall not provide for any termination fee in connection
with the termination thereof and shall provide such incentive fee as Owner and
Manager may agree upon. Manager shall not be required to enter into a Management
Agreement for a Hotel if Manager reasonably determines in good faith that its
management of that Hotel could reasonably be expected to (a) subject Manager to
any material liability that is not typically incurred in the hotel management
business or (b) cause Manager to violate any law, court order, or presently
existing contractual obligations or restrictions. If Manager makes such
determination, then it shall so advise Owner within ten business days after
Manager receives (1) notice from Owner of Owner's intention to acquire the Hotel
or site in question and (2) all relevant information necessary to make such
determination. If Owner intends to acquire a site or Hotel that is located
outside of the Protected States (defined below) and Manager has a then-existing
business relationship with a lodging facility ("Existing Competing Project")
--------------------------
which would be a Competing Extended-Stay Project (based upon the stabilized pro
forma average weekly rates for the Hotel to be acquired or developed by Owner)
but for its location outside of the Protected States, then Owner shall notify
Manager of its pending acquisition and Manager shall within 30 days following
the receipt of such notice from Owner, notify Owner that Manager will (A)
terminate its business relationship with the Existing Competing Project prior to
the scheduled opening date of the Hotel in question or (B) decline management of
the Hotel in question. If Manager determines not to manage a Hotel pursuant to
the previous two sentences, then Owner may self-manage or engage any other party
to manage such Hotel without payment of any fee to Manager of any kind.
4 Marketing Service. Upon Owner's request, Manager shall perform the
-----------------
following services: (a) provide Owner with marketing research for locations
designated by Owner and assist Owner in determining the suitability of the
acquisition or development of Hotel sites; and (b) promote Hotels which are
subject to Management Agreements through national and local marketing programs
consisting of advertising, promotion, publicity and public relations designed to
attract guests to Hotels, as provided in each individual Management Agreement.
Owner and
2
<PAGE>
Manager shall enter into a MIS service agreement under which Manager shall
assist Owner in developing a property management system and related software for
Hotel operations, which shall be in form and substance reasonably satisfactory
to Owner and Manager.
5 Purchasing Assistance. Owner and Manager shall enter a purchase
---------------------
agreement under which Owner shall use Manager's purchasing procurement
department to acquire furniture, fixtures, and equipment and operating supplies
to be used in the Hotels (collectively, "Operating Equipment"). Such agreement
-------------------
shall be in form and substance reasonably satisfactory to Owner and Manager and
shall provide, among other things, the following: Owner shall pay Manager a
commission equal to 5% of the aggregate purchase price of all items acquired
under such agreement; Owner may terminate the agreement at any time by
delivering to Manager at least 90-days' prior written notice thereof, provided
that Owner either (a) reimburses to Manager the amount of penalties or lost
discounts under then-pending volume-discount contracts entered into with Owner's
prior written approval, but only to the extent such lost discounts or penalties
were caused by such termination and are not related to items or quantities that
reasonably can be used at other properties managed or operated by Manager; and
such reimbursement shall be made within ten days after Manager delivers to Owner
evidence reasonably satisfactory to Owner evidencing such lost discounts or
penalties; or (b) allows Manager to continue purchasing the Operating Equipment
that is the subject of such volume-discount contract for the then-remaining term
of such volume-discount contract.
6 Non-Competition.
---------------
(a) Definitions. When used in this Section 6, the following terms shall
have the following meanings:
"Competing Extended-Stay Project" means a lodging facility in any of
-------------------------------
the Protected States whose primary business is the leasing or providing of hotel
rooms to guests for average stays of one week or more for a price that is within
20% of (1) the stabilized proforma average weekly rates for Hotels planned or
under construction in the applicable market of the Protected State in question
or (2) if a Hotel has been completed in such market, the average weekly rates
for completed Hotels operating in the applicable market of the Protected State.
"Portfolio Project" means a Competing Extended-Stay Project acquired
-----------------
in connection with (1) the direct or indirect acquisition of a controlling
interest in another person which owns or manages hotel facilities which include
Competing Extended-Stay Projects or (2) the direct or indirect acquisition in a
single transaction of a controlling interest in hotel facilities which include
Competing Extended-Stay Projects (a "Portfolio Transaction").
---------------------
3
<PAGE>
"Protected State" means (1) each of the States described on Exhibit B
--------------- ---------
and (2) other states in the 48 continental United States in which a Hotel exists
for which Owner and Manager have actually entered into a Management Agreement.
"Restricted Radius" means the area in which Manager is prohibited from
-----------------
competing against Owner in the extended-stay lodging business under a Management
Agreement, subject to the terms and conditions set forth therein.
(b) Manager shall not, directly or indirectly, through one or more
intermediaries, and shall cause its Affiliates not to, construct, own, operate
or manage any Competing Extended-Stay Project during the Term, except as
provided below. If Manager acquires a Portfolio Project, in a Protected State,
then Manager may continue to own, operate or manage the Portfolio Project unless
it is within a Restricted Radius, in which case, Manager shall either (1)
terminate its business relationship with the Portfolio Project within the
Restricted Radius or (2) terminate the Management Agreement for the Hotel in the
Restricted Radius (in which case, no termination fee shall be payable in
connection therewith). Such election shall be made by Manager within 30 days
after the Portfolio Transaction in question occurs and any termination shall be
effective no earlier than 45 nor later than 90 days after such election. If
Manager elects to terminate the Management Agreement for the Hotel in the
Restricted Radius, Owner may elect to keep such Management Agreement in effect
by delivering to Manager written notice thereof, in which case Manager shall
continue to manage such Hotel and may own, operate, or manage the Portfolio
Project in the Restricted Radius. From time to time, Owner and Manager, may, by
mutual agreement, add additional Protected States or delete states as Protected
States to this Agreement by signing and attaching a new Exhibit B hereto
---------
including such State as a Protected State. This non-competition provision is a
material inducement to the execution of this Agreement by Owner, and is
consideration therefor. Manager acknowledges and stipulates that the non-
competition provisions of this Section are reasonable in light of Owner's
agreement to allow Manager to manage Hotels and Owner's intended expansion plans
for developing Hotels during the Term. In addition to all of the other rights
and remedies therefor, each of Manager and Owner shall be entitled to injunctive
relief if either party violates the terms of this Agreement.
7 Severability. If any provision hereof is found to be invalid or
------------
unenforceable, all the other provisions shall remain in full force and effect to
the maximum extent permitted by law and such invalid or unenforceable provisions
shall be interpreted and deemed to be modified so as to give effect to the
intent and purpose thereof to the fullest extent permitted by law.
8 Notices. All notices provided or permitted to be given under this
-------
Agreement must be in writing and may be served by depositing the notice in the
United States Mail addressed to the party to be notified, postage prepaid,
registered or certified with return receipt requested; by delivering the notice
in person to such party or by overnight courier service; or by facsimile
transmission. Notice given in accordance herewith shall be effective when
delivered to the address of the addressee. The address for notices for each
party hereto is set forth under its signature to this
4
<PAGE>
Agreement. Any party may change its address for notice by giving three-days'
prior written notice thereof to the other parties.
9 Binding Effect; Governing Law. This Agreement shall be binding on Owner
-----------------------------
and Manager and their respective successors and assigns. Except as provided
below, neither Owner nor Manager may assign its rights or delegate its
obligations hereunder without the prior written consent of the other, which may
be withheld or granted in its sole discretion. Owner may, without Manager's
consent, assign all of its rights and obligations hereunder to Homegate
Hospitality, Inc. ("Homegate") in a merger in which Owner merges with Homegate
--------
in connection with an initial public offering of the common stock of Homegate,
in which case, Owner shall be relieved of all obligations and liabilities
hereunder. Manager may, without Owner's consent, assign its interest in this
Agreement to any Affiliate of Manager having full right, power and authority to
provide to Owner all services and organizational expertise (including applicable
trademarks, service marks and marketing services) which Manager is required to
provide hereunder, provided that all then-existing Management Agreements are
assigned to such Affiliate or (b) any assignee which also acquires all, or
substantially all, of the assets of Manager (including all then-existing
Management Agreements) and assumes its obligation, provided such assignee is
financially responsible and capable of performing the duties of manager
hereunder. This Agreement shall be governed by Texas law.
10 Grant of Right of First Refusal. As an inducement to Manager to enter
into this Agreement, Owner hereby agrees to cause Wyndham Hotel Corporation to
be granted, prior to or concurrently with the closing of any initial public
offering of equity securities of Homegate, a right of first refusal to acquire
the equity interest in Homegate then or thereafter beneficially held by CRI/ESH
Partners, L.P., Harlan Crow or any affiliate of either of them or of Crow
Family, Inc. (for purposes hereof, such affiliates are not to include Homegate,
JMI/Greystar Extended Stay Partners, L.P., or JMI/Greystar Extended Stay
Partners, L.P.'s affiliates). Such right of first refusal shall be exercisable
from and after such time as the securities covered thereby are registered for
sale pursuant to the Securities Act of 1933, as amended, or otherwise are
eligible for sale on the open market, and such right of first refusal otherwise
shall be on such terms as Wyndham Hotel Corporation and such parties may
agree.
Executed as of the date first written above.
EXTENDED STAY LIMITED PARTNERSHIP, a Delaware
limited partnership
By: ESH Partners, L.P., a Texas limited
partnership and its general partner
By: Crow Family, Inc.
By:
Name:
Its:
Address:
5
<PAGE>
WYNDHAM MANAGEMENT CORPORATION
By:_
Name:_
Title:_
Address:
CONSENT
-------
This undersigned hereby consents to and agrees to be bound by the terms of
Section 6 hereof.
WYNDHAM HOTEL CORPORATION
By:_
Name:_
Title:_
6
<PAGE>
EXHIBIT B
---------
THE PROTECTED STATES
Alabama Mississippi
Arizona Missouri
Arkansas Nevada
California New Mexico
Colorado North Carolina
Florida Ohio
Georgia Oklahoma
Illinois Oregon
Indiana South Carolina
Iowa Tennessee
Kansas Texas
Louisiana Utah
Minnesota Virginia
Washington
B-1
<PAGE>
Standard Form
Extended Stay Program
____________________
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT ("Agreement") is made and entered into as of
_____________, 199__ by and between EXTENDED STAY LIMITED PARTNERSHIP, a
Delaware limited partnership, whose address is ____________________________
___________________ (the "Owner") and WYNDHAM MANAGEMENT CORPORATION, a Delaware
corporation, whose address is 2001 Bryan Tower, 2001 Bryan Street, Suite 2300,
Dallas, Texas 75201 (the "Manager").
RECITALS:
- --------
Owner owns _________________________ title to the Site (hereinafter
defined) and all improvements now situated thereon.
Owner desires to retain Manager's services in managing and operating the
hotel situated on the Site and Manager is willing to provide such services, all
upon the terms and conditions set forth in this Agreement. For and in
consideration of the premises and of the mutual covenants and agreements set
forth herein, Owner and Manager agree as follows:
ARTICLE I
DEFINITIONS
-----------
Section 1.1 Defined Terms. Certain terms in this Agreement have been
----------- -------------
given specially defined meanings. The defined terms may be used in the singular
or plural or in varying tenses or forms, but such variations shall not affect
their defined meaning so long as they are written with initial capital letters.
Section 1.2 Definitions. As used herein, the following terms shall have
----------- -----------
the respective meanings indicated:
Adjusted Owner's Yield on Cost for any period shall mean (i) if Owner's
------------------------------
Yield on Cost for such period is less than (13%), the Owner's Yield on Cost for
such period; (ii) if Owner's Yield on Cost for any period equals or exceeds
thirteen percent (13%) but is less than sixteen percent (16%), a fraction,
expressed as a percentage, the numerator of which shall be the amount determined
by subtracting from Operating Cash Flow for such period an amount equal to one
percent (1%) of Gross Revenues for such period, and the denominator of which
shall be the average Owner's Cost for such period; and (iii) if Owner's Yield on
Cost for any period equals or exceeds sixteen percent (16%),
<PAGE>
Management Agreement
a fraction, expressed as a percentage, the numerator of which shall be the
amount determined by subtracting from Operating Cash Flow for such period an
amount equal to two percent (2%) of Gross Revenues for such period, and the
denominator of which shall be the sum of the average Owner's Cost for such
period. In the case of any period of less than twelve (12) calendar months, the
result of the calculation pursuant to the preceding sentence shall be adjusted
to an annualized percentage based on a full calendar year. The following table
illustrates the foregoing provisions:
Owner's Yield on Cost Adjusted Owner's Yield on
for applicable period* Cost for applicable period*
---------------------- ---------------------------
Less than 13% Owner's Yield on Cost (i.e.,
no adjustment)
13% or greater (Operating Cash Flow for
but less than 16% such period minus 1%
of Gross Revenues
for such period)
------------------------
Average Owner's Cost for
such period
16% or greater (Operating Cash Flow for
such period minus 2%
of Gross Revenues
for such period)
------------------------
Average Owner's Cost for
such period
_________________
* To be annualized in respect of any period of less than twelve (12)
calendar months.
Affiliate shall mean any person or entity that directly or indirectly
---------
through one or more intermediaries, controls, is controlled by or is under
common control with another person or entity. The term "control" shall mean the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of voting
securities, by contract or otherwise, and shall in any event include the
ownership or power to vote fifty percent (50%) or more of the outstanding equity
interests of such other person.
-2-
<PAGE>
Management Agreement
Notwithstanding the foregoing, for purposes of this Agreement, Owner and Manager
in any event shall not be "Affiliates" of one another.
Annual Plan shall mean an annual plan for the operation of the Project
-----------
prepared by the Manager and approved by Owner in accordance with Section 6.1,
-----------
consisting of the Operating Budget, Capital Improvements Budget and FF&E Budget
and a description or narrative which shall reasonably describe the methods to be
employed and the strategies to be adopted in order to achieve the results set
forth in such Budgets.
Average Monthly Management Fee shall mean (a) after this Agreement has been
------------------------------
in effect for a period of at least twelve (12) calendar months following the
Opening Date, one-twelfth (1/12) of the total Management Fees for the twelve
(12) full calendar months immediately preceding the event requiring a
determination of the Average Monthly Management Fee or (b) prior to such time as
this Agreement has been in effect for twelve (12) calendar months following the
Opening Date, the monthly average of the Management Fees for the number of full
calendar months following the Opening Date during which this Agreement has been
in effect.
Base Fee in respect of any period shall mean an amount equal to three
--------
percent (3%) of Gross Revenues for such period.
Capital Improvements shall mean any and all major alterations and
--------------------
improvements to the Hotel and all major repairs and replacements to the
structural, mechanical, electrical, HVAC, plumbing or vertical transportation
elements of the Hotel other than certain non-routine repairs and maintenance to
the Project which are normally capitalized under generally accepted accounting
principles.
Capital Improvements Budget shall mean each annual budget prepared by the
---------------------------
Manager and approved by Owner as part of the Annual Plan, reflecting the
estimated costs for all Capital Improvements which in the reasonable opinion of
Manager are necessary to keep and maintain the Project during the applicable
Operating Year in good condition and in keeping with the Operating Standards.
Capital Transaction shall mean any sale, transfer or other disposition for
-------------------
value or any refinancing of all or any substantial part of the Project.
Competing Extended-Stay Project shall mean a lodging facility that is
-------------------------------
similar in operation to the Hotel and whose primary business is the leasing or
providing of hotel rooms to guests for
-3-
<PAGE>
Management Agreement
average stays of one week or more for a price that is within twenty percent
(20%) of the average weekly rate for the Hotel.
Condemnation shall mean the acquisition of all or any portion of the
------------
Project by any Governmental Authority having the power of condemnation or
eminent domain, by compulsory acquisition, conveyance in lieu of or under threat
of condemnation or like procedure.
Cumulative CPI Percentage, as of any adjustment date for the amounts
-------------------------
referred to in Section 7.5, shall mean a fraction (expressed as a percentage),
-----------
the numerator of which is the Consumer Price Index (all items) for all Urban
Consumers, All Cities (1982-84 = 100) (the "CPI Index") as of such adjustment
date and the denominator of which is the CPI Index as of the end of the first
Operating Year.
Default Rate shall mean the lesser of (i) the Prime Rate plus four percent
------------
(4%) or (ii) the highest lawful rate permitted by applicable Legal Requirements.
Demonstrable Negligence shall have the meaning provided therefor in Section
----------------------- -------
8.4(a).
- ------
Effective Date shall mean the date on which Manager commences performing
--------------
Preopening Services pursuant to Section 3.5 in preparation for the Opening Date.
-----------
Executive Personnel shall mean the general manager and any other key
-------------------
executive of the Project designated by Manager.
Fair Market Share Penetration refers to the performance of the Project,
-----------------------------
measured on the basis of revenue per available room ("REVPAR"), relative to its
competition in its market area. REVPAR is defined as net room revenue (defined
------
according to the Uniform System of Accounts), divided by the number of
annualized rooms available in the Project. The Project's Fair Market Share
Penetration shall be the ratio of the Project REVPAR, divided by the market
average REVPAR for the defined competitive set. For purposes of this Agreement,
the defined competitive set shall include the Project and the following hotels:
Hotel Rooms
- ------------------ -------------
- ------------------ -------------
-4-
<PAGE>
Management Agreement
-------------------- --------
-------------------- --------
The competitive set may be redefined from time to time by mutual agreement of
Owner and Manager.
Fixed Charges shall have the meaning provided therefor in the Uniform
-------------
System of Accounts.
Force Majeure shall mean acts of God, war, insurrection, civil commotion,
-------------
riots, strikes, lockouts, embargoes, shortages of labor or materials specified
or reasonably necessary in connection with the construction, refurbishment,
equipping, ownership or management of the Project, fire, unavoidable casualties,
failure of any applicable Governmental Authority to issue required Governmental
Permits and any other occurrence, event or condition (excluding financial
difficulty) beyond the reasonable control of Owner or Manager, whichever shall
be applicable.
FF&E shall mean all furniture, fixtures, furnishings and specialized
----
equipment and systems (exclusive of Operating Equipment) necessary or customary
(now or in the future) in the reasonable opinion of Manager in order to operate
the Project in accordance with the terms of this Agreement and the Operating
Standards, including but not limited to all equipment required for the operation
of kitchens, laundries, dry cleaning facilities and bars, special lighting and
other equipment, signs, carpets, drapes, shades, tapestries, pictures,
paintings, beds, mattresses, chairs, desks, tables, sofas, wall coverings,
televisions, radios, intercoms, telephones and office equipment and machinery.
FF&E Budget shall mean each annual budget prepared by the Manager and
-----------
approved by Owner as part of the Annual Plan, reflecting the estimated costs and
expenses for all FF&E which in the reasonable opinion of Manager are necessary
or customary in order to operate the Project during the applicable Operating
Year in accordance with the terms of this Agreement and the Operating Standards.
Governmental Authority shall mean the United States of America, State of
----------------------
______, County of __________, City of _______________ and any political or other
subdivision of any of the foregoing, and any agency, department, commission,
board, bureau, court or instrumentality of any of them which now or hereafter
has jurisdiction over the Owner, the Manager, any part of the Project or
operation or management of the Project.
-5-
<PAGE>
Management Agreement
Governmental Permits shall mean all certificates, licenses and permits from
--------------------
any Governmental Authority required to evidence full compliance by Owner or
Manager with all Legal Requirements or required to evidence conformance of the
Project with all Legal Requirements.
Gross Revenues in respect of any period shall mean all revenues, receipts
--------------
and income of Owner of every kind derived directly or indirectly during such
period from all or any part of the Project, as finally determined on an accrual
basis in accordance with the Uniform System of Accounts and generally accepted
accounting principles consistently applied, including but not limited to (i) all
rentals and charges for guest rooms, suites and public rooms, including but not
limited to all charges for room reservations and deposits not refunded to
guests; (ii) all sales or leases of miscellaneous and sundry merchandise and
services including but not limited to laundry, valet, garage, parking,
telephone, telex, telecopy, check room, vault and other miscellaneous services,
cover and minimum charges for guest entertainment, fees charged for the
temporary use of facilities at the Project, all sales through vending machines
and all other receipts from business conducted by, through or under Manager at,
in, on, about or from the Project; (iii) all business interruption insurance
awards received in respect of the Project; (iv) Condemnation awards for
temporary use of the Project; and (v) all rentals, fees, commissions,
concessions and other payments derived from lessees, licensees and
concessionaires. Gross Revenues for any such period shall not include:
(1) Excise, sales and use taxes or similar impositions collected directly
from patrons or guests or included as part of the sales price of any goods or
services and paid to any Governmental Authority, such as gross receipts,
admission or similar equivalent taxes;
(2) Sales and other receipts of tenants, licensees and concessionaires,
except to the extent payable as rent under a lease or occupancy agreement;
(3) Insurance proceeds (subject, however, to the inclusion of business
interruption insurance awards as provided in clause (iv) above);
(4) Condemnation awards, except as provided in clause (v) above;
(5) Proceeds from sale or refinancing of the Project or any part thereof;
(6) With respect to in-room video services and long distance telephone
service, charges payable by guests directly to the providers of such services
(but Gross Revenues shall include amounts payable to Owner by the providers of
such services); and
(7) Interest on any escrow accounts maintained in respect of the Project.
-6-
<PAGE>
Management Agreement
Gross Room Revenues in respect of any period shall mean all revenues
-------------------
derived during such period, as finally determined on an accrual basis in
accordance with the Uniform System of Accounts and generally accepted accounting
principles consistently applied, from (i) rentals and charges for guest rooms
and suites ("Rooms"); (ii) all business interruption insurance awards in respect
of the Rooms; and (iii) Condemnation awards for temporary use of the Rooms.
Hazardous Materials shall mean (i) any "hazardous waste" as defined by the
-------------------
Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et seq.),
-- ---
as amended from time to time, and regulations promulgated thereunder; (ii) any
"hazardous substance" as defined by the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et seq.), as
-- ---
amended from time to time, and regulations promulgated thereunder (including
petroleum-based products as described therein); (iii) asbestos in any quantity
or form which would subject it to regulation under any applicable environmental
law; (iv) polychlorinated biphenyls; (v) any substance, the presence of which on
the Project is prohibited by any Legal Requirements; (vi) underground storage
tanks; and (vii) any other substance which by any Legal Requirements requires
special handling in its collection, storage, treatment or disposal. In no
event, however, shall the term "Hazardous Materials" include (1) chemicals
routinely used in office areas or (2) janitorial supplies, cleaning fluids or
chemicals necessary for the day-to-day operation or other maintenance of the
Project if the disposition, handling, storage or quantity of the items described
in (1) and (2) herein are at all times in compliance with all applicable Legal
Requirements.
Hazardous Materials Contamination shall mean the contamination (whether
---------------------------------
presently existing or hereafter occurring) of the improvements, facilities,
soil, groundwater, air or other elements on or of the Project by Hazardous
Materials, or the contamination of the buildings, facilities, soil, groundwater,
air or other elements on or of any other property as a result of Hazardous
Materials at any time (whether before or after the date of this Management
Agreement) emanating from the Project.
Hotel shall mean and include (i) the hotel situated on the Site, all
-----
facilities therein and all related improvements, equipment and facilities and
(ii) all FF&E, Inventories and Operating Equipment now or hereafter placed or
installed therein.
Impositions shall mean all real estate, personal property, utility,
-----------
business or occupation taxes that cannot be passed along to customers of the
Project and other taxes (other than income and payroll), imposed by any
Governmental Authority which at any time may be assessed, levied or imposed on
or with respect to the Project.
-7-
<PAGE>
Management Agreement
Incentive Fee in respect of any period shall mean an amount equal to (i)
-------------
three percent (3%) of Gross Revenues if the Adjusted Owner's Yield on Cost for
such period equals or exceeds sixteen percent (16%), (ii) two percent (2%) of
Gross Revenues if the Adjusted Owner's Yield on Cost for such period equals or
exceeds thirteen percent (13%) but is less than sixteen percent (16%) or (iii)
one percent (1%) of Gross Revenues if the Adjusted Owner's Yield on Cost for
such period equals or exceeds ten percent (10%) but is less than thirteen
percent (13%).
Independent Auditor shall mean a national firm of independent certified
-------------------
public accountants having hotel experience selected by Manager from time to time
and approved by Owner, such approval not to be unreasonably withheld or delayed.
Inventories shall mean all fuel, soap, light bulbs, mechanical supplies,
-----------
cleaning supplies, stationery, paper supplies and other similar consumable and
expendable items necessary or customary (now or in the future) in the reasonable
opinion of Manager in order to operate the Project in accordance with the terms
of this Agreement and the Operating Standards.
Legal Requirements shall mean any law, ordinance, order, rule or regulation
------------------
of any Governmental Authority and any requirement, term or condition contained
in any restriction or restrictive covenant affecting Owner, Manager, the Project
or the construction or operation of the Project.
Management Fee in respect of any period shall mean the sum of the Base Fee
--------------
and the Incentive Fee payable for such period.
Marketing Services shall have the meaning provided therefor in Section 7.4.
------------------ -----------
Mortgage shall mean any mortgage or deed of trust encumbering all or any
--------
portion of the Project, whether now in existence or hereafter created.
Mortgagee shall mean the mortgagee or beneficiary (whether one or more)
---------
under any Mortgage.
Opening Date shall mean the date on which the Hotel is first open to the
------------
public for business.
Operating Accounts shall mean one or more accounts (as Owner may elect)
------------------
with a bank or banks designated by Owner and approved by Manager, such approval
not to be unreasonably withheld or delayed, bearing a name identifying the
Project and styled Operating Account, into which all funds advanced to the
Project by Owner as working capital or otherwise derived from the
-8-
<PAGE>
Management Agreement
operation of the Project shall be deposited and from which sums shall be
withdrawn in accordance with this Agreement. Unless prohibited by the terms of
a Mortgage, the funds advanced by Owner for the benefit of, or derived from the
operation of, the Project and deposited in such account or accounts may be
commingled with funds advanced by Owner for, or derived from the operation of,
other hotels that are similar in operation to the Hotel, are managed by Manager
and are owned or franchised to third parties by Owner.
Operating Budget shall mean an annual budget prepared by the Manager and
----------------
approved by Owner as part of the Annual Plan, reflecting in reasonable detail
the projected or estimated revenues and expenses in respect of the Project for
the applicable Operating Year.
Operating Cash Flow in respect of any period shall mean the amount by which
-------------------
gross cash receipts from Project operations for such period (excluding proceeds
of any Capital Transaction or any sale of Operating Equipment, FF&E or
Inventories) exceed the aggregate of, without duplication, (a) all operating
costs and expenses of the Project paid in cash during such period, including
amounts (other than the Incentive Fee) payable to Manager pursuant to this
Agreement, (b) Owner's administrative and other partnership expenses provided
for in the Annual Plan paid during such period, (c) Fixed Charges (other than
the Incentive Fee and interest or principal payments on Mortgage or other
indebtedness) paid during such period, (d) amounts added during such period to
the Reserve, to any reserve required by a Mortgagee, including a reserve for
taxes or insurance, or to any other reserve deemed reasonably necessary by Owner
and Manager and (e) expenditures during such period for FF&E and Regular Capital
Improvements to the extent not funded out of the Reserve or any other reserve
required by a Mortgagee, but funded from operations. The proceeds from the
elimination or reduction of any such reserve shall be added to Operating Cash
Flow for the period during which such elimination or reduction occurs. There
shall not be deducted in computing Operating Cash Flow depreciation,
amortization or any other non-cash charge.
Operating Equipment shall mean all blankets, linens, uniforms, silver,
-------------------
china, glassware, crockery, kitchen utensils, cleaning equipment or any other
similar items necessary or customary (now or in the future) in the reasonable
opinion of Manager in order to operate the Project in accordance with the terms
of this Agreement and the Operating Standards.
Operating Standards shall mean the operation of the Project in a manner
-------------------
consistent with (i) the condition of the Project as of the Opening Date (or,
after the completion of any renovation specifically contemplated by this
Agreement, the condition of the Project as of the date of completion of such
renovation) and the condition and level of operation of extended stay hotels of
comparable class and standing to the Project, (ii) then current market
conditions regarding rental rates and lease terms and conditions with respect to
extended stay hotels of comparable class and
-9-
<PAGE>
Management Agreement
standing to the Project, and (iii) then current prudent business and management
practices applicable to the leasing, operation, repair, maintenance and
management of a hotel comparable in size, character and location to the Project,
including those concerning compliance with applicable Legal Requirements.
Operating Year shall mean each twelve (12) month period during the Term
--------------
commencing on January 1 and ending on December 31, except that the first
Operating Year shall be that period commencing on the Opening Date and ending on
the next succeeding December 31. In the event that this Agreement shall
terminate on a date other than December 31, the last Operating Year hereunder
shall end on the date of termination.
Owner's Cost, as of any date, shall mean an amount equal to the sum of,
------------
without duplication, (a) the purchase price for the acquisition of the Site by
Owner and other direct costs and expenses incurred by Owner in connection with
the acquisition of the Site and any improvements thereon, (b) the direct costs
and expenses incurred by Owner in connection with, if applicable, the design and
construction or, if applicable, the initial refurbishment and renovation of the
Hotel on the Site, (c) amounts expended by Owner through such date to fund (i)
pre-opening expenses and operating working capital in respect of the Project and
(ii) any reserve required by a Mortgagee and any other reserve reasonably deemed
necessary by Owner, (d) the cost of Special Capital Improvements and (e) the
cost of Regular Capital Improvements and additions to FF&E in excess of those
funded out of the Reserve or any other reserve required by a Mortgagee or
directly from operations. Owner's Cost shall include contributions made to fund
interest payments on Mortgage indebtedness until the earlier of the date that
(i) is six (6) months after the Opening Date or (ii) the Project first achieves
occupancy of eighty percent (80%) of guest rooms. To the extent the Project
consists of one or more significant assets in addition to the Hotel, and the
Hotel or one of such other assets is sold, Owner's Cost shall be reduced by the
net sales proceeds (after deducting all closing costs) reasonably allocable to
the asset that is sold. In the event that the Project is transferred or sold to
a party other than an Affiliate of Owner and this Agreement is not terminated in
connection therewith as herein provided, the portion of the Owner's Cost
described in clauses (a) and (b) shall thereafter be fixed at the amount thereof
as it existed immediately prior to such transfer or sale.
Owner's Yield on Cost, for any period, shall mean a fraction, expressed as
---------------------
a percentage, the numerator of which shall be the Operating Cash Flow for such
period and the denominator of which shall be the average Owner's Cost for such
period. In the case of any period of less than twelve (12) calendar months, the
result of the calculation pursuant to the preceding sentence shall be adjusted
to an annualized percentage based on a full calendar year.
-10-
<PAGE>
Management Agreement
Portfolio Transaction shall mean Manager's or its Affiliate's direct or
---------------------
indirect acquisition (i) of a controlling interest in another person which owns
or manages hotel facilities which include Competing Extended-Stay Projects or
(ii) in a single transaction of a controlling interest in hotel facilities which
include Competing Extended-Stay Projects.
Preopening Budget shall have the meaning provided therefor in Section 3.5.
----------------- -----------
Preopening Period shall have the meaning provided therefor in Section 3.5.
----------------- -----------
Preopening Services shall have the meaning provided therefor in Section
------------------- -------
3.5.
Prime Rate shall mean the rate that is announced from time to time by
----------
Citibank, N.A. as its "prime", "base" or similar reference rate of interest for
commercial loans.
Project shall mean the Hotel and the Site.
-------
Regular Capital Improvements shall mean all Capital Improvements other than
----------------------------
Special Capital Improvements (but such term shall not include the initial
construction of the Hotel on the Site).
Reimbursable Expenses shall mean all travel, lodging, entertainment,
---------------------
telephone, telecopy, postage, courier, delivery, employee training and other
expenses incurred by Manager which are directly related to its performance of
this Agreement, other than those incurred in connection with the performance of
Marketing Services and any national sales office services provided by Manager.
The Reimbursable Expenses projected for each Operating Year shall be expressly
set forth in the Annual Plan. Reimbursable Expenses shall not include any of
Manager's corporate office overhead expenses, except as may otherwise be
approved in the Annual Plan.
Reserve shall mean the reserve established pursuant to Section 5.2(b) of
------- --------------
this Agreement to be deposited in one or more accounts with a bank or banks
designated by Owner and approved by Manager, (such approval not to be
unreasonably withheld or delayed), or with a bank or banks designated by any
Mortgagee, and in either case such account shall bear the name of the Project
and styled "Repairs and Replacement Account." Unless prohibited by the terms of
a Mortgage, the funds deposited in the Repairs and Replacement Account may be
commingled with funds advanced for similar purposes for the benefit of other
hotels that are similar in operation to the Hotel, are managed by Manager and
are owned or franchised to third parties by Owner.
-11-
<PAGE>
Management Agreement
Restoration shall mean the repairing, rebuilding and replacing of the Hotel
-----------
upon the destruction or damage of the Project or any part thereof or upon the
taking of the Project or any part thereof by Condemnation to a value, condition
and character substantially the same as (in the case of damage or destruction)
or as near as possible to (in the event of Condemnation) the value, condition
and character of the Project immediately prior to such damage, destruction or
Condemnation.
Securities Act shall mean the Securities Act of 1933, as amended, or any
--------------
successor federal statute, and the rules and regulations of the Securities and
Exchange Commission (or successor agency) thereunder, all as the same shall be
in effect at the applicable time.
Site shall mean that certain tract of land located in the State of _____,
----
County of _______, City of _____________, more particularly described in
Exhibit A to this Agreement.
- ------- -
Special Capital Improvements shall mean Capital Improvements made in
----------------------------
connection with a major addition to, or expansion or renovation of, the Project
(but such term shall not include the initial construction of the Hotel on the
Site).
Term shall mean that period commencing on the Effective Date and continuing
----
through and including the tenth anniversary of the Opening Date, unless this
Agreement shall be sooner terminated or extended as herein provided, in which
case the word "Term" shall mean such lesser or extended period of time.
Termination Fee, in respect of any termination of this Agreement pursuant
---------------
to which a Termination Fee is payable, shall mean an amount equal to the
following:
Date of Termination Termination Fee
------------------- ---------------
Opening Date through 48 x Average Monthly
sixth anniversary of Management Fee
the Opening Date
Following sixth anniversary * x Average Monthly
of the Opening Date Management Fee
_______________
*Number of calendar months (or parts thereof) remaining after such termination
until the end of the original Term or any renewal Term (as applicable).
-12-
<PAGE>
Management Agreement
Total Income Before Fixed Charges for any period shall mean an amount equal
---------------------------------
to total income before fixed charges for such period as calculated pursuant to
the Uniform System of Accounts.
Uniform System of Accounts shall mean the Uniform System of Accounts for
--------------------------
Hotels, Eighth Revised Edition, 1986, as adopted by the American Hotel and Motel
Association and all future amendments and supplements thereto approved by
Manager and Owner (such approval not to be unreasonably withheld or delayed).
ARTICLE II
APPOINTMENT OF MANAGER AND RENEWAL RIGHTS
------------------------------------------
Section 2.1 Appointment of Manager. Owner hereby appoints Manager as
----------- ----------------------
its sole and exclusive agent to manage and operate the Project during the Term
in accordance with the Operating Standards and the terms and conditions set
forth in this Agreement. Manager agrees to manage the Project during the Term
as the agent of Owner in accordance with the Operating Standards and the terms
and conditions of this Agreement. Owner and Manager agree that the agency
created by this Agreement is coupled with an interest and is terminable only in
accordance with the express provisions of this Agreement.
Section 2.2 Renewal of Term. Upon expiration of the original Term of this
----------- ---------------
Agreement, it shall be automatically renewed from month to month thereafter
unless terminated by Owner or Manager effective at the end of such original Term
or any such subsequent month by notice in writing to the other given not later
than ninety (90) days prior to the end of the original Term or thirty (30) days
prior to the end of such subsequent month, as the case may be. Unless otherwise
agreed, upon the effective date of any renewal, the Term of this Agreement and
all other terms, covenants and conditions set forth in this Agreement shall be
automatically extended to the expiration of the applicable renewal term.
Section 2.3 Conformity to Annual Plan. Manager will use all commercially
----------- -------------------------
reasonable efforts to cause the Project to be operated in accordance with the
Annual Plan. Owner and Manager acknowledge, however, that the Annual Plan is a
budget based upon assumptions believed to be reasonable at the time of its
preparation and, as such, is only an estimate of the results of operation and
other activity with respect to the Project. Manager cannot guarantee that the
actual operation of the Project will conform to the Annual Plan or that the
financial results reflected therein will actually be realized. Notwithstanding
any other provision of this Agreement, any and all references
-13-
<PAGE>
Management Agreement
herein to the Annual Plan (including the Preopening Budget during the Preopening
Period as provided in Section 3.5) shall be qualified by this Section 2.3.
----------- -----------
ARTICLE III
OPERATION OF THE PROJECT
------------------------
Section 3.1 Duties and Authority of Manager. Subject to and consistent
----------- -------------------------------
with the Operating Standards and the Annual Plan, Manager shall have exclusive
supervision, control and discretion in the management, maintenance and operation
of the Project, including, but not limited to, the right, power and authority to
(a) enter into such contracts and agreements in the name and at the expense of
Owner as Manager may deem to be reasonably necessary or advisable in connection
with the management, maintenance and operation of the Project, provided,
however, that Manager shall not enter into any such contract or agreement
without the approval of Owner if it obligates Owner for more than Twenty-Five
Thousand Dollars ($25,000) or has a term, not cancelable upon not more than
ninety (90) days' notice without payment of any cancellation fee, of more than
one (1) year, unless such contract or agreement has previously been approved by
Owner as part of the Annual Plan; (b) determine and implement terms of
admittance, charges for rooms and commercial space, which right shall
specifically allow Manager to charge varying rates to different customers or
groups of customers and allow Manager, in the exercise of reasonable and sound
business judgment consistent with the Operating Standards, to permit persons to
occupy rooms or suites at the Project at rates lower than published rates or
free of charge; (c) determine and implement all phases of advertising, promotion
and publicity relating to the Project; (d) determine and implement all
employment policies (including salaries, wages, fringe benefits and other
compensation, the hiring and discharge of employees and the establishment of
employee retirement, severance and other benefit plans); (e) determine and
implement credit policies (including arrangements with credit card
organizations); (f) receive, hold and disburse funds, maintain bank accounts,
procure Inventories, Operating Equipment, supplies and services; (g) engage
independent contractors to provide legal, accounting or other professional or
technical services in connection with the operation of the Project; (h)
initiate, settle or otherwise dispose of litigation or claims which might give
rise to litigation, including the adjustment of insurance claims, provided,
however, that Manager shall not have such authority without the approval of
Owner with respect to any litigation or claim where the amount in controversy
exceeds Fifty Thousand Dollars ($50,000); and (i) manage and direct generally
all activities incidental to the operation of the Project in the ordinary course
of business. Manager shall operate the Project in a businesslike and efficient
manner and shall operate the Project solely for the operation of a hotel
business and for such other activities which are customary and usual in
connection therewith. Except as otherwise expressly provided in this Agreement,
to the extent that Owner's approval is required for any matter in connection
with the foregoing or any other
-14-
<PAGE>
Management Agreement
matter in connection with this Agreement, Owner shall approve or disapprove such
matter within fifteen (15) business days after being notified thereof by
Manager; provided, however, that Owner shall approve or disapprove any such
matter involving pending litigation concerning the Project within ten (10)
business days after being notified thereof by Manager. If Owner does not
approve or disapprove any such matter within the specified time period, Owner
shall be deemed to have approved such matter.
Section 3.2 Working Capital. Owner shall at all times cause sufficient
----------- ---------------
funds to be on hand in the Operating Accounts to assure the timely payment of
all current liabilities of the Project, including but not limited to all items
entering into the calculation of Total Income Before Fixed Charges, all other
monthly costs and expenses incurred in connection with the Project pursuant to
this Agreement and the performance by Manager of its obligations under this
Agreement, all fees, charges and reimbursements payable monthly to Manager
hereunder and all amounts required hereunder to be transferred monthly into the
Reserve or any other reserve required by a Mortgagee. In no event shall Owner
permit the balance in the Operating Accounts to be less than an amount equal to
the estimated average monthly operating expenses of the Project as reflected in
the then current Operating Budget. From time to time, upon five (5) days prior
written notice from Manager that such funds are required, Owner shall furnish to
Manager funds which Manager deems reasonably necessary to assure that the
Project shall have adequate working capital as herein provided.
Section 3.3 Owner to Bear All Expenses. In performing its duties under
----------- --------------------------
any provision of this Agreement and in managing and operating the Project,
Manager shall act solely for the account of and as the agent of Owner. All
expenses incurred by Manager in accordance with Section 2.3 in performing its
-----------
duties hereunder and in managing and operating the Project shall be borne
exclusively by Owner. To the extent that the funds necessary therefor are not
generated by the operation of the Project, they shall be promptly supplied by
Owner in the manner provided in Section 3.2 above. Manager shall in no event be
-----------
required to advance any of its funds or utilize Manager's credit for the
operation of the Project, nor shall Manager be required to incur any liability
in connection therewith, unless Owner shall have furnished Manager with funds
necessary for the discharge thereof.
Section 3.4 Transactions with Affiliates. With Owner's prior consent,
----------- ----------------------------
Manager may engage one or more of its Affiliates or other related parties to
furnish goods or services to the Project, provided, however, that the terms of
any such arrangement shall be no less favorable in any material respect to the
Project than those reasonably obtainable from an unrelated party. Manager will
promptly notify Owner of any such engagement of Manager's Affiliates. Amounts
payable
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Management Agreement
pursuant to the arrangements described in this Section 3.4 shall be in addition
-----------
to the Management Fee and other amounts payable to Manager under this Agreement.
Section 3.5 Preopening Services. It is contemplated that certain
----------- -------------------
activities must be undertaken prior to the Opening Date so that the Project can
function in an orderly and businesslike manner on the Opening Date. To the
extent and in the manner contemplated by the Preopening Budget, Manager shall,
prior to the Opening Date, and subject to the same Owner approval requirements
as apply hereunder after the Opening Date, (i) plan and implement a marketing
program for the Project, including advertising, public relations and related
activities with respect to the opening of the Project, (ii) recruit, employ and
train the employees necessary for operation of the Project, (iii) assist and
advise in applying for and obtaining Governmental Permits required in connection
with the operation of the Project, and (iv) render such other services as in the
judgment of Manager are reasonably necessary to prepare the Hotel for operation
on the Opening Date. The foregoing services are referred to collectively as
"Preopening Services". During the period from the Effective Date to the Opening
- --------------------
Date (the "Preopening Period"), Manager's duties and responsibilities under this
-----------------
Agreement with respect to the management of the Project and operation of the
Hotel shall be confined to performing Preopening Services, notwithstanding any
other provision in this Agreement to the contrary. The costs and expenses
incurred by Manager in accordance with Section 2.3 in connection with the
Preopening Services shall be at Owner's sole cost and expense, and Owner shall
furnish all funds required therefor. Owner shall give Manager not less than one
hundred twenty (120) days' advance notice of the Opening Date, and Manager
thereafter will notify Owner of the Effective Date. Manager shall submit to
Owner not less than thirty (30) days prior to the Effective Date, either
separately or as part of the Annual Plan for the first Operating Year, a
proposed budget for the Preopening Period (the "Preopening Budget"), and such
-----------------
budget shall be considered the "Annual Plan" for the Preopening Period for
purposes of this Agreement, the approval or disapproval of which by Owner shall
be governed by Section 6.1.
-----------
Section 3.6 Cooperation with Owner. Manager shall cooperate in keeping
----------- ----------------------
Owner informed about the operation of the Project, including providing such
information from time to time as Owner may reasonably request, and Manager shall
also meet with Owner's representatives and Mortgagees, from time to time, upon
reasonable request.
Section 3.7 Non-Competition.
----------- ---------------
(a) During the Term, without the prior written consent of Owner, Manager
shall not (nor will it permit its Affiliates to) acquire any ownership interest
in, loan money to, develop, or provide management services to, any other hotel
which is both (i) operated as an extended stay lodging project similar in
operation, format and quality to the Hotel and (ii) located within a radius of
five
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Management Agreement
(5) miles of the Hotel; provided, however, that Manager may engage in any such
transaction or activity or provide such services in respect of another such
hotel within the five (5)-mile radius if a "Big Six" accounting firm selected by
Manager and Owner determines that the operation of the hotel in question is not
likely to have a material adverse impact on the operation and performance of the
Hotel.
(b) Notwithstanding the provisions of subsection (a) above, so long as
Manager complies with the following provisions of this subsection (b), during
the Term Manager may enter into and consummate one or more Portfolio
Transactions even if the consummation thereof would result in a violation of
subsection (a). If Manager consummates a Portfolio Transaction and the effect
thereof is to violate the provisions of subsection (a), then Manager shall, at
its election, either (i) terminate its business relationship with the Competing
Extended-Stay Project or Projects that were included in such Portfolio
Transaction and that violate such subsection or (ii) terminate this Agreement,
in which case no Termination Fee shall be payable in connection therewith.
Manager shall make such election within thirty (30) days after the consummation
of such Portfolio Transaction, and any termination shall be effective no earlier
than forty-five (45) and no later than ninety (90) days after the date of such
election. Notwithstanding any such election by Manager to terminate this
Agreement, Owner may elect to keep this Agreement in effect by delivering to
Manager written notice of such election no later than thirty (30) days after
receiving notice of Manager's election to terminate, in which case this
Agreement shall not terminate and the provisions of subsection (a) shall be
deemed permanently waived as to the Competing Extended-Stay Project or Projects
that were included in such Portfolio Transaction. Manager shall not be liable
to Owner for damages, and shall not be subject to any equitable remedy, in
respect of any violation of such subsection (a) resulting from the consummation
of a Portfolio Transaction if Manager subsequently complies with such subsection
or terminates this Agreement in accordance with the provisions of this
subsection (b). The termination right provided to Manager under this Section is
in addition and without prejudice to any other right that Manager may have to
terminate this Agreement under any other provision of this Agreement.
ARTICLE IV
PERSONNEL
---------
Section 4.1 Employment of Personnel. Manager shall be responsible for and
----------- -----------------------
shall have the sole and exclusive right to hire, promote, discharge, supervise,
train, transfer and determine the terms of employment of the Executive Personnel
and, through the Executive Personnel, all other administrative, service and
operating employees of the Project; provided, however, that, without
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Management Agreement
restricting Manager's authority to discharge any employee pursuant to the
foregoing, Owner shall have the right to approve the terms of the severance
packages, if any, applicable to all employees, and each employee must be
employed on an "at will" basis unless Owner consents to any different
arrangement. All such employees of the Project shall be employees of Manager or
one of Manager's Affiliates. In addition, Manager may, from time to time,
assign one or more of its employees to the staff of the Project on a full-time,
part-time or temporary basis. Notwithstanding the provisions of this Section
-------
4.1 or any other provision of this Agreement, the responsibility of Manager for
- ---
acts or omissions of Project employees shall not extend beyond responsibility
for acts or omissions of the Executive Personnel. Manager acknowledges,
however, that the Executive Personnel have the duties specified in the first
sentence of this Section 4.1 with respect to other Project employees.
-----------
Section 4.2 Union Negotiations. Manager will negotiate, subject to
----------- ------------------
Owner's right to have a representative present at any time, with any labor union
lawfully entitled to represent employees of the Project. Manager shall not
enter into any collective bargaining agreements or labor contracts with respect
to employees of the Project without the prior written consent of Owner, which
consent shall not be unreasonably withheld or delayed.
Section 4.3 Payment of Employees. Manager shall be entitled to withdraw
----------- --------------------
from the Operating Accounts all wages, salaries, fringe benefits and other
compensation paid or payable with respect to all Project employees and Manager
shall pay such compensation directly to such employees.
Section 4.4 Personnel Accommodations. Manager shall decide which, if any,
----------- ------------------------
of the Executive Personnel shall reside at the Project. Manager shall be
permitted to provide free room and board to one member of the Executive
Personnel and his or her family. In addition, Manager shall be permitted to
provide free accommodations and amenities to Manager's employees and
representatives visiting the Project on a temporary basis in connection with the
management and operation of the Project.
Section 4.5 Employee Health Insurance. Subject to reasonable
----------- -------------------------
availability, Manager shall, at no cost to Manager, be responsible for arranging
health insurance coverage for employees of the Project. Subject to the prior
agreement of Owner and Manager and subject to reimbursement of Manager of all
applicable costs and expenses (including, but not limited to, those associated
with compliance with the Consolidated Omnibus Budget Reconciliation Act of 1985
and an exit premium in connection with the termination of such coverage),
Manager may permit the enrollment of some or all of such employees under health
insurance plans maintained by Manager.
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Management Agreement
ARTICLE V
REPAIRS, MAINTENANCE AND CAPITAL IMPROVEMENTS
---------------------------------------------
Section 5.1 Repairs and Maintenance. During the Term, Manager, at the
----------- -----------------------
expense of Owner, shall take good care of the Project (other than such portions
thereof as are leased to tenants who undertake a duty of repair and maintenance)
and maintain the same in good order and condition and make all repairs thereto
as may be necessary to maintain and operate the Project in accordance with the
Operating Standards; provided, however, that in no event shall the
responsibilities of Manager include the obligation to repair or otherwise
maintain the structural integrity of the Hotel or other matter relating to
defects in design, materials or workmanship in the construction of the Hotel,
all of which shall be the responsibility of Owner.
Section 5.2 Repairs and Replacements.
----------- ------------------------
(a) Manager shall, from funds derived from the operation of the
Project or funds contributed by Owner, establish the Reserve to cover the cost
of (i) Regular Capital Improvements, (ii) additions to and substitutions,
replacements and renewals of FF&E and (iii) certain non-routine repairs and
maintenance to the Project which are normally capitalized under generally
accepted accounting principles such as exterior and interior repainting,
resurfacing building walls, floors, roof and parking areas, replacing folding
walls and similar items. The Reserve shall be maintained in an interest-bearing
account or, if directed by Owner, shall be invested in short-term obligations
approved by Owner. All amounts in the Reserve shall be the property of Owner,
and any interest on amounts in the Reserve shall remain a part of the Reserve.
To the extent that Manager shall be required to pay any income taxes on any
interest paid on amounts in the Reserve, the same shall be payable out of the
Reserve.
(b) Once each calendar month, Manager shall transfer from the
Operating Accounts into the Reserve an amount equal to four percent (4%) of the
Gross Revenues for each such month during the Term; provided, however, that,
unless otherwise agreed by Owner, if the Project is encumbered by a first
Mortgage held by a Mortgagee that is not an Affiliate of Owner, the balance of
the Reserve shall at no time exceed the amount required by such Mortgagee. The
amount to be contributed to the Reserve is an estimate of amounts required for
the purposes set forth in Section 5.2(a). The parties recognize that the
--------------
passage of time or unforeseen events or conditions may render such amount
insufficient to keep the Reserve at the level required to maintain the Project
in good repair and condition in keeping with the Operating Standards and this
Agreement.
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Management Agreement
(c) To the extent funds are available in the Reserve or are otherwise
supplied by Owner, Manager shall from time to time make such Regular Capital
Improvements and additions to and substitutions, replacements and renewals of
FF&E and all such non-routine repairs to the Hotel (as described in Section
-------
5.2(a)(ii) above) in accordance with the Annual Plan or as otherwise approved by
- ----------
Owner and Manager shall be entitled to withdraw funds from the Reserve for such
purpose. Proceeds from the sale of FF&E no longer necessary to the operation of
the Project shall be deposited in the Reserve in addition to the amounts
otherwise required to be deposited into the Reserve under Section 5.2(b). At
--------------
the end of each Operating Year, any amounts remaining in the Reserve shall be
carried forward to the next Operating Year. Any amount remaining in the Reserve
upon termination of this Agreement shall be transferred to Owner.
Section 5.3 Special Capital Improvements.
----------- ----------------------------
(a) Manager shall promptly notify Owner of the need for all Special
Capital Improvements provided for in the Annual Plan then in effect, whereupon
work in respect of such Special Capital Improvements will be promptly commenced
and completed by Owner in accordance with plans, schedules and specifications
therefor approved by Manager. Owner and Manager acknowledge, however, that
Manager's responsibilities and compensation under this Agreement do not include
the supervision or carrying out of the development, or refurbishment or
renovation, of the Project or the provision of any purchasing services in
connection therewith, and that any such services may be provided, if at all,
only pursuant to a separate agreement or agreements providing for the
compensation and other terms and conditions relating to the provision of such
services. Except as otherwise provided herein or in the Annual Plan then in
effect, Manager shall make no Special Capital Improvements in or to the Project
without the express written approval of Owner. Notwithstanding the foregoing, if
Manager shall, at any time, believe that (i) a dangerous condition exists at the
Project, (ii) repairs or Capital Improvements are required to comply with any
applicable Legal Requirement or (iii) expenditures are required to remedy any
condition caused by fire, Act of God, flood, earthquake or other like casualty
or other emergency, Manager shall (except in the case of an emergency) notify
Owner and Manager shall as promptly as possible take all steps and make all
expenditures necessary to remedy or cure any such condition or to comply with
any applicable Legal Requirement. In the case of an emergency, Manager shall
notify Owner as promptly as practicable after the occurrence thereof, but such
notice shall not be required prior to taking such steps or making such
expenditures.
(b) The cost of all Capital Improvements made under this Section
(except as otherwise expressly provided in (a) above) shall be borne and paid
for directly by Owner.
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Management Agreement
Section 5.4 Enforcement of Guaranties and Warranties. Owner shall
----------- ----------------------------------------
furnish to Manager copies of all guaranties and warranties relating to the
Project. Manager shall use all reasonable efforts to enforce all such
guaranties or warranties and Owner shall cooperate with Manager in such efforts.
Section 5.5 Ownership of Replacements. All changes, repairs,
----------- -------------------------
alterations, improvements, renewals or replacements of FF&E and Capital
Improvements to the Project shall be the property of Owner.
Section 5.6 Payment of Certain Obligations. Upon request of Owner
----------- ------------------------------
and subject to the availability of adequate funds to do so, Manager shall pay
all costs of insurance and Impositions concerning the Project and any other
payments for which Owner is responsible pursuant to Section 11.1 hereof.
------------
ARTICLE VI
ANNUAL PLAN, BOOKS, RECORDS AND REPORTS
---------------------------------------
Section 6.1 Annual Plan.
----------- -----------
(a) At least thirty (30) days prior to the commencement of each
Operating Year (except the first Operating Year), Manager shall submit to Owner
for Owner's written approval the Annual Plan for the following Operating Year.
Manager shall submit the Annual Plan for the first Operating Year not less than
sixty (60) days prior to the Opening Date. Manager shall submit a preliminary
estimate of its Annual Plan for the first Operating Year within thirty (30) days
after the execution hereof.
(b) Owner shall give its written approval or disapproval of the
Annual Plan not later than thirty (30) days after its submission to Owner by
Manager.
(c) If Owner does not approve or disapprove such Annual Plan within
such thirty (30) day period, then Owner shall be deemed to have approved the
Annual Plan as submitted by Manager. If Owner objects to all or any portion of
such Annual Plan, then Owner shall notify Manager of the reasons for its
objections, and Owner and Manager shall use their best efforts to agree in
respect of the items to which Owner objects. Should Owner and Manager not reach
agreement on all or any portion of the Annual Plan, pending agreement being
reached, and in the case of the first Operating Year, during the period prior to
submission of the Annual Plan, Manager shall operate the Project in accordance
with the Operating Standards and this Agreement and, if such disagreement
relates
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Management Agreement
to an Operating Year after the first Operating Year, at rates or levels of
expenditures comparable to those of the preceding Operating Year with suitable
adjustments of rates and expenses for such items or portions thereof as dictated
by inflationary factors, seasonality and the necessity of operating the Project
in accordance with the Operating Standards and this Agreement. The foregoing
procedure shall also apply to approval of proposed revisions to the Annual Plan
pursuant to Section 6.1(d).
--------------
(d) Manager shall monitor the Annual Plan throughout the Operating
Year. Should Manager consider it necessary to revise the Annual Plan during the
course of the Operating Year, whether due to changed trading climate, unforeseen
capital requirements or for any other reason, Manager shall submit such
revisions to Owner for Owner's approval, setting forth the reasons for the
revisions.
(e) The Operating Budget is intended as, and will represent only, an
estimate of the anticipated results for the Operating Year in question, based
upon assumptions believed by Manager to be reasonable at the time of the
preparation of such Operating Budget, and the same shall not be construed as a
guarantee of actual results which may be experienced during and for such
Operating Year.
Section 6.2 Books and Records; Operating Accounts.
----------- -------------------------------------
(a) Manager shall keep full and adequate books of account and such
other records as are necessary to reflect the results of operation of the
Project, and such books of account and records shall be the property of Owner.
Such books of account shall be kept in all material respects in accordance with
generally accepted accounting principles and the Uniform System of Accounts and
shall contain the information necessary to make the cash adjustments required to
calculate Operating Cash Flow. The books of account and all other records
relating to, or reflecting the operation of, the Project shall be kept at the
Project or at the corporate office of Manager and shall be available to Owner
and its representatives at all reasonable times for examination, inspection and
copying. Upon any termination of this Agreement, all of such books and records
(or copies thereof) shall be turned over to Owner forthwith so as to insure the
orderly continuance of the operation of the Project, but the books and records
through such date of termination shall thereafter be available to Manager at all
reasonable times for inspection, examination and copying.
(b) Manager shall cause all funds advanced to the Project by Owner as
working capital and all funds derived from the operation of the Project to be
deposited in the Operating Accounts. Manager shall have sole control of the
Operating Accounts and Manager shall be entitled to pay out of the Operating
Accounts all costs and expenses incurred in connection with the operation of the
Project, including without limitation all wages, salaries, fringe benefits and
other compensation and expenses of Project employees, all costs and expenditures
which Manager is permitted or required
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Management Agreement
to make pursuant to this Agreement, all fees, charges, reimbursements and other
amounts due Manager under this Agreement and all other amounts required to
perform Manager's obligations hereunder. Checks or other documents of
withdrawal drawn upon the Operating Accounts shall be signed by representatives
of Manager or Project employees designated by Manager. Subject to the
provisions of Section 5.6, Owner shall be responsible for and shall pay directly
-----------
from funds outside the Operating Accounts and the Reserve all costs of Capital
Improvements and insurance required to be maintained pursuant to this Agreement,
as well as the payments and related costs and expenses for which Owner is
responsible pursuant to Section 11.1 hereof. In addition to the Operating
------------
Accounts, Manager shall be entitled to maintain such funds as are set forth in
the Annual Plan in house banks or in petty cash funds at the Project.
Section 6.3 Reports.
----------- -------
(a) On or before the fifteenth (15th) day of each calendar month
during the Term, Manager shall deliver to Owner monthly unaudited financial
statements prepared from the books of account maintained by Manager, consisting
of a balance sheet and a profit and loss statement for the Project for the
preceding calendar month and the Operating Year to date. The monthly financial
statements shall also contain or be accompanied by (i) a monthly variance report
in reasonable detail and in a format reasonably approved by Manager describing
the variances between actual results of operations and the Annual Plan and (ii)
statements and calculations of the Base Fee for the preceding calendar month.
Manager shall also furnish to Owner weekly reports reflecting occupancy, average
rate and average length of stay information for the Project.
(b) Within thirty (30) days after the end of each calendar quarter
during the Term, Manager shall deliver to Owner quarterly unaudited financial
statements prepared from the books of account maintained by Manager, consisting
of a balance sheet and profit and loss statement for the Project for such
quarter and the Operating Year to date.
(c) Within sixty (60) days after the end of each Operating Year,
Manager shall cause to be delivered to Owner financial statements for such
Operating Year consisting of at least a balance sheet and related statement of
profit and loss, together with a source and application of funds analysis for
such Operating Year, audited and certified by the Independent Auditor as
prepared in accordance with the Uniform System of Accounts and generally
accepted accounting principles consistently applied. The annual financial
statements shall also include or be accompanied by a statement prepared by the
Independent Auditor showing the calculation of the Management Fee for such
Operating Year. Unless Owner and Manager agree otherwise, such financial
statements shall be conclusive upon the parties and shall be deemed to be a
final determination of the Management
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Management Agreement
Fee for such Operating Year. The cost of the annual audit shall be an operating
expense of the Project.
(d) Subject to reimbursement by Owner of any related out-of-pocket
expenses or increased staffing costs incurred by Manager, Manager shall from
time to time prepare and deliver to Owner such other reports concerning the
operation and performance of the Project as any Mortgagee may reasonably
request.
ARTICLE VII
MANAGEMENT FEE, EXPENSE REIMBURSEMENT AND REMITTANCES TO OWNER
--------------------------------------------------------------
Section 7.1 (a) Base Fee. On or before the tenth (10th) day of each
----------- --------
calendar month during the Term, and at the expiration or sooner termination of
the Term, Owner shall pay to Manager an amount equal to the Base Fee for the
period from the commencement of the then current Operating Year to the end of
the immediately preceding calendar month or the date of such expiration or
sooner termination of the Term, as the case may be, less the aggregate amount of
----
monthly payments theretofore paid in respect of the Base Fee for such Operating
Year.
(b) Incentive Fee. On or before thirty (30) days following the end of
-------------
each Operating Year, and at the expiration or sooner termination of the Term,
Owner shall pay to Manager an amount equal to the Incentive Fee, if any, for
such Operating Year.
Section 7.2 Year-End Adjustment to Management Fee. If for any
----------- -------------------------------------
Operating Year, the aggregate amount of the payments of the Management Fee
theretofore paid by Owner to Manager shall be more or less than the Management
Fee payable for such Operating Year based upon the final determination of such
Management Fee as reflected in the annual financial statements certified by the
Independent Auditor in accordance with Section 6.3 of this Agreement, then, by
-----------
way of year-end adjustment, within fifteen (15) days after the delivery of such
annual financial statements to Owner, Manager shall pay to Owner the amount of
any overpayment or withdraw from the Operating Accounts the amount of any
underpayment; provided, however, that in the event that funds in the Operating
Accounts are not sufficient to pay fully the Management Fee payable to Manager
hereunder, Owner shall promptly pay to Manager on demand the amount of such
deficiency.
Section 7.3 Expense Reimbursement. Owner shall be obligated to
----------- ---------------------
reimburse Manager for all Reimbursable Expenses incurred by it in connection
with the performance of this Agreement in accordance with Section 2.3. Manager
-----------
shall submit a monthly invoice for its Reimbursable
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Management Agreement
Expenses showing in reasonable detail the nature and amount of such expenses,
and such invoices shall be payable within five (5) days after submission.
Section 7.4 Marketing Services and Advertising
----------- ---------------------- -----------
(a) To the extent that (i) Owner shall establish a marketing fund for
the benefit of the Project and other extended stay hotels owned or franchised to
third parties by Owner and managed by Manager and (ii) Owner shall make monthly
contributions (on or before the tenth (10th) day of each calendar month) to such
fund in an amount equal to one and one-half percent (1.5%) of Gross Room
Revenues of the Project (or such other amount as may be provided for in the
Annual Plan) for the preceding calendar month, Manager, upon request by Owner,
will administer such marketing fund and shall provide for the Project during the
Term such marketing and advertising services as may be set forth in a marketing
plan developed by Owner and Manager (the "Marketing Services"). Manager shall be
an authorized signatory for, and shall be entitled to pay out of, the marketing
fund all costs and expenses incurred in connection with the provision of the
Marketing Services. A marketing budget setting forth the estimated costs and
expenses of the Marketing Services for each Operating Year shall be set forth in
each Annual Plan delivered under this Agreement.
(b) In the event that any business is referred or provided to the
Hotel by the national sales offices that Manager operates pursuant to its
management of Wyndham hotels, or if at any time Manager operates a national
sales office that, upon Owner's request, is dedicated to provide services for
the extended stay hotels owned or franchised to third parties by Owner, Owner
shall pay separately the cost of such services as reasonably determined by
Manager and approved by Owner, which approval will not be unreasonably withheld
or delayed.
(c) Owner and Manager acknowledge that, as of the Effective Date, no
centralized reservations services are being provided in respect of the Project,
either by Manager or any other party. If Owner at any time during the Term
should elect to utilize centralized reservations services for the Project and
all other extended stay hotels owned or franchised to third parties by Owner,
before negotiating with any third party to provide such services, Owner will
offer Manager the opportunity to provide such services. If Manager elects to
provide such services for the Project and all such other hotels on terms and
conditions acceptable to Owner, the centralized reservation costs incurred in
respect of the Project shall be paid or reimbursed on the basis of an initial
link-up charge and subsequent charges based on the cost of handling reservations
made at the Project.
Section 7.5 Accounting and Related Services. To cover the costs and
----------- -------------------------------
expenses incurred by Manager or any of its Affiliates in providing property
accounting to be provided by Manager hereunder with respect to the operation of
the Project, Owner shall pay Manager, on a monthly basis,
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Management Agreement
an amount equal to (i) $1,000 per month during the first Operating Year and (ii)
an amount equal to $1,000 multiplied by the Cumulative CPI Percentage for each
succeeding Operating Year, with the Cumulative CPI Percentage to be adjusted as
of the first day of each such succeeding Operating Year. To the extent the Term
of this Agreement commences or ends on a day other than the first day of a
month, the fee to be paid under this Section 7.5 shall be pro rated to cover the
-----------
actual number of days included in the Term.
Section 7.6 Purchasing and Technical Services Fees; Management
----------- --------------------------------------------------
Information Services. To the extent provided for in the Annual Plan or otherwise
- --------------------
approved by Owner, Manager or one of its Affiliates shall be entitled to the
payment of purchasing and technical services fees with respect to the
acquisition, or supervision of installation or construction, of Capital
Improvements, FF&E, Operating Equipment and Inventories at the Project. In
addition, to the extent that Owner elects to utilize management information
services provided by Manager, then Owner and Manager shall enter into a separate
management information services agreement setting forth the charges therefor and
otherwise in form and substance reasonably satisfactory to each party. Unless
otherwise provided in such agreement, any recurring service and maintenance
charges in connection with such management information services shall be
provided for in the Annual Plan.
Section 7.7 Remittances to Owner. On or before the fifteenth (15th)
----------- --------------------
day of each calendar month of each Operating Year, Manager shall remit to Owner
all sums in the Operating Accounts in excess of the then working capital
requirements of the Project determined in accordance with Section 3.2 of this
-----------
Agreement.
ARTICLE VIII
INSURANCE AND INDEMNITIES
-------------------------
Section 8.1 Insurance. Subject to reasonable availability, Manager
----------- ---------
shall, at no cost to Manager, procure and maintain with responsible and properly
licensed companies reasonably acceptable to Owner insurance in such amounts,
written on such forms and covering such risks as shall be required by any
Mortgagee or as shall otherwise be reasonably required by Owner or Manager,
including but not limited to the insurance in respect of the Project described
in Exhibit B to this Agreement.
---------
Section 8.2 Evidence of Insurance. Manager agrees to deliver to
----------- ---------------------
Owner evidence reasonably satisfactory to Owner that all insurance required to
be maintained under this Agreement is in full force and effect. In addition,
prior to the date on which any such insurance premiums must be paid to prevent
delinquency thereof, Manager will deliver to Owner a statement or statements
showing
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Management Agreement
the amount of the premiums required to be paid, the name and mailing address of
the party to whom the same is payable and receipts reflecting that all such
amounts have been fully paid.
Section 8.3 Investigation of Claims and Reports. Manager shall
----------- -----------------------------------
promptly investigate and, as soon as reasonably practicable, make a full written
report to Owner as to all material accidents, claims for damage relating to the
ownership, operation and maintenance of the Project and the estimated cost of
repair thereof, and shall prepare at the expense of and for the approval of
Owner, any and all reports required by any insurance company in connection
therewith. All such reports shall be promptly filed with the applicable
insurance company. Subject to the rights of any Mortgagee, all policies of
insurance required under this Agreement shall provide for adjustment of losses
of less than Fifty Thousand Dollars ($50,000) by Manager alone and of greater
losses by Owner and Manager jointly.
Section 8.4 Indemnities.
----------- -----------
(a) Manager shall indemnify and hold harmless Owner and its partners
and Affiliates and their respective partners, shareholders, directors, officers,
employees and agents from and against any and all liability, loss, damages,
costs and expenses ("Liabilities") incurred by reason of the management and
operation of the Project by Manager during the Term insofar and only insofar as
such Liabilities are caused by the Demonstrable Negligence, willful misconduct
or willful violation of Legal Requirements by Manager. Project employees other
than the Executive Personnel shall not be deemed to be employees or agents of,
or otherwise acting on behalf of, Manager. "Demonstrable Negligence" shall mean
a demonstrable failure, established by clear and convincing evidence, to use
such care as a reasonably prudent person would use under similar circumstances.
(b) Owner shall indemnify and hold harmless Manager and its
shareholders and Affiliates and their respective partners, shareholders,
directors, officers, employees and agents from and against any and all
Liabilities (INCLUDING THOSE CAUSED BY THE SIMPLE NEGLIGENCE OF THE INDEMNITEE
THAT DOES NOT CONSTITUTE DEMONSTRABLE NEGLIGENCE AND THOSE AS TO WHICH THE
INDEMNITEE MAY BE STRICTLY LIABLE) (i) arising out of or incurred in connection
with the construction, renovation, management or operation of the Project or
(ii) which may be asserted or arise as a direct or indirect result of the
presence on or under, or escape, seepage, leakage, spillage, discharge, emission
or release from the Project of any Hazardous Materials or any Hazardous
Materials Contamination or arise out of or result from the environmental
condition of the Project or the applicability of any Legal Requirements relating
to Hazardous Materials, except, in the case of both (i) and (ii) above, those
Liabilities caused by the Demonstrable Negligence, willful misconduct or willful
violation of Legal Requirements by Manager during the Term.
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Management Agreement
(c) In case an action covered by this Section 8.4 is brought against
-----------
any indemnified party, the indemnifying party will be entitled to assume the
defense thereof, subject to the provisions herein stated, with counsel
reasonably satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election to so assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party for any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof. The indemnified party shall have
the right to employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel shall not be at
the expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that the fees and expenses of the indemnified party's counsel
shall be at the expense of the indemnifying party if (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party or
(ii) such indemnified party shall have been advised by counsel that there is a
conflict of interest or issue conflict involved in the representation by counsel
employed by the indemnifying party in the defense of such action on behalf of
the indemnified party or that there may be one or more legal defenses available
to such indemnified party which are not available to the indemnifying party (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of such indemnified party, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for the indemnified party, which firm shall be designated in writing
by the indemnified party).
(d) The provisions of this Section shall survive any termination or
expiration of this Agreement, whether by lapse of time or otherwise, and shall
be binding upon the parties hereto and their respective successors and assigns.
ARTICLE IX
DAMAGE AND CONDEMNATION
-----------------------
Section 9.1 Damage or Destruction.
----------- ---------------------
(a) If the Hotel shall be totally destroyed or substantially damaged
by fire or other casualty, either party may, within sixty (60) days after the
occurrence of such event, give written notice to the other terminating this
Agreement. For purposes of this Section, the Hotel shall be deemed to have been
substantially damaged if the estimated cost of Restoration shall exceed twenty
percent (20%) of the cost of replacing the Hotel by constructing, furnishing and
equipping a new hotel on the site
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Management Agreement
substantially the same as the Hotel prior to such casualty. In the event Owner
terminates this Agreement by reason of such damage or destruction, Owner shall,
contemporaneously with the giving of notice of such termination and as a
condition (which may be waived by Manager) to the effectiveness of such
termination, pay to Manager the applicable Termination Fee.
(b) In the event of (i) any damage to the Hotel by fire or other
casualty which does not amount to "substantial damage" as described in
subsection (a) above, or (ii) the total destruction of or substantial damage to
the Project and the failure of either party to terminate this Agreement pursuant
to subsection (a) above, then this Agreement shall not terminate, and Owner
shall, at its own expense and in accordance with plans and specifications
therefor developed by Owner in consultation with Manager, promptly commence and
expeditiously complete the Restoration and, subject to the rights of any
Mortgagee, all proceeds of property and casualty insurance shall be made
available to Owner for this purpose. Owner shall promptly commence and
diligently pursue the Restoration to completion; provided, however, that if
Owner shall not fully complete the Restoration within a reasonable period of
time after the date of such casualty or one hundred eighty (180) days, whichever
is earlier (or such longer period as Manager may approve), then Manager shall
have the right to terminate this Agreement upon thirty (30) days' prior written
notice to Owner, whereupon Owner shall, within ten (10) days following such
notice and as a condition (which may be waived by Manager) to the effectiveness
of such termination, pay to Manager the applicable Termination Fee.
(c) Manager's monthly compensation following damage to the Project
until the Restoration with respect to such damage is completed shall in no event
be less than fifty percent (50%) of the Average Monthly Management Fee at the
time the damage occurs; provided, however, that such amount shall be payable
only from, and to the extent of, the proceeds of business interruption insurance
maintained in respect of the Project.
(d) Notwithstanding the provisions of subsections (a) and (b) of this
Section 9.1, the Termination Fee payable thereunder shall be payable (i) in any
- -----------
event to the extent it is covered by insurance, and (ii) to the extent it is not
covered by insurance, such Termination Fee shall be payable by Owner unless, at
or any time prior to the date of the related termination of this Agreement,
Manager has managed for Owner and Owner's franchisees an aggregate of at least
fifteen (15) extended stay hotels similar in operation to (and including) the
Hotel, in which case such portion of the Termination Fee shall not be payable to
Manager. In addition, in the event that, on or before the date that is twelve
(12) months after the related termination of this Agreement, Manager has managed
for Owner and Owner's franchisees an aggregate of at least fifteen (15) extended
stay hotels similar in operation to (and including) the Hotel, then Manager
shall repay to Owner the amount of such Termination Fee paid to Manager
hereunder.
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Management Agreement
Section 9.2 Condemnation.
----------- ------------
(a) If all or a substantial portion of the Project shall be taken by
Condemnation (other than for temporary use), this Agreement shall terminate as
of the date of such taking. A substantial portion of the Project shall be
deemed taken if in the reasonable opinion of Manager or Owner the part not taken
may not be repaired, restored, replaced, rebuilt or utilized so as to constitute
a hotel facility in keeping with this Agreement. If this Agreement shall
terminate pursuant to the foregoing provisions of this Section, (i) the
Condemnation award, after payment of all sums due and payable to any Mortgagee,
shall be paid to Owner as its property, provided, however, that so long as it
does not reduce the Condemnation award payable to Owner, Manager may make a
separate and distinct claim against the condemning authority for the value of
the loss of its interest in this Agreement, and (ii) Owner shall, within ten
(10) days following such termination and as a condition (which may be waived by
Manager) to the effectiveness thereof, pay to Manager the applicable Termination
Fee. Provided Owner pays the applicable Termination Fee, Manager shall remit to
Owner any amount received by it pursuant to any claim it pursues in accordance
with clause (i) above.
(b) If a portion of the Project shall be taken by Condemnation and
this Agreement is not terminated pursuant to subsection (a) above, the
Condemnation award relating to damage to or the taking of the Project, including
any interest thereon, shall, subject to the rights of any Mortgagee, be made
available to Owner for application to the Restoration of the Project made
necessary by such taking. Such Restoration shall be promptly commenced and
expeditiously completed by, and at the expense of, Owner in accordance with
plans and specifications therefor developed by Owner in consultation with
Manager (which approval shall not be unreasonably withheld or delayed) so as to
restore the Project as nearly as possible to its value, condition and character
immediately prior to the Condemnation.
(c) In the event of a Condemnation of all or part of the Project for
temporary use, this Agreement shall remain in full force and effect, and the
following shall be applicable:
(i) If the Condemnation is for a period not extending beyond the
Term, the Condemnation award, including any interest, shall be
included in Gross Revenues for the Operating Year or Years in which
received. When and if during the Term the period of temporary use
shall terminate, Owner shall, at its own expense, after its approval,
in consultation with Manager, of plans and specifications, promptly
commence and expeditiously complete the Restoration necessary to
restore the Project to its condition prior to the Condemnation for
temporary use; or
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Management Agreement
(ii) If the Condemnation is for a period extending beyond the
Term, that portion of the Condemnation award which is attributable to
the period up to the expiration of the Term shall be included in Gross
Revenues for the Operating Year or Years in which received. The
remainder of the Condemnation award shall be paid to Owner as its
property.
(d) Manager's monthly compensation following a Condemnation until the
Restoration with respect to such Condemnation is completed or during any period
of Condemnation for temporary use shall in no event be less than fifty percent
(50%) of the Average Monthly Management Fee at the time the Condemnation occurs;
provided, however, that such amount shall be payable only from, and to the
extent of, the proceeds or business interruption insurance maintained in respect
of the Project.
(e) Notwithstanding the provisions of subsection (a) of this Section
-------
9.2, the Termination Fee payable thereunder shall be payable (i) in any event to
- ---
the extent it is covered by insurance, and (ii) to the extent it is not covered
by insurance, such Termination Fee shall be payable by Owner unless, at or any
time prior to the date of the related termination of this Agreement, Manager has
managed for Owner and Owner's franchisees an aggregate of at least fifteen (15)
extended stay hotels similar in operation to (and including) the Hotel, in which
case such portion of the Termination Fee shall not be payable to Manager. In
addition, in the event that, on or before the date that is twelve (12) months
after the related termination of this Agreement, Manager has managed for Owner
and Owner's franchisees an aggregate of at least fifteen (15) extended stay
hotels similar in operation to (and including) the Hotel, then Manager shall
repay to Owner the amount of such Termination Fee paid to Manager hereunder.
ARTICLE X
ASSIGNMENT
----------
Section 10.1 Assignment by Manager. Manager shall have the right,
------------ ---------------------
without the consent of Owner, to assign its interest in this Agreement to (i)
any Affiliate of Manager having full right, power and authority to provide to
Owner all services and organizational expertise (including applicable
trademarks, service marks and Marketing Services) which Manager is required to
provide hereunder, or (ii) any assignee who also acquires all, or substantially
all, of the assets of Manager and assumes its obligations, provided such
assignee is financially responsible and capable of performing the duties of
Manager hereunder. In such latter event, Manager's liability hereunder shall
terminate upon such assignment, but in the event of such an assignment to an
Affiliate of Manager, Manager shall continue to be liable under this Agreement
to the same extent as though such
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Management Agreement
assignment had not been made. Manager shall also have the right to assign its
rights to receive payments hereunder as security for indebtedness or any other
obligation. Except as herein provided, Manager shall not assign its rights and
obligations under this Agreement without the approval of Owner.
Section 10.2 Assignment by Owner.
------------ -------------------
(a) Owner may transfer or convey the Project to an Affiliate of Owner
pursuant to the transfer of all of the assets and liabilities of Owner to such
Affiliate. Owner shall give Manager not less than thirty (30) days' written
notice prior to the consummation of any such transfer and provide to Manager
such information regarding the proposed transferee as Manager may reasonably
request.
(b) Owner also may transfer or convey the Project in connection with a
bona fide sale to an independent third party, whereupon Owner shall have the
right to terminate this Agreement as set forth in Section 12.5(a) and Manager
---------------
shall have the right to terminate this Agreement as set forth in Section
-------
12.4(b). Owner shall give Manager not less than thirty (30) days' written
- -------
notice prior to the consummation of any such sale of the Project and provide to
Manager such information regarding the proposed transferee as Manager may
reasonably request; provided, however, that if Owner intends to exercise its
right to terminate this Agreement as set forth in Section 12.5(a) in connection
---------------
with such sale, Owner shall give Manager notice of such sale and of such
termination not less than ten (10) (rather than thirty (30)) days prior to the
consummation thereof and, in such event, Owner shall not be required to provide
Manager with any information regarding the proposed transferee. Notwithstanding
the requirements for notice of sale set forth in this Section 10.2(b) and
---------------
Section 12.5(a), Owner's failure to give any such notice in connection with a
- ---------------
sale pursuant to which this Agreement is to terminate shall not preclude Owner's
consummation of such sale and termination of this Agreement in connection
therewith, and shall not constitute a breach of this Agreement, so long as Owner
pays to Manager the applicable Termination Fee as a condition precedent to the
consummation of such sale and such termination.
(c) In the event of a bona fide sale to an independent third party
pursuant to subsection (b) above where neither Owner nor Manager exercises its
termination right referenced therein, or in the event of a transfer to an
Affiliate pursuant to subsection (a) above, Owner shall cause the transferee or
assignee by reason of any such sale, transfer or conveyance to assume and agree
to perform all of Owner's duties, obligations and liabilities herein contained
pursuant to a written instrument in form and substance reasonably satisfactory
to Manager and reflecting any amendments to this Agreement reasonably necessary
in order to preserve and protect Manager's rights hereunder in light of the
change in ownership.
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Management Agreement
(d) Subject to the following provisions of this Section 10.2(d), the
---------------
sale or other disposition of fifty percent (50%) or more of the beneficial
interests in Owner (whether partnership interests, shares of stock or other
beneficial interests), whether in a single transaction or in a series of
transactions, shall be deemed to constitute the transfer or conveyance of the
Project for purposes of this Section. The "deemed transfer" provisions of the
preceding sentence shall not apply in respect of, or following, a registered
public offering under the Securities Act of 1933, as amended, of equity
interests in Owner or any successor to Owner, which public offering is made
pursuant to a registration statement on Form S-1 or a successor form (i.e., such
a public offering will not permit either Owner or Manager to terminate this
Agreement pursuant to Section 12.5(a) or Section 12.4(b)); provided, however,
--------------- ---------------
that, in the event that following such a public offering fifty percent (50%) or
more of the beneficial interests in Owner are acquired by a person who is
directly or indirectly engaged in the hotel management business under a brand
owned by it or one of its Affiliates or is directly or indirectly engaged in the
hotel franchising business as a franchisor, then Owner shall have the right to
terminate this agreement as set forth in Section 12.5(d), and Manager shall have
---------------
the right to terminate this Agreement as set forth in Section 12.4(c). In
---------------
addition, prior to the closing of such a public offering, any person who is a
partner in Owner on the Effective Date may transfer all or part of his interest
in Owner to a Permitted Transferee, and such transfer shall not constitute a
transfer or conveyance of the Project for purposes of this Section (even if the
interest transferred represents fifty percent (50%) or more of the beneficial
interests in Owner). As used in the preceding sentence, "Permitted Transferee"
shall mean (i) an Affiliate of the transferor partner or (ii) any other person
who also is a partner in Owner on the Effective Date and at the time of such
transfer or an Affiliate thereof.
(e) Except as otherwise expressly provided for herein, Owner may not
sell, transfer or otherwise convey all or any part of the Project or Owner's
interest therein or assign this Agreement or any interest herein without the
express prior written consent of Manager.
Section 10.3 Notice of Intention to Sell. Prior to offering the
------------ ---------------------------
Project for sale or accepting an unsolicited offer to purchase the Project,
Owner shall give Manager reasonable notice of its intention to sell the Project.
Section 10.4 Binding Effect. Subject to the terms of this Article,
------------ --------------
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.
ARTICLE XI
OWNER'S COVENANTS, TITLE AND ENCUMBRANCES
-----------------------------------------
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Management Agreement
Section 11.1 Covenants and Warranties. With respect to any ground or
------------ -------------------------
underlying leases, mortgages, deeds of trust, security agreements or other
encumbrances affecting the Project, Owner agrees to use all commercially
reasonable efforts to secure for Manager's benefit a non-disturbance agreement
(in form and substance satisfactory to Manager) to the effect that this
Agreement shall not be subject to forfeiture or termination except in accordance
with the provisions hereof, notwithstanding a default, termination, foreclosure
or exercise of a power of sale with respect to any such lease or encumbrance.
Owner further warrants that, so long as Manager shall not be in default
hereunder, Manager shall be entitled to operate the Project for the Term, and
Owner shall, at no expense to Manager, undertake and prosecute all appropriate
actions, judicial or otherwise, required to assure such right of operation to
Manager. Owner further agrees that it shall do the following, except to the
extent that any failure to do so could not reasonably be expected to materially
and adversely affect the operation of the Project by Manager or result in any
failure to pay amounts due, or otherwise provide funds, to Manager hereunder:
(a) Keep and maintain, or cause to be kept and maintained, any leases
covering real or personal property or other agreements necessary to the
ownership or control of the Project, or any part thereof, in full force and
effect and free from default, and in this connection Owner shall pay and
discharge, or cause to be paid and discharged, any ground rents or other rental
payments or other charges payable by Owner in respect of the Project;
(b) Observe, or cause to be observed, and comply with or cause to be
complied with, any and all other liens, encumbrances, covenants, charges,
burdens or restrictions pertaining to the Project or any part thereof;
(c) Fully comply with the terms and provisions of all documents and
instruments evidencing or securing any Mortgages or other loans secured by an
interest in or otherwise related to the ownership or operation of the Project
and all other agreements (whether written or oral) to which Owner is a party;
(d) Pay all Impositions prior to delinquency, and upon request of
Manager, furnish Manager with evidence that all such Impositions have been so
paid; provided, however, that Owner shall have the right to contest in good
faith the validity or amount of any Impositions by appropriate proceedings, so
long as such proceedings do not interfere with the operation of the Hotel or
result in a default under any Mortgage or any loans secured by an interest in or
otherwise related to the ownership or operation of the Project or any ground
lease affecting the Project and provided, further, that during the time any such
contest is pending, Owner shall pay all Impositions being contested unless
collecting or enforcement of any lien securing payment thereof is effectively
stayed during such pendency; and
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Management Agreement
(e) Obtain and maintain in good standing all Governmental Permits,
except those which under applicable Legal Requirements are required to be
obtained and maintained by Manager.
Section 11.2 Estoppel Certificates. Manager agrees, at any time and
------------ ----------------------
from time to time, upon not less than fifteen (15) days' prior notice by Owner
or any Mortgagee, to execute, acknowledge and deliver to Owner or such Mortgagee
a statement in writing certifying that this Agreement has not been modified and
is in full force and effect (or, if there have been modifications, that the same
is in full force and effect as modified and specifying the modifications) and
stating whether or not to the best knowledge of the party providing such
certificate there exists any default of which such party may have knowledge.
Upon similar notice, Manager shall be entitled to a similar certificate from
Owner.
ARTICLE XII
DEFAULT AND TERMINATION
-----------------------
Section 12.1 Events of Default.
------------ -----------------
(a) The following shall constitute events of default:
(i) The filing of a voluntary petition in bankruptcy or
insolvency or a petition for reorganization under any
bankruptcy law by either party;
(ii) The consent to an involuntary petition in bankruptcy or the
failure to vacate within thirty (30) days from the date of entry
thereof any order approving an involuntary petition by either
party;
(iii) The entering of an order, judgment or decree by any court of
competent jurisdiction, on the application of a creditor,
adjudicating either party as bankrupt or insolvent or approving
a petition seeking reorganization or appointing a receiver,
trustee or liquidator of all or a substantial part of such
party's assets, and such order, judgment or decree shall
continue unstayed and in effect for thirty (30) days after its
entry;
(iv) The appointment of a receiver or trustee for all or any
substantial portion of the property of either party and the
order, judgment or decree appointing any such receiver or
trustee shall continue unstayed and in effect for thirty (30)
days after its entry;
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Management Agreement
(v) The death, legal incapacity, liquidation, termination or
dissolution of either party;
(vi) Any representation or warranty made in this Agreement by either
party shall be false or misleading in any material respect on
the date as of which it is made or deemed made;
(vii) The failure of either party to make any payment or provide
funds to or on behalf of the other party in accordance with the
terms hereof and the continuation of such failure for ten (10)
days after notice of such failure is given to the defaulting
party; or
(viii) The failure of either party to perform, keep or fulfill any of
the other covenants, undertakings, obligations or conditions
set forth in this Agreement, and the continuance of such
default for a period of thirty (30) days after written notice
is given by the other party specifying said failure; provided
that in the event such failure is of the nature that it cannot,
with due diligence, be cured within thirty (30) days, it shall
not constitute an event of default unless the defaulting party
fails to proceed promptly and with due diligence to cure the
same, it being the intention of the parties that with respect
to a failure not susceptible of being cured within thirty (30)
days, the time of such defaulting party within which to cure
the same shall be extended for such period as may be necessary
for the curing thereof with the exercise of due diligence.
(b) Upon the occurrence of any event of default, in addition to and
cumulative of any and all rights and remedies available to the non-defaulting
party under this Agreement, at law or in equity, the non-defaulting party may
give to the defaulting party notice of intention to terminate this Agreement,
whereupon this Agreement shall terminate upon the expiration of thirty (30) days
after the giving of such notice. In addition to and cumulative of the
foregoing, upon the occurrence of any event of default on the part of Owner, all
earned Management Fees and all other sums payable to Manager under this
Agreement shall be immediately due and payable without notice. In no event
shall the provisions of this Agreement with respect to the payment of a
Termination Fee upon termination of this Agreement under certain circumstances
be construed as defining or limiting the amount recoverable by Manager from
Owner by reason of any event of default on the part of Owner.
Section 12.2 Manager's Right to Perform Owner's Obligations. If
------------ ----------------------------------------------
Owner shall fail to make any payment or to perform any act to be made or
performed by Owner pursuant to this Agreement and such failure continues for a
period of ten (10) days after Owner is notified thereof, then Manager
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Management Agreement
may (but shall not be obligated to) without further notice to, or demand upon,
Owner, and without waiving or releasing Owner from any obligations under this
Agreement, make such payment (either with its own funds or with funds withdrawn
for such purpose from the Operating Accounts or the Reserve) or perform such
act. All sums so paid by Manager from its funds and all necessary incidental
costs and expenses incurred by Manager in connection with the performance of any
such act, together with interest thereon at the Default Rate from the date of
making such expenditure or expenditures by Manager, shall be payable to Manager
upon demand.
Section 12.3 Default Interest. If either party hereto shall fail to
------------ ----------------
pay to the other party hereto any sum payable when due hereunder, then such
defaulting party shall, without notice or demand, be liable to the non-
defaulting party for the payment of all such sums together with interest thereon
at the Default Rate. The terms and provisions of this Section shall survive any
termination of this Agreement for any reason whatsoever (including the
expiration of the Term) and shall continue until all such amounts, together with
interest thereon, are paid in full.
Section 12.4 Special Rights of Manager to Terminate. In addition and
------------ --------------------------------------
without prejudice to any other right Manager may have to terminate this
Agreement under any other provision of this Agreement:
(a) Manager shall have the right to terminate this Agreement if any
Governmental Permit required to be maintained by Owner for the operation of the
Project, including without limitation any certificate of occupancy or restaurant
or liquor license, shall at any time be suspended, terminated or revoked and
such suspension, termination or revocation is not due to the fault of Manager
and shall continue for a period of thirty (30) days, unless such suspension,
termination or revocation is subject to cure within such period by reasonable
efforts on the part of Manager and Manager fails to take such action. In the
event that Manager elects to terminate this Agreement pursuant to this Section
-------
12.4(a), Manager shall give Owner written notice of such election whereupon this
- -------
Agreement shall terminate as of the date set forth in any such notice of
termination, which date shall be not less than thirty (30) days after the date
such notice is given. Not later than the effective date of termination of this
Agreement by Manager pursuant to clause (1) of this Section 12.4(a), and as a
---------------
condition (which may be waived by Manager) to the effectiveness of any such
termination, Owner shall pay to Manager the applicable Termination Fee.
(b) If Owner proposes to effect a bona fide sale of the Project and
does not elect to terminate this Agreement as provided in Section 12.5(b) below,
---------------
Manager shall have the right to terminate this Agreement effective upon
consummation of such sale, transfer or conveyance, upon written notice to Owner
not more than fifteen (15) days after Owner's notice to Manager pursuant to
Section 10.2, provided, however, that Manager shall have such right to terminate
- ------------
this Agreement
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Management Agreement
only if Manager reasonably determines that such sale, transfer or conveyance
involves an unsuitable transferee or assignee. Manager shall make its
determination based solely on an evaluation of whether (i) the proposed
transferee or assignee has adequate net worth to timely discharge all of the
obligations of Owner under this Agreement, (ii) the transferee or assignee or
one or more of its Affiliates are known to have engaged in criminal activities
or are shown by credible evidence to be of bad character or (iii) the proposed
transferee or assignee or one or more of its Affiliates is directly or
indirectly engaged in the hotel management business under a brand owned by it or
one of its Affiliates or is directly or indirectly engaged in the hotel
franchising business as a franchisor. Any such notice of termination shall be
deemed ineffective if such sale, transfer or conveyance thereafter is not
consummated. Not later than the effective date of termination of this Agreement
by Manager pursuant to this Section 12.4(b), and as a condition (which may be
---------------
waived by Manager) to the effectiveness of any such termination, Owner shall pay
to Manager the applicable Termination Fee. If, within one year after the date of
any such termination by Manager and payment of the applicable Termination Fee by
Owner, Manager and Owner's transferee or assignee enter into a management
agreement pursuant to which Manager is to manage the Project, then Manager
shall, upon the execution of such agreement, repay to Owner the amount of such
Termination Fee paid to Manager.
(c) If, following a registered public offering of the type described
in Section 10.2(d) of equity interests in Owner or any successor to Owner, any
---------------
person, other than Manager or an Affiliate of Manager, who is directly or
indirectly engaged in the hotel management business under a brand owned by it or
one of its Affiliates or is directly or indirectly engaged in the hotel
franchising business as a franchisor acquires fifty percent (50%) or more of the
beneficial interests in Owner (whether in a single transaction or series of
transactions), then Manager shall have the right to terminate this Agreement
upon at least thirty (30) days prior written notice to Owner given not later
than the date that is ninety (90) days after such person first acquires such
interest. Not later than the effective date of termination of this Agreement by
Manager pursuant to this Section 12.4(c), and as a condition (which may be
---------------
waived by Manager) to the effectiveness of any such termination, Owner shall pay
to Manager the applicable Termination Fee. If, within one year after the date
of any such termination by Manager and payment of the applicable Termination Fee
by Owner, Manager and Owner or any transferee or assignee from Owner enter into
a management agreement pursuant to which Manager is to manage the Project, then
Manager shall, upon the execution of such agreement, repay to Owner the amount
of such Termination Fee paid to Manager.
Section 12.5 Special Rights of Owner to Terminate. In addition and
------------ ------------------------------------
without prejudice to any other right Owner may have to terminate this Agreement
under any other provision of this Agreement, Owner shall have the following
rights to terminate this Agreement:
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Management Agreement
(a) If Owner proposes to effect a bona fide sale of the Project as
permitted by Section 10.2(b), Owner shall have the right to terminate this
---------------
Agreement, effective upon consummation of such sale, upon written notice to
Manager not less than ten (10) days prior to such consummation. Any such notice
shall be deemed ineffective if such sale thereafter is not consummated. Not
later than the effective date of termination of this Agreement by Owner pursuant
to this Section 12.5(a), and as a condition (which may be waived by Manager) to
---------------
the effectiveness of any such termination, Owner shall pay to Manager the
applicable Termination Fee.
(b) Owner shall have the right, subject to Manager's rights to cure
described below, to terminate this Agreement if, for a reason other than Force
Majeure or Owner's breach of this Agreement, in any two (2) consecutive
Operating Years, commencing with the third Operating Year, both (i) Total Income
Before Fixed Charges for such Operating Years is less than seventy-five percent
(75%) of the Total Income Before Fixed Charges projected for such Operating
Years in the approved Annual Plans for such Operating Years and (ii) the Fair
Market Share Penetration of the Project is less than ninety percent (90%)
(collectively, the "Annual Performance Standard"). Such determinations shall be
made in accordance with the audited annual financial statements prepared and
delivered pursuant to Section 6.3(c) of this Agreement. If the Annual
--------------
Performance Standard is not satisfied for any two consecutive (2) Operating
Years, commencing with the third Operating Year, Manager may, within sixty (60)
days after the delivery to Owner of the audited annual financial statements for
the second consecutive such Operating Year for which the Annual Performance
Standard was not satisfied, pay to Owner an amount which, when added to the
Total Income Before Fixed Charges for such Operating Years, equals the amount
necessary to satisfy clause (i) of the Annual Performance Standard for such
Operating Years and upon such payment the Annual Performance Standard for such
Operating Years shall be deemed to have been satisfied. If the Annual
Performance Standard is not satisfied and not cured as provided above for two
(2) consecutive Operating Years, commencing with the third Operating Year, and
Owner elects to exercise its right to terminate this Agreement pursuant to this
Section, Owner shall give written notice to Manager of such election within
sixty (60) days after delivery to Owner of such audited annual financial
statements, which notice shall specify a date for the termination of this
Agreement that is not less than ninety (90) days after the date such notice is
given. Failure to give such notice shall constitute a waiver of such right. In
addition to the right to cure set forth above, Manager may, within thirty (30)
days following the date upon which Owner's notice of termination has been given,
pay to Owner an amount which, when added to the aggregate amount of Total Income
Before Fixed Charges for the two (2) Operating Years in question, equals the
amount necessary to satisfy clause (i) of the Annual Performance Standard for
each such Operating Year. Upon such payment, the Annual Performance Standard
shall be deemed to have been satisfied for each such Operating Year, Owner shall
have no right to terminate this Agreement based upon such Operating Years and
Owner's election to do so shall be of no further force or effect.
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Management Agreement
(c) If Owner elects to assume the management of the Project, rather
than utilize any third party manager for such purpose, Owner shall have the
right to terminate this Agreement, effective upon its assumption of such
management, upon written notice to Manager not less than thirty (30) days prior
to such assumption. Not later than the effective date of any termination of
this Agreement by Owner pursuant to this Section 12.5(c), and as a condition
(which may be waived by Manager) to the effectiveness of any such termination,
Owner shall pay to Manager the applicable Termination Fee. If, within one year
following the date of any such termination of this Agreement, Owner shall elect
to cease managing the Project itself and engage a third party for such purpose,
Owner shall, before engaging any third party manager, offer (which offer shall
be in writing) to Manager the right to manage the Project on the same terms as
set forth in this Agreement. Manager may accept such offer by giving written
notice thereof to Owner within thirty (30) days after Manager's receipt of such
offer. If Manager fails to give such notice within such period of time, Manager
shall be deemed to have rejected such offer. If Manager accepts such offer and
re-assumes responsibility for the management of the Project, then, provided that
the term of the new management arrangement is no less than ten (10) years from
and after the date that Manager re-assumes such management, Manager shall repay
to Owner the amount of the Termination Fee that Owner paid to it in connection
with the termination of this Agreement pursuant to this Section 12.5(c). Such
---------------
amount shall be payable on the date that Manager re-assumes such management.
Manager acknowledges and agrees that the right of first refusal provided under
this subsection shall not be available following any bona fide sale or deemed
sale of the Project by Owner to an independent third party (including a
transaction described in Section 12.5(d)). The provisions of this Section
--------------- -------
12.5(c) shall survive any termination of this Agreement.
- -------
(d) If, following a registered public offering of the type described
in Section 10.2(d) of equity interests in Owner or any successor to Owner, any
---------------
person, other than Manager or an Affiliate of Manager, who is directly or
indirectly engaged in the hotel management business under a brand owned by it or
one of its Affiliates or is directly or indirectly engaged in the hotel
franchising business as a franchisor acquires fifty percent (50%) or more of the
beneficial interests in Owner (whether in a single transaction or series of
transactions), then Owner shall have the right to terminate this Agreement upon
at least thirty (30) days prior written notice to Manager given not later than
the date that is ninety (90) days after such person first acquires such
interest. Not later than the effective date of termination of this Agreement by
Owner pursuant to this Section 12.5(d), and as a condition (which may be waived
---------------
by Manager) to the effectiveness of any such termination, Owner shall pay to
Manager the applicable Termination Fee.
Section 12.6 Termination of Employees. In connection with any
------------ ------------------------
termination of this Agreement, Manager shall, unless otherwise requested in
writing by Owner, give notice of termination of employment to all Project
employees containing such information as is required by
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Management Agreement
any severance policy applicable to such employees and the provisions of any
applicable federal or state plant closing or similar laws. The notice to
employees shall be given within ten (10) days after notice of termination of
this Agreement is given by Owner or Manager, as the case may be. To the extent
Manager satisfies its obligation under the foregoing provisions of this Section
-------
12.6, Owner shall bear the severance and related costs of terminating such
- ----
employees and any failure to comply with the notification requirements of any
applicable federal or state plant closing or similar laws in connection with any
termination of this Agreement.
Section 12.7 Termination Assistance. Upon the termination or
------------ ----------------------
expiration of this Agreement, Manager shall (a) assist Owner and the successor
management company in a smooth and orderly transition in the management and
operation of the Hotel in a manner consistent with past practices for daily
operations, (b) provide the successor management company with Hotel information,
including, without limitation, employee records, sales records, and definite and
tentative bookings whether maintained at the Hotel or elsewhere, (c) continue to
operate the Hotel in a manner consistent with prior operations through the
termination date, including, without limitation, marketing of the Hotel,
soliciting advanced bookings, and rendering marketing services to the extent
then provided under this Agreement through the termination date, (d) surrender,
assign and transfer to Owner, without recourse, to the extent assignable and
transferable, all of Manager's rights, titles and interest, if any, in or to all
Governmental Permits relating specifically to the Hotel (or, if not assignable,
terminate the same at Owner's request) and in all bank accounts, bank agreements
and other similar instruments used in the daily operation of the Hotel, (e)
transfer the Operating Accounts, and (f) specifically identify all property
Manager intends to remove from the Hotel.
ARTICLE XIII
MISCELLANEOUS
-------------
Section 13.1 Use of Names. (a) During the Term of this Agreement,
------------ ------------
the Project shall at all times be known and designated under such name as Owner
may determine and as may be approved by Manager (which approval shall not be
unreasonably withheld or delayed). Initially, the Project shall be known as
"Homegate Studios & Suites." Owner represents and warrants to Manager that, to
the best of Owner's knowledge, the name "Homegate Studios & Suites" and any
other name or names by which the Project shall be known and designated are, and
shall be, owned by Owner or Owner has, and shall have, the right to use such
name without infringing any rights of any other party. Without limiting the
provisions of Section 8.4(b), Owner shall indemnify Manager and Manager's
--------------
shareholders and Affiliates and their respective partners, shareholders,
directors, officers, employees and agents from and against any and all
liabilities, costs and expenses (including, but not limited to, attorneys' fees)
arising out of or incurred in connection with any such infringement or
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Management Agreement
claim of such infringement. Such indemnity shall survive any termination or
expiration of this Agreement and shall be binding upon Owner and its successors
and assigns.
(b) Owner agrees that the name, trade name, trademark and service mark
"Wyndham," when used alone or in conjunction with some other emblem, design,
slogan, word or words, and all other trademarks, service marks, trade names and
names owned in whole or in part by Manager or an Affiliate of Manager, when used
alone or in conjunction with some other design, emblem, slogan, word or words,
are the exclusive property of Manager or such Affiliate, as the case may be, and
shall not be used by Owner in any manner. Accordingly, Owner agrees that no
right or remedy of Owner for any default of Manager or delivery or possession of
the Project to Owner upon the expiration or sooner termination of this
Agreement, shall confer, nor shall any provisions of this Agreement confer, upon
the Owner or any person acquiring an interest in Owner or the Project, the right
to use the name "Wyndham," either alone or in conjunction with some other
emblem, design, slogan, word or words, or any other name, trade name, trademark
or service mark owned in whole or in part by Manager or any of its Affiliates,
either alone or in conjunction with some other design, emblem, slogan, words or
words, in the use and operation of the Project or any other property.
(c) Manager agrees that it has no ownership rights in the name
"Homegate Studios & Suites" and that such name is, and shall remain upon
expiration or termination of this Agreement, the exclusive property of Owner.
(d) In the event of any breach of this Section by Owner or Manager,
then the other party shall be entitled to damages, relief by injunction and to
any other right or remedy at law or equity. The provisions of this Section shall
survive the expiration or sooner termination of this Agreement and shall be
binding upon Owner and Manager, and their respective successors and assigns.
Section 13.2 Limitations on Ability to Perform. Notwithstanding any
------------ ---------------------------------
other provision in this Agreement to the contrary, Manager or Owner shall be
excused from the performance of its obligations under this Agreement (i) to the
extent and whenever Manager or Owner shall be prevented from such compliance by
Force Majeure (but this clause (i) shall not apply to any payment obligation),
(ii) to the extent of any breach by the other party of any material provision of
this Agreement, including but not limited to a breach by Owner of any of its
obligations under Sections 3.2 and 3.3 of this Agreement, and (iii) in the case
--------------------
of excusing Manager only, to the extent and whenever there is provided in this
Agreement a limitation upon the ability of Manager to expend funds in respect of
the Project.
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Management Agreement
Section 13.3 Negation of Partnership or Joint Venture. Nothing in
------------ ----------------------------------------
this Agreement shall constitute or be construed to constitute or create a
partnership, joint venture or lease between Owner and Manager with respect to
the Project.
Section 13.4 Right to Make Agreement. Each party warrants and
------------ -----------------------
represents, with respect to itself, that neither the execution of this Agreement
nor performance of the obligations contemplated hereby shall violate any Legal
Requirement, result in or constitute a breach or default under any indenture,
contract or other commitment or restriction to which it is a party or by which
it is bound, or require any consent, vote or approval which has not been
obtained, or at the appropriate time shall not have been given or obtained.
Each party covenants that it has and will continue to have throughout the Term
full right and authority to enter into this Agreement and to perform its
obligations hereunder and each party agrees to supply to the other party upon
request evidence of such right and authority.
Section 13.5 Further Assurances. Each party hereto will execute and
------------ ------------------
acknowledge any and all agreements, contracts, leases, licenses, applications,
verifications and such other additional instruments and documents as may be
requested by the other party hereto in order to carry out the intent of this
Agreement and to perfect or give further assurances of any of the rights granted
or provided for herein.
Section 13.6 Form of Documents and Evidence. Each written instrument
------------ ------------------------------
or other document required by this Agreement to be furnished to either party
shall be duly executed by the person or persons specified (or where no
particular person is specified, by such person as the recipient may require)
and, in the case of affidavits, waivers and similar sworn instruments, duly
sworn to and subscribed before a notary public or similar public official
authorized to act in the premises by Governmental Authority and shall be
furnished to recipient in one or more copies as required by the recipient and
shall in all respects be in form and substance reasonably satisfactory to the
recipient. Where evidence of the existence or non-existence of any circumstance
or condition is required by this Agreement to be furnished to either party, such
evidence shall in all respects be in form and substance reasonably satisfactory
to the recipient.
Section 13.7 Approvals by Manager. Owner and Manager agree that
------------ --------------------
whenever Manager is required to give its approval of plans, specifications,
budgets, drawings, schedules or financing, pursuant to this Agreement or
otherwise, such approval shall not imply or be deemed to constitute an opinion
by Manager nor impose upon Manager any responsibility for the design or
construction of the Hotel or any part thereof, including but not limited to its
structural integrity and/or life safety requirements, compliance with Legal
Requirements, or the adequacy of any such budgets or financing. All reviews and
approvals by Manager under the terms of this Agreement or otherwise
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Management Agreement
are for the sole and exclusive benefit of Manager and no other person or party
shall have the right to rely on any such reviews or approvals. Manager shall
have absolute right, in its sole discretion, to waive any such reviews or
approvals required under this Agreement.
Section 13.8 Sale of Securities. In the event Owner, or any
------------ ------------------
Affiliate of Owner, shall at any time, sell or offer to sell any securities in
any way relating to the Project, through the medium of any prospectus or
otherwise, it shall do so only in compliance with all applicable Legal
Requirements and shall clearly disclose to all purchasers and offerees that (i)
neither Manager nor any of its partners nor any of their respective officers,
directors, agents or employees shall in any way be deemed an issuer or
underwriter of said securities, and (ii) Manager and said partners, officers,
directors, agents and employees have not assumed and shall not have any
liability arising out of or relating to the sale or offer of said securities,
including but not limited to any liability or responsibility for any financial
statements, projections or other financial information contained in the
prospectus or similar written or oral communication. Manager shall have the
right to reasonably approve any description of Manager, or any description of
this Agreement or of the Owner's relationship with Manager hereunder, which may
be contained in any prospectus or other communication, and Owner further agrees
to furnish copies of all such materials to Manager for such purpose at a time
that will allow for a reasonable review period by Manager prior to delivery
thereof to any prospective purchaser.
Section 13.9 Third Party Beneficiaries. This Agreement has been made
------------ -------------------------
and entered into for the sole protection and benefit of the Manager and Owner
and their respective successors and assigns (but in the case of assigns, so long
as any such assignment has been made in accordance with this Agreement), and no
other person or entity shall have any right or action under this Agreement,
except as otherwise expressly provided in Section 8.4.
-----------
Section 13.10 Notices. All notices to be given hereunder shall be in
------------- -------
writing, and all payments to be made hereunder shall be by check, and may be
given, served or made by depositing the same in the United States mail addressed
to the party to be notified, postpaid and registered or certified with return
receipt requested, or by delivering the same in person to such party. Notice
deposited in the mail in accordance with the provisions hereof shall be deemed
to have been given on the fourth day next following the date postmarked on the
envelope containing such notice, or when actually received, whichever is
earlier. Notice given in any other manner shall be effective only if and when
received by the party to be notified. Copies of all notices given to Manager
regarding defaults shall be delivered in the manner provided above to M. Charles
Jennings, Esq., Locke Purnell Rain Harrell, Suite 2200, 2200 Ross Avenue,
Dallas, Texas 75201. All notices to be given to the parties hereto shall be
sent to or delivered at the addresses set forth at the beginning of this
Agreement. By giving the other party at least fifteen (15) days written notice
thereof, each
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Management Agreement
party hereto shall have the right to change its address and specify as its new
address for the purposes hereof any other address in the United States of
America.
Section 13.11 Waiver. No consent or waiver, express or implied, by
------------- ------
either party to this Agreement to or of any breach or default by the other in
the performance of any obligations hereunder shall be deemed or construed to be
consent or waiver to or of any other breach or default by such party hereunder.
Except as otherwise provided herein, failure on the part of any party hereto to
complain of any act or failure to act by the other party or to declare the other
party in default hereunder, irrespective of how long such failure continues,
shall not constitute a waiver of the rights of such party hereunder.
Section 13.12 Counterparts. This Agreement may be executed in one or
------------- ------------
more counterparts, each of which shall be deemed an original and all of which,
taken together, shall be construed as a single instrument.
Section 13.13 Captions. The captions used for the Articles and
------------- --------
Sections in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope or the intent of
this Agreement or any Article or Section hereof.
Section 13.14 Gender. Unless the context clearly indicates to the
------------- ------
contrary, words singular or plural in number shall be deemed to include the
other and pronouns having a neuter, masculine or feminine gender shall be deemed
to include the others. The term "person" shall be deemed to include an
individual, corporation, partnership, trust, unincorporated organization,
government and governmental agency or subdivision, as the context shall require.
Section 13.15 Unenforceable Provisions. In the event any provision
------------- ------------------------
of this Agreement is declared or adjudged to be unenforceable or unlawful by any
Governmental Authority, then such unenforceable or unlawful provision shall be
excised herefrom, and the remainder of this Agreement, together with all rights
and remedies granted thereby, shall continue and remain in full force and
effect.
Section 13.16 Cumulative Remedies. All rights, powers, remedies,
------------- -------------------
benefits and privileges available under any provision of this Agreement to any
party hereunder are in addition to and cumulative of any and all rights, powers,
remedies, benefits and privileges available to such party under all other
provisions of this Agreement, at law or in equity.
Section 13.17 Entire Agreement. This Agreement constitutes the
------------- ----------------
entire agreement between the parties hereto with respect to the matters covered
hereby. All prior negotiations, representations
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Management Agreement
and agreements with respect thereto not incorporated in this Agreement are
hereby canceled. This Agreement can be modified or amended only by a written
document duly executed by the parties hereto or their duly appointed
representatives.
Section 13.18 Governing Law. This Agreement shall be governed by and
------------- -------------
construed under the laws of the State of Texas and the United States of America.
Section 13.19 Exhibits. Exhibits referred to in this Agreement and
------------- --------
attached hereto are incorporated herein in full by this reference as if each of
such exhibits were set forth in the body of this Agreement and duly executed by
the parties hereto.
Section 13.20 Confidentiality. Owner agrees not to disclose the terms
------------- ---------------
or conditions of this Agreement to any person other than a Permitted Person (as
hereinafter defined), provided, however, that the restrictions of this Section
-------
13.20 shall not apply to any information required to be disclosed by applicable
- -----
law or to information that becomes public other than by virtue of a breach of
this Section. For purposes of this Section, the term "Permitted Person" shall
mean (i) the partners, shareholders, directors, officers and employees of Owner,
(ii) accountants, attorneys, consultants and other professionals engaged to
render services in connection with the Project and (iii) lenders, potential
lenders, potential investors, potential underwriters and potential purchasers of
the Project. Permitted Persons shall be informed of the confidential nature of
the information disclosed to them.
Section 13.21 Limitation on Recourse. Manager agrees that, in
------------- ----------------------
connection with the enforcement of any obligations of Owner hereunder in respect
of any period during which Extended Stay Limited Partnership is the Owner
hereunder, it will not look to, or seek to recover from, any assets of Crow
Family, Inc. other than the interest of Crow Family, Inc. in ESH Partners, L.P.
(or any successor thereto) or any assets of Greystar Holdings, Inc. other than
the interest of Greystar Holdings, Inc. in JMI/Greystar Extended Stay Partners,
L.P. (or any successor thereto). The foregoing shall not otherwise limit
Manager's recourse to Extended Stay Limited Partnership, any general partner in
Extended Stay Limited Partnership or any of their respective assets.
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Management Agreement
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
EXTENDED STAY LIMITED PARTNERSHIP, a
Delaware limited partnership
By: JMI/Greystar Extended Stay Partners,
L.P., a Delaware limited partnership
By: Greystar Holdings, Inc., a Delaware
corporation, its sole general partner
By:
Name:
Title:
WYNDHAM MANAGEMENT CORPORATION,
a Delaware corporation ("Manager")
By:
-----------------------------------
Name:
----------------------------
Title:
----------------------------
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Management Agreement
EXHIBIT B
---------
INSURANCE
---------
A. Pursuant to Section 8.1 of the Management Agreement ("Agreement")
made and entered into as of ______________, 199__ by and between
___________________ (the "Owner") and Wyndham Management Corporation (the
"Manager"), subject to reasonable availability, Manager shall procure and
maintain insurance in respect of the Project (as that term is defined in the
Agreement), at Owner's expense, as follows:
1. Property damage insurance in an amount not less than that
stipulated by Owner covering all real and personal property, which insurance
shall be written on an "all risks" and replacement cost form;
2. Boiler and machinery coverage insuring against damage to, and
against loss or damage caused by an accident or occurrence arising from or
related to, boilers, heating apparatus, pressure vessels and pipes, air
conditioning apparatus and electrical equipment, which insurance coverage shall
be written on a standard, broad form boiler and machinery policy (on a blanket
or comprehensive basis) and shall include "repair and replacement" coverage;
3. Commercial general liability insurance in an amount not less than
$1,000,000.00 per occurrence/$3,000,000.00 aggregate, insuring against liability
for bodily injury and property damage and, including without limitation, the
following coverage:
a) premises and operations liability;
b) independent contractors liability;
c) product/completed operations liability;
d) broad form property damage liability;
e) blanket contractual liability with respect to all
contracts, written and oral;
f) personal injury liability;
g) liquor liability, if applicable;
h) incidental malpractice liability; and
<PAGE>
Management Agreement
i) garagekeepers legal liability, if applicable.
4. If there are any owned vehicles, comprehensive automobile
liability insurance in an amount not less than $1,000,000.00 per occurrence
covering liability for bodily injury and property damage arising out of the
ownership, maintenance or use of all private passenger and commercial
vehicles and other equipment required to be licensed for road use;
5. Innkeeper's legal liability insurance covering the property of
premises guests in an amount not less than $10,000.00 per guest and
$250,000.00 per occurrence;
6. Safe depository insurance in an amount not less than $250,000.00
per occurrence;
7. Business interruption insurance written on an "all risks" form
either as endorsements to the policies satisfying (1) and (2) above or on a
separate policy, such insurance to include specific coverage for Manager's
Management Fee calculated based on the Gross Revenues used as the basis for
calculation of the business interruption insurance award and specific
coverage for any Termination Fee in the event there is 100% constructive
loss; and
8. Broad form umbrella/excess liability insurance, which shall cover
defense costs on a "first dollar" basis and shall provide coverage not less
than "following form" in respect of all underlying coverages, in an amount
not less than $25,000,000.00 covering against excess liability over
coverages provided by all primary general liability, automobile liability
and employers' liability insurance policies.
B. In addition, Owner and Manager agree that, subject to reasonable
availability, Manager shall maintain the following insurance with respect to
Project employees, agents and servants, at Owner's expense:
1. Workers' compensation insurance complying with the statutory
workers' compensation law for the state in which the Project is located;
provided, however, that, with the approval of Owner pursuant to the Annual
Plan or otherwise and so long as such election is permitted by applicable
law, Manager may elect, in lieu of subscribing to any worker's compensation
coverage under the law of any state, to procure and maintain an excess
indemnity policy (or alternate coverage) covering each claim formerly
covered by such law. Such policy will provide legal liability coverage,
including, to the extent permitted by law, punitive damages and
proportionate share of defense costs, over a retention by Owner of $500,000
per occurrence, with a policy limit of $5,000,000 per occurrence. Manager
also
B-2
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Management Agreement
shall procure and maintain an excess umbrella liability policy covering,
among other things, any losses from claims in excess of $5,000,000, up to
$25,000,000 in the aggregate. If at any time Manager determines that
subscribing to coverage under any applicable state's law would be more
economical than the foregoing procedures, or if subscribing to any such
coverage is required by law, then Manager shall do so and shall obtain
statutory workers compensation, employers liability and such other
insurance coverage as is required thereunder, provided that Owner consents
to any such change not required by law;
2. Employer's liability insurance in an amount not less than
$500,000.00 covering against liability in respect of employees, agents and
servants not covered by workers' compensation insurance and against
occupational disease benefits; an d
3. Employee fidelity insurance in an amount not less than
$1,000,000.00.
4. Employment practices insurance in an amount not less than
$1,000,000 per claim/aggregate.
Manager shall also maintain such other insurance as Manager shall deem necessary
for operation of the Project, with the prior approval of Owner.
C. All insurance procured and maintained pursuant to the Agreement
shall have such deductibles, limits and coverages, and shall otherwise be in
such form, as Owner and Manager shall agree. However, Owner assumes all
responsibility and risks with respect to the adequacy of insurance in respect of
the Hotel.
D. All insurance policies procured and maintained pursuant to the
Agreement shall have attached thereto an endorsement that such policy shall not
be canceled or materially changed without at least thirty (30) days prior
written notice to Owner and Manager.
E. All property damage insurance procured and maintained pursuant to
the Agreement, including, without limitation, insurance procured and maintained
pursuant to A(1), A(2) and A(7) above, shall name Owner and Manager as insureds
and shall provide for the payment of losses thereunder to Owner and Manager as
their respective interests shall appear thereon. All liability insurance
procured and maintained pursuant to the Agreement, including without limitation,
the policies procured and maintained pursuant to A(3), (4), (5), (6) and (8),
shall name Owner, Manager, their Affiliates and their and their Affiliates'
respective shareholders, partners, directors, officers, agents and employees as
insureds. All policies of Workers Compensation and Employers Liability pursuant
to B (1) and (2) shall include a waiver of subrogation in favor of Owner.
B-3
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Management Agreement
F. Any insurance procured and maintained pursuant to the Agreement by
either party may be effected under policies of blanket insurance which may cover
other properties managed or owned by such party.
B-4
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is entered into as of the ____
day of September, 1996, between Homegate Hospitality, Inc., a Delaware
corporation (the "Company"), and John C. Kratzer ("JCK").
RECITALS:
WHEREAS, JCK is the Chief Operating Officer of the Company and is an
integral part of its management who participates in the Company's planning and
policy decision-making;
WHEREAS, the Board of Directors of the Company (the "Board") desires to
assure itself of the continued management services of JCK by directly engaging
JCK as an officer of the Company; and
WHEREAS, JCK desires to commit himself to serve the Company on the terms
herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ JCK as its Chief
----------
Operating Officer, and JCK hereby agrees to accept such employment, on the terms
and conditions set forth herein, for the period commencing on the Effective
Date, as defined below, and expiring as of 11:59 p.m. on December 31, 1998
(unless sooner terminated as hereinafter set forth) (the "Term"). For the
purposes of this Agreement, the "Effective Date" shall mean the date on which
the Company has successfully completed an initial public offering (the
"Offering") of shares of common stock of the Company pursuant to that certain
Registration Statement on Form S-1, filed by the Company on August 30, 1996.
2. Duties and Restrictions.
-----------------------
(a) Duties as Employee of the Company. JCK shall, subject to the
---------------------------------
supervision of the President of the Company and the Board, have general
management and control of the investment affairs of the Company in the ordinary
course of its business with all such powers with respect to such general
management and control as may be reasonably incident to such responsibilities.
(b) Non-Compete. JCK agrees that he will not, for a period of two
-----------
years following the termination of his employment with the Company, knowingly
(i) employ, associate in any business relationship with, endeavor to entice away
from the Company or its subsidiary or otherwise interfere with any person who
was an employee of or consultant to the Company or any of its affiliates during
the one year-period preceding such termination or (ii) be employed by,
associated with or have any interest in, directly or indirectly (whether as
principal, director, officer, employee, consultant, partner, stockholder,
trustee, manager or otherwise), any extended-stay lodging company which is
directly competitive with the Company or its affiliates within a 25-mile radius
of any extended-stay lodging facility at which the Company or its affiliates
engage in business at the time of such termination; provided, however, that the
provisions of this
<PAGE>
Section 2(b) shall not apply in the event (x) the Company terminates JCK's
employment with the Company without "Cause" (as herein defined) or otherwise in
violation of this Agreement, or (y) JCK remains employed by the Company until
the Term of this Agreement expires.
(c) Confidentiality. During the period of his employment hereunder,
---------------
and following the term of such employment, JCK shall not, directly or
indirectly, at any time reveal, divulge or make known to any person or entity,
or use for JCK's personal benefit (including without limitation for the purpose
of soliciting business, whether or not competitive with any business of the
Company or any of its affiliates), any information acquired during the course of
employment hereunder with regard to the financial, business or other affairs of
the Company or any of its affiliates (including without limitation any list or
record of persons or entities with which the Company or any of its affiliates
has any dealings); provided however, that JCK shall not be required to keep
confidential any such information and may disclose such information under the
following circumstances:
(i) during the term of his employment hereunder, JCK may
disclose such confidential information to another employee of the
Company or to representatives or agents of the Company (such as
independent accountants and legal counsel) when such disclosure is
reasonably necessary or appropriate in connection with the performance
by JCK of his duties as an executive officer of the Company;
(ii) at the express direction of any authorized governmental
entity;
(iii) pursuant to a subpoena or other court process; or
(iv) as otherwise required by law or the rules, regulations,
or orders of any applicable regulatory body.
JCK shall, at any time requested by the Company (either during or after his
employment with the Company), promptly deliver to the Company all memoranda,
notes, reports, lists and other documents (and all copies thereof) relating to
the business of the Company or any of its affiliates which he may then possess
or have under his control.
(d) Restrictions on Transfer of Stock. The parties hereby
---------------------------------
acknowledge and agree that JCK will own 237,138 shares of Company common stock
as of the Effective Date (such number of shares may be adjusted pursuant to the
Offering). JCK hereby agrees that two-thirds of the shares (the "Restricted
Shares") of common stock issued to him shall not be transferable by him without
the Company's prior written consent, which consent may be withheld by the
Company in its sole discretion, prior to December 31, 2003; provided, however,
that (i) 50% of the Restricted Shares shall be released from this Section 2(d)
and freely transferable by JCK (subject to compliance with applicable securities
laws) if JCK is still an employee of the Company upon the earlier of (A) the
first date on which the Company owns 30 completed (acquired or constructed)
extended-stay lodging facilities, and (B) December 31, 1997, and (ii) the
remainder of such Restricted Shares shall be released from this Section 2(d) and
freely transferable by JCK (subject to compliance with applicable securities
laws) if JCK is still an employee of the Company upon the earlier of (A) the
first date on which the Company owns 60 completed extended-stay lodging
facilities, and (B) December 31, 1998.
2
<PAGE>
3. Compensation and Related Matters.
--------------------------------
(a) Base Salary. JCK shall receive an initial base salary paid
-----------
by the Company ("Base Salary") at the annual rate of $145,000, payable in
substantially equal monthly installments (or such other more frequent times as
executives of the Company normally are paid). The Base Salary may be adjusted
upward from time to time, as determined by the Company's Compensation Committee
in its sole discretion. Any payments payable to JCK hereunder in respect of any
calendar year during which JCK is employed by the Company for less than the
entire year, unless otherwise provided in the applicable plan or arrangement,
shall be prorated in accordance with the number of days in such calendar year
during which he is so employed. All amounts payable hereunder shall be net of
applicable withholding for federal income taxes and other taxes, as required by
law.
(b) Expenses. During the term of his employment hereunder, JCK
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by him (in accordance with the policies and procedures established by
the Board for its senior executive officers) in performing services hereunder,
provided that JCK properly accounts therefor in accordance with Company policy.
4. Termination. JCK's employment hereunder may be terminated by the
-----------
Company without any breach of this Agreement only under the following
circumstances.
(a) Death. JCK's employment hereunder shall terminate upon his
-----
death.
(b) Disability. If, as a result of JCK's incapacity due to
----------
physical or mental illness, JCK shall have been unable to perform his material
managerial duties and responsibilities hereunder on a full-time basis for 180
consecutive calendar days, and within 30 days after written notice of
termination is given (which may occur before or after the end of such 180 day
period) JCK shall not have returned to the performance of his material
managerial duties and responsibilities hereunder on a full-time basis, the
Company may terminate JCK's employment hereunder.
(c) Cause. The Company may terminate JCK's employment hereunder
-----
for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate JCK's employment hereunder upon:
(i) JCK's failure to obey the reasonable and lawful
orders of a material nature of the Board;
(ii) JCK's habitually neglecting or willfully disregarding
his duties of a material nature;
(iii) JCK's material violation of any material covenant of
JCK contained herein;
(iv) the engagement by JCK in dishonesty of a material
nature that relates to the performance of JCK's duties hereunder;
or
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<PAGE>
(v) the engagement by JCK in criminal conduct (other than
minor infractions and traffic violations) that relates to the performance of the
JCK's duties hereunder.
5. Compensation Upon Termination. JCK shall be entitled to the following
-----------------------------
compensation from the Company upon the termination of his employment.
(a) Cause. If JCK's employment shall be terminated for Cause, the
-----
Company shall pay JCK his Base Salary through the Date of Termination. Such
payments shall fully discharge the Company's obligations hereunder.
(b) Death or Breach of Agreement. If (A) JCK's employment is
----------------------------
terminated by reason of his death, or (B) the Company shall terminate JCK's
employment in breach of this Agreement (it being understood that a purported
termination of JCK's employment by the Company pursuant to any provision of this
Agreement that is disputed and finally determined not to have been proper shall
be a termination by the Company in breach of this Agreement), then the Company
shall pay JCK his Base Salary through December 31, 1998 in addition to all
benefits payable under the terms of any employee benefit plan or other
arrangement as of the Date of Termination. In the event of a termination by
reason of death, the stock transfer restrictions contained in Section 2(d) above
shall immediately lapse and all shares shall become immediately and fully vested
in JCK's spouse and/or children. In the event of a termination in breach of
this Agreement, JCK shall be considered to remain in the Company's employment
solely for the purpose of meeting the lapse provisions set forth in Section 2(d)
above. In addition, the Company shall make payments of premiums as necessary to
cause JCK and JCK's spouse and children under age 25 to continue to be covered
by the medical and dental insurance as in effect at and as of the Date of
Termination (or to provide as similar coverage as possible for the same premiums
if the continuation of existing coverage is not permitted) for one year after
the Date of Termination, in each case to the extent such coverage is available.
(c) Disability. During any period that JCK fails to perform his
----------
material managerial duties and responsibilities hereunder as a result of
incapacity due to physical or mental illness, JCK shall continue to receive his
Base Salary and any bonus payments until JCK's employment is terminated pursuant
to Section 4(b) hereof. After such termination, the Company shall pay to JCK,
on or before the fifth day following the Date of Termination (as hereinafter
defined), his Base Salary to the Date of Termination. In addition, the Company
shall make payments of premiums as necessary to cause JCK and JCK's spouse and
children under age 25 to continue to be covered by the medical and dental
insurance as in effect at and as of the Date of Termination (or to provide as
similar coverage as possible for the same premiums if the continuation of
existing coverage is not permitted) for one year after the Date of Termination,
in each case to the extent such coverage is available.
(d) Mitigation. JCK shall not be required to mitigate the amount of
----------
any payment provided for in this Section 5 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Section 5 be
reduced by any compensation earned by JCK as the result of employment by another
employer after the Date of Termination, or otherwise.
All amounts payable hereunder shall be net of applicable withholding for federal
income taxes and other taxes, as required by law.
4
<PAGE>
6. Other Provisions Relating to Termination.
----------------------------------------
(a) Notice of Termination. Any termination of JCK's employment by the
---------------------
Company (other than termination because of the death of JCK) shall be
communicated by written Notice of Termination to JCK. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of JCK's employment under the provision so indicated.
(b) Date of Termination. For purposes of this Agreement, "Date of
-------------------
Termination" shall mean (i) if JCK's employment is terminated by his death, the
date of his death; (ii) if JCK's employment is terminated because of a
disability pursuant to Section 4(b), then 30 days after Notice of Termination is
given (provided that JCK shall not have returned to the performance of his
duties on a full-time basis during such 30 day period); (iii) if JCK's
employment is terminated by the Company for Cause, then, subject to Section
6(c), the date specified in the Notice of Termination; and (iv) if JCK's
employment is terminated for any other reason, the date on which a Notice of
Termination is given.
(c) Cause. In the case of any termination of JCK for Cause, the
-----
Company will give JCK a Notice of Termination describing in reasonable detail
the facts or circumstances giving rise to JCK's termination (and, if applicable,
the action required to cure same) and will permit JCK 30 days to cure such
failure to comply or perform. Cause for JCK's termination will not be deemed to
exist until the expiration of the foregoing cure period, so long as JCK
continues to use his best efforts during the cure period to cure such failure.
If within 30 days following JCK's receipt of a Notice of Termination for Cause
(i) JCK delivers written notice to the Company denying that Cause exists, the
question of the existence or nonexistence of Cause will be submitted for
arbitration in accordance with Section 9; or (b) if JCK has not cured the facts
or circumstances giving rise to JCK's termination for Cause and shall not have
delivered a notice pursuant to clause (i) of this Section 6(c), then JCK's
termination for Cause shall be effective as of the date specified in the Notice
of Termination.
(d) Interest. Until paid, all past due amounts required to be paid by
--------
the Company under any provision of this Agreement shall bear interest at the
highest non-usurious rate permitted by applicable federal, state, or local law.
7. Successors; Binding Agreement.
-----------------------------
(a) Successors. This Agreement shall be binding upon, and inure to
----------
the benefit of, the Company, JCK, and their respective successors, assigns,
personal and legal representatives, executors, administrators, heirs,
distributees, devisees, and legatees, as applicable.
(b) Certain Payments. If JCK should die while any amounts would still
----------------
be payable to him hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to JCK's devisee, legatee, or other designee or, if there be no
such designee, to JCK's estate.
5
<PAGE>
8. Notice. For purposes of this Agreement, notices and all other
------
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when (i) delivered personally; (ii) sent by
facsimile or similar electronic device and confirmed; (iii) delivered by
overnight express; or (iv) if sent by any other means, upon receipt. Notices
and all other communications provided for in this Agreement shall be sent to the
parties at the addresses indicated on the signature page attached hereto, or
such other addresses of which the parties have received 10 days prior written
notice.
9. Disputes. In the event any dispute or controversy arises under this
--------
Agreement and is not resolved by mutual written agreement between JCK and the
Company within 30 days after notice of the dispute is first given, then, upon
the written request of JCK or the Company, such dispute or controversy shall be
submitted to arbitration, which arbitration shall be conducted in accordance
with the rules of the American Arbitration Association. Judgment may be entered
thereon and the results of arbitration will be binding and conclusive on the
parties hereto. Any arbitrator's award or finding or any judgment or verdict
thereon will be final and unappealable. All parties agree that venue for
arbitration will be in Dallas, Texas, and that any arbitration commenced in any
other venue will be transferred to Dallas, Texas, upon the written request of
any party to this Agreement. The prevailing party will be entitled to
reimbursement for reasonable attorneys fees, costs or other expenses pertaining
to the arbitration and the enforcement thereof and such attorneys fees, costs or
other expenses shall become a part of any award, judgment or verdict. All
arbitrations will have three individuals acting as arbitrators: one arbitrator
will be selected by JCK, one arbitrator will be selected by the Company, and the
two arbitrators so selected will select a third arbitrator. Any arbitrator
selected by a party will not be affiliated, associated or related to the party
selecting that arbitrator in any matter whatsoever. The decision of the
majority of the arbitrators will be binding on all parties.
10. Miscellaneous. No provision of this Agreement may be modified,
-------------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in writing signed by JCK and the Company. No waiver by either party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. The validity, interpretation,
construction, and performance of this Agreement shall be governed by the laws of
the State of Texas, excluding any choice-of-law provisions thereof.
11. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
12. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original, but all of which together will
constitute one and the same agreement.
THE SIGNATURE PAGE IS ATTACHED HERETO.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first above written.
ADDRESS:
HOMEGATE HOSPITALITY, INC.
a Delaware corporation
2001 Bryan Street, Suite 2300
Dallas, Texas 75201
Fax No.: (214) 863-1713
By:
---------------------
Robert A. Faith
President
--------------------------
John C. Kratzer
7
<PAGE>
EXHIBIT 10.4
HOMEGATE HOSPITALITY, INC.
1996 LONG-TERM INCENTIVE PLAN
SCOPE AND PURPOSE OF PLAN
Homegate Hospitality, Inc., a Delaware corporation (the "Corporation"), has
adopted this 1996 Long-Term Incentive Plan (the "Plan") to provide for the
granting of:
(a) Incentive Options (hereafter defined) to certain Key Employees
(hereafter defined);
(b) Nonstatutory Options (hereafter defined) to certain Key Employees and
Non-Employee Directors (hereafter defined); and
(c) Restricted Stock Awards (hereafter defined) to certain Key Employees.
The purpose of the Plan is to provide an incentive for Key Employees and
directors of the Corporation or its Subsidiaries (hereafter defined) to remain
in the service of the Corporation or its Subsidiaries, to extend to them the
opportunity to acquire a proprietary interest in the Corporation so that they
will apply their best efforts for the benefit of the Corporation and to aid the
Corporation in attracting able persons to enter the service of the Corporation
and its Subsidiaries.
SECTION 1. DEFINITIONS
1.1 "Acquiring Person" means any Person other than the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of the Corporation or
of a Subsidiary of the Corporation or of a corporation owned directly or
indirectly by the stockholders of the Corporation in substantially the same
proportions as their ownership of Stock of the Corporation or any trustee or
other fiduciary holding securities under an employee benefit plan of the
Corporation or of a Subsidiary of the Corporation or of a corporation owned
directly or indirectly by the stockholders of the Corporation in substantially
the same proportions as their ownership of Stock of the Corporation.
1.2 "Affiliate" means (a) any Person who is directly or indirectly the
beneficial owner of at least 10% of the voting power of the Voting Securities or
(b) any Person controlling, controlled by or under common control with the
Company or any Person contemplated in clause (a) of this Subsection 1.2.
--------------
<PAGE>
1.3 "Award" means the grant of any form of Option or Restricted Stock
Award under the Plan, whether granted individually, in combination or in tandem,
to a Holder pursuant to the terms, conditions and limitations that the Committee
may establish to fulfill the objectives of the Plan.
1.4 "Award Agreement" means the written agreement between the Corporation
and a Holder evidencing the terms, conditions and limitations of the Award
granted to that Holder.
1.5 "Board of Directors" means the board of directors of the Corporation.
1.6 "Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the state of Delaware are authorized or
obligated by law or executive order to close.
1.7 "Change in Control" means the event that is deemed to have occurred
if:
(a) any Acquiring Person is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 50% or more of the combined
voting power of the then outstanding Voting Securities of the Corporation;
or
(b) members of the Incumbent Board cease for any reason to constitute
at least a majority of the Board of Directors; or
(c) a public announcement is made of a tender or exchange offer by any
Acquiring Person for 50% or more of the outstanding Voting Securities of
the Corporation and the Board of Directors approves or fails to oppose that
tender or exchange offer in its statements in Schedule 14D-9 under the
Exchange Act; or
(d) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation or partnership
(or, if no such approval is required, the consummation of such a merger or
consolidation of the Corporation), other than (i) a merger or consolidation
that would result in the Voting Securities of the Corporation outstanding
immediately before the consummation thereof continuing to represent (either
by remaining outstanding or by being converted into Voting Securities of
the surviving entity or of a parent of the surviving entity) a majority of
the combined voting power of the Voting Securities of the surviving entity
(or its parent) outstanding immediately after that merger or consolidation
or (ii) a merger or consolidation of the Corporation with Extended Stay
Limited Partnership, a Texas limited partnership ("ESLP"); or
(e) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition
by the Corporation of all or
2
<PAGE>
substantially all the Corporation's assets (or, if no such approval is
required, the consummation of such a liquidation, sale or disposition in
one transaction or series of related transactions) other than a
liquidation, sale or disposition of all or substantially all the
Corporation's assets in one transaction or a series of related transactions
to a corporation owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their ownership of
Stock of the Corporation.
1.8 "Code" means the Internal Revenue Code of 1986, as amended.
1.9 "Committee" means the committee appointed pursuant to Section 3 by the
---------
Board of Directors to administer the Plan.
1.10 "Convertible Securities" means evidences of indebtedness, shares of
capital stock or other securities that are convertible into or exchangeable for
shares of Stock, either immediately or upon the arrival of a specified date or
the happening of a specified event.
1.11 "Corporation" means Homegate Hospitality, Inc., a Delaware
corporation.
1.12 "Date of Grant" has the meaning given it in Subsection 5.3.
--------------
1.13 "Disability" has the meaning given it in Subsection 10.3.
---------------
1.14 "Disinterested Person" means a Person that meets the definition of
both a "disinterested person" under Rule 16b-3(c)(2)(i) and an "outside
director" under Section 162(m).
1.15 "Effective Date" means the earlier of (a) the date the Plan is adopted
by the Board of Directors and (b) the date the Plan is approved by the
stockholders of the Corporation.
1.16 "Eligible Individuals" means (a) Key Employees and (b) Non-Employee
Directors only for purposes of Nonstatutory Options granted hereunder.
Notwithstanding the foregoing provisions of this Subsection 1.16, to ensure that
---------------
the requirements of the fourth sentence of Subsection 3.1 are satisfied, the
--------------
Board of Directors may from time to time specify individuals who shall not be
eligible for the grant of Awards or equity securities under any plan of the
Corporation or its Affiliates. Nevertheless, the Board of Directors may at any
time determine that an individual who has been so excluded from eligibility
shall become eligible for grants of Awards and grants of such other equity
securities under any plans of the Corporation or its Affiliates so long as that
eligibility will not impair the Plan's satisfaction of the conditions of Rule
16b-3.
1.17 "Employee" means any employee of the Corporation or of any of its
Subsidiaries, including officers and directors of the Corporation who are also
employees of the Corporation or of any of its Subsidiaries.
3
<PAGE>
1.18 "Exchange Act" means the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder or any successor law, as it may be
amended from time to time.
1.19 "Exercise Notice" has the meaning given it in Subsection 6.5.
--------------
1.20 "Exercise Price" has the meaning given it in Subsection 6.4.
--------------
1.21 "Fair Market Value" means, for a particular day:
(a) If shares of Stock of the same class are listed or admitted to
unlisted trading privileges on any national or regional securities exchange
at the date of determining the Fair Market Value, then the last reported
sale price, regular way, on the composite tape of that exchange on the last
Business Day before the date in question or, if no such sale takes place on
that Business Day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to unlisted
trading privileges on that securities exchange; or
(b) If shares of Stock of the same class are not listed or admitted to
unlisted trading privileges as provided in Subsection 1.21(a) and sales
------------------
prices for shares of Stock of the same class in the over-the-counter market
are reported by the National Association of Securities Dealers, Inc.
Automated Quotations, Inc. ("NASDAQ") Stock Market (or such other system
then in use) at the date of determining the Fair Market Value, then the last
reported sales price so reported on the last Business Day before the date in
question or, if no such sale takes place on that Business Day, the average
of the high bid and low asked prices so reported; or
(c) If shares of Stock of the same class are not listed or admitted to
unlisted trading privileges as provided in Subsection 1.21(a) and sales
------------------
prices for shares of Stock of the same class are not reported by the NASDAQ
Stock Market (or a similar system then in use) as provided in Subsection
----------
1.21(b), and if bid and asked prices for shares of Stock of the same class
-------
in the over-the-counter market are reported by NASDAQ (or, if not so
reported, by the National Quotation Bureau Incorporated) at the date of
determining the Fair Market Value, then the average of the high bid and low
asked prices on the last Business Day before the date in question; or
(d) If shares of Stock of the same class are not listed or admitted to
unlisted trading privileges as provided in Subsection 1.21(a) and sales
------------------
prices or bid and asked prices therefor are not reported by NASDAQ (or the
National Quotation Bureau Incorporated) as provided in Subsection 1.21(b)
------------------
or Subsection 1.21(c) at the date of determining the Fair Market Value,
------------------
then the value determined in good faith by the Committee, which
determination shall be conclusive for all purposes; or
4
<PAGE>
(e) If shares of Stock of the same class are listed or admitted to
unlisted trading privileges as provided in Subsection 1.21(a) or sales
------------------
prices or bid and asked prices therefor are reported by NASDAQ (or the
National Quotation Bureau Incorporated) as provided in Subsection 1.21(b)
------------------
or Subsection 1.21(c) at the date of determining the Fair Market Value, but
------------------
the volume of trading is so low that the Board of Directors determines in
good faith that such prices are not indicative of the fair value of the
Stock, then the value determined in good faith by the Committee, which
determination shall be conclusive for all purposes notwithstanding the
provisions of Subsections 1.21(a), (b) or (c).
------------------- --- ---
For purposes of valuing Incentive Options, the Fair Market Value of Stock shall
be determined without regard to any restriction other than one that, by its
terms, will never lapse. For purposes of the redemption provided for in
Subsection 9.3(d)(v), Fair Market Value shall have the meaning and shall be
- --------------------
determined as set forth above; provided, however, that the Committee, with
respect to any such redemption, shall have the right to determine that the Fair
Market Value for purposes of the redemption should be an amount measured by the
value of the shares of Stock, other securities, cash or property otherwise being
received by holders of shares of Stock in connection with the Restructuring and
upon that determination the Committee shall have the power and authority to
determine Fair Market Value for purposes of the redemption based upon the value
of such shares of stock, other securities, cash or property. Any such
determination by the Committee, as evidenced by a resolution of the Committee,
shall be conclusive for all purposes.
1.22 "Fair Value" means such value as is determined by a majority of the
"disinterested" directors of the Corporation, as evidenced by a resolution of
such disinterested directors, even if the disinterested directors of the
Corporation constitute less than a quorum. If the Corporation does not have any
disinterested directors, the Fair Value shall be such value as is determined by
a nationally recognized investment banking firm selected by the Corporation, the
expenses of which shall be borne by the Corporation.
1.23 "Holder" means an Eligible Individual to whom an outstanding Award has
been granted.
1.24 "Incumbent Board" means the individuals who, as of the Effective Date,
constitute the Board of Directors and any other individual who becomes a
director of the Corporation after that date and whose election or appointment by
the Board of Directors or nomination for election
by the Corporation's stockholders was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board.
1.25 "Incentive Option" means an incentive stock option as defined under
Section 422 of the Code and regulations thereunder.
1.26 "Key Employee" means any Employee or advisor whom the Committee
identifies as having a direct and significant effect on the performance of the
Corporation or any of its Subsidiaries.
5
<PAGE>
1.27 "Non-Employee Director" means a director of the Corporation who while
a director is not an Employee.
1.28 "Nonstatutory Option" means a stock option that does not satisfy the
requirements of Section 422 of the Code or that is designated at the Date of
Grant or in the applicable Award Agreement to be an option other than an
Incentive Option.
1.29 "Non-Surviving Event" means an event of Restructuring as described in
either Subsection 1.36(b) or Subsection 1.36(c).
------------------ ------------------
1.30 "Normal Retirement" means the separation of a Holder from employment
with the Corporation and its Subsidiaries with the right to receive an immediate
benefit under a retirement plan approved by the Corporation.
1.31 "Option" means either an Incentive Option or a Nonstatutory Option or
both.
1.32 "Person" means any person or entity of any nature whatsoever,
specifically including (but not limited to) an individual, a firm, a company, a
corporation, a partnership, a trust or other entity. A Person, together with
that Person's affiliates and associates (as "affiliate" and "associate" are
defined in Rule 12b-2 under the Exchange Act for purposes of this definition
only), and any Persons acting as a partnership, limited partnership, joint
venture, association, syndicate or other group (whether or not formally
organized) or otherwise acting jointly or in concert or in a coordinated or
consciously parallel manner (whether or not pursuant to any express agreement),
for the purpose of acquiring, holding, voting or disposing of securities of the
Corporation with that Person, shall be deemed a single "Person."
1.33 "Plan" means the Corporation's 1996 Long-Term Incentive Plan, as it
may be amended from time to time.
1.34 "Restricted Stock" means Stock that is nontransferable or subject to
substantial risk of forfeiture until specific conditions are met.
1.35 "Restricted Stock Award" means the grant or purchase, on the terms and
conditions of Section 8 or that the Committee otherwise determines, of
---------
Restricted Stock.
1.36 "Restructuring" means the occurrence of any one or more of the
following:
(a) The merger or consolidation of the Corporation with any Person,
whether effected as a single transaction or a series of related
transactions, with the Corporation remaining the continuing or surviving
entity of that merger or consolidation and the Stock remaining outstanding
and not changed into or exchanged for stock or other securities of any
other Person or of the Corporation, cash or other property, other than the
merger or consolidation of the Corporation with ESLP;
6
<PAGE>
(b) The merger or consolidation of the Corporation with any Person,
whether effected as a single transaction or a series of related
transactions, with (i) the Corporation not being the continuing or
surviving entity of that merger or consolidation or (ii) the Corporation
remaining the continuing or surviving entity of that merger or
consolidation but all or a part of the outstanding shares of Stock are
changed into or exchanged for stock or other securities of any other Person
or the Corporation, cash or other property, other than the merger or
consolidation of the Corporation with ESLP; or
(c) The transfer, directly or indirectly, of all or substantially all
of the assets of the Corporation (whether by sale, merger, consolidation,
liquidation or otherwise) to any Person (other than ESLP), whether effected
as a single transaction or a series of related transactions.
1.37 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange Act
or any successor rule, as it may be amended from time to time.
1.38 "Section 162(m)" means Section 162(m) of the Code or any successor
section under the Code, as it may be amended from time to time and as
interpreted by final or proposed regulations promulgated thereunder from time to
time.
1.39 "Securities Act" means the Securities Act of 1933 and the rules and
regulations promulgated thereunder or any successor law, as it may be amended
from time to time.
1.40 "Stock" means the Corporation's authorized common stock, par value
$.01 per share or any other securities that are substituted for the Stock as
provided in Section 9.
---------
1.41 "Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the Voting Securities is owned, directly or
indirectly, by that Person.
1.42 "Total Shares" has the meaning given it in Subsection 9.2.
--------------
1.43 "Voting Securities" means any securities that are entitled to vote
generally in the election of directors, in the admission of general partners or
in the selection of any other similar governing body.
SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN
2.1 Maximum Number of Shares. Subject to the provisions of Subsections
-----------
2.2 and 2.5 and Section 9, the aggregate number of shares of Stock that may be
- --- ---- ---------
issued or transferred pursuant to Awards under the Plan shall initially be seven
hundred fifty thousand (750,000), and shall automatically increase by one
hundred thousand (100,000) on each anniversary of the execution of this Plan
through the fifth such anniversary, resulting in a maximum of one million two
hundred fifty thousand (1,250,000) shares of stock issuable or transferable
pursuant to Awards under the Plan. Awards to which shares of such Stock relate
may be awarded to any one Eligible Individual or allocated among the Eligible
Individuals, as determined by the Committee and subject in all respects to the
other terms hereof (including, without limitation, Section 5).
---------
7
<PAGE>
2.2 Limitation of Shares. For purposes of the limitations specified in
Subsection 2.1, the following principles shall apply:
- --------------
(a) shares of Stock subject to outstanding Options and outstanding
shares of Restricted Stock shall count against and decrease the number of
shares of Stock that may be issued for purposes of Subsection 2.1;
--------------
(b) shares of Stock for which Options or Restricted Stock Awards
expire, are cancelled or otherwise terminate without being exercised or
vested, as applicable; shall be added back to the number of shares of Stock
that may be issued for purposes of Subsection 2.1;
--------------
(c) shares of Stock that are transferred by a Holder of an Award (or
withheld by the Corporation) as full or partial payment to the Corporation
of the purchase price of shares of Stock subject to an Option or the
Corporation's or any Subsidiary's tax withholding obligations shall not be
added back to the number of shares of Stock that may be issued for purposes
of Subsection 2.1 and shall not again be subject to Awards; and
--------------
(d) if the number of shares of Stock counted against the number of
shares that may be issued for purposes of Subsection 2.1 is based upon an
--------------
estimate made by the Corporation or the Committee as provided in clause (a)
above and the actual number of shares of Stock issued pursuant to the
applicable Award is greater or less than the estimated number, then, upon
such issuance, the number of shares of Stock that may be issued pursuant to
Subsection 2.1 shall be further reduced by the excess issuance or increased
--------------
by the shortfall, as applicable.
Notwithstanding the provisions of this Subsection 2.2, no Stock shall be
--------------
treated as issuable under the Plan to (i) Eligible Individuals subject to
Section 16 of the Exchange Act if otherwise prohibited from issuance under Rule
16b-3 or (ii) Persons subject to Section 162(m) if otherwise prohibited from
issuance under Section 162(m).
2.3 Description of Shares. The shares to be delivered under the Plan
shall be made available from (a) authorized but unissued shares of Stock, (b)
Stock held in the treasury of the Corporation or (c) previously issued shares of
Stock reacquired by the Corporation, including shares purchased on the open
market, in each situation as the Board of Directors or the Committee may
determine from time to time at its sole option.
2.4 Registration and Listing of Shares. From time to time, the Board of
Directors and appropriate officers of the Corporation shall and are authorized
to take whatever actions are necessary to file required documents with
governmental authorities, stock exchanges and other appropriate Persons to make
shares of Stock available for issuance pursuant to the exercise of Awards.
8
<PAGE>
2.5 Reduction in Outstanding Shares of Stock. Nothing in this Section 2
---------
shall impair the right of the Corporation to reduce the number of outstanding
shares of Stock pursuant to repurchases, redemptions or otherwise; provided,
however, that no reduction in the number of outstanding shares of Stock shall
(a) impair the validity of any outstanding Award, whether or not that Award is
fully exercisable or fully vested or (b) impair the status of any shares of
Stock previously issued pursuant to the exercise of an Award or thereafter
issued pursuant to a then-outstanding Award as duly authorized, validly issued,
fully paid and nonassessable shares.
SECTION 3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Committee shall administer the Plan with respect to
all Eligible Individuals who are subject to Section 16(b) of the Exchange Act or
Section 162(m); provided, however, that the Board of Directors may administer
-------- -------
the Plan with respect to all Eligible Individuals who are subject to Section
16(b) of the Exchange Act or Section 162(m). The Board of Directors may
administer the Plan with respect to all other Eligible Individuals or may
delegate all or part of that duty to the Committee. The Committee shall not have
the authority to appoint members of the Committee, except for references in
Subsections 3.1, 3.2 and 3.3, and unless the context otherwise requires,
- --------------- --- ---
references herein to the Committee shall also refer to the Board of Directors as
administrator of the Plan for Eligible Individuals who are not subject to
Section 16(b) of the Exchange Act or Section 162(m). The Committee shall be
constituted so that, as long as Stock is registered under Section 12 of the
Exchange Act, each member of the Committee shall be a Disinterested Person and
so that the Plan in all other applicable respects will qualify transactions
related to the Plan for the exemptions from Section 16(b) of the Exchange Act
provided by Rule 16b-3 and the exemption from the deductibility limitation
imposed by Section 162(m) provided by the performance-based compensation
exception described in Section 162(m), to the extent exemptions thereunder may
be available. No discretion regarding Awards to Eligible Individuals who are
subject to Section 16(b) of the Exchange Act or Section 162(m) shall be afforded
to a Person who is not a Disinterested Person. The number of Persons that shall
constitute the Committee shall be determined from time to time by a majority of
all the members of the Board of Directors and, unless that majority of the Board
of Directors determines otherwise or Rule 16b-3 or Section 162(m) is amended to
require otherwise, shall be no less than two Persons. Persons elected to serve
on the Committee as Disinterested Persons shall not be eligible to receive
Awards or equity securities under any plan of the Corporation or its affiliates
while they are serving as members of the Committee; shall not have received
Awards or such equity securities under any plan of the Corporation or its
Affiliates within one year before their appointment to the Committee becomes
effective; and shall not be eligible to receive Awards or such equity securities
under any plan of the Corporation or its Affiliates for such period following
service on the Committee as may be required by Rule 16b-3 for that person to
remain a Disinterested Person, in each case except for Awards or equity
securities granted as provided in paragraphs (c)(2)(i)(A), (B), (C)or (D) of
Rule 16b-3. Notwithstanding the foregoing, the Board of Directors may designate
the Compensation Committee of the Board of Directors to serve as the Committee
hereunder, provided that each member of such Compensation Committee is a
Disinterested Person and satisfies the requirements of the immediately preceding
sentence.
9
<PAGE>
3.2 Duration, Removal, Etc. The members of the Committee shall serve at
the discretion of the Board of Directors, which shall have the power, at any
time and from time to time, to remove members from or add members to the
Committee. Removal from the Committee may be with or without cause. Any
individual serving as a member of the Committee shall have the right to resign
from membership in the Committee by at least three days' written notice to the
Board of Directors. The Board of Directors, and not the remaining members of
the Committee, shall have the power and authority to fill all vacancies on the
Committee. The Board of Directors shall promptly fill any vacancy that causes
the number of members of the Committee to be below two or any other number that
Rule 16b-3 or Section 162(m) may require from time to time.
3.3 Meetings and Actions of Committee. The Board of Directors shall
designate which of the Committee members shall be the chairman of the Committee.
If the Board of Directors fails to designate a Committee chairman, the members
of the Committee shall elect one of the Committee members as chairman, who shall
act as chairman until he ceases to be a member of the Committee or until the
Board of Directors elects a new chairman. The Committee shall hold its meetings
at those times and places as the chairman of the Committee may determine. At
all meetings of the Committee, a quorum for the transaction of business shall be
required and a quorum shall be deemed present if at least a majority of the
members of the Committee are present. At any meeting of the Committee, each
member shall have one vote. All decisions and determinations of the Committee
shall be made by the majority vote or majority decision of all of its members
present at a meeting at which a quorum is present; provided, however, that any
decision or determination reduced to writing and signed by all of the members of
the Committee shall be as fully effective as if it had been made at a meeting
that was duly called and held. The Committee may make any rules and regulations
for the conduct of its business that are not inconsistent with the provisions of
the Plan, the Certificate of Incorporation of the Corporation, the by-laws of
the Corporation and Rule 16b-3 and Section 162(m) so long as applicable, as the
Committee may deem advisable.
3.4 Committee's Powers. Subject to the express provisions of the Plan and
Rule 16b-3, the Committee shall have the authority, in its sole and absolute
discretion, to (a) adopt, amend and rescind administrative and interpretive
rules and regulations relating to the Plan; (b) determine the Eligible
Individuals to whom, and the time or times at which, Awards shall be granted;
(c) determine the amount of cash and the number of shares of Stock or Restricted
Stock Awards or any combination thereof, that shall be the subject of each
Award; (d) determine the terms and provisions of each Award Agreement (which
need not be identical), including provisions defining or otherwise relating to
(i) the term and the period or periods and extent of exercisability of the
Options, (ii) the extent to which the transferability of shares of Stock issued
or transferred pursuant to any Award is restricted, (iii) the effect of
termination of employment of a Holder on the Award and (iv) the effect of
approved leaves of absence (consistent with any applicable regulations of the
Internal Revenue Service); (e) accelerate, pursuant to Section 9, the time of
---------
exercisability of any Option that has been granted; (f) construe the respective
Award Agreements and the Plan; (g) make determinations of the Fair Market Value
of the Stock pursuant to the Plan; (h) delegate its duties under the Plan to
such agents as it may appoint from time to time, provided
10
<PAGE>
that the Committee may not delegate its duties with respect to making Awards to
or otherwise with respect to Awards granted to, Eligible Individuals who are
subject to Section 16(b) of the Exchange Act or Section 162(m); (i) subject to
ratification by the Board of Directors, terminate, modify or amend the Plan; and
(j) make all other determinations, perform all other acts and exercise all other
powers and authority necessary or advisable for administering the Plan,
including the delegation of those ministerial acts and responsibilities as the
Committee deems appropriate. Subject to Rule 16b-3 and Section 162(m), the
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan, in any Award or in any Award Agreement in the manner
and to the extent it deems necessary or desirable to carry the Plan into effect,
and the Committee shall be the sole and final judge of that necessity or
desirability. The determinations of the Committee on the matters referred to in
this Subsection 3.4 shall be final and conclusive.
--------------
SECTION 4. ELIGIBILITY AND PARTICIPATION
4.1 Eligible Individuals. Subject to the limitations set forth in Section
-------
5, Awards may be granted pursuant to the Plan only to persons who are Eligible
- -
Individuals at the time of the grant thereof.
4.2 Grant of Awards. Subject to the express provisions of the Plan
(including, without limitation, Section 5), the Committee shall determine which
---------
Eligible Individuals shall be granted Awards from time to time. In making
grants, the Committee shall take into consideration the contribution that the
potential Holder has made or may make to the success of the Corporation or its
Subsidiaries and such other considerations as the Board of Directors may from
time to time specify. The Committee shall also determine the number of shares
subject to each of the Awards and shall authorize and cause the Corporation to
grant Awards in accordance with those determinations.
4.3 Date of Grant. Subject to the last sentence of this Subsection 4.3
--------------
and clause (ii) of the first sentence of Subsection 9.9, the date on which the
--------------
Committee completes all action resolving to offer an Award to an individual,
including the specification of the number of shares of Stock to be subject to
the Award, shall be the date on which the Award covered by an Award Agreement is
granted (the "Date of Grant"), even though certain terms of the Award Agreement
may not be determined at that time and even though the Award Agreement may not
be executed until a later time. In no event shall a Holder gain any rights in
addition to those specified by the Committee in its grant, regardless of the
time that may pass between the grant of the Award and the actual execution of
the Award Agreement by the Corporation and the Holder.
4.4 Award Agreements. Each Award granted under the Plan shall be
evidenced by an Award Agreement that is executed by the Corporation and the
Eligible Individual to whom the Award is granted and incorporating those terms
that the Committee shall deem necessary or desirable. More than one Award may
be granted under the Plan to the same Eligible Individual and be outstanding
concurrently. In the event an Eligible Individual is granted both one or more
11
<PAGE>
Incentive Options and one or more Nonstatutory Options, those grants shall be
evidenced by separate Award Agreements, one for each of the Incentive Option
grants and one for each of the Nonstatutory Option grants.
4.5 Limitation for Incentive Options. Notwithstanding any provision
contained herein to the contrary, (a) a person shall not be eligible to receive
an Incentive Option unless he is an Employee of the Corporation or a corporate
Subsidiary (but not a partnership Subsidiary) and (b) a Person shall not be
eligible to receive an Incentive Option if, immediately before the time the
Option is granted, that person owns (within the meaning of Sections 422 and
424(d) of the Code) stock possessing more than ten percent of the total combined
voting power or value of all classes of outstanding stock of the Corporation or
a Subsidiary. Nevertheless, Subsection 4.5(b) shall not apply if, at the time
-----------------
the Incentive Option is granted, the Exercise Price of the Incentive Option is
at least one hundred ten percent of Fair Market Value and the Incentive Option
is not, by its terms, exercisable after the expiration of five years from the
Date of Grant.
4.6 No Right to Award. The adoption of the Plan shall not be deemed to
give any Person a right to be granted an Award.
SECTION 5. AWARDS TO NON-EMPLOYEE DIRECTORS
5.1 Ineligibility for Other Awards. Non-employee Directors shall not be
eligible to receive any Awards under the Plan other than the automatic Awards
specified in this Section 5.
---------
5.2 Automatic Grant of Awards. Awards of Nonstatutory Options shall be
made automatically to Non-employee Directors as follows: Beginning in 1996 and
for each year thereafter, each Non-employee Director who is a director of the
Corporation on December 31st shall automatically be granted a Nonstatutory
Option for the purchase of 5,000 shares of Stock with such Award to be
immediately vested.
5.3 Available Stock. The automatic Awards specified in Subsection 5.2
--------------
shall be made in the amounts specified in Subsection 5.2 only if the number of
--------------
shares of Stock available to be issued, transferred or exercised pursuant to
Awards under the Plan (as calculated in Subsection 2) is sufficient to make all
------------
automatic grants required to be made in Subsection 5.2 on the Date of Grant of
--------------
those automatic Awards. If a lesser number of shares of Stock are available to
be issued or transferred pursuant to Awards under the Plan on the Date of Grant
of the automatic Awards described in Subsection 5.2, but their number is
--------------
insufficient to permit the grant of the entire number of shares specified in the
automatic Awards, then the number of available shares shall be apportioned
equally among the automatic Awards made on that date, and the number of shares
apportioned to each automatic Award shall be the amount of shares automatically
subject to that automatic Award.
5.4 Terms and Conditions of Automatic Award. Award Agreements for
Nonstatutory Option Awards to Non-employee Directors shall be in the form
attached hereto as Annex A and,
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12
<PAGE>
except a expressly provided in those Award Agreements, the automatic Awards to
Non-employee Directors shall not be subject to the provisions of Sections 9.2,
------------
9.3 or 10. In addition, the following terms and conditions shall apply to
- --- --
automatic Awards pursuant to Subsection 5.2: (a) the exercise price for each
--------------
share of Stock subject to the Option shall be the Fair Market Value of a share
of Stock on the Date of Grant of such Option; (b) the Option shall become fully
vested and exercisable immediatly; and (c) the Option shall terminate on the
earliest of (i) 11:59 p.m., Dallas, Texas, time, on the date ten years from the
Date of Grant, (ii) immediately when the Holder ceases to be a director, if the
Board demands or requests the Holder's resignation from the Board, (iii) 11:59
p.m., Dallas, Texas, time, on the date 90 days after the Holder ceases to be a
director for any reason other than the reasons specified in the preceding clause
(ii) or the following clause (iv) or (iv) 11:59 p.m., Dallas, Texas, time, on
the date one year after the Holder ceases to be a director because of death or
permanent disability (as defined in Annex A attached hereto).
-------
5.5 Tax Withholding. The Corporation shall have the right to require a
Non-employee Director to pay to the Corporation the amount necessary to satisfy
the Corporation's current or future obligation to withhold federal, state or
local income or other taxes that the Non-employee Director incurs by the
granting, vesting or exercising of an Option. Tax withholding obligations in
respect of Options to Non-employee Directors may not be satisfied by the
Corporation's withholding of Stock subject to the Option or by the Non-employee
Director's transfer of Stock to the Corporation.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS
All Options granted under the Plan (other than Options granted to Non-
employee Directors pursuant to Section 5) shall comply with, and the related
---------
Award Agreements shall be deemed to include and be subject to, the terms and
conditions set forth in this Section 6 (to the extent each term and condition
---------
applies to the form of Option) and also to the terms and conditions set forth in
Sections 8 and 9; provided, however, that the Committee may authorize an Award
- ---------- -
Agreement that expressly contains terms and provisions that differ from the
terms and provisions set forth in Subsections 8.2, 8.3 and 8.4 and any of the
--------------- --- ---
terms and provisions of Section 9 (other than Subsections 9.8 and 9.9).
--------- --------------- ---
6.1 Number of Shares. Each Award Agreement shall state the total number
of shares of Stock to which it relates.
6.2 Vesting. Each Award Agreement shall state the time or periods in
which or the conditions upon satisfaction of which, the right to exercise the
Option or a portion thereof shall vest and the number of shares of Stock for
which the right to exercise the Option shall vest at each such time, period or
fulfillment of condition.
6.3 Expiration of Options. Options may be exercised during the term
determined by the Committee and set forth in the Award Agreement; provided that
no Incentive Option shall be
13
<PAGE>
exercised after the expiration of a period of ten years commencing on the Date
of Grant of the Incentive Option.
6.4 Exercise Price. Each Award Agreement shall state the exercise price
per share of Stock (the "Exercise Price"); provided, however, that the exercise
price per share of Stock subject to an Incentive Option shall not be less than
the greater of (a) the par value per share of the Stock or (b) 100% of the Fair
Market Value per share of the Stock on the Date of Grant of the Option and the
exercise price per share of Stock subject to a Nonstatutory Option shall not be
less than the par value per share of the Stock (but may be less than the Fair
Market Value of a share of the Stock on the Date of Grant).
6.5 Method of Exercise. The Option shall be exercisable only by written
notice of exercise (the "Exercise Notice") delivered to the Corporation during
the term of the Option, which notice shall (a) state the number of shares of
Stock with respect to which the Option is being exercised, (b) be signed by the
Holder of the Option or, if the Holder is dead or becomes affected by a
Disability, by the person authorized to exercise the Option pursuant to
Subsection 9.3, (c) be accompanied by the Exercise Price for all shares of Stock
- --------------
for which the Option is being exercised and (d) include such other information,
instruments and documents as may be required to satisfy any other condition to
exercise contained in the Award Agreement. The Option shall not be deemed to
have been exercised unless all of the requirements of the preceding provisions
of this Subsection 6.5 have been satisfied.
--------------
6.6 Incentive Option Exercises. Except as otherwise provided in
Subsection 10.3, during a Holder's lifetime, only the Holder may exercise an
- ---------------
Incentive Option.
6.7 Medium and Time of Payment. The Exercise Price of an Option shall be
payable in full upon the exercise of the Option (a) in cash or by an equivalent
means acceptable to the Committee, (b) on the Committee's prior consent, with
shares of Stock owned by the Holder (including shares received upon exercise of
the Option or shares of Restricted Stock already held by the Holder) and having
a Fair Market Value at least equal to the aggregate Exercise Price payable in
connection with such exercise or (c) by any combination of clauses (a) and (b).
If the Committee elects to accept shares of Stock in payment of all or any
portion of the Exercise Price, then (for purposes of payment of the Exercise
Price) those shares of Stock shall be deemed to have a cash value equal to their
aggregate Fair Market Value determined as of the date the certificate for such
shares is delivered to the Corporation. If the Committee elects to accept
shares of Restricted Stock in payment of all or any portion of the Exercise
Price, then an equal number of shares issued pursuant to the exercise shall be
restricted on the same terms and for the restriction period remaining on the
shares used for payment.
6.8 Payment with Sale Proceeds. In addition, at the request of a Holder
and to the extent permitted by applicable law, the Committee may (but shall not
be required to) approve arrangements with a brokerage firm under which that
brokerage firm, on behalf of the Holder, shall pay to the Corporation the
Exercise Price of the Option being exercised and the Corporation
14
<PAGE>
shall promptly deliver the exercised shares of Stock to the brokerage firm. To
accomplish this transaction, the Holder must deliver to the Corporation an
Exercise Notice containing irrevocable instructions from the Holder to the
Corporation to deliver the Stock certificates representing the shares of Stock
directly to the broker. Upon receiving a copy of the Exercise Notice
acknowledged by the Corporation, the broker shall sell that number of shares of
Stock or loan the Holder an amount sufficient to pay the Exercise Price and any
withholding obligations due. The broker then shall deliver to the Corporation
that portion of the sale or loan proceeds necessary to cover the Exercise Price
and any withholding obligations due. The Committee shall not approve any
transaction of this nature if the Committee believes that the transaction would
give rise to the Holder's liability for short-swing profits under Section 16(b)
of the Exchange Act.
6.9 Payment of Taxes. The Committee may, in its discretion, require a
Holder to pay to the Corporation (or the Corporation's Subsidiary if the Holder
is an employee of a Subsidiary of the Corporation), at the time of the exercise
of an Option or thereafter, the amount that the Committee deems necessary to
satisfy the Corporation's or its Subsidiary's current or future obligation to
withhold federal, state or local income or other taxes that the Holder incurs by
exercising an Option. In connection with the exercise of an Option requiring tax
withholding, a Holder may (a) direct the Corporation to withhold from the shares
of Stock to be issued to the Holder the number of shares necessary to satisfy
the Corporation's obligation to withhold taxes, that determination to be based
on the shares' Fair Market Value as of the date of exercise; (b) deliver to the
Corporation sufficient shares of Stock (based upon the Fair Market Value as of
the date of such delivery) to satisfy the Corporation's tax withholding
obligation, which tax withholding obligation is based on the shares' Fair Market
Value as of the later of the date of exercise or the date as of which the shares
of Stock issued in connection with such exercise become includible in the income
of the Holder; or (c) deliver sufficient cash to the Corporation to satisfy its
tax withholding obligations. Holders who elect to use such a Stock withholding
feature must make the election at the time and in the manner that the Committee
prescribes. The Committee may, at its sole option, deny any Holder's request to
satisfy withholding obligations through Stock instead of cash. In the event the
Committee subsequently determines that the aggregate Fair Market Value (as
determined above) of any shares of Stock withheld or delivered as payment of any
tax withholding obligation is insufficient to discharge that tax withholding
obligation, then the Holder shall pay to the Corporation, immediately upon the
Committee's request, the amount of that deficiency in the form of payment
requested by the Committee.
6.10 Limitation on Aggregate Value of Shares That May Become First
Exercisable During Any Calendar Year Under an Incentive Option. Except as
otherwise provided in Subsection 9.3, with respect to any Incentive Option
--------------
granted under the Plan, the aggregate Fair Market Value of shares of Stock
subject to an Incentive Option and the aggregate Fair Market Value of shares of
Stock or stock of any Subsidiary (or a predecessor of the Corporation or a
Subsidiary) subject to any other incentive stock option (within the meaning of
Section 422 of the Code) of the Corporation or its Subsidiaries (or a
predecessor corporation of any such corporation) that first become purchasable
by a Holder in any calendar year may not (with respect to that Holder) exceed
$100,000 or such other amount as may be prescribed under Section 422
15
<PAGE>
of the Code or applicable regulations or rulings from time to time. As used in
the previous sentence, Fair Market Value shall be determined as of the Date of
Grant of the Incentive Option. For purposes of this Subsection 6.10,
---------------
"predecessor corporation" means (a) a corporation that was a party to a
transaction described in Section 424(a) of the Code (or which would be so
described if a substitution or assumption under that Section had been effected)
with the Corporation, (b) a corporation which, at the time the new incentive
stock option (within the meaning of Section 422 of the Code) is granted, is a
Subsidiary of the Corporation or a predecessor corporation of any such
corporations or (c) a predecessor corporation of any such corporations. Failure
to comply with this provision shall not impair the enforceability or
exercisability of any Option, but shall cause the excess amount of shares to be
reclassified in accordance with the Code.
6.11 No Fractional Shares. The Corporation shall not in any case be
required to sell, issue or deliver a fractional share with respect to any
Option. In lieu of the issuance of any fractional share of Stock, the
Corporation shall pay to the Holder an amount in cash equal to the same fraction
(as the fractional Stock) of the Fair Market Value of a share of Stock
determined as of the date of the applicable Exercise Notice.
6.12 Modification, Extension and Renewal of Options. Subject to the terms
and conditions of and within the limitations of the Plan, Rule 16b-3, and any
consent required by the last sentence of this Subsection 6.12, the Committee may
---------------
(a) modify, extend or renew outstanding Options granted under the Plan, (b)
accept the surrender of Options outstanding hereunder (to the extent not
previously exercised) and authorize the granting of new Options in substitution
for outstanding Options (to the extent not previously exercised) and (c) amend
the terms of an Incentive Option at any time to include provisions that have the
effect of changing the Incentive Option to a Nonstatutory Option. Nevertheless,
without the consent of the Holder, the Committee may not modify any outstanding
Options so as to specify a higher or lower Exercise Price or accept the
surrender of outstanding Incentive Options and authorize the granting of new
Options in substitution therefor specifying a higher or lower Exercise Price.
In addition, no modification of an Option granted hereunder shall, without the
consent of the Holder, alter or impair any rights or obligations under any
Option theretofore granted to such Holder under the Plan except, with respect to
Incentive Options, as may be necessary to satisfy the requirements of Section
422 of the Code or as permitted in clause (c) of this Subsection 6.12.
---------------
6.13 Other Agreement Provisions. Subject in all respects to Section 5, the
---------
Award Agreements authorized under the Plan shall contain such provisions in
addition to those required by the Plan (including, without limitation,
restrictions or the removal of restrictions upon the exercise of the Option and
the retention or transfer of shares thereby acquired) as the Committee may deem
advisable. Each Award Agreement shall identify the Option evidenced thereby as
an Incentive Option or Nonstatutory Option, as the case may be, and no Award
Agreement shall cover both an Incentive Option and a Nonstatutory Option. Each
Award Agreement relating to an Incentive Option granted hereunder shall contain
such limitations and restrictions upon the exercise of the Incentive Option to
which it relates as shall be necessary for the Incentive Option
16
<PAGE>
to which such Award Agreement relates to constitute an incentive stock option,
as defined in Section 422 of the Code.
SECTION 7. RESTRICTED STOCK AWARDS
All Restricted Stock Awards granted under the Plan shall comply with and be
subject to, and the related Award Agreements shall be deemed to include, the
terms and conditions set forth in this Section 7 and also to the terms and
---------
conditions set forth in Sections 8 and 9; provided, however, that the Committee
---------- -
may authorize an Award Agreement related to a Restricted Stock Award that
expressly contains terms and provisions that differ from the terms and
provisions set forth in Subsections 8.2, 8.3 and 8.4 and the terms and
--------------- --- ---
provisions set forth in Section 9 (other than Subsections 9.8 and 9.9).
7.1 Restrictions. All shares of Restricted Stock Awards granted or sold
pursuant to the Plan shall be subject to the following conditions:
(a) Transferability. The shares may not be sold, transferred or
otherwise alienated or hypothecated until the restrictions are removed or
expire.
(b) Conditions to Removal of Restrictions. Conditions to removal or
expiration of the restrictions may include, but are not required to be
limited to, continuing employment or service as a director, officer,
consultant or advisor or achievement of performance objectives described in
the Award Agreement.
(c) Legend. Each certificate representing Restricted Stock Awards
granted pursuant to the Plan shall bear a legend making appropriate
reference to the restrictions imposed.
(d) Possession. The Committee may require the Corporation to retain
physical custody of the certificates representing Restricted Stock Awards
during the restriction period and may require a Holder of the Award to
execute stock powers in blank for those certificates and deliver those
stock powers to the Corporation or the Committee may require the Holder to
enter into an escrow agreement providing that the certificates representing
Restricted Stock Awards granted or sold pursuant to the Plan shall remain
in the physical custody of an escrow holder until all restrictions are
removed or expire.
(e) Other Conditions. The Committee may impose other conditions on
any shares granted or sold as Restricted Stock Awards pursuant to the Plan
as it may deem advisable, including without limitation (i) restrictions
under the Securities Act or Exchange Act, (ii) the requirements of any
securities exchange upon which the shares or shares of the same class are
then listed and (iii) any state securities law applicable to the shares.
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7.2 Expiration of Restrictions. The restrictions imposed in Subsection
----------
8.1 on Restricted Stock Awards shall lapse as determined by the Committee and
- ---
set forth in the applicable Award Agreement, and the Corporation shall promptly
deliver to the Holder of the Restricted Stock Award a certificate representing
the number of shares for which restrictions have lapsed, free of any restrictive
legend relating to the lapsed restrictions. Each Restricted Stock Award may
have a different restriction period as determined by the Committee in its sole
discretion. The Committee may, in its discretion, prospectively reduce the
restriction period applicable to a particular Restricted Stock Award.
7.3 Rights as Stockholder. Subject to the provisions of Subsections 8.1
---------------
and 9.9 the Committee may, in its discretion, determine what rights, if any, a
---
Holder shall have with respect to the Restricted Stock Awards granted or sold,
including the right to vote the shares and receive all dividends and other
distributions paid or made with respect thereto.
7.4 Payment of Taxes. The Committee may, in its discretion, require a
Holder to pay to the Corporation (or the Corporation's Subsidiary if the Holder
is an employee of a Subsidiary of the Corporation) the amount that the Committee
deems necessary to satisfy the Corporation's or its Subsidiary's current or
future obligation to withhold federal, state or local income or other taxes that
the Holder incurs by reason of the Restricted Stock Award. A Holder may (a)
direct the Corporation to withhold from the shares of Stock to be issued to the
Holder the number of shares necessary to satisfy the Corporation's obligation to
withhold taxes, that determination to be based on the shares' Fair Market Value
as of the date on which tax withholding is to be made; (b) deliver to the
Corporation sufficient shares of Stock (based upon the Fair Market Value as of
the date of such delivery) to satisfy the Corporation's tax withholding
obligation, which tax withholding obligation is based on the shares' Fair Market
Value as of the later of the date of issuance or the date as of which the shares
of Stock issued become includible in the income of the Holder; or (c) deliver
sufficient cash to the Corporation to satisfy its tax withholding obligations.
Holders who elect to have Stock withheld pursuant to (a) or (b) above must make
the election at the time and in the manner that the Committee prescribes. The
Committee may, in its sole discretion, deny any Holder's request to satisfy
withholding obligations through Stock instead of cash. In the event the
Committee subsequently determines that the aggregate Fair Market Value (as
determined above) of any shares of Stock withheld or delivered as payment of any
tax withholding obligation is insufficient to discharge that tax withholding
obligation, then the Holder shall pay to the Corporation, immediately upon the
Committee's request, the amount of that deficiency.
7.5 Other Agreement Provisions. The Award Agreements relating to
Restricted Stock Awards shall contain such provisions in addition to those
required by the Plan as the Committee may deem advisable.
18
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SECTION 8. ADJUSTMENT PROVISIONS
8.1 Adjustment of Awards and Authorized Stock. The terms of an Award and
the number of shares of Stock authorized pursuant to Subsection 2.1 for issuance
--------------
under the Plan shall be subject to adjustment from time to time, in accordance
with the following provisions:
(a) If at any time or from time to time, the Corporation shall
subdivide as a whole (by reclassification, by a Stock split, by the
issuance of a distribution on Stock payable in Stock or otherwise) the
number of shares of Stock then outstanding into a greater number of shares
of Stock, then (i) the maximum number of shares of Stock available for the
Plan as provided in Subsection 2.1 shall be increased proportionately, and
--------------
the kind of shares or other securities available for the Plan shall be
appropriately adjusted, (ii) the number of shares of Stock (or other kind
of shares or securities) that may be acquired under any Award shall be
increased proportionately and (iii) the price (including Exercise Price)
for each share of Stock (or other kind of shares or securities) subject to
then outstanding Awards shall be reduced proportionately, without changing
the aggregate purchase price or value as to which outstanding Awards remain
exercisable or subject to restrictions.
(b) If at any time, or from time to time, the Corporation shall
consolidate as a whole (by reclassification, reverse Stock split or
otherwise) the number of shares of Stock then outstanding into a lesser
number of shares of Stock, (i) the maximum number of shares of Stock
available for the Plan as provided in Subsection 2.1 shall be decreased
--------------
proportionately, and the kind of shares or other securities available for
the Plan shall be appropriately adjusted, (ii) the number of shares of
Stock (or other kind of shares or securities) that may be acquired under
any Award shall be decreased proportionately and (iii) the price (including
Exercise Price) for each share of Stock (or other kind of shares or
securities) subject to then outstanding Awards shall be increased
proportionately, without changing the aggregate purchase price or value as
to which outstanding Awards remain exercisable or subject to restrictions.
(c) Whenever the number of shares of Stock subject to outstanding
Awards and the price for each share of Stock subject to outstanding Awards
are required to be adjusted as provided in this Subsection 8.1, the
--------------
Committee shall promptly prepare a notice setting forth, in reasonable
detail, the event requiring adjustment, the amount of the adjustment, the
method by which such adjustment was calculated, and the change in price and
the number of shares of Stock, other securities, cash or property
purchasable subject to each Award after giving effect to the adjustments.
The Committee shall promptly give each Holder such a notice.
(d) Adjustments under Subsections 8.1(a) and (b) shall be made by the
------------------ ---
Committee, and its determination as to what adjustments shall be made and
the extent
19
<PAGE>
thereof shall be final, binding and conclusive. No fractional
interest shall be issued under the Plan on account of any such adjustments.
8.2 Changes in Control. Upon the occurrence of a Change in Control, but
only if approved by the Committee, (a) all outstanding Options shall immediately
become fully vested and exercisable in full, including that portion of any
Option that pursuant to the terms and provisions of the applicable Award
Agreement had not yet become exercisable (the total number of shares of Stock as
to which an Option is exercisable upon the occurrence of a Change in Control is
referred to herein as the "Total Shares"); and (c) the restriction period of any
Restricted Stock Award shall immediately be accelerated and the restrictions
shall expire. The Committee shall also have the power and discretion (at the
time of grant of an Award or thereafter) to provide any or all of such vesting,
exercisability, acceleration and expiration provisions in any Award Agreements.
If a Change in Control involves a Restructuring or occurs in connection with a
series of related transactions involving a Restructuring and if such
Restructuring is in the form of a Non-Surviving Event and as a part of such
Restructuring shares of Stock, other securities, cash or property shall be
issuable or deliverable in exchange for Stock, then a Holder of an Award shall
be entitled to purchase or receive (in lieu of the Total Shares that the Holder
would otherwise be entitled to purchase or receive), as appropriate for the form
of Award, the number of shares of Stock, other securities, cash or property to
which that number of Total Shares would have been entitled in connection with
such Restructuring (and, for Options, at an aggregate exercise price equal to
the Exercise Price that would have been payable if that number of Total Shares
had been purchased on the exercise of the Option immediately before the
consummation of the Restructuring). Nothing in this Subsection 8.2 shall impose
--------------
on a Holder the obligation to exercise any Award immediately before or upon the
Change of Control or cause the Holder to forfeit the right to exercise the Award
during the remainder of the original term of the Award because of a Change in
Control.
8.3 Restructuring Without Change in Control. In the event a Restructuring
shall occur at any time while there is any outstanding Award hereunder and that
Restructuring does not occur in connection with a Change in Control or a series
of related transactions involving a Change in Control, then:
(a) no outstanding Option shall immediately become fully vested and
exercisable in full merely because of the occurrence of the Restructuring;
(b) the restriction period of any Restricted Stock Award shall not
immediately be accelerated and the restrictions expire merely because of
the occurrence of the Restructuring; and
(c) at the option of the Committee, the Committee may (but shall not
be required to) cause the Corporation to take any one or more of the
following actions:
20
<PAGE>
(i) accelerate in whole or in part the time of the vesting and
exercisability of any one or more of the outstanding Options so as to
provide that those Options shall be exercisable before, upon or after
the consummation of the Restructuring;
(ii) accelerate in whole or in part the expiration of some or all
of the restrictions on any Restricted Stock Award;
(iii) if the Restructuring is in the form of a Non-Surviving
Event, cause the surviving entity to assume in whole or in part any
one or more of the outstanding Awards upon such terms and provisions
as the Committee deems desirable; or
(iv) redeem in whole or in part any one or more of the outstanding
Awards (whether or not then exercisable) in consideration of a cash
payment, as such payment may be reduced for tax withholding
obligations as contemplated in Subsections 6.9, 7.6 or 8.4, as
--------------- --- ---
applicable, in an amount equal to:
(A) for Options, the excess of (1) the Fair Market Value,
determined as of the date immediately preceding the consummation
of the Restructuring, of the aggregate number of shares of Stock
subject to the Award and as to which the Award is being redeemed
over (2) the Exercise Price for that number of shares of Stock;
and
(B) for Restricted Stock Awards, the Fair Market Value,
determined as of the date immediately preceding the consummation
of the Restructuring, of the aggregate number of shares of Stock
subject to the Award and as to which the Award is being redeemed.
The Corporation shall promptly notify each Holder of any election or action
taken by the Corporation under this Subsection 8.3. In the event of any
--------------
election or action taken by the Corporation pursuant to this Subsection 8.3 that
--------------
requires the amendment or cancellation of any Award Agreement as may be
specified in any notice to the Holder thereof, the Holder shall promptly deliver
that Award Agreement to the Corporation in order for that amendment or
cancellation to be implemented by the Corporation and the Committee. The
failure of the Holder to deliver any such Award Agreement to the Corporation as
provided in the preceding sentence shall not in any manner affect the validity
or enforceability of any action taken by the Corporation and the Committee under
this Subsection 8.3, including without limitation any redemption of an Award as
--------------
of the consummation of a Restructuring. Any cash payment to be made by the
Corporation pursuant to this Subsection 8.3 in connection with the redemption of
---------------
any outstanding Awards shall be paid to the Holder thereof currently with the
delivery to the Corporation of the Award Agreement evidencing that Award;
provided, however, that any such redemption shall be effective upon the
consummation of the Restructuring notwithstanding that the payment of the
21
<PAGE>
redemption price may occur subsequent to the consummation. If all or any
portion of an outstanding Award is to be exercised or accelerated upon or after
the consummation of a Restructuring that does not occur in connection with a
Change in Control and is in the form of a Non-Surviving Event and as a part of
that Restructuring shares of stock, other securities, cash or property shall be
issuable or deliverable in exchange for Stock, then the Holder of the Award
shall thereafter be entitled to purchase or receive (in lieu of the number of
shares of Stock that the Holder would otherwise be entitled to purchase or
receive) the number of shares of Stock, other securities, cash or property to
which such number of shares of Stock would have been entitled in connection with
the Restructuring (and, for Options, upon payment of the aggregate exercise
price equal to the Exercise Price that would have been payable if that number of
Total Shares had been purchased on the exercise of the Option immediately before
the consummation of the Restructuring) and such Award Agreement shall be subject
to adjustments that shall be as nearly equivalent as may be practical to the
adjustments provided for in this Section 8. Notwithstanding the provisions of
---------
this Subsection 8.3, the Committee shall not have the power or authority to take
--------------
any action pursuant to this Subsection 8.3 that causes the Plan not to be in
--------------
compliance with the requirements of Rule 16b-3 and any such action purported to
be taken by the Committee shall be null and void and without any force or
effect.
8.4 Notice of Restructuring. The Corporation shall attempt to keep all
Holders informed with respect to any Restructuring or of any potential
Restructuring to the same extent that the Corporation's stockholders are
informed by the Corporation of any such event or potential event.
SECTION 9. ADDITIONAL PROVISIONS
9.1 Termination of Employment. If a Holder is an Eligible Individual
because the Holder is an Employee and if that employment relationship is
terminated for any reason other than (a) Normal Retirement, (b) that Holder's
death or (c) that Holder's Disability (hereinafter defined), then any and all
Awards held by such Holder in such Holder's capacity as an Employee as of the
date of the termination that are not yet exercisable (or for which restrictions
have not lapsed) shall become null and void as of the date of such termination
and the portion, if any, of such Awards that are exercisable as of the date of
termination shall be exercisable for a period of the lesser of (a) the remainder
of the term of the Award or (b) the date which is 180 days after the date of
termination. If a Holder is an Eligible Individual because such Holder is an
Employee and if that employment relationship is terminated as a result of (a)
Normal Retirement, (b) that Holder's death or (c) that Holder's Disability, then
any and all Awards held by such Holder in such Holder's capacity as an Employee
as of the date of termination that are not yet exercisable (or for which
restrictions have not lapsed) shall become exercisable (and the restrictions
thereon, if any, shall lapse) as of the date of termination, and all such Awards
held by that Holder as of the date of termination that are exercisable (either
as a result of this sentence or otherwise) shall be exercisable for a period of
the lesser of (a) the remainder of the term of the Award or (b) the date which
is 180 days after the date of termination. Any portion of any such Award not
22
<PAGE>
exercised upon the expiration of the lesser of the periods specified in (a) or
(b) of the preceding two sentences shall be null and void upon the expiration of
such period, as applicable.
9.2 Other Loss of Eligibility. If a Holder is an Eligible Individual
because the Holder is serving in a capacity other than as an Employee and if
that capacity is terminated for any reason other than the Holder's death or
Disability, then that portion, if any, of any and all Awards held by the Holder
that were granted because of that capacity which are not yet exercisable (or for
which restrictions have not lapsed) as of the date of the termination shall
become null and void as of the date of the termination; provided, however, that
the portion, if any, of any and all Awards held by the Holder that are then
exercisable as of the date of the termination shall survive the termination and
shall be exercisable for a period of the lesser of (a) the remainder of the term
of the Award or (b) 180 days following the date such capacity terminated. If a
Holder is an Eligible Individual because the Holder is serving in a capacity
other than as an Employee and if that capacity is terminated by reason of the
Holder's death or Disability, then the portion, if any, of any and all Awards
held by the Holder that are not yet exercisable (or for which restrictions have
not lapsed) as of the date of that termination for death or Disability shall
become exercisable (and the restrictions thereon, if any, shall lapse) and all
such Awards held by that Holder as of the date of termination that are
exercisable (either as a result of this sentence or otherwise) shall be
exercisable for a period of the lesser of (a) the remainder of the term of the
Award or (b) the date which is 180 days after the date of termination. Any
portion of an Award not exercised upon the expiration of the lesser of the
periods specified in (a) or (b) of the preceding two sentences shall be null and
void upon the expiration of such period, as applicable.
9.3 Death or Disability. Upon the death or Disability of a Holder, any
and all Awards held by the Holder that are not yet exercisable (or for which
restrictions have not lapsed) as of the date of the Holder's death or Disability
may be exercised by, in the case of the Holder's Disability, the Holder, his
guardian or his legal representative or, in the case of the Holder's death, by
the Holder's legal representatives, heirs, legatees or distributees, in each
case for the periods prescribed in Subsection 9.1 or Subsection 9.2, as
-------------- --------------
applicable. "Disability" shall have the meaning given it in the employment
agreement of the Holder; provided, however, that if that the Holder has no
employment agreement, "Disability" shall mean, as determined by the Board of
Directors in the sole discretion exercised in good faith of the Board of
Directors, a physical or mental impairment of sufficient severity that either
the Holder is unable to continue performing the duties he performed before such
impairment or the Holder's condition entitles him to disability benefits under
any insurance or employee benefit plan of the Corporation or its Subsidiaries
and that impairment or condition is cited by the Corporation as the reason for
termination of the Holder's employment or participation as a member of the Board
of Directors.
9.4 Leave of Absence. With respect to an Award, the Committee may, in its
sole discretion, determine that any Holder who is on leave of absence for any
reason will be considered to still be in the employ of the Corporation, provided
that rights to that Award during a leave of absence will be limited to the
extent to which those rights were earned, vested or exercisable when the leave
of absence began.
23
<PAGE>
9.5 Transferability of Awards. In addition to such other terms and
conditions as may be included in a particular Award Agreement, an Award
requiring exercise shall be exercisable during a Holder's lifetime only by that
the Holder or by that the Holder's guardian or legal representative. An Award
requiring exercise shall not be transferrable other than by will or the laws of
descent and distribution.
9.6 Forfeiture and Restrictions on Transfer. Each Award Agreement may
contain or otherwise provide for conditions giving rise to the forfeiture of the
Stock acquired pursuant to an Award or otherwise and may also provide for those
restrictions on the transferability of shares of the Stock acquired pursuant to
an Award or otherwise that the Committee in its sole and absolute discretion may
deem proper or advisable. The conditions giving rise to forfeiture may include,
but need not be limited to, the requirement that the Holder render substantial
services to the Corporation or its Subsidiaries for a specified period of time.
The restrictions on transferability may include, but need not be limited to,
options and rights of first refusal in favor of the Corporation and stockholders
of the Corporation other than the Holder of such shares of Stock who is a party
to the particular Award Agreement or a subsequent holder of the shares of Stock
who is bound by that Award Agreement.
9.7 Delivery of Certificates of Stock. Subject to Subsection 9.8, the
--------------
Corporation shall promptly issue and deliver a certificate representing the
number of shares of Stock as to which (a) an Option has been exercised after the
Corporation receives an Exercise Notice and upon receipt by the Corporation of
the Exercise Price and any tax withholding as may be requested or (b)
restrictions have lapsed with respect to a Restricted Stock Award and upon
receipt by the Corporation of any tax withholding as may be requested. The
value of the shares of Stock or cash transferable because of an Award under the
Plan shall not bear any interest owing to the passage of time, except as may be
otherwise provided in an Award Agreement. If a Holder is entitled to receive
certificates representing Stock received for more than one form of Award under
the Plan, separate Stock certificates shall be issued with respect to Incentive
Options and Nonstatutory Options.
9.8 Conditions to Delivery of Stock. Nothing herein or in any Award
granted hereunder or any Award Agreement shall require the Corporation to issue
any shares with respect to any Award if that issuance would, in the opinion of
counsel for the Corporation, constitute a violation of the Securities Act or any
similar or superseding statute or statutes, any other applicable statute or
regulation or the rules of any applicable securities exchange or securities
association, as then in effect. At the time of any exercise of an Option or at
the time of any grant of a Restricted Stock Award, the Corporation may, as a
condition precedent to the exercise of such Option or vesting of any Restricted
Stock Award, require from the Holder of the Award (or in the event of his death,
his legal representatives, heirs, legatees or distributees) such written
representations, if any, concerning the Holder's intentions with regard to the
retention or disposition of the shares of Stock being acquired pursuant to the
Award and such written covenants and agreements, if any, as to the manner of
disposal of such shares as, in the opinion of counsel to the Corporation, may be
necessary to ensure that any disposition by that Holder (or
24
<PAGE>
in the event of the Holder's death, his legal representatives, heirs, legatees
or distributees) will not involve a violation of the Securities Act or any
similar or superseding statute or statutes, any other applicable state or
federal statute or regulation or any rule of any applicable securities exchange
or securities association, as then in effect.
9.9 Certain Directors and Officers. With respect to Holders who are
directors or officers of the Corporation or any of its Subsidiaries and who are
subject to Section 16(b) of the Exchange Act, (i) Awards and all rights under
the Plan shall be exercisable during a Holder's lifetime only by the Holder or
the Holder's guardian or legal representative, but not for at least six months
after the date of grant, as determined in accordance with Rule 16b-3 and (ii)
all Awards granted prior to the date the stockholders of the Corporation shall
have approved the Plan shall be subject to such stockholder approval, may not be
transferred or exercised, as applicable, until such stockholder approval is
obtained, and shall become null and void on the first anniversary of the
Effective Date if such stockholder approval is not obtained on or before the
Effective Date. In addition, no such officer or director shall have shares of
Stock withheld to pay tax withholding obligations within the first six months
after the date of grant of an Award, as determined in accordance with Rule 16b-
3, unless permitted under Rule 16b-3 and agreed to by the Committee. Any
election by any such officer or director to have tax withholding obligations
satisfied by the withholding of shares of Stock shall be irrevocable and shall
be communicated to the Committee during the period beginning on the third day
following the date of release of quarterly or annual summary statements of sales
and earnings and ending on the twelfth business day following such date, by an
irrevocable election communicated to the Committee at least six months before
the date of exercise of the Award for which such withholding is desired or as
otherwise permitted under Rule 16b-3.
9.10 Securities Act Legend. Certificates for shares of Stock, when issued,
may have the following legend or statements of other applicable restrictions,
endorsed thereon and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED,
TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES
EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION OF THE
ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT
SUCH OFFER, SALE, PLEDGE, TRANSFER, OR OTHER DISPOSITION WILL NOT VIOLATE
APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Stock issued pursuant to an
effective registration statement under the Securities Act.
25
<PAGE>
9.11 Legend for Restrictions on Transfer. Each certificate representing
shares issued to a Holder pursuant to an Award granted under the Plan shall, if
such shares are subject to any transfer restriction, including a right of first
refusal, provided for under the Plan or an Award Agreement, bear a legend that
complies with applicable law with respect to the restrictions on transferability
contained in this Subsection 9.11, such as:
---------------
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY IMPOSED BY THAT CERTAIN INSTRUMENT ENTITLED
"HOMEGATE HOSPITALITY, INC. 1996 LONG-TERM INCENTIVE PLAN" AS ADOPTED BY
HOMEGATE HOSPITALITY, INC. (THE "CORPORATION"), ON _______, 1996, AND AN
AGREEMENT THEREUNDER BETWEEN THE CORPORATION AND THE INITIAL HOLDER THEREOF
DATED _______, 199 , AND MAY NOT BE TRANSFERRED, SOLD, OR OTHERWISE
DISPOSED OF EXCEPT AS THEREIN PROVIDED. THE CORPORATION WILL FURNISH A COPY
OF SUCH INSTRUMENT AND AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE
WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE.
9.12 Rights as a Stockholder. A Holder shall have no right as a
stockholder with respect to any shares covered by his Award until a certificate
representing those shares is issued in his name. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash or other property) or
distributions or other rights for which the record date is before the date that
certificate is issued, except as contemplated by Section 9 hereof.
---------
Nevertheless, dividends, dividend equivalent rights and voting rights may be
extended to and made part of any Award (other than Options) denominated in Stock
or units of Stock, subject to such terms, conditions and restrictions as the
Committee may establish. The Committee may also establish rules and procedures
for the crediting of interest on deferred cash payments and dividend equivalents
for deferred payment denominated in Stock or units of Stock.
9.13 Furnish Information. Each Holder shall furnish to the Corporation all
information requested by the Corporation to enable it to comply with any
reporting or other requirement imposed upon the Corporation by or under any
applicable statute or regulation.
9.14 Obligation to Exercise. The granting of an Award hereunder shall
impose no obligation upon a Holder to exercise the same or any part thereof.
9.15 Adjustments to Awards. Subject to the general limitations set forth
in Sections 5, 6, 7 and 9, the Committee may make any adjustment in the
---------- - - -
exercise price of, the number of shares subject to or the terms of a
Nonstatutory Option by cancelling an outstanding Nonstatutory Option and
regranting a Nonstatutory Option. Such adjustment shall be made by amending,
substituting or regranting an outstanding Nonstatutory Option. Such amendment,
substitution or regrant may result in terms and conditions that differ from the
terms and conditions of the original
26
<PAGE>
Nonstatutory Option. The Committee may not, however, impair the rights of any
Holder of previously granted Nonstatutory Options without that Holder's consent.
If such action is effected by amendment, such amendment shall be deemed
effective as of the Date of Grant of the amended Award.
9.16 Remedies. The Corporation shall be entitled to recover from a Holder
reasonable attorneys' fees incurred in connection with the enforcement of the
terms and provisions of the Plan and any Award Agreement whether by an action to
enforce specific performance or for damages for its breach or otherwise.
9.17 Information Confidential. As partial consideration for the granting
of each Award hereunder, a Holder shall agree with the Corporation that he will
keep confidential all information and knowledge that he has relating to the
manner and amount of his participation in the Plan; provided, however, that such
information may be disclosed as required by law and may be given in confidence
to the Holder's spouse, tax or financial advisors or to a financial institution
to the extent that such information is necessary to secure a loan. In the event
any breach of this promise comes to the attention of the Committee, it shall
take into consideration that breach in determining whether to recommend the
grant of any future Award to that Holder, as a factor mitigating against the
advisability of granting any such future Award to that Person.
9.18 Consideration. No Option shall be exercisable and no restriction on
any Restricted Stock Award shall lapse with respect to a Holder unless and until
the Holder thereof shall have paid cash or property to or performed services
for, the Corporation or any of its Subsidiaries that the Committee believes is
equal to or greater in value than the par value of the Stock subject to such
Award.
SECTION 10. EFFECTIVENESS, DURATION AND AMENDMENT OF PLAN
10.1 Effectiveness; Duration. Notwithstanding the provisions of the Plan,
Awards granted prior to the date the stockholders of the Corporation approve the
Plan shall be subject to such stockholder approval and may not be transferred or
exercised, as applicable, until such stockholder approval is obtained. All such
Awards shall become null and void, and the Plan shall terminate, on the first
anniversary date of the Effective Date if such stockholder approval is not
obtained on or before such date. No Awards may be granted hereunder after the
date that is ten years from the earlier of (a) the date the Plan is adopted by
the Board of Directors and (b) the date the Plan is approved by the stockholders
of the Corporation.
10.2 Amendment. The Committee may, insofar as permitted by law and subject
to ratification of the Board of Directors, with respect to any shares which, at
the time, are not subject to Awards, suspend or discontinue the Plan or revise
or amend it in any respect whatsoever and may amend any provision of the Plan or
any Award Agreement to make the Plan or the Award Agreement, or both, comply
with Section 16(b) of the Exchange Act and the exemptions from those sections in
the regulations thereunder. The Committee may also, subject
27
<PAGE>
to ratification of the Board of Directors, amend, modify, suspend or terminate
the Plan for the purpose of meeting or addressing any changes in other legal
requirements applicable to the Corporation or the Plan or for any other purpose
permitted by law. The Plan may not be amended without the consent of the holders
of a majority of the shares of Stock then outstanding to (a) increase materially
the aggregate number of shares of Stock that may be issued under the Plan
(except for adjustments pursuant to Section 9 hereof), (b) increase materially
---------
the benefits accruing to Eligible Individuals under the Plan or (c) modify
materially the requirements about eligibility for participation in the Plan;
provided, however, that such amendments may be made without the consent of
stockholders of the Corporation if changes occur in law or other legal
requirements (including Rule 16b-3 or Section 162(m)) that would permit such
changes. Notwithstanding the provisions of this Subsection 10.2, the Committee
---------------
specifically shall have the authority, subject to ratification by the Board of
Directors, to amend the Plan (without approval of the holders of the shares of
Stock then outstanding) to the extent required to cause the Plan, as it relates
to Options granted to Eligible Individuals subject to Section 162(m), to comply
with the requirements for classification of Awards as "performance-based
compensation" under Section 162(m)(4)(C), except for such amendments that
require such stockholder approval under Section 162(m).
SECTION 11. GENERAL
11.1 Application of Funds. The proceeds received by the Corporation from
the sale of shares pursuant to Awards may be used for any general corporate
purpose.
11.2 Right of the Corporation and Subsidiaries to Terminate Employment.
Nothing contained in the Plan, or in any Award Agreement, shall confer upon any
Holder the right to continue in the employ of the Corporation or any Subsidiary
or interfere in any way with the rights of the Corporation or any Subsidiary to
terminate the Holder's employment at any time.
11.3 No Liability for Good Faith Determinations. Neither the members of
the Board of Directors nor any member of the Committee shall be liable for any
act, omission or determination taken or made in good faith with respect to the
Plan or any Award granted under it; and members of the Board of Directors and
the Committee shall be entitled to indemnification and reimbursement by the
Corporation in respect of any claim, loss, damage or expense (including
attorneys' fees, the costs of settling any suit, provided such settlement is
approved by independent legal counsel selected by the Corporation, and amounts
paid in satisfaction of a judgment, except a judgment based on a finding of bad
faith) arising therefrom to the full extent permitted by law and under any
directors' and officers' liability or similar insurance coverage that may from
time to time be in effect. This right to indemnification shall be in addition
to, and not a limitation on, any other indemnification rights any member of the
Board of Directors or the Committee may have.
28
<PAGE>
11.4 Other Benefits. Participation in the Plan shall not preclude a Holder
from eligibility in any other stock or stock option plan of the Corporation or
any Subsidiary or any old age benefit, insurance, pension, profit sharing,
retirement, bonus or other extra compensation plans that the Corporation or any
Subsidiary has adopted or may, at any time, adopt for the benefit of its
Employees. Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to the stockholders of the Corporation for approval shall
be construed as creating any limitations on the power of the Board of Directors
to adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options and the awarding of stock and
cash otherwise than under the Plan and such arrangements may be either generally
applicable or applicable only in specific cases.
11.5 Exclusion from Pension and Profit-Sharing Compensation. By acceptance
of an Award (regardless of form), as applicable, each Holder shall be deemed to
have agreed that the Award is special incentive compensation that will not be
taken into account in any manner as salary, compensation or bonus in determining
the amount of any payment under any pension, retirement or other employee
benefit plan of the Corporation or any Subsidiary unless any pension, retirement
or other employee benefit plan of the Corporation or any Subsidiary expressly
provides that such Award shall be so considered for purposes of determining the
amount of any payment under any such plan. In addition, each beneficiary of a
deceased Holder shall be deemed to have agreed that the Award will not affect
the amount of any life insurance coverage, if any, provided by the Corporation
or a Subsidiary on the life of a Holder that is payable to the beneficiary under
any life insurance plan covering employees of the Corporation or any Subsidiary.
11.6 Execution of Receipts and Releases. Any payment of cash or any
issuance or transfer of shares of Stock to a Holder or to his legal
representative, heir, legatee or distributee, in accordance with the provisions
hereof, shall, to the extent thereof, be in full satisfaction of all claims of
such persons hereunder. The Committee may require any Holder, legal
representative, heir, legatee or distributee, as a condition precedent to such
payment, to execute a release and receipt therefor in such form as it shall
determine.
11.7 Unfunded Plan. Insofar as it provides for Awards of cash and Stock,
the Plan shall be unfunded. Although bookkeeping accounts may be established
with respect to Holders who are entitled to cash, Stock or rights thereto under
the Plan, any such accounts shall be used merely as a bookkeeping convenience.
The Corporation shall not be required to segregate any assets that may at any
time be represented by cash, Stock or rights thereto, nor shall the Plan be
construed as providing for such segregation, nor shall the Corporation nor the
Board of Directors nor the Committee be deemed to be a trustee of any cash,
Stock or rights thereto to be granted under the Plan. Any liability of the
Corporation to any Holder with respect to a grant of cash, Stock or rights
thereto under the Plan shall be based solely upon any contractual obligations
that may be created by the Plan and any Award Agreement; no such obligation of
the Corporation shall be deemed to be secured by any pledge or other encumbrance
on any property of the Corporation.
29
<PAGE>
Neither the Corporation nor the Board of Directors nor the Committee shall be
required to give any security or bond for the performance of any obligation that
may be created by the Plan.
11.8 No Guarantee of Interests. Neither the Committee nor the Corporation
guarantees the Stock of the Corporation from loss or depreciation.
11.9 Payment of Expenses. All expenses incident to the administration,
termination or protection of the Plan, including, but not limited to, legal and
accounting fees, shall be paid by the Corporation or its Subsidiaries.
11.10 Corporation Records. Records of the Corporation or its Subsidiaries
regarding a Holder's period of employment, termination of employment and the
reason therefor, leaves of absence, re-employment and other matters shall be
conclusive for all purposes hereunder, unless determined by the Committee to be
incorrect.
11.11 Information. The Corporation and its Subsidiaries shall, upon
request or as may be specifically required hereunder, furnish or cause to be
furnished all of the information or documentation which is necessary or required
by the Committee to perform its duties and functions under the Plan.
11.12 No Liability of Corporation. The Corporation assumes no obligation
or responsibility to a Holder or his legal representatives, heirs, legatees or
distributees for any act of, or failure to act on the part of, the Committee.
11.13 Corporation Action. Any action required of the Corporation shall be
by resolution of its Board of Directors or by a person authorized to act by
resolution of the Board of Directors.
11.14 Severability. In the event that any provision of the Plan, or the
application hereof to any Person or circumstance, is held by a court of
competent jurisdiction to be invalid, illegal or unenforceable in any respect
under present or future laws effective during the effective term of any such
provision, such invalid, illegal or unenforceable provision shall be fully
severable; and the Plan shall then be construed and enforced as if such invalid,
illegal or unenforceable provision had not been contained in the Plan; and the
remaining provisions of the Plan shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance from the Plan. Furthermore, in lieu of each such illegal, invalid or
unenforceable provision, there shall be added automatically as part of the Plan
a provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable. If any of the
terms or provisions of the Plan conflict with the requirements of Rule 16b-3 (as
those terms or provisions are applied to Eligible Individuals who are subject to
Section 16(b) of the Exchange Act), then those conflicting terms or provisions
shall be deemed inoperative to the extent they so conflict with the requirements
of Rule 16b-3 and, in lieu of such conflicting provision, there shall be added
automatically as part of the Plan a provision as similar in terms to such
conflicting provision as may be possible and not conflict with
30
<PAGE>
the requirements of Rule 16b-3. If any of the terms or provisions of the Plan
conflict with the requirements for classification of Awards as "performance-
based compensation" under Section 162(m)(4)(C) of the Code (as those terms or
provisions are applied to Options granted to Eligible Individuals who are
subject to Section 162(m) of the Code), then those conflicting terms or
provisions shall be deemed inoperative to the extent they so conflict with such
requirements of Section 162(m)(4)(C) of the Code and, in lieu of such
conflicting provision, there shall be added automatically as part of the Plan a
provision as similar in terms to such conflicting provision as may be possible
and not conflict with such requirements of Section 162(m)(4)(C) of the Code. If
any of the terms or provisions of the Plan conflict with the requirements of
Section 422 of the Code (with respect to Incentive Options), then those
conflicting terms or provisions shall be deemed inoperative to the extent they
so conflict with the requirements of Section 422 of the Code and, in lieu of
such conflicting provision, there shall be added automatically as part of the
Plan a provision as similar in terms to such conflicting provision as may be
possible and not conflict with the requirements of Section 422 of the Code. With
respect to Incentive Options, if the Plan does not contain any provision
required to be included herein under Section 422 of the Code, that provision
shall be deemed to be incorporated herein with the same force and effect as if
that provision had been set out at length herein; provided, however, that, to
the extent any Option that is intended to qualify as an Incentive Option cannot
so qualify, that Option (to that extent) shall be deemed a Nonstatutory Option
for all purposes of the Plan.
11.15 Notices. Whenever any notice is required or permitted hereunder,
such notice must be in writing and personally delivered or sent by mail. Any
notice required or permitted to be delivered hereunder shall be deemed to be
delivered on the date on which it is actually received, addressed to the
applicable party as specified in the applicable Award Agreement. The Corporation
or a Holder may change, at any time and from time to time, by written notice to
the other, the address which it or he had previously specified for receiving
notices. Until changed in accordance herewith, the Corporation and each Holder
shall specify as its and his address for receiving notices the address set forth
in the Award Agreement pertaining to the shares to which such notice relates.
Any person entitled to notice hereunder may waive such notice.
11.16 Successors. The Plan shall be binding upon the Holder, his legal
representatives, heirs, legatees and distributees, upon the Corporation, its
successors and assigns and upon the Committee and its successors.
11.17 Headings. The titles and headings of Sections and Subsections are
included for convenience of reference only and are not to be considered in
construction of the provisions hereof.
11.18 Governing Law. All questions arising with respect to the provisions
of the Plan shall be determined by application of the laws of the State of
Delaware, without giving effect to any conflict of law provisions thereof,
except to the extent Delaware law is preempted by federal law. Questions arising
with respect to the provisions of an Award Agreement that are matters of
contract law shall be governed by the laws of the state specified in the Award
Agreement, except
31
<PAGE>
to the extent Delaware corporate law conflicts with the contract law of such
state, in which event Delaware corporate law, without giving effect to any
conflict of law provisions thereof, shall govern. The obligation of the
Corporation to sell and deliver Stock hereunder is subject to applicable federal
and state laws and to the approval of any governmental authority required in
connection with the authorization, issuance, sale or delivery of such Stock.
11.19 Availability of Exempt Transactions. Notwithstanding the provisions
of the Plan, nothing contained in the Plan shall prohibit any transactions
permitted by Rule 16a-2(d) promulgated under the Exchange Act to the extent such
transactions are approved by the Committee and are not in violation of, and do
not otherwise cause the Plan not to be in compliance with, Rule 16b-3.
11.20 Word Usage. Words used in the masculine shall apply to the feminine
where applicable, and wherever the context of the Plan dictates, the plural
shall be read as the singular and the singular as the plural.
IN WITNESS WHEREOF, Homegate Hospitality, Inc., acting by and through its
officer hereunto duly authorized, has executed this instrument this ____ day of
________, 1996.
HOMEGATE HOSPITALITY, INC.
By:
-------------------------------------------
Robert A. Faith
President and Chief Executive Officer
32
<PAGE>
ANNEX A
-------
HOMEGATE HOSPITALITY, INC.
INCENTIVE PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
AWARD FOR NON-EMPLOYEE DIRECTORS
To: Date of Grant:
-------------------------------- ---------------------
Number of Shares: Exercise Price Per Share:
------------------ ----------
Homegate Hospitality, Inc., a Delaware corporation (the "Corporation"), is
pleased to grant you a Nonstatutory Option (the "Option") to purchase shares of
the Corporation's common stock, par value $.01 per share. The number of shares
subject to this Option and the exercise price per share are stated above. This
Option is granted under Subsection 5.2 of the Homegate Hospitality, Inc. 1996
--------------
Long-Term Incentive Plan dated ____________, 1996 (the "Plan") and is governed
by the terms of the Plan. All terms having their initial letters capitalized
have the meanings given them in the Plan unless otherwise defined in this
Agreement or unless the context requires otherwise.
THIS OPTION IS NOT BINDING ON THE CORPORATION UNTIL YOU COMPLETE YOUR ADDRESS
FOR NOTICE IN PARAGRAPH 7, SIGN THIS DOCUMENT AND RETURN IT TO THE CORPORATION'S
HUMAN RESOURCES DEPARTMENT.
1. Vesting and Exercisability. This Option will vest and will be
exercisable at the times and with respect to the number of shares of Stock
indicated as follows:
Number of shares of Stock as to
Option Exercisable On and After: which the Option may be exercised
- ---------------------------------- ---------------------------------
________________, ______ ______ shares of Stock
A-1
<PAGE>
________________, ______ ______ additional shares of Stock
________________, ______ ______ additional shares of Stock
________________, ______ ______ additional shares of Stock
________________, ______ ______ additional shares of Stock
________________, ______ ______ additional shares of Stock
In accordance with the preceding schedule, the Option may be exercised, from
time to time, in whole or in part.
2. Method of Exercise. The Option shall be exercisable only by written
or recorded electronic notice of exercise delivered to the Corporation's Human
Resources Department or designee, in accordance with instructions generally
applicable to all optionholders, during the term of the Option. The notice must
(a) state the number of shares of Stock with respect to which the Option is
being exercised, (b) be signed or otherwise given by you (or by your legal
representative, legatee or distributee in the case of your death or by your
guardian or legal representative in case of your disability), (c) be accompanied
by the Exercise Price for all shares of Stock for which the Option is exercised
(unless you have provided for the payment of such Exercise Price pursuant to
Subsection 6.7 of the Plan (regarding cashless exercises)) and (d) be
- --------------
accompanied by the amount that the Corporation is required to withhold for
federal income or other tax purposes. The Option shall not be deemed to have
been exercised unless all of these requirements are satisfied.
3. Duration. The Option will terminate on the earliest of (a) 11.59
p.m., Dallas, Texas, time, on the date ten years from the Date of Grant; (b)
immediately when you cease to be a director of the Corporation, if the Board of
Directors of the Corporation demands or requests your resignation from the Board
of Directors; (c) 11:59 p.m. Dallas, Texas, time, on the date 90 days after you
cease to be a director of the Corporation for any reason other than the reasons
specified in the preceding clause (b) or the following clause (d); or (d) 11:59
p.m., Dallas, Texas, time, on the date one year after you cease to be a director
because of your death or Disability. In this Option, "Disability" means a
physical or mental impairment of sufficient severity such that, in the opinion
of a physician selected by the Corporation (which may be your physician or any
other physician), you are unable to continue to serve as a director of the
Corporation and that in fact results in the cessation of your service.
4. Transferability. This Option is not transferable other than by will
or the laws of descent and distribution.
5. Rights as a Stockholder. You will have no right as a stockholder with
respect to any shares subject to this Option until a certificate representing
those shares is issued in your
A-2
<PAGE>
name. No adjustment will be made for dividends (ordinary or extraordinary,
whether in cash or other property) or distributions or other rights for which
the record date is before the date that certificate is issued, except as
contemplated by the Plan.
6. Incorporation of Plan. The terms and provisions of the Plan are
hereby expressly incorporated herein and made a part of this Agreement and shall
be applicable for all purposes under this Agreement with any necessary changes
in points of detail.
7. Notice. For purposes of notice hereunder, which shall be given in
accordance with Subsection 2.15 of the Plan, the Corporation, the Committee and
---------------
you agree that any notices shall be given to the Corporation or you at the
following addresses:
Corporation or Homegate Hospitality, Inc.
Committee: 2001 Bryan Street, Suite 2400
Dallas, Texas 75201
Attn: Human Resources Department
Option Notice
You:
The Corporation or you may change the address previously specified for receiving
notices at any time and from time to time by written notice to the other in
accordance with Subsection 12.15 of the Plan.
----------------
HOMEGATE HOSPITALITY, INC. DIRECTOR
By:
---------------------------- ------------------------------
Name:
A-3
<PAGE>
EXHIBIT 10.5
NONCOMPETITION AGREEMENT
This Noncompetition Agreement dated as of October __, 1996 (this
"Agreement") is by and between Homegate Hospitality, Inc., a Delaware
---------
corporation (the "Company"), and Robert A. Faith (the "Covenantor").
------- ----------
WHEREAS, the Company is contemplating an underwritten public offering of
the common shares of the Company; and
WHEREAS, the managing underwriters for such of offering have required that
in connection therewith and as a condition to the consummation thereof, the
Covenantor agree to be bound by the provisions of this Agreement.
NOW, THEREFORE, in consideration of the premises and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
Section 1. Closing. This Agreement shall be effective as of the
-------
consummation of the Company's underwritten public offering of the common shares
of the Company pursuant to an effective registration statement filed pursuant to
the Securities Act of 1933, as amended (the "Effective Date").
--------------
Section 2. Exclusivity. Until 30 months subsequent to the Effective Date
-----------
and so long thereafter as the Covenantor remains an officer or on the Board of
Directors of the Company (the period from the Effective Date through such period
above being referred to as the "Noncompete Period" and the last date of the
-----------------
Noncompete Period being referred to as the "Expiration Date"), the Covenantor
---------------
hereby agrees that he will not compete in the extended-stay hotel business with
the Company within the United States, directly or indirectly, or as an officer,
director, consultant or shareholder or partner holding more than 5% of the
equity interests of any person, firm, partnership, corporation or other entity
(each, a "Person") engaged in the extended-stay hotel business. During the
------
Noncompete Period neither the Covenantor nor any Person directly or indirectly
controlled by the Covenantor may acquire any (i) fee, ground lease interests or
other equity interests in extended-stay hotels in the United States and (ii)
debt interests in extended-stay hotels in the United States where it is
anticipated that the equity interests will be acquired by the debt holder within
one year from the acquisition of such debt interest. Notwithstanding the
foregoing, the Noncompete Period shall expire prior to Expiration Date if, prior
to such date, a majority of the disinterested directors of the Company approve a
transaction (a "Merger Transaction") involving a reorganization, merger or other
------------------
combination of the Company or any substantial part of its assets with or into,
or a sale of all or substantially all of the assets of the Company to, any
Person or a combination with the assets of any Person and as a result of such
Merger Transaction (I) the combined total market capitalization of the surviving
entity or entities, as the case may be, is at least 150% of the total market
capitalization of the Company immediately prior to such Merger Transaction, (II)
the Covenantor does not remain or become an officer, trustee or director of the
surviving entity or entities, as the case may be, and (III) the Covenantor and
any Person controlled directly or indirectly by the Covenantor owns directly or
indirectly in
<PAGE>
the aggregate not more than a 5% pecuniary interest in the surviving entity or
entities on a fully diluted basis.
Section 3. Partial Invalidity. In case any one or more of the provisions
------------------
contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein.
Section 4. Injunctive Relief. Covenantor agrees that the remedy at law
-----------------
for any breach by him of any provision of Section 2 will be inadequate for the
---------
Company, and that, accordingly, the Company shall be entitled to apply for and
obtain injunctive relief in any court of competent jurisdiction to restrain the
breach or threatened breach of, or otherwise to specifically enforce, any of
such provisions. Nothing herein shall be construed as prohibiting the Company
from pursuing any other remedies available to it for such breach or threatened
breach.
Section 5. Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties hereto and their respective permitted
successors or assigns. Nothing in this Agreement, expressed or implied, is
intended or shall be construed to confer upon any person other than the parties
hereto and such successors and assigns, any right, remedy or claim under or by
reason of this Agreement.
Section 6. Entire Agreement; Amendments and Waivers. This Agreement
----------------------------------------
contains the entire understanding of the parties hereto with regard to the
subject matter contained herein. The parties hereto, by mutual agreement in
writing, may amend, modify and supplement this Agreement. The failure of any
party hereto to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of such party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
Section 7. Determinations and Interpretations by the Company. All
-------------------------------------------------
determinations of the Company provided for in or pursuant to this Agreement
(including, without limitation, the matters described in Section 6 or any
---------
termination of any provision of this Agreement) shall be made by a majority of
the disinterested directors of the Company. All interpretations of the terms of
this Agreement shall be resolved on behalf of the Company by a majority of the
disinterested directors of the Company. For purposes of this Agreement, a
director shall be deemed a disinterested director so long as such director does
not have a financial interest in the transaction or matter being reviewed or
acted upon.
Section 8. Execution in Counterparts. This Agreement may be executed in
-------------------------
one or more counterparts, each of which shall be considered an original
counterpart, and shall become a binding agreement when the Company and the
Covenantor shall have each executed one counterpart.
2
<PAGE>
Section 9. Governing Law. This Agreement, and the application or
-------------
interpretation thereof, shall be exclusively governed by its terms and by the
internal laws of the State of New York, without regard to principles of
conflicts of laws an applied in the State of New York or any other jurisdiction
which, if applied, would result in the application of any laws other than the
internal laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
HOMEGATE HOSPITALITY, INC.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-------------------------------------------
Robert A. Faith
3
<PAGE>
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of the _____ day of
_______________, 1995, by and between Homegate Hospitality, Inc., a Delaware
corporation (the "Company"), and _______________ (the "Indemnitee").
RECITALS
A. The Indemnitee has been requested to serve, or is presently serving, as
a director and/or an officer of the Company and/or, at the request of the
Company, in an Authorized Capacity (as defined below) of or for Another Entity
(as defined below). The Company desires the Indemnitee to serve or to continue
to serve in such capacity. The Company believes that the Indemnitee's
undertaking or continued undertaking of such responsibilities is important to
the Company and that the protection afforded by this Agreement will enhance the
Indemnitee's ability to discharge such responsibilities under existing
circumstances. The Indemnitee is willing, subject to certain conditions
including without limitation the execution and performance of this Agreement by
the Company and the Company's agreement to provide the Indemnitee at all times
the broadest and most favorable (to Indemnitee) indemnification permitted by
applicable law (whether by legislative action or judicial decision), to serve or
to continue to serve in that capacity.
B. In addition to the indemnification to which the Indemnitee is entitled
under the Certificate of Incorporation, as amended, of the Company (the
"Certificate") or the Bylaws, as amended, of the Company (the "Bylaws"), the
Company may obtain insurance protecting its officers and directors and certain
other persons (including the Indemnitee) against certain losses arising out of
actual or threatened actions, suits or proceedings to which such persons may be
made or threatened to be made parties ("D&O Insurance"). The Company, however,
may be unable to obtain such D&O Insurance, and, if obtained, there can be no
assurance as to the continuation or renewal thereof, or that any such D&O
Insurance will provide coverage for losses to which the Indemnitee may be
exposed and for which he or she may be permitted to be indemnified under the
General Corporation Law of the State of Delaware (the "DGCL").
Now, therefore, for and in consideration of the premises, the mutual
promises hereinafter set forth, the reliance of the Indemnitee hereon in
continuing to serve the Company or Another Entity in his or her present capacity
and in undertaking to serve the Company or Another Entity in any additional
capacity or capacities, the Company and the Indemnitee agree as follows:
1. Continued Service. The Indemnitee will serve or continue to serve as a
-----------------
director and/or an officer of the Company and/or in each such Authorized
Capacity of or for Another Entity, in each case so long as he or she is duly
elected and qualified to serve in such capacity or until he or she resigns or is
removed.
2. Initial Indemnity. (a) The Company will indemnify the Indemnitee when
-----------------
he or she was or is involved in any manner (including without limitation as a
party, a deponent or a witness) or is threatened to be made so involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, formal or informal, and any appeals
therefrom (a "Proceeding") (other than a Proceeding by or in the right of the
Company), by reason of the fact that he or she is or was or had agreed to become
a director, officer, employee or agent of the Company, or is or was serving or
had agreed to serve at the request of the Company as a director, officer,
partner, member,
<PAGE>
trustee, employee or agent (each an "Authorized Capacity") of another
corporation, partnership, joint venture, trust or other enterprise (each
"Another Entity"), or by reason of any action alleged to have been taken or
omitted in such capacity, against any and all costs, charges and expenses
(including attorneys' and others' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such Proceeding if the Indemnitee acted in good faith and in a manner that he or
she reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal Proceeding, the Indemnitee had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent will not, of itself, adversely affect the right of
the Indemnitee to indemnification or create a presumption that the Indemnitee
did not meet the foregoing standard of conduct to the extent applicable thereto.
(b) The Company will indemnify the Indemnitee when he or she was or is a
party or is threatened to be made a party to any Proceeding by or in the right
of the Company to procure a judgment in its favor by reason of the fact that he
or she is or was or had agreed to become a director, officer, employee or agent
of the Company, or is or was serving or had agreed to serve at the request of
the Company in an Authorized Capacity of or for Another Entity, against any and
all costs, charges and expenses (including attorneys' and others' fees) actually
and reasonably incurred by him or her in connection with the investigation,
preparation, defense, settlement or appeal of such Proceeding if the Indemnitee
acted in good faith and in a manner that he or she reasonably believed to be in
or not opposed to the best interests of the Company, except that no
indemnification will be made in respect of any claim, issue or matter as to
which the Indemnitee shall have been adjudged to be liable to the Company
unless, and only to the extent, that the Court of Chancery or the court in which
the Proceeding was brought determines upon application that, despite the
adjudication of liability but in view of all circumstances of the case, the
Indemnitee is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court deems proper.
(c) To the extent that the Indemnitee has been successful on the merits or
otherwise, including without limitation the dismissal of a Proceeding without
prejudice, in the defense of any Proceeding referred to in Section 2(a) or
Section 2(b) or in the defense of any claim, issue or matter in any such
Proceeding, the Company will indemnify him or her against any and all costs,
charges and expenses, including without limitation attorneys' and others' fees,
actually and reasonably incurred by him or her in connection therewith.
(d) Any indemnification under Section 2(a), Section 2(b) or Section 2(c)
(unless ordered by a court) will be made by the Company only as authorized in
the specific case upon a determination, in accordance with Section 4, that such
indemnification is proper in the circumstances because he or she has met the
applicable standards of conduct set forth in Section 2(a) and Section 2(b) (the
"Indemnification Standards"). Such determination will be made in the manner set
forth in Section 4(b).
(e) Any and all costs, charges and expenses, including without limitation
attorneys' and others' fees, actually and reasonably incurred by the Indemnitee
in defending any Proceeding will be paid by the Company as incurred and in
advance of the final disposition of such Proceeding in accordance with the
procedure set forth in Section 4(e).
(f) Notwithstanding anything in this Agreement to the contrary, the
Indemnitee will not be entitled to indemnification or advancement of expenses
pursuant hereto in connection with any Proceeding initiated by the Indemnitee
against the Company (except for any Proceeding initiated by the Indemnitee
pursuant to Section 6) unless the Company has joined in or consented to the
initiation of such Proceeding.
-2-
<PAGE>
3. Additional Indemnification. (a) Pursuant to Section 145(f) of the
--------------------------
DGCL, without limiting any right which the Indemnitee may have under Section 2,
the Certificate, the Bylaws, the DGCL, any policy of insurance or otherwise, but
subject to the limitations set forth in Section 2(f) and to any maximum
permissible indemnity that may exist under applicable law at the time of any
request for indemnity hereunder as contemplated by this Section 3(a), the
Company will indemnify the Indemnitee against any amount which he or she is or
becomes legally obligated to pay relating to or arising out of any claim made
against him or her because of any act, failure to act or neglect or breach of
duty, including any actual or alleged error, omission, misstatement or
misleading statement, which he or she commits, suffers, permits or acquiesces in
while acting in his or her capacity as a director or officer of the Company, or,
at the request of the Company, in an Authorized Capacity of or for Another
Entity. The payments which the Company is obligated to make pursuant to this
Section 3 will include without limitation damages, judgments, fines, amounts
paid in settlement and reasonable charges, costs and expenses, including
attorneys' fees, expenses of investigation, preparation, defense and settlement
of Proceedings and expenses of appeal, attachment or similar bonds; provided,
however, that the Company will not be obligated under this Section 3(a) to make
any payment in connection with any claim against the Indemnitee:
(i) to the extent of any fine or similar governmental imposition which
the Company is prohibited by applicable law from paying and which results
from a final, nonappealable order; or
(ii) to the extent based upon or attributable to the Indemnitee gaining
in fact a personal profit to which he or she was not legally entitled,
including without limitation profits made from the purchase and sale of
equity securities of the Company which are recoverable by the Company
pursuant to Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and profits arising from transactions in
securities which were effected in violation of Section 10(b) or Section
14(e) of the Exchange Act, including Rule 10b-5 or Rule 14e-3 promulgated
thereunder.
The determination of whether the Indemnitee is entitled to indemnification under
this Section 3(a) shall be made in accordance with Section 4(b).
(b) Any and all costs, charges and expenses, including without
limitation attorneys' and others' fees, actually and reasonably incurred by the
Indemnitee in connection with any claim for which the Indemnitee may be entitled
to indemnification pursuant to Section 3(a) will be paid by the Company as
incurred and in advance of the final disposition thereof in accordance with the
procedure set forth in Section 4(e).
4. Certain Procedures Relating to Indemnification and Advancement of
-----------------------------------------------------------------
Expenses. (a) Except as otherwise permitted or required by the DGCL, for
- --------
purposes of pursuing his or her rights to indemnification under Section 2(a),
Section 2(b), Section 2(c) or Section 3(a), as the case may be, the Indemnitee
shall submit to the Company (to the attention of the Secretary) a statement of
request for indemnification substantially in the form of Exhibit 1 attached
hereto (the "Indemnification Statement") stating that he or she believes that he
or she is entitled to indemnification pursuant to this Agreement, together with
such documents supporting the request as are reasonably available to the
Indemnitee and are reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification hereunder (the "Supporting
Documentation"). Upon receipt of any Indemnification Statement, the Company
will promptly advise the Board of Directors of the Company (the "Board") in
writing that the Indemnitee has requested indemnification.
-3-
<PAGE>
(b) The Indemnitee's entitlement to indemnification under Section 2(a),
Section 2(b), Section 2(c) or Section 3(a), as the case may be, will be
determined promptly following a claim by the Indemnitee for indemnification
thereunder and in any event not less than 30 calendar days after receipt by the
Company of such Indemnification Statement and Supporting Documentation. The
Indemnitee's entitlement to indemnification under Section 2(a) or Section 2(b)
will, subject to the next sentence, be made in one of the following ways: (i)
by the Board by a majority vote of the directors who are not and were not
parties to such Proceeding or claim ("Disinterested Directors"), even though
less than a quorum, (ii) if there are no Disinterested Directors, or if a
majority of the Disinterested Directors so direct, by written opinion of
independent legal counsel selected by a majority of the Disinterested Directors
(or, if there are no Disinterested Directors or a majority vote thereof is not
obtainable, by a majority of the entire Board), (iii) by the stockholders of the
Company (but only if a majority of Disinterested Directors, if they constitute a
quorum of the Board, presents the issue of entitlement to indemnification to the
stockholders of the Company for their determination) or (iv) as deemed to have
been determined in accordance with Section 4(c). The Indemnitee's entitlement
to indemnification under Section 2(c), Section 3(a) or, in the event of a Change
of Control (as hereinafter defined), under Section 2(a) or Section 2(b) will be
determined by written opinion of independent legal counsel selected by the
Indemnitee. Independent legal counsel selected as described above will be a law
firm or member of a law firm (x) that neither at the time in question nor in the
five years immediately preceding such time has been retained to represent (A)
the Company (or any of its affiliates) or the Indemnitee in any matter material
to either such party or (B) any other party to the Proceeding or claim giving
rise to a claim for indemnification under this Agreement, (y) that, under the
applicable standards of professional conduct then prevailing under the law of
the State of Delaware, would not be precluded from representing either the
Company or the Indemnitee in an action to determine the Indemnitee's rights
under this Agreement and (z) to which the Indemnitee or the Company, acting
therein through a majority of the Disinterested Directors or, if there are no
Disinterested Directors, by a majority of the entire Board, does not reasonably
object. If the Company or the Indemnitee reasonably objects to such independent
legal counsel, the Company, acting therein as hereinbefore provided, or the
Indemnitee shall select another independent legal counsel subject to similar
reasonable objection until there is no further such objection to such
independent legal counsel. The Company will pay the fees and expenses of such
independent legal counsel.
(c) Submission of an Indemnification Statement and Supporting Documentation
to the Company pursuant to Section 4(b) will create a presumption that the
Indemnitee is entitled to indemnification under Section 2(a), Section 2(b),
Section 2(c) or Section 3(a), as the case may be, and thereafter the Company
will have the burden of proof to overcome that presumption in reaching a
contrary determination. In any event, the Indemnitee will be deemed to be
entitled to indemnification under Section 2(a), Section 2(b), Section 2(c) or
Section 3(a) herein unless, within the 30-calendar day period following receipt
by the Company of such Indemnification Statement and Supporting Documentation,
the person or persons empowered under Section 4(b) to determine the Indemnitee's
entitlement to indemnification have been appointed and have made a
determination, based upon clear and convincing evidence (sufficient to rebut the
foregoing presumption), that the Indemnitee is not entitled to such
indemnification and the Indemnitee has received notice within such period in
writing of such determination. The foregoing notice shall (i) disclose with
particularity the evidence in support of such determination and (ii) (A) if made
by Disinterested Directors, be sworn to by all Disinterested Directors who
participated in the determination and voted to deny indemnification, (B) if made
by independent legal counsel, include a signed copy of the related written
opinion of such counsel or (C) if made by the stockholders of the Company,
include a certificate of the Company's Secretary as to the vote of such
stockholders. The provisions of this Section 4(c) are intended to be procedural
only; any determination pursuant to this Section 4(c) that the Indemnitee is not
entitled to indemnification and any related failure to make the payments
requested in the Indemnification Statement will be subject to review as provided
in Section 6.
-4-
<PAGE>
(d) If a determination is made or deemed to have been made pursuant to this
Section 4 that the Indemnitee is entitled to indemnification, the Company will
pay to the Indemnitee the amounts to which the Indemnitee is entitled within
five business days after such determination of entitlement to indemnification
has been made or deemed to have been made.
(e) In order to obtain advancement of expenses pursuant to Section 2(e),
the Indemnitee will submit to the Company a written undertaking substantially in
the form of Exhibit 2 attached hereto, executed personally or on his or her
behalf (the "Undertaking"), stating that (i) he or she has incurred or will
incur actual expenses in defending a Proceeding and (ii) if and to the extent
required by law at the time of such advance, he or she undertakes to repay such
amounts advanced as to which it may ultimately be determined that the Indemnitee
is not entitled. In order to obtain advancement of expenses pursuant to Section
3(b), the Indemnitee may submit an Undertaking or, if the Indemnitee chooses not
to submit an Undertaking, shall submit such other form of request as he or she
determines to be appropriate (an "Expense Request"). Upon receipt of an
Undertaking or Expense Request, as the case may be, the Company will within five
calendar days make payment of the costs, charges and expenses stated in the
Undertaking or Expense Request. No security will be required in connection with
any Undertaking or Expense Request, and any Undertaking or Expense Request will
be accepted, and all such payments shall be made, without reference to the
Indemnitee's ability to make repayment.
5. Duplication of Payments. The Company will not be liable under this
-----------------------
Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent the Indemnitee has actually received payment (under any
insurance policy, the Certificate, the Bylaws, the DGCL or otherwise) of the
amount otherwise payable hereunder.
6. Enforcement. (a) If a claim for indemnification or advancement of
-----------
expenses made to the Company pursuant to Section 4 is not timely paid in full by
the Company as required by Section 4, the Indemnitee will be entitled to seek
judicial enforcement of the Company's obligations to make such payments. If a
determination is made pursuant to Section 4 that the Indemnitee is not entitled
to indemnification or advancement of expenses hereunder, (i) the Indemnitee may
at any time thereafter seek an adjudication of his or her entitlement to such
indemnification or advancement either, at the Indemnitee's sole option, in (A)
an appropriate court of the State of Delaware or any other court of competent
jurisdiction or (B) an arbitration to be conducted by a single arbitrator
pursuant to the rules of the American Arbitration Association, (ii) any such
judicial proceeding or arbitration will be de novo and the Indemnitee will not
be prejudiced by reason of such prior adverse determination and (iii) in any
such judicial proceeding or arbitration the Company will have the burden of
proving that the Indemnitee is not entitled to indemnification or advancement of
expenses under this Agreement.
(b) The Company will be precluded from asserting in any judicial proceeding
or arbitration commenced pursuant to the provisions of Section 6(a) that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and will stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
(c) In any action brought under Section 6(a), it will be a defense to a
claim for indemnification pursuant to Section 2(a) or Section 2(b) (but not an
action brought to enforce a claim for costs, charges and expenses incurred in
defending any Proceeding in advance of its final disposition where the
Undertaking, if any is required, has been tendered to the Company) that the
Indemnitee has not met the standards of conduct which make it permissible under
the DGCL for the Company to indemnify the Indemnitee for the amount claimed, but
the burden of proving such defense will be on the Company. Neither the failure
of the Company (including any person or persons empowered under Section 4(b) to
determine the Indemnitee's entitlement to indemnification) to have made a
determination as to the propriety
-5-
<PAGE>
of indemnification of the Indemnitee hereunder prior to commencement of such
action nor an actual determination by the Company (including any person or
persons empowered under Section 4(b) to determine the Indemnitee's entitlement
to indemnification) that the Indemnitee has not met the applicable standard of
conduct hereunder will be a defense to the action or create a presumption that
the Indemnitee has not met the applicable standard of conduct.
(d) It is the intent of the Company that the Indemnitee shall not be
required to incur the expenses associated with the enforcement of his or her
rights under this Agreement by litigation or other legal action because the cost
and expense thereof would substantially detract from the benefits intended to be
extended to the Indemnitee hereunder. Accordingly, if it should appear to the
Indemnitee that the Company has failed to comply with any of its obligations
under this Agreement or if the Company or any other person takes any action to
declare this Agreement void or unenforceable or institutes any action, suit or
proceeding designed (or having the effect of being designed) to deny, or to
recover from, the Indemnitee the benefits intended to be provided to the
Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from
time to time to retain counsel of his or her choice, at the expense of the
Company as hereafter provided, to represent the Indemnitee in connection with
the initiation or defense of any litigation or other legal action, whether by or
against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction relating to enforcement of this
Agreement. Notwithstanding any existing or prior attorney-client relationship
between the Company and such counsel, the Company irrevocably consents to the
Indemnitee's entering into an attorney-client relationship with such counsel,
and in that connection the Company and the Indemnitee acknowledge that a
confidential relationship will exist between the Indemnitee and such counsel.
The Company will pay and be solely responsible for any and all costs, charges
and expenses, including without limitation attorneys' and others' fees, incurred
by the Indemnitee (i) as a result of the Company's failure to perform this
Agreement or any provision hereof or (ii) as a result of the Company or any
person unsuccessfully contesting the validity or enforceability of this
Agreement or any provision hereof as aforesaid.
7. Liability Insurance and Funding. If the Company obtains D&O Insurance,
-------------------------------
the Company will use its best efforts, subject to commercial reasonability, to
maintain such D&O Insurance in force at the Company's sole expense. To the
extent that the Company obtains or maintains D&O Insurance, the Indemnitee will
be covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for a director or officer of the
Company or a person serving at the request of the Company in an Authorized
Capacity of or for Another Entity, as the case may be. The Company may, but
shall not be required to, create a trust fund, grant a security interest or use
other means (including without limitation a letter of credit) to ensure the
payment of such amounts as may be necessary to satisfy its obligations to
indemnify and advance expenses pursuant to this Agreement.
8. Change of Control. (a) If the Company sells or otherwise disposes of
-----------------
all or substantially all of its assets or is a constituent corporation in a
consolidation, merger or other business combination transaction or if there is a
Change of Control (as defined below) of the Company, (a) the Company will
require (if it is not the surviving, resulting or acquiring corporation therein)
the surviving, resulting or acquiring corporation expressly to assume the
Company's obligations under this Agreement and to agree to indemnify the
Indemnitee to the full extent provided herein and (b), whether or not the
Company is the resulting, surviving or acquiring corporation in any such
transaction (or Change of Control), the Indemnitee will also stand in the same
position under this Agreement with respect to the resulting, surviving or
acquiring corporation as he or she would have with respect to the Company if the
transaction (or Change of Control) had not occurred.
-6-
<PAGE>
(b) The Company agrees that, if there is a Change of Control of the Company
(other than a Change of Control which has been approved by a majority of the
Company's Board of Directors who were directors immediately prior to such Change
of Control), then with respect to all matters thereafter arising concerning the
rights of the Indemnitee to indemnity payments and advancement of expenses under
this Agreement or any other agreement or Certificate (as defined below) or Bylaw
provision now or hereafter in effect, the Company shall seek legal advice only
from independent legal counsel selected as provided in Section 4(b). Such
counsel, among other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent the Indemnitee would be permitted to
be indemnified under applicable law. The Company agrees to pay the reasonable
fees of such independent legal counsel and to indemnify such counsel fully
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
9. Partial Indemnity. If the Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
costs, charges, expenses, judgments, fines and amounts paid in settlement of a
Proceeding but not, however, for the total amount thereof, the Company shall
nevertheless indemnify the Indemnitee for the portion thereof to which the
Indemnitee is entitled.
10. Nonexclusivity and Severability. (a) The right to indemnification and
-------------------------------
advancement of expenses provided by this Agreement is not exclusive of any other
right to which the Indemnitee may be entitled under the Certificate, the Bylaws,
the DGCL, any other statute, insurance policy, agreement, vote of stockholders
or of directors or otherwise, both as to actions in his or her official capacity
and as to actions in another capacity while holding such office, and will
continue after the Indemnitee has ceased to serve as a director or officer of
the Company or in an Authorized Capacity in or for Another Entity and will inure
to the benefit of his or her heirs, executors and administrators; provided,
however, that, to the extent the Indemnitee otherwise would have any greater
right to indemnification or advancement of expenses under any provision of the
Certificate or the Bylaws as in effect on the date hereof, the Indemnitee will
be deemed to have such greater right pursuant to this Agreement; and, provided
further, that, inasmuch as it is the intention of the Company to provide the
Indemnitee with the broadest and most favorable (to the Indemnitee) indemnity
permitted by applicable law (whether by legislative action or judicial
decision), to the extent that the DGCL currently permits or in the future
permits (whether by legislative action or judicial decision) any greater right
to indemnification or advancement of expenses than that provided under this
Agreement as of the date hereof, the Indemnitee will automatically, without the
necessity of any further action by the Company or the Indemnitee, be deemed to
have such greater right pursuant to this Agreement. Similarly, the Indemnitee
shall have the benefit of any future changes to the Certificate or the Bylaws
which grant or permit any greater right to indemnification or advancement of
expenses.
(b) The Company will not adopt any amendment to the Certificate or Bylaws
the effect of which would be to deny, diminish or encumber the Indemnitee's
rights to indemnity pursuant to the Certificate, the Bylaws, the DGCL or any
other applicable law as applied to any act or failure to act occurring in whole
or in part prior to the date upon which any such amendment was approved by the
Board or the stockholders, as the case may be. Notwithstanding the foregoing,
if the Company adopts any amendment to the Certificate or Bylaws the purported
effect of which is to so deny, diminish or encumber the Indemnitee's rights to
such indemnity, such amendment will apply only to acts or failures to act
occurring entirely after the effective date thereof.
(c) If any provision or provisions of this Agreement are held to be
invalid, illegal or unenforceable for any reason whatsoever: (i) the validity,
legality and enforceability of the
-7-
<PAGE>
remaining provisions of this Agreement (including without limitation all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) will not in any way be affected or impaired thereby
and (ii) to the fullest extent possible, the provisions of this Agreement
(including without limitation all portions of any paragraph of this Agreement
containing any such provision held to be invalid, illegal or unenforceable that
are not themselves invalid, illegal or unenforceable) will be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable. No claim or right to indemnity or advancement of expenses
pursuant to Section 3 hereof shall in any way affect or limit any right which
the Indemnitee may have under Section 2 hereof, the Certificate, the Bylaws, the
DGCL, any policy of insurance or otherwise.
11. Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflict of laws thereof.
12. Modification; Survival. This Agreement contains the entire agreement
----------------------
of the parties relating to the subject matter hereof; provided, however, that
this provision shall not be construed to affect the Company's obligations to the
Indemnitee under the Certificate or Bylaws. This Agreement may be modified only
by an instrument in writing signed by both parties hereto. The provisions of
this Agreement will survive the death, disability, or incapacity of the
Indemnitee or the termination of the Indemnitee's service as a director or an
officer of the Company or in an Authorized Capacity of or for Another Entity and
will inure to the benefit of the Indemnitee's heirs, executors and
administrators.
13. Certain Terms. (a) For purposes of this Agreement, references to a
-------------
person's capacity as a "director" shall include without limitation such person's
capacity as a member of any committee appointed by the board of which such
person is a director; references to "Another Entity" will include employee
benefit plans; references to "fines" will include any excise taxes assessed on
the Indemnitee with respect to any employee benefit plan; and references to
"serving at the request of the Company" will include any service in any capacity
which imposes duties on, or involves services by, the Indemnitee with respect to
an employee benefit plan, its participants or beneficiaries; references to
Sections or Exhibits are to Sections or Exhibits of or to this Agreement;
references to the singular will include the plural and vice versa; and, if the
Indemnitee acted in good faith and in a manner he or she reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, he or she will be deemed to have acted in a "manner not opposed to the
best interests of the Company" as referred to herein.
(b) For purposes of this Agreement, a "Change of Control" shall be deemed
to have occurred if (1) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) other than Robert A. Faith, Harlan R. Crow, one of
their affiliates, a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing a majority of the total
voting power represented by the Company's then outstanding Voting Securities,
(2) during any period of two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Company and any new
director whose election by the Board of Directors or nomination for election by
the Company's stockholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof or (3) the stockholders of
the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding
-8-
<PAGE>
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation (or the merger of Extended Stay Limited
Partnership, a Delaware limited partnership, with and into the Company), or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all the Company's
assets.
(c) For purposes of this Agreement, the term "Voting
Securities"shall mean any securities of the Company which vote generally in the
election of directors.
14. Joint Defense. Notwithstanding anything to the contrary contained
-------------
herein, if (a) the Indemnitee elects to retain counsel in connection with any
Proceeding or claim in respect of which indemnification may be sought by the
Indemnitee against the Company pursuant to this Agreement and (b) any other
director or officer of the Company or person serving at the request of the
Company in an Authorized Capacity of or for Another Entity may also be subject
to liability arising out of such Proceeding or claim and in connection with such
Proceeding or claim seeks indemnification against the Company pursuant to an
agreement similar to this Agreement, the Indemnitee, together with such other
persons, will employ counsel to represent jointly the Indemnitee and such other
persons unless the Indemnitee determines that such joint representation would be
precluded under the applicable standards of professional conduct then prevailing
under the law of the State of Delaware, in which case the Indemnitee will notify
the Company (to the attention of the Secretary) thereof and will be entitled to
be represented by separate counsel.
15. Express Negligence Acknowledgment. Without limiting or enlarging the
---------------------------------
scope of the indemnification obligations set forth in this Agreement, the
Indemnitee will be entitled to indemnification hereunder in accordance with the
terms hereof, regardless of whether the claim giving rise to such
indemnification obligation is the result of the sole, concurrent or comparative
negligence, or strict liability, of the Indemnitee.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
HOMEGATE HOSPITALITY, INC.
By:______________________________________
Name: _______________________________
Title:_______________________________
INDEMNITEE
_________________________________________
Name: ___________________________________
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<PAGE>
Exhibit 1
---------
INDEMNIFICATION STATEMENT
-------------------------
1. This Indemnification Statement is submitted pursuant to the
Indemnification Agreement, dated as of _____________ _____, 1995 (the
"Indemnification Agreement"), between Homegate Hospitality, Inc., a Delaware
corporation (the Company"), and the undersigned.
2. I am requesting indemnification in connection with a Proceeding (as
defined in the Indemnification Agreement) or claim in which I was or am involved
or am threatened to be made involved.
3. With respect to all matters related to any such Proceeding or claim, I
believe that I am entitled to be indemnified pursuant to the provisions of the
Indemnification Agreement.
4. Without limiting any other rights which I have or may have, I am
requesting indemnification against liabilities which have or may arise out of
________________________________________________________________________________
________________________________________________________________________________
__________.
5. I have attached such documents supporting this request as are
reasonably available to me and are reasonably necessary to determine whether and
to what extent I am entitled to indemnification under the Indemnification
Agreement.
_____________________________________
Name: _______________________________
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<PAGE>
Exhibit 2
---------
UNDERTAKING
-----------
1. This Undertaking is submitted pursuant to the Indemnification
Agreement, dated as of _______________ ___, 1995 (the "Indemnification
Agreement"), between Homegate Hospitality, Inc., a Delaware corporation (the
"Company"), and the undersigned.
2. I am requesting advancement of certain costs, charges and expenses
(including attorneys' and others' fees) which I have incurred or will incur in
defending a Proceeding (as defined in the Indemnification Agreement) or in
connection with a claim for which I may be entitled to indemnification pursuant
to the Indemnification Agreement.
3. I hereby undertake to repay this advancement of expenses if it is
ultimately determined that I am not entitled to be indemnified by the Company
under the Indemnification Agreement.
4. The costs, charges and expenses for which advancement is requested
are, in general, all expenses related to
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________.
_____________________________________
Name: _______________________________
-12-
<PAGE>
EXHIBIT 10.8
EXECUTION COPY
================================================================================
LOAN AGREEMENT
Dated as of December 29, 1995
Between
VPS I, L.P.
as Borrower
AND
NOMURA ASSET CAPITAL CORPORATION,
as Lender
================================================================================
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C> <C>
Section Page
I.
DEFINITIONS; PRINCIPLES OF CONSTRUCTION
1.1 Definitions........................................................ 1
1.2 Principles of Construction......................................... 15
II.
GENERAL TERMS
2.1 Loan Commitment; Disbursement to Borrower.......................... 15
2.1.1 The Loan.................................................... 16
2.1.2 Disbursement to Borrower.................................... 16
2.1.3 The Note.................................................... 16
2.2 Use of Proceeds.................................................... 16
2.3 Loan Repayment and Defeasance...................................... 16
2.3.1 Repayment................................................... 16
2.3.2 Prepayments................................................. 17
2.3.3 Voluntary Defeasance of the Loan............................ 17
2.4 Release of Properties.............................................. 20
2.4.1 Release of All the Properties............................... 20
2.4.2 Release of Individual Properties............................ 20
2.4.3 Successor Borrower.......................................... 21
2.4.4 Release on Payment in Full.................................. 22
2.5 Interest........................................................... 22
2.5.1 Generally................................................... 22
2.5.2 Default Rate; Post-Maturity Interest........................ 22
2.6 Payments and Computations.......................................... 23
2.6.1 Making of Payments.......................................... 23
2.6.2 Computations................................................ 23
2.6.3 Late Payment Charge......................................... 23
2.6.4 Payments Prior to the Optional Prepayment Date.............. 23
2.6.5 Payments After the Optional Prepayment Date................. 26
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
III.
CONDITIONS PRECEDENT
3.1 Conditions Precedent to Closing.................................... 28
IV.
REPRESENTATIONS AND WARRANTIES
4.1 Borrower Representations........................................... 33
4.2 Survival of Representations........................................ 43
V.
AFFIRMATIVE COVENANTS
5.1 Borrower Covenants................................................. 43
VI.
NEGATIVE COVENANTS
6.1 Borrower's Negative Covenants...................................... 53
VII.
CASUALTY; CONDEMNATION; ESCROWS
7.1 Insurance; Casualty and Condemnation............................... 55
7.1.1 Insurance................................................... 55
7.1.2 Casualty and Application of Proceeds........................ 59
7.1.3 Condemnation................................................ 61
7.2 Required Repairs; Required Repair Funds............................ 64
7.2.1 Required Repairs; Deposits.................................. 64
7.2.2 Grant of Security Interest.................................. 64
7.2.3 Release of Required Repair Funds............................ 65
7.2.4 Failure to Perform Required Repairs......................... 66
7.3 Tax and Insurance Escrow Fund...................................... 66
7.3.1 Tax and Insurance Escrow Fund............................... 66
7.3.2 Grant of Security Interest.................................. 67
7.3.3 Application of Tax and Insurance Escrow Fund................ 68
7.4 Replacements and Replacement Reserve............................... 68
7.4.1 Replacement Reserve Fund.................................... 68
7.4.2 Grant of Security Interest.................................. 69
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
7.4.3 Disbursements from Replacement Reserve Account.............. 69
7.4.4 Performance of Replacements................................. 72
7.4.5 Failure to Make Replacements................................ 75
7.4.6 Balance in the Replacement Reserve Account.................. 76
7.4.7 Indemnification............................................. 76
7.5 Sales Tax Escrow Fund.............................................. 77
7.5.1 Sales Tax Escrow Fund....................................... 77
7.5.2 Grant of Security Interest.................................. 77
7.5.3 Application of Sales Tax Escrow Fund........................ 78
7.6 Seasonal Working Capital Reserve Fund.............................. 78
7.6.1 Seasonal Working Capital Reserve Fund....................... 78
7.6.2 Grant of Security Interest.................................. 79
7.6.3 Application of the Seasonal Working Capital
Reserve Fund............................................... 80
VIII.
DEFAULTS
8.1 Event of Default................................................... 80
8.2 Remedies........................................................... 82
8.3 Remedies Cumulative................................................ 84
IX.
SPECIAL PROVISIONS
9.1 Sale of Notes and Securitization................................... 85
9.2 Securitization Indemnification..................................... 86
9.3 Rating Surveillance................................................ 90
9.4 Exculpation........................................................ 90
9.5 Termination........................................................ 92
9.6 Lock-Box Agreement................................................. 92
X.
MISCELLANEOUS
10.1 Survival........................................................... 93
10.2 Lender's Discretion................................................ 93
10.3 Governing Law...................................................... 93
10.4 Modification, Waiver in Writing.................................... 95
10.5 Delay Not a Waiver................................................. 95
</TABLE>
iii
<PAGE>
10.6 Notices............................................................ 96
10.7 Trial by Jury...................................................... 98
10.8 Headings........................................................... 98
10.9 Severability....................................................... 98
10.10 Preferences........................................................ 98
10.11 Waiver of Notice................................................... 99
10.12 Remedies of Borrower............................................... 99
10.13 Expenses; Indemnity................................................ 99
10.14 Exhibits and Schedules Incorporated................................ 101
10.15 Offsets, Counterclaims and Defenses................................ 101
10.16 No Joint Venture or Partnership; No Third Party Beneficiaries...... 101
10.17 Publicity.......................................................... 102
10.18 Cross-Default; Cross-Collateralization; Waiver
of Marshaling of Assets.......................................... 103
10.19 Waiver of Counterclaim............................................. 104
10.20 Conflict; Construction of Documents; Reliance...................... 104
10.21 Brokers and Financial Advisors..................................... 104
10.22 Prior Agreements................................................... 105
iv
<PAGE>
SCHEDULES
Schedule I - Allocated Loan Amounts
Schedule II - Property Required Repairs
Schedule III - Replacements Reserve Deposits
Schedule IV - List of Approved Replacements
Schedule V - Seasonal Working Capital Contributions
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Mortgage
Exhibit C - Form of Assignment of Leases
Exhibit D - Form of Assignment of Agreements
Exhibit E - Form of Environmental Indemnity
Exhibit F - Form of O&M Agreement
Exhibit G - Form of Consent and Subordination of Manager
Exhibit H - Form of Management Agreement
v
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of December 29, 1995 (as amended, restated,
replaced, supplemented or otherwise modified from time to time, this
"Agreement"), between Nomura Asset Capital Corporation, having an address at Two
World Financial Center, Building B, New York, New York 10281 ("Lender") and VPS
I, L.P., a Delaware limited partnership, having an address at 313 East Anderson
Lane, Suite 201-B, Austin, Texas 78752 ("Borrower").
All capitalized terms used herein shall have the respective meanings set
forth in Article I hereof.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Borrower desires to obtain the Loan from Lender;
WHEREAS, Lender is willing to make the Loan to Borrower, subject to and in
accordance with the terms of this Agreement and the other Loan Documents;
NOW, THEREFORE, in consideration of the making of the Loan by Lender and
the covenants, agreements, representations and warranties set forth in this
Agreement, the parties hereto hereby covenant, agree, represent and warrant as
follows:
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION
Section 1.1 Definitions.
For all purposes of this Agreement, except as otherwise expressly required
or unless the context clearly indicates a contrary intent:
"Accrued Interest" shall have the meaning set forth in Section 2.6.5
"Additional Replacements" shall have the meaning set forth in Section
7.4.4(d).
<PAGE>
2
"Affiliate" shall mean, as to any Person, any other Person that, directly
or indirectly, is in control of, is controlled by or is under common control
with such Person or is a director or officer of such Person or of an Affiliate
of such Person.
"Allocated Loan Amount" shall mean (a) on the date of this Agreement, the
original principal portion of the Loan attributable to each Individual Property
as set forth on Schedule I hereto and (b) from time to time, such original
principal portion of the Loan attributable to each Individual Property, as
reduced only by the amount of the Monthly Debt Service Payment Amount that is
applied toward the reduction of the principal sum of the Loan.
"ALTA" shall mean American Land Title Association, or any successor
thereto.
"Annual Budget" shall have the meaning specified in Section 2.6.4(b).
"Applicable Interest Rate" shall have the meaning set forth in the Note.
"Approved Annual Budget" shall have the meaning specified in Section
2.6.4(b).
"Assignment of Agreements" shall mean, that certain first priority
Assignment of Agreements, Permits and Contracts dated as of the date hereof,
from Borrower, as assignor, to Lender, as assignee, assigning to Lender all of
Borrower's interest in and to the Management Agreement and all other licenses,
permits and contracts necessary for the use and operation of the Properties as
security for the Loan, substantially in the form of Exhibit D annexed hereto, as
the same may be amended, restated, replaced, supplemented or otherwise modified
from time to time.
"Assignment of Leases" shall mean, with respect to each Individual
Property, that certain first priority Assignment of Leases and Rents, dated as
of the date hereof, from Borrower, as assignor, to Lender, as assignee,
assigning to Lender all of Borrower's interest in and to the Leases and Rents of
such Individual Property as security for the Loan, substantially in the form of
Exhibit C annexed hereto, as the same may be amended, restated, replaced,
supplemented or otherwise modified from time to time.
<PAGE>
3
"Assignments of Leases" shall mean, collectively all of the Assignment of
Leases encumbering each Individual Property.
"Award" shall have the meaning set forth in Section 7.1.3(b).
"Basic Carrying Costs" shall mean, with respect to an Individual Property,
the sum of the following costs associated with such Individual Property for the
relevant Fiscal Year or payment period: (i) real property taxes with respect to
such Individual Property and (ii) insurance premiums with respect to such
Individual Property.
"Borrower" shall mean VPS I, L.P., a Delaware limited partnership, together
with its successors and assigns.
"Business Day" shall mean any day other than a Saturday, Sunday or any
other day on which national banks in New York are not open for business.
"Capital Expenditures" shall mean for any period the amount expended for
items capitalized under GAAP (including expenditures for building improvements
or major repairs).
"Cash Expenses" shall mean, for any period, Non-Escrowed Operating Expenses
for such period adjusted by (i) deducting the accrued Non-Escrowed Operating
Expenses at the end of such period and adding the accrued Non-Escrowed Operating
Expenses at the end of the comparable prior period and (ii) adding prepaid Non-
Escrowed Operating Expenses at the end of such period and deducting the prepaid
Non-Escrowed Operating Expenses at the end of the comparable prior period.
"Cash Gross Income" shall mean, for any period, Gross Income from
Operations adjusted by (i) deducting accrued revenues at the end of such period
and adding accrued revenues at the end of the comparable prior period and (ii)
adding the deferred revenues at the end of such period and deducting the
deferred revenues at the end of the comparable prior period.
"Casualty" shall have the meaning specified in Section 7.1.1(d).
<PAGE>
4
"Casualty/Condemnation Involuntary Prepayments" shall have the meaning set
forth in Section 2.3.2.
"Closing Date" shall mean the date of the funding of the Loan.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and as it
may be further amended from time to time, any successor statutes thereto, and
applicable U.S. Department of Treasury regulations issued pursuant thereto in
temporary or final form.
"Condemnation" shall have the meaning set forth in Section 7.1.3(a).
"Condemnation Restoration" shall have the meaning set forth in Section
7.1.3(c).
"Consent and Subordination of Manager" shall mean that certain Consent and
Subordination of Manager dated the date hereof between Westar Hotels, Inc. and
Lender, substantially in the form of Exhibit G hereto.
"Debt" shall mean the outstanding principal amount set forth in, and
evidenced by, the Note together with all interest accrued and unpaid thereon and
all other sums (including the Yield Maintenance Premium) due to Lender in
respect of the Loan under the Note, this Agreement, the Mortgages or any other
Loan Document.
"Debt Service" shall mean, with respect to any particular period of time,
scheduled principal and interest payments under the Note.
"Debt Service Coverage Ratio" shall mean a ratio for the applicable period
in which:
(a) the numerator is the Net Operating Income for such period as set
forth in the statements required thereunder, without deduction for (i) actual
management fees paid in connection with the operation of the Properties or (ii)
amounts paid to the Tax and Insurance Escrow Fund and less (A) management and
franchise fees deemed to equal the greater of (1) assumed management and
franchise fees of eight percent (8%) of Gross Income from Operations or (2) the
sum of actual management fees and franchise fees, (B) Replacement Reserve Fund
<PAGE>
5
contributions deemed to equal the greater of (1) assumed contributions of five
percent (5%) of Gross Income from Operations or (2) the actual contributions
thereto for the applicable period and (C) for purposes of calculating the Debt
Service Coverage Ratio in connection with Section 3.1(p) only, any increases in
operating profits for the applicable period attributable to the operating
departments of each of the Properties (as shown on the financial reports
prepared for such period) to the extent such increases are in excess of ten
percent (10%) over the operating profits attributable to such operating
departments for the previous period of calculation; and
(b) the denominator is the aggregate amount of principal and interest
due and payable on the Note or, in the event a Defeasance Event has occurred,
the Undefeased Note, for such period.
"Default" shall mean the occurrence of any event hereunder or under any
other Loan Document which, but for the giving of notice or passage of time, or
both, would be an Event of Default.
"Default Rate" shall have the meaning set forth in the Note.
"Defeasance Deposit" shall mean an amount equal to the principal amount of
that portion of the Note which Borrower wishes to defease, the Yield Maintenance
Premium, any costs and expenses incurred or to be incurred in the purchase of
U.S. Obligations necessary to meet the Scheduled Defeasance Payments and any
revenue, documentary stamp or intangible taxes or any other tax or charge due in
connection with the transfer of the Note, the creation of the Defeased Note and
the Undefeased Note, if applicable, any transfer of the Defeased Note or
otherwise required to accomplish the agreements of Sections 2.3 and 2.4 hereof;
"Defeased Note" shall have the meaning set forth in Section 2.3.3(v)
hereof.
"Deposit Account" shall mean the account(s) established and maintained
pursuant to the Lock-Box Agreement for collecting and retaining all the Rents
from the Properties.
"Disclosure Document" shall have the meaning set forth in Section 9.2(a).
<PAGE>
6
"Environmental Indemnity" shall mean that certain Environmental and
Hazardous Substance Indemnification Agreement executed by Borrower in connection
with the Loan for the benefit of Lender, substantially in the form of Exhibit E
attached hereto.
"Equipment" shall have the meaning set forth in the Mortgage with respect
to each Individual Property.
"Event of Default" shall have the meaning set forth in Section 8.1(a).
"Excess Cash Flow" shall mean, for any period, the amount obtained by
subtracting Cash Expenses and Net Capital Expenditures for such period from Cash
Gross Income for such period.
"Exchange Act" shall have the meaning set forth in Section 9.2(a).
"Extraordinary Expenses" shall have the meaning set forth in Section
2.6.4(c) hereof.
"Fiscal Year" shall mean each twelve month period commencing on January 1
and ending on December 31 during each year of the term of the Loan.
"GAAP" shall mean generally accepted accounting principles in the United
States of America, as of the date of the applicable financial report.
"Gross Income from Operations" shall mean all income, computed in
accordance with GAAP, derived from the ownership and operation of the Properties
from whatever source, including, but not limited to, all guest room revenues,
all food, beverage, and merchandise sales receipts, all interest income, if any,
rent, utility charges, escalations, forfeited security deposits, service fees or
charges, license fees, parking fees, rent concessions or credits, and any
business interruption insurance proceeds but excluding Sales Taxes, refunds and
uncollectible accounts, sales of furniture, fixtures and equipment, proceeds of
casualty insurance and condemnation awards, and interest on credit accounts;
provided, however, the proceeds of casualty insurance and condemnation awards
shall not be included in this definition whenever this definition is used for
purposes of computing Debt Service Coverage Ratio. Gross income shall not be
diminished
<PAGE>
7
as a result of the Mortgages or the creation of any intervening estate or
interest in the Properties or any part thereof.
"Hotel Operating Expenses" shall mean the total of all expenditures of
whatever kind, computed in accordance with GAAP, relating to the operation,
maintenance and management of the Properties that are incurred on a regular
monthly or other periodic basis, including without limitation, utilities,
ordinary repairs and maintenance, license fees, advertising expenses, management
fees, franchise fees, insurance premiums and real estate taxes or assessments,
payroll and related taxes, computer processing charges, operational equipment or
other lease payments as approved by Lender, and other similar costs, but
excluding depreciation, amortization of intangible assets, debt service, and
capital expenditures, all calculated in accordance with GAAP.
"Improvements" shall have the meaning set forth in the related Mortgage
with respect to each Individual Property.
"Independent Director" shall have the meaning set forth in Section
4.1(ee)(xvi).
"Individual Property" shall mean each parcel of real property and the
improvements thereon owned by Borrower and encumbered by a Mortgage, together
with all rights pertaining to such property and improvements, as more
particularly described in the Granting Clauses of such Mortgages and referred to
therein as the "Mortgaged Property" or the "Trust Property", as the case may be.
"Initial Interest Rate" shall have the meaning set forth in the Note.
"Insurance Premiums" shall have the meaning set forth in Section 7.1.1(c)
hereof.
"Interest Rate" shall mean the contract rate of interest payable under and
in accordance with the Note.
"Lease" shall mean any lease, or, to the extent of the interest therein of
Borrower, any sublease or subsublease, letting, license, concession or other
agreement (whether written or oral and whether now or hereafter in effect)
pursuant to which any person is granted a possessory interest in, or right to
use or
<PAGE>
8
occupy all or any portion of any space in any Individual Property of Borrower,
and every modification, amendment or other agreement relating to such lease,
sublease, subsublease, or other agreement entered into in connection with such
lease, sublease, subsublease, or other agreement and every guarantee of the
performance and observance of the covenants, conditions and agreements to be
performed and observed by the other party thereto.
"Legal Requirements" shall mean, with respect to each Individual Property,
all federal, state, county, municipal and other governmental statutes, laws,
rules, orders, regulations, ordinances, judgments, decrees and injunctions of
Governmental Authorities applicable to such Individual Property or any part
thereof or the construction, use, alteration or operation thereof, or any part
thereof, whether now or hereafter enacted and in force, and all permits,
licenses and authorizations and regulations relating thereto, and all covenants,
agreements, restrictions and encumbrances contained in any instruments, either
of record or known to Borrower, at any time in force applicable to such
Individual Property or any part thereof, including, without limitation, any
which may (i) require repairs, modifications or alterations in or to such
Individual Property or any part thereof, or (ii) in any way limit the use and
enjoyment thereof.
"Lender" shall mean Nomura Asset Capital Corporation, together with its
successors and assigns.
"Liabilities" shall have the meaning set forth in Section 9.2(b).
"Licenses" shall have the meaning set forth in Section 4.1(w).
"Lien" shall mean, with respect to each Individual Property, any mortgage,
deed of trust, lien, pledge, hypothecation, assignment, security interest, or
any other encumbrance, charge or transfer of, on or affecting the related
Individual Property or any portion thereof or Borrower, or any interest therein,
including, without limitation, any conditional sale or other title retention
agreement, any financing lease having substantially the same economic effect as
any of the foregoing, the filing of any financing statement, and mechanic's,
materialmen's and other similar liens and encumbrances.
<PAGE>
9
"Loan" shall mean the loan made by Lender to Borrower in the original
principal amount set forth in, and evidenced by, the Note executed and delivered
by Borrower and secured by the Mortgages and the other Loan Documents executed
and delivered by Borrower.
"Loan Documents" shall mean, collectively, this Agreement, the Note, the
Lock-Box Agreement, the Mortgage and Assignment of Leases encumbering each
Individual Property, the Assignment of Agreements for each Individual Property,
the Environmental Indemnity, the O&M Agreement for each Individual Property, the
Consent and Subordination of Manager for each Individual Property and any other
document pertaining to the Individual Properties as well as all other documents
executed and/or delivered in connection with the Loan.
"Lock-Box Agreement" shall have the meaning set forth in Section 9.6.
"Management Agreement" shall mean, with respect to any Individual Property,
a management agreement in the form attached hereto as Exhibit H entered into by
and between Borrower and the Manager, pursuant to which the Manager is to
provide management and other services with respect to said Individual Property.
"Management Fee" shall mean an amount not to exceed four percent (4%) per
annum of Gross Income from Operations for each Individual Property.
"Manager" shall mean Westar Hotels, Inc.
"Maturity Date" shall mean the date on which the final payment of principal
of the Note (and the Defeased Note, if applicable) becomes due and payable as
therein provided, whether at a stated maturity, by declaration of acceleration,
or otherwise.
"Monthly Debt Service Payment Amount" shall have the meaning set forth in
the Note.
"Mortgage" shall mean, with respect to each Individual Property, that
certain first priority Mortgage (or Deed of Trust or Deed to Secure Debt),
Assignment of Leases and Rents and Security Agreement, dated the date hereof,
executed and delivered by Borrower as security for the Loan made to Borrower
<PAGE>
10
and encumbering such Individual Property, substantially in the form of Exhibit B
annexed hereto with such modifications as may be required by Lender, as the same
may be amended, restated, replaced, supplemented or otherwise modified from time
to time.
"Mortgages" shall mean, collectively, each Mortgage encumbering an
Individual Property.
"NACC" shall have the meaning set forth in Section 2.4.3 hereof.
"Net Capital Expenditures" shall mean, for any period, the amount expended
for Capital Expenditures that exceeds reimbursements for such items during such
period from any reserve funds established under the Loan Documents.
"Net Cash Flow" shall mean, for any period, the amount obtained by
subtracting Cash Expenses and Capital Expenditures for such period from Cash
Gross Income for such period.
"Net Operating Income" means the amount obtained by subtracting Hotel
Operating Expenses from Gross Income from Operations.
"Nomura" shall have the meaning set forth in Section 9.2(b).
"Nomura Group" shall have the meaning set forth in Section 9.2(b).
"Non-Escrowed Operating Expenses" shall mean, for any period, Hotel
Operating Expenses excluding insurance premiums and real estate taxes and
assessments.
"Note" shall mean that certain note of even date herewith, made by Borrower
in favor of Lender, substantially in the form of Exhibit A annexed hereto, as
the same may be amended, restated, replaced, supplemented or otherwise modified
from time to time, including any Defeased Note and Undefeased Note that may
exist from time to time.
"O&M Agreement" shall mean that certain Operations and Maintenance
Agreement dated the date hereof between Borrower and Lender given in connection
with the Loan, substantially in the form of Exhibit F attached hereto.
<PAGE>
11
"Officers' Certificate" shall mean a certificate delivered to Lender by
Borrower which is signed by an authorized officer of the general partner of
Borrower.
"Optional Prepayment Date" shall have the meaning set forth in the Note.
"Other Charges" shall mean all ground rents, maintenance charges,
impositions other than Taxes, and any other charges, including, without
limitation, vault charges and license fees for the use of vaults, chutes and
similar areas adjoining the Properties, now or hereafter levied or assessed or
imposed against the Properties or any part thereof.
"Payment Date" shall have the meaning set forth in the Note.
"Permitted Encumbrances" shall mean, with respect to an Individual
Property, collectively, (a) the Liens and security interests created by the Loan
Documents, (b) all Liens, encumbrances and other matters disclosed in the Title
Insurance Policies relating to such Individual Property or any part thereof, (c)
Liens, if any, for Taxes imposed by any Governmental Authority not yet due or
delinquent, and (d) such other title and survey exceptions as Lender has
approved or may approve in writing or by acceptance of the applicable Title
Insurance Policy, in either case in Lender's sole discretion.
"Person" shall mean any individual, corporation, partnership, joint
venture, estate, trust, unincorporated association, any federal, state, county
or municipal government or any bureau, department or agency thereof and any
fiduciary acting in such capacity on behalf of any of the foregoing.
"Policies" shall have the meaning specified in Section 7.1.1(c).
"Premises" shall have the meaning set forth in the Granting Clause of the
related Mortgage with respect to each Individual Property.
"Properties" shall mean, collectively, all of the Individual Properties
which are subject to the terms of this Agreement.
"Property Required Repairs" shall have the meaning set forth in Section
7.2.1.
<PAGE>
12
"Provided Information" shall have the meaning set forth in Section 9.1(a).
"Rating Agency" shall mean each of Standard & Poor's Ratings Group, a
division of McGraw-Hill, Inc., Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. and Fitch Investors Service, Inc. or any other nationally-
recognized statistical rating agency which has been approved by Lender.
"Registration Statement" shall have the meaning set forth in Section
9.2(b).
"Release Amount" shall mean for an Individual Property the amount
calculated as one hundred twenty-five percent (125%) of the Allocated Loan
Amount for such Individual Property.
"Rents" shall mean, with respect to each Individual Property, all rents,
rent equivalents, moneys payable as damages or in lieu of rent or rent
equivalents, royalties (including, without limitation, all oil and gas or other
mineral royalties and bonuses), income, receivables, receipts, revenues,
deposits (including, without limitation, security, utility and other deposits),
accounts, cash, issues, profits, charges for services rendered, and other
consideration of whatever form or nature received by or paid to or for the
account of or benefit of Borrower or its agents or employees from any and all
sources arising from or attributable to the Individual Property, including,
without limitation, all hotel receipts, revenues and credit card receipts
collected from guest rooms, restaurants, bars, meeting rooms, banquet rooms and
recreational facilities, all receivables, customer obligations, installment
payment obligations and other obligations now existing or hereafter arising or
created out of the sale, lease, sublease, license, concession or other grant of
the right of the use and occupancy of property or rendering of services by
Borrower or any operator or manager of the hotel or the commercial space located
in the Improvements or acquired from others (including, without limitation, from
the rental of any office space, retail space, guest rooms or other space, halls,
stores, and offices, and deposits securing reservations of such space), license,
lease, sublease and concession fees and rentals, health club membership fees,
food and beverage wholesale and retail sales, service charges, vending machine
sales and proceeds, if any, from business interruption or other loss of income
insurance.
"Replacement Reserve Account" shall have the meaning set forth in Section
7.4.1.
<PAGE>
13
"Replacement Reserve Fund" shall have the meaning set forth in Section
7.4.1.
"Replacement Reserve Monthly Deposit" shall have the meaning set forth in
Section 7.4.1.
"Replacements" shall have the meaning set forth in Section 7.4.3(a).
"Required Records" shall have the meaning set forth in Section 5.1(k)(iv)
hereof.
"Required Repair Account" shall have the meaning set forth in Section
7.2.1.
"Required Repair Fund" shall have the meaning set forth in Section 7.2.1.
"Restoration" shall have the meaning set forth in Section 7.1.2(b).
"Revised Interest Rate" shall have the meaning set forth in the Note.
"Sales Taxes" shall mean all city, county, state or federal sales, use,
excise, luxury, occupancy or other taxes on receipts required to be accounted
for by Borrower to any government or governmental authority or agency.
"Sales Tax Escrow Fund" shall have the meaning set forth in Section 7.5.
"Scheduled Defeasance Payments" shall have the meaning set forth in Section
2.3.3(b).
"Seasonal Working Capital Reserve Fund" shall have the meaning set forth in
Section 7.6.1.
"Seasonal Working Capital Contribution" shall have the meaning set forth in
Section 7.6.1.
"Seasonal Working Capital Reserve Account" shall have the meaning set forth
in Section 7.6.1.
<PAGE>
14
"Secondary Market Transaction" shall mean any transaction in which the
Lender (i) sells the Loan, the Note and the other Loan Documents to one or more
investors as a whole loan, (ii) participates the Loan to one or more investors,
(iii) deposits the Loan, the Mortgages, the Note and other Loan Documents with a
trust, which trust may sell certificates to investors evidencing an ownership
interest in the trust assets, or (iv) otherwise sells the Loan or interest
therein to investors.
"Securities" shall have the meaning set forth in Section 9.1.
"Securities Act" shall have the meaning set forth in Section 9.2(a).
"Securitization" shall have the meaning set forth in Section 9.1.
"Severed Loan Documents" shall have the meaning set forth in Section
8.2(c).
"State" shall mean, with respect to an Individual Property, the State or
Commonwealth in which such Individual Property or any part thereof is located.
"Successor Borrower" shall have the meaning set forth in Section 2.4.3.
"Survey" shall mean a survey of the Individual Property in question
prepared by a surveyor licensed in the State and satisfactory to Lender and the
company or companies issuing the Title Insurance Policies, and containing a
certification of such surveyor satisfactory to Lender.
"Tax and Insurance Escrow Fund" shall have the meaning set forth in Section
7.3.1.
"Taxes" shall mean all real estate and personal property taxes,
assessments, water rates or sewer rents, now or hereafter levied or assessed or
imposed against any of the Properties or part thereof. Taxes shall not include
Sales Taxes.
"Term" shall have the meaning set forth in Section 7.1.1.
"Title Insurance Policies" shall mean, with respect to each Individual
Property, ALTA mortgagee title insurance policies in the form (acceptable to
<PAGE>
15
Lender) issued with respect to such Individual Property and insuring the lien of
the Mortgage encumbering such Individual Property.
"UCC" or "Uniform Commercial Code" shall mean the Uniform Commercial Code
as in effect in the applicable State or Commonwealth in which an Individual
Property is located.
"Uniform System of Accounts" shall mean the Uniform System of Accounts for
Hotels (Eighth, or most currently revised, Edition), consistently applied.
"Undefeased Note" shall have the meaning set forth in Section 2.3.3(v)
hereof.
"Underwriter Group" shall have the meaning set forth in Section 9.2(b).
"U.S. Obligations" shall mean direct non-callable obligations of the United
States of America.
"Yield Maintenance Premium" shall mean the amount (if any) which, when
added to the principal amount of that portion of the Note which Borrower wishes
to defease, will be sufficient to purchase U.S. Obligations providing the
required Scheduled Defeasance Payments.
Section 1.2 Principles of Construction.
All references to sections, schedules and exhibits are to sections,
schedules and exhibits in or to this Agreement unless otherwise specified.
Unless otherwise specified, the words "hereof," "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
Unless otherwise specified, all meanings attributed to defined terms herein
shall be equally applicable to both the singular and plural forms of the terms
so defined.
II. GENERAL TERMS
Section 2.1 Loan Commitment; Disbursement to Borrower.
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16
2.1.1 The Loan. Subject to and upon the terms and conditions set
forth herein, Lender hereby agrees to make the Loan to Borrower on the Closing
Date, in the original principal amount set forth in the Note and which Loan
shall mature on the Maturity Date set forth in the Note. Borrower hereby agrees
to accept the Loan on the Closing Date, subject to and upon the terms and
conditions set forth herein.
2.1.2 Disbursement to Borrower. Borrower may request and receive
only one borrowing hereunder in respect of the Loan and any amount borrowed and
repaid hereunder in respect of the Loan may not be reborrowed. Borrower shall,
on the Closing Date, receive its Loan, subject to the direction given by
Borrower as to the application of Loan proceeds to pay certain closing costs and
to fund (i) the Tax and Insurance Escrow Fund, (ii) the Replacement Reserve Fund
and (iii) the Required Repair Fund, all in accordance with the provisions of
this Agreement.
2.1.3 The Note. The Loan shall be evidenced by the Note of
Borrower, in the original principal amount of the Loan. The Note shall bear
interest as provided in such Note and shall be subject to repayment as provided
in Section 2.3. The Note shall be entitled to the benefits of this Agreement and
shall be secured by the Mortgages, the Assignments of Leases and the other Loan
Documents.
Section 2.2 Use of Proceeds.
Borrower shall use the proceeds of the Loan disbursed to it pursuant to
Section 2.1 to (i) repay and discharge any existing loans relating to the
Properties, (ii) pay all past-due Basic Carrying Costs, if any, in respect of
the Properties, (iii) fund the Tax and Insurance Escrow Fund, the Replacement
Reserve Fund, the Required Repair Fund, (iv) pay costs and expenses incurred in
connection with the Closing of the Loan, as approved by Lender, and (v) fund any
working capital requirements of the Properties.
Section 2.3 Loan Repayment and Defeasance.
2.3.1 Repayment. Borrower shall repay any outstanding principal
indebtedness of the Loan in full on the Maturity Date of the Loan, together with
interest thereon to (but excluding) the date of repayment.
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2.3.2 Prepayments. (a) Casualty/Condemnation Involuntary
---------------------------------
Prepayments. The Loan is subject to prepayment in certain instances of Casualty
- -----------
and Condemnation (each a "Casualty/Condemnation Involuntary Prepayment"), in the
manner and to the extent set forth in Sections 7.1.2 and Section 7.1.3 hereof.
Each Casualty/Condemnation Involuntary Prepayment shall be made on a scheduled
Payment Date and include all accrued and unpaid interest up to but not including
such Payment Date or, if not paid on a Payment Date, include interest that would
have accrued on such prepayment through the next Payment Date.
(b) Optional Prepayments. From and after the Optional Prepayment
--------------------
Date, the Borrower, on any Payment Date, may prepay all or any portion of the
Loan then outstanding, together with all accrued and unpaid interest up to but
not including such Payment Date, without payment of the Yield Maintenance
Premium or any other premium or penalty. Other than as set forth in this Section
2.3.2, the Borrower shall have no right to prepay all or any portion of Loan.
2.3.3 Voluntary Defeasance of the Loan. (a) At any time during the
period beginning on the date which is two (2) years from the "startup day"
within the meaning of Section 860G(a)(9) of the Internal Revenue Code of 1986,
as amended (the "Code") of a "real estate mortgage investment conduit," within
the meaning of Section 860D of the Code, which holds the Note (the "REMIC
Trust") and ending on the Optional Prepayment Date, and provided no Event of
Default exists, Borrower may voluntarily defease all or any portion of the Loan
by providing Lender with U.S. Obligations that produce payments which replicate
the payment obligations of the Borrower under the Note, or that portion of the
Note which the Borrower wishes to defease (hereinafter, a "Defeasance Event").
Upon request from Borrower, Lender shall confirm to Borrower in writing the
occurrence of the "startup day" of the REMIC that holds the Note. Each
Defeasance Event by the Borrower shall be subject to the satisfaction of the
following conditions precedent:
(i) Borrower shall provide not less than thirty (30) days prior
written notice to Lender specifying a scheduled Payment Date (the "Defeasance
Date") on which the Defeasance Event is to occur. Such notice shall indicate the
principal amount of the Note to be defeased;
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18
(ii) Borrower shall pay to Lender all accrued and unpaid interest on the
principal balance of the Note to but not including the Defeasance Date. If for
any reason the Defeasance Date is not a Payment Date, the Borrower shall also
pay interest that would have accrued on the Note through the next regularly
scheduled payment date;
(iii) Borrower shall pay to Lender all other sums, not including
scheduled interest or principal payments, due under the Note, this Agreement,
the Mortgages, and the other Loan Documents;
(iv) Borrower shall pay to Lender the required Defeasance Deposit for
the Defeasance Event;
(v) In the event only a portion of the Loan is the subject of the
Defeasance Event, Borrower shall prepare all necessary documents to amend and
restate the Note and issue two substitute notes, one note having a principal
balance equal to the defeased portion of the original Note (the "Defeased Note")
and the other note having a principal balance equal to the undefeased portion of
the Note (the "Undefeased Note"). The Defeased Note and Undefeased Note shall
have identical terms as the Note except for the principal balance. A Defeased
Note cannot be the subject of any further Defeasance Event;
(vi) Borrower shall execute and deliver a security agreement, in form
and substance satisfactory to Lender, creating a first priority lien on the
Defeasance Deposit and the U.S. Obligations purchased with the Defeasance
Deposit in accordance with this provision of this Section 2.3.3 (the "Security
Agreement");
(vii) Borrower shall deliver an opinion of counsel for Borrower in form
satisfactory to Lender in its sole discretion stating, among other things, that
Lender has a perfected first priority security interest in the Defeasance
Deposit and the U.S. Obligations delivered by Borrower;
(viii) Lender shall have received evidence in writing from the applicable
Rating Agencies to the effect that such release will not result in a reduction,
withdrawal or re-qualification of the respective ratings in effect immediately
prior to such Defeasance Event for the Securities issued in
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19
connection with the Securitization which are then outstanding. If required
by the applicable Rating Agencies, the Borrower shall also deliver or cause
to be delivered a substantive non-consolidation opinion with respect to the
Successor Borrower in form and substance satisfactory to Lender and the
applicable Rating Agencies;
(ix) Borrower shall deliver an officer's certificate of Borrower
certifying that the requirements set forth in this Section 2.3.3(a) have
been satisfied;
(x) Borrower shall deliver such other certificates, documents or
instruments as Lender may reasonably request; and
(xi) Borrower shall pay all costs and expenses of Lender incurred
in connection with the Defeasance Event, including any costs and expenses
associated with a release of one or more Liens as provided in Section 2.4
hereof as well as reasonable attorneys' fees and expenses.
(b) In connection with each Defeasance Event, Borrower hereby
appoints Lender as its agent and attorney-in-fact for the purpose of using the
Defeasance Deposit to purchase U.S. Obligations which provide payments on or
prior to, but as close as possible to, all successive scheduled payment dates
after the Defeasance Date upon which interest and principal payments are
required under the Note, in the case of a Defeasance Event for the entire
outstanding principal balance of the Loan, or the Defeased Note, in the case of
a Defeasance Event for only a portion of the outstanding principal balance of
the Loan, as applicable (assuming that the Borrower were to prepay the Note in
full on the Optional Prepayment Date), and in amounts equal to the scheduled
payments due on such dates under the Note or the Defeased Note, as applicable
(the "Scheduled Defeasance Payments"). Borrower, pursuant to the Security
Agreement or other appropriate document, shall authorize and direct that the
payments received from the U.S. Obligations may be made directly to Lender and
applied to satisfy the obligations of the Borrower under the Note or the
Defeased Note, as applicable. Any portion of the Defeasance Deposit in excess of
the amount necessary to purchase the U.S. Obligations required by this Section
2.3(b) and satisfy the Borrower's obligations under Sections 2.3 and 2.4 shall
promptly be remitted to the Borrower.
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20
Section 2.4 Release of Properties. Except as otherwise set forth in
this Section 2.4, no repayment, prepayment or defeasance of all or any portion
of the Note shall cause, give rise to a right to require, or otherwise result
in, the release of any Lien of any Mortgage on any of the Properties.
2.4.1 Release of All the Properties. (a) If the Borrower has
elected to defease the entire Note and the requirements of Section 2.3 have been
satisfied, all of the Properties shall be released from the Liens of their
respective Mortgages and the U.S. Obligations, pledged pursuant to the Security
Agreement, shall be the sole source of collateral securing the Note.
(b) In connection with the release of the Liens, the Borrower
shall submit to Lender, not less than thirty (30) days prior to the Defeasance
Date, a release of Lien (and related Loan Documents) for each Individual
Property for execution by Lender. Such release shall be in a form appropriate in
each jurisdiction in which an Individual Property is located and satisfactory to
Lender in its sole discretion. In addition, Borrower shall provide all other
documentation Lender reasonably requires to be delivered by Borrower in
connection with such release, together with an Officer's Certificate of Borrower
certifying that such documentation (i) is in compliance with all Legal
Requirements, and (ii) will effect such releases in accordance with the terms of
this Agreement.
2.4.2 Release of Individual Properties. Borrower on one or more
occasions may obtain (i) the individual release of one (1) or more Individual
Properties from the Lien of the Mortgage thereon (and related Loan Documents)
and (ii) the release of Borrower's obligations under the Loan Documents with
respect to such Individual Property (other than those expressly stated to
survive), upon satisfaction of each of the following conditions:
(a) The principal balance of the Defeased Note shall equal or
exceed the Release Amount for the applicable Individual Property or Properties
so released.
(b) The requirements of Section 2.3.3 have been satisfied.
(c) Borrower shall submit to Lender, not less than thirty (30)
days prior to the date of such release, a release of Lien (and related Loan
Documents) for such Individual Property for execution by Lender. Such release
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21
shall be in a form appropriate in each jurisdiction in which the Individual
Property is located and satisfactory to Lender in its sole discretion. In
addition, Borrower shall provide all other documentation Lender reasonably
requires to be delivered by Borrower in connection with such release, together
with an Officer's Certificate of Borrower certifying that such documentation (i)
is in compliance with all Legal Requirements, (ii) will effect such release in
accordance with the terms of this Agreement, and (iii) will not impair or
otherwise adversely affect the Liens, security interests and other rights of
Lender under the Loan Documents not being released (or as to the parties to the
Loan Documents and Properties subject to the Loan Documents not being released).
(d) After giving effect to such release, the Debt Service Coverage
Ratio for all of the Properties then remaining subject to the Liens of the
Mortgages shall be equal to the greater of (i) the Debt Service Coverage Ratio
calculated as of the Closing Date, and (ii) the Debt Service Coverage Ratio for
all of the then remaining Properties (including the Individual Property to be
released) for the twelve (12) full calendar months immediately preceding the
release of the Individual Property;
2.4.3. Successor Borrower. In connection with any release of a Lien
under this Section 2.4, Nomura Asset Capital Corporation ("NACC") shall
establish or designate a successor entity (the "Successor Borrower") and
Borrower shall transfer and assign all obligations, rights and duties under and
to the Note or the Defeased Note, as applicable, together with the pledged U.S.
Obligations to such Successor Borrower. The obligation of NACC to establish or
designate a Successor Borrower shall be retained by NACC notwithstanding the
sale or transfer of this Agreement unless such obligation is specifically
assumed by the transferee. Such Successor Borrower shall assume the obligations
under the Note or the Defeased Note, as applicable, and the Security Agreement
and Borrower shall be relieved of its obligations under such documents. The
Borrower shall pay $1,000 to any such Successor Borrower as consideration for
assuming the obligations under the Note or the Defeased Note, as applicable, and
the Security Agreement. Notwithstanding anything in this Agreement to the
contrary, no other assumption fee shall be payable upon a transfer of the Note
in accordance with this Section 2.4.3, but Borrower shall pay all costs and
expenses incurred by Lender, including Lender's reasonable attorneys' fees and
expenses, incurred in connection therewith.
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2.4.4 Release on Payment in Full. Lender shall, upon the written
request and at the expense of Borrower, upon payment in full of all principal
and interest on the Loan and all other amounts due and payable under the Loan
Documents in accordance with the terms and provisions of the Note and this Loan
Agreement, release the Liens of the Mortgages not theretofore released.
Section 2.5 Interest.
2.5.1 Generally. Interest on the Loan and the Note shall accrue at
the applicable Interest Rate, to be paid in installments as follows: (a) a
payment of interest only on January 11, 1996; (b) a constant payment equal to
the Monthly Debt Service Payment Amount, on the twelfth (12th) day of February,
1996 and on each Payment Date thereafter up to and including the Payment Date
occurring in December 2020; each of such payments, subject to Sections 2.6.4 and
2.6.5, to be applied (i) to the payment of interest computed at the Initial
Interest Rate; and (ii) the balance applied toward the reduction of the
principal sum; and the balance of said principal sum together with all accrued
and unpaid interest thereon shall be due and payable on the Maturity Date. All
amounts due under the Note shall be payable without setoff, counterclaim or any
other deduction whatsoever.
2.5.2 Default Rate; Post-Maturity Interest. Upon the occurrence of
an Event of Default with respect to any payment of principal or interest in
respect of the Loan (including upon the failure of Maker to pay the Debt in full
on the Maturity Date), or any other amount owed by Borrower under this
Agreement, the Note or any of the other Loan Documents, whether by acceleration
or otherwise, Borrower shall pay (a) interest at the Default Rate in respect of
all of such amounts not paid when due by Borrower, upon demand from time to
time, to the extent permitted by applicable law, until such defaulted amount has
been paid by Borrower and (b) on each Payment Date following the occurrence of
such Event of Default until such Event of Default shall have been cured to
Lender's satisfaction, an amount equal to all Excess Cash Flow for the prior
month, such Excess Cash Flow to be applied by Lender to the payment of the Debt
in such order as Lender shall determine in its sole discretion, including
alternating applications thereof between interest and principal. Interest at the
Default Rate and Excess Cash Flow shall both be computed from the occurrence of
the Event of Default until the actual receipt and collection of the Debt (or
that portion that is then due). Interest at the Default Rate shall be added to
the Debt and shall be secured by the Deeds of Trust. The foregoing requirement
to pay Excess Cash
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23
Flow shall not apply with respect to any Event of Default occurring after the
Optional Prepayment Date inasmuch as amounts that comprise Excess Cash Flow will
be paid in accordance with Section 2.65 below. Payment or acceptance of the
increased rates provided for in this subsection is not a permitted alternative
to timely payment and shall not constitute a waiver of any Default or Event of
Default or an amendment to this Agreement or any other Loan Document and shall
not otherwise prejudice or limit any rights or remedies of Lender.
Section 2.6 Payments and Computations.
2.6.1 Making of Payments. Each payment by Borrower hereunder or
under the Note shall be made in funds settled through the New York Clearing
House Interbank Payments System or other funds immediately available to Lender
by 11:00 a.m., New York City time, on the date such payment is due, to Lender by
deposit to such account as Lender may designate by written notice to Borrower.
Whenever any payment hereunder or under the Note shall be stated to be due on a
day which is not a Business Day, such payment shall be made on the first
Business Day thereafter.
2.6.2 Computations. Interest payable hereunder or under the
Note by Borrower shall be computed on the basis of the actual number of days
elapsed in each interest accrual period by a daily rate based on a 360-day year.
Each interest accrual period shall commence on the eleventh (11th) day of each
calendar month during the term of the Loan and shall end on the tenth (10th) day
of the next occurring calendar month.
2.6.3 Late Payment Charge. If any principal, interest or any
other sums due under the Loan Documents is not paid by Borrower on the date on
which it is due, Borrower shall pay to Lender upon demand an amount equal to the
lesser of five percent (5%) of such unpaid sum or the maximum amount permitted
by applicable law in order to defray the expense incurred by Lender in handling
and processing such delinquent payment and to compensate Lender for the loss of
the use of such delinquent payment. Any such amount shall be secured by the
Mortgages and the other Loan Documents.
2.6.4 Payments Prior to the Optional Prepayment Date.
Notwithstanding anything to the contrary contained in this Agreement, the Note
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or the other Loan Documents, the following subparagraphs shall apply from and
after the date hereof:
(a) On each Payment Date preceding the Optional Prepayment Date,
Borrower shall pay, or shall cause to be paid in accordance with the terms and
provisions of the Lock-Box Agreement, the following payments in the listed order
of priority from the Cash Gross Income (calculated without deduction for Sales
Taxes) with respect to each of the Properties:
(i) First, payments to the Tax and Insurance Escrow Fund in
accordance with the terms and conditions hereof;
(ii) Second, payments to the Sales Taxes Escrow Fund in accordance
with the terms and conditions hereof;
(iii) Third, payment of the Monthly Debt Service Payment Amount in
accordance with the terms and conditions hereof and of the Note;
(iv) Fourth, payments to the Replacement Reserve Fund in
accordance with the terms and conditions hereof and any other reserves required
hereunder (including, without limitation, the Seasonal Working Capital Reserve
Fund).
(v) Fifth, payments for monthly Cash Expenses pursuant to the
terms and conditions of the related Approved Annual Budgets;
(vi) Sixth, payments for Net Capital Expenditures pursuant to the
terms and conditions of the related Approved Annual Budgets;
(vii) Seventh, payments for any Extraordinary Expenses approved by
Lender, if any; and
(viii) Eighth, payment to the Lender of any other amounts due under
the Loan Documents; and
(ix) Lastly, any amounts remaining after such payments shall be
paid to the Borrower.
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(b) For each fiscal year commencing on January 1, 1996, and for each
Fiscal Year thereafter, the Borrower shall submit to Lender for Lender's written
approval an annual budget in respect of each Individual Property (as to each
Individual Property, an "Annual Budget") not later than forty-five (45) days
prior to the commencement of such Fiscal Year, in form satisfactory to Lender
setting forth in reasonable detail budgeted monthly operating income and monthly
operating capital and other expenses for each Individual Property, including all
planned capital expenditures in respect of each Individual Property for such
Fiscal Year. Each Annual Budget shall contain, among other things, limitations
on management fees, third party service fees, and other expenses as the Borrower
may reasonably determine. Lender shall have the right to approve each such
Annual Budget (such approval not to be unreasonably withheld or delayed) and in
the event that Lender objects to any of the proposed Annual Budgets submitted by
Borrower, Lender shall advise Borrower of such objections within twenty (20)
days after receipt thereof (and deliver to Borrower a reasonably detailed
description of such objections) and Borrower shall promptly revise each such
Annual Budget and resubmit the same to Lender. Lender shall advise Borrower of
any objections to such revised Annual Budget within ten (10) days after receipt
thereof (and deliver to Borrower a reasonably detailed description of such
objections) and Borrower shall promptly revise the same in accordance with the
process described in this subparagraph until the Lender approves an Annual
Budget. If the Annual Budget shall be submitted in a timely fashion pursuant to
this Section 2.6, together with a prominent notation that failure to respond
within twenty (20) days of receipt shall constitute deemed approval, then if
Lender shall fail to disapprove or otherwise object to such budgets within
twenty (20) days after receipt of same, Lender shall be deemed to have approved
the same. Each such Annual Budget approved by Lender in accordance with terms
hereof shall hereinafter be referred to as an "Approved Annual Budget". Until
such time that Lender approves a proposed Annual Budget, the most recently
Approved Annual Budget shall apply; provided that, such Approved Annual Budget
shall be adjusted to reflect actual increases in real estate taxes, insurance
premiums and utilities expenses.
(c) In the event that the Borrower must incur an extraordinary
operating expense or capital expense not set forth in the Annual Budget (each an
"Extraordinary Expense"), then the Borrower shall promptly deliver to Lender a
reasonably detailed explanation of such proposed Extraordinary Expense for the
Lender's approval.
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2.6.5 Payments After the Optional Prepayment Date. In the event that
the Borrower does not prepay the entire principal balance of the Note and any
other amounts outstanding on the Optional Prepayment Date, the provisions of
Section 2.6.4(b) and (c) as set forth above shall remain in full force and
effect, and the following subparagraphs also shall apply:
(a) From and after the Optional Prepayment Date, interest shall
accrue on the unpaid principal balance from time to time outstanding on
this Note at the Revised Interest Rate. Subject to the provisions of this
section, Borrower shall continue to make payments in monthly installments
beginning on the Optional Prepayment Date and each Payment Date thereafter
up to and including the Maturity Date in an amount equal to the Monthly
Debt Service Payment Amount. Each Monthly Debt Service Payment Amount paid
on and after the Optional Prepayment Date shall be applied first to the
payment of interest computed at the Initial Interest Rate with the
remainder of the Monthly Debt Service Payment Amount applied to the
reduction of the outstanding principal balance of this Note. Interest
accrued at the Revised Interest Rate and not paid pursuant to the preceding
sentence shall be deferred and added to the Debt and shall earn interest at
the Revised Interest Rate to the extent permitted by applicable law (such
accrued interest is hereinafter defined as "Accrued Interest"), it being
agreed that such non-payment and such accrual shall not constitute an Event
of Default. All of the Debt, including any Accrued Interest, shall be due
and payable on the Maturity Date.
(b) On the Optional Prepayment Date and on each Payment Date
thereafter up to an including the Maturity Date, Borrower shall pay, or
shall cause to be paid in accordance with the terms and provisions of the
Lock-Box Agreement, the following payments in the listed order of priority
from the Cash Gross Income (calculated without deduction for Sales Taxes)
with respect to each of the Properties:
(i) First, payments to the Tax and Insurance Escrow Fund in
accordance with the terms and conditions hereof;
(ii) Second, payments to the Sales Tax Escrow Fund in
accordance with the terms and conditions hereof;
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(iii) Third, payment of the Monthly Debt Service Payment Amount in
accordance with the terms and conditions hereof and of the Note;
(iv) Fourth, payments to the Replacement Reserve Fund in accordance with
the terms and conditions hereof and any other reserves required hereunder
(including without limitation, the Seasonal Working Capital Reserve Fund);
(v) Fifth, payments for monthly Cash Expenses pursuant to the terms and
conditions of the related Approved Annual Budgets;
(vi) Sixth, payments for Net Capital Expenditures pursuant to the
related Approved Annual Budgets;
(vii) Seventh, payments for Extraordinary Expenses approved by Lender, if
any;
(viii) Eighth, payments to the Lender to be applied against the
outstanding principal amount due under the Note until such principal amount is
paid in full;
(ix) Ninth, payments to the Lender for Accrued Interest;
(x) Tenth, payment to the Lender of any other amounts due under the
Loan Documents;
(xi) Lastly, any amounts remaining after such payments shall be paid to
the Borrower.
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III. CONDITIONS PRECEDENT
Section 3.1 Conditions Precedent to Closing.
The obligation of Lender to make the Loan hereunder is subject to the
fulfillment by Borrower or waiver by Lender of the following conditions
precedent no later than the Closing Date:
(a) Representations and Warranties; Compliance with Conditions. The
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents shall be true and correct in all material respects on and
as of the Closing Date with the same effect as if made on and as of such date,
and no Default or an Event of Default shall have occurred and be continuing; and
Borrower shall be in compliance in all material respects with all terms and
conditions set forth in this Agreement and in each other Loan Document on its
part to be observed or performed.
(b) Loan Agreement, Note and Lock-Box Agreement. Lender shall have
received a copy of this Agreement, the Note and the Lock-Box Agreement, in each
case, duly executed and delivered on behalf of Borrower.
(c) Delivery of Loan Documents; Title Insurance; Reports; Leases.
(i) Mortgages, Assignments of Leases, Assignments of Agreements.
Lender shall have received from Borrower fully executed and acknowledged
counterparts of the Mortgages, the Assignments of Leases and Assignments of
the Agreements relating to each of the Properties and evidence that
counterparts of the Mortgages and Assignments of Leases have been delivered
to the title company for recording, in the reasonable judgment of Lender,
so as to effectively create upon such recording valid and enforceable Liens
upon such Properties, of the requisite priority, in favor of Lender (or
such other trustee as may be required or desired under local law), subject
only to the Permitted Encumbrances and such other Liens as are permitted
pursuant to the Loan Documents. Lender shall have also received from
Borrower fully executed counterparts of the Environmental Indemnity, O&M
Agreement, and Consent and Subordination of Manager.
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(ii) Title Insurance. Lender shall have received Title Insurance
Policies (or marked-up commitments to receive such Title Policies
satisfactory to Lender) issued by a title company acceptable to Lender
and dated as of the Closing Date, with reinsurance and direct access
agreements acceptable to Lender. Such Title Insurance Policies shall
(A) provide coverage in amounts satisfactory to Lender, (B) insure
Lender that the relevant Mortgage creates a valid lien on the
Individual Property encumbered thereby of the requisite priority, free
and clear of all exceptions from coverage other than Permitted
Encumbrances and standard exceptions and exclusions from coverage (as
modified by the terms of any endorsements), (C) contain such
endorsements and affirmative coverages as Lender may reasonably
request, and (D) name Lender as the insured. The Title Insurance
Policies shall be assignable. Lender also shall have received evidence
that all premiums in respect of such Title Insurance Policies have
been paid or will be paid out of the proceeds of the Loan.
(iii) Survey. Lender shall have received a current title survey
for each Individual Property, certified to the title company and
Lender and their successors and assigns, in form and content
satisfactory to Lender and prepared by a professional and properly
licensed land surveyor satisfactory to Lender in accordance with the
1992 Minimum Standard Detail Requirements for ALTA/ACSM Land Title
Surveys. The survey should meet the classification of an "Urban
Survey" and the following additional items from the list of "Optional
Survey Responsibilities and Specifications" (Table A) should be added
to each survey: 2, 3, 4, 6, 8, 9, 10, 11 and 13. Such survey shall
reflect the same legal description contained in the Title Insurance
Policies relating to such Individual Property referred to in clause
(ii) above and shall include, among other things, a metes and bounds
description of the real property comprising part of such Individual
Property reasonably satisfactory to Lender. The surveyor's seal shall
be affixed to each survey and the surveyor shall provide a
certification for each survey in form and substance acceptable to
Lender.
(iv) Insurance. Lender shall have received valid certificates of
insurance for the policies of insurance required hereunder,
satisfactory to Lender in its sole discretion, and evidence of the
payment of all premiums payable for the existing policy period, which
period shall not be less than one (1) year.
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(v) Environmental Reports. Lender shall have received an
environmental report in respect of each Individual Property, in each case
satisfactory to Lender.
(vi) Zoning. With respect to each Individual Property, Lender
shall have received, at Lender's option, (i) letters or other evidence with
respect to each Individual Property from the appropriate municipal
authorities (or other Persons) concerning applicable zoning and building
laws, (ii) a zoning opinion letter, in substance reasonably satisfactory to
Lender or (iii) such other evidence relating to compliance with zoning and
building law compliance as shall be reasonably satisfactory to Lender.
(vii) Encumbrances. Borrower shall have taken or caused to be taken
such actions in such a manner so that Lender has a valid and perfected Lien
of the requisite priority as of the Closing Date with respect to each
Mortgage in the applicable Individual Property, subject only to applicable
Permitted Encumbrances and such other Liens as are permitted pursuant to
the Loan Documents, and Lender shall have received satisfactory evidence
thereof.
(d) Related Documents. Each additional document not specifically
referenced herein, but relating to the transactions contemplated herein, shall
have been duly authorized, executed and delivered by all parties thereto and
Lender shall have received and approved certified copies or originals thereof.
(e) Delivery of Organizational Documents. On or before the
Closing Date, Borrower shall deliver or cause to be delivered to Lender (i)
copies certified by Borrower of all organizational documentation related to
Borrower and/or the formation, structure, existence, good standing and/or
qualification to do business, as Lender may request in its sole discretion,
including, without limitation, good standing certificates, qualifications to do
business in the appropriate jurisdictions, resolutions authorizing the entering
into of the Loan and incumbency certificates as may be requested by Lender.
(f) Opinions of Borrower's Counsel. Lender shall have received
opinions of Borrower's counsel (i) with respect to substantive non-
consolidation, true sale or true contribution, and fraudulent transfer issues,
and (ii)
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31
with respect to due execution, authority, enforceability of the Loan Documents
and such other matters as Lender may require, all such opinions in form, scope
and substance satisfactory to Lender and Lender's counsel in their reasonable
discretion considering the custom and convention for the types of legal opinions
described in (i) and (ii) above that are customarily given in transactions
similar to the transaction contemplated by this Agreement.
(g) Budgets. Borrower shall have delivered, and Lender shall have
approved, the Annual Operating Budget and the Capital Expenditures Budget for
Fiscal Year 1996.
(h) Basic Carrying Costs. Borrower shall have paid all Basic
Carrying Costs relating to each of the Properties which are in arrears,
including without limitation, (i) accrued but unpaid insurance premiums relating
to each of the Properties, (ii) currently due Taxes (including any in arrears)
relating to each of the Properties, and (iii) currently due Other Charges
relating to each of the Properties, which amounts, to the extent they are unpaid
shall be funded with proceeds of the Loan.
(i) Completion of Proceedings. All corporate and other
proceedings taken or to be taken in connection with the transactions
contemplated by this Agreement and other Loan Documents and all documents
incidental thereto shall be reasonably satisfactory in form and substance to
Lender, and Lender shall have received all such counterpart originals or
certified copies of such documents as Lender may reasonably request.
(j) [Intentionally Deleted]
(k) Payments. All payments, deposits or escrows required to be
made or established by Borrower under this Agreement, the Note and the other
Loan Documents on or before the Closing Date shall have been paid or shall be
funded with the proceeds of the Loan.
(l) No Casualty or Condemnation. None of the Properties shall
have suffered a Casualty that has not been fully restored to the full
satisfaction of Lender and no Condemnation shall have occurred or been commenced
with respect to any of the Properties;
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32
(m) No Material Adverse Change. There shall not have occurred a
material adverse change, determined in the exercise of Lender's reasonable
judgment, in or to:
(1) the financial, physical or mechanical condition of any of
the Properties;
(2) the financial condition of Borrower or any general partner
of Borrower; or
(3) the financial condition of Westar Hotels, Inc. or any
Affiliate of Westar Hotels, Inc.
(n) No Breach Under Other Agreements. Neither Westar Hotels, Inc.
nor any Affiliate of Westar Hotels, Inc. shall be in breach or default under any
material contract or agreement or in connection with any loan or indebtedness of
such entities.
(o) No Lease Defaults. There shall not have been any default by
either Borrower or any tenant or occupancy under any Lease at any of the
Properties and there shall not exist any conditions that, with the passage of
time or the giving of notice, or both that would constitute defaults thereunder.
(p) Minimum Net Operating Income. Borrower shall have established
to Lender's reasonable satisfaction that the Properties, taken together,
generated Net Operating Income that was in an amount equal to at least
$2,702,222.00 and that was sufficient to generate a Debt Service Coverage Ratio
of at least 1.40 to 1, in either case during the twelve (12) full calendar
months ending on the last day of October, 1995.
(q) Loan-To-Value Ratio. Based on a report prepared at Borrower's
expense by a licensed, independent M.A.I. appraiser selected by Lender, the
original principal amount of the Loan shall not exceed seventy percent (70%) of
the fair market value of all of the Properties, taken together, as of the date
of such report.
(r) Leases, Management Agreement and Other Contracts. Borrower
shall have delivered to Lender originals or copies accompanied by an
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33
Officers Certificate of Borrower's general partner of any Leases affecting the
Properties, the Management Agreement and any other material agreements or
contracts relating to the ownership, operation and maintenance of the
Properties.
(s) Financial Statements. Borrower shall have delivered to Lender
audited annual financial statements, meeting the requirements of Section 5.1(k)
hereof, for the Fiscal Years 1992, 1993 and 1994 and unaudited monthly and year-
to-date financial statements, meeting such requirements, for the period January
1, 1995 through the last day of the calendar month immediately preceding the
month in which the Closing Date occurs. In addition, Borrower shall deliver an
agreed-upon procedures report or opinion that certifies the minimum Net
Operating Income required under Section 3.1(p) above.
IV. REPRESENTATIONS AND WARRANTIES
Section 4.1 Borrower Representations.
Borrower represents and warrants as of the date hereof and as of the
Closing Date that:
(a) Organization. Borrower has been duly organized and is validly
existing and in good standing as a limited partnership with requisite power and
authority to own its properties and to transact the businesses in which it is
now engaged. Borrower is duly qualified to do business and is in good standing
in each jurisdiction where it is required to be so qualified in connection with
its properties, businesses and operations. Borrower possesses all rights,
licenses, permits and authorizations, governmental or otherwise, necessary to
entitle it to own its properties and to transact the businesses in which it is
now engaged, and the sole business of Borrower is the ownership, management and
operation of the Properties.
(b) Proceedings. Borrower has taken all necessary action to authorize
the execution, delivery and performance by Borrower of this Agreement and the
other Loan Documents. This Agreement and such other Loan Documents have been
duly executed and delivered by or on behalf of Borrower and constitute legal,
valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms, subject to applicable bankruptcy,
<PAGE>
34
insolvency and similar laws affecting rights of creditors generally, and
subject, as to enforceability, to general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law).
(c) No Conflicts. The execution, delivery and performance of this
Agreement and the other Loan Documents by Borrower will not conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance (other than pursuant to the Loan Documents) upon any of the property
or assets of Borrower pursuant to the terms of any indenture, mortgage, deed of
trust, loan agreement, partnership agreement or other agreement or instrument to
which Borrower is a party or by which any of Borrower's property or assets is
subject, nor will such action result in any violation of the provisions of any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over Borrower or any of Borrower's properties or
assets, and any consent, approval, authorization, order, registration or
qualification of or with any court or any such regulatory authority or other
governmental agency or body required for the execution, delivery and performance
by Borrower of this Agreement or any other Loan Documents has been obtained and
is in full force and effect.
(d) Litigation. There are no actions, suits or proceedings at law or
in equity by or before any Governmental Authority or other agency now pending or
threatened in writing, or verbally to any officer of Westar Hotels, Inc.,
against Borrower or any of the Properties, which actions, suits or proceedings,
if determined against Borrower or any of the Properties, might materially and
adversely affect the condition (financial or otherwise) or business of Borrower
or the condition or ownership of any of the Properties.
(e) Agreements. Except as otherwise disclosed in writing to Lender
and approved by Lender, or as may constitute Permitted Encumbrances, Borrower is
not a party to any agreement or instrument or subject to any restriction which
might materially and adversely affect Borrower or any of the Properties, or
Borrower's business, properties or assets, operations or condition, financial or
otherwise. Borrower is not in default in any material respect in the
performance, observance or fulfillment of any of the material obligations,
covenants or conditions contained in any agreement or instrument to which it is
a party or by which Borrower or any of its Properties are bound.
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35
(f) Title. Borrower has good and marketable title in fee simple to
the real property comprising part of the Properties and good title to the
balance of such Properties, free and clear of all Liens whatsoever except the
Permitted Encumbrances, such other Liens as are permitted pursuant to the Loan
Documents and the Liens created by the Loan Documents. Each Mortgage intended
to encumber any of the Properties, when properly recorded in the appropriate
records, together with any Uniform Commercial Code financing statements required
to be filed in connection therewith, will create (i) a valid, perfected lien on
the applicable Individual Property, subject only to Permitted Encumbrances and
the Liens created by the Loan Documents and (ii) perfected security interests in
and to, and perfected collateral assignments of, all personalty (including the
Leases), all in accordance with the terms thereof, in each case subject only to
any applicable Permitted Encumbrances, such other Liens as are permitted
pursuant to the Loan Documents and the Liens created by the Loan Documents.
There are no claims for payment for work, labor or materials affecting any of
Borrower's Properties which are or may become a lien prior to, or of equal
priority with, the Liens created by the Loan Documents.
(g) No Bankruptcy Filing. Borrower is not contemplating either the
filing of a petition by it under any state or federal bankruptcy or insolvency
laws or the liquidation of all or a major portion of Borrower's assets or
property, and Borrower has no knowledge of any Person contemplating the filing
of any such petition against it.
(h) Full and Accurate Disclosure. No statement of fact made by
Borrower in this Agreement or in any of the other Loan Documents contains any
untrue statement of a material fact or omits to state any material fact
necessary to make statements contained herein or therein not misleading. There
is no material fact presently known to Borrower which has not been disclosed to
Lender which materially and adversely affects, nor as far as Borrower can
foresee, might materially and adversely affect, any of the Properties or the
business, operations or condition (financial or otherwise) of Borrower.
(i) No Plan Assets. Borrower is not an "employee benefit plan," as
defined in Section 3(3) of ERISA, subject to Title I of ERISA, and none of the
assets of Borrower constitutes or will constitute "plan assets" of one or more
such plans within the meaning of 29 C.F.R. Section 2510.3-101.
<PAGE>
36
(j) Compliance. Borrower and each of the Properties and the use
thereof comply in all material respects with all applicable Legal Requirements,
including, without limitation, building and zoning ordinances and codes.
Borrower is not in default or violation of any order, writ, injunction, decree
or demand of any Governmental Authority, the violation of which might materially
and adversely affect the condition (financial or otherwise) or business of
Borrower. There has not been and shall never be committed by Borrower or any
other person in occupancy of or involved with the operation or use of the
Properties any act or omission affording the federal government or any state or
local government the right of forfeiture as against any of the Properties or any
part thereof or any monies paid in performance of Borrower's obligations under
any of the Loan Documents. Borrower hereby covenants and agrees not to commit,
permit or suffer to exist any act or omission affording such right of
forfeiture.
(k) Contracts; Collective Bargaining. Except as otherwise disclosed
in writing to Lender and approved by Lender. There are no contracts or
agreements affecting any Individual Property which are not terminable on one (1)
month's notice or less without cause and without penalty or premium. None of
the Properties are subject to or affected by any collective bargaining
agreements.
(l) Financial Information. All financial data, including, without
limitation, the audited and unaudited financial statements and statements of
cash flow and income and operating expense, that have been delivered to Lender
in respect of the Properties (i) are true, complete and correct in all material
respects, (ii) accurately represent the financial condition of the Properties as
of the date of such reports, and (iii) to the extent prepared by an independent
certified public accounting firm, have been prepared in accordance with GAAP and
presented in accordance with the Uniform System of Accounts throughout the
periods covered, except as disclosed therein. Borrower does not have any
contingent liabilities, liabilities for taxes, unusual forward or long-term
commitments or unrealized or anticipated losses from any unfavorable commitments
that are known to Borrower and reasonably likely to have a materially adverse
effect on the Properties or the operation thereof as a hotel, except as referred
to or reflected in said financial statements. Since the date of such financial
statements, there has been no materially adverse change in the financial
condition, operations or business of Borrower from that set forth in said
financial statements.
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37
(m) Condemnation. No Condemnation or other proceeding has been
commenced or, to Borrower's best knowledge, is contemplated with respect to all
or any portion of any of the Properties or for the relocation of roadways
providing access to any of the Properties.
(n) Federal Reserve Regulations. No part of the proceeds of the Loan
will be used for the purpose of purchasing or acquiring any "margin stock"
within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System or for any other purpose which would be inconsistent with such
Regulation U or any other Regulations of such Board of Governors, or for any
purposes prohibited by Legal Requirements or by the terms and conditions of this
Agreement or the other Loan Documents.
(o) Utilities and Public Access. Each of the Properties has rights of
access to public ways and is served by water, sewer, sanitary sewer and storm
drain facilities adequate to service such Property for its respective intended
uses. All public utilities necessary or convenient to the full use and enjoyment
of each of the Properties are located either in the public right-of-way abutting
such Properties (which are connected so as to serve the Properties without
passing over other property) or in recorded easements serving such Properties
and such easements are set forth in the Title Insurance Policies. All roads
necessary for the access to or use of each of the Properties for their current
respective purposes have been completed and dedicated to public use and accepted
by all Governmental Authorities.
(p) Not a Foreign Person. Borrower is not a "foreign person" within
the meaning of (Section) 1445(f)(3) of the Code.
(q) Separate Lots. Each Individual Property is comprised of one (1)
or more parcels which constitutes a separate tax lot and does not constitute a
portion of any other tax lot not a part of such Individual Property.
(r) Assessments. There are no pending or to the best of Borrower's
knowledge, proposed special or other assessments for public improvements or
otherwise affecting any of the Properties, nor to the best of Borrower's
knowledge, are there any contemplated improvements to any of the Properties that
may result in such special or other assessments.
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38
(s) Enforceability. The Loan Documents are not subject to any right
of rescission, set-off, counterclaim or defense by Borrower, including the
defense of usury, nor would the operation of any of the terms of the Loan
Documents, or the exercise of any right thereunder, render the Loan Documents
unenforceable, and Borrower has not asserted any right of rescission, set-off,
counterclaim or defense with respect thereto.
(t) No Prior Assignment. There are no prior assignments of the Leases
or any portion of the Rents due and payable or to become due and payable which
are presently outstanding.
(u) Insurance. Borrower has obtained and has delivered to Lender
certified copies of all insurance policies reflecting the insurance coverages,
amounts and other requirements set forth in this Agreement.
(v) Use of Properties. Each of the Properties is used exclusively for
hotel/motel purposes and other appurtenant and related uses including, but not
limited to, restaurants and lounges.
(w) Certificate of Occupancy; Licenses. All certifications, permits,
licenses and approvals, including without limitation, certificates of completion
and occupancy permits for the legal use, occupancy and operation of each of the
Properties as a hotel (collectively, the "Licenses"), have been obtained and are
in full force and effect. The Borrower shall keep and maintain all licenses
necessary for the operation of each of the Properties as a hotel. The use being
made of each Individual Property is in material conformity with the certificate
of occupancy issued for such Individual Property.
(x) Flood Zone. Except as shown on the Surveys, none of the
Improvements on any of the Properties are located in an area as identified by
the Federal Emergency Management Agency as an area having special flood hazards.
(y) Physical Condition. Each of the Properties, including, without
limitation, all buildings, improvements, parking facilities, sidewalks, storm
drainage systems, roofs, plumbing systems, HVAC systems, fire protection
systems, electrical systems, equipment, elevators, exterior sidings and doors,
landscaping, irrigation systems and all structural components, are in good
condition, order and repair in all material respects; there exist no structural
or
<PAGE>
39
other material defects or damages in any of the Properties, whether latent or
otherwise, and Borrower has not received notice from any insurance company or
bonding company of any defects or inadequacies in any of the Properties, or any
part thereof, which would adversely affect the insurability of the same or cause
the imposition of extraordinary premiums or charges thereon or of any
termination or threatened termination of any policy of insurance or bond.
(z) Boundaries. All of the improvements which were included in
determining the appraised value of each Individual Property lie wholly within
the boundaries and building restriction lines of such Individual Property, and
no improvements on adjoining properties encroach upon such Individual Property,
and no easements or other encumbrances upon the applicable Individual Property
encroach upon any of the improvements, so as to materially and adversely affect
the value or marketability of the applicable Individual Property except those
which are insured against by title insurance.
(aa) Leases. The Properties are not subject to any Leases other than
the Leases disclosed by Borrower in writing by Lender in connection with this
Agreement. No person has any possessory interest in any of the Properties or
right to occupy the same except under and pursuant to the provisions of the
Leases and except for any prepaid or otherwise confirmed reservation or
occupancy rights in the ordinary course of the operation of the Properties. The
current Leases are in full force and effect and there are no defaults thereunder
by either party and there are no conditions that, with the passage of time or
the giving of notice, or both, would constitute defaults thereunder.
(bb) Survey. The Survey for each of the Properties delivered to
Lender in connection with this Agreement has been prepared in accordance with
the provisions of Section 3.1(c)(iii) hereof, and does not fail to reflect any
material matter affecting any of the Properties or the title thereto.
(cc) Loan to Value. The original principal balance of the Loan does
not exceed seventy percent (70%) of the aggregate fair market value as of the
date hereof of the interests in real property securing the Loan.
(dd) Filing and Recording Taxes. All transfer taxes, deed stamps,
intangible taxes or other amounts in the nature of transfer taxes required to be
paid by any Person under applicable Legal Requirements currently in effect
<PAGE>
40
in connection with the transfer of the Properties to Borrower have been paid.
All mortgage, mortgage recording, stamp, intangible or other similar tax
required to be paid by any Person under applicable Legal Requirements currently
in effect in connection with the execution, delivery, recordation, filing,
registration, perfection or enforcement of any of the Loan Documents, including,
without limitation, the Mortgages encumbering the Properties have been paid,
and, under current Legal Requirements, the Mortgages encumbering the Properties
are enforceable in accordance with their respective terms by Lender (or any
subsequent holder thereof).
(ee) Single-Purpose. Borrower hereby represents and warrants to,
and covenants with, Lender that as of the date hereof and until such time as the
Debt shall be paid in full:
(i) Borrower does not own and will not own any asset or property
other than (A) the Properties, and (B) incidental personal property
necessary or appropriate for the ownership or operation of the Properties.
(ii) Borrower will not engage in any business other than the
ownership, management and operation of the Properties and Borrower will
conduct and operate its business as presently conducted and operated.
(iii) Borrower will not enter into any contract or agreement with
any Affiliate of the Borrower, any constituent party of Borrower or any
Affiliate of any constituent party, except upon terms and conditions that
are intrinsically fair and substantially similar to those that would be
available on an arms-length basis with third parties other than any such
party.
(iv) Except as otherwise disclosed in writing to Lender and
approved by Lender, Borrower has not incurred and will not incur any
indebtedness, secured or unsecured, direct or indirect, absolute or
contingent (including guaranteeing any obligation), other than (A) the
Debt, (B) unsecured trade payables customarily satisfied within thirty (30)
days and (C) debt incurred in financing the Insurance Premiums required to
be paid under this Agreement (so long as the terms and conditions of
Sections 7.1 and 7.3 are satisfied). Except as set forth in the immediately
preceding sentence, no indebtedness other than the Debt may be secured
(subordinate or pari passu) by the Properties.
<PAGE>
41
(v) Borrower has not made and will not make any loans or advances
to any third party (including any Affiliate or constituent party).
(vi) Borrower is and will remain solvent and Borrower will pay its
debts and liabilities (including employment and overhead expenses) from its
assets as the same shall become due.
(vii) Borrower has done or caused to be done and will do all things
necessary to observe partnership formalities and preserve its existence, and
Borrower will not, nor will Borrower's general partner amend, modify or
otherwise change the partnership certificate, partnership agreement, articles of
incorporation and bylaws, trust or other organizational documents of Borrower
without the prior written consent of Lender, which consent will not be
unreasonably withheld or delayed provided that such amendment or modification is
not inconsistent with or does not violate any of the representations, warranties
and/or covenants set forth in this Section 4.1(ee) or any of the assumptions in
the substantive non-consolidation opinion delivered to Lender in connection with
the making of the Loan.
(viii) Borrower will maintain books, records, financial statements
and bank accounts separate from those of its Affiliates and any constituent
party and Borrower will file its own tax returns.
(ix) Borrower will be, and at all times will hold itself out to
the public as, a legal entity separate and distinct from any other entity
(including any Affiliate of Borrower or any constituent party of Borrower or any
Affiliate of any constituent party), and shall conduct business in its own name
and shall maintain and utilize a separate telephone number and separate
stationery, invoices and checks.
(x) Borrower will maintain adequate capital for the normal
obligations reasonably foreseeable in a business of its size and character and
in light of its contemplated business operations.
(xi) Neither Borrower nor any constituent party will seek or
effect the liquidation, dissolution or winding up, in whole or in part, of the
Borrower.
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42
(xii) Borrower will not commingle the funds and other assets of
Borrower with those of any Affiliate or constituent party or any Affiliate of
any constituent party or any other Person.
(xiii) Borrower has and will maintain its assets in such a manner
that it will not be costly or difficult to segregate, ascertain or identify its
individual assets from those of any Affiliate or constituent party or any
Affiliate of any constituent party or any other Person.
(xiv) Borrower does not and will not hold itself out to be
responsible for the debts or obligations of any other Person.
(xv) If Borrower is a limited partnership, and its general partner
is a corporation whose sole asset is its interest in Borrower, such general
partner will at all times comply, and will cause Borrower to comply, with each
of the representations, warranties, and covenants contained in this Section
4.1(ee) as if such representation, warranty or covenant was made directly by
such general partner.
(xvi) Borrower shall at all times cause there to be at least one
duly appointed member of the board of directors (an "Independent Director") of
the general partner of Borrower reasonably satisfactory to Lender who shall not
have been at the time of such individual's initial appointment, and may not have
been at any time during the preceding five years (i) a shareholder of, or an
officer, director, partner or employee of, Borrower or any of its shareholders,
subsidiaries or Affiliates, (ii) a material customer of, or material supplier
to, Borrower or any of its shareholders, subsidiaries or Affiliates, (iii) a
Person controlling or under common control with any such shareholder, partner
supplier or customer, or (iv) a member of the immediate family of any such
shareholder, officer, director, partner, employee, supplier or customer of any
other director of Borrower. As used herein, the term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of voting securities, by contract or otherwise.
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43
(xvii) Borrower shall not cause or permit the board of directors of
the general partner of Borrower to take any action which, under the terms
of any certificate of incorporation, by-laws or any voting trust agreement
with respect to any common stock, requires a vote of the board of directors
of the general partner of Borrower unless at the time of such action there
shall be at least one member who is an Independent Director.
(xviii) Borrower shall conduct its business so that the assumptions
made with respect to Borrower in that certain substantive non-consolidation
opinion letter, dated even date herewith delivered by Messrs. Baker &
Hostetler in connection with the Loan shall be true and correct in all
respects.
Section 4.2 Survival of Representations.
Borrower agrees that all of the representations and warranties of Borrower
set forth in Section 4.1 and elsewhere in this Agreement and in the other Loan
Documents shall survive for so long as any amount remains owing to Lender under
this Agreement or any of the other Loan Documents by Borrower. All
representations, warranties, covenants and agreements made in this Agreement or
in the other Loan Documents by Borrower shall be deemed to have been relied upon
by Lender notwithstanding any investigation heretofore or hereafter made by
Lender or on its behalf.
V. AFFIRMATIVE COVENANTS
Section 5.1 Borrower Covenants.
From the date hereof and until payment and performance in full of all
obligations of Borrower under the Loan Documents or the earlier release of the
Liens of all Mortgages encumbering the Properties (and all related obligations)
in accordance with the terms of this Agreement and the other Loan Documents,
Borrower hereby covenants and agrees with Lender that:
(a) Existence; Compliance with Legal Requirements; Insurance.
Borrower shall do or cause to be done all things necessary to preserve, renew
and keep in full force and effect its existence, rights, licenses, permits and
franchises and comply with all Legal Requirements applicable to it and its
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44
Properties. Borrower shall at all times maintain, preserve and protect all
franchises and trade names and preserve all the remainder of its property used
or useful in the conduct of its business and shall keep all of the Properties in
good working order and repair, and from time to time make, or cause to be made,
all reasonably necessary repairs, renewals, replacements, betterments and
improvements thereto, all as more fully provided in the Mortgages encumbering
such Properties. Borrower shall keep each of the Properties insured at all
times by financially sound and reputable insurers, to such extent and against
such risks, and maintain liability and such other insurance, as is more fully
provided in this Agreement.
(b) Taxes, Sales Taxes and Other Charges. Borrower shall pay all
Taxes and Other Charges now or hereafter levied or assessed or imposed against
the Properties or any part thereof as the same become due and payable. Borrower
shall also pay all Sales Taxes as the same become due and payable to the
applicable governmental authority. Borrower will deliver to Lender receipts for
payment or other evidence satisfactory to Lender that the Taxes, Sales Taxes and
Other Charges have been so paid or are not then delinquent no later than the
date on which the Taxes, Sales Taxes and/or Other Charges would otherwise be
delinquent if not paid. Borrower shall not suffer and shall promptly cause to
be paid and discharged any lien or charge whatsoever which may be or become a
lien or charge against the Properties (except for Permitted Encumbrances and any
other Liens permitted by the Loan Documents), and shall promptly pay for all
utility services provided to the Properties. Borrower shall furnish to Lender
receipts for the payment of the Taxes and the Other Charges prior to the date
the same shall become delinquent (provided, however, that Borrower is not
-------- -------
required to furnish such receipts for payment of Taxes in the event that such
Taxes have been paid by Lender pursuant to Section 7.3 hereof). After prior
written notice to Lender, Borrower, at its own expense, may contest by
appropriate legal proceeding, promptly initiated and conducted in good faith and
with due diligence, the amount or validity or application in whole or in part of
any Taxes or Other Charges, provided that (i) no Default or Event of Default
(other than nonpayment of the contested Taxes or Other Charges) has occurred and
remains uncured, (ii) Borrower is permitted to do so under the provisions of any
mortgage or deed of trust superior in lien to the applicable Mortgage, (iii)
such proceeding shall suspend the collection of Taxes or Other Charges from the
applicable Individual Property, (iv) such proceeding shall be permitted under
and be conducted in accordance with the provisions of any other instrument to
which Borrower is
<PAGE>
45
subject and shall not constitute a default thereunder and such proceeding shall
be conducted in accordance with all applicable statutes, laws and ordinances,
(v) no Individual Property nor any part thereof or interest therein will be in
danger of being sold, forfeited, terminated, canceled or lost, (vi) Borrower
shall have furnished such security as may be required in the proceeding, or as
may be reasonably and customarily requested by Lender, to insure the payment of
any such Taxes or Other Charges, together with interest and penalties thereon,
and (vii) Borrower shall promptly upon final determination thereof pay the
amount of any such Taxes or Other Charges, together with all costs, interest and
penalties which may be payable in connection therewith. Lender may pay over any
such cash deposit or part thereof held by Lender to the claimant entitled
thereto at any time when, in the judgment of Lender, the entitlement of such
claimant is established. Borrower acknowledges as of the Closing Date, the
public records of certain jurisdictions in which certain of the Properties are
located do not reflect that Taxes for Tax Year 1995 have been paid in full.
Borrower agrees to use its best efforts to deliver to Lender by no later than
January 31, 1996 receipts, cancelled checks or other evidence of payment of such
Taxes reasonably satisfactory to Lender and to further use its best efforts to
deliver to Lender by no later than February 15, 1996 certified copies of the
official real property Tax records from such jurisdictions establishing that
such Taxes have been paid and sufficient to cause the title insurance company
issuing the Title Policies not to take an exception in the Title Policies for
Taxes for Tax Year 1995.
(c) Litigation. Borrower shall give prompt written notice to Lender
of any litigation or governmental proceedings pending or threatened in writing,
or verbally to any officer of Westar Hotels, Inc., against Borrower which might
materially adversely affect Borrower's condition (financial or otherwise) or
business or any of the Properties.
(d) Access to Premises. Borrower shall permit agents,
representatives and employees of Lender to inspect any of its Properties or any
part thereof at reasonable hours upon reasonable advance notice (which may be
given verbally) and subject to the rights of hotel occupants.
(e) Notice of Default. Borrower shall promptly advise Lender of any
material adverse change in Borrower's condition, financial or otherwise, or of
the occurrence of any Default or Event of Default of which Borrower has
knowledge.
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46
(f) Cooperate in Legal Proceedings. Borrower shall cooperate fully
with Lender with respect to any proceedings before any court, board or other
Governmental Authority which may in any way affect the rights of Lender
hereunder or any rights obtained by Lender under any of the other Loan Documents
and, in connection therewith, permit Lender, at its election, to participate in
any such proceedings.
(g) Perform Loan Documents. Borrower shall observe, perform and
satisfy all the terms, provisions, covenants and conditions of, and shall pay
when due all costs, fees and expenses to the extent required under the Loan
Documents executed and delivered by, or applicable to, Borrower.
(h) Insurance Benefits. Borrower shall cooperate with Lender in
obtaining for Lender the benefits of any Insurance Proceeds lawfully or
equitably payable in connection with any of the Properties, and Lender shall be
reimbursed for any expenses incurred in connection therewith (including
reasonable attorneys' fees and disbursements, and the payment by Borrower of the
expense of an appraisal on behalf of Lender in case of a fire or other casualty
affecting any of the Properties or any part thereof) out of such Insurance
Proceeds.
(i) Further Assurances; Supplemental Mortgage Affidavits. (i) Borrower
shall, at Borrower's sole cost and expense:
(A) furnish to Lender all instruments, documents, boundary
surveys, footing or foundation surveys, certificates, plans and specifications,
appraisals, title and other insurance reports and agreements, and each and every
other document, certificate, agreement and instrument required to be furnished
by Borrower pursuant to the terms of the Loan Documents or reasonably requested
by Lender in connection therewith;
(B) execute and deliver to Lender such documents, instruments,
certificates, assignments and other writings, and do such other acts necessary
or desirable, to evidence, preserve and/or protect the collateral at any time
securing or intended to secure the obligations of Borrower under the Loan
Documents, as Lender may reasonably require; and
(C) do and execute all and such further lawful and reasonable
acts, conveyances and assurances for the better and more effective
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47
carrying out of the intents and purposes of this Agreement and the other Loan
Documents, as Lender shall reasonably require from time to time.
(j) As of the date hereof, Borrower represents that it has paid all
state, county and municipal recording and all other taxes imposed upon the
execution and recordation of the Mortgages encumbering each of the Properties or
that such taxes will be paid out of the Loan Proceeds. If at any time Lender
determines, based on applicable law, that Lender is not being afforded the
maximum amount of security available from any one or more of the Properties as a
direct or indirect result of applicable taxes not having been paid with respect
to any such Properties, Borrower agrees that Borrower will execute, acknowledge
and deliver to Lender, immediately upon Lender's request, supplemental
affidavits (a) increasing the amount of the Debt attributable to any such
Individual Property (as set forth on Schedule I annexed hereto and as reduced
from time to time by the Monthly Debt Service Payment Amount) for which all
applicable taxes have been paid to an amount determined by Lender to be equal to
the lesser of (i) the greater of the fair market value of the applicable
Individual Property (x) as of the date hereof and (y) as of the date such
supplemental affidavits are to be delivered to Lender, and (ii) the amount of
the Debt attributable to any such Individual Property (as set forth on Schedule
I annexed hereto and as so reduced), and (b) decreasing the amount of the Debt,
on a proportionate basis, attributable to the other Properties (as set forth on
Schedule I annexed hereto and as so reduced), and Borrower shall, on demand, pay
any additional taxes.
(k) Financial Reporting.
(i) Borrower will keep and maintain or will cause to be kept and
maintained on a Fiscal Year basis, prepared in accordance with GAAP and
presented in accordance with the Uniform System of Accounts, proper and
accurate books, records and accounts reflecting all of the financial
affairs of Borrower and all items of income and expense in connection with
the operation on an individual basis of each of the Properties and in
connection with any services, equipment or furnishings provided in
connection with the operation of each of the Properties, whether such
income or expense be realized by Borrower or by any other Person
whatsoever, excepting lessees unrelated to and unaffiliated with Borrower
who have leased from Borrower portions of any of the Properties for the
purpose of occupying the same. Lender shall have the right at its sole cost
from time to time at all
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48
times during normal business hours upon reasonable notice to examine such books,
records and accounts at the office of Borrower or other Person maintaining such
books, records and accounts and to make such copies or extracts thereof as
Lender shall desire. After the occurrence of an Event of Default, Borrower
shall pay any costs and expenses incurred by Lender to examine Borrower's
accounting records with respect to the Properties, as Lender shall determine to
be necessary or appropriate in the protection of Lender's interest.
(ii) Borrower will furnish to Lender annually, within ninety (90) days
following the end of each Fiscal Year of Borrower, a complete copy of Borrower's
annual financial statements prepared in accordance with GAAP and presented in
accordance with the Uniform System of Accounts and audited by one of the "Big
Six" independent certified public accounting firms or by another independent
certified public accountant reasonably acceptable to Lender and covering the
Properties on a combined basis as well as each Individual Property for such
Fiscal Year and containing balance sheets and statements of profit and loss for
the Borrower and the Properties in such detail as Lender may reasonably request.
Such statements shall set forth the financial condition and the income and
expenses for the Properties for the immediately preceding calendar year,
including without limitation statements of annual Net Operating Income, Gross
Income from Operations and Hotel Operating Expenses. Borrower's annual
financial statements shall be accompanied by (i) a comparison of the budgeted
income and expenses and the actual income and expenses for the prior Fiscal
Year, and (ii) a certificate executed by the chief financial officer of the
general partner of Borrower, stating that each such annual financial statement
presents fairly the financial condition of the Properties being reported upon
and has been prepared in accordance with GAAP and presented in accordance with
the Uniform system of Accounts. All audited financial statements shall, in
addition to the foregoing, be accompanied by a report from such independent
certified public accountants on a schedule reconciling Net Operating Income to
Net Cash Flow (the "Net Cash Flow Schedule"). The Net Cash Flow Schedule shall
itemize all adjustments, deemed material by such certified public accountants,
made to Net Operating Income to calculate Net Cash Flow. Together with
Borrower's annual audited financial statements, Borrower shall furnish to Lender
an Officer's Certificate certifying as of the date thereof whether there exists
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49
an event or circumstance which constitutes a Default or Event of Default under
the Loan Documents executed and delivered by, or applicable to, Borrower, and if
such Default or Event of Default exists, the nature thereof, the period of time
it has existed and the action then being taken to remedy the same. In addition
to the annual audited financial statements to be delivered by Borrower as
described above, Borrower shall furnish to Lender within forty (40) days
following the end of each Fiscal Year of Borrower a complete, but unaudited,
copy of such financial statements.
(iii) Borrower will furnish, or cause to be furnished, to Lender on or
before twenty (20) days after the end of each calendar month the following
items, accompanied by a certificate of the chief financial officer of the
general partner of Borrower, stating that such items are true, correct,
accurate, and complete and fairly present the financial condition and results of
the operations of Borrower and the Properties on a combined basis as well as
each Individual Property (subject to normal year-end adjustments) as applicable:
(i) a report of occupancy for the subject month, including an average daily
rate, and any and all franchise inspection reports received by Borrower during
the subject month; (ii) monthly and year to date operating statements prepared
for each calendar month, noting Net Operating Income, Gross Income from
Operations, and Hotel Operating Expenses (not including any contributions to the
Replacement Reserve Fund), the amount of sales taxes, use taxes or licensing
fees paid for the period and other information necessary and sufficient under
GAAP to fairly represent the financial position and results of operation of the
Properties during such calendar month, all in form satisfactory to Lender;
(iii) a property balance sheet for each such month; (iv) a comparison of the
budgeted income and expenses and the actual income and expenses for each such
month, and year to date, together with detailed explanations of any variances of
five percent (5%) or more between budgeted and actual amounts and (v) a
calculation reflecting the annual Debt Service Coverage Ratio for the
immediately preceding twelve (12) month period as of the last day of each such
month. The above referenced certificate shall also be accompanied by a
certificate of the chief financial officer of the general partner of Borrower
stating that the representations and warranties of Borrower set forth in Section
4.1(ee)(iv) are true and correct as of the date of such certificate and that
there are no trade payables outstanding for more than thirty (30) days. In
addition, the above referenced certificate shall be accompanied by a Net
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50
Cash Flow Schedule (unaudited), itemizing all adjustments made to Net
Operating Income for the applicable period to calculate Net Cash Flow for
such period. With respect to the monthly and year to date reports and
certificates required under this Section 5.1(k)(iii) for the months of
January and February, 1996, Borrower agrees to furnish the same to Lender
on or before fourteen (14) days after the end of each of such months.
(iv) Borrower shall furnish to Lender, within ten (10) Business Days
after request (or as soon thereafter as may be reasonably possible), such
further detailed information with respect to the operation of any of the
Properties and the financial affairs of Borrower as may be reasonably
requested by Lender. In the event that Borrower fails to provide to Lender
or its designee any of the financial statements, certificates, reports or
information (the "Required Records") required by this Section 5.1(k) within
thirty (30) days after the date upon which such Required Record is due,
Borrower shall pay to Lender, at Lender's option and in its sole
discretion, an amount equal to $10,000 for each Required Record that is not
delivered; provided that, Lender has given at least fifteen (15) days prior
written notice to Borrower of such failure by Borrower to timely submit the
applicable Required Record and the above payment requirement relating to
such failure.
(l) Business and Operations. Borrower will continue to engage in the
businesses presently conducted by it as and to the extent the same are necessary
for the ownership, maintenance, management and operation of each of the
Properties. Borrower will qualify to do business and will remain in good
standing under the laws of each jurisdiction as and to the extent the same are
required for the ownership, maintenance, management and operation of each of the
Properties.
(m) Title to the Properties. Borrower will warrant and defend (i)
the title to each of the Properties and every part thereof, subject only to
Liens permitted hereunder (including Permitted Encumbrances), and (ii) the
validity and priority of the Liens of the Mortgages and the Assignments of
Leases on the Properties, subject only to Liens permitted hereunder (including
Permitted Encumbrances), in each case against the claims of all Persons
whomsoever. Borrower shall reimburse Lender for any losses, costs, damages or
expenses (including reasonable attorneys' fees and court costs) incurred by
Lender if an
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51
interest in any of the Properties, other than as permitted hereunder, is claimed
by another Person.
(n) Costs of Enforcement. In the event (i) that any Mortgage
encumbering any of the Properties is foreclosed in whole or in part or that any
such Mortgage is put into the hands of an attorney for collection, suit, action
or foreclosure, (ii) of the foreclosure of any mortgage prior to or subsequent
to any Mortgage encumbering any of the Properties in which proceeding Lender is
made a party, or (iii) of the bankruptcy, insolvency, rehabilitation or other
similar proceeding in respect of Borrower or an assignment by Borrower for the
benefit of its creditors, Borrower, its successors or assigns, shall be
chargeable with and agrees to pay all costs of collection and defense, including
reasonable attorneys' fees in connection therewith and in connection with any
appellate proceeding or post-judgment action involved therein, which shall be
due and payable together with all required service or use taxes.
(o) Estoppel Statement. (i) After request by Lender, Borrower
shall within ten (10) days furnish Lender with a statement, duly acknowledged
and certified, setting forth (A) the amount of the original principal amount of
the Note, (B) the unpaid principal amount of the Note, (C) the Interest Rate of
the Note, (D) the date installments of interest and/or principal were last paid,
(E) any offsets or defenses to the payment of the Debt, if any, and (F) that the
Note, this Agreement, the Mortgages and the other Loan Documents are valid,
legal and binding obligations and have not been modified or if modified, giving
particulars of such modification.
(ii) Borrower shall use its commercially reasonable good faith
efforts to deliver to Lender within twenty (20) days after request, tenant
estoppel certificates from each commercial tenant at the Properties in form
and substance reasonably satisfactory to Lender provided that Borrower
shall not be required to deliver such certificates more frequently than two
(2) times in any calendar year.
(iii) After request by Lender, Borrower shall within ten (10) days
furnish Lender with a certificate reaffirming all representations and
warranties of Borrower set forth herein and in the other Loan Documents as
of the date requested by Lender or, to the extent of any changes to any
such representations and warranties, so stating such changes.
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52
(p) Loan Proceeds. Borrower shall use the proceeds of the Loan
received by it on the Closing Date only for the purposes set forth in Section
2.2.
(q) Performance by Borrower. Borrower shall in a timely manner
observe, perform and fulfill each and every covenant, term and provision of each
Loan Document executed and delivered by, or applicable to, Borrower, and shall
not enter into or otherwise suffer or permit any amendment, waiver, supplement,
termination or other modification of any Loan Document executed and delivered
by, or applicable to, Borrower without the prior written consent of Lender.
(r) Annual Operating Budget and Capital Expenditures Budget. Borrower
shall prepare and deliver to Lender, within forty-five (45) days prior to the
commencement of each Fiscal Year of Borrower, Annual Budgets in accordance with,
and subject to Lender's approval pursuant to, Section 2.6.4(b).
(s) Confirmation of Representations. In addition to and not in
limitation of the covenants and agreements of Borrower contained in Section 7.1,
Borrower shall deliver, in connection with any Secondary Market Transaction, (i)
one or more Officer's Certificates certifying as to the accuracy of all
representations made by Borrower in the Loan Documents as of the date of the
closing of such Secondary Market Transaction in all relevant jurisdictions, and
(ii) certificates of the relevant Governmental Authorities in all relevant
jurisdictions indicating the good standing and qualification of Borrower and its
general partner as of the date of the Secondary Market Transaction.
(t) No Joint Assessment. Borrower shall not suffer, permit or
initiate the joint assessment of any Individual Property (i) with any other real
property constituting a tax lot separate from such Individual Property, and (ii)
with any portion of such Individual Property which may be deemed to constitute
personal property, or any other procedure whereby the lien of any taxes which
may be levied against such personal property shall be assessed or levied or
charged to such Individual Property.
(u) Leasing Matters. Any Leases with respect to an Individual
Property written after the date hereof shall be approved by Lender, which
approval shall not be unreasonably withheld, conditioned or delayed. Upon
request, Borrower shall furnish Lender with executed copies of all Leases. All
renewals
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53
of Leases and all proposed Leases shall provide for rental rates comparable to
existing local market rates. All proposed Leases shall be on commercially
reasonable terms and shall not contain any terms which would materially affect
Lender's rights under the Loan Documents. All Leases executed after the date
hereof shall provide that they are subordinate to the Mortgage encumbering the
applicable Individual Property and that the lessee agrees to attorn to Lender.
Borrower (i) shall observe and perform the obligations imposed upon the lessor
under the Leases in a commercially reasonable manner; (ii) shall enforce and may
amend or terminate the terms, covenants and conditions contained in the Leases
upon the part of the lessee thereunder to be observed or performed in a
commercially reasonable manner; (iii) shall not collect any of the rents more
than one (1) month in advance (other than security deposits); (iv) shall not
execute any other assignment of lessor's interest in the Leases or the Rents
(except as contemplated by the Loan Documents); (v) shall not alter, modify or
change the terms of the Leases in a manner inconsistent with the provisions of
the Loan Documents; and (vi) shall execute and deliver at the request of Lender
all such further assurances, confirmations and assignments in connection with
the Leases as Lender shall from time to time reasonably require.
(v) Principal Place of Business. Borrower shall not change its
principal place of business set forth on the first page of this Agreement
without first giving Lender thirty (30) days prior written notice.
VI. NEGATIVE COVENANTS
Section 6.1 Borrower's Negative Covenants.
From the date hereof until payment and performance in full of all
obligations of Borrower under the Loan Documents or the earlier release of the
Liens of all Mortgages encumbering each of the Properties in accordance with the
terms of this Agreement and the other Loan Documents, Borrower covenants and
agrees with Lender that it will not do, directly or indirectly, any of the
following:
(a) Operation of Properties. Borrower shall not, without the prior
consent of Lender (which consent may be granted or withheld in Lender's sole
discretion), materially modify, amend, extend or terminate any Management
Agreement relating to any Individual Property or otherwise replace the Manager
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54
or enter into any other management agreement or any franchise agreements with
respect to any of the Properties.
(b) Liens. Borrower shall not, without the prior written consent of
Lender, create, incur, assume or suffer to exist any Lien on any portion of any
of the Properties or permit any such action to be taken, except:
(i) Permitted Encumbrances;
(ii) Liens created by or permitted pursuant to the Loan Documents;
(iii) Liens for Taxes, or Other Charges not yet due.
(c) Dissolution. Borrower shall not dissolve, terminate, liquidate,
merge with or consolidate into another Person.
(d) Change In Business. Borrower shall not enter into any line of
business other than the ownership and operation of the Properties, or make any
material change in the scope or nature of its business objectives, purposes or
operations, or undertake or participate in activities other than the continuance
of its present business.
(e) Debt Cancellation. Borrower shall not cancel or otherwise
forgive or release any claim or debt (other than termination of Leases in
accordance herewith) owed to Borrower by any Person, except for adequate
consideration and in the ordinary course of Borrower's business.
(f) Affiliate Transactions. Borrower shall not enter into, or be a
party to, any transaction with an Affiliate of Borrower or any of the partners
of Borrower except in the ordinary course of business and on terms which are
fully disclosed to Lender in advance and are no less favorable to Borrower or
such Affiliate than would be obtained in a comparable arm's-length transaction
with an unrelated third party.
(g) Zoning. Borrower shall not initiate or consent to any zoning
reclassification of any portion of any of the Properties or seek any variance
under any existing zoning ordinance or use or permit the use of any portion of
any of the
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55
Properties in any manner that could result in such use becoming a non-conforming
use under any zoning ordinance or any other applicable land use law, rule or
regulation, without the prior consent of Lender.
(h) Assets. Borrower shall not purchase or own any real properties
other than the Properties and the personal property used directly in connection
with the operation and maintenance of the Properties.
(i) Debt. Borrower shall not create, incur or assume any debt other
than (A) the Debt, (B) the loan evidenced by that certain unsecured Floating
Rate Note, from Borrower to Lender generally referred to as the "Mezzanine
Loan", (C) unsecured trade debt customarily payable within thirty (30) days and
(D) indebtedness incurred in financing the Insurance Premiums required to be
paid under this Agreement (so long as the terms and conditions of Sections 7.1
and 7.3 are satisfied).
VII. CASUALTY; CONDEMNATION; ESCROWS
Section 7.1 Insurance; Casualty and Condemnation.
7.1.1 Insurance. (a) Borrower, at its sole cost and expense, for
the mutual benefit of Borrower and Lender shall keep the Properties (separately
or in the aggregate) insured and obtain and maintain during the entire term of
this Agreement (the "Term") policies of insurance insuring against loss or
damage by fire and lightning and against loss or damage by all other risks and
hazards covered by a standard extended coverage insurance policy including,
without limitation, riot and civil commotion, vandalism, malicious mischief,
burglary and theft. Such insurance shall be in an amount equal to the greatest
of (i) the then full replacement cost of the Properties, without deduction for
physical depreciation, (ii) the outstanding principal balance of the Loan, and
(iii) such amount that the insurer would not deem Borrower a co-insurer under
said policies. The policies of insurance carried in accordance with this
paragraph shall be paid annually in advance and shall contain a "Replacement
Cost Endorsement" with a waiver of depreciation.
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56
(b) Borrower, at its sole cost and expense, for the mutual benefit
of Borrower and Lender shall also obtain and maintain during the Term the
following policies of insurance:
(i) Flood insurance if any part of an Individual Property is
located in an area identified by the Federal Emergency Management Agency as
an area having special flood hazards and in which flood insurance has been
made available under the National Flood Insurance Program in an amount at
least equal to the Allocable Loan Amount for the related Individual
Property or the maximum limit of coverage available with respect to the
related Individual Property under said program, whichever is less.
(ii) Comprehensive public liability insurance, including broad form
property damage, blanket contractual and personal injuries (including death
resulting therefrom) coverages and containing minimum limits per occurrence
of $1,000,000.00 and $2,000,000.00 in the aggregate for any policy year. In
addition, at least $5,000,000.00 excess and/or umbrella liability insurance
shall be obtained and maintained during the Term for any and all claims,
including all legal liability imposed upon Borrower and all court costs and
attorneys' fees incurred in connection with the ownership, operation and
maintenance of the Properties.
(iii) Rental loss and/or business interruption insurance in an amount
equal to the lesser of (A) the estimated gross revenues from the operations
of the Properties for the next succeeding eighteen (18) month period or (B)
the projected operating expenses (including debt service) for the
maintenance and operation of the Properties for the next succeeding
eighteen (18) month period. The amount of such insurance shall be increased
from time to time during the Term as and when the estimate of Net Operating
Income or projected operating expenses, as may be applicable, increases.
(iv) Insurance against loss or damage from (A) leakage of sprinkler
systems and (B) explosion of steam boilers, air conditioning equipment,
high pressure piping, machinery and equipment, pressure vessels or similar
apparatus now or hereafter installed in any of the
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57
Improvements (without exclusion for explosions), in an amount at least
equal to the original Allocated Loan Amount for each of the Properties.
(v) Worker's compensation insurance with respect to any employees
of Borrower, as required by any governmental authority or legal
requirement.
(vi) During any period of repair or restoration, builder's "all
risk" insurance in an amount equal to not less than the full insurable
value of the applicable Individual Property against such risks (including,
without limitation, fire and extended coverage and collapse of the
Improvements to agreed limits) as Lender may reasonably request, in form
and substance reasonably acceptable to Lender.
(vii) If any Individual Property is or becomes a "non-conforming use"
under applicable zoning and building ordinances, ordinance or law coverage
to compensate for the cost of demolition and the increased cost of
construction for the applicable Individual Property.
(viii) Such other insurance as may from time to time be reasonably
required by Lender in order to protect its interests.
(c) All policies of insurance (the "Policies") required pursuant to
this Section 7.1.1 (i) shall be issued by companies approved by Lender and
licensed to do business in all States where the Properties are located, with a
claims paying ability rating of "AA" or better by Standard & Poor's Ratings
Group; (ii) shall name Lender and its successors and/or assigns as their
interest may appear as the mortgagee; (iii) shall contain a non-contributory
standard mortgagee clause and a mortgagee's loss payable endorsement, or their
equivalents, naming Lender as the person to which all payments made by such
insurance company shall be paid; (iv) shall contain a waiver of subrogation
against Lender; (v) shall be maintained throughout the Term without cost to
Lender; (vi) shall be assigned and certified copies thereof delivered to Lender;
(vii) shall contain such provisions as Lender deems reasonably necessary or
desirable to protect its interest including, without limitation, endorsements
providing that neither Borrower, Lender nor any other party shall be a co-
insurer under said Policies and that Lender shall receive at least thirty (30)
days prior written notice of any modification, reduction or cancellation of any
of the Policies; and (viii) otherwise shall be approved by
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58
Lender in the exercise of its reasonable judgment as to amounts, form, risk
coverage, deductibles, loss payees and insureds. In no event may the
deductibles on the property damage or casualty policies exceed five percent (5%)
of the Net Operating Income for the previous Fiscal Year. Borrower shall pay
the premiums for such Policies (the "Insurance Premiums") as the same become due
and payable and shall furnish to Lender evidence of the renewal of each of the
Policies with receipts for the payment of the Insurance Premiums or other
evidence of such payment reasonably satisfactory to Lender (provided, however,
-------- -------
that Borrower is not required to furnish such evidence of payment to Lender in
the event that such Insurance Premiums have been paid by Lender pursuant to
Section 7.3 hereof). If Borrower does not furnish such evidence and receipts at
least twenty (20) days prior to the expiration of any expiring Policy, then
Lender may procure, but shall not be obligated to procure, such insurance and
pay the Insurance Premiums therefor, and Borrower agrees to reimburse Lender for
the cost of such Insurance Premiums promptly on demand. Within thirty (30) days
after request by Lender, Borrower shall obtain such increases in the amounts of
coverage required hereunder as may be reasonably requested by Lender, taking
into consideration changes in the value of money over time, changes in liability
laws, changes in prudent customs and practices, and the like. In the event the
Borrower satisfies the requirements under this Section 7.1.1 through the use of
a Policy covering more than the Properties, the Borrower shall provide evidence
satisfactory to Lender that the Insurance Premiums for the Properties covered by
such Policy are separately allocated under such Policy and payment of such
allocation shall continue such Policy as to the Properties notwithstanding any
other payment of premiums, or, if no such allocation is available at any time
during the Term, Lender shall have the right to increase the Tax and Insurance
Escrow or the Premium Deposit, as applicable, in an amount sufficient to
purchase a non-blanket Policy covering the Properties from insurance companies
which qualify under this Agreement.
(d) If any Individual Property is damaged or destroyed, in whole or in
part, by fire or other casualty (a "Casualty"), Borrower shall give prompt
notice thereof to Lender. Following the occurrence of a Casualty, Borrower,
regardless of whether insurance proceeds are available (except to the extent
that Lender has elected pursuant to Section 7.1.2(c) to apply the proceeds of
the casualty insurance to the payment of the Debt), shall promptly proceed to
restore, repair, replace or rebuild the same to be of at least equal value and
of substantially the same character as prior to such damage or destruction, all
to be effected in accordance with applicable law. The expenses incurred by
Lender in the
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59
adjustment and collection of insurance proceeds shall become part of the Debt
and be secured hereby and shall be reimbursed by Borrower to Lender upon demand.
7.1.2 Casualty and Application of Proceeds. (a) In case of loss or
damages covered by any of the Policies, the following provisions shall apply:
(i) In the event of a Casualty that does not exceed $250,000.00,
Borrower may settle and adjust any claim without the consent of Lender,
provided that such adjustment is carried out in a competent and timely
manner. In such case, Borrower is hereby authorized to collect and receipt
for any such insurance proceeds.
(ii) In the event a Casualty shall exceed $250,000.00, then and in
that event, Lender may settle and adjust any claim without the consent of
Borrower, but in consultation with Borrower and with Borrower's reasonable
input, and agree with the insurance company or companies on the amount to
be paid on the loss (all in a commercially diligent and timely manner under
the circumstances) and the proceeds of any such policy shall be due and
payable solely to Lender and held in escrow by Lender in accordance with
the terms hereof.
(b) In the event of a Casualty to an Individual Property where the
loss is in an aggregate amount less than thirty percent (30%) of the Allocated
Loan Amount for such Individual Property, and if, in the reasonable judgment of
Lender, the Individual Property can be restored within nine (9) months and prior
to maturity of the Note to an economic unit not less valuable (including an
assessment of the impact of the termination of any Leases due to such Casualty)
and not less useful than the same was prior to the Casualty, and after such
restoration will adequately secure the outstanding balance of the Allocated Loan
Amount, then, if no Default or Event of Default shall have occurred and be then
continuing, the proceeds of insurance (after reimbursement of any expenses
reasonably incurred by Lender) shall be applied to pay for the cost of
restoring, repairing, replacing or rebuilding the Individual Property or part
thereof subject to the Casualty (the "Restoration"), in the manner set forth
herein. Borrower hereby covenants and agrees to commence and diligently to
prosecute such Restoration; provided that (i) Borrower shall pay all costs (and
if reasonably required by Lender, Borrower shall deposit the total thereof with
Lender in advance) of such Restoration in excess of the net proceeds of
insurance made
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available pursuant to the terms hereof; (ii) the Restoration shall be done in
compliance with all applicable laws, rules and regulations; and (iii) Lender
shall have received evidence reasonably satisfactory to it that, during the
period of the Restoration, the sum of (A) income derived from the applicable
Individual Property, as reasonably determined by Lender, plus (B) proceeds of
rent loss insurance or business interruption insurance, if any, to be paid will
equal or exceed the sum of (1) expenses in connection with the operation of such
Individual Property and (2) the debt service under the Loan attributable to such
Individual Property.
(c) Except as provided in Section 7.1.2(b) above, the proceeds of
insurance collected upon any Casualty shall, at the option of Lender in its sole
discretion, be applied to the payment of the Debt or applied to pay for the cost
of any Restoration in the manner set forth herein. Any such application to
the Debt shall be without any prepayment consideration except that if a Default
or an Event of Default has occurred and is continuing then the Borrower shall
pay to Lender an additional amount equal to the Yield Maintenance Premium, if
any, that would be required under Section 2.3.3 hereof if a Defeasance Deposit
was to be made by Borrower. In the event that Lender elects to apply the
insurance proceeds to the Debt, Lender shall give Borrower notice of such
election and so long as no Event of Default shall have occured or be continuing
Borrower shall have the right, for a period of six (6) months from the later of
(i) the date of Lender's notice of its election to apply the proceeds to the
Debt or (ii) the date on which Lender and Borrower are irrevocably notified of
the amount of insurance proceeds which will be paid by the insurance company for
such Casualty (the "Settlement Amount"), to elect to prepay to Lender the
Allocated Loan Amount for the Individual Property affected by the Casualty
(without any additional prepayment consideration or Yield Maintenance Premium)
by paying to Lender such Allocated Loan Amount less the Settlement Amount on or
before the end of such six-month period, in which case (A) Lender shall retain
the Settlement Amount, (B) Lender shall reduce the Debt by the amount of the
Allocated Loan Amount and shall reduce the Debt Service by the amount of Debt
Service attributable to such Individual Property, and (C) Lender shall release
such Individual Property from the lien of the Mortgage. Any such prepayment
shall be subject to the provisions of Section 2.3.2. In the event that Borrower
elects not to prepay the Allocated Loan Amount to Lender or does not complete
such prepayment within such six (6) month period, then Lender shall apply the
Settlement Amount to the Debt and the Borrower shall be released
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from that portion of the Debt attributable to such Individual Property and the
corresponding Debt Service attributable to the Settlement Amount so applied.
(d) In the event Borrower is entitled to reimbursement out of
insurance proceeds held by Lender, such proceeds shall be disbursed from time to
time upon Lender being furnished with (i) evidence satisfactory to it of the
estimated cost of completion of the Restoration, (ii) funds, or at Lender's
option, assurances satisfactory to Lender that such funds are available,
sufficient in addition to the proceeds of insurance to complete the proposed
Restoration, (iii) such architect's certificates, waivers of lien, contractor's
sworn statements, title insurance endorsements, bonds, plats of survey and such
other evidences of cost, payment and performance as Lender may reasonably
require and approve, and (iv) all plans and specifications for such Restoration,
such plans and specifications to be delivered and approved by Lender prior to
commencement of any work. In addition, no payment made prior to the final
completion of the Restoration shall exceed ninety percent (90%) of the value of
the work performed from time to time; funds other than proceeds of insurance
shall be disbursed prior to or proportionately with disbursement of such
proceeds; and at all times, the undisbursed balance of such proceeds remaining
in the hands of Lender, together with funds deposited for that purpose or
irrevocably committed to the satisfaction of Lender by or on behalf of Borrower
for that purpose, shall be at least sufficient in the reasonable judgment of
Lender to pay for the cost of completion of the Restoration, free and clear of
all liens or claims for lien. Any surplus which may remain out of insurance
proceeds held by Lender after payment of such costs of Restoration shall be
promptly paid to the Borrower.
7.1.3 Condemnation. (a) Borrower shall promptly give Lender written
notice of the actual or threatened (in writing) commencement of any condemnation
or eminent domain proceeding (a "Condemnation") and shall deliver to Lender
copies of any and all papers served in connection with such Condemnation.
Following the occurrence of a Condemnation, Borrower, regardless of whether an
Award (hereinafter defined) is available (except to the extent that Lender has
elected pursuant to Section 7.1.3(d) to apply the proceeds of such Award to the
payment of the Debt), shall promptly proceed to restore, repair, replace or
rebuild the same to the extent practicable to be of at least equal value and of
substantially the same character as prior to such Condemnation, all to be
effected in accordance with applicable law.
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(b) In the event that the potential Award can be reasonably estimated
to exceed $250,000.00, Lender is hereby irrevocably appointed as Borrower's
attorney-in-fact, coupled with an interest, with exclusive power to collect,
receive and retain any award or payment ("Award") for any taking accomplished
through a Condemnation and to make any compromise or settlement in connection
with such Condemnation, subject to the provisions of this Section. In the event
that the potential Award can be reasonably estimated to be less than or equal to
$250,000.00, Borrower may collect (but not retain) any Award and made any
compromises or settlements in connection therewith. Notwithstanding any
Condemnation by any public or quasi-public authority (including, without
limitation, any transfer made in lieu of or in anticipation of such a
Condemnation), Borrower shall continue to pay the Debt at the time and in the
manner provided for in the Note, in this Agreement and the other Loan Documents
and the Debt shall not be reduced unless and until any Award shall have been
actually received and applied by Lender to expenses of collecting the Award and
to discharge of the Debt. Lender shall not be limited to the interest paid on
the Award by the condemning authority but shall be entitled to receive out of
the Award interest at the rate or rates provided in the Note. Borrower shall
cause any Award that is payable to Borrower to be paid directly to Lender.
(c) In the event of any Condemnation to an Individual Property where
the Award is in an aggregate amount less than thirty percent (30%) of the
Allocated Loan Amount for such Individual Property and if, in the reasonable
judgment of Lender, the Properties can be restored within nine (9) months and
prior to maturity of the Note to an economic unit not less valuable (including
an assessment of the impact of the termination of any Leases due to such
Condemnation) and not less useful than the same was prior to the Condemnation,
and after such restoration will adequately secure the outstanding balance of the
Allocated Loan Amount, then, if no Default or Event of Default shall have
occurred and be then continuing, the proceeds of the Award (after reimbursement
of any expenses reasonably incurred by Lender) shall be applied to reimburse
Borrower for the cost of restoring, repairing, replacing or rebuilding the
Properties or part thereof subject to Condemnation (the "Condemnation
Restoration"), in the manner set forth herein. Borrower hereby covenants and
agrees to commence and diligently to prosecute such Condemnation Restoration;
provided that (i) Borrower shall pay all costs (and if reasonably required by
Lender, Borrower shall deposit the total thereof with Lender in advance) of such
Condemnation Restoration in excess of the Award made available pursuant to the
terms hereof; (ii) the
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Condemnation Restoration shall be done in compliance with all applicable laws,
rules and regulations; and (iii) Lender shall have received evidence reasonably
satisfactory to it that, during the period of the Condemnation Restoration, the
sum of (A) income derived from the applicable Individual Property, as reasonably
determined by Lender, plus (B) proceeds of rent loss insurance or business
interruption insurance, if any, to be paid will equal or exceed the sum of (1)
expenses in connection with the operation of such Individual Property and (2)
the debt service under the Loan attributable to such Individual Property.
(d) Except as provided in Section 7.1.3(c) above, the Award collected
upon any Condemnation shall, at the option of Lender in its sole discretion, be
applied to the payment of the Debt or applied to reimburse Borrower for the cost
of the Condemnation Restoration in the manner set forth herein. Any such
application to the Debt shall be without any prepayment consideration except
that if a Default or Event of Default has occurred then the Borrower shall pay
to Lender an additional amount equal to the Yield Maintenance Premium, if any,
that would be required under Section 2.3.3 hereof if a Defeasance Deposit was to
be made by Borrower. Any such application to the Debt shall be subject to a
right in Borrower to elect to prepay the Allocated Loan Amount for the
Individual Property affected by such Condemnation, on the same terms and in the
same manner as set forth in Section 7.1.2(c), above, with respect to a Casualty,
and, if Borrower elects not to so prepay the Allocated Loan Amount or does not
timely complete such prepayment, then Lender shall apply the Award to the Debt
in the same manner as set forth in Section 7.1.2(c) with respect to the
application of the Settlement Amount. If the related Individual Property is
sold, through foreclosure or otherwise, prior to the receipt by Lender of such
Award, Lender shall have the right, whether or not a deficiency judgment on the
Note shall be recoverable or shall have been sought, recovered or denied, to
receive all or a portion of said Award sufficient to pay the Allocated Loan
Amount and interest thereon.
(e) In the event Borrower is entitled to reimbursement out of the
Award received by Lender, such proceeds shall be disbursed from time to time
upon Lender being furnished with (i) evidence satisfactory to it of the
estimated cost of completion of the Condemnation Restoration, (ii) funds or, at
Lender's option, assurances satisfactory to Lender that such funds are
available, sufficient in addition to the proceeds of the Award to complete the
Condemnation Restoration, (iii) such architect's certificates, waivers of lien,
contractor's sworn statements, title insurance endorsements, bonds, plats of
survey and such other
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evidences of costs, payment and performance as Lender may reasonably require and
approve; and (iv) all plans and specifications for such Condemnation
Restoration, such plans and specifications to be delivered and approved by
Lender prior to commencement of work. In addition, no payment made prior to the
final completion of the restoration, repair, replacement and rebuilding shall
exceed ninety percent (90%) of the value of the work performed from time to
time; funds other than proceeds of the Award shall be disbursed prior to or
proportionately with disbursement of such proceeds; and at all times, the
undisbursed balance of such proceeds remaining in hands of Lender, together with
funds deposited for that purpose or irrevocably committed to the satisfaction of
Lender by or on behalf of Borrower for that purpose, shall be at least
sufficient in the reasonable judgment of Lender to pay for the costs of
completion of the Condemnation Restoration free and clear of all liens or claims
for lien. Any surplus which may remain out of the Award received by Lender
after payment of such costs of restoration, repair, replacement or rebuilding
shall, in the sole and absolute discretion of Lender, be retained by Lender and
applied to payment of the Debt.
Section 7.2 Required Repairs; Required Repair Funds.
7.2.1 Required Repairs; Deposits. Borrower shall perform the repairs
at its Properties, as more particularly set forth on Schedule II hereto (such
repairs hereinafter referred to as "Property Required Repairs"). Borrower shall
complete each of the Property Required Repairs on or before the required
deadline for each repair as set forth on Schedule II. On the Closing Date,
Borrower shall deposit with Lender the amount for each Individual Property set
forth on such Schedule II hereto to perform the Property Required Repairs for
such Individual Property. Amounts so deposited with Lender shall be held by
Lender in an interest bearing account. Amounts so deposited shall hereinafter be
referred to as Borrower's "Required Repair Fund" and the account in which such
amounts are held shall hereinafter be referred to as Borrower's "Required Repair
Account".
7.2.2 Grant of Security Interest. Borrower hereby pledges, assigns
and grants a security interest to Lender, as security for payment of all sums
due under the Loan and the performance of all other terms, conditions and
covenants of the Loan Documents and this Agreement on Borrower's part to be paid
and performed, in all of Borrower's right, title and interest in and to the
Required Repair Fund and the Required Repair Account. Borrower shall not,
without obtaining the prior written consent of Lender, further pledge, assign or
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grant any security interest in the Required Repair Fund or the Required Repair
Account or permit any lien or encumbrance to attach thereto, or any levy to be
made thereon, or any UCC-1 Financing Statements, except those naming Lender as
the secured party, to be filed with respect thereto. Upon the occurrence of an
Event of Default, Lender may apply any sums then present in the Required Repair
Fund to the payment of the Debt in any order in its sole discretion. Until
expended or applied as herein provided, the Required Repair Fund shall
constitute additional security for the Debt. The Required Repair Fund shall not
be commingled with other monies held by Lender not relating to the Properties.
7.2.3 Release of Required Repair Funds. Lender shall disburse to
Borrower the Required Repair Funds from the Required Repair Account from time to
time upon satisfaction by Borrower of each of the following conditions: (i)
Borrower shall submit a written request for payment to Lender at least ten (10)
Business Days prior to the date on which Borrower requests such payment be made
and specifies the Property Required Repairs to be paid, (ii) on the date such
request is received by Lender and on the date such payment is to be made, no
Default or Event of Default shall exist and remain uncured, (iii) Lender shall
have received a certificate from Borrower (A) stating that all Property Required
Repairs at the applicable Individual Property to be funded by the requested
disbursement have been completed in good and workmanlike manner and in
accordance with all applicable federal, state and local laws, rules and
regulations, such certificate to be accompanied by a copy of any license, permit
or other approval by any Governmental Authority required to commence and/or
complete such Property Required Repairs, (B) identifying each Person that
supplied materials or labor in connection with the Property Required Repairs
performed at such Individual Property to be funded by the requested
disbursement, and (C) stating that each such Person has been paid in full or
will be paid in full upon such disbursement, such certificate to be accompanied
by evidence of the amounts due, together with lien waivers (conditioned upon
receipt of the amount to be paid with such disbursement) or other, if
applicable, evidence of payment satisfactory to Lender, (iv) at Lender's
option, a title search for such Individual Property indicating that such
Individual Property is free from all liens, claims and other encumbrances not
previously approved by Lender, and (v) Lender shall have received such other
evidence as Lender shall reasonably request that the Property Required Repairs
at such Individual Property to be funded by the requested disbursement have been
completed and are paid for or will be paid upon such disbursement to the
Borrower and that the funds remaining in the Required Repair Account are
sufficient to
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complete the Property Required Repairs that remain to be completed. Lender
shall not be required to make disbursements from the Required Repair Account
with respect to any Individual Property unless such requested disbursement is in
an amount greater than $25,000 (or a lesser amount if the total amount in the
Required Repair Account is less than $25,000, in which case only one
disbursement of the amount remaining in the account shall be made) and such
disbursement shall be made only upon satisfaction of each condition contained in
this Section 7.2.3.
7.2.4 Failure to Perform Required Repairs. It shall be an Event of
Default under this Agreement if (i) Borrower does not complete the Property
Required Repairs at each Individual Property by the required deadline for each
repair as set forth on Schedule II, and such Property Required Repairs remain
uncompleted for a period of thirty (30) days after notice thereof from Lender,
and (ii) Borrower does not satisfy each condition contained in Section 7.2.3
hereof. Upon the occurrence of such an Event of Default, Lender, at its option,
may withdraw all Required Repair Funds from the Required Repair Account and
Lender may apply such funds either to completion of the Property Required
Repairs at one or more of the Properties or toward payment of the Debt in such
order, proportion and priority as Lender may determine in its sole discretion.
Lender's right to withdraw and apply Required Repair Funds shall be in addition
to all other rights and remedies provided to Lender under this Agreement and the
other Loan Documents.
Section 7.3 Tax and Insurance Escrow Fund
7.3.1 Tax and Insurance Escrow Fund. On the Closing date, Borrower
shall deposit with Lender the amount of $24,121.19, representing an initial
deposit on account of the next due payments of Taxes and Insurance Premiums.
Thereafter, Borrower shall pay to Lender on each Payment Date, (a) one-twelfth
of the Taxes that Lender estimates will be payable during the next ensuing
twelve (12) months in order to accumulate with Lender sufficient funds to pay
all such Taxes at least thirty (30) days prior to their respective due dates,
and (b) one-twelfth of the Insurance Premiums that Lender estimates will be
payable for the renewal of the coverage afforded by the Policies upon the
expiration thereof in order to accumulate with Lender sufficient funds to pay
all such Insurance Premiums at least thirty (30) days prior to the expiration of
the Policies (said amounts in (a) and (b) above hereinafter called the "Tax and
Insurance Escrow
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Fund"). The Tax and Insurance Escrow Fund and the payments of interest or
principal or both, payable pursuant to the Note, shall be added together and
shall be paid as an aggregate sum by Borrower to Lender. Lender will apply the
Tax and Insurance Escrow Fund to payments of Taxes and Insurance Premiums
required to be made by Borrower pursuant to Sections 5.1 hereof and under the
Mortgages. In making any payment relating to the Tax and Insurance Escrow Fund,
Lender may do so according to any bill, statement or estimate procured from the
appropriate public office (with respect to Taxes) or insurer or agent (with
respect to Insurance Premiums), without inquiry into the accuracy of such bill,
statement or estimate or into the validity of any tax, assessment, sale,
forfeiture, tax lien or title or claim thereof. If the amount of the Tax and
Insurance Escrow Fund shall exceed the amounts due for Taxes and Insurance
Premiums pursuant to Section 5.1 hereof, Lender shall, in its sole discretion,
return any excess to Borrower or credit such excess against future payments to
be made to the Tax and Insurance Escrow Fund. Any amount remaining in the Tax
and Insurance Escrow Fund after the Debt has been paid in full shall be returned
to Borrower. In allocating such excess, Lender may deal with the person shown
on the records of Lender to be the owner of the Properties. If at any time
Lender reasonably determines that the Tax and Insurance Escrow Fund is not or
will not be sufficient to pay the items set forth in (a) and (b) above, Lender
shall notify Borrower of such determination and Borrower shall increase its
monthly payments to Lender by the amount that Lender estimates is sufficient to
make up the deficiency at least ten (10) days prior to delinquency of the Taxes
and/or thirty (30) days prior to expiration of the Policies, as the case may be.
In the event the payment of any of the Insurance Premiums is financed by
Borrower, the financing company shall agree in writing to give Lender thirty
(30) days prior written notice of a default by Borrower in the payment of such
credit and shall acknowledge Lender's right to make such payments and cure such
default by Borrower.
7.3.2 Grant of Security Interest. Borrower hereby pledges, assigns
and grants a security interest to Lender, as security for payment of all sums
due under the Loan and the performance of all other terms, conditions and
provisions of the Loan Documents and this Agreement on Borrower's part to be
paid and performed, of all Borrower's right, title and interest in and to the
Tax and Insurance Escrow Fund. Borrower shall not, without obtaining the prior
written consent of Lender, further pledge, assign or grant any security interest
in the Tax and Insurance Escrow Fund or permit any lien or encumbrance to attach
thereto,
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or any levy to be made thereon, or any UCC-1 Financing Statements, except those
naming Lender as the secured party, to be filed with respect thereto.
7.3.3 Application of Tax and Insurance Escrow Fund. Until expended
or applied as above provided, any amounts in the Tax and Insurance Escrow Fund
shall constitute additional security for the Debt. Upon the occurrence of an
Event of Default, Lender may apply any sums then present in the Tax and
Insurance Escrow Fund to the payment of the following items in any order in its
sole discretion: (i) Taxes and Other Charges; (ii) insurance premiums; (iii)
interest on the unpaid principal balance of the Note; (iv) amortization of the
unpaid principal balance of the Note; or (v) all other sums payable pursuant to
this Agreement and the other Loan Documents. Lender shall notify Borrower of
the amounts so applied and the items to which such amounts were so applied;
provided, however, that Lender's failure to give such notice shall not limit any
of Lender's rights or Borrower's obligations under the Agreement. The Tax and
Insurance Escrow Fund shall not be commingled with other monies held by Lender
not relating to the Properties. Sums in the Tax and Insurance Escrow Fund may
be invested in accordance with the terms and provisions of the Lock-Box
Agreement. Earnings or interest, if any, on the Tax and Insurance Escrow Fund
shall be retained as part of such fund and applied in accordance with this
Section 7.3. Lender shall not be liable for any loss sustained on the
investment of any funds constituting the Tax and Insurance Escrow Fund.
Section 7.4 Replacements and Replacement Reserve.
7.4.1 Replacement Reserve Fund. On each Payment Date, Borrower
shall deposit with Lender the monthly deposit set forth on Schedule III hereto
(the "Replacement Reserve Monthly Deposit"). Amounts so deposited shall
hereinafter be referred to as Borrower's "Replacement Reserve Fund" and the
account in which such amounts are held shall hereinafter be referred to as
Borrower's "Replacement Reserve Account". Sums in the Replacement Reserve Fund
may be invested in accordance with the terms and provisions of the Lock-Box
Agreement. All earnings or interest on the Replacement Reserve Fund shall be and
become part of such Replacement Reserve Fund and shall be disbursed as provided
in this Section 7.4. Lender shall not be liable for any loss sustained on the
investment of any funds constituting the Replacement Reserve Fund. Lender may
reassess its estimate of the amount necessary for the Replacement Reserve Fund
from time to time and, and may increase the monthly amounts required to be
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deposited into the Replacement Reserve Fund by thirty (30) days notice to
Borrower if it determines in its reasonable discretion that an increase is
necessary to maintain the proper maintenance and operation of the Properties.
Any amount held in the Replacement Reserve Account and allocated for an
Individual Property shall be retained by Lender and credited toward the future
Replacement Reserves Monthly Deposits required by Lender hereunder in the event
such Individual Property is released from the Lien of its related Mortgage in
accordance with Section 2.4 hereof.
7.4.2 Grant of Security Interest. Borrower hereby pledges, assigns
and grants a security interest to Lender, as security for payment of all sums
due under the Loan and the performance of all other terms, conditions and
provisions to be paid and performed, of all Borrower's right, title and interest
in and to the Replacement Reserve Fund and the Replacement Reserve Account.
Borrower shall not, without obtaining the prior written consent of Lender,
further pledge, assign or grant any security interest in the Replacement Reserve
Fund or the Replacement Reserve Account or permit any lien or encumbrance to
attach thereto, or any levy to be made thereon, or any UCC-1 Financing
Statements, except those naming Lender as the secured party, to be filed with
respect thereto. Upon the occurrence of an Event of Default, Lender may apply
any sums then present in the Replacement Reserve Fund to the payment of the Debt
in any order in its sole discretion. Until expended or applied as above
provided, the Replacement Reserve Fund shall constitute additional security for
the Debt. The Replacement Reserve Fund shall not be commingled with other
monies held by Lender not relating to the Properties.
7.4.3 Disbursements from Replacement Reserve Account. (a) Lender
shall make disbursements from the Replacement Reserve Account to pay Borrower
only for the costs of those items listed on Schedule IV hereto (the
"Replacements"). Lender shall not be obligated to make disbursements from the
Replacement Reserve Account to reimburse Borrower for the costs of routine
maintenance to an Individual Property or for costs which are to be reimbursed
from the Required Repair Fund. Lender may require an inspection of the
Individual Property at Borrower's expense prior to making a monthly disbursement
in order to verify completion of replacements and repairs for which
reimbursement is sought if (i) the requested disbursement is in excess of
$25,000 for an Individual Property, (ii) any portion of the requested
disbursement is for a capital item for an Individual Property whose total cost
is in excess of $25,000 or (iii) in the
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reasonable judgment of Lender, special circumstances exists which require an
inspection.
(b) Lender shall, upon written request from Borrower and satisfaction
of the requirements set forth in this Section 7.4.3 and Section 7.4.4 of this
Agreement, disburse to Borrower amounts from the Replacement Reserve Account
necessary to pay for the actual approved costs of Replacements or to reimburse
the Borrower therefor, upon completion of such Replacements (or, upon partial
completion in the case of Replacements made pursuant to Section 7.4.3(f)) as
determined by Lender. In no event shall Lender be obligated to disburse funds
from the Replacement Reserve Account if a Default or an Event of Default exists.
(c) Each request for disbursement from the Replacement Reserve Account
shall be in a form specified or approved by Lender and shall specify (i) the
specific Replacements for which the disbursement is requested, (ii) the quantity
and price of each item purchased, if the Replacement includes the purchase or
replacement of specific items, (iii) the price of all materials (grouped by type
or category) used in any Replacement other than the purchase or replacement of
specific items, and (iv) the cost of all contracted labor or other services
applicable to each Replacement for which such request for disbursement is made.
With each request Borrower shall certify that all Replacements have been made in
accordance with all applicable laws, ordinances, and regulations of any
Governmental Authority having jurisdiction over the applicable Individual
Property to which the Replacements are being provided. Each request for
disbursement shall include copies of invoices for all items or materials
purchased and all contracted labor or services provided and, unless Lender has
agreed to issue joint checks or advance checks to Borrower as described below in
connection with a particular Replacement, each request shall include evidence
satisfactory to Lender of payment of all such amounts. Except as provided in
Section 7.4.3(e), each request for disbursement from the Replacement Reserve
Account shall be made only after completion of the Replacement for which
disbursement is requested. Borrower shall provide Lender evidence of completion
satisfactory to Lender in its reasonable judgment.
(d) Borrower shall pay all invoices in connection with the
Replacements with respect to which a disbursement is requested prior to
submitting such request for disbursement from the Replacement Reserve Account
or, at the request of Borrower, Lender will issue joint checks, payable to
Borrower and the
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contractor, supplier, materialman, mechanic, subcontractor or other party to
whom payment is due in connection with a Replacement or, if Lender shall
consent, in the exercise of its reasonable judgment, an advance check payable to
Borrower. In the case of payments made by joint or advance check, Lender may
require a waiver of lien conditioned on receipt of the requested payment from
each Person receiving payment prior to Lender's disbursement from the
Replacement Reserve Account. In addition, as a condition to any disbursement,
Lender may require Borrower to obtain an acknowledgment of payment and release
of lien from each contractor, supplier, materialman, mechanic or subcontractor
who receives payment for completion of its work or delivery of its materials.
Any such acknowledgment and release delivered hereunder shall conform to the
requirements of applicable law and shall cover all work performed and materials
supplied (including equipment and fixtures) for the applicable Individual
Property by that contractor, supplier, subcontractor, mechanic or materialman
through the date covered by the current reimbursement request (or, in the event
that payment to such contractor, supplier, subcontractor, mechanic or
materialmen is to be made by a joint check, the release of lien shall be
effective through the date covered by the previous release of funds request).
(e) If (i) the cost of a Replacement exceeds $25,000, (ii) the
contractor performing such Replacement requires periodic payments pursuant to
terms of a written contract, and (iii) Lender has approved in writing in advance
such periodic payments, a request for reimbursement from the Replacement Reserve
Account may be made after completion of a portion of the work under such
contract, provided (A) such contract requires payment upon completion of such
portion of the work, (B) the materials for which the request is made are on site
at the applicable Individual Property and are properly secured or have been
installed in such Individual Property, (C) all other conditions in this
Agreement for disbursement have been satisfied, (D) funds remaining in the
Replacement Reserve Account are, in Lender's judgment, sufficient to complete
such Replacement and other Replacements when required, and (E) if required by
Lender, each contractor or subcontractor receiving payments under such contract
shall provide a waiver of lien with respect to amounts which have been paid to
that contractor or subcontractor.
(f) Borrower shall not make a request for disbursement from the
Replacement Reserve Account more frequently than once in any calendar month
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and (except in connection with the final disbursement) the aggregate total cost
of all Replacements in any request shall not be less than $25,000.00.
7.4.4 Performance of Replacements. (a) Borrower shall make
Replacements when required in order to keep each Individual Property in
condition and repair consistent with other hotel/motel properties in the same
market segment in the metropolitan area in which the respective Individual
Property is located, and to keep each Individual Property or any portion thereof
from deteriorating. Borrower shall complete all Replacements in a good and
workmanlike manner as soon as practicable following the commencement of making
each such Replacement.
(b) Lender reserves the right, at its option, to approve all
contracts or work orders with materialmen, mechanics, suppliers, subcontractors,
contractors or other parties providing labor or materials in connection with the
Replacements. Upon Lender's request, Borrower shall assign any contract or
subcontract to Lender as additional security for the Loan.
(c) In the event Lender determines in its reasonable discretion
that any Replacement is not being performed in a workmanlike or timely manner or
that any Replacement has not been completed in a workmanlike or timely manner,
and if Borrower fails to correct such performance within thirty (30) days after
written notice from Lender, Lender shall have the option to withhold
disbursement for such unsatisfactory Replacement and to proceed under existing
contracts or to contract with third parties to complete such Replacement and to
apply the Replacement Reserve Fund toward the labor and materials necessary to
complete such Replacement and to exercise any and all other remedies available
to Lender upon an Event of Default hereunder.
(d) If at any time during the term of the Loan, Lender determines
that replacements not listed on Schedule IV are advisable to keep any Individual
Property in a condition consistent with other hotel/motel properties in the
metropolitan area in which the respective Individual Property is located, or to
prevent deterioration of an Individual Property (the "Additional Replacements")
Lender may send Borrower written notice of the need for making such Additional
Replacements. Borrower shall promptly commence making such Additional
Replacements in accordance with all the requirements of this Agreement, except
that Borrower understands that reimbursement from the Replacement Reserve
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Account shall not be made unless otherwise approved by Lender. If Borrower
fails to commence such Additional Replacements with thirty (30) days after such
notice and diligently pursue completion of such Additional Replacements, such
failure shall be an Event of Default under this Agreement, and, in addition to
all other rights Lender may have under the Loan Documents upon a default, Lender
may contract with third parties to make such Additional Replacements and may at
its sole discretion (i) apply the funds in the Replacement Reserve Account
toward the labor and material necessary to complete such Additional
Replacements, or (ii) demand payment of such Additional Replacements from
Borrower.
(e) In order to facilitate Lender's completion or making of the
Replacements pursuant to Section 7.4.4(c) above, Borrower grants Lender the
right to enter onto any Individual Property and perform any and all work and
labor necessary to complete or make the Replacements and Additional Replacements
and/or employ watchmen to protect such Individual Property from damage. All
sums so expended by Lender shall be deemed to have been advanced under the Loan
to Borrower and secured by the Mortgages. For this purpose Borrower constitutes
and appoints Lender its true and lawful attorney-in-fact with full power of
substitution to complete or undertake the Replacements and any Additional
Replacements in the name of Borrower. Such power of attorney shall be deemed to
be a power coupled with an interest and cannot be revoked. Borrower empowers
said attorney-in-fact as follows: (i) to use any funds in the Replacement
Reserve Account for the purpose of making or completing the Replacements and any
Additional Replacements; (ii) to make such additions, changes and corrections to
the Replacements and any Additional Replacements as shall be necessary or
desirable to complete the Replacements and any Additional Replacements; (iii) to
employ such contractors, subcontractors, agents, architects and inspectors as
shall be required for such purposes; (iv) to pay, settle or compromise all
existing bills and claims which are or may become Liens against any Individual
Property, or as may be necessary or desirable for the completion of the
Replacements and any Additional Replacements, or for clearance of title; (v) to
execute all applications and certificates in the name of Borrower which may be
required by any of the contract documents; (vi) to prosecute and defend all
actions or proceedings in connection with any Individual Property or the
rehabilitation and repair of any Individual Property; and (vii) to do any and
every act which Borrower might do in its own behalf to fulfill the terms of this
Agreement.
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(f) Nothing in this Section 7.4.4 shall: (i) make Lender responsible
for making or completing the Replacements; (ii) require Lender to expend funds
in addition to the Replacement Reserve Fund to make or complete any Replacement
or Additional Replacement; (iii) obligate Lender to proceed with the
Replacements or Additional Replacement; or (iv) obligate Lender to demand from
Borrower additional sums to make or complete any Replacement or Additional
Replacement.
(g) Borrower shall permit Lender and Lender's agents and
representatives (including, without limitation, Lender's engineer, architect, or
inspector) or third parties making Replacements pursuant to this Section 7.4.4
to enter onto each Individual Property during normal business hours and upon
reasonable advance notice, which may be given verbally, to inspect (subject to
the rights of hotel occupants and tenants under their Leases) the progress of
any Replacements and Additional Replacements and all materials being used in
connection therewith, to examine all plans and shop drawings relating to such
Replacements or Additional Replacements which are or may be kept at each
Individual Property, and to complete any Replacements or Additional Replacements
made pursuant to this Section 7.4.4. Borrower shall cause all contractors and
subcontractors to cooperate with Lender or Lender's representatives or such
other persons described above in connection with inspections described in this
Section 7.4.4(f) or the completion of Replacements or Additional Replacements
pursuant to this Section 7.4.4.
(h) Lender may require an inspection of the Individual Property at
Borrower's expense prior to making a monthly disbursement from the Replacement
Reserve Account in order to verify completion of the Replacements or Additional
Replacements for which reimbursement is sought. Lender may require that such
inspection be conducted by an appropriate independent qualified professional
selected by Lender and/or may require a copy of a certificate of completion by
an independent qualified professional acceptable to Lender prior to the
disbursement of any amounts from the Replacement Reserve Account. Borrower shall
pay the reasonable expense of the inspection as required hereunder, whether such
inspection is conducted by Lender or by an independent qualified professional.
(i) The Replacements and Additional Replacements and all materials,
equipment, fixtures, or any other item comprising a part of any
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Replacement or Additional Replacement shall be constructed, installed or
completed, as applicable, free and clear of all mechanic's, materialman's or
other liens (except for those Liens existing on the date of this Agreement which
have been approved in writing by Lender).
(j) Before each disbursement from the Replacement Reserve Account,
Lender may require Borrower to provide Lender with a search of title to the
applicable Individual Property effective to the date of the disbursement, which
search shows that no mechanic's or materialmen's liens or other liens of any
nature have been placed against the applicable Individual Property since the
date of recordation of the related Mortgage and that title to such Individual
Property is free and clear of all Liens (other than the lien of the related
Mortgage and any other Liens previously approved in writing by the Lender, if
any).
(k) All Replacements shall comply with all applicable laws,
ordinances, rules and regulations of all governmental authorities having
jurisdiction over the applicable Individual Property and applicable insurance
requirements including, without limitation, applicable building codes, special
use permits, environmental regulations, and requirements of insurance
underwriters.
(l) In addition to any insurance required under the Loan Documents,
Borrower shall provide or cause to be provided workmen's compensation insurance,
builder's risk, and public liability insurance and other insurance to the extent
required under applicable law in connection with a particular Replacement. All
such policies shall be in form and amount reasonably satisfactory to Lender.
All such policies which can be endorsed with standard mortgagee clauses making
loss payable to Lender or its assigns shall be so endorsed. The originals of
such policies shall be delivered to Lender.
7.4.5 Failure to Make Replacements. (a) It shall be an Event of
Default under this Agreement if Borrower fails to comply with any provision of
this Section 7.4 and such failure is not cured within thirty (30) days after
notice from Lender (which grace period shall run concurrently with the grace
period set forth in Section 7.4.4.(c)). Upon the occurrence of such an Event of
Default, Lender may use the Replacement Reserve Fund (or any portion thereof)
for any purpose, including but not limited to (i) completion of the Replacements
and Additional Replacements as provided in Section 7.4.4, or for any other
repair or replacement to any Individual Property, (ii) toward payment of any
indebtedness
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secured by the Mortgages, including the Yield Maintenance Premium applicable to
any full or partial payment, in such order, proportion and priority as Lender
may determine in its sole discretion or (iii) reimbursement of Lender of all
costs, losses and expenses suffered or incurred as a result of such Event of
Default. Lender's right to withdraw and apply the Replacement Reserve Funds
shall be in addition to all other rights and remedies provided to Lender under
this Agreement and the other Loan Documents.
(b) Nothing in this Agreement shall obligate Lender to apply all or
any portion of the Replacement Reserve Fund on account of an Event of Default to
payment of the Debt or in any specific order or priority.
7.4.6 Balance in the Replacement Reserve Account. The insufficiency
of any balance in the Replacement Reserve Account shall not relieve Borrower
from its obligation to fulfill all preservation and maintenance covenants in the
Loan Documents. In the event that the balance of the Replacement Reserve
Account is less than the current estimated cost to make the Replacements and any
Additional Replacements required by the Lender, Borrower shall deposit the
shortage within thirty (30) days of request by Lender. In the event Lender
determines from time to time based on Lender's inspections and confirmation from
Lender's independent qualified professional that the amount of the Replacement
Reserve Monthly Deposit is insufficient to fund the cost of likely Replacements
and Additional Replacements and related contingencies that may arise during the
remaining term of the Loan, Lender may require an increase in the amount of the
monthly deposits upon thirty (30) days prior written notice to Borrower.
7.4.7 Indemnification. Borrower shall indemnify Lender and hold
Lender harmless from and against any and all actions, suits, claims, demands,
liabilities, losses, damages, obligations and costs and expenses (including
litigation costs and reasonable attorneys fees and expenses) arising from or in
any way connected with the performance of the Replacements and Additional
Replacements, unless the same are caused by the gross negligence, wilful
misconduct or bad faith of Lender. Borrower shall assign to Lender all rights
and claims Borrower may have against all persons or entities supplying labor or
materials in connection with the Replacements and Additional Replacements;
provided, however, that Lender may not pursue any such right or claim unless an
Event of Default has occurred and remains uncured.
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Section 7.5 Sales Tax Escrow Fund
7.5.1 Sales Tax Escrow Fund. Borrower shall pay to Lender on each
Payment Date, an amount equal to twelve percent (12%) of Gross Income from
Operations (calculated without deduction for Sales Taxes) for the month in which
such Payment Date occurs, which amount represents an agreed-upon estimate of the
amount of Sales Tax that will be due and owing to the applicable governmental
authority for the forthcoming month and which amount may be increased or
decreased from time to time in Lender's reasonable discretion upon reasonably
prior notice (said amount hereinafter called the "Sales Tax Escrow Fund").
Lender shall, on a monthly basis and upon written request from Borrower and
subject to the further requirements set forth herein, disburse, or cause to be
disbursed, to Borrower amounts from the Sales Tax Escrow Fund necessary to pay
for the actual Sales Taxes due and owing with respect to each of the Properties
for the month in question. Each request for disbursement from the Sales Tax
Escrow Fund shall be in a form specified and approved by Lender and shall be
accompanied by an Officer's Certificate certifying to the amount of such Sales
Taxes due and owing for such month. To the extent the same have been received
by Borrower, each such request shall be accompanied by a tax bill or invoice
from the applicable governmental authority. Upon the payment by Borrower of the
Sales Taxes due and owing for the month in question, Borrower shall promptly
deliver to Lender receipts or other evidence of payment from the applicable
governmental authority. If the amount of the Sales Tax Escrow Fund shall exceed
the amounts due for Sales Taxes, Lender shall, in its sole discretion, return
any excess to Borrower or credit such excess against future payments to be made
to the Sales Tax Escrow Fund. Any amount remaining in the Sales Tax Escrow Fund
after the Debt has been paid in full shall be returned to Borrower. In
allocating such excess, Lender may deal with the person shown on the records of
Lender to be the owner of the Properties. If at any time Lender reasonably
determines that the Sales Tax Escrow Fund is not or will not be sufficient to
pay the sales, use, luxury or excise taxes due for the month in question, Lender
shall notify Borrower of such determination and Borrower shall increase its
monthly payments to Lender by the amount that Lender estimates is sufficient to
make up the deficiency.
7.5.2 Grant of Security Interest. Borrower hereby pledges, assigns
and grants a security interest to Lender, as security for payment of all sums
due under the Loan and the performance of all other terms, conditions and
provisions of the Loan Documents and this Agreement on Borrower's part to be
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paid and performed, of all Borrower's right, title and interest in and to the
Sales Tax Escrow Fund. Borrower shall not, without obtaining the prior written
consent of Lender, further pledge, assign or grant any security interest in the
Sales Tax Escrow Fund or permit any lien or encumbrance to attach thereto, or
any levy to be made thereon, or any UCC-1 Financing Statements, except those
naming Lender as the secured party, to be filed with respect thereto.
7.5.3 Application of Sales Tax Escrow Fund. Until expended or
applied as above provided, any amounts in the Sales Tax Escrow Fund shall
constitute additional security for the Debt. Upon the occurrence of an Event of
Default, Lender may apply any sums then present in the Sales Tax Escrow Fund to
the payment of the following items in any order in its sole discretion: (i)
Sales Taxes; (ii) interest on the unpaid principal balance of the Note; (iii)
amortization of the unpaid principal balance of the Note; or (iv) all other sums
payable pursuant to this Agreement and the other Loan Documents. Lender shall
notify Borrower of the amounts so applied and the items to which such amounts
were so applied; provided, however, that Lender's failure to give such notice
shall not limit any of Lender's rights or Borrower's obligations under the
Agreement. The Sales Tax Escrow Fund shall not be commingled with other monies
held by Lender not relating to the Properties. Sums in the Sales Tax Escrow
Fund may be invested in accordance with the terms and provisions of the Lock-Box
Agreement. Earnings or interest, if any, on the Sales Tax Escrow Fund shall be
retained as part of such fund and disbursed in accordance with this Section 7.5.
Lender shall not be liable for any loss sustained on the investment of any funds
constituting the Sales Tax Escrow Fund.
Section 7.6 Seasonal Working Capital Reserve Fund
7.6.1 Seasonal Working Capital Reserve Fund. Borrower shall deposit
with Lender on each Payment Date, an amount equal to the monthly deposit set
forth on Schedule V hereto (the "Seasonal Working Capital Contribution"). The
parties acknowledge and agree that the Seasonal Working Capital Contribution
made on the Payment Date of a given month shall derive from the Gross Income
From Operations for the immediately prior month. By way of example, the
Seasonal Working Capital Contribution made on the Payment Date occuring in June
shall reflect the Gross Income From Operations for May. Amounts so deposited
shall hereinafter be referred to as Borrower's "Seasonal Working Capital Reserve
Fund" and the account in which such amounts are held
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shall hereinafter be referred to as the "Seasonal Working Capital Reserve
Account." Sums in the Seasonal Working Capital Reserve Fund shall be invested
in accordance with the terms and provisions of the Lock-Box Agreement. All
earnings or interest on the Seasonal Working Capital Reserve Fund shall be and
become part of such Seasonal Working Capital Reserve Fund and shall be held
and/or disbursed as provided in this Section 7.6. Lender shall not be liable
for any loss sustained on the investment of any funds constituting the Seasonal
Working Capital Reserve Fund. Lender may reassess its estimate of the monthly
amounts necessary for the Seasonal Working Capital Reserve Fund from time to
time and, may increase the monthly amounts required to be deposited into the
Seasonal Working Capital Reserve Fund by thirty (30) days notice to Borrower if
it determines in its reasonable discretion that an increase is necessary to
reflect the seasonal fluctuations in Gross Income from Operations from the
Properties. Any amount held in the Seasonal Working Capital Reserve Account and
allocated for an Individual Property shall be retained by Lender and credited
toward the future Seasonal Working Capital Reserves Monthly Deposits required by
Lender hereunder in the event such Individual Property is released from the Lien
of its related Mortgage in accordance with Section 2.4 hereof.
7.6.2 Grant of Security Interest. Borrower hereby pledges, assigns
and grants a security interest to Lender, as security for payment of all sums
due under the Loan and the performance of all other terms, conditions and
provisions to be paid and performed, of all Borrower's right, title and interest
in and to the Seasonal Working Capital Reserve Fund and the Seasonal Working
Capital Reserve Account. Borrower shall not, without obtaining the prior
written consent of Lender, further pledge, assign or grant any security interest
in the Seasonal Working Capital Reserve Fund or the Seasonal Working Capital
Reserve Account or permit any lien or encumbrance to attach thereto, or any levy
to be made thereon, or any UCC-1 Financing Statements, except those naming
Lender as the secured party, to be filed with respect thereto. Upon the
occurrence of an Event of Default, Lender may apply any sums then present in the
Seasonal Working Capital Reserve Fund to the payment of the Debt in any order in
its sole discretion. Until expended or applied as above provided, the Seasonal
Working Capital Reserve Fund shall constitute additional security for the Debt.
The Seasonal Working Capital Reserve Fund shall not be commingled with other
monies held by Lender not relating to the Properties.
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7.6.3. Application of the Seasonal Working Capital Reserve Fund. On
each Payment Date, there shall be disbursed from the Seasonal Working Capital
Reserve Fund the amounts for the applicable months set forth on Schedule V,
which amounts shall be applied to the payments to be made by Borrower pursuant
to Sections 2.6.4 and 2.6.5 hereof, as applicable. Upon payment of the Debt in
full and the release of the lien of the Mortgages, any remaining, unapplied
balance then in the Seasonal Working Capital Reserve Account shall be released
to Borrower.
VIII. DEFAULTS
Section 8.1 Event of Default.
(a) Each of the following events shall constitute an event of
default hereunder (an "Event of Default"):
(i) if any portion of the Debt is not paid when due;
(ii) if any of the Taxes or Other Charges are not paid when the
same are due and payable (unless the same are being challenged or contested
as permitted hereunder) or if Borrower fails to deliver the evidence of
payment and/or certificates required pursuant to the final sentence of
Section 5.1(b) by the dates set forth in such final sentence of Section
5.1(b);
(iii) if the Policies are not kept in full force and effect, or if
the Policies are not delivered to Lender upon request;
(iv) if Borrower transfers or encumbers any portion of the
Properties without Lender's prior written consent;
(v) if any representation or warranty made by Borrower herein or
in any other Loan Document, or in any report, certificate, financial
statement or other instrument, agreement or document furnished to Lender
shall have been false or misleading in any material respect as of the date
the representation or warranty was made;
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(vi) if Borrower shall make an assignment for the benefit of
creditors, or if Borrower or any general partner of Borrower shall generally not
be paying its debts as they become due;
(vii) if a receiver, liquidator or trustee shall be appointed for
Borrower or if Borrower shall be adjudicated a bankrupt or insolvent, or if any
petition for bankruptcy, reorganization or arrangement pursuant to federal
bankruptcy law, or any similar federal or state law, shall be filed by or
against, consented to, or acquiesced in by, Borrower, or if any proceeding for
the dissolution or liquidation of Borrower shall be instituted; provided,
however, if such appointment, adjudication, petition or proceeding was
involuntary and not consented to by Borrower, upon the same not being
discharged, stayed or dismissed within sixty (60) days;
(viii) if Borrower attempts to assign its rights under this Agreement
or any of the other Loan Documents or any interest herein or therein in
contravention of the Loan Documents;
(ix) if Borrower breaches any of its respective negative covenants
contained in Section 6.1 or any covenant contained in Section 4.1 (ee) hereof;
(x) with respect to any term, covenant or provision set forth
herein which specifically contains a notice requirement or grace period, if
Borrower shall be in default under such term, covenant or condition after the
giving of such notice or the expiration of such grace period;
(xi) if any of the assumptions contained in that certain
"substantive non-consolidation" opinion delivered to Lender in connection with
the Loan, or in any other "substantive non-consolidation" opinion delivered
subsequent to the closing of the Loan, is or shall become untrue in any material
respect;
(xii) if Borrower shall continue to be in Default under any of the
other terms, covenants or conditions of this Agreement not specified in
subsections (i) to (xi) above, for ten (10) days after notice to Borrower from
Lender, in the case of any Default which can be cured by the payment of a sum of
money, or for thirty (30) days after notice from Lender in the
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case of any other Default; provided, however, that if such non-monetary
Default is susceptible of cure but cannot reasonably be cured within such
30-day period and provided further that Borrower shall have commenced to
cure such Default within such 30-day period and thereafter diligently and
expeditiously proceeds to cure the same, such 30-day period shall be
extended for such time as is reasonably necessary for Borrower in the
exercise of due diligence to cure such Default, such additional period not
to exceed sixty (60) days; or
(xiii) if there shall be default under any of the other Loan
Documents beyond any applicable cure periods contained in such documents,
whether as to Borrower or any of the Properties, or if any other such event
shall occur or condition shall exist, if the effect of such event or
condition is to accelerate the maturity of any portion of the Debt or to
permit Lender to accelerate the maturity of all or any portion of the Debt;
(b) Upon the occurrence of an Event of Default (other than an
Event of Default described in clauses (vi), (vii) or (viii) above) and at any
time thereafter the Lender may, in addition to any other rights or remedies
available to it pursuant to this Agreement and the other Loan Documents or at
law or in equity, take such action, without notice or demand, that Lender deems
advisable to protect and enforce its rights against Borrower and in and to all
or any of the Properties, including, without limitation, declaring the Debt to
be immediately due and payable, and Lender may enforce or avail itself of any or
all rights or remedies provided in the Loan Documents against Borrower and any
or all of the Properties, including, without limitation, all rights or remedies
available at law or in equity; and upon any Event of Default described in
clauses (vi), (vii) or (viii) above, the Debt and all other obligations of
Borrower hereunder and under the other Loan Documents shall immediately and
automatically become due and payable, without notice or demand, and Borrower
hereby expressly waives any such notice or demand, anything contained herein or
in any other Loan Document to the contrary notwithstanding.
Section 8.2 Remedies.
(a) Upon the occurrence of an Event of Default, all or any one or
more of the rights, powers, privileges and other remedies available to Lender
against Borrower under this Agreement or any of the other Loan Documents
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executed and delivered by, or applicable to, Borrower or at law or in equity may
be exercised by Lender at any time and from time to time, whether or not all or
any of the Debt shall be declared due and payable, and whether or not Lender
shall have commenced any foreclosure proceeding or other action for the
enforcement of its rights and remedies under any of the Loan Documents with
respect to all or any of the Properties. Any such actions taken by Lender shall
be cumulative and concurrent and may be pursued independently, singly,
successively, together or otherwise, at such time and in such order as Lender
may determine in its sole discretion, to the fullest extent permitted by law,
without impairing or otherwise affecting the other rights and remedies of Lender
permitted by law, equity or contract or as set forth herein or in the other Loan
Documents. Without limiting the generality of the foregoing, Borrower agrees
that if an Event of Default is continuing (i) Lender is not subject to any "one
action" or "election of remedies" law or rule, and (ii) all liens and other
rights, remedies or privileges provided to Lender shall remain in full force and
effect until Lender has exhausted all of its remedies against the Properties and
each Mortgage has been foreclosed, sold and/or otherwise realized upon in
satisfaction of the Debt or the Debt has been paid in full.
(b) With respect to Borrower and the Properties, nothing contained
herein or in any other Loan Document shall be construed as requiring Lender to
resort to any Individual Property for the satisfaction of any of the Debt in
preference or priority to any other Individual Property, and Lender may seek
satisfaction out of all of the Properties or any part thereof, in its absolute
discretion in respect of the Debt. In addition, Lender shall have the right
from time to time to partially foreclose the Mortgages in any manner and for any
amounts secured by the Mortgages then due and payable as determined by Lender in
its sole discretion including, without limitation, the following circumstances:
(i) in the event Borrower defaults beyond any applicable grace period in the
payment of one or more scheduled payments of principal and interest, Lender may
foreclose one or more of the Mortgages to recover such delinquent payments, or
(ii) in the event Lender elects to accelerate less than the entire outstanding
principal balance of the Loan, Lender may foreclose one or more of the Mortgages
to recover so much of the principal balance of the Loan as Lender may accelerate
and such other sums secured by one or more of the Mortgages as Lender may elect.
Notwithstanding one or more partial foreclosures, the Properties shall remain
subject to the Mortgages to secure payment of sums secured by the Mortgages and
not previously recovered.
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(c) Lender shall have the right from time to time to sever
the Note and the other Loan Documents into one or more separate notes, mortgages
and other security documents (the "Severed Loan Documents") in such
denominations as Lender shall determine in its sole discretion for purposes of
evidencing and enforcing its rights and remedies provided hereunder. Borrower
shall execute and deliver to Lender from time to time, promptly after the
request of Lender, a severance agreement and such other documents as Lender
shall request in order to effect the severance described in the preceding
sentence, all in form and substance reasonably satisfactory to Lender. Effective
after the occurrence of an Event of Default, Borrower hereby absolutely and
irrevocably appoints Lender as its true and lawful attorney, coupled with an
interest, in its name and stead to make and execute all documents necessary or
desirable to effect the aforesaid severance, Borrower ratifying all that its
said attorney shall do by virtue thereof; provided, however, Lender shall not
make or execute any such documents under such power until three (3) days after
notice has been given to Borrower by Lender of Lender's intent to exercise its
rights under such power. Except as may be required in connection with a
securitization pursuant to Section 9.1 hereof, the Severed Loan Documents shall
not contain any representations, warranties or covenants not contained in the
Loan Documents and any such representations and warranties contained in the
Severed Loan Documents will be given by Borrower only as of the Closing Date.
Section 8.3 Remedies Cumulative.
The rights, powers and remedies of Lender under this Agreement shall
be cumulative and not exclusive of any other right, power or remedy which Lender
may have against Borrower pursuant to this Agreement or the other Loan
Documents, or existing at law or in equity or otherwise. Lender's rights,
powers and remedies may be pursued singly, concurrently or otherwise, at such
time and in such order as Lender may determine in Lender's sole discretion. No
delay or omission to exercise any remedy, right or power accruing upon an Event
of Default shall impair any such remedy, right or power or shall be construed as
a waiver thereof, but any such remedy, right or power may be exercised from time
to time and as often as may be deemed expedient. A waiver of one Default or
Event of Default with respect to Borrower shall not be construed to be a waiver
of any subsequent Default or Event of Default by Borrower or to impair any
remedy, right or power consequent thereon.
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IX. SPECIAL PROVISIONS
Section 9.1 Sale of Notes and Securitization.
At the request of the holder of the Note and, to the extent not
already required to be provided by Borrower under this Agreement, Borrower shall
use reasonable efforts to satisfy the market standards to which the holder of
the Note customarily adheres or which may be reasonably required in the
marketplace or by the Rating Agencies in connection with the sale of the Note or
participation therein or the first successful securitization (such sale and/or
securitization, the "Securitization") of rated single or multi-class securities
(the "Securities") secured by or evidencing ownership interests in the Note and
the Mortgages, including, without limitation, to:
(a) (i) provide such financial and other information with respect
to the Properties, the Borrower and the Manager, (ii) provide budgets relating
to the Properties and (iii) to perform or permit or cause to be performed or
permitted such site inspection, appraisals, market studies, environmental
reviews and reports (Phase I's and, if appropriate, Phase II's), engineering
reports and other due diligence investigations of the Properties, as may be
reasonably requested by the holder of the Note or the Rating Agencies or as may
be necessary or appropriate in connection with the Securitization (the "Provided
Information"), together, if customary, with appropriate verification and/or
consents of the Provided Information through letters of auditors or opinions of
counsel of independent attorneys acceptable to the Lender and the Rating
Agencies;
(b) at Borrower's expense, cause counsel to render opinions as to
substantive non-consolidation, fraudulent conveyance, and true sale or any other
opinion customary in securitization transactions with respect to the Properties
and Borrower and its affiliates, which counsel and opinions shall be reasonably
satisfactory to the holder of the Note and the Rating Agencies;
(c) make such representations and warranties as of the closing
date of the Securitization with respect to the Properties, Borrower, and the
Loan Documents as are customarily provided in securitization transactions and as
may be reasonably requested by the holder of the Note or the Rating Agencies and
consistent with the facts covered by such representations and warranties as they
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exist on the date thereof, including the representations and warranties made in
the Loan Documents; and
(d) execute such amendments to the Loan Documents and organizational
documents, enter into a lockbox or similar arrangement with respect to the Rents
and establish and fund such reserve funds (including, without limitation,
reserve funds for deferred maintenance and capital improvements) as may be
requested by the holder of the Note or the Rating Agencies or otherwise to
effect the Securitization; provided, however, that the Borrower shall not be
-------- -------
required to modify or amend any Loan Document if such modification or amendment
would (i) change the interest rate, the stated maturity or the amortization of
principal set forth in the Note, or (ii) modify or amend any other material
economic term of the Loan.
All reasonable third party costs and expenses incurred by Lender in
connection with Borrower's complying with requests made under this Section 9.1
shall be paid by the Borrower; provided, that Lender's request for reimbursement
of the aggregate of such costs and expenses shall not exceed an amount equal to
one-half of one percent (0.5%) of the original principal amount of the Loan. At
the Closing, Lender shall be permitted to retain from the proceeds of the Loan,
an amount not to exceed $50,000.00, which amount shall be applied to pay the
foregoing third-party costs and expenses. Any additional costs incurred by
Lender and reimburseable under this paragraph shall be disbursed to the Lender
pursuant to the Lock-Box Agreement, up to the maximum amount permitted
hereunder. Upon the closing of the Securitization, any unused portion of such
funds shall be refunded to Borrower; provided, however, that nothing contained
herein shall operate to relieve Borrower of its obligations to pay such costs
and expenses, subject to the limitation set forth in the preceding sentence.
Section 9.2 Securitization Indemnification.
(a) Borrower understands that certain of the Provided Information
and the Required Records may be included in disclosure documents in connection
with the Securitization, including, without limitation, a prospectus or private
placement memorandum (each, a "Disclosure Document") and may also be included in
filings with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), or the Securities and Exchange
Act of 1934, as amended (the "Exchange Act"), or provided or made
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87
available to investors or prospective investors in the Securities, the Rating
Agencies, and service providers relating to the Securitization. In the event
that the Disclosure Document is required to be revised prior to the sale of all
Securities, the Borrower will cooperate with the holder of the Note in updating
the Disclosure Document by providing all current information necessary to keep
the Disclosure Document accurate and complete in all material respects.
(b) Borrower agrees to provide in connection with each of (i) a
preliminary and a private placement memorandum or (ii) a preliminary and final
prospectus, as applicable, an indemnification certificate (A) certifying that
Borrower has carefully examined such memorandum or prospectus, as applicable,
including without limitation, the sections entitled "Special Considerations,"
"Description of the Mortgages," "Description of the Mortgage Loans and Mortgaged
Properties," "The Manager," "The Borrower" and "Certain Legal Aspects of the
Mortgage Loan," and such sections (and any other sections reasonably requested)
do not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading, (B) indemnifying
Lender, the affiliate of Nomura Securities International, Inc. ("Nomura") that
has filed the registration statement relating to the securitization (the
"Registration Statement"), each of its directors, each of its officers who have
signed the Registration Statement and each person or entity who controls the
affiliate within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act (collectively, the "Nomura Group"), and Nomura, each of its
directors and each person who controls Nomura within the meaning of Section 15
of the Securities Act and Section 20 of the Exchange Act (collectively, the
"Underwriter Group") for any losses, claims, damages or liabilities (the
"Liabilities") to which Lender, the Nomura Group or the Underwriter Group may
become subject insofar as the Liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such sections or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated in such sections or
necessary in order to make the statements in such sections or in light of the
circumstances under which they were made, not misleading and (C) agreeing to
reimburse Lender, the Nomura Group and the Underwriter Group for any legal or
other expenses reasonably incurred by Lender and Nomura in connection with
investigating or defending the Liabilities; provided, however, that Borrower
will be liable in any such case under clauses (B) or (C) above only to the
extent that any such loss
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claim, damage or liability arises out of or is based upon any such untrue
statement or omission made therein in reliance upon and in conformity with
information furnished to Lender by or on behalf of Borrower in connection with
the preparation of the memorandum or prospectus or in connection with the
underwriting of the debt, including, without limitation, financial statements of
Borrower, operating statements, rent rolls, environmental site assessment
reports and property condition reports with respect to the Properties. This
indemnity agreement will be in addition to any liability which Borrower may
otherwise have.
(c) In connection with filings under the Exchange Act, Borrower agrees
to indemnify (i) Lender, the Nomura Group and the Underwriter Group for
Liabilities to which Lender, the Nomura Group or the Underwriter Group may
become subject insofar as the Liabilities arise out of or are based upon the
omission or alleged omission to state in the Provided Information or Required
Records a material fact required to be stated in the Provided Information or
Required Records in order to make the statements in the Provided Information or
Required Records, in light of the circumstances under which they were made not
misleading and (ii) reimburse Lender, the Nomura Group or the Underwriter Group
for any legal or other expenses reasonably incurred by Lender, the Nomura Group
or the Underwriter Group in connection with defending or investigating the
Liabilities.
(d) Promptly after receipt by an indemnified party under this Section
9.2 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 9.2, notify the indemnifying party in writing of the commencement
thereof, but the omission to so notify the indemnifying party will not relieve
the indemnifying party from any liability which the indemnifying party may have
to any indemnified party hereunder except to the extent that failure to notify
causes prejudice to the indemnifying party. In the event that any action is
brought against any indemnified party, and its notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled, jointly
with any other indemnifying party, to participate therein and, to the extent
that it (or they) may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. After notice from the indemnifying party to such indemnified
party under this Section 9.2 for any legal or other expenses subsequently
incurred by such indemnified party
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in connection with the defense thereof other than reasonable costs of
investigation; provided, however, if the defendants in any such action include
-------- -------
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there are any legal defenses available to
it and/or other indemnified parties that are different from or additional to
those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assert such legal defenses
and to otherwise participate in the defense of such action on behalf of such
indemnified party to parties. The indemnifying party shall not be liable for
the expenses of more than one separate counsel unless an indemnified party shall
have reasonably concluded that there may be legal defenses available to it that
are different from or additional to those available to another indemnified
party.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 9.2(b) or
(c) is for any reason held to be unenforceable by an indemnified party in
respect of any losses, claims, damages or liabilities (or action in respect
thereof) referred to therein which would otherwise be indemnifiable under
Section 9.2(b) or (c), the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such losses, claims,
damages or liabilities (or action in respect thereof); provided, however, that
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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. In determining the
amount of contribution to which the respective parties are entitled, the
following factors shall be considered: (i) Nomura's and Borrower's relative
knowledge and access to information concerning the matter with respect to which
claim was asserted; (ii) the opportunity to correct and prevent any statement or
omission; and (iii) any other equitable considerations appropriate in the
circumstances. Nomura and Borrower hereby agree that it would not be equitable
if the amount of such contribution were determined by pro rata or per capita
allocation.
(f) The liabilities and obligations of both Borrower and Lender under
this Section 9.2 shall survive the termination of this Agreement and the
satisfaction and discharge of the Debt.
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Section 9.3 Rating Surveillance.
The Borrower will retain the Rating Agencies to provide rating
surveillance services on any certificates issued in a Securitization. Such
rating surveillance will be at the expense of the Borrower up to a maximum cost
of $1,000 per year and such expense will be paid pursuant to the terms of the
Lock-Box Agreement.
Section 9.4 Exculpation.
Subject to the qualifications below, Borrower shall have no personal
liability for, and Lender shall not enforce the liability and obligation of
Borrower to perform and observe the obligations contained in, the Note, this
Agreement, the Mortgages or the other Loan Documents by any action or proceeding
wherein a money judgment shall be sought against Borrower or its general
partner, except that Lender may bring a foreclosure action, an action for
specific performance or any other appropriate action or proceeding to enable
Lender to enforce and realize upon its interest under the Note, this Agreement,
the Mortgages and the other Loan Documents, or in the Properties, the Rents, or
any other collateral given to Lender pursuant to the Loan Documents; provided,
however, that, except as specifically provided herein, any judgment in any such
action or proceeding shall be enforceable against Borrower only to the extent of
Borrower's interest in the Properties, in the Rents and in any other collateral
given to Lender, and Lender, by accepting the Note, this Agreement, the
Mortgages and the other Loan Documents, agrees that it shall not sue for, seek
or demand any deficiency judgment against Borrower or its general partner in any
such action or proceeding under or by reason of or under or in connection with
the Note, this Agreement, the Mortgages or the other Loan Documents. The
provisions of this section shall not, however, (a) constitute a waiver or
release or limitation of any obligation evidenced or secured by any of the Loan
Documents; (b) impair the right of Lender to name Borrower as a party defendant
in any action or suit for foreclosure and sale under any of the Mortgages; (c)
affect the validity or enforceability of or any guaranty made in connection with
the Loan or any of the rights and remedies of the Lender thereunder; (d) impair
the right of Lender to obtain the appointment of a receiver; (e) impair the
enforcement of any of the Assignments of Leases; (f) constitute a prohibition
against Lender to seek a deficiency judgment against Borrower in order to fully
realize the security granted by each of the Mortgages or to commence any other
appropriate action or proceeding in order for Lender to exercise its remedies
against all of the Properties; or (g) limit or constitute a
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waiver of the right of Lender to enforce the liability and obligation of
Borrower, by money judgment or otherwise, to the extent of any loss, damage,
cost, expense, liability, claim or other obligation incurred by Lender
(including attorneys' fees and costs reasonably incurred) arising out of or in
connection with the following:
(i) fraud or intentional misrepresentation by Borrower or any
guarantor in connection with the Loan;
(ii) the gross negligence or willful misconduct of Borrower;
(iii) the breach of any provision in the Environmental Indemnity or
in the Mortgages concerning environmental laws, hazardous substances and
asbestos and any indemnification of Lender with respect thereto in either
document;
(iv) the removal or disposal of any portion of the Properties after
an Event of Default except, in the case of machinery, equipment, furniture,
fixtures or other personality, if the same is replaced with items of
comparable quality as required under the Loan Documents;
(v) the misapplication or conversion by Borrower of (A) any
insurance proceeds paid over to or otherwise received by Borrower by reason
of any loss, damage or destruction to the Properties, (B) any awards or
other amounts paid over to or otherwise received by Borrower in connection
with the condemnation of all or a portion of the Properties, or (C) any
Rents following an Event of Default;
(vi) failure to pay charges for labor or materials or other charges
that can create liens on any portion of the Properties;
(vii) any security deposits collected by Borrower or Manager with
respect to the Properties which are not delivered to Lender upon a
foreclosure of the Properties or action in lieu thereof, except to the
extent any such security deposits were applied in accordance with the terms
and conditions of any of the Leases prior to the occurrence of the Event of
Default that gave rise to such foreclosure or action in lieu thereof; and
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(viii) Borrower's indemnification of Lender set forth in
Section 9.2 hereof.
Notwithstanding anything to the contrary in this Agreement, the Note
or any of the Loan Documents, (A) Lender shall not be deemed to have waived any
right which Lender may have under Section 506(a), 506(b), 1111(b) or any other
provisions of the U.S. Bankruptcy Code to file a claim for the full amount of
the Debt secured by the Mortgages or to require that all collateral shall
continue to secure all of the Debt owing to Lender in accordance with the Loan
Documents, and (B) the Debt shall be fully recourse to Borrower in the event
that: (i) Borrower fails to maintain its status as a single purpose entity; (ii)
Borrower fails to obtain Lender's prior written consent to any subordinate
financing or other voluntary lien encumbering the Properties; or (iii) Borrower
fails to obtain Lender's prior written consent to any assignment, transfer, or
conveyance of the Properties or any interest therein as required by the
Mortgage.
Section 9.5. Termination of Manager. If at any time during the term
of the Loan the Debt Service Coverage Ratio as shown on the calculation and
certification provided by Borrower pursuant to Section 5.1(k)(iii) shall be less
than 1.12 to 1, Borrower, at Lender's request, shall terminate the Management
Agreement and replace the Manager with a manager approved by Lender pursuant to
a new management agreement in form and substance reasonably satisfactory to
Lender and for a management fee to be approved by Lender but in no event greater
than the then market rate for managers of hotel properties like the Properties
in their respective markets. Lender shall have the further right to terminate
any replacement manager in the same manner as provided for in the immediately
preceding sentence.
Section 9.6 Lock-Box Agreement.
Borrower represents, warrants and covenants that it shall deposit or
cause to be deposited all Rents collected from the Properties in the clearing
account established and maintained pursuant to those certain clearing and
deposit agreements dated of even date herewith among Borrower, Lender and
certain financial institutions, on Lender's current form (collectively, the
"Lock-Box Agreement"). All such deposits shall be made in accordance with the
terms and provisions of the Lock-Box Agreement. The Borrower shall pay all
costs and expenses required under the Lock-Box Agreement.
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X. MISCELLANEOUS
Section 10.1 Survival.
This Agreement and all covenants, agreements, representations and
warranties made herein and in the certificates delivered pursuant hereto shall
survive the making by Lender of the Loan and the execution and delivery to
Lender of the Note, and shall continue in full force and effect so long as all
or any of the Debt is outstanding and unpaid unless a longer period is expressly
set forth herein or in the other Loan Documents. Whenever in this Agreement any
of the parties hereto is referred to, such reference shall be deemed to include
the legal representatives, successors and assigns of such party. All covenants,
promises and agreements in this Agreement, by or on behalf of Borrower, shall
inure to the benefit of the legal representatives, successors and assigns of
Lender.
Section 10.2 Lender's Discretion.
Whenever pursuant to this Agreement, Lender exercises any right given
to it to approve or disapprove, or any arrangement or term is to be satisfactory
to Lender, the decision of Lender to approve or disapprove or to decide whether
arrangements or terms are satisfactory or not satisfactory shall (except as is
otherwise specifically herein provided) be in the sole discretion of Lender and
shall be final and conclusive.
Section 10.3 Governing Law.
(A) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW
YORK, AND MADE BY LENDER AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND
THE PROCEEDS OF THE NOTE DELIVERED PURSUANT HERETO WERE DISBURSED FROM THE STATE
OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE
PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS,
INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS
ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK
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APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE (WITHOUT REGARD TO
PRINCIPLES OF CONFLICT LAWS) AND ANY APPLICABLE LAW OF THE UNITED STATES OF
AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION,
AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED PURSUANT HERETO AND
PURSUANT TO THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED
ACCORDING TO THE LAW OF THE STATE IN WHICH THE APPLICABLE INDIVIDUAL PROPERTY IS
LOCATED, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF
SUCH STATE, THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION,
VALIDITY AND ENFORCEABILITY OF ALL LOAN DOCUMENTS AND ALL OF THE OBLIGATIONS
ARISING HEREUNDER OR THEREUNDER. TO THE FULLEST EXTENT PERMITTED BY LAW,
BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT
THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS
AGREEMENT AND THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
(B) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER
ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY AT LENDER'S OPTION BE
INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW
YORK, AND BORROWER WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE
BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR
PROCEEDING, AND BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. BORROWER DOES HEREBY DESIGNATE
AND APPOINT GEORGE W. LOOMIS, JR., ESQ., WITH AN OFFICE AT PARSON & BROWN,
230 PARK AVENUE, NEW YORK, NEW YORK 10169. AS ITS AUTHORIZED AGENT TO ACCEPT AND
ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN
ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK,
NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID
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95
AGENT AT SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE MAILED OR DELIVERED TO
BORROWER IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT
EFFECTIVE SERVICE OF PROCESS UPON BORROWER, IN ANY SUCH SUIT, ACTION OR
PROCEEDING IN THE STATE OF NEW YORK. BORROWER (I) SHALL GIVE PROMPT NOTICE TO
LENDER OF ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (II) MAY AT ANY
TIME AND FROM TIME TO TIME DESIGNATE A SUBSTITUTE AUTHORIZED AGENT WITH AN
OFFICE IN NEW YORK, NEW YORK (WHICH SUBSTITUTE AGENT AND OFFICE SHALL BE
DESIGNATED AS THE PERSON AND ADDRESS FOR SERVICE OF PROCESS), AND (III) SHALL
PROMPTLY DESIGNATE SUCH A SUBSTITUTE IF ITS AUTHORIZED AGENT CEASES TO HAVE AN
OFFICE IN NEW YORK, NEW YORK OR IS DISSOLVED WITHOUT LEAVING A SUCCESSOR.
Section 10.4 Modification, Waiver in Writing.
No modification, amendment, extension, discharge, termination or
waiver of any provision of this Agreement, or of the Note, or of any other Loan
Document, nor consent to any departure by Borrower therefrom, shall in any event
be effective unless the same shall be in a writing signed by the party against
whom enforcement is sought, and then such waiver or consent shall be effective
only in the specific instance, and for the purpose, for which given. Except as
otherwise expressly provided herein, no notice to, or demand on Borrower, shall
entitle Borrower to any other or future notice or demand in the same, similar or
other circumstances.
Section 10.5 Delay Not a Waiver.
Neither any failure nor any delay on the part of Lender in insisting
upon strict performance of any term, condition, covenant or agreement, or
exercising any right, power, remedy or privilege hereunder, or under the Note or
under any other Loan Document, or any other instrument given as security
therefor, shall operate as or constitute a waiver thereof, nor shall a single or
partial exercise thereof preclude any other future exercise, or the exercise of
any other right, power, remedy or privilege. In particular, and not by way of
limitation, by accepting payment after the due date of any amount payable under
this Agreement,
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the Note or any other Loan Document, Lender shall not be deemed to have waived
any right either to require prompt payment when due of all other amounts due
under this Agreement, the Note or the other Loan Documents, or to declare a
default for failure to effect prompt payment of any such other amount.
Section 10.6 Notices.
All notices, consents, approvals and requests required or permitted
hereunder or under any other Loan Document shall be given in writing and shall
be effective for all purposes if hand delivered or sent by (a) certified or
registered United States mail, postage prepaid, or (b) expedited prepaid
delivery service, either commercial or United States Postal Service, with proof
of attempted delivery, and by telecopier (with answer back acknowledged),
addressed as follows (or at such other address and person as shall be designated
from time to time by any party hereto, as the case may be, in a written notice
to the other parties hereto in the manner provided for in this Section):
If to Lender:
Nomura Asset Capital Corporation
Two World Financial Center
Building B
New York, New York 10281
Attention: Ms. Sheryl McAfee
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with a copy to:
Nomura Asset Capital Corporation
Two World Financial Center
Building B
New York, New York 10281
Attention: Barry Funt, Esq., General Counsel
with a copy to:
King & Spalding
120 West 45th Street
New York, New York 10036
Attention: Eileen P. Brumback, Esq.
If to Borrower:
VPS I, L.P.
313 East Anderson Lane
Suite 201-B
Austin, Texas 78752
Attention: Mr. Bill Romney
with a copy to:
Baker & Hostetler
Capital Square, Suite 2100
65 East State Street
Columbus, Ohio 43215
Attention: Richard Bibart, Esq.
A notice shall be deemed to have been given: in the case of hand
delivery, at the time of delivery; in the case of registered or
certified mail, when delivered or the
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first attempted delivery on a Business Day; or in the case of expedited prepaid
delivery and telecopy, upon the first attempted delivery on a Business Day.
Section 10.7 Trial by Jury.
BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN
DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION
THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE
AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE.
LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING
AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.
Section 10.8 Headings.
The Article and/or Section headings and the Table of Contents in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 10.9 Severability.
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
Section 10.10 Preferences.
Lender shall have the continuing and exclusive right to apply or
reverse and reapply any and all payments by Borrower to any portion of the
obligations of
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Borrower hereunder. To the extent Borrower makes a payment or payments to
Lender, which payment or proceeds or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, receiver or any other party under any bankruptcy law,
state or federal law, common law or equitable cause, then, to the extent of such
payment or proceeds received, the obligations hereunder or part thereof intended
to be satisfied shall be revived and continue in full force and effect, as if
such payment or proceeds had not been received by Lender.
Section 10.11 Waiver of Notice.
Borrower shall not be entitled to any notices of any nature whatsoever
from Lender except with respect to matters for which this Agreement or the other
Loan Documents specifically and expressly provide for the giving of notice by
Lender to Borrower and except with respect to matters for which Borrower is not,
pursuant to applicable Legal Requirements, permitted to waive the giving of
notice. Borrower hereby expressly waives the right to receive any notice from
Lender with respect to any matter for which this Agreement or the other Loan
Documents do not specifically and expressly provide for the giving of notice by
Lender to Borrower.
Section 10.12 Remedies of Borrower.
In the event that a claim or adjudication is made that Lender or its
agents have acted unreasonably or unreasonably delayed acting in any case where
by law or under this Agreement or the other Loan Documents, Lender or such
agent, as the case may be, has an obligation to act reasonably or promptly,
Borrower agrees that neither Lender nor its agents shall be liable for any
monetary damages, and Borrower's sole remedies shall be limited to commencing an
action seeking injunctive relief or declaratory judgment. The parties hereto
agree that any action or proceeding to determine whether Lender has acted
reasonably shall be determined by an action seeking declaratory judgment.
Section 10.13 Expenses; Indemnity.
(a) Borrower covenants and agrees to pay, or if Borrower fails
to pay to reimburse, Lender upon receipt of written notice from Lender for all
reasonable costs and expenses (including reasonable attorneys' fees and
<PAGE>
100
disbursements) incurred by Lender in connection with (i) the preparation,
negotiation, execution and delivery of this Agreement and the other Loan
Documents and the consummation of the transactions contemplated hereby and
thereby and all the costs of furnishing all opinions by counsel for Borrower
(including without limitation any opinions requested by Lender as to any legal
matters arising under this Agreement or the other Loan Documents with respect to
the Properties); (ii) Borrower's ongoing performance of and compliance with
Borrower's respective agreements and covenants contained in this Agreement and
the other Loan Documents on its part to be performed or complied with after the
Closing Date, including, without limitation, confirming compliance with
environmental and insurance requirements; (iii) Lender's ongoing performance and
compliance with all agreements and conditions contained in this Agreement and
the other Loan Documents on its part to be performed or complied with after the
Closing Date; (iv) the negotiation, preparation, execution, delivery and
administration of any consents, amendments, waivers or other modifications to
this Agreement and the other Loan Documents and any other documents or matters
requested by either Borrower or Lender; (v) securing Borrower's compliance with
any requests made pursuant to Section 9.1 hereof (subject to the limitations
contained in such section); (vi) the filing and recording fees and expenses,
title insurance and reasonable fees and expenses of counsel for providing to
Lender all required legal opinions, and other similar expenses incurred in
creating and perfecting the Liens in favor of Lender pursuant to this Agreement
and the other Loan Documents; (vii) enforcing or preserving any rights, in
response to third party claims or the prosecuting or defending of any action or
proceeding or other litigation, in each case against, under or affecting
Borrower, this Agreement, the other Loan Documents, the Properties, or any other
security given for the Loan; and (viii) enforcing any obligations of or
collecting any payments due from Borrower under this Agreement, the other Loan
Documents or with respect to the Properties or in connection with any
refinancing or restructuring of the credit arrangements provided under this
Agreement in the nature of a "work-out" or of any insolvency or bankruptcy
proceedings; provided, however, that Borrower shall not be liable for the
-------- -------
payment of any such costs and expenses to the extent the same arise by reason of
the gross negligence, illegal acts, fraud or willful misconduct of Lender. Any
cost and expenses due and payable to Lender may be paid from any amounts in the
Deposit Account.
(b) Subject to the limitations of Section 9.4 above, Borrower shall
indemnify, defend and hold harmless Lender from and against any and all
<PAGE>
101
other liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, claims, costs, expenses and disbursements of any kind or nature
whatsoever (including, without limitation, the reasonable fees and disbursements
of counsel for Lender in connection with any investigative, administrative or
judicial proceeding commenced or threatened, whether or not Lender shall be
designated a party thereto), that may be imposed on, incurred by, or asserted
against Lender in any manner relating to or arising out of (i) any breach by
Borrower of its obligations under, or any material misrepresentation by Borrower
contained in, this Agreement or the other Loan Documents, or (ii) the use or
intended use of the proceeds of the Loan (collectively, the "Indemnified
Liabilities"); provided, however, that Borrower shall not have any obligation to
-------- -------
Lender hereunder to the extent that such Indemnified Liabilities arise from the
gross negligence, illegal acts, fraud or willful misconduct of Lender. To the
extent that the undertaking to indemnify, defend and hold harmless set forth in
the preceding sentence may be unenforceable because it violates any law or
public policy, Borrower shall pay the maximum portion that it is permitted to
pay and satisfy under applicable law to the payment and satisfaction of all
Indemnified Liabilities incurred by the Lender.
Section 10.14 Exhibits and Schedules Incorporated.
The Exhibits and Schedules annexed hereto are hereby incorporated
herein as a part of this Agreement with the same effect as if set forth in the
body hereof.
Section 10.15 Offsets, Counterclaims and Defenses.
Any assignee of Lender's interest in and to this Agreement, the Note
and the other Loan Documents shall take the same free and clear of all offsets,
counterclaims or defenses which are unrelated to such documents which Borrower
may otherwise have against any assignor of such documents, and no such unrelated
counterclaim or defense shall be interposed or asserted by Borrower in any
action or proceeding brought by any such assignee upon such documents and any
such right to interpose or assert any such unrelated offset, counterclaim or
defense in any such action or proceeding is hereby expressly waived by Borrower.
Section 10.16 No Joint Venture or Partnership; No Third Party
Beneficiaries.
(a) Borrower and Lender intend that the relationships created
hereunder and under the other Loan Documents be solely that of borrower and
<PAGE>
102
lender. Nothing herein or therein is intended to create a joint venture,
partnership, tenancy-in-common, or joint tenancy relationship between Borrower
and Lender nor to grant Lender any interest in the Properties other than that of
mortgagee or lender.
(b) This Agreement and the other Loan Documents are solely for the
benefit of Lender and the Borrower and nothing contained in this Agreement or
the other Loan Documents shall be deemed to confer upon anyone other than the
Lender and the Borrower any right to insist upon or to enforce the performance
or observance of any of the obligations contained herein or therein. All
conditions to the obligations of Lender to make the Loan hereunder are imposed
solely and exclusively for the benefit of Lender and no other Person shall have
standing to require satisfaction of such conditions in accordance with their
terms or be entitled to assume that Lender will refuse to make the Loan in the
absence of strict compliance with any or all thereof and no other Person shall
under any circumstances be deemed to be a beneficiary of such conditions, any or
all of which may be freely waived in whole or in part by Lender if, in Lender's
sole discretion, Lender deems it advisable or desirable to do so.
Section 10.17 Publicity.
All news releases, publicity or advertising by Borrower or its
Affiliates through any media intended to reach the general public which refers
to the Loan Documents or the financing evidenced by the Loan Documents, to the
Lender, Nomura, or any of their Affiliates shall be subject to the prior written
approval of Lender. Lender shall be permitted to publicly announce the closing
of the Loan and the Securitization by way of a published "tombstone" or similar
announcement. Except as may be required in connection with a Securitization
pursuant to Section 9.1, Borrower covenants and agrees not to disclose or to
permit any of its respective advisors, attorneys, employees or agents to
disclose the existence of the Loan or any of the terms or conditions of the
Loan; provided, however, that Borrower may disclose such information, if
-------- -------
required by law or legal process and on a "need-to-know" basis to those
advisors, attorneys and other Persons who, in Borrower's respective judgment,
require such information in order to render advice to Borrower and Borrower may
disclose such information in connection with the preparation and/or filing of
any tax returns or other governmental disclosure requirements. Borrower shall
inform the recipient of the confidential nature of such information. In the
event that Borrower is required (by
<PAGE>
103
interrogatories, subpoena or other legal process) to disclose any of such
information, Borrower shall provide Lender with prompt written notice of any
such requirement so that Lender may seek an appropriate protective order or
waive the provisions of this Section 10.17. If such a protective order is not
obtained timely and, in the opinion of counsel of Borrower, Borrower is
compelled to disclose such information, Borrower may disclose that portion of
such information which counsel advises that Borrower is compelled to disclose.
Section 10.18 Cross-Default; Cross-Collateralization; Waiver of
Marshaling of Assets.
(a) The Borrower acknowledges that Lender has made the Loan to the
Borrower upon the security of its collective interest in the Properties and in
reliance upon the aggregate of the Properties taken together being of greater
value as collateral security than the sum of the Properties taken separately.
The Borrower agrees that the Mortgages are and will be cross-collateralized and
cross-defaulted with each other so that (i) an Event of Default under any of the
Mortgages shall constitute an Event of Default under each of the other Mortgages
which secure the Note; (ii) an Event of Default under the Note or this Loan
Agreement shall constitute an Event of Default under each Mortgage; and (iii)
each Mortgage shall constitute security for the Note as if a single blanket lien
were placed on all of the Properties as security for the Note.
(b) To the fullest extent permitted by law, Borrower, for itself and
its successors and assigns, waives all rights to a marshaling of the Properties,
or to a sale in inverse order of alienation in the event of foreclosure of all
or any of the Mortgages, and agrees not to assert any right under any laws
pertaining to the marshaling of assets, the sale in inverse order of alienation,
homestead exemption, the administration of estates of decedents, or any other
matters whatsoever to defeat, reduce or affect the right of Lender under the
Loan Documents to a sale of the Properties for the collection of the Debt
without any prior or different resort for collection or of the right of Lender
to the payment of the Debt out of the net proceeds of the Properties in
preference to every other claimant whatsoever. In addition, Borrower, for itself
and its successors and assigns, waives in the event of foreclosure of any or all
of the Mortgages, any equitable right otherwise available to the Borrower which
would require the separate sale of the Properties or require Lender to exhaust
its remedies against any Individual Property or any combination of the
Properties before proceeding against
<PAGE>
104
any other Individual Property or combination of Properties; and further in the
event of such foreclosure the Borrower does hereby expressly consents to and
authorizes, at the option of the Lender, the foreclosure and sale either
separately or together of any combination of the Properties.
Section 10.19 Waiver of Counterclaim.
Borrower hereby waives the right to assert a counterclaim, other than
a compulsory counterclaim, in any summary proceeding or foreclosure action or
proceeding brought against it by Lender or its agents.
Section 10.20 Conflict; Construction of Documents; Reliance.
In the event of any conflict between the provisions of this Loan
Agreement and any of the other Loan Documents, the provisions of this Loan
Agreement shall control. The parties hereto acknowledge that they were
represented by competent counsel in connection with the negotiation, drafting
and execution of the Loan Documents and that such Loan Documents shall not be
subject to the principle of construing their meaning against the party which
drafted same. Borrower acknowledges that, with respect to the Loan, Borrower
shall rely solely on its own judgment and advisors in entering into the Loan
without relying in any manner on any statements, representations or
recommendations of Lender or any parent, subsidiary or affiliate of Lender.
Lender shall not be subject to any limitation whatsoever in the exercise of any
rights or remedies available to it under any of the Loan Documents or any other
agreements or instruments which govern the Loan by virtue of the ownership by it
or any parent, subsidiary or affiliate of Lender of any equity interest any of
them may acquire in Borrower, and Borrower hereby irrevocably waives the right
to raise any defense or take any action on the basis of the foregoing with
respect to Lender's exercise of any such rights or remedies. Borrower
acknowledges that Lender engages in the business of real estate financings and
other real estate transactions and investments which may be viewed as adverse to
or competitive with the business of the Borrower or its affiliates.
Section 10.21 Brokers and Financial Advisors.
Borrower hereby represents that it has dealt with no financial
advisors, brokers, underwriters, placement agents, agents or finders in
connection with the transactions contemplated by this Agreement other than Union
Capital Advisors,
<PAGE>
105
Inc. ("Broker"). Borrower agrees to pay any fee, commission or other amount to
Broker pursuant to a separate agreement. Borrower and Lender hereby agree to
indemnify and hold the other harmless from and against any and all claims,
liabilities, costs and expenses of any kind in any way relating to or arising
from a claim by any Person (other than Broker) that such Person acted on behalf
of the indemnifying party in connection with the transactions contemplated
herein. In addition, Borrower hereby agrees to indemnify and hold Lender
harmless from and against any such claim by Broker. The provisions of this
Section 10.21 shall survive the expiration and termination of this Agreement and
the payment of the Debt.
Section 10.22 Prior Agreements.
This Agreement and the other Loan Documents contain the entire
agreement of the parties hereto and thereto in respect of the transactions
contemplated hereby and thereby, and all prior agreements among or between such
parties, whether oral or written, including, without limitation, the Commitment
Letter dated November 8, 1995 (as amended) between Borrower and Lender are
superseded by the terms of this Agreement and the other Loan Documents.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed by their duly authorized representatives, all as of the day
and year first above written.
VPS I, L.P.,
a Delaware limited partnership
By: VPS, Inc.,
its general partner
By: /s/ Mark Harris
------------------------------
Name: President
Title: Mark Harris
NOMURA ASSET CAPITAL CORPORATION,
a Delaware corporation
By: /s/ Brett R. Kaplan
------------------------------
Name: Brett R. Kaplan
Title: AVP
<PAGE>
SCHEDULE I
ALLOCATED LOAN AMOUNTS
<TABLE>
<CAPTION>
Closing Date
Property Allocated Loan Amount
- -------- ---------------------
<S> <C>
Westar Suites-Fiesta Park, $ 3,164,942.00
San Antonio, Texas
Westar Suites-Airport, $ 4,379,768.00
San Antonio, Texas
Westar Suites-Amarillo $ 3,166,293.00
Amarillo, Texas
Westar Suites-El Paso $ 4,607,139.00
El Paso, Texas
Westar Suites-Irving $ 2,781,858.00
Irving, Texas
Total $18,100,000.00
</TABLE>
<PAGE>
SCHEDULE II
PROPERTY REQUIRED REPAIRS
[OMITTED]
<PAGE>
SCHEDULE III
REPLACEMENT RESERVE DEPOSITS
[OMITTED]
<PAGE>
SCHEDULE IV
LIST OF APPROVED REPLACEMENTS
[OMITTED]
<PAGE>
SCHEDULE V
SEASONAL WORKING CAPITAL
RESERVE DEPOSITS
[OMITTED]
<PAGE>
EXHIBIT A
FORM OF NOTE
<PAGE>
NOTE
$18,100,000.00 December 29, 1995
For value received, VPS I, L.P., a Delaware limited partnership, having its
principal place of business at 313 East Anderson Lane, Suite 201-B, Austin,
Texas 78752 (hereinafter referred to as "Maker"), promises to pay to the order
of Nomura Asset Capital Corporation, a Delaware corporation, at its principal
place of business at Two World Financial Center, Building B, New York, New York
10281 (hereinafter referred to as "Payee"), or at such place as the holder
hereof may from time to time designate in writing, the principal sum of EIGHTEEN
MILLION, ONE HUNDRED THOUSAND and no/100 Dollars ($18,100,000.00), in lawful
money of the United States of America, with interest thereon to be computed on
the unpaid principal balance from time to time outstanding at the Applicable
Interest Rate (as hereinafter defined), and to be paid in installments as
follows:
A. A payment of interest only on January 11, 1996;
B. A constant payment of $160,789.28 (such amount hereinafter the
"Monthly Debt Service Payment Amount"), on the twelfth day of February, 1996 and
on each Payment Date (as hereinafter defined) thereafter up to and including the
Payment Date occurring in December, 2020; each of such payments, subject to the
applicable provisions of the Loan Agreement (as hereinafter defined), to be
applied (a) to the payment of interest computed at the rate aforesaid; and (b)
the balance applied toward the reduction of the principal sum; and the balance
of said principal sum together with all accrued and unpaid interest thereon
shall be due and payable on the eleventh day of January, 2021 (the "Maturity
Date"). Interest on the principal sum of this Note shall be calculated on the
basis of the actual number of days elapsed in each interest accrual period by a
daily rate based on a 360 day year. Each interest accrual period shall commence
on the eleventh (11th) day of each calendar month during the term of this Note
and shall end on the tenth (10th) day of the next occurring calendar month. All
amounts due under this Note shall be payable without setoff, counterclaim or any
other deduction whatsoever and are payable without relief from valuation and
appraisement laws and with all expenses, costs and charges incurred in
collection or enforcement hereof including, without limitation, attorneys' fees
and court costs.
<PAGE>
2
1. (a) The term "Applicable Interest Rate" as used in this Note shall
mean from (i) the date of this Note through but not including the Optional
Prepayment Date (hereinafter defined), a rate of nine and 71/100 percent (9.71%)
per annum (the "Initial Interest Rate"), and (ii) from and after the Optional
Prepayment Date through and including the date this Note is paid in full, a rate
per annum equal to the greater of (A) five (5) percentage points over the
Initial Interest Rate and (B) the Treasury Rate (hereinafter defined) plus nine
(9) percentage points (the "Revised Interest Rate"). For purposes of this Note,
(x) the term "Optional Prepayment Date" shall mean, January 11, 2011 and (y) the
term "Treasury Rate" shall mean, as of any applicable date, including the
Optional Prepayment Date, the yield, calculated by linear interpolation, if
necessary, (rounded to the nearest one-thousandth of one percent (i.e., 0.001%))
of the yields of noncallable United States Treasury obligations with maturities
(one longer and one shorter) most nearly approximating the Maturity Date, as
determined by Payee on the basis of Federal Reserve Statistical Release H.15-
Selected Interest Rates under the heading U.S. Governmental Security/Treasury
Constant Maturities, or other recognized source of financial market information
selected by Payee.
(b) The term "Payment Date" as used in this Note shall mean the
eleventh (11th) day of each calendar month during the term of this Note;
provided, however, that if the eleventh (11th) day of a given month shall not be
a Business Day (as hereinafter defined), then the Payment Date for such month
shall be the next Business Day to occur after the eleventh (11th) day of such
month.
2. This Note is evidence of that certain loan made by Payee to Maker
contemporaneously herewith (the "Loan") and is executed pursuant to the terms
and conditions of that certain loan agreement executed the date hereof between
Maker and Payee (the "Loan Agreement"). This Note is secured by, among other
things, (a) the Mortgagees (as defined in the Loan Agreement), (b) the
Assignments of Leases (as defined in the Loan Agreement), and (c) the other Loan
Documents (as defined in the Loan Agreement). Reference is made to the
Mortgages, Assignments of Leases and the other Loan Documents for a description
of the nature and extent of the security afforded thereby, the rights of the
holder hereof in respect of such security, the terms and conditions upon which
this Note is secured and the rights and duties of the holder of this Note. The
holder of this Note is entitled to the benefits of the Mortgages, Assignments of
Leases and the other Loan Documents and may enforce the agreements contained
therein and exercise the remedies provided therein or otherwise in respect
thereof, all in accordance with the terms thereof. Except for the provisions and
limitations set forth in Section 9.4 of the Loan Agreement, no reference herein
to any of the Mortgages, Assignments of Leases and the other Loan Documents and
no other provision of this Note or of any of the Mortgages, Assignments of
Leases and the other Loan Documents shall alter or impair the
<PAGE>
3
obligation of Maker, which is absolute and unconditional, to pay the principal
of and interest on this Note at the time and place and at the rates and in the
monies and funds described herein. All of the agreements, conditions, covenants,
provisions and stipulations contained in the Mortgages, Assignments of Leases
and the other Loan Documents which are to be kept and performed by Maker are by
this reference hereby made part of this Note to the same extent and with the
same force and effect as if they were fully set forth in this Note, and Maker
covenants and agrees to keep and perform the same, or cause the same to be kept
and performed, in accordance with their terms. All capitalized terms not
otherwise defined herein shall have the meaning set forth in the Loan Agreement.
3. If any sum payable under this Note is not paid on the date on which it
is due, Maker shall pay to Payee upon demand an amount equal to the lesser of
five percent (5%) of such unpaid sum or the maximum amount permitted by
applicable law in order to defray a portion of the expenses incurred by Payee in
handling and processing such delinquent payment and to compensate Payee for the
loss of the use of such delinquent payment. Without limiting anything contained
in Paragraph 1(b) above, if the day when any payment required under this Note is
due is not a Business Day (as hereinafter defined), then payment shall be due on
the first Business Day thereafter. The term "Business Day" shall mean a day
other than (i) a Saturday or Sunday, or (ii) any day on which national banks in
New York are not open for business.
4. The whole of the principal sum of this Note, together with all
interest accrued and unpaid thereon and all other sums due under the Loan
Documents (all such sums hereinafter collectively referred to as the "Debt"), or
any portion thereof, shall without notice become immediately due and payable at
the option of Payee if any payment required in this Note (other than a payment
of Accrued Interest (as hereinafter defined)) is not paid on the date on which
it is due or upon the happening of any other Event of Default (as defined in the
Loan Agreement). In the event that it should become necessary to employ counsel
to collect or enforce the Debt or to protect or foreclose the security therefor,
Maker also shall pay on demand all costs of collection incurred by Payee,
including reasonable attorneys' fees and costs reasonably incurred for the
services of counsel whether or not suit be brought.
5. Maker does hereby agree that upon the occurrence of an Event of
Default (including upon the failure of Maker to pay the Debt in full on the
Maturity Date), Payee shall be entitled to receive and Maker shall pay (a)
interest on the entire unpaid principal sum and any other amounts due at a rate
(the "Default Rate") equal to the lesser of (i) the maximum rate permitted by
applicable law, or (ii) the greater of (x) five percent (5%) plus the Applicable
Interest Rate or (y) nine (9) percentage points above the then-effective
Treasury Rate and (b) on each Payment Date
<PAGE>
4
following the occurrence of such Event of Default, until such Event of Default
shall have been cured to Lender's satisfaction, an amount equal to all Excess
Cash Flow (as defined in the Loan Agreement) for the prior month, such Excess
Cash Flow to be paid and applied as set forth in Section 2.5 of the Loan
Agreement. The Default Rate and the amount of such Excess Cash Flow to be so
paid shall be computed from the occurrence of the Event of Default until the
actual receipt and collection of the Date (or that portion thereof that is then
due). Interest at the Default Rate shall be added to the Debt and shall be
secured by the Mortgages. This paragraph, however, shall not be construed as an
agreement or privilege to extend the date of the payment of the Debt, nor as a
waiver of any other right or remedy accruing to Payee by reason of the
occurrence of any Event of Default.
6. Except as otherwise set forth in Section 2.3.2 of the Loan Agreement,
this Note may not be prepaid prior to the Optional Prepayment Date; provided,
however, Maker shall have the right and option to release any or all of the
Properties (as defined in the Loan Agreement) from the lien of the Mortgages in
accordance with the terms and provisions set forth in Section 2.3 and 2.4 of the
Loan Agreement (the "Defeasance Option"). On the Optional Prepayment Date or on
any Payment Date thereafter, the Maker may, at its option, prepay in whole or in
part the outstanding principal balance of this Note and any other amounts
outstanding without payment of the Yield Maintenance Premium (as defined in the
Loan Agreement) or any other premium or penalty in accordance with Section 2.3.2
of the Loan Agreement. If prior to the Optional Prepayment Date and following
the occurrence of any Event of Default, Maker shall tender payment of an amount
sufficient to satisfy the Debt at any time prior to a sale of an Individual
Property (as defined in the Loan Agreement), either through foreclosure or the
exercise of the other remedies available to Payee under the Mortgage, such
tender by Maker shall be deemed to be voluntary and Maker shall pay, in addition
to the Debt, the Yield Maintenance Premium, if any, that would be required under
the Defeasance Option.
7. It is expressly stipulated and agreed to be the intent of Maker and
Payee at all times to comply with applicable state law or applicable United
States federal law (to the extent that it permits Payee to contract for, charge,
take, reserve, or receive a greater amount of interest than under state law) and
that this paragraph shall control every other covenant and agreement in this
Note, the Loan Agreement, the Mortgages and the other Loan Documents. If the
applicable law (state or federal) is ever judicially interpreted so as to render
usurious any amount called for under this Note, the Loan Agreement, the
Mortgages or any of the other Loan Documents, or contracted for, charged, taken,
reserved, or received with respect to the Debt, or if Payee's exercise of the
option to accelerate the Maturity Date, or if any prepayment by Maker results in
Maker having paid any interest in excess of that permitted by applicable law,
then it is Maker's and Payee's express intent that all excess amounts
<PAGE>
5
theretofore collected by Payee shall be credited on the principal balance of
this Note and all other Debt and the provisions of this Note, the Loan
Agreement, the Mortgages and the other Loan Documents immediately be deemed
reformed and the amounts thereafter collectible hereunder and thereunder
reduced, without the necessity of the execution of any new documents, so as to
comply with the applicable law, but so as to permit the recovery to the fullest
amount otherwise called for hereunder or thereunder. All sums paid or agreed to
be paid to Payee for the use, forbearance, or detention of the Debt shall, to
the extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full stated term of the Debt until payment in full so that
the rate or amount of interest on account of the Debt does not exceed the
maximum lawful rate from time to time in effect and applicable to the Debt for
so long as the Debt is outstanding. Notwithstanding anything to the contrary
contained herein, the Loan Agreement, the Mortgages or in any of the other Loan
Documents, it is not the intention of Payee to accelerate the maturity of any
interest that has not accrued at the time of such acceleration or to collect
unearned interest at the time of such acceleration.
8. This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
Maker or Payee, but only by an agreement in writing signed by the party against
whom enforcement of any modification, amendment, waiver, extension, change,
discharge or termination is sought. Whenever used, the singular number shall
include the plural, the plural the singular, and the words "Payee" and "Maker"
shall include their respective successors, assigns, heirs, executors and
administrators. If Maker consists of more than one person or party, the
obligations and liabilities of each such person or party shall be joint and
several.
9. Maker and all others who become liable for the payment of all or any
part of the Debt do hereby severally waive presentment and demand for payment,
notice of dishonor, protest, notice of protest, notice of nonpayment, notice of
intent to accelerate the maturity hereof and of acceleration. No release of any
security for the Debt or any person liable for payment of the Debt, no extension
of time for payment of this Note or any installment hereof, and no alteration,
amendment or waiver of any provision of the Loan Documents made by agreement
between Payee and any other person or party shall release, modify, amend, waive,
extend, change, discharge, terminate or affect the liability of Maker, and any
other person or party who may become liable under the Loan Documents for the
payment of all or any part of the Debt.
10. The remedies of the holder hereof as provided in this Note or in any
of the Mortgages, Assignments of Leases or other Loan Documents shall be
cumulative and concurrent, and may be pursued singly, successively, or together
at
<PAGE>
6
the sole discretion of the holder hereof, and may be exercised as often as
occasion therefor shall occur, and the failure to exercise any such right or
remedy shall in no event be construed as a waiver or release thereof. Nothing
herein contained shall be construed as limiting the holder of the Note to the
remedies mentioned above; provided, however, that the liability of the Maker and
its general partner shall be limited by the "non-recourse" provisions of Section
9.4 of the Loan Agreement.
11. Maker (and the undersigned representative of Maker, if any) represents
that Maker has full power, authority and legal right to execute, deliver and
perform its obligations pursuant to this Note, the Loan Agreement, the Mortgages
and the other Loan Documents and that this Note, the Loan Agreement, the
Mortgages and the other Loan Documents constitute valid and binding obligations
of Maker.
12. If any term or provision of this Note or the application thereof to
any person or circumstance shall to any extent be invalid, illegal or
unenforceable, the remainder of this Note or the application of such term or
provision to persons or circumstances other than those as to which it is
invalid, illegal or unenforceable shall not be affected thereby.
13. All notices or other communications required or permitted to be given
pursuant hereto shall be given in the manner specified in the Loan Agreement
directed to the parties at their respective addresses as provided therein.
14. MAKER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE
OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT
ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN
DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION
THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY MAKER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE
AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE.
PAYEE IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS
CONCLUSIVE EVIDENCE OF THIS WAIVER BY MAKER.
15. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS) AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
<PAGE>
7
Maker has duly executed this Note the day and year first above written.
VPS I, L.P.,
a Delaware limited partnership
By: VPS, Inc.
its general partner
By:
---------------------------
Name:
Title:
Pay to the order of
------------------------,
without recourse.
NOMURA ASSET CAPITAL CORPORATION
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE>
EXHIBIT B
FORM OF MORTGAGE
[OMITTED]
<PAGE>
EXHIBIT C
FORM OF ASSIGNMENT OF LEASES
[OMITTED]
<PAGE>
EXHIBIT D
FORM OF ASSIGNMENT OF AGREEMENTS
[OMITTED]
<PAGE>
EXHIBIT E
FORM OF ENVIRONMENTAL INDEMNITY
[OMITTED]
<PAGE>
EXHIBIT F
FORM OF O&M AGREEMENT
[OMITTED]
<PAGE>
EXHIBIT G
FORM OF CONSENT AND
SUBORDINATION OF MANAGER
[OMITTED]
<PAGE>
EXHIBIT H
FORM OF MANAGEMENT AGREEMENT
[OMITTED]
<PAGE>
EXHIBIT 10.10
STOCKHOLDERS' AGREEMENT
dated as of October __, 1996
among
HOMEGATE HOSPITALITY, INC.
and
The Stockholders Listed on the Signature Pages Hereto
<PAGE>
STOCKHOLDERS' AGREEMENT
THIS STOCKHOLDERS' AGREEMENT (this "Agreement") is made and entered into as
of October __, 1996, by and among Homegate Hospitality, Inc., a Delaware
corporation ("Homegate"), and each of the Stockholders (as hereinafter defined)
listed on the signature pages hereto.
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. In addition to the terms defined elsewhere herein, the
-------------
following terms have the meanings set forth below when used in this Agreement
with initial capital letters:
Affiliate. With respect to any Person, any other Person controlling,
---------
controlled by or under common control with, the first Person. For purposes
of this definition and this Agreement, the term "control" (and correlative
terms) means the power, whether by contract, equity ownership or otherwise,
to direct the policies or management of a Person.
Business Day. Any day, excluding Saturday, Sunday and any day which
------------
is a legal holiday or a day on which banking institutions in New York City
or Dallas, Texas are authorized by law or other governmental actions to
close.
Covered Shares. Shares held by Stockholders that are subject to the
---------------
provisions of Article II as provided in section 4.5. If any Stockholder
holds Shares that are not Covered Shares ("Uncovered Shares"), Article II
will apply on a "last-in-first-out" basis, with the result that such
Stockholder may freely Transfer (as hereafter defined) a number of Shares
equal to up to the total number of Uncovered Shares held by such
Stockholder before the provisions of Article II apply to any Transfer of
Covered Shares.
Crow Principals. Harlan R. Crow, Leslie V. Bentley, James D.
---------------
Carreker, Anthony W. Dona, J. Ronald Terwilliger, Jack van Hartesvelt, and
Leonard W. Wood.
Crow Stockholder. The stockholders, other than the JMI/Greystar
----------------
Stockholders, listed on the signature page of this Agreement and the
Transferees of such stockholders (except a JMI/Greystar Stockholder)
authorized under this Agreement, excluding, however, a Transferee in an
Exempt Transfer or a Third-Party Sale.
<PAGE>
Exempt Transfer. Any (i) open-market sales of Shares by a Stockholder
---------------
pursuant to Rule 144 under the Securities Act or a shelf registration
statement filed with the Securities and Exchange Commission pursuant to the
Securities Act, (ii) Transfer of Shares by a Crow Stockholder to the direct
or indirect owners of equity interests in such Crow Stockholder, whether in
connection with the dissolution of such Crow Stockholder or otherwise, and
(iii) Transfer of Shares by JMI/Greystar to the direct or indirect owners
of equity interests in JMI/Greystar, whether in connection with the
dissolution of JMI/Greystar or otherwise.
Homegate Board. The board of directors of Homegate.
--------------
Immediate Family. The spouse of an individual and the parents,
----------------
children and grandchildren of the individual or his or her spouse. An
adopted child will be treated as the child of his or her adoptive parent or
parents if (but only if) he or she was adopted before he or she reached 21
years of age.
IPO. The initial public offering of Shares effected pursuant to that
---
certain Registration Statement on Form S-1 (No. 333-11113) filed by
Homegate with the Securities and Exchange Commission.
JMI/Greystar. JMI/Greystar Extended Stay Partners, L.P., a Delaware
------------
limited partnership.
JMI/Greystar's Allocable Percentage. A fraction, expressed as a
-----------------------------------
percentage, (i) the numerator of which is the sum of the number of Shares
owned by the JMI/Greystar Stockholders and (ii) the denominator of which is
the total number of outstanding Shares collectively owned by the
JMI/Greystar Stockholders and the Crow Stockholders.
JMI/Greystar Principals. John Moores, Charles E. Noell, and Robert A.
-----------------------
Faith.
JMI/Greystar Stockholders. JMI/Greystar and the Transferees of such
-------------------------
stockholder (except a Crow Stockholder) authorized under this Agreement,
excluding, however, a Transferee in an Exempt Transfer or a Third-Party
Sale.
Market Price. The closing sale price of the Shares on the date in
------------
question on the principal securities exchange (treating the Nasdaq National
Market as an exchange for such purpose) on which the Shares are traded.
Nomination Percentage. A fraction, expressed as a percentage, (i) the
---------------------
numerator of which is the sum of (a) the number of Shares owned by the
JMI/Greystar Stockholders, and (b) the number of Shares owned by the Crow
-2-
<PAGE>
Stockholders and (ii) the denominator of which is the total number of
Shares outstanding.
Permitted Transferee. (a) With respect to a Stockholder who is an
--------------------
individual, a member of the Immediate Family of the Stockholder or a trust
whose sole beneficiaries are members of the Immediate Family of the
Stockholder, (b) with respect to a Stockholder that is a corporation,
partnership or other entity (other than a trust), an equity owner of the
corporation, partnership or other legal entity, (c) with respect to a
Stockholder that is a trust, any member of the Immediate Family of the
grantor of the trust, and (d) with respect to Trammell Crow, Margaret Crow
and their direct descendants, a charitable trust or foundation that meets
the requirements of Section 501 (c) (3) of the Internal Revenue Code of
1986, as amended.
Person. Any individual or a legal entity.
------
Securities Act. The Securities Act of 1933, as amended.
--------------
Shares. The common stock, $.01 par value per share, of Homegate.
-------
Stockholder Group. The Crow Stockholders, as a group, or the
-----------------
JMI/Greystar Stockholders, as a group.
Stockholders. The Crow Stockholders and the JMI/Greystar
------------
Stockholders.
Third Party Sale. As defined in section 2.1(b)(i).
----------------
Transfer. As defined in section 2.1(a)(i).
--------
-3-
<PAGE>
ARTICLE II
TRANSFERS OF SHARES
-------------------
2.1 Transfers of Shares.
-------------------
(a) Restriction on Transfers.
------------------------
(i) General Rule. No Stockholder may effect any direct or indirect
------------
sale, transfer, pledge or other disposition, whether directly or in connection
with or as a result of any merger, consolidation or other transaction that
results in any Person not included within the categories of authorized
Transferees specified in Section 2.1(a)(ii) obtaining beneficial ownership of
Covered Shares (any such direct or indirect sale, transfer, pledge or other
disposition being a "Transfer"), except in connection with an Exempt Transfer or
otherwise in accordance with this Agreement. As to any Stockholder that is a
legal entity and does not have assets, other than Shares, valued, on a cost
basis, in excess of $1,000,000, any direct or indirect sale, transfer, pledge or
other disposition of any equity interest in such Stockholder which, in one or a
series of transactions, involves in the aggregate more than a 50% equity
interest in such Stockholder will be a "Transfer" for purposes of this Agreement
unless such direct or indirect sale, transfer, pledge or other disposition is
solely to other existing equity holders of such entity. Notwithstanding the
foregoing, any transfer that might otherwise be deemed to result from the merger
or consolidation of Homegate with or into another entity or any recapitalization
of the Shares shall not be deemed to constitute a "Transfer" for purpose of this
Agreement.
(ii) Permitted Transfers. Any Stockholder may Transfer any Shares (A)
-------------------
to any wholly-owned Affiliate of the Stockholder, (B) to any Person who is a
Permitted Transferee, (C) to Trammell or Margaret Crow or any lineal descendant
of Trammell and Margaret Crow or any trust of which not less than 75% of the
beneficial interests are held by Trammell or Margaret Crow or such lineal
descendants or any partnership, corporation or other entity of which not less
than 75% of the outstanding equity interests are owned directly or indirectly by
Trammell or Margaret Crow or such descendants (collectively, the "Crow
Interests"), (D) to Homegate, to any then-existing Crow Stockholder or
JMI/Greystar Stockholder or to any individual employed substantially full time
in Homegate's business as a senior executive officer, (E) as a pledge to secure
indebtedness, provided that the pledgee agrees that, upon any foreclosure of the
pledge, the pledgee shall immediately comply with the provisions of Section
2.1(d) below with respect to the pledged Shares and (F) to the owners of equity
interests in a Stockholder upon a partial or complete liquidation or dissolution
of such Stockholder. Each Transfer permitted by this Section 2.1(a)(ii) will
also require the execution and delivery of an instrument in form and substance
satisfactory to the Homegate Board pursuant to which the Transferee agrees to be
bound by this Agreement.
(b) Procedures for Effecting Third-Party Sales.
------------------------------------------
-4-
<PAGE>
(i) Right of First Offer. Prior to consummating any Transfer of
--------------------
Covered Shares to any Person, other than in connection with an Exempt Transfer
or as permitted pursuant to Section 2.1(a)(ii) (a "Third-Party Sale"), the
Stockholder proposing to effect the Third Party Sale (the "Offering
Stockholder") will deliver to each of the other Stockholders and to Homegate a
written Notice (an "Offer Notice") specifying (A) the aggregate amount of cash
consideration (the "Offer Price") for which the Offering Stockholder proposes in
good faith to sell the Shares to be offered in such Third-Party Sale (the
"Offered Shares"), (B) the identity of the purchaser in such Third-Party Sale,
and (C) all other material terms of the proposed Third-Party Sale. The
procedures set forth in this Section 2.1(b) shall be subject to the special
provisions set forth below in Sections 2.1(c) and (d) with respect to proposed
Third Party Sales in connection with an underwritten public offering and pledge
foreclosures.
(ii) Rights To Purchase Offered Shares. For purposes of this
---------------------------------
agreement, (A) the JMI/Greystar Stockholders (collectively and as they may
allocate among themselves as set forth below) will be the "Non-Offering
Stockholder" with respect to a proposed Third-Party Sale by any Crow
Stockholder, and (B) the Crow Stockholders (collectively and as they may
allocate among themselves as set forth below) will be the "Non-Offering
Stockholder" with respect to a proposed Third Party Sale by any JMI/Greystar
Stockholder. If a Non-Offering Stockholder delivers to the Offering Stockholder
a written Notice (an "Acceptance Notice") within 10 Business Days following
delivery of the Offer Notice (such 10 Business Day period being referred to
herein as the "ROFO Acceptance Period") stating that such Non-Offering
Stockholder is willing to purchase all of the Offered Shares for the Offer Price
and on the other terms set forth in the Offer Notice, the Offering Stockholder
will sell all (but not less than all) of the Offered Shares to such Non-Offering
Stockholder, and such Non-Offering Stockholder will purchase such Offered Shares
from the Offering Stockholder, on the proposed terms and subject to the
conditions set forth below. In such case,
(A) the JMI/Greystar Stockholders, with the Offered Shares allocated
(unless otherwise agreed by the JMI/Greystar Stockholders requesting to
purchase Offered Shares) based on the number of Shares owned by each of the
JMI/Greystar Stockholders who request to purchase Offered Shares, will be
the "Purchasing Stockholder" with respect to a proposed Third-Party Sale by
any Crow Stockholder, and
(B) the Crow Stockholders, with the Offered Shares allocated (unless
otherwise agreed by the Crow Stockholders requesting to purchase Offered
Shares) based on the number of Shares owned by each of the Crow
Stockholders who request to purchase Offered Shares, will be the
"Purchasing Stockholder" with respect to a proposed Third-Party Sale by any
JMI/Greystar Stockholder,
provided, however, that in no event will any Stockholder be required to purchase
- -----------------
in excess of the number of Offered Shares requested to be purchased by such
Stockholder.
-5-
<PAGE>
(iii) The ROFO Closing. The consummation of any purchase of the
----------------
Offered Shares by the Purchasing Stockholder pursuant to this Section 2.1(b)
(the "ROFO Closing") will occur no more than 10 Business Days following the
delivery of the Acceptance Notice (such 10 Business Day period being referred to
herein as the "ROFO Closing Period") at such time and place as may be agreed
upon by the Offering Stockholder and the Purchasing Stockholder or, if such
parties fail to agree to such time and place, at the principal executive offices
of Homegate at 10:00 a.m. (Central Time) on the tenth Business Day following the
delivery of the Acceptance Notice. At the ROFO Closing, (A) the Purchasing
Stockholder will deliver to the Offering Stockholder by certified or official
bank check or wire transfer to an account designated by the Offering Stockholder
an amount in immediately available funds equal to the Offer Price, (B) the
Offering Stockholder will deliver one or more certificates evidencing the
Offered Shares, together with such other duly executed instruments or documents
(executed by the Offering Stockholder) as may be reasonably requested by the
Purchasing Stockholder to acquire the Offered Shares free and clear of any and
all claims, liens, pledges, charges, encumbrances, security interests, options,
trusts, commitments and other restrictions of any kind whatsoever (collectively,
"Encumbrances"), except for Encumbrances created by this Agreement, federal or
state securities laws or the Purchasing Stockholder or as specified in the Offer
Notice, and (C) the Offering Stockholder will be deemed to represent and warrant
to the Purchasing Stockholder that, upon the ROFO Closing, the Offering
Stockholder will convey and the Purchasing Stockholder will acquire the entire
record and beneficial ownership of, and good and valid title to, the Offered
Shares, free and clear of any and all Encumbrances, except for Encumbrances
created by this Agreement, federal and state securities laws or the Purchasing
Stockholder or as described in the Offer Notice.
(iv) Right To Consummate Third-Party Sale. If no Acceptance Notice
------------------------------------
relating to the proposed Third-Party Sale is delivered to the Offering
Stockholder prior to the expiration of the ROFO Acceptance Period, or an
Acceptance Notice is so delivered to the Offering Stockholder but the ROFO
Closing fails to occur prior to the expiration of the ROFO Closing Period
(unless the Purchasing Stockholder was ready, willing and able prior to the
expiration of the ROFO Closing Period to consummate the transactions to be
consummated by the Purchasing Stockholder at the ROFO Closing), the Offering
Stockholder may (without affecting its rights, if any, arising out of such
failure) consummate the Third Party Sale, but only (A) during the 60 calendar
day period immediately following the expiration of the ROFO Acceptance Period
(in the event that no Acceptance Notice was timely delivered to the Offering
Stockholder) or the 60 calendar day period immediately following the expiration
of the ROFO Closing Period (in the event that an Acceptance Notice was timely
delivered to the Offering Stockholder but the ROFO Closing failed timely to
occur), (B) at a price at least equal to 95% of the Offer Price, and (C) upon
other terms not materially less favorable to the Offering Stockholder than those
set forth in the Offer Notice.
(c) Special Procedures Applicable to Proposed Underwritten Offerings. The
----------------------------------------------------------------
procedures set forth above in Section 2.1(b) will be applicable to proposed
Third Party Sales in connection with an underwritten public offering (a "Public
Offering") except that (i) the Offer Price shall be a good faith estimate by the
Offering Stockholder of the price to the public at which the Offering
Stockholder
-6-
<PAGE>
would be willing to sell in the proposed Public Offering (the "Public Offering
Estimate") and (ii) if, as described in Section 2.1(b)(iv), an Acceptance Notice
is not delivered or a sale to the Non-Offering Stockholder does not occur, the
Offering Stockholder may consummate the Third-Party Sale in the proposed Public
Offering without regard to the price at which such Third-Party Sale is
completed, but only if the Public Offering is consummated during the 150
calendar day period immediately following the expiration of the ROFO Acceptance
Period.
(d) Special Procedures Applicable to Pledge Foreclosures. Within 10
-----------------------------------------------------
Business Days following the foreclosure of a pledge of Shares permitted under
Section 2.1(a)(ii)(E), the pledgee shall send an Offer Notice pursuant to
Section 2.1(b)(i) and the procedures set forth in Section 2.1(b) shall apply to
such Offer Notice, except that (i) the Non-Offering Stockholder shall be the
Crow Stockholders in the case of a pledge by a JMI/Greystar Stockholder and the
JMI/Greystar Stockholders shall be the Non-Offering Stockholder in the case of a
pledge by a Crow Stockholder and (ii) the Offer Price shall be the Market Price
on the Business Day immediately preceding the date of the Offer Notice.
(e) Unauthorized Transfers. Any purported Transfer of Shares in violation
----------------------
of this Agreement (an "Unauthorized Transfer") will be null and void. Homegate
will not register, recognize or give effect to any Unauthorized Transfer, and
the purported Transferee of any Shares pursuant to an Unauthorized Transfer will
not thereby acquire any rights in such Shares.
ARTICLE III
CERTAIN CORPORATE GOVERNANCE MATTERS
------------------------------------
3.1 Board of Directors. The Company and the Stockholders agree that the
------------------
Homegate Board will consist of between 5 and thirteen directors, with the
precise number of directors fixed from time to time by a majority of the entire
Homegate Board then in office.
3.2 Right to Nominate Directors.
---------------------------
(a) The JMI/Greystar Stockholders and the Crow Stockholders will each be
entitled to nominate a portion of the Homegate Board. With respect to each
nomination of directors (or election of directors effected by the Homegate Board
to fill vacancies on the Homegate Board), the Company hereby agrees to nominate
(or elect) as directors such designees (the "Stockholder Nominees") of the
JMI/Greystar Stockholders and the Crow Stockholders as shall be required in
order that the percentage of the entire Homegate Board thereafter represented by
the Stockholder Nominees (taking into account then sitting directors who were
nominated by the JMI/Greystar Stockholders or the Crow Stockholders and assuming
the election of the nominees then being designated) is equal to the nearest
whole number obtained by multiplying the Nomination Percentage times the number
of directors that are to serve on the Homegate Board.
-7-
<PAGE>
(b) With respect to the Stockholder Nominees,
(i) the JMI/Greystar Stockholders (acting with the approval of the
holders of a majority of the Shares held by the JMI/Greystar Stockholders) shall
be entitled to nominate that portion of the Stockholder Nominees that is equal
to the nearest whole number obtained by multiplying the JMI/Greystar Allocable
Percentage times the number of Stockholder Nominees. Each director nominated by
the JMI/Greystar Stockholders shall be a JMI/Greystar Principal or such other
director as is reasonably acceptable to the Crow Stockholders; and
(ii) the Crow Stockholders (acting with the approval of the holders
of a majority of the Shares held by Crow Stockholders) shall be entitled to
nominate all of the Stockholder Nominees other than those that the JMI/Greystar
Stockholders have the right to nominate. Each director nominated by the Crow
Stockholders shall be a Crow Principal or such other director as is reasonably
acceptable to the JMI/Greystar Stockholders.
3.3 Election of Stockholder Nominees.
--------------------------------
(a) Each Stockholder will use its best efforts to cause the Stockholder
Nominees to be elected in any and all elections of directors of Homegate held
during the term of this Agreement. Notwithstanding any other provision of this
Agreement, however, no Stockholder will be required to cause the election of any
Stockholder Nominee, or to support the continued service of any Stockholder
Nominee, if the Homegate Board determines in good faith, based as to legal
matters on the advice of outside counsel, that the election or continued service
of such Stockholder Nominee would be inconsistent with the fiduciary duty owed
by the Homegate Board to all the stockholders of Homegate; provided, however,
-----------------
that the foregoing shall not detract from the right of the Stockholder Group who
nominated such Stockholder Nominee to nominate another Stockholder Nominee for
such position.
(b) Without limiting the generality or effect of Section 3.3(a), each
Stockholder will vote or cause to be voted for the election of the Stockholder
Nominees in any and all elections of directors of Homegate held during the term
of this Agreement all Shares that such Stockholder has the power to vote or in
respect of which such Stockholder has the power to direct the vote.
3.4 Vacancies Among Stockholder Nominees. If a Stockholder Group fails at
------------------------------------
any time to nominate the maximum number of persons for election to the Board
that such Stockholder Group is entitled to nominate pursuant to Section 3.2,
each directorship in respect of which such Stockholder Group so failed to make a
nomination will remain vacant unless such vacancy results in there being fewer
than the minimum number of directors required by law, in which case such vacancy
or vacancies will be filled by a person or persons selected by a majority of the
directors of Homegate then in office.
-8-
<PAGE>
3.5 Removal of Stockholder Nominees. If at any time a Stockholder Group
-------------------------------
shall notify Homegate in writing of its desire to have removed from the Homegate
Board, with or without cause, any Stockholder Nominee that was nominated by such
Stockholder Group, each of the Stockholders will, if necessary, subject to all
applicable requirements of law, use its best efforts to take or cause to be
taken all such action as may be required to remove such Stockholder Nominee from
the Homegate Board. Subject to the immediately preceding sentence, no
Stockholder will vote or cause to be voted any Shares that such Stockholder has
the power to vote or in respect of which such Stockholder has the power to
direct the vote for the removal, other than for cause, of any Stockholder
Nominee nominated solely by the other Stockholder Group without the prior
written consent of such other Stockholder Group (which shall be by action of the
holders of a majority of the Shares held by such other Stockholder Group). The
foregoing provisions shall be without prejudice to the right of the stockholders
of Homegate to remove directors for cause as provided by the Delaware General
Corporation Law.
ARTICLE IV
MISCELLANEOUS
-------------
4.1 Notices. All notices, demands, consents, approvals, requests or other
-------
communications which any of the parties to this Agreement may desire or be
required to give hereunder (collectively, "Notices") will be in writing and will
be given by (a) personal delivery, (b) facsimile transmission, or (c) Federal
Express or another nationally recognized overnight courier service, fees
prepaid, addressed as follows:
If to Homegate or to any JMI/Greystar Stockholder, to:
Two Riverway, Suite 850
Houston, Texas 77056
Attn: Robert A. Faith
Facsimile (713) ________
If to any Crow Stockholder, to:
Suite 3200
2001 Ross Avenue
Dallas, Texas 75201
Attn: Anthony W. Dona
Facsimile (214) 979-6249
Any party hereto may designate another addressee (and/or change its address) for
Notices hereunder by a Notice given pursuant to this Section. A Notice sent in
compliance with the provisions of this Section will be deemed given on the date
of receipt.
-9-
<PAGE>
4.2 Successors and Assigns. This Agreement will be binding upon the
----------------------
parties hereto and their respective successors and assigns, and will inure to
the benefit of the parties hereto and, except as otherwise provided herein,
their respective successors and assigns, provided, however, that this Agreement
-----------------
shall not be binding upon or inure to the benefit of any Transferee in an Exempt
Transfer or a Third-Party Sale. Except in connection with any Transfers
permitted by Article II, neither this Agreement nor any right or obligation
hereunder may be assigned or delegated by any party hereto without the prior
written consent of the other parties hereto.
4.3 Extension Not a Waiver. No delay or omission in the exercise of any
----------------------
power, remedy or right herein provided or otherwise available to any party
hereto will impair or affect the right of such party thereafter to exercise the
same, except as expressly provided herein to the contrary. Any extension of
time or other indulgence granted to any party hereunder will not otherwise alter
or affect any power, remedy or right of any other party hereto, or the
obligations of the party to whom such extension or indulgence is granted.
4.4 Entire Agreement; Amendments. This Agreement sets forth the entire
----------------------------
agreement between the parties relating to the subject matter hereof and all
prior agreements relative thereto which are not contained herein are terminated.
Amendments, variations, modifications or changes herein may be made effective
and binding upon the parties hereto by, and only by, a written agreement duly
executed by each of (a) Homegate, (b) the holders of at least a majority of the
Shares held by the Crow Stockholders and (c) the holders of at least a majority
of the Shares held by the JMI/Greystar Stockholders and any alleged amendment,
variation, modification, or change herein which is not so documented will not be
effective as to any party hereto.
4.5 After-Acquired Shares. The provisions of Article II of this Agreement
----------------------
restricting the Transfer of Shares will apply to and include (i) all Shares
owned by the Stockholders on the date hereof until they are Transferred in an
Exempt Transfer or Third-Party Sale and (ii) all voting securities received in
respect of Shares that remain subject to clause (i) in connection with any
merger or consolidation of Homegate with or into another entity or any
recapitalization or stock split of, or stock dividend on, such Shares, but such
provisions will not otherwise apply to Shares or other voting securities
acquired by a Stockholder after the date hereof.
4.6 Counterparts. This Agreement may be executed in counterparts, each of
------------
which will be an original, but all of which together will constitute but one and
the same agreement.
4.7 Expenses. Each party hereto will bear its own legal and other
--------
expenses incurred in connection with the preparation, execution and performance
of this Agreement.
4.8 Arbitration.
-----------
(a) Any dispute relating to this Agreement or the performance by the
parties of their respective obligations under this Agreement, which is not
resolved after the parties' attempt at
-10-
<PAGE>
amicable negotiations, will be finally settled by arbitration. If such a dispute
arises, any party hereto may initiate arbitration proceedings by filing a demand
for arbitration with the other parties and the Dallas, Texas office of the
American Arbitration Association ("AAA").
(b) All the arbitration proceedings will be conducted in accordance with
the rules of the AAA and will be held in Dallas, Texas. Within a reasonable
period of time following the conclusion of such proceedings, the arbitration
panel will render a written decision. Decisions of the arbitration panel will
be made by a majority of the panel members. The decision rendered by the
arbitration panel will be final and binding and be enforceable by appropriate
action brought in any state or federal court of competent jurisdiction.
4.9 Further Assurances. Each of the parties will, at any time, upon the
------------------
request of another party hereto, take or cause to be taken, all actions and do,
or cause to be done, all things (including, without limitation, executing,
acknowledging and delivering any additional agreements, instruments and
documents) as may be reasonably necessary, proper or advisable in order to
consummate or make effective the intentions, purposes and transactions
contemplated by this Agreement.
4.10 Legend. A legend referring to the restrictions imposed by this
------
Agreement may be placed upon any certificate issued to evidence Shares.
4.11 Termination. This Agreement (a) may be terminated at any time by an
-----------
instrument duly executed by (i) Homegate, (ii) the holders of at least a
majority of the Shares held by Crow Stockholders and (iii) the holders of at
least a majority of the Shares held by JMI/Greystar Stockholders and (b) will
terminate without further action upon the the earliest of (i) the first date on
which the JMI/Greystar Stockholders and the Crow Stockholders have beneficial
ownership (as that term is defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) of less than 20%, in the aggregate, of the outstanding
Shares of Homegate, (ii) the first date on which the JMI/Greystar Principals, or
any of them, do not control the business and affairs of the JMI/Greystar
Stockholders, including the voting and disposition of Shares, unless the
foregoing occurs by reason of the death of the last of such individuals to
control such business and affairs, in which case this Agreement shall not
terminate if within 90 days thereafter a replacement satisfactory to the Crow
Stockholders is placed in control and such replacement (or a subsequent
replacement who is likewise so satisfactory) remains in control at all times
thereafter, or (iii) any distribution or other Transfer of Shares by the
JMI/Greystar Stockholders to direct or indirect owners of equity interests in
the JMI/Greystar Stockholders which results in the Shares being held by any
Person other than a JMI/Greystar Principal or a Person controlled by a
JMI/Greystar Principal.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
HOMEGATE HOSPITALITY, INC., a
Delaware corporation
-11-
<PAGE>
By: ______________________________
Name:_____________________________
Title:____________________________
STOCKHOLDERS:
JMI/GREYSTAR EXTENDED STAY
PARTNERS, L.P., a Delaware limited
partnership
By: Greystar Holdings, Inc., a _________
corporation, its sole general partner
By: _________________________
Name: _______________________
Title: ______________________
CROW FAMILY, INC., a __________
corporation
By:________________________________
Name:______________________________
Title:_____________________________
CRI/ESH Partners, L.P., a Texas limited
partnership
By: Crow Family, Inc., a __________
corporation
By: _________________________
Name: _______________________
-12-
<PAGE>
Title: _______________________
------------------------------------
J. Ronald Terwilliger
------------------------------------
Leonard W. Wood
-13-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), is made and entered
into as of October ___, 1996, by and among Homegate Hospitality, Inc., a
Delaware corporation (the "Company"), and the other parties signatory hereto.
RECITALS
--------
WHEREAS, the parties hereto are to become owners of Common Stock (as
hereinafter defined) prior to the completion of the Company's initial public
offering;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, the following terms have
-----------
the following meanings when used herein with initial capital letters:
Advice: As defined in Section 5 hereof.
------
Common Stock: The Common Stock, par value $0.01 per share, of the
------------
Company.
Demand Notice: As defined in Section 2 hereof.
-------------
Demand Registration: As defined in Section 2 hereof.
-------------------
Losses: As defined in Section 7 thereof.
------
Piggyback Registration: As defined in Section 3 hereof.
----------------------
Prospectus: The prospectus included in any Registration Statement
----------
(including without limitation a prospectus that discloses information previously
omitted from a prospectus filed as part of an effective registrations statement
in reliance upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by such
Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
Registrable Securities: The Shares and other shares of Common Stock
----------------------
held by a party that are not already saleable by such party without
registration, upon the respective original issuance thereof, and at all times
subsequent thereto, until, in the case of any such security, (i) it is
effectively registered under the Securities Act and disposed of in accordance
with the Registration Statement
1
<PAGE>
covering it, (ii) it is saleable by the holder thereof pursuant to Rule 144(k),
or (iii) it is distributed to the public by the holder thereof pursuant to Rule
144.
Registration Expenses: As defined in Section 6 hereof.
---------------------
Registration Statement: Any registration statement of the Company
----------------------
under the Securities Act that covers any of the Registrable Securities pursuant
to the provisions of this Agreement, including the related Prospectus, all
amendments and supplements to such registration statement (including post-
effective amendments), all exhibits and all material incorporated by reference
or deemed to be incorporated by reference in such registration statement.
Rule 144: Rule 144 under the Securities Act, as such Rule may be
--------
amended from time to time, or any similar rule or regulation hereafter adopted
by the SEC.
SEC: The Securities and Exchange Commission.
---
Securities Act: The Securities Act of 1933, as amended.
--------------
Shares: All shares of Common Stock acquired by any party hereto
------
(other than the Company) as a result of the merger of Extended Stay Limited
Partnership with and into the Company.
Special Counsel: As defined in Section 6(b) hereof.
---------------
Underwritten registration or underwritten offering: A registration in
--------------------------------------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.
2. Demand Registration.
-------------------
(a) Requests for Registration. At any time and from time to time
-------------------------
after the date that is one year following the date of this Agreement, one or
more holders of Registrable Securities will have the right, by written notice
delivered to the Company (a "Demand Notice"), to require the Company to register
( a "Demand Registration") Registrable Securities under and in accordance with
the provisions of the Securities Act; provided, however, that (i) no such Demand
-------- -------
Registration may be required unless the total amount of Registrable Securities
sought to be included in such Demand Registration has a market value of least
$20,000,000 (calculated based on the closing sale price of such securities on
the principal securities exchange on which such securities are listed on the
business day immediately preceding the date of the Demand Notice) as of the time
a Demand Notice is given and (ii) no Demand Notice may be given prior to six
months after the effective date of the immediately preceding Demand
Registration. Notwithstanding the foregoing, a good faith decision by a holder
to withdraw Registrable Securities from registration will not affect the
Company's obligations hereunder even if the amount remaining to be registered
has a market value of less than $20,000,000 (calculated as aforesaid). Subject
to the foregoing, there shall be no limit on the number of Demand Registrations
that may be required pursuant to this Agreement.
2
<PAGE>
(b) Filing and Effectiveness. The Company will file a Registration
------------------------
Statement relating to any Demand Registration within 60 calendar days of the
date on which the Demand Notice is given and will use all reasonable efforts to
cause the same to be declared effective by the SEC within 120 calendar days of
the date on which the holders of Registrable Securities first give the Demand
Notice required by Section 2(a) hereof with respect to such Demand Registration.
All requests made pursuant to this Section 2 will specify the number of
Registrable Securities to be registered and will also specify the intended
methods of disposition thereof.
If any Demand Registration is requested to be effected as a "shelf"
registration by the holders of Registrable Securities demanding such Demand
Registration, the Company will keep the Registration Statement filed in respect
thereof effective for a period of up to six months from the date on which the
SEC declares such Registration Statement effective (subject to extension
pursuant to Sections 5 and 6 hereof) or such shorter period that will terminate
when all Registrable Securities covered by such Registration Statement have been
sold pursuant to such Registration Statement.
Within ten calendar days after receipt of such Demand Notice, the Company
will serve written notice thereof (the "Notice") to all other holders of
Registrable Securities and will, subject to the provisions of Section 2(c)
hereof, include in such registration all Registrable Securities with respect to
which the Company receives written requests for inclusion therein within 20
calendar days after the receipt of the Notice by the applicable holder. The
holders of Registrable Securities will be permitted to withdraw in good faith
all of part of the Registrable Securities from a Demand Registration at any time
prior to the effective date of such Demand Registration, in which event the
Company will promptly amend or, if applicable, withdraw the related Registration
Statement.
(c) Priority on Demand Registration. If Registrable Securities are to
-------------------------------
be registered pursuant to a Demand Registration, the Company shall provide
written notice to the other holders of Registrable Securities and will permit
all such holders who request to be included in the Demand Registration to
include any and all Registrable Securities held by such holders in such Demand
Registration. Notwithstanding the foregoing, if the managing underwriter or
underwriters of an underwritten offering to which such Demand Registration
relates advises the holders of Registrable Securities that the total amount of
Registrable Securities that such holders intend to include in such Demand
Registrable is in the aggregate such as to materially and adversely affect the
success of such offering, then the number of Registrable Securities to be
included in such Demand Registration will, if necessary, be reduced and there
will be included in such underwritten offering the number of Registrable
Securities that, in the opinion of such managing underwriter or underwriters,
can be sold without materially and adversely affecting the success of such
offering, allocated pro rata among the holders of Registrable Securities on the
--- ----
basis of the amount of Registrable Securities requested to be included therein
by each such holder.
(d) Postponement of Demand Registration. The Company will be entitled
-----------------------------------
to postpone the filing period of any Demand Registration for a reasonable period
of time not in excess of 90 calendar days, if the Company determines, in the
good faith exercise of the business judgment of its Board of Directors, that
such registration and offering could materially interfere with bona fide
---- ----
financing plans of the Company or would require disclosure of information, the
premature disclosure
3
<PAGE>
of which could materially and adversely affect the Company. If the Company
postpones the filing of a Registration Statement, it will promptly notify the
holders of Registrable Securities in writing when the events or circumstances
permitting such postponement have ended.
3. Piggyback Registration.
----------------------
(a) Right to Piggyback. If at any time the Company proposes to file a
------------------
registration statement under the Securities Act with respect to a primary
offering of any class of equity securities (or securities convertible into,
exchangeable for or exercisable for a class of equity securities of the Company)
by the Company (other than a registration statement (i) on Form S-4, S-8 or any
successor form thereto, (ii) filed in connection with an exchange offer or an
offering of securities solely to the Company's existing stockholders or (iii)
filed solely in connection with an offering made solely to employees of the
Company), then the Company will give written notice of such proposed filing to
the holders of Registrable Securities at least 30 calendar days before the
anticipated filing date. Such notice will offer such holders the opportunity to
register such amount of Registrable Securities as each such holder may request
(a "Piggyback Registration"). Subject to Section 3(b) hereof, the Company will
include in each such Piggyback Registration all Registrable Securities with
respect to which the Company has received written requests for inclusion
therein. The holders of Registrable Securities will be permitted to withdraw
all or part of the Registrable Securities from a Piggyback Registration at any
time prior to the effective date of such Piggyback Registration.
(b) Priority on Piggyback Registrations. The Company will cause the
-----------------------------------
managing underwriter or underwriters of a proposed underwritten offering on
behalf of the Company to permit holders of Registrable Securities requested to
be included in the registration for such offering to include therein all such
Registrable Securities requested to be so included on the same terms and
conditions as any securities of the Company included therein. Notwithstanding
the foregoing, if the managing underwriter or underwriters of such offering
deliver an opinion to the holders of Registrable Securities to the effect that
the total amount of securities which such holders and the Company propose to
include in such offering is such as to materially and adversely affect the
success of such offering, then the amount of securities to be included therein
for the account of holders of Registrable Securities (allocated pro rata among
--- ----
such holders on the basis of the Registrable Securities requested to be included
therein by each such holder) will be reduced (to zero if necessary) to reduce
the total amount of securities to be included in such offering to the amount
recommended by such managing underwriter or underwriters. The managing
underwriter or underwriters, applying the same standard, may also exclude
entirely from such offering all Registrable Securities proposed to be included
in such offering to the extent the Registrable Securities are not of the same
class as securities of the Company included in such offering.
(c) Registration of Securities Other than Registrable Securities.
------------------------------------------------------------
Without the written consent of the holders of 66 2/3% of the then-outstanding
Registrable Securities and an appropriate amendment to this Agreement pursuant
to Section 10(c), the Company will not grant to any person the right to request
the Company to register any securities of the Company under the Securities Act,
provided, however, that with the consent of the holders of a majority of the
then-outstanding Registrable Securities, the Company may grant to any person the
same rights as the
4
<PAGE>
rights of a holder of Registrable Securities under this Agreement, either by an
amendment making such person a party to this Agreement or pursuant to a separate
agreement.
4. Restrictions on Sale by Holders of Registrable Securities. Each
---------------------------------------------------------
holder of Registrable Securities agrees, if such holder is so requested
(pursuant to a timely written notice) by the managing underwriter or
underwriters in an underwritten agreement of any class of securities that
constitutes Registrable Securities, not to effect any public sale or
distribution of any of the Company's securities of such class (except as part of
such underwritten offering), including a sale pursuant to Rule 144, during the
10-calendar day period prior to, and during the 90-calendar day period,
beginning on, the closing date of such underwritten offering.
5. Registration Procedures. In connection with the Company's
-----------------------
registration obligations pursuant to Sections 2 and 3 hereof, the Company will
effect such registrations to permit the sale of such Registrable Securities in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto the Company will as expeditiously as possible, in each case, to
the extent applicable:
(a) Prepare and file with the SEC a Registration Statement or
Registration Statements on any appropriate form under the Securities Act
available for the sale of the Registrable Securities by the holders thereof in
accordance with the intended method or methods of distribution thereof, and
cause each such Registration Statement to become effective and remain effective
as provided herein; provided, however, that before filing a Registration
-------- -------
Statement or Prospectus or any amendments or supplements thereto (including
documents would be incorporated or deemed to be incorporated thereby by
reference) the Company will furnish to the holders of the Registrable Securities
covered by such Registration Statement, the Special Counsel and the managing
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be subject to the review of such holders, the Special Counsel and
such underwriters, and the Company will not file any such Registration Statement
or amendment thereto or any Prospectus or any supplement thereto (including such
documents which, upon filing, would or would be incorporated or deemed to be
incorporated by reference therein) to which the holders of a majority of the
Registrable Securities covered by such Registration Statement, the Special
Counsel or the managing underwriter, if any, shall reasonably object on a timely
basis.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the applicable period
specified in Section 2; cause the related Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 (or any similar provisions then in force) under the Securities Act; and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement as so amended or to such
Prospectus as so supplemented.
(c) Notify the selling holders of Registrable Securities, the Special
Counsel and the managing underwriters, if any, promptly, and (if requested by
any such person) confirm such
5
<PAGE>
notice in writing, (i) when a Prospectus or any Prospectus supplement or post-
effective amendment has been filed, and, with respect to a Registration
Statement or any post-effective amendment, when the same has become effective,
(ii) of any request by the SEC or any other federal or state governmental
authority for amendments or supplements to a Registration Statement or related
Prospectus or for additional information, (iii) of the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iv) if at any time the representations and
warranties of the Company contained in any agreement contemplated by Section
5(n) hereof (including any underwriting agreement) cease to be true and correct,
(v) of the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, (vi) of the occurrence of any
event which makes any statement made in such Registration Statement or related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or which requires the making of any
changes in a Registration Statement, Prospectus or documents so that, in the
case of the Registration Statement, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and, in the case of
the Prospectus, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated or is necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and (vii) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.
(d) Use every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement, or the lifting of any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest possible
moment.
(e) If requested by the managing underwriters, if any, or the holders
of a majority of the Registrable Securities being registered, (i) promptly
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters, if any, and such holder agree should
be included therein as may be required by applicable law and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company will not be required to take any
-------- -------
actions under this Section 5(e) that are not, in the opinion of counsel for the
Company, in compliance with applicable law.
(f) Furnish to each selling holder of Registrable Securities, the
Special Counsel and each managing underwriter, if any, without charge, at least
one conformed copy of the Registration Statement and any post-effective
amendment thereto, including financial statements (but excluding schedules, all
documents incorporated or deemed to be incorporated therein by reference and all
exhibits, unless requested in writing by such holder, counsel or underwriter).
6
<PAGE>
(g) Deliver to each selling holder of Registrable Securities, the
Special Counsel and the underwriters, if any, without charge, as many copies of
the Prospectus or Prospectuses relating to such Registrable Securities
(including each preliminary prospectus) and any amendment or supplement thereto
as such persons may reasonably request; and the Company hereby consents to the
use of such Prospectus or each amendment or supplement thereto by each of the
selling holders or Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus or any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, to
register or qualify or cooperate with the selling holders of Registrable
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions within the United States as
any seller or underwriter reasonably requests in writing; use all reasonable
efforts to keep each such registration or qualification (or exemption therefrom)
effective during the period such Registration Statement is required to be kept
effective and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdiction of the Registrable Securities
covered by the applicable Registration Statement; provided, however, that the
-------- -------
Company will not be required to (i) qualify generally to do business in any
jurisdiction in which it is not then so qualified or (ii) take any action that
would subject it to any general service of process in any such jurisdiction in
which it is not then so subject.
(i) Cooperate with the selling holders of Registrable Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and
enable such Registrable Securities to be in such denominations and registered in
such names as the managing underwriters, if any, shall request at least two
business days prior to any sale of Registrable Securities to the underwriters.
(j) Use all reasonable efforts to cause the Registrable Securities
covered by the applicable Registration Statements to be registered with or
approved by such other governmental agencies or authorities within the United
States except as may be required solely as a consequence of the nature of such
selling holder's business, in which case the Company will cooperate in all
reasonable respects with the filing of such Registration Statement and the
granting of such approvals as may be necessary to enable the seller or sellers
thereof or the underwriters, if any, to consummate the disposition of such
Registrable Securities.
(k) Upon the occurrence of any event contemplated by Section 5(c)(vi)
or 5(c)(vii) hereof, prepare a supplement or post-effective amendment to each
Registration Statement or a supplement to the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
7
<PAGE>
(l) Use all reasonable efforts to cause all Registrable Securities
covered by such Registration Statement to be (i) listed on each securities
exchange, if any, on which similar securities issued by the Company are then
listed or, if no similar securities issued by the Company are then so listed, on
the New York Stock Exchange or another national securities exchange if the
securities qualify to be so listed or (ii) authorized to be quoted on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
or the National Market System of NASDAQ if the securities qualify to be so
quoted; in each case, if requested by the holders of a majority of the
Registrable Securities covered by such Registration Statement or the managing
underwriters, if any.
(m) Prior to the effective date of the first Demand Registration or
the first Piggyback Registration, whichever shall occur first, (i) engage an
appropriate transfer agent and provide the transfer agent with printed
certificates for the Registrable Securities in a form eligible for deposit with
The Depository Trust Company and (ii) provide a CUSIP number for the Registrable
Securities.
(n) Enter into such agreements (including, in the event of an
underwritten offering, an underwriting agreement in form, scope and substance as
is customary in underwritten offerings) and take all such other actions in
connection therewith (including those requested by the holders of a majority of
the Registrable Securities being sold or, in the event of an underwritten
offering, those requested by the managing underwriters) in order to expedite or
facilitate the disposition of such Registrable Securities and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration, (i) make such
representations and warranties to the holders of such Registrable Securities and
the underwriters, if any, with respect to the business of the Company and its
subsidiaries, the Registration Statement, Prospectus and documents incorporated
by reference or deemed incorporated by reference, if any, in each case, in form,
substance and scope as are customarily made by issuers to underwriters in
underwritten offerings and confirm the same if and when requested; (ii) obtain
opinions of counsel to the Company and updates thereof (which counsel and
opinions (in form, scope and substance) shall be reasonably satisfactory to the
managing underwriters, if any, and the holders of a majority of the Registrable
Securities being sold) addressed to such selling holder of Registrable
Securities and each of the underwriters, if any, covering the matters
customarily covered in opinions requested in underwritten offerings and such
other matters as may be reasonably requested by such holders and underwriters,
including without limitation the matters referred to in Section 5(n)(i) hereof;
(iii) use its best efforts to obtain "comfort" letters and updates thereof from
the independent certified public accountants of the Company (and, if necessary,
any other certified public accountants of any subsidiary of the Company or of
any business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to each selling holder of Registrable Securities and each
of the underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "comfort" letters in connection with
underwritten offerings; and (iv) deliver such documents and certificates as may
be requested by the holders of a majority of the Registrable Securities being
sold, the Special Counsel and the managing underwriters, if any, to evidence the
continued validity of the representations and warranties of the Company and its
subsidiaries made pursuant to clause (i) above and to evidence compliance with
any customary conditions contained in the underwriting agreement or similar
agreement entered into by the Company. The foregoing actions will be taken in
8
<PAGE>
connection with each closing under such underwriting or similar agreement as and
to the extent required thereunder.
(o) Make available for inspection by a representative of the holders
of Registrable Securities being sold, any underwriter participating in any
disposition of Registrable Securities, and any attorney or accountant retained
by such selling holders or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and cause the officers, directors and employees of the Company and
its subsidiaries to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with such
Registration Statement; provided, however, that any records, information or
-------- -------
documents that are designated by the Company in writing as confidential at the
time of delivery of such records, information or documents will be kept
confidential by such persons unless (i) such records, information or documents
are in the public domain or otherwise publicly available, (ii) disclosure of
such records, information or documents is required by court or administrative
order or is necessary to respond to inquiries of regulatory authorities, or
(iii) disclosure of such records, information or documents, in the opinion of
counsel to such person, is otherwise required by law (including, without
limitation, pursuant to the requirements of the Securities Act).
(p) Comply with all applicable rules and regulations of the SEC and
make generally available to its security holders earning statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act) no later than 45
calendar days after the end of any 12-month period (or 90 calendar days after
the end of any 12-month period if such period is a fiscal year) (i) commencing
at the end of any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm commitment or best efforts underwritten offering, and
(ii) if not sold to underwriters in such an offering, commencing on the first
day of the first fiscal quarter of the Company, after the effective date of a
Registration Statement, which statements shall cover said 12-month period.
(q) In connection with any underwritten offering, cause appropriate
members of its management to cooperate and participate on a reasonable basis in
the underwriters' "road show" conferences related to such offering.
The Company may require each seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such Registrable Securities as the Company may,
from time to time, reasonably request in writing and the Company may exclude
from such registration the Registrable Securities of any seller who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
Each holder of Registrable Securities will be deemed to have agreed by
virtue of its acquisition of such Registrable Securities that, upon receipt of
any notice from the Company of the occurrence of any event of the kind described
in Section 5(c)(ii), 5(c)(iii), 5(c)(v), 5(c)(vi) or 6(c)(vii) hereof, such
holder will forthwith discontinue disposition of such Registrable Securities
covered by such Registration Statement or Prospectus until such holder's receipt
of the copies of the supplemented or amended Prospectus contemplated by Section
5(k) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed,
9
<PAGE>
and has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus. In
the event the Company shall give any such notice, the time period prescribed in
Section 2(a) hereof will be extended by the number of days during the time
period from and including the date of the giving of such notice to and including
the date when each seller of Registrable Securities covered by such Registration
Statement shall have received (i) the copies of the supplemented or amended
Prospectus contemplated by Section 5(k) or (ii) the Advice.
6. Registration Expenses. (a) All fees and expenses incident to the
---------------------
performance of or compliance with this Agreement by the Company will be borne by
the Company whether or not any of the Registration Statements become effective.
Such fees and expenses will include, without limitation, (i) all registration
and filing fees (including without limitation fees and expenses (1) with respect
to filings required to be made with the National Association of Securities
Dealers, Inc. and (2) of compliance with securities or "blue sky" laws
(including without limitation fees and disbursements of counsel for the
underwriters or selling holders in connection with "blue sky" qualifications of
the Registrable Securities and determination of the eligibility of the
Registrable Securities for investment under the laws of such jurisdictions as
the managing underwriters, if any, or holders of a majority of the Registrable
Securities being sold may designate)), (ii) printing expenses (including without
limitation expenses of printing certificates for Registrable Securities in an
form eligible for deposit with The Depository Trust Company and of printing
prospectuses if the printing of prospectuses is requested by the holders of a
majority of the Registrable Securities included in any Registration Statement),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company and the Special Counsel for the sellers of the
Registrable Securities, (v) fees and disbursements of all independent certified
public accountants referred to in Section 5(n)(iii) hereof (including the
expenses of any special audit and "comfort" letters required by or incident to
such performance), (vi) any fees and expenses of any "qualified independent
underwriter" or other independent appraiser participating in an offering
pursuant to Section 3 of Schedule E to the Bylaws of the National Association of
Securities Dealers, Inc., (vii) Securities Act liability insurance if the
Company so desires such insurance, and (viii) fees and expenses of all other
persons retained by the Company. In addition, the Company will pay its internal
expenses (including without limitation all salaries and expenses of its officers
and employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
securities to be registered on any securities exchange on which similar
securities issued by the Company are then listed and the fees and expenses of
any person, including special experts, retained by the Company. In no event,
however, will the Company be responsible for any underwriting discount or
selling commission with respect to any sale of Registrable Securities pursuant
to this Agreement.
(b) In connection with any Demand Registration or Piggyback
Registration hereunder, the Company will reimburse the holders of the
Registrable Securities being registered in such registration for the reasonable
fees and disbursements of not more than one counsel (the "Special Counsel"),
together with appropriate local counsel, chosen by the holders of a majority of
the Registrable Securities being registered.
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7. Indemnification.
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(a) Indemnification by the Company. The Company will, without
------------------------------
limitation as to time, indemnify and hold harmless, to the fullest extent
permitted by law, each holder of Registrable Securities registered pursuant to
this Agreement, the officers, directors and agents and employees of each of
them, each person who controls such holder (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of any such controlling person, from and against
all losses, claims, damages, liabilities, costs (including without limitation
the costs of investigation and attorneys' fees) and expenses (collectively,
"Losses"), as incurred, arising out of or based upon any untrue or alleged
untrue statement of a material fact contained in any Registration Statement,
Prospectus or form of Prospectus or in any amendment or supplement thereto or in
any preliminary prospectus, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are based solely upon information furnished in writing to the Company
by such holder expressly for use therein; provided, however, that the Company
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will not be liable to any holder of Registrable Securities to the extent that
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any preliminary
prospectus if either (i) (1)such holder failed to send or deliver a copy of the
Prospectus with or prior to the delivery of written confirmation of the sale of
such holder of a Registrable Security to the person asserting the claim from
which such Losses arise and (2) the Prospectus would have completely corrected
such untrue statement or alleged untrue statement or such omission or alleged
omission; or (ii) such untrue statement or alleged untrue statement, omission or
alleged omission is completely corrected in an amendment or supplement to the
Prospectus previously furnished by or on behalf of the Company with copies of
the Prospectus as so amended or supplemented, and such holder thereafter fails
to deliver such Prospectus as so amended or supplemented prior to or
concurrently with the sale of a Registrable Security to the person asserting the
claim from which such Losses arise.
(b) Indemnification by Holders of Registrable Securities. In
----------------------------------------------------
connection with any Registration Statement in which a holder of Registrable
Securities is participating, such holder of Registrable Securities will furnish
to the Company in writing such information as the Company reasonably requests
for use in connection with any Registration Statement or Prospectus and will
indemnify, to the fullest extent permitted by law, the Company, its directors
and officers, agents and employees, each person who controls the Company (within
the meaning of Section 15 of the Securities Act and Section 20 of the Exchange
Act), and the directors, officers, agents or employees of such controlling
persons, from and against all Losses arising out of or based upon any untrue
statement of a material fact contained in any Registration Statement, Prospectus
or preliminary prospectus or arising out of or based upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such holder to the Company expressly for use in such Registration Statement or
Prospectus and was relied upon by the Company in the preparation of such
Registration Statement, Prospectus or preliminary prospectus. In no event will
the liability of any selling holder of Registrable Securities hereunder be
greater in amount than the dollar amount of the proceeds (net of payment of all
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<PAGE>
expenses) received by such holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any person shall
--------------------------------------
become entitled to indemnity hereunder (an "indemnified party"), such
indemnified party shall give prompt notice to the party from which such
indemnity is sought (the "indemnifying party") of any claim or of the
commencement of any action or proceeding with respect to which such indemnified
party seeks indemnification or contribution pursuant hereto; provided, however,
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that the failure to so notify the indemnifying party will not relieve the
indemnifying party from any obligation or liability except to the extent that
the indemnifying party has been prejudiced materially by such failure. All fees
and expenses (including any fees and expenses incurred in connection with
investigating or preparing to defend such action or proceeding) will be paid to
the indemnified party, as incurred, within five calendar days of written notice
thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder). The indemnifying party will not consent to entry of any judgment or
enter into any settlement or otherwise seek to terminate any action or
proceeding in which any indemnified party is or could be a party and as to which
indemnification or contribution could be sought by such indemnified party under
this Section 7, unless such judgment, settlement or other termination includes
as an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release, in form and substance satisfactory to the
indemnified party, from all liability in respect of such claim or litigation for
which such indemnified party would be entitled to indemnification hereunder.
(d) Contribution. If the indemnification provided for in this Section
------------
7 is unavailable to an indemnified party under Section 7(a) or 7(b) hereof in
respect of any Losses or is insufficient to hold such indemnified party
harmless, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, will, jointly and severally, contribute to the amount paid or
payable by such indemnified party as a result of such Losses, in such proportion
as is appropriate to reflect the relative fault of the indemnifying party or
indemnifying parties, on the one hand, and such indemnified party, on the other
hand, in connection with the actions, statement or omissions that resulted in
such Losses as well as any other relevant equitable considerations. The
relative fault of such indemnifying party or indemnifying parties, on the one
hand, and such indemnified party, on the other hand, will be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or related to
information supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses will be deemed to include any legal
or other fees or expenses incurred by such party in connection with any action
or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
--- ----
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provision of this Section 7(d), an indemnifying party that
is a selling holder of Registrable Securities will not be required to contribute
any amount in excess of the
12
<PAGE>
amount by which the total price at which the Registrable Securities sold by such
indemnifying party and distributed to the public were offered to the public
exceed the amount of any damages which such indemnifying party has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
The indemnity, contribution and expense reimbursement obligations of the
Company hereunder will be in addition to any liability the Company may otherwise
have hereunder or otherwise. The provisions of this Section 7 will survive so
long as Registrable Securities remain outstanding, notwithstanding any transfer
of the Registrable Securities by any holder thereof or any termination of this
Agreement.
8. Rule 144. The Company will use its best efforts to file the reports
--------
required to be filed by it under the Securities Act and the Exchange Act, and
will cooperate with any holder of Registrable Securities (including without
limitation by making such representations as any such holder may reasonably
request), all to the extent required from time to time to enable such holder to
sell Registrable Securities without registration under the Securities Act within
the limitations of the exemptions provided by Rule 144. Upon the request of any
holder of Registrable Securities, the Company will deliver to such holder a
written statement as to whether it has complied with such filing requirements.
Notwithstanding the foregoing, nothing in this Section 8 will be deemed to
require the Company to register any of its securities under any section of the
Exchange Act.
9. Underwritten Registrations. If any of the Registrable Securities
--------------------------
covered by any Demand Registration are to be sold in an underwritten offering,
the investment banker or investment bankers and manager or managers that will
manage the offering will be selected by the holders of a majority of the
Registrable Securities included in the Demand Notice; provided, that such
--------
investment banker or manager shall re reasonably satisfactory to the Company.
If any Piggyback Registration is an underwritten offering, the Company will have
the right to select the investment banker or investment bankers and managers to
administer the offering.
10. Miscellaneous.
-------------
(a) Remedies. In the event of a breach by the Company of its
--------
obligations under this Agreement, each holder of Registrable Securities, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of any
of the provisions of this Agreement and hereby further agrees that, in the event
of any action for specific performance in respect of such breach, it will waive
the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company has not, as of the date
--------------------------
hereof, and will not, on or after the date hereof, enter into any agreement with
respect to its securities which is inconsistent with the rights granted to the
holders of Registrable Securities in this Agreement or otherwise conflicts with
the provisions hereof.
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<PAGE>
(c) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of the
holders of 66 2/3% of the then-outstanding Registrable Securities, subject,
however, to the proviso of Section 3(c). Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of holders of Registrable Securities
whose securities are being sold pursuant to a Registration Statement and that
does not directly or indirectly affect the rights of other holders of
Registrable Securities may be given by holders of at least 66 2/3% of the
Registrable Securities being sold by such holders; provided, however, that the
-------- -------
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(d) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing and will be deemed to given (i)
when made, if made by hand delivery, (ii) upon confirmation, if made by
telecopier, or (iii) one business day after being deposited with a reputable
next-day courier, to the parties as follows:
(1) if to the Company, initially at 2001 Bryan Street, Suite 2300,
Dallas, Texas 75201, Telecopier Number (214) 863-1777, and thereafter at such
other address, notice of which is given to the holders of Registrable Securities
in accordance with the provisions of this Section 10(d); and
(2) if to any holder of Registrable Securities, at the most
current address given by such holder to the Company in accordance with the
provisions of this Section 10(d).
(e) Owner of Registrable Securities. The Company will maintain, or
-------------------------------
will cause its registrar and transfer agent to maintain, a stock book with
respect to the Common Stock, in which all transfers of Registrable Securities of
which the Company has received notice will be recorded. The Company may deem and
treat the person in whose name Registrable Securities are registered in the
stock book of the Company as the owner thereof for all purposes, including
without limitation the giving of notices under this Agreement.
(f) Successors of Assigns. This Agreement will inure to the benefit
---------------------
of and be binding upon the successors and assigns of each of the parties
(including any pledgee acquiring securities by foreclosure) and will inure to
the benefit of each holder of any Registrable Securities. Notwithstanding the
foregoing, no transferee will have any of the rights granted under this
Agreement (i) until such transferee shall have acknowledged its rights and
obligations hereunder by a signed written statement of such transferee's
acceptance of such rights and obligations, (ii) if the transferor notifies the
Company in writing on or prior to such transfer that the transferee shall not
have such rights, or (iii) if such transferee was not a party to this Agreement
on the date hereof (or an affiliate of a party hereto) and acquired Registrable
Securities in open-market purchases or pursuant to an underwritten public
offering.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed will
14
<PAGE>
be deemed to be an original and all of which taken together will constitute one
and the same instrument.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and will not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AS APPLIED TO CONTRACTS MADE
AND PERFORMED WITHIN THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS.
(j) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein will remain in full force and effect and will in
no way be affected, impaired or invalidated, an the parties hereto will use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be in the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(k) Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the registration rights granted by the Company with respect to the
Registrable Securities. This Agreement supersedes all prior agreements and
understandings among the parties with respect to such registration rights.
(l) Attorneys' Fees. In any action or proceeding brought to enforce
---------------
any provisions of this Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by the court, will be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
HOMEGATE HOSPITALITY, INC.
By:
------------------------------------
Name:
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Its:
-----------------------------------
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Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our reports dated August 22, 1996 and
August 8, 1996, in Amendment No. 2 to the Registration Statement (Form S-1 No.
333-11113) and related Prospectus of Homegate Hospitality, Inc. for the
registration of 4,325,000 shares of its common stock.
ERNST & YOUNG LLP
Dallas, Texas
October 17, 1996
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our reports dated August 2, 1996, in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-11113) and
related Prospectus of Homegate Hospitality, Inc. for the registration of
4,325,000 shares of its common stock.
ERNST & YOUNG LLP
San Antonio, Texas
October 17, 1996
