<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
REGISTRATION NO. 333-49881
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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
---------------
MERISTAR HOTELS & RESORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7011 51-0379982
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.)
MERISTAR HOTELS & RESORTS, INC.
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(202) 965-4455
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
PAUL W. WHETSELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MERISTAR HOTELS & RESORTS, INC.
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(202) 965-4455
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
RICHARD S. BORISOFF, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
(212) 373-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
---------------
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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 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 JUNE 5, 1998
PROSPECTUS
. SHARES
MERISTAR HOTELS & RESORTS, INC.
SHARES OF COMMON STOCK AND RIGHTS TO ACQUIRE
UP TO . OF SUCH SHARES
----------
MeriStar Hotels & Resorts, Inc. ("MeriStar Hotels" or the "Company") is
distributing to holders of record of (a) the common stock, par value $0.01 per
share (the "REIT Common Stock"), of MeriStar Hospitality Corporation, a
Maryland corporation operating as a real estate investment trust (the "REIT"),
and (b) the units of limited partnership (the "REIT OP Units") of MeriStar
Hospitality Operating Partnership, L.P., a Delaware limited partnership (the
"REIT Operating Partnership"), other than REIT OP Units held by the REIT or any
of its subsidiaries, as of the effective time of the Merger defined below (the
"Record Date"), non-transferable rights (the "Rights") to subscribe for and
purchase shares of the common stock, par value $0.01 per share (the "Common
Stock"), of MeriStar Hotels, at a subscription price (the "Subscription Price")
equal to 95% of the average of the daily high and low prices of the Common
Stock on the New York Stock Exchange Inc. ("NYSE") for the period (the
"Measurement Period") of five consecutive trading days (a "Trading Day") on the
NYSE immediately following the third Trading Day after the date the Common
Stock opens for trading on the NYSE.
The Company will be spun off (the "Spin-Off") by CapStar Hotel Company, a
Delaware corporation ("CapStar"), and certain of its affiliates, as further
described below, to become the lessee, manager and operator of various hotel
assets, including those currently (i) owned, leased and managed by CapStar and
its affiliates. CapStar intends to transfer or cause to be transferred certain
assets and liabilities constituting the hotel management and leasing business
currently operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly
owned subsidiary of CapStar. CapStar then intends to distribute, on a share-
for-share basis, to its stockholders of record as of the effective time of the
Merger (the "Spin-Off Record Date") all of the outstanding capital stock of
MeriStar Hotels in the Spin-Off. The Spin-Off will provide the stockholders of
CapStar as of the Spin-Off Record Date with the opportunity to participate in
the benefits of both the real estate operations of the REIT, and the leasing
and management operations of MeriStar Hotels.
Pursuant to an Agreement and Plan of Merger, dated as of March 15, 1998 (the
"Merger Agreement"), among American General Hospitality Corporation, a Maryland
corporation operating as a real estate investment trust ("AGH"), American
General Hospitality Operating Partnership, L.P., a Delaware limited partnership
("AGH Operating Partnership"), CapStar, CapStar Management Company, L.P., a
Delaware limited partnership, ("CapStar Management"), and CapStar Management
Company II, L.P., a Delaware limited partnership ("CapStar Management II"),
CapStar after spinning-off MeriStar Hotels will merge with and into AGH (the
"Merger"), with the result that (a) AGH will be the surviving corporation
operating under the name MeriStar Hospitality Corporation and (b) each
outstanding share of common stock, par value $0.01 per share, of CapStar
("CapStar Common Stock") will be converted into 1.0 share of REIT Common Stock,
and each outstanding share of common stock, par value $0.01 per share, of AGH
("AGH Common Stock") will be converted into 0.8475 shares of REIT Common Stock.
Immediately following the Spin-Off and the effective date of the Merger, the
Company will acquire 100% of the partnership interests in the third-party
lessee of most of the hotels owned by AGH and substantially all of the assets
and certain liabilities of the third-party manager of most of the hotels owned
by AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the
"Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-Off--The
Lessee-Manager Acquisition Agreement."
(Continued on next page)
PRIOR TO DECIDING TO EXERCISE THE RIGHTS, RIGHTHOLDERS SHOULD CAREFULLY
CONSIDER THE MATERIAL RISKS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 12
HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
SUBSCRIPTION PROCEEDS TO
PRICE COMPANY(1)(2)(3)
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<S> <C> <C>
Per Share............................................... $ $
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Total................................................... $ $
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</TABLE>
(1) The Common Stock issuable pursuant to the Rights Offering is being offered
and sold directly by the Company, and no commission or other remuneration
will be paid to any person for soliciting purchases of the Common Stock.
(2) Before deducting expenses payable by the Company.
(3) Assumes the sale of all of the . shares offered hereby.
The date of this Prospectus is , 1998.
<PAGE>
(cover page continued)
Each holder of record of REIT Common Stock and/or REIT OP Units on the
Record Date (a "Rightholder") will receive one-sixth of a Right for each share
of REIT Common Stock and/or each REIT OP Unit so held. Each whole Right will
entitle the Rightholder (but not a subsequent transferee of the REIT Common
Stock and/or REIT OP Units held by such Rightholder on the Record Date) to
purchase one share of Common Stock at the Subscription Price (the
"Subscription Privilege"). The Company will publicly announce the Subscription
Price promptly following determination thereof. Although fractional Rights
will be issued to Rightholders, the Company reserves the right, in its sole
discretion, to pay cash in lieu of fractional shares of Common Stock that
would otherwise be issued or issuable in respect of fractional Rights
exercised by Rightholders, based on a value per whole share of Common Stock
equal to the closing price of the Common Stock on the Principal Market on the
Expiration Date. Any such cash payment will be made to the applicable
Rightholder at the same time that shares of Common Stock are issued in respect
of whole rights exercised by Rightholders. Fractional Rights can only be
exercised concurrently with the exercise of whole Rights. The Company intends
to pay cash in lieu of all such fractional shares of Common Stock. An election
to exercise Rights, once made, may not be revoked. The subscription agent (the
"Subscription Agent") for the Rights Offering will be Continental Stock
Transfer & Trust Company. All amounts received by the Subscription Agent
pursuant to the exercise of Rights will be held in a non-interest-bearing
escrow account until the completion of the Rights Offering. See "The Rights
Offering--Subscription Privilege." The Rights will be evidenced by non-
transferable subscription certificates. The issuance of shares of Common Stock
pursuant to the Rights Offering is conditioned upon consummation of the Spin-
Off, the Merger and transactions contemplated by the Lessee-Manager
Acquisition Agreement. The Company also reserves the right, at its sole
option, to cancel the Rights Offering if the Subscription Price is less than
.. The Rights will be exercisable at any time following 5:00 p.m., New York
City time, on the last day of the Measurement Period until 5:00 p.m., New York
City time, on the sixteenth calendar day immediately following the last day of
the Measurement Period, or such later date as the Company may determine (the
"Expiration Date"), unless the Rights Offering is earlier cancelled.
The Rights may not be exercised by any person, and neither this Prospectus
nor any Subscription Certificate shall constitute an offer to sell or a
solicitation of an offer to purchase any shares of Common Stock, in any
jurisdiction in which such transactions would be unlawful.
If the Rights Offering is not completed, the Subscription Agent will return
the Subscription Price paid by investors as soon as practicable thereafter.
See "The Rights Offering--Conditions to Sale of Shares" and "Risk Factors--
Risk of Termination of the Rights Offering Under Certain Circumstances." The
maximum number of shares which may be issued in the Rights Offering is .,
representing approximately .% of the shares of Common Stock that would be
outstanding after the Rights Offering.
The Common Stock has been approved for listing on the NYSE, under the symbol
"MMH", subject to official notice of issuance. No listing has been applied for
with respect to the Rights. Prior to the Spin-Off, there will be no
established trading market for the Common Stock and there can be no assurance
that after the Spin-Off any such trading market will develop.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR THE SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF MERISTAR HOTELS SINCE THE DATE HEREOF OR THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
2
<PAGE>
AVAILABLE INFORMATION
Following the Spin-off, MeriStar Hotels will be subject to the informational
requirements of the Exchange Act, and in accordance therewith will file
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Copies of such reports, proxy
statements and other information filed with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the following Regional Offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates.
MeriStar Hotels will file information electronically with the Commission, and
the Commission maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web Site
on the Internet is http://www.sec.gov. In addition, the Company expects to
apply to list the Common Stock on the NYSE. If the Common Stock is so listed,
MeriStar Hotels will file reports, proxy and information statements and other
information with the NYSE. These documents may be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
MeriStar Hotels has filed with the Commission a registration statement on
Form S-1 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act, relating to the Rights and
the shares of Common Stock that will be issued to Rightholders upon exercise
thereof in connection with the Rights Offering. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto filed by MeriStar Hotels with the Commission, certain
portions of which are omitted in accordance with the rules and regulations of
the Commission. Such additional information is available for inspection and
copying at the offices of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The distribution of this Prospectus and the offering of the Rights and the
shares of Common Stock in certain jurisdictions may be restricted by law. No
action has been taken by MeriStar Hotels that would permit an offering of the
Rights or such shares or the circulation or distribution of this Prospectus or
any offering material in relation to the Company, the Rights or such shares in
any country outside the United States where action for that purpose is
required. Persons into whose possession this Prospectus comes are required by
the Company to inform themselves about and to observe any such restrictions.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and the notes thereto appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors." Unless the context
otherwise requires, references herein to "MeriStar Hotels" or the "Company"
include MeriStar Hotels & Resorts, Inc. and its subsidiaries, including its
subsidiary operating partnership, MeriStar H&R Operating Company, L.P., and,
with respect to periods prior to the Spin-Off, the Merger and the consummation
of transactions contemplated by the Lessee-Manager Acquisition Agreement
(collectively, the "Formation Transactions"), the real estate leasing,
management and related operations of CapStar. The historical combined financial
information of the Company included herein relates to the real estate leasing,
management and related operations of CapStar prior to the Formation
Transactions and the pro forma combined financial information of the Company
included herein reflects such historical combined financial information as
adjusted for the assumption by the Company of rights and liabilities under
hotel management contracts and operating leases of AGHI and AGH Leasing upon
consummation of the Formation Transactions.
THE COMPANY.................
MeriStar Hotels & Resorts, Inc. ("MeriStar
Hotels" or the "Company") will be spun off (the
"Spin-Off") by CapStar Hotel Company, a Delaware
corporation ("CapStar"), to become the lessee,
manager and operator of various hotel assets,
including those currently owned, leased and
managed by CapStar, and certain of its
affiliates. CapStar intends to transfer or cause
to be transferred certain assets and liabilities
constituting the hotel management and leasing
business currently operated by CapStar and its
subsidiaries to MeriStar Hotels, a wholly owned
subsidiary of CapStar. The Company will initially
have two $50 million credit facilities, one
through the REIT and the other through third-
party lenders. CapStar intends initially to
capitalize the Company with approximately $48
million of cash, including approximately $18
million of forgiveness of indebtedness and a $30
million draw on the Company's credit facilities.
The Company intends to draw an additional $35
million from the credit facilities in connection
with the consummation of the transactions
contemplated by the Lessee-Manager Acquisition
Agreement (as defined herein). The rate on the
revolving credit facilities will not exceed 350
basis points over LIBOR. Immediately following
the Spin-Off and the effective date of the
Merger, the Company will acquire 100% of the
partnership interests in the third-party lessee
of most of the hotels owned by AGH and
substantially all of the assets and certain
liabilities of the third-party manager of most of
the hotels owned by AGH, pursuant to an
Acquisition Agreement, dated as of March 15, 1998
(the "Lessee-Manager Acquisition Agreement"). See
"The Merger and the Spin-Off--The Lessee-Manager
Acquisition Agreement." Pursuant to the purchase
of AGHI and AGH Leasing, MeriStar Hotels will be
the manager and operator of most of the hotels
owned by American General Hospitality, a Maryland
corporation operating as a real estate investment
trust ("AGH"). Immediately following consummation
of the Formation Transactions, the Company
expects to be one of the largest independent
hotel management companies in the United States
based on rooms under management. The Company will
be the successor-in-interest and will assume all
of the rights and liabilities
4
<PAGE>
with respect to hotel management contracts and
operating leases of CapStar, AGHI, and AGH
Leasing. Pursuant to the Formation Transactions,
the Company will lease and manage 201 hotels
containing 42,476 rooms (the "Hotels"). Of the
Hotels, MeriStar Hotels will (i) lease and manage
99 hotels owned by MeriStar Hospitality
Corporation, a Maryland corporation operating as
a real estate investment trust (the "REIT"),
containing 25,854 rooms (the "REIT Owned
Hotels"), (ii) lease 47 (of which they manage 36)
hotels that are not REIT Owned Hotels containing
6,800 rooms, and (iii) manage an additional 55
hotels that are not REIT Owned Hotels containing
9,822 rooms. The Hotels are located throughout
the United States and Canada including most major
metropolitan areas and rapidly growing secondary
cities. The Hotels include hotels operated under
nationally recognized brand names such as
Hilton(R), Sheraton(R), Westin(R), Marriott(R),
Doubletree(R) and Embassy Suites(R). The
Company's business strategy will be to renovate,
reposition and operate each hotel according to a
business plan specifically tailored to the
characteristics of the hotel and its market. See
"The Merger and the Spin-Off," "The Company,"
"Management's Discussion and Analysis of
Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business."
THE SPIN-OFF................ CapStar intends to distribute on a share-for-
share basis to its stockholders of record as of
the effective time of the Merger (the "Spin-Off
Record Date") all of the outstanding Common
Stock, par value $0.01 per share, of MeriStar
Hotels (the "Common Stock"). The Spin-Off will
provide the stockholders of CapStar as of the
Spin-Off Record Date with the opportunity to
participate in the benefits of both ownership of
real estate through the REIT, and the leasing and
management operations (including the ownership of
certain non-real estate assets) of MeriStar
Hotels.
THE MERGER.................. Pursuant to the Agreement and Plan of Merger
dated as of March 15, 1998 (the "Merger
Agreement"), among AGH, American General
Hospitality Operating Partnership, L.P., a
Delaware limited partnership ("AGH Operating
Partnership"), CapStar, CapStar Management
Company, L.P., a Delaware limited partnership,
("CapStar Management"), and CapStar Management
Company II, L.P., a Delaware limited partnership
("CapStar Management II"), CapStar intends to
merge with and into AGH (the "Merger"), with the
result that (a) AGH will be the surviving
corporation operating under the name MeriStar
Hospitality Corporation (the "REIT") and (b) each
outstanding share of common stock, par value
$0.01 per share of CapStar ("CapStar Common
Stock"), will be converted into 1.0 share of
common stock of the REIT, par value $0.01 per
share ("REIT Common Stock") and each outstanding
share of common stock, par value $0.01 per share
of AGH ("AGH Common Stock"), will be converted
into 0.8475 shares of REIT Common Stock. See "The
Merger and the Spin-Off."
5
<PAGE>
THE INTERCOMPANY AGREEMENT.. Pursuant to the Intercompany Agreement (the
"Intercompany Agreement") among MeriStar Hotels
and its subsidiary operating partnership,
MeriStar H&R Operating Company, L.P., a Delaware
limited partnership that will be a manager and
lessee of hotels and resorts ("Hotels OP" and,
together with MeriStar Hotels, the "Hotel
Parties"), on the one hand, and the REIT and its
subsidiary operating partnership, MeriStar
Hospitality Operating Partnership, L.P., a
Delaware limited partnership which will own
hotels, resorts and other real property (the
"REIT Operating Partnership" and, together with
the REIT, the "REIT Parties"), on the other hand,
the Hotel Parties and the REIT Parties will
provide each other with, among other things,
reciprocal rights to participate in certain
transactions entered into by such parties. In
particular, subject to certain exceptions, the
Hotel Parties will have a right of first refusal
to become the lessee of any real property
acquired by the REIT Parties if the REIT Parties
determine that, consistent with the REIT's status
as a real estate investment trust, the REIT
Parties are required to enter into such a lease
arrangement; provided that the Hotel Parties or
an entity that the Hotel Parties control is
qualified to be the lessee. Further, pursuant to
the Intercompany Agreement, MeriStar Hotels has
agreed, subject to certain exceptions, not to
acquire or make (i) investments in real estate
(which, for purposes of the Intercompany
Agreement, include the provision of services
related to real estate and investment in hotel
properties, real estate mortgages, real estate
derivatives or entities that invest in real
estate assets) or (ii) any other investments that
may be structured in a manner that qualifies
under the federal income tax requirements
applicable to a real estate investment trust,
unless in either case it has notified the REIT of
the acquisition or investment opportunity, in
accordance with the terms of the Intercompany
Agreement, and the REIT has determined not to
pursue such acquisition or investment. In
addition, the Hotel Parties intend to pursue
additional opportunities with other hotel owners
in the future. See "The Company--The Intercompany
Agreement."
THE LESSEE-MANAGER
ACQUISITION AGREEMENT......
Following the Spin-Off and the effective date of
the Merger, the Company will acquire 100% of the
partnership interests in AGH Leasing, the third-
party lessee of most of the hotels owned by AGH,
and substantially all of the assets and certain
liabilities of AGHI, the third-party manager of
most of the hotels owned by AGH, for $95 million
pursuant to an Agreement, dated as of March 15,
1998 (the "Lessee-Manager Acquisition
Agreement"), by and among Hotels OP, AGHI, AGHL
GP, Inc., a Delaware corporation, the general
partner of AGH Leasing, and the limited partners
of AGH Leasing. Specifically, the Company will
acquire (i) substantially all of the assets and
certain liabilities of AGHI for a cash purchase
price of $10 million; and (ii) 100% of the
partnership interests in AGH Leasing for a
purchase price of $85 million, consisting of
approximately $73.8 million in cash and
approximately $11.2
6
<PAGE>
million in the form of partnership units of
Hotels OP convertible into Common Stock ("Hotels
OP Units"). Upon consummation of the transactions
contemplated by the Lessee-Manager Acquisition
Agreement, Hotels OP will become the lessee and
manager of most of the AGH Owned Hotels that are
currently leased and/or managed by AGH Leasing.
The Lessee-Manager Acquisition Agreement further
contemplates that the REIT and the Company will
enter into new lease agreements with respect to
all of the CapStar Owned Hotels and amend the
lease agreements with respect to most of the AGH
Owned Hotels. See "The Merger and the Spin-Off--
The Lessee-Manager Acquisition Agreement."
THE RIGHTS OFFERING......... The distribution of the Rights by the Company and
the sale of shares of Common Stock upon the
exercise of the Rights are referred to herein as
the "Rights Offering."
RIGHTS...................... Non-transferable rights (the "Rights") to
subscribe for and purchase shares at the
Subscription Price.
RECIPIENTS OF RIGHTS;
RIGHTS RECEIVED............ MeriStar Hotels is distributing the Rights to
holders of record of (a) the REIT Common Stock
and/or (b) the units of limited partnership (the
"REIT OP Units") of the REIT Operating
Partnership (other than REIT OP Units held by the
REIT or any of its subsidiaries) as of the Record
Date defined below. Each holder of record of REIT
Common Stock and/or REIT OP Units on the Record
Date (a "Rightholder") will receive one-sixth of
a Right for each share of REIT Common Stock
and/or each REIT OP Unit so held.
RECORD DATE................. The effective time of the Merger (the "Record
Date"), which will be publicly announced by the
Company.
EXPIRATION DATE............. The Rights will be exercisable at any time
following 5:00 p.m., New York City time, on the
last day of the Measurement Period until 5:00
p.m., New York City time, on the sixteenth
calendar day immediately following the last day
of the Measurement Period, or such later date as
the Company may determine (the "Expiration
Date"), unless the Rights Offering is earlier
cancelled.
SUBSCRIPTION PRICE;
MEASUREMENT PERIOD.........
An amount in cash per share of Common Stock equal
to 95% of the average of the daily high and low
prices of the Common Stock on the New York Stock
Exchange Inc. ("NYSE") for the period (the
"Measurement Period") of five consecutive trading
days (a "Trading Day") on the Principal Market
immediately following the third Trading Day after
the date that the Common Stock opens for trading
on the Principal Market (the "Subscription
Price"). The Company will publicly announce the
Subscription Price promptly following
determination thereof.
SUBSCRIPTION PRIVILEGE...... Each whole Right will entitle the Rightholder
(but not a subsequent transferee of the REIT
Common Stock and/or REIT OP Units held
7
<PAGE>
by such Rightholder on the Record Date) to
purchase one share of Common Stock at the
Subscription Price (the "Subscription
Privilege"). See "The Rights Offering--
Subscription Privilege."
COMMON STOCK OUTSTANDING
AFTER RIGHTS OFFERING...... A maximum of . shares. See "The Spin-Off and
the Merger," "Capitalization," "Management," and
"Security Ownership of Certain Beneficial Owners
and Management."
TRANSFERABILITY OF RIGHTS... The Rights are non-transferable. In the event
that Rightholders transfer the REIT Common Stock
and/or REIT OP Units owned by them as of the
Record Date, they will remain the owners of
Rights issued in respect of such shares of REIT
Common Stock or such REIT OP Units.
PROCEDURE FOR EXERCISING The Subscription Privilege may be exercised by
RIGHTS..................... properly completing the subscription certificate
evidencing the Rights (a "Subscription
Certificate") and forwarding such Subscription
Certificate (or following the Guaranteed Delivery
Procedures (as described in "The Rights
Offering--Exercise of Rights")), with payment of
the Subscription Price for each share subscribed
for pursuant to the Subscription Privilege, to
the Subscription Agent on or prior to the
Expiration Date. If the mail is used to forward
Subscription Certificates, it is recommended that
insured registered mail be used. Once a
Rightholder has exercised the Subscription
Privilege, such exercise may not be revoked. See
"The Rights Offering--Exercise of Rights."
PROCEDURE FOR EXERCISING
RIGHTS BY FOREIGN Subscription Certificates will not be mailed to
STOCKHOLDERS............... Rightholders whose addresses are outside the
United States or who have an APO or FPO address,
but will be held by the Subscription Agent for
their account. To exercise the Rights represented
thereby, such Rightholders must notify the
Subscription Agent by completing an International
Holder Subscription Form, which will be delivered
to such Rightholders in lieu of a Subscription
Certificate, and sending it by mail or telecopy
to the Subscription Agent. Rightholders located
in the United Kingdom will not initially be
provided with an International Holder
Subscription Form and, if they are interested in
participating in the Rights Offering, should
contact European Agent/broker-dealer, facsimile
number . , attention: . . International Holder
Subscription Forms must be returned to the
Subscription Agent on or prior to 11:00 a.m., New
York City time, on the date that is four Trading
Days prior to the Expiration Date. Certain
restrictions applicable to the exercise and sale
of Rights by persons located outside of the
United States are set forth elsewhere in this
Prospectus. See "The Rights Offering--Foreign and
Certain Other Stockholders."
PERSONS HOLDING SHARES OR
WISHING TO EXERCISE RIGHTS Rightholders holding or receiving the Rights
THROUGH OTHERS............. through a broker, dealer, commercial bank, trust
company or other nominee, as well as Rightholders
who would prefer to have such institutions effect
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transactions relating to the Rights on their
behalf, should contact the appropriate
institution or nominee and request it to effect
the transactions for them. Such Rightholders
should be aware that brokers or other nominee
holders may establish deadlines for receiving
instructions from beneficial holders
significantly in advance of the Expiration Date.
See "The Rights Offering--Exercise of Rights."
ISSUANCE OF COMMON STOCK.... Certificates representing shares of Common Stock
purchased pursuant to the exercise of Rights will
be delivered to subscribers as soon as
practicable following the fourth business day
after the Expiration Date. The issuance of shares
pursuant to the exercise of Rights is conditioned
upon the consummation of the Formation
Transactions prior to the closing of the Rights
Offering. Although fractional Rights will be
issued to Rightholders, the Company reserves the
right, in its sole discretion, to pay cash in
lieu of fractional shares of Common Stock that
would otherwise be issued or issuable in respect
of fractional Rights exercised by Rightholders,
based on a value per whole share of Common Stock
equal to the closing price of the Common Stock on
the Principal Market on the Expiration Date. Any
such cash payment will be made to the applicable
Rightholder at the same time that shares of
Common stock are issued in respect of whole
rights exercised by Rightholders. Fractional
Rights can only be exercised concurrently with
the exercise of whole Rights. The Company intends
to pay cash in lieu of all such fractional shares
of Common Stock. The Company also reserves the
right, at its sole option, to cancel the Rights
Offering if the Subscription Price is less than
. . See "The Spin-Off and the Merger," "The
Rights Offering--Conditions to the Sale of
Shares."
USE OF PROCEEDS............. MeriStar Hotels will use the proceeds of the
Rights Offering to repay existing indebtedness
and for general corporate purposes. See "Use of
Proceeds."
SUBSCRIPTION AGENT.......... Continental Stock Transfer & Trust Company.
MARKET FOR COMMON STOCK;
PROPOSED TRADING SYMBOL....
The Common Stock has been approved for listing on
the NYSE, under the symbol "MMH", subject to
official notice of issuance. No listing has been
applied for with respect to the Rights.
RISK FACTORS................ The purchase of the Common Stock involves certain
risks. See "Risk Factors."
POTENTIAL ANTI-TAKEOVER
EFFECT OF CERTAIN
PROVISIONS OF DELAWARE LAW
AND OF THE MERISTAR HOTELS
CHARTER AND BY-LAWS........
Certain provisions of Delaware General
Corporation Law ("DGCL") and of the Amended and
Restated Certificate of Incorporation of MeriStar
Hotels (the "Charter") and the By-Laws of
MeriStar Hotels (the "By-laws") may have the
effect of
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discouraging a third party from making an
acquisition proposal for MeriStar Hotels and
could delay, defer or prevent a transaction or a
change in control of MeriStar Hotels under
circumstances that could otherwise give the
holders of Common Stock the opportunity to
realize a premium over the then prevailing market
prices of the Common Stock. See "Description of
Capital Stock" and "Certain Antitakeover
Provisions."
FEDERAL INCOME TAX See "The Rights Offering--Federal Income Tax
CONSEQUENCES............... Consequences."
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OWNERSHIP STRUCTURE
The diagram set forth below illustrates the ownership structure of the
Company after the Spin-Off and the Merger.
[DIAGRAM OF OWNERSHIP STRUCTURE AFTER THE SPIN-OFF AND THE MERGER]
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RISK FACTORS
Rightholders, in considering whether to exercise their Rights in the Rights
Offering, should consider, in addition to the other information set forth in
this Prospectus, the matters discussed in this section. Such matters address
the risks of the Spin-Off, the risk arising from the relationship of MeriStar
Hotels and the REIT and the risks relating to the business in which MeriStar
Hotels is engaged. This Prospectus contains forward-looking statements which
involve material risks and uncertainties. MeriStar Hotels' actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.
IMPACT ON EXISTING SHAREHOLDERS
The Rights entitle the Rightholders to purchase shares of Common Stock from
the Company at a price below the prevailing average closing market price of
the Common Stock during the Measurement Period. If any Rightholders exercise
Rights, those Rightholders who do not exercise Rights will experience a
decrease in their proportionate interests in the Company.
TERMINATION OF THE RIGHTS OFFERING UNDER CERTAIN CIRCUMSTANCES
The issuance of shares of Common Stock pursuant to the exercise of the
Rights is conditioned upon the consummation of the Spin-Off, the Merger and
related transactions and the transactions contemplated by the Lessee--Manager
Acquisition Agreement. The Company also reserves the right, at its sole
option, to cancel the Rights offering if the Subscription Price is less than
. . See "The Rights Offering--Conditions to the Sale of Shares."
MERISTAR HOTELS' DEPENDENCE UPON THE REIT; LIMITED RESOURCES FOR GROWTH
THROUGH NEW OPPORTUNITIES
Due to MeriStar Hotels' restricted corporate purpose and the Intercompany
Agreement, MeriStar Hotels will rely on the REIT to provide MeriStar Hotels
with opportunities described in the Intercompany Agreement only if it is
necessary for the REIT, consistent with its status as a real estate investment
trust, to enter into a master lease arrangement and only if MeriStar Hotels
and the REIT negotiate a mutually satisfactory master lease arrangement. If
the REIT in the future should fail to qualify as a real estate investment
trust, such failure could have a substantial adverse effect on those aspects
of MeriStar Hotels' business operations and business opportunities that are
dependent upon the REIT. For example, the Intercompany Agreement remains
effective even if the REIT ceases to qualify as a real estate investment
trust, with MeriStar Hotels' rights relating to lessee opportunities under the
Intercompany Agreement continuing to be based on the REIT's need to create a
master lease structure due to its status as a real estate investment trust.
Accordingly, if the REIT failed to qualify as a real estate investment trust
and thereafter acquired a property, the REIT would have the right under the
Intercompany Agreement to lease the property to any person or entity pursuant
to any type of lease (including a master lease arrangement) or to operate the
property itself. MeriStar Hotels, however, would remain subject to all of the
limitations on its operations contained in the Charter and the Intercompany
Agreement. In addition, although it is anticipated that any master lease
arrangement involving MeriStar Hotels generally will provide that MeriStar
Hotels' rights will continue following a sale of the property or an assignment
of the lease (with the likelihood of a sale or assignment of lease possibly
increasing if the REIT fails to qualify as a real estate investment trust),
MeriStar Hotels could lose its rights under any such master lease arrangement
upon the expiration of the lease. If MeriStar Hotels and the REIT do not
negotiate a mutually satisfactory lease arrangement within 30 days after the
REIT provides MeriStar Hotels with written notice of the lessee opportunity
(or such longer period to which MeriStar Hotels and the REIT may agree), the
REIT may offer the opportunity to others for a period of one year before it
must again offer the opportunity to MeriStar Hotels.
LACK OF DIVIDENDS
The Company anticipates that for the foreseeable future the Company's
earnings, if any, will be retained for use in the operation of the business
and that no cash dividends will be paid on the Common Stock.
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Declaration of dividends on the Common Stock will depend upon, among other
things, future earnings, the operating and financial condition of the Company,
its capital requirements and general business conditions. See "Dividend
Policy."
INITIAL CAPITALIZATION; LIMITED FINANCIAL RESOURCES
CapStar will initially have two $50 million credit facilities, one through
the REIT and the other through third-party lenders. CapStar intends initially
to capitalize the Company with approximately $48 million of cash, including
approximately $18 million of forgiveness of indebtedness and a $30 million
draw on the Company's $100 credit facilities. In addition, in connection with
the consummation of the transactions contemplated by the Lessee--Manager
Acquisition Agreement, the Company intends to draw an additional $35 million
from the revolving credit facilities. The rate on the revolving credit
facilities will not exceed 350 basis points over LIBOR. There can be no
assurance that the Company will be able to satisfy its obligations under, or
to pay amounts due under, such revolving credit facility.
RISK OF IRS RECHARACTERIZATION OF THE RIGHTS OFFERING
Although MeriStar Hotels, CapStar, AGH, the REIT and the REIT Operating
Partnership intend to take the position that the federal income tax treatment
of the issuance of Rights to CapStar stockholders, AGH stockholders and
holders of REIT OP Units is as described in "Federal Income Tax Consequences,"
it is possible that the Internal Revenue Service ("IRS") might attempt to
recharacterize the Rights Offering. For example, in the case of CapStar and
AGH stockholders, it is possible that the IRS could treat the Rights as a
distribution of property by CapStar and AGH to their stockholders subject to
the rules governing dividend distributions, rather than as boot received by
such stockholders in the Merger. It is also possible that, in the case of
holders of REIT OP Units, the IRS could view the REIT Operating Partnership,
and not MeriStar Hotels, as the distributor of the Rights.
If the distribution of the Rights to holders of AGH and CapStar Common Stock
were treated as a distribution of property by AGH and CapStar to its
stockholders, an amount equal to the fair market value of the Rights on the
date of distribution would be treated as a dividend to holders of AGH and
CapStar Common Stock to the extent of the current and accumulated earnings and
profits of AGH, in the case of AGH stockholders, or CapStar, in the case of
CapStar stockholders, on such date, including earnings and profits resulting
from the distribution of the Rights. Any amount in excess of the earnings and
profits of AGH, in the case of AGH stockholders, or CapStar, in the case of
CapStar stockholders, would be treated first as a tax-free return of capital,
reducing the stockholder's tax basis in its AGH or CapStar Common Stock, and
any amount in excess of tax basis would be taxable as gain from sale or
exchange of such stockholder's shares of AGH or CapStar Common Stock. Such
gain would be capital gain if such stockholder's shares of AGH or CapStar
Common Stock were held as a capital asset on the date of distribution.
If the distribution of the Rights to holders of REIT OP Units were treated
as a distribution by the REIT Operating Partnership, it would be treated as a
distribution by a partnership of marketable securities so that such unit-
holder would have to recognize capital gain to the extent that the fair market
value of the Rights as of the date of distribution exceeds such holder's basis
in such Units. Under such a view, holders of REIT OP Units would take a basis
in the Rights equal to the fair market value of the Rights as of the date of
distribution.
See "The Rights Offering--Federal Income Tax Consequences" for a description
of the potential recharacterization.
ADVERSE EFFECTS RESULTING FROM THE MERGER TRANSACTIONS
INTEGRATION RISKS
To operate successfully following the Spin-Off and related transactions,
MeriStar Hotels must be able to successfully integrate all of the operations
of AGHI and AGH Leasing with and into the management and
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operating businesses of CapStar, and the REIT must be able to successfully
integrate operations for the hotels owned by CapStar (the "CapStar Owned
Hotels") and those owned by AGH (the "AGH Owned Hotels"). The consolidation of
functions and integration of departments, systems and procedures and the spin-
off of MeriStar Hotels to manage the hotels owned by the REIT (the "REIT Owned
Hotels") will present a significant management challenge, and the failure to
integrate all of such hotels into MeriStar Hotels' management and operating
structures could have a material adverse effect on the results of operations
and financial condition of MeriStar Hotels. There can be no assurance that
such integration will be successfully and timely implemented.
FAILURE TO TRANSFER OPERATING LICENSES
In connection with the Merger, certain operating licenses, such as food and
beverage licenses, are to be transferred to MeriStar Hotels. It may not be
possible to transfer such licenses, or to obtain new licenses in a timely
manner in the event such licenses cannot be transferred. Although hotels can
provide alcoholic beverages under interim licenses or licenses held by the
hotel's previous owner, there can be no assurance that these licenses will
remain in effect until MeriStar Hotels obtains new licenses or that new
licenses will be obtained. The failure to have alcoholic beverage licenses or
other operating licenses could adversely affect the results of operations of
MeriStar Hotels.
CONFLICT OF INTEREST IN RELATIONSHIP BETWEEN THE REIT AND MERISTAR HOTELS.
GENERAL CONFLICTS OF INTEREST
MeriStar Hotels and the REIT will have several common members of their
Boards of Directors and several common senior executives, including their two
top executives. MeriStar Hotels and the REIT will operate in a relationship
governed by the Intercompany Agreement which restricts each party from taking
advantage of certain business opportunities without first presenting those
opportunities to the other party. Also, in their relationship with MeriStar
Hotels as lessee and manager of hotels and the REIT as owner of hotels,
MeriStar Hotels and the REIT may have conflicting views on the manner in which
the hotels are operated and managed, and with respect to lease arrangements,
acquisitions and dispositions. As a result, the directors and senior
executives of MeriStar Hotels (who serve in similar capacities at the REIT)
may well be presented with several decisions which provide them the
opportunity to benefit the REIT to the detriment of MeriStar Hotels or benefit
MeriStar Hotels to the detriment of the REIT. Such inherent potential
conflicts of interest will be present in all of the numerous transactions
between MeriStar Hotels and the REIT.
See "The Company--The Intercompany Agreement" for a description of the
relationship between MeriStar Hotels and the REIT and the Intercompany
Agreement.
RESTRICTIONS ON MERISTAR HOTELS' AND THE REIT'S BUSINESS AND FUTURE
OPPORTUNITIES
The Charter provides that for so long as the Intercompany Agreement is in
effect, MeriStar Hotels is prohibited from engaging in activities or making
investments that a real estate investment trust could make unless the REIT was
first given the opportunity but elected not to pursue such activities or
investments. Under the Charter and the Intercompany Agreement, MeriStar Hotels
has agreed not to acquire or make (i) investments in real estate (which, for
purposes of the Intercompany Agreement, include the provision of services
related to real estate and investment in hotel properties, real estate
mortgages, real estate derivatives or entities that invest in real estate
assets) or (ii) any other investments that may be structured in a manner that
qualifies under the federal income tax requirements applicable to a real
estate investment trust, unless in either case it has notified the REIT of the
acquisition or investment opportunity, in accordance with the terms of the
Intercompany Agreement, and the REIT has determined not to pursue such
acquisition or investment; provided, however, that MeriStar Hotels may make
limited minority investments or contributions as part of a lease arrangement
with a party that is not an affiliate of MeriStar Hotels in a bona fide arms-
length transaction; provided further, that such investment or contribution
does not materially impact MeriStar Hotels' financial and legal qualifications
to lease and manage additional real estate investment trust properties. See
"The Company--The Intercompany Agreement." MeriStar Hotels also has agreed to
assist the REIT in structuring and consummating any such acquisition or
investment which the REIT elects to pursue, on terms determined by the REIT.
On the other hand, the Intercompany Agreement grants MeriStar Hotels the right
of first refusal to become the lessee of any real property acquired by
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the REIT as to which the REIT determines that, consistent with the REIT's
status as a real estate investment trust, it is required to enter into a
master lease arrangement. This lessee opportunity will be available to
MeriStar Hotels only if the REIT determines, in its sole discretion, that
MeriStar Hotels is qualified to be the lessee. Because of the provisions of
the Intercompany Agreement and the Charter, the nature of MeriStar Hotels'
business and the opportunities it may pursue are restricted.
CONFLICTS RELATING TO SALE OF HOTELS SUBJECT TO LEASES
The REIT generally will be obligated under its master leases with MeriStar
Hotels to pay a lease termination fee to MeriStar Hotels if the REIT elects to
sell a hotel or if it elects not to restore a hotel after a casualty and does
not replace it with another hotel on terms that would create a leasehold
interest in such hotel with a fair market value equal to MeriStar Hotels'
remaining leasehold interest under the lease to be terminated. Where
applicable, the termination fee is equal to the fair market value of MeriStar
Hotels' leasehold interest in the remaining term of the lease to be
terminated. A decision to sell a hotel may, therefore, have significantly
different consequences for MeriStar Hotels and the REIT.
NO ARM'S LENGTH BARGAINING
The terms of the Intercompany Agreement, the agreement pursuant to which (i)
the REIT and the Company will provide to each other a right of first
opportunity with respect to certain investment opportunities available to each
of them, (ii) the Company will provide certain corporate and other general
services to the REIT and (iii) the REIT and the Company agree to cooperate and
coordinate with each other with regard to certain matters, was not negotiated
on an arm's length basis. Because Messrs. Whetsell, Jorns, Worms and Doctoroff
will be directors of both the REIT and the Company and Messrs. Whetsell and
Jorns will be executive officers of both the REIT and the Company, there is a
potential conflict of interest with respect to the enforcement and termination
of the Intercompany Agreement to benefit the REIT to the detriment of the
Company or benefit of the Company to the detriment of the REIT. Because of
these conflicts, Messrs. Whetsell, Jorns, Worms and Doctoroff may have
conflicts of interest with respect to their decisions relating to the
enforcement of the Intercompany Agreement.
TAX RISKS IN RELATIONSHIP BETWEEN THE REIT AND MERISTAR HOTELS
A real estate investment trust generally is not subject to federal corporate
income taxes on that portion of its income distributed currently to
stockholders. Section 269B(a)(3) of the Internal Revenue Code of 1986, as
amended (the "Code") provides that if the shares of a real estate investment
trust are stapled with the shares of any other entity, then the real estate
investment trust and such other entity shall be treated as one entity for
purposes of determining whether the real estate investment trust qualifies as
a real estate investment trust for federal income tax purposes. If Section
269B(a)(3) of the Code applied to the Company and the REIT, the REIT would not
qualify as a real estate investment trust under the Code. MeriStar Hotels and
the REIT are not stapled entities because the Common Stock will be issued
independently of the shares of the REIT and will be traded separately as well.
However, because at least initially some employees and members of management
of the Company and the REIT will be the same, it is possible that the Internal
Revenue Service could seek to assert that the Company should be treated as an
agent of the REIT or that the Company and the REIT should be treated as one
entity for federal income tax purposes. If such assertion were successful, the
REIT would not qualify as a real estate investment trust under the Code.
AGH and CapStar will receive an opinion of counsel in connection with the
Merger providing in part that the Company and the REIT will not be treated as
stapled entities under Section 269B(a)(3) of the Code and that, based upon the
intended operations of each entity and certain other factors and upon
representations made by certain persons who will be members of management of
the Company and the REIT, the separate corporate identities of MeriStar Hotels
and the REIT will be respected and the Company will not be treated as an agent
of the REIT for federal income tax purposes.
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ADVERSE EFFECTS RELATING TO THE LODGING INDUSTRY
OPERATING RISKS
Various factors could adversely affect the ability of MeriStar Hotels to
generate revenues and make lease payments to the REIT. MeriStar Hotels'
business will be subject to all of the operating risks inherent in the lodging
industry. These risks include the following: (i) changes in general and local
economic conditions; (ii) cyclical overbuilding in the lodging industry; (iii)
varying levels of demand for rooms and related services; (iv) competition from
other hotels, motels and recreational properties, some of which may have
greater marketing and financial resources than the REIT or MeriStar Hotels;
(v) dependence on business and commercial travelers and tourism, which
business may fluctuate and be seasonal; (vi) the recurring need for
renovations, refurbishment and improvements of hotel properties; (vii) changes
in governmental regulations that influence or determine wages, prices and
construction and maintenance costs; and (viii) changes in interest rates and
the availability of credit. Demographic, geographic or other changes in one or
more of MeriStar Hotels' markets could impact the convenience or desirability
of the sites of certain hotels, which would in turn affect the operations of
those hotels. In addition, due to the level of fixed costs required to operate
full-service hotels, certain significant expenditures necessary for the
operation of hotels generally cannot be reduced when circumstances cause a
reduction in revenue.
SEASONALITY
The lodging industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters
although this may not be true for hotels in major tourist destinations.
Revenues for hotels in tourist areas generally are substantially greater
during tourist season than other times of the year. Seasonal variations in
revenue at the hotels MeriStar Hotels manages can be expected to cause
quarterly fluctuations in the revenues of MeriStar Hotels. Quarterly earnings
also may be adversely affected by events beyond MeriStar Hotels' control, such
as extreme weather conditions, economic factors and other considerations
affecting travel.
FRANCHISE AGREEMENTS
Upon completion of the Merger, 93 of the REIT Owned Hotels will be operated
pursuant to existing franchise or license agreements with nationally
recognized hotel companies (the "Franchise Agreements"). The Franchise
Agreements generally contain specific standards for, and restrictions and
limitations on, the operation and maintenance of a hotel in order to maintain
uniformity within the franchisor system. Those limitations may conflict with
the REIT's and MeriStar Hotels' philosophy of creating specific business plans
tailored to each hotel and to each market. Such standards are often subject to
change over time, in some cases at the discretion of the franchisor, and may
restrict a franchisee's ability to make improvements or modifications to a
hotel without the consent of the franchisor. In addition, compliance with such
standards could require a franchisee to incur significant expenses or capital
expenditures. Action or inaction on the part of any of the REIT, MeriStar
Hotels or third-party operators could result in a breach of such standards or
other terms and conditions of the franchise agreements and could result in the
loss or cancellation of a franchise license.
In connection with terminating or changing the franchise affiliation of a
REIT Owned Hotel or a subsequently acquired hotel, MeriStar Hotels or the REIT
may be required to incur significant expenses or capital expenditures.
Moreover, the loss of a franchise license could have a material adverse effect
upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor. The
Franchise Agreements covering the hotels expire or terminate, without
specified renewal rights, at various times and have differing remaining terms.
As a condition to renewal, the Franchise Agreements frequently contemplate a
renewal application process, which may require substantial capital
improvements to be made to a hotel.
Under certain of their existing Franchise Agreements, AGH and CapStar may be
required to obtain the consent of the franchisors under such agreements to
consummate the Merger and related transactions. There can be no assurance that
such consents will be obtained.
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COMPETITION IN THE LODGING INDUSTRY
The lodging industry is highly competitive. There is no single competitor or
small number of competitors of the REIT and MeriStar Hotels that will be
dominant in the industry. MeriStar Hotels will operate in areas that contain
numerous competitors, some of which may have substantially greater resources
than MeriStar Hotels and the ability to accept more risk than MeriStar Hotels
will be able to manage. Competition in the lodging industry is based generally
on location, room rates and range and quality of services and guest amenities
offered. New or existing competitors could significantly lower rates or offer
greater conveniences, services or amenities or significantly expand, improve
or introduce new facilities in markets in which MeriStar Hotels will compete,
thereby adversely affecting MeriStar Hotels' operations and the number of
suitable business opportunities.
COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
contamination from hazardous or toxic substances, or the failure to properly
remediate such contaminated property, may adversely affect the owner's ability
to sell or rent such real property or to borrow using such real property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not such
facility is or ever was owned or operated by such person. The operation and
removal of certain underground storage tanks are also regulated by federal and
state laws. In connection with the ownership and operation of the hotels, the
REIT could be held liable for the costs of remedial action with respect to
such regulated substances and storage tanks and claims related thereto.
Activities have been undertaken to close or remove storage tanks located on
the property of several of the REIT Owned Hotels.
All of the REIT Owned Hotels have undergone Phase I environmental site
assessments ("Phase Is"), which generally provide a nonintrusive physical
inspection and database search, but not soil or groundwater analyses, by a
qualified independent environmental engineer, within the last 18 months. The
purpose of a Phase I is to identify potential sources of contamination for
which the REIT Owned Hotels may be responsible and to assess the status of
environmental regulatory compliance. The Phase Is have not revealed and the
Company is not aware of any environmental liability or compliance concerns
that MeriStar Hotels believes would have a material adverse effect on MeriStar
Hotels' results of operation or financial condition.
In addition, the REIT Owned Hotels have been inspected to determine the
presence of asbestos. Federal, state and local environmental laws, ordinances
and regulations also require abatement or removal of certain asbestos-
containing materials ("ACMs") and govern emissions of and exposure to asbestos
fibers in the air. ACMs are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
REIT Owned Hotels. Operations and maintenance programs for maintaining such
ACMs have been or are in the process of being designed and implemented, or the
ACMs have been scheduled to be or have been abated, at such hotels. However,
there can be no assurance that this will be the case. Any liability resulting
from non-compliance or other claims relating to environmental matters could
have a material adverse effect on MeriStar Hotels' results of operations or
financial condition.
GOVERNMENTAL REGULATION
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. MeriStar Hotels
believes that it is substantially in compliance with these requirements or, in
the case of liquor licenses, that it has or will promptly obtain the
appropriate licenses. Managers of hotels are also subject to laws governing
their relationship with hotel employees, including minimum wage requirements,
overtime, working conditions and work permit requirements. Compliance with, or
changes in, these laws could reduce the revenue and profitability of the REIT
Owned Hotels and could otherwise adversely affect MeriStar Hotels' results of
operations or financial condition.
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Under the Americans with Disabilities Act (the "ADA"), all public
accommodations are required to meet certain requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA required
upgrades to the REIT Owned Hotels, a determination that the REIT is not in
compliance with the ADA could result in a judicial order requiring compliance,
imposition of fines or an award of damages to private litigants. The REIT is
likely to incur additional costs of complying with the ADA.
ADVERSE EFFECTS RELATING TO THE OPERATION OF REAL ESTATE
Upon consummation of the Formation Transactions, MeriStar Hotels will
continue the hotel management businesses as previously undertaken separately
by AGHI, AGH Leasing and CapStar. MeriStar Hotels will lease the REIT Owned
Hotels pursuant to the Participating Leases. The REIT will have the right to
terminate a Participating Lease upon the sale of a hotel to a third party or
if MeriStar Hotels fails to meet certain performance criteria. The underlying
value of MeriStar Hotels' operations and income will be dependent upon the its
ability to operate the hotels in a manner sufficient to maintain or increase
revenues and to generate sufficient revenue in excess of operating expenses to
make lease payments to the REIT. Many of these risks are beyond the control of
MeriStar Hotels and the effects of these risks are likely to be more
pronounced than if MeriStar Hotels had diversified operations.
PAPER CLIP STRUCTURE RISKS
The Intercompany Agreement between the REIT and the Company has been
structured to provide the two companies with mutually beneficial rights and
obligations so that investors in both companies may enjoy the economic benefit
of the entire enterprise. This is known as the "paper-clip" REIT structure.
However, because of the independent trading of the REIT and the Company,
stockholders in each company may develop divergent interests which could lead
to conflicts of interest. This divergence of interests could also lead the two
companies in separate directions which could lead to conflicts of interest.
DEPENDENCE ON KEY PERSONNEL
Upon consummation of the Merger, MeriStar Hotels will place substantial
reliance on the lodging industry knowledge and experience and the continued
services of both AGH and CapStar senior management, led by Messrs. Whetsell,
Jorns and McCaslin. MeriStar Hotels' future success and its ability to manage
future growth depend in large part upon the efforts of these persons and on
MeriStar Hotel's ability to attract and retain other highly qualified
personnel. Competition for such personnel is intense, and there can be no
assurance that MeriStar Hotels will be successful in attracting and retaining
such personnel. MeriStar Hotels' inability to attract and retain other highly
qualified personnel may adversely affect its results of operations and
financial condition. MeriStar Hotels will have employment agreements with
Messrs. Whetsell and Jorns for terms of five years, and with Mr. McCaslin for
a term of three years, in each case with automatic renewals on a year-to-year
bases thereafter. See "Executive Officers-Employment Agreements." While
certain of such contracts will contain non-compete clauses, such clauses may
not be enforceable in certain jurisdictions.
ADVERSE EFFECTS ON MARKET PRICE OF COMMON STOCK ARISING FROM SHARES AVAILABLE
FOR FUTURE SALE
No prediction can be made as to the effect, if any, that any future sales of
shares, or the availability of shares for future sale, will have on the market
prices for Common Stock following the Spin-Off. Sales of substantial amounts
of Common Stock (including Common Stock issued in connection with the Rights,
outstanding stock options or the exchange or sale of units of limited partner
interest in Hotels OP) or the perception that such sales could occur could
adversely affect the then-prevailing market price for Common Stock. With the
exception of the Common Stock issued to affiliates of MeriStar Hotels in
connection with the Spin-Off and the Rights Offering, all of the Common Stock
to be issued in connection with the Spin-Off and the Rights Offering will be
freely transferable.
18
<PAGE>
ABSENCE OF A PUBLIC MARKET FOR COMMON STOCK
There is currently no public market for the Common Stock. The Common Stock
has been approved for listing on the NYSE, under the symbol "MMH", subject to
official notice of issuance. There can be no assurance as to the prices at
which trading in Common Stock will occur after the Spin-Off or that an active
trading market in the Common Stock will develop or be sustained in the future.
In the event no active trading market develops for the Common Stock, holders
of shares of Common Stock may not be able to sell their shares promptly at a
reasonable price. Accordingly, Rightholders and holders of Common Stock should
consider the Common Stock a long-term investment.
The prices at which the Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
MeriStar Hotels' and the REIT's performance and prospects, the depth and
liquidity of the market for the Common Stock, investor perception of MeriStar
Hotels and of the hotel industry in which MeriStar Hotels operate, economic
conditions in general, MeriStar Hotels' dividend policy, and general financial
and other market conditions. Such volatility and other factors may materially
adversely affect the market price of the Common Stock.
REDISTRIBUTION OF MERISTAR HOTELS COMMON STOCK
Trading in shares of OpCo will likely be characterized by a period of
redistribution among the MeriStar shareholders who receive such shares in the
Spin-Off (especially in light of the taxable nature of the Spin-Off) which may
temporarily depress the market price of such shares during such period.
POTENTIAL ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF DELAWARE LAW AND OF THE
CHARTER AND BY-LAWS
Certain provisions of Delaware law and of the Charter and By-Laws may have
the effect of discouraging a third party from making an acquisition proposal
for MeriStar Hotels and could delay, defer or prevent a transaction or a
change in control of MeriStar Hotels under circumstances that could otherwise
give the holders of Common Stock the opportunity to realize a premium over the
then prevailing market prices of the Common Stock. Certain provisions of the
Charter and By-laws, as each will be in effect as of the Rights Offering, and
of the DGCL, have the effect of making more difficult an acquisition of
control of the Company in a transaction not approved by the Board of
Directors. These provisions include (i) a provision for a classified Board,
with only approximately one-third of the Board to be elected in any year, to
serve for three-year terms, (ii) a requirement that directors be removed only
for cause upon the affirmative vote of holders of at least 66 2/3% of the
total voting power, (iii) a requirement that actions of stockholders be taken
at a meeting of stockholders, rather than by written consent, (iv) a
prohibition on the stockholders' ability to call a special meeting, (v) an
advance notice requirement for stockholders to make nominations of candidates
for directors or to bring other business before an annual meeting of
stockholders, and (vi) a requirement that certain amendments to the Charter be
approved by the affirmative vote of 66 2/3% of total voting power. See
"Description of Capital Stock" and "Certain Antitakeover Provisions."
19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected historical and pro forma financial
information for the Company. The historical balance sheet data of the Company
as of March 31, 1998 and 1997 and December 31, 1997 and 1996 and the
historical operating results and other financial data for the three months
ended March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and
1995, have been derived from the combined financial statements of the Company
which are included elsewhere in this Prospectus. The historical balance sheet
data as of December 31, 1995, 1994 and 1993 and the historical operating
results and other financial data for the years ended December 31, 1994 and
1993 have been derived from financial statements of the Company which are not
required to be included in this Prospectus. The following historical
information should be read in conjunction with the combined financial
statements and notes thereto of the Company and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
The pro forma balance sheet data of the Company as of March 31, 1998 has
been prepared assuming that the Formation Transactions had been consummated on
such date. The pro forma operating results and other financial data have been
prepared assuming that the Formation Transactions had been consummated at the
beginning of the periods presented. The following pro forma information should
be read in conjunction with MeriStar Hotels Unaudited Pro Forma Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------------- ----------------------------------------------------
PRO FORMA PRO FORMA
1998 1998 1997 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ------- ------- ------ ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenue:
Rooms.................. $176,474 $23,404 $ -- $674,197 $ 9,880 $ -- $ -- $ -- $ --
Food, beverage and
other................. 68,017 2,576 -- 264,440 1,871 -- -- -- --
Management services
and other revenues.... 2,085 4,150 1,139 10,510 12,088 7,050 5,354 4,418 4,234
-------- ------- ------- -------- ------- ------- ------ ------ ------
Total revenues....... 246,576 30,130 1,139 949,147 23,839 7,050 5,354 4,418 4,234
-------- ------- ------- -------- ------- ------- ------ ------ ------
Operating expenses:
Departmental expenses:
Rooms.................. 41,232 5,124 -- 165,633 2,533 -- -- -- --
Food, beverage and
other ................ 49,451 1,493 -- 195,555 1,170 -- -- -- --
Undistributed operating
expenses:
Administrative and
general............... 43,794 6,963 2,202 159,909 10,473 6,140 4,745 4,508 4,065
Participating lease
expense............... 85,592 10,655 -- 297,201 4,135 -- -- -- --
Property operating
costs................. 29,962 4,142 -- 114,699 1,917 -- -- -- --
Depreciation and
amortization.......... 1,224 421 96 4,690 636 349 84 23 14
-------- ------- ------- -------- ------- ------- ------ ------ ------
Total operating
expenses.............. 251,255 28,798 2,298 937,687 20,864 6,489 4,829 4,531 4,079
-------- ------- ------- -------- ------- ------- ------ ------ ------
Net operating income
(loss)................. (4,679) 1,332 (1,159) 11,460 2,975 561 525 (113) 155
Equity in earnings
(loss) of affiliates... -- (521) -- 46 46 -- -- -- --
Interest expense, net... 2,006 18 14 5,297 56 123 44 -- --
Minority interest....... (1,074) 35 -- 1,047 103 -- -- -- --
Income tax provision
(benefit).............. (2,244) -- -- 2,065 -- -- -- -- --
-------- ------- ------- -------- ------- ------- ------ ------ ------
Net income (loss).... $ (3,367) $ 758 $(1,173) $ 3,097 $ 2,862 $ 438 $ 481 $ (113) $ 155
======== ======= ======= ======== ======= ======= ====== ====== ======
Basic and diluted net
income (loss) per
common share........... $ (0.14) $ -- $ -- $ 0.12 $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Total assets ........... $198,879 $84,719 $25,415 $ -- $84,419 $24,366 $2,881 $1,232 $1,458
Debt.................... 65,776 776 800 -- 981 885 950 -- --
OTHER FINANCIAL DATA:
EBITDA (A).............. (3,455) 1,753 (1,063) 16,150 3,611 910 609 (90) 169
Net cash provided by
(used in) operating
activities............. (1,583) 2,760 682 9,697 4,465 1,226 208 66 (101)
Net cash used in
investing activities... (84,125) (326) (902) (90,300) (6,501) (1,826) (61) (41) (24)
Net cash provided by
(used in) financing
activities............. 64,795 (205) (85) 69,208 4,208 699 59 -- 244
</TABLE>
- --------
(A) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is a useful
measure of operating performance because (i) it is industry practice to
evaluate hotel companies based on operating income before interest,
depreciation and amortization and minority interests, which is generally
equivalent to EBITDA, and (ii) EBITDA is unaffected by the debt and equity
structure of the entity. EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles ("GAAP"), is not
necessarily indicative of cash available to fund all cash flow needs, should
not be considered as an alternative to net income under GAAP for purposes of
evaluating the Company's results of operations and may not be comparable to
other similarly titled measures used by other companies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------------- --------------------------------------
PRO FORMA PRO FORMA
1998 1998 1997 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA CALCULATION
Net operating income
(loss)................. (4,679) 1,332 (1,159) 11,460 2,975 561 525 (113) 155
Add:
Depreciation and
amortization........... 1,224 421 96 4,690 636 349 84 23 14
------ ----- ------ ------ ----- --- --- ---- ---
EBITDA.................. (3,455) 1,753 (1,063) 16,150 3,611 910 609 (90) 169
</TABLE>
21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The Unaudited Pro Forma Balance Sheet of MeriStar Hotels as of March 31,
1998 is presented assuming the Formation Transactions had occurred on March
31, 1998.
The Unaudited Pro Forma Statements of Operations of MeriStar Hotels for the
three months ended March 31, 1998 and the year ended December 31, 1997 are
presented assuming the Formation Transactions occurred at the beginning of
1997.
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments columns, which are
further described in the notes to the MeriStar Hotels Unaudited Pro Forma
Financial Statements. The MeriStar Hotels Unaudited Pro Forma Financial
Statements are not necessarily indicative of what MeriStar Hotels' financial
position or results of operations would have been if all the hotels were owned
on such dates and if the Spin-Off and other related transactions occurred on
such dates. Additionally, the pro forma information does not purport to
project MeriStar Hotels' financial position or results of operations at any
future date or for any future period. The MeriStar Hotels Unaudited Pro Forma
Financial Statements should be read in conjunction with the financial
statements and related notes thereto of MeriStar Hotels, AGH Leasing and AGHI
which are included elsewhere in this Prospectus.
22
<PAGE>
MERISTAR HOTELS
UNAUDITED PRO FORMA BALANCE SHEET
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUIRE
AGH
SPIN- PARTICIPATING LEASING AND
HISTORICAL (A) OFF (B) LEASES (C) SUBTOTAL AGHI (D) PRO FORMA
-------------- -------- ------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $28,602 $ 30,000 $ -- $ 58,602 $(48,799) $ 9,803
Prepaid expenses,
deposits and other..... 17,498 -- 37,959 55,457 -- 55,457
Intangible and fixed
assets, net............ 38,619 -- -- 38,619 95,000 133,619
------- -------- ------- -------- -------- --------
Total assets.......... $84,719 $ 30,000 $37,959 $152,678 $ 46,201 $198,879
======= ======== ======= ======== ======== ========
LIABILITIES, MINORITY INTEREST AND
OWNERS'/STOCKHOLDERS' EQUITY
Due to affiliate........ $18,372 $(18,372) $ 871 $ 871 $ -- $ 871
Other liabilities....... 20,069 -- 37,088 57,157 -- 57,157
Credit facilities....... -- 30,000 -- 30,000 35,000 65,000
Capital leases and other
debt................... 776 -- -- 776 -- 776
------- -------- ------- -------- -------- --------
Total liabilities..... 39,217 11,628 37,959 88,804 35,000 123,804
Minority interest....... 3,835 768 -- 4,603 11,201 15,804
Common stock............ -- 249 -- 249 -- 249
Additional paid-in
capital................ -- 59,022 -- 59,022 -- 59,022
Retained earnings....... -- -- -- -- -- --
Owners' equity.......... 41,667 (41,667) -- -- -- --
------- -------- ------- -------- -------- --------
Owners'/Stockholders'
equity............... 41,667 17,604 -- 59,271 -- 59,271
------- -------- ------- -------- -------- --------
Total liabilities,
minority interest and
owners'/stockholders'
equity............... $84,719 $ 30,000 $37,959 $152,678 $ 46,201 $198,879
======= ======== ======= ======== ======== ========
</TABLE>
- --------
(A) Reflects the unaudited historical condensed combined balance sheet of the
Company as of March 31, 1998.
(B) Reflects adjustments to capitalize MeriStar Hotels upon the Spin-Off for
(i) $30,000 of cash drawn from MeriStar Hotels' credit facilities, and
(ii) contributions of $18,372 to MeriStar Hotels shareholders ($17,604)
and OP Unit holders ($768) by CapStar upon forgiveness of $18,372 due to
CapStar.
(C) Reflects the transfer of net hotel operating assets from CapStar ($37,959
of operating assets and $37,088 of operating liabilities) in conjunction
with the execution of the Participating Leases and the resulting due to
affiliates of $871 for the amount by which operating assets transferred to
MeriStar Hotels exceed operating liabilities assumed by MeriStar Hotels.
(D) Reflects the acquisitions of AGH Leasing and AGHI for $95,000. Based on
preliminary estimates, the purchase price will be allocated $26,500 to
intangible hotel leases acquired, to be amortized over 26 years
(representing the average remaining initial lease terms plus the assumed
exercise of three 5-year renewal options) and $68,500 to goodwill, to be
amortized over 35 years. The transaction is to be financed with $48,799 in
cash, an additional $35,000 drawn from MeriStar Hotels' credit facilities,
and $11,201 in OP Units.
23
<PAGE>
MERISTAR HOTELS
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACQUIRE AGH LEASING
AND AGHI
----------------------------------
SPIN-OFF PARTICIPATING AGH OTHER
HISTORICAL(A) PRO FORMA(B) LEASES(C) SUBTOTAL LEASING(D) AGHI(D) ADJUSTMENTS(E) PRO FORMA
------------- ------------ ------------- -------- ---------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from hotel
operations:
Rooms................ $23,404 $ -- $84,254 $107,658 $68,816 $ -- $ -- $176,474
Food and beverage.... 1,357 -- 33,632 34,989 20,493 -- -- 55,482
Other hotel revenue.. 1,219 -- 7,024 8,243 4,292 -- -- 12,535
Hotel management,
accounting and
other................ 4,150 -- (3,121) 1,029 -- 2,815 (1,759) 2,085
------- ----- ------- -------- ------- ------ ------- --------
Total revenue........ 30,130 -- 121,789 151,919 93,601 2,815 (1,759) 246,576
Hotel operating
expense by
department:
Rooms................ 5,124 -- 21,130 26,254 14,978 -- -- 41,232
Food and beverage.... 995 -- 27,154 28,149 14,931 -- -- 43,080
Other operating
departments......... 498 -- 3,819 4,317 2,054 -- -- 6,371
Undistributed
operating expenses:
Administrative and
general............. 6,963 -- 20,775 27,738 14,203 2,430 (577) 43,794
Property operating
costs............... 4,142 -- 15,778 19,920 12,112 -- (2,070) 29,962
Lease expense........ 10,655 -- 41,174 51,829 33,763 -- -- 85,592
Depreciation and
amortization........ 421 -- -- 421 26 27 750 1,224
------- ----- ------- -------- ------- ------ ------- --------
28,798 -- 129,830 158,628 92,067 2,457 (1,897) 251,255
Interest expense and
other, net........... 539 694 -- 1,233 6 (42) 809 2,006
------- ----- ------- -------- ------- ------ ------- --------
Total expenses........ 29,337 694 129,830 159,861 92,073 2,415 (1,088) 253,261
------- ----- ------- -------- ------- ------ ------- --------
Income (loss) before
minority interest and
income taxes......... 793 (694) (8,041) (7,942) 1,528 400 (671) (6,685)
Minority interest..... 35 (20) (336) (321) -- -- (753) (1,074)
------- ----- ------- -------- ------- ------ ------- --------
Income (loss) before
income taxes......... 758 (674) (7,705) (7,621) 1,528 400 82 (5,611)
Income tax provision
(benefit)............ -- 34 (3,082) (3,048) -- -- (804) (2,244)
------- ----- ------- -------- ------- ------ ------- --------
Net income (loss)..... $ 758 $(708) $(4,623) $ (4,573) $ 1,528 $ 400 $ (722) $ (3,367)
======= ===== ======= ======== ======= ====== ======= ========
Basic net income per
common share......... -- $ (0.14)(F)
======= ========
Diluted net income per
common share......... -- $ (0.14)(F)
======= ========
</TABLE>
- --------
(A) Reflects the unaudited historical condensed combined statement of
operations of the Company for the three months ended March 31, 1998.
(B) Reflects adjustments to (i) record interest expense (at an annual rate of
9.25%) of $694 relating to the $30,000 drawn from MeriStar Hotels' credit
facilities, (ii) adjust minority interest for the effects of (i) and (iii)
record income taxes at 40% in conjunction with the change in tax status to
a C-corporation.
(C) Reflects the execution of the Participating Leases to (i) present a full
period of hotel operations for hotels leased from CapStar, (ii) adjust
minority interest for the effects of (i) and (iii) record income taxes at
40%. Lease expense was calculated based on contractual terms of existing
leases or expected terms of leases that will be entered into concurrently
with the Merger.
(D) Reflects adjustments for the acquisition of AGH Leasing and AGHI for (i)
pro forma AGH Leasing operations and (ii) the historical operating
activity of AGHI for the three months ended March 31, 1998. Pro forma
financial statements of AGH Leasing and the historical financial
statements of AGHI are included elsewhere in this prospectus.
(E) Other adjustments for the acquisition reflect (i) elimination of
historical management fees earned by AGHI from the AGH Owned Hotels of
$1,759, (ii) elimination of pro forma management fees incurred by AGH
Leasing for AGHI services of $2,070, (iii) elimination of management
advisory services fees of $858 that will not be incurred in the future (as
the management advisory contract terminates upon sale of AGHI and the
Company will perform these functions internally with existing management),
net of $281 of additional general and administrative costs expected to be
incurred upon the Spin-Off and acquisition, (iv) amortization of $750 on
intangible assets acquired in the purchase, (v) interest expense of $809
relating to the $35,000 draw from MeriStar Hotels' credit facilities, (vi)
minority interest of 16.2% adjusted for (i) through (v), and (vii) income
taxes at 40%.
(F) Pro forma basic and diluted net income per common share has been
calculated using 24,890,355 shares of Common Stock.
24
<PAGE>
MERISTAR HOTELS
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACQUIRE AGH LEASING
AND AGHI
----------------------------------
SPIN-OFF PARTICIPATING AGH OTHER
HISTORICAL(A) PRO FORMA(B) LEASES(C) SUBTOTAL LEASING(D) AGHI(D) ADJUSTMENTS(E) PRO FORMA
------------- ------------ ------------- -------- ---------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from hotel
operations:
Rooms................. $ 9,880 $68,738 $343,066 $421,684 $252,513 $ -- $ -- $674,197
Food and beverage..... 1,397 3,316 137,358 142,071 76,703 -- -- 218,774
Other................. 474 3,237 26,265 29,976 15,690 -- -- 45,666
Hotel management,
accounting and other.. 12,088 -- (7,238) 4,850 -- 7,351 (1,691) 10,510
------- ------- -------- -------- -------- ------ -------- --------
Total revenue......... 23,839 75,291 499,451 598,581 344,906 7,351 (1,691) 949,147
Hotel operating expense
by department:
Rooms................. 2,533 14,300 89,297 106,130 59,503 -- -- 165,633
Food and beverage..... 909 2,215 109,096 112,220 58,940 -- -- 171,160
Other operating
departments.......... 261 1,648 14,227 16,136 8,259 -- -- 24,395
Undistributed operating
expenses:
Administrative and
general.............. 10,473 11,169 77,254 98,896 54,873 7,242 (1,102) 159,909
Property operating
costs................ 1,917 12,265 60,265 74,447 47,607 -- (7,355) 114,699
Participating lease
expense.............. 4,135 32,002 140,936 177,073 120,128 -- -- 297,201
Depreciation and
amortization......... 636 826 -- 1,462 104 124 3,000 4,690
------- ------- -------- -------- -------- ------ -------- --------
20,864 74,425 491,075 586,364 349,414 7,366 (5,457) 937,687
Interest expense and
other, net............ 10 2,775 -- 2,785 (373) (135) 2,974 5,251
------- ------- -------- -------- -------- ------ -------- --------
Total expenses......... 20,874 77,200 491,075 589,149 349,041 7,231 (2,483) 942,938
------- ------- -------- -------- -------- ------ -------- --------
Income (loss) before
minority interest and
income taxes.......... 2,965 (1,909) 8,376 9,432 (4,135) 120 792 6,209
Minority interest...... 103 (14) 350 439 (1,663) -- 2,271 1,047
------- ------- -------- -------- -------- ------ -------- --------
Income (loss) before
income taxes.......... 2,862 (1,895) 8,026 8,993 (2,472) 120 (1,479) 5,162
Income tax provision
(benefit)............. -- 387 3,210 3,597 -- -- (1,532) 2,065
------- ------- -------- -------- -------- ------ -------- --------
Net income (loss)...... $ 2,862 $(2,282) $ 4,816 $ 5,396 $ (2,472) $ 120 $ 53 $ 3,097
======= ======= ======== ======== ======== ====== ======== ========
Basic net income per
common share.......... -- $ 0.12(F)
======= ========
Diluted net income per
common share.......... -- $ 0.12(F)
======= ========
</TABLE>
- --------
(A) Reflects the audited historical condensed combined statement of operations
of the Company for the year ended December 31, 1997.
(B) Reflects the pre-acquisition operations of the management operations and
leases acquired during 1997 as if they were acquired at the beginning of
the year. The pre-acquisition operations were obtained from each entity's
pre-acquisition financial statements. Also reflects adjustments to (i)
record pro forma depreciation and amortization at MeriStar Hotels' cost
basis for its acquisitions, (ii) record interest expense of $2,775 at
9.25% relating to the $30,000 drawn from MeriStar Hotels' credit
facilities, (iii) adjust minority interest for the effects of the
acquisitions and (i) and (ii), and (iv) record income taxes at 40% in
conjunction with the change in tax status to a C-corporation.
(C) Reflects the execution of the Participating Leases to (i) present a full
year of hotel operations for hotels leased from CapStar, (ii) eliminate
$7,238 of management fee revenue earned from CapStar-owned hotels, (iii)
adjust minority interest for the effects of (i) and (ii), and (iv) record
income taxes at 40%. Lease expense was calculated based on contractual
terms of existing leases or expected terms of leases that will be entered
into concurrently with the Merger.
25
<PAGE>
(D) Reflects adjustments for the acquisition of AGH Leasing and AGHI for (i)
pro forma AGH Leasing operations and (ii) the historical operating
activity of AGHI for the year. Pro forma financial statements of AGH
Leasing and the historical financial statements of AGHI are included
elsewhere in this prospectus.
(E) Other adjustments for the acquisition reflect (i) elimination of
historical management fees earned by AGHI from the AGH Owned Hotels of
$1,691, (ii) elimination of pro forma management fees incurred by AGH
Leasing for AGHI services of $7,355, (iii) elimination of management
advisory services fees of $2,227 that will not be incurred in the future
(as the management advisory contract terminates upon sale of AGHI and the
Company will perform these functions internally with existing management)
net of $1,125 of additional general and administrative costs expected to
be incurred upon the Spin-Off and acquisition, (iv) amortization of $3,000
on intangible assets acquired in the purchase, (v) interest expense of
$3,238 relating to the $35,000 draw from MeriStar Hotels' credit
facilities net of historical AGH Leasing and AGHI interest expense of $264
will not be incurred upon acquisition, (vi) minority interest adjusted for
(i) through (v), and (vii) income taxes at 40%.
(F) Pro forma basic and diluted net income per common share has been
calculated using 24,867,205 shares of Common Stock.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's financial condition and results of operations both on a pro
forma basis as of March 31, 1998 and December 31, 1997 and for the periods
then ended and on a historical basis as of March 31, 1998 and 1997 and
December 31, 1997 and for the periods then ended reflect differing numbers of
managed and leased hotels throughout the periods. The historical results of
operations for the years ended December 31, 1996 and 1995 reflect the same
number of managed hotels; however, the number of rooms under management
increased significantly during 1996. The following table outlines the
Company's pro forma and historical portfolio of managed and leased hotels:
<TABLE>
<CAPTION>
THIRD-PARTY
CAPSTAR HOTELS LEASED HOTELS
MANAGED HOTELS MANAGED TOTAL
---------------- ------------- ------------ -------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------- -------- ------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pro Forma:
March 31, 1998...... -- -- 146 32,654 55 9,822 201 42,476
December 31, 1997... -- -- 146 32,654 55 9,822 201 42,476
Historical:
March 31, 1998...... 55 14,414 45 6,410 40 6,899 140 27,723
December 31, 1997... 47 12,019 40 5,687 27 4,631 114 22,337
March 31, 1997...... 24 6,348 -- -- 28 4,482 52 10,830
December 31, 1996... 19 5,166 -- -- 28 4,619 47 9,785
December 31, 1995... 6 2,101 -- -- 41 6,089 47 8,190
</TABLE>
The increases described above affect the comparability of the Company's
financial condition and results of operations for these pro forma and
historical periods.
FINANCIAL CONDITION
PRO FORMA MARCH 31, 1998 COMPARED WITH HISTORICAL MARCH 31, 1998
Total assets increased by $114.2 million to $198.9 million at March 31, 1998
on a pro forma basis from $84.7 million at March 31, 1998 on a historical
basis. The increase is primarily due to the proposed acquisition of AGH
Leasing and AGHI for $95 million. The remaining increase reflects primarily
the net effect of the transactions to finance the acquisition of AGH Leasing
and AGHI and to execute the leases on CapStar-owned hotels.
Total liabilities increased by $84.6 million to $123.8 million at March 31,
1998 on a pro forma basis from $39.2 million on a historical basis. This
overall increase was primarily due to the Company's draws on its revolving
credit facilities of $65.0 million to partially finance both the Spin-Off and
the acquisition of AGH Leasing and AGHI. The remaining increase reflects the
net effect of this transaction to complete the Spin-Off and to execute the
leases on CapStar-owned hotels.
Minority interests increased by $12.0 million to $15.8 million on a pro
forma basis from $3.8 million at March 31, 1998 on a historical basis. This
increase was due to $11.2 million in REIT OP Units issued to third parties to
finance the acquisition of AGH Leasing and AGHI and allocations to minority
interests in the Spin-Off.
HISTORICAL MARCH 31, 1998 COMPARED WITH HISTORICAL DECEMBER 31, 1997
Total assets increased by $0.3 million to $84.7 million at March 31, 1998
from $84.4 million at December 31, 1997. Total liabilities decreased by $0.5
million to $39.2 million at March 31, 1998 from $39.7 million at December 31,
1997. There were no material changes in the Company's financial condition.
27
<PAGE>
RESULTS OF OPERATIONS
PRO FORMA FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH HISTORICAL
FOR THE THREE MONTHS ENDED MARCH 31, 1998
Total revenue increased by $216.1 million to $246.6 million for the three-
month period ended March 31, 1998 on a pro forma basis compared to $30.1
million for the three-month period ended March 31, 1998 on a historical basis.
Operating expenses increased to $251.2 million for the three-month period
ended March 31, 1998 on a pro forma basis from $28.8 million for the three-
month period ended March 31, 1998 on a historical basis. These increases
result primarily from the increase in total leased and managed hotels on a pro
forma basis, as compared to a historical basis.
Net operating income (loss) decreased to $(6.7) million for the three-month
period ended March 31, 1998 on a pro forma basis from $0.8 million for the
three-month period ended March 31, 1998 on a historical basis and EBITDA
decreased to $(3.5) million for the three-month period ended March 31, 1998 on
a pro forma basis from $1.8 million for the three-month period ended March 31,
1998 on a historical basis. These decreases relate primarily to the seasonal
nature of operations of the leased hotels (whose operations are included in
the Company's financial statements) on a pro forma basis.
Net interest expense increased by $1.5 million to $2.0 million for the
three-month period ended March 31, 1998 on a pro forma basis from $0.5 million
for the three-month period ended March 31, 1998 on a historical basis. This
increase results from the interest expense on the pro forma outstanding
balance on the credit facility.
Minority interest decreased by $1.1 million to $(1.0) million for the three-
month period ended March 31, 1998 on a pro forma basis due to the allocation
of a proportionate amount of loss to the minority interests.
The pro forma statement of operations for 1998 reflects income tax expense
at an effective rate of 40 percent, as a result of the change in tax status to
a C-Corporation.
HISTORICAL FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH HISTORICAL
FOR THE THREE MONTHS ENDED MARCH 31, 1997
Total revenue increased by $29.0 million or 2,636% to $30.1 million in the
three-month period ended March 31, 1998 compared to $1.1 million in the three-
month period ended March 31, 1997. This increase results from revenue of $26.0
million from hotels leased subsequent to March 31, 1997 and an increase of
$3.0 million in management fees and other revenue. The Company did not lease
any hotels as of March 31, 1997. The increase in revenue from leased hotels is
primarily due to the increase in the number of leased hotels in 1998. The
increase in management fees and other revenue is primarily due to the increase
in number of managed hotels in 1998. Hotel management and other revenue earned
by the Company from hotels owned by CapStar were $3.1 million or 10% of total
revenue in the three-month period ended March 31, 1998, and $0.3 million or
27% of total revenue in the three-month period ended March 31, 1997.
Operating expenses increased to $28.8 million in the three-month period
ended March 31, 1998 compared to $2.3 million in the three-month period ended
March 31, 1997. The increase reflects the increase in the number of managed
hotels and the hotel leases acquired subsequent to March 31, 1997, which
resulted in and includes the costs of additional personnel and other
administrative costs incurred in conjunction with the Company's growth.
Net operating income increased by 215% to $1.3 million in the three-month
period ended March 31, 1998 compared to a net operating loss of $1.2 million
in the three-month period ended March 31, 1997 and earnings before interest
EBITDA grew to $1.8 million in the three-month period ended March 31, 1998
from $(1.1) million in the three-month period ended March 31, 1997. These
increases resulted primarily from the increase in the number of managed hotels
and the hotel leases acquired subsequent to March 31, 1997, offset partially
by the costs of additional personnel and other administrative costs incurred
as described above.
28
<PAGE>
Equity in loss of affiliates was $0.5 million in the three-month period
ended March 31, 1998, due to the Company's share of net loss of affiliates
accounted for using the equity method. The Company acquired all such
investments in affiliates subsequent to March 31, 1997.
PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR
ENDED DECEMBER 31, 1997
Total revenue increased by $925.3 million to $949.1 million in 1997 on a pro
forma basis compared to $23.8 million in 1997 on a historical basis. Operating
expenses increased to $937.7 million in 1997 on a pro forma basis from $20.9
million in 1997 on a historical basis. Net operating income increased to $6.2
million in 1997 on a pro forma basis compared to $3.0 million in 1997 on a
historical basis, and earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") increased to $16.1 million in 1997 on
a pro forma basis from $3.6 million in 1997 on a historical basis. These
increases result primarily from the increase in total leased and managed
hotels on a pro forma basis, as compared to a historical basis.
Net interest expense increased by $5.2 million in 1997 on a pro forma basis
from $0.01 million in 1997 on a historical basis. This increase results from
the interest expense on the pro forma outstanding balance on the credit
facilities.
Minority interest increased by $0.9 million in 1997 on a pro forma basis
from $0.1 million in 1997 on a historical basis as a result of the net effect
of the changes described above and the issuance of the REIT OP Units in
connection with the acquisition of AGH Leasing and AGHI.
The pro forma statement of operations for 1997 reflects income tax expense
at an effective rate of 40 percent, as a result of the change in tax status to
a C-Corporation.
HISTORICAL YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR
ENDED DECEMBER 31, 1996
Total revenue increased by $16.7 million or 235% to $23.8 million in 1997
compared to $7.1 million in 1996. The increase results from revenue of $11.8
million from hotel leases acquired in 1997 and an increase of $4.9 million in
management fees and other revenue. The Company did not lease any hotels in
1996. The increase in management fees and other revenue is primarily due to
the increase in the number of managed hotels in 1997 and additional fees
resulting from improved operations of the managed hotels. Hotel management and
other revenue earned by the Company from hotels owned by CapStar were $7.2
million or 30% of total revenue in 1997, and $2.6 million or 37% of total
revenue in 1996.
Operating expenses increased to $20.9 million in 1997 from $6.5 million in
1996. This increase reflects the increase in the number of managed hotels and
the hotel leases acquired in 1997, which resulted in includes the costs of
additional personnel and other administrative costs incurred in conjunction
with the Company's growth.
Net operating income increased by 430% to $3.0 million in 1997 compared to
$0.6 million in 1996 and EBITDA grew to $3.7 million in 1997 from $0.9 million
in 1996. These increases resulted primarily from the increase in the number of
managed hotels and the hotel leases acquired in 1997, offset partially by the
costs of additional personnel and other administrative costs incurred as
described above.
Minority interests of $0.1 million in 1997 are due to the Company's
allocated portion of minority interests related to the REIT OP Units issued to
third parties in 1997.
29
<PAGE>
HISTORICAL YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE HISTORICAL YEAR
ENDED DECEMBER 31, 1995
Total revenue increased to $7.1 million in 1996 from $5.4 million in 1995.
The growth in management fees and other revenues between 1995 and 1996
reflects the increase in the number of hotel rooms managed and additional fees
resulting from improved operations of the managed hotels and new services
offered, such as tour and travel services. Hotel management and other revenue
earned by the Company from hotels owned by CapStar were $2.6 million or 37% of
total revenue in 1996, and $0.9 million or 17% of total revenue in 1995.
Operating expenses increased to $6.5 million in 1996 from $4.9 million in
1995. This increase reflects the increase in the number hotel rooms under
management, which resulted in costs of additional personnel and other
administrative costs incurred in conjunction with the Company's current and
anticipated growth.
Net operating income increased to $0.6 million in 1996 compared to $0.5
million in 1995 and EBITDA grew to $0.9 million in 1996 from $0.6 million in
1995. These increases resulted primarily from the increase in the number of
hotel rooms under management and additional fees earned as described above,
offset partially by the costs of additional personnel and other administrative
costs incurred as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have been cash on hand, cash
generated from operations, capital contributions from CapStar and the issuance
of OP Units by CapStar's operating partnership subsidiaries. The Company's
continuing operations have been funded through cash generated from management
and hotel leasing operations. Business acquisitions and investments in
affiliates are financed through capital contributions and the issuance of OP
Units by CapStar's operating partnership subsidiaries.
At December 31, 1997, the Company had $2.5 million in cash and cash
equivalents, an increase of $2.2 million from $0.3 million at December 31,
1996. Net cash provided by operations increased to $4.5 million compared to
$1.2 million in 1996, mainly due to the increase in managed hotels and the
hotel leases acquired in 1997. The Company used $6.5 million of cash in
investing activities in 1997, primarily for investments in notes receivable,
investments in affiliates and purchases of fixed assets. Net cash provided by
financing activities was $4.2 million in 1997. Non-cash capital contributions
of $34.6 million were made to the Company related to the acquisition of
Winston and its investments in affiliates.
CapStar has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and has initiated an
implementation plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of CapStar's and the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. CapStar presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will
not pose significant operational problems for the computer systems of CapStar
or the Company as so modified and converted. Additionally, CapStar does not
expect the Year 2000 problem to have a material effect on CapStar's or the
Company's financial position or results of operations. However, if such
modifications and conversions are not completed timely, the Year 2000 problem
may have a material impact on the financial position and operations of CapStar
and the Company.
As described more fully elsewhere in this document (see "The Merger and the
Spin-Off"), the Company is expected to be spun-off from CapStar in
anticipation of CapStar's proposed Merger with AGH. To initially capitalize
itself after the Spin-Off, the Company will draw $30.0 million from its credit
facilities to be provided by the REIT and certain third-party lenders and
receive a net cash contribution of $18.4 million from CapStar upon forgiveness
of certain amounts due to CapStar as of the date of the Spin-Off.
In conjunction with the Merger, the Company has entered into the Lessee-
Manager Acquisition Agreement to acquire substantially all of the assets and
liabilities of AGHI and AGH Leasing for a combined purchase price consisting
of approximately $83.8 million in cash and approximately $11.2 million in the
form of OP Units of
30
<PAGE>
Hotels OP which are convertible into Common Stock. The $83.8 million in cash
will consist of a combination of $65.0 million drawn on MeriStar Hotels'
credit facilities plus $18.8 of available cash. Specifically, the acquisitions
will comprise (i) substantially all of the assets and certain liabilities of
AGHI for a cash purchase price of $10 million; and (ii) 100% of the
partnership interests in AGH Leasing for a purchase price of $85 million,
consisting of approximately $73.8 million in cash and $11.2 million in OP
Units of Hotels OP. Upon consummation of the transactions contemplated by the
Lessee-Manager Acquisition Agreement, the Company will become the lessee and
manager of all of the AGH Hotels and certain other hotels, in addition to
currently acting as manager for the CapStar Hotels and other third party
arrangements. It is a condition to the closing of the Merger that the
transactions set forth in the Lessee-Manager Acquisition Agreement are
consummated.
To finance the transactions set forth in the Lessee-Manager Acquisition
Agreement, the Company expects to enter into two $50 million revolving credit
facilities, one through the REIT and the other through third-party lenders, at
an interest rate no greater than LIBOR plus 350 basis points, with other
customary terms and conditions. It is a condition to the closing of the Merger
that the Company receive a commitment from the REIT's Operating Partnership
for such a credit facilities. In addition to funding the Lessee-Manager
Acquisition Agreement transactions, the available capacity under the new
credit facilities are expected to be used by the Company to pursue investments
in additional joint ventures and to secure additional third-party management
arrangements, as discussed above.
Following the Merger, pursuant to the Intercompany Agreement the Company
will have a right of first refusal to become the lessee of any real property
acquired by the REIT. In addition, the Intercompany Agreement prohibits the
Company from making certain acquisitions or investments in real estate unless
such acquisitions or investments are first offered to the REIT and the REIT
elects not to pursue such acquisitions or investments. As a result of these
provisions, the Company's future operations immediately following the Spin-Off
and the Merger are expected to rely significantly on the REIT to identify
business opportunities for the Company. There is no assurance that MeriStar
will identify opportunities for the Company or that any opportunities that
either identifies will be within the Company's financial, operational or
management parameters.
Also, the Company's current operations after the Merger are predominantly
with its affiliate, the REIT; based on pro-forma operating results for 1997,
approximately 89% of the Company's revenue is expected to come from hotels
owned by and leased from the REIT. Accordingly, the Company's current
operations are highly dependent upon the performance of the REIT Owned Hotels.
Following the Spin-Off, Merger and related transactions described above, the
Company believes cash generated by operations, together with its new borrowing
capacity under its credit facility, will be sufficient to fund its existing
working capital, ongoing capital expenditures, debt service requirements, and
future acquisitions and investment opportunities. The Company believes these
sources of capital are sufficient to provide for the Company's short-term
capital needs.
Under the terms of the Participating Leases between the Company and the
REIT, the REIT will generally be required to fund significant capital
expenditures at the Hotels. Consequently, the Company's ongoing capital
expenditures are likely to be substantially reduced from the levels of such
expenditures prior to the Formation Transactions. Additionally, the Company
expects to finance future acquisitions and investments though a combination of
cash generated by operations, borrowing capacity under the credit facility,
and the issuance of OP Units and/or Common Stock. The Company believes these
sources of capital will be sufficient to provide for the Company's long-term
capital needs.
SEASONALITY
Demand in the lodging industry is affected by recurring seasonal patterns.
Demand is lower in the winter months due to decreased travel and higher in the
spring and summer months during peak travel season.
31
<PAGE>
Therefore, the Company's operations are seasonal in nature. Assuming other
factors remain constant, the Company has lower revenue, operating income and
cash flow in the first and fourth quarters and higher revenue, operating
income and cash flow in the second and third quarters.
INFLATION
The rate of inflation has not had a material effect on the revenues or
operating results of the Company during the three most recent fiscal years.
32
<PAGE>
THE COMPANY
The Company has been formed to become the lessee, manager and operator of
various hotel assets, including those currently owned, leased and managed by
CapStar and its affiliates. Immediately following the Spin-Off, the Company
will acquire 100% of the partnership interests in the third-party lessee of
most of the hotels owned by AGH and substantially all of the assets and
certain liabilities of the third-party manager of most of the hotels owned by
AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the
"Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-Off--The
Lessee-Manager Acquisition Agreement." CapStar and AGHI have been two of the
fastest growing operators of upscale, full-service hotels in North America
based on rooms under management. Following consummation of the Formation
Transactions, the Company is expected to be one of the largest independent
hotel management companies in the United States based on rooms under
management. The Company will be the successor-in-interest and will assume all
of the rights and liabilities with respect to hotel management contracts and
operating leases of CapStar, AGHI and AGH Leasing. Pursuant to the Formation
Transactions, the Company will lease and/or manage 201 Hotels containing
42,476 rooms. Of the Hotels, MeriStar Hotels will (i) lease and manage 99 REIT
Owned Hotels, containing 25,854 rooms, (ii) lease 47 (of which they managed
36) hotels (that are not REIT Owned Hotels) containing 6,800 rooms, (the
"Leased Hotels") and (iii) manage an additional 55 hotels (that are not REIT
Owned Hotels) containing 9,822 rooms (the "Managed Hotels"). The Hotels are
located throughout the United States and Canada including most major
metropolitan areas and rapidly growing secondary cities. The Hotels include
hotels operated under nationally recognized brand names such as Hilton(R),
Sheraton(R), Westin(R), Marriott(R), Doubletree(R) and Embassy Suites(R). The
Company's business strategy will be to renovate, reposition and operate each
hotel according to a business plan specifically tailored to the
characteristics of the hotel and its market.
MeriStar Hotels will capitalize on its management experience and expertise
by continuing to secure additional management contracts and improving the
operating performance of the hotels under its management. The Company's senior
management team, with an average of 20 years of lodging industry experience,
has successfully managed hotels in all segments of the lodging industry, with
particular emphasis on upscale, full-service hotels.
Management attributes its management success to its ability to analyze each
hotel as a unique property and identify those particular cash flow growth
opportunities which each hotel presents. The Company's principal operating
objectives will be to continue to analyze each hotel as a unique property, to
generate higher revenue per available room ("RevPAR"), to increase average
daily rates ("ADR") and to increase net operating income while providing its
hotel guests with high-quality service and value.
In addition to assuming the rights and obligations under all of the
operating leases and management agreements of CapStar, AGHI and AGH Leasing,
MeriStar Hotels will assume the interest of CapStar in two joint ventures. The
Company expects to form additional strategic alliances with institutional and
private hotel owners and to secure additional fee management arrangements.
From time to time, the Company may also acquire certain hotel assets that the
REIT could not, or for strategic reasons does not wish to, own.
Management believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to lease and manage hotels
and therefore intends to focus its efforts on attaining management contracts
for such properties. The upscale, full-service segment is attractive for
several reasons. First, upscale, full-service hotels appeal to a wide variety
of customers, thus reducing the risk of decreasing demand from any particular
customer group. Secondly, such hotels have particular appeal to both business
executives and upscale leisure travelers, customers who are generally less
price sensitive than travelers who use limited-service hotels. Finally, full-
service hotels require a greater depth of management expertise than limited-
service hotels, and the Company believes that its superior management skills
provide it with a significant competitive advantage in their operation.
THE INTERCOMPANY AGREEMENT
RIGHTS OF FIRST REFUSAL
The Company believes that the Intercompany Agreement represents an
attractive opportunity because (i) the REIT Owned Hotels are upscale, full-
service hotels under nationally recognized brand names located in major
metropolitan or growing secondary markets and (ii) they have attractive
current returns and potential for significant revenue and cash flow growth
through implementation of the Company's operating strategy.
33
<PAGE>
Pursuant to the Intercompany Agreement, subject to certain exceptions, the
Hotel Parties will have a right of first refusal to become the lessee of any
real property acquired by the REIT Parties if the REIT Parties determine that,
consistent with the REIT's status as a real estate investment trust, the REIT
Parties are required to enter into such a lease arrangement; provided that the
Hotel Parties or an entity controlled by the Hotel Parties is, as determined
by the REIT in its sole discretion, qualified to be the lessee based on
experience in the industry and financial and legal qualifications.
As to opportunities for the Hotel Parties to become the lessee of any assets
under a lease arrangement, the Intercompany Agreement provides that the REIT
Parties must provide the Hotel Parties with written notice of the lessee
opportunity. During the 30 days following such notice, the Hotel Parties have
a right of first refusal with regard to the offer to become a lessee and the
right to negotiate with the REIT Parties on an exclusive basis regarding the
terms and conditions of the lease. If a mutually satisfactory agreement cannot
be reached within the 30-day period, or if the Hotel Parties indicate that
they are not interested in pursuing the lessee opportunity, the REIT Parties
may offer the opportunity to others for a period of one year thereafter, at a
price and on terms and conditions that are not more favorable to such other
parties than the price and terms and conditions proposed by the REIT Parties
to the Hotel Parties, before it must again offer the opportunity to the Hotel
Parties in accordance with the procedures specified above.
The REIT Parties and the Hotel Parties will each establish, following the
closing of the Merger, a leasing committee which will review all hotel leases
to be entered into between the REIT Parties and the Hotel Parties. The REIT
Parties' leasing committee will consist of directors of the REIT that are not
also directors of MeriStar Hotels and the Hotel Parties' leasing committee
will consist of directors of MeriStar Hotels that are not also directors of
the REIT.
The Hotel Parties will agree not to acquire or make (i) investments in real
estate which, for purposes of the Intercompany Agreement, includes the
provision of services related to real estate and investments in hotel
properties, real estate mortgages, real estate derivatives or entities that
invest in real estate assets or (ii) any other investments that may be
structured in a manner that qualifies under the federal income tax
requirements applicable to real estate investment trusts unless in either case
they have provided written notice to the REIT Parties of the material terms
and conditions of the acquisition or investment opportunity, and the REIT
Parties have determined not to pursue such acquisitions or investments either
by providing written notice to the Hotel Parties rejecting the opportunity
within 20 days from the date of receipt of notice of the opportunity or by
allowing such 20-day period to lapse. The Hotel Parties also have agreed to
assist the REIT Parties in structuring and consummating any such acquisition
or investment which the REIT Parties elect to pursue, on terms determined by
the REIT Parties.
PROVISION OF SERVICES
The Hotel Parties will provide the REIT Parties with certain services as the
REIT Parties may reasonably request from time to time, including
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services. The REIT Parties will
compensate the Hotel Parties for services provided in an amount determined in
good faith by the Hotel Parties as the amount an unaffiliated third party
would charge the REIT Parties for comparable services.
EQUITY OFFERINGS
If either the REIT Parties or the Hotel Parties desire to engage in a
securities issuance (the "Issuing Party"), then such Issuing Party will give
notice to such other party (the "Non-Issuing Party") as promptly as
practicable of their desire to engage in a securities issuance. The Non-
Issuing Party will cooperate with the Issuing Party to effect any securities
issuance of the Issuing Party by assisting in the preparation of any
registration statement or other document required in connection with such
issuance and, in connection therewith, providing the Issuing Party with such
information as may be required to be included in such registration statement
or other document.
TERM
The Intercompany Agreement will terminate upon the earlier of (a) the tenth
anniversary of the date of the Intercompany Agreement, and (b) a change in
ownership or control of MeriStar Hotels.
34
<PAGE>
USE OF PROCEEDS
The Company's net proceeds from the Rights Offering will depend on the
number of Rights exercised and the Subscription Price. The number of Rights
exercised will range from a minimum of zero to a maximum of 8,310,638; the
Subscription Price will be equal to 95% of the average of the daily high and
low prices of the Common Stock for the period of five consecutive trading days
immediately following the third Trading Day after the date the Common Stock
opens for trading. The Company also reserves the right, at its sole option, to
cancel the Rights Offering if the Subscription Price is less than . . Based
on an assumed Subscription Price of $2.85 per share, the net proceeds (net of
transaction expenses of approximately $250,000) will range from a minimum of
zero to a maximum of $23.7 million. The Company currently expects to use the
net proceeds from the Rights Offering to repay existing indebtedness under the
Company's two $50 million revolving credit facilities, which are expected to
bear interest at a rate no greater than LIBOR plus 350 basis points, or for
general corporate purposes. The pro forma balance outstanding on the credit
facility prior to repayment of any amounts with the net proceeds of the Rights
Offering is expected to be $65.0 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
35
<PAGE>
CAPITALIZATION
The following table sets forth the historical and pro forma capitalization of
the Company as of March 31, 1998. The pro forma capitalization is adjusted to
reflect the Formation Transactions. The information below should be read in
conjunction with the historical combined financial statements and notes thereto
of the Company and the Unaudited Pro Forma Financial Statements and notes
thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
(IN THOUSANDS,
EXCEPT SHARE DATA)
----------------------
PRO FORMA HISTORICAL
----------- ----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND MINORITY INTEREST:
Credit facilities.................................. $ 65,000 $ --
Capital leases and other debt...................... 776 776
Minority interest.................................. 15,804 3,835
-------- -------
Total liabilities and minority interest.......... 81,580 4,611
-------- -------
OWNERS'/STOCKHOLDERS' EQUITY:
Owners' Equity..................................... -- 41,667
Preferred Stock ($0.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding)...... -- --
Common Stock ($0.01 par value, 100,000,000 shares
authorized 24,890,355 shares issued and outstand-
ing on a pro forma basis)......................... 249 --
Additional paid-in capital and retained earnings... 59,022 --
-------- -------
Total owners'/stockholders' equity............... 59,271 41,667
-------- -------
Total capitalization............................. $140,851 $46,278
======== =======
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock and does not
anticipate that it will do so in the foreseeable future. The Company intends to
retain earnings to provide funds for the continued growth and development of
the Company's business. Loan agreements and leases to be entered into by the
Company may restrict the Company's ability to pay dividends on the Common
Stock. Any determination to pay cash dividends in the future will be at the
discretion of the Board of Directors and will be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors.
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THE MERGER AND THE SPIN-OFF
GENERAL
The Company will be spun off, as further described below, to become the
lessee, manager and operator of various hotel assets, including those
currently owned, leased and managed by CapStar and certain of its affiliates.
CapStar intends to transfer or cause to be transferred certain assets and
liabilities constituting the hotel management and leasing business currently
operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly owned
subsidiary of CapStar. CapStar then intends to distribute to its stockholders
of record on the Spin-Off Record Date on a share-for-share basis all of the
outstanding capital stock of MeriStar Hotels in the Spin-Off. The Spin-Off
will provide the stockholders of CapStar as of the Spin-Off Record Date with
the opportunity to participate in the benefits of both the ownership of real
estate through the REIT, and the leasing and management operations of MeriStar
Hotels.
Pursuant to the Merger Agreement, CapStar, after the Spin-Off, will merge
with and into AGH, with the result that (a) AGH will be the surviving
corporation operating under the name MeriStar Hospitality Corporation and (b)
each outstanding share of CapStar Common Stock will be converted into 1.0
share of REIT Common Stock, and each outstanding share of AGH Common Stock
will be converted into 0.8475 shares of REIT Common Stock.
Immediately following the Spin-Off and the effective date of the Merger, the
Company will acquire 100% of the partnership interests in AGH Leasing, the
third-party lessee of most of the hotels owned by AGH, and substantially all
of the assets and certain liabilities of AGHI, the third-party manager of most
of the hotels owned by AGH, pursuant to the Lessee-Manager Acquisition
Agreement.
Pursuant to the Intercompany Agreement, the Hotel Parties and the REIT
Parties will provide each other with reciprocal rights to participate in
certain transactions entered into by such parties. In particular, subject to
certain exceptions, the Hotel Parties will have a right of first refusal to
become the lessee of any real property acquired by the REIT Parties if the
REIT Parties determine that, consistent with the REIT's status as a real
estate investment trust, the REIT Parties are required to enter into such a
lease arrangement; provided that the Hotel Parties or an entity that the Hotel
Parties control is, as determined by the REIT in its sole discretion,
qualified to be the lessee. In addition, the Hotel Parties intend to pursue
additional opportunities with others in the future. See "The Company--The
Intercompany Agreement." The Intercompany Agreement is structured to provide
the REIT and the Company with mutually beneficial rights and obligations so
that investors in both companies may enjoy the economic benefit of the entire
enterprise. This is commonly known as the "paper-clip" REIT structure. AGH and
CapStar believe that the REIT will be the first publicly-traded lodging REIT
to utilize the "paper-clip" REIT structure. However, investors should be aware
that because of the independent trading of the REIT and the Company,
stockholders may develop divergent interests which could lead to conflicts of
interest. This divergence of interests could also reduce the anticipated
benefits of the relationship between the two companies. See "Risk Factors--
Paper Clip Structure Risks."
BACKGROUND OF AND REASONS FOR THE SPIN-OFF
In order for the REIT to maintain its status as a REIT for federal income
tax purposes, it may not operate hotels. The Company will be formed to own
assets that the REIT could not itself own and to succeed to CapStar's hotel
management and leasing business, by becoming the lessee, manager and operator
of the various hotel assets, and to perform the services more fully described
in the Intercompany Agreement. The Spin-Off, together with the Rights
Offering, will provide the stockholders of CapStar as of the Spin-Off Record
Date with the opportunity to participate in the benefits of both the ownership
of real estate through the REIT, and the leasing and management operations of
MeriStar Hotels.
MeriStar Hotels will function principally as a hotel leasing, management and
operating company, while the REIT will focus on investment in real estate
assets. The Spin-Off is designed to provide CapStar's existing stockholders
with the long-term benefits of ownership in an entity devoted to the conduct
of operating business
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<PAGE>
activities in addition to their investment interest in the REIT itself. A
small number of real estate investment trusts, operating under tax provisions
that no longer are available to newly formed real estate investment trusts,
have shares that are "paired" or "stapled" with shares of a related operating
company, and therefore cannot be owned or transferred independently. The
shares of MeriStar Hotels and the REIT are not, and will not be, paired or
stapled in any manner. Because the shares of the REIT and MeriStar Hotels can
be owned and transferred separately and independently of each other, the REIT
and MeriStar Hotels will not provide a paired investment on an ongoing basis
to investors who purchase or sell shares of only one company or the other.
Although the Spin-Off will not be effected unless the Merger is approved by
the stockholders of CapStar and AGH and all other conditions precedent have
been satisfied or waived, the Spin-Off is separate from the Merger and the
shares of MeriStar Hotels to be received by holders of CapStar Common Stock in
the Spin-Off do not constitute a part of the Merger consideration. The
stockholders of CapStar are being asked to vote on the approval and adoption
of the Merger Agreement, and are not being asked to vote on the Spin-Off.
RESTRUCTURING AND SPIN-OFF
GENERAL
In order to effectuate the Spin-Off, CapStar will effect a series of
mergers, asset and stock transfers and liability assumptions among itself and
its subsidiaries (the "CapStar OP Restructuring"). The purpose and effect of
the CapStar OP Restructuring is to separate substantially all of the
management and leasing business of CapStar from the real estate investments of
CapStar.
Substantially all of CapStar's assets are currently held indirectly by and
operated through CapStar Management and CapStar Management II, CapStar's
subsidiary operating partnerships. CapStar is the sole general partner of
CapStar Management, and CapStar, certain wholly owned subsidiaries of CapStar
(the "CapStar LP Entities"), and certain third parties are the sole limited
partners of CapStar Management. CapStar General Corp., a wholly-owned
subsidiary of CapStar ("CapStar General"), is the sole general partner of
CapStar Management II, and CapStar Limited Corp., a wholly owned subsidiary of
CapStar General ("CapStar Limited"), and certain third parties are the sole
limited partners of CapStar Management II. The partnership agreements of
CapStar Management and CapStar Management II give the general partner full
control over the business and affairs of the partnerships.
THE CONTRIBUTIONS
Prior to the effectiveness of the Merger, CapStar Management and CapStar
Management II will effectuate the following transactions (the
"Contributions"):
1. Each of the CapStar LP Entities, CapStar General and CapStar Limited
will merge with and into CapStar;
2. Each of CapStar Management and CapStar Management II will convert into
a limited liability company (respectively, "CapStar Management LLC" and
"CapStar Management II LLC").
3. CapStar Management LLC will contribute all of its hotel related assets
together with certain other assets, subject to all of its liabilities
except as set forth in the Merger Agreement, to CapStar Hotel Operating
Company, L.L.C., a newly-formed Delaware limited liability company
("CapStar Hotel LLC"), in exchange for interests in CapStar Hotel LLC and
CapStar Management II LLC will contribute all of its hotel related assets
together with certain other assets, subject to all of its liabilities
except as set forth in the Merger Agreement, to CapStar Hotel Operating
Company, L.L.C., a newly-formed Delaware limited liability company
("CapStar Hotel II LLC"), in exchange for interests in CapStar Hotel II
LLC;
4. CapStar Management will contribute all its management and
substantially all its leasehold related assets, together with certain other
assets (including cash), subject to $30 million in indebtedness and certain
other liabilities, to Hotels OP in exchange for interests in Hotels OP and
CapStar Management II LLC will
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contribute all its management and substantially all its leasehold related
assets, together with certain other assets (including cash), subject to $30
million in indebtedness and certain other liabilities, to MeriStar H&R
Operating Company, L.P., a newly-formed Delaware limited liability company
("Hotels OP II"), in exchange for interests in Hotels OP II;
5. CapStar Management LLC will redeem CapStar's interests in CapStar
Management LLC in exchange for CapStar's pro rata share of its interests in
Hotels OP and CapStar Hotel LLC and CapStar Management II LLC will redeem
CapStar's interests in CapStar Management II LLC in exchange for CapStar's
pro rata share of its interests in Hotels OP II and CapStar Hotel II LLC;
and
6. CapStar will contribute its interest (the "Interests") in, and all of
its rights and title in and to substantially all of the assets and business
of, Hotels OP and Hotels OP II represented by such Interests (collectively,
the "Contributed Assets") to MeriStar Hotels in exchange for 100% of the
outstanding capital stock of MeriStar Hotels.
7. MeriStar Hotels will assume all of the liabilities, obligations, debt
and commitments arising out of its ownership of the Interest, the
Contributed Assets and the operation of the business conducted by Hotels OP
and Hotels OP II (the "Assumed Liabilities"), and CapStar will retain, or
will cause one of its subsidiaries to retain, all other liabilities.
THE SPIN-OFF; RECORD DATE
Upon completion of the Contributions, the Spin-Off will be effected by the
distribution to each holder of record of CapStar Common Stock as of the close
of business on the Spin-Off Record Date of one share of Common Stock for every
share of CapStar Common Stock held by such holder. As a result of the Spin-
Off, the stockholders of record of CapStar at the closing of business on the
Spin-Off Record Date will own all of the outstanding Common Stock. Following
the Spin-Off, Hotels OP II will merge with and into Hotel OP, with Hotel OP as
the surviving entity.
Management estimates the initial value of the Common Stock will be between
$2.50 and $3.50 per share. This initial value per share estimate was derived
by applying assumed market multiples to various, pro forma financial reporting
measures for the Company, including earnings before interest expense, income
taxes, depreciation and amortization, and net income. Management developed the
assumed market multiples through discussions with financial advisors and
analysis of current market multiples for comparable companies.
LISTING ON THE NYSE
The Common Stock to be issued pursuant to the Spin-Off has been approved for
listing on the NYSE, under the symbol "MMH", subject to official notice of
issuance.
USE OF "MERISTAR" NAME
Pursuant to the terms of the Intercompany Agreement, the Company will grant
to the REIT a non-exclusive, royalty-free license to use "MeriStar Hospitality
Corporation" and other names that include "MeriStar" (the "Licensed
Property"). Upon termination of the Intercompany Agreement, all rights of the
Hotel Parties to the Licensed Property will terminate. See "The Company --The
Intercompany Agreement."
EMPLOYEES AND EMPLOYEE BENEFIT PLANS
On the effective date of the Spin-Off, CapStar will cause MeriStar Hotels to
offer employment to certain employees of CapStar, on the same terms and
conditions as were in effect immediately prior to the Spin-Off. Any such
transfer of employment from CapStar to MeriStar Hotels will not constitute a
termination or qualifying event under any severance policy.
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MeriStar Hotels will establish new employee benefit plans substantially
similar to the existing CapStar benefit plans, including but not limited to an
Equity Incentive Plan and a Stock Purchase Plan. Employees who currently hold
CapStar Stock Options will be granted new stock options in the REIT and
MeriStar Hotels.
CONDITIONS TO THE SPIN-OFF
The obligations of CapStar to consummate the Spin-Off are subject to the
satisfaction or waiver of the same conditions to the consummation of the
Merger set forth in the Merger Agreement.
THE LESSEE-MANAGER ACQUISITION AGREEMENT
Pursuant to the Lessee-Manager Acquisition Agreement, following the Spin-Off
and immediately after the effective time of the Merger, Hotels OP will
acquire: (i) substantially all of the assets and certain liabilities of AGHI
for a cash purchase price of $10 million; and (ii) 100% of the partnership
interests in AGH Leasing for a purchase price of $85 million, consisting of
approximately $73.8 million in cash and approximately $11.2 million in the
form of Hotels OP Units convertible into Common Stock. Upon consummation of
the transactions contemplated by the Lessee-Manager Acquisition Agreement,
Hotels OP will become the lessee and manager of most of the AGH Owned Hotels
that are currently leased by AGH Leasing. The REIT and MeriStar Hotels will
enter into new lease agreements (the "Participating Leases") with respect to
all of the CapStar Owned Hotels and amend the lease agreements with respect to
most the AGH Owned Hotels. See "Business--The Participating Leases."
It is a condition to the closing of the Merger that the transactions set
forth in the Lessee-Manager Acquisition Agreement are consummated.
INDEMNIFICATION OBLIGATIONS
MeriStar Hotels will indemnify, defend and hold harmless the REIT and its
affiliates and any directors, officers, employees and agents of the foregoing,
from and against any losses arising out of or resulting from the Assumed
Liabilities, the Contributed Assets or the business and operations of Hotels
OP.
The REIT will indemnify, defend and hold harmless MeriStar Hotels, its
affiliates and their respective successors and any directors, officers,
employees and agents of the foregoing, from and against any losses arising out
of any assets or liabilities retained by the REIT and its affiliates.
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BUSINESS
The Company seeks to increase shareholder value by (i) implementing its
operating strategy to improve hotel operations and increase cash flow and (ii)
expanding its management business.
EXPANSION STRATEGY
The Company anticipates that it will continue to expand its portfolio of
hotels under management and/or lease by securing additional management
contracts and/or leases. The Company will also seek to expand its management
operations into other hospitality-related businesses, such as time share
properties and conference centers. The Company will attempt to identify
promising management candidates located in markets with economic, demographic
and supply dynamics favorable to hotel lessees and operators. Through its
extensive due diligence process, the Company will select those expansion
targets where it believes selective capital improvements and intensive
management will increase the hotel's ability to attract key demand segments,
enhance hotel operations and increase long-term value. In order to evaluate
the relative merits of each investment opportunity, senior management and
individual operations teams will create detailed plans covering all areas of
renovation and operation. These plans will serve as the basis for the
Company's expansion decisions and guide subsequent renovation and operating
plans.
The Company will seek to lease and/or manage hotels that meet the following
criteria:
MARKET CRITERIA
Economic Growth. The Company will focus on metropolitan areas that are
approaching, or have already entered, periods of economic growth. Such areas
generally show above average growth in the business community as measured by
(i) job formation rates, (ii) population growth rates, (iii) tourism and
convention activity, (iv) airport traffic volume, (v) local commercial real
estate occupancy, and (vi) retail sales volume. Markets that exhibit these
characteristics typically have strong demand for hotel facilities and
services.
Supply Constraints. The Company will seek lodging markets with favorable
supply dynamics for hotel owners and operators, including an absence of
current new hotel development and barriers to future development such as
zoning constraints, the need to undergo lengthy local development approval
processes and a limited number of suitable sites. Other factors limiting the
supply of new hotels are the current lack of financing available for new
development and the inability to generate adequate returns on investment to
justify new development.
Geographic Diversification. The Hotels are located in 34 states across the
nation, the District of Columbia, the U.S. Virgin Islands and Canada. See
"Properties" for additional information regarding the Hotels. The Company will
seek to maintain a geographically diverse portfolio of managed hotels to
offset the effects of regional economic cycles.
HOTEL CRITERIA
Location and Market Appeal. The Company will seek to operate hotels that are
situated near both business and leisure centers which generate a broad base of
demand for hotel accommodations and facilities. These demand generators
include (i) airports, (ii) convention centers, (iii) business parks, (iv)
shopping centers and other retail areas, (v) sports arenas and stadiums, (vi)
major highways, (vii) tourist destinations, (viii) major universities, and
(ix) cultural and entertainment centers with nightlife and restaurants. The
confluence of nearby business and leisure centers will enable the Company to
attract both weekday business travelers and weekend leisure guests. Attracting
a balanced mix of business, group and leisure guests to the Hotels helps to
maintain stable occupancy rates and high ADRs.
Size and Facilities. The Company will seek to operate hotels that contain
200 to 500 guest rooms and include accommodations and facilities that are, or
are capable of being made, attractive to key demand segments
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such as business, group and leisure travelers. These facilities typically
include large, upscale guest rooms, food and beverage facilities, extensive
meeting and banquet space, and amenities such as health clubs, swimming pools
and adequate parking.
Potential Performance Improvements. The Company seeks to operate
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. These hotels represent
opportunities where a systematic management approach and targeted renovations
should result in improvements in revenue and cash flow.
The Company expects that its relationships throughout the industry will
continue to provide it with a competitive advantage in identifying, evaluating
and managing hotels that meet its criteria. Management has a record of
successfully renovating and repositioning hotels, in situations with varying
levels of service, room rates and market types, and the Company plans to
continue such renovation programs as its acquires new leases and management
contracts.
OPERATING STRATEGY
The Company's principal operating objectives will be to generate higher
RevPAR and to increase net operating income while providing its hotel guests
with high-quality service and value. The Company will seek to achieve these
objectives by creating and executing management plans that are specifically
tailored for each individual Hotel rather than by implementing an operating
strategy that is designed to maintain a uniform corporate image or brand.
Management believes that custom-tailored business plans are the most effective
means of addressing the needs of a given hotel or market. The Company believes
that skilled management of hotel operations is the most critical element in
maximizing revenue and cash flow in hotels, especially in upscale, full-
service hotels.
The Company's corporate headquarters will carry out financing and investment
activities and provide services to support as well as monitor the Company's
on-site hotel operating executives. Each of the Company's executive
departments, including Sales and Marketing, Human Resources and Training, Food
and Beverage, Technical Services, Development and Corporate Finance, will be
headed by an executive with significant experience in that area. These
departments will support decentralized decision-making by the hotel operating
executives by providing accounting and budgeting services, property management
software and other resources which cannot be economically maintained at the
individual Hotels.
Key elements of the Company's management programs include the following:
Comprehensive Budgeting and Monitoring. The Company's operating strategy
begins with an integrated budget planning process that is implemented by
individual on-site managers and monitored by the Company's corporate staff.
Management sets targets for cost and revenue categories at each of the Hotels
based on historical operating performance, planned renovations, operational
efficiencies and local market conditions. On-site managers coordinate with the
central office staff to ensure that such targets are realistic. Through
effective and timely use of its comprehensive financial information and
reporting systems, the Company will be able to monitor actual performance and
rapidly adjust prices, staffing levels and sales efforts to take advantage of
changes in the market and to improve yield.
Targeted Sales and Marketing. The Company will employ a systematic approach
toward identifying and targeting segments of demand for each Hotel in order to
maximize market penetration. Executives at the Company's corporate
headquarters and property-based managers will divide such segments into
smaller subsegments, typically ten or more for each Hotel, and develop
narrowly tailored marketing plans to suit each such segment. The Company will
support each Hotel's local sales efforts with corporate sales executives who
will develop new marketing concepts and monitor and respond to specific market
needs and preferences. These executives will be active in implementing on-site
marketing programs developed in the central management office. The Company
will employ computerized revenue yield management systems to manage each
Hotel's use
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of the various distribution channels in the lodging industry. Management
control over those channels, which include franchisor reservation systems and
toll-free numbers, travel agent and airline global distribution systems,
corporate travel offices and office managers, and convention and visitor
bureaus, will enable the Company to maximize revenue yields on a day-to-day
basis. Sales teams will be recruited locally and receive incentive-based
compensation bonuses. All of the Company's sales managers will complete a
highly developed sales training program.
Strategic Capital Improvements. The Company and the REIT (through the
Intercompany Agreement) will plan renovations primarily to enhance a Hotel's
appeal to targeted market segments, thereby attracting new customers and
generating increased revenue and cash flow. For example, in many of the
Hotels, the banquet and meeting spaces have been or are intended to be
renovated and guest rooms have been upgraded with computer ports and
comfortable work spaces to better accommodate the needs of business travelers
and to increase ADRs. Capital spending decisions will be based on both
strategic needs and potential rate of return on a given capital investment.
Pursuant to the Intercompany Agreement, the REIT will be primarily responsible
for funding capital expenditures.
Selective Use of Multiple Brand Names. Management believes that the
selection of an appropriate franchise brand is essential in positioning a
hotel optimally within its local market. The Company will select brands based
on local market factors such as local presence of the franchisor, brand
recognition, target demographics and efficiencies offered by franchisors.
Management believes that its relationships with many major hotel franchisors
places the Company in a favorable position when dealing with those franchisors
and allows it to negotiate favorable franchise agreements with franchisors.
Management believes that its growth in acquiring management contracts will
further strengthen its relationship with franchisors.
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The following chart summarizes certain information with respect to the
national franchise affiliations of the Hotels:
<TABLE>
<CAPTION>
REIT THIRD-PARTY THIRD-PARTY
OWNED HOTELS LEASED HOTELS MANAGED HOTELS
------------------- ------------------ ------------------
GUEST % OF GUEST % OF GUEST % OF
FRANCHISE ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS
- --------- ------ ------ ----- ----- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hilton ................. 5,499 21 21% -- -- -- 225 1 2%
Sheraton ............... 2,978 9 11% -- -- -- 167 1 2%
Radisson(R) ............ 2,712 9 10% -- -- -- 756 4 8%
Doubletree ............. 2,055 6 8% 388 1 6% 363 2 4%
Marriott ............... 1,494 4 5% -- -- -- -- -- --
Holiday Inn(R).......... 2,571 12 10% 367 2 5% 1,763 9 18%
Embassy Suites ......... 728 3 3% -- -- -- 248 1 3%
Westin ................. 1,296 4 5% -- -- -- -- -- --
Wyndham................. 1,122 3 4% 219 1 3% -- -- --
Independent ............ 674 6 3% -- -- -- 1,151 10 12%
Four Points(R).......... 213 1 1% -- -- -- 400 1 4%
Doubletree Guest
Suites(R) ............. 292 2 1% -- -- -- -- -- --
Ramada(R) .............. 665 3 3% -- -- -- 1,037 5 10%
Crowne Plaza(R) ........ 715 3 3% -- -- -- 730 2 7%
Courtyard(R) ........... 1,044 5 4% 490 3 7% 455 2 5%
Hilton Garden Inn....... -- -- -- 474 3 7% -- -- --
Hilton Suites........... -- -- -- -- -- -- 174 1 2%
Comfort Suites(R) ...... -- -- -- 277 2 4% 359 3 4%
Clarion(R) ............. -- -- -- -- -- -- 432 2 4%
Quality Suites(R) ...... -- -- -- 168 1 2% 177 1 2%
Residence Inn(R) ....... -- -- -- -- -- -- 391 3 4%
Quality Inn(R) ......... -- -- -- -- -- -- 265 2 3%
Days Inn(R) ............ -- -- -- -- -- -- 96 1 1%
Holiday Inn Express(R).. 159 1 1% 208 2 3% 78 1 1%
Best Western(R) ........ -- -- -- -- -- -- 355 2 4%
Hampton Inn(R) ......... 292 2 1% 1,965 16 29% -- -- --
Comfort Inn(R) ......... -- -- -- 1,293 9 19% -- -- --
Holiday Inn Select(R) .. 1,245 4 5% 244 1 4% -- -- --
HomewoodSuites(R) ...... -- -- -- 461 4 7% -- -- --
Howard Johnson.......... 100 1 1% -- -- -- -- -- --
Hampton Inn &
Suites(R).............. -- -- -- 136 1 2% -- -- --
Fairfield Inn(R) ....... -- -- -- 110 1 2% 200 1 2%
------ --- ----- ----- --- ----- ----- --- ---
Total.................. 25,854 99 100.0% 6,800 47 100.0% 9,822 55 100%
====== === ===== ===== === ===== ===== === ===
</TABLE>
Emphasis on Food and Beverage. Management believes popular food and beverage
ideas are a critical component in the overall success of a hotel. The Company
utilizes its food and beverage operations to create local awareness of its
hotel facilities, to improve the profitability of its hotel operations and to
enhance customer satisfaction. The Company is committed to competing for
patrons with restaurants and catering establishments by offering high-quality
restaurants that garner positive reviews and strong local and/or national
reputations. The Company has engaged food and beverage experts to develop
several proprietary restaurant concepts. The REIT Owned Hotels contain
restaurants ranging from Michel Richard's highly acclaimed CITRONELLE(R), to
Morgan's(R), a CapStar-designed concept which offers popular, moderately-
priced American cuisine. CapStar has also successfully placed national food
franchises such as Starbuck's Coffee(R) and "TCBY"(R) Yogurt in casual,
delicatessen-style restaurants in several of the REIT Owned Hotels. Popular
food concepts will strengthen the Company's ability to attract business
travelers and group meetings and improve the name recognition of the Hotels.
Commitment to Service and Value. The Company is dedicated to providing
exceptional service and value to its customers on a consistent basis. The
Company conducts extensive employee training programs to ensure personalized
service at the highest levels. Programs such as "Be A Star" have been created
and implemented by
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the Company to ensure the efficacy and uniformity of its employee training.
The Company's practice of tracking customer comments, through the recording of
guest comment cards and the direct solicitation (during check-in and check-
out) of guest opinions regarding specific items, allows investment in services
and amenities where they are most effective. The Company's focus on these
areas has enabled it to attract lucrative group business.
Distinct Management Culture. The Company will have a distinct management
culture that stresses creativity, loyalty and entrepreneurship. Management
believes in realistic solutions to problems, and innovation is always
encouraged. Incentive programs and awards have been established to encourage
individual property managers to seek new ways of increasing revenues and
operating cash flow. This creative, entrepreneurial spirit is prevalent from
the corporate staff and the general managers down to the operations staff.
Individual general managers work closely with the corporate staff and they and
their employees are rewarded for achieving target operating and financial
goals.
Computerized Reporting Systems. The Company will employ computerized
reporting systems at each of the Hotels and at its corporate offices to
monitor the financial and operating performance of the Hotels. Management
information services have been fully integrated through the installation of
Novell and Unix networks. Management also utilizes programs like Data Plus(R)
and cc:Mail(R) to facilitate daily communication. Such programs will enable
the Company to create and implement detailed reporting systems at each of the
Hotels and its corporate headquarters. Corporate executives will utilize
information systems that track each Hotel's daily occupancy, ADR, and revenue
from rooms, food and beverage. By having the latest hotel operating
information available at all times, management will be better able to respond
to changes in the market of each hotel.
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PROPERTIES
The Company maintains its corporate headquarters in Washington, D.C.,
satellite offices in California, North Carolina and Texas and leases and/or
manages hotel properties throughout the United States and Canada. The Company
leases its offices. No one hotel property is material to the operation of the
Company. A typical Hotel has meeting and banquet facilities, food and beverage
facilities and guest rooms and suites.
The REIT Owned Hotels feature, or after contemplated renovation programs
have been completed will feature, comfortable, modern guest rooms, extensive
meeting and convention facilities and full-service restaurant and catering
facilities that attract meeting and convention functions from groups and
associations, upscale business and vacation travelers as well as banquets and
receptions from the local community.
The following table sets forth the 1997 operating information with respect
to the hotels owned by the REIT and leased and managed by the Company:
<TABLE>
<CAPTION>
GUEST AVERAGE DAILY AVERAGE
HOTEL LOCATION ROOMS RATE ("ADR") OCCUPANCY REV PAR
- ----- -------- ----- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Sheraton Hotel.......... Mesa, AZ 273 $ 89.49 53.6% 47.97
Crowne Plaza Phoenix.... Phoenix, AZ 249 72.83 63.7 46.29
Embassy Suites.......... Tucson, AZ 204 74.39 78.5 58.40
Courtyard by Marriott
Century City........... Century City, CA 134 106.02 84.1 89.13
Orange County Airport
Hilton................. Irvine, CA 290 85.87 73.0 62.69
Marriott Hotel.......... Los Angeles, CA 469 118.56 60.5 71.73
Courtyard by Marriott
Marina del Rey......... Marina del Rey, CA 276 79.78 90.4 72.04
Monterey Hilton......... Monterey, CA 204 107.33 66.4 71.29
DoubleTree Resort....... Palm Springs, CA 289 97.45 66.9 65.19
Sacramento Hilton....... Sacramento, CA 326 86.74 74.4 64.53
Holiday Inn Select Mis-
sion Valley............ San Diego, CA 317 71.99 72.6 52.25
Sheraton Fisherman's
Wharf.................. San Francisco, CA 524 133.28 84.5 112.62
Crowne Plaza Park Center
....................... San Jose, CA 239 111.80 70.2 78.48
Wyndham San Jose Airport
Hotel.................. San Jose, CA 356 115.93 59.3 68.76
San Pedro Hilton........ San Pedro, CA 226 61.66 76.3 47.05
Santa Barbara Inn....... Santa Barbara, CA 71 139.35 79.7 111.06
Holiday Inn............. Colorado Springs, CO 201 67.16 70.7 47.48
Sheraton Hotel.......... Colorado Springs, CO 502 74.15 72.1 53.46
Embassy Suites Denver... Englewood, CO 236 103.75 76.2 79.06
Mystic Hotel............ Mystic, CT 77 77.63 58.0 45.06
DoubleTree Bradley Air-
port................... Windsor Locks, CT 200 84.27 67.4 56.80
Embassy Row Hilton...... Washington, DC 195 119.63 73.5 87.93
Georgetown Inn.......... Washington, DC 95 137.95 72.4 99.88
The Latham Hotel........ Washington, DC 143 113.32 81.1 91.90
DoubleTree Resort
Surfside Clearwater
Beach.................. Clearwater Beach, FL 426 101.12 70.9 71.72
Ramada Inn Gulfview
Clearwater Beach....... Clearwater Beach, FL 289 72.85 60.7 44.19
Hilton Hotel Cocoa
Beach.................. Cocoa Beach, FL 296 83.31 72.2 60.11
Holiday Inn Fort Lauder-
dale Beach............. Fort Lauderdale, FL 240 75.95 77.2 58.66
Westin Resort Key Largo. Key Largo, FL 200 126.87 76.8 97.19
Howard Johnson Resort
Key Largo.............. Key Largo, FL 100 86.06 83.4 71.77
Courtyard by Marriott
Disney Village......... Lake Buena Vista, FL 323 105.41 93.8 98.89
Holiday Inn Madeira
Beach.................. Madeira Beach, FL 149 77.36 55.8 43.16
Radisson Twin Towers Or-
lando.................. Orlando, FL 742 81.10 78.5 63.34
Wyndham Safari Resort
Lake Buena Vista....... Orlando, FL 490 73.67 66.3 48.81
DoubleTree Hotel Tampa
Airport................ Tampa, FL 496 64.05 68.3 43.73
DoubleTree Guest Suites
Atlanta................ Atlanta, GA 155 104.90 61.4 64.42
Westin Atlanta Airport.. Atlanta, GA 496 79.18 75.5 59.78
Jekyll Inn.............. Jekyll Island, GA 265 63.15 46.6 29.43
Radisson Hotel Arlington
Heights................ Arlington Heights, IL 201 81.72 74.5 60.88
Radisson Hotel & Suites. Chicago, IL 341 134.71 81.2 109.38
Holiday Inn Chicago
O'Hare International
Airport................ Rosemont, IL 507 99.15 78.6 77.89
Radisson Hotel.......... Schaumburg, IL 202 83.59 75.9 63.44
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY REV PAR
- ----- -------- ----- ------ --------- -------
<S> <C> <C> <C> <C> <C>
DoubleTree Guest Suites...... Indianapolis, IN 137 87.05 71.0 61.81
Radisson Plaza............... Lexington, KY 367 77.76 62.1 48.29
Seelbach Hilton.............. Louisville, KY 321 109.73 62.9 69.02
Holiday Inn Select New Or-
leans International Airport. Kenner, LA 304 84.29 74.8 63.03
Lafayette Hilton & Towers.... Lafayette, LA 328 73.65 72.8 53.62
Hotel Maison de Ville........ New Orleans, LA 23 260.56 68.7 179.09
Holiday Inn Annapolis........ Annapolis, MD 220 82.51 59.4 49.00
Radisson Cross Keys.......... Baltimore, MD 146 89.63 72.6 65.07
Sheraton Columbia............ Columbia, MD 289 90.72 69.8 63.32
Holiday Inn Express BWI Air-
port........................ Hanover, MD 159 65.10 83.0 54.02
Hampton Inn Ocean City....... Ocean City, MD 168 85.21 47.3 40.32
Metro Airport Hilton Suites.. Detroit, MI 151 81.37 85.7 69.73
Hilton Airport Hotel Grand
Rapids...................... Grand Rapids, MI 226 84.38 64.7 54.61
Holiday Inn Sports Complex... Kansas City, MO 163 68.96 71.8 49.51
Holiday Inn Forest Park St.
Louis....................... St. Louis, MO 120 70.63 75.3 53.21
Sheraton Airport Plaza....... Charlotte, NC 226 88.79 69.8 61.98
Courtyard by Marriott Durham. Durham, NC 146 78.98 73.2 57.82
Hilton Hotel Durham.......... Durham, NC 194 89.23 70.4 62.80
Four Points Hotel............ Cherry Hill, NJ 213 73.72 60.7 44.75
Westin Morristown............ Morristown, NJ 201 126.04 59.3 74.74
Courtyard by Marriott
Meadowlands................. Secaucus, NJ 165 103.25 85.9 88.67
Marriott Hotel............... Somerset, NJ 434 111.62 75.0 83.72
Holiday Inn.................. Tinton Falls, NJ 171 78.89 72.2 56.96
DoubleTree Hotel............. Albuquerque, NM 294 80.50 67.2 54.10
Wyndham Albuquerque Airport
Hotel....................... Albuquerque, NM 276 60.67 75.3 45.70
Radisson Inn Rochester....... Rochester, NY 171 65.23 72.0 46.95
Radisson Hotel Southwest..... Cleveland, OH 237 78.06 66.6 51.99
Hilton Hotel Toledo.......... Toledo, OH 213 67.80 67.4 45.71
Westin Oklahoma.............. Oklahoma City, OK 399 80.29 47.8 38.38
Great Valley Sheraton........ Frazer, PA 154 100.44 76.3 76.64
Embassy Suites Center City... Philadelphia, PA 288 127.64 73.6 93.94
Holiday Inn Select Bucks
County...................... Trevose, PA 215 89.89 74.4 66.87
Arlington Hilton............. Arlington, TX 310 85.92 72.2 62.03
Austin Hilton & Towers....... Austin, TX 320 75.64 72.9 55.14
DoubleTree Hotel............. Austin, TX 350 88.08 74.9 65.97
Holiday Inn Dallas DFW Air-
port West................... Bedford, TX 243 62.53 81.1 50.70
Dallas Renaissance........... Dallas, TX 289 92.94 53.4 49.63
Radisson Hotel............... Dallas, TX 305 61.07 74.1 45.25
Sheraton Hotel............... Dallas, TX 348 64.61 61.4 39.67
Houston Southwest Hilton..... Houston, TX 293 71.43 68.5 48.93
Marriott Houston West Loop... Houston, TX 302 103.60 72.6 75.25
Sheraton Houston Brookhollow. Houston, TX 382 76.85 61.0 46.88
Westchase Hilton & Towers.... Houston, TX 295 95.72 79.5 76.10
Holiday Inn Select Dallas DFW
Airport South............... Irving, TX 409 77.92 73.9 57.59
Midland Hilton & Towers...... Midland, TX 249 71.14 54.2 38.56
Salt Lake Airport Hilton..... Salt Lake City, UT 287 80.05 78.6 62.92
Holiday Inn Historic District
Alexandria.................. Alexandria, VA 178 101.20 71.8 72.68
Ramada Old Town Alexandria... Alexandria, VA 258 94.47 62.8 59.36
Arlington Hilton............. Arlington, VA 209 110.31 78.3 86.37
National Airport Hilton...... Arlington, VA 386 96.78 67.3 65.13
Hampton Inn Richmond Airport. Richmond, VA 124 66.63 81.8 54.51
Holiday Inn Richmond West.... Richmond, VA 280 59.67 60.9 36.36
Bellevue Hilton.............. Bellevue, WA 180 110.38 79.3 87.53
Crowne Plaza Madison......... Madison, WI 227 91.48 74.3 67.98
Holiday Inn Calgary Airport.. Calgary, Alberta 170 51.34 72.2 37.07
Sheraton Hotel............... Guildford, B.C. 280 72.85 74.8 54.49
Holiday Inn-Metrotown........ Vancouver, B.C. 100 75.03 87.8 65.88
Ramada Vancouver Centre...... Vancouver, B.C. 118 75.00 81.8 61.35
</TABLE>
47
<PAGE>
THE PARTICIPATING LEASES
Prior to the effective date of the Merger, MeriStar Hotels, operating
through Hotels OP, will enter into a lease with the REIT or its respective
subsidiary (a "Participating Lease") for each CapStar Owned Hotel. In
addition, the Company will enter into amended and restated Participating
Leases with the REIT for each of the AGH Owned Hotels that is currently leased
by AGH Leasing, which will conform the Participating Leases for the applicable
AGH Owned Hotels with the Participating Leases for the CapStar Owned Hotels,
except that (a) the base rent and percentage rent for each Participating Lease
of an applicable AGH Owned Hotel will not be modified and (b) the initial term
of each Participating Lease of an applicable AGH Owned Hotel will not be
modified.
The obligations of Hotels OP under each Participating Lease will be
guaranteed by MeriStar Hotels.
TERM
Each Participating Lease of an AGH Owned Hotel provides for an initial term
of 12 years commencing on the date on which the hotel was acquired. Each
Participating Lease of a CapStar Owned Hotel provides for an initial term of
12 years commencing on the effective date of the Merger. Each Participating
Lease of an AGH Owned Hotel will be modified to provide, and each
Participating Lease of a CapStar Owned Hotel will provide, MeriStar Hotels
with three renewal options of five years each (except in the case of
Properties with ground leases having a remaining term of less than 40 years)
provided that (a) MeriStar Hotels will not have the right to a renewal if
there shall have occurred a change in the tax law which would permit the REIT
to operate the hotel directly; (b) if MeriStar Hotels shall elect not to renew
a Participating Lease for any REIT Owned Hotel, then the REIT shall have the
right to reject the exercise of a renewal right on a Participating Lease of a
comparable hotel; and (c) the rent for each renewal term shall be adjusted to
reflect the then fair market rental value of the hotel. If the REIT and
MeriStar Hotels are unable to agree upon the then fair market rental value of
the hotel, the Participating Lease will terminate upon the expiration of the
then current term and MeriStar Hotels shall thereupon have a right of first
refusal to lease the hotel from the REIT on such terms as the REIT may have
agreed upon with a third-party lessee.
BASE RENT; PARTICIPATING RENT; ADDITIONAL CHARGES
Each Participating Lease requires the lessee to pay (i) fixed monthly base
rent, (ii) on a monthly basis, the excess of participating rent over base
rent, with participating rent based on certain percentages of room revenue,
food and beverage revenue and telephone and other revenue at each hotel, and
(iii) certain other amounts, including interest accrued on any late payments
or charges ("Additional Charges"). Base rent and participating rent
departmental thresholds (departmental revenue on which the rent percentage is
based) are increased annually by a percentage equal to the percentage increase
in the consumer price index ("CPI") (CPI percentage increase plus 0.75% in the
case of the participating rent departmental revenue threshold) compared to the
price year. Base rent is payable monthly in arrears. Participating rent is
payable in arrears based on a monthly schedule adjusted to reflect the
seasonal variations in the hotel's revenue. Participating rent payments during
each calendar quarter will be adjusted at the end of each quarter to reflect
actual results.
Other than real estate and personal property taxes and assessments, rent
payable under ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and refurbishments
(determined in accordance with generally accepted accounting principles),
which are obligations of the REIT, the Participating Leases require the Lessee
to pay rent, liability insurance, all costs and expenses and all utility and
other charges incurred in the operation of the hotels. The Participating
Leases also provide for rent reductions and abatements in the event of damage
or destruction or a partial taking of any hotel.
The Participating Leases also provide for a rental adjustment under certain
circumstances in the event of (a) a major renovation of the hotel, (b) a
change in the franchisor of the hotel or (c) a major change in operations at
the hotel.
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<PAGE>
LESSEE CAPITALIZATION
The Participating Leases require Hotels OP (or MeriStar Hotels as guarantor
of the Participating Leases) to maintain a book net worth of not less than
$25,000,000. Further, commencing January 1, 1999, for so long as the tangible
net worth of Hotels OP (or MeriStar Hotels as guarantor of the Participating
Leases) is less than 17.5% of the aggregate rents payable under the
Participating Leases for the prior calendar year, Hotels OP (or MeriStar
Hotels as guarantor of the Participating Leases) is prohibited from paying
dividends or making distributions other than dividends or distributions made
for the purpose of permitting the partners of Hotels OP to pay taxes on the
taxable income of Hotels OP attributable to its partners plus any required
preferred distributions to partners.
TERMINATION
The REIT will have the right to terminate the applicable Participating Lease
upon the sale of a hotel to a third-party or, upon the REIT's determination
not to rebuild after a casualty, upon payment to MeriStar Hotels of the fair
market value of the leasehold estate. The fair market value of the leasehold
estate will be determined by discounting to present value at a discount rate
of 10% per annum the cash flow for each remaining year of the then current
lease term, which cash flow will be deemed to be the cash flow realized by
MeriStar Hotels under the applicable Participating Lease for the 12-month
period preceding the termination date. The REIT will receive a credit against
any such termination payments an amount equal to any outstanding "New Lease
Credits" which shall mean the projected cash flow (determined on the same
basis as the termination payment) of any new Participating Leases entered into
between the REIT and Hotels OP or MeriStar Hotels after the Effective Date for
the initial term of such new Participating Lease amortized on a straight-line
basis over a period of 72 months commencing on the commencement of the new
Participating Lease.
PERFORMANCE STANDARDS
The REIT will have the right to terminate the applicable Participating Lease
if, in any calendar year, the gross revenues from a hotel are less than 95% of
the projected gross revenues for such year as set forth in the applicable
budget unless (a) MeriStar Hotels can reasonably demonstrate that the gross
revenue shortfall was caused by general market conditions beyond MeriStar
Hotels' control or (b) MeriStar Hotels "cures" the shortfall by paying to the
REIT the difference between the rent that would have been paid to the REIT had
the property achieved gross revenues of 95% of the budgeted amounts and the
rent paid based on actual gross revenues. MeriStar Hotels will not have such
cure right for more than two consecutive years.
The Participating Leases also require that Hotels OP spend in each calendar
year at least 95% of the amounts budgeted for marketing expenses and for
repair and maintenance expenses.
ASSIGNMENT AND SUBLEASING
MeriStar Hotels will not have the right to assign a Participating Lease or
sublet a hotel without the prior written consent of the REIT. For purposes of
the Participating Lease, a change in control of MeriStar Hotels will be deemed
an assignment of the Participating Lease and will require the REIT's consent,
which may be granted or withheld in its sole discretion.
LEGAL PROCEEDINGS
In the course of the Company's normal business activities, various lawsuits,
claims and proceedings have been or may be instituted or asserted against the
Company. Based on currently available facts, management believes that the
disposition of matters that are pending or asserted will not have a material
adverse effect on the consolidated financial position, results of operations
or liquidity of the Company.
49
<PAGE>
THE RIGHTS OFFERING
MeriStar Hotels is distributing the Rights to holders of record of (a) the
REIT Common Stock and/or (b) the REIT OP Units (other than REIT OP Units held
by the REIT or any of its subsidiaries) as of the Record Date. Each
Rightholder will receive one sixth of a Right for each share of REIT Common
Stock and/or each REIT OP Unit so held. Each whole Right will be exercisable
for one share of Common Stock. Although fractional Rights will be issued to
Rightholders, the Company reserves the right, in its sole discretion, to pay
cash in lieu of fractional shares of Common Stock that would otherwise be
issued or issuable in respect of fractional Rights exercised by Rightholders,
based on a value per whole share of Common Stock equal to the closing price of
the Common Stock on the Principal Market on the Expiration Date. Any such cash
payment will be made to the applicable Rightholder at the same time that
shares of Common Stock are issued in respect of whole Rights exercised by
Rightholders. Fractional Rights can only be exercised concurrently with the
exercise of whole Rights. The Company intends to pay cash in lieu of all such
fractional shares of Common Stock.
EXPIRATION DATE
The Rights will be exercisable at any time following 5:00 p.m., New York
City time, on the last day of the Measurement Period until the Expiration
Date. After the Expiration Date, unexercised Rights will be null and void. The
Company will not be obligated to honor any purported exercise of Rights
received by the Subscription Agent after the Expiration Date, regardless of
when the documents relating to such exercise were sent, except pursuant to the
Guaranteed Delivery Procedures described below. Notice of any extension of the
Expiration Date will be made through a press release issued by the Company.
SUBSCRIPTION PRIVILEGE
Each whole Right will entitle the Rightholder (but not a subsequent
transferee of the REIT Common Stock and/or REIT OP Units held by such
Rightholder on the Record Date) to purchase one share of Common Stock at the
Subscription Price. Certificates representing shares of Common Stock purchased
pursuant to the Subscription Privilege will be delivered to subscribers as
soon as practicable after the fourth business day following the Expiration
Date.
CONDITIONS TO SALE OF SHARES
The issuance of shares of Common Stock pursuant to the exercise of the
Subscription Privilege is conditioned upon the consummation of the Spin-Off,
the Merger and the transactions contemplated by the Lessee-Manager Acquisition
Agreement prior to the closing of the Rights Offering. See "The Merger and the
Spin-Off." The Company also reserves the right, at its sole option, to cancel
the Rights Offering if the Subscription Price is less than .. All amounts
received by the Subscription Agent pursuant to the exercise of Rights will be
held in a non-interest-bearing escrow account until the completion of the
Rights Offering. If the Rights Offering is not completed, all funds received
by the Subscription Agent in payment of the Subscription Price and held in
escrow by the Subscription Agent will be returned by mail without interest or
deduction as soon as practicable following the termination or expiration of
the Rights Offering.
EXERCISE OF RIGHTS
Rights may be exercised by Rightholders by delivering to the Subscription
Agent, at or prior to the Expiration Date, the properly completed and executed
Subscription Certificate evidencing such Rights with any required signatures
guaranteed, together with payment in full of the Subscription Price for each
share subscribed for pursuant to the Subscription Privilege. Such payment in
full must be by (a) check or bank draft drawn upon a United States bank or
postal, telegraphic or express money order payable to Continental Stock
Transfer & Trust Company, as Subscription Agent, or (b) wire transfer of funds
to the account maintained by the Subscription Agent for such purpose at 2
Broadway, New York, New York 10004, The Chase Manhattan Bank Account No.
001021389; ABA No. 021000021. Any wire transfer of funds should clearly
indicate the identity of the subscriber who is paying the Subscription Price
by the wire transfer. The Subscription Price will be deemed to
50
<PAGE>
have been received by the Subscription Agent only upon (i) clearance of any
uncertified check, (ii) receipt by the Subscription Agent of any certified
check or bank draft drawn upon a United States bank or of any postal,
telegraphic or express money order or (iii) receipt of good funds in the
Subscription Agent's account designated above. IF PAYING BY UNCERTIFIED
PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE UP TO FIVE
BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTHOLDERS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF
FUNDS.
The address to which the Subscription Certificates and payment of the
Subscription Price should be delivered is:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Telephone: (212) 509-4000
If a Rightholder wishes to exercise Rights, but time will not permit such
Rightholder to cause the Subscription Certificate or Subscription Certificates
evidencing such Rights to reach the Subscription Agent on or prior to the
Expiration Date, such Rights may nevertheless be exercised if all of the
following conditions (the "Guaranteed Delivery Procedures") are met:
(1) such Rightholder has caused payment in full of the Subscription Price
for each share being subscribed for pursuant to the Subscription Privilege
to be received (in the manner set forth above) by the Subscription Agent on
or prior to the Expiration Date;
(2) the Subscription Agent receives, on or prior to the Expiration Date,
a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in
the form provided with the Instructions as to Use of Subscription
Certificates and International Holder Subscription Forms (the
"Instructions") distributed with the Subscription Certificates, from a
member firm of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. (the "NASD"), or from a
commercial bank or trust company having an office or correspondent in the
United States (each, an "Eligible Institution"), stating the name of the
exercising Rightholder, the number of Rights represented by the
Subscription Certificate or Subscription Certificates held by such
exercising Rightholder, the number of shares being subscribed for pursuant
to the Subscription Privilege, and guaranteeing the delivery to the
Subscription Agent of any Subscription Certificate evidencing such Rights
within three Trading Days following the date of the Notice of Guaranteed
Delivery; and
(3) the properly completed Subscription Certificate evidencing the Rights
being exercised, with any required signatures guaranteed, is received by
the Subscription Agent within three Trading Days following the date of the
Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed
Delivery may be delivered to the Subscription Agent in the same manner as
Subscription Certificates at the address set forth above, or may be
transmitted to the Subscription Agent by telegram or facsimile transmission
(telecopy no. (212) 509-4000. Additional copies of the form of Notice of
Guaranteed Delivery are available upon request from the Subscription Agent,
at the address set forth above.
A Rightholder who purchases less than all of the shares of Common Stock
represented by such Rightholder's Subscription Certificate will receive from
the Subscription Agent a new Subscription Certificate representing the balance
of the unsubscribed Rights, to the extent the Subscription Agent is able to
reissue a Subscription Certificate prior to the Expiration Date.
Unless a Subscription Certificate (1) provides that the shares of Common
Stock to be issued pursuant to the exercise of Rights represented thereby are
to be delivered to the Rightholder or (2) is submitted for the account of an
Eligible Institution, signatures on such Subscription Certificate must be
guaranteed by an Eligible Institution.
51
<PAGE>
Rightholders who hold Rights for the account of others, such as brokers,
trustees or depositaries for securities, should provide a copy of this
Prospectus to the respective beneficial owners of such Rights as soon as
possible, ascertain such beneficial owners' intentions and obtain instructions
with respect to the Rights. If the beneficial owner so instructs, the record
Rightholder should complete Subscription Certificates and submit them to the
Subscription Agent with the proper payment. In addition, beneficial owners of
Rights held through such a Rightholder should contact the Rightholder and
request the Rightholder to effect transactions in accordance with the
beneficial owner's instructions. Beneficial holders should be aware that
brokers or other record Rightholders may establish deadlines for receiving
instructions from beneficial holders significantly in advance of the
Expiration Date.
The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail.
The Company anticipates that the exercise of the Subscription Privilege may
be effected through the facilities of The Depository Trust Company.
DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE COMPANY, AGH, CAPSTAR OR ANY OF
THEIR AFFILIATES, BUT RATHER SEND THEM TO THE SUBSCRIPTION AGENT AS REFERENCED
ABOVE.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK
OF THE RIGHTHOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT AT OR PRIOR
TO THE EXPIRATION DATE. BECAUSE UNCERTIFIED, PERSONAL CHECKS MAY TAKE UP TO
FIVE BUSINESS DAYS TO CLEAR, RIGHTHOLDERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR
WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
will be final and binding. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as the
Company determines in its sole discretion. The Company reserves the right to
reject any purchases not properly submitted or the acceptance of which would,
in the opinion of its counsel, be unlawful. Neither the Company nor the
Subscription Agent will be under any duty to give notification of any defect
or irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.
Any questions or requests for assistance concerning the method of exercising
Rights or requests for additional copies of this Prospectus, the Instructions
or the Notice of Guaranteed Delivery should be directed to the Subscription
Agent.
NO REVOCATION
ONCE A RIGHTHOLDER HAS EXERCISED THE SUBSCRIPTION PRIVILEGE, SUCH EXERCISE
MAY NOT BE REVOKED.
RIGHTS NOT TRANSFERABLE
The Rights may be not be transferred. The Rights will entitle only a
Rightholder (but not a subsequent transferee of the REIT Common Stock and/or
REIT OP Units held by such Rightholder on the Record Date) to purchase shares
of Common Stock at the Subscription Price. In the event that Rightholders
transfer REIT Common Stock and/or REIT OP Units owned by them as of the Record
Date, they will remain the owners of Rights issued in respect of such shares
of REIT Common Stock and/or such REIT OP Units.
52
<PAGE>
None of the Company nor the Subscription Agent nor any of their affiliates
will have any liability to a purported transferee or transferor of Rights in
connection with any purported transfer. Except for the fees charged by the
Subscription Agent (which will be paid by the Company), all commissions, fees
and other expenses (including brokerage commissions and transfer taxes)
incurred in connection with the exercise of Rights will be for the account of
the Rightholder, and none of such commissions, fees or expenses will be paid
by the Company or the Subscription Agent.
FOREIGN AND CERTAIN OTHER RIGHTHOLDERS
Subscription Certificates will not be mailed to Rightholders whose addresses
are outside the United States or who have an APO or FPO address, but will be
held by the Subscription Agent for their account. To exercise or sell Rights,
such Rightholders must notify the Subscription Agent by completing an
International Holder Subscription Form, which will be delivered to such
Rightholders (except those located in the United Kingdom) in lieu of a
Subscription Certificate, and sending it by mail or telecopy to the
Subscription Agent at the address and telecopy number specified above.
Rightholders located in the United Kingdom will not initially be provided with
International Holder Subscription Forms.
The distribution of this Prospectus and the offering of the Rights and the
shares of Common Stock in certain jurisdictions may be restricted by law. No
action has been taken by MeriStar Hotels that would permit an offering of the
Rights or such shares or the circulation or distribution of this Prospectus or
any offering material in relation to the Company, the Rights or such shares in
any country outside the United States where action for that purpose is
required. Persons into whose possession this Prospectus comes are required by
the Company to inform themselves about and to observe any such restrictions.
FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax considerations affecting Rightholders in the Rights Offering. This summary
is based upon laws, regulations, rulings, and decisions currently in effect.
This summary does not discuss all aspects of federal taxation that may be
relevant to a particular investor or to certain types of investors subject to
special treatment under the federal tax laws (for example, banks, dealers in
securities, life insurance companies, tax-exempt organizations, and foreign
persons), nor does it discuss any aspect of state, local, or foreign tax laws.
In the opinion of Paul, Weiss, Rifkind, Wharton & Garrison ("Special Tax
Counsel"), the following discussion accurately reflects the material federal
income tax consequences of the Rights Offering to the Rightholders.
RIGHTHOLDERS SHOULD THEREFORE CONSULT THEIR OWN TAX ADVISORS CONCERNING
THEIR INDIVIDUAL TAX SITUATIONS AND THE TAX CONSEQUENCES OF THE RIGHTS
OFFERING UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND UNDER ANY
APPLICABLE STATE, LOCAL, OR FOREIGN TAX LAWS.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CAPSTAR COMMON STOCK
DISTRIBUTION OF RIGHTS TO HOLDERS OF CAPSTAR COMMON STOCK
Although the matter is not entirely free from doubt, in the opinion of
Special Tax Counsel because the Rights Offering is an integral part of a
series of related transactions culminating in the Merger, the distribution of
Rights to holders of CapStar Common Stock should constitute taxable boot
received in the Merger (as described in "The Merger and the Spin-Off--
Restructuring and Spin-Off"). The distribution of the Common Stock of MeriStar
Hotels should also constitute taxable boot received in the Merger.
As a result, holders of CapStar Common Stock will recognize gain in the
Merger equal to the lesser of (i) the fair market value of the Rights and the
Common Stock of MeriStar Hotels received by such stockholder and (ii) the fair
market value of the Common Stock of the REIT, the Common Stock of MeriStar
Hotels and the Rights received in the Merger minus the adjusted tax basis of
such stockholder in its CapStar Common Stock exchanged therefor. The amount of
gain recognized by holders of CapStar Common Stock that "has the effect of the
distribution of a dividend" will be treated as ordinary dividend income to the
extent of the stockholder's
53
<PAGE>
ratable share of the undistributed earnings and profits of CapStar as of the
effective time of the Merger, and any excess will be treated as gain from the
exchange of property. Such gain will be capital gain if such shares of CapStar
Common Stock were held as a capital asset at the effective time of the Merger.
In general, the determination as to whether the gain recognized by a CapStar
stockholder in the Merger will be treated as capital gain or dividend income
depends upon whether and to what extent the transactions related to the Merger
will be deemed to reduce the stockholder's percentage ownership of the REIT
following the Merger. For purposes of that determination, the stockholder is
treated as if it first exchanged all of its shares of CapStar Common Stock
solely for Common Stock of the REIT and then the REIT immediately redeemed
(the "deemed redemption") a portion of such Common Stock of the REIT in
exchange for the boot the stockholder actually received. If, under section 302
of the Code, the deemed redemption is "substantially disproportionate" with
respect to a CapStar stockholder, the gain recognized will be treated as
capital gain. One requirement that must be met in order for the deemed
redemption to be "substantially disproportionate" is that the percentage of
the outstanding voting stock of the REIT following the Merger and the deemed
redemption considered owned by the stockholder is less than 80% of the
percentage of the outstanding voting stock of the REIT considered owned by the
stockholder following the Merger but immediately before the deemed redemption.
Based on calculations of the relative values of the Common Stock of the REIT,
the Common Stock of MeriStar Hotels and the Rights to be received by holders
of CapStar Common Stock, it is anticipated that the deemed redemption will not
be "substantially disproportionate" with respect to holders of CapStar Common
Stock. Accordingly, unless a CapStar shareholder qualifies for the exception
described below, the gain recognized by such shareholder will be taxed as
dividend income to the extent of the accumulated earnings and profits of
CapStar at the time of Merger.
However, section 302 of the Code also provides that if the deemed redemption
is "not essentially equivalent to a dividend" with respect to the stockholder,
then any gain recognized by the stockholder in the transaction will be capital
gain. In general, in order for the deemed redemption to be "not essentially
equivalent to a dividend", the deemed redemption must result in a "meaningful
reduction" in the stockholder's deemed percentage stock ownership of the REIT
following the Merger. That determination generally requires a comparison of
(i) the percentage of the outstanding stock of the REIT the stockholder is
considered to have owned immediately before the deemed redemption and (ii) the
percentage of the outstanding stock of the REIT the stockholder owns
immediately after the deemed redemption. The Internal Revenue Service has
indicated in a published ruling that, in the case of a small minority holder
of a publicly-held corporation who exercises no control over corporate
affairs, a reduction in the holder's proportionate interest in the corporation
from .0001118% to .0001081% would constitute a meaningful reduction.
In applying the foregoing tests, under the attribution rules of section 318
of the Code, a stockholder is deemed to own (i) stock owned and, in some
cases, constructively owned by family members, by certain estates and trusts
of which the stockholder is a beneficiary and by certain affiliated entities
and (ii) stock subject to an option actually or constructively owned by the
stockholder or such other persons. As the determination as to whether a
CapStar stockholder has recognized capital gain with respect to the receipt of
the Rights is complex, each stockholder that believes that it might qualify
for capital gain treatment under the above rules is urged to consult its tax
advisor with respect to such determination.
To the extent that the gain recognized by a holder of CapStar Common Stock
"has the effect of the distribution of a dividend", the amount that will be
treated as ordinary dividend income will depend on the earnings and profits of
CapStar at the effective time of the Merger. Earnings and profits immediately
prior to the effective time of the Merger will be increased by an amount equal
to the sum of the fair market value of the Rights and the excess of the fair
market value of the Common Stock of MeriStar Hotels over CapStar's tax basis
in such stock.
If the distribution of the Rights instead was treated as a distribution of
property under Section 301 of the Code, an amount equal to the fair market
value of the Rights on the date of distribution would be treated as a
54
<PAGE>
dividend to the extent of the current and accumulated earnings and profits of
CapStar on such date, including earnings and profits resulting from the
distribution of the Rights, as described in the preceding paragraph. Any
amount in excess of the earnings and profits of CapStar would be treated first
as a tax-free return of capital, reducing the stockholder's tax basis in its
CapStar Common Stock, and any amount in excess of tax basis would be taxable
as gain from sale or exchange of such stockholder's shares of CapStar Common
Stock. Such gain would be capital gain if such stockholder's shares of CapStar
Common Stock were held as a capital asset on the date of distribution.
The tax basis of a CapStar stockholder in the Rights received in the
distribution will be the fair market value of such Rights, and the holding
period for such Rights will begin on the date of the distribution.
Whether the Rights Offering is treated as a distribution of boot in a
reorganization or as a dividend, CapStar will recognize gain on the
distribution of the Rights in an amount equal to the fair market value of such
Rights at the time of the distribution. No gain or loss will be recognized by
MeriStar as a result of the distribution of the Rights in the Rights Offering.
EXERCISE OF RIGHTS BY HOLDERS OF CAPSTAR COMMON STOCK
Holders of CapStar Common Stock will not recognize gain or loss upon the
exercise of the Rights. Such holders who receive shares of MeriStar Hotels
Common Stock upon such exercise will take a tax basis in those shares equal to
the sum of the price paid on exercise and the Rightholder's tax basis in the
Rights.
LAPSE OF RIGHTS BY HOLDERS OF CAPSTAR COMMON STOCK
Holders of CapStar Common Stock who fail to exercise their Rights prior to
the Expiration Date will be deemed to have sold their Rights on that date for
an amount equal to zero. Assuming the Rights are held as capital assets, such
holders will recognize a short-term capital loss equal to their adjusted tax
basis in the Rights upon failure to exercise such Rights.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF AGH COMMON STOCK
DISTRIBUTION OF RIGHTS TO HOLDERS OF AGH COMMON STOCK
Although the matter is not free from doubt, in the opinion of Special Tax
Counsel, because the Rights Offering is an integral part of a series of
related transactions culminating in the Merger, including the recapitalization
in which the AGH shareholders exchange their shares for shares of the REIT,
the distribution of Rights should constitute boot received in the AGH
recapitalization.
As a result, a holder of AGH Common Stock will recognize gain equal to the
lesser of (i) the fair market value of the Rights received by such stockholder
or (ii) the fair market value of the Common Stock of the REIT, and of the
Rights minus the adjusted tax basis of such stockholder in its AGH Common
Stock exchanged therefor. The amount of gain recognized by a holder of AGH
Common Stock that "has the effect of the distribution of a dividend" will be
treated as ordinary dividend income to the extent of the stockholder's ratable
share of the undistributed earnings and profits of AGH as of the effective
time of the Merger and any excess will be treated as gain from the exchange of
property. Such gain will be capital gain if such shares of AGH Common Stock
were held as a capital asset at the effective time of the Merger.
In general, the determination as to whether the gain so recognized by an AGH
stockholder will be treated as capital gain or dividend income depends upon
whether and to what extent the transactions related to the Merger will be
deemed to reduce the stockholder's percentage ownership of the REIT following
the Merger. For purposes of that determination, the stockholder is treated as
if it first exchanged all of its shares of AGH Common Stock solely for Common
Stock of the REIT and then the REIT immediately redeemed (the "deemed
redemption") a portion of such Common Stock of the REIT in exchange for the
boot the stockholder actually
55
<PAGE>
received. If, under section 302 of the Code, the deemed redemption is
"substantially disproportionate" with respect to a AGH stockholder, the gain
recognized will be treated as capital gain. One requirement that must be met
in order for the deemed redemption to be "substantially disproportionate" is
that the percentage of the outstanding voting stock of the REIT following the
Merger and the deemed redemption considered owned by the stockholder is less
than 80% of the percentage of the outstanding voting stock of the REIT
considered owned by the stockholder following the Merger but immediately
before the deemed redemption. Although the matter is not free from doubt, in
determining whether this test is satisfied, the reduction in percentage
interests of the AGH stockholder as a result of the issuance of additional
shares of the REIT to former CapStar stockholders in the Merger should be
taken into account. Based on calculations of the relative values of the Common
Stock of the REIT, the Rights to be received by holders of AGH Common Stock
and the amount of stock to be issued to former CapStar stockholders in the
Merger, it is anticipated that the deemed redemption will be "substantially
disproportionate" with respect to holders of AGH Common Stock. Accordingly,
the gain recognized by such shareholder will be taxed as a capital gain.
In applying the foregoing tests, under the attribution rules of section 318
of the Code, a stockholder is deemed to own (i) stock owned and, in some
cases, constructively owned by family members, by certain estates and trusts
of which the stockholder is a beneficiary and by certain affiliated entities
and (ii) stock subject to an option actually or constructively owned by the
stockholder or such other persons. As the determination as to whether an AGH
stockholder has recognized capital gain with respect to the receipt of the
Rights is complex, each stockholder that believes that it might qualify for
capital gain treatment under the above rules is urged to consult its tax
advisor with respect to such determination.
If the distribution of the Rights instead was treated as a distribution of
property under Section 301 of the Code, an amount equal to the fair market
value of the Rights on the date of distribution would be treated as a dividend
to the extent of the current and accumulated earnings and profits of AGH on
such date, including earnings and profits resulting from the distribution of
the Rights. The earnings and profits of AGH immediately prior to the effective
time of the Merger would be increased by an amount equal to the fair market
value of the Rights. Any amount in excess of the earnings and profits of AGH
would be treated first as a tax-free return of capital, reducing the
stockholder's tax basis in its AGH Common Stock, and any amount in excess of
tax basis would be taxable as gain from sale or exchange of such stockholder's
shares of AGH Common Stock. Such gain would be capital gain if such
stockholder's shares of AGH Common Stock were held as a capital asset on the
date of distribution.
The tax basis of an AGH stockholder in the Rights received in the
distribution will be the fair market value of such Rights, and the holding
period for such Rights will begin on the date of the distribution.
Whether the Rights Offering is treated as a distribution of boot in a
reorganization or as a dividend, AGH will recognize gain on the distribution
of the Rights in an amount equal to the fair market value of such Rights at
the time of the distribution.
EXERCISE OF RIGHTS BY HOLDERS OF AGH COMMON STOCK
Holders of AGH Common Stock will not recognize gain or loss upon the
exercise of the Rights. Such holders who receive shares of MeriStar Hotels
Common Stock upon such exercise will take a tax basis in those shares equal to
the sum of the price paid on exercise and the Rightholder's tax basis in the
Rights.
LAPSE OF RIGHTS BY HOLDERS OF AGH COMMON STOCK
Holders of AGH Common Stock who fail to exercise their Rights prior to the
Expiration Date will be deemed to have sold their Rights on that date for an
amount equal to zero. Assuming the Rights are held as capital assets, such
holders will recognize a short-term capital loss equal to their adjusted tax
basis in the Rights upon failure to exercise such Rights.
56
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF REIT OP UNITS
DISTRIBUTION TO HOLDERS OF REIT OP UNITS
Although the matter is not free from doubt, in the opinion of Special Tax
Counsel the distribution of the Rights by MeriStar Hotels to holders of REIT
OP Units in their capacity as such should not initially be a taxable event to
the recipient.
EXERCISE OF RIGHTS BY HOLDERS OF REIT OP UNITS
Although there is not published authority directly on point, based upon
internal IRS memoranda, holders of REIT OP Units who exercise their Rights
will recognize ordinary taxable income in an amount equal to the fair market
value of such Rights on the date of exercise. Such holders would take a tax
basis in such shares received upon exercise equal to the exercise price paid
under the Rights Offering and the amount of ordinary income recognized upon
exercise as described herein.
LAPSE OF RIGHTS BY HOLDERS OF REIT OP UNITS
Holders of REIT OP Units who fail to exercise their Rights prior to the
Expiration Date should recognize no income, gain or loss upon the lapse of
such Rights unexercised.
RISK OF RECHARACTERIZATION TO HOLDERS OF REIT OP UNITS
Although MeriStar Hotels, the REIT and the REIT Operating Partnership intend
to take the position that the issuance of the Rights will be characterized for
federal income tax purposes as described above, it is possible that the IRS
might recharacterize the Rights Offering. For example, it is possible the IRS
could view the REIT Operating Partnership as the distributor of the Rights. If
this were the case, the distribution of the Rights to holders of REIT OP Units
would be treated as a partnership distribution of marketable securities so
that such unit-holder would have to recognize capital gain to the extent that
the fair market value of the Rights as of the date of distribution exceeds
such holder's basis in such units. Under such a view, holders of REIT OP Units
would take a basis in the Rights equal to the fair market value of the Rights
as of the date of distribution.
If the offering were recharacterized in this way, holders of REIT OP Units
would not recognize further gain or loss upon the exercise of their Rights.
Assuming such Rights were held as capital assets, holders of REIT OP Units
would recognize a short-term capital loss equal to their adjusted tax basis in
the Rights upon failure to exercise such Rights.
57
<PAGE>
MANAGEMENT
MeriStar Hotels was recently formed. None of the Company's executive
officers has yet received compensation from or on behalf of MeriStar Hotels
since its formation. The Company intends to enter into employment agreements
with certain executive officers and will pay a salary and/or other
compensation to such executive officers for their services in such capacities
as set forth below under "Executive Compensation." Options have been, and in
the future may be, granted to executive officers. See "Stock Option Grants."
THE BOARD OF DIRECTORS
The Board of Directors will be divided into three classes of directors. The
inital term of the first, second and third classes expires in 2001, 2002 and
2003, respectively. Directors of each class will be elected for three-year
terms upon the expiration of the initial class terms, and, beginning in 2001
and each year thereafter, each class of directors will be elected by the
stockholders. As of the date of this Prospectus, the following individuals are
expected to become directors of MeriStar Hotels:
<TABLE>
<CAPTION>
WILL SERVE AS A
DIRECTOR OF
NAME, PRINCIPAL OCCUPATION MERISTAR HOTELS
AND BUSINESS EXPERIENCE BEGINNING AGE CLASS
-------------------------- --------------- --- -----
<S> <C> <C> <C>
DANIEL L. DOCTOROFF.................................. 1998 39 I
Daniel L. Doctoroff has been a Director of CapStar
since 1996, a Managing Director of Oak Hill
Partners, Inc., the investment advisor to several
private investment funds (including Acadia Partners,
L.P.), and its predecessor since August 1987; Vice
President and Director of Acadia Partners MGP, Inc.
since March 1992; Vice President of Keystone, Inc.
since March 1992; and a Managing Partner of
Insurance Partners Advisors, L.P. since February
1994. All of such entities are affiliates of Acadia
Partners. Mr. Doctoroff is also a Director of Bell &
Howell Holdings Company, Kemper Corporation and
Specialty Foods Corporation.
KENT R. HANCE........................................ 1998 55 II
Kent R. Hance has been a director of AGH since July
1996. Since 1994, Mr. Hance has been a law partner
in the firm Hance, Scarborough, Woodward & Weisbart,
L.L.P., Austin, Texas, and from 1991 to 1994, he was
a law partner in the firm of Hance and Gamble. From
1985 to 1987, he was a law partner with Boyd, Viegal
and Hance. Mr. Hance also served as a member of the
Texas Railroad Commission from 1987 until 1991 and
as its Chairman from 1989 until 1990. From 1979 to
1985, he served as a member of the United States
Congress. In addition, Mr. Hance served as a State
Senator in the State of Texas from 1975 to 1979 and
was a professor of business law at Texas Tech
University from 1969 to 1973.
STEVEN D. JORNS...................................... 1998 49 I
Steven D. Jorns has been the Chairman of the Board
of Directors, Chief Executive Officer and President
of AGH since April 1996. Mr. Jorns is the founder
of, and has served since its formation in 1981 as
Chairman of the Board of Directors, Chief Executive
Officer and President of, AGHI, a hotel management
company. Prior to forming AGHI, Mr. Jorns spent
seven years with an affiliate of General Growth
Companies overseeing that company's hotel portfolio.
Prior to that, Mr. Jorns was associated with
Hospitality Motor Inns, a division of Standard Oil
of Ohio, and held marketing positions with Holiday
Inns, Inc.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
WILL SERVE AS A
DIRECTOR OF
NAME, PRINCIPAL OCCUPATION MERISTAR HOTELS
AND BUSINESS EXPERIENCE BEGINNING AGE CLASS
-------------------------- --------------- --- -----
<S> <C> <C> <C>
JOSEPH MCCARTHY..................................... 1998 65 I
Joseph McCarthy has been retired since 1994 and has
been a Director of CapStar since 1996. From 1993 to
1994 he served as Chairman of the Board for Motel
6. From 1985 to 1993, he served as President and
Chief Executive Officer for Motel 6. From 1980 to
1985, he served as President and Chief Executive
Officer of Lincoln Hotels. From 1976 to 1980, he
served as President and Chief Executive Officer of
Quality Inns International. Prior to that, from
1971 to 1976, he served as Senior Vice President of
the Sheraton Corporation.
DAVID E. MCCASLIN................................... 1998 41 III
David E. McCaslin has been a Director of CapStar
since 1996. He has served as Chief Operating
Officer of CapStar since 1994. Mr. McCaslin joined
CapStar in 1987 as a General Manager and was named
Vice President of Operations in 1988. From 1985 to
1987, Mr. McCaslin served as General Manager for
Lincoln Hotels. Prior to that, from 1979 to 1985,
he worked for Westin Hotels in various capacities,
including Assistant General Manager, Rooms Division
Manager and Food & Beverage Manager.
JAMES MCCURRY....................................... 1998 49 III
James McCurry became a director of AGH in July
1996. Since July 1997, Mr. McCurry has been a
Partner at Bain & Company, an international
management consulting firm specializing in
corporate strategy. Mr. McCurry served from
December 1994 through December 1996 as Chief
Executive Officer of NeoStar Retail Group, Inc.
("NeoStar"), a specialty retailer of consumer
software. NeoStar filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code in September
1996. From April 1983 to December 1994, Mr. McCurry
was the Chairman of Babbage's Inc., a consumer
software retailer, which merged with Software Etc.
Stores, Inc. in December of 1994 to form NeoStar.
PAUL W. WHETSELL.................................... 1998 47 II
Paul W. Whetsell has been a Director of CapStar
since 1996. He has served as President and Chief
Executive Officer of CapStar and its predecessors
since its founding in 1987. From 1981 to 1986, Mr.
Whetsell served as Vice President of Development
for Lincoln Hotels in Dallas, Texas. Prior to that,
from 1973 to 1981, Mr. Whetsell worked for Quality
Inns in various capacities in its franchise
division, culminating in Vice President of
Franchise.
JAMES R. WORMS...................................... 1998 51 II
James R. Worms has served as director of AGH since
July 1996. Mr. Worms has served since August 1995
as a Managing Director of William E. Simon & Sons
L.L.C., a private investment firm and merchant bank
and President of William E. Simon & Sons Realty,
through which the firm conducts its real estate
activities. Prior to joining William E. Simon &
Sons, Mr. Worms was employed since March 1987 by
Salomon Brothers Inc., an international investment
banking firm, most recently as a managing director.
ADDITIONAL DIRECTOR III
</TABLE>
[TO BE DETERMINED]
59
<PAGE>
BOARD COMMITTEES
The Board of Directors of MeriStar Hotels will have four committees: an
Audit Committee, a Compensation Committee, an Investment Committee and a
Leasing Committee.
The Audit Committee will consist of three directors who are not employees of
the Company ("Independent Directors"). The Audit Committee will be responsible
for making recommendations concerning the engagement of independent auditors,
reviewing with the independent auditors the plans and results of the audit
engagement, approving professional services provided by the independent
auditors, reviewing the independence of the independent auditors, considering
the range of audit and non-audit fees and reviewing the adequacy of the
Company's internal accounting controls.
The Compensation Committee will consist of four Independent Directors. The
Compensation Committee will be responsible for the determination of
compensation of the Company's executive officers and the administration of the
Company's employee incentive plans.
The Investment Committee of the Company will consist of the Chairman of the
Board and directors from each of MeriStar Hotels and the REIT. The Company's
Investment Committee will be responsible for the review and approval of
investments proposed by the Company.
The Leasing Committee will consist of the Chairman of the Board and three
Independent Directors. The Leasing Committee will be responsible for the
review and approval of leases to be entered into between the Hotel Parties and
the REIT Parties.
The entire Board of Directors of the Company will act as the nominating
committee for directors of the Company and will consider nominations by
stockholders for directors. The Board of Directors would be pleased to receive
suggestions from stockholders about persons it should consider as possible
members of the Board of Directors. Any such suggestion should be mailed to the
Secretary of the Company by December 31, 1998.
DIRECTORS COMPENSATION
Independent Directors of the Company will be paid an annual fee of $20,000.
In addition, each Independent Director will be paid $1,250 for attendance at
each meeting of the Board; $1,000 for attendance at each meeting of a
committee of the Board of Directors of which such director is a member and
$500 for each telephonic meeting of the Board or a committee thereof of which
such director is a member. Directors who are employees of the Company will not
receive any fees for their service on the Board of Directors or a committee
thereof. The Company will reimburse directors for their out-of-pocket expenses
in connection with their service on the Board of Directors.
OPTIONS
Pursuant to the MeriStar Hotels & Resorts, Inc. Non-Employee Incentive Plan
(the "MeriStar Hotels Directors' Plan"), each director, who is not an officer
or employee of MeriStar or its subsidiaries (each an "Independent Director"),
will be awarded an option to purchase 7,500 shares of Common Stock upon
initial commencement of service after the Spin-Off, whether by appointment or
election. Thereafter, each Independent Director will be granted an option to
purchase 5,000 shares of Common Stock on the first business day following the
Company's annual meeting of stockholders. The exercise price of option grants
will be 100% of the fair market value of the Common Stock on the date of
grant, and options will vest in three annual installments. The exercise price
may be paid in cash, cash equivalents acceptable to the Compensation
Committee, Common Stock or a combination thereof. Options granted under the
MeriStar Hotels Directors' Plan, once vested, are exercisable for ten years
from the date of grant. Upon termination of service as a director, options
which have not vested are forfeited and vested options may be exercised until
they expire. All options accelerate upon a change in control of MeriStar
Hotels.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS
Generally, an eligible director does not recognize any taxable income, and
the Company is not entitled to a deduction upon the grant of an option. Upon
the exercise of an option, the eligible director recognizes ordinary
60
<PAGE>
income equal to the excess of the fair market value of the shares acquired
over the option exercise price, if any. The director will then take a basis in
such shares equal to their fair market value at the time of option exercise,
and any gain or loss subsequently recognized upon a sale or exchange of such
shares will be treated as capital gain or loss to such director. Special rules
may apply as a result of Section 16 of the Exchange Act. The Company is
generally entitled to a deduction equal to the compensation taxable to the
eligible director as ordinary income. Eligible directors may be subject to
backup withholding requirements for federal income tax. Options are generally
non-transferable. However, the MeriStar Hotels Directors' Plan authorizes the
granting of options which are transferable to Permitted Family Members (as
defined therein).
The transfer of an option to a Permitted Family Member will have no
immediate tax consequences to the Company, the director or the Permitted
Family Member. Upon the subsequent exercise of the transferred option by the
Permitted Family Member, the director will realize ordinary income in an
amount measured by the difference between the option exercise price and the
fair market value of the shares on the date of exercise, and the employer will
be entitled to a deduction in the same amount. Any difference between such
fair market value and the price at which the Permitted Family Member may
subsequently sell such shares will be treated as capital gain or loss to the
Permitted Family Member, long-term or short-term depending on the length of
time the shares have been held by the Permitted Family Member.
COMMON STOCK IN LIEU OF FEES
Independent Directors may elect to receive all or a portion of their annual
retainer in shares of Common Stock rather than cash. Unless an Independent
Director elects otherwise, fees paid in stock will be paid at the same time as
fees paid in cash.
AMENDMENT AND TERMINATION
The MeriStar Hotels Directors' Plan provides that the Board of Directors may
amend or terminate the MeriStar Directors' Plan at any time. An amendment will
not become effective without stockholder approval if the amendment (i)
materially increases the number of shares that may be issued under the
MeriStar Hotels Directors' Plan or (ii) stockholder approval would be required
for compliance with stock exchange rules. No options may be granted under the
MeriStar Hotels Directors' Plan after December 31, 2008.
STOCK OPTION GRANTS
The following table sets forth information regarding the proposed grants of
options under the MeriStar Hotels Directors Plan:
<TABLE>
<CAPTION>
NUMBER OF MERISTAR
STOCK OPTIONS TO
NAME AND POSITION BE GRANTED
- ----------------- ------------------
<S> <C>
Daniel L. Doctoroff--Director................................ 7,500
Kent R. Hance--Director...................................... 7,500
Joseph McCarthy--Director.................................... 7,500
James McCurry--Director...................................... 7,500
James R. Worms--Director..................................... 7,500
</TABLE>
61
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth the name, age, expected title and business
experience for each person who is expected to serve as an executive officer of
MeriStar Hotels. For information concerning the business experience of Messrs.
Whetsell, Jorns and McCaslin, who are also expected to be members of the
MeriStar Hotels Board of Directors, see "Management--The Board of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul W. Whetsell................. 47 Chairman of the Board and Chief Executive Officer
Steven D. Jorns.................. 49 Vice Chairman and Chief Operating Officer
David E. McCaslin................ 41 President and Director
James A. Calder.................. 35 Chief Financial Officer
John E. Plunket.................. 42 Executive Vice President, Finance and Development
</TABLE>
James A. Calder
James A. Calder has served as Senior Vice President of Finance of CapStar
since September 1997. From May 1995 to September 1997, he served as Senior
Vice President and Corporate Controller of ICF Kaiser International, Inc.
Prior to that, from July 1984 to May 1995, he worked for Deloitte & Touche LLP
in various capacities, culminating with Audit Senior Manager for the real
estate industry. He is a Certified Public Accountant.
John E. Plunket
John E. Plunket has served as Executive Vice President, Finance and
Development of CapStar since November 1993. From September 1991 to October
1993, Mr. Plunket served as Vice President and Principal Broker for CIG
International, an investment and hotel asset management company. From February
1988 to August 1991, Mr. Plunket served as Managing Director of Cassidy &
Pinkard Inc., a commercial real estate services company. From 1985 to 1987,
Mr. Plunket served as Senior Vice President for Oxford Development
Corporation. Prior to that, from December 1979 to April 1985, Mr. Plunket
worked for Marriott Corporation in various capacities, culminating in Director
of Project Finance.
EXECUTIVE COMPENSATION
The following table sets forth the compensation that is expected to be paid
by the Company during 1998 with respect to the Chief Executive Officer and the
four most highly compensated executive officers (the "Named Executive
Officers").
<TABLE>
<CAPTION>
OPTIONS TO
ANNUAL COMPENSATION BE GRANTED
--------------------- OTHER ANNUAL LONG-TERM
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
--------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PAUL W. WHETSELL............. 1998 $190,000 $ -- $ -- --
Chief Executive Officer and
Chairman of the Board
STEVEN D. JORNS.............. 1998 190,000 -- -- 250,000
Vice Chairman and Chief Op-
erating Officer
DAVID E. MCCASLIN............ 1998 300,000 -- -- 87,500
President and Director
JAMES A. CALDER.............. 1998 200,000 -- -- 47,500(1)
Chief Financial Officer
JOHN E. PLUNKET.............. 1998 162,000 -- -- 10,000(2)
Executive Vice President,
Finance and
Development
</TABLE>
- --------
(1) Does not include 47,500 options to purchase REIT Common Stock to be
granted by the REIT in consideration for services to be rendered by Mr.
Calder to the REIT.
(2) Does not include 12,500 options to purchase REIT Common Stock to be
granted by the REIT in consideration for services to be rendered by Mr.
Plunket to the REIT.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company has agreed to enter into employment agreements with Paul W.
Whetsell, Steven D. Jorns, David E. McCaslin, James A. Calder and John E.
Plunket effective upon the consummation of the Formation Transactions. With
respect to Messrs. Whetsell and Jorns, each agreement will be for an initial
term of five years with automatic renewals on a year-to-year basis thereafter
unless terminated in accordance with its terms. The other employment
agreements will be for an initial term of three years, with automatic renewals
on a year-to-year basis thereafter, unless terminated in accordance with their
respective terms. Certain material terms of these agreements are as follows:
BASE SALARY
Messrs. Whetsell and Jorns will each receive a base salary of $190,000 per
year (Messrs. Whetsell and Jorns will each receive a base salary of $285,000
per year as employees of the REIT). Mr. McCaslin will receive a base salary of
$300,000 per year, Mr. Calder will receive a base salary of $200,000 per year
and Mr. Plunket will receive a base salary of $162,000 per year. Each base
salary will be subject to review annually.
ANNUAL INCENTIVE BONUS
Each executive shall be eligible to receive an annual incentive bonus at the
following targeted amounts of base salary:
<TABLE>
<CAPTION>
THRESHOLD MAXIMUM
TARGET TARGET BONUS AMOUNT
--------- ------ ------------
<S> <C> <C> <C>
Paul W. Whetsell............................... 25% 125% 150%
Steven D. Jorns................................ 25% 125% 150%
David E. McCaslin.............................. 25% 100% 125%
James A. Calder................................ 25% 85% 100%
John E. Plunket................................ 25% 85% 100%
</TABLE>
The amount of the annual bonus will be based on the achievement of
predefined operating or performance goals and other criteria to be established
by the Compensation Committee of the Board of Directors.
LONG-TERM INCENTIVES
Each executive will be eligible to participate in the MeriStar Hotels
Incentive Plan. Awards will be made in the discretion of the Compensation
Committee.
Certain Severance Benefits
If, at any time during the term of their respective employment agreements or
any automatic renewal period, the employment of Messrs. Whetsell, Jorns,
McCaslin, Calder or Plunket is terminated, he shall be entitled to receive the
benefits described below.
Termination by the Company Without Cause or by the Executive with Good
Reason. In the case of Messrs. Whetsell and Jorns, if such executive is
terminated without cause or voluntarily terminates with "good reason," he is
entitled to a lump sum payment equal to the greater of (i) two times the sum
of his total cash-compensation for the preceding year or (ii) the product of
his total cash-compensation for the previous fiscal year and the number of
full and fractional years remaining in his employment contract, without
further extension. In addition, all of the executive's options and restricted
stock will vest, effective as of the termination date. The other executives
will receive (i) a lump sum payment equal to one times their then annual base
salary, (ii) the amount of their bonus for the preceding year, and (iii)
immediate vesting and exercisability of all unvested stock options and
restricted stock awards.
Termination Due to Death or Disability. Upon termination due to death or
disability, the executive or his estate will receive a lump sum payment equal
to the executive's base salary, plus the pro rata portion of his bonus for the
fiscal year in question, in addition to payment for one year of any other
compensation due the executive pursuant to his employment contract. The
executive's stock options and restricted stock will vest immediately.
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Voluntary Termination or Termination for Cause. Upon voluntary termination
or termination for "cause" by the Company, the executive will receive the pro
rata portion of his base salary through the termination date. Any vested
options held by the executive will expire ninety (90) days after the
termination date.
Termination Following a Change in Control. If Mr. Whetsell or Mr. Jorns is
terminated without cause or voluntarily terminates with "good reason" within
24 months following a "Change in Control," the executive will receive the
following benefits: (i) a lump sum payment equal to the greater of (a) two
times the sum of his total cash-compensation for the previous year and (b) the
product of his cash compensation for the previous year and the number of full
and fractional years remaining in his employment contract; (ii) all unvested
stock options held by the executive will vest and be exercisable immediately;
and (iii) the 280G Payment. In the case of the other executives, they would
each be entitled to the same type of payments provided the termination
occurred within 18 months of the Change in Control, except they will only
receive two times the sum of their then annual base salary plus bonus.
Change in Control Payments. In the case of each of the executives, in the
event that any accelerated vesting of the executive's rights with respect to
stock options, restricted stock or any other payment, benefit or compensation
results in the imposition of an excise tax payable by the executive under
Section 4999 of the Code, or any successor or other provision with respect to
"excess parachute payments" within the meaning of Section 280G(b) of the
Internal Revenue Code, the Company will make a cash payment to the executive
in the amount of such excise tax (the "Excise Tax Payment") and shall also
make a cash payment to the executive in an amount equal to the total of
federal, state and local income and excise taxes for which the executive may
be liable on account of such Excise Tax Payment.
Termination within 24 Months of Effective Time
Notwithstanding anything to the contrary, if the employment of Messrs.
Whetsell or Jorns is terminated other than for cause within 24 months after
the consummation of the Formation Transactions, stock options or other awards
made to Messrs. Whetsell and Jorns will continue to vest and remain
exercisable as if such executive's employment had not terminated.
THE MERISTAR HOTELS INCENTIVE PLAN
The Board of Directors adopted the MeriStar Hotels & Resorts, Inc. Incentive
Plan (the "MeriStar Hotels Incentive Plan") for the purposes of (i) attracting
and retaining employees, directors and other service providers with ability
and initiative, (ii) providing incentives to those deemed important to the
success of the Company and related entities, and (iii) associating the
interests of these individuals with the interests of the Company and its
stockholders through opportunities for increased stock ownership.
ADMINISTRATION
The MeriStar Hotels Incentive Plan is administered by the Compensation
Committee. The Compensation Committee may delegate its authority to administer
the MeriStar Hotels Incentive Plan. The Compensation Committee may not,
however, delegate its authority with respect to grants and awards to
individuals subject to Section 16 of the Exchange Act. As used in this
summary, the term "Administrator" means the Compensation Committee or its
delegate, as appropriate.
ELIGIBILITY
Each employee of the Company or of an affiliate of the Company or any other
person whose efforts contribute to the Company's performance, including an
employee who is a member of the Board of Directors, is eligible to participate
in the MeriStar Hotels Incentive Plan ("Participants"). The Administrator may,
from time to time, grant stock options, stock awards, incentive awards, or
performance shares to Participants.
OPTIONS
Options granted under the MeriStar Hotels Incentive Plan may be incentive
stock options ("ISOs") or nonqualified stock options. An option entitles a
Participant to purchase shares of Common Stock from the
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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 option
price will be fixed by the Administrator at the time the option is granted,
but the price cannot be less than 100% for existing employees (85% in
connection with the hiring of new employees) of the shares' fair market value
on the date of grant; provided, however, no more than 10% of the shares under
the MeriStar Hotels Incentive Plan will be granted at less than 100% of fair
market value. The exercise price of an ISO may not be less than 100% of the
shares' fair market value on the date of grant (110% of the fair market value
in the case of an ISO granted to a 10% stockholder of the Company). Options
may be exercised at such times and subject to such conditions as may be
prescribed by the Administrator but the maximum term of an option is ten years
in the case of an ISO or five years in the case of an ISO granted to a 10%
stockholder.
ISOs may only be granted to employees; however, no employee may be granted
ISOs (under the MeriStar Hotels Incentive Plan or any other plan of the
Company) that are first exercisable in a calendar year for Common Stock having
an aggregate fair market value (determined as of the date the option is
granted) exceeding $100,000. In addition, no Participant may be granted
options in any calendar year for more than 750,000 shares of Common Stock.
STOCK AWARDS
Participants also may be awarded shares of Common Stock pursuant to a stock
award. A Participant's rights in a stock award will be nontransferable or
forfeitable or both unless certain conditions prescribed by the Administrator
are satisfied. These conditions may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the Common Stock or the Company's, a subsidiary's, or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital, funds from operations or return on assets or other
acceptable performance criteria. A stock award, no portion of which is
immediately vested and nonforfeitable, will be restricted, in whole or in
part, for a period of at least three years; provided, however, that the period
will be at least one year in the case of a stock award that is subject to
objectives based on one or more of the foregoing performance criteria. The
maximum number of stock awards that may be granted to an individual in any
calendar year cannot exceed 50,000 shares of Common Stock and no more than 30%
of the shares available under the plan may be issued in the form of Stock
Awards.
INCENTIVE AWARDS
Incentive awards also may be granted under the MeriStar Hotels Incentive
Plan. An incentive award is an opportunity to earn a bonus, payable in cash,
upon attainment of stated performance objectives. The objectives may be stated
with reference to the fair market value of the Common Stock or on the
Company's, a subsidiary's, or an operating unit's return on equity, earnings
per share, total earnings, earnings growth, return on capital, funds from
operations or return on assets or other acceptable performance criteria. The
period in which performance will be measured will be at least one year. No
Participant may receive an incentive award payment in any calendar year that
exceeds the lesser of (i) 100% of the Participant's base salary (prior to any
salary reduction or deferral election) as of the date of grant of the
incentive award or (ii) $250,000.
PERFORMANCE SHARE AWARDS
The MeriStar Hotels Incentive Plan also provides for the award of
performance shares. A performance share award entitles the Participant to
receive a payment equal to the fair market value of a specified number of
shares of Common Stock if certain standards are met. The Administrator will
prescribe the requirements that must be satisfied before a performance share
award is earned. These conditions may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the Common Stock or on the Company's, a subsidiary's, or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital, funds from operations or return on assets or other
acceptable performance criteria. To the extent that performance shares are
earned, the obligation
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<PAGE>
may be settled in cash, in Common Stock, or by a combination of the two. No
Participant may be granted performance shares for more than 12,500 shares of
Common Stock in any calendar year.
TRANSFERABILITY
Awards granted under the MeriStar Hotels Incentive Plan are generally
nontransferable. The Compensation Committee may, however, grant awards other
than ISOs, which are transferable to Permitted Family Members.
SHARE AUTHORIZATION
At any given time, the maximum number of shares of Common Stock that may be
issued pursuant to awards granted under the MeriStar Hotels Incentive Plan
will be the total of (i) twelve (12%) percent of the number of shares of
Common Stock that were outstanding as of the end of the immediately preceding
calendar year (rounded downward if necessary to eliminate fractional shares),
minus (ii) the number of shares subject to awards which were granted under the
MeriStar Hotels Incentive Plan through the last day of the immediately
preceding calendar year, plus (iii) as of the last day of the immediately
preceding calendar year, the number of shares with respect to which previously
granted awards have expired. For calendar year 1998, the maximum number of
shares of Common Stock that may be issued pursuant to the plan will be twelve
(12%) percent of the
number of shares of Common Stock outstanding after the Spin-Off. In addition
to the foregoing, in no event may the total number of shares of Common Stock
covered by outstanding ISOs granted under the MeriStar Hotels Incentive Plan,
plus the number of shares of Common Stock issued pursuant to the exercise of
ISOs, whenever granted under the MeriStar Hotels Incentive Plan, exceed
approximately 1.4 million shares. All awards made under the MeriStar Hotels
Incentive Plan will be evidenced by written agreements between the Company and
the Participant. The share limitation and the terms of outstanding awards will
be adjusted, as the Compensation Committee deems appropriate, in the event of
a stock dividend, stock split, combination, reclassification, recapitalization
or other similar event.
TERMINATION AND AMENDMENT
No option or stock award may be granted and no performance shares may be
awarded under the MeriStar Hotels Incentive Plan more than ten years after the
earlier of the date that the MeriStar Hotels Incentive Plan is adopted by the
Board of Directors or the date that it is approved by the Company's
stockholders. The Board of Directors may amend or terminate the MeriStar
Hotels Incentive Plan at any time, but, except as set forth in the immediately
preceding paragraph, an amendment will not become effective without
stockholder approval if the amendment materially (i) increases the number of
shares of Common Stock that may be issued under the MeriStar Hotels Incentive
Plan (other than an adjustment as described above), (ii) changes the
eligibility requirements, or (iii) increases the benefits that may be provided
under the MeriStar Hotels Incentive Plan.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In general, a Participant will not recognize taxable income upon the grant
or exercise of an ISO. However, upon the exercise of an ISO, the excess of the
fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as an adjustment to alternative
minimum taxable income. When a Participant disposes of shares acquired by
exercise of an ISO, the Participant's gain (the difference between the sale
proceeds and the price paid by the Participant for the shares) upon the
disposition will be taxed as capital gain provided the Participant does not
dispose of the shares within two years after the date of grant nor within one
year after the date of exercise, and exercises the option while an employee of
the Company or of a subsidiary of the Company or within three months after
termination of employment for reasons other than death or disability. If the
first condition is not met, the Participant generally will realize ordinary
income in the year of the disqualifying disposition. If the second condition
is not met, the Participant generally will recognize ordinary income upon
exercise of the ISO.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date
of exercise over the exercise price of the option. Special timing rules may
apply to a Participant who is subject to Section 16(a) of the Exchange Act.
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A Participant will recognize income on account of the settlement of a
performance share award or incentive award. A Participant will recognize
income equal to any cash that is paid and with respect to performance share
awards, which are settled in shares, will recognize the fair market value of
Common Stock (on the date that the shares are first transferable or not
subject to a substantial risk of forfeiture) that is received in settlement of
the award.
The employer (either the Company or its affiliate) will be entitled to claim
a federal income tax deduction on account of the exercise of a nonqualified
option, the vesting of a restricted share award, payment under an incentive
award and the settlement of a performance share award. The amount of the
deduction will be equal to the ordinary income recognized by the Participant.
The employer will not be entitled to a federal income tax deduction on account
of the grant or the exercise of an ISO. The employer may claim a federal
income tax deduction on account of certain disqualifying dispositions of
Common Stock acquired upon the exercise of an ISO.
The transfer of a nonqualified stock option to a Permitted Family Member
will have no immediate tax consequences to the Company, the Participant or the
Permitted Family Member. Upon the subsequent exercise of the transferred
option by the Permitted Family Member, the Participant will realize ordinary
income in an amount measured by the difference between the option exercise
price and the fair market value of the shares on the date of exercise, and the
employer will be entitled to a deduction in the same amount. Any difference
between such fair market value and the price at which the Permitted Family
Member may subsequently sell such shares will be treated as capital gain or
loss to the Permitted Family Member, long-term or short-term depending on the
length of time the shares have been held by the Permitted Family Member. There
has been no formal pronouncement on the tax consequences of the transfer of
other awards. Accordingly, if such transfers are permitted, Participants will
be directed to consult their own tax advisers.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the
Company may deduct for federal income tax purposes. The limit does not apply
to certain performance-based compensation paid under a plan that meets the
requirements of the Code and regulations promulgated thereunder. While the
MeriStar Hotels Incentive Plan generally complies with the requirements for
performance-based compensation, options granted at less than 100% of fair
market value and stock awards granted under the MeriStar Hotels Incentive Plan
will not satisfy those requirements.
STOCK OPTIONS
The following table sets forth for certain executive officers of the Company
information regarding the grant of Stock Options as parity awards. See
"Management" for information concerning the business experience of the
proposed executive officers of the Company.
<TABLE>
<CAPTION>
NUMBER OF STOCK
OPTIONS TO BE
NAME AND POSITION GRANTED(1)
- ----------------- ---------------
<S> <C>
Steven D. Jorns............................................... 250,000
Vice Chairman, Chief Operating Officer
David E. McCaslin............................................. 87,500
President
James A. Calder............................................... 47,500
Chief Financial Officer
John E. Plunket............................................... 10,000
Executive Vice President, Finance and Development
</TABLE>
- --------
(1) The awards described herein are parity awards, such that after the Spin-
Off similarly situated executives will have the same number of options to
purchase Common Stock. Similar parity awards will be made by the REIT. The
options will vest in three annual installments beginning on the first
anniversary of the consummation of the Formation Transactions.
Except as set forth above, awards granted under the MeriStar Hotels
Incentive Plan are discretionary and are therefore not determinable at this
time.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock that would be held as of the Spin-Off
Record Date by (i) each director of MeriStar Hotels, (ii) each executive
officer of MeriStar Hotels, (iii) all directors and executive officers of
MeriStar Hotels as a group, and (iv) persons who own more than 5% of the
outstanding shares of Common Stock, assuming that each such person's
beneficial interest in CapStar Common Stock as of February 15, 1998 remains
unchanged on the Spin-Off Record Date. Except as otherwise described below,
all shares are owned directly and the indicated person has sole voting and
investment power. The number of shares of Common Stock includes the number of
shares of Common Stock that such person could receive if it exchanged OP Units
for shares of Common Stock under certain circumstances.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED CLASS*
------------------------ ------------ ----------
<S> <C> <C>
Franklin Resources, Inc.(1)......................... 2,082,637 8.4%
Pilgrim Baxter & Associates, Ltd.(2)................ 1,828,020 7.3%
Morgan Stanley, Dean Witter, Discover & Co.(3)...... 1,608,275 6.5%
Massachusetts Financial Services Company(4)......... 1,431,512 5.8%
Dresdner RCM Global Investors LLC(5)................ 1,427,800 5.7%
James A. Calder..................................... 2,000 *
Daniel L. Doctoroff................................. 65,996 *
Kent R. Hance....................................... 0 *
Steven D. Jorns..................................... 0 *
Joseph McCarthy..................................... 0 *
David E. McCaslin................................... 63,203 *
James McCurry....................................... 0 *
John E. Plunket..................................... 32,719 *
Paul W. Whetsell.................................... 454,407 1.8%
James R. Worms...................................... 0 *
Executive officers and directors as a group (10
persons)........................................... 618,325 2.5%
</TABLE>
- --------
*Represents less than 1% of the class.
(1) The business address of Franklin Resources, Inc. ("FRI") is 777 Mariners
Island Blvd., San Mateo, California 94404. Such shares are owned by one or
more open or closed-ended investment companies or other managed accounts
which are advised by direct or indirect advisory subsidiaries of FRI. Such
advisory subsidiaries may be deemed to beneficially own such shares.
Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of
FRI and, as such, also may be deemed to own such shares held, directly or
indirectly, by FRI.
(2) The business address of Pilgrim Baxter & Associates, Ltd. is 825 Duportail
Road, Wayne, Pennsylvania 19087.
(3) The business address of Morgan Stanley, Dean Witter, Discover & Co. is
1585 Broadway, New York, New York 10036. Such shares are owned by accounts
managed on a discretionary basis by Morgan Stanley, Dean Witter, Discover
& Co. No such account holds more than 5% of the class.
(4) The business address of Massachusetts Financial Services Company is 500
Boylston Street, Boston, Massachusetts 02116.
(5) The business address of Dresdner RCM Global Investors LLC is Four
Embarcadero Center, San Francisco, California 94111. Dresdner RCM Global
Investors LLC ("Dresdner RCM") is an investment advisor. RCM Limited L.P.
("RCM Limited") is the Managing Agent of Dresdner RCM. RCM Limited has
beneficial ownership of such shares only to the extent that RCM Limited
may be deemed to have beneficial ownership of securities beneficially
owned by Dresdner RCM. RCM General Corporation ("RCM General") is the
General Partner of RCM Limited. RCM General has beneficial ownership of
such shares only to the extent RCM General may be deemed to have
beneficial ownership of securities beneficially owned by Dresdner RCM.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of the Charter and By-laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Available Information."
The authorized capital stock of MeriStar Hotels consists of 100,000,000
shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of
preferred stock ("Preferred Stock"), of which 100 shares of Common Stock and
no shares of Preferred Stock are outstanding. Upon completion of the Rights
Offering, . shares of Common Stock and no shares of Preferred Stock will be
outstanding.
Prior to the Spin-Off, there has been no public market for the Common Stock
and there can be no assurance that any such market will develop. See "Risk
Factors--Absence of a Public Market for Common Stock."
COMMON STOCK
Voting Rights. Except as set forth below under "Certain Antitakeover
Provisions," the Charter provides that holders of Common Stock are entitled to
one vote per share on all matters submitted to a vote of stockholders.
Dividends. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board. Under Delaware law, a corporation may
declare and pay dividends out of surplus, or if there is no surplus, out of
net profits for the fiscal year in which the dividend is declared and/or the
preceding year. No dividends may be declared out of net profits, however, if
the capital of the corporation has been diminished by depreciation in the
value of its property, losses or otherwise to an amount less than the
aggregate amount of capital represented by any issued and outstanding stock
having a preference on the distribution of assets. See "Dividend Policy."
Other Rights. Stockholders of MeriStar Hotels have no preemptive or other
rights to subscribe for additional shares. Subject to any rights of the
holders of any Preferred Stock, all holders of Common Stock are entitled to
share equally on a share-for-share basis in any assets available for
distribution to stockholders on liquidation, dissolution or winding up of
MeriStar Hotels. No shares of Common Stock are subject to redemption or a
sinking fund. All outstanding shares of Common Stock are, and the Common Stock
to be outstanding upon completion of the Rights Offering will be, fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized to issue, without further authorization
from stockholders, up to 10,000,000 shares of Preferred Stock in one or more
series and to determine, at the time of creating each series, the distinctive
designation of, and the number of shares in, the series, its dividend rate,
the number of votes, if any, for each share of such series, the price and
terms on which such shares may be redeemed, the terms of any applicable
sinking fund, the amount payable upon liquidation, dissolution or winding up,
the conversion rights, if any, and such other rights, preferences and
priorities of such series as the Board of Directors may be permitted to fix
under the laws of the State of Delaware as in effect at the time such series
is created. The issuance of Preferred Stock could adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring or preventing a change in control of MeriStar Hotels.
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CERTAIN ANTITAKEOVER PROVISIONS
THE CHARTER AND BY-LAWS
The Charter and By-laws and applicable sections of the DGCL contain several
provisions that may make the acquisition of control of the Company more
difficult without the prior approval of the Board of Directors. Certain
provisions of the Charter and the By-laws, among other things: (i) classify
the Board of Directors into three classes, each of which serves for staggered
three-year terms; (ii) provide that a director of Company may be removed by
the stockholders only for cause; (iii) provide that only the Chairman of the
Board, Vice Chairman, President or the Board of Directors may call special
meetings of the stockholders; (iv) provide that the stockholders may take
action only at a meeting of Company stockholders, not by written consent; (v)
provide that stockholders must comply with certain advance notice procedures
in order to nominate candidates for election to the Board of Directors or to
place stockholders' proposals on the agenda for consideration at meetings of
the stockholders; and (vi) provide that the stockholders may amend or repeal
any of the foregoing provisions of the Charter only by a vote of 66 2/3% of
the stock entitled to vote generally in the election of directors. In general,
Section 203 of the DGCL prohibits publicly held Delaware corporations from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the time of the transaction in which the
person or entity became an interested stockholder, unless (i) prior to such
time, either the business combination or the transaction which resulted in the
stockholder's becoming an interested stockholder is approved by the Board of
Directors, (ii) upon consummation of the transaction which resulted in the
stockholder's becoming an interested stockholder, the interested stockholder
owned at least 85% of the outstanding voting stock of the corporation
(excluding for this purpose certain shares owned by persons who are directors
and also officers of the corporation and by certain employee benefit plans) or
(iii) on or after such date the business combination is approved by the Board
of Directors and by the affirmative vote (and not by written consent) of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. For the purposes of Section 203, a "business
combination" is broadly defined to include mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or, in certain cases, within the immediately preceding three
years did own) 15% or more of the corporation's voting stock. The Charter
authorizes the Board of Directors to issue up to 10 million shares of
Preferred Stock in series, and to establish the rights and preferences
(including the convertibility of such shares of Preferred Stock into shares of
Common Stock) of any series of Preferred Stock so issued. The issuance of
Preferred Stock could have the effect of delaying or preventing a change in
control of Company, even if such a change in control were in the best
interests of some, or a majority, of Company's stockholders. See "Description
of Capital Stock".
RESTRICTIONS ON OWNERSHIP
The Charter also provides, with certain exceptions, that no person may own,
either directly or under the attribution rules set forth in Section 318(a) of
the Code, as modified by Section 856(d)(5) of the Code, more than 9.9% of the
shares of any class of the Company's stock (the "Ownership Limit").
The Charter provides that a transfer of Common Stock that would otherwise
result in ownership of Common Stock in excess of the Ownership Limit will be
void ab initio as to the Common Stock that would otherwise be owned in
violation of the Ownership Limit and the intended transferee will acquire no
rights or economic interest in such Common Stock. In addition, the Charter
provides that Common Stock that would otherwise be owned, whether as a result
of a transfer or otherwise, in violation of the Ownership Limit will
automatically be designated as Excess Shares until the intended transferee
does not own Common Stock in excess of the Ownership Limit. Such Excess Shares
shall be transferred, by operation of law, to a special trust for the benefit
of a charitable organization designated by the Board of Directors of the
Company.
The trustee of the special trust shall have the authority to exercise any
voting rights associated with Excess Shares during the period that they are
held as Excess Shares. Except as described below, any distributions on Excess
Shares shall be paid to the trustee of the special trust for the benefit of
the charitable organization designated by the Board of Directors of the
Company. Excess Shares may be transferred only to a person
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<PAGE>
designated by the Board of Directors whose ownership of the Excess Shares will
not result in a violation of the Ownership Limit, in which case such Excess
Shares cease to be held as Excess Shares. In the event of a transfer of Excess
Shares, the holder of the shares of Common Stock that were automatically
exchanged for Excess Shares shall be entitled to receive, from the proceeds of
the transfer of the Excess Shares, an amount equal to the lesser of (a) the
proceeds from the transfer of the Excess Shares and (b) the amount paid by
such holder if the automatic designation as Excess Shares resulted from a
transfer for value or, if the automatic designation did not result from a
transfer for value, the fair market value of the shares of Common Stock on the
date of their designation as Excess Shares. In the event of a liquidation,
dissolution or winding up of the Company while shares are held as Excess
Shares, the holder of the shares of Common Stock that were automatically
designated as Excess Shares will be entitled to receive, from the proceeds of
such liquidation, dissolution or winding-up, an amount equal to the lesser of
(a) the proceeds from the liquidation, dissolution or winding-up which would
have been applicable to such shares if they had remained shares of Common
Stock and (b) the amount paid by such holder if the automatic designation as
Excess Shares resulted from a transfer for value or, if the automatic
designation did not result from a transfer for value, the fair market value of
the shares of Common Stock on the date of their designation as Excess Shares.
Any excess proceeds from a transfer of the Excess Shares or on liquidation,
dissolution or winding-up shall be paid to the trustee of the special trust
for the benefit of the designated charitable organization.
The Company shall also have the right to purchase any Excess Shares at a
price equal to the lesser of (a) the fair market value of such shares on the
date that the Company or its designee exercises such right to purchase and (b)
the price per share in the transaction that resulted in designation of such
Excess Shares or, if the Excess Share designation resulted from an event other
than a transfer for value, the fair market value of the Common Stock
designated as Excess Shares at the time of such designation.
EXPERTS
The balance sheet of MeriStar Hotels & Resorts, Inc. as of March 31, 1998
and the combined financial statements of the management and leasing business
of CapStar Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and
1996 and for each of the years in the three-year period ended December 31,
1997, included in this Prospectus, have been included herein in reliance on
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of AGH Leasing, L.P. as of December 31, 1997 and
1996 and for the year ended December 31, 1997 and for the period from July 31,
1996 through December 31, 1996, the financial statements of American General
Hospitality, Inc. as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997, and the balance sheets of Winston
Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and the
statements of income, shareholders' equity, and cash flows for the ten months
ended October 31, 1997 and each of the two years in the period ended December
31, 1996, included in this registration statement have been audited by Coopers
& Lybrand L.L.P., independent accounts, as set forth in their reports thereon.
Each of the above referenced financial statements have been included by
reference herein in reliance upon the authority of said firm as expert in
accounting and auditing.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison will pass on the validity of the
Rights and the Common Stock to be issued in connection with the Rights
Offering and certain federal income tax consequences of the Rights Offering.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MERISTAR HOTELS & RESORTS, INC.
Independent Auditors' Report............................................. F-2
Balance Sheet as of March 31, 1998....................................... F-3
Notes to Balance Sheet................................................... F-4
OPCO
Independent Auditors' Report............................................. F-5
Combined Balance Sheets as of March 31, 1998 (unaudited) and December 31,
1997 and 1996........................................................... F-6
Combined Statements of Operations for the three months ended March 31,
1998 and 1997 (unaudited) and the years ended December 31, 1997, 1996
and 1995................................................................ F-7
Combined Statements of Owner's Equity for the three months ended March
31, 1998 (unaudited) and the years ended December 31, 1997, 1996 and
1995.................................................................... F-8
Combined Statements of Cash Flows for the three months ended March 31,
1998 and 1997 (unaudited) and the years ended December 31, 1997, 1996
and 1995................................................................ F-9
Notes to Combined Financial Statements................................... F-10
WINSTON HOSPITALITY, INC.
Report of Independent Accountants........................................ F-17
Balance Sheets as of October 31, 1997 and December 31, 1996.............. F-18
Statements of Income (for the ten months ended October 31, 1997 and 1996
and the years ended December 31, 1996 and 1995)......................... F-19
Statements of Shareholders' Equity (for the ten months ended October 31,
1997 and the years ended December 31, 1996 and 1995).................... F-20
Statements of Cash Flows (for the ten months ended October 31, 1997 and
1996 and the years ended December 31, 1996 and 1995).................... F-21
Notes to Financial Statements............................................ F-22
AMERICAN GENERAL HOSPITALITY, INC.
Report of Independent Accountants........................................ F-24
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 and
1996.................................................................... F-25
Statements of Operations for the three months ended March 31, 1998 and
1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995... F-26
Statements of Stockholders' Equity for the three months ended March 31,
1998 (unaudited) and the years ended December 31, 1997, 1996 and 1995... F-27
Statements of Cash Flows for the three months ended March 31, 1998 and
1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995... F-28
Notes to Financial Statements............................................ F-29
AGH LEASING, L.P.
Report of Independent Accountants........................................ F-32
Consolidated Balance Sheets as of March 31, 1998 (unaudited) December 31,
1997 and 1996........................................................... F-33
Consolidated Statements of Operations for the three months ended March
31, 1998 and 1997 (unaudited) and the year ended December 31, 1997 and
the period July 31, 1996 (Inception of Operations) through December 31,
1996.................................................................... F-34
Consolidated Statements of Partners' Deficit for the period from July 31,
1996 (Inception of Operations) through December 31, 1996 and for the
three months ended March 31, 1998 (unaudited) and the year ended
December 31, 1997....................................................... F-35
Consolidated Statements of Cash Flows for the three months ended March
31, 1998 and 1997 (unaudited) and the year ended December 31, 1997 and
for the period July 31, 1996 (Inception of Operations) through December
31, 1996................................................................ F-36
Notes to Consolidated Financial Statements............................... F-37
AGH LEASING, L.P.
Proforma Consolidated Statements of Operations........................... F-42
Notes to Proforma Consolidated Statements of Operations.................. F-45
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MeriStar Hotels & Resorts, Inc.
We have audited the accompanying balance sheet of MeriStar Hotels & Resorts,
Inc. as of March 31, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit 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 MeriStar Hotels & Resorts, Inc.
as of March 31, 1998, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Washington, DC
May 19, 1998
F-2
<PAGE>
MERISTAR HOTELS & RESORTS, INC.
BALANCE SHEET
MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS
Cash..................................................................... $100
STOCKHOLDER'S EQUITY
Common stock $.01 par value:
1,000 shares authorized; 100 issued and outstanding.................... 1
Additional paid-in-capital............................................... 99
----
Total stockholder's equity............................................. $100
====
</TABLE>
See accompanying notes to balance sheet
F-3
<PAGE>
MERISTAR HOTEL & RESORTS, INC.
NOTES TO BALANCE SHEET
MARCH 31, 1998
1. FORMATION OF THE COMPANY
CMC Operating Company was incorporated in the state of Delaware on March 13,
1998. CMC Operating Company subsequently changed its name to MeriStar Hotels &
Resorts, Inc. (the "Company"). The Company has filed a registration statement
on Form S-1 with the Securities and Exchange Commission with respect to a
proposed distribution of common stock and a proposed public offering of non-
transferable rights to acquire common stock.
The Company is currently a wholly-owned subsidiary of CapStar Hotel Company
("CapStar"). The Company will be spun off by CapStar to become the lessee,
manager and operator of various hotel assets, including those currently owned,
leased and managed by CapStar and its affiliates.
2. PLANNED TRANSACTIONS
CapStar will initially have two $50 million revolving credit facilities, one
through MeriStar Hospitality Corporation, a real estate investment trust
formed by the proposed merger of CapStar and American General Hospitality
("AGH") and one through third-party lenders. CapStar intends initially to
capitalize the Company with approximately $48 million of cash, including
approximately $18 million of forgiveness of indebtedness and a $30 million
draw on the proposed revolving credit facilities.
The Company intends to draw an additional $35 million from the revolving
credit facilities in connection with the purchase of American General
Hospitality, Inc. and AGH Leasing, L.P. currently the manager and lessee,
respectively, of AGH's hotel properties.
Upon consummation of the planned transactions, the Company will be the
lessee/manager of substantially all of MeriStar Hospitality Corporation's
hotel properties.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapStar Hotel Company:
We have audited the accompanying combined balance sheets of the management
and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of
December 31, 1997 and 1996 and the related combined statements of operations,
owners' equity and cash flows for each of the years in the three-year period
ended December 31, 1997. These combined financial statements are the
responsibility of OpCo's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of OpCo as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
March 30, 1998
F-5
<PAGE>
OPCO
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1998 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 4,706 $ 2,477 $ 305
Cash and cash equivalents held on behalf of af-
filiates...................................... 23,896 24,545 17,843
Accounts receivable, net of allowance for
doubtful accounts of $134, $72, and $33, re-
spectively.................................... 6,669 7,162 1,703
Prepaid expenses............................... 973 1,097 777
Deposits, inventory and other.................. 709 756 111
------- ------- -------
Total current assets......................... 36,953 36,037 20,739
Fixed assets:
Furniture, fixtures and equipment.............. 3,320 2,701 726
Accumulated depreciation....................... (439) (418) (210)
------- ------- -------
Total fixed assets, net...................... 2,881 2,283 516
Investments in affiliates........................ 7,047 8,058 1,926
Notes receivable................................. 2,100 2,100 500
Intangible assets, net of accumulated
amortization of $1,041, $719 and $362,
respectively.................................... 35,738 35,941 685
------- ------- -------
$84,719 $84,419 $24,366
======= ======= =======
LIABILITIES AND OWNERS' EQUITY
Current Liabilities:
Accounts payable............................... $ 1,900 $ 2,082 $ 543
Accrued expenses and other liabilities......... 11,066 8,532 1,282
Percentage lease payable....................... 6,910 5,682 --
Due to affiliates, net......................... 18,372 22,287 18,649
Advance deposits............................... 193 146 --
Long-term debt, current portion................ 315 392 336
------- ------- -------
Total current liabilities.................... 38,756 39,121 20,810
Long-term debt................................... 461 589 549
------- ------- -------
Total liabilities............................ 39,217 39,710 21,359
Commitments and contingencies
Minority interest................................ 3,835 3,800 --
Owners' equity................................... 41,667 40,909 3,007
------- ------- -------
$84,719 $84,419 $24,366
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
OPCO
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED DECEMBER
MARCH 31, 31,
-------------------- ---------------------
1998 1997 1997 1996 1995
--------- --------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Leased hotels' operations:
Rooms......................... $2223,404 $ -- $ 9,880 $ -- $ --
Food and beverage............. 1,357 -- 1,397 -- --
Other operating departments... 1,219 -- 474 -- --
Hotel management and other
revenue........................ 4,150 1,139 12,088 7,050 5,354
--------- --------- ------- ------ ------
Total revenue............... 30,130 1,139 23,839 7,050 5,354
--------- --------- ------- ------ ------
Leased hotels' operating expenses
by department:
Rooms........................... 5,124 -- 2,533 -- --
Food and beverage............... 995 -- 909 -- --
Other operating departments..... 498 -- 261 -- --
Undistributed operating expenses:
Administrative and general...... 6,963 2,202 10,473 6,140 4,745
Lease expense................... 10,655 -- 4,135 -- --
Property operating costs........ 4,142 -- 1,917 -- --
Depreciation and amortization... 421 96 636 349 84
--------- --------- ------- ------ ------
Total operating expenses.... 28,798 2,298 20,864 6,489 4,829
--------- --------- ------- ------ ------
Net operating income.............. 1,332 (1,159) 2,975 561 525
Equity in earnings (losses) of
affiliates....................... (521) -- 46 -- --
Interest expense.................. 18 14 56 123 44
--------- --------- ------- ------ ------
Income before minority interests.. 793 (1,173) 2,965 438 481
Minority interests................ 35 -- 103 -- --
--------- --------- ------- ------ ------
Net income (loss)................. $ 758 $ (1,173) $ 2,862 $ 438 $ 481
========= ========= ======= ====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE>
OPCO
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<S> <C>
Capital contributions since January 12, 1995........................... $ 398
Capital distributions.................................................. (116)
Net income............................................................. 481
-------
Balance, December 31, 1995............................................. 763
Capital contributions.................................................. 1,806
Net income............................................................. 438
-------
Balance, December 31, 1996............................................. 3,007
Capital contributions.................................................. 35,040
Net income............................................................. 2,862
-------
Balance, December 31, 1997............................................. 40,909
Net income (unaudited)................................................. 758
-------
Balance, March 31, 1998 (unaudited).................................... $41,667
=======
</TABLE>
See accompanying notes to the combined financial statements.
F-8
<PAGE>
OPCO
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -----------------------
1998 1997 1997 1996 1995
--------- --------- ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).............. $ 758 $ (1,173) $2,862 $ 438 $ 481
Adjustments to reconcile net
income (loss) to net cash
provided by
operating activities:
Depreciation and
amortization................ 421 96 636 349 84
Equity in earnings of
affiliates.................. 521 -- (46) -- --
Minority interests........... 35 -- 103 -- --
Changes in operating assets
and liabilities:
Accounts receivable, net... 493 40 (5,459) (412) (1,290)
Prepaid expenses........... 124 (257) (320) (724) (11)
Deposits, Inventory and
other..................... 47 (211) (645) (111) --
Cash and cash equivalents
held on behalf of
affiliates................ 649 (120) (6,702) (17,843) --
Accounts payable........... (182) 367 1,539 276 267
Due to affiliates, net..... (3,915) 484 3,638 18,344 305
Accrued expenses and other
liabilities............... 2,534 1,456 7,250 909 372
Percentage lease payable... 1,228 -- 1,463 -- --
Advance deposits........... 47 -- 146 -- --
-------- --------- ------ ------- ------
Net cash provided by operating
activities...................... 2,760 682 4,465 1,226 208
-------- --------- ------ ------- ------
Investing activities:
Purchases of fixed assets...... (697) (234) (2,046) (382) (61)
Purchases of intangible assets. (119) (355) (924) (824) --
Investments in affiliates...... -- -- (2,078) (150) --
Distributions from investments
in affiliates................. 490 37 147 30 --
Additions to notes receivable.. -- (350) (1,600) (500) --
-------- --------- ------ ------- ------
Net cash used in investing
activities...................... (326) (902) (6,501) (1,826) (61)
-------- --------- ------ ------- ------
Financing activities:
(Principal payments on)
proceeds from long-term debt,
net........................... (205) (85) 96 662 (38)
Capital contributions.......... -- -- 4,112 -- 250
Capital distributions.......... -- -- -- -- (116)
Loan from (repayments to)
affiliate..................... -- -- -- (950) 950
Repayments from (loans to)
management.................... -- -- -- 987 (987)
-------- --------- ------ ------- ------
Net cash provided (used) by
financing activities............ (205) (85) 4,208 699 59
-------- --------- ------ ------- ------
Net increase (decrease) in cash
and cash equivalents............ 2,229 (305) 2,172 99 206
Cash and cash equivalents,
beginning of period............. 2,477 305 305 206 --
-------- --------- ------ ------- ------
Cash and cash equivalents, end of
period.......................... $4,706 $ -- $2,477 $ 305 $ 206
======== ========= ====== ======= ======
</TABLE>
See accompanying notes to combined financial statements.
F-9
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1. ORGANIZATION
CapStar Hotel Company and its subsidiaries ("CapStar") was formed pursuant
to certain formation transactions prior to or on August 20, 1996. Prior to its
August 20, 1996 initial public offering (the "IPO"), CapStar's business was
conducted through its predecessor entities, EquiStar Hotel Investors, L.P. and
subsidiaries (collectively, "EquiStar") and CapStar Management Company, L.P.
("CMC").
The principal activity of CapStar is to acquire, renovate, reposition and
manage upscale, full-service hotels. CapStar also leases and manages certain
other hotels. CapStar owns, leases and manages hotels through its two
operating partnerships: CMC and CapStar Management Company II, L.P. ("CMC
II"). Separate wholly-owned limited liability companies or limited
partnerships directly own the hotels and leases. The owned, leased and managed
hotels are located in 29 states, the District of Columbia, the U.S. Virgin
Islands and Canada, and are operated under various franchise agreements.
OpCo is comprised of the assets, liabilities, and related operations
(collectively "OpCo") associated with the hotel management and leasing
business of CapStar, and certain hotel ownership investments of CapStar which
are directly owned by certain CapStar subsidiaries, as follows:
. the hotel management business and certain investments in affiliates
owned by CMC;
. the hotel management business and 38 hotel leases owned by CapStar
Winston Company, LLC "CapStar Winston" which was purchased by CapStar
in 1997;
. the hotel lease and investment in BoyStar Ventures, L.P. owned by
CapStar BK Company, LLC "CapStar BK" which was purchased by CapStar
in 1997; and
. the investment in CapStar Wyandotte Company, LLC owned by CapStar KC
Company, LLC "CapStar KC" which was purchased by CapStar in 1997.
. the investment in Ballston Parking Associates owned by CapStar
Virginia Company, LLC "CapStar Virginia" which was purchased by
CapStar in 1996.
The following table outlines OpCo's portfolio of managed and leased hotels:
<TABLE>
<CAPTION>
CAPSTAR
HOTELS THIRD PARTY LEASED
MANAGED MANAGED HOTELS HOTELS TOTAL
------------- ----------------- ------------ -------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ------ ------- -------- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997.... 47 12,019 27 4,631 40 5,687 114 22,337
December 31, 1996.... 19 5,166 28 4,619 -- -- 47 9,785
December 31, 1995.... 6 2,101 41 6,089 -- -- 47 8,190
</TABLE>
These financial statements present the financial position and operations of
OpCo as of December 31, 1997 and 1996, and for each of the years in the three-
year period ended December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination- The combined financial statements include the
operations of CMC, CapStar Winston, CapStar BK, CapStar KC, and CapStar
Virginia, as described above. All significant intercompany transactions and
balances have been eliminated in the combination.
Investments in affiliates in which OpCo holds a voting interest of 50% or
less and exercises significant influence are accounted for using the equity
method. OpCo uses the cost method to account for its investment in an entity
in which it does not have the ability to exercise significant influence.
F-10
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
Cash and Cash Equivalents--OpCo considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
OpCo invests excess cash balances on behalf of the CapStar-owned hotels it
manages. This cash is recorded as cash and cash equivalents held on behalf of
affiliates with the offsetting liability recorded in due to affiliates, net.
Fixed Assets--Fixed assets are recorded at cost and are depreciated using
the straight-line method over lives ranging from five to seven years.
Intangible Assets--Intangible assets consist of the value of goodwill and
lease contracts purchased, organization and franchise costs, and costs
incurred to obtain management contracts. Goodwill represents the excess of
cost over the fair value of the net assets of the acquired businesses.
Intangible assets are amortized on a straight-line basis over the estimated
useful lives of the underlying assets ranging from five to 40 years.
The carrying values of long-lived intangible assets, which include fixed
assets and all intangible assets, are evaluated periodically in relation to
the operating performance and expected future undiscounted cash flows of the
underlying assets. Adjustments are made if the sum of expected future
undiscounted net cash flows is less than book value. The impairment loss to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. No impairment losses were recorded
during 1997, 1996 or 1995.
Income Taxes--No provision is made for income taxes as the operations of
OpCo are directly owned by a partnership and four limited liability companies,
and therefore, any such liability is the liability of the partners and
members.
Revenue Recognition--Revenue is earned through the operation and management
of the hotel properties and is recognized when earned.
Minority Interests--Minority interests represent OpCo's proportionate share
of the value of operating partnership units ("OP Units") of CMC and CMC II
issued to third parties in conjunction with CapStar's purchases of certain
hotels and CapStar Winston.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited interim financial statements--The combined financial statements as
of March 31, 1998 and for the three months ended March 31, 1998 and 1997 are
unaudited. In the opinion of management, such financial statements reflect all
adjustments necessary for a fair presentation of the results of the respective
interim periods. All such adjustments are of a normal, recurring nature.
F-11
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
3. INVESTMENTS IN AFFILIATES
OpCo has ownership interests in certain corporate joint ventures and
affiliated companies. OpCo's investments in affiliates are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
OWNERSHIP -------------
INTEREST 1997 1996
--------- ------ ------
<S> <C> <C> <C>
CapStar Wyandotte Company LLC..................... 50% $3,023 $ --
HGI Holdings, LLC................................. 1,895 --
BoyStar Ventures, L.P. ........................... 9% 1,175 --
Ballston Parking Associates....................... 36% 1,629 1,776
Other............................................. 336 150
------ ------
$8,058 $1,926
====== ======
</TABLE>
Combined summarized financial information of OpCo's investments in
affiliates accounted for using the equity method as of and for the years ended
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Balance Sheet data:
Current assets............................................. $1,773 34
Non-current assets......................................... 32,766 5,469
Current liabilities........................................ 1,094 --
Non-current liabilities.................................... 7,000 --
Operating data:
Revenue.................................................... $1,742 589
Net income (loss).......................................... (110) 141
</TABLE>
4. NOTES RECEIVABLE
Notes receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1997 1996
------ ----
<S> <C> <C>
Loans to managed hotels....................................... $2,000 $500
Other......................................................... 100 --
------ ----
$2,100 $500
====== ====
</TABLE>
In the normal course of business, OpCo makes interest bearing loans to
certain managed hotels and other affiliates. These loans generally require
monthly payments of interest. Of the outstanding notes receivable at December
31, 1997 and 1996, $900 and $0, respectively, of the balances are secured by a
second mortgage on a certain hotel; $250 and $500 of the balances,
respectively, are guaranteed by third parties; and $950 and $0, respectively,
is unsecured. The loans bear interest at market rates between 8% and 9%. The
loans to managed hotels mature between 2001 and 2007 while loans to other
affiliates are payable on 30 days notice. OpCo earned interest income on these
loans of $82 and $11 during 1997 and 1996, respectively.
F-12
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- -----
<S> <C> <C>
Goodwill................................................... $27,605 $ --
Lease contracts............................................ 6,576 --
Organization costs......................................... 897 897
Management contracts....................................... 867 150
Other...................................................... 715 --
------- -----
36,660 1,047
Less accumulated amortization.............................. (719) (362)
------- -----
$35,941 $ 685
======= =====
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Note payable............................................ $ 855 $ 665
Capital leases.......................................... 126 220
------ ------
981 885
Less current portion.................................... (392) (336)
------ ------
$ 589 $ 549
====== ======
</TABLE>
Note Payable--In June 1996, OpCo entered into a note payable to finance
liability insurance premiums. This note was amended in December 1997 to
increase the principal balance. The principal balance was changed to $887 and
the maturity date was extended to May 2000. The note accrues interest at an
annual rate of 6.4% and requires monthly payments of principal and interest.
OpCo incurred interest expense of $33 and $19 during 1997 and 1996,
respectively.
Capital Leases--OpCo has entered into various capital leases for office
equipment which expire between 1998 and 2000. The leases require monthly
payments of principal and interest. Interest rates on the leases range from
6.4% to 13.3%. The Company incurred interest expense on the leases of $23 in
1997, $28 in 1996, and $18 in 1995.
Future Maturities--Aggregate future maturities of the above obligations are
as follows:
<TABLE>
<S> <C>
1998.............................................. $392
1999.............................................. 417
2000.............................................. 172
----
$981
====
</TABLE>
During 1996 and 1995, OpCo incurred interest expense of $76 and $26,
respectively, on the note payable to an affiliate of OpCo.
F-13
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
7. RELATED-PARTY TRANSACTIONS
OpCo manages hotels owned by CapStar. Hotel management revenue associated
with these hotels was $7,238, $2,625 and $917 during 1997, 1996 and 1995,
respectively. Management believes these contracts are at prevailing market
rates. In the normal course of business, OpCo manages cash on behalf of
CapStar and its owned hotels and advances and receives amounts on behalf of
CapStar and its owned hotels. At December 31, 1997 and 1996, the net amount
due to CapStar and its owned hotels was $24,545 and $17,843, respectively.
OpCo also manages hotels that are owned in part by affiliates or officers of
CapStar. Hotel management revenue associated with these hotels was $943, $824
and $1,104 during 1997, 1996 and 1995, respectively. At December 31, 1997,
1996 and 1995, the amount due from these properties related to hotel
management fees was $798, $304 and $237, respectively. Management believes
these contracts are at prevailing market rates.
8. COMMITMENTS AND CONTINGENCIES
OpCo leases certain hotels under non-cancelable operating leases with
initial terms ranging from 5 to 15 years, expiring through 2012. OpCo also
leases corporate office space. Future minimum lease payments required under
these operating leases as of December 31, 1997 were as follows:
<TABLE>
<S> <C>
1998.................................... $ 20,533
1999.................................... 20,728
2000.................................... 20,653
2001.................................... 20,674
2002.................................... 20,701
Thereafter.............................. 189,757
---------
$ 293,046
=========
</TABLE>
In connection with the CapStar Winston hotel leases, CapStar has guaranteed
certain lease obligations of OpCo. CapStar was contingently liable for lease
guarantees on 38 of the hotel leases aggregating up to a maximum of
approximately $20 million at December 31, 1997. In addition, two other hotel
leases are secured by CapStar BK's and CapStar KC's pledges of their interests
in the affiliate companies that own those leased hotels. OpCo knows of no
event of default that would require either CapStar, CapStar Winston, CapStar
BK, or CapStar KC to satisfy these guarantees or pledges of security
interests.
OpCo operates and manages 27 hotels owned by third parties containing 4,631
rooms. OpCo's management agreements (the "Management Agreements") have
remaining terms ranging from one month to nine years. Substantially all of the
Management Agreements permit the hotel owners to terminate such agreements
prior to the stated expiration dates if the applicable hotel is sold, and
several of the Management Agreements permit the hotel owners to terminate such
agreements prior to the stated expiration date without cause or by reason of
the failure of the applicable hotel to obtain specified levels of performance.
In the course of OpCo's normal business activities, various lawsuits, claims
and proceedings have been or may be instituted or asserted against OpCo. Based
on currently available facts, management believes that the disposition of
matters that are pending or asserted will not have a material adverse effect
on the combined financial position, results of operations or liquidity of
OpCo.
F-14
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
9. ACQUISITIONS
In November 1997, CapStar acquired substantially all of the assets of
Winston Hospitality, Inc. ("Winston") for a purchase price of $34,000 and
contributed the assets to OpCo. Winston leased 38 and managed 28 of the
operating hotels of Winston Hotels, Inc., a real estate investment trust. The
acquisition of Winston has been accounted for as a purchase and, accordingly,
the operating results of Winston have been included in OpCo's combined
financial statements since the date of acquisition. The excess of the
aggregate purchase price over the fair market value of net identifiable assets
acquired was approximately $27,605 and is being amortized over 40 years.
The following unaudited pro forma summary presents information as if Winston
had been acquired at the beginning of the periods presented. The pro forma
information is provided for informational purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations of OpCo.
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Total revenue............................................. $94,911 $68,895
Net income before minority interest....................... 3,991 253
Net income................................................ 3,698 235
</TABLE>
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the OpCo's quarterly results of operations:
<TABLE>
<CAPTION>
1997
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................... $1,838 $2,816 $4,794 $14,391
Total operating expenses.................... 1,390 2,129 3,911 13,434
Net operating income........................ 448 687 883 957
Net income.................................. 424 650 861 927
<CAPTION>
1996
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................... $1,158 $1,812 $1,982 $ 2,098
Total operating expenses.................... 1,066 1,668 1,824 1,931
Net operating income........................ 92 144 158 167
Net income.................................. 72 113 123 130
</TABLE>
F-15
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
--------------- --------------------
1998 1997 1997 1996 1995
------ ------ ------- ------ ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for interest..... $ 18 $ 14 $ 56 $ 138 $ 18
Assets contributed (liabil-
ities assigned) to OpCo:
Percentage lease payable... -- -- $(4,219) $ -- $--
Investments in affiliates.. -- -- 4,155 1,806 --
Intangible assets.......... -- -- 34,689 -- --
Non-cash investing and fi-
nancing activities:
Capital contributions by
owners.................... -- -- $30,928 $1,806 $148
Minority interests......... -- -- 3,697 -- --
Additions to equipment
through capital leases.... -- -- -- -- 261
</TABLE>
12. SUBSEQUENT EVENTS
On March 15, 1998, CapStar and American General Hospitality Corporation
signed a definitive agreement to merge. As part of the merger, CapStar will
spin-off OpCo to its current shareholders as a C corporation to be called
MeriStar Hotels & Resorts, Inc. Subsequently, CapStar will merge into American
General Hospitality Corporation. The combined entity will be renamed MeriStar
Hospitality Corporation and will own 108 hotels with 27,336 rooms in 27
states, the District of Columbia and Canada.
As a condition of the proposed merger, MeriStar Hotels & Resorts is to
acquire privately-held American General Hospitality, Inc. and AGH Leasing,
L.P., which together currently operate and/or lease 44 of American General
Hospitality Corporation's 53 owned hotels and manage 15 additional properties
for third party owners. The aggregate purchase price for American General
Hospitality, Inc. and AGH Leasing, L.P. is $95 million, payable in a mixture
of cash and units of limited partnership interest. Upon completion of OpCo's
spin-off and acquisitions, MeriStar Hotels & Resorts will lease and manage 201
hotels in 34 states, the U.S. Virgin Islands, the District of Columbia and
Canada, 108 of which will be owned by MeriStar Hospitality Corporation.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Winston Hospitality, Inc.
We have audited the accompanying balance sheets of Winston Hospitality, Inc.
as of October 31, 1997 and December 31, 1996 and the related statements of
income, shareholders' equity and cash flows for the 10 months ended October
31, 1997 and the years ended December 31, 1996 and 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 financial position of Winston Hospitality, Inc.
as October 31, 1997 and December 31, 1996 and the results of its operations
and its cash flows for the 10 months ended October 31, 1997 and the years
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Raleigh, North Carolina
February 6, 1998
F-17
<PAGE>
WINSTON HOSPITALITY, INC.
BALANCE SHEETS
AS OF OCTOBER 31, 1997 AND DECEMBER 31, 1996
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
ASSETS ------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 6,926 $5,463
Accounts receivable:
Trade....................................................... 2,303 1,166
Lessor...................................................... 768 1,391
Affiliates.................................................. 125 95
Shareholders................................................ -- 71
Prepaid expenses and other assets............................. 182 220
------- ------
Total current assets...................................... 10,304 8,406
------- ------
Furniture, fixtures and equipment:
Furniture and equipment....................................... 399 323
Leasehold improvements........................................ 113 113
------- ------
512 436
Less accumulated depreciation and amortization................ 245 178
------- ------
Net furniture, fixtures and equipment..................... 267 258
------- ------
$10,571 $8,664
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade....................................... $ 1,918 $1,259
Percentage lease payable to Lessor............................ 3,882 4,661
Accounts payable--affiliates.................................. -- 146
Accrued salaries and wages.................................... 1,204 874
Accrued sales and occupancy taxes............................. 814 462
Other current liabilities..................................... 842 618
------- ------
Total current liabilities................................... 8,660 7,970
------- ------
Commitments (Note 3)
Shareholders' equity:
Common stock, $.01 par value, 100 shares authorized, issued
and outstanding.............................................. 1 1
Additional paid-in capital.................................... 49 49
Retained earnings............................................. 1,861 644
------- ------
Total shareholders' equity.................................. 1,911 694
------- ------
$10,571 $8,664
======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
WINSTON HOSPITALITY, INC.
STATEMENTS OF INCOME
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996 AND
THE YEARS ENDED DECEMBER 31, 1996 AND 1995
($ IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31,
------------------- ---------------
1997 1996 1996 1995
------- ----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Room...................................... $67,145 $49,633 $58,956 $39,677
Food and beverage......................... 2,419 1,240 1,685 138
Other operating, net...................... 1,373 1,068 1,191 877
Interest income........................... 152 82 93 85
------- ------- ------- -------
Total revenue........................... 71,089 52,023 61,925 40,777
------- ------- ------- -------
Expenses:
Property and operating.................... 24,112 17,388 21,550 14,124
Property repairs and maintenance.......... 3,193 2,614 3,181 1,909
Food and beverage......................... 1,715 924 1,281 189
General and administrative................ 2,090 1,603 2,050 1,526
Franchise costs........................... 6,167 4,327 5,361 3,565
Management fees........................... 1,015 1,109 1,126 784
Percentage lease payments................. 30,980 22,800 26,611 17,148
------- ------- ------- -------
Total expenses.......................... 69,272 50,765 61,160 39,245
------- ------- ------- -------
Net income.............................. $ 1,817 $ 1,258 $ 765 $ 1,532
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
WINSTON HOSPITALITY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997,
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
($ IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1994................... 100 $ 1 $49 $ 15 $ 65
Net income.............. -- -- -- 1,532 1,532
Distributions........... -- -- -- (1,112) (1,112)
--- --- --- ------- -------
Balances at December 31,
1995................... 100 1 49 435 485
Net income.............. -- -- -- 765 765
Distributions........... -- -- -- (556) (556)
--- --- --- ------- -------
Balances at December 31,
1996................... 100 1 49 644 694
Net income.............. -- -- -- 1,817 1,817
Distributions........... -- -- -- (600) (600)
--- --- --- ------- -------
Balances at December 31,
1997................... 100 $ 1 $49 $ 1,861 $ 1,911
=== === === ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
WINSTON HOSPITALITY, INC.
STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996 AND THE YEARS ENDED DECEMBER
31, 1996 AND 1995
($ IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31,
------------------ ---------------
1997 1996 1996 1995
-------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 1,817 $ 1,258 $ 765 $ 1,532
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 67 65 83 63
Changes in assets and liabilities:
Accounts receivable--trade.......... (1,137) (1,525) (330) (310)
Prepaid expenses and other assets... 38 (137) (103) (65)
Accounts payable--trade............. 659 547 666 132
Percentage lease payable to Lessor.. (729) 532 2,064 1,159
Accrued expenses and other
liabilities........................ 906 1,045 914 30
-------- -------- ------ -------
Net cash provided by operating
activities....................... 1,621 1,785 4,059 2,541
-------- -------- ------ -------
Cash flows from inventing activities:
Purchases of furniture, fixtures and
equipment.............................. (76) (107) (144) (67)
Repayments from (advances to) Lessor,
affiliates and shareholders, net....... 518 (265) (145) (1,233)
-------- -------- ------ -------
Net cash provided by (used in)
investing activities............. 442 (372) (289) (1,300)
-------- -------- ------ -------
Cash flows from financing activities:
Distributions to shareholders........... (600) (485) (556) (1,112)
-------- -------- ------ -------
Net cash used in financing
activities....................... (600) (485) (556) (1,112)
-------- -------- ------ -------
Net increase in cash and cash equivalents. 1,463 928 3,214 129
Cash and cash equivalents at beginning of
the period............................... 5,463 2,249 2,249 2,120
-------- -------- ------ -------
Cash and cash equivalents at end of the
period................................... $ 6,926 $ 3,177 $5,463 $ 2,249
======== ======== ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION:
Winston Hospitality, Inc. ("Hospitality") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston
Hotels, Inc. ("WHI") (collectively, the "Company"). Approximately 90.15% of
the Partnership is owned by WHI. The two shareholders of Hospitality (Robert
W. Winston, III and John B. Harris, Jr.) are also shareholders of WHI and/or
partners in the Partnership. The Company owned 21 hotels as of December 31,
1995, 31 hotels as of December 31, 1996 and 38 hotels as of October 31, 1997
(collectively, all 38 hotels are the "Current Hotels").
Each hotel was separately leased by the Company to Hospitality under a
Percentage Lease Agreement. These leases required minimum base rental payments
to be made to the Company on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue and certain food and
beverage revenues.
Thirty-seven of the 38 hotels are limited-service hotels and one is a full-
service hotel. All 38 hotels are operated under franchise agreements with
Promus Hotels, Inc., Choice Hotels International, Inc., Holiday Inns
Franchising, Inc. and Marriott International, Inc. The cost of obtaining the
franchise licenses was paid by the Company and the on-going franchise fees
were paid by Hospitality.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Cash Equivalents. All highly liquid investments with a maturity date of
three months or less when purchased are considered to be cash equivalents.
Hospitality places cash deposits with federally insured depository
institutions. At October 31, 1997, bank account balances exceeded federal
depository insurance limits by approximately $6,252.
Fair Value of Financial Instruments. Hospitality's financial instruments
consist of cash and cash equivalents whose carrying value approximates fair
value because of their short maturity. Hospitality's remaining assets and
liabilities are not considered financial instruments.
Furniture, Fixtures and Equipment. Furniture and equipment are recorded at
cost and are depreciated using the straight-line method over estimated useful
lives of the assets of five and seven years. Leasehold improvements are being
amortized using the straight-line method over the terms of the related leases.
Upon disposition, both the asset and accumulated depreciation accounts are
relieved and the related gain or loss is credited or charged to the income
statement. Repairs and maintenance of hotel properties owned by the Company
are paid by Hospitality and are charged to expense as incurred.
Income Taxes. Hospitality has made an election under Subchapter S of the
Internal Revenue Code of 1986, as amended. Any taxable income or loss is
recognized by the shareholders and, therefore, no provision for income taxes
has been provided in the accompanying financial statements.
Reclassifications. Certain reclassifications have been made to the 1996 and
1995 financial statements to conform with the 1997 presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
Unaudited October 31, 1996 operating results. Operating results for the 10
months ended October 31, 1996, presented for comparison purposes, are
unaudited. The unaudited financial statements for the period ended October 31,
1996 reflect, in the opinion of management, all adjustments necessary for a
fair presentation of the financial statements. All such adjustments are normal
and recurring in nature.
F-22
<PAGE>
WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. COMMITMENTS:
Under the terms of the Percentage Lease Agreements, Hospitality had future
lease commitments to the Company through 2006. As disclosed in Note 6 below,
all Percentage Leases were sold as of November 24, 1997.
Hospitality incurred minimum rents of $13,535, $11,154 and $7,853 as well as
percentage rents of $17,445, $15,457 and $9,295 for the ten months ended
October 31, 1997 and the years ended December 31, 1996 and 1995, respectively.
Hospitality had entered into separate contracts with unrelated parties for
the management of 10 of the hotels. The terms of these agreements provided for
management fees to be paid based on predetermined formulas for a period of ten
years through 2006. The contracts were cancelable under certain circumstances
as outlined in the agreements. As disclosed in Note 6 below, all such
contracts were sold as of November 24, 1997.
Various legal proceedings against Hospitality have arisen from time to time
in the normal course of business. Management believes liabilities arising from
these proceedings, if any, will have no material adverse effect on the
financial positions or results of operations of Hospitality.
4. DISTRIBUTIONS:
Beginning with the year ended December 31, 1996, the shareholders agreed to
limit distributions by Hospitality to amounts necessary to pay their income
taxes on the net income derived from Hospitality until such time as the
tangible net worth of Hospitality reached $4,000. Thereafter, they agreed to
invest at least 75% of their after-tax distributions of net income from
Hospitality in Common Stock of the Company. These agreements terminated
effective November 24, 1997, due to the sale of the leases to CapStar.
5. PROFIT SHARING PLAN:
On January, 1, 1996, Hospitality adopted the Winston 401(k) Plan (the
"Plan") for substantially all employees, except any highly compensated
employee, as defined in the Plan, who had attained the age of 21 and completed
one year of service. Under the Plan, employees were able to contribute from 1%
to 15% of compensation, subject to an annual maximum as determined under the
Internal Revenue Code. Hospitality made matching contributions of a specified
percentage of the employee's contribution currently 3% of the first 6% of the
employee's contribution, and may make additional discretionary contributions.
Hospitality contributed $54, $50 (unaudited) and $61 during the 10-month
periods ended October 31, 1997 and 1996, and the year ended December 31, 1996,
respectively.
6. SUBSEQUENT EVENT:
On November 24, 1997, Hospitality completed the sale of substantially all of
its assets and all 38 existing Percentage Leases to CapStar Management
Company, L.P. ("CMC") for total consideration of $34,000. The $34,000 sale
price consisted of $10,000 in cash and 674,236 CMC Partnership Units.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of American General Hospitality, Inc.
We have audited the accompanying balance sheets of American General
Hospitality, Inc. (the "Company") as of December 31, 1997 and 1996 and the
related statements of operations, stockholders' equity and cash flows for the
three years in the period ended December 31, 1997. 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American General
Hospitality, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
Dallas, Texas
April 1, 1998
F-24
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1998
ASSETS ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $1,900,176 $ 455,058 $3,234,315
Accounts and management fees receivable. 1,756,317 1,731,204 1,768,463
Accounts receivable, affiliates......... 167,621 103,574 35,193
Prepaid expenses........................ 36,010 13,229 34,519
---------- ---------- ----------
Total current assets................ 3,860,124 2,303,065 5,072,490
Investments in property and equipment, at cost:
Furniture and equipment............... 1,155,220 522,696 1,317,040
Leasehold improvements................ 88,049 6,960 93,260
---------- ---------- ----------
1,243,269 529,656 1,410,300
Less accumulated depreciation......... 300,362 334,933 327,362
---------- ---------- ----------
Net investments in property and
equipment.......................... 942,907 194,723 1,082,938
---------- ---------- ----------
Deposits................................ 78,860 50 78,860
Goodwill, net of accumulated
amortization of $2,250, $2,000,
and $2,312 (unaudited) as of
December 31, 1997 and 1996 and
March 31, 1998, respectively........... 7,750 8,000 7,688
Other assets............................ -- 1,477
---------- ---------- ----------
Total assets........................ $4,889,641 $2,507,315 $6,241,976
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................ $ 77,499 $ 474,253 $2,366,542
Accounts payable, affiliates............ 1,275,000 42,770 1,275,000
Accrued liabilities..................... 2,795,477 1,268,895 1,507,866
Deferred revenue........................ 48,699 148,586
---------- ---------- ----------
Total current liabilities........... 4,196,675 1,934,504 5,149,408
---------- ---------- ----------
Commitments and contingencies (Notes 3
and 5)
Stockholders' equity:
Common stock, $.01 par value, 100,000
shares authorized, 600 shares issued
and outstanding...................... 6 6 6
Additional paid-in capital............ 584,143 584,143 584,143
Retained earnings..................... 108,817 (11,338) 508,419
---------- ---------- ----------
Total stockholders' equity.......... 692,966 572,811 1,092,568
---------- ---------- ----------
Total liabilities and stockholders'
equity............................. $4,889,641 $2,507,315 $6,241,976
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1996 1995 1998 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Management and con-
sulting fee revenue.. $7,350,851 $9,818,069 $10,070,090 $ 2,815,323 $ 1,441,670
---------- ---------- ----------- ----------- -----------
Operating expenses:
Salaries and employee
benefits............. 3,705,366 4,253,358 4,498,855 1,333,768 1,138,630
Professional fees..... 520,067 412,994 562,152 18,997 10,991
Rent and related ex-
pense................ 378,699 292,103 320,515 138,505 72,867
Travel and entertain-
ment................. 69,328 114,110 397,740 10,542 28,783
General and adminis-
trative
expenses............. 130,863 82,429 227,081 30,175 28,222
Office expenses....... 113,513 139,013 190,190 38,339 28,633
Advertising and promo-
tion................. 29,127 36,813 50,135 1,689 4,802
---------- ---------- ----------- ----------- -----------
4,946,963 5,330,810 6,246,668 1,572,015 1,312,928
---------- ---------- ----------- ----------- -----------
Income before deprecia-
tion, amortization,
consulting fees and
other income (expense). 2,403,888 4,487,259 3,823,422 1,243,308 128,742
---------- ---------- ----------- ----------- -----------
Consulting fees....... 2,227,077 3,979,446 4,056,477 858,226 427,323
Depreciation expense.. 123,927 101,891 93,974 27,000 25,470
Amortization expense.. 250 250 250 62 62
---------- ---------- ----------- ----------- -----------
2,351,254 4,081,587 4,150,701 885,288 452,855
---------- ---------- ----------- ----------- -----------
Income (loss) from op-
erations............. 52,634 405,672 (327,279) 358,020 (324,113)
---------- ---------- ----------- ----------- -----------
Other income (expense):
Interest income....... 134,931 187,750 135,600 41,582 19,945
Other expense......... (67,410) -- (189,204) -- --
---------- ---------- ----------- ----------- -----------
67,521 187,750 (53,604) 41,582 19,945
---------- ---------- ----------- ----------- -----------
Net income (loss)..... $ 120,155 $ 593,422 $ (380,883) $ 399,602 $ (304,168)
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994... 600 $ 6 $584,143 $(223,877) $ 360,272
Net loss..................... (380,883) (380,883)
--- --- -------- --------- ----------
Balance, December 31, 1995... 600 6 584,143 (604,760) (20,611)
Net income................... 593,422 593,422
--- --- -------- --------- ----------
Balance, December 31, 1996... 600 6 584,143 (11,338) 572,811
Net income................... 120,155 120,155
--- --- -------- --------- ----------
Balance, December 31, 1997... 600 6 584,143 108,817 692,966
Net income (unaudited)....... 399,602 399,602
--- --- -------- --------- ----------
Balance, March 31, 1998
(unaudited)................. 600 $ 6 $584,143 $ 508,419 $1,092,568
=== === ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1996 1995 1998 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss).... $ 120,155 $ 593,422 $(380,883) $ 399,602 $ (304,168)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used
in) operating
activities:
Amortization........... 250 250 250 62 62
Depreciation........... 123,927 101,891 93,974 27,000 25,470
Loss from disposition
of assets............. 33,269 -- 36,425 --
Changes in assets and
liabilities:
Accounts and
management fees
receivable.......... (25,113) (980,292) (151,928) (12,146) 443,310
Accounts receivable--
affiliates.......... (64,047) (35,071) 231,687 132,428 (135,630)
Prepaid expenses..... (22,781) 4,906 11,073 1,491 5,653
Deposits............. (78,810) (20) 54,750 -- (80,257)
Accounts payable..... (396,754) 152,191 (185,613) 2,289,043 (82,176)
Accounts payable--
affiliates.......... 1,232,230 -- (245,691) -- 63,672
Accrued liabilities.. 1,526,582 272,663 449,100 (1,287,611) 922,178
Deferred revenue..... (99,887) 89,169 59,417 (48,699) (148,586)
---------- --------- --------- ---------- ----------
Net cash provided by
(used in) operating
activities.......... 2,349,021 199,109 (27,439) 1,501,170 709,528
---------- --------- --------- ---------- ----------
Cash flows from
investing
activities:
Proceeds from sale of
investment.......... 1,477 -- -- -- 1,477
Loan to affiliates..... -- -- (25,000) -- --
Proceeds from loans
to affiliates....... -- -- 282,218 -- --
Purchase of property
and equipment....... (916,746) (87,076) (167,160) (167,031) (104,677)
Proceeds from sale of
furniture and
equipment........... 11,366 -- -- -- --
---------- --------- --------- ---------- ----------
Net cash provided by
(used in) investing
activities............ (903,903) (87,076) 90,058 (167,031) (103,200)
---------- --------- --------- ---------- ----------
Net increase in cash and
equivalents............ 1,445,118 112,033 62,619 1,334,139 606,328
Cash and equivalents at
beginning of year...... 455,058 343,025 280,406 1,900,176 455,058
---------- --------- --------- ---------- ----------
Cash and equivalents at
end of year............ $1,900,176 $ 455,058 $ 343,025 $3,234,315 $1,061,386
========== ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of theses financial statements.
F-28
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
American General Hospitality, Inc. (the "Company"), a Texas corporation, was
incorporated in November 1988 and provides hotel management and consulting
services to hotels throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
certificates of deposit and debt instruments with original maturities of three
months or less to be cash equivalents. The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes
it is not exposed to any significant credit risk on cash and cash equivalents.
INVESTMENTS IN PROPERTY AND EQUIPMENT
Property and equipment consist of furniture, equipment, computer equipment
and leasehold improvements and are stated at cost. Depreciation is provided by
using the straight-line method over estimated useful lives of five to seven
years for furniture and equipment and three years for leasehold improvements.
This is considered reasonable for financial reporting purposes and is not
materially different from estimated useful lives.
Maintenance and repairs are charged to operations as incurred; major
renewals and improvements are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation accounts are
removed from the accounts and the related gain or loss is included in
operations.
GOODWILL
Goodwill in the amount of $10,000 was recorded when the S Corporation was
originally formed in 1988. The goodwill is being amortized using the straight
line method over a 40 year period.
REVENUE RECOGNITION
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible.
ADVERTISING COST
The Company participates in various advertising and marketing programs. All
advertising costs are expensed in the period incurred.
CONCENTRATIONS OF RISK
The Company places cash deposits at a major bank. At December 31, 1997, bank
account balances exceed Federal Deposit Insurance Corporation limits by
approximately $2,330,000. Management believes credit risk related to these
deposits is minimal.
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 reported amounts of assets and liabilities and
F-29
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company, with the consent of its shareholders, elected to be treated as
a small business corporation under Subchapter S of the Internal Revenue Code.
In this status, the Company is not a taxable entity, and elements of income
and expense flow through and are taxed to the shareholders on an individual
basis; therefore, no provision or liability for income taxes is reflected in
these financial statements. The Company's tax returns and the amount of
allocable income or loss are subject to examination by federal and state
taxing authorities. If such examinations result in changes to income or loss,
the tax liability of the shareholder could be changed accordingly.
Interim Financial Information--The unaudited interim financial statements as
of March 31, 1998 and for the three months ended March 31, 1998 and March 31,
1997 have been prepared pursuant to the rules and regulations of the SEC. The
accompanying interim financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring
nature.
3. OPERATING LEASES:
During 1997, the Company entered into a sublease agreement with Federal Home
Loan Bank of Dallas to lease 18,668 square feet of office space. The agreement
requires monthly rental payments of $28,780 and expires in September 2000.
Federal Home Loan Bank of Dallas lease from Crescent Real Estate Funding II,
L.P.
The Company also has various equipment leases on office equipment expiring
in future years.
Future minimum lease payments under these noncancelable lease agreements are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1998.......................................... $360,072
1999.......................................... 360,072
2000.......................................... 260,806
--------
$980,950
========
</TABLE>
4. EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) retirement plan and provides discretionary
matching contributions of 50% of eligible employees' contributions, up to 6%
of employee compensation. During 1997, 1996 and 1995, the Company contributed
$26,033, $63,933 and $53,365 to this plan, respectively.
The Company has an employee stock ownership plan which covers all eligible
employees meeting age and length of service requirements. Under the terms of
this plan, contributions are at the discretion of the Board of Directors up to
the maximum allowable for tax purposes. During 1997, 1996 and 1995, the
Company contributed $71,625, $98,255 and $94,814 in cash to this plan,
respectively. This approximated 3% of eligible employee compensation. No
contributions of stock have been made to the plan to date.
5. CONTINGENCIES:
The Company is a defendant in various litigation arising in the ordinary
course of its business. No provision for liability related to this litigation
has been recorded in the financial statements as the Company believes that no
material uninsured loss will result.
6. CONCENTRATIONS OF CREDIT RISK:
Most of the Company's business activity is with or on behalf of the hotels
it manages across the United States, and substantially all of the Company's
trade and management fee receivables are from these hotels. The
F-30
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company employs all hotel employees for the properties and is reimbursed by
the property owners. At December 31, 1997, there were approximately 7,500
employees.
7. RELATED PARTY TRANSACTIONS:
Accounts receivable-affiliates represents amounts due from affiliates for
property renovations, purchases, potential investments, shared expenses and
other advances.
Accounts payable-affiliates represents amounts due to affiliates for
advances.
During 1997, 1996 and 1995, the Company received fee revenue for management,
consulting and accounting services provided in the amount of $866,969,
$121,087 and $249,088, respectively, from entities affiliated with the Company
through common ownership.
In addition, the Company paid consulting fees of $2,227,077, $3,979,446 and
$4,056,477 during 1997, 1996 and 1995, respectively, to an affiliated entity.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statements of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Company reports the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
other liabilities at cost, which approximates fair value due to the short
maturity of these instruments.
9. SUBSEQUENT EVENTS:
On March 15, 1998 American General Hospitality Corporation (the "REIT") and
an affiliate and CapStar Hotel Company ("CapStar") entered into a definitive
agreement (the "Merger Agreement") pursuant to which the parties agreed,
subject to stockholder approval and other conditions and covenants, to merge
as equals (the "Proposed Merger"). Accordingly, no assurance can be given that
the Proposed Merger will be consummated. Pursuant to the Merger Agreement,
CapStar will spin off (the "Spin-Off") in a taxable transaction, its hotel
operations and management business to its current stockholders as a new C
Corporation to be called MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts").
CapStar will subsequently merge with and into the REIT, which will qualify as
a reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"). The REIT will be renamed MeriStar Hospitality
Corporation after the Proposed Merger. In a separate transaction, which will
close immediately after the closing of the Proposed Merger, MeriStar Resorts
will acquire AGH Leasing (an affiliate) and the Company which acquisition is a
condition to closing the Proposed Merger. If the Proposed Merger is
consummated, MeriStar Resorts will become the lessee and manager of all of the
Current Hotels currently leased by AGH Leasing and will have a right of first
refusal to become the lessee of hotels acquired by the Company in the future
except for the Prime Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the REIT's and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The REIT's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of common stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The REIT expects the Proposed Merger to close in June 1998. The Proposed
Merger will be submitted for approval at separate meetings of the stockholders
of the REIT and CapStar. Prior to such stockholder meetings, the REIT will
file a registration statement with the SEC registering under the Securities
Act of 1933, as amended, the shares of MeriStar Hospitality Corporation to be
issued in the Proposed Merger.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
AGH Leasing, L.P.
We have audited the accompanying balance sheets of AGH Leasing, L.P. (The
"Partnership") as of December 31, 1997 and 1996, and the related statements of
operations, changes in partners' deficit, and cash flows for the year ended
December 31, 1997 and for the period from July 31, 1996 (inception of
operations) through December 31, 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 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 audit of the financial statements
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 AGH Leasing, L.P. as of
December 31, 1997 and 1996 and its results of operations and its cash flows
for the year ended December 31, 1997 and for the period from July 31, 1996
(inception of operations) through December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand l.l.p.
Dallas, Texas
January 30, 1998,
except for Note 6, as
to which the date is
March 16, 1998
F-32
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments in hotel properties, at cost
Furniture, fixtures and equipment..... $ 315,000 $ 315,000 $ 315,000
Less accumulated depreciation.........
(89,250) (26,250) (105,000)
----------- ----------- -----------
Net investment in hotel properties...... 225,750 288,750 210,000
Cash and cash equivalents............... 8,781,329 5,673,232 24,644,714
Accounts receivable, net of allowance
for doubtful accounts of $73,915,
$5,291 and $80,987 (unaudited) as of
December 31, 1997 and 1996 and March
31, 1998, respectively................. 6,247,083 2,822,936 12,594,508
Inventories............................. 1,007,296 448,234 1,508,406
Prepaid expenses........................ 1,067,384 553,400 1,165,999
Deferred expenses....................... 159,207 194,287 148,859
Other assets............................ 283,997 47,985 457,900
----------- ----------- -----------
Total assets........................ $17,772,046 $10,028,824 $40,730,386
=========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY (DEFI-
CIT)
Accounts payable, trade................. $ 2,642,639 $ 1,054,902 $ 5,309,072
Participating Lease payable, American
General Hospitality
Operating Partnership, L.P............ 7,999,122 3,979,242 17,371,456
Note payable to American General Hospi-
tality Operating
Partnership, L.P....................... 234,321 287,684 220,136
Accrued expenses and other liabilities.. 5,327,522 4,198,035 13,227,644
Deferred income......................... 2,100,000 730,000 2,047,500
Minority interest in Twin Towers Leas-
ing, L.P............................... 1,197,442 -- 1,197,442
----------- ----------- -----------
Total liabilities................... 19,501,046 10,249,863 39,373,250
----------- ----------- -----------
Commitments and contingencies (Notes 1
and 2)
Partner's Capital (deficit)--General
Partner.............................. (17,290) (2,210) 13,571
Partner's Capital (deficit)--Limited
Partners............................. (1,711,710) (218,829) 1,343,565
----------- ----------- -----------
Total partners' (deficit)........... (1,729,000) (221,039) 1,357,136
----------- ----------- -----------
Total liabilities and partners'
(deficit).......................... $17,772,046 $10,028,824 $40,730,386
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1996 1998 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Room revenue............. $123,965,649 $26,725,200 $58,224,156 $19,465,968
Food and beverage reve-
nue..................... 35,595,835 8,374,459 17,367,968 5,197,244
Other revenue............ 8,031,070 1,691,472 3,449,076 1,305,853
Minority interest income. 1,802,558 -- -- --
------------ ----------- ----------- -----------
Total revenue.......... 169,395,112 36,791,131 79,041,200 25,969,065
------------ ----------- ----------- -----------
Expenses
Property operating costs
and expenses............ 33,894,184 7,235,297 13,956,762 5,340,286
Food and beverage costs
and expenses............ 27,646,671 6,262,071 12,238,150 4,239,312
General and administra-
tive.................... 15,871,676 3,270,481 6,315,376 2,475,288
Advertising and promo-
tion.................... 12,792,700 2,305,776 5,316,895 1,820,589
Repairs and maintenance.. 6,712,883 1,450,987 2,906,546 1,032,093
Utilities................ 7,258,674 1,628,490 2,872,937 1,147,891
Management fees.......... 1,691,639 947,632 1,759,353 82,854
Franchise costs.......... 4,754,285 950,307 2,300,237 676,148
Depreciation............. 63,000 26,250 15,750 15,750
Amortization............. 40,997 6,753 10,348 10,052
Interest expense......... 26,808 13,314 5,858 7,192
Other expense............ 158,113 27,093 91,628 20,746
Participating Lease ex-
penses.................. 59,934,337 13,387,719 28,165,224 9,508,365
------------ ----------- ----------- -----------
Total expenses......... 170,845,967 37,512,170 75,955,064 26,376,566
------------ ----------- ----------- -----------
Net income (loss)...... $ (1,450,855) $ (721,039) $ 3,086,136 $ (407,501)
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS
1% 99% TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Initial capitalization at inception........ $ 5,000 $ 495,000 $ 500,000
Net loss for the period from July 31, 1996
through December 31, 1996................. (7,210) (713,829) (721,039)
-------- ----------- -----------
Balance at December 31, 1996............... (2,210) (218,829) (221,039)
Partner distributions...................... (571) (56,535) (57,106)
Net loss for the year ended December 31,
1997...................................... (14,509) (1,436,346) (1,450,855)
-------- ----------- -----------
Balance at December 31, 1997............... $(17,290) $(1,711,710) $(1,729,000)
-------- ----------- -----------
Net income for the three months ended March
31, 1998
(unaudited)............................... 30,861 3,055,275 3,086,136
-------- ----------- -----------
Balance at March 31, 1998 (unaudited)...... $ 13,571 $ 1,343,565 $ 1,357,136
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-35
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996 AND THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1996 1998 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flow from operating ac-
tivities:
Net income (loss)......... $ (1,450,855) $ (721,039) $ 3,086,136 $ (407,501)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............ 63,000 26,250 15,750 15,750
Amortization............ 40,997 6,753 10,348 10,052
Minority interest....... (1,802,558) -- -- --
Changes in assets and
liabilities:
Accounts receivable..... (3,424,147) (2,822,936) (6,347,425) (1,367,672)
Inventories............. (559,062) (448,234) (501,110) (146,066)
Prepaid expenses........ (513,984) (553,400) (98,615) 44,250
Deferred expenses....... (5,917) (201,040) -- --
Other assets............ (236,012) (47,985) (173,903) (113,119)
Accounts payable, trade. 1,587,737 1,054,902 2,666,433 420,001
Participating Lease
payable, American
General Hospitality
Operating Partnership,
L.P.................... 4,019,880 3,979,242 9,372,334 419,460
Accrued expenses and
other liabilities...... 1,129,487 4,198,035 7,900,122 (30,138)
Deferred income......... 1,370,000 730,000 (52,500) 420,001
------------ ---------- ----------- ----------
Net cash flow provided
by operating
activities........... 218,566 5,200,548 15,877,570 (734,982)
------------ ---------- ----------- ----------
Cash flow from financing
activities:
Capital contributions, AGH
Leasing, L.P............. -- 500,000 -- --
Capital contributions,
Twin Leasing, L.P........ 3,000,000 -- -- --
Partner distributions .... (57,106) -- -- --
Principal payments on
borrowings............... (53,363) (27,316) (14,185) (12,851)
------------ ---------- ----------- ----------
Net cash provided by
financing activities... 2,889,531 472,684 (14,185) (12,851)
------------ ---------- ----------- ----------
Net change in cash and
cash equivalents....... 3,108,097 5,673,232 15,863,385 (747,833)
Cash and cash equivalents
at beginning of periods.. 5,673,232 -- 8,781,329 5,673,232
------------ ---------- ----------- ----------
Cash and cash equivalents
at end of periods........ $ 8,781,329 $5,673,232 $24,644,714 $4,925,399
============ ========== =========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the
period for interest...... $ 26,808 $ 13,314 $ 5,858 $ 7,192
============ ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
AGH Leasing, L.P. is a Delaware limited partnership which was formed on May
29, 1996, and commenced operations on July 31, 1996. AGH Leasing is owned in
part by certain executive officers of American General Hospitality Corporation
(the "Company") and American General Hospitality, Inc. ("AGHI"). AGH Leasing,
L.P. leases 26 of the 27 Hotels (the "December 31 Hotels") owned by American
General Hospitality Operating Partnership, L.P. (the "Operating Partnership")
at December 31, 1997, pursuant to operating leases ("Participating Leases")
which provide for rent based on the revenues of the December 31 Hotels.
During 1996, the Company acquired two of the December 31 Hotels for an
aggregate acquisition price of $49 million. During 1997, the Company acquired
twelve of the December 31 Hotels for an aggregate acquisition price of $289.7
million. The acquisitions were accounted for by the Company under the purchase
method of accounting. Thirteen of the fourteen acquired hotels were
subsequently leased to AGH Leasing, L.P. pursuant to the Participating Leases
with the remaining hotel being leased to Twin Towers Leasing, L.P. The results
of operations of the acquired hotels have been included in the reported
results from the date of acquisition.
Twin Towers Leasing, L.P. ("Twin Towers Leasing" and, together with AGH
Leasing, L.P., "AGH Leasing") leases the remaining December 31 Hotel, the
Radisson Twin Towers Orlando, pursuant to a Participating Lease which is
substantially similar in form to the other Participating Leases. Twin Towers
Leasing is a Florida limited partnership which was formed on June 1, 1997, and
commenced operations on June 25, 1997. AGH Leasing is the 51% sole general
partner of Twin Towers Leasing. The remaining 49% is owned by Regent Carolina
Corporation ("Regent"), an affiliate of the selling entity. Based on the
partnership agreement, Regent is allocated 100% of any losses generated by
Twin Towers Leasing up to their capital contribution of $3 million. The
operations of Twin Towers Leasing are consolidated with the operations of AGH
Leasing for financial statement purposes.
The consolidated financial statements of AGH Leasing include the results of
operations of the December 31 Hotels leased from the Operating Partnership due
to AGH Leasing's control over the operations of the December 31 Hotels during
the 12-year term of the Participating Leases. AGH Leasing has complete
discretion in establishing room rates and all rates for hotel goods and
services. Likewise, all operating expenses of the December 31 Hotels are under
the control of AGH Leasing. AGH Leasing has the right to manage or to enter
into management contracts with other parties to manage the December 31 Hotels.
If AGH Leasing elects to enter into management contracts with parties other
than AGHI, AGH Leasing must obtain the prior written consent of the Operating
Partnership, which consent may not be unreasonably withheld. AGH Leasing has
entered into management agreements pursuant to which 26 of the December 31
Hotels are managed by AGHI and the remaining December 31 Hotel is managed by
Wyndham Hotel Corporation.
AGH Leasing's results of operations are seasonal. The aggregate room
revenues in the second and third quarters of each fiscal year may be higher
than room revenues in the first quarter and fourth quarter of each fiscal
year. Consequently, AGH Leasing may have net income in some quarters and may
have net losses in other quarters of the same year.
Upon consummation of the Company's Initial Public Offering ("IPO"), the
partners of AGH Leasing capitalized AGH Leasing with $500,000 cash and pledged
275,000 units of limited partnership interest in the Operating Partnership
("OP Units") to the Company to collateralize the Lessee's obligations under
the Participating Leases. Twin Towers Leasing was capitalized with $3 million
by the 49% limited partner upon commencement of operations.
F-37
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties--Hotel properties consist principally of
furniture, fixtures and equipment and are stated at the lower of cost or net
realizable value and are depreciated using the straight-line method over
estimated useful lives ranging from 3 to 7 years.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed
from the accounts and the gain or loss is included in operations.
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Inventories--Inventories, consisting primarily of food and beverage items,
are stated at the lower of cost (generally, first-in first-out) or market.
Deferred Expenses--Deferred expenses at December 31, 1997 and 1996 include
organizational costs of $5,916 and $1,041, respectively and a $200,000 payment
made in connection with the Wyndham Safari Resort Lake Buena Vista cash flow
guarantee. Amortization is computed using the straight-line method over five
years.
Deferred Income--Deferred income of $2,100,000 and $730,000 at December 31,
1997 and 1996, respectively, represents the cash received from one of the
sellers of the Wyndham Safari Resort Lake Buena Vista for recurring
association fee agreements with the sellers as described in Note 4. The gain
will be amortized over the term of the agreements of ten years. The agreements
commence January 1, 1998.
Income Taxes--AGH Leasing is a Maryland limited partnership, which is not a
taxable entity. The results of operations are included in the tax returns of
the partners. The partnerships' tax returns and the amount of allocable income
or loss are subject to examination by federal and state taxing authorities. If
such examinations result in changes to income or loss, the tax liability of
the partners could be changed accordingly.
Revenue Recognition--Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Advertising Cost--The December 31 Hotels participate in various advertising
and marketing programs. All advertising costs are expensed in the period
incurred. The Lessee recognized advertising expense of $7.4 million and $1.3
million for the years ended December 31, 1997 and 1996, respectively.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk--AGH Leasing places cash deposits at a major
bank. At December 31, 1997 and 1996, bank account balances exceeded Federal
Deposit Insurance Corporation limits by approximately $5.7 million and $2.5
million, respectively. Management believes the credit risk related to these
deposits is minimal.
Interim Financial Information--The unaudited interim financial statements as
of March 31, 1998 and for the three months ended March 31, 1998 and 1997 have
been prepared pursuant to the rules and regulations of the SEC. The
accompanying interim financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring
nature.
F-38
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Lessee reports the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, participating lease
payable, note payable, accrued expenses and other liabilities at cost, which
approximates fair value due to the short maturity of these instruments.
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements, which
expire from 1998 to 2013. Franchise costs are based upon varying percentages
of gross room revenue ranging from 2.0% to 5.0%. These fees are paid by the
Lessee. No franchise costs were incurred for the Hotel Maison de Ville.
Twenty-six of the December 31 Hotels are managed by AGHI on behalf of AGH
Leasing. AGH Leasing pays AGHI a base management fee of 1.5% of total revenue
and an incentive fee of up to 2.0% of total revenue. The incentive fee, if
applicable, is equal to 0.025% of annual total revenue for each 0.1% increase
in annual total revenue over the total revenues for the preceding twelve-month
period up to the maximum incentive fee.
The remaining December 31 Hotel, the Wyndham Garden Hotel Marietta, is
managed by Wyndham Hotel Corporation ("Wyndham") on behalf of AGH Leasing. AGH
Leasing pays Wyndham a base management fee equal to 1.5% of gross revenues at
the hotel plus an incentive management fee of up to 1.5% of gross revenues.
The incentive fee, if applicable, will be earned if gross revenues exceed
certain year over year thresholds.
Each December 31 Hotel, except the Hotel Maison de Ville, is required to
remit varying percentages of gross room revenue ranging from 1.0% to 5.0% to
the various franchisors for sales and advertising expenses incurred to promote
the hotel at the national level. Additional sales and advertising costs are
incurred at the local property level. These fees are paid by AGH Leasing.
The Company entered into an agreement for a license and an association
membership from one of the sellers of the Wyndham Safari Lake Buena Vista,
which the Company immediately assigned to AGH Leasing. Commencing January
1998, in connection with the license and the association membership, the
Lessee is required to pay recurring association fees including a base monthly
fee equal to 1.0% of the prior month's gross room revenues generated at the
Hotel, and an additional fee of 0.5% to 1.0% of gross monthly revenues if the
trailing twelve month's gross room revenues at the Hotel exceed a threshold of
approximately $13 million (subject to increase based on the percentage
increase in the CPI). In addition, the Lessee is obligated to pay a recurring
royalty for the African Safari theme equal to an amount which ranges from 10%
to 25% of net operating income in excess of $6 million (subject to adjustment
if the Operating Partnership invests more than $40 million in the Hotel). AGH
Leasing is also obligated to pay a marketing assistance fee equal to .25% of
gross room revenues. The marketing and association fees are not expected to
exceed 2.25% of gross room revenues for any twelve-month period. The
association membership agreement terminates in October 2008; AGH Leasing is
obligated to pay liquidated damages if the agreement is terminated earlier.
In order to facilitate compliance with state and local liquor laws and
regulations, AGH Leasing subleases those areas of certain of the hotels that
comprise the restaurant and other areas where alcoholic beverages are served
to the Beverage Corporations, 39 of which are wholly owned by a senior
executive of the Company but controlled by AGH Leasing. In accordance with the
terms of the Beverage Subleases, each Beverage Corporation is obligated to pay
to AGH Leasing rent payments equal to 30% of each such corporation's annual
gross revenues generated from the sale of alcoholic beverages generated from
such areas; however, pursuant to the Participating Leases, such subleases will
not reduce the Participating Rent payments to the Operating Partnership, which
it is entitled to receive from such beverage sales.
F-39
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AGH Leasing has future lease commitments to the Company under the
Participating Leases, which have various expiration dates between July 2008 to
June 2009. The Participating Lease expenses are based on percentages of room
revenues, food and beverage revenues, telephone and other revenues. The
departmental revenue thresholds in the Participating Leases are seasonally
adjusted for interim periods and the Participating Lease formulas are adjusted
annually effective January 1, by a percentage equal to the percentage increase
in the CPI, plus .75% as compared to the prior year. Additionally, several of
the December 31 Hotels will have further adjustments to the Participating
Lease formulas due to the significant renovations expected to be completed in
those hotels in 1997. Minimum future rental expense (i.e., base rents) under
these noncancellable Participating Leases is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
1998...................................... $ 48,960,000
1999...................................... 50,527,600
2000...................................... 52,143,028
2001...................................... 53,814,309
2002...................................... 55,428,738
2003 and thereafter....................... 342,549,603
------------
Minimum future base rents $603,423,278
============
</TABLE>
5. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the IPO and other hotel acquisitions made by the
Company as described in Note 1 and leased to AGH Leasing, the historical
results of operations may not be indicative of future results of operations.
The following unaudited pro forma information of AGH Leasing is presented as
if the IPO and acquisition of the December 31 Hotels had occurred on January
1, 1996 and all of the Current Hotels had been leased pursuant to the
Participating Leases since that date.
In management's opinion, all adjustments necessary to reflect the effects of
the transactions previously described have been made. The pro forma
information does not purport to present what the actual results of operations
of AGH Leasing would have been if the previously mentioned transactions had
occurred on such date or to project the future financial position or results
of operations of AGH Leasing for any future period.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Room revenue.................................. $151,771,990 $136,811,842
Food and beverage revenue..................... 44,882,294 44,176,435
Other revenue................................. 9,804,140 9,537,309
Minority interest income...................... 2,874,156 1,284,177
------------ ------------
Total revenue............................... 209,332,580 191,809,763
------------ ------------
Hotel operating expenses...................... 134,759,239 126,515,121
Depreciation and amortization................. 103,997 69,753
Interest expense.............................. 264,064 31,689
Other expenses................................ 331,229 359,009
Participating Lease expense................... 74,192,463 65,776,641
------------ ------------
Net loss...................................... $ (318,412) $ (942,450)
============ ============
</TABLE>
F-40
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SUBSEQUENT EVENTS
PROPOSED MERGER
On March 15, 1998 the Company and CapStar Hotel Company ("CapStar") entered
into a definitive agreement (the "Merger Agreement") pursuant to which the
parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger"). Accordingly, no
assurance can be given that the Proposed Merger will be consummated. Pursuant
to the Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable
transaction, its hotel operations and management business to its current
stockholders as a new C-Corporation to be called MeriStar Hotels & Resorts,
Inc. ("MeriStar Resorts"). CapStar will subsequently merge with and into the
Company, which will qualify as a reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Company will be
renamed MeriStar Hospitality Corporation after the Proposed Merger. In a
separate transaction, which will close immediately after the closing of the
Proposed Merger, MeriStar Resorts will acquire AGH Leasing and AGHI which is
payable through the issuance of $11.2 million of units of limited partnership
interests of a subsidiary owned by MeriStar Resorts and $83.8 million in cash.
This acquisition is a condition to closing the Proposed Merger. If the
Proposed Merger is consummated, MeriStar Resorts will become the lessee and
manager of all of the Current Hotels currently leased by AGH Leasing and will
have a right of first refusal to become the lessee of hotels acquired by the
Company in the future except for the Prime Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company's and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The Proposed
Merger will be submitted for approval at separate meetings of the stockholders
of the Company and CapStar. Prior to such stockholder meetings, the Company
will file a registration statement with the SEC registering under the
Securities Act of 1933, as amended, the shares of MeriStar Hospitality
Corporation to be issued in the Proposed Merger.
F-41
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
The following unaudited Pro Forma Consolidated Statement of Operations are
presented as if the Company had completed the acquisition of the 12 hotels
acquired during 1997 and 15 hotels acquired during 1996 all owned as of
December 31, 1997 (the "December 31 Hotels") and the 18 hotels acquired in the
first quarter of 1998 (the "Acquired Hotels") and the one hotel to be acquired
by the Company and leased to AGH Leasing (the "Proposed Acquisition Hotel")
(collectively the "AGH Hotels") as of January 1, 1997. The Acquired Hotels
include the Potomac Portfolio Acquisition Hotels, the FSA Portfolio
Acquisition Hotels, the Holiday Inn O'Hare International Hotel and the
Proposed Acquisition Hotel is the Madison Hotel Acquisition. The Pro Forma
Consolidated Statement of Operations does not include the effects of the
Proposed Merger with CapStar.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statement of Operation are
derived from AGH Leasing's Consolidated Statements of Operations as of
December 31, 1997 and should be read in conjunction with the financial
statements filed with American General Hospitality Corporation's Annual Report
on Form 10-K for the year ended December 31, 1997.
The following Pro Forma Consolidated Statement of Operations are not
necessarily indicative of what the actual results of operations would have
been assuming such transactions had been completed as of January 1, 1997.
F-42
<PAGE>
AGH LEASING, L.P.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL DECEMBER 31
YEAR ENDED HOTELS PROPOSED MANAGEMENT
DECEMBER 31, PRO FORMA ACQUIRED ACQUISITION FEES
1997 ADJUSTMENTS HOTELS HOTEL ADJUSTMENT COMBINED
(A) (B) (C) (C) (G) PRO FORMA
------------ ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Room revenue (D)...... $123,965,649 $27,806,341 $ 99,361,895 $1,379,556 $ -- $252,513,441
Food and beverage
revenue (D).......... 35,595,835 9,286,459 31,592,242 228,514 -- 76,703,050
Other revenue (D)..... 8,031,070 1,773,070 6,446,925 76,166 -- 16,327,231
Minority interest 1,802,558 (139,150) -- -- -- 1,663,408
income (E)........... ------------ ----------- ------------ ---------- ----------- ------------
Total revenue....... $169,395,112 $38,726,720 $137,401,062 $1,684,236 -- $347,207,130
------------ ----------- ------------ ---------- ----------- ------------
Expenses
Property operating
costs and expenses
(F).................. 33,894,184 6,754,081 26,658,014 456,500 -- 67,762,779
Food and beverage
costs and expenses
(F).................. 27,646,671 6,425,715 24,731,326 135,969 -- 58,939,681
General and
administrative (F)... 15,871,676 2,978,176 11,792,008 241,768 -- 30,883,628
Advertising and
promotion (F)........ 12,792,700 2,489,673 8,638,295 68,533 -- 23,989,201
Repairs and
maintenance (F)...... 6,712,883 1,756,796 6,399,372 95,048 -- 14,964,099
Utilities (F)......... 7,258,674 1,532,149 6,198,780 95,716 -- 15,085,319
Management fees (G)... 1,691,639 1,158,265 2,694,902 42,106 1,767,977 7,354,889
Franchise costs (H)... 4,754,285 1,041,672 3,945,161 50,095 -- 9,791,213
Depreciation.......... 63,000 -- -- -- -- 63,000
Amortization (I)...... 40,997 -- -- -- -- 40,997
Interest expense...... 26,808 237,256 -- -- -- 264,064
Other expense......... 158,113 173,116 79,997 -- -- 411,226
Participating Lease 59,934,337 14,258,118 45,298,537 637,336 -- 120,128,328
expenses (J)......... ------------ ----------- ------------ ---------- ----------- ------------
Total expenses...... 170,845,967 38,805,017 136,436,392 1,823,071 1,767,977 349,678,424
------------ ----------- ------------ ---------- ----------- ------------
Net income (loss)... $ (1,450,855) $ (78,297) $ 964,670 $ (138,835) $(1,767,977) $ (2,471,294)
============ =========== ============ ========== =========== ============
</TABLE>
F-43
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The pro forma consolidated statement of operations of AGH Leasing, L.P.
("AGH Leasing") include the results of operations of the 46 hotels leased from
the American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") due to AGH Leasing's control over the operations of the hotels
during the twelve-year term of the Participating Leases. AGH Leasing has
complete discretion in establishing room rates and all rates for hotel goods
and services. Likewise, all operating expenses of the hotels are under the
control of AGH Leasing. AGH Leasing has the right to manage or to enter into
management contracts with other parties to manage the hotels. If AGH Leasing
elects to enter into management contracts with parties other than American
General Hospitality, Inc. ("AGHI"), AGH Leasing must obtain the prior written
consent of the Company, which consent may not be unreasonably withheld.
AGH Leasing's results of operations are seasonal. Generally, hotel revenue
is greater in the second and third quarters of a calendar year, although this
may not be true for hotels in major tourist destinations. With the Company's
acquisition and subsequent leasing of the FSA Portfolio Acquisition Hotels,
which include several hotels in tourist destinations, the AGH Hotels may now
produce greater revenues in the first and second quarters.
(A) Represents the Company's historical statement of operations for the year
ended December 31, 1997.
(B) Represents the adjustments to present a statement of operations for the 12
hotels acquired by the Company and leased to AGH Leasing during 1997 prior
to their acquisition by the Company based on historical balances of the
previous owners. The combination of the historical statement of operations
presented in column (A) and the pro forma statement of operation presented
in column (B) represent the results of operations of the 27 December 31
Hotels as if all of the AGH Hotels were acquired on January 1, 1997 and
leased to AGH Leasing pursuant to a Participating Lease since that date.
(C) Acquired Hotels represent the acquisition of the interests in the hotels
acquired by the Company and leased to AGH Leasing through March 31, 1998.
The Acquired Hotels are leased pursuant to operating leases
("Participating Leases") which provide for rent based on the revenues of
the Acquired Hotels. The Acquired Hotels include the FSA Portfolio
Acquisition Hotels, the Potomac Portfolio Acquisition Hotels and the
Holiday Inn O'Hare International Airport Hotel.
Proposed Acquisition Hotel represents the acquisition of one hotel, the
Madison Hotel, to be acquired by the Company and leased to AGH Leasing
pursuant to a Participating Lease.
The following table reflects summarized information regarding the Acquired
Hotels:
<TABLE>
<CAPTION>
POTOMAC PORTFOLIO
ACQUISITION HOTELS
AND THE HOLIDAY INN
FSA PORTFOLIO O'HARE INTERNATIONAL
ACQUISITION HOTELS AIRPORT HOTEL TOTAL
------------------ -------------------- ------------
<S> <C> <C> <C>
Total Hotel revenues..... $88,539,197 $49,256,403 $137,795,600
Total expenses........... 70,978,387 44,146,771 115,125,158
----------- ----------- ------------
Net income............... 17,560,810 5,109,632 22,670,442
Elimination of historical
expenses
Net income of Select Inn
Bloomington............ (392,417) -- (392,417)
Management fees......... 570,568 (11,292) 559,276
Depreciation............ 7,951,340 2,703,858 10,655,198
Amortization............ -- 121,242 121,242
Real estate and personal
property taxes and
property insurance..... 3,521,192 1,968,253 5,489,445
Interest expense........ -- 4,138,093 4,138,093
Other expense........... 2,678,741 343,187 3,021,928
----------- ----------- ------------
Adjusted net income be-
fore Participating
Lease payment.......... 31,890,234 14,372,973 46,263,207
Participating Lease pay-
ment................... 30,576,487 14,722,050 45,298,537
----------- ----------- ------------
Acquired Hotels adjusted
net income.............. $ 1,313,757 $ (349,077) $ 964,670
=========== =========== ============
</TABLE>
F-44
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)
(D) Represents historical room, food and beverage and other revenues of the
AGH Hotels.
(E) Represents the amount of AGH Leasing's minority interest investment in
Twin Towers Leasing, L.P. (the "Twin Towers Lessee", together with AGH
Leasing, L.P., "AGH Leasing") which leases the Radisson Orlando Twin
Towers hotel from the Operating Partnership. The Twin Towers Lessee is
owned 51% by AGH Leasing, which is the sole general partner, and 49% by
Regent Carolina Corporation, which is the sole limited partner. Regent
Carolina Corporation is not affiliated with the Company, the Operating
Partnership or AGH Leasing.
(F) Represents the historical expenses of the AGH Hotels.
(G) Represents management fees to be incurred under the Management Agreements.
The management fees payable to AGHI consist of a base fee of 1.5% of total
revenue and an incentive fee of up to 2.0% of total revenue. The incentive
fee, if applicable, is equal to 0.025% of annual total revenue for each
0.01% increase in annual total revenues over the total revenues for the
preceding twelve month period up to the maximum incentive fee. The payment
of the management fees to AGHI by AGH Leasing is subordinate to AGH
Leasing's obligations to the Company under the Participating Leases. The
full management fee payable during 1997 will be earned only to the extent
that AGH Leasing has taxable income equal to or greater than $50,000. If
AGH Leasing's taxable net operating income is below $50,000 in 1997,
management fees are forfeited by AGHI to increase AGH Leasing's taxable
net operating income to $50,000.
<TABLE>
<CAPTION>
BASE INCENTIVE TOTAL
MANAGEMENT FEE MANAGEMENT FEE MANAGEMENT FEE
-------------- -------------- --------------
<S> <C> <C> <C>
December 31 Hotels............. $2,849,904 $ -- $2,849,904
Acquired Hotels
Potomac Portfolio Acquisition
Hotels and the Holiday Inn
O'Hare International Airport
Hotel........................ 738,846 614,955 1,353,801
FSA Portfolio Acquisition Ho-
tels........................ 1,341,101 -- 1,341,101
Proposed Acquisition Hotel
Madison Hotel................ 25,263 16,843 42,106
Management fee adjustment...... -- 1,767,977 1,767,977
---------- ---------- ----------
Total management fees.......... $4,955,114 $2,399,775 $7,354,889
========== ========== ==========
</TABLE>
(H) Represents the historical franchise fees of the AGH Hotels. Franchise fees
associated with the hotel conversions are not included in the pro forma
statements of operations since other impacts including possible revenue
enhancements and operating expense reductions are also not included.
(I) Historical deferred loan costs and the related amortization has been
eliminated since AGH Leasing is not expected to incur similar costs.
Amortization expense relates to the amortization of organization costs
which are being amortized over a 60 month period.
(J) Represents lease payments to the Operating Partnership from AGH Leasing
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the revenues
of the AGH Hotels. The departmental thresholds in the Participating Leases
are seasonally adjusted for interim periods. The Participating Lease
payments for the Acquired Hotels and the Proposed Acquisition Hotel are
calculated by applying the rent provisions applicable in the first year of
the respective leases executed to the historical operating revenues of the
hotels prior to the acquisition by the Company.
F-45
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)
<TABLE>
<CAPTION>
EXCESS OF
PARTICIPATING TOTAL
RENT OVER BASE PARTICIPATING
BASE RENT RENT RENT
----------- -------------- -------------
<S> <C> <C> <C>
December 31 Hotels.................... $46,110,810 $28,081,645 $ 74,192,455
Base and Participating Lease payments
for the Acquired Hotels
Potomac Portfolio Acquisition Hotels
and the Holiday Inn O'Hare
International Airport Hotel......... 9,737,500 4,984,550 14,722,050
FSA Portfolio Acquisition Hotels 9
hotels owned by the Company......... 17,752,496 7,637,735 25,390,231
FSA Portfolio Acquisition Hotels 4
hotels owned by PSS I, Inc.......... 3,924,955 1,261,301 5,186,266
----------- ----------- ------------
Total Base and Participating Lease
payments for the Acquired Hotels.... 31,414,951 13,883,586 45,298,537
----------- ----------- ------------
Base and Participating Lease payments
for the Proposed Acquisition Hotel
Madison Hotel........................ 637,336 0 637,336
----------- ----------- ------------
Total Base and Participating Lease
payments for the Proposed
Acquisition Hotel................... $78,163,097 $41,965,231 $120,128,328
=========== =========== ============
</TABLE>
F-46
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the 45 hotels which the Company and its affiliates lease to
AGH Leasing (the "AGH Leasing March 31 Hotels") and one of the additional
hotels to be acquired by the Company and leased to AGH Leasing (the "Proposed
Acquisition Hotel", together with AGH Leasing March 31 Hotels, the "AGH
Leasing Hotels") were leased pursuant to Participating Leases as of January 1,
1997. The Proposed Acquisition Hotel is the Madison Hotel Acquisition. The Pro
Forma Consolidated Statement of Operations does not include the effects of the
Proposed Merger with CapStar.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statement of Operation are
derived from AGH Leasing's Consolidated Statements of Operations as of March
31, 1998 and should be read in conjunction with the financial statements filed
with American General Hospitality Corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
The following Pro Forma Consolidated Statement of Operations are not
necessarily indicative of what the actual results of operations would have
been assuming such transactions had been completed as of January 1, 1997.
F-47
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AGH LEASING
HISTORICAL MARCH 31 HOTELS PROPOSED
THREE MONTHS ENDED PRO FORMA ACQUISITION
MARCH 31, 1998 ADJUSTMENTS HOTEL COMBINED
(A) (B) (C) PRO FORMA
------------------ --------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Room revenue (D)...... $58,224,156 $10,591,753 $ -- $68,815,909
Food and beverage rev-
enue (D)............. 17,367,968 3,125,341 -- 20,493,309
Other revenue (D)..... 3,449,076 839,369 3,373 4,291,818
----------- ----------- --------- -----------
Total revenue..... 79,041,200 14,556,463 3,373 93,601,036
----------- ----------- --------- -----------
Expenses
Property operating
cost and expenses
(E).................. 13,956,762 3,068,333 7,492 17,032,587
Food and beverage
costs and expenses
(E).................. 12,238,150 2,693,625 (411) 14,931,364
General and adminis-
trative (E).......... 6,315,376 1,486,918 46,447 7,848,741
Advertising and promo-
tion (E)............. 5,316,895 1,030,001 7,289 6,354,185
Repairs and mainte-
nance (E)............ 2,906,546 735,838 1,135 3,643,519
Utilities (E)......... 2,872,937 694,370 9,151 3,576,458
Management fees (F)... 1,759,353 311,020 -- 2,070,373
Franchise costs (G)... 2,300,237 409,716 -- 2,709,953
Depreciation.......... 15,750 -- -- 15,750
Amortization (H)...... 10,348 -- -- 10,348
Interest expense...... 5,858 -- -- 5,858
Other expense......... 91,628 19,500 -- 111,128
Participating Lease
expense (I).......... 28,165,224 5,358,517 238,997 33,762,738
----------- ----------- --------- -----------
Total expenses.... 75,955,064 15,807,838 310,100 92,073,002
----------- ----------- --------- -----------
Net income (loss). $ 3,086,136 $(1,251,375) $(306,727) $ 1,528,034
=========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-48
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The Pro Forma Consolidated Statement of Operations of AGH Leasing, L.P.
("AGH Leasing") include the results of operations of the 45 hotels leased from
the American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") due to AGH Leasing's control over the operations of the hotels
during the twelve-year term of the Participating Leases. AGH Leasing has
complete discretion in establishing room rates and all rates for hotel goods
and services. Likewise, all operating expenses of the hotels are under the
control of AGH Leasing. AGH Leasing has the right to manage or to enter into
management contracts with other parties to manage the hotels. If AGH Leasing
elects to enter into management contracts with parties other than American
General Hospitality, Inc. ("AGHI"), AGH Leasing must obtain the prior written
consent of the Company, which consent may not be unreasonably withheld.
AGH Leasing's results of operations are seasonal. Generally, hotel revenue
is greater in the second and third quarters of a calendar year, although this
may not be true for hotels in major tourist destinations. With the Company's
acquisition and subsequent leasing of the FSA Portfolio Acquisition Hotels,
which include several hotels in tourist destinations, the AGH Hotels may now
produce greater revenues in the first and second quarters.
(A) Represents the Company's historical statement of operations for the year
ended March 31, 1998.
(B) Represents the adjustments to present a statement of operations for the 18
hotels acquired by the Company and leased to AGH Leasing during the first
quarter of 1998 prior to their acquisition by the Company based on
historical balances of the previous owners. The combination of the
historical statement of operations presented in column (A) and the pro
forma statement of operation presented in column (B) represent the results
of operations of the 45 AGH Leasing March 31 Hotels as if all of the AGH
Hotels were acquired on January 1, 1997 and leased to AGH Leasing pursuant
to a Participating Lease since that date.
(C) Proposed Acquisition Hotel represents the acquisition of one hotel, the
Madison Hotel, to be acquired by the Company and leased to AGH Leasing
pursuant to a Participating Lease. The Madison Hotel was closed for a
complete renovation in September 1997 and is expected to reopen in July
1998.
(D) Represents historical room, food and beverage and other revenues of AGH
Hotels.
(E) Represents the historical expenses of the AGH Hotels.
(F) Represents management fees to be incurred under the Management Agreements.
The management fees payable to AGHI consist of a base fee of 1.5% of total
revenue and an incentive fee of up to 2.0% of total revenue. The incentive
fee, if applicable, is equal to 0.025% of annual total revenue for each
0.01% increase in annual total revenues over the total revenues for the
preceding twelve month period up to the maximum incentive fee. The payment
of the management fees to AGHI by AGH Leasing is subordinate to AGH
Leasing's obligations to the Company under the Participating Leases.
<TABLE>
<CAPTION>
BASE INCENTIVE TOTAL
MANAGEMENT FEE MANAGEMENT FEE MANAGEMENT FEE
-------------- -------------- --------------
<S> <C> <C> <C>
AGH Leasing March 31 Hotels....... $1,403,965 $666,408 $2,070,373
Proposed Acquisition Hotel Madison
Hotel............................ 0 0 0
---------- -------- ----------
Total management fees............. $1,403,965 $666,408 $2,070,373
========== ======== ==========
</TABLE>
(G) Represents the historical franchise fees of the AGH Hotels. Franchise fees
associated with the hotel conversions are not included in the pro forma
statements of operations since other impacts including possible revenue
enhancements and operating expense reductions are also not included.
(H) Historical deferred loan costs and the related amortization has been
eliminated since AGH Leasing is not expected to incur similar costs.
Amortization expense relates to the amortization of organization costs
which are being amortized over a 60 month period.
F-49
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(CONTINUED)
(I) Represents lease payments to the Operating Partnership from AGH Leasing
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the revenues
of the AGH Hotels. The departmental thresholds in the Participating Leases
are seasonally adjusted for interim periods. The Participating Lease
payments for the Acquired Hotels and the Proposed Acquisition Hotel are
calculated by applying the rent provisions applicable in the first year of
the respective leases to the historical operating revenues of the hotels
prior to the acquisition by the Company.
<TABLE>
<CAPTION>
EXCESS OF
PARTICIPATING
RENT OVER BASE TOTAL PARTICIPATING
BASE RENT RENT RENT
----------- -------------- -------------------
<S> <C> <C> <C>
AGH Leasing March 31 Hotels...... $20,195,193 $13,328,548 $33,523,741
Base and Participating Lease
payments for the Proposed
Acquisition Hotel Madison Hotel. 238,997 0 238,997
----------- ----------- -----------
Total........................... $20,434,190 $13,328,548 $33,762,738
=========== =========== ===========
</TABLE>
F-50
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK DISTRIBUTED PURSUANT HERETO,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 12
Selected Historical and Pro Forma Financial Information................... 20
Unaudited Pro Forma Financial Statements.................................. 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
The Company............................................................... 33
Use of Proceeds........................................................... 35
Capitalization............................................................ 36
Dividend Policy........................................................... 36
The Merger and the Spin-Off............................................... 37
Business.................................................................. 41
The Rights Offering....................................................... 50
Management................................................................ 58
Security Ownership of Certain Beneficial Owners and Management............ 68
Description of Capital Stock.............................................. 69
Certain Antitakeover Provisions........................................... 70
Experts................................................................... 71
Legal Matters............................................................. 71
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MERISTAR HOTELS & RESORTS, INC.
SHARES OF COMMON STOCK AND RIGHTS TO ACQUIRE UP TO OF SUCH SHARES
The date of this Prospectus is , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses payable in connection
with the Rights Offering. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee. All of such expenses are
being borne by the Company.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 6,394
NYSE Listing Fee................................................. 10,000
Accounting Fees and Expenses..................................... 70,000
Legal Fees and Expenses.......................................... 100,000
Printing and Engraving Expenses.................................. 50,000
Registrar and Transfer Agent's Fees.............................. 5,000
Subscription Agent's Fees........................................ 5,000
Miscellaneous Fees and Expenses.................................. 3,606
Total........................................................ $250,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware Law permits a provision in the certificate
of incorporation of each corporation organized thereunder, eliminating or
limiting, with certain exceptions, the personal liability of a director to the
corporation or its stockholders for monetary damages for certain breaches of
fiduciary duty as a director. The Charter eliminates the personal liability of
directors to the fullest extent permitted by the Delaware Law.
Section 145 of the Delaware Law ("Section 145"), in summary, empowers a
Delaware corporation, within certain limitations, to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court
of Chancery or the court in which such action or suit was brought approves
such indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.
Article Eight of the Charter provides for the indemnification of officers
and directors and certain other parties (the "Indemnitees") of the Company to
the fullest extent permitted under the Delaware Law; provided, that except in
the case of proceedings to enforce rights to indemnification, the Company
shall indemnify such Indemnitee in connection with a proceeding initiated by
such Indemnitee only if such proceeding was authorized by the Board of
Directors. The Charter also provides that the Company may reimburse or advance
an Indemnitee funds necessary for payment of expenses, including reasonable
attorneys' fees and disbursements incurred in connection with any proceeding,
in advance of the final disposition of such proceeding.
Each of the employment agreements described in "Management--Employment
Agreements" contains provisions entitling the executive to indemnification for
losses incurred in the course of service to the Company or its subsidiaries,
under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the formation of the Company on March 13, 1998, CapStar
became the Company's sole stockholder, acquiring 100 shares of Common Stock
for nominal consideration. In addition, CapStar expects initially to
capitalize the Company with approximately $48 million of cash, including
approximately $18 million of forgiveness of indebtedness and a $30 million
draw on the Company's two $50 million revolving credit facilities.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <C> <S>
2.1* -- Acquisition Agreement, dated as of March 15, 1998, among
MeriStar H&R Operating Company, L.P., American General
Hospitality Corporation, American General Hospitality, Inc.,
AGHL GP, Inc., the general partner of AGH Leasing, L.P., and
the limited partners of AGH Leasing, Inc.
2.2 -- Form of Contribution, Assumption and Indemnity Agreement
between CapStar Hotel Company and MeriStar H&R Operating
Company, L.P. (Incorporated by reference to Exhibit 99.4 to
CapStar Hotel Company's Report on Form 8-K dated March 17,
1998, No. 1-11903)
2.3 -- Agreement and Plan of Merger dated as of March 15, 1998, among
American General Hospitality Corporation, American General
Hospitality Operating Partnership, L.P., CapStar Hotel
Company, CapStar Management Company, L.P. and CapStar
Management Company II, L.P. (Incorporated by reference to
Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K
dated March 17, 1998, No. 1-11903)
Amended and Restated Certificate of Incorporation of the
3.1** -- Company
3.2** -- By-laws of the Company
4.1** -- Specimen Common Stock certificate
4.2** -- Specimen Subscription Certificate
5.1* -- Opinion as to Validity of Common Stock and Rights
8.1* -- Opinion as to Certain Tax Matters
Form of Employment Agreement between the Company and Paul W.
10.1**+ -- Whetsell
Form of Employment Agreement between the Company and Steven D.
10.2**+ -- Jorns
Form of Employment Agreement between the Company and David E.
10.3**+ -- McCaslin
Form of Employment Agreement between the Company and James A.
10.4**+ -- Calder
Form of Employment Agreement between the Company and John E.
10.5**+ -- Plunket
10.6**+ -- Form of Equity Incentive Plan of the Company
10.7**+ -- Form of Employee Stock Purchase Plan of the Company
10.8**+ -- Form of Management Bonus Plan of the Company
10.9 -- Form of Intercompany Agreement among MeriStar Hotels &
Resorts, Inc., MeriStar H&R Operating Company, L.P., MeriStar
Hospitality Corporation and MeriStar Hospitality Operating
Partnership, L.P. (Incorporated by reference to Exhibit 99.4
to CapStar Hotel Company's Report on Form 8-K dated March 17,
1998, No. 1-11903)
23.1* -- Consent of KPMG Peat Marwick LLP
23.2.1* -- Consent of Coopers & Lybrand L.L.P. (Dallas Office)
23.2.2* -- Consent of Coopers & Lybrand L.L.P. (Raleigh Office)
23.3*** -- Consent of Daniel L. Doctoroff
23.4*** -- Consent of Kent Hance
23.5*** -- Consent of Steven D. Jorns
23.6*** -- Consent of Joseph McCarthy
23.7*** -- Consent of James McCurry
23.8*** -- Consent of James Worms
Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included
23.11* -- in Exhibit 5)
27* -- Financial Data Schedule
99.1* -- Form of Subscription Agency Agreement
Instructions as to use of Subscription Certificates and
99.2* -- International Holder Subscription Form
99.3* -- International Holder Subscription Form
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
+ Management contract or compensatory plan or arrangement.
(B) FINANCIAL STATEMENT SCHEDULES
Not applicable.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-laws, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be a part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) of this section
do not apply if the registration statement is on Form S-3, Form S-8 or
Form F-3, and the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
WASHINGTON, DISTRICT OF COLUMBIA, ON THE 5TH DAY OF JUNE, 1998.
MeriStar Hotels & Resorts, Inc.
/s/ Paul W. Whetsell
By:__________________________________
NAME: PAUL W. WHETSELL
TITLE: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE
--------- -----
/s/ Paul W. Whetsell Chief Executive Officer and Chairman
- ------------------------------------- of the Board (Principal Executive
PAUL W. WHETSELL Officer)
/s/ James A. Calder Chief Financial Officer (Principal
- ------------------------------------- Financial and Accounting Officer)
JAMES A. CALDER
President and Director
/s/ David E. McCaslin
- -------------------------------------
DAVID E. MCCASLIN
DATED: JUNE 5, 1998
II-4
<PAGE>
EXHIBIT 2.1
AGREEMENT, dated as of the 15/th/ day of March, 1998, by and among CMC
OPERATING PARTNERSHIP, L.P., a Delaware limited partnership ("Purchaser") and
AMERICAN GENERAL HOSPITALITY, INC., a Texas corporation ("Star Management"),
AGHL GP, INC., a Delaware corporation ("Corporate G.P.") and each of the
persons listed on Schedule A hereto (the "Shareholders"); (Star Management,
Corporate G.P. and the Shareholders are sometimes hereinafter referred to
collectively, as the "Sellers" or, individually, as a "Seller").
RECITALS
WHEREAS:
A. Star Management along with AGH Leasing, L.P., a Delaware limited
partnership ("Star Leasing") and Twin Towers Leasing, L.P., a Delaware limited
partnership and a subsidiary partnership of Star Leasing ("Star Sub L.P."), are
jointly engaged in the business (the "Business") of managing and operating
hotels, principally those leased from American General Hospitality Operating
Partnership, L.P., a Delaware limited partnership (the "REIT Partnership");
(Star Management, Star Leasing and Star Sub L.P. are hereinafter sometimes
referred to collectively as the "Star Companies" or, individually, as a "Star
Company");
B. Corporate G.P. owns all of the general partnership interest in Star
Leasing and the Shareholders own all of the limited partnership interests in
Star Leasing; and
C. The Purchaser desires to acquire the Business by acquisition of
substantially all of the assets, business and properties of Star Management and
all of the partnership interests in Star Leasing; and the Sellers desire to
contribute and sell such assets and partnership interests to the Purchaser, all
on the terms and subject to the conditions of this Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
SECTION 1.01. CERTAIN DEFINITIONS. For purposes of this Agreement, the
-------------------
following terms shall have the meanings indicated:
"Affiliate" of any Person shall mean any Person controlling, controlled by
---------
or under common control with such Person.
"Annual Budgets" shall mean the operating and capital budgets for each
--------------
Hotel for 1998 as prepared by a Star Company pursuant to the applicable Hotel
Lease and approved by the Lessor under such Hotel Lease as amended or revised to
the date of this Agreement.
"Assignment of Leases" shall mean an Assignment of Leases in form and
--------------------
substance reasonably
<PAGE>
satisfactory to the Purchaser and the Sellers.
"Assumed Contract" shall mean (a) those Management Contracts listed on
----------------
Schedule 3.07(a) to this Agreement (other than those indicated on Schedule
-------
3.07(a)(viii) as not being assumed) and those excluded from such Schedule
3.07(a) but deemed to be an Assumed Contract pursuant to Section 3.07(c), (b)
- -------
any additional Management Contracts entered into by Star Management after the
date of this Agreement not in violation of the provisions of Section 5.02 and
(c) the Included Contracts.
"Assumed Liabilities" shall mean the following:
-------------------
(a) all of the monetary debts, obligations and liabilities of Star
Management accruing subsequent to the Closing and all of the non-monetary
duties and obligations of the Star Management arising subsequent to the
Closing, in each case under the Assumed Contracts; and
(b) the other liabilities and obligations of or relating to Star
Management specifically set forth on Schedule 1.01(a).
"Assumption Agreement" shall mean an Assumption Agreement in form and
--------------------
substance reasonably satisfactory to the Purchaser and the Sellers.
"Bookings" shall mean contracts or reservations for the use or occupancy of
--------
guest rooms, meeting rooms, banquet rooms or other facilities of a Hotel.
"Business" shall have the meaning ascribed to such term in the Recitals to
--------
this Agreement.
"Capital" shall mean CapStar Hotel Company, a Delaware corporation.
-------
"Cash Consideration" shall have the meaning ascribed to such term in
------------------
Section 2.03(a)(iii).
"Closing" and "Closing Date" shall have the meanings ascribed to such terms
------- ------------
in Section 2.01.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Common Stock" shall mean the common stock of Parent Corp.
------------
"Consents" shall have the meaning ascribed to such term in Section 3.02(d).
--------
"Contracts" shall mean the Management Contracts and the Leasing Contracts.
---------
"Corporate G.P." shall have the meaning ascribed to such term in the
--------------
preamble to this Agreement.
"Escrow Agreement" shall mean that certain Escrow Agreement substantially
----------------
in the form of Exhibit A annexed to this Agreement.
"Escrow Agent" shall mean (i) a bank or financial institution selected by
------------
the Shareholders subject to the consent of the Purchaser or (ii) such other
Person as the Shareholders and the Purchaser shall mutually select.
2
<PAGE>
"Excluded Assets" shall mean (a) all cash, cash equivalents and accounts
---------------
receivable of Star Management (including intercompany receivables), (b)
Management Contracts, other than Assumed Contracts, (c) those assets and rights
of Star Management described in Schedule 1.01(b) to this Agreement, (d) security
deposits (and other similar amounts paid to the lessors) under the Office
Leases, (e) all rights of Star Management under this Agreement and the other
Seller Documents, (f) all corporate minute books, stock ledgers and stock
certificate books, and corporate (but not operational) accounting and tax
records of Star Management, as a corporate entity, (g) all policies of fire,
liability and other forms of insurance held by a Star Company or with respect to
which a Star Company is an insured or loss payee, (h) all claims and causes of
action against others and proceeds and refunds under insurance policies to the
extent related to an event occurring prior to the Closing and (i) the trade name
and/or service mark of American General Hospitality and American General
Hospitality, Inc.
"Excluded Liabilities" shall mean all liabilities and obligations of all
--------------------
types whatsoever (direct or indirect, known or unknown, absolute, accrued,
contingent or otherwise) of Star Management other than those specifically
included in clauses (a) and (b) of the definition of Assumed Liabilities.
"Franchise Agreements" shall mean all franchise or license agreements
--------------------
pursuant to which the Hotels are operated under their respective brand names as
part of a common franchise or licensing system together with (a) all
reservations, marketing, software licensing and similar agreements entered into
between the franchisor or licensor and the franchisee or licensee thereunder and
(b) all current property improvement plans in effect with such franchisors or
licensors.
"GAAP" shall mean generally accepted U.S. accounting principles.
----
"General Partner Interest" shall mean all rights and interests as the
------------------------
general partner under the partnership agreement of Star Leasing.
"Hotel" shall mean any of the hotels listed in Schedule 1.01(c) to this
-----
Agreement (as well as any other hotels leased and/or managed by a Star Company
pursuant to agreements entered into after the date hereof and prior to the
Closing not in violation of this Agreement) together with all related real
property included within the definition of "Leased Property" as such term is
used in the applicable Hotel Leases.
"Hotel Contracts" shall mean all service and maintenance contracts,
---------------
employment agreements, union contracts, purchase orders, equipment leases, and
other contracts or agreements (written or oral) relating to the maintenance,
operation, provisioning or equipping of any Hotel, together with all related
warranties and guaranties.
"Hotel Leases" shall mean all agreements pursuant to which a Star Company
------------
leases Hotels.
"Hotel Management Agreements" shall mean all agreements pursuant to which
---------------------------
Hotels are managed by a Star Company.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended, and the rules and regulations promulgated thereunder.
"Included Contracts" shall have the meaning ascribed to such term in
------------------
Section 5.10.
3
<PAGE>
"Intellectual Properties" shall have the meaning ascribed to such term in
-----------------------
Section 3.12.
"Knowledge" or "knowledge" of a fact or matter shall mean, as to any
--------- ---------
individual, that such individual has actual knowledge (rather than constructive
knowledge) of such fact or other matter without due inquiry . A Star Company
will be deemed to have knowledge of a fact or matter if any of Steven D. Jorns,
Bruce G. Wiles or Kenneth E. Barr have actual knowledge (rather than
constructive knowledge) of such fact or matter without due inquiry.
"Latest Balance Sheet" with respect to Star Leasing and Star Management,
--------------------
shall have the meaning ascribed to such term in Section 3.03(a), and with
respect to Star Sub L.P. shall mean the Latest Balance Sheet of Star Leasing.
"Lease Master Agreement" shall mean that certain Lease Master Agreement,
----------------------
dated as of July 31, 1996, by and between the REIT Partnership and Star Leasing,
as amended.
"Leasing Contract" all leases, agreements, contracts and other legally
----------------
binding commitments, whether written or oral, to which Star Leasing or Star Sub
L.P. is a party or by which either of them or any of their respective assets are
bound.
"Lessee Property" shall mean all "Inventory" and "Lessee Personal Property"
---------------
(as such terms are defined in the Hotel Leases) owned by the Star Companies and
used in the Hotels.
"Lessors" shall mean the lessors under the Hotel Leases.
-------
"Liens" shall mean any and all mortgages, pledges, liens, security
-----
interests, purchase options, claims, encumbrances and restrictions of every kind
and nature.
"Limited Partner Interest" shall mean all rights and interests as a limited
------------------------
partners under the partnership agreement of Star Leasing.
"Losses" shall mean loss, damage, liability, claim, cost and expense,
------
including reasonable attorneys' and accountants' fees.
"Management Contracts" shall mean all leases, agreements, contracts and
--------------------
other legally binding commitments, whether written or oral, to which Star
Management is a party or by which Star Management or any of its assets or
properties are bound.
"Management Sub" shall mean a corporation which may be formed as an
--------------
Affiliate of the Purchaser to operate the hotel management business of Star
Management acquired hereunder.
"Merger Agreement" shall mean that certain Agreement and Plan of Merger,
----------------
dated as of the date hereof, by and among the REIT, REIT Partnership, CapStar
Hotel Company, CapStar Management Company L.P. and CapStar Management Company II
L.P.
"Merger Transaction" shall mean the Merger and OP Reorganization as such
------------------
terms are defined in the Merger Agreement.
4
<PAGE>
"Monthly Statements" shall mean the monthly financial statements for the
------------------
Hotels prepared and delivered by a Star Company pursuant to the Hotel Leases.
"Net Working Capital" shall mean the net working capital of Star Leasing
-------------------
determined in accordance with GAAP, applied on a consistent basis with the
latest audited balance sheet of Star Leasing delivered to the Purchaser pursuant
to Section 3.03(a), such principles to be modified as described on Schedule
1.01(d).
"Office Leases" shall mean those leases described on Schedule 1.01(e).
------------
"Parent Corp." shall mean CMC Operating Company, a Delaware corporation.
------------
"Partnership Agreement" shall mean the Agreement of Limited Partnership of
---------------------
the Purchaser, dated as of March 13, 1998.
"Partnership Amendment" shall mean the First Amendment to Agreement of
---------------------
Limited Partnership which will amend the Partnership Agreement so as to be
substantially in the form of the partnership agreement of CapStar Management
Company L.P.
"Partnership Interests" shall mean the Limited Partner Interests and the
---------------------
General Partner Interest.
"Partnership Unit" shall mean a Partnership Unit as defined in the
----------------
Partnership Amendment.
"Permits" shall mean all licenses, franchises, permits, certificates of
-------
occupancy, authorizations and approvals used in or required in connection with
the Business or the ownership, occupancy or operation of any part of any Hotel,
including, without limitation, those necessary for the on-premises sale and
consumption of liquor and other alcoholic beverages.
"Person" shall mean any individual, corporation (including any non-profit
------
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or governmental body.
"Pro Forma Budgets" shall mean the pro form annual budget of the operations
-----------------
of the Business for the 1998 calendar year provided to the Purchaser by the
Sellers.
"Purchaser Consents" shall have the meaning ascribed to such term in
------------------
Section 4.03.
"Purchaser Documents" shall have the meaning ascribed to such term in
--------------------
Section 4.02(a).
"Purchaser Representatives" shall have the meaning ascribed to such term in
-------------------------
Section 5.03.
"REIT" shall mean American General Hospitality Corporation, a Maryland
----
corporation, operating as a real estate investment trust.
"REIT Partnership" shall have the meaning ascribed to such term in the
----------------
Recitals to this Agreement.
"Retained Employees" shall have the meaning ascribed to such term in
------------------
Section 10.02(a).
5
<PAGE>
"Seller Documents" shall have the meaning ascribed to such term in Section
----------------
3.02(b).
"Shareholder" shall have the meaning ascribed to such term in the preamble
-----------
to this Agreement.
"Shareholder's Percentage" for any Shareholder shall mean the percentage
------------------------
set forth next to such Shareholder's name on Schedule 1.01(f).
"Space Leases" shall mean all leases and agreements (written or oral) for
------------
the occupancy of office, retail or restaurant space at any Hotel.
"Spin-Off Transaction" shall have the meaning ascribed to such term in the
--------------------
Merger Agreement.
"Star Sub L.P." shall have the meaning ascribed to such term in the
-------------
Recitals to this Agreement.
"Stipulation Date" shall mean the earlier of (a) the date Parent Corp.
----------------
publicly releases its earnings report for the calendar year ended December 31,
1998 and (b) February 28, 1999.
"Tax" or "Taxes" shall mean all taxes, charges, fees, levies, interest,
--- -----
penalties, additions to tax or other assessments, including, but not limited to,
income, gross receipts, excise, property, transfer, gains, sales, use, value
added, franchise, employment, payroll, withholding and other taxes, and custom
duties, imposed by any domestic or foreign national, state or municipal or other
local government, any subdivision, agency, commission or authority thereof, or
any quasi-governmental or private body exercising any regulatory or taxing
authority.
"Tax Returns" shall mean any return, report, information return or other
-----------
document (including any related or supporting information) filed or required to
be filed in connection with the determination, assessment or collection of any
Taxes or the administration of any laws, regulations or administrative
requirements relating to Taxes.
"Termination Date" shall have the meaning ascribed to such term in Section
----------------
11.01(b).
"Third Party Hotel Management Agreements" shall mean all agreements
---------------------------------------
pursuant to which Hotels leased by the Star Companies are managed by Persons
other than Star Management.
"Transferred Assets" shall mean all of the assets and properties used,
------------------
owned or held by Star Management, tangible and intangible, wheresoever situated
and whether or not specifically referred to herein other than Excluded Assets,
including, without limitation, all Hotel Leases, Lessee Property, Permits (but
only if held by a Star Company and to the extent assignable), Franchise
Agreements, Hotel Contracts (to the extent they are Assumed Contracts), all
other Assumed Contracts, claims and causes of action against others, proceeds
under insurance policies to the extent related to another Transferred Asset or
to an Assumed Liability relating to an event occurring after the Closing,
customer lists, all good will, if any, as a going concern, all of the rights of
Star Management with respect to Intellectual Properties and all of the books and
records of Star Management.
"Uniform System" shall mean the Uniform System of Accounts for Hotels (9th
--------------
Revised Edition, 1997) as published by the American Hotel and Motel Association
of the United States.
6
<PAGE>
"WARN Act" shall mean the Worker Adjustment and Retraining Notification
--------
Act, 29 U.S.C. Section 2101 et seq.
-- ---
ARTICLE II
CONTRIBUTION AND SALE
SECTION 2.01. CLOSING. The closing (the "Closing") of the transactions
-------
set forth in Sections 2.02 and 2.03 hereof shall take place simultaneously with
and at the location of the consummation of the Merger Transaction. The date on
which the Closing shall take place is hereinafter referred to as the "Closing
Date."
SECTION 2.02. CONTRIBUTION AND SALE. On the Closing Date:
---------------------
(a) each Shareholder will convey, transfer, assign and deliver to the
Purchaser all of its right, title and interest in and to the Limited Partner
Interest of such Shareholder as set forth on Schedule A, free and clear of all
Liens, as follows: each Shareholder will (i) contribute such Limited Partner
Interest to the Purchaser pursuant to Section 721(a) of the Code to the extent
of the Partnership Units received by such Shareholder pursuant to Section
2.03(a) and (ii) sell such Limited Partner Interest to the Purchaser for the
portion of the Cash Consideration payable to such Shareholder pursuant to
Section 2.03(a);
(b) Corporate G.P. will convey, transfer, assign and deliver to a corporate
Affiliate of the Purchaser (the "Corporate Purchaser") all of its right, title
and interest in and to the General Partner Interest, free and clear of all
Liens; and
(c) Star Management will convey, transfer, assign and deliver to the
Purchaser all of its right, title and interest in and to the Transferred Assets,
free and clear of all Liens, other than as set forth on Schedule 2.02(c);
-------
and the Purchaser shall accept such contributions and sales of the Partnership
Interests and the Transferred Assets from the applicable Sellers on the terms
and subject to the conditions set forth in this Agreement. Such contribution
and sale shall be effected by the execution and delivery to the Purchaser by the
Sellers of such assignments, deeds, bills of sale and other instruments as shall
be reasonably requested by counsel for the Purchaser.
SECTION 2.03. CONSIDERATION. (a) In consideration for the Partnership
-------------
Interests and the Transferred Assets acquired from the Sellers, the Purchaser
agrees:
(i) to pay to Corporate G.P. on the Closing Date, on behalf of the
Corporate Purchaser, by wire transfer in immediately available funds the
amount of $850,000;
(ii) to pay to the Shareholders, in accordance with the Shareholders'
Percentages, by delivery to the Escrow Agent under the Escrow Agreement on
the Closing Date by wire transfer in immediately available funds the amount
of $3,000,000;
(iii) to pay to each Shareholder on the Closing Date an amount equal
to such Shareholder's portion of $69,949,221 (the "Cash Consideration")
set forth on Schedule 2.03(a)(iii)
------------
7
<PAGE>
by wire transfer in immediately available funds to an account designated by
such Shareholder;
(iv) to issue to each Shareholder on the Closing Date such
Shareholder's portion of Partnership Units having an aggregate value of
$11,200,779 set forth on Schedule 2.03(a)(iv) , the aggregate number of
------------
such Partnership Units to be determined by dividing such aggregate dollar
value by the value per share of Common Stock determined by the Board of
Directors of Capital in connection with the Spin-Off Transaction;
(v) to pay to Star Management on the Closing Date by wire transfer
in immediately available funds the amount of $10,000,000;
(vi) to assume, on the Closing Date, the Assumed Liabilities by the
execution and delivery to the Sellers by the Purchaser of the Assumption
Agreement.
(b) The consideration paid by the Purchaser to Star Management (including
the Assumed Liabilities) shall be allocated to the Transferred Assets in
accordance with a Schedule to be determined in good faith by the Sellers and the
Purchaser before Closing and the Purchaser and the Sellers agree that such
allocation shall be used by them for all purposes, including but not limited to,
federal, state and local tax and financial reporting purposes including, but not
limited to, the preparation and filing of Internal Revenue Service Form 8594 and
any related exhibits thereto (or other forms required pursuant to Section 1060
of the Code, or other applicable laws).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller, jointly and severally, represents and warrants to the
Purchaser that:
SECTION 3.01. ORGANIZATION AND GOOD STANDING. (a) Each of Star Management
------------------------------
and Corporate G.P. is a corporation duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of incorporation and is duly
licensed or qualified to do business and in good standing as a foreign
corporation under the laws of each jurisdiction in which the nature of the
activities conducted by it and/or the character of the assets owned or leased by
it requires such qualification or license, except where the failure to be so
qualified or licensed or in good standing, individually or in the aggregate,
would not have a material and adverse effect on the Business.
(b) Each of Star Leasing and Star Sub L.P. is a limited partnership duly
formed, validly existing and in good standing under the laws of Delaware and is
duly licensed or qualified to do business and in good standing as a foreign
limited partnership under the laws of each jurisdiction in which the nature of
the activi ties conducted by it and/or the character of the assets owned or
leased by it requires such qualification or li cense, except where the failure
to be so qualified or licensed or in good standing, individually or in the
aggregate, would not have a material and adverse effect on the Business.
SECTION 3.02. AUTHORITY; NO-CONFLICT. (a) Star Management has taken all
----------------------
corporate action (including any required shareholder approval) required to be
taken to authorize the execution and delivery of this Agreement and the other
agreements to be executed and delivered by Star Management under this
8
<PAGE>
Agreement (the "Management Documents") and the transactions contemplated by this
Agreement and the Management Documents.
(b) Corporate G.P. has taken all corporate action (including any required
shareholder approval) required to be taken to authorize the execution and
delivery of this Agreement and the other agreements to be executed and delivered
by Corporate G.P. under this Agreement (collectively, the "Corporate G.P.
Documents") and the transactions contemplated by this Agreement and the
Corporate G.P. Documents; (this Agreement, the Management Documents, the
Corporate G.P. Documents and the other agreements to be executed and delivered
by the Shareholders under this Agreement are hereinafter sometimes referred to
collectively as the "Seller Documents").
(c) Each of Star Management and Corporate G.P. has the corporate power and
authority to exe cute and deliver this Agreement and the other Seller Documents
to be executed by it and to consummate the transactions contemplated hereby and
thereby. This Agreement is, and the other Seller Documents when executed and
delivered will be, valid and binding upon, and enforceable against, the Sellers
party thereto in accordance with their respective terms except to the extent
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws relating to or affecting creditor's rights generally. Assuming, in
the cases of clause(i)(C), (ii) and (iii) below that the Consents (as
hereinafter defined) are obtained, neither the execution and delivery of the
Seller Documents by the Sellers nor the consummation of the transactions thereby
contemplated (i) will constitute any violation or breach of (A) the Articles of
Incorporation or By-Laws of Star Management or Corporate G.P., (B) the
partnership agreements of Star Leasing or Star Sub L.P. or (C) any order, writ,
injunction, decree, statute, rule or regulation applicable to or binding upon
any Seller, Star Leasing or Star Sub L.P. or their respective assets; (ii) will
result in a breach of, or constitute a default under (or with notice or lapse of
time, or both, result in a breach of or constitute a default under) or otherwise
give any Person the right to terminate or accelerate any payment under, any
Contract; or (iii) will result in the creation of any Lien on any Partnership
Interest, any of the assets or properties of any Star Leasing or Star Sub L.P.
or any of the Transferred Assets, except in the case of (i)(C) or (ii) to the
extent that the same would not be reasonably likely to have a material adverse
effect on the Business.
(d) Except for those items described on Schedule 3.02(d) (the "Consents"),
-------
neither any Seller nor any Star Company is required to give prior notice to,
make any filing or registration with, or obtain any consent, approval or
authorization of any Person or any governmental authority in connection with the
execution and delivery of this Agreement or the other Seller Documents or the
consummation of the transactions contemplated hereby or thereby except to the
extent that the failure to give such notices, make such filings or obtain such
consents, approvals or authorizations would not be reasonably likely to have a
material adverse effect on the Business.
SECTION 3.03. FINANCIAL STATEMENTS. (a) The Sellers have delivered to the
--------------------
Purchaser the audited and unaudited financial statements of the Star Companies
described in Schedule 3.03(a) hereto (the latest balance sheet included in such
-------
financial statements for each Star Company is hereinafter referred to as the
"Latest Balance Sheet" of such Star Company). All such statements were prepared
in conformity with GAAP applied on a consistent basis during the applicable
periods and fairly present, in all material respects, the financial position of
the applicable Star Company and the results of such Star Company's operations as
of the dates and for the periods indicated subject, in the case of such
unaudited financial statements, to normal year end adjustments and the lack of
footnotes and other presentation items required by GAAP.
(b) Other than as set forth in its Latest Balance Sheet or as described on
Schedule 3.03(b), no Star
-------
9
<PAGE>
Company has any liabilities or obligations of any nature (known or unknown,
absolute, accrued, con tingent or otherwise) other than those arising after the
date of such Latest Balance Sheet in the ordinary and regular course of such
Star Company's business.
(c) The Sellers have delivered to the Purchaser the financial statements of
each Hotel for the years ended December 31, 1996 and 1997 (to the extent a Star
Company leased or managed such Hotel during such years). Such statements for
each Hotel were prepared in conformity with GAAP applied on a consistent basis
during the applicable periods and fairly present in all material respects the
financial position of such Hotel and the results of its operations as of the
dates and for the periods indicated.
(d) The Sellers have made available to the Purchaser the Monthly Statements
for each Hotel for 1997. All such statements were prepared in substantial
compliance with the Hotel Leases and the Uniform System and fairly present in
all material respects the financial position of the Hotels and the results of
their operations as of the dates and for the periods indicated.
(e) The Sellers have delivered to the Purchaser the Annual Budgets for each
Hotel for 1998. Each Annual Budget has been approved in writing by the
applicable Lessor.
(f) The Sellers have delivered or made available to the Purchaser true and
complete copies of all "Officer's Certificates" (as such term is defined in the
Hotel Leases), if any, delivered to any Lessor with respect to any financial
statements of hotel operations (as set forth in the related Hotel Lease) for the
calendar years 1996 and 1997.
SECTION 3.04. SHAREHOLDERS; NO SUBSIDIARIES; ETC. (a) Except as set
----------------------------------
forth on Schedule 3.04, the Shareholders are the record and beneficial holders
of all of the Limited Partner Interests, free and clear of all Liens, in the
respective amounts shown on Schedule A hereto. Corporate G.P is the record and
beneficial holder of the General Partner Interest, free and clear of all Liens.
Other than the Partnership Interests, no Person has any partnership or other
equity or similar interest in or (other than as set forth in Schedule 3.04(a)),
has any right to participate in the earnings or profits of Star Leasing; and
Star Leasing does not have outstanding and is not bound by any subscription,
option, warrant or other right, call or commitment to issue any such partnership
or other equity or similar interest or any such participation. The Shareholders
and Corporate G.P. will transfer to the Purchaser at the Closing good and
marketable title to all of the Partnership Interests, free and clear of all
Liens.
(b) Star Leasing is the sole general partner of Star Sub L.P., holding a
51% interest in such limited partnership, free and clear of all Liens. Except
for such interest and the 49% interest of Regent Carolina Corp., as limited
partner, no Person has any partnership or other equity or similar interest in or
has any right to participate in the earnings or profits of Star Sub L.P.; and
Star Sub L.P. does not have outstanding and is not bound by any subscription,
option, warrant or other right, call or commitment to issue any such partnership
or other equity or similar interest or any such participation. Star Leasing
also owns 455 shares of the common stock, $0.01 per share par value, of the
REIT.
(c) Other than as set forth in Section 3.04(b), no Star Company owns, of
record or beneficially, directly or indirectly, any shares of stock or any other
securities of any corporation or any interest in any firm, partnership,
association or other entity or venture.
(d) The Sellers have delivered to the Purchaser true and complete copies of
the Articles of
10
<PAGE>
Incorporation and By-Laws of Star Management and Corporate G.P., all as amended
and as in full force and effect on the date hereof.
(e) The Sellers have delivered to the Purchaser true and complete copies of
the partnership agreements of Star Leasing and Star Sub L.P., all as amended and
as in full force and effect on the date hereof.
SECTION 3.05. TAXES. (a) All Tax Returns required to be filed by a Star
-----
Company or with respect to a Star Company or its assets have been timely filed
with the appropriate taxing authorities, are complete and correct in all
material respects, and properly reflect the Taxes payable for the periods
covered thereby. All Taxes required to be paid by each Star Company or with
respect to its assets, including, without limitation, all Taxes withheld from
employees' wages and all Taxes claimed to be due by any taxing authority have
been paid. The Sellers have delivered to the Purchaser true and complete copies
of all income and franchise Tax Returns filed by each Star Company.
(b) There is no unsatisfied Tax deficiency in respect of any Star Company
and no Star Company has any notice of any pending audit or investigation in
respect of Taxes. There are no outstanding waivers of statutory periods of
limitation with respect to any Tax Returns filed by or on behalf of any Star
Company nor any extensions of time to file any Tax Returns and, other than as
set forth on Schedule 3.05(b), none of the Tax Returns of any Star Company have
-------
been audited or examined by any taxing authority. No Star Company has or is a
party to any tax sharing agreement or arrangement. No Star Company has any
contractual obligation to indemnify any Person with respect to Taxes.
(c) Since formation, each of Star Leasing and Star Sub L.P. been classified
as a partnership for federal income Tax purposes and not as a corporation or as
an association taxed as a corporation.
SECTION 3.06. ASSETS. (a) Star Leasing has good and marketable title to
------
all of its assets and properties which include all of the assets and properties
reflected in its Latest Balance Sheet, in the amounts and categories set forth
therein, and all of the assets acquired by it after the date of such Latest
Balance Sheet except, in each case, for those assets disposed of since the date
of such Latest Balance Sheet in the ordinary course of business. All such assets
and properties are owned free and clear of all Liens other than (i) any Lessor's
Lien established pursuant to the provisions of the Hotel Leases and (ii) a Lien
in favor of the REIT on certain furniture, fixtures and equipment used at the
Hotels to secure the obligation of Star Leasing to pay the purchase price for
such assets.
(b) Star Sub L.P. has good and marketable title to all of its assets and
properties which include all of the assets and properties reflected in its
Latest Balance Sheet, in the amounts and categories set forth therein, and all
of the assets acquired by it after the date of such Latest Balance Sheet except,
in each case, for those assets disposed of since the date of such Latest Balance
Sheet in the ordinary course of business. All such assets and properties are
owned free and clear of all Liens other than any Lessor's Lien established
pursuant to the provisions of the Hotel Leases.
(c) The Transferred Assets include all of the assets reflected in the
Latest Balance Sheet of Star Management, in the amounts and categories set forth
therein, and all of the assets acquired by Star Management after the date of
such Latest Balance Sheet except, in each case, for the Excluded Assets and
those assets disposed of since the date of such Latest Balance Sheet in the
ordinary course of business. Star Management will have and will transfer to the
Purchaser at the Closing, good and marketable title to all of the Transferred
Assets, free and clear of all Liens other than any lessor's lien established
pursuant to the provisions
11
<PAGE>
of the Hotel Leases and the Liens described on Schedule 2.02(c).
-------
(d) The assets and properties of Star Leasing and Star Sub L.P. and the
Transferred Assets (along with the Excluded Assets and any property owned by the
Lessors used by the Star Companies in operation of the Hotels) constitute all of
the assets used in, and are sufficient for, the operation of the Hotels and the
Business.
SECTION 3.07. CONTRACTS. (a) Subject to the exceptions set forth in
---------
Section 3.07(c), Schedule 3.07(a) is a complete and correct list of all
-------
Management Contracts (as amended or modified) in effect as of the date hereof
classifiable in one or more of the following categories: (i) Hotel Leases, (ii)
Hotel Contracts (other than oral agreements for employment at-will), (iii)
Office Leases, (iv) Franchise Agreements, (v) Hotel Management Agreements, (vi)
Third Party Hotel Management Agreements, (vii) collective bargaining agreements
and other contracts with labor unions, (viii) employment and consulting
agreements (other than oral agreements for employment at-will), (ix) agreements
for borrowed money and other evidences of indebt edness, (x) instruments whereby
a Seller has guaranteed any indebtedness or obligation of a third party, (xi)
guarantees of obligations of a Seller by third parties, (xii) tax benefit
transfer or similar agreements, (xiii) commitments for capital expenditures by a
Seller, (xiv) other than Space Leases and Hotel Leases, personal and real
property leases with a Seller as lessor or lessee, (xv) covenants not to compete
and confidentiality agreements, (xvi) all Management Contracts entered into
outside of the ordinary and regular course of the Star Companies' business and
(xvii) all other Management Contracts (other than those which, individually and
in the aggregate, are not material to the financial condition or continued
operation of a Hotel or the Business).
(b) Subject to the exceptions set forth in Section 3.07(c), Schedule
3.07(b) is a complete and correct list of all Leasing Contracts (as amended or
- -------
modified) in effect as of the date hereof classifiable in one or more of the
following categories: (i) Hotel Leases, (ii) Hotel Contracts (other than oral
agreements for employment at-will), (iii) Office Leases, (iv) Franchise
Agreements, (v) Hotel Management Agreements, (vi) Third Party Hotel Management
Agreements, (vii) collective bargaining agreements and other contracts with
labor unions, (viii) employment and consulting agreements (other than oral
agreements for employment at-will), (ix) agreements for borrowed money and other
evidences of indebtedness, (x) instruments whereby a Seller has guaranteed any
indebtedness or obligation of a third party, (xi) guarantees of obligations of a
Seller by third parties, (xii) tax benefit transfer or similar agreements,
(xiii) commitments for capital expen ditures by a Seller, (xiv) other than
Space Leases and Hotel Leases, personal and real property leases with a Seller
as lessor or lessee, (xv) covenants not to compete and confidentiality
agreements, (xvi) all Leasing Contracts entered into outside of the ordinary and
regular course of the Star Companies' business and (xvii) all other Leasing
Contracts (other than those which, individually and in the aggregate, are not
material to the financial condition or continued operation of a Hotel or the
Business).
(c) Notwithstanding anything in Section 3.07 (a) or (b) to the contrary,
the Sellers may omit from listing on Schedules 3.07(a) and 3.07(b) Space Leases
-------- -------
and Contracts of the type described in clauses 3.07(a)(ii), (ix), (x), (xiii)
and (xiv) of such Sections which do not involve the payment or receipt of more
than $50,000, in any individual case, and Hotel Contracts which may be canceled
on ninety (90) days notice or less without the payment of any penalty of more
than $50,000, in any individual case. Each Management Contract excluded from
Schedule 3.07(a) pursuant to the exceptions set forth in the previous sentence
-------
or in the parenthetical phrases in Section 3.07(a)(ii), (viii) or (xvii) shall
be an Assumed Contract for purposes of this Agreement.
(d) A true and complete copy of each written Contract and a complete and
correct summary of
12
<PAGE>
each oral Contract listed on Schedules 3.07(a) and 3.07(b) have been made
------- -------
available to the Purchaser by the Sellers.
(e) Each Assumed Contract and each Leasing Contract is valid, binding and
enforceable in accordance with its terms and is in full force and effect.
Except as set forth in Schedule 3.07(e)(i), neither any Star Company nor, to the
----------
knowledge of any Star Company or Seller, any other party to an Assumed Contract
or Leasing Contract is in material default under such Contract and no event has
occurred which with the lapse of time or the giving of notice, or both, would
constitute a material default under such Contract. Except as set forth on
Schedule 3.07(e)(ii), each Assumed Contract is assignable to the Purchaser as
-----------
part of the Transferred Assets without the consent of any third party. There are
no renegotiations of, or attempts to renegotiate, or outstanding rights to
renegotiate, any Assumed Contract or Leasing Contract and neither any Star
Company nor any Shareholder has received any notice (in writing or otherwise) of
any termination of or any intent to terminate any Assumed Contract or Leasing
Contract.
SECTION 3.08. INSURANCE. Schedule 3.08 is a true, complete and correct
--------- ----
list and brief description of all policies of fire, liability, and other forms
of insurance held by a Star Company or with respect to which a Star Company is
an insured or loss payee on the date hereof, together with their respective
termination dates.
SECTION 3.09. [INTENTIONALLY OMITTED]
SECTION 3.10. ACCOUNTS RECEIVABLE. All of the accounts receivable of Star
-------------------
Leasing and Star Sub L.P. represent obligations arising from sales or services
actually made or rendered by the Sellers in the ordinary course of business and
are subject to no material adverse claims, liens, counterclaims, set-offs or
defenses.
SECTION 3.11. REAL ESTATE. Other than the interests represented by the
-----------
Hotel Leases, the Space Leases and the Office Lease, no Star Company has any
interest of any nature in real property.
SECTION 3.12. INTELLECTUAL PROPERTY. The Star Companies own or possess
---------------------
adequate franchises, licenses or other rights to use all patents, patent
applications, trade secrets, inventions, processes, drawings, service manuals,
software, and copyrights (including all renewals and extensions thereof),
licenses, fran chises, trademarks, trademark registrations, trademark
applications, trade names, service marks and logos (collectively, the
"Intellectual Properties") used in the conduct of and necessary to conduct the
Business. Schedule 3.12 to this Agreement is a complete and correct list of all
----
such Intellectual Property except for such Intellectual Properties as are
licensed by the Sellers under the Franchise Agreements. Except as other wise
set forth in Schedule 3.12 and except with respect to the Intellectual
----
Properties licensed under the Franchise Agreements and off-the-shelf software,
(a) each Star Company has filed all material certificates, affidavits and other
documents and taken all other actions necessary to obtain and evidence its title
to each of the Intellectual Properties, (b) no Star Company has granted to any
individual, firm, partnership, cor poration, association or other entity any
interest in any Intellectual Properties, as licensee or otherwise, (c) all of
such Intellectual Properties are valid and (d) to the knowledge of any Star
Company or Shareholder, no such Intellectual Property infringes on the property
rights of any third party and no third party is in fringing any of the rights
of any Star Company to any Intellectual Property.
SECTION 3.13. LITIGATION. Except as set forth in Schedule 3.13, there is
---------- ----
no action, suit or pro ceeding pending or, to the knowledge of any Star Company
or Shareholder, threatened against a Star Company or any Hotel or relating to or
affecting the Business or any Transferred Asset in any court, before any
arbitrator or
13
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before or by any governmental authority, agency or other instrumentality,
domestic or foreign (other than such actions, suits or preceding arising out of
the ordinary and usual course of business and the defense and other costs of
which are adequately covered by insurance). Except as set forth in Schedule
3.13, there is no outstanding judgment, order or decree of any court, any
- ----
arbitrator or arbitration tribunal or any governmental authority, agency or
other instrumentality against a Star Company or any Hotel or relating to or
affecting the Business or any Transferred Asset nor is any such company nor any
Hotel in default under or with respect to any item set forth on such Schedule.
SECTION 3.14. COMPLIANCE WITH LAW. Except as set forth on Schedule 3.14,
------------------- ----
each Star Company and Hotel is in compliance in all material respects with all
laws, regulations and orders applicable to such Star Companies or Hotels or to
the Business and the Transferred Assets.
SECTION 3.15. PERMITS. All material Permits are in full force and effect.
-------
The Star Companies, the Hotels and the Business are in material compliance with
the terms of such Permits and there are no material violations of any such
Permit.
SECTION 3.16. EMPLOYEES. Other than (a) liabilities that may become
---------
payable under the WARN Act, (b) unemployment compensation and (c) severance with
respect to those employees who will not be given the opportunity to become
Retained Employee as described in Section 10.02(a) (and which severance will not
be an Assumed Liability and will be satisfied by the Sellers) the consummation
of the transactions contemplated by the Agreement will not entitle any employee
of any Star Company or Hotel to any severance pay or any other payment from any
Star Company or the Purchaser. The Sellers shall indemnify and hold harmless the
Purchaser and its Affiliates from and against any liability or claim by any
employees of Star Management for severance or separation pay (other than
pursuant to the WARN Act) arising out of their termination of employment with
Star Management or otherwise by virtue of the consummation of the transactions
contemplated hereby.
SECTION 3.17. LABOR DISPUTES. Except as set forth on Schedule 3.17, (a)
-------------- ----
no Star Company is a party to any labor union contract or collective bargaining
agreement, (b) there are no labor unions or other organizations representing or
purporting to represent or , to the knowledge of any Star Company or Seller,
attempting to represent any such employees, (c) there is no labor strike,
slowdown, work stoppage, lockout disturbances or arbitration pending or, to the
knowledge of any Star Company or Seller, threatened, in connection with such
employees and (d) there is no unfair labor practice charge or complaint pending
or, to the knowledge of any Star Company or Shareholder, threatened against any
Star Company or Hotel in connection with its present or former employees.
SECTION 3.18 EMPLOYEE BENEFIT PLANS.
----------------------
(a) Definitions.
-----------
(i) "Employee Plan" means (i) any "employee benefit plan," as defined
in Section 3(3) of ERISA, that (a) is subject to any provision of ERISA, (b) is
maintained, administered or contributed to, by any Star Company or any of their
ERISA Affiliates and (c) covers any employee or former employee of any Star
Company or any of their ERISA Affiliates, and (ii) any employment, severance or
similar contract or arrangement (whether or not written) or any plan, policy,
fund, program or contract or arrangement (whether or not written) providing for
compensation, bonus, profit-sharing, stock option, or other stock related rights
or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-
14
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insured arrangements) health or medical benefits, disability benefits, worker's
compensation, supplemental unemployment benefits, severance benefits, post-
employment or retirement benefits (including compensation, pension, health,
medical or life insurance or other benefits) that is entered into, maintained,
administered or contributed to, as the case may be, by any Star Company or any
of their ERISA Affiliates, and covers any employee or former employee of any
Star Company or any of their ERISA Affiliates.
(ii) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated thereunder.
(iii) "ERISA Affiliate" shall mean all members of a controlled group
---------------
of corporations and all trades and businesses (whether or not incorporated)
under common control and all other entities which, together with any Star
Company, are treated as a single employer under any or all of Sections 414(b),
(c), (m) or (n) of the Code at any time prior to the Closing Date.
(iv) "Multiemployer Plan" means each Employee Plan that is a
multiemployer plan, as defined in Section 3(37)of ERISA.
(b) Employee Plans.
--------------
(i) Schedule 3.18 identifies each Employee Plan which is not a
-------------
Multiemployer Plan or otherwise provided for in a collective bargaining
agreement referred to in Schedule 3.17. The Sellers shall, no later than ten
----
(10) business days prior to the Closing Date make available to the Purchaser
copies of all Employee Plans listed on Schedule 3.18 (and, if applicable,
----
related trust agreements) and all amendments thereto together with the three
most recent annual reports (Forms 5500 including, if applicable, Schedule B
thereto) and the most recent actuarial valuation report, if any, prepared in
connection with any Employee Plan listed on Schedule 3.18. The Sellers will
----
make available to the Purchaser complete age, salary, service and related data
for all employees and former employees covered under the Employee Plans.
(ii) Other than as set forth in Schedule 3.17, neither any Seller
----
nor Star Management nor any of their ERISA Affiliates has any obligation to
contribute to a Multiemployer Plan; and no Employee Plan listed on Schedule 3.18
is or will be subject to Title IV of ERISA.
(iii) Each Employee Plan listed on Schedule 3.18 has been established
----
and administered in all material respects in compliance with its terms and all
applicable laws, statutes, orders, rules and regulations, including, but not
limited to, ERISA and the Code. Each Employee Plan listed on Schedule 3.18
that is intended to be qualified under Section 401(a) of the Code has received a
favorable letter of determination from the Internal Revenue Service that the
form of such Employee Plan meets the requirements of Section 401(a) of the Code
and that the form of the corresponding trust meets the requirements for
exemption under Section 501(a) of the Code and to the knowledge of any Star
Company, nothing has occurred since the date of each such letter that could
result in the disqualification of such plans. No Star Company or Seller has
knowledge that any of the Multiemployer Plans to which it or any of their
respective ERISA Affiliates contributes on behalf of its employees has been
established or administered in violation of any provisions of ERISA or the Code,
or the regulations promulgated thereunder.
(iv) Neither any Star Company nor any or their ERISA Affiliates has
any current or
15
<PAGE>
projected liability in respect of post-employment or post-retirement health or
medical or life insurance benefits for retired, former or current employees of
the Sellers or any of their Affiliates, other than as may be required to avoid
excise tax under Section 4980B of the Code or as a result of an obligation to
contribute to a Multiemployer Plan.
(v) Except as set forth in Section 3.16 and as provided for in
Section 10.02(a), no employee or former employee of the Star Companies or any of
their Affiliates will become entitled to any bonus, retirement, severance, job
security or similar benefit or enhanced such benefit (including acceleration of
vesting or exercise of an incentive award) as a result of the transactions
contemplated hereby.
(vi) No Star Company other than Star Management has any employees
nor, other than as an ERISA Affiliate of Star Management, any obligations or
liabilities related to employment or employee benefits.
SECTION 3.19. ORDINARY COURSE; NO MATERIAL CHANGE. Except as set forth on
-----------------------------------
Schedule 3.19, since the date of its Latest Balance Sheet each Star Company and
----
since the most recent Monthly Statements for each Hotel (a) the operation of
such Star Company or such Hotel and the Business has been conducted in the
ordinary and regular course thereof and (b) there has not been any material
adverse change in such Star Company or Hotel or in its operations or condition,
financial or otherwise or in the Business.
SECTION 3.20. BROKERAGE. Neither any Star Company nor any of their
---------
respective partners, directors, shareholders, employees or agents, has incurred
any liability for finder's or brokerage fees or commissions in connection with
this Agreement or the transactions contemplated hereby. The Sellers, jointly
and severally, agree to indemnify and hold the Purchaser, Star Leasing and Star
Sub L.P. harmless from any such payment resulting from the actions of any Star
Company or any of their respective partners, directors, shareholders, employees
or agents.
SECTION 3.21. ACCREDITED INVESTOR. Each Shareholder is an "accredited
-------------------
investor" as that term is defined in Rule 501 of the Securities and Exchange
Commission as promulgated under the Securities Act of 1933, as amended.
SECTION 3.22. NO OMISSION. No representation or warranty by the Sellers
-----------
made in this Agreement or any other Seller Document or any exhibit hereto or
thereto and no Schedule or certificate furnished or to be furnished to the
Purchaser pursuant to or in connection with this Agreement, or any other Seller
Document or any of the transactions contemplated hereby contains or will contain
any statement of a material fact that was untrue as of its date or omits to
state a material fact necessary in order to make the statements contained herein
or therein, in the light of the circumstances in which they are made, not
misleading as of the date thereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Sellers that:
SECTION 4.01. ORGANIZATION AND GOOD STANDING. (a) Parent Corp. is a
------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware.
16
<PAGE>
(b) The Purchaser is a limited partnership duly organized, validly existing
and in good standing under the laws of the State of Delaware.
SECTION 4.02. AUTHORITY; NO CONFLICT. (a) Parent Corp. has taken all
----------------------
required corporate action and all action required to be taken under the
Partnership Agreement to authorize the execution and delivery of this Agreement
and the other agreements to be executed and delivered by the Purchaser hereunder
(together with this Agreement, the "Purchaser Documents") on behalf of the
Purchaser.
(b) The Purchaser has taken all partnership action required to be taken to
authorize the execution and delivery of the Purchaser Documents and the
transactions contemplated by the Purchaser Documents. The Purchaser has the
power and authority to execute and deliver the Purchaser Documents and to
consummate the transactions contemplated by the Purchaser Documents. The
Purchaser Documents when executed and delivered will be, valid and binding upon
and enforceable against the Purchaser in accordance with their respective terms.
Neither the execution and delivery of the Purchaser Documents nor the
consummation of the transactions thereby contemplated will constitute any
violation or breach (i) of the Partnership Agreement or the Partnership
Agreement as amended by the Partnership Amendment or (ii) of (Y) any order,
writ, injunction, decree, statute, rule or regulation binding upon the Purchaser
or any of its assets or (Z) any contract or agreement to which the Purchaser is
a party or by which the Purchaser or its assets are bound, in either case, which
would materially and adversely affect the Purchaser's ability to consummate the
transactions contemplated by the Purchaser Document.
SECTION 4.03. CONSENTS. Except as set forth on Schedule 4.03 to this
-------- ----
Agreement (the "Purchaser Consents"), no authorization, approval, order,
license, permit, franchise, or consent and no registration, notice, declaration
or filing to, by or with any domestic or foreign governmental authority is
required on the Purchaser's part in connection with the execution and delivery
by the Purchaser of the Purchaser Documents and the consummation by the
Purchaser of the transactions contemplated thereby.
SECTION 4.04. BROKERAGE COMMISSIONS. Neither Parent Corp. nor Purchaser
---------------------
nor any of their respective partners, directors, shareholders, employees or
agents has incurred any liability for finder's or brokerage fees or commissions
in connection with this Agreement or the transactions hereby contemplated. The
Purchaser agrees to indemnify and hold the Sellers harmless from any such
payment resulting from the actions of Parent Corp. or the Purchaser or any of
their respective partners, directors, shareholders, employees or agents.
SECTION 4.05. PARTNERSHIP UNITS; COMMON STOCK. (a) Upon the issuance of
-------------------------------
the Partnership Units as contemplated by this Agreement, (i) such Partnership
Units will be duly authorized, validly issued, fully paid and non-assessable
partnership interests, free of any restrictions and encumbrances, except for
restrictions on transferability imposed under applicable securities laws and the
terms of the Partnership Agreement as amended by the Partnership Amendment and
(ii) each Shareholder receiving such Partnership Units will be a limited partner
in the Purchaser and will have the full rights of a limited partner holding the
Partnership Units as set forth in the Partnership Agreement as amended by the
Partnership Amendment.
(b) Any shares of the Common Stock issued in exchange for the Partnership
Units in accordance with the terms of the Partnership Agreement as amended by
the Partnership Amendment, will be duly authorized, validly issued, fully paid
and non-assessable shares of the Common Stock, not issued in violation of any
preemptive rights of any stockholder of Parent Corp. and free of any
restrictions and encumbrances, except for restrictions on transferability
imposed under applicable securities laws.
17
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(c) Parent Corp. has reserved authorized but unissued shares of Common
Stock or shares of Common Stock in its treasury as necessary for the Purchaser
to redeem any Partnership Units issued in accordance with Section 2.03(a)(iv)
for shares of Common Stock in accordance with the terms of the Partnership
Agreement as amended by the Partnership Amendment.
(d) Parent Corp. owns the majority of the Partnership Units.
SECTION 4.06. PARTNERSHIP AGREEMENT, ETC. The Purchaser has delivered to
--------------------------
the Sellers a true and complete copy of the Partnership Agreement and of Parent
Corp.'s Certificate of Incorporation and By-Laws. The Partnership Agreement
shall not be amended prior to the Closing without the consent of the
Shareholders other than (i) by the adoption of the Partnership Amendment and
(ii) in any way which would not require the consent of the Shareholders if, at
such time, the Partnership Amendment had been adopted and the Shareholders were
limited partners holding the maximum number of Partnership Units which may be
issued to them under Section 2.03(a)(iv).
SECTION 4.07. TAX CLASSIFICATION. The Purchaser is treated for federal
------------------
tax purposes as a partnership and not as a corporation or as an association
taxable as a corporation.
SECTION 4.08. INVESTMENT COMPANY. Parent Corp. is not an "investment
------------------
company" within the meaning of Section 351(e)(1) of the Code and the Treasury
Regulations issued thereunder.
ARTICLE V
PRE-CLOSING COVENANTS OF SELLERS
Prior to the Closing:
SECTION 5.01. CONDUCT OF BUSINESS. The Star Companies will, and the
-------------------
Sellers will cause the Star Companies to (a) continue to conduct the Business
and operate each Hotel in the ordinary and regular course, consistent with prior
practices and in accordance with the Hotel Leases, Hotel Management Agreements
and the Annual Budgets; (b) maintain their books of account, records and files
and those of each Hotel in a manner consistent with prior practices and the
Hotel Leases and Hotel Management Agreements; (c) use all reasonable efforts to
preserve their business organizations intact, to retain the services of their
present employees and to preserve the good will of the Sellers' suppliers and
customers, the REIT and REIT Partnership, and others having business relations
with the Star Companies; (d) pay and perform all of their debts, obligations and
liabilities and those of each Hotel as and when due; (e) comply in all material
respects with all laws, regulations and orders applicable to the Star Companies,
each Hotel and the Business; (f) maintain at each Hotel, Lessee Property
approximately in those quantities and approximately at those levels present as
of the date of this Agreement and in accordance with the Hotel Leases; (g)
continue to enter into Bookings in the ordinary course of business; (h) continue
to insure all their respective assets and properties including, without
limitation, all Transferred Assets, against risks, with insurers and in amounts
consistent with prior practices; (i) keep all Assumed Contracts and Leasing
Contracts in full force and effect (except those that expire by their terms
prior to the Closing Date) and pay and perform all of their obligations under
such Contracts, (j) keep all Permits (or renewals of such Permits) in full force
and effect and (k) continue to lease new hotels from the Lessors and to manage
such hotels in the ordinary course of business on terms consistent with prior
practices and pursuant to lease and management agreements in form and substance
similar to the existing Hotel Leases and Hotel
18
<PAGE>
Management Agreements.
SECTION 5.02. CHANGES IN BUSINESS. The Star Companies will not, and the
-------------------
Sellers will cause the Star Companies not to, without the prior written consent
of the Purchaser (a) enter into any new Contracts (or modify or amend any
Contracts) other than (i) new hotel leases and hotel management agreements
relating to Hotels leased from the Lessors in form and substance similar to the
existing Hotel Leases and Hotel Management Agreements, (ii) other Contracts in
the ordinary course of business and in accordance with their normal prior
practice and (iii) the Included Contracts; provided, that, all such Management
Contracts so entered into by the Sellers shall be assignable to the Purchaser by
the Sellers as Transferred Assets without the consent of any third party and
without any payment or penalty; (b) increase the compensation or the annual rate
of compensation or change the method of determining the compensation of any
employee who, after such action, would earn in excess of $100,000 per year, or
grant any general or uniform increases in the wages or rates of pay of
employees, or any classification thereof except as required under any Contract;
(c) sell, transfer, or otherwise dispose of any of their respective assets or
property (including any Transferred Asset) except for Lessee Property which is
sold or consumed in the ordinary and regular course of business; (d) create or
permit to exist any Lien on any of their respective assets or properties
(including any Transferred Assets); (e) authorize, undertake, expend any moneys
for, or enter into any commitment with respect to, any material capital
expenditure at any Hotel except in accordance with the Annual Budgets; or (f)
modify any Annual Budget in any material respect.
SECTION 5.03. ACCESS BY PURCHASER. During usual business hours, and as
--------------------
often as may be reasonably requested, the officers, employees and
representatives of the Purchaser (collectively, the "Purchaser Representatives")
will be permitted reasonable access, to, and will be permitted to make copies of
and extracts from, the accounts, other records, books of account, insurance
policies, tax returns, documents and other instruments, records and files of
each Star Company as the Purchaser shall reasonably request. The Purchaser
Representatives will be permitted reasonable access, during usual business
hours, and as often as may be reasonably requested, to the Hotels and other
premises and physical properties used by the Star Companies, and will be
permitted to discuss the affairs, finances and accounts of such companies with
their respective counsel, auditors, actuaries, officers and employees. The
parties hereto shall, and shall use commercially reasonable efforts to cause
their respective Affiliates and their respective officers, accountants, counsel,
financial advisors and other representatives to, hold any non-public information
in confidence to the extent required by, and in accordance with, and will comply
with the provisions of the letter agreement dated as of September 15, 1997
between Capital and the REIT as if they were parties to and bound by such letter
agreement.
SECTION 5.04. NOTIFICATION. The Sellers will promptly notify the
------------
Purchaser of any event which would cause or constitute a breach of any of the
representations and warranties set forth in Article III.
SECTION 5.05. ADDITIONAL INFORMATION. The Sellers shall promptly furnish
----------------------
to the Purchaser any and all such other financial and operating reports with
respect to any Star Company or Hotel as may be prepared from time to time
between the date hereof and the Closing Date, including without limitation, all
Monthly Statements and Officer's Certificates delivered to any Lessors. The
Sellers shall promptly make available to the Purchaser information with respect
to any document, event, transaction or condition entered into or occurring after
the date of this Agreement which, had it occurred or been in effect on or prior
to the date of this Agreement, would have been included on the Schedules to this
Agreement, and make available copies of all documents with respect thereto. No
such information shall be deemed to supplement or amend any Schedule to this
Agreement or to cure any breach of representation, warranty or covenant made by
the Sellers unless the
19
<PAGE>
Purchaser consents thereto in writing making specific reference to this
provision.
SECTION 5.06. LIQUOR LICENSES. The Sellers will cause each Star Company
---------------
and its respective Affiliates to cooperate with the Purchaser in all reasonable
respects in connection with the transfer of liquor licenses (or the stock of
Affiliate corporations holding such liquor licenses, if appropriate) to the
Purchaser or any Affiliate of the Purchaser or an application for new liquor
licenses at any Hotel where the same is legally required. If the Purchaser or
its Affiliate is unable to obtain the transfer of any such liquor licenses or
obtain a new license by the Closing Date, then, on the Closing Date, the
appropriate Star Company or its Affiliate corporation shall enter into an
interim arrangement for a period not in excess of 120 days whereby such Star
Company or Affiliate corporation shall operate the liquor concessions at the
applicable Hotels on behalf of the Purchaser or its Affiliate pending the
transfer or issuance of such liquor license; and the Purchaser shall indemnify
such Star Company or such Affiliate corporation, as the case may be, against any
liabilities incurred by virtue of such arrangement.
SECTION 5.08. HSR ACT FILINGS. As soon as practicable, the Sellers
---------------
shall cause the Star Companies to make any filing required under the HSR Act in
connection with this Agreement and the transactions contemplated hereby and will
comply with any subsequent requests for further information. Neither the
Sellers nor the Star Companies shall be required to contest or appeal any
preliminary injunction prohibiting or inhibiting the consummation of the
transactions contemplated hereby. The Sellers will furnish the Purchaser with
such necessary information concerning the Sellers and the Star Companies, and
reasonable assistance, in written form, as the Purchaser may request in
connection with its preparation of any filings by it under the HSR Act.
SECTION 5.09. BEST EFFORTS. Each Seller will use, and the Sellers will
------------
cause each Star Company to use, his or its best efforts to fulfill the
conditions to the Purchaser's obligations set forth in Article VII.
SECTION 5.10. INCLUDED CONTRACTS. The Sellers represent and warrant that
------------------
the Pro Forma Budgets include financial effects of certain contracts pursuant to
which telecommunications and purchasing services are provided to hotels and
others (the "Included Contracts") as well as the operational and other expenses
related thereto. Prior to the Closing, the Sellers shall cause Star Management
to acquire and, the holders of such Included Contracts to convey to Star
Management, the Included Contracts on terms reasonably satisfactory to the
Purchaser in such a manner that, on the Closing Date, the Business acquired by
the Purchaser under this Agreement will include the Included Contracts.
ARTICLE VI
PRE-CLOSING COVENANTS OF THE PURCHASER
Prior to the Closing:
SECTION 6.01. INSPECTIONS. The Purchaser shall give the Sellers
-----------
reasonable prior notice of any such inspections and investigations to be made by
the Purchaser pursuant to Section 5.03 and shall use its best efforts to
minimize any interference with the operation of the Business and of the Hotels.
Neither the Purchaser nor the Purchaser Representatives shall permit any
borings, drillings or samplings to be done at any Hotel without the Sellers'
prior written consent. The Purchaser agrees to indemnify, defend and hold the
Sellers harmless from any actions, suits, Liens, claims, damages, expenses,
losses and liabilities (including reasonable
20
<PAGE>
attorneys fees and expenses) arising out of any access to, entry upon or
inspection of any Hotel by the Purchaser or any Purchaser Representatives.
SECTION 6.02. NOTIFICATION. The Purchaser will promptly give the Sellers
------------
written notice of any event which would cause or constitute a breach of any of
the representations and warranties set forth in Article IV. Neither the
Purchaser nor any Affiliate of the Purchaser shall take any action that would
cause any such representation or warranty to be untrue.
SECTION 6.03. HSR ACT FILINGS. As soon as practicable, the Purchaser
---------------
will make any filing required under the HSR Act in connection with this
Agreement and the transactions contemplated hereby and will comply with any
subsequent requests for further information. The Purchaser shall not be
required to contest or appeal any preliminary injunction prohibiting or
inhibiting the consummation of the transactions contemplated hereby. The
Purchaser will furnish the Sellers with such necessary information and
reasonable assistance, in written form, as such companies may request in
connection with the preparation of any filings by the Sellers and the Star
Companies under the HSR Act.
SECTION 6.04. BEST EFFORTS. The Purchaser will use its best efforts to
------------
fulfill the conditions to the Sellers' obligations set forth in Article VIII.
ARTICLE VII
CONDITIONS TO THE PURCHASER'S OBLIGATIONS
The obligations of the Purchaser to acquire the Partnership Interests and
the Transferred Assets from the Sellers and to take the other actions required
to be taken by the Purchaser at the Closing are subject to the fulfillment, at
the Closing, of each of the following conditions, any or all of which may be
waived by the Purchaser in writing in whole or in part at or prior to the
Closing:
SECTION 7.01. REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties contained in Article III hereof which are qualified as to materiality
shall be true and correct and such representations and warranties that are not
so qualified shall be true and correct in all material respects as of the date
of this Agreement and as of the Closing Date, as though made on and as of the
Closing Date, except to the extent that such representation and warranty is
expressly limited by its terms to an earlier date.
SECTION 7.02. COVENANTS. The Sellers shall have performed and complied in
---------
all material respects with all agreements and conditions on their part required
by this Agreement to be performed or complied with prior to or at the Closing.
SECTION 7.03. OFFICER'S CERTIFICATE. The Purchaser shall have received a
---------------------
certificate of the Shareholders and a certificate of an appropriate officer of
Star Management, dated the Closing Date, certifying as to the fulfillment of
the conditions specified in Sections 7.01 and 7.02.
SECTION 7.04. LEGALITY. No change shall have occurred in any law, rule or
--------
regulation that would prohibit the performance of the Purchaser's obligations
under Article II hereof.
SECTION 7.05. INJUNCTIONS. No court, agency or other authority shall have
-----------
issued any order, decree
21
<PAGE>
or judgment to restrain, enjoin or prevent the performance of the Purchaser's
obligations under Article II hereof nor shall there be pending any suit, action
or proceeding requesting such relief or remedy.
SECTION 7.06. OPINION OF COUNSEL. The Purchaser shall have received, on
------------------
behalf of the Sellers, an opinion of Robinson Silverman Pearce Aronsohn & Berman
LLP and local counsel for the Sellers, dated the Closing Date, in form and
substance reasonably satisfactory to counsel for the Purchaser, as to the
matters set forth in Sections 3.01, 3.02(a), (b), (c)(i)(A) and (c)(i)(B) and
in the first two sentences of Section 3.02(c) and such other matters as counsel
for the Purchaser shall reasonably request.
SECTION 7.07. CONSENTS. The Sellers shall have obtained and provided to
--------
the Purchaser in struments in form and substance reasonably satisfactory to
counsel for the Purchaser evidencing the Consents; provided that, it shall not
be a breach of this condition if, with respect to the Hotel Management
Agreements listed on Schedule 3.07(a)(v), the Sellers, after using their
reasonable efforts, have not obtained Consents with respect to those Contracts
which are marked with an asterisk on such Schedule.
SECTION 7.08. HOTEL LEASE AMENDMENTS. The Lessors shall have executed and
----------------------
delivered to the Purchaser amendments to each Hotel Lease substantially in the
form annexed to the Merger Agreement, and the Lease Master Agreement shall have
been terminated.
SECTION 7.09. MEMORANDUM OF LEASE. A memorandum or short-form of each
-------------------
Hotel Lease, as amended as required under Section 7.08, in recordable form shall
have been executed by the applicable Lessor and delivered to the Purchaser.
SECTION 7.10. DELIVERY OF DOCUMENTS. The Sellers shall have executed and
---------------------
delivered to the Purchaser the Assignment of Leases and all other conveyances,
covenants, warranties, deeds, assignments, bills of sale, confirmations, powers
of attorney, approvals, consents and any and all further instruments as may be
necessary to effect the transactions contemplated hereby, all in form and
substance reasonably satisfactory to counsel for the Purchaser.
SECTION 7.11. LEGAL MATTERS SATISFACTORY. All actions, proceedings,
--------------------------
instruments and documents required by or from the Shareholders or the Sellers to
carry out the transactions contemplated by this Agreement, or incidental
thereto, and all other required relevant legal matters, shall be reasonably
satisfactory in all respects to counsel for the Purchaser.
SECTION 7.12. ESCROW AGREEMENT. All parties thereto shall have executed
----------------
and delivered the Escrow Agreement.
SECTION 7.13. MERGER TRANSACTION. All conditions precedent to the Merger
------------------
Transaction (including, without limitation, the consummation of the Spin-Off
Transaction) shall have been satisfied and the Merger Transaction shall have
been consummated, all substantially on the terms set forth in the Merger
Agreement.
SECTION 7.14. SECURITIES REPRESENTATIONS. Each Shareholder shall have
--------------------------
executed and delivered to the Purchaser a certificate confirming Section 3.21
and containing such other representations as may be required to confirm
compliance with federal and state securities laws in connection with the
issuance of Partnership Units and/or Common Stock to such Shareholder pursuant
to this Agreement, such certificate to be in form and substance reasonably
satisfactory to the Purchaser.
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<PAGE>
SECTION 7.15. HSR. The Sellers and Star Companies shall have made all
---
filings required to be made by them under the HSR Act in connection with the
execution, delivery and performance of this Agree ment and the consummation of
the transactions hereby contemplated and all required waiting periods thereunder
shall have expired or been terminated without request for additional information
or, if additional information has been requested, all applicable extended
waiting periods shall have expired.
SECTION 7.16. INCLUDED CONTRACTS. The Included Contracts shall have been
------------------
acquired in accordance with Section 5.10.
ARTICLE VIII
CONDITIONS TO THE SELLERS' OBLIGATIONS
The obligations of the Sellers to contribute and sell the Partnership
Interests and the Transferred Assets to the Purchaser and to take the other
actions required to be taken by the Sellers at the Closing are subject to the
fulfillment, at the Closing, of each of the following conditions, any or all of
which may be waived in whole or in part by the Sellers at or prior to the
Closing:
SECTION 8.01. REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties contained in Article IV hereof which are qualified as to materiality
shall be true and correct and such representations and warranties that are not
so qualified shall be true and correct in all material respects as of the date
of this Agreement and as of the Closing Date, as though made on and as of the
Closing Date, except to the extent that such representation and warranty is
expressly limited by its terms to an earlier date.
SECTION 8.02. COVENANTS. The Purchaser shall have performed and complied
---------
in all material respects with all agreements and conditions on its part required
by this Agreement to be performed or complied with prior to or at the Closing.
SECTION 8.03. OFFICER'S CERTIFICATE. The Sellers shall have received a
---------------------
certificate of an appropriate officer of Parent Corp., dated the Closing Date,
certifying to the fulfillment of the conditions specified in Sections 8.01 and
8.02.
SECTION 8.04. LEGALITY. No change shall have occurred in any law, rule or
--------
regulation that would prohibit the performance of the Sellers' obligations
under Article II.
SECTION 8.05. INJUNCTIONS. No court, agency or other authority shall have
-----------
issued any order, decree or judgment to restrain, enjoin or prevent the
performance of the Sellers' obligations under Article II nor shall there be
pending any suit, action or proceeding requesting such relief or remedy.
SECTION 8.06. OPINION OF COUNSEL. The Sellers shall have received, on
------------------
behalf of the Purchaser, an opinion of DeCampo, Diamond & Ash, counsel for the
Purchaser, dated the Closing Date, in form and substance reasonably
satisfactory to counsel for the Purchaser, as to the matters set forth in
Sections 4.01, 4.02(a) and (b)(i), and 4.05(a) and (c) and the first three
sentences of Section 4.02(b) and such other matters as counsel for the Sellers
shall reasonably request.
23
<PAGE>
SECTION 8.07. CONSENTS. The Consents shall have been executed and
--------
delivered.
SECTION 8.08. DELIVERY OF DOCUMENTS. The Purchaser shall have executed
---------------------
and delivered to the Sellers the Assumption Agreements and such other closing
certificates and documents as counsel for the Sellers shall reasonably request.
SECTION 8.09. LEGAL MATTERS SATISFACTORY. All actions, proceedings,
--------------------------
instruments and documents required by or from the Purchaser to carry out the
transactions contemplated by this Agreement, or incidental thereto, and all
other required relevant legal matters, shall be reasonably satisfactory in all
respects to counsel for the Sellers.
SECTION 8.10. ESCROW AGREEMENT. All parties thereto shall have executed
----------------
and delivered the Escrow Agreement.
SECTION 8.11. PARTNERSHIP AGREEMENT. The Partnership Agreement shall have
---------------------
been amended by the adoption of the Partnership Amendment and the Shareholders
shall have been admitted as limited partners of the Purchaser.
SECTION 8.12. MERGER TRANSACTION. All conditions precedent to the Merger
------------------
Transaction (including, without limitation, the consummation of the Spin-Off
Transaction) shall have been satisfied and the Merger Transaction shall have
been consummated, all substantially on the terms set forth in the Merger
Agreement.
SECTION 8.13. REGISTRATION RIGHTS AGREEMENT. Parent Corp. shall have
-----------------------------
entered into a Registration Rights Agreement with the Shareholders in
substantially the form of that certain Registration Rights Agreement, dated
April 1, 1997, by and between Capital and the other parties thereto.
SECTION 8.14. HSR. The Purchaser shall have made all filings required to
---
be made by it under the HSR Act in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions hereby
contemplated and all required waiting periods thereunder shall have expired or
been terminated without request for additional information or, if additional
information has been requested, all applicable extended waiting periods shall
have expired.
ARTICLE IX
CERTAIN FINANCIAL MATTERS
SECTION 9.01. BREAK-UP FEE. If this Agreement is terminated by the
------------
Sellers pursuant to Section 11.01(d)(ii) solely because the condition precedent
to the Sellers' obligations set forth in Section 8.12 becomes impossible under
circumstances which give rise to the obligation of Capital to pay a so-called
"Break-Up Fee" pursuant to Section 9.2(c) of the Merger Agreement, then the
Purchaser will pay to the Sellers a fee in the amount of $3,000,000, by wire
transfer in immediately available funds, within two business days of a written
demand therefor from the Sellers. The payment of such amount shall be
compensation and liquidated damages for the loss suffered by the Sellers as a
result of the Purchaser's failure to acquire the Partnership Interests and the
Transferred Assets from the Sellers and to take the other actions required to be
taken by the Purchaser at the Closing and to avoid the difficulty of determining
damages under the circumstances and, other than the payment of such amount by
the Purchaser, no party shall have any other liability to the other.
24
<PAGE>
SECTION 9.02. CLOSING DATE NET WORKING CAPITAL. The Shareholders and
--------------------------------
the Purchaser shall take the following actions to insure that the Net Working
Capital as of the Closing Date shall be zero (the "Required Amount"):
(i) On the Closing Date, the Shareholders and the Purchaser shall
prepare, jointly and in good faith, an estimate of the Net Working Capital
as of the Closing Date (the "Estimated Net Working Capital");
(ii) If the Estimated Net Working Capital exceeds the Required
Amount, Star Leasing shall, immediately prior to the Closing, make a
distribution to the Shareholders, in cash, of an amount equal to such
excess; if the Required Amount exceeds the Estimated Net Working Capital,
each Shareholder shall, immediately prior to the Closing, contribute to
Star Leasing, in cash, an amount equal to the product of such excess and
the Shareholder's Percentage of such Shareholder; provided, however, that
no Shareholder shall be required to make a contribution to Star Leasing in
excess of the aggregate distributions made to such Shareholder by Star
Leasing from and after December 31, 1997;
(iii) Within thirty (30) days after the date that all information is
available as required to calculate the Net Working Capital as of the
Closing Date, the Purchaser shall deliver to the Shareholders a written
report (the "Purchaser Report") setting forth the Purchaser's calculation
of the Net Working Capital as of the Closing Date;
(iv) Within thirty (30) days after delivery of the Purchaser Report
to the Shareholders, the Shareholders may deliver to the Purchaser a
written report (the "Shareholders Report") setting forth any disagreement
of the Shareholders with the Purchaser Report and showing the Shareholders'
calculation of the Net Working Capital as of the Closing Date. If the
Shareholders do not submit a Shareholders Report within such period, then
the Net Working Capital as of the Closing Date as set forth in the
Purchaser Report shall be final and binding on the Shareholders and the
Purchaser.
(v) If the Shareholders and the Purchaser are unable to resolve by
good faith negotiations any differences between the Purchaser Report and a
Shareholders Report within thirty (30) days of the Purchaser's receipt of
such Shareholders Report, either the Shareholders or the Purchaser may
elect to have the disagreements between the two reports resolved by a
nationally recognized accounting firm mutually agreed upon by the parties
hereto which shall not be the regular accountants for either the Purchaser
or any Seller (the "Accounting Firm"), which shall make a final and binding
resolution of the disagreements and, based on such resolution, a final and
binding determination of the Net Working Capital as of the Closing Date.
The Accounting Firm shall be in structed to use every reasonable effort to
perform its arbitration function within thirty (30) days of submission of
the matter to it and in any case, as soon as practicable after such
submission to it. The fees and expenses of the Accounting Firm shall be
shared 50% by the Purchaser and 50% by the Shareholders.
(vi) If the Net Working Capital as of the Closing Date as
established by a Purchaser Report, or by mutual agreement of the Purchaser
and the Shareholders, or by the Accounting Firm, as the case may be, is
less than the Estimated Net Working Capital, the Shareholders hereby,
jointly and severally, agree to pay such difference to Star Leasing by wire
transfer in immediately available funds within two business days of a
written demand therefor from the Purchaser; provided, however, that the
amount of such payment by any Shareholder shall not, when aggregated with
the amount, if any, which such Shareholder is required to pay pursuant to
Sections 9.02(ii) and 9.04(b) exceed the
25
<PAGE>
aggregate distributions made to such Shareholder by Star Leasing from
December 31, 1997 through the Closing Date (including any distribution made
on the Closing Date pursuant to Section 9.02(ii)).
(vii) If the Net Working Capital as of the Closing Date as
established by a Purchaser Report, or by mutual agreement of the Purchaser
and the Shareholders, or by the Accounting Firm, as the case may be, is
greater than the Estimated Net Working Capital, the Purchaser hereby agrees
to cause Star Leasing to pay to each Shareholder by wire transfer in
immediately available funds to an account designated by such Shareholder
its Shareholder's Percentage of such difference within two business days of
a written demand therefor from the Shareholders. (viii) The Purchaser
agrees to permit the Shareholders and their representatives (including
accountants) to have full and timely access to, and to examine and make
copies of, all applicable books, records and schedules which are in the
possession of the Purchaser after the Closing and which are necessary to
prepare the Shareholders Report.
SECTION 9.03. EXPENSES. Each of the parties hereto shall pay its own
--------
expenses (including attorney's fees) in connection with this Agreement and the
transactions hereby contemplated. All expenses of the Shareholders and the
Sellers in connection with this Agreement and the transactions hereby
contemplated shall be paid by the Shareholders, and no part of such expenses
shall be liabilities of Star Leasing or Star Sub L.P. or constitute Assumed
Liabilities nor in any way be charged to or for the account of the Business or
the Hotels or the Purchaser. The Merger Agreement provides that all amounts
payable to secure the Consents relating to the Franchise Agreements shall be
paid by the REIT.
SECTION 9.04. FEE PAYMENT. (a) In order to compensate the Purchaser for
-----------
certain management services to be performed by it and its Affiliates during the
period from the Closing Date through December 31, 1998 for and on behalf of the
Sellers, the Shareholders hereby agree to pay to the Purchaser, at Closing , an
amount equal to the Fee Payment (as hereinafter defined).
(b) At Closing or promptly thereafter, the Sellers shall pay a fee (the
"Fee Payment") to the Purchaser as follows: each Shareholder shall pay to the
Purchaser an amount equal to such Fee Payment multiplied by the Shareholder's
Percentage of such Shareholder; provided, however that the amount of such
payment by any Shareholder shall not, when aggregated with the amount, if any,
which such Shareholder is required to pay pursuant to Sections 9.02(ii) and
(vi), exceed the aggregate distributions made to such Shareholder by Star
Leasing from December 31, 1997 through the Closing Date (including any
distribution made on the Closing Date pursuant to Section 9.02(ii)).
(c) Based upon the Pro Forma Budgets, Salomon Smith Barney has prepared
certain pro forma projections of the operations of the Business for the calendar
year ending December 31, 1998 (the "Pro Forma Annual Financial Statements").
The Sellers shall prepare a pro forma projection of the operations of the
Business for such calendar year on a month-by-month basis, based upon the Pro
Forma Budgets (the "Pro Forma Monthly Financial Statements"), which shall be
reasonably acceptable to the Purchaser. The Fee Payment shall be the amount, if
any, by which (i) an amount equal to the product of (A) the annual net operating
income of the Business as shown on the Pro Forma Annual Financial Statements and
(B) a fraction, the numerator of which is the number of days in the period from
the Closing Date to and including December 31, 1998 and the denominator of which
is 365, exceeds (ii) the aggregate net operating income of the Business for
such period as shown on the Pro Forma Monthly Financial Statements (with net
operating income for any partial month being included on a pro rata basis, based
upon the number of days in such month included in such
26
<PAGE>
period).
ARTICLE X
ADDITIONAL COVENANTS
SECTION 10.01. FURTHER ASSURANCES. From and after the Closing Date, all
------------------
parties shall, at any time and from time to time, at their sole cost and
expense, make, execute and deliver, or cause to be made, exe cuted and
delivered, such assignments, deeds, bills of sale, drafts, checks, returns,
filings and other instruments, consents and assurances and take or cause to be
taken all such action as any other party may reasonably request for the
effectual consummation, confirmation and particularization of this Agreement and
the transactions contemplated by this Agreement.
SECTION 10.02. CERTAIN EMPLOYMENT MATTERS. (a) The Purchaser shall offer
--------------------------
employment as of the Closing Date to each Person (other than employees who may
be included in the description set forth on Schedule 10.02(a)) who, on the
---
Closing Date, is actively employed by the Star Management or who is absent from
work by reason of vacation, sick leave, short-term disability or due to
authorized leave of absence or military service. Such employment shall be in a
position similar to the position in the Business as of the Closing Date at the
same location at which such employee was employed by the Sellers immediately
prior to the Closing Date. Any such employee who accepts such offer of
employment shall be referred to herein as a Retained Employee. Except as
provided in Section 10.02(b), (d) and (e) below, the Purchaser shall have no
liability, and the Sellers shall hold the Purchaser harmless, from all liability
with respect to each employee of Star Management who is included in the
description set forth on Schedule 10.02(a). Nothing in this Section 10.02 shall
--------
prohibit the Purchaser from terminating the employment of any Retained Employee
at any time after the Closing.
(b) As of the Closing Date, the Purchaser shall provide the Retained
Employees coverage under benefit plans and programs similar to the benefit plans
and programs provided by the Purchaser to its similarly situated employees.
Such benefit plans and programs maintained by the Purchaser shall give credit to
the Retained Employees to the same extent as such employees had earned credit as
of such date under the Sellers' benefit plans and programs for (i) service prior
to the Closing Date toward any waiting period for eligibility and (ii) in the
case of group health plans, amounts paid in the year in which the Closing Date
occurs toward deductibles and out of pocket limitations, and such Purchaser
group health plan shall waive any preexisting condition limitation, in each case
to the extent credited, paid or satisfied under the benefit plans and programs
of Star Management. The Purchaser shall be liable and responsible for all
accrued and unused vacation and sick pay as of the Closing Date for all Retained
Employees.
(c) As of the Closing Date, Star Management shall, to the extent permitted
by applicable law, terminate (i) its 401(k) Plan (the "Sellers' 401(k) Plan")
and (ii) its Retirement Savings Plan (the "ESOP"), and shall distribute the
assets of such plans to their respective participants and beneficiaries in
accordance with the relevant plan documents and applicable law. The Purchaser
shall cause an individual account plan that it maintains (the "Purchaser's
401(k) Plan") to be amended, if necessary, to accept eligible rollover
distributions, as defined in Code section 402(f)(2)(A), from the Sellers' 401(k)
Plan and the Sellers' ESOP. As of the Closing Date, the Purchaser shall cover
the Retained Employees who are participants in the Sellers' 401(k) Plan in the
Purchaser's 401(k) plan. The Purchaser shall recognize accumulated service with
Star Management for purposes of eligibility and vesting under the Purchaser's
401(k) Plan.
27
<PAGE>
(d) The Purchaser hereby agrees to defend and indemnify the Sellers, the
Shareholders and their respective agents from and against any and all liability,
loss, claim, demand, cost, expense, including without limitation, reasonable
attorneys' fees, charges and costs, and any other liability which the Sellers,
the Shareholders and their respective agents may incur under, or on account of,
the WARN Act or any similar state laws on account of the transactions
contemplated in this Agreement. The foregoing shall in no way impair the
ability of the Purchaser to modify the terms of employment of, or terminate, any
employee at any time after the Closing Date, although such action may result in
liability for the Purchaser under this Section 10.02(d).
(e) As of the Closing Date, the Purchaser shall offer and/or provide group
health plan coverage, to the extent required of Star Management or the Purchaser
by the group health plan continuation coverage requirements of section 4980B of
the Code and sections 601 through 608 of ERISA ("continuation coverage"), to
each individual who (i) is covered by Star Management's group health plan as of
the Closing Date, loses coverage under Star Management's group health plan on
account of the transactions contemplated by this Agreement, and does not become
an employee of the Purchaser, (ii) is an eligible dependent of an individual
described in (i) above covered by Star Management's group health plan as of the
Closing Date, (iii) is receiving, as of the Closing Date, continuation coverage
under Star Management's group health plan, or (iv) is entitled to elect, as of
the Closing Date, continuation coverage under Star Management's group health
plan.
(f) (i) No Star Company nor any of their respective ERISA Affiliates has
any obligation to contribute to a Multiemployer Plan except as set forth on
Schedule 3.17 (the "Sellers Multiemployer Plans").
----
(ii) The Purchaser and the Sellers intend to comply with Section 4204
of ERISA so as to prevent Star Management from incurring at the Closing
Date a complete or partial withdrawal in respect of the Sellers
Multiemployer Plans determined as if the Purchaser is the "purchaser"
referred to in such Section 4204 as follows:
(A) For the first plan year of each Sellers Multiemployer Plans
commencing after the Closing, and for each of the succeeding four plan
years for each plan year for each plan, the Purchaser shall assume the
obligation to contribute to each such plan with respect to operations
conducted with the business assets acquired from Star Management for
substantially the same number of contribution base units (as defined
in Section 4001(a)(11) if ERISA) for which Star Management had an
obligation to contribute to such plan;
(B) Prior to each Sellers Multiemployer Plan's first plan year
beginning after the Closing, the Purchaser shall apply to such plan
for a variance from the requirement of Section 4204(a)(1)(B) of ERISA
that a bond be obtained or an amount be held in escrow and provided in
such Section. In the event any such plan determines that the request
does not qualify for a variance, the Purchaser shall obtain any
required bond or establish any required escrow within thirty (30) days
after the date on which it receives notice of such plan's decision,
and shall maintain such bond or escrow until the earliest of:
(i) the date a variance is obtained from such plan;
(ii) the date a variance or exception is obtained from the
Pension Benefit Guaranty Corporation; or
(iii) the last day of the fifth plan year commencing after the
Closing;
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<PAGE>
which bond or escrow shall be paid to such plan if the Purchaser
withdraws therefrom or fails to make a contribution to such plan when
due at any time during the first five plan years of such plan
commencing after the Closing. To the extent the Purchaser is unable
to obtain any variance as set forth above, the Purchaser shall be
responsible for the cost of any bond or escrow or other security
required of the Purchaser under Section 4204 of ERISA.
(C) In order to comply with subsection (a)(1)(C) of Section 4204
of ERISA, if the Purchaser withdraws in a complete or partial
withdrawal from any Sellers Multiemployer Plan with respect to which
the Purchaser has assumed an obligation to contribute pursuant to this
Agreement and such withdrawal or partial withdrawal occurs during the
first five plan years commencing with the first plan year after the
Closing, Star Management shall be secondarily liable for any
withdrawal liability it would have had to such plan on the Closing
Date under Title IV of ERISA. The Purchaser agrees to provide Star
Management with reasonable advance notice or its anticipated failure
to pay any withdrawal liability and to furnish Star Management
promptly with a copy of any notice of withdrawal liability it may
receive with respect to such plan.
(iii) As soon as practicable after the execution of this Agreement,
Star Management shall request in writing that the plan sponsor of each
Sellers Multiemployer Plan provide Star Management with an estimate of Star
Management's potential withdrawal liability to such plan as of the date of
this Agreement, and the Purchaser shall reimburse Star Management for the
amount, if any, Star Management is required to pay for such estimates.
(iv) Purchaser shall indemnify and hold harmless the Sellers and the
Shareholders against any loss, liabilities, claims, damages and expenses
arising out of the secondary liability assumed by Star Management under
Section 10.02(f)(ii)(C).
(g) Neither the Sellers nor any Star Company will take, or permit any of
their respective Affiliates to take, any action which would impede, hinder,
interfere or otherwise compete with the Purchaser's effort to hire the Retained
Employees as contemplated above.
(h) Nothing contained herein shall obligate the Purchaser to adopt or
continue any particular employee benefit plan, or to continue to provide any
particular level of benefits, after the Closing Date. The Purchaser shall
indemnify and hold harmless the Sellers and the Shareholders against any
liability or claim arising out of any changes in or terminations of such plans
on and after the Closing Date, or otherwise arising with respect to the terms
and conditions of employment of any Retained Employee or other employees of the
Purchaser after the Closing Date.
(i) The Sellers and the Shareholders hereby, jointly and severally,
indemnify the Purchaser and Management Sub and their respective Affiliates
against any liability of the Sellers arising under ERISA or the provisions of
the Code relating to employee benefit plans solely on account of the
relationship of an entity to the Sellers under Code section 414.
(j) No provision of this Section 10.02 shall create any third party
beneficiary rights in any employee or former employee of the Sellers, the
Purchaser, the Management Sub or any other Person (including any beneficiary or
dependent thereof).
29
<PAGE>
(k) Except as expressly assumed by the Purchaser in Sections 10.02(b), (c),
(d), (f) and (h) the Sellers shall retain, and the Purchaser shall not be liable
for, (i) all obligations and liabilities under all Employee Plans and otherwise
in respect of any employee, prior employee or independent contractor (including
any beneficiary or dependent thereof) of the Sellers or any Star Company and
(ii) all liabilities and obligations arising under any workers' compensation
arrangement to the extent such liability or obligation relates to events
occurring (whether or not reported) during the period prior to the Closing Date.
For purposes of this Section, a claim shall be deemed to be incurred when (A)
with respect to medical or dental benefits, the medical or dental services
giving rise to such claim are performed and ( B) with respect to life, accident
or disability benefits, when the event giving rise to such claim occurs.
(l) The Purchaser shall have no liability or obligation arising out of or
related to any Multiemployer Plan which is not listed in Schedule 3.17 or under
----
any Multiemployer Plan listed on Schedule 3.17 other than those related to the
----
operation of the Hotels.
SECTION 10.03. RETENTION OF RECORDS. After the Closing, the Sellers
--------------------
and the Shareholders shall, upon reasonable notice to the Purchaser, have
reasonable access during usual business hours to the books and records of the
Sellers for periods prior to the Closing Date delivered to it hereunder for all
reasonable business and tax purposes and may make copies or extracts from such
books and records for such purposes. The Purchaser agrees to retain such books
and records for at least three years after the Closing Date or later upon
request from the Sellers until final completion of all Internal Revenue Service
and state tax audits relating to any business, sales, revenues or income of the
Sellers with respect to tax periods preceding or including the Closing Date;
provided, however, that if the Purchaser shall, after the first year following
the Closing Date, propose to destroy or dispose of any such books and records,
it shall first so advise the Sellers and, if any Seller objects in writing to
such destruction or disposition, shall either continue to preserve such books
and records for the requisite period or shall deliver to the Sellers, at the
expense of the Sellers, such books and records as were proposed to be destroyed
or disposed of.
SECTION 10.04. CERTAIN HOTELS. If, prior to the Closing, the Lessor
--------------
with respect to any of the Hotels listed in Schedule 10.04 sells or otherwise
-----
disposes of any such Hotel and, as a result, the related Hotel Lease and any
related Hotel Management Agreement or Third Party Hotel Management Agreement is
terminated, such Contracts shall automatically be removed from Schedule 3.07(a)
or (b) as the case may be effective as of the date of this Agreement.
SECTION 10.05. TAX RETURNS. The Purchaser will file the final tax
-----------
returns of Star Leasing and Star Sub L.P. that ends on the Closing Date as a
result of the termination of such partnership(s) pursuant to Section 708(b)(1)
of the Code subject to the approval of the Sellers which approval shall not be
unreasonably delayed or withheld.
ARTICLE XI
TERMINATION
SECTION 11.01. TERMINATION. This Agreement may be terminated at any
-----------
time prior to the Closing Date:
(a) by mutual written consent of the Purchaser and Sellers;
30
<PAGE>
(b) by either the Purchaser or the Sellers if the Closing has not
occurred on or before October 31, 1998 (the "Termination Date"); provided,
however, this provision shall not be available to a party who fails or
refuses to consummate the transactions contemplated hereby or to take any
other action necessary to consummate such transactions in breach of such
party's obligations under this Agreement;
(c) by the Purchaser (i) if there has been a material violation or
breach by a Shareholder or a Seller of any agreement, representation or
warranty contained in this Agreement and such violation, breach or
condition has not been waived by the Purchaser; provided that in the case
of a violation or breach which may be cured or remedied, the Purchaser
shall have provided the Sellers written notice describing the same and such
violation or breach shall not have been cured or remedied within 20 days of
such notice or (ii) if the satisfaction of any condition to the obligations
of the Purchaser hereunder becomes impossible or shall not occur on or
prior to the Termination Date; or
(d) by the Sellers (i) if there has been a material violation or
breach by the Purchaser of any agreement, representation or warranty
contained in this Agreement and such violation, breach or condition has not
been waived by the Sellers; provided that in the case of a violation or
breach which may be cured or remedied, the Sellers shall have provided the
Purchaser written notice describing the same and such violation or breach
shall not have been cured or remedied within 20 days of such notice or (ii)
if the satisfaction of any condition to the obligations of the Sellers
hereunder becomes impossible or shall not occur on or prior to the
Termination Date.
SECTION 11.02. NO WAIVER. No termination pursuant to Section 11.01 shall
---------
be deemed to constitute a release or waiver by any party of any claim against
another party hereto based on any breach by such party of its agreements,
representations and warranties contained in this Agreement.
ARTICLE XII
INDEMNIFICATION
SECTION 12.01. BY THE SELLERS. The Sellers, jointly and severally, agree
--------------
to indemnify and hold harmless the Purchaser, Parent Corp. and, from and after
the Closing, if any, Star Leasing and Star Sub L.P., and their respective
Affiliates, and their respective shareholders, partners, directors, officers,
employees, agents, successors and assigns (each an "indemnified person") from
and against, and to reimburse any such indemnified person when incurred with
respect to, any and all Losses incurred by such indemnified person by reason of
or arising out of or in connection with (i) the breach of any representation or
warranty made by or on behalf of any Seller contained in this Agreement or any
other Seller Document or any exhibit hereto or thereto or in any Schedule or
certificate furnished or to be furnished to the Purchaser pursuant to or in
connection with this Agreement, a Seller Document or any of the transactions
hereby contemplated; (ii) the failure of any Seller to perform any agreement
required by this Agreement or any Seller Document to be performed by such
Person; (iii) the allegation by any third party of the existence of any state
of facts which if it existed would constitute a breach of any representation or
warranty made by or on behalf of any Seller contained in this Agreement or any
other Seller Document or any exhibit hereto or thereto or in any Schedule or
certificate furnished or to be furnished to the Purchaser pursuant to or in
connection with this Agreement, a Seller Document or any of the transactions
hereby contemplated; and (iv) any Excluded Liability which such indemnified
person may be liable to pay, perform or discharge.
31
<PAGE>
Each indemnified person agrees to give prompt notice to the Sellers of any
claim by any third party for which such indemnified party may request
indemnification under this Section 12.01 (except any failure or delay to give
such notice shall not relieve any Seller of its obligations hereunder unless
and only to the extent, if at all, that any such Person has been irrevocably
prejudiced directly by reason of such failure or delay).
If (a) any such third party claim shall be a claim solely for monetary
damages, (b) the entire amount of such claim shall not be subject to the
limitations on indemnification set forth in Section 12.03 hereof, and (c) the
Sellers shall agree in writing within ten business days after receipt of notice
of such claim that they are required, pursuant to this Section 12.01, to
indemnify for the full amount of such claim, then the Sellers shall be entitled
to control the contest, defense, settlement or compromise of any such claim
(including the engagement of counsel in connection therewith), at their own cost
and expense, including the cost and expense of attorneys' fees in connection
with such contest, defense, settlement or compromise and each indemnified person
shall have the right to participate in the contest, defense, settlement or
compromise of any such claim at its own cost and expense, including the cost and
expense of attorneys' fees in connection with such participation; provided,
however, that, the Sellers shall not settle or compromise any such claim without
the prior written consent of the indemnified persons, unless the sole relief
provided is monetary damages that are paid in full by the Sellers.
If such claim shall not be solely a claim for monetary damages and/or such
claim shall be subject, in whole or in part, to the limitations on
indemnification set forth in Section 12.03, but the Sellers shall agree in
writing within ten business days after receipt of notice of such claim that they
are required, pursuant to this Section 12.01 (but subject to the limitations set
forth in Section 12.03), to indemnify each indemnified person for the full
amount of such claim, then the contest, defense, settlement and compromise of
such claim shall be controlled jointly by the Sellers, on the one hand, and the
indemnified persons, on the other hand (and any counsel engaged in connection
therewith shall be acceptable to both such groups), at the cost and expense of
the Sellers, including the cost and expense of attorneys' fees in connection
with such contest, defense, settlement or compromise, and such claim shall not
be settled or compromised unless the indemnified persons, on the one hand, and
the Sellers, on the other hand, jointly approve such settlement or compromise.
If such claim shall not be a claim for monetary damages or the Sellers do
not agree in writing within ten business days after receipt of notice of such
claim that the Sellers are required, pursuant to this Section 12.01, to
indemnify the indemnified persons for the full amount of such claim, then the
indemnified persons shall control the contest, defense, settlement or compromise
of any such claim (including the engagement of counsel in connection therewith),
at the Sellers' cost and expense, including the cost and expense of attorneys'
fees in connection with such contest, defense, settlement or compromise, and the
Sellers shall have the right to participate in the contest, defense, settlement
or compromise of any such claim at their own cost and expense, including the
cost and expense of attorneys' fees in connection with such participation;
provided, however, that the indemnified persons shall diligently defend any such
claim and shall not settle or compromise any such claim without the prior
written consent of the Sellers, which consent shall not be unreasonably
withheld.
Notwithstanding the foregoing, the right of the Sellers (i) to control any
contest or defense or (ii) to require that the indemnified persons diligently
defend any claim or obtain the consent of the Sellers to any settlement or
compromise of any claim shall be conditioned upon the Sellers providing to such
indemnified persons evidence satisfactory to such indemnified persons of the
financial ability of the Sellers to satisfy such claim.
32
<PAGE>
SECTION 12.02. BY THE PURCHASER. The Purchaser agrees to indemnify and
----------------
hold harmless the Sellers and their respective Affiliates, and their respective
shareholders, partners, directors, officers, employees, agents, successors and
assigns (each an "indemnified person") from and against, and to reimburse any
such indemnified person when incurred with respect to, any and all Losses
incurred by such indemnified person by reason of or arising out of or in
connection with (i) the breach of any representation or warranty made by or on
behalf of the Purchaser contained in this Agreement or any other Purchaser
Document or any exhibit hereto or thereto or in any Schedule or certificate
furnished or to be furnished to the Sellers pursuant to or in connection with
this Agreement, a Purchaser Document or any of the transactions hereby
contemplated, (ii) the failure of the Purchaser to perform any agreement
required by this Agreement or any Purchaser Document to be performed by it,
(iii) the allegation by any third party of the existence of any or state of
facts which if it existed would constitute a breach of any representation or
warranty made by or on behalf of the Purchaser contained in this Agreement or
any other Purchaser Document or any exhibit hereto or thereto or in any Schedule
or certificate furnished or to be furnished to the Sellers pursuant to or in
connection with this Agreement, a Purchaser Document or any of the transactions
hereby contemplated, and (iv) any Assumed Liability which such indemnified
person is required to pay, perform or discharge.
Each indemnified person agrees to give prompt notice to the Purchaser of
any claim by any third party for which such indemnified party may request
indemnification under this Section 12.02 (except any failure or delay to give
such notice shall not relieve the Purchaser of its obligations hereunder unless
and only to the extent, if at all, that the Purchaser has been irrevocably
prejudiced directly by reason of such failure or delay).
If (a) any such third party claim shall be a claim solely for monetary
damages, (b) the entire amount of such claim shall not be subject to the
limitations on indemnification set forth in Section 12.03 hereof, and (c) the
Purchaser shall agree in writing within ten business days after receipt of
notice of such claim that it is required, pursuant to this Section 12.02, to
indemnify for the full amount of such claim, then the Purchaser shall be
entitled to control the contest, defense, settlement or compromise of any such
claim (including the engagement of counsel in connection therewith), at its own
cost and expense, including the cost and expense of attorneys' fees in
connection with such contest, defense, settlement or compromise and each
indemnified person shall have the right to participate in the contest, defense,
settlement or compromise of any such claim at its own cost and expense,
including the cost and expense of attorneys' fees in connection with such
participation; provided, however, that, the Purchaser shall not settle or
compromise any such claim without the prior written consent of the indemnified
persons, unless the sole relief provided is monetary damages that are paid in
full by the Purchaser.
If such claim shall not be solely a claim for monetary damages and/or such
claim shall be subject, in whole or in part, to the limitations on
indemnification set forth in Section 12.03, but the Purchaser shall agree in
writing within ten business days after receipt of notice of such claim that it
is required, pursuant to this Section 12.02 (but subject to the limitations set
forth in Section 12.03), to indemnify each indemnified person for the full
amount of such claim, then the contest, defense, settlement and compromise of
such claim shall be controlled jointly by the Purchaser, on the one hand, and
the indemnified persons, on the other hand (and any counsel engaged in
connection therewith shall be acceptable to both such groups), at the cost and
expense of the Purchaser, including the cost and expense of attorneys' fees in
connection with such contest, defense, settlement or compromise, and such claim
shall not be settled or compromised unless the indemnified persons, on the one
hand, and the Purchaser, on the other hand, jointly approve such settlement or
compromise.
If such claim shall not be a claim for monetary damages or the Purchaser
does not agree in writing within ten business days after receipt of notice of
such claim that it is required, pursuant to this Section 12.02,
33
<PAGE>
to indemnify the indemnified persons for the full amount of such claim, then the
indemnified persons shall control the contest, defense, settlement or compromise
of any such claim (including the engagement of counsel in connection therewith),
at the Purchaser's cost and expense, including the cost and expense of
attorneys' fees in connection with such contest, defense, settlement or
compromise, and the Purchaser shall have the right to participate in the
contest, defense, settlement or compromise of any such claim at their own cost
and expense, including the cost and expense of attorneys' fees in connection
with such participation; provided, however, that the indemnified persons shall
diligently defend any such claim and shall not settle or compromise any such
claim without the prior written consent of the Purchaser, which consent shall
not be unreasonably withheld.
SECTION 12.03. LIMITATIONS ON INDEMNIFICATION. Except as set forth
------------------------------
in the proviso to this Section, neither the Sellers, on the one hand, nor the
Purchaser, on the other hand, shall be required to pay any amounts pursuant to
clause (i) or (iii) of Section 12.01, or pursuant to clause (i) or (iii) of
Section 12.02 hereof (as the case may be) unless and until the aggregate of all
Losses (other than those hereinafter referred to in the proviso to this
sentence) incurred by all persons indemnified by such indemnifying parties under
such clauses exceeds $500,000, in which event such indemnifying parties shall be
liable, dollar-for-dollar, for the full amount of such Losses in excess of
$500,000; provided that, notwithstanding the foregoing, the Sellers shall in all
-------- ----
events be obligated to indemnify on a dollar-for-dollar basis from and against
all Losses arising out of or in connection with the breach or alleged breach of
the representations and warranties made in Sections 3.01, 3.02(a), (b),
(c)(i)(A) and (c)(i)(B), 3.04(a), 3.05, 3.20 and 3.21, and the first two
sentences of Section 3.02(c) (or Section 3.22 as such Section relates to any of
the foregoing Sections) and in any certificate delivered pursuant to Section
7.14, and the Purchaser shall be obligated to indemnify on a dollar-for-dollar
basis from and against all Losses arising out of or in connection with the
breach or alleged breach of the representations and warranties made in Sections
4.01, 4.02(a) and (b)(i), 4.04 and 4.05 and the first three sentences of Section
4.02(b); and provided, further, that with respect to any Losses for which a
-------- -------
claim is made against the Sellers under Section 12.01(i) or (iii) (other than
those arising out of or in connection with the breach or alleged breach of the
representations and warranties made in Sections 3.01, 3.02(a), (b), (c)(i)(A),
and (c)(i)(B), 3.04(a), 3.05, 3.20 and 3.21, and the first two sentences of
Section 3.02(c) (or Section 3.22 as such Section relates to any of the foregoing
Sections) and in any certificate delivered pursuant to Section 7.14) in no event
shall the aggregate amount required to be paid by the Sellers exceed $3,000,000,
for all such claims for indemnity brought prior to the Stipulated Date (the
"Stipulated Date Payments"), and the lesser of (Y) $1,000,000 and (Z)
$3,000,0000 minus the amount of the Stipulated Date Payments for all such claims
for indemnification made after the Stipulation Date.
SECTION 12.04. ESCROW. In any instance in which the Purchaser has a claim
------
for indemnity under this Article XII, the Purchaser agrees that it will make a
demand and a reasonable effort under the circumstances (which shall not require
the Purchaser to institute any suit or other action) to collect such claim as
against the funds, if any, then held under the Escrow Agreement prior to making
any claim as against any individual Shareholder with respect to such claim.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.01. SURVIVAL. All statements, certifications, indemnifications,
--------
representations and warranties made hereby by the parties to this Agreement, and
their respective covenants, agreements and obligations to be performed pursuant
to the terms hereof, shall survive the Closing, notwithstanding any
34
<PAGE>
examination by or on behalf of any party hereto, notwithstanding any notice of a
breach or of a failure to perform not waived in writing and notwithstanding the
consummation of the transactions hereby contemplated with knowledge of such
breach or failure, and (except with respect to those made in Sections 3.01,
3.02(a), (b), (c)(i)(A) and (c)(i)(B), 3.04(a), 3.20 and 3.21, and the first two
sentences of Section 3.02(c) (or Section 3.22 as such Section relates to any of
the foregoing Sections), Sections 4.01, 4.02(a) and (b)(i), 4.04 and 4.05 and
the first three sentences of Section 4.02(b)and in any certificate delivered
pursuant to Section 7.14, which shall survive without limitation, and those
contained in Section 3.05, which shall survive until the expiration of the
statute of limitations on the tax matters discussed therein) the representations
and warranties made hereby by the parties shall terminate on the first
anniversary of the Closing Date, except to the extent a party gives written
notice to the other parties of any breach thereof on or before such date, and
then only with respect to the matters described in such notice; provided,
however, that nothing herein contained shall modify or be construed to modify in
any respect whatsoever any covenant, agreement or obligation to be performed by
any party pursuant to the provisions of this Agreement.
SECTION 13.02. NOTICES. Any notice, communication, request, reply or
-------
advice (collectively, "Notice") provided for or permitted by this Agreement to
be made or accepted by either party must be in writing. Notice shall be given
or served by personal delivery, by delivery by nationally-recognized overnight
courier, or by facsimile transmission, if applicable. Notice by personal
delivery shall be effective on the business day delivered. Notice by overnight
courier shall be effective one business day after deposit with the courier
service. Notice given by facsimile transmission shall be effective on the
business date delivered. For the purposes of Notice, the addresses of the
parties shall be:
Any Seller:
As set forth on Schedule 13.02
with copy to:
Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, N.Y. 10104
Fax No.: (212) 541-4630
Attn: Alan S. Pearce, Esq.
Purchaser:
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Fax No.: 202-965-4445
Attn: Mr. Paul W. Whetsell
with copy to:
DeCampo, Diamond & Ash
805 Third Avenue
New York, New York 10022
Fax No.: 212-758-1728
Attn: William H. Diamond, Esq.
The parties shall have the right from time to time to change their respective
addresses for notice by at least five
35
<PAGE>
days' written notice to the other party.
SECTION 13.03. ENTIRE AGREEMENT; AMENDMENT. All prior or contemporaneous
---------------------------
agreements, contracts, promises, representations and statements, if any, among
the parties hereto, or their representatives, as to the subject matter hereof,
are merged into this Agreement, the Purchaser Documents and the Seller Documents
which shall constitute the entire agreement among such Persons with respect to
the matters contained therein. No waiver or modification of the terms hereof
shall be valid unless in writing signed by the party to be charged.
SECTION 13.04. GOVERNING LAW. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York applicable to
contracts made and wholly performed in such state by residents thereof without
giving effect to the conflict of laws principles thereof.
SECTION 13.05. ASSIGNMENT. This Agreement shall be binding upon and inure
----------
to the benefit of the parties hereto and their respective successors and
assigns, provided that this Agreement may not be assigned to any third party
except that this Agreement and the Purchaser's rights hereunder may be assigned,
in whole or in part, by the Purchaser to one or more of its Affiliates,
including, without limitation, the Management Sub. The Purchaser shall remain
fully and primarily liable for the performance by any assignee of any obligation
of the Purchaser hereunder. Any purported assignment in violation of this
Section 13.05 shall be void.
SECTION 13.06. PUBLICITY. The Purchaser and the Sellers shall consult
---------
with one another before issuing any press release or public announcement or
announcement to their respective employees generally about the transactions
contemplated by this Agreement. Except as may be required by applicable law, no
party shall issue any press release or other public announcement without the
consent of the other parties, which consent shall not be unreasonably withheld
or delayed.
SECTION 13.07. TRANSFER TAXES. Any taxes in the nature of sales or
--------------
transfer taxes, documentary stamps or similar taxes payable on the sale or
transfer of all or any portion of the assets, properties or business being
transferred under or pursuant to this Agreement shall be paid fifty (50%) per
cent by the Shareholders and the Sellers and fifty (50%) per cent by the
Purchaser.
SECTION 13.08. LEGAL FEES. In the event of any litigation or arbitration
----------
concerning the interpretation, application or enforcement of this Agreement, the
prevailing party shall be entitled to recover from the other party, in addition
to all other remedies to which the prevailing party is entitled, all court costs
and all fees and expenses of attorneys and expert witnesses incurred by the
prevailing party.
SECTION 13.09. 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 constitute a single agreement.
SECTION 13.10. CAPTIONS AND SECTIONS. The captions appearing in this
---------------------
Agreement are inserted only as a matter of convenience and for reference and in
no way define, limit or describe the scope and intent of this Agreement or any
of its provisions. All references to Sections, Articles, Exhibits and Schedules
shall be deemed to refer to those of this Agreement unless otherwise specified.
SECTION 13.11. THIRD PARTIES. Except as specifically set forth in this
-------------
Agreement, other than the parties to this Agreement, no person shall have any
rights under or to enforce any provisions of this Agreement.
36
<PAGE>
SECTION 13.12. SPECIFIC PERFORMANCE. The parties acknowledge and agree
--------------------
that the breach of certain provisions of this Agreement could not be adequately
compensated with monetary damages, and the parties hereto agree, accordingly,
that injunctive relief and specific performance shall be appropriate remedies to
enforce such provisions and waive any claim or defense that there is an adequate
remedy at law for breaches of such provisions.
SECTION 13.13. BULK TRANSFERS. The parties acknowledge that the parties
--------------
hereto will not comply with the bulk transfer laws of any jurisdiction, in
connection with the transactions contemplated by this Agreement.
37
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
the day and year first above written.
AGHL GP, INC.
By:__________________________
Name:
Title:
_______________________________
CAROL CARRINGTON SHAW
_______________________________
KENNETH E. BARR
_______________________________
STEVEN D. JORNS
_______________________________
KENNETH W. SHAW
_______________________________
LEWIS W. SHAW, II
_______________________________
JAMES E. SOWELL
_______________________________
BRUCE G. WILES
AMERICAN GENERAL HOSPITALITY, INC.
By:__________________________
Name:
Title:
38
<PAGE>
CMC OPERATING PARTNERSHIP, L.P.
By: CMC OPERATING COMPANY,
general partner
By:______________________________
Name:
Title:
39
<PAGE>
EXHIBIT 5.1
PAUL, WEISS, RIFKIND WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
June 5, 1998
MeriStar Hotels & Resorts, Inc.
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
MeriStar Hotels & Resorts, Inc.
Registration Statement on Form S-1
Registration No. 333-49881
------------------------------------
Ladies and Gentlemen:
In connection with the above-captioned Registration Statement, dated
April 10, 1998, as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder (the
"Rules"), we have been requested by MeriStar Hotels & Resorts, Inc. (the
"Company"), to furnish our opinion as to the legality of 8,400,000 shares (the
"Shares") of common stock, par value $.01 per share ("Common Stock"), underlying
rights to purchase Common Stock offered by the Company, registered for sale
thereunder.
In connection with the furnishing of this opinion, we have reviewed the
Registration Statement (including all amendments thereto), the prospectus
included as part of the Registration Statement, originals, or copies certified
or
<PAGE>
MeriStar Hotels & Resorts, Inc. 2
otherwise identified to our satisfaction, of the Company's Certificate of
Incorporation and By-laws, each as in effect on the date hereof, and records of
certain of the Company's corporate proceedings. We have also examined and relied
upon representations as to factual matters contained in certificates of officers
of the Company, and have made such other investigations of fact and law and have
examined and relied upon the originals, or copies certified or otherwise
identified to our satisfaction, of such documents, records, certificates or
other instruments, and upon such factual information otherwise supplied to us,
as in our judgment are necessary or appropriate to render the opinion expressed
below. In addition, we have assumed, without independent investigation, the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity of original documents to all documents submitted
to us as certified, photostatic, reproduced or conformed copies, the
authenticity of all such latter documents and the legal capacity of all
individuals who have executed any of the documents.
Based upon the foregoing, we are of the opinion that the Shares, when
issued, delivered and paid for as contemplated in the Registration Statement,
will be duly authorized, validly issued, fully paid and nonassessable.
Our opinion expressed above is limited to the General Corporation Law of
the State of Delaware. Please be advised that no member of this firm is
admitted to practice in the State of Delaware. Our opinion is rendered only
with respect to the laws, and the rules, regulations and orders thereunder,
which are currently in effect.
<PAGE>
MeriStar Hotels & Resorts, Inc. 3
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" contained in the Prospectus included in the Registration Statement. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required by the Act or the Rules.
Very truly yours,
/s/ Paul, Weiss, Rifkind, Wharton & Garrison
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE>
EXHIBIT 8.1
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
May 22, 1998
MeriStar Hotels & Resorts, Inc.
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Re: Registration Statement on Form S-1
Dear Ladies and Gentlemen:
In connection with the Registration Statement on Form S-1 (the "Registration
Statement") filed by MeriStar Hotels and Resorts, Inc. (the "Company"), with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended (the "Act"), and the rules and regulations thereunder (the
"'Rules"), we have been requested to render our opinion as to the matters
hereinafter set forth. Capitalized terms used and not otherwise defined herein
shall have the meanings attributed thereto in the Registration Statement.
In this regard, we have reviewed copies of the Registration Statement
(including the exhibits and amendments thereto) with respect to the
distribution of Rights to subscribe for and purchase shares of Common Stock of
the Company. We have also made such other investigations of fact and law and
have examined the originals, or copies authenticated to our satisfaction, of
such other documents, record, certificates or other instruments as in our
judgment are necessary or appropriate to render the opinion expressed below.
The opinion set forth below is limited to the Internal Revenue Code of 1986,
as amended (the "Code"), administrative rulings, judicial decisions, Treasury
regulations and other applicable authorities, all as in effect on the date
hereof. The statutory provisions, regulations, and interpretations upon which
our opinion is based are subject to change, and such changes could apply
retroactively. Any such change could affect the continuing validity of the
opinion set forth below. We assume no responsibility to advise you of any
subsequent changes in existing law or facts, nor do we assume any
responsibility to update this opinion with respect to any matters expressly
set forth herein, and no opinions are to be implied or may be inferred beyond
the matters expressly so stated.
Based upon and subject to the foregoing, we confirm that the opinion set
forth in the Registration Statement under the heading "Federal Income Tax
Consequences" constitutes our opinion with respect to such matters.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, or any amendment pursuant to Rule 462 under the Act,
and to the reference to us under the heading "Legal Matters" in the Prospectus
included in the Registration Statement, or any amendment pursuant to Rule 462
under the Act. In giving this consent, we do not hereby agree that we come
within the category of persons whose consent is required by the Act or the
Rules.
Very truly yours,
/s/ Paul, Weiss, Rifkind, Wharton &
Garrison
PAUL, WEISS, RIFKIND, WHARTON
& GARRISON
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
CapStar Hotel Company:
We consent to the use of our report dated May 19, 1998 related to the
balance sheet of MeriStar Hotels & Resorts, Inc. as of March 31, 1998 and the
use of our report dated March 30, 1998 related to the combined balance sheets
of the management and leasing business of CapStar Hotel Company and
subsidiaries ("OpCo") as of December 31, 1997 and 1996 and the related
combined statements of operations, owners' equity and cash flows for each of
the years in the three-year period ended December 31, 1997, included in the
registration statement on Form S-1 of MeriStar Hotels & Resorts, Inc.
We also consent to the reference to our firm under the heading "Experts" in
the registration statement.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
June 5, 1998
<PAGE>
EXHIBIT 23.2.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to Registration
Statement of MeriStar Hotels & Resorts, Inc. on Form S-1 (File No. 333-49881)
of our report dated January 30, 1998, except for Note 6, as to which the date
is March 16, 1998, on our audits of the financial statements of AGH Leasing,
L.P. and our report dated April 1, 1998, on our audits of the financial
statements of American General Hospitality, Inc. We also consent to the
references to our firm under the caption
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 5, 1998
<PAGE>
EXHIBIT 23.2.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to Registration
Statement of MeriStar Hotels & Resorts, Inc. on Form S-1 (File No. 333-49881)
of our report dated February 6, 1998 on our audits of the financial statements
of Winston Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and
for the ten months ended October 31, 1997 and the years ended December 31,
1996 and 1995. We also consent to the references to our firm under the caption
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
June 5, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
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<PAGE>
EXHIBIT 99.1
MERISTAR HOTELS & RESORTS, INC.
and
[----------------------------------------------------],
as Subscription Agent
This SUBSCRIPTION AGENCY AGREEMENT is dated as of [----------], 1998, by and
between MeriStar Hotels & Resorts, Inc., a Delaware corporation (the "Company"),
and [------------------------------------------], as Subscription Agent (the
"Subscription Agent").
WHEREAS, the Company has caused a Registration Statement on Form S-1
(Registration No. 333-49881) under the Securities Act of 1933, as amended (the
"Act"), to be filed with the Securities and Exchange Commission (the
"Commission") relating to the distribution by the Company of non-transferable
subscription rights (the "Rights") and the sale of newly issued shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), upon the
exercise of such Rights (such Registration Statement, in the form in which it
first becomes effective under the Act, and as it may thereafter be amended from
time to time, is referred to herein as the "Registration Statement"; the
prospectus contained in the Registration Statement, as it may be amended or
supplemented from time to time, is referred to herein as the "Prospectus," and
the distribution of the Rights and the sale of shares of Common Stock upon the
exercise thereof as contemplated by the Registration Statement is referred to
herein as the "Rights Offering");
WHEREAS, in the Rights Offering the Rights will be distributed to holders of
record of (a) shares of the common stock, par value $0.01 per share (the "REIT
Common Stock"), of MeriStar Hospitality Corporation, a Maryland corporation
operating as a real estate investment trust (the "REIT"), and (b) the units of
limited partnership (the "REIT OP Units") of MeriStar Hospitality Operating
Partnership, L.P., a Delaware limited partnership (the "REIT Operating
Partnership"), other than REIT OP Units held by the REIT or any of its
subsidiaries, as of the effective time of the Merger defined below (the "Record
Date") at a rate of approximately one-sixth of a Right for each share of REIT
Common Stock and/or REIT OP Unit held on the Record Date;
WHEREAS, the Company will be spun off (the "Spin-Off") by CapStar Hotel Company,
a Delaware corporation ("CapStar"), and certain of its affiliates, to become the
lessee, manager and operator of various hotel assets, including those currently
(i) owned, leased and managed by CapStar and its affiliates, and (ii) owned by
American General Hospitality Corporation, a Maryland corporation operating as a
real estate investment trust ("AGH");
<PAGE>
2
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of March 15,
1998, among AGH, American General Hospitality Operating Partnership, L.P., a
Delaware limited partnership, CapStar, CapStar Management Company, L.P., a
Delaware limited partnership, and CapStar Management Company II, L.P., a
Delaware limited partnership, CapStar will merge with and into AGH (the
"Merger"), with the result, among other things, that AGH will be the surviving
corporation operating under the name MeriStar Hospitality Corporation;
WHEREAS, immediately following the Spin-Off and the effective date of the
Merger, the Company will acquire certain other interests and assets pursuant to
an Acquisition Agreement, dated as of March 15, 1998 (the "Lessee-Manager
Acquisition Agreement");
WHEREAS, the Company will reserve for issuance, and authorize the issuance of,
an aggregate number of authorized and unissued shares of Common Stock (the
"Underlying Shares") not less than the aggregate number of shares of Common
Stock issuable pursuant to the Rights Offering;
WHEREAS, each holder of record of REIT Common Stock and/or REIT OP Units on the
Record Date (a "Rightholder") will be entitled pursuant to the Rights issued to
such Rightholder to subscribe for and purchase shares of Common Stock at a
subscription price (the "Subscription Price") equal to 95% of the average of the
daily high and low prices of the Common Stock on the New York Stock Exchange
("NYSE") or any other principal trading market on which the Common Stock is then
traded (the "Principal Market"), for the period (the "Measurement Period") of
five consecutive trading days (a "Trading Day") on the Principal Market
immediately following the third Trading Day after the date the Common Stock
opens for trading on the Principal Market;
WHEREAS, the issuance of shares of Common Stock in the Rights Offering is
conditioned upon consummation of the Spin-Off, the Merger and the transactions
contemplated by the Lessee-Manager Acquisition Agreement (collectively, the
"Formation Transactions");
WHEREAS, the Company has expressly reserved the right, at its sole option, to
cancel the Rights Offering if the Subscription Price is less than [----];
WHEREAS, the Rights will be exercisable at any time following 5:00 p.m., New
York City time, on the last day of the Measurement Period until 5:00 p.m., New
York City time, on the sixteenth calendar day immediately following the last day
of the Measurement Period, or such later date as the Company may determine (the
"Expiration Date"), unless the Rights Offering is earlier canceled;
WHEREAS, the Rights will entitle the Rightholder (but not a subsequent
transferee of the REIT Common Stock and/or REIT OP Units held by such
Rightholder on the Record
<PAGE>
3
Date) to purchase shares of Common Stock at the Subscription Price (the
"Subscription Privilege"); and
WHEREAS, the Company desires the Subscription Agent to act on its behalf in
connection with the Rights Offering as set forth herein, and the Subscription
Agent is willing so to act.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto hereby agree as follows:
SECTION 1. Appointment of Subscription Agent.
The Company hereby appoints the undersigned as the Subscription Agent to
act as agent for the Company in accordance with the instructions set forth in
this Agreement, and the Subscription Agent hereby accepts such appointment. The
Company may from time to time appoint such co-subscription agents as it may deem
necessary or desirable.
SECTION 2. Distribution of Subscription Certificates and International Holder
Subscription Forms; Issue of Securities.
(a) The Company will promptly notify the Subscription Agent upon the
effectiveness of the Registration Statement. [As transfer agent and registrar
for the Common Stock], the Subscription Agent shall provide such assistance as
the Company may require in order to effect the distribution of the Subscription
Certificates (as defined in Section 3(b) hereof) or International Holder
Subscription Forms (as defined in Section 3(c) hereof), as the case may be, to
Rightholders. Such assistance shall include assistance in determining the
identity of Rightholders on the Record Date, the name and address of each
Rightholder, the number of Rights to which each Rightholder is entitled and
distributing the Subscription Certificates and International Holder Subscription
Forms to the applicable Rightholders. The Subscription Agent shall mail
Subscription Certificates and International Holder Subscription Forms to
Rightholders [(except those located in the United Kingdom)], together with a
copy of the Prospectus, no later than two Trading Days following the Record
Date. [Rightholders located in the United Kingdom must contact [---------------
- ----------] to obtain a copy of the International Holder Subscription Form and
the Prospectus.]
(b) The Company will authorize the issuance of, and will hold in reserve,
the Underlying Shares, and upon the valid exercise of Rights, the Company will
issue Underlying Shares to validly exercising Rightholders as set forth in the
Prospectus and herein.
SECTION 3. Subscription Privilege; Form of Subscription Certificates and
International
<PAGE>
4
Holder Subscription Forms.
(a) Upon the valid exercise of Rights, Rightholders will be entitled to
subscribe for and purchase Underlying Shares from the Company for the
Subscription Price.
(b) The Rights will be evidenced by Subscription Certificates (the
"Subscription Certificates") dated as of the Record Date. The Subscription
Certificates (and the form of election to exercise Rights to be printed on the
reverse thereof) will be substantially in the form attached as Exhibit 4.2 to
the Registration Statement. International Holder Subscription Forms (the
"International Holder Subscription Forms") referred to herein will be
substantially in the form attached as Exhibit 99.3 to the Registration
Statement.
(c) Subscription Certificates will not be provided to Rightholders whose
addresses are outside the United States or who have an APO or FPO address, but
will be held by the Subscription Agent for their account. Such Rightholders
[(except those located in the United Kingdom )] will receive International
Holder Subscription Forms in lieu of a Subscription Certificate from the
Subscription Agent. To exercise Rights, such Rightholders must notify the
Subscription Agent by duly completing an International Holder Subscription Form
and timely sending it by mail or telecopy to the Subscription Agent.
[Rightholders located in the United Kingdom will not initially be provided with
International Holder Subscription Forms. Interested Rightholders in the United
Kingdom will be directed to contact [--------------------------------].]
SECTION 4. Signature and Registration.
(a) The Subscription Certificates will be executed on behalf of the
Company by two of its executive officers. Any Subscription Certificate may be
signed on behalf of the Company by any person who, at the actual date of the
execution of such Subscription Certificate, will be a proper officer of the
Company to sign such Subscription Certificate, even if at the date of the
execution of this Agreement or the date of the actual issuance of such
certificate any such person is not such an officer.
(b) The Subscription Agent will keep or cause to be kept, at its principal
offices in [------------------------], books for the registration of ownership
of the Rights issued hereunder. Such books will show the names and addresses of
the respective Rightholders and the number of Rights held by each Rightholder.
SECTION 5. Division, Combination and Exchange of Subscription Certificates;
Mutilated, Destroyed, Lost or Stolen Subscription Certificates.
(a) Subscription Certificates may be divided, combined or exchanged for
any number of Subscription Certificates of different denominations; provided,
however, that the aggregate number of Rights evidenced by the Subscription
Certificate or
<PAGE>
5
Subscription Certificates so issued shall not exceed the aggregate number of
Rights evidenced by the Subscription Certificate or Subscription Certificates
surrendered in exchange therefore. The foregoing notwithstanding, a bank, trust
company, securities dealer or broker holding shares of Common Stock on the
Record Date for more than one beneficial owner may, upon proper showing to the
Subscription Agent, exchange its Subscription Certificate to obtain Subscription
Certificates for the number of Rights (including fractions thereof) which each
such beneficial owner would have been entitled to receive had each such
beneficial owner been the Rightholder of record on the Record Date. Any
Rightholder desiring to divide, combine or exchange Subscription Certificates
shall make such requests in writing to the Subscription Agent, and shall
surrender the Subscription Certificates to be divided, combined or exchanged to
the Subscription Agent. Thereupon the Subscription Agent shall deliver to the
person entitled thereto Subscription Certificates as so requested. In all cases
of transfer by an attorney-in-fact, the original power of attorney, duly
approved, or a copy thereof, duly certified, shall be deposited and remain with
the Subscription Agent. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority satisfactory to the Subscription Agent shall be produced and may be
required to be deposited and to remain with the Subscription Agent in its
discretion. The Company may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with any division,
combination or exchange of Subscription Certificates.
(b) Upon receipt by the Company and the Subscription Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Subscription Certificate, and, in case of loss, theft or destruction, of
indemnity and/or security satisfactory to them which may be in the form of an
open penalty bond, and reimbursement to the Company and the Subscription Agent
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Subscription Certificate if mutilated, the Company will make
and deliver a new Subscription Certificate of like tenor to the Subscription
Agent for delivery to the registered owner in lieu of the Subscription
Certificate so lost, stolen, destroyed or mutilated. If required by the Company
or the Subscription Agent, an indemnity bond must be sufficient in the judgment
of both to protect the Company, the Subscription Agent or any agent thereof from
any loss which any of them may suffer if a Subscription Certificate is replaced.
SECTION 6. Subsequent Issue of Subscription Certificates. Subsequent to their
original issuance, no Subscription Certificates shall be issued except (a)
Subscription Certificates issued upon any combination, division or exchange of
Rights pursuant to Section 5(a) hereof, (b) Subscription Certificates issued in
replacement of mutilated, destroyed, lost or stolen Subscription Certificates
pursuant to Section 5(b) hereof and (c) Subscription Certificates issued
pursuant to Section 7(h) hereof upon the partial exercise of any Subscription
Certificate to evidence the unexercised portion of such Subscription
Certificate.
<PAGE>
6
SECTION 7. Exercise of Rights; Exercise Price; Expiration Date.
(a) The Rights will be exercisable at any time following 5:00 p.m., New
York City time, on the last day of the Measurement Period until 5:00 p.m., New
York City time, on the Expiration Date, unless the Rights Offering is earlier
canceled.
(b) To exercise Rights directly, Rightholders receiving Subscription
Certificates are required properly to complete and execute Form 1 of the
Subscription Certificate or, for Rightholders outside the United States or with
APO or FPO addresses, an International Holder Subscription Form, and timely to
send such properly completed and executed Subscription Certificate or
International Holder Subscription Form, together with payment in full of the
Subscription Price for all shares subscribed for pursuant to the Subscription
Privilege (including any fractions of shares), to the Subscription Agent. An
International Holder Subscription Form, but not a Subscription Certificate, may
---
be sent by telecopy to the Subscription Agent. Any wire transfer of funds shall
clearly indicate the identity of the party paying the Subscription Price by the
wire transfer. The Subscription Price will be deemed to have been received by
the Subscription Agent only upon (i) the clearance of any uncertified check,
(ii) the receipt by the Subscription Agent of any certified check or bank draft
drawn upon a U.S. bank or any postal, telegraphic or express money order or
(iii) the receipt of good funds in the Subscription Agent's account designated
above.
(c) Rightholders receiving Subscription Certificates (but not those
receiving International Holder Subscription Forms) may cause a written guarantee
(the "Notice of Guaranteed Delivery"), substantially in the form of EXHIBIT A to
the Instructions as to Use of MeriStar Hotels & Resorts, Inc. Subscription
Certificates and International Holder Subscription Forms (the "Instructions")
distributed with the Subscription Certificates and International Holder
Subscription Forms, from a member firm of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
from a commercial bank or trust company having an office or correspondent in the
United States (each of the foregoing being an "Eligible Institution"), to be
received by the Subscription Agent at or prior to the Expiration Date together
with payment in full of the applicable Subscription Price. Such Notice of
Guaranteed Delivery must state the Rightholder's name, the number of Rights
represented by such Rightholder's Subscription Certificate and the number of
Rights being exercised pursuant to the Subscription Privilege, and guarantee the
delivery to the Subscription Agent of the Rightholder's properly completed and
executed Subscription Certificate within three Trading Days following the date
of the Notice of Guaranteed Delivery. To constitute a valid exercise of Rights,
such Rightholder's Subscription Certificate must be received by the Subscription
Agent within such three Trading Days following the date of the Notice of
Guaranteed Delivery.
(d) Rightholders shall be entitled to exercise the Rights evidenced by a
<PAGE>
7
Subscription Certificate indirectly through their bank or broker, by so
indicating on Form 2 in the Subscription Certificate and delivering such
executed Subscription Certificate to their bank or broker for delivery to the
Subscription Agent. If any such Form 2 is completed without designating a bank
or broker, the Subscription Agent shall be entitled thereafter to treat the
bearer of the Subscription Certificate as the absolute owner of all of the
Rights evidenced by such Subscription Certificate for all purposes, and the
Subscription Agent shall not be affected by any notice to the contrary.
(e) Rights held of record through The Depository Trust Company ("DTC")
shall be exercisable by instruction to DTC to transfer Rights (such Rights being
"DTC Exercised Rights") from the DTC account of a beneficial holder of Rights to
the DTC account of the Subscription Agent, together with payment of the
Subscription Price for all shares subscribed for pursuant to the Subscription
Privilege.
(f) The Company will publicly announce the Subscription Price promptly
following determination thereof and will simultaneously deliver a written copy
of such announcement to the Subscription Agent. The Subscription Price shall be
payable in United States dollars (i) by check or bank draft drawn upon a U.S.
bank or postal, telegraphic or express money order payable to the Subscription
Agent, or (ii) by wire transfer of same day funds to the account maintained by
the Subscription Agent for such purpose at [------------------------------------
- -------------------], Account No. [----------]; ABA No.[---------]. If the
amount enclosed or transmitted is not sufficient to pay the Subscription Price
for all shares that are stated to be subscribed for, or if the number of shares
being subscribed for is not specified, the number of shares subscribed for will
be assumed to be the maximum number that could be subscribed for upon payment of
such amount. If the amount enclosed or transmitted exceeds the Subscription
Price for all shares purchased pursuant to the Subscription Privilege (the
"Subscription Excess"), the Subscription Excess will be returned without
interest or deduction.
(g) Funds received by the Subscription Agent in payment of the
Subscription Price for Underlying Shares subscribed for pursuant to the
Subscription Privilege shall be held in a segregated, interest-bearing account
pending application pursuant to the terms hereof. The Company shall have sole
discretion in determining how the funds in such account shall be invested, and
all interest and gains earned on such funds shall be paid to the Company.
(h) In case any Rightholder holding a Subscription Certificate shall
exercise less than all the Rights evidenced thereby, a new Subscription
Certificate evidencing the number of rights remaining unexercised shall be
issued by the Subscription Agent to the Rightholder, to the extent the
Subscription Agent is able to reissue a Subscription Certificate prior to the
Expiration Date. International Rightholders who exercise less than all of their
Rights by delivery of an International Holder Subscription Form will not receive
a replacement Subscription Certificate or any other evidence of their remaining
<PAGE>
8
Rights.
(i) Except as provided to the contrary with respect to the procedures for
guaranteed delivery set forth in Section 7(c), the Subscription Agent is
authorized to accept only Subscription Certificates, International Holder
Subscription Forms or transfers of Rights to its account at DTC received prior
to 5:00 p.m., New York City time, on the Expiration Date.
(j) Once a Rightholder has exercised a Right, such exercise may not be
revoked.
SECTION 8. Closing; Closing Conditions; Fractional Shares.
(a) If the Closing Conditions defined in Section 8 (b) hereof are
satisfied, the Company will so notify the Subscription Agent, and the closing of
the sale of the Common Stock upon exercise of the Rights (the "Closing") will
take place as soon as practicable after the fourth business day following the
Expiration Date (the "Closing Date"). At the Closing, the Subscription Agent
shall pay, by wire transfer, certified or bank check or other method acceptable
to the Company, the amount of all funds received by the Subscription Agent in
payment of the Subscription Price for Underlying Shares subscribed for pursuant
to the Subscription Privilege. The Company shall deliver, or arrange to have
delivered, at the Closing the number of shares of Common Stock as are properly
subscribed for pursuant to the Rights Offering. As soon as practicable after
the Closing, the Subscription Agent shall send to each exercising Rightholder,
in the case of domestic Rightholders, at the address shown on the face of their
respective Subscription Certificates or in accordance with instructions to the
contrary on Form 3 of their respective Subscription Certificates and, in the
case of international Rightholders or Rightholders with APO or FPO addresses, at
the address shown on the records of the Company, (i) certificates representing
shares of Common Stock purchased pursuant to the Subscription Privilege and (ii)
excess funds, if any, received in payment of the Subscription Price and/or cash
payable, if any, at the Company's option in lieu of fractional shares of Common
Stock otherwise issuable in respect of fractional Rights exercised by
Rightholders.
(b) The issuance of shares of Common Stock purchased upon the exercise of
Rights is conditioned upon consummation of (i) the Spin-Off, (ii) the Merger and
(iii) the transactions contemplated by the Lessee-Manager Acquisition Agreement,
in each case as described in more detail in the Prospectus (collectively, the
"Transaction Conditions"), and the Company has expressly reserved the right, at
its sole option, to cancel the Rights Offering if the Subscription Price is less
than [------] (the "Pricing Condition," and, together with the Transaction
Conditions, the "Closing Conditions"). If the Transaction Conditions are not
satisfied, or if the Company, at its sole option, chooses to invoke the Pricing
Condition and to cancel the Rights Offering, the Company will so notify the
Subscription Agent, and the Subscription Agent will send to each of the
<PAGE>
9
respective exercising Rightholders at the address referred to in Section 8 (a),
the aggregate Subscription Price delivered by each of them for the exercise of
Rights, without interest or deduction, as soon as practicable thereafter.
[SECTION 9. Fractional Rights and Shares.
(a) Fractional Rights will be issued to Rightholders in the Rights
Offering. The Company reserves the right, in its sole discretion, to pay cash
in lieu of fractional shares of Common Stock that would otherwise be issued or
issuable in respect of fractional Rights exercised by Rightholders, based on a
value per whole share of Common Stock equal to the closing price of the Common
Stock on the Principal Market on the Expiration Date. Any such cash payment
shall be made to the applicable Rightholder at the same time that shares of
Common Stock are issued in respect of whole Rights exercised by Rightholders.
Fractional Rights can only be exercised concurrently with the exercise of whole
Rights.
(b) Upon notice from the Company prior to the Closing that the Company will
pay cash in lieu of fractional Underlying Shares, the Subscription Agent shall
deliver to the Company as soon as practicable (but prior to the Closing)
information with respect to all fractional Rights exercised by Rightholders, and
the Company shall deliver, or arrange to have delivered, at the Closing cash
payments in lieu of as many fractional Underlying Shares as are properly
subscribed for pursuant to the Rights Offering, for delivery by the Subscription
Agent to the applicable Rightholders as provided in Section 8(a) hereof.
SECTION 10. Transfer of Rights.
Except as specifically set forth in Section 7, the Rights shall be non-
transferable. The Rights will entitle only a Rightholder (but not a subsequent
transferee of the REIT Common Stock and/or REIT OP Units held by such
Rightholder on the Record Date) to purchase one share of Common Stock per whole
Right at the Subscription Price. In the event that Rightholders transfer the
REIT Common Stock and/or REIT OP Units owned by them as of the Record Date, they
will remain the owners of Rights issued in respect of such shares of REIT Common
Stock and/or such REIT OP Units. None of the Company nor the Subscription Agent
nor any of their affiliates will have any liability to a purported transferee or
transferor of Rights in connection with any purported transfer. Except for the
fees charged by the Subscription Agent (which will be paid by the Company), all
commissions, fees and other expenses (including brokerage commissions and
transfer taxes) incurred in connection with the exercise of Rights will be for
the account of the Rightholder, and none of such commissions, fees or expenses
will be paid by the Company or the Subscription Agent.
SECTION 11. Foreign and Certain Other Stockholders. The Subscription Agent
shall
<PAGE>
10
not mail Subscription Certificates to Rightholders whose addresses are outside
the U.S. or who have an APO or FPO address. The Subscription Agent shall hold
such Subscription Certificates for the account of such Rightholders and upon
notice from such Rightholders in the form of a duly completed and delivered
International Holder Subscription Form shall exercise the Rights on their
behalf. The distribution of the Prospectus and the offering of the Rights and
the shares of Common Stock in the Rights Offering in certain jurisdictions may
be restricted by law. No action has been taken by the Company that would permit
an offering of the Rights or such shares or the circulation or distribution of
the Prospectus or any offering material in relation to the Company, the Rights
or such shares in any country outside the United States where action for that
purpose is required. Persons into whose possession the Prospectus comes are
required by the Company to inform themselves about and to observe any such
restrictions.
SECTION 12. Reports. The Subscription Agent shall notify both the Company and
its designated representatives by telephone as requested during the period
commencing with the mailing of Subscription Certificates and ending on the
Expiration Date (and in the case of guaranteed deliveries pursuant to Section
7(c), the period ending three Trading Days after the Expiration Date), which
notice shall thereafter be confirmed in writing, of (i) the number of Rights
exercised on the day of such request, (ii) the number of Underlying Shares
subscribed for pursuant to the Subscription Privilege and the number of such
Rights for which payment has been received, (iii) the number of Rights subject
to guaranteed delivery pursuant to Section 7(b) on such day, (iv) the number of
Rights for which defective exercises have been received on such day and (v)
cumulative totals derived from the information set forth in clauses (i) through
(iv) above. At or before 5:00 p.m., New York City time, on the first Trading Day
following the Expiration Date, the Subscription Agent shall certify in writing
to the Company the cumulative totals through the Expiration Date derived from
the information set forth in clauses (i) through (v) above. The Subscription
Agent shall also maintain and update a listing of Rightholders who have fully or
partially exercised their Rights, Rightholders who have exercised fractional
Rights and Rightholders who have not exercised their Rights. The Subscription
Agent shall provide the Company or its designated representatives with the
information compiled pursuant to this Section 12 as any of them shall request.
SECTION 13. Future Instructions and Interpretation.
(a) All questions as to the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
shall be final and binding. The Company in its sole discretion may waive any
defect or irregularity, permit a defect or irregularity to be corrected within
such time as it may determine or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time
<PAGE>
11
as the Company determines in its sole discretion. Neither the Company nor the
Subscription Agent shall be under any duty to give notification of any defect or
irregularity in connection with the submission of Subscription Certificates or
incur any liability for failure to give such notification.
(b) The Subscription Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from an
authorized officer of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer.
SECTION 14. Payment of Taxes. The Company covenants and agrees that it will
pay when due and payable all documentary, stamp and other taxes, if any, which
may be payable in respect of the issuance or delivery of any Subscription
Certificate or of the Underlying Shares; provided, however, that the Company
shall not be liable for any tax liability arising out of any transaction which
results in, or is deemed to be, an exchange of Rights or shares or a
constructive dividend with respect to the Rights or shares, and provided
further, that the Company shall not be required to pay any tax or other
governmental charge which may be payable in respect of any transfer involved in
the transfer or delivery of any Subscription Certificate or the issuance or
delivery of certificates for shares of Common Stock in a name other than that of
the Rightholder of Rights exercised or transferred, and the Subscription Agent
shall not register any such transfer or issue any such certificate until such
tax or governmental charge, if required, shall have been paid.
SECTION 15. Cancellation and Destruction of Subscription Certificates. All
Subscription Certificates surrendered for the purpose of exercise, exchange,
substitution or transfer shall be canceled by the Subscription Agent, and no
Subscription Certificates shall be issued in lieu thereof except as expressly
permitted by provisions of this Agreement. The Company shall deliver to the
Subscription Agent for cancellation and retirement, and the Subscription Agent
shall so cancel and return, any other Subscription Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof. The
Subscription Agent shall deliver all canceled Subscription Certificates to the
Company, or shall, at the written request of the Company, destroy such canceled
Subscription Certificates, and in such case shall deliver a certificate of
destruction thereof to the Company.
SECTION 16. Right of Action. All rights of action in respect of this Agreement
are vested in the Company and the respective Rightholders; and any Rightholder,
without the consent of the Subscription Agent or of any other Rightholder, may,
on his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
otherwise act in respect of, his right to exercise Rights in the manner provided
in this Agreement.
<PAGE>
12
SECTION 17. Concerning the Subscription Agent.
(a) The Company agrees to pay to the Subscription Agent compensation in
the amount of $[-----] for all services rendered by it hereunder and, from time
to time, on demand of the Subscription Agent, its reasonable out-of-pocket
expenses and disbursements for mailing, postage and delivery. The Company also
agrees to indemnify the Subscription Agent for, and to hold it harmless against,
any loss, liability, or expense incurred without negligence or bad faith on the
part of the Subscription Agent for anything done or omitted by the Subscription
Agent in connection with the acceptance and administration of this Agreement,
including the costs and expenses of defending against any claim of liability in
the premises, provided that the Subscription Agent shall have provided the
Company with notice of any such claim promptly after such claim became known to
the Subscription Agent, and provided further that the Company shall have the
right to assume the defense of any such claim upon receipt of written notice
thereof from the Subscription Agent. If the Company assumes the defense of any
such claim, the Subscription Agent shall be entitled to participate in (but not
control) the defense of any such claim at its own expense. The Company shall
not be required to indemnify the Subscription Agent with respect to any claim or
action settled without its consent, which consent shall not be unreasonably
withheld.
(b) The Subscription Agent shall be protected and shall incur no liability for
or in respect of any action taken, suffered or omitted by it in connection with
its administration of this Agreement in reliance upon any Subscription
Certificate, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement or other paper or document reasonably believed by it to be genuine and
to be signed, executed and, where necessary, verified or acknowledged by the
proper person or persons.
SECTION 18. Merger or Consolidation of Subscription Agent. Any corporation
into which the Subscription Agent or any successor Subscription Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Subscription Agent or any successor
Subscription Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Subscription Agent or any successor Subscription
Agent, shall be the successor to the Subscription Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto.
SECTION 19. Duties of Subscription Agent. The Subscription Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the Rightholders shall be bound:
(a) The Subscription Agent may consult with legal counsel (who may be, but
is not required to be, legal counsel for the Company), and the opinion of such
counsel
<PAGE>
13
shall be full and complete authorization and protection to the Subscription
Agent as to any actions taken or omitted by it in good faith and in accordance
with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Subscription Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the President
or any Vice President (including any Senior or Executive Vice President) and by
the Treasurer or any Assistant Treasurer or the Secretary or any Assistant
Secretary of the Company and delivered to the Subscription Agent; and such
certificate shall be full authorization to the Subscription Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Subscription Agent shall be liable hereunder only for its own
negligence or willful misconduct.
(d) The Subscription Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
Subscription Certificates or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been made by the Company
only.
(e) The Subscription Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Subscription Agent) or in respect of the
validity or execution of any Subscription Certificate; nor shall it be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Subscription Certificate; nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued pursuant
to this Agreement or any Subscription Certificate or as to whether any shares of
Common Stock will, when issued, be validly authorized and issued, fully paid and
non-assessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Subscription Agent for the carrying out or performing by the Subscription
Agent of the provisions of this Agreement.
(g) Nothing herein shall preclude the Subscription Agent from acting in
any other capacity for the Company
<PAGE>
14
SECTION 20. Notices to the Company, Rightholders and Subscription Agent. All
notices and other communications provided for or permitted hereunder shall be
made by hand delivery, prepaid first-class mail, or telecopier:
(a) if to the Company, to:
MeriStar Hotels & Resorts, Inc.
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Attn: [NAME]
Telephone: (202) 965-4455
Telecopier: (202) 295-2230
(b) if to the Subscription Agent, to:
Attn: [NAME]
Telephone:
Telecopier:
Attn:
(c) if to a Rightholder, at the address of such Rightholder as shown on the
registry books or other records of the Company.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; two business days after being
deposited in the mail, postage prepaid, if mailed as aforesaid; when answered
back if telexed; and when receipt is acknowledged, if telecopied.
SECTION 21. Supplements and Amendments. The Company and the Subscription Agent
may from time to time supplement or amend this Agreement without the approval of
any Rightholders in order to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Subscription Agent may
deem necessary or desirable and which shall not materially adversely affect the
interests of the Rightholders.
SECTION 22. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Subscription Agent shall bind and inure
to the
<PAGE>
15
benefit of their respective successors and assigns hereunder.
SECTION 23. Termination. This Agreement shall terminate at 5:00 p.m.,New York
City time, on the thirtieth day following the Expiration Date. Upon termination
of this Agreement, and provided that all shares of Common Stock for Rights
accepted for exercise on prior to such termination are issued and delivered by
the Company, the Company shall be discharged from all obligations under this
Agreement except for its obligations to the Subscription Agent under Sections 14
and 17 hereof and except with respect to the obligation of the Company to
provide instruction and direction to the Subscription Agent as may be provided
in this Agreement
SECTION 24. Governing Law. This Agreement and each Subscription Certificate
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the internal laws of
said State.
SECTION 25. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Subscription Agent and the Rightholders any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Subscription Agent and the Rightholders.
SECTION 26. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
SECTION 27. Descriptive Headings. Descriptive headings of the several Sections
of this Agreement are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF each of the undersigned have caused this Subscription Agency
Agreement to be executed by their duly authorized representative as of the date
first above written.
<PAGE>
16
The Company:
------------
MERISTAR HOTELS & RESORTS, INC.
By:_________________________
Name:
Title:
The Subscription Agent:
-----------------------
[----------------------------------------------------------]
By:_________________________
Name:
Title:
<PAGE>
EXHIBIT 99.2
MERISTAR HOTELS & RESORTS, INC.
INSTRUCTIONS AS TO USE
OF
SUBSCRIPTION CERTIFICATE
AND
INTERNATIONAL HOLDER SUBSCRIPTION FORM
----------------
CONSULT THE SUBSCRIPTION AGENT OR YOUR BANK OR BROKER
AS TO ANY QUESTIONS
The following instructions relate to the rights offering (the "Rights
Offering") by MeriStar Hotels & Resorts, Inc., a Delaware corporation (the
"Company"), with respect to subscription rights (the "Rights") to subscribe for
and purchase shares of the Company's common stock, par value $0.01 per share
(the "Common Stock") described in the Company's Prospectus dated [-------------
], 1998 (the "Prospectus"). Capitalized terms used herein but not defined herein
shall have the meanings ascribed to them in the Prospectus. The Company is
distributing to holders of record of (a) the common stock, par value $0.01 per
share (the "REIT Common Stock"), of MeriStar Hospitality Corporation, a Maryland
corporation operating as a real estate investment trust (the "REIT"), and (b)
the units of limited partnership (the "REIT OP Units") of MeriStar Hospitality
Operating Partnership, L.P., a Delaware limited partnership (the "REIT Operating
Partnership"), other than REIT OP Units held by the REIT or any of its
subsidiaries, as of the effective time of the Merger (the "Record Date"), non-
transferable Rights to subscribe for and purchase shares of Common Stock at a
subscription price (the "Subscription Price") equal to 95% of the average of the
daily high and low prices of the Common Stock on the New York Stock Exchange
("NYSE") or any other principal trading market on which the Common Stock is then
traded (the "Principal Market"), for the period (the "Measurement Period") of
five consecutive trading days (a "Trading Day") on the Principal Market
immediately following the third Trading Day after the date the Common Stock
opens for trading on the Principal Market. See "The Rights Offering" in the
Prospectus.
The Rights will be exercisable at any time following 5:00 p.m., New York
City time, on the last day of the Measurement Period until 5:00 p.m., New York
City time, on the sixteenth calendar day immediately following the last day of
the Measurement Period, or such later date as the Company may determine (the
"Expiration Date"), unless the Rights Offering is earlier canceled.
Each holder of record of REIT Common Stock and/or REIT OP Units on the
Record Date (a "Rightholder") will receive one-sixth of a Right for each share
of REIT Common Stock and/or each REIT OP Unit so held. Each whole Right will
entitle the Rightholder (but not a subsequent transferee of the REIT Common
Stock and/or REIT
<PAGE>
2
OP Units held by such Rightholder on the Record Date) to purchase one share of
Common Stock at the Subscription Price (the "Subscription Privilege"). The
Company will publicly announce the Subscription Price promptly following
determination thereof. Although fractional Rights will be issued to
Rightholders, the Company reserves the right, in its sole discretion, to pay
cash in lieu of fractional shares of Common Stock that would otherwise be issued
or issuable in respect of fractional Rights exercised by Rightholders, based on
a value per whole share of Common Stock equal to the closing price of the Common
Stock on the Principal Market on the Expiration Date. Any such cash payment
will be made to the applicable Rightholder at the same time that shares of
Common Stock are issued in respect of whole Rights exercised by Rightholders.
Fractional Rights can only be exercised concurrently with the exercise of whole
Rights. An election to exercise Rights, once made, may not be revoked. All
amounts received by the Subscription Agent pursuant to the exercise of Rights
will be held in a non-interest-bearing escrow account until the completion of
the Rights Offering. The Rights will, with certain exceptions referred to
below, be evidenced by non-transferable subscription certificates. See "The
Rights Offering--Subscription Privilege" in the Prospectus.
If your address is located within the United States and you do not have an
APO or FPO address, you will be provided with a Subscription Certificate dated
as of the Record Date, with the number of rights to which you are entitled
printed on the face thereof. You should indicate your wishes with regard to the
exercise of your Rights by completing the appropriate form or forms on the back
of your Subscription Certificate and returning it to the Subscription Agent in
the envelope provided.
If your address is located outside of the United States or you have an APO
or FPO address, you will not be provided with a Subscription Certificate, but
will receive an International Holder Subscription Form (unless you are located
in the United Kingdom). You should indicate your wishes with regard to the
exercise of your Rights by completing the International Holder Subscription Form
and returning it to the Subscription Agent by mail or by telecopy at the address
or telecopier number provided below. Rightholders located in the United Kingdom
who are interested in participating in the Rights Offering should contact [-----
- -------------------------------------].
YOUR SUBSCRIPTION CERTIFICATE OR INTERNATIONAL HOLDER SUBSCRIPTION FORM
MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, OR GUARANTEED DELIVERY REQUIREMENTS
WITH RESPECT TO YOUR SUBSCRIPTION CERTIFICATE MUST BE COMPLIED WITH AND PAYMENT
OF THE SUBSCRIPTION PRICE, INCLUDING FINAL CLEARANCE OF ANY CHECKS, MUST BE
RECEIVED BY THE SUBSCRIPTION AGENT, ON OR BEFORE 5:00 P.M., NEW YORK CITY TIME,
ON THE EXPIRATION DATE. YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT.
<PAGE>
3
THE ISSUANCE OF SHARES UPON THE EXERCISE OF RIGHTS IS CONDITIONED UPON THE
CONSUMMATION OF THE SPIN-OFF, THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY
THE LESSEE-MANAGER ACQUISITION AGREEMENT. THE COMPANY ALSO RESERVES THE RIGHT,
AT ITS SOLE OPTION, TO CANCEL THE RIGHTS OFFERING IF THE SUBSCRIPTION PRICE IS
LESS THAN [-----]. IF THE RIGHTS OFFERING IS CANCELED, THE SUBSCRIPTION PRICE
WILL BE RETURNED TO YOU WITHOUT INTEREST OR DEDUCTION.
1. CLOSING; CONDITIONS; DELIVERIES; ETC.
(a) If the Closing Conditions referred to in paragraph 1(b) are satisfied,
the Company will so notify the Subscription Agent, and the closing of the sale
of the Common Stock upon exercise of the Rights (the "Closing") will take place
as soon as practicable after the fourth business day following the Expiration
Date (the "Closing Date"). At the Closing, the Subscription Agent shall pay, by
wire transfer, certified or bank check or other method acceptable to the
Company, the amount of all funds received by the Subscription Agent in payment
of the Subscription Price for Underlying Shares subscribed for pursuant to the
Subscription Privilege. The Company shall deliver, or arrange to have
delivered, at the Closing the number of shares of Common Stock as are properly
subscribed for pursuant to the Rights Offering. As soon as practicable after
the Closing, the Subscription Agent shall send to each exercising Rightholder,
in the case of domestic Rightholders, at the address shown on the face of their
respective Subscription Certificates or in accordance with instructions to the
contrary on Form 3 of their respective Subscription Certificates and, in the
case of international Rightholders or Rightholders with APO or FPO addresses, at
the address shown on the records of the Company, (i) certificates representing
shares of Common Stock purchased pursuant to the Subscription Privilege and (ii)
excess funds, if any, received in payment of the Subscription Price and cash
payable, if any, at the Company's option in lieu of fractional shares of Common
Stock otherwise issuable in respect of fractional Rights exercised by
Rightholders.
(b) The issuance of shares of Common Stock purchased upon the exercise of
Rights is conditioned upon consummation of (i) the Spin-Off, (ii) the Merger and
(iii) the transactions contemplated by the Lessee-Manager Acquisition Agreement,
in each case as described in more detail in the Prospectus (collectively, the
"Transaction Conditions"), and the Company has expressly reserved the right, at
its sole option, to cancel the Rights Offering if the Subscription Price is less
than [------] (the "Pricing Condition," and, together with the Transaction
Conditions, the "Closing Conditions"). If the Transaction Conditions are not
satisfied, or if the Company, at its sole option, chooses to invoke the Pricing
Condition and to cancel the Rights Offering, the Company will so notify the
Subscription Agent, and the Subscription Agent will send to you at the address
referred to in paragraph 1(a), the aggregate Subscription Price delivered by
<PAGE>
4
you for the exercise of Rights, without interest or deduction, as soon as
practicable thereafter.
2. DIRECT EXERCISE OF SUBSCRIPTION PRIVILEGE
To exercise Rights directly, complete Form 1 of the Subscription
Certificate and send your properly completed and executed Subscription
Certificate or, for Rightholders outside the United States or with APO or FPO
addresses, complete an International Holder Subscription Form and send it,
together with payment in full of the Subscription Price for all shares
subscribed for pursuant to the Subscription Privilege (including any fractions
of shares), to the Subscription Agent. An International Holder Subscription
Form, but not a Subscription Certificate, may be sent by telecopy to the
---
Subscription Agent at the number provided below. Payment of the Subscription
Price must be made in U.S. dollars for all shares being subscribed for (a) by
check or bank draft drawn upon a U.S. bank or postal, telegraphic or express
money order payable to [--------------------------], as Subscription Agent, or
(b) by wire transfer of same day funds to the account maintained by the
Subscription Agent for such purpose at [----------------------------]. Any wire
transfer of funds should clearly indicate the identity of the Rightholder on
whose behalf the Subscription Price is being paid. The Subscription Price will
be deemed to have been received by the Subscription Agent only upon (i) the
clearance of any uncertified check, (ii) the receipt by the Subscription Agent
of any certified check or bank draft drawn upon a U.S. bank or any postal,
telegraphic or express money order or (iii) the receipt of good funds in the
Subscription Agent's account designated above. If paying by uncertified personal
check, please note that the funds paid thereby may take up to five business days
to clear. Accordingly, Rightholders who wish to pay the Subscription Price by
means of uncertified personal check are urged to make payment sufficiently in
advance of the Expiration Date to ensure that such payment is received and
clears by such date and are urged to consider payment by means of certified or
cashier's check, money order or wire transfer of funds. You may also transfer
your Subscription Certificate to your bank or broker in accordance with the
procedures specified in paragraph 3, by making arrangements with such bank or
broker for the delivery of funds on your behalf and requesting such bank or
broker to exercise the Subscription Certificate on your behalf. Alternatively,
you may cause a written guarantee substantially in the form of EXHIBIT A to
these instructions (the "Notice of Guaranteed Delivery") from a member firm of a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc., or from a commercial bank or trust company having
an office or correspondent in the United States (each of the foregoing being an
"Eligible Institution"), to be received by the Subscription Agent at or prior to
the Expiration Date together with payment in full of the applicable Subscription
Price. Such Notice of Guaranteed Delivery must state your name, the number of
Rights represented by your Subscription Certificate and the number of Rights
being exercised pursuant to the Subscription Privilege, and will guarantee the
delivery to the Subscription Agent of your properly completed and
<PAGE>
5
executed Subscription Certificate within three Trading Days following the date
of the Notice of Guaranteed Delivery. If this procedure is followed, your
Subscription Certificate must be received by the Subscription Agent within three
Trading Days following the date of the Notice of Guaranteed Delivery. Additional
copies of the Notice of Guaranteed Delivery may be obtained upon request from
the Subscription Agent at the address, or by calling the telephone number,
indicated below.
The address, telephone and telecopier numbers of the Subscription Agent are
as follows:
If By Mail:
If By Hand:
If By Overnight Courier or Telecopier:
Telephone and Telecopier Numbers:
Telephone:
Telecopier:
If you exercise less than all of the Rights evidenced by your Subscription
Certificate by so indicating in Form 1 of your Subscription Certificate, the
Subscription Agent will issue you a new Subscription Certificate evidencing the
unexercised Rights. However, if you choose to have a new Subscription
Certificate sent to you, you may not receive such new Subscription Certificate
in sufficient time to permit you to exercise the Rights evidenced thereby.
International Rightholders or Rightholders with APO or FPO addresses who
exercise less than all of their Rights will not receive a Subscription
Certificate evidencing their remaining Rights. If the amount enclosed or
transmitted is not sufficient to pay the Subscription Price for all shares that
are stated to be subscribed for, or if the number of shares being subscribed for
is not specified, the number of shares subscribed for will be assumed to be the
maximum number that could be subscribed for upon payment of such amount. If the
amount enclosed or transmitted exceeds the Subscription Price for all shares
purchased pursuant to the Subscription Privilege (the "Subscription Excess"),
the Subscription Excess will be returned without interest or deduction.
3. EXERCISE OF RIGHTS THROUGH BANK OR BROKER
To exercise the Rights evidenced by a Subscription Certificate through your
bank or broker, so indicate on Form 2 and deliver your properly completed and
executed Subscription Certificate to your bank or broker. Your Subscription
Certificate should be
<PAGE>
6
delivered to your bank or broker in ample time for it to be exercised. If Form
2 is completed without designating a bank or broker, the Subscription Agent
shall be entitled thereafter to treat the bearer of the Subscription Certificate
as the absolute owner of all of the Rights evidenced by such Subscription
Certificate for all purposes, and the Subscription Agent shall not be affected
by any notice to the contrary. Because your bank or broker cannot issue
Subscription Certificates, if you wish to exercise less than all of the Rights
evidenced by the Subscription Certificate, either you or your bank or broker
must instruct the Subscription Agent as to the action to be taken with respect
to the Rights not exercised, or you or your bank or broker must first have your
Subscription Certificate divided into Subscription Certificates of appropriate
denominations by following the instructions in paragraph 5 of these
instructions. The Subscription Certificates evidencing the number of Rights you
intend to exercise can then be exercised by your bank or broker in accordance
with the instructions in this paragraph 3.
4. DELIVERY THROUGH THE DEPOSITORY TRUST COMPANY
In the case of Rights that are held of record through The Depository Trust
Company ("DTC"), exercises of the Subscription Privilege may be effected by
instructing DTC to transfer Rights (such Rights being "DTC Exercised Rights")
from the DTC account of such Rightholder to the DTC account of the Subscription
Agent, together with payment of the Subscription Price for all shares subscribed
for pursuant to the Subscription Privilege.
5. SUBDIVIDING A SUBSCRIPTION CERTIFICATE
Send your Subscription Certificate, together with complete separate
instructions (including specification of the denominations into which you wish
your Rights to be divided) signed by you, to the Subscription Agent, allowing a
sufficient time for new Subscription Certificates to be issued and returned so
that they can be used prior to the Expiration Date. Alternatively, you may ask a
bank or broker to effect such actions on your behalf. Your signature must be
guaranteed by an Eligible Institution if any of the new Subscription
Certificates are to be issued in a name other than that in which the old
Subscription Certificate was issued. Subscription Certificates may not be
divided into fractional Rights, and any instruction to do so will be rejected.
As a result of delays in the mail, the time of the transmittal, the necessary
processing time and other factors, you may not receive such new Subscription
Certificates in time to enable the Rightholder to complete an exercise by the
Expiration Date. Neither the Company nor the Subscription Agent will be liable
for any such delays.
6. EXECUTION
(a) Execution by Registered Rightholder
<PAGE>
7
The signature on the Subscription Certificate or the International Holder
Subscription Form must correspond with the name of the registered Rightholder
exactly as it appears on the face of the Subscription Certificate or, in the
case of international Rightholders or Rightholders with APO or FPO addresses,
the name of the registered Rightholder as shown on the records of the Company,
without any alteration or change whatsoever. Persons who sign the Subscription
Certificate or the International Holder Subscription Form in a representative or
other fiduciary capacity must indicate their capacity when signing and, unless
waived by the Subscription Agent in its sole and absolute discretion, must
present to the Subscription Agent satisfactory evidence of their authority so to
act.
(b) Execution by Person Other than Registered Rightholder
If the Subscription Certificate or the International Holder Subscription
Form is executed by a person other than the Rightholder named on the face of the
Subscription Certificate or shown on the records of the Company, as the case may
be, proper evidence of authority of the person executing the Subscription
Certificate or the International Holder Subscription Form must accompany the
same unless the Subscription Agent dispenses with proof of authority.
(c) Signature Guarantees
Your signature must be guaranteed by an Eligible Institution if you specify
special payment or delivery instructions pursuant to Form 3.
7. METHOD OF DELIVERY
The method of delivery of subscription certificates or International Holder
Subscription Forms and payment of the Subscription Price to the Subscription
Agent will be at the election and risk of the Rightholder, but, if sent by mail,
it is recommended that they be sent by registered mail, properly insured, with
return receipt requested, and that a sufficient number of days be allowed to
ensure delivery to the Subscription Agent and the clearance of any checks sent
in payment of the Subscription Price prior to 5:00 p.m., New York City time, on
the Expiration Date.
8. FORM W-9
Each Rightholder who elects to exercise Rights should provide the
Subscription Agent with a correct Taxpayer Identification Number ("TIN") on Form
W-9, a copy of which is included as EXHIBIT B hereto. Additional copies of Form
W-9 may be obtained upon request from the Subscription Agent at the address or
by calling the telephone number indicated above. Failure to provide the
information on the form may subject such Rightholder to federal income tax
withholding with respect to dividends that
<PAGE>
8
may be paid by the Company on shares of Common Stock purchased upon the exercise
of Rights (for those Rightholders exercising Rights), or funds to be remitted in
respect of fractional Rights for which the Company elects to pay cash in lieu of
issuing fractional shares of Common Stock.
<PAGE>
EXHIBIT A
TO INSTRUCTIONS
NOTICE OF GUARANTEED DELIVERY
FOR
SUBSCRIPTION CERTIFICATES
ISSUED BY
MERISTAR HOTELS & RESORTS, INC.
This form, or one substantially equivalent hereto, must be used to exercise
Rights in connection with the Rights Offering described in the Prospectus dated
[----------], 1998 (the "Prospectus") of MeriStar Hotels & Resorts, Inc., a
Delaware corporation (the "Company"), if a Rightholder cannot deliver the
Subscription Certificate(s) evidencing the Rights (the "Subscription
Certificate(s)"), to the Subscription Agent listed below (the "Subscription
Agent") at or prior to 5:00 p.m., New York City time, on the Expiration Date
referred to in the Prospectus. Such form must be delivered by hand or sent by
facsimile transmission or mailed to the Subscription Agent, and must be received
by the Subscription Agent on or prior to the Expiration Date. See "The Rights
Offering" in the Prospectus. Payment of the Subscription Price for all shares
of Common Stock subscribed for upon exercise of such Rights must be received by
the Subscription Agent in the manner specified in the Prospectus at or prior to
5:00 p.m., New York City time, on the Expiration Date even if the Subscription
Certificate evidencing such Rights is being delivered pursuant to the procedure
for guaranteed delivery thereof.
The Subscription Agent is:
General Information:
By Mail: Facsimile Transmission: By
Hand:
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY.
<PAGE>
2
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SUBSCRIPTION CERTIFICATE
SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States, guarantees that the undersigned will deliver to the Subscription Agent
the certificate representing the Rights being exercised hereby, with any
required signature guarantee and any other required documents, all within three
Trading Days after the date hereof.
Dated: ________________, 1998
________________________
(Name of Firm)
________________________
________________________
________________________
________________________
________________________
(Address)
________________________
(Authorized Signature)
________________________
(Telephone Number)
The institution which completes this form must communicate the guarantee to the
Subscription Agent and must deliver the Subscription Certificate(s) to the
Subscription Agent within the time period shown herein. Failure to do so could
result in a financial loss to such institution.
Ladies and Gentlemen:
The undersigned hereby represents that he or she is the Rightholder of
Subscription Certificate(s) representing ________ Rights and that such
Subscription Certificate(s) cannot be delivered to the Subscription Agent at or
before 5:00 p.m., New York City time, on the Expiration Date. Upon the terms
and subject to the conditions set forth in the Prospectus, receipt of which is
hereby acknowledged, the undersigned hereby
<PAGE>
3
elects to exercise the Subscription Privilege to subscribe for shares of Common
Stock with respect to the Rights and/or fractions thereof represented by such
Subscription Certificate. The undersigned understands that payment of the
Subscription Price for all shares of Common Stock subscribed for pursuant to the
Subscription Privilege must be received by the Subscription Agent at or before
5:00 p.m., New York City time, on the Expiration Date and represents that such
payment, in the aggregate amount of $_______, either (check appropriate box):
[ ] is being delivered to the Subscription Agent herewith;
or
[ ] has been delivered separately to the Subscription Agent; and is or was
delivered in the manner set forth below (check appropriate box and complete
information relating thereto):
[ ] wire transfer of funds
Name of transferor institution:_____________________________
Date of transfer:_________________________________________
Confirmation number (if available):_________________________
[ ] uncertified check
(Payment by uncertified check will not be deemed to have been received by the
Subscription Agent until such check has cleared. Rightholders paying by such
means are urged to make payment sufficiently in advance of the Expiration Date
to ensure that such payment clears by such date.)
[ ] certified check
[ ] bank draft (cashier's check)
[ ] money order
Name of maker:_________________________
Date of check, draft or money order:_______________________
Check, draft or money order number:______________________
Bank on which check is drawn or issuer of money order:_______________________
Signature(s): _________________________________
Name:
_________________________________
Name:
<PAGE>
4
_________________________________
Name:
_________________________________
Name:
Address: _________________________________
_________________________________
_________________________________
_________________________________
_________________________________
_________________________________
Telephone: (___)_______________
Subscription Certificate Numbers:____________________________
____________________________
____________________________
____________________________
<PAGE>
EXHIBIT B
TO INSTRUCTIONS
IMPORTANT TAX INFORMATION
Under the federal income tax law, (i) dividend payments that may be
made by the Company on shares of Common Stock issued upon the exercise of
Rights, and (ii) payments to be remitted in respect of fractional Rights for
which the Company elects to pay cash in lieu of issuing fractional shares of
Common Stock, may be subject to backup withholding, and each Rightholder who
exercises Rights should provide the Subscription Agent (as the Company's agent,
in respect of exercised Rights) with such Rightholder's correct taxpayer
identification number on Form W-9 below. If such Rightholder is an individual,
the taxpayer identification number is his social security number. If the
Subscription Agent, [which is also the transfer agent for the Company], is not
provided with the correct taxpayer identification number in connection with such
payments, the Rightholder may be subject to a penalty imposed by the Internal
Revenue Service.
Certain Rightholders (including, among others, all corporations and
certain foreign individuals) are exempt from these backup withholding and
reporting requirements. In general, in order for a foreign individual to
qualify as an exempt recipient, that Rightholder must submit a statement, signed
under the penalties of perjury, attesting to that individual's exempt status.
Such statements can be obtained from the Subscription Agent. See the Specific
Instructions on Form W-9 for additional instructions and information.
If backup withholding applies, the Company or the Subscription Agent,
as the case may be, will be required to withhold [31 percent] of any such
payments made to the Rightholder. Backup withholding is not an additional tax.
Rather, the amount of backup withholding is treated, like other withheld
amounts, as an advance payment of the person's tax liability. If withholding
results in an overpayment of taxes, a refund may be obtained.
PURPOSE OF FORM
To prevent backup withholding, the Rightholder is required to notify
the Subscription Agent of his correct taxpayer identification number by
completing the form below certifying that the taxpayer identification number
provided on Form W-9 is correct or that such Rightholder is awaiting a taxpayer
identification number.
WHAT NUMBER TO GIVE THE SUBSCRIPTION AGENT
The Rightholder is required to give the Subscription Agent the social
security number or employer identification number of the record owner of the
Rights. If the
<PAGE>
2
Rights are in more than one name or are not in the name of the actual owner,
consult the Specific Instructions on Form W-9 for additional guidance on which
number to report.
<PAGE>
EXHIBIT 99.3
MERISTAR HOTELS & RESORTS, INC.
International Holder Subscription Form
IMPORTANT: THE NUMBER OF RIGHTS THAT MAY BE EXERCISED PURSUANT TO THE
SUBSCRIPTION PRIVILEGE BY THE PERSON WHOSE NAME APPEARS ON THE LABEL AFFIXED TO
THIS FORM IS THE NUMBER INDICATED IN THE TOP RIGHT-HAND CORNER OF THE LABEL.
RIGHTHOLDERS MAY USE THIS FORM TO EXERCISE RIGHTS (THE "RIGHTS") TO PURCHASE
SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF MERISTAR HOTELS & RESORTS, INC.
("COMMON STOCK"). THE RIGHTS ARE VOID IF NOT EXERCISED BEFORE THE EXPIRATION
DATE. THE RIGHTS ARE NON-TRANSFERABLE AND ENTITLE ONLY A RIGHTHOLDER (BUT NOT A
SUBSEQUENT TRANSFEREE OF THE REIT COMMON STOCK OR REIT OP UNITS HELD BY SUCH
RIGHTHOLDER ON THE RECORD DATE) TO PURCHASE SHARES OF COMMON STOCK AT THE
SUBSCRIPTION PRICE. THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING, THE RIGHTS
AND THIS INTERNATIONAL HOLDER SUBSCRIPTION FORM ARE SET FORTH IN THE COMPANY'S
PROSPECTUS DATED [-------------] (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN
BY REFERENCE. CAPITALIZED TERMS USED HEREIN BUT NOT DEFINED HEREIN SHALL HAVE
THE MEANINGS ASCRIBED TO THEM IN THE PROSPECTUS. COPIES OF THE PROSPECTUS ARE
AVAILABLE UPON REQUEST FROM THE SUBSCRIPTION AGENT, AT [----------------].
EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably exercises Rights
to subscribe for shares of MeriStar Hotels & Resorts, Inc. Common Stock as
indicated below, on the terms and subject to the conditions specified in the
Prospectus, receipt of which is hereby acknowledged.
(a) Number of Rights exercised/shares of Common Stock subscribed for pursuant
to the Subscription Privilege (including fractions):_______________________
(b) Total Subscription Price (number of Rights exercised/shares of Common Stock
subscribed for pursuant to the Subscription Privilege multiplied by the
-------------
Subscription Price):_____________________(1)
METHOD OF PAYMENT (CHECK ONE)
[ ] CHECK OR BANK DRAFT DRAWN ON A U.S. BANK OR MONEY ORDER PAYABLE TO
[-------------], AS SUBSCRIPTION AGENT.
[ ] WIRE TRANSFER DIRECTED TO THE ACCOUNT MAINTAINED BY THE SUBSCRIPTION
AGENT AT ______________________________________.
<PAGE>
(1) If the amount enclosed or transmitted is not sufficient to pay the
Subscription Price for all shares that are stated to be subscribed for, or if
the number of shares being subscribed for is not specified, the number of shares
subscribed for will be assumed to be the maximum number that could be subscribed
for upon payment of such amount. If the amount enclosed or transmitted exceeds
the Subscription Price for all shares purchased pursuant to the Subscription
Privilege (the "Subscription Excess"), the Subscription Excess will be returned
without interest or deduction.
ANY PERSON LOCATED IN THE UNITED KINGDOM WHO IS NOT A PERSON WHOSE ORDINARY
BUSINESS IS TO BUY OR SELL SHARES OR DEBENTURES, WHETHER AS PRINCIPAL OR AGENT
REPRESENTS, BY SIGNING BELOW, THAT ANY SHARES OF MERISTAR HOTELS & RESORTS, INC.
COMMON STOCK PURCHASED UPON THE EXERCISE OF RIGHTS ARE BEING PURCHASED WITH A
VIEW TO HOLDING SUCH SHARES AS AN INVESTMENT AND WITHOUT ANY INTENTION TO RESELL
SUCH SHARES.
ALL RIGHTHOLDERS MUST SIGN BELOW AND ENCLOSE A DULY COMPLETED FORM W-9.
Signature of Rightholder:_______________________________
Name:
Dated:_____________________
Telephone Number: ( )__________________
Tax Identification or Social Security No.:_______________
A duly completed Form W-9 must be signed by the registered holder(s) exactly as
name(s) appear(s) on this International Holder Subscription Form. If signature
is by trustee(s), executor(s), administrator(s), guardian(s), attorney(s)-in-
fact, agent(s), officer(s) of a corporation or another acting in a fiduciary
capacity, please provide the following information. See Instructions.
Name(s): __________________________
Capacity: __________________________
Dated: __________________________
Address: __________________________
__________________________
__________________________
__________________________
(Including Zip Code)
