<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998
REGISTRATION NO. 333-49881
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
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
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 19, 1998
PROSPECTUS
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"), as
amended, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSCRIPTION PROCEEDS TO
PRICE COMPANY(1)(2)(3)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share............................................... $ $
- -----------------------------------------------------------------------------------------------------
Total................................................... $ $
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</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 NYSE 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
8,400,000, representing approximately 14% 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"), as amended, 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 (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>
Pursuant to the Intercompany Agreement (the
THE INTERCOMPANY AGREEMENT.. "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 NYSE immediately
following the third Trading Day after the date
that the Common Stock opens for trading on the
NYSE (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 34,000,000 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
8
<PAGE>
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
9
<PAGE>
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."
10
<PAGE>
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]
11
<PAGE>
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.
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
PAPER CLIP STRUCTURE RISKS
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. 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 reduce the anticipated
benefits of the "paper-clip" REIT structure.
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
16
<PAGE>
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.
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
17
<PAGE>
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.
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.
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.
18
<PAGE>
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.
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, (vi) a
requirement that certain amendments to the Charter be approved by the
affirmative vote of 66 2/3% of total voting power and (vii) a provision that
the chair of any meeting of stockholders shall have the power to adjourn such
meeting. 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................. 65,321 2,576 -- 253,906 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....... 243,880 30,130 1,139 938,613 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 ................ 46,755 1,493 -- 185,021 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.............. 248,559 28,798 2,298 927,153 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 16,641 -- -- 51,630
Other hotel revenue.. 1,219 -- 7,024 8,243 5,448 -- -- 13,691
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 90,905 2,815 (1,759) 243,880
Hotel operating
expense by
department:
Rooms................ 5,124 -- 21,130 26,254 14,978 -- -- 41,232
Food and beverage.... 995 -- 27,154 28,149 12,235 -- -- 40,384
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 89,371 2,457 (1,897) 248,559
Interest expense and
other, net........... 539 694 -- 1,233 6 (42) 809 2,006
------- ----- ------- -------- ------- ------ ------- --------
Total expenses........ 29,337 694 129,830 159,861 89,377 2,415 (1,088) 250,565
------- ----- ------- -------- ------- ------ ------- --------
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 61,655 -- -- 203,726
Other................. 474 3,237 26,265 29,976 20,204 -- -- 50,180
Hotel management,
accounting and other.. 12,088 -- (7,238) 4,850 -- 7,351 (1,691) 10,510
------- ------- -------- -------- -------- ------ -------- --------
Total revenue......... 23,839 75,291 499,451 598,581 334,372 7,351 (1,691) 938,613
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 48,406 -- -- 160,626
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 74,425 491,075 586,364 338,880 7,366 (5,457) 927,153
Interest expense and
other, net............ 10 2,775 -- 2,785 (373) (135) 2,974 5,251
------- ------- -------- -------- -------- ------ -------- --------
Total expenses......... 20,874 77,200 491,075 589,149 338,507 7,231 (2,483) 932,404
------- ------- -------- -------- -------- ------ -------- --------
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 $213.8 million to $243.9 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 $248.6 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 $914.8 million to $938.6 million in 1997 on a pro
forma basis compared to $23.8 million in 1997 on a historical basis. Operating
expenses increased to $927.2 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 8,400,000; 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.
36
<PAGE>
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 "paper-clip" REIT structure. 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
37
<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
38
<PAGE>
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.
39
<PAGE>
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.
40
<PAGE>
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
41
<PAGE>
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
42
<PAGE>
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.
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
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 and AGH Leasing 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
(except as described below with respect to "discounted revenues") and (b) the
initial term of each Participating Lease of an applicable AGH Owned Hotel will
not be modified (though renewal options will be added).
The obligations of Lessee 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, Lessee 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)
Lessee 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 Lessee 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. In addition, under certain circumstances a reduced percentage rate
will apply to the revenues attributable to certain "discounted rates" that the
Lessee may offer. 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, or (b) a
change in the franchisor of the hotel.
48
<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
$40,000,000 and MeriStar Hotel's consolidated debt cannot exceed an amount
equal to 5.5 times MeriStar Hotel's trailing 12-month EBITDA. 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 existing 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 Lessee of the fair market
value of the leasehold estate (except for properties initially identified by
the REIT and MeriStar Hotels as properties slated to be sold). 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 Lessee 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 Lessee after the Effective Date for the
initial term of such new Participating Lease amortized on a straight-line
basis over the initial term 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) Lessee can reasonably demonstrate that the gross revenue
shortfall was caused by general market conditions beyond Lessee control or (b)
Lessee "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. Lessee will not have such cure right for more than two
consecutive years.
The Participating Leases also require that Lessee spend in each calendar
year at least 95% of the amounts budgeted for marketing expenses and for
repair and maintenance expenses.
ASSIGNMENT AND SUBLEASING
Lessee 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 or Lessee 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
initial 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 Spin-off and the effective date of the Merger, 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.
S. KIRK KINSELL..................................... 1998 43 III
S. Kirk Kinsell has been a Director and President
and Chief Operating Officer of Apple South, Inc.
since 1997. Prior to joining Apple South, Mr.
Kinsell served as President of the Franchise
Division of ITT Sheraton and its Four Point Hotels
from 1995 to 1997. Immediately prior to ITT
Sheraton, Mr. Kinsell was with Holiday Inn
Worldwide from 1988 to 1995 and last served as the
senior vice president in its franchise division.
</TABLE>
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 Directors'
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
number of shares authorized for issuance under the MeriStar Hotels Directors'
Plan is 125,000. 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
S. Kirk Kinsell--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.
62
<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 product of (x) the sum of (A) his
total then annual base salary and (B) the amount of his bonus for the
preceding year, or if the term of the employment agreement is terminated in
its initial year his target bonus for such year multiplied by (y) the greater
of (A) two (2) and (B) a fraction, the numerator of which is the number of
days remaining in the Term of the employment agreements, without further
extension, and the denominator of which is 365. In addition, all of the
executive's options and restricted stock will immediately vest and become
exercisable for a period of one year thereafter and shares of restricted stock
previously granted to the executive will become free from all contractual
restrictions, effective as of the termination date. In addition, the Company
will continue in effect certain benefits under the employment agreement,
including, but not limited to, life and health insurance plans, or their
equivalent for a period equal to the greater of two years or the remaining
term of the employment agreement, without further extension. 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 and (iv) the continuance of certain benefits under
their employment agreements, but only until the earlier of (x) one year from
the end of the term of their respective employment agreements or (y) the date
on which the executive obtains health insurance coverage from a subsequent
employer.
63
<PAGE>
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. Any
unvested portion of such executive's stock options and restricted stock will
vest immediately and become exercisable for one year thereafter, and shares of
restricted stock previously granted shall become free from all contractual
restrictions.
Voluntary Termination or Termination for Cause. Upon voluntary termination
or termination for "cause" by the Company, the executive will receive any
accrued and unpaid base salary through the termination date. Any unvested
options will terminate immediately, and 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 product of (x) the sum
of (A) his then annual base salary and (B) the amount of his bonus for the
preceding year or if the term of the employment agreement is terminated in its
initial year his target bonus for such year multiplied by (y) the greater of
(A) three (3) and (B) a fraction the numerator of which is the number of days
remaining in the Term of the employment agreement, without further extension
and the denominator of which is 365; (ii) all unvested stock options held by
the executive will immediately vest and be exercisable for the period of one
(1) year thereafter and shares of restricted stock previously granted to the
executive will become free from all contractual restrictions; and (iii) the
continuance of certain benefit under the employment agreement, including, but
not limited to, life and health insurance plans, or their equivalent for a
period equal to the greater of two years or the remaining term of the
employment agreement, without further extension. In the case of the other
executives, they would each be entitled to the same type of benefits provided
the termination occurred within 18 months of the Change in Control, except
their lump sum payment will only be two (2) times the sum of their then annual
base salary plus bonus and the total payments would be limited to the amount
which is deductible under Section 280G of the Code; but only if, by reason of
such limitation, the net after tax benefit of executive shall exceed the net
after tax benefit if such limitation were not made.
Change in Control Payments. In the case of Messrs. Whetsell and Jorns, 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 for any reason within 24 months after the
consummation of the Formation Transactions, any pre-Formation Transaction
stock options or other awards will immediately vest and remain exercisable in
accordance with their respective terms (with a minimum of one year from the
date of termination). If the employment of Messrs. Whetsell and Jorns is
terminated other than for cause within 24 months after the consummation of the
Formation Transactions, all post-Formation Transactions stock options or other
awards made to Messrs. Whetsell and Jorns will continue to vest and remain
exercisable following any such termination of employment 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.
64
<PAGE>
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, excluding 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 Company at the option
price. The option price may be paid in cash, with a cash equivalent, 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.
65
<PAGE>
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 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
66
<PAGE>
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.
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
67
<PAGE>
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.
68
<PAGE>
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.
69
<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.
70
<PAGE>
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; (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 and (vii)
provide that the chair of any meeting of stockholders shall have the power to
adjourn such meeting. 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
71
<PAGE>
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 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.
72
<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..................... 28,626,625 6,659,959 14,147,363 4,173,607
Other revenue............ 10,121,833 2,205,822 4,415,258 1,612,944
Minority interest income. 1,802,558 -- -- --
------------ ----------- ----------- -----------
Total revenue.......... 164,516,665 35,590,981 76,786,777 25,252,519
------------ ----------- ----------- -----------
Expenses
Property operating costs
and expenses............ 33,894,184 7,235,297 13,956,762 5,340,286
Food and beverage costs
and expenses............ 22,768,224 5,061,921 9,983,727 3,522,766
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......... 165,967,520 36,312,020 73,700,641 25,660,020
------------ ----------- ----------- -----------
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.
Reclassifications--Certain prior period amounts have been reclassified to
conform with the current period presentation.
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..................... 36,301,599 35,545,269
Other revenue................................. 12,378,349 12,126,659
Minority interest income...................... 2,874,156 1,284,177
------------ ------------
Total revenue............................... 203,326,094 185,767,947
------------ ------------
Hotel operating expenses...................... 128,752,753 120,473,305
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).......... 28,626,625 7,674,974 25,145,757 207,374 -- 61,654,730
Other revenue (D)..... 10,121,833 2,256,516 8,380,871 82,507 -- 20,841,727
Minority interest 1,802,558 (139,150) -- -- -- 1,663,408
income (E)........... ------------ ----------- ------------ ---------- ----------- ------------
Total revenue....... $164,516,665 $37,598,681 $132,888,523 $1,669,437 -- $336,673,306
------------ ----------- ------------ ---------- ----------- ------------
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).................. 22,768,224 5,297,676 20,218,787 121,170 -- 48,405,857
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...... 165,967,520 37,676,978 131,923,853 1,808,272 1,767,977 339,144,600
------------ ----------- ------------ ---------- ----------- ------------
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)............. 14,147,363 2,493,306 -- 16,640,669
Other revenue (D)..... 4,415,258 1,028,980 3,373 5,447,611
----------- ----------- --------- -----------
Total revenue..... 76,786,777 14,114,039 3,373 90,904,189
----------- ----------- --------- -----------
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).................. 9,983,727 2,251,201 (411) 12,234,517
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.... 73,700,641 15,365,414 310,100 89,376,155
----------- ----------- --------- -----------
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)
2.4 -- Amendment No. 1 to the Agreement and Plan of Merger, dated as
of June 5, 1998, by and 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 2.2 to American General
Hospitality Corporation's Amendment No. 2 to Form S-4 dated
June 8, 1998)
2.5** -- Form of Dealer-Manager Agreement
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 Non-Employee Directors' Incentive Plan of the Company
10.8 -- 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. 3 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 19TH 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 19, 1998
II-4
<PAGE>
Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
of
MERISTAR HOTELS & RESORTS, INC.
(Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware)
The undersigned Chief Executive Officer of MeriStar Hotels & Resorts,
Inc., a corporation organized and existing under the laws of the State of
Delaware (the "Corporation"), hereby certifies as follows:
FIRST. The Corporation's present name is MeriStar Hotels & Resorts,
Inc.;
SECOND. The Corporation was originally incorporated under the name
CMC Operating Company, and its original Certificate of Incorporation was duly
filed with the Secretary of State of the State of Delaware on March 13, 1998.
The Certificate of Amendment to change the name of the Corporation to MeriStar
Hotels & Resorts, Inc. was duly filed with the Secretary of State of the State
of Delaware on April 9, 1998;
THIRD. This Restated Certificate of Incorporation restates,
integrates and further amends the Certificate of Incorporation, as heretofore
amended and now in effect;
FOURTH. This Restated Certificate of Incorporation of the Corporation
has been duly adopted in accordance with the provisions of Sections 242 and 245
of the General Corporation Law of the State of Delaware; and
<PAGE>
2
FIFTH. The text of the Corporation's Certificate of Incorporation is
hereby amended and restated to read in full as follows:
ARTICLE I
NAME
The name of the corporation is MeriStar Hotels & Resorts, Inc. (the
"Corporation").
ARTICLE II
ADDRESS; REGISTERED AGENT AND ADDRESS
The address of the Corporation's registered office is 1209 Orange
Street, City of Wilmington, County of New Castle, State of Delaware; and its
registered agent at such address is Corporation Trust Corporation.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE IV
CAPITALIZATION
A. Number of Shares. The total number of shares of stock that the
----------------
Corporation shall have authority to issue is: one hundred ten million
(110,000,000), which shall be one hundred million (100,000,000) shares of common
stock, par value of one cent ($0.01) per share (the "Common Stock"), and ten
million (10,000,000) shares of preferred stock, par value of one cent ($0.01)
per share (the "Preferred Stock").
B. Designation of Classes; Relative Rights, Etc. The designation,
---------------------------------------------
relative rights, preferences and limitations of the shares of each class are as
follows:
1. Preferred Stock. The Board of Directors (the "Board") is
---------------
authorized, subject to any limitations prescribed by law, to provide for the
issuance of shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable
<PAGE>
3
law of the State of Delaware (such certificate being hereinafter referred to as
a "Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Preferred Stock Designation.
2. Common Stock. Subject to the provisions of any applicable
------------
law or of the by-laws of the Corporation (the "By-laws"), as from time to time
amended, with respect to the closing of the transfer books or the fixing of a
record date for the determination of stockholders entitled to vote and except as
otherwise provided by law or by the resolution or resolutions providing for the
issue of any series of shares of Preferred Stock, the holders of outstanding
shares of Common Stock shall exclusively possess voting power for the election
of directors and for all other purposes, each holder of record of shares of
Common Stock being entitled to one vote for each share of Common Stock standing
in his or her name on the books of the Corporation.
3. Consideration. Subject to the provisions of this
-------------
Certificate of Incorporation and except as otherwise provided by law, the stock
of the Corporation, regardless of class, may be issued for such consideration
and for such corporate purposes as the Board may from time to time determine.
ARTICLE V
BOARD OF DIRECTORS
A. General Powers. This Article is inserted for the management of
--------------
the business and for the conduct of the affairs of the Corporation, and it is
expressly provided that it is intended to be in furtherance and not in
limitation or exclusion of the powers conferred by the statutes of the State of
Delaware. The business and affairs of the Corporation shall be managed by the
board of directors of the Corporation (the "Board").
B. Number. The Board shall consist of not less than three (3) and
------
not more than fifteen (15) members. The exact number of directors within the
minimum and maximum limitations specified in the preceding sentence shall be
fixed from time to time by resolution adopted by a majority of the entire Board
that would be in office, if no vacancy existed, whether or not present at a
meeting.
<PAGE>
4
C. Election. Members of the Board need not be elected by written
--------
ballot. The directors shall be elected at the annual meeting of stockholders by
such stockholders as have the right to vote on such election.
D. Classes. The Board shall be divided into three Classes,
-------
designated "Class I," "Class II" and "Class III," respectively.
E. Term. The initial term of office of Class I shall expire at the
----
first annual meeting of stockholders of the Corporation following the end of the
Corporation's fiscal year ending December 31, 1998. The initial term of office
of Class II shall expire at the first annual meeting of stockholders of the
Corporation following the end of the Corporation's fiscal year ending December
31, 1999, and the initial term of office of Class III shall expire at the first
annual meeting of stockholders of the Corporation following the end of the
Corporation's fiscal year ending December 31, 2000. Commencing with the annual
meeting of stockholders of the Corporation at which the initial term of office
of the Class I directors expires, each director elected to succeed those
directors whose terms have thereupon expired shall serve for a term ending on
the date of the third annual meeting of stockholders following the annual
meeting at which such director was elected.
F. Vacancies. In the event of any increase or decrease in the
---------
authorized number of directors, (a) each director then serving as such shall
nonetheless continue as a director of the class of which he is a member until
the expiration of his current term, or his earlier death, retirement,
resignation, or removal, and (b) the newly created or eliminated directorships
resulting from such increase or decrease shall be apportioned by the Board among
the three classes of directors so as to maintain such classes as nearly equal in
number as reasonably possible. If such equality is not possible, the increase
or decrease shall be apportioned among the classes in such a way that the
difference in the number of directors in any two classes shall not exceed one.
G. Filling Vacancies and Newly-Created Directors. Subject to the
---------------------------------------------
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board resulting from death, resignation,
retirement, disqualification, removal from office or other cause shall, unless
otherwise provided by law or by resolution of the Board, be filled only by a
majority vote of the directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of office of the class to which they have been
chosen expires. No decrease in the authorized number of directors shall shorten
the term of any incumbent director.
H. Removal. A director may be removed, with cause, by the
-------
affirmative vote of not less than two-thirds of the votes entitled to be cast by
all of the then outstanding shares of capital stock of the Corporation in an
election of directors at
<PAGE>
5
an annual meeting or at a special meeting of the stockholders called for the
purpose of removing such director.
ARTICLE VI
DIRECTOR LIABILITY
A. Limitation. No director of the Corporation shall be personally
----------
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that this provision shall not eliminate
or limit the liability of a director (a) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under section 174 of the Delaware General Corporation Law or (d) for
any transaction from which the director derived any improper personal benefits.
Any repeal or modification of the foregoing provision shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
B. Indemnification and Advance of Expenses. To the extent not
---------------------------------------
prohibited by law, the Corporation shall indemnify any person who is or was
made, or threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding (a "Proceeding"), whether civil, criminal,
administrative or investigative, including, without limitation, an action by or
in the right of the Corporation to procure a judgment in its favor, by reason of
the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Corporation, or, at the
request of the Corporation, is or was serving as a director or officer of any
other corporation or in a capacity with comparable authority or responsibilities
for any partnership, joint venture, trust, employee benefit plan or other
enterprise (an "Other Entity"), against judgments, fines, penalties, excise
taxes, amounts paid in settlement and costs, charges and expenses (including
attorneys' fees, disbursements and other charges). Persons who are not
directors or officers of the Corporation (or otherwise entitled to
indemnification pursuant to the preceding sentence) may be similarly indemnified
in respect of service to the Corporation or to an Other Entity at the request of
the Corporation to the extent the Corporation determines to provide such
indemnification.
The Corporation shall reimburse or advance to any director or officer
or other person entitled to indemnification hereunder the funds necessary for
payment of expenses, including attorneys' fees and disbursements, incurred in
connection with any Proceeding, in advance of the final disposition of such
Proceeding; provided, however, that, if required by the Delawares General
-------- -------
Corporation Law, such expenses incurred by or on behalf of any director or
officer or other person may be paid in advance of the final disposition of a
Proceeding only upon receipt by the Corporation of an under-
<PAGE>
6
taking, by or on behalf of such director or officer (or other person indemnified
hereunder), to repay any such amount so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right of
appeal that such director, officer or other person is not entitled to be
indemnified for such expenses.
C. Rights Not Exclusive. The rights to indemnification and reim
--------------------
bursement or advancement of expenses provided by, or granted pursuant to, this
Section C shall not be deemed exclusive of any other rights to which a person
seeking indemnification or reimbursement or advancement of expenses may have or
hereafter be entitled under any statute, this Certificate of Incorporation, the
By-laws, any agreement, any vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office.
The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Section C shall continue as
to a person who has ceased to be a director or officer (or other person
indemnified hereunder) and shall inure to the benefit of the executors,
administrators, legatees and distributees of such person.
D. Insurance. The Corporation shall have power to purchase and
---------
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Article, the By-laws or under Section 145
of the Delaware General Corporation Law or any other provision of law.
E. Binding Effect. The rights to indemnification and to the
--------------
advancement of expenses conferred in this Article shall be contract rights and
such rights shall continue as to an indemnitee who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the indemnitee's
heirs, executors and administrators. No repeal or modification of this Article
shall affect any rights or obligations with respect to any state of facts then
or theretofore existing or thereafter arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
F. Procedural Rights. The rights to indemnification and reim
-----------------
bursement or advancement of expenses provided by, or granted pursuant to, this
Article shall be enforceable by any person entitled to such indemnification or
reimbursement or advancement of expenses in any court of competent jurisdiction.
The burden of proving that such indemnification or reimbursement or advancement
of expenses is not appropriate shall be on the Corporation. Neither the failure
of the Corporation
<PAGE>
7
(including its directors, its independent legal counsel and its stockholders) to
have made a determination prior to the commencement of such action that such
indemnification or reimbursement or advancement of expenses is proper in the
circumstances nor an actual determination by the Corporation (including its
directors, its independent legal counsel and its stockholders) that such person
is not entitled to such indemnification or reimbursement or advancement of
expenses shall constitute a defense to the action or create a presumption that
such person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.
G. Service Deemed at Corporation's Request. Any director or officer
---------------------------------------
of the Corporation serving in any capacity of (a) another corporation of which a
majority of the shares entitled to vote in the election of its directors is
held, directly or indirectly, by the Corporation or (b) any employee benefit
plan of the Corporation or any corporation referred to in clause (a) shall be
deemed to be doing so at the request of the Corporation.
ARTICLE VII
STOCKHOLDER MEETINGS
A. Notice and Place of Meeting. Meetings of stockholders of the
---------------------------
Corporation may be held at such place, either within or outside the State of
Delaware as may be designated by or in the manner provided in the By-laws.
B. Stockholder Action. Any action required or permitted to be taken
------------------
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
C. Special Meetings. Special meetings of stockholders of the
----------------
Corporation may be called at any time only by the Chairman of the Board, the
Vice Chairman of the Board, the Secretary of the Board, by the President or by a
majority of the directors, and any power of stockholders to call a special
meeting is specifically denied. Business transacted at any special meeting of
stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
ARTICLE VIII
STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS ETC.
Advance notice of stockholder nominations for election of directors
and other business to be brought by stockholders before a meeting of
stockholders, shall be given in the manner provided in the By-laws.
<PAGE>
8
ARTICLE IX
AMENDMENTS
A. Certificate of Incorporation. Notwithstanding any other
----------------------------
provisions of law, this Certificate of Incorporation or the By-laws, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of not less than two-thirds of all votes
entitled to be cast by all of the then outstanding shares of capital stock of
the Corporation in an election of directors shall be required to amend, repeal,
or adopt any amendment to Sections D, E, F, G, and H of Article V, this Article
IX and Article X of the Certificate of Incorporation.
B. By-Laws. The By-laws may be altered or repealed and new By-laws
-------
may be adopted (i) at any annual or special meeting of stockholders, by the
affirmative vote of not less than a majority of all votes entitled to be cast by
all of the then outstanding shares of capital stock of the Corporation in the
election of directors, provided, however, that any proposed alteration or repeal
of, or the adoption of any by-law inconsistent with, Sections 2.3, 2.13 and 2.14
of Article 2 of the By-laws, 3.1, 3.2, 3.3, 3.4 and 3.5 of Article 3 of the By-
laws, by stockholders shall require the affirmative vote of not less than two-
thirds of all votes entitled to be cast by all of the then outstanding shares of
capital stock of the Corporation in an election of directors, or (ii) by the
affirmative vote of a majority of the Board.
ARTICLE X
OWNERSHIP AND TRANSFER RESTRICTIONS
A. Definitions. For the purposes of this Article the following
-----------
terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Shares by a Person
----------------------
either directly or under the constructive ownership rules of Section 318(a) of
the Code, as modified by Section 856(d)(5) of the Code. The terms "Beneficial
Owner," "Beneficially Owns," "Beneficially Own" and "Beneficially Owned" shall
have the correlative meanings.
"Charitable Beneficiary" shall mean an organization or
------------------------
organizations described in Sections 170(b)(1)(A) and 170(c) of the Code and
identified by the Board as the beneficiary or beneficiaries of the Excess Share
Trust.
"Code" shall mean the Internal Revenue Code of 1986, as
----
amended from time to time. "Excess Shares" shall mean Shares resulting from an
event described in Section C of this Article.
"Excess Share Trust" shall mean the trust created pursuant to
------------------
<PAGE>
9
Section C and Section K of this Article.
"Excess Share Trustee" shall mean a person, who shall be
----------------------
unaffiliated with the Corporation, any Purported Beneficial Transferee and any
Purported Record Transferee, identified by the Board as the trustee of the
Excess Share Trust.
"Exchange" shall mean the New York Stock Exchange.
--------
"Fair Market Value" shall mean the last reported sales price on
-------------------
the Exchange for Shares of the relevant class or series on the trading day
immediately preceding the relevant date, or if not then traded on the Exchange,
the last reported sales price for such Shares on the trading day immediately
preceding the relevant date as reported on any exchange or quotation system over
or through which such Shares may be traded, or if not then traded over or
through any exchange or quotation system, then the market price of such Shares
on the relevant date as determined in good faith by the Board.
"Ownership Limit" shall initially mean 9.9%, in number of Shares
-----------------
or value, of the outstanding Shares of any class or series of the Corporation.
The number and value of the outstanding Shares of any class or series of the
Corporation shall be determined by the Board in good faith, which determination
shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership,
--------
estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of
the Code), portion of a trust permanently set aside for or to be used
exclusively for the purposes described in Section 642(c) of the Code, joint
stock company or other entity and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Purported Beneficial Transferee" shall mean, with respect to
-------------------------------
any Excess Shares, the Person who would have been the beneficial holder of the
Shares, if the Shares had not been transferred to the Trust.
"Purported Record Transferee" shall mean, with respect to any
---------------------------
purported Transfer which results in Excess Shares, the Person who would have
been the record holder of the Shares, if the Shares had not been transferred by
the Trust.
"REIT" shall mean a real estate investment trust under Section
----
856 of the Code.
"REIT Provisions of the Code" shall mean Sections 856 through 860 of
---------------------------
the Code and any successor or other provisions of the Code relating to real
<PAGE>
10
estate investment trusts (including provisions as to the attribution of
ownership of beneficial interests therein) and the regulations promulgated
thereunder.
"Restriction Termination Date" shall mean such date as may be
----------------------------
determined by the Board as the date on which the ownership and transfer
restrictions set forth in this Article should cease to apply; provided that such
--------
date may not be prior to the date on which MeriStar Hospitality Corporation
makes a public announcement that neither MeriStar Hospitality Corporation nor
any affiliate of MeriStar Hospitality Corporation that, directly or indirectly,
leases property to the Corporation, intends to qualify as a REIT.
"Shares" shall mean the shares of the Corporation as may be
------
authorized and issued from time to time pursuant to Article IV.
"Transfer" shall mean any sale, transfer, gift, assignment,
--------
devise or other disposition of Shares (including (a) the granting of any option
or entering into any agreement for the sale, transfer or other disposition of
Shares, (b) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Shares and (c) any
transfer or other disposition of any interest in Shares as a result of a change
in the marital status of the holder thereof), whether voluntary or involuntary,
whether of record, constructively or beneficially and whether by operation of
law or otherwise. The terms "Transfers" and "Transferred" shall have the
correlative meanings.
B. Ownership Limitation.
--------------------
1. Subject to Clause 3 of this Section B, until the Restriction
Termination Date, no Person, or Persons acting as a group, shall Beneficially
Own Shares of any class or series in excess of the Ownership Limit;
2. Subject to Clause 3 of this Section B, until the Restriction
Termination Date, any Transfer that, if effective, would result in any Person
Beneficially Owning Shares of any class in excess of the Ownership Limit shall
be void ab initio as to the Transfer of such Shares which would be otherwise
Beneficially Owned by such Person in excess of the Ownership Limit; and the
intended transferee shall acquire no rights in such Shares; and
3. Nothing contained in this Article shall preclude the
settlement of any transaction entered into through the facilities of the
Exchange. The fact that the settlement of any transaction is permitted shall not
negate the effect of any other provision of this Article and any transferee in
such a transaction shall be subject to all of the provisions and limitations set
forth in this Article.
C. Excess Shares.
-------------
<PAGE>
11
1. If, notwithstanding the other provisions contained in this
Article, at any time prior to the Restriction Termination Date, there is a
purported Transfer such that any Person would Beneficially Own Shares of any
class in excess of the applicable Ownership Limit, then Shares beneficially
owned by such Person in excess of the Ownership Limit shall be automatically
designated as Excess Shares (without reclassification) until such Person does
not own Shares in excess of the applicable Ownership Limit. The designation of
such Shares as Excess Shares shall be effective as of the close of business on
the business day prior to the date of the purported Transfer. If, after
designation of such Shares owned directly by a Person as Excess Shares, such
Person still owns Shares in excess of the applicable Ownership Limit, Shares
Beneficially Owned by such Person constructively in excess of the Ownership
Limit shall be designated as Excess Shares until such Person does not own Shares
in excess of the applicable Ownership Limit. Where such Person owns Shares
constructively through one or more Persons and the Shares held by such other
Persons must be designated as Excess Shares, the designation of Shares held by
such other Persons as Excess Shares shall be pro rata.
2. If, at any time prior to the Restriction Termination Date,
an event other than a purported Transfer (an "Event") occurs which would cause
any Person to Beneficially Own Shares of any class in excess of the Ownership
Limit, then, Shares Beneficially Owned by such Person in excess of the Ownership
Limit shall be automatically designated as Excess Shares to the extent necessary
to eliminate such excess ownership. The designation of Shares as Excess Shares
shall be effective as of the close of business on the business day prior to the
date of the Event. In determining which Shares are designated as Excess Shares,
Shares beneficially Owned by any Person who caused the Event to occur shall be
designated as Excess Shares before any Shares not so held are designated. Where
several similarly situated Persons exist, the designation of Shares as Excess
Shares shall be pro rata. If Shares held by any Person are required to be
designated as Excess Shares pursuant to this Clause 2 of this Section C of this
Article, Shares beneficially held by such Person shall first be designated
before Shares Beneficially Owned constructively and designated. Where such
Person owns Shares constructively through one or more Persons and the Shares
held by such other Persons must be designated as Excess Shares, the designation
of Shares held by such other Persons as Excess Shares shall be pro rata.
D. Prevention of Transfer. If the Board or its designee shall at
----------------------
any time determine in good faith that a Transfer has taken place in violation of
Section B of this Article or that a Person intends to acquire or has attempted
to acquire Beneficial Ownership (determined without reference to any rules of
attribution) of any Shares in violation of Section B of this Article, the Board
or its designee shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer, including, but not limited to, refusing
to give effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin such Transfer; provided, however, that any Transfers or
-------- -------
attempted Transfers in violation of Section B of this Article shall
<PAGE>
12
automatically result in the designation and treatment described in Section C of
this Article, irrespective of any action (or non-action) by the Board.
E. Notice to Corporation. Any Person who acquires or attempts to
---------------------
acquire Shares in violation of Section B of this Article, or any Person who is a
transferee such that Excess Shares result under Section C of this Article, shall
immediately give written notice or, in the event of a proposed or attempted
Transfer, give at least 15 days prior written notice to the Corporation of such
event. Such person shall also provide to the Corporation such other information
as the Corporation may request in order to determine the effect, if any, of such
Transfer or attempted Transfer on the status of MeriStar Hospitality Corporation
or any affiliate of MeriStar Hospitality Corporation as a REIT and shall execute
and deliver such instruments and provide such further cooperation and assistance
as the Board deems advisable to preserve the status of the MeriStar Hospitality
Corporation or any affiliate of MeriStar Hospitality Corporation as a REIT.
F. Information for Corporation. Until the Restriction Termination
---------------------------
Date, each Person who is a Beneficial Owner of Shares and each Person (including
the stockholder of record) who is holding Shares for a Beneficial Owner shall
provide to the Corporation in writing such information with respect to direct,
indirect and constructive ownership of Shares as the Board deems reasonably
necessary to comply with the provisions of the Code applicable to the status of
MeriStar Hospitality Corporation or any of its affiliates as a REIT, to
determine the status of MeriStar Hospitality Corporation or any of its
affiliates as a REIT, to comply with the requirements of any taxing authority or
governmental agency or to determine any such compliance.
G. Other Action by Board. Subject to Section B of this Article,
---------------------
nothing contained in this Article shall limit the authority of the Board to take
such other action as it deems necessary or advisable to protect the status of
MeriStar Hospitality Corporation or any affiliate of MeriStar Hospitality
Corporation as a REIT.
H. Ambiguities. In the case of an ambiguity in the application of
-----------
any of the provisions of this Article, including any definition contained in
Section A, the Board shall have the power to determine the application of the
provisions of this Article with respect to any situation based on the facts
known to it. In the event this Article requires or permits an action by the
Board and the Certificate of Incorporation fails to provide specific guidance
with respect to such action, the Board shall have the power to determine the
action to be taken so long as such action is not contrary to the provisions of
this Article.
I. Legend. Each certificate for Shares shall bear substantially the
------
following legend:
<PAGE>
13
The securities represented by this certificate are subject to
restrictions on ownership and transfer. This description is summary
only, and is qualified in its entirety by reference to the full
transfer restrictions in the Certificate of Incorporation of the
Corporation, a copy of which will be supplied free of charge at any
stockholder request. Except as otherwise provided pursuant to the
Certificate of Incorporation of the Corporation, no Person may
Beneficially Own Shares in excess of 9.9% of the number or value of
the outstanding Shares of any class or series of the Common Stock or
Preferred Stock of the Corporation. Any Person who attempts or
proposes to Beneficially Own Shares in excess of the above limitations
must notify the Corporation in writing at least 15 days prior to such
proposed or attempted Transfer. All capitalized terms in this legend
have the meanings defined in the Certificate of Incorporation of the
Corporation, a copy of which, including the restrictions on transfer,
will be furnished to each stockholder on request and without charge.
If the restrictions on transfer are violated, the securities
represented hereby which are in excess of the above limitations will
be designated and treated as Excess Shares which will be held in trust
by the Excess Share Trustee for the benefit of the Charitable
Beneficiary.
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
J. Severability. If any provision of this Article or any
------------
application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall be affected only to the extent
necessary to comply with the determination of such court.
K. Transfer of Excess Shares. Upon any purported Transfer that
-------------------------
results in Excess Shares pursuant to Section C of this Article, such Excess
Shares shall be automatically transferred to the Excess Share Trustee, as
trustee of a special trust for the exclusive benefit of the Charitable
Beneficiary. The Corporation shall name a Charitable Beneficiary, if one does
not already exist, within five days of the discovery of any designation of any
Excess Shares; however, the failure to so name a Charitable Beneficiary shall
not affect the designation of Shares as Excess Shares or the transfer thereof to
the Excess Share Trustee. Excess Shares so held in trust shall be issued and
outstanding Shares of the Corporation. The Purported Record Transferee or
Purported Record Holder shall have no rights in such Excess Shares except as
expressly provided in this Article.
L. Distributions on Excess Shares. Any dividends (whether taxable
------------------------------
as a dividend, return of capital or otherwise) on Excess Shares shall be paid to
the Excess Share Trust for the benefit of the Charitable Beneficiary. Upon
liquidation,
<PAGE>
14
dissolution or winding up, the Purported Record Transferee shall receive, for
each Excess Share, the lesser of (1) the amount per share of any distribution
made upon liquidation, dissolution or winding up or (2) the price paid by the
Purported Record Transferee for the Excess Shares, or if the Purported Record
Transferee did not give value for the Excess Shares, the Fair Market Value of
the Excess Shares on the day of the event causing the Excess Shares to be held
in trust. Any such dividend or distribution paid to the Purported Record
Transferee in excess of the amount provided in the preceding sentence prior to
the discovery by the Corporation that the Shares with respect to which the
dividend or distribution was made had been designated as Excess Shares shall be
repaid, upon demand, to the Excess Share Trust for the benefit of the Charitable
Beneficiary.
M. Voting of Excess Shares. The Excess Share Trustee shall be
-----------------------
entitled to vote the Excess Shares on behalf of the Charitable Beneficiary on
any matter. Subject to Delaware law, any vote cast by a Purported Record
Transferee with respect to the Excess Shares prior to the discovery by the
Corporation that the Excess Shares were held in trust will be rescinded ab
initio; provided, however, that if the Corporation has already taken
-------- -------
irreversible action with respect to a merger, reorganization, sale of all or
substantially all the assets, dissolution of the Corporation or other action by
the Corporation, then the vote cast by the Purported Record Transferee shall not
be rescinded. The owner of the Excess Shares will be deemed to have given an
irrevocable proxy to the Excess Share Trustee to vote the Excess Shares for the
benefit of the Charitable Beneficiary.
Notwithstanding the provisions of this Article, until the Corporation
has received notification that Excess Shares have been transferred into an
Excess Share Trust, the Corporation shall be entitled to rely on its share
transfer and other stockholder records for purposes of preparing lists of
stockholders entitled to vote at meetings, determining the validity and
authority of proxies and otherwise conducting votes of stockholders.
N. Non-Transferability of Excess Shares. Excess Shares shall be
------------------------------------
transferable only as provided in this Section N. At the direction of the Board
of the Directors, the Excess Share Trustee shall transfer the Shares held in the
Excess Share Trust to a Person or Persons whose ownership of such Shares will
not violate the Ownership Limit. If such a transfer is made to such a Person or
Persons, the interest of the Charitable Beneficiary shall terminate the
designation of such Shares as Excess Shares shall thereupon cease. The
Purported Record Transferee shall receive the lesser of (1) the price paid by
the Purported Record Transferee for the Excess Shares or, if the Purported
Record Transferee did not give value for the Excess Shares, the Fair Market
Value of the Excess Shares on the day of the event causing the Excess Shares to
be held in trust, or (2) the price received by the Excess Share Trust from the
sale or other disposition of the Excess Shares. Any proceeds in excess of the
amount payable to the Purported Record Transferee will be paid to the Charitable
Beneficiary. The Excess Share Trustee shall be under no obligation to obtain
the highest possible price
<PAGE>
15
for the Excess Shares. Prior to any transfer of any Excess Shares by the Excess
Share Trustee, the Corporation must have waived in writing its purchase rights
under Section N. It is expressly understood that the Purported Record Transferee
may enforce the provisions of this Section against the Charitable Beneficiary.
If any of the foregoing restrictions on transfer of Excess Shares is
determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Record Transferee may be deemed, at the option
of the Corporation, to have acted as an agent of the Corporation in acquiring
such Excess Shares in trust and to hold such Excess Shares on behalf of the
Corporation.
O. Call by Corporation on Excess Shares. Excess Shares shall be
------------------------------------
deemed to have been offered for sale to the Corporation, or its designee, at a
price equal to the lesser of (a) the price paid by the Purported Record
Transferee for the Excess Shares or, if the Purported Record Transferee did not
give value for the Excess Shares, the Fair Market Value of the Excess Shares on
the day of the event causing the Excess Shares to be held in trust and (b) the
Fair Market Value of the Excess Shares on the date the Corporation, or its
designee, accepts such offer (the "Redemption Price"). The Corporation shall
have the right to accept such offer for a period of ninety days after the later
of (x) the date of the Purported Transfer which resulted in such Excess Shares
or (y) the date the Board determines in good faith that a Purported Transfer
resulting in Excess Shares has occurred, if the Corporation does not receive a
notice of such Purported Transfer pursuant to Section E of this Article but in
no event later than a permitted Transfer pursuant to and in compliance with the
terms of Section N of this Article. Unless the Board determines that it is in
the interests of the Corporation to make earlier payments of all of the amount
determined as the Redemption Price in accordance with the preceding sentence,
the Redemption Price may be payable at the option of the Board at any time up to
but not later than the five years after the date the Corporation accepts the
offer to purchase the Excess Shares. The Corporation shall pay interest at the
applicable federal rate under Section 1274(d) of the Code, or any successor
provision, to the Purported Record Transferee.
P. Underwritten Offerings. The Ownership Limit shall not apply to
----------------------
the acquisition of Shares or rights, options or warrants for, or securities
convertible into, Shares by an underwriter in a public offering, provided that
(i) the underwriter makes a timely distribution of such Shares or rights,
options or warrants for, or securities convertible into, Shares and (ii) the
underwriter Beneficially Owns (x) less than 10% of the value of the outstanding
shares of MeriStar Hospitality Corporation and (y) less than 10% of the value of
the outstanding shares of any affiliate of MeriStar Hospitality Corporation that
is a REIT.
Q. Enforcement. The Corporation is authorized specifically to seek
-----------
equitable relief, including injunctive relief, to enforce the provisions of this
Article.
<PAGE>
16
R. Non-Waiver. No delay or failure on the part of the Corporation
----------
or the Board in exercising any right hereunder shall operate as a waiver of any
right of the Corporation or the Board, as the case may be, except to the extent
specifically waived in writing.
IN WITNESS WHEREOF, MeriStar Hotels & Resorts, Inc. has caused this
certificate to be signed on this __ day of June, 1998.
____________________________________
Name:
Title:
<PAGE>
Exhibit 3.2
BY-LAWS
of
MERISTAR HOTELS & RESORTS, INC.
(A Delaware Corporation)
________________________
ARTICLE 1
DEFINITIONS
-----------
As used in these By-laws, unless the context otherwise requires, the
term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as
amended from time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "Chairman" means the Chairman of the Board of Directors of the
Corporation.
1.7 "Corporation" means MeriStar Hotels & Resorts, Inc.
1.8 "Directors" means directors of the Corporation.
1.9 "Entire Board" means all directors of the Corporation in office,
whether or not present at a meeting of the Board, but disregarding vacancies.
1.10 "General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended from time to time.
<PAGE>
2
1.11 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.12 "President" means the President of the Corporation.
1.13 "Secretary" means the Secretary of the Corporation.
1.14 "stockholders" means stockholders of the Corporation.
1.15 "Treasurer" means the Treasurer of the Corporation.
1.16 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
------------
2.1 Place of Meetings. Every meeting of stockholders shall be held
-----------------
at the office of the Corporation or at such other place within or without the
State of Delaware as shall be specified or fixed in the notice of such meeting
or in the waiver of notice thereof.
2.2 Annual Meeting. A meeting of stockholders shall be held annually
--------------
for the election of Directors and the transaction of other business at such hour
and on such business day or as may be determined by the Board and designated in
the notice of meeting.
2.3 Other Special Meetings. A special meeting of stockholders (other
----------------------
than a special meeting for the election of Directors), unless otherwise
prescribed by statute, may be called at any time only by the Chairman of the
Board, the Vice Chairman of the Board, the Secretary of the Board, by the
President or by a majority of the Directors. At any special meeting of
stockholders only such business may be transacted as is related to the purpose
or purposes of such meeting set forth in the notice thereof given pursuant to
Section 2.5 hereof or in any waiver of notice thereof given pursuant to Section
2.6 hereof. Any power of stockholders to call a special meeting is specifically
denied.
2.4 Fixing Record Date. For the purpose of (a) determining the
------------------
stockholders entitled (i) to notice of or to vote at any meeting of stockholders
or any adjournment thereof, (ii) to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock; or (b) any other lawful
action, the Board may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date was adopted by the Board
and which record date shall not be
<PAGE>
3
(x) in the case of clause (a)(i) above, more than sixty nor less than ten days
before the date of such meeting or (y) in the case of clause (a)(iii) or (b)
above, more than sixty days prior to such action. If no such record date is
fixed:
2.4.1 The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held;
2.4.2 The record date for determining stockholders for any purpose
other than that specified in Sections 2.4.1 shall be at the close of business on
the day on which the Board adopts the resolution relating thereto.
When a determination of stockholders entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section 2.4, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting.
2.5 Notice of Meetings of Stockholders. Except as otherwise provided
----------------------------------
in Sections 2.4 and 2.6 hereof, whenever under the provisions of any statute,
the Certificate of Incorporation or these By-laws, stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these by-laws, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten nor more than sixty days before the date of the meeting, to each
stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the stockholder at his or her address as it
appears on the records of the Corporation. An affidavit of the Secretary or an
Assistant Secretary that the notice required by this Section 2.5 has been given
shall be prima facie evidence of the facts stated therein. When a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meet ing if the time and place thereof are announced at the meeting at which
the adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted at the meeting as originally called.
If, however, the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
2.6 Waiver of Notice. Whenever the giving of any notice is required
----------------
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the stockholder or stockholders entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent
<PAGE>
4
to notice. Attendance by a stockholder at a meeting shall constitute a waiver of
notice of such meeting except when the stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the stockholders need be specified in any
written waiver of notice unless so required by statute, the Certificate of
Incorporation or these By-laws.
2.7 List of Stockholders. The Secretary shall prepare and make, or
--------------------
cause to be prepared and made, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, the stockholder's
agent, or attorney, at the stockholder's expense, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The
Corporation shall maintain the stockholder list in written form or in another
form capable of conversion into written form within a reasonable time. Upon the
willful neglect or refusal of the Directors to produce such a list at any
meeting for the election of Directors, they shall be ineligible for election to
any office at such meeting. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the Corporation, or to vote in person or by proxy
at any meeting of stockholders.
2.8 Quorum of Stockholders; Adjournment. Except as otherwise
-----------------------------------
provided by any statute, the Certificate of Incorporation or these By-laws, the
holders of one-third of all outstanding shares of stock entitled to vote at any
meeting of stockholders, present in person or represented by proxy, shall
constitute a quorum for the transaction of any business at such meeting. When a
quorum is once present to organize a meeting of stockholders, it is not broken
by the subsequent withdrawal of any stockholders. The chair of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him or her in order. The chair shall have the power to
adjourn the meeting to another place, date and time. The date and time of the
opening and closing of the polls for each matter upon which the stockholders
will vote at the meeting shall be announced at the meeting. Shares of its own
stock belonging to the Corporation or to another corporation, if a majority of
the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the Corporation, shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
-------- -------
the foregoing shall not limit the
<PAGE>
5
right of the Corporation to vote stock, including but not limited to its own
stock, held by it in a fiduciary capacity.
2.9 Voting; Proxies. Unless otherwise provided in the Certificate
---------------
of Incorporation, every stockholder of record shall be entitled at every meeting
of stockholders to one vote for each share of capital stock standing in his or
her name on the record of stockholders determined in accordance with Section 2.4
hereof. If the Certificate of Incorporation provides for more or less than one
vote for any share on any matter, each reference in the By-laws or the General
Corporation Law to a majority or other proportion of stock shall refer to such
majority or other proportion of the votes of such stock. The provisions of
Sections 212 and 217 of the General Corporation Law shall apply in determining
whether any shares of capital stock may be voted and the persons, if any,
entitled to vote such shares; but the Corporation shall be protected in assuming
that the persons in whose names shares of capital stock stand on the stock
ledger of the Corporation are entitled to vote such shares. Holders of
redeemable shares of stock are not entitled to vote after the notice of
redemption is mailed to such holders and a sum sufficient to redeem the stocks
has been deposited with a bank, trust company, or other financial institution
under an irrevocable obligation to pay the holders the redemption price on
surrender of the shares of stock. At any meeting of stockholders (at which a
quorum was present to organize the meeting), all matters, except as otherwise
provided by statute or by the Certificate of Incorporation or by these By-laws,
shall be decided by a majority of the votes cast affirmatively or negatively on
any such matter at such meeting by the holders of shares present in person or
represented by proxy and entitled to vote thereon, whether or not a quorum is
present when the vote is taken. All elections of Directors shall be by written
ballot unless otherwise provided in the Certificate of Incorporation. In voting
on any other question on which a vote by ballot is required by law or is
demanded by any stockholder entitled to vote, the voting shall be by ballot.
Each ballot shall be signed by the stockholder voting or the stockholder's proxy
and shall state the number of shares voted. Each stockholder entitled to vote
at a meeting of stockholders may authorize another person or persons to act for
such stockholder by proxy. The validity and enforceability of any proxy shall
be determined in accordance with Section 212 of the General Corporation Law. A
stockholder may revoke any proxy that is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or by delivering a proxy in accordance with applicable law bearing a later
date to the Secretary.
2.10 Voting Procedures and Inspectors of Election at Meetings of
-----------------------------------------------------------
Stockholders. The Board, in advance of any meeting of stockholders, may appoint
- ------------
one or more inspectors to act at the meeting and make a written report thereof.
The Board may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate has been appointed
or is able to act at a meeting, the person presiding at the meeting may appoint,
and on the request of any stockholder entitled to vote thereat shall appoint,
one or more inspectors to act at the
<PAGE>
6
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall (a) ascertain the number of shares outstanding and
the voting power of each, (b) determine the shares represented at the meeting
and the validity of proxies and ballots, (c) count all votes and ballots, (d)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (e) certify their
determination of the number of shares represented at the meeting and their count
of all votes and ballots. The inspectors may appoint or retain other persons or
entities to assist the inspectors in the performance of their duties. Unless
otherwise provided by the Board, the date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be determined by the person presiding at the meeting and shall be
announced at the meeting. No ballot, proxies or votes, or any revocation thereof
or change thereto, shall be accepted by the inspectors after the closing of the
polls unless the Court of Chancery of the State of Delaware upon application by
a stockholder shall determine otherwise.
2.11 Organization. At each meeting of stockholders, the President,
------------
or in the absence of the President, the Chairman, or if there is no Chairman or
if there be one and the Chairman is absent, a Vice President, and in case more
than one Vice President shall be present, that Vice President designated by the
Board (or in the absence of any such designation, the most senior Vice
President, based on age, present), shall act as chairman of the meeting. The
Secretary, or in his or her absence, one of the Assistant Secretaries, shall act
as secretary of the meeting. In case none of the officers above designated to
act as chairman or secretary of the meeting, respectively, shall be present, a
chairman or a secretary of the meeting, as the case may be, shall be chosen by a
majority of the votes cast at such meeting by the holders of shares of capital
stock present in person or represented by proxy and entitled to vote at the
meeting.
2.12 Order of Business. The order of business at all meetings of
-----------------
stockholders shall be as determined by the chairman of the meeting.
2.13 Written Consent of Stockholders Not Permitted. Any action
---------------------------------------------
required or permitted to be taken by the stockholders of the Corporation must be
taken at a duly called annual or special meting of such holders and may not be
taken by any consent in writing by such stockholders.
2.14 Advance Notice of Stockholder Proposals. At any annual or
---------------------------------------
special meeting of stockholders, proposals by stockholders and persons nominated
for election as Directors by stockholders shall be considered only if advance
notice thereof has been timely given as provided herein and such proposals or
nominations are otherwise proper for consideration under applicable law and the
Certificate of Incorporation and these By-laws. Notice of any proposal to be
presented by any
<PAGE>
7
stockholder or of the name of any person to be nominated by any stockholder for
election as a director of the Corporation at any meeting of stockholders shall
be delivered to the Secretary of the Corporation at its principal executive
office not less than 60 nor more than 90 days prior to the date of the meeting;
provided, however, that if the date of the meeting is first publicly announced
- -------- -------
or disclosed (in a public filing or otherwise) less than 70 days prior to the
date of the meeting, such advance notice shall be given not more than ten days
after such date is first so announced or disclosed. Public notice shall be
deemed to have been given more than 70 days in advance of the annual meeting if
the Corporation shall have previously disclosed, in these By-laws or otherwise,
that the annual meeting in each year is to be held on a determinable date,
unless and until the Board determines to hold the meeting on a different date.
Any stockholder who gives notice of any such proposal shall deliver therewith
the text of the proposal to be presented and a brief written statement of the
reasons why such stockholder favors the proposal and setting forth such
stockholder's name and address, the number and class of all shares of each class
of stock of the Corporation beneficially owned by such stockholder and any
material interest of such stockholder in the proposal (other than as a
stockholder). Any stockholder desiring to nominate any person for election as a
director of the Corporation shall deliver with such notice a statement in
writing setting forth the name of the person to be nominated, the number and
class of all shares of each class of stock of the Corporation beneficially owned
by such person, the information regarding such person required by paragraphs
(a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and
Exchange Commission (or the corresponding provisions of any regulation
subsequently adopted by the Securities and Exchange Commission applicable to the
Corporation), such person's signed consent to serve as a director of the
Corporation if elected, such stockholder's name and address and the number and
class of all shares of each class of stock of the Corporation beneficially owned
by such stockholder. As used herein, shares "beneficially owned" shall mean all
shares as to which such person, together with such person's affiliates and
associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934),
may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, as well as all shares as to which such person,
together with such person's affiliates and associates, has the right to become
the beneficially owner pursuant to any agreement or understanding, or upon the
exercise of warrants, options or rights to convert or exchange (whether such
rights are exercisable immediately or only after the passage of time or the
occurrence of conditions). The person presiding at the meeting, in addition to
making any other determinations that may be appropriate to the conduct of the
meeting, shall determine whether such notice has been duly given and shall
direct that proposals and nominees not be considered if such notice has not been
given.
<PAGE>
8
ARTICLE 3
Directors
---------
3.1 General Powers. Except as otherwise provided in the Certificate
--------------
of Incorporation, the business and affairs of the Corporation shall be managed
by or under the direction of the Board. The Board may adopt such rules and
regulations, not inconsistent with the Certificate of Incorporation or these By-
laws or applicable laws, as it may deem proper for the conduct of its meetings
and the management of the Corporation. In addition to the powers expressly
conferred by these By-laws, the Board may exercise all powers and perform all
acts that are not required, by these By-laws or the Certificate of Incorporation
or by statute, to be exercised and performed by the stockholders.
3.2 Number; Qualification. The Board shall consist of not less than
---------------------
three (3) and not more than fifteen (15) members. The exact number of Directors
within the minimum and maximum limitations specified in the preceding sentence
shall be fixed from time to time by resolution adopted by a majority of the
Entire Board that would be in office, if no vacancy existed, whether or not
present at a meeting. Directors need not be stockholders.
3.3 Classes; Term; Vacancies. The directors of the Corporation
-------------------------
shall be divided into three Classes, designated "Class I", "Class II" and "Class
III" respectively. The initial term of office of Class I shall expire at the
first annual meeting of stockholders of the Corporation following the end of the
Corporation's fiscal year ending December 31, 1998. The initial term of office
of Class II shall expire at the first annual meeting of stockholders of the
Corporation following the end of the Corporation's fiscal year ending December
31, 1999, and the initial term of office of Class III shall expire at the first
annual meeting of stockholders of the Corporation following the end of the
Corporation's fiscal year ending December 31, 2000. Commencing with the annual
meeting of stockholders of the Corporation at which the initial term of office
of the Class I directors expires, each director elected to succeed those
directors whose terms have thereupon expired shall serve for a term ending on
the date of the third annual meeting of stockholders following the annual
meeting at which such director was elected.
In the event of any increase or decrease in the authorized number of
directors, (a) each director then serving as such shall nonetheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his earlier death, retirement, resignation, or removal, and (b)
the newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board among the three classes of directors
so as to maintain such classes as nearly equal in number as reasonably possible.
If such equality is not possible, the increase or decrease shall be apportioned
among the classes in such a way that the difference in the number of directors
in any two classes shall not exceed one.
<PAGE>
9
3.4 Election. Directors shall, except as otherwise required by
--------
statute or by the Certificate of Incorporation, be elected by a plurality of the
votes cast at a meeting of stockholders by the holders of shares entitled to
vote in the election.
3.5 Resignation. Any Director may resign at any time by written
-----------
notice to the Corporation. Such resignation shall take effect at the time
therein specified, and, unless otherwise specified in such resignation, the
acceptance of such resignation shall not be necessary to make it effective.
3.6 Compensation. Each Director, in consideration of his or her
------------
service as such, shall be entitled to receive from the Corporation such amount
per annum or such fees for attendance at Directors' meetings, or both, as the
Board may from time to time determine, together with reimbursement for the
reasonable out-of-pocket expenses, if any, incurred by such Director in
connection with the performance of his or her duties. Each Director who shall
serve as a member of any committee of Directors in consideration of serving as
such shall be entitled to such additional amount per annum or such fees for
attendance at committee meetings, or both, as the Board may from time to time
determine, together with reimbursement for the reasonable out-of-pocket
expenses, if any, incurred by such Director in the performance of his or her
duties. Nothing contained in this Section 3.6 shall preclude any Director from
serving the Corporation or its subsidiaries in any other capacity and receiving
proper compensation therefor.
3.7 Times and Places of Meetings. The Board may hold meetings, both
----------------------------
regular and special, either within or without the State of Delaware. The times
and places for holding meetings of the Board may be fixed from time to time by
resolution of the Board or (unless contrary to a resolution of the Board) in the
notice of the meeting.
3.8 Annual Meetings. On the day when and at the place where the
---------------
annual meeting of stockholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, for the purposes of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
may be held at any other time and place specified in a notice given as provided
in Section 3.11 hereof for special meetings of the Board or in a waiver of
notice thereof.
3.9 Regular Meetings. Regular meetings of the Board may be held
----------------
without notice at such times and at such places as shall from time to time be
determined by the Board.
3.10 Special Meetings. Special meetings of the Board may be called by
----------------
the Chairman, the President or the Secretary or majority of the Entire Board
then serving on at least one day's notice to each Director given by one of the
means
<PAGE>
10
specified in Section 3.13 hereof other than by mail, or on at least three days'
notice if given by mail. Special meetings shall be called by the Chairman,
President or Secretary in like manner and on like notice on the written request
of any two or more of the Directors then serving.
3.11 Telephone Meetings. Directors or members of any committee
------------------
designated by the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 3.11 shall constitute
presence in person at such meeting.
3.12 Adjourned Meetings. A majority of the Directors present at any
------------------
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. At least one day's
notice of any adjourned meeting of the Board shall be given to each Director
whether or not present at the time of the adjournment, if such notice shall be
given by one of the means specified in Section 3.14 hereof other than by mail,
or at least three days' notice if by mail. Any business may be transacted at an
adjourned meeting that might have been transacted at the meeting as originally
called.
3.13 Notice Procedure. Subject to Sections 3.10 and 3.16 hereof,
----------------
whenever, under the provisions of any statute, the Certificate of Incorporation
or these By-laws, notice is required to be given to any Director, such notice
shall be deemed given effectively if given in person or by telephone, by mail
addressed to such Director at such Director's address as it appears on the
records of the Corporation, with postage thereon prepaid, or by telegram, telex,
telecopy or similar means addressed as aforesaid.
3.14 Waiver of Notice. Whenever the giving of any notice is required
----------------
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the person or persons entitled to said notice, whether
before or after the event as to which such notice is required, shall be deemed
equivalent to notice. Attendance by a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Directors or a committee of Directors
need be specified in any written waiver of notice unless so required by statute,
the Certificate of Incorporation or these By-laws.
3.15 Organization. At each meeting of the Board, the Chairman, or in
------------
the absence of the Chairman, the President, or in the absence of the President,
a chairman chosen by a majority of the Directors present, shall preside. The
Secretary
<PAGE>
11
shall act as secretary at each meeting of the Board. In case the Secretary shall
be absent from any meeting of the Board, an Assistant Secretary shall perform
the duties of secretary at such meeting; and in the absence from any such
meeting of the Secretary and all Assistant Secretaries, the person presiding at
the meeting may appoint any person to act as secretary of the meeting.
3.16 Quorum of Directors. Except as otherwise expressly provided by
-------------------
statute or the Certificate of Incorporation, the presence in person of a
majority of the entire Board shall be necessary and sufficient to constitute a
quorum for the transaction of business at any meeting of the Board, but a
majority of a smaller number may adjourn any such meeting to a later date.
3.17 Action by Majority Vote. Except as otherwise expressly required
-----------------------
by statute, the Certificate of Incorporation or these By-laws, the act of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board.
3.18 Action Without Meeting. Unless otherwise restricted by the
----------------------
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all Directors or members of such committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
ARTICLE 4
COMMITTEES OF THE BOARD
-----------------------
The Board may designate one or more committees, each committee to
consist of one or more of the Directors. The Board may designate 1 or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members present at
any meeting and not disqualified from voting, whether or not such member or
members constitute a quorum, may unanimously appoint another member of the Board
to act at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board, or in
the By-laws, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to the following matter: (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by the General Corporation
Law to be submitted to stockholders for approval or (ii) adopting, amending or
repealing any by-law of the Corporation.
<PAGE>
12
ARTICLE 5
OFFICERS
--------
5.1 Positions. The officers of the Corporation shall be a President,
---------
a Secretary, a Treasurer and such other officers as the Board may appoint,
including a Chairman, one or more Vice Presidents and one or more Assistant
Secretaries and Assistant Treasurers, who shall exercise such powers and perform
such duties as shall be determined from time to time by the Board. The Board
may designate one or more Vice Presidents as Executive Vice Presidents and may
use descriptive words or phrases to designate the standing, seniority or areas
of special competence of the Vice Presidents elected or appointed by it. Any
number of offices may be held by the same person unless the Certificate of
Incorporation or these By-laws otherwise provide.
5.2 Appointment. The officers of the Corporation shall be chosen by
-----------
the Board at its annual meeting or at such other time or times as the Board
shall determine.
5.3 Compensation. The compensation of all officers of the
------------
Corporation shall be fixed by, or in the manner prescribed by, the Board. No
officer shall be prevented from receiving a salary or other compensation by
reason of the fact that the officer is also a Director.
5.4 Term of Office. Each officer of the Corporation shall hold
--------------
office for the term for which he or she is elected and until such officer's
successor is chosen and qualifies or until such officer's earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. Such resignation shall take effect at the date of receipt
of such notice or at such later time as is therein specified, and, unless
otherwise specified, the acceptance of such resignation shall not be necessary
to make it effective. The resignation of an officer shall be without prejudice
to the contract rights of the Corporation, if any. Any officer elected or
appointed by the Board may be removed at any time, with or without cause, by
vote of a majority of the Entire Board. Any vacancy occurring in any office of
the Corporation shall be filled by the Board. The removal of an officer without
cause shall be without prejudice to the officer's contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights.
5.5 Fidelity Bonds. The Corporation may secure the fidelity of any
--------------
or all of its officers or agents by bond or otherwise.
5.6 Chairman. The Chairman, if one shall have been appointed, shall
--------
preside at all meetings of the Board and shall exercise such powers and perform
such other duties as shall be determined from time to time by the Board.
<PAGE>
13
5.7 Chief Executive Officer The Chief Executive Officer shall have
-----------------------
responsibility for the management and direction of the business and affairs of
the Corporation and shall exercise such duties as customarily pertain to the
office of the Chief Executive Officer and such other duties as may be prescribed
from time to time by the Board.
5.8 President. The President shall be the Chief Executive Officer of
---------
the Corporation and shall have general supervision over the business of the
Corporation, subject, however, to the control of the Board and of any duly
authorized committee of Directors. The President shall preside at all meetings
of the stockholders and at all meetings of the Board at which the Chairman (if
there be one) is not present. The President may sign and execute in the name of
the Corporation deeds, mortgages, bonds, contracts and other instruments except
in cases in which the signing and execution thereof shall be expressly delegated
by the Board or by these By-laws to some other officer or agent of the
Corporation or shall be required by statute otherwise to be signed or executed
and, in general, the President shall perform all duties incident to the office
of President of a corporation and such other duties as may from time to time be
assigned to the President by the Board.
5.9 Vice Presidents. At the request of the President, or, in the
---------------
President's absence, at the request of the Board, the Vice Presidents shall (in
such order as may be designated by the Board, or, in the absence of any such
designation, in order of seniority based on age) perform all of the duties of
the President and, in so performing, shall have all the powers of, and be
subject to all restrictions upon, the President. Any Vice President may sign
and execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments, except in cases in which the signing and execution thereof
shall be expressly delegated by the Board or by these By-laws to some other
officer or agent of the Corporation, or shall be required by statute otherwise
to be signed or executed, and each Vice President shall perform such other
duties as from time to time may be assigned to such Vice President by the Board
or by the President.
5.10 Secretary. The Secretary shall attend all meetings of the Board
---------
and of the stockholders and shall record all the proceedings of the meetings of
the Board and of the stockholders in a book to be kept for that purpose, and
shall perform like duties for committees of the Board, when required. The
Secretary shall give, or cause to be given, notice of all special meetings of
the Board and of the stockholders and shall perform such other duties as may be
prescribed by the Board or by the President, under whose supervision the
Secretary shall be. The Secretary shall have custody of the corporate seal of
the Corporation, and the Secretary, or an Assistant Secretary, shall have
authority to impress the same on any instrument requiring it, and when so
impressed the seal may be attested by the signature of the Secretary or by the
signature of such Assistant Secretary. The Board may give general authority to
any other officer to impress the seal of the Corporation and to attest the same
by such
<PAGE>
14
officer's signature. The Secretary or an Assistant Secretary may also attest all
instruments signed by the President or any Vice President. The Secretary shall
have charge of all the books, records and papers of the Corporation relating to
its organization and management, shall see that the reports, statements and
other documents required by statute are properly kept and filed and, in general,
shall perform all duties incident to the office of Secretary of a corporation
and such other duties as may from time to time be assigned to the Secretary by
the Board or by the President.
5.11 Treasurer. The Treasurer shall have charge and custody of, and
---------
be responsible for, all funds, securities and notes of the Corporation; receive
and give receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such moneys and valuable effects in the name and to the
credit of the Corporation in such depositaries as may be designated by the
Board; against proper vouchers, cause such funds to be disbursed by checks or
drafts on the authorized depositaries of the Corporation signed in such manner
as shall be determined by the Board and be responsible for the accuracy of the
amounts of all moneys so disbursed; regularly enter or cause to be entered in
books or other records maintained for the purpose full and adequate account of
all moneys received or paid for the account of the Corporation; have the right
to require from time to time reports or statements giving such information as
the Treasurer may desire with respect to any and all financial transactions of
the Corporation from the officers or agents transacting the same; render to the
President or the Board, whenever the President or the Board shall require the
Treasurer so to do, an account of the financial condition of the Corporation and
of all financial transactions of the Corporation; exhibit at all reasonable
times the records and books of account to any of the Directors upon application
at the office of the Corporation where such records and books are kept; disburse
the funds of the Corporation as ordered by the Board; and, in general, perform
all duties incident to the office of Treasurer of a corporation and such other
duties as may from time to time be assigned to the Treasurer by the Board or the
President.
5.12 Assistant Secretaries and Assistant Treasurers. Assistant
----------------------------------------------
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the President.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
----------------------------------------------
6.1 Execution of Contracts. The Board, except as otherwise provided
----------------------
in these By-laws, may prospectively or retroactively authorize any officer or
officers, employee or employees or agent or agents, in the name and on behalf of
the Corporation, to enter into any contract or execute and deliver any
instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
<PAGE>
15
6.2 Loans. The Board may prospectively or retroactively authorize
-----
the President or any other officer, employee or agent of the Corporation to
effect loans and advances at any time for the Corporation from any bank, trust
company or other institution, or from any firm, corporation or individual, and
for such loans and advances the person so authorized may make, execute and
deliver promissory notes, bonds or other certificates or evidences of
indebtedness of the Corporation, and, when authorized by the Board so to do, may
pledge and hypothecate or transfer any securities or other property of the
Corporation as security for any such loans or advances. Such authority
conferred by the Board may be general or confined to specific instances, or
otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
--------------------
payment of money out of the funds of the Corporation and all evidences of
indebtedness of the Corporation shall be signed on behalf of the Corporation in
such manner as shall from time to time be determined by resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the order of the Corporation with such
banks, trust companies, investment banking firms, financial institutions or
other depositaries as the Board may select or as may be selected by an officer,
employee or agent of the Corporation to whom such power to select may from time
to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
-------------------
7.1 Certificates Representing Shares. Certificates representing the
--------------------------------
shares of capital stock of the Corporation shall be in such form (consistent
with the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman, the
President or a Vice President and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer, and may be impressed with the seal of
the Corporation or a facsimile thereof. If the Corporation is authorized to
issue direct classes of shares or different series within a class, the
designations, relative rights, preferences, and limitations applicable to each
class and the variations in rights, preferences, and limitations determined for
each series (and the authority of the Board to determine variations for future
series) shall be summarized on the front or back of each certificate of shares
of such class or series. Alternatively, each certificate may state
conspicuously on its front or back that the Corporation will furnish the
stockholder this information on request in writing and without charge. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall
<PAGE>
16
be entered on the stock transfer books of the Corporation. Any signatures on the
stock certificates may be facsimiles. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may, unless otherwise
ordered by the Board, be issued by the Corporation with the same effect as if
such person were such officer, transfer agent or registrar at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
------------------
Corporation shall be made only on the books of the Corporation by the holder
thereof or by the holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent of the
Corporation, and on surrender of the certificate or certificates representing
such shares of capital stock properly endorsed for transfer and upon payment of
all necessary transfer taxes. Every certificate exchanged, returned or
surrendered to the Corporation shall be marked "Canceled," with the date of
cancellation, by the Secretary or an Assistant Secretary or the transfer agent
of the Corporation. A person in whose name shares of capital stock shall stand
on the books of the Corporation shall be deemed the owner thereof to receive
dividends, to vote as such owner and for all other purposes as respects the
Corporation.
7.3 Transfer and Registry Agents. The Corporation may from time to
----------------------------
time maintain one or more transfer offices or agents and registry offices or
agents at such place or places as may be determined from time to time by the
Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder
--------------------------------------------------
of any shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his or her legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft or mutilation and to
advertise such fact in such manner as the Board may require, and to give the
Corporation and its transfer agents and registrars, or such of them as the Board
may require, a bond in such form, in such sums and with such surety or sureties
as the Board may direct, to indemnify the Corporation and its transfer agents
and registrars against any claim that may be made against any of them on account
of the continued existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection with such
claim.
7.5 Rules and Regulations. The Board may make such rules and
---------------------
regulations as it may deem expedient, not inconsistent with these By-laws or
with the
<PAGE>
17
Certificate of Incorporation, concerning the issue, transfer and registration of
certificates representing shares of its capital stock.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 Indemnity Undertaking. To the extent not prohibited by law, the
---------------------
Corporation shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a Director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees, disbursements and other
charges). Persons who are not directors or officers of the Corporation (or
otherwise entitled to indemnification pursuant to the preceding sentence) may be
similarly indemnified in respect of service to the Corporation or to an Other
Entity at the request of the Corporation to the extent the Board at any time
specifies that such persons are entitled to the benefits of this Article 8.
8.2 Advancement of Expenses. The Corporation shall reimburse or
-----------------------
advance to any Director or officer or other person entitled to indemnification
hereunder the funds necessary for payment of expenses, including attorneys' fees
and disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
-------- -------
the General Corporation Law, such expenses incurred by or on behalf of any
Director or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such Director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of appeal that such Director, officer or other person is not
entitled to be indemnified for such expenses.
8.3 Rights Not Exclusive. The rights to indemnification and
--------------------
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or reimbursement or advancement of expenses may
have or hereafter be entitled under any statute, the Certificate of
Incorporation, these By-laws, any agreement, any vote of stockholders or
disinterested Directors or otherwise, both as to action
<PAGE>
18
in his or her official capacity and as to action in another capacity while
holding such office.
8.4 Continuation of Benefits. The rights to indemnification and
------------------------
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall continue as to a person who has ceased to be a Director or
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
8.5 Insurance. The Corporation shall have power to purchase and
---------
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Article 8, the Certificate of
Incorporation or under Section 145 of the General Corporation Law or any other
provision of law.
8.6 Binding Effect. The rights to indemnification and to the
--------------
advancement of expenses conferred in this Article shall be contract rights and
such rights shall continue as to an indemnitee who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the indemnitee's
heirs, executors, and administrators. No repeal or modification of this Article
8 shall affect any rights or obligations with respect to any state of facts then
or theretofore existing or there after arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
8.7 Procedural Rights. The rights to indemnification and
-----------------
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall be enforceable by any person entitled to such
indemnification or reimbursement or advancement of expenses in any court of
competent jurisdiction. The burden of proving that such indemnification or
reimbursement or advancement of expenses is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including its directors,
its independent legal counsel and its stockholders) to have made a determination
prior to the commencement of such action that such indemnification or
reimbursement or advancement of expenses is proper in the circumstances nor an
actual determination by the Corporation (including its directors, its
independent legal counsel and its stockholders) that such person is not entitled
to such indemnification or reimbursement or advancement of expenses shall
constitute a defense to the action or create a presumption that such person is
not so entitled. Such a person shall also be indemnified for any expenses
incurred in connection with successfully establishing his or her right to such
indemnification or reimbursement or advancement of expenses, in whole or in
part, in any such proceeding.
<PAGE>
19
8.8 Service Deemed at Corporation's Request. Any Director or officer
---------------------------------------
of the Corporation serving in any capacity (a) another corporation of which a
majority of the shares entitled to vote in the election of its directors is
held, directly or indirectly, by the Corporation or (b) any employee benefit
plan of the Corporation or any corporation referred to in clause (a) shall be
deemed to be doing so at the request of the Corporation.
ARTICLE 9
BOOKS AND RECORDS
-----------------
9.1 Books and Records. There shall be kept at the principal office
-----------------
of the Corporation correct and complete records and books of account recording
the financial transactions of the Corporation and minutes of the proceedings of
the stockholders, the Board and any committee of the Board. The Corporation
shall keep at its principal office, or at the office of the transfer agent or
registrar of the Corporation, a record containing the names and addresses of all
stockholders, the number and class of shares held by each and the dates when
they respectively became the owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in
---------------
the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
written form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by
-------------------------------
law, the Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations, the accounts, books, minutes and
other records of the Corporation, or any of them, shall be open to the
stockholders for inspection.
ARTICLE 10
SEAL
----
The corporate seal, if the Board elects to adopt one, shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or otherwise reproduced.
<PAGE>
20
ARTICLE 11
FISCAL YEAR
-----------
The fiscal year of the Corporation shall be fixed, and may be changed,
by resolution of the Board.
ARTICLE 12
PROXIES AND CONSENTS
--------------------
Unless otherwise directed by the Board, the Chairman, the President,
any Vice President, the Secretary or the Treasurer, or any one of them, may
execute and deliver on behalf of the Corporation proxies respecting any and all
shares or other ownership interests of any Other Entity owned by the Corporation
appointing such person or persons as the officer executing the same shall deem
proper to represent and vote the shares or other ownership interests so owned at
any and all meetings of holders of shares or other ownership interests, whether
general or special, and/or to execute and deliver consents respecting such
shares or other ownership interests; or any of the aforesaid officers may attend
any meeting of the holders of shares or other ownership interests of such Other
Entity and thereat vote or exercise any or all other powers of the Corporation
as the holder of such shares or other ownership interests.
ARTICLE 13
OFFICES
-------
13.1 Registered Office. The registered office of the Corporation
-----------------
shall be at 1209 Orange Street, City of Wilmington, County of Newcastle, State
of Delaware; and its registered agent at such address is Corporation Trust
Corporation.
13.2 Other Offices. The Corporation may also have offices, including
-------------
its principal office, at such other places both within and without the State of
Delaware as the Board may from time to time determine or the business of the
Corporation may require.
ARTICLE 14
EMERGENCY BY-LAWS
-----------------
Unless the Certificate of Incorporation provides otherwise, the
following provisions of this Article 13 shall be effective during an emergency,
which is defined as
<PAGE>
21
when a quorum of the Corporation's directors cannot be readily assembled because
of some catastrophic event. During such emergency:
14.1 Notice to Board Members. Any one member of the Board or any one
-----------------------
of the following officers: Chairman, President, any Vice President, Secretary,
or Treasurer, may call a meeting of the Board. Notice of such meeting need be
given only to those Directors whom it is practicable to reach, and may be given
in any practical manner, including by publication and radio. Such notice shall
be given at least six hours prior to commencement of the meeting.
14.2 Temporary Directors and Quorum. One or more officers of the
------------------------------
Corporation present at the emergency Board meeting, as is necessary to achieve a
quorum, shall be considered to be Directors for the meeting, and shall so serve
in order of rank, and within the same rank, in order of seniority. In the event
that less than a quorum of the Directors are present (including any officers who
are to serve as Directors for the meeting), those Directors present (including
the officers serving as Directors) shall constitute a quorum.
14.3 Actions Permitted To Be Taken. The Board as constituted in
-----------------------------
Section 13.2, and after notice as set forth in Section 13.1 may:
14.3.1 prescribe emergency powers to any officer of the
Corporation;
14.3.2 delegate to any officer or Director, any of the powers of
the Board;
14.3.3 designate lines of succession of officers and agents, in
the event that any of them are unable to discharge their duties;
14.3.4 relocate the principal place of business, or designate
successive or simultaneous principal places of business; and
14.3.5 take any other convenient, helpful or necessary action to
carry on the business of the Corporation.
ARTICLE 15
AMENDMENTS
----------
These By-laws of the Corporation may be altered or repealed and new
By-laws may be adopted (i) at any annual or special meeting of stockholders, by
the affirmative vote of not less than a majority of all votes entitled to be
cast by all of the then outstanding shares of capital stock of the Corporation
in the election of directors,
<PAGE>
22
provided, however, that any proposed alteration or repeal of, or the adoption of
any by-law inconsistent with, Sections 2.4, 2.14 and 2.15 of Article 2 of these
By-laws, 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 of Article 3 of these By-laws, by
stockholders shall require the affirmative vote of not less than two-thirds of
all votes entitled to be cast by all of the then outstanding shares of capital
stock of the Corporation in the election of directors, or (ii) by the
affirmative vote of a majority of the Board.
The undersigned, in his capacity as Secretary of the Corporation,
hereby certifies that the foregoing is the Amended and Restated Bylaws of the
Corporation adopted by the Board of the Corporation on this ___ day of June,
1998.
___________________________
Secretary,
MeriStar Hotels & Resorts, Inc.
<PAGE>
Exhibit 4.2
[FRONT OF RIGHTS CERTIFICATE]
MERISTAR HOTELS & RESORTS, INC.
SUBSCRIPTION CERTIFICATE FOR SHARES
CERTIFICATE NUMBER:______ NUMBER OF RIGHTS: ________
SUBSCRIPTION CERTIFICATE REPRESENTING RIGHTS TO PURCHASE SHARES OF COMMON STOCK,
$0.01 PAR VALUE, OF MERISTAR HOTELS & RESORTS, INC. ("COMMON STOCK"). VOID IF
NOT EXERCISED BEFORE EXPIRATION DATE. THE RIGHTS EVIDENCED BY THIS SUBSCRIPTION
CERTIFICATE 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 SUBSCRIPTION CERTIFICATE ARE SET FORTH IN THE COMPANY'S PROSPECTUS
DATED [-------------] (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY
REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE
SUBSCRIPTION AGENT, AT [----------------].
REGISTERED OWNER: The registered owner whose name is inscribed hereon is
entitled to subscribe for shares of Common Stock in the Rights Offering upon the
terms and subject to the conditions set forth in the Prospectus and instructions
to Rightholders relating to the Rights Offering. The Rights represented by this
Subscription Certificate may be exercised directly by duly completing Form 1 or
may be exercised through a bank or broker by completing Form 2. Special
delivery instructions may be specified by completing Form 3. THE RIGHTS
EVIDENCED BY THIS SUBSCRIPTION CERTIFICATE MAY NOT BE EXERCISED UNLESS THE
REVERSE SIDE HEREOF IS DULY SIGNED WITH THE APPROPRIATE FORM DULY COMPLETED AND,
IF APPLICABLE, SIGNATURES GUARANTEED.
Dated:___________________
MERISTAR HOTELS & RESORTS, INC.
[ Corporate Seal ]
Secretary Chairman and Chief Executive Officer
<PAGE>
[BACK OF RIGHTS CERTIFICATE]
MERISTAR HOTELS & RESORTS, INC.
RIGHTHOLDERS SHOULD BE AWARE THAT IF THEY CHOOSE TO EXERCISE LESS THAN ALL OF
THE RIGHTS EVIDENCED HEREBY, THEY MAY NOT RECEIVE A NEW SUBSCRIPTION CERTIFICATE
IN SUFFICIENT TIME TO EXERCISE THE REMAINING RIGHTS EVIDENCED BY SUCH NEW
SUBSCRIPTION CERTIFICATE.
FORM 1 - 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 of MeriStar Hotels & Resorts, Inc. dated [---------]
(the "Prospectus"), receipt of which is hereby acknowledged. Capitalized terms
used herein but not defined herein shall have the meanings ascribed to them in
the Prospectus.
(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 ______________________________________.
(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
<PAGE>
pursuant to the Subscription Privilege (the "Subscription Excess"), the
Subscription Excess will be returned without interest or deduction.
(c) If the number of Rights being exercised pursuant to the Subscription
Privilege is less than all of the Rights represented by this Subscription
Certificate (check only one):
[ ] DELIVER TO ME A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING
RIGHTS TO WHICH I AM ENTITLED.
[ ] DELIVER A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING
RIGHTS IN ACCORDANCE WITH MY FORM 2 INSTRUCTIONS (which include any
required signature guarantees).
[ ] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE
HEREOF AND COMPLETE THE FOLLOWING
Name(s) of Registered Owner(s): ______________________________
______________________________
______________________________
Window Ticket Number (if any): ______________________________
Date of Execution of Notice of Guaranteed Delivery:________________
Name of Institution which Guaranteed Delivery:____________________
Address:__________________________
__________________________
__________________________
__________________________
__________________________
(Including Zip Code)
FORM 2 - TO EXERCISE RIGHTS THROUGH YOUR BANK OR BROKER: For value received,
________ Rights represented by this Subscription Certificate are hereby assigned
for purposes of exercise to (please print name and address and Taxpayer
Identification Number of bank or broker in full):
Name:______________________________________
<PAGE>
Address:__________________________
__________________________
__________________________
__________________________
__________________________
(Including Zip Code)
Taxpayer Identification No.:______________
FORM 3 - DELIVERY INSTRUCTIONS (PROVIDE GUARANTEE OF SIGNATURE(S) BELOW): Name
and/or address for mailing any stock, new Subscription Certificate or cash
payment if other than shown on the reverse hereof:
Name:___________________________________
Address:__________________________
__________________________
__________________________
__________________________
__________________________
(Including Zip Code)
Social Security or Taxpayer Identification No.:______________
ALL RIGHTHOLDERS MUST SIGN BELOW AND ENCLOSE A DULY COMPLETED FORM W-9.
Signature of Rightholder:_______________________________
Name:
Signature of Rightholder:_______________________________
Name:
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 Subscription Certificate. If signature is by
trustee(s), executor(s),
<PAGE>
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)
GUARANTEE OF SIGNATURE(S)
(Note: See paragraphs 2, 5 and 6 of Instructions)
Authorized Signature:___________________
Name:_______________________________
Title:_________________________________
Name of Firm:__________________________
Address: __________________________
__________________________
__________________________
__________________________
__________________________
(Including Zip Code)
Telephone Number: ( )________________
Dated:_____________________
<PAGE>
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT, made as of June ___, 1998 by and
between MERISTAR HOTELS & RESORTS, INC., a Delaware corporation (the "Company"),
MERISTAR H & R OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (the
"Partnership"), and PAUL W. WHETSELL (the "Executive"), an individual residing
at 10901 Tara Road, Potomac, Maryland 20854.
The Company and the Partnership desire to employ the Executive in the
capacities of Chairman of the Board and Chief Executive Officer, and the
Executive desires to be so employed, on the terms and subject to the conditions
set forth in this agreement (the "Agreement");
Now, therefore, in consideration of the mutual covenants set forth
herein and other good and valuable consideration the parties hereto hereby agree
as follows:
1. Employment; Term. The Company and the Partnership each hereby
----------------
employ the Executive, and the Executive agrees to be employed by the Company and
the Partnership, upon the terms and subject to the conditions set forth herein,
for an initial term of five (5) years, commencing on the Spin Off Record Date
(the "Commencement Date") as such term is defined in the Company's Registration
Statement on Form S-1 (Registration Number 333-49881) (the "Registration
Statement"), unless terminated earlier in accordance with Section 5 of this
Agreement; provided that such term shall automatically be extended from time to
-------- ----
time for additional periods of one calendar year from the date on which it would
otherwise expire unless the Executive, on one hand, or the Company and the
Partnership, on the other, gives notice to the other party or parties not less
than 120 days prior to such date that it elects to permit the term of this
Agreement to expire without extension on such date. (The initial term of this
Agreement as the same may be extended in accordance with the terms of this
Agreement is hereinafter referred to as the "Term").
2. Positions; Conduct.
------------------
(a) During the Term, the Executive will hold the titles and offices
of, and serve in the positions of, Chairman of the Board and Chief Executive
Officer of the Company and the Partnership. The Executive shall report to the
Board of Directors of the Company (the "Board") and shall perform such specific
duties and services (including service as an officer, director or equivalent
position of any direct or indirect subsidiary without additional compensation)
as they shall reasonably request consistent with the Executive's positions.
(b) During the Term, the Executive agrees to devote his full business
time and attention to the business and affairs of the Company and the
Partnership and to faithfully and diligently perform, to the best of his
ability, all of his duties and responsibilities
<PAGE>
hereunder; provided, that the Executive may devote his business time to
--------
providing services to MeriStar Hospitality Corporation, and may provide services
as described in Schedule A attached hereto, so long as such activity does not
----------
interfere with the performance of the Executive's duties hereunder. Nothing in
this Agreement shall preclude the Executive from devoting reasonable time and
attention to (i) serving, with the approval of the Board, as a director, trustee
or member of any committee of any organization, (ii) engaging in charitable and
community activities and (iii) managing his personal investments and affairs;
provided that such activities do not involve any material conflict of interest
- -------- ----
with the interests of the Company or, individually or collectively, interfere
materially with the performance by the Executive of his duties and
responsibilities under this Agreement. Notwithstanding the foregoing and except
as expressly provided herein, during the Term, the Executive may not accept
employment with any other individual or entity, or engage in any other venture
which is directly or indirectly in conflict or competition with the business of
the Company or the Partnership.
(c) The Executive's office and place of rendering his services under
this Agreement shall be in the principal executive offices of the Company which
shall be in the Washington, D.C. metropolitan area. Under no circumstances
shall the Executive be required to relocate from the Washington, D.C.
metropolitan area or provide services under this Agreement in any other location
other than in connection with reasonable and customary business travel. During
the Term, the Company shall provide the Executive with executive office space,
and administrative and secretarial assistance and other support services
consistent with his position as Chairman of the Board and Chief Executive
Officer and with his duties and responsibilities hereunder.
3. Board of Directors. While it is understood that the right to
------------------
elect directors of the Company is by law vested in the stockholders and
directors of the Company, it is nevertheless mutually contemplated that, subject
to such rights, during the Term the Executive will serve as a member of the
Company's Board of Directors.
4. Salary; Additional Compensation; Perquisites and Benefits.
---------------------------------------------------------
(a) During the Term, the Company and the Partnership will pay the
Executive a base salary at an aggregate annual rate of not less than $190,000
per annum, subject to annual review by the Compensation Committee of the Board
(the "Compensation Committee"), and in the discretion of such Committee,
increased from time to time. Once increased, such base salary may not be
decreased. Such salary shall be paid in periodic installments in accordance
with the Company's standard practice, but not less frequently than semi-monthly.
(b) For each fiscal year during the Term, the Executive will be
eligible to receive a bonus from the Company. The award and amount of such
bonus shall be based upon the achievement of predefined operating or performance
goals and other criteria established by the Compensation Committee, which goals
shall give the Executive the opportunity to earn a
2
<PAGE>
bonus in the following amounts: threshold target - 25% of base salary; target -
125% of base salary; and maximum bonus amount - 150% of base salary.
(c) During the Term, the Executive will participate in all plans now
existing or hereafter adopted by the Company or the Partnership for their
management employees or the general benefit of their employees, such as any
pension, profit-sharing, bonuses, stock option or other incentive compensation
plans, life and health insurance plans, or other insurance plans and benefits on
the same basis and subject to the same qualifications as other senior executive
officers.
(d) (1) The Executive shall be eligible for stock option grants from
time to time pursuant to the Company's Incentive Plan in accordance with the
terms thereof.
(2) In connection with the spin-off of the Company from CapStar Hotel
Company, the Executive received options to purchase 250,000 shares of common
stock of the Company (the "Pre-Spinoff Awards"). The Pre-Spinoff Awards will
become fully vested if the Executive's employment is terminated voluntarily or
involuntarily within twenty-four (24) months of the Spin-Off Date.
(e) The Company and the Partnership will reimburse the Executive, in
accordance with their standard policies from time to time in effect, for all
out-of-pocket business expenses as may be incurred by the Executive in the
performance of his duties under this Agreement.
(f) The Executive shall be entitled to vacation time to be credited
and taken in accordance with the Company's policy from time to time in effect
for senior executives, which in any event shall not be less than a total of four
weeks per calendar year.
(g) The Company, at its sole cost, shall provide the Executive with a
life insurance policy with a death benefit of at least $2,000,000 payable to a
beneficiary designated by the Executive and a disability policy which, upon a
determination of the Executive's Disability (as hereinafter defined), pays at
least $2,000,000 to the Executive.
(h) The Executive shall be granted a car allowance of up to $___ per
month for the lease of an automobile to be leased by the Company for the use of
the Executive.
(i) In the event that any payment, benefit or other right or
compensation due to the Executive hereunder or otherwise from the Company
including, without limitation the accelerated vesting of the Executive's rights
with respect to stock options, restricted stock or any other benefit or
compensation, results in the imposition of an excise tax payable by the
Executive under Section 4999 of the Internal Revenue 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 shall make a cash
payment to the Executive in the
3
<PAGE>
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.
(j) To the fullest extent permitted by applicable law, the Executive
shall be indemnified and held harmless by the Company and the Partnership
against any and all judgments, penalties, fines, amounts paid in settlement, and
other reasonable expenses (including, without limitation, reasonable attorneys'
fees and disbursements) actually incurred by the Executive in connection with
any threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative, investigative or other) for any action or omission in
his capacity as a director, officer or employee of the Company or the
Partnership.
Indemnification under this Section 4(j) shall be in addition to, and
not in substitution of, any other indemnification by the Company or the
Partnership of its officers and directors. Expenses incurred by the Executive
in defending an action, suit or proceeding for which he claims the right to be
indemnified pursuant to this Section 4(j) shall be paid by the Company or the
Partnership, as the case may be, in advance of the final disposition of such
action suit or proceeding upon the Company's or the Partnership's receipt of (x)
a written affirmation by the Executive of his good faith belief that the
standard of conduct necessary for his indemnification hereunder and under the
provisions of applicable law has been met and (y) a written undertaking by or on
behalf of the Executive to repay the amount advanced if it shall ultimately be
determined by a court that the Executive engaged in conduct which precludes
indemnification under the provisions of such applicable law. Such written
undertaking in clause (y) shall be accepted by the Company or the Partnership,
as the case may be, without security therefor and without reference to the
financial ability of the Executive to make repayment thereunder. The Company
and the Partnership shall use commercially reasonable efforts to maintain in
effect for the Term of this Agreement a directors' and officers' liability
insurance policy, with a policy limit of at least $5,000,000, subject to
customary exclusions, with respect to claims made against officers and directors
of the Company or the Partnership; provided, however, the Company or the
-------- -------
Partnership, as the case may be, shall be relieved of this obligation to
maintain directors' and officers' liability insurance if, in the good faith
judgment of the Company or the Partnership, it cannot be obtained at a
reasonable cost.
5. Termination.
-----------
(a) The Term will terminate immediately upon the Executive's death or,
upon thirty (30) days' prior written notice by the Company, in the case of a
determination of the Executive's Disability. As used herein the term
"Disability" means the Executive's inability to perform his duties and
responsibilities under this Agreement for a period of more than 120 consecutive
days, or for more than 180 days, whether or not continuous, during any 365-day
period, due to physical or mental incapacity or impairment. A determination of
Disability will be made by a physician reasonably satisfactory to both the
Executive and the Company and paid for by the Company or the Partnership whose
decision shall be final and
4
<PAGE>
binding on the Executive and the Company; provided that if they cannot agree as
-------- ----
to a physician, then each shall select and pay for a physician and these two
together shall select a third physician whose fee shall be borne equally by the
Executive and either the Company or the Partnership and whose determination of
Disability shall be binding on the Executive and the Company. Should the
Executive become incapacitated, his employment shall continue and all base and
other compensation due the Executive hereunder shall continue to be paid through
the date upon which the Executive's employment is terminated for Disability in
accordance with this section.
(b) The Term may be terminated by the Company upon notice to the
Executive upon the occurrence of any event constituting "Cause" as defined
herein.
(c) The Term may be terminated by the Executive upon notice to the
Company of any event constituting "Good Reason" as defined herein.
6. Severance.
---------
(a) If the Term is terminated by the Company for Cause, the Company
and the Partnership will pay to the Executive an aggregate amount equal to the
Executive's accrued and unpaid base salary through the date of such termination,
and all unvested options will terminate immediately and any vested options
issued pursuant to the Company's Incentive Plan and held by the Executive at
termination, will expire ninety (90) days after the termination date.
(b) If the Term is terminated by the Executive other than because of
death, Disability or for Good Reason, the Company and the Partnership will pay
to the Executive an aggregate amount equal to the Executive's accrued and unpaid
base salary through the date of such termination, and all unvested options will
terminate immediately and any vested options issued pursuant to the Company's
Incentive Plan and held by the Executive at termination, will expire ninety (90)
days after the termination date.
(c) If the Term is terminated upon the Executive's death or
Disability, the Company and the Partnership will pay to the Executive's estate
or the Executive, as the case may be, a lump sum payment equal to the
Executive's base salary through the termination date, plus a pro rata portion of
the Executive's bonus for the fiscal year in which the termination occurred. In
addition, the Company will make payments for one (1) year of all compensation
otherwise payable to the Executive pursuant to this Agreement, including, but
not limited to, base salary, bonus and welfare benefits. In addition, all of
the Executive's unvested stock options and restricted stock awards will
immediately vest and become exercisable for a period of one (1) year thereafter
and shares of restricted stock of the Company previously granted to the
Executive shall become free from all contractual restrictions.
(d) Subject to Section 6(e) hereof, if the Term is terminated by the
Company without Cause or other than by reason of his death or Disability, in
addition to any other
5
<PAGE>
remedies available, or if the Executive terminates the Term for Good Reason, the
Company and the Partnership shall pay the Executive a lump sum equal to the
product of (x) the sum of (A) the Executive's then annual base salary and (B)
the amount of the Executive's bonus for the preceding year, or if the Term is
terminated in its initial year the Executive's target bonus for such year,
multiplied by (y) the greater of (A) two (2) and (B) a fraction, the numerator
of which is the number of days remaining in the Term (without further extension)
and the denominator of which is 365. In addition, all of the Executive's
unvested stock options and restricted stock awards will immediately vest and
become exercisable for a period of one (1) year thereafter and shares of
restricted stock of the Company previously granted to the Executive shall become
free from all contractual restrictions, and the Company shall continue in effect
the Executive's benefits under Section 4(g) hereof and the Executive's health
benefits noted in Section 4(c) hereof or their equivalent for a period equal to
the greater of two (2) years or the remaining Term, without further extension.
(e) If, within twenty-four (24) months following a Change in Control,
the Term is terminated by the Executive for Good Reason or by the Company
without Cause, in addition to any other rights which the Executive may have
under law or otherwise, the Executive shall receive the same payments and
benefits provided for under Section 6(d) hereof; provided, that the amount of
--------
the multiplier described in clause (d)(y)(A) of Section 6 hereof shall be
increased from two (2) times to three (3) times.
(f) If at any time the Term is not extended pursuant to the proviso to
Section 1 hereof as a result of the Company giving notice thereunder that it
elects to permit the term of this Agreement to expire without extension, the
Company shall be deemed to have terminated the Executive's employment without
Cause.
(g) Notwithstanding anything in this Section 6 to the contrary: (i) if
the Term is terminated for any reason within twenty-four (24) months following
the Spin-Off Date, the Pre-Spinoff Awards will immediately vest and remain
exercisable in accordance with their respective terms; provided, however, such
Pre-Spinoff Awards will have an exercise period of at least one-year from the
date of termination, and (ii) if the Term is terminated within twenty-four (24)
months of the Spin-Off Date, other than by the Company for Cause (as defined
herein), all stock options and restricted stock awards granted to the Executive
(other than the Pre-Spinoff Awards which are addressed in clause (i) above) will
continue to vest and remain exercisable in accordance with their respective
terms as if the termination of the Term had not occurred.
(h) As used herein, the term "Cause" means:
(i) the Executive's willful and intentional failure or refusal to
perform or observe any of his material duties, responsibilities or
obligations set forth in this Agreement; provided, however, that the
-------- -------
Company shall not be deemed to have Cause pursuant to this clause (i)
unless the Company gives the Executive written notice
6
<PAGE>
that the specified conduct has occurred and making specific reference to
this Section 6(h)(i) and the Executive fails to cure the conduct within
thirty (30) days after receipt of such notice;
(ii) any willful and intentional act of the Executive involving
malfeasance, fraud, theft, misappropriation of funds, embezzlement or
dishonesty affecting the Company or the Partnership; or
(iii) the Executive's conviction of, or a plea of guilty or nolo
contendere to, an offense which is a felony in the jurisdiction involved.
Termination of the Executive for Cause shall be communicated by a Notice of
Termination. For purposes of this Agreement, a "Notice of Termination" shall
mean delivery to the Executive of a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Company's Board at a meeting of the Board called and held for the purpose (after
reasonable notice to the Executive and reasonable opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board prior to
such vote) of finding that in the good faith opinion of the Board, the Executive
was guilty of conduct constituting Cause and specifying the particulars thereof
in detail, including, with respect to any termination based upon conduct
described in clause (i) above that the Executive failed to cure such conduct
during the thirty-day period following the date on which the Company gave
written notice of the conduct referred to in such clause (i). For purposes of
this Agreement, no such purported termination of the Executive's employment
shall be effective without such Notice of Termination;
(i) As used herein, the term "Good Reason" means the occurrence of any
of the following, without the prior written consent of the Executive:
(i) assignment of the Executive of duties materially inconsistent
with the Executive's positions as described in Section 2(a) hereof, or any
significant diminution in the Executive's duties or responsibilities, other
than in connection with the termination of the Executive's employment for
Cause, Disability or as a result of the Executive's death or by the
Executive other than for Good Reason;
(ii) the failure of the Company to nominate the Executive to the
Board or the failure of the Executive to be elected to the Board;
(iii) the change in the location of the Company's principal
executive offices or of the Executive's principal place of employment to a
location outside the Washington, D.C. metropolitan area;
(iv) any material breach of this Agreement by the Company or the
Partnership which is continuing; or
7
<PAGE>
(v) a Change in Control;
provided, however, that the Executive shall not be deemed to have Good Reason
- -------- -------
pursuant to clauses (i), (ii) or (iv) above unless the Executive gives the
Company or the Partnership, as the case may be, written notice that the
specified conduct or event has occurred and the Company or the Partnership fails
to cure such conduct or event within thirty (30) days of the receipt of such
notice.
(j) As used herein, the term "Change in Control" means the
occurrence of any one of the following events:
(i) the acquisition (other than from the Company) by any "Person"
(as the term is used for purposes of Sections 13(d) or 14(d) of the
Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of fifty (50%) percent or more of the
combined voting power of the Company's then outstanding voting securities;
or
(ii) the individuals who were members of the Board (the
"Incumbent Board") during the previous twelve (12) month period, cease for
any reason to constitute at least a majority of the Board; provided,
--------
however, that if the election, or nomination for election by the Company's
-------
stockholders, of any new director was approved by a vote of at least two-
thirds of the Incumbent Board, such new director shall, for purposes of
this Agreement, be considered as a member of the Incumbent Board; or
(iii) approval by stockholders of the Company of (a) merger or
consolidation involving the Company if the stockholders of the Company,
immediately before such merger or consolidation do not, as a result of such
merger or consolidation, own, directly or indirectly, more than seventy
(70%) percent of the combined voting power of the then outstanding voting
securities of the corporation resulting from such merger or consolidation
in substantially the same proportion as their ownership of the combined
voting power of the voting securities of the Company outstanding
immediately before such merger or consolidation or (b) a complete
liquidation or dissolution of the Company or an agreement for the sale or
other disposition of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur pursuant to clause (i) above solely because fifty (50%) percent or
more of the combined voting power of the Company's then outstanding
securities is acquired by (a) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained by the
Company or any of its subsidiaries or (b) any corporation which,
immediately prior to such acquisition, is owned directly or indirectly by
the
8
<PAGE>
stockholders of the Company in the same proportion as their ownership of
stock in the Company immediately prior to such acquisition.
(k) The amounts required to be paid and the benefits required to be
made available to the Executive under this Section 6 are absolute. Under no
circumstances shall the Executive, upon the termination of his employment
hereunder, be required to seek alternative employment and, in the event that the
Executive does secure other employment, no compensation or other benefits
received in respect of such employment shall be set-off or in any other way
limit or reduce the obligations of the Company under this Section 6.
7. Confidential Information.
------------------------
(a) The Executive acknowledges that the Company and its subsidiaries
or affiliated ventures ("Company Affiliates") own and have developed and
compile, and will in the future own, develop and compile certain Confidential
Information and that during the course of his rendering services hereunder
Confidential Information will be disclosed to the Executive by the Company
Affiliates. The Executive hereby agrees that, during the Term and for a period
of three years thereafter, he will not use or disclose, furnish or make
accessible to anyone, directly or indirectly, any Confidential Information of
the Company Affiliates.
(b) As used herein, the term "Confidential Information" means any
trade secrets, confidential or proprietary information, or other knowledge,
know-how, information, documents or materials, owned, developed or possessed by
a Company Affiliate pertaining to its businesses the confidentiality of which
such company takes reasonable measures to protect, including, but not limited
to, trade secrets, techniques, know-how (including designs, plans, procedures,
processes and research records), software, computer programs, innovations,
discoveries, improvements, research, developments, test results, reports,
specifications, data, formats, marketing data and business plans and strategies,
agreements and other forms of documents, expansion plans, budgets, projections,
and salary, staffing and employment information. Notwithstanding the foregoing,
Confidential Information shall not in any event include information which (i)
was generally known or generally available to the public prior to its disclosure
to the Executive, (ii) becomes generally known or generally available to the
public subsequent to its disclosure to the Executive through no wrongful act of
the Executive, (iii) is or becomes available to the Executive from sources other
than the Company Affiliates which sources are not known to the Executive to be
under any duty of confidentiality with respect thereto or (iv) the Executive is
required to disclose by applicable law or regulation or by order of any court or
federal, state or local regulatory or administrative body (provided that the
Executive provides the Company with prior notice of the contemplated disclosure
and reasonably cooperates with the Company, at the Company's sole expense, in
seeking a protective order or other appropriate protection of such information).
9
<PAGE>
8. Specific Performance.
--------------------
(a) The Executive acknowledges that the services to be rendered by him
hereunder are of a special, unique, extraordinary and personal character and
that the Company Affiliates would sustain irreparable harm in the event of a
violation by the Executive of Section 7 hereof. Therefore, in addition to any
other remedies available, the Company shall be entitled to specific enforcement
and/or an injunction from any court of competent jurisdiction restraining the
Executive from committing or continuing any such violation of this Agreement
without proving actual damages or posting a bond or other security. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of damages.
(b) If any of the restrictions on activities of the Executive
contained in Section 7 hereof shall for any reason be held by a court of
competent jurisdiction to be excessively broad, such restrictions shall be
construed so as thereafter to be limited or reduced to be enforceable to the
maximum extent compatible with the applicable law as it shall then appear; it
being understood that by the execution of this Agreement the parties hereto
regard such restrictions as reasonable and compatible with their respective
rights.
(c) Notwithstanding anything in this Agreement to the contrary, in the
event that the Company fails to make any payment of any amounts or provide any
of the benefits to the Executive when due as called for under Section 6 of this
Agreement and such failure shall continue for twenty (20) days after notice
thereof from the Executive, all restrictions on the activities of the Executive
under Section 7 hereof shall be immediately and permanently terminated.
9. Withholding. The parties agree that all payments to be made to
-----------
the Executive by the Company pursuant to the Agreement shall be subject to all
applicable withholding obligations of such company.
10. Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be deemed given and received when delivered personally, four
(4) days after being mailed if sent by registered or certified mail, postage
pre-paid, or by one (1) day after delivery if sent by air courier (for next-day
delivery) with evidence of receipt thereof or by facsimile with receipt
confirmed by the addressee. Such notices shall be addressed respectively:
If to the Executive, to:
10901 Tara Road
Potomac, Maryland 20854
10
<PAGE>
If to the Company or to the Partnership, to:
MeriStar Hotel & Resorts, Inc.
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
or to any other address of which such party may have given notice to the other
parties in the manner specified above.
11. Miscellaneous.
-------------
(a) This Agreement is a personal contract calling for the provision of
unique services by the Executive, and the Executive's rights and obligations
hereunder may not be sold, transferred, assigned, pledged or hypothecated by the
Executive. The rights and obligations of the Company and the Partnership
hereunder will be binding upon and run in favor of their respective successors
and assigns. The Company will not be deemed to have breached this Agreement if
any obligations of the Company to make payments to the Executive are satisfied
by the Partnership.
(b) This Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Delaware, without regard to
conflict of laws principles.
(c) Any controversy arising out of or relating to this Agreement or
any breach hereof shall be settled by arbitration in Washington, D.C. by a
single neutral arbitrator in accordance with the Commercial Arbitration Rules of
the American Arbitration Association. Judgment upon any award rendered may be
entered in any court having jurisdiction thereof, except in the event of a
controversy relating to any alleged violation by the Executive of Section 7
hereof, in which case the Company shall be entitled to seek injunctive relief
from a court of competent jurisdiction without the requirement to seek
arbitration.
(d) The headings of the various sections of this Agreement are for
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
(e) The provisions of this Agreement which by their terms call for
performance subsequent to the expiration or termination of the Term shall
survive such expiration or termination.
(f) The Company and the Partnership shall reimburse the Executive for
all costs incurred by the Executive in any proceeding for the successful
enforcement of the terms of this Agreement, including without limitation all
costs of investigation and reasonable attorneys fees and expenses.
11
<PAGE>
(g) This Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof and supersedes all other prior
agreements and undertakings, both written and oral, among the parties with
respect to the subject matter hereof, all of which shall be terminated on the
Commencement Date. In addition, the parties hereto hereby waive all rights such
party may have under all other prior agreements and undertakings, both written
and oral, among the parties hereto, or among the Executive, CapStar Hotel
Company and CapStar Management Co., L.P., with respect to the subject matter
hereof.
(h) This Agreement is conditioned upon and subject to the occurrence
of the Spin-Off as defined in the Registration Statement and shall not be
effective until the Spin-Off has occurred.
[SIGNATURE PAGE FOLLOWS]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
EXECUTIVE:
_____________________________________
Paul W. Whetsell
COMPANY:
MERISTAR HOTELS & RESORTS, INC.
By:___________________________________
Name:
Title:
PARTNERSHIP:
MERISTAR H & R OPERATING PARTNERSHIP L.P.
By:____________________________,
its general partner
By:___________________________________
Name:
Title:
13
<PAGE>
EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT, made as of June ___, 1998 by and
between MERISTAR HOTELS & RESORTS, INC., a Delaware corporation (the "Company"),
MERISTAR H & R OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (the
"Partnership"), and STEVEN D. JORNS (the "Executive"), an individual residing at
900 Kingsbury Way, Southlake, Texas 76092.
The Company and the Partnership desire to employ the Executive in the
capacities of Vice Chairman and Chief Operating Officer, and the Executive
desires to be so employed, on the terms and subject to the conditions set forth
in this agreement (the "Agreement");
Now, therefore, in consideration of the mutual covenants set forth
herein and other good and valuable consideration the parties hereto hereby agree
as follows:
1. Employment; Term. The Company and the Partnership each hereby
----------------
employ the Executive, and the Executive agrees to be employed by the Company and
the Partnership, upon the terms and subject to the conditions set forth herein,
for an initial term of five (5) years, commencing on the Spin Off Record Date
(the "Commencement Date") as such term is defined in the Company's Registration
Statement on Form S-1 (Registration Number 333-49881) (the "Registration
Statement"), unless terminated earlier in accordance with Section 5 of this
Agreement; provided that such term shall automatically be extended from time to
-------- ----
time for additional periods of one calendar year from the date on which it would
otherwise expire unless the Executive, on one hand, or the Company and the
Partnership, on the other, gives notice to the other party or parties not less
than 120 days prior to such date that it elects to permit the term of this
Agreement to expire without extension on such date. (The initial term of this
Agreement as the same may be extended in accordance with the terms of this
Agreement is hereinafter referred to as the "Term").
2. Positions; Conduct.
------------------
(a) During the Term, the Executive will hold the titles and offices
of, and serve in the positions of, Vice Chairman and Chief Operating Officer of
the Company and the Partnership. The Executive shall report to the Board of
Directors of the Company (the "Board") and shall perform such specific duties
and services (including service as an officer, director or equivalent position
of any direct or indirect subsidiary without additional compensation) as they
shall reasonably request consistent with the Executive's positions.
(b) During the Term, the Executive agrees to devote his full business
time and attention to the business and affairs of the Company and the
Partnership and to faithfully and diligently perform, to the best of his
ability, all of his duties and responsibilities
<PAGE>
hereunder; provided, that the Executive may devote his business time to
--------
providing services to MeriStar Hospitality Corporation, so long as such activity
does not interfere with the performance of the Executive's duties hereunder.
Nothing in this Agreement shall preclude the Executive from devoting reasonable
time and attention to (i) serving, with the approval of the Board, as a
director, trustee or member of any committee of any organization, (ii) engaging
in charitable and community activities and (iii) managing his personal
investments and affairs; provided that such activities do not involve any
-------- ----
material conflict of interest with the interests of the Company or, individually
or collectively, interfere materially with the performance by the Executive of
his duties and responsibilities under this Agreement. Notwithstanding the
foregoing and except as expressly provided herein, during the Term, the
Executive may not accept employment with any other individual or entity, or
engage in any other venture which is directly or indirectly in conflict or
competition with the business of the Company or the Partnership.
(c) The Executive's office and place of rendering his services under
this Agreement shall be in the Dallas, Texas metropolitan area with a satellite
office in the Washington, D.C. metropolitan area. Under no circumstances shall
the Executive be required to relocate from the Dallas, Texas metropolitan area
or provide services under this Agreement in any other location other than (i) in
Washington, D.C. or (ii) in connection with reasonable and customary business
travel. During the Term, the Company shall provide the Executive with executive
office space, and administrative and secretarial assistance and other support
services consistent with his position as Vice Chairman and Chief Operating
Officer and with his duties and responsibilities hereunder.
3. Board of Directors. While it is understood that the right to
------------------
elect directors of the Company is by law vested in the stockholders and
directors of the Company, it is nevertheless mutually contemplated that, subject
to such rights, during the Term the Executive will serve as a member of the
Company's Board of Directors.
4. Salary; Additional Compensation; Perquisites and Benefits.
---------------------------------------------------------
(a) During the Term, the Company and the Partnership will pay the
Executive a base salary at an aggregate annual rate of not less than $190,000
per annum, subject to annual review by the Compensation Committee of the Board
(the "Compensation Committee"), and in the discretion of such Committee,
increased from time to time. Once increased, such base salary may not be
decreased. Such salary shall be paid in periodic installments in accordance
with the Company's standard practice, but not less frequently than semi-monthly.
(b) For each fiscal year during the Term, the Executive will be
eligible to receive a bonus from the Company. The award and amount of such
bonus shall be based upon the achievement of predefined operating or performance
goals and other criteria established by the Compensation Committee, which goals
shall give the Executive the opportunity to earn a
2
<PAGE>
bonus in the following amounts: threshold target - 25% of base salary; target -
125% of base salary; and maximum bonus amount - 150% of base salary.
(c) During the Term, the Executive will participate in all plans now
existing or hereafter adopted by the Company or the Partnership for their
management employees or the general benefit of their employees, such as any
pension, profit-sharing, bonuses, stock option or other incentive compensation
plans, life and health insurance plans, or other insurance plans and benefits on
the same basis and subject to the same qualifications as other senior executive
officers.
(d) (1) The Executive shall be eligible for stock option grants from
time to time pursuant to the Company's Incentive Plan in accordance with the
terms thereof.
(2) The Compensation Committee has granted to the Executive,
effective on the Commencement Date, options to purchase 250,000 shares of the
common stock of the Company at an exercise price equal to the fair market value
at the time of grant. Subject to the terms of this Agreement as to the
acceleration of vesting of stock options, such options shall vest as follows:
First Anniversary of the Commencement Date
33-1/3%
vested Second Anniversary of the
Commencement Date 66-2/3%
vested Third Anniversary of the
Commencement Date 100% vested
Such options shall be exercisable, subject to vesting and continued service, for
ten (10) years from the date of grant and in all other respects shall be subject
to the terms and conditions of the Incentive Plan.
(e) The Company and the Partnership will reimburse the Executive, in
accordance with their standard policies from time to time in effect, for all
out-of-pocket business expenses as may be incurred by the Executive in the
performance of his duties under this Agreement.
(f) The Executive shall be entitled to vacation time to be credited
and taken in accordance with the Company's policy from time to time in effect
for senior executives, which in any event shall not be less than a total of four
weeks per calendar year.
(g) The Company, at its sole cost, shall provide the Executive with a
life insurance policy with a death benefit of at least $2,000,000 payable to a
beneficiary designated
3
<PAGE>
by the Executive and a disability policy which, upon a determination of the
Executive's Disability (as hereinafter defined), pays at least $2,000,000 to the
Executive.
(h) The Executive shall be granted a car allowance of up to $___ per
month for the lease of an automobile to be leased by the Company for the use of
the Executive.
(i) In the event that any payment, benefit or other right or
compensation due to the Executive hereunder or otherwise from the Company
including, without limitation the accelerated vesting of the Executive's rights
with respect to stock options, restricted stock or any other benefit or
compensation, results in the imposition of an excise tax payable by the
Executive under Section 4999 of the Internal Revenue 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 shall 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.
(j) To the fullest extent permitted by applicable law, the Executive
shall be indemnified and held harmless by the Company and the Partnership
against any and all judgments, penalties, fines, amounts paid in settlement, and
other reasonable expenses (including, without limitation, reasonable attorneys'
fees and disbursements) actually incurred by the Executive in connection with
any threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative, investigative or other) for any action or omission in
his capacity as a director, officer or employee of the Company or the
Partnership.
Indemnification under this Section 4(j) shall be in addition to, and
not in substitution of, any other indemnification by the Company or the
Partnership of its officers and directors. Expenses incurred by the Executive
in defending an action, suit or proceeding for which he claims the right to be
indemnified pursuant to this Section 4(j) shall be paid by the Company or the
Partnership, as the case may be, in advance of the final disposition of such
action suit or proceeding upon the Company's or the Partnership's receipt of (x)
a written affirmation by the Executive of his good faith belief that the
standard of conduct necessary for his indemnification hereunder and under the
provisions of applicable law has been met and (y) a written undertaking by or on
behalf of the Executive to repay the amount advanced if it shall ultimately be
determined by a court that the Executive engaged in conduct which precludes
indemnification under the provisions of such applicable law. Such written
undertaking in clause (y) shall be accepted by the Company or the Partnership,
as the case may be, without security therefor and without reference to the
financial ability of the Executive to make repayment thereunder. The Company
and the Partnership shall use commercially reasonable efforts to maintain in
effect for the Term of this Agreement a directors' and officers' liability
insurance policy, with a policy limit of at least $5,000,000, subject to
customary exclusions, with respect to claims made against officers and directors
of the Company or the Partnership; provided, however, the Company or the
-------- -------
Partnership, as the case may be, shall be relieved of
4
<PAGE>
this obligation to maintain directors' and officers' liability insurance if, in
the good faith judgment of the Company or the Partnership, it cannot be obtained
at a reasonable cost.
5. Termination.
-----------
(a) The Term will terminate immediately upon the Executive's death or,
upon thirty (30) days' prior written notice by the Company, in the case of a
determination of the Executive's Disability. As used herein the term
"Disability" means the Executive's inability to perform his duties and
responsibilities under this Agreement for a period of more than 120 consecutive
days, or for more than 180 days, whether or not continuous, during any 365-day
period, due to physical or mental incapacity or impairment. A determination of
Disability will be made by a physician reasonably satisfactory to both the
Executive and the Company and paid for by the Company or the Partnership whose
decision shall be final and binding on the Executive and the Company; provided
--------
that if they cannot agree as to a physician, then each shall select and pay for
- ----
a physician and these two together shall select a third physician whose fee
shall be borne equally by the Executive and either the Company or the
Partnership and whose determination of Disability shall be binding on the
Executive and the Company. Should the Executive become incapacitated, his
employment shall continue and all base and other compensation due the Executive
hereunder shall continue to be paid through the date upon which the Executive's
employment is terminated for Disability in accordance with this section.
(b) The Term may be terminated by the Company upon notice to the
Executive upon the occurrence of any event constituting "Cause" as defined
herein.
(c) The Term may be terminated by the Executive upon notice to the
Company of any event constituting "Good Reason" as defined herein.
6. Severance.
---------
(a) If the Term is terminated by the Company for Cause, the Company
and the Partnership will pay to the Executive an aggregate amount equal to the
Executive's accrued and unpaid base salary through the date of such termination,
and all unvested options will terminate immediately and any vested options
issued pursuant to the Company's Incentive Plan and held by the Executive at
termination, will expire ninety (90) days after the termination date.
(b) If the Term is terminated by the Executive other than because of
death, Disability or for Good Reason, the Company and the Partnership will pay
to the Executive an aggregate amount equal to the Executive's accrued and unpaid
base salary through the date of such termination, and all unvested options will
terminate immediately and any vested options issued pursuant to the Company's
Incentive Plan and held by the Executive at termination, will expire ninety (90)
days after the termination date.
5
<PAGE>
(c) If the Term is terminated upon the Executive's death or
Disability, the Company and the Partnership will pay to the Executive's estate
or the Executive, as the case may be, a lump sum payment equal to the
Executive's base salary through the termination date, plus a pro rata portion of
the Executive's bonus for the fiscal year in which the termination occurred. In
addition, the Company will make payments for one (1) year of all compensation
otherwise payable to the Executive pursuant to this Agreement, including, but
not limited to, base salary, bonus and welfare benefits. In addition, all of
the Executive's unvested stock options and restricted stock awards will
immediately vest and become exercisable for a period of one (1) year thereafter
and shares of restricted stock of the Company previously granted to the
Executive shall become free from all contractual restrictions, and the Company
shall continue in effect the Executive's benefits under Section 4(g) hereof and
the Executive's health benefits noted in Section 4(c) hereof or their equivalent
for a period equal to the greater of two (2) years or the remaining Term,
without further extension.
(d) Subject to Section 6(e) hereof, if the Term is terminated by the
Company without Cause or other than by reason of his death or Disability, in
addition to any other remedies available, or if the Executive terminates the
Term for Good Reason, the Company and the Partnership shall pay the Executive a
lump sum equal to the product of (x) the sum of (A) the Executive's then annual
base salary and (B) the amount of the Executive's bonus for the preceding year,
or if the Term is terminated in its initial year the Executive's target bonus
for such year, multiplied by (y) the greater of (A) two (2) and (B) a fraction,
the numerator of which is the number of days remaining in the Term (without
further extension) and the denominator of which is 365. In addition, all of the
Executive's unvested stock options and restricted stock awards will immediately
vest and become exercisable for a period of one (1) year thereafter and shares
of restricted stock of the Company previously granted to the Executive shall
become free from all contractual restrictions.
(e) If, within twenty-four (24) months following a Change in Control,
the Term is terminated by the Executive for Good Reason or by the Company
without Cause, in addition to any other rights which the Executive may have
under law or otherwise, the Executive shall receive the same payments and
benefits provided for under Section 6(d) hereof; provided, that the amount of
--------
the multiplier described in clause (d)(y)(A) of Section 6 hereof shall be
increased from two (2) times to three (3) times.
(f) If at any time the Term is not extended pursuant to the proviso to
Section 1 hereof as a result of the Company giving notice thereunder that it
elects to permit the term of this Agreement to expire without extension, the
Company shall be deemed to have terminated the Executive's employment without
Cause.
(g) Notwithstanding anything in this Section 6 to the contrary if the
Term is terminated within twenty-four (24) months of the Spin-Off Date, other
than by the Company for Cause (as defined herein), all stock options and
restricted stock awards granted to the
6
<PAGE>
Executive will continue to vest and remain exercisable in accordance with their
respective terms as if the termination of the Term had not occurred.
(h) As used herein, the term "Cause" means:
(i) the Executive's willful and intentional failure or refusal to
perform or observe any of his material duties, responsibilities or
obligations set forth in this Agreement; provided, however, that the
-------- -------
Company shall not be deemed to have Cause pursuant to this clause (i)
unless the Company gives the Executive written notice that the specified
conduct has occurred and making specific reference to this Section 6(h)(i)
and the Executive fails to cure the conduct within thirty (30) days after
receipt of such notice;
(ii) any willful and intentional act of the Executive involving
malfeasance, fraud, theft, misappropriation of funds, embezzlement or
dishonesty affecting the Company or the Partnership; or
(iii) the Executive's conviction of, or a plea of guilty or nolo
contendere to, an offense which is a felony in the jurisdiction involved.
Termination of the Executive for Cause shall be communicated by a Notice of
Termination. For purposes of this Agreement, a "Notice of Termination" shall
mean delivery to the Executive of a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Company's Board at a meeting of the Board called and held for the purpose (after
reasonable notice to the Executive and reasonable opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board prior to
such vote) of finding that in the good faith opinion of the Board, the Executive
was guilty of conduct constituting Cause and specifying the particulars thereof
in detail, including, with respect to any termination based upon conduct
described in clause (i) above, that the Executive failed to cure such conduct
during the thirty-day period following the date on which the Company gave
written notice of the conduct referred to in such clause (i). For purposes of
this Agreement, no such purported termination of the Executive's employment
shall be effective without such Notice of Termination;
(i) As used herein, the term "Good Reason" means the occurrence of any
of the following, without the prior written consent of the Executive:
(i) assignment of the Executive of duties materially inconsistent
with the Executive's positions as described in Section 2(a) hereof, or any
significant diminution in the Executive's duties or responsibilities, other
than in connection with the termination of the Executive's employment for
Cause, Disability or as a result of the Executive's death or by the
Executive other than for Good Reason;
7
<PAGE>
(ii) the failure of the Company to nominate the Executive to the
Board or the failure of the Executive to be elected to the Board;
(iii) the change in the location of the Company's principal
executive offices to a location outside the Washington, D.C. metropolitan
area or the change in the location of the Executive's principal place of
employment to a location outside the Dallas, Texas metropolitan area;
(iv) any material breach of this Agreement by the Company or the
Partnership which is continuing; or
(v) a Change in Control;
provided, however, that the Executive shall not be deemed to have Good Reason
- -------- -------
pursuant to clauses (i), (ii) or (iv) above unless the Executive gives the
Company or the Partnership, as the case may be, written notice that the
specified conduct or event has occurred and the Company or the Partnership fails
to cure such conduct or event within thirty (30) days of the receipt of such
notice.
(j) As used herein, the term "Change in Control" means the occurrence of
any one of the following events:
(i) the acquisition (other than from the Company) by any "Person"
(as the term is used for purposes of Sections 13(d) or 14(d) of the
Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of fifty (50%) percent or more of the
combined voting power of the Company's then outstanding voting securities;
or
(ii) the individuals who were members of the Board (the
"Incumbent Board") during the previous twelve (12) month period, cease for
any reason to constitute at least a majority of the Board; provided,
--------
however, that if the election, or nomination for election by the Company's
-------
stockholders, of any new director was approved by a vote of at least two-
thirds of the Incumbent Board, such new director shall, for purposes of
this Agreement, be considered as a member of the Incumbent Board; or
(iii) approval by stockholders of the Company of (a) merger or
consolidation involving the Company if the stockholders of the Company,
immediately before such merger or consolidation do not, as a result of such
merger or consolidation, own, directly or indirectly, more than seventy
(70%) percent of the combined voting power of the then outstanding voting
securities of the corporation resulting from such merger or consolidation
in substantially the same proportion as their ownership of the combined
voting power of the voting securities of the Company outstanding
8
<PAGE>
immediately before such merger or consolidation or (b) a complete
liquidation or dissolution of the Company or an agreement for the sale or
other disposition of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur pursuant to clause (i) above solely because fifty (50%) percent or
more of the combined voting power of the Company's then outstanding
securities is acquired by (a) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained by the
Company or any of its subsidiaries or (b) any corporation which,
immediately prior to such acquisition, is owned directly or indirectly by
the stockholders of the Company in the same proportion as their ownership
of stock in the Company immediately prior to such acquisition.
(k) The amounts required to be paid and the benefits required to be
made available to the Executive under this Section 6 are absolute. Under no
circumstances shall the Executive, upon the termination of his employment
hereunder, be required to seek alternative employment and, in the event that the
Executive does secure other employment, no compensation or other benefits
received in respect of such employment shall be set-off or in any other way
limit or reduce the obligations of the Company under this Section 6.
7. Confidential Information.
------------------------
(a) The Executive acknowledges that the Company and its subsidiaries
or affiliated ventures ("Company Affiliates") own and have developed and
compile, and will in the future own, develop and compile certain Confidential
Information and that during the course of his rendering services hereunder
Confidential Information will be disclosed to the Executive by the Company
Affiliates. The Executive hereby agrees that, during the Term and for a period
of three years thereafter, he will not use or disclose, furnish or make
accessible to anyone, directly or indirectly, any Confidential Information of
the Company Affiliates.
(b) As used herein, the term "Confidential Information" means any
trade secrets, confidential or proprietary information, or other knowledge,
know-how, information, documents or materials, owned, developed or possessed by
a Company Affiliate pertaining to its businesses the confidentiality of which
such company takes reasonable measures to protect, including, but not limited
to, trade secrets, techniques, know-how (including designs, plans, procedures,
processes and research records), software, computer programs, innovations,
discoveries, improvements, research, developments, test results, reports,
specifications, data, formats, marketing data and business plans and strategies,
agreements and other forms of documents, expansion plans, budgets, projections,
and salary, staffing and employment information. Notwithstanding the foregoing,
Confidential Information shall not in any event include information which (i)
was generally known or generally available to the public prior to its disclosure
to the Executive, (ii) becomes generally known or generally available to the
public subsequent to its disclosure to the Executive through no wrongful act of
the Executive,
9
<PAGE>
(iii) is or becomes available to the Executive from sources other than the
Company Affiliates which sources are not known to the Executive to be under any
duty of confidentiality with respect thereto or (iv) the Executive is required
to disclose by applicable law or regulation or by order of any court or federal,
state or local regulatory or administrative body (provided that the Executive
provides the Company with prior notice of the contemplated disclosure and
reasonably cooperates with the Company, at the Company's sole expense, in
seeking a protective order or other appropriate protection of such information).
8. Specific Performance.
--------------------
(a) The Executive acknowledges that the services to be rendered by him
hereunder are of a special, unique, extraordinary and personal character and
that the Company Affiliates would sustain irreparable harm in the event of a
violation by the Executive of Section 7 hereof. Therefore, in addition to any
other remedies available, the Company shall be entitled to specific enforcement
and/or an injunction from any court of competent jurisdiction restraining the
Executive from committing or continuing any such violation of this Agreement
without proving actual damages or posting a bond or other security. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of damages.
(b) If any of the restrictions on activities of the Executive
contained in Section 7 hereof shall for any reason be held by a court of
competent jurisdiction to be excessively broad, such restrictions shall be
construed so as thereafter to be limited or reduced to be enforceable to the
maximum extent compatible with the applicable law as it shall then appear; it
being understood that by the execution of this Agreement the parties hereto
regard such restrictions as reasonable and compatible with their respective
rights.
(c) Notwithstanding anything in this Agreement to the contrary, in the
event that the Company fails to make any payment of any amounts or provide any
of the benefits to the Executive when due as called for under Section 6 of this
Agreement and such failure shall continue for twenty (20) days after notice
thereof from the Executive, all restrictions on the activities of the Executive
under Section 7 hereof shall be immediately and permanently terminated.
9. Withholding. The parties agree that all payments to be made to
-----------
the Executive by the Company pursuant to the Agreement shall be subject to all
applicable withholding obligations of such company.
10. Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be deemed given and received when delivered personally, four
(4) days after being mailed if sent by registered or certified mail, postage
pre-paid, or by one (1) day after delivery if sent by air courier (for next-day
delivery) with evidence of receipt thereof or by facsimile with receipt
confirmed by the addressee. Such notices shall be addressed respectively:
10
<PAGE>
If to the Executive, to:
900 Kingsbury Way
Southlake, Texas 76092
If to the Company or to the Partnership, to:
MeriStar Hotel & Resorts, Inc.
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
or to any other address of which such party may have given notice to the other
parties in the manner specified above.
11. Miscellaneous.
-------------
(a) This Agreement is a personal contract calling for the provision of
unique services by the Executive, and the Executive's rights and obligations
hereunder may not be sold, transferred, assigned, pledged or hypothecated by the
Executive. The rights and obligations of the Company and the Partnership
hereunder will be binding upon and run in favor of their respective successors
and assigns. The Company will not be deemed to have breached this Agreement if
any obligations of the Company to make payments to the Executive are satisfied
by the Partnership.
(b) This Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Delaware, without regard to
conflict of laws principles.
(c) Any controversy arising out of or relating to this Agreement or
any breach hereof shall be settled by arbitration in Dallas, Texas by a single
neutral arbitrator in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. Judgment upon any award rendered may be
entered in any court having jurisdiction thereof, except in the event of a
controversy relating to any alleged violation by the Executive of Section 7
hereof, in which case the Company shall be entitled to seek injunctive relief
from a court of competent jurisdiction without the requirement to seek
arbitration.
(d) The headings of the various sections of this Agreement are for
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
11
<PAGE>
(e) The provisions of this Agreement which by their terms call for
performance subsequent to the expiration or termination of the Term shall
survive such expiration or termination.
(f) The Company and the Partnership shall reimburse the Executive for
all costs incurred by the Executive in any proceeding for the successful
enforcement of the terms of this Agreement, including without limitation all
costs of investigation and reasonable attorneys fees and expenses.
(g) This Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof and supersedes all other prior
agreements and undertakings, both written and oral, among the parties with
respect to the subject matter hereof, all of which shall be terminated on the
Commencement Date. In addition, the parties hereto hereby waive all rights such
party may have under all other prior agreements and undertakings, both written
and oral, among the parties hereto, or between the Executive and American
General Hospitality Corporation, with respect to the subject matter hereof.
(h) This Agreement is conditioned upon and subject to the occurrence
of the Spin-Off as defined in the Registration Statement and shall not be
effective until the Spin-Off has occurred.
[SIGNATURE PAGE FOLLOWS]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
EXECUTIVE:
_____________________________________
Steven D. Jorns
COMPANY:
MERISTAR HOTELS & RESORTS, INC.
By:___________________________________
Name:
Title:
PARTNERSHIP:
MERISTAR H & R OPERATING PARTNERSHIP L.P.
By:____________________________,
its general partner
By:___________________________________
Name:
Title:
13
<PAGE>
Exhibit 10.6
MERISTAR HOTELS & RESORTS, INC.
INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS............................................... -1-
-----------
1.1 Affiliate............................................ -1-
---------
1.2 AGHI................................................. -1-
----
1.3 Agreement............................................ -1-
---------
1.4 Award................................................ -1-
-----
1.5 Board................................................ -1-
-----
1.6 Code................................................. -1-
----
1.7 Committee............................................ -1-
---------
1.8 Common Stock......................................... -1-
------------
1.9 Company.............................................. -1-
-------
1.10 Exchange Act........................................ -1-
------------
1.11 Fair Market Value................................... -1-
-----------------
1.12 Incentive Award..................................... -2-
---------------
1.13 Lessee.............................................. -2-
------
1.14 MeriStar............................................ -2-
--------
1.15 Option.............................................. -2-
------
1.16 Participant......................................... -2-
-----------
1.17 Performance Shares.................................. -2-
------------------
1.18 Permitted Family Members............................ -2-
------------------------
1.19 Plan................................................ -2-
----
1.20 Stock Award......................................... -2-
-----------
1.21 Ten Percent Shareholder............................. -2-
-----------------------
ARTICLE II
PURPOSES.................................................. -3-
--------
ARTICLE III
ADMINISTRATION............................................ -3-
--------------
ARTICLE IV
ELIGIBILITY............................................... -4-
-----------
ARTICLE V
STOCK SUBJECT TO PLAN..................................... -4-
---------------------
5.1 Shares Issued........................................ -4-
-------------
5.2 Aggregate Limit...................................... -4-
---------------
5.3 Reallocation of Shares............................... -5-
----------------------
-i-
<PAGE>
ARTICLE VI
OPTIONS.................................................. -5-
-------
6.1 Award............................................... -5-
-----
6.2 Option Price........................................ -5-
------------
6.3 Maximum Option Period............................... -5-
---------------------
6.4 Nontransferability.................................. -6-
------------------
6.5 Transferable Options................................ -6-
--------------------
6.6 Employee Status..................................... -6-
---------------
6.7 Exercise............................................ -6-
--------
6.8 Payment............................................. -6-
-------
6.9 Shareholder Rights.................................. -7-
------------------
6.10 Disposition of Stock............................... -7-
--------------------
ARTICLE VII
STOCK AWARDS............................................. -7-
------------
7.1 Award............................................... -7-
-----
7.2 Vesting............................................. -7-
-------
7.3 Performance Objectives.............................. -7-
----------------------
7.4 Employee Status..................................... -8-
---------------
7.5 Shareholder Rights.................................. -8-
------------------
ARTICLE VIII
PERFORMANCE SHARE AWARDS................................. -8-
------------------------
8.1 Award............................................... -8-
-----
8.2 Earning the Award................................... -8-
-----------------
8.3 Payment............................................. -9-
-------
8.4 Shareholder Rights.................................. -9-
------------------
8.5 Nontransferability.................................. -9-
------------------
8.6 Transferable Performance Shares..................... -9-
-------------------------------
8.7 Employee Status..................................... -9-
---------------
ARTICLE IX
INCENTIVE AWARDS......................................... -10-
----------------
9.1 Award............................................... -10-
-----
9.2 Terms and Conditions................................ -10-
--------------------
9.3 Nontransferability.................................. -10-
------------------
9.4 Transferable Incentive Awards....................... -10-
-----------------------------
9.5 Employee Status..................................... -11-
---------------
9.6 Shareholder Rights.................................. -11-
------------------
ARTICLE X..................................................... -11-
-ii-
<PAGE>
ARTICLE XI
ADJUSTMENT UPON CHANGE IN COMMON STOCK................... -11-
--------------------------------------
ARTICLE XII
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES; GOVERNING LAW............. -12-
--------------------------------------------
ARTICLE XIII
GENERAL PROVISIONS....................................... -12-
------------------
13.1 Effect on Employment and Service................... -12-
--------------------------------
13.2 Unfunded Plan...................................... -13-
-------------
13.3 Rules of Construction.............................. -13-
---------------------
ARTICLE XIV
AMENDMENT................................................ -13-
---------
ARTICLE XV
DURATION OF PLAN......................................... -13-
----------------
ARTICLE XVI
EFFECTIVE DATE OF PLAN................................... -13-
----------------------
-iii-
<PAGE>
ARTICLE I
DEFINITIONS
-----------
1.1 Affiliate means any "subsidiary" or "parent" corporation
---------
(within the meaning of Section 424 of the Code) of the Company and MeriStar H&R
Operating Partnership, L.P.
1.2 Agreement means a written agreement (including any amendment
---------
or supplement thereto) between the Company and a Participant specifying the
terms and conditions of a Stock Award, an award of Performance Shares or an
Option or Incentive Award granted to such Participant.
1.3 Award means any of an Incentive Award, an Option, an award of
-----
Performance Shares, or a Stock Award.
1.4 Board means the Board of Directors of the Company.
-----
1.5 Code means the Internal Revenue Code of 1986, and any
----
amendments thereto.
1.6 Committee means the Compensation Committee of the Board or a
---------
subcommittee thereof comprised of at least two (2) directors each of whom is a
non-employee director within the meaning of Securities and Exchange Commission
Rule 16b-3.
1.7 Common Stock means the common stock, $0.01 par value, of the
------------
Company.
1.8 Company means MeriStar Hotels & Resorts, Inc., a Delaware
-------
corporation.
1.9 Exchange Act means the Securities Exchange Act of 1934, as
------------
amended and as in effect on the effective date of this Plan.
1.10 Fair Market Value means, on any given date, the current fair
-----------------
market value of the shares of Common Stock as determined below:
If the Common Stock is not listed on an established stock
exchange, the Fair Market Value shall be the average of the final bid and asked
quotations on the over-the-counter market in which the Common Stock is traded
or, if applicable, the reported "closing" price of a share of Common Stock in
the New York over-the-counter market as reported by the National Association of
Securities Dealers, Inc. If the Common Stock is listed on one or more
established stock exchanges, Fair Market Value shall be deemed to be the highest
closing price of a share of Common Stock reported on any such exchange. In any
case, if no sale of Common Stock is made on any stock exchange or
over-the-counter market on that date, then Fair Market Value shall be determined
as of the next preceding day on which there was a sale. If the Common Stock is
not traded, Fair Market Value shall be determined by the Board using any
reasonable method in good faith.
<PAGE>
1.11 Incentive Award means an award which, subject to such terms
---------------
and conditions as may be prescribed by the Administrator, entitles the
Participant to receive a cash payment from the Company or an Affiliate.
1.12 MeriStar means MeriStar Hospitality Corporation, a Maryland
--------
corporation.
1.13 Option means a stock option that entitles the holder to
------
purchase from the Company a stated number of shares of Common Stock at the price
set forth in an Agreement.
1.14 Participant means an employee of the Company or an Affiliate,
-----------
including an employee who is a member of the Board, or an individual whose
efforts contribute to the performance or success of the Company or an Affiliate,
who satisfies the requirements of Article IV and is selected by the Committee to
receive a Stock Award, an Option, an Incentive Award, an award of Performance
Shares or a combination thereof.
1.15 Performance Shares means an award, in the amount determined
------------------
by the Committee and specified in an Agreement, stated with reference to a
specified number of shares of Common Stock, that entitles the holder to receive
a payment for each specified share equal to the Fair Market Value of Common
Stock on the date of payment.
1.16 Permitted Family Members shall have the meaning set forth in
------------------------
Section 6.5 hereof.
1.17 Plan means the MeriStar Hotels & Resorts, Inc. Incentive
----
Plan.
1.18 Spin-Off means the effective time of the spin-off of the
--------
Company by Capstar Hotel Company, a Delaware corporation, and certain of its
affiliates.
1.19 Stock Award means Common Stock awarded to a Participant under
-----------
Article VIII.
1.20 Ten Percent Shareholder means any individual owning more than
-----------------------
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of an Affiliate. An individual shall be considered to own any
voting stock owned (directly or indirectly) by or for his brothers, sisters,
spouse, ancestors or lineal descendants and shall be considered to own
proportionately any voting stock owned (directly or indirectly) by or for a
corporation, partnership, estate or trust of which such individual is a
shareholder, partner or beneficiary.
-2-
<PAGE>
ARTICLE II
PURPOSES
--------
The Plan is intended to assist the Company and its Affiliates in
recruiting and retaining individuals with ability and initiative by enabling
such persons to participate in the future success of the Company and its
Affiliates and to associate their interests with those of the Company and its
stockholders. The Plan is intended to permit the grant of both Options
qualifying under Section 422 of the Code ("incentive stock options") and Options
not so qualifying, and the grant of Stock Awards, Performance Shares and
Incentive Awards. No Option that is intended to be an incentive stock option
shall be invalid for failure to qualify as an incentive stock option. The
proceeds received by the Company from the sale of Common Stock pursuant to this
Plan shall be used for general corporate purposes.
ARTICLE III
ADMINISTRATION
--------------
The Plan shall be administered by the Committee. The Committee
shall have authority to grant Stock Awards, Performance Shares, Incentive Awards
and Options upon such terms (not inconsistent with the provisions of this Plan)
as the Committee may consider appropriate. Such terms may include conditions (in
addition to those contained in this Plan) on the exercisability of all or any
part of an Option or on the transferability or forfeitability of a Stock Award,
Incentive Award or Performance Shares. Notwithstanding any such conditions, the
Committee may, in its discretion, accelerate the time at which any Option may be
exercised, or the time at which a Stock Award may become transferable or
nonforfeitable or the time at which an Incentive Award or Performance Shares may
be settled. In addition, the Committee shall have complete authority to
interpret all provisions of this Plan; to prescribe the form of Agreements; to
adopt, amend, and rescind rules and regulations pertaining to the administration
of the Plan; and to make all other determinations necessary or advisable for the
administration of this Plan. The express grant in the Plan of any specific power
to the Committee shall not be construed as limiting any power or authority of
the Committee. Any decision made, or action taken, by the Committee or in
connection with the administration of this Plan shall be final and conclusive.
Neither the Committee nor any member of the Committee shall be liable for any
act done in good faith with respect to this Plan or any Agreement, Option, Stock
Award, Incentive Award or award of Performance Shares. All expenses of
administering this Plan shall be borne by the Company.
The Committee, in its discretion, may delegate to one or more
officers of the Company all or part of the Committee's authority and duties with
respect to grants and awards to individuals who are not subject to the reporting
and other provisions of Section 16 of the Exchange Act; provided, however, the
-------- -------
Committee shall not delegate its authority (i) to appoint delegates or its
authority to amend or revoke any delegation, (ii) under Articles XI and XII
hereof and (iii) to accelerate the exercisability of Options, the
transferability of Stock Awards or the
-3-
<PAGE>
time at which Incentive Awards or awards of Performance Shares may be settled.
The Committee may revoke or amend the terms of a delegation at any time but such
action shall not invalidate any prior actions of the Committee's delegate or
delegates that were consistent with the terms of the Plan.
ARTICLE IV
ELIGIBILITY
-----------
Any employee of the Company or an Affiliate (including a
corporation that becomes an Affiliate after the adoption of this Plan) or a
person whose efforts contribute to the performance or success of the Company or
an Affiliate (including a corporation that becomes an Affiliate after the
adoption of this Plan) (other than a Board member or an employee of MeriStar who
is not also an employee of the Company or an Affiliate) is eligible to
participate in this Plan if the Committee, in its sole discretion, determines
that such person has contributed significantly or can be expected to contribute
significantly to the profits or growth of the Company or an Affiliate. Directors
of the Company who are employees of the Company or an Affiliate may be selected
to participate in this Plan.
ARTICLE V
STOCK SUBJECT TO PLAN
---------------------
5.1 Shares Issued. Upon the award of shares of Common Stock
-------------
pursuant to a Stock Award or the settlement of a Performance Share award, the
Company may issue shares of Common Stock from its authorized but unissued Common
Stock. Upon the exercise of an Option, the Company may deliver to the
Participant (or the Participant's broker if the Participant so directs), shares
of Common Stock from its authorized but unissued Common Stock.
5.2 Aggregate Limit. With respect to calendar year 1998, the
---------------
maximum number of shares of Common Stock that may be issued pursuant to Awards
granted under the Plan shall be the total of (i) twelve (12%) percent of the
number of shares of Common Stock outstanding immediately after the Spin-Off.
Thereafter, at any given time, the maximum number of shares of Common Stock that
may be issued pursuant to Awards granted under the Plan shall 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 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. In addition to the foregoing, in no
event may the total number of shares of Common Stock covered by outstanding
Incentive Stock Options granted under the Plan, plus the number of shares of
Common Stock issued pursuant to the exercise of Incentive Stock Options,
whenever granted under the Plan, exceed 1,400,000 shares.
-4-
<PAGE>
The maximum aggregate number of shares that may be issued under this Plan shall
be subject to adjustment as provided in XI.
5.3 Reallocation of Shares. If an Award is terminated (for any
----------------------
reason other than its exercise), forfeited or expires unexercised, the number of
shares of Common Stock allocated to the Award or portion thereof which was
terminated, forfeited or expired unexercised may be reallocated to other Awards
to be granted under this Plan.
ARTICLE VI
OPTIONS
-------
6.1 Award. In accordance with the provisions of Article IV, the
-----
Committee will designate each individual to whom an Option is to be granted and
will specify the number of shares of Common Stock covered by such awards;
provided, however, that no individual may be granted Options in any calendar
year covering more than 750,000 shares of Common Stock.
6.2 Option Price. The price per share for Common Stock purchased
------------
on the exercise of an Option shall be determined by the Committee on the date of
grant; provided, however, that the price per share for Common Stock purchased on
the exercise of any Option shall not be less than the Fair Market Value on the
date of grant or, with respect to Options granted in connection with the initial
employment of an individual, eighty-five (85%) percent of the Fair Market Value
on the date the Option is granted; provided, however, that no more than ten
percent (10%) of the shares of Common Stock issued under the Plan be may granted
at less than one hundred percent (100%) of Fair Market Value. Notwithstanding
the preceding sentence, the price per share for Common Stock purchased on the
exercise of any Option that is an incentive stock option shall not be less than
the Fair Market Value on the date the Option is granted or, in the case of an
incentive stock option granted to an individual who is a Ten Percent Shareholder
on the date such option is granted, shall not be less than one hundred ten
percent (110%) of the Fair Market Value on the date the Option is granted.
6.3 Maximum Option Period. The maximum period in which an Option
---------------------
may be exercised shall be determined by the Committee on the date of grant,
except that no Option that is an incentive stock option shall be exercisable
after the expiration of ten years from the date such Option was granted. In the
case of an incentive stock option that is granted to a Participant who is a Ten
Percent Shareholder on the date of grant, such Option shall not be exercisable
after the expiration of five years from the date of grant. The terms of any
Option that is an incentive stock option may provide that it is exercisable for
a period less than such maximum period.
6.4 Nontransferability. Except as provided in Section 6.5 hereof,
------------------
each Option granted under this Plan shall be nontransferable except by will or
by the laws of descent and distribution. During the lifetime of the Participant
to whom the option is granted, the Option
-5-
<PAGE>
may be exercised only by the Participant. No right or interest of a Participant
in any Option shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
6.5 Transferable Options. Section 6.4 hereof to the contrary
--------------------
notwithstanding, if the Agreement provides, an Option that is not an incentive
stock option may be transferred by a Participant to the Participant's children,
grandchildren, spouse, one or more trusts for the benefit of such family members
or a partnership in which such family members are the only partners
(collectively, "Permitted Family Members"); provided, however, that the
Participant may not receive any consideration for the transfer. The holder of an
Option transferred pursuant to this section shall be bound by the same terms and
conditions that governed the Option during the period that it was held by the
Participant.
6.6 Employee Status. For purposes of determining the applicability
---------------
of Section 422 of the Code (relating to incentive stock options), or in the
event that the terms of any Option provide that it may be exercised only during
employment or within a specified period of time after termination of employment,
the Committee may decide to what extent leaves of absence for governmental or
military service, illness, temporary disability, or other reasons, shall not be
deemed interruptions of continuous employment.
6.7 Exercise. Subject to the provisions of this Plan and the
--------
applicable Agreement, an Option shall become exercisable in such installments
(which need not be equal) and at such times as may be designated by the
Committee and set forth in the Agreement; provided, however, that incentive
stock options (granted under the Plan and all plans of the Company and its
Affiliates) may not be first exercisable in a calendar year for stock having a
Fair Market Value (determined as of the date an option is granted) exceeding
$100,000. To the extent not exercised, installments shall accumulate and be
exercisable, in whole or in part, at any time after becoming exercisable, but
not later than the date the Option expires in accordance with Section 6.3
hereof. An Option granted under this Plan may be exercised with respect to any
number of whole shares less than the full number for which the Option could be
exercised. A partial exercise of an Option shall not affect the right to
exercise the Option from time to time in accordance with this Plan and the
applicable Agreement with respect to the remaining shares subject to the Option.
6.8 Payment. Unless otherwise provided by the Agreement, payment
-------
of the Option price shall be made in cash or a cash equivalent acceptable to the
Committee. If the Agreement provides, payment of all or part of the Option price
may be made by surrendering shares of Common Stock to the Company. If Common
stock is used to pay all or part of the Option price, the sum of the cash and
cash equivalent and the Fair Market Value (determined as of the day preceding
the date of exercise) of the shares surrendered must not be less than the Option
price of the shares for which the Option is being exercised. In addition, a
Participant may provide instructions to the Company that upon receipt of the
Option price in cash from a broker
-6-
<PAGE>
or dealer acting at the direction of the Participant in payment for any shares
of Common Stock pursuant to the exercise of an Option, the Company shall issue
such shares of Common Stock directly to the designated broker or dealer.
6.9 Shareholder Rights. No Participant shall have any rights as a
------------------
shareholder with respect to shares subject to his Option until the date of
exercise of such Option.
6.10 Disposition of Stock. A Participant shall notify the Company
--------------------
of any sale or other disposition of Common Stock acquired pursuant to an Option
that was an incentive stock option if such sale or disposition occurs:
(i) within two years of the grant of an Option or
(ii) within one year of the issuance of the Common Stock
to the Participant.
Such notice shall be in writing and directed to the Secretary of the Company.
ARTICLE VII
STOCK AWARDS
------------
7.1 Award. In accordance with the provisions of Article IV, the
-----
Committee will designate each individual to whom a Stock Award is to be made and
will specify the number of shares of Common Stock covered by such awards;
provided, however, that no individual may receive Stock Awards with respect to
more than 50,000 shares of Common Stock in any calendar year and no more than
thirty (30%) percent of the shares of Common Stock available under the Plan may
be issued in the form of Stock Awards.
7.2 Vesting. The Committee, on the date of the award, may
-------
prescribe that a Participant's rights in the Stock Award shall be forfeitable or
otherwise restricted for a period of time or subject to such conditions as may
be set forth in the Agreement. Except with respect to Stock Awards any portion
of which are immediately vested, the period of restriction shall be at least
three years; provided, however, that the minimum period of restriction shall be
at least one year in the case of (i) the restricted portion of a Stock Award
with an immediately vested portion and (ii) a Stock Award that will become
transferable and nonforfeitable on account of the satisfaction of performance
objectives prescribed by the Committee.
7.3 Performance Objectives. In accordance with Section 7.2 hereof,
----------------------
the Committee may prescribe that Stock Awards will be vested immediately upon
grant or will become vested or transferable or both based on objectives stated
with respect to the Company's, an Affiliate's or an operating unit's return on
equity, earnings per share, total earnings, earnings growth, return on capital,
return on assets, funds from operations or Fair Market Value. If the Committee,
on the date of award, prescribes that a Stock Award shall become nonforfeitable
and
-7-
<PAGE>
transferable only upon the attainment of performance objectives stated with
respect to one or more of the foregoing criteria, the shares subject to such
Stock Award shall become nonforfeitable and transferable only to the extent that
the Committee certifies that such objectives have been achieved.
7.4 Employee Status. In the event that the terms of any Stock
---------------
Award provide that shares may become transferable and nonforfeitable thereunder
only after completion of a specified period of employment, the Committee may
decide in each case to what extent leaves of absence for governmental or
military service, illness, temporary disability, or other reasons shall not be
deemed interruptions of continuous employment.
7.5 Shareholder Rights. Prior to their forfeiture (in accordance
------------------
with the applicable Agreement and while the shares of Common Stock granted
pursuant to the Stock Award may be forfeited or are nontransferable), a
Participant will have all rights of a shareholder with respect to a Stock Award,
including the right to receive dividends and vote the shares; provided, however,
that during such period (i) a Participant may not sell, transfer, pledge,
exchange, hypothecate, or otherwise dispose of shares of Common Stock granted
pursuant to a Stock Award, (ii) the Company shall retain custody of the
certificates evidencing shares of Common Stock granted pursuant to a Stock
Award, and (iii) the Participant will deliver to the Company a stock power,
endorsed in blank, with respect to each Stock Award. The limitations set forth
in the preceding sentence shall not apply after the shares of Common Stock
granted under the Stock Award are transferable and are no longer forfeitable.
ARTICLE VIII
PERFORMANCE SHARE AWARDS
------------------------
8.1 Award. In accordance with the provisions of Article IV, the
-----
Committee will designate each individual to whom an award of Performance Shares
is to be made and will specify the number of shares of Common Stock covered by
such awards; provided, however, that no Participant may receive an award of
Performance Shares in any calendar year for more than 12,500 shares of Common
Stock.
8.2 Earning the Award. The Committee, on the date of the grant of
-----------------
an award, may prescribe that the Performance Shares, or portion thereof, will be
earned, and the Participant will be entitled to receive payment pursuant to the
award of Performance Shares only upon the satisfaction of certain requirements
or the attainment of certain objectives. By way of example and not of
limitation, the restrictions may provide that Performance Shares will be
forfeited without payment if the Participant separates from the service of the
Company and its Affiliates before the expiration of a stated term or unless the
Company, an Affiliate or an operating unit achieves objectives stated with
reference to the Company's, an Affiliate's or an operating unit's return on
equity, earnings per share, total earnings, earnings growth, return on capital,
return on assets, funds from operations or Fair Market Value. If the Committee,
on the date of award,
-8-
<PAGE>
prescribes that no payments will be made with respect to Performance Shares
unless performance objectives stated with respect to the foregoing criteria are
attained, no such payment will be made unless, and then only to the extent that,
the Committee certifies that such objectives have been achieved.
8.3 Payment. In the discretion of the Committee, the amount
-------
payable when an award of Performance Shares is earned may be settled in cash, by
the issuance of Common Stock or a combination of cash and Common Stock. A
fractional share shall not be deliverable when an award of Performance Shares is
earned, but a cash payment will be made in lieu thereof.
8.4 Shareholder Rights. No Participant shall, as a result of
------------------
receiving an award of Performance Shares, have any rights as a shareholder until
and to the extent that the award of Performance Shares is earned and settled by
the issuance of Common Stock. After an award of Performance Shares is earned, if
settled completely or partially in Common Stock, a Participant will have all the
rights of a shareholder with respect to such Common Stock.
8.5 Nontransferability. Except as provided in Section 8.6 hereof,
------------------
Performance Shares granted under this Plan shall be nontransferable except by
will or by the laws of descent and distribution. No right or interest of a
Participant in any Performance Shares shall be liable for, or subject to, any
lien, obligation, or liability of such Participant.
8.6 Transferable Performance Shares. Section 8.5 hereof to the
-------------------------------
contrary notwithstanding, the Committee may grant Performance Shares which are
transferable to Permitted Family Members to the extent that, and on such terms
and conditions as may be permitted by, Securities Exchange Commission Rule 16b-3
as in effect from time to time. The holder of Performance Shares transferred
pursuant to this section shall be bound by the same terms and conditions that
governed the Performance Shares during the period that they were held by the
Participant.
8.7 Employee Status. In the event that the terms of any
---------------
Performance Share award provide that no payment will be made unless the
Participant completes a stated period of employment, the Committee may decide to
what extent leaves of absence for government or military service, illness,
temporary disability, or other reasons shall not be deemed interruptions of
continuous employment.
ARTICLE IX
INCENTIVE AWARDS
----------------
9.1 Award. In accordance with the provisions of Article IV, the
-----
Committee shall designate Participants to whom Incentive Awards are made. All
Incentive Awards shall be finally determined exclusively by the Committee under
the procedures established by the Committee; provided, however, that no
Participant may receive an Incentive Award payment in
-9-
<PAGE>
any calendar year that exceeds the lesser of (i) one hundred (100%) percent of
the Participant's base salary (prior to any salary reduction or deferral
elections) as of the date of grant of the Incentive Award or (ii) $250,000.
9.2 Terms and Conditions. The Committee, at the time an Incentive
--------------------
Award is made, shall specify the terms and conditions which govern the award.
Such terms and conditions shall prescribe that the Incentive Award shall be
earned only to the extent that the Company, an Affiliate or an operating unit,
during a performance period of at least one year, achieves objectives stated
with respect to the Company's, an Affiliate's or an operating unit's return on
equity, earnings per share, total earnings, earnings growth, return on capital,
return on assets, funds from operations or Fair Market Value. Such terms and
conditions also may include other limitations on the payment of Incentive Awards
including, by way of example and not of limitation, requirements that the
Participant complete a specified period of employment with the Company or an
Affiliate or that the Company, an Affiliate, or the Participant attain stated
objectives or goals (in addition to those prescribed in accordance with the
preceding sentence) as a prerequisite to payment under an Incentive Award. The
Committee, at the time an Incentive Award is made, shall also specify when
amounts shall be payable under the Incentive Award and whether amounts shall be
payable in the event of the Participant's death, disability, or retirement. No
payment shall be made under an Incentive Award except to the extent that the
Committee certifies that the objectives governing such award have been achieved.
9.3 Nontransferability. Except as provided in Section 9.4 hereof,
------------------
Incentive Awards granted under this Plan shall be nontransferable except by will
or by the laws of descent and distribution. No right or interest of a
Participant in an Incentive Award shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
9.4 Transferable Incentive Awards. Section 9.3 hereof to the
-----------------------------
contrary notwithstanding, the Committee may grant Incentive Awards which are
transferable to Permitted Family Members to the extent that, and on such terms
and conditions as may be permitted by, Securities Exchange Commission Rule 16b-3
as in effect from time to time. The holder of an Incentive Award transferred
pursuant to this section shall be bound by the same terms and conditions that
governed the Incentive Award during the period that it was held by the
Participant.
9.5 Employee Status. If the terms of an Incentive Award provide
---------------
that a payment will be made thereunder only if the Participant completes a
stated period of employment, the Committee may decide to what extent leaves of
absence for governmental or military service, illness, temporary disability or
other reasons shall not be deemed interruptions of continuous employment.
-10-
<PAGE>
9.6 Shareholder Rights. No Participant shall, as a result of
------------------
receiving an Incentive Award, have any rights as a shareholder of the Company or
any Affiliate on account of such award.
ARTICLE X
ACCELERATION UPON CERTAIN EVENTS
--------------------------------
In the event (i) of the commencement of a public tender offer for
all or any portion of the Common Stock, (ii) a proposal to merge, consolidate or
otherwise combine with another company is submitted to the stockholders of the
Company for approval, or (iii) the Board approves any transaction or event that
would constitute a change of control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of the
Securities Exchange Act of 1934, as amended, all outstanding Options and awards
shall become fully vested or exercisable, as the case may be, in each case as of
the date of the consummation of such tender offer or other transaction or event.
ARTICLE XI
ADJUSTMENT UPON CHANGE IN COMMON STOCK
--------------------------------------
The maximum number of shares as to which Options, Stock Awards and
Performance Shares may be granted under this Plan, the terms of outstanding
Stock Awards, Options, Performance Share awards and Incentive Awards, and the
per individual limitations on the number of shares for which Options, Stock
Awards and Performance Shares may be granted, shall be adjusted as the Committee
shall determine to be equitably required in the event that there is an increase
or reduction in the number of shares of Common Stock, or any change (including,
but not limited to, a change in value) in the shares of Common Stock or exchange
of shares of Common Stock for a different number or kind of shares or other
securities of the Company by reason of a reclassification, recapitalization,
merger, consolidation, reorganization, spin-off, split-up, subdivision or
consolidation of shares, extraordinary dividend, change in corporate structure
or otherwise. Any determination made under this Article XI by the Committee
shall be final and conclusive.
The issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services, either upon direct sale or upon the exercise of rights
or warrants to subscribe therefor, or upon conversion of shares or obligations
of the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
maximum number of shares as to which Options, Stock Awards and Performance
Shares may be granted, the per individual limitations on the number of shares
for which Options, Stock Awards
-11-
<PAGE>
and Performance Shares may be granted or the terms of outstanding Stock Awards,
Options, Incentive Awards or Performance Shares.
The Committee may make Stock Awards and may grant Options,
Incentive Awards and Performance Shares in substitution for performance shares,
phantom shares, stock awards, stock options, stock appreciation rights, or
similar awards held by an individual who becomes an employee of the Company or
an Affiliate in connection with a transaction described in the first paragraph
of this Article XI. Notwithstanding any provision of the Plan (other than the
limitation of Section 5.2 hereof), the terms of such substituted Stock Awards,
Option, Incentive Awards or Performance Share grants shall be as the Committee,
in its discretion, determines is appropriate.
ARTICLE XII
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES; GOVERNING LAW
--------------------------------------------
No Option shall be exercisable, no Common Stock shall be issued,
no certificates for shares of Common Stock shall be delivered, and no payment
shall be made under this Plan except in compliance with all applicable federal
and state laws and regulations (including, without limitation, withholding tax
requirements), any listing agreement to which the Company is a party, and the
rules of all domestic stock exchanges on which the Company's shares may be
listed. The Company shall have the right to rely on an opinion of its counsel as
to such compliance. Any share certificate issued to evidence Common Stock when a
Stock Award is granted or for which an option is exercised or a Performance
Share settled may bear such legends and statements as the Committee may deem
advisable to assure compliance with federal and state laws and regulations. No
Option shall be exercisable, no Stock Award shall be granted, no Common Stock
shall be issued, no certificate for shares shall be delivered, and no payment
shall be made under this Plan until the Company has obtained such consent or
approval as the Committee may deem advisable from regulatory bodies having
jurisdiction over such matters. Except as to matters of federal law, this Plan
and the rights of all persons claiming hereunder shall be construed and
determined in accordance with the laws of the State of Delaware without giving
effect to conflicts of law principles.
ARTICLE XIII
GENERAL PROVISIONS
13.1 Effect on Employment and Service. Neither the adoption of
this Plan, its operation, nor any documents describing or referring to this Plan
(or any part thereof) shall confer upon any individual any right to continue in
the employ or service of the Company or an Affiliate or in any way affect any
right and power of the Company or an Affiliate to terminate the employment or
service of any individual at any time with or without assigning a reason
therefor.
-12-
<PAGE>
13.2 Unfunded Plan. The Plan, insofar as it provides for grants,
-------------
shall be unfunded, and the Company shall not be required to segregate any assets
that may at any time be represented by grants under this Plan. Any liability of
the Company to any person with respect to any grant under this Plan shall be
based solely upon any contractual obligations that may be created pursuant to
this Plan. No such obligation of the Company shall be deemed to be secured by
any pledge of, or other encumbrance on, any property of the Company.
13.3 Rules of Construction. Headings are given to the articles and
---------------------
sections of this Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
ARTICLE XIV
AMENDMENT
---------
The Board may amend or terminate this Plan from time to time;
provided, however, that no amendment may become effective until shareholder
- -------- -------
approval is obtained if the amendment materially (i) increases the aggregate
number of shares of Common Stock that may be issued under the Plan, (ii) changes
the class of individuals eligible to become Participants or (iii) increases the
benefits that may be provided under the Plan. No amendment shall, without a
Participant's consent, adversely affect any rights of such Participant under any
outstanding Stock Award, Option, Incentive Award or Performance Share award
outstanding at the time such amendment is made.
ARTICLE XV
DURATION OF PLAN
----------------
No Stock Award, Option, Incentive Award or Performance Share award
may be granted under this Plan more than ten years after the earlier of the date
this Plan was adopted by the Board or the date this Plan was originally approved
by stockholders, as reflected in Article XVI. Stock Awards, Options, Incentive
Awards and Performance Share awards granted before that date shall remain valid
in accordance with their terms.
ARTICLE XVI
EFFECTIVE DATE OF PLAN
----------------------
The Plan was originally adopted by the Board on _____________,
1998, and approved by shareholders on ____________, 1998.
-13-
<PAGE>
Exhibit 10.7
MERISTAR HOTELS & RESORTS, INC.
NON-EMPLOYEE DIRECTORS' INCENTIVE PLAN
<PAGE>
ARTICLE I
DEFINITIONS
1.1 Award Date means the first business day following the
----------
Company's annual meeting of stockholders, beginning with the annual meeting of
stockholders in 1999.
1.2 Board means the Board of Directors of the Company.
-----
1.3 Committee means the Board or the committee appointed by
---------
the Board to administer the Plan.
1.4 Common Stock means the common stock of the Company.
------------
1.5 Company means MeriStar Hotels & Resorts, Inc., a Delaware
-------
corporation.
1.6 Fair Market Value means, on any given date: if the Common
-----------------
Stock is not listed on an established stock exchange, Fair Market Value shall be
the average of the final bid and asked quotations on the over-the-counter market
in which the Common Stock is traded or, if applicable, the reported "closing"
price of a share of Common Stock in the New York over-the-counter market as
reported by the National Association of Securities Dealers, Inc. If the Common
Stock is listed on one or more established stock exchanges, Fair Market Value
shall be deemed to be the highest closing price of a share of Common Stock
reported on any of such exchanges. In any case, if no sale of Common Stock is
made on any stock exchange or over-the-counter market on that date, then Fair
Market Value shall be determined as of the next preceding day on which there was
a sale.
1.7 First Award Date means the date following the initial
----------------
commencement of service as a member of the Board after the Spin-Off, whether by
election or appointment.
1.8 Internal Revenue Code means the Internal Revenue Code of
---------------------
1986, as amended.
<PAGE>
1.9 Option means a stock option that entitles the holder to
------
purchase shares of Common Stock from the Company on the terms set forth in
Article IV of this Plan.
1.10 Participant means a member of the Board who, on the First
-----------
Award Date or applicable Award Date, is not an employee or officer of the
Company or any "subsidiary" or "parent" corporation of the Company within the
meaning of Section 424 of the Internal Revenue Code.
1.11 Plan means the MeriStar Hotels & Resorts, Inc. Non-Employee
----
Directors' Incentive Plan.
1.12 Spin-Off means the effective time of the spin-off of the
--------
Company by CapStar Hotel Company, a Delaware corporation, and certain of its
affiliates.
ARTICLE II
PURPOSES
--------
The Plan is intended to (i) assist the Company in recruiting and
retaining non-employee directors and (ii) promote a greater identity of interest
between Participants and stockholders by enabling Participants to participate in
the Company's future success.
ARTICLE III
ADMINISTRATION
--------------
The Plan shall be administered by the Committee. The Committee
shall have complete authority to interpret all provisions of the Plan; to adopt,
amend, and rescind rules and regulations pertaining to the administration of the
Plan and to make all other determinations
2
<PAGE>
necessary or advisable for the administration of the Plan. The express grant in
the Plan of any specific power to the Committee shall not be construed as
limiting any power or authority of the Committee. Any decision made, or action
taken, by the Committee in connection with the administration of the Plan shall
be final and conclusive. No member of the Committee shall be liable for any act
done in good faith with respect to the Plan. All expenses of administering the
Plan shall be borne by the Company.
ARTICLE IV
OPTIONS
-------
4.1 Grant of Options. Each Participant shall be granted an Option
----------------
for 7,500 shares of Common Stock on the applicable First Award Date. Thereafter,
each Participant shall receive an annual grant of an Option to purchase 5,000
shares of Common Stock on each Award Date. All Options shall be evidenced by
Agreements that shall be subject to the applicable provisions of this Plan and
to such other provisions as the Committee may adopt which are not inconsistent
with the provisions of this Plan.
4.2 Option Price. The price per share of Common Stock purchased
------------
on the exercise of an Option shall be the Fair Market Value on the date that the
Option is granted.
4.3 Maximum Option Period. The maximum period during which an
---------------------
Option may be exercised shall be ten years from the date of grant.
4.4 Exercise of Options. All Options granted under the Plan shall
-------------------
vest in three annual installments beginning on the date of grant and on
subsequent anniversaries thereof (each,
3
<PAGE>
a "Vesting Date"), provided the Participant continues to serve as a director of
the Company on such Vesting Date.
4.5 Effect of Termination of Services or Death. If a Participant
------------------------------------------
ceases to serve as a director of the Company for any reason, the Options that
have been previously granted to that Participant and that are not vested as of
that date shall be forfeited. Options that have vested as of the date of such
cessation of services may be exercised by the Participant, in accordance with
and subject to the terms of the Plan, after the date such Participant ceases to
be a director of the Company. If a Participant dies, the Options that have been
previously granted to that Participant and that are vested as of the date of
death may be exercised by the administrator of the Participant's estate, or by
the person to whom such Options are transferred by will or the laws of descent
and distribution. In no event, however, may any Option be exercised after the
expiration date of such Option. Any Option or portion thereof that is not
exercised during the applicable time period specified above shall be deemed
terminated at the end of the applicable time period for purposes of Article VI
hereof.
4.6 Effect of a Change in Control. All Options granted pursuant
-----------------------------
to this Plan shall immediately vest upon a Change in Control of the Company. For
purposes of the Plan, a "Change in Control" shall mean (i) the commencement of a
public tender offer for all or any portion of the Common Stock, (ii) a proposal
to merge, consolidate or otherwise combine with another company is submitted to
the stockholders of the Company for approval, or (iii) the Board approves any
transaction or event that would constitute a change of control of the Company of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of the Securities Exchange Act of 1934, as amended.
4
<PAGE>
4.7 Payment of Option Price. Payment of the Option price shall be
-----------------------
made in cash, cash equivalent acceptable to the Committee, Company Common Stock,
or a combination thereof. In addition, a Participant may provide instructions to
the Company that upon receipt of the Option price in cash from a broker or
dealer acting at the direction of the Participant in payment for any shares of
Common Stock pursuant to the exercise of an Option, the Company shall issue such
shares of Common Stock directly to the designated broker or dealer. If shares of
Common Stock are surrendered in payment of the Option price, the shares
surrendered must have an aggregate Fair Market Value (determined as of the day
preceding the exercise date) that, together with any cash or cash equivalent
paid, is not less than the Option price for the number of shares of Common Stock
for which this Option is being exercised.
4.8 Nontransferability. Each Option granted under this Plan shall
------------------
be nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom an Option is granted, the Option
may be exercised only by the Participant. No right or interest of a Participant
in any Option shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
4.9 Transferable Options. Section 4.8 hereof to the contrary
--------------------
notwithstanding, an Option may be transferred by a Participant to the
Participant's children, grandchildren, spouse, one or more trusts for the
benefit of such family members or a partnership in which such family members are
the only partners; provided, however, that the Participant may not receive any
consideration for the transfer. The holder of an Option transferred pursuant to
this section shall be bound by the same terms and conditions that governed the
Option during the period that it was held by the Participant.
5
<PAGE>
4.10 Stockholder Rights. No Participant shall have any rights as
------------------
a stockholder with respect to shares of Common Stock subject to his or her
Option until the date of exercise of such option.
ARTICLE V
SHARES IN LIEU OF FEES
----------------------
5.1 Each Participant shall have the right to elect to receive
payment of any or all director fees in shares of Common Stock rather than cash.
Unless a Participant elects otherwise, fees paid in shares of Common Stock will
be paid at the same time as are fees paid in cash.
ARTICLE VI
STOCK SUBJECT TO PLAN
---------------------
6.1 Shares Issued. Upon the exercise of an Option, the Company
-------------
may deliver to the Participant (or the Participant's broker if the Participant
so directs), shares of Common Stock from its authorized but unissued Common
Stock.
6.2 Aggregate Limit. The maximum aggregate number of shares of
---------------
Common Stock that may be issued under this Plan is 125,000 shares. The maximum
aggregate number of shares that may be issued under this Plan shall be subject
to adjustment as provided in Article VII.
6.3 Reallocation of Shares. If an Option is terminated, in whole
----------------------
or in part, for any reason other than its exercise, the number of shares of
Common Stock allocated to the Option or portion thereof may be reallocated to
other Options to be granted under this Plan.
6
<PAGE>
ARTICLE VII
ADJUSTMENT UPON CHANGE IN COMMON STOCK
--------------------------------------
The provisions of this Plan and the terms of outstanding Options
shall be adjusted as the Committee shall determine to be equitably required in
the event that there is an increase or reduction in the number of shares of
Common Stock, or any change (including, but not limited to, a change in value)
in the shares of Common Stock or exchange of shares of Common Stock for a
different number or kind of shares or other securities of the Company by reason
of a reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, subdivision or consolidation of shares, extraordinary
dividend, change in corporate structure or otherwise. Any determination made
under this Article VII by the Committee shall be final and conclusive.
The issuance by the Company of shares of any class, or securities
convertible into shares of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares of obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the provisions of
this Plan or the terms of outstanding Options.
7
<PAGE>
ARTICLE VIII
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES; GOVERNING LAW
No Common Stock shall be issued and no certificates for shares of
Common Stock shall be delivered under the Plan except in compliance with all
applicable federal and state laws and regulations, any listing agreement to
which the Company is a party, and the rules of all domestic stock exchanges on
which the Company's Common Stock may be listed. The Company shall have the right
to rely on an opinion of its counsel as to such compliance. Any certificate
issued to evidence Common Stock issued upon the exercise of an Option granted
under the Plan may bear such legends and statements as the Committee may deem
advisable to assure compliance with federal and state laws and regulations. No
Common Stock shall be issued and no certificate for shares of Common Stock shall
be delivered upon the exercise of an Option granted under the Plan until the
Company has obtained such consent or approval as the Committee may deem
advisable from regulatory bodies having jurisdiction over such matters. Except
as to matters of federal law, this Plan and the rights of all persons claiming
hereunder shall be construed and determined in accordance with the laws of the
State of Delaware without giving effect to conflicts of law principles.
ARTICLE IX
GENERAL PROVISIONS
9.1 Unfunded Plan. The Plan, insofar as it provides for awards,
-------------
shall be unfunded, and the Company shall not be required to segregate any assets
that may at any time be
8
<PAGE>
represented by awards under the Plan. Any liability of the Company to any person
with respect to any award to be made under the Plan shall be based solely upon
any contractual obligations that may be created pursuant to the Plan. No such
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
9.2 Rules of Construction. Headings are given to the articles and
---------------------
sections of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
ARTICLE X
AMENDMENT
---------
The Board may amend from time to time or terminate the Plan at
any time; provided, however, that no amendment may become effective until
-------- -------
stockholder approval is obtained if the amendment (i) materially increases the
aggregate number of shares of Common Stock that may be issued under this Plan or
(ii) stockholder approval would be required for compliance with stock exchange
rules. No amendment shall, without a Participant's consent, adversely affect any
rights of such Participant under any outstanding Option.
ARTICLE XI
DURATION OF PLAN
----------------
No Option may be made under this Plan after December 31, 2008.
Options made before that date shall remain valid in accordance with their terms.
9
<PAGE>
ARTICLE XII
EFFECTIVE DATE OF PLAN
----------------------
The Plan was originally adopted by the Board on ___________, 1998
and approved by shareholders on ______________, 1998.
10
<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 18, 1998
<PAGE>
EXHIBIT 23.2.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 3 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., included in the Report on
Form 8-K dated and filed on April 17, 1998 and the Form 8-K/A filed on May 22,
1998. We also consent to the references to our firm under the caption
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 18, 1998
<PAGE>
EXHIBIT 23.2.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 3 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 18, 1998
