-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H4JI78A7Ij3IKFAispQtICG8CHYCa8blPEqzO+zL3yidG+2FMSrMsENhh/0X9+bg 49PGQQAtNaOO9L88OpFVwA== 0000950131-96-003157.txt : 19960705 0000950131-96-003157.hdr.sgml : 19960705 ACCESSION NUMBER: 0000950131-96-003157 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960703 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXTENDED STAY AMERICA INC CENTRAL INDEX KEY: 0001002579 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 363996573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-00102 FILM NUMBER: 96590564 BUSINESS ADDRESS: STREET 1: 500 E BROWARD BLVD STREET 2: STE 950 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 BUSINESS PHONE: 9547131600 MAIL ADDRESS: STREET 1: 500 E BROWARD BLVD STREET 2: STE 950 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 S-1/A 1 AMENDMENT #4 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996 REGISTRATION NO. 333-102 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- POST-EFFECTIVE AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- EXTENDED STAY AMERICA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7011 36-3996573 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. JURISDICTION OF INDUSTRIAL CLASSIFICATION EMPLOYERIDENTIFICATION INCORPORATION OR CODE NUMBER) NUMBER) ORGANIZATION) 500 E. BROWARD BOULEVARD FT. LAUDERDALE, FLORIDA 33394 TELEPHONE (954) 713-1600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- GEORGE D. JOHNSON, JR. CHIEF EXECUTIVE OFFICER EXTENDED STAY AMERICA, INC. 500 E. BROWARD BOULEVARD FT. LAUDERDALE, FLORIDA 33394 TELEPHONE (954) 713-1600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JOHN T. MCCARTHY, ESQ. BELL, BOYD & LLOYD THREE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60602 TELEPHONE: (312) 372-1121 ---------------- AMENDING THE PROSPECTUS AND FILING CERTAIN EXHIBITS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +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 JULY 3, 1996 PROSPECTUS 3,468,000 SHARES LOGO COMMON STOCK ----------- The 3,468,000 shares of common stock, $.01 par value per share ("Common Stock"), covered by this Prospectus may be offered and issued from time to time by Extended Stay America, Inc. (the "Company") in connection with acquisitions of other businesses, real or personal properties, or securities in business combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities Act of 1933, as amended (the "Securities Act"), or otherwise under Rule 415. This Prospectus may also be used, with the Company's prior consent, by persons who have received or will receive shares in connection with acquisitions and who wish to offer and sell such shares under circumstances requiring or making desirable its use. See "Securities Covered by this Prospectus" and see the inside back cover page hereof for the identity of such persons, if any. The Common Stock is traded on the Nasdaq National Market under the symbol "STAY". On June 26, 1996, the closing sale price of the Common Stock, as reported in The Wall Street Journal, was $29.875 per share. See "Price Range of Common Stock." ----------- SEE "RISK FACTORS" AT PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ----------- THE DATE OF THIS PROSPECTUS IS , 1996. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 2 Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Recent Developments....................................................... 11 Securities Covered by this Prospectus..................................... 13 Price Range of Common Stock............................................... 14 Dividend Policy........................................................... 14 Selected Financial Data................................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 17 Business.................................................................. 21 Management................................................................ 28 Certain Transactions...................................................... 36 Principal Shareholders.................................................... 37 Financing................................................................. 38 Description of Capital Stock.............................................. 40 Shares Eligible for Future Sale........................................... 42 Experts................................................................... 43 Index to Financial Statements............................................. F-1
AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, registration statements, proxy statements, and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Company has filed with the Commission a Registration Statement on Form S- 1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. As used herein, the term "Registration Statement" means the initial Registration Statement and any and all amendments thereto. This Prospectus omits certain information contained in said Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to such contract or other document filed with the Commission as an exhibit to the Registration Statement, or otherwise, each such statement being qualified by and subject to such reference in all respects. The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by its independent public accountants. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context suggests otherwise, references in this Prospectus to the "Company" mean Extended Stay America, Inc. and its subsidiaries and references to the year ended December 31, 1995 mean the period from January 9, 1995, the Company's date of inception, through December 31, 1995. On May 9, 1996, the Board of Directors of the Company declared a dividend of one additional share of Common Stock for each share issued as of the close of business on July 5, 1996, to be distributed on July 19, 1996, thereby effecting a 2-for-1 stock split (the "Stock Dividend"). Except as otherwise noted, none of the information contained in this Prospectus reflects the Stock Dividend. THE COMPANY Extended Stay America, Inc. was organized in January 1995 to develop, own, and manage extended stay lodging facilities which are designed to appeal to value-conscious guests. The Company's facilities are designed to offer quality accommodations for guests at substantially lower rates than most other extended stay lodging providers and hotels in the economy segment of the traditional lodging industry. They feature fully furnished rooms which are generally rented on a weekly basis to guests such as business travelers (particularly those with limited expense accounts), professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home, with most guests staying for multiple weeks. The Company's facilities provide a variety of features that are attractive to the extended stay guest such as a fully-equipped kitchenette, weekly housekeeping with twice-weekly towel service, color television with cable or satellite hook-up, coin laundromat, and telephone service with voice mail messaging. To help maintain affordability of room rates, labor intensive services such as daily cleaning, room service, and restaurants are not provided. The extended stay category is one of the most rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay rooms increased at a compounded annual growth rate of approximately 3.3%, compared with compounded annual room growth of approximately 1.4% for the overall lodging industry over the same period. However, the vast majority of these rooms have been developed in the high-price end of the category. The economy extended stay sector of the lodging industry appears to present a number of attractive characteristics compared to traditional hotels, including higher occupancy rates and operating margins. Based on published occupancy rates for other participants in the extended stay market, the Company believes that demand in the economy extended stay market is greater, relative to supply, than in the lodging industry generally. The Company is not aware of any operator who serves the economy extended stay market niche on a national level. The Company's goal is to become a national provider of economy extended stay lodging. The Company intends to achieve this goal by rapidly developing properties in selected markets, providing high value accommodations for its guests, actively managing its properties to increase revenues and reduce operating costs, and increasing awareness of the economy extended stay concept. Through June 26, 1996, the Company had developed and opened three facilities, acquired six others, and had agreements to acquire five additional facilities. As of such date, the Company had 34 facilities under construction, 25 of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 33 additional facilities during the remainder of 1996 and to continue an active development program thereafter. The Company's plans call for the average facility to have approximately 125 extended stay rooms and to take approximately 7-9 months to construct. 3 The Company was founded by George D. Johnson, Jr. and H. Wayne Huizenga, who are the two largest shareholders of the Company. Mr. Johnson, who is the President and Chief Executive Officer of the Company, was formerly the President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of Directors of the Company, is the Chairman and Chief Executive Officer of Republic Industries, Inc. and was formerly Vice-Chairman of Viacom, Inc. and Chairman and Chief Executive Officer of Blockbuster Entertainment Corporation. The Company's management team has extensive experience in the acquisition and development of real estate and the operation of properties on a national scale. The Company was initially capitalized with approximately $60 million in equity from a group of private investors, a number of whom constitute part of the Company's management team. On December 19, 1995, the Company completed an initial public offering of 5,060,000 shares of Common Stock at a price of $13.00 per share (the "IPO") and a concurrent offering to the Company's then existing shareholders of 2,067,825 additional shares of Common Stock at a price of $12.09 per share, being the initial public offering price per share less the underwriting discounts and commissions (the "Concurrent Offering", and, collectively with the IPO, the "December 1995 Offerings"). The net proceeds to the Company from the December 1995 Offerings were approximately $85 million after deduction of the underwriting discounts and commissions and other offering expenses. On June 5, 1996, the Company completed an additional offering of 9,775,000 shares of Common Stock at a price to the public of $31.00 per share (the "June 1996 Offering", and collectively with the December 1995 Offerings, the "Prior Offerings"). The net proceeds to the Company from the June 1996 Offering were approximately $290 million after deduction of the underwriting discounts and commissions and other offering expenses. See "Recent Developments." In addition, pursuant to its mortgage facilities, the Company may be able to borrow up to $400 million to finance its properties. The Company was formed in 1995 as a Delaware corporation and its executive offices are located at 500 E. Broward Boulevard, Ft. Lauderdale, Florida 33394 and its telephone number is (954) 713-1600. SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus Summary and under the captions "Risk Factors," "Recent Developments," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the Company's limited operating history and uncertainty as to the Company's future profitability; the ability to meet construction and development schedules and budgets; the ability to develop and implement operational and financial systems to manage rapidly growing operations; the uncertainty as to the consumer demand for economy extended stay lodging; increasing competition in the extended stay lodging market; the ability to integrate and successfully operate acquired properties and the risks associated with such properties; the ability to obtain financing on acceptable terms to finance the Company's growth strategy; and the ability of the Company to operate within the limitations imposed by financing arrangements; and other factors referenced in this Prospectus. See "Risk Factors." 4 SUMMARY FINANCIAL INFORMATION
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ------------------------- -------------------------- ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(2) OPERATING STATEMENT DATA: Revenue................ $ 877,885 $14,164,414 $ 1,170,829 $ 3,904,359 Operating expenses..... 2,887,091 10,118,595 2,846,928 4,118,518 Depreciation and amortization.......... 146,726 2,193,514 203,343 586,780 Income (loss) from operations............ (2,155,932) 1,852,305 (1,879,442) (800,939) Interest income........ 848,510 804,510 1,450,132 1,425,132 Income taxes........... 0 1,036,000 0 243,000 Net income (loss)...... $(1,307,422) $ 1,620,815 $ (429,310) $ 381,193 =========== =========== ============ ============ Net income (loss) per share(3)................ $ (0.10) $ 0.11 $ (0.02) $ 0.02 Weighted average number of shares of common stock and equivalents outstanding(3).......... 12,652,110 15,260,204 22,467,393 24,785,595 AS OF MARCH 31, 1996 -------------------------- ACTUAL PRO FORMA(4) BALANCE SHEET DATA: Cash and cash equivalents....................... $104,010,918 $391,358,418 Total assets.................................... 166,369,727 494,692,227 Long-term debt(5)............................... 0 0 Shareholders' equity............................ 164,533,055 492,544,810
- -------------------- (1) Giving pro forma effect to the acquisition of the Norcross, Georgia lodging facility in January 1996, the Norcross, Georgia and Riverdale, Georgia lodging facilities in February 1996, and the Lawrenceville, Georgia lodging facility in June 1996 (the "Gwinnett Facility") (collectively, the "Acquired Facilities"), the acquisition of the Marietta, Georgia lodging facility in August 1995 (the "Marietta Facility"), and the proposed acquisitions of the lodging facility in Lakewood, Colorado (the "KHEC Facility") from Kipling Hospitality Enterprise Corporation ("KHEC") and the four lodging facilities in Las Vegas, Nevada (the "M&M Facilities") as if they all had occurred at the beginning of the period and to the Company operating as a publicly held entity as of such date. See the pro forma financial statements and notes thereto and notes 5 and 14 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (2) Giving pro forma effect to the acquisitions of the Acquired Facilities and the proposed acquisitions of the KHEC Facility and the M&M Facilities as if they had occurred at the beginning of the period. See the pro forma financial statements and notes thereto and notes 5 and 14 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (3) See notes 2, 5, and 14 to the Company's consolidated financial statements contained elsewhere herein. (4) Giving pro forma effect to the acquisition of the Gwinnett Facility and the proposed acquisitions of the KHEC Facility and the M&M Facilities and the June 1996 Offering as if they occurred on March 31, 1996. See the pro forma financial statements and notes thereto contained elsewhere herein. (5) Does not give effect to future borrowings. 5 RISK FACTORS Prospective purchasers of the shares of Common Stock offered hereby should consider carefully the specific factors set forth below as well as the other information contained in this Prospectus in evaluating an investment in the Common Stock. LIMITED OPERATING HISTORY AND COSTS ASSOCIATED WITH EXPANSION The Company first began operating economy extended stay facilities in August 1995 and has a limited operating history upon which investors may evaluate the Company's performance. The Company has incurred losses to date and there can be no assurance that the Company will be profitable in the future. Given the substantial development and financing expenses relating to the Company's expansion, it expects to have net losses for the foreseeable future. DEVELOPMENT RISKS The Company intends to grow primarily by developing additional Company-owned lodging facilities. Development involves substantial risks, including the risk that development costs will exceed budgeted or contracted amounts, the risk of delays in completion of construction, the risk of failing to obtain all necessary zoning and construction permits, the risk that financing might not be available on favorable terms, the risk that developed properties will not achieve desired revenue or profitability levels once opened, the risk of competition for suitable development sites from competitors which have greater financial resources than the Company, the risks of incurring substantial costs in the event a development project must be abandoned prior to completion, changes in governmental rules, regulations, and interpretations (including interpretations of the requirements of the Americans with Disabilities Act), and general economic and business conditions. Although the Company intends to manage development to reduce such risks, there can be no assurance that present or future developments will perform in accordance with the Company's expectations. As of June 26, 1996, the Company operated nine facilities, had agreements to acquire five additional facilities, and had 34 facilities under construction, 25 of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 33 additional facilities during the remainder of 1996 and to continue an active development program thereafter. There can be no assurance, however, that the Company will complete the development and construction of the facilities or will acquire each of the planned properties and complete development of a Company-owned facility thereon, or that any such developments will be completed in a timely manner or within budget. RISKS ASSOCIATED WITH RAPID GROWTH The Company's rapid development plans will require the implementation of enhanced operational and financial systems and will require additional management, operational, and financial resources. For example, the Company will be required to recruit and train property managers and other personnel for each new lodging facility as well as additional accounting personnel. In addition, the Company needs to complete the development of a systemwide integrated computer network. There can be no assurance that the Company will be able to manage its expanding operations effectively. The failure to implement such systems and add such resources on a cost-effective basis could have a material adverse effect on the Company's results of operations and financial condition. RISKS ASSOCIATED WITH THE LODGING INDUSTRY The economy extended stay segment of the lodging industry, in which the Company operates, may be adversely affected by changes in national or local economic conditions and other local market conditions, such as an oversupply of hotel space or a reduction in demand for hotel space in a geographic area, changes in travel patterns, extreme weather conditions, changes in governmental regulations which influence or 6 determine wages, prices, or construction costs, changes in interest rates, the availability of financing for operating or capital needs, and changes in real estate tax rates and other operating expenses. The Company's principal assets will consist of real property, and real estate values are sensitive to changes in local market and economic conditions and to fluctuations in the economy as a whole. In addition, due in part to the strong correlation between the lodging industry's performance and economic conditions, the lodging industry is subject to cyclical changes in revenues and profits. These risks may be exacerbated by the relatively illiquid nature of real estate holdings. The ability of the Company to vary its portfolio in response to changes in economic and other conditions will be limited. There can be no assurance that downturns or prolonged adverse conditions in real estate or capital markets or in national or local economies, and the inability of the Company to dispose of an investment when it finds disposition to be advantageous or necessary, will not have a material adverse impact on the Company. COMPETITION IN THE LODGING INDUSTRY There is no single competitor or small number of competitors of the Company that is or are dominant in the economy extended stay market. However, some of the Company's indirect competitors have substantially larger networks of locations and greater financial resources than the Company. A number of major lodging companies recently have announced their intent to aggressively develop extended stay lodging properties which may compete with the Company's properties. Competition in the U.S. lodging industry is based generally on convenience of location, price, range of services and guest amenities offered, and quality of customer service. The Company considers the location of its lodging facilities, the reasonableness of its room rates, and the services and guest amenities provided by it to be among the most important factors in its business. Demographic or other changes in one or more of the Company's markets could impact the convenience or desirability of the sites of certain lodging facilities, which would adversely affect their operations. Further, there can be no assurance that new or existing competitors will not significantly lower rates or offer greater convenience, services, or amenities or significantly expand or improve facilities in a market in which the Company's facilities compete, thereby adversely affecting the Company's operations. See "Business-- Competition." RISKS ASSOCIATED WITH ACQUISITIONS Although the Company expects that the construction and development of new extended stay lodging facilities will be its primary means of expansion, the Company has also made, and may continue making, acquisitions of existing extended stay lodging facilities or other properties that are suitable for conversion to the extended stay concept. There can be no assurance that the Company will be able to acquire other extended stay lodging facilities on terms favorable to the Company. When the Company does make such acquisitions, it encounters various associated risks, including possible environmental and other regulatory costs, goodwill amortization, diversion of management's attention, and unanticipated problems or liabilities, some or all of which could have a material adverse effect on the Company's operations and financial performance. RISKS OF BORROWING The Company expects to incur substantial borrowings in connection with its expansion. Pursuant to its mortgage facilities, the Company may be able to borrow up to $400 million to finance its properties, depending on certain conditions. This compares to total equity of $492.5 million as of March 31, 1996, including estimated net proceeds from the June 1996 Offering of approximately $290 million and the issuance of shares of Common Stock in connection with the acquisition of the Gwinnett Facility and the proposed acquisitions of the KHEC Facility and the M&M Facilities. These borrowings will be secured by mortgages on the Company's properties and various accounts and other assets. The Company may incur additional debt from time to time. See "-- Need for Additional Capital." Leverage increases the risks to the Company of any variations in its results, construction cost overruns, or any other factors affecting its cash flow or liquidity. In addition, the Company's interest costs could increase as the result of general increases in interest rates because 7 a portion of the Company's borrowings under these facilities will bear interest at floating rates, the rates on individual term loans under these facilities will depend on the level of prevailing yields on U.S. Treasury securities at the times loans are made, and additional borrowings may bear interest at floating rates. See "Financing." NEED FOR ADDITIONAL CAPITAL The extent to which the Company will be able to borrow under its mortgage facilities will be dependent on the Company meeting certain conditions and maintaining certain reserves. In addition, these mortgage facilities may restrict the ability of the Company to incur additional debt in the future. Although the Company is unable to quantify its needs for additional financing, the Company expects that it will need to procure additional financing over time, the amount of which will depend on a number of factors including the number of properties the Company constructs or acquires and the cash flow generated by its properties. There can be no assurance regarding the availability or terms of additional financing the Company may be able to procure over time. Any future debt financings or issuances of preferred stock by the Company will be senior to the rights of the holders of Common Stock, and any future issuances of Common Stock will result in the dilution of the then existing shareholders' proportionate equity interests in the Company. RESTRICTIONS ON OPERATIONS IN MORTGAGE FACILITIES The Company's financing arrangements contain a number of provisions that impose restrictions on the Company which could, under certain circumstances, limit the Company's operating and financial flexibility and adversely affect its results of operations. These provisions include restrictions on the ability of the Company to incur additional indebtedness, prepay indebtedness, declare dividends, enter into certain financing arrangements, acquire or dispose of certain assets, or make certain investments. In addition, the Company's ability to utilize these mortgage facilities is subject to it meeting certain conditions. See "Financing." NEW MANAGEMENT Since its formation in January 1995, the Company has recruited a management team, most of whom have had no prior experience in the lodging industry. The Company's success depends upon the ability of these individuals to develop expertise in managing such business. See "Management--Directors and Officers." IMPACT OF ENVIRONMENTAL REGULATIONS The Company's operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances, and regulations. In addition, in the event any future legislation is adopted, the Company may, from time to time, be required to make significant capital and operating expenditures in response to such legislation. The Company attempts to minimize its exposure to potential environmental liability through its site- selection procedures. The Company typically secures an option to purchase land subject to certain contingencies. Prior to exercising such option and purchasing the property, the Company conducts a Phase I environmental assessment (which generally involves a physical inspection and database search, but not soil or groundwater analyses). 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 borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common-law principles could be used to impose liability for releases of hazardous materials, including asbestos-containing materials 8 ("ACMs"), into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs or other hazardous materials. Environmental laws also may impose restrictions on the manner in which property may be used or transferred or in which businesses may be operated, and these restrictions may require expenditures. In connection with the ownership of its properties, the Company may be potentially liable for any such costs. The cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could materially adversely affect the Company's results of operations and financial condition. LOSSES IN EXCESS OF INSURANCE COVERAGE The Company intends to maintain comprehensive insurance on each of its properties, including liability, fire, and extended coverage, in the types and amounts customarily obtained by an owner and operator in the Company's industry. Nevertheless, there are certain types of losses, generally of a catastrophic nature, such as hurricanes, earthquakes, and floods, that may be uninsurable or not economically insurable. The Company uses its discretion in determining amounts, coverage limits, and deductibility provisions of insurance, with a view to obtaining appropriate insurance on the Company's properties at a reasonable cost and on suitable terms. This may result in insurance coverage that in the event of a loss would not be sufficient to pay the full current market value or current replacement value of the Company's lost investment and the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to such property. RELIANCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the efforts and abilities of its senior management and key employees, particularly Mr. George D. Johnson, Jr., President and Chief Executive Officer, and Mr. Robert A. Brannon, Senior Vice President and Chief Financial Officer. The loss of the services of any of these individuals could have a material adverse effect upon the Company. See "Management--Directors and Officers." The Company does not have employment or consulting agreements with any of its officers other than Mr. Harold E. Wright nor does it carry key man life insurance on any of its officers. CONTROL OF THE COMPANY BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS As of June 26, 1996, George D. Johnson, Jr., H. Wayne Huizenga, and Stewart H. Johnson beneficially owned approximately 33.1% of the outstanding shares of Common Stock of the Company and these individuals together with other executive officers and directors of the Company as a group owned approximately 39.9% of the outstanding shares of Common Stock. By reason of such holdings, such shareholders acting as a group will be able to effectively control the affairs and policies of the Company and will be able to elect a sufficient number of directors to control the Company's Board of Directors and to approve or disapprove any matter submitted to a vote of the shareholders, including certain fundamental corporate transactions (such as certain mergers and sales of assets) requiring shareholder approval. See "Principal Shareholders." In addition, the Company's debt agreements contain, and future financing arrangements may contain, provisions regarding the composition of the Company's Board of Directors. See "Financing." ANTITAKEOVER EFFECT OF CHARTER, BYLAWS, STATUTORY PROVISIONS, AND FINANCING ARRANGEMENTS The ownership positions of Messrs. George D. Johnson, Jr., H. Wayne Huizenga, and Stewart H. Johnson and the other executive officers and directors of the Company as a group, together with the anti-takeover effects of Section 203 of the Delaware General Corporation Law which, in general, imposes restrictions upon acquirors of 15% or more of the Common Stock, and of certain provisions in the Company's Certificate of Incorporation and Bylaws, may have the effect of delaying, deferring, or preventing a change of control of the Company, even if such event would be beneficial to shareholders. For example, the Certificate of 9 Incorporation requires that all shareholder action must be effected at a duly- called annual or special meeting of shareholders, and the Bylaws require that shareholders follow an advance notification procedure for certain shareholder nominations of candidates for the Board of Directors and for certain other business to be conducted at any meeting of shareholders. In addition, the Company's Certificate of Incorporation authorizes "blank check" preferred stock, so that the Company's Board of Directors may, without shareholder approval, issue preferred shares through a shareholders rights plan or otherwise which could inhibit a change of control. In the event that the current members of the Company's Board of Directors cease to constitute a majority of the Board or Mr. George D. Johnson, Jr. or Mr. Huizenga cease to be a member of the Board, amounts outstanding under its financing arrangements would become immediately due. See "Principal Shareholders," "Financing," and "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE At June 26, 1996, the Company had 32,628,092 shares of Common Stock outstanding, 17,625,062 of which were freely tradeable (other than by an "affiliate" of the Company as such term is defined in the Securities Act of 1933, as amended (the "Securities Act")) without restriction or registration under the Securities Act. The remaining 15,003,030 shares of Common Stock will become eligible for sale in the public market at various times, subject to compliance with an exemption from the registration requirements of the Securities Act, such as Rule 144 or Rule 144A, or registration under the Securities Act. The Company has registered under the Securities Act all of those 15,003,030 shares of Common Stock so that such shareholders may make resales in the public market of their Common Stock. The holders of approximately 13.3 million shares of Common Stock (including all shares beneficially owned by the Company's directors and executive officers) have agreed that they will not sell any shares of Common Stock until August 28, 1996 without the consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), subject to certain exceptions, including pursuant to a foreclosure by a lender on a loan for which shares of Common Stock have been pledged as collateral. The Company also intends to register under the Securities Act all shares reserved for issuance under the 1995 Plan, the 1996 Plan, and the Directors' Plan (each as defined below and collectively the "Option Plans"). Shares so registered could be sold in the public market. No predictions can be made as to the effect, if any, that market sales of such shares or the availability of such shares for sale will have on the market price for shares of Common Stock prevailing from time to time. Sales of substantial amounts of shares of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of equity securities. See "Shares Eligible for Future Sale." ABSENCE OF DIVIDENDS The Company intends to retain its earnings to finance its growth and for general corporate purposes and therefore does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's debt agreements contain, and future financing agreements may contain, limitations on the payment of cash dividends or other distributions of assets. See "Dividend Policy." 10 RECENT DEVELOPMENTS On January 26, 1996, the Company acquired substantially all of the assets of Apartment/Inn, L.P., a Georgia limited partnership ("Apartment/Inn"). Apartment/Inn owned and operated a 196-room economy extended stay lodging facility in Norcross, Georgia which is similar in concept to the Company's lodging facilities. In consideration for such acquisition, the Company issued an aggregate of 293,629 shares of Common Stock, 163,629 of which may be reoffered and resold pursuant to this Prospectus. See the inside back cover page of this Prospectus. For historical and pro forma financial information concerning this acquisition, see "Index to Financial Statements--Apartment/Inn, L.P." and "--Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." On February 23, 1996, the Company acquired substantially all of the assets of Hometown Inn I, LTD and Hometown Inn II, LTD (collectively "Hometown Inn"). Hometown Inn owned and operated a 130-room economy extended stay lodging facility in Norcross, Georgia and a 144-room economy extended stay lodging facility in Riverdale, Georgia, both of which are similar in concept to the Company's lodging facilities. In consideration for such acquisition, the Company issued 428,608 shares of Common Stock and paid an additional $75,000 in cash. Of such shares, 198,608 shares of Common Stock may be reoffered and resold pursuant to this Prospectus. See the inside back cover page of this Prospectus. The acquisition was accounted for using the purchase method of accounting. For historical and pro forma financial information concerning this acquisition, see "Index to Financial Statements--Hometown Inn I, LTD and Hometown Inn II, LTD" and "--Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." On May 10, 1996, the Company acquired substantially all of the assets of American Apartmen-Tels Investors II, L.P. ("AATI"), which owned and operated a 59-room extended stay lodging facility in Lenexa, Kansas, for a purchase price of approximately $3.3 million in cash. This purchase includes adjacent land on which the Company intends to build a new 60-room economy extended stay lodging facility. On May 1, 1996, the Company entered into an agreement to acquire the KHEC Facility, a 145-room traditional lodging facility located in Lakewood, Colorado, which the Company intends to remodel and convert to the economy extended stay format. The purchase price will be approximately $3.0 million, which the Company expects to pay by delivering shares of Common Stock. Consummation of the proposed acquisition of the KHEC Facility is subject to a number of conditions. The Company expects to account for this acquisition using the purchase method of accounting. For historical and pro forma financial information concerning this proposed acquisition, see "Index to Financial Statements--Kipling Hospitality Enterprise Corporation" and "--Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." On May 9, 1996, the Board of Directors of the Company declared the Stock Dividend of one additional share of Common Stock for each share issued as of the close of business on July 5, 1996. Except as otherwise noted, none of the information contained in this Prospectus reflects the Stock Dividend. On June 5, 1996, the Company completed the June 1996 Offering, consisting of 9,775,000 shares of Common Stock at a price to the public of $31.00 per share. The net proceeds to the Company from the June 1996 Offering were approximately $290 million after the deduction of underwriting discounts and commissions and other offering expenses. On June 25, 1996, the Company acquired substantially all of the assets of Apartment Inn Partners/Gwinnett, L.P., a Georgia limited partnership ("Gwinnett"). Gwinnett owned and operated a 126-room economy extended stay lodging facility in Lawrenceville, Georgia which is similar in concept to the Company's lodging facilities. The facility was operated as The Apartment Inn and rights for the use of that name and certain other rights were controlled by Apartment/Inn. In consideration for such acquisition, the Company issued 172,100 shares of Common Stock and paid an additional $23,000 in cash. The acquisition was accounted for using the purchase method of accounting. For historical and pro forma financial information concerning this acquisition, see "Index to Financial Statements--Apartment Inn Partners/Gwinnett, L.P." and "-- Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." 11 On June 26, 1996, the Company entered into agreements to acquire substantially all of the assets of Melrose Suites, Inc., St. Louis Manor, Inc., Boulder Manor, Inc., and Nicolle Manor (co-owned by Michael J. Mona, Jr. and Dean O'Bannon), which own extended stay lodging facilities in Las Vegas, Nevada (collectively, the "M & M Facilities"), that have 177 rooms, 125 rooms, 211 rooms, and 125 rooms, respectively. Each of the facilities is managed by M & M Development, with which the Company expects to enter into a two-year consulting agreement with a fee of $120,000 per year. In consideration for these facilities, in addition to assuming liability under certain leases for personal property, the Company will issue promissory notes totalling $34.0 million, which the Company expects to pay by delivering approximately 1,138,000 shares of Common Stock. All of such shares may be reoffered and resold pursuant to this Prospectus. These acquisitions will be accounted for using the purchase method of accounting. For historical and pro forma financial information concerning these acquisitions, see "Index to Financial Statements--M & M Facilities" and "--Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." 12 SECURITIES COVERED BY THIS PROSPECTUS The shares of Common Stock covered by this Prospectus are available for use in future acquisitions of other businesses, real or personal properties, or securities in business combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities Act or otherwise under Rule 415. Such acquisitions may be made directly by the Company or indirectly through a subsidiary, may relate to businesses or securities of businesses similar or dissimilar to the Company's extended stay lodging facilities or to properties of a type which may or may not currently be used by or in connection with the Company's extended stay lodging facilities or by the Company, and may be made in connection with the settlement of litigation or other disputes. The consideration offered by the Company in such acquisitions, in addition to the shares of Common Stock offered by this Prospectus, may include cash, debt, or other securities (which may be convertible into shares of Common Stock covered by this Prospectus), or assumption by the Company of liabilities of the business, properties, or securities being acquired or of their owners, or a combination thereof. It is contemplated that the terms of acquisitions will be determined by negotiations between the Company and the owners of the businesses, properties, or securities to be acquired, with the Company taking into account such factors as the quality of management, the past and potential earning power, growth and appreciation of the businesses, properties, or securities acquired, and other relevant factors, and it is anticipated that shares of Common Stock issued in acquisitions will be valued at a price reasonably related to the market value of the Common Stock either at the time the terms of the acquisition are tentatively agreed upon or at or about the time or times of delivery of the shares. The Company may from time to time, in an effort to maintain an orderly market in the Common Stock, negotiate agreements with persons receiving Common Stock covered by this Prospectus that will limit the number of shares that may be sold by such persons at specified intervals. Such agreements may be more restrictive than restrictions on sales made pursuant to the exemption from registration requirements of the Securities Act, including the requirements under Rule 144 or Rule 145(d), and certain persons party to such agreements may not otherwise be subject to such Securities Act requirements. The Company anticipates that, in general, such negotiated agreements will be of limited duration and will permit the recipients of Common Stock issued in connection with acquisitions to sell up to a specified number of shares per business day or days. With the consent of the Company, this Prospectus may also be used by persons who have received or will receive from the Company Common Stock covered by this Prospectus and who may wish to sell such stock under circumstances requiring or making desirable its use. This Prospectus may also be used, with the Company's consent, by pledgees, donees, or assignees of such persons. The Company's consent to any such use may be conditioned upon such persons' agreeing not to offer more than a specified number of shares following supplements or amendments to this Prospectus, which the Company may agree to use its best efforts to prepare and file at certain intervals. The Company may require that any such offering be effected in an organized manner through securities dealers. Sales by means of this Prospectus may be made from time to time privately at prices to be individually negotiated with the purchasers, or publicly through transactions in the over-the-counter market (which may involve block transactions), at prices reasonably related to market prices at the time of sale or at negotiated prices. Broker-dealers participating in such transactions may act as agent or as principal and, when acting as agent, may receive commissions from the purchasers as well as from the sellers (if also acting as agent for the purchasers). The Company may indemnify any broker-dealer participating in such transactions against certain liabilities, including liabilities under the Securities Act. Profits, commissions, and discounts on sales by persons who may be deemed to be underwriters within the meaning of the Securities Act may be deemed underwriting compensation under the Securities Act. Stockholders may also offer shares of stock covered by this Prospectus by means of prospectuses under other registration statements or pursuant to exemptions from the registration requirements of the Securities Act, including sales which meet the requirements of Rule 144 or Rule 145(d) under the Securities Act, and stockholders should seek the advice of their own counsel with respect to the legal requirements for such sales. 13 This Prospectus may be supplemented or amended from time to time to reflect its use for resales by persons who have received shares of Common Stock for whom the Company has consented to the use of this Prospectus in connection with resales of such shares. See the inside back cover page of this Prospectus for the identity of any such persons. PRICE RANGE OF COMMON STOCK The Common Stock began trading in the Nasdaq National Market on December 14, 1995. The following table sets forth, for the periods indicated, the high and low sales prices of the Common Stock as quoted on the Nasdaq National Market. On June 26, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $29.875 per share. At March 31, 1996, there were approximately 150 record holders and approximately 3,500 beneficial holders of Common Stock.
PRICE RANGE OF COMMON STOCK --------------- HIGH LOW Year Ended December 31, 1995: Fourth Quarter (from December 14, 1995)................. $28 $20 1/4 Year Ended December 31, 1996: First Quarter........................................... 31 1/4 20 Second Quarter.......................................... 35 22
DIVIDEND POLICY The Company has not paid dividends on its Common Stock, and the Board of Directors intends to continue a policy of retaining earnings to finance its growth and for general corporate purposes and, therefore, does not anticipate paying any such dividends in the foreseeable future. In addition, the Company's debt agreements contain, and future financing agreements may contain, a minimum net worth covenant and limitations on payment of any cash dividends or other distributions of assets, which covenant, limitations, and requirements could restrict the Company's ability to pay dividends. See "Financing." 14 SELECTED FINANCIAL DATA The selected financial data set forth below has been derived from the historical and pro forma financial statements of the Company and from the historical financial statements of Welcome Inn America 89-1, L.P. ("Welcome"). The selected financial data for Welcome is included because Welcome may be deemed to be a predecessor of the Company. The historical financial statements of the Company for the year ended December 31, 1995 have been audited by Coopers & Lybrand L.L.P., independent accountants, whose report thereon appears elsewhere herein. The historical financial statements of Welcome for the years ended December 31, 1992, 1993, and 1994, and for the period from January 1, 1995 through August 18, 1995, have been audited by Coopers & Lybrand L.L.P., independent accountants, whose report for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995 thereon appears elsewhere herein. The selected financial data set forth below for the year ended December 31, 1991 has been derived from Welcome's unaudited internal financial statements and reflects all adjustments which management considers necessary for a fair and consistent presentation of the results of operations for that period. Operating statement data for the three months ended March 31, 1995 and 1996 and balance sheet data as of March 31, 1996 are derived from unaudited financial statements of the Company included herein. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for the fair presentation of its financial position and the results of its operations for these periods. The pro forma data is unaudited but, in the opinion of management, all necessary pro forma adjustments have been made. The unaudited pro forma consolidated operating statement data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the pro forma transactions had been completed as of the beginning of the period, nor does it purport to represent the results of operations for any future periods. The unaudited pro forma consolidated balance sheet data is not necessarily indicative of what the actual financial position would have been assuming the pro forma transactions had been completed as of March 31, 1996, nor does it purport to represent the future financial position of the Company. These selected financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the historical and pro forma financial statements and related notes thereto of the Company and the historical financial statements and related notes thereto of Welcome, Apartment/Inn, Hometown Inn, KHEC, Gwinnett, and the M & M Facilities contained elsewhere herein. THE COMPANY
FOR THE THREE YEAR ENDED MONTHS ENDED FOR THE THREE MONTHS DECEMBER 31, 1995 MARCH 31, 1995 ENDED MARCH 31, 1996 ------------------------- -------------- -------------------------- ACTUAL PRO FORMA(1) ACTUAL ACTUAL PRO FORMA(2) OPERATING STATEMENT DATA: Revenue............... $ 877,885 $14,164,414 $ $ 1,170,829 $ 3,904,359 Operating expenses.... 2,887,091 10,118,595 248,601 2,846,928 4,118,518 Depreciation and amortization......... 146,726 2,193,514 203,343 586,780 Income (loss) from operations........... (2,155,932) 1,852,305 (248,601) (1,879,442) (800,939) Interest income....... 848,510 804,510 1,450,132 1,425,132 Income taxes.......... 0 1,036,000 0 243,000 Net income (loss)..... $ (1,307,422) $ 1,620,815 $ (248,601) $ (429,310) $ 381,193 ============ =========== ========== ============ ============ Net income (loss) per share(3)............. $ (0.10) $ 0.11 $ (0.02) $ (0.02) $ 0.02 ============ =========== ========== ============ ============ Weighted average number of shares of common stock and equivalents outstanding(3)....... 12,652,110 15,260,204 11,489,017 22,467,393 24,785,595 ============ =========== ========== ============ ============ AS OF DECEMBER 31, 1995 AS OF MARCH 31, 1996 ------------ -------------------------- ACTUAL ACTUAL PRO FORMA(4) BALANCE SHEET DATA: Cash and cash equivalents.......... $123,357,510 $104,010,918 $391,358,418 Total assets.......... 149,618,649 166,369,727 494,692,227 Long-term debt(5)..... 0 0 0 Shareholders' equity.. 147,222,245 164,533,055 492,544,810
15 WELCOME INN AMERICA 89-1, L.P.
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31, 1995 THROUGH ------------------------------------------ AUGUST 18, 1991(6) 1992 1993 1994 1995 OPERATING STATEMENT DATA: Revenue............... $ 686,970 $ 866,314 $999,371 $1,079,287 $712,837 Operating expenses.... 503,508 502,611 557,002 561,746 367,217 Depreciation and amortization......... 153,066 159,874 138,987 141,362 95,546 --------- --------- -------- ---------- -------- Income from operations........... 30,396 203,829 303,382 376,179 250,074 Interest expense...... 470,698 398,650 382,306 360,639 272,152 --------- --------- -------- ---------- -------- Net income (loss)..... $(440,302) $(194,821) $(78,924) $ 15,540 $(22,078) ========= ========= ======== ========== ========
- --------------------- (1) Giving pro forma effect to the acquisitions of the Acquired Facilities and the Marietta Facility and the proposed acquisitions of the KHEC Facility and the M&M Facilities as if they all had occurred at the beginning of the period and to the Company operating as a publicly held entity as of such date. See the pro forma financial statements and notes thereto and notes 5 and 14 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (2) Giving pro forma effect to the acquisitions of the Acquired Facilities and the proposed acquisitions of the KHEC Facility and the M&M Facilities as if they had occurred at the beginning of the period. See the pro forma financial statements and notes thereto and notes 5 and 14 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (3) See notes 2, 5, and 14 to the Company's consolidated financial statements contained elsewhere herein. (4) Giving pro forma effect to the acquisition of the Gwinnett Facility and the proposed acquisitions of the KHEC Facility and the M&M Facilities and the June 1996 Offering as if they occurred on March 31, 1996. See the pro forma financial statements and notes thereto contained elsewhere herein. (5) Does not give effect to future borrowings. (6) The Marietta Facility commenced operations in February 1991. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was organized in January 1995 to develop, own, and manage extended stay lodging facilities. The Company began construction of its first lodging facility in Spartanburg, South Carolina on February 1, 1995. This facility was completed and commenced operations in August 1995. The Company's activities during the quarter ended March 31, 1995 consisted of corporate organization, site selection, and site development. The Company did not have operating facilities or other revenue sources during the quarter ended March 31, 1995. On May 1, 1995, the Company contracted to manage an extended stay facility in Marietta, Georgia which was subsequently acquired by the Company on August 18, 1995. On August 18, 1995 the Company also issued 11,718,000 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock in exchange for net proceeds of approximately $55.8 million. In October 1995, the Company executed a mortgage facility providing for up to $200 million in mortgage loans, which may be used to finance on a long-term basis newly constructed facilities. The Company completed the December 1995 Offerings in December 1995 from which it received net proceeds of approximately $85.3 million. In May 1996, the Company executed an additional mortgage facility providing for up to $300 million in mortgage loans and also reduced the existing mortgage facility to $100 million. In June 1996, the Company completed the June 1996 Offering from which it received net proceeds of approximately $289.8 million. As of March 31, 1996 the Company had 5 operating facilities, 17 facilities under construction, and options to purchase 64 sites for development in 23 states. The Company expects to complete the construction of the facilities currently under construction and to commence construction on the majority of these sites under option during 1996. There can be no assurances, however, that the Company will complete the acquisition of the sites under option or, if acquired, commence construction during 1996 and the Company's ability to do so may be materially impacted by various factors including zoning, permitting, and environmental due diligence issues and weather-induced construction delays. Although the Company expects that the construction and development of new extended stay lodging facilities will be its primary means of expansion, the Company has also made, and may continue making, acquisitions of existing extended stay facilities or other properties that are suitable for conversion to the extended stay concept. During the quarter ended March 31, 1996, the Company acquired three operating facilities (two in Norcross, Georgia and one in Riverdale, Georgia). On January 26, 1996, the Company acquired substantially all of the assets of Apartment/Inn, which owned and operated a 196-room economy extended stay lodging facility in Norcross, Georgia. In consideration for the acquisition, the Company issued an aggregate of 293,629 shares of Common Stock. On February 23, 1996, the Company acquired substantially all of the assets of Hometown Inn which owned and operated a 130-room economy extended stay lodging facility in Norcross, Georgia and a 144-room economy extended stay lodging facility in Riverdale, Georgia. In consideration for the acquisition, the Company issued an aggregate of 428,608 shares of Common Stock and paid an additional $75,000 in cash. These acquisitions were accounted for using the purchase method of accounting. On May 10, 1996, the Company acquired substantially all of the assets of AATI, which owned and operated a 59-room extended stay lodging facility in Lenexa, Kansas, for a purchase price of approximately $3.3 million in cash. This purchase includes adjacent land on which the Company intends to build a new 60-room economy extended stay lodging facility. On June 25, 1996, the Company acquired substantially all of the assets of Gwinnett, which owned a 126-room extended stay lodging facility in Lawrenceville, Georgia. In consideration for this acquisition, the Company issued 172,100 shares of Common Stock and paid an additional $23,000 in cash. This acquisition was accounted for using the purchase method of accounting. On May 1, 1996, the Company entered into an agreement to acquire from KHEC a 145-room traditional lodging facility located in Lakewood, Colorado, which the Company intends to remodel and convert to the economy extended stay format. The purchase price will be approximately $3.0 million, which the Company expects to pay by delivering shares of Common Stock. Consummation of the proposed acquisition of the 17 KHEC Facility is subject to a number of conditions. The Company will account for this acquisition using the purchase method of accounting. On June 26, 1996, the Company entered into agreements to acquire substantially all of the assets of the M & M Facilities with a total of 636 rooms located in Las Vegas, Nevada. In addition to assuming liability for certain leases of personal property, the Company expects to issue, as consideration for these acquisitions, promissory notes totalling $34 million, which the Company expects to pay by delivering approximately 1,138,000 shares of Common Stock. Consummation of the proposed acquisition of the M & M Facilities is subject to a number of conditions. These acquisitions will be accounted for using the purchase method of accounting. RESULTS OF OPERATIONS PROPERTY OPERATIONS Property operations for the year ended December 31, 1995 included the Spartanburg, South Carolina property from the date of opening on August 1, 1995 and the Marietta, Georgia facility from the date of acquisition on August 18, 1995. These properties realized average occupancy of 83% and average weekly room rates of $198 for their periods of operation by the Company during 1995. The Company did not have operating facilities during the quarter ended March 31, 1995. The Company began the quarter endedMarch 31, 1996 with two operating facilities and acquired three additional operating facilities during that quarter. During the period owned by the Company, these properties realized average occupancy of 90% and average weekly room rates of $198 during the quarter ended March 31, 1996. There can be no assurance that the foregoing occupancy and room rates can be maintained or are representative of rates to be expected for new facilities. Occupancy rates are determined by dividing the guest rooms occupied on a daily basis by the total number of guest rooms. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates vary from standard room rates due primarily to (i) stays of less than one week, which are charged at a higher nightly rate, (ii) higher weekly rates for a limited number of rooms which are larger than the standard rooms, and (iii) additional charges for more than one person per room. The Company recognized total room revenues of $817,133, along with other revenues, consisting of telephone and vending revenues which vary based on occupancy, of $42,977 during 1995. Total room revenues for the quarter ended March 31, 1996 were $1,137,841 and other revenues were $32,988. Property operating expenses, consisting of all expenses directly allocable to the operation of the properties but excluding any allocation of corporate operating expenses and depreciation, were $332,523 or 37.9% of total revenues for 1995 and $442,540 or 37.8% of total revenues for the quarter ended March 31, 1996. Depreciation of the cost of the facilities was provided using the straight- line method over the estimated useful lives of the properties. The provision for the period ended December 31, 1995 was $126,772 and the provision for the quarter ended March 31, 1996 was $193,113. These provisions reflect a pro-rata allocation of the annual depreciation charge for the period for which the properties were in operation. CORPORATE OPERATIONS The Company realized management fees of $17,775 in 1995 from its management of the Marietta facility prior to its acquisition of that facility. The Company has not managed properties for a fee since that property was acquired. Corporate operating and property management expenses include all expenses not directly related to the development or operation of facilities. Expenses of $2,042,039 for the year ended December 31, 1995, $1,580,655 for the quarter ended March 31, 1996, and $195,823 for the quarter ended March 31, 1995 consist primarily of personnel expenses, professional and consulting fees, and related travel expenses. The increase in corporate operating and property management expenses for the quarter ended March 31, 1996 as compared with the quarter ended March 31, 1995 reflects an increase in personnel and related expenses in connection 18 with the Company's increased level of operating properties and site development. The total amount of these expenses will increase in the future with the development of additional facilities. Site selection costs of $512,529 for the year ended December 31, 1995, $823,733 for the quarter ended March 31, 1996 and $52,778 for the quarter ended March 31, 1995 consist of real estate and construction personnel costs which are not directly related to a site that will be developed by the Company, along with expenditures made to third parties for services and costs related to the investigation of such sites. The increase in these costs for the quarter ended March 31, 1996 as compared with the quarter ended March 31, 1995 reflects the increased level of sites under development. These costs will continue in the future and could increase depending on the rate of expansion because the Company's development personnel must evaluate numerous potential sites in an effort to identify sites meeting the Company's standards. Depreciation and amortization in the amount of $19,954 for the year ended December 31, 1995, and $10,230 for the quarter ended March 31, 1996 were provided using the straight-line method over the estimated useful lives of the assets for assets not directly related to the operation of the facilities, including primarily organization costs and office furniture and equipment. These assets were acquired subsequent to March 31, 1995 and therefore no provision for depreciation and amortization was made for the quarter ended March 31, 1995. The Company realized $848,510 of interest income during the year ended December 31, 1995 and $1,450,132 during the quarter ended March 31, 1996 which was primarily attributable to the short-term investment of funds received from the initial capitalization of the Company in the third quarter of 1995 and the consummation of the December 1995 Offerings on December 19, 1995. There were no funds held for investment by the Company during the quarter ended March 31, 1995. LIQUIDITY AND CAPITAL RESOURCES From the inception of the Company in January 1995 through August 18, 1995, the Company's operations were financed primarily by loans from the Company's two largest shareholders in an aggregate amount of approximately $6.1 million. These loans accrued interest at an annual rate of 8.75% with such interest being capitalized as a cost of development of the Spartanburg, South Carolina facility. The loans were repaid in full in August 1995 from the proceeds of $55.8 million received upon the issuance of 11,718,000 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock. In December 1995, the Company completed the December 1995 Offerings from which the Company received net proceeds of approximately $85 million upon the issuance of 7,127,825 shares of Common Stock. The Company completed the June 1996 Offering in June 1996, from which it received net proceeds of approximately $289.8 million upon the issuance of 9,775,000 shares of Common Stock. The Company had cash balances of $123.4 million as of December 31, 1995 and $104.0 million as of March 31, 1996. Substantially all of the cash balances as of December 31, 1995 and March 31, 1996 were invested in an overnight sweep account with a commercial bank which invests in short-term, interest bearing reverse repurchase agreements for U.S. government securities. The market value of the securities held pursuant to the agreements approximates the carrying amount. In consideration for the three existing facilities acquired by the Company in the quarter ended March 31, 1996, the Company issued Common Stock valued at approximately $17.9 million and paid cash, including the payment of related expenses, of approximately $356,000. In addition, approximately $15.4 million was used to acquire land and develop and furnish the 17 sites under construction during the quarter. This compares to approximately $281,000 used to develop one property during the first quarter of 1995. A total of approximately $2.7 million, less refunds of site deposits of $240,000, was used for site deposits and preacquisition costs in the three months ended March 31, 1996, compared to approximately $120,000 used for such costs in the comparable prior year period. The Company expects to finance the construction and development of its lodging facilities principally with its cash balances and with loans under mortgage facilities. The Company has two mortgage facilities which provide for up to a total of $400 million in loans, subject to certain conditions and limitations, for facilities after completion of construction. See "Financing." 19 The Company in the future may seek to increase the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments. Any debt incurred or issued by the Company may be secured or unsecured, with a fixed or variable interest rate, and may be subject to such terms as the Board of Directors of the Company deems prudent. The Company expects that it will need to procure additional financing over time, although there can be no assurance that such financing will be available when needed. SEASONALITY AND INFLATION Based upon the operating history of the Company's facilities, management believes that extended stay lodging facilities are not as seasonal in nature as the overall lodging industry. Management does expect, however, that occupancy and revenues may be lower than average during the months of December and January due to the holiday season. Because many of the Company's expenses do not fluctuate with occupancy, such declines in occupancy may cause fluctuations or decreases in the Company's quarterly earnings. The rate of inflation as measured by changes in the average consumer price index has not had a material effect on the revenue or operating results of the Company from its inception on January 9, 1995. There can be no assurance, however, that inflation will not affect future operating or construction costs. See "Risk Factors--Development Risks." EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement requires the Company to identify properties for which it has committed to an exit plan or which may be otherwise impaired. The fixed assets for such properties must be written down to fair market value. The Company anticipates that the adoption of SFAS 121, required for fiscal years beginning after December 15, 1995, will not result in a reduction of net fixed assets or an increase in expenses in the fiscal year 1996 statement of operations. The FASB has also issued Statement No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995. Under SFAS 123, companies are encouraged but not required to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value accounting rules. Companies that choose not to record compensation expense under the new rules will be required to disclose pro forma net income and earnings per share under the new method. The Company has not yet determined the financial statement impact of SFAS 123 and has elected not to recognize the impact of this pronouncement in its fiscal 1995 statement of operations, but will disclose as required in the fiscal 1996 financial statements on a pro forma comparative basis the effect of SFAS 123 on net income and earnings per share. 20 BUSINESS OVERVIEW Extended Stay America, Inc. was organized in January 1995 to develop, own, and manage extended stay lodging facilities which are designed to appeal to value-conscious guests. The Company's facilities are designed to offer quality accommodations for guests at substantially lower rates than most other extended stay lodging providers and hotels in the economy segment of the traditional lodging industry. They feature fully furnished rooms which are generally rented on a weekly basis to guests such as business travelers (particularly those with limited expense accounts), professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home, with most guests staying for multiple weeks. The Company's facilities provide a variety of features that are attractive to the extended stay guest such as a fully-equipped kitchenette, weekly housekeeping with twice-weekly towel service, color television with cable or satellite hook-up, coin laundromat, and telephone service with voice mail messaging. To help maintain affordability of room rates, labor intensive services such as daily cleaning, room service, and restaurants are not provided. The extended stay category is one of the most rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay rooms increased at a compounded annual growth rate of approximately 3.3%, compared with compounded annual room growth of approximately 1.4% for the overall lodging industry over the same period. However, the vast majority of these rooms have been developed in the high-price end of the category. The economy extended stay sector of the lodging industry appears to present a number of attractive characteristics compared to traditional hotels, including higher occupancy rates and operating margins. Based on published occupancy rates for other participants in the extended stay market, the Company believes that demand in the economy extended stay market is greater, relative to supply, than in the lodging industry generally. The Company is not aware of any operator who serves the economy extended stay market niche on a national level. The Company's goal is to become a national provider of economy extended stay lodging. The Company intends to achieve this goal by rapidly developing properties in selected markets, providing high value accommodations for its guests, actively managing its properties to increase revenues and reduce operating costs, and increasing awareness of the economy extended stay concept. Through June 26, 1996, the Company had developed and opened three facilities, acquired six others, and had agreements to acquire five additional facilities. As of such date, the Company had 34 facilities under construction, 25 of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 33 additional facilities during the remainder of 1996 and to continue an active development program thereafter. The Company's plans call for the average facility to have approximately 125 extended stay rooms and to take approximately 7-9 months to construct. The Company was founded by George D. Johnson, Jr. and H. Wayne Huizenga, who are the two largest shareholders of the Company. Mr. Johnson, who is the President and Chief Executive Officer of the Company, was formerly the President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of Directors of the Company, is the Chairman and Chief Executive Officer of Republic Industries, Inc. and was formerly Vice-Chairman of Viacom, Inc. and Chairman and Chief Executive Officer of Blockbuster Entertainment Corporation ("Blockbuster"). The Company's management team has extensive experience in the acquisition and development of real estate and the operation of properties on a national scale. GROWTH AND DEVELOPMENT STRATEGY The Company's goal is to become a national provider of economy extended stay facilities. The Company plans to rapidly develop new economy extended stay lodging facilities. Although the Company expects that the construction and development of new extended stay lodging facilities will be its primary means of expansion, the Company has also made, and may continue making, acquisitions of existing extended stay lodging facilities or other properties that are suitable for conversion to the extended stay concept. 21 Through June 26, 1996, the Company has developed and opened three economy extended stay facilities and acquired six other facilities since the Company began operations in 1995. As of such date, the Company had 34 facilities under construction, 25 of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 33 additional facilities during 1996 and to continue an active development program thereafter. The Company's strategy is to identify regions of the country that contain the demographic factors necessary to support one or more economy extended stay lodging facilities and to focus its development in those regions in order to obtain the maximum benefit from operational efficiencies. The Company expects target sites will generally have a large and/or growing population in the surrounding area with a large employment base. Such sites also are generally expected to have good visibility from a major traffic artery and be in close proximity to convenience stores, restaurants, and shopping centers. For the economy extended stay facilities developed and opened by the Company in Spartanburg, South Carolina, Columbia, South Carolina, and Downers Grove, Illinois, the average development cost was approximately $5.1 million with an average of 133 rooms. The cost to develop a facility varies significantly by geographic location. For the 34 facilities that were under construction as of June 26, 1996, the estimated average cost is approximately $4.7 million with an average of approximately 122 rooms. The cost of these facilities is expected to vary from a low of approximately $3.7 million to a high of $6.0 million with the number of rooms ranging from a low of 96 to a high of 150. Sites for development are selected by the Company's real estate professionals, subject to review and approval by senior management. The Company currently maintains offices in Spartanburg, South Carolina; Park Ridge, Illinois; Bellevue, Washington; Morristown, New Jersey; El Segundo, California; San Rafael, California; and Phoenix, Arizona for these real estate professionals and the construction supervisors for the region. The Company expects to open regional offices in other geographic areas in the future as the Company increases the number of regions in which it is focusing its development. The Company utilizes independent general contractors for the construction of its lodging facilities and is using a number of such contractors depending upon geographic area, costs of construction, and financial and physical capacities of the contractors. The Company's construction personnel will oversee the progress of construction on a regular basis during the development cycle. Certain members of the Company's management team have extensive experience in the rapid development of standardized commercial properties nationwide. In connection with past development activities, in particular the nationwide roll- out of Blockbuster video stores, these individuals were responsible for site selection, construction management, and subsequent operation of hundreds of locations. OPERATING STRATEGY The Company's business strategy is to develop the economy extended stay concept by providing an affordable and attractive lodging alternative for value-conscious travelers looking for extended stay accommodations. The Company's goal is to provide its guests with the level of amenities needed to optimize room and occupancy rates while maintaining high operating margins at its facilities. The Company attempts to achieve this goal through the following: Appeal to Value Conscious Guests. The Company's facilities are designed to offer quality accommodations for guests at substantially lower rates than most other extended stay lodging providers and hotels in the economy segment of the traditional lodging industry. As of June 26, 1996, the Company's facilities offered extended stay accommodations for $169 to $269 per week. Room rates at the Company's facilities may vary significantly depending upon market factors affecting such locations. These rates contrast with average weekly rates of approximately $545 for traditional extended stay hotels and approximately $330 for hotels in the economy segment of the lodging industry. Lodging Facility Features. The Company's facilities contain a variety of non-labor intensive features that are attractive to the extended stay guest such as a fully-equipped kitchenette, weekly housekeeping 22 with twice-weekly towel service, color television with cable or satellite hook-up, coin laundromat, and telephone service with voice mail messaging. Standardized Concept. The Company has developed standardized plans and specifications for its facilities which should lower construction and purchasing costs and establish uniform quality and operational standards. The Company also expects to benefit from the experience of various members of the Company's management team in developing numerous commercial properties to a uniform set of design standards and in operating systems on a cost-effective basis. Operating Efficiencies. The Company believes that the design and price level of its facilities attract guest stays of several weeks, which should result in a more stable revenue stream and which, coupled with low-labor amenities, could in turn lead to reduced administrative and operational costs and higher operating margins. In addition, members of the Company's management team have extensive experience in the utilization of sophisticated control and information systems which should enable the Company to manage, on a Company-wide basis, individual facility specific factors such as pricing, payroll, and occupancy levels. Each Company facility employs a property manager who is responsible for the operations of the particular property. The property manager shares duties with and oversees a staff typically consisting of an assistant manager, a desk clerk, a maintenance person, and a housekeeping/laundry staff of approximately 8-10 persons (most of whom are part-time employees). The office at each facility is generally open daily from 7:00 a.m. to 11:00 p.m., although an employee normally is on duty twenty-four hours a day to respond to guests' needs. The majority of daily operational decisions are made by the property manager. Each property manager is under the supervision of a regional manager who will be responsible for five to ten facilities, depending on geographic location. The regional manager oversees the performance of the property managers in such areas as guest service, property maintenance, and payroll and cost control. The corporate office utilizes state-of-the-art information systems to support its regional managers. Each facility is measured against a detailed revenue and expense budget, as well as against the performance of the Company's other facilities. The Company is developing centralized pricing, purchasing, marketing, and operational procedures in order to achieve operating efficiencies. The Company's current operating subsidiaries are ESA Development, Inc. ("ESA Development") and ESA Properties, Inc. ("ESA Properties"), which acquire and develop properties, and ESA Management, Inc. ("ESA Management"), which provides construction and management services for all of the lodging facilities owned by the Company and its subsidiaries. The Company expects that each lodging facility will be owned by a separate single-purpose subsidiary formed for such purpose. See "Financing." LODGING FACILITIES As of June 26, 1996, the Company had nine economy extended stay lodging facilities in operation and 34 facilities under construction in a total of 15 states. The following table sets forth certain information regarding the Company's lodging facilities that are in operation.
DATE OPENED NUMBER LOCATION OR ACQUIRED OF ROOMS Spartanburg, South Carolina........................ August 1995 123 Marietta, Georgia.................................. August 1995 119 Norcross, Georgia.................................. January 1996 196 Norcross, Georgia.................................. February 1996 130 Riverdale, Georgia................................. February 1996 144 Columbia, South Carolina........................... April 1996 120 Downers Grove, Illinois............................ May 1996 154 Lenexa, Kansas..................................... May 1996 59 Lawrenceville, Georgia............................. June 1996 126
23 The following table sets forth certain information regarding the Company's lodging facilities that are under construction.
PLANNED ESTIMATED NUMBER LOCATION OPENING DATE OF ROOMS Chattanooga, Tennessee....................... Second Quarter 1996 120 Greensboro, North Carolina................... Third Quarter 1996 129 Chesapeake, Virginia......................... Third Quarter 1996 132 Sharonville, Ohio............................ Third Quarter 1996 130 Winston-Salem, North Carolina................ Third Quarter 1996 111 Charleston, South Carolina................... Third Quarter 1996 126 Virginia Beach, Virginia..................... Third Quarter 1996 120 Maryland Heights, Missouri................... Third Quarter 1996 150 Lexington, Kentucky.......................... Third Quarter 1996 126 Little Rock, Arkansas........................ Third Quarter 1996 120 Brentwood, Tennessee......................... Fourth Quarter 1996 120 Springdale, Ohio............................. Fourth Quarter 1996 126 Rolling Meadows, Illinois.................... Fourth Quarter 1996 125 Novi, Michigan............................... Fourth Quarter 1996 124 Louisville, Kentucky......................... Fourth Quarter 1996 120 Itasca, Illinois............................. Fourth Quarter 1996 125 Memphis, Tennessee........................... Fourth Quarter 1996 126 Greece, New York............................. Fourth Quarter 1996 125 Burr Ridge, Illinois......................... Fourth Quarter 1996 119 Newport News, Virginia....................... Fourth Quarter 1996 120 Auburn Hills, Michigan....................... Fourth Quarter 1996 133 Columbus, Georgia............................ Fourth Quarter 1996 108 Dewitt, New York............................. Fourth Quarter 1996 121 Tukwila, Washington.......................... Fourth Quarter 1996 96 Merrillville, Indiana........................ Fourth Quarter 1996 105 Lakewood, Colorado........................... First Quarter 1997 120 Greenville, South Carolina................... First Quarter 1997 109 Kansas City, Missouri........................ First Quarter 1997 109 Hazelwood, Missouri.......................... First Quarter 1997 122 Ann Arbor, Michigan.......................... First Quarter 1997 112 Nashville, Tennessee......................... First Quarter 1997 125 Albany, New York............................. First Quarter 1997 134 Henrietta, New York.......................... First Quarter 1997 127 Naperville, Illinois......................... First Quarter 1997 125
The design plans for the Company's economy extended stay lodging facilities call for a newly-constructed apartment style complex with two to three story buildings containing an average of approximately 125 guest rooms with laundromat and office areas. The Company utilizes both interior and exterior corridor building designs, depending primarily on local zoning and weather factors. Rooms generally offer approximately 250 to 300 square feet of fully furnished living space, including a kitchenette and a dining/working area. The kitchenette is fully-equipped with a refrigerator, stovetop, microwave, and sink. INDUSTRY OVERVIEW TRADITIONAL LODGING INDUSTRY The U.S. lodging industry is estimated to have generated approximately $51 billion in annual room revenues in 1995 and had approximately 3.3 million rooms at the end of 1995. Over 60% of the industry's rooms are owned, managed, or franchised by the 10 largest lodging chains. Industry statistics, which the Company believes to be reliable, indicate that the U.S. lodging industry's performance is strongly correlated to economic activity. Room supply and demand historically have been 24 sensitive to shifts in economic growth, which has resulted in cyclical changes in average daily room and occupancy rates. Overbuilding in the lodging industry in the mid and late 1980s, when approximately 500,000 rooms were added, resulted in an oversupply of rooms. The Company believes this oversupply and the general downturn in the economy led to depressed industry performance and a lack of capital available to the industry in the late 1980s and early 1990s. The Company believes that the lodging industry has benefited from a gradually improving supply and demand balance, evidenced by increased average daily room and occupancy rates. Room supply growth in the lodging industry has slowed in recent years as the industry absorbs the oversupply of rooms that resulted from an average annual room supply growth of approximately 3.5% for 1988 through 1991. According to industry reports, which the Company believes are reliable, this growth slowed to an average of 1.4% for 1992 through 1995. The 3.1% average annual increase in demand (measured by occupied rooms) for 1992 through 1995 as compared to increases in supply during the same period reflects an improved supply and demand balance in the industry. The Company believes these factors were primarily responsible for the increase in industry occupancy rates from 61.7% for 1991 to 66.1% for 1995 and the increase in average daily room rates from $58.11 for 1991 to $65.62 for 1995. The lodging industry generally can be segmented by the level of service provided and the pricing of the rooms. Segmentation by level of service is divided into the following categories: full service hotels, which offer food and beverage services, meeting rooms, room service, and similar guest services; limited service hotels, which generally offer only rooms with amenities such as swimming pools, continental breakfast, or similar limited services; and all- suites, which generally have limited public spaces but provide guests with two rooms or distinct partitioned areas and which may or may not offer food and beverage service to guests. Segmentation by price level may generally be divided into the following categories with the respective average daily room rates for 1995: budget ($36), economy ($47), mid-price ($61), upscale ($80), and luxury ($118). The all-suites segment of the lodging industry is a relatively new segment, having developed largely over the past 10 years, and is principally oriented toward business travelers in the mid-price to upscale price levels. All-suite hotels were developed partially in response to the increasing number of corporate relocations, transfers, and temporary assignments and the need of business travelers for more than just a room. To address those needs, all-suite hotels began to offer suites with additional space and, in some cases, an efficiency kitchen, and guests staying for extended periods of time were offered discounts to daily rates when they paid on a weekly or monthly basis. Because of the perceived positive price/value relationship, all-suite hotels have generally outperformed the lodging industry as a whole over the last five years. EXTENDED STAY MARKET The Company believes that the extended stay market, in which the Company participates, is a continuation of the all-suites phenomenon, and that the same price/value relationship which has enabled the all-suites segment to achieve higher than industry average occupancy rates and operating margins will also carry through to the extended stay market. Demand for extended stay lodging has been stimulated by the economic and social changes resulting from the increased volume of corporate reorganizations and trends toward down-sizing and out- sourcing of various functions, the break-up and geographic dispersion of the traditional family, and technological improvements which have allowed businesses to relocate outside of large metropolitan areas. These changes have created new accommodation needs for, among others, corporate executives and trainees, consultants, sales representatives, construction workers, and people in between jobs or houses. The extended stay category is one of the most rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay rooms has increased at a compounded annual growth rate of approximately 3.3%, compared with compounded annual room growth of approximately 1.4% for the overall lodging industry over the same period. However, the vast majority of these rooms have been developed in the high-price end of the category. ECONOMY EXTENDED STAY CONCEPT Economy extended stay lodging competes on the basis of price compared to the extended stay market generally, thereby providing an economic inducement to guests who are already attracted to the extended 25 stay concept. In addition, economy extended stay lodging provides a new and affordable lodging alternative for guests who are value conscious, have lower incomes, or are on limited expense accounts. Based on published occupancy rates for other participants in the extended stay market, the Company believes that there is a strong demand for economy extended stay accommodations and that there is little organized competition for that business on a national or regional basis. Of the approximately 3.3 million total available rooms in the U.S. lodging industry at the end of 1995, there were approximately 38,000, or 1.2%, dedicated extended stay rooms at approximately 325 separate properties. More than two-thirds of these extended stay properties were controlled by only two other competitors, both of which are priced toward the upscale segment of the extended stay market. COMPETITION The lodging industry is highly competitive. Competitive factors within the lodging industry include room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, name recognition, and supply and availability of alternative lodging in local markets, including short-term lease apartments. The Company's facilities compete with a number of competitors, including budget and economy segment hotels and other companies focusing on the extended stay market. All of the Company's existing facilities are located in developed areas that include competing lodging facilities. In addition, each of the Company's proposed facilities is likely to be located in an area that includes competing facilities. The number of competitive lodging facilities in a particular area could have a material adverse effect on the levels of occupancy and average weekly room rates of the Company's existing and future facilities. The Company anticipates that competition within the economy extended stay lodging market will increase as participants in other segments of the lodging industry and others focus on this relatively new market. A number of major lodging companies recently have announced their intent to aggressively develop extended stay lodging properties which may compete with the Company's properties. Numerous other extended stay lodging facilities exist, most of which are oriented toward the upscale segment. The Company may compete for development sites with established entities which have greater financial resources than the Company and better relationships with lenders and sellers. These entities may generally be able to accept more risk than the Company can prudently manage. Further, there can be no assurance that new or existing competitors will not significantly reduce their rates or offer greater convenience, services, or amenities or significantly expand, improve, or develop facilities in a market in which the Company competes, thereby adversely affecting the Company's operations. ENVIRONMENTAL MATTERS Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment a hazardous substance at a property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of its properties, the Company may be potentially liable for any such costs. The Company has obtained recent Phase I environmental site assessments ("Phase I Surveys") on its existing properties and intends to obtain Phase I Surveys prior to the purchase of any future properties. The Phase I Surveys are intended to identify potential environmental contamination and regulatory compliance concerns. Phase I Surveys generally include historical reviews of the properties, reviews of certain public records, preliminary investigations of the sites and surrounding properties and the preparation and issuance of written reports. Phase I Surveys generally do not include invasive procedures, such as soil sampling or ground water analysis. 26 The Phase I Surveys have not revealed any environmental liability or compliance concern that the Company believes would have a material adverse effect on the Company's business, assets, results of operations, or liquidity, nor is the Company aware of any such liability or concern. Nevertheless, it is possible that Phase I Surveys will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns of which the Company will not be aware. Moreover, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, or (ii) the current environmental condition of the Company's existing and future properties will not be affected by the condition of the neighboring properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Company. GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels by requiring registration, disclosure statements, and compliance with specific standards of conduct. The Company believes that each of its facilities has the necessary permits and approvals to operate its respective business and the Company intends to continue to obtain such permits and approvals for its new facilities. In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions, and work permit requirements. An increase in the minimum wage rate, employee benefit costs, or other costs associated with employees could adversely affect the Company. Both at the federal and state level from time to time, there are proposals under consideration to increase the minimum wage. Under the Americans With Disabilities Act ("ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. Although the Company has attempted to satisfy ADA requirements in the designs for its facilities, no assurance can be given that a material ADA claim will not be asserted against the Company, which could result in a judicial order requiring compliance, and the expenditure of substantial sums to achieve compliance, an imposition of fines, or an award of damages to private litigants. These and other initiatives could adversely affect the Company as well as the lodging industry in general. INSURANCE The Company currently has the types and amounts of insurance coverage that it considers appropriate for a company in its business. While management believes that its insurance coverage is adequate, if the Company were held liable for amounts exceeding the limits of its insurance coverage or for claims outside of the scope of its insurance coverage, the Company's business, results of operations, and financial condition could be materially and adversely affected. EMPLOYEES As of March 31, 1996, the Company and its subsidiaries employed approximately 180 persons. The Company expects that it will significantly increase the number of its employees as it expands its business. The Company's employees are not subject to any collective bargaining agreements and management believes that its relationship with its employees is good. PROPERTIES In addition to its lodging facilities described above (see "--Lodging Facilities"), the Company also maintains a corporate headquarters and seven regional offices. The Company's principal executive offices are located in Ft. Lauderdale, Florida and the Company's regional offices are located in Spartanburg, South Carolina; Park Ridge, Illinois; Bellevue, Washington; Morristown, New Jersey; El Segundo, California; San Rafael, California; and Phoenix, Arizona. The Company generally rents its office space on a short-term basis, although it has recently entered into a new five-year lease for its corporate headquarters in Ft. Lauderdale, Florida. These offices are sufficient to meet the Company's present needs and it does not anticipate any difficulty in securing additional office space, as needed, on terms acceptable to the Company. LEGAL PROCEEDINGS The Company is not a party to any litigation or claims, other than routine matters incidental to the operation of the business of the Company. To date, no claims have had a material adverse effect on the Company nor does the Company expect that the outcome of any pending claims will have such an effect. 27 MANAGEMENT DIRECTORS AND OFFICERS The directors and executive officers of the Company and its subsidiaries, their ages at March 31, 1996, and their positions with the Company or such subsidiaries are as follows:
NAME AGE POSITION H. Wayne Huizenga(1)...... 58 Chairman of the Board of Directors George D. Johnson, Jr.(1). 53 President, Chief Executive Officer, and Director Robert A. Brannon......... 45 Senior Vice President, Chief Financial Officer, Secretary, and Treasurer Richard A. Fadel, Jr...... 38 Vice President--Operations of ESA Management, Inc. Michael R. Beck........... 34 Vice President--Real Estate of ESA Properties, Inc. Corry W. Oakes............ 29 Vice President--Construction of ESA Management, Inc. Gregory R. Moxley......... 41 Vice President--Finance and Controller Michael M. Wilson......... 56 Vice President--Marketing of ESA Management, Inc. Shawn R. Ruben............ 29 Vice President--Development of ESA Management, Inc. Robert W. Levis........... 32 Vice President--Corporate Development of ESA Management, Inc. Harold E. Wright.......... 53 President of ESA Development, Inc. Donald F. Flynn(2)(3)..... 56 Director Stewart H. Johnson(3)..... 52 Director John J. Melk(2)........... 59 Director Peer Pedersen(3).......... 71 Director
- --------------------- (1) Member of Executive Committee of the Board of Directors (2) Member of the Compensation Committee of the Board of Directors (3) Member of the Audit Committee of the Board of Directors All directors are elected to serve until the next annual meeting of shareholders and until their successors are elected and qualified. Officers serve at the pleasure of the Board. H. Wayne Huizenga became a director of the Company in August 1995 and serves as Chairman of its Board of Directors. Mr. Huizenga also currently serves as Chairman of the Board of Directors and Chief Executive Officer of Republic Industries, Inc., ("Republic"), a diversified company with operations in solid waste collection, disposal, and recycling, electronic security services, and out-of-home advertising, and served until 1995 as Vice-Chairman of Viacom, Inc. ("Viacom"), a diversified media and entertainment company, a position he assumed upon its merger with Blockbuster in 1994. Mr. Huizenga became a director of Blockbuster in February 1987 and was elected as Chairman of the Board and Chief Executive Officer from April 1987 through September 1994. He is a co-founder of Waste Management, Inc. (now WMX Technologies, Inc. ("WMX")), a waste disposal and collection company, where he served in various capacities, including President, Chief Operating Officer, and director until May 1984. From May 1984 to present, Mr. Huizenga has been an investor in several businesses and is the sole shareholder and Chairman of the Board of Huizenga Holdings, Inc., a holding and management company with various business interests. In connection with these business interests, Mr. Huizenga has been actively involved in strategic planning for, and executive management of, these businesses. He also has a majority ownership interest in the Florida Marlins, a Major League Baseball franchise, and owns the Florida Panthers, a National Hockey League franchise, the Miami Dolphins, a National Football League franchise, and Joe Robbie Stadium in South Florida. 28 George D. Johnson, Jr. has been President, Chief Executive Officer, and a director of the Company since January 1995. He is responsible for all aspects of development, operation, marketing, and personnel of the Company. Mr. Johnson is the former President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom. In this position he was responsible for all U. S. video and music stores. Mr. Johnson has over 30 years of experience developing and managing various businesses. He was formerly the managing general partner of WJB Video, the largest Blockbuster franchisee which developed over 200 video stores prior to a merger with Blockbuster in 1993 and is the managing general partner of American Storage Limited Partnership, a chain of 23 self-storage facilities located in the Carolinas and Georgia. He currently serves on the board of directors of Viacom, Republic, and Duke Power Company and has been the Chairman of the Board of Directors of Johnson Development Associates, Inc. since its founding in 1986. Johnson Development Associates, Inc. is a real estate management, leasing, and development company controlling approximately two million square feet of commercial, retail, and industrial property located in the Carolinas and Georgia which are owned by various partnerships controlled by Mr. Johnson and his brother, Stewart H. Johnson. Mr. Johnson practiced law in Spartanburg, South Carolina from 1967 until 1986 and served three terms in the South Carolina House of Representatives. Robert A. Brannon has been Chief Financial Officer of the Company since February 1995 and Senior Vice President, Secretary, and Treasurer since August 1995. He is responsible for overseeing accounting procedures and controls, along with financial reporting and cash management. Prior thereto, he served as Vice President--Finance for the Domestic Home Video division of the Blockbuster Entertainment Group, where he was responsible for financial management and control of over 2,000 video stores. Prior to joining Blockbuster in 1993, Mr. Brannon was Chief Financial Officer for WJB Video and for American Storage Limited Partnership. In those capacities, Mr. Brannon was responsible for the financial aspects of the development of over 200 video stores and 23 self- storage facilities. Prior to his participation in these businesses, Mr. Brannon served as a Certified Public Accountant in various management and staff positions with local and national accounting firms. Richard A. Fadel, Jr. has been Vice President--Operations of ESA Management since June 1996. Mr. Fadel is responsible for staffing and managing the operations of the Company's extended stay facilities. Mr. Fadel served as Zone Vice President of Operations for the Blockbuster Entertainment Group from August 1993 through June 1996, where he was responsible for the operations of over 500 stores. Prior to joining Blockbuster, Mr. Fadel was employed by WJB Video, where he served as Director of Operations from April 1992 through August 1993 and as Regional Manager of Operations from December 1990 through April 1992. Prior to joining WJB Video, Mr. Fadel held retail management positions with The Limited, Inc. and Peebles Department Stores, Inc. from 1981 through 1990. Michael R. Beck has been Vice President--Real Estate of the Company from September 1995 to January 1996 and Vice President--Real Estate of ESA Properties since January 1996. Mr. Beck is responsible for identifying and negotiating the purchase of suitable locations for the Company's expansion. Prior to joining the Company, Mr. Beck served in various capacities including Vice President--Development at Blockbuster Entertainment Group from July 1993 to May 1995, where he was responsible for new store development including real estate construction and distribution for Blockbuster Video and Blockbuster Music. From May 1989 to July 1993, Mr. Beck served in various capacities at WJB Video, including the position of Director of Strategic Planning where he was responsible for real estate acquisition and construction, marketing, and video tape purchasing. Corry W. Oakes has been Vice President--Construction of the Company from January 1995 to January 1996 and Vice President--Construction of ESA Management since January 1996. Mr. Oakes is responsible for managing initial construction of all properties as well as ongoing renovations and repairs. Prior thereto, he served as a National Director of Construction for the Blockbuster Entertainment Group. In that capacity, he was responsible for the development of over 400 video and music stores during 1994 alone. Prior to joining Blockbuster in 1993, Mr. Oakes served as Construction Manager for WJB Video. Mr. Oakes also served as property manager with Westover Development Company, a real estate development firm. 29 Gregory R. Moxley became Controller of the Company in October 1995 and Vice President--Finance in January 1996, where he is responsible for the accounting, budgeting, and financial reporting functions. From 1990 until joining the Company, Mr. Moxley held various positions, including Director of Financial Reporting and Assistant Treasurer, with One Price Clothing Stores, Inc., a national chain of women's apparel stores. Prior to that, Mr. Moxley served as a Certified Public Accountant in various management and staff positions with Ernst & Young from 1978 to 1990. Michael M. Wilson has been Vice President--Marketing of ESA Management since February 1996. Mr. Wilson is responsible for developing and implementing marketing strategy and public relations. From September 1993 until he joined the Company, he served as Director of Marketing--Special Projects for Blockbuster, where he was responsible for marketing and developing proprietary technology. Before joining Blockbuster in 1993, Mr. Wilson was Director of Marketing of WJB Video. Prior thereto, Mr. Wilson founded and served as President of two private consumer products companies, Lasso Closure Corp. and Torus Corporation, and served as Senior V.P. for Henderson Advertising in Greenville, South Carolina. Shawn R. Ruben has been Vice President--Development of ESA Management since December 1995. Mr. Ruben is responsible for managing the due diligence process on all of the Company's properties as well as land closings and loan approvals. Prior thereto, he served as National Director of Real Estate for the Blockbuster Entertainment Group, where he was responsible for new store development, asset management, and all real estate legal matters. Before joining Blockbuster in 1991, Mr. Ruben practiced law in Florida. Robert W. Levis has been Vice President--Corporate Development of ESA Management since April 1996. Mr. Levis is responsible for corporate strategy, including acquisitions. From 1992 until he joined the Company, Mr. Levis was Director, Corporate Development for Blockbuster where he was responsible for corporate strategy for new lines of business, including mergers and acquisitions. From 1995 until he joined the Company, Mr. Levis was also Vice President, Corporate Development and Finance for Discovery Zone, Inc. ("Discovery Zone"), an owner and franchisor of family indoor entertainment and fitness facilities, during the period it was managed by Blockbuster. On March 25, 1996, Discovery Zone announced that it had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. Prior thereto, Mr. Levis was a Manager, Real Estate and Hospitality Consulting with KPMG Peat Marwick. Harold E. Wright has been President of ESA Development, a wholly-owned subsidiary of the Company, since June 1995. Mr. Wright is responsible for selection and development of suitable locations in certain geographic areas. See "--Management Compensation," and "--Employment and Stock Option Agreements." Prior to joining ESA Development, Inc., Mr. Wright was President of HVI, Inc., formerly Homestead Venture, Inc., a site selection and development company of extended stay facilities in the Southwest. From 1989 to 1992, Mr. Wright was President of Homestead Properties, Inc., which developed and operated three extended stay properties in North Carolina. Prior to that time, Mr. Wright was involved in commercial and real estate development in Georgia and Florida. Donald F. Flynn became a director of the Company in August 1995. Mr. Flynn is Chairman and Chief Executive Officer of Flynn Enterprises, Inc., a business consulting and venture capital company, and from July 1992 until March 1996 was Chairman of Discovery Zone. From July 1992 until May 1995, Mr. Flynn also served as Chief Executive Officer of Discovery Zone. Mr. Flynn also currently serves as a director of WMX, Waste Management International plc, Wheelabrator Technologies, Inc., and Psychemedics, Inc. ("Psychemedics"). Mr. Flynn is a former director of Blockbuster. From 1972 to 1990, Mr. Flynn served in various positions with WMX, including Senior Vice President and Chief Financial Officer. Stewart H. Johnson became a director of the Company in August 1995. Mr. Johnson is currently the Chairman of the Board of Directors, Chief Executive Officer, and President of Morgan Corporation, a construction company specializing in grading, site preparation, and sewer and utility installation. Mr. Johnson has been directing the operations of Morgan Corporation since 1971. Mr. Johnson also serves as Secretary for Johnson Development Associates, Inc. Mr. Johnson is the brother of George D. Johnson, Jr. 30 John J. Melk became a director of the Company in August 1995. He has been Chairman and Chief Executive Officer of H/2/0 Plus, Inc. since 1988. H/2/0 Plus develops and manufactures health and beauty products and distributes them through a national chain of company-owned retail stores as well as through over 500 wholesale/department stores. Prior to 1984, Mr. Melk held various positions with WMX and its subsidiaries, and served as President of Waste Management International, Ltd. based in London, England. Mr. Melk currently serves as a director of Psychemedics and Republic and is a former Vice-Chairman and director of Blockbuster. Mr. Melk is also Chairman of M.W. Partners, which is a major investor in residential and commercial real estate development, resort hotels, marinas, and other private ventures. Peer Pedersen became a director of the Company in August 1995. He is the founder and has been Chairman of the law firm of Pedersen & Houpt, P.C., in Chicago, Illinois for more than five years. He serves on the board of directors of Aon Corporation, Boston Chicken, Inc., and WMX. MANAGEMENT COMPENSATION The Company was incorporated in January 1995 and did not conduct any operations prior to that time. The Company's executive officers commenced their service with the Company at various times during 1995 and none was employed by the Company during all of 1995. Accordingly, the following table sets forth, on an annualized basis with respect to the salary information, the information regarding the compensation paid by the Company to its Chief Executive Officer and each of the other four most highly compensated officers of the Company (hereinafter, the "Named Executive Officers") for services rendered in all capacities to the Company during 1995. The Company does not have a restricted stock award program or a long-term incentive plan. Directors of the Company are not paid any cash compensation for their services but are reimbursed for their out-of-pocket expenses. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------- ------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($) George D. Johnson, Jr...... 200,000 -- -- 200,000 -- President and Chief Executive Officer Robert A. Brannon.......... 175,000 -- -- 301,875 -- Senior Vice President, Chief Financial Officer, Secretary, and Treasurer Michael R. Beck............ 100,000 -- -- 21,000 -- Vice President--Real Estate of ESA Properties, Inc. Corry W. Oakes............. 100,000 -- -- 21,000 22,837(1) Vice President-- Construction of ESA Management, Inc. Harold E. Wright........... 175,000 -- -- -- 51,179(1) President of ESA Development, Inc.
- --------------------- (1) Represents the taxable portion of reimbursed relocation expenses. 31 The following table sets forth individual grants of stock options made to the Named Executive Officers during 1995. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF STOCK TOTAL PRICE APPRECIATION OPTIONS GRANTED EXERCISE FOR OPTION TERM(2) DATE OF OPTIONS TO EMPLOYEES IN OR BASE EXPIRATION --------------------- NAME GRANT GRANTED FISCAL YEAR PRICE(1) DATE 5% 10% George D. Johnson, Jr... 11/17/95 200,000 17.7% $13.00 11/17/05 $1,635,126 $4,143,730 Robert A. Brannon....... 8/18/95 301,875 26.7 4.76 8/18/05 903,675 2,290,087 Michael R. Beck......... 8/18/95 21,000 1.9 4.76 8/18/05 62,864 159,310 Corry W. Oakes.......... 8/18/95 21,000 1.9 4.76 8/18/05 62,864 159,310 Harold E. Wright........ -- -- -- -- -- -- --
- --------------------- (1) Under the 1995 Plan, the exercise price must be the fair market value on the date of grant. Except for specific situations, the options granted become exercisable as to one-fourth of the grant on each of the first, second, third, and fourth anniversary of the date of grant. (2) These amounts represent certain assumed annual rates of appreciation calculated from the exercise price, as required by the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock. There can be no assurance that the amounts reflected in this table will be achieved. The following table provides certain information concerning the value of unexercised options to purchase Common Stock at December 31, 1995 for the Named Executive Officers. No options to purchase Common Stock were exercised during 1995. AGGREGATE 1995 OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT 12/31/95 AT 12/31/95(1) ------------------------- ------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE NAME (#) (#) ($) ($) George D. Johnson, Jr....... -- 200,000 -- 2,900,000 Robert A. Brannon........... -- 301,875 -- 6,864,638 Michael R. Beck............. -- 21,000 -- 477,540 Corry W. Oakes.............. -- 21,000 -- 477,540 Harold E. Wright............ -- -- -- --
- --------------------- (1) This column indicates the aggregate amount, if any, by which the market value of the Common Stock on December 31, 1995 exceeded the options' exercise price based on the closing per share sale price of the Common Stock on such date of $27.50 as quoted on the Nasdaq National Market as reported by The Wall Street Journal. EMPLOYMENT AND STOCK OPTION AGREEMENTS In June 1995, Mr. Wright entered into an employment agreement, which was terminated in March 1996, with ESA Development, a wholly-owned subsidiary of the Company which was formed for the purpose of developing economy extended stay facilities in the Midwest and certain other areas. In connection with the termination of a business relationship before joining ESA Development, Mr. Wright entered into a non- 32 compete agreement that may restrict him from performing certain functions for ESA Development in the states of Texas, New Mexico, Colorado, Arizona, Nevada, Utah, California, Oklahoma, Louisiana, Florida and the greater metropolitan areas of Las Vegas, Nevada; Portland, Oregon; Atlanta, Georgia; Charlotte, North Carolina and Washington, D.C. until the end of 1996. As a result, neither Mr. Wright nor ESA Development will operate in those areas and Mr. Wright will focus his time and efforts locating and developing sites for ESA Development in regions not restricted by his non-compete agreement. Pursuant to his employment agreement, Mr. Wright was entitled to receive a minimum annual base salary of $175,000. The agreement had an initial term of two years and was to have been automatically renewed for one-year periods thereafter unless notice of termination was given by either party. The agreement provided that in the event Mr. Wright's employment with ESA Development was terminated for any reason other than for cause, Mr. Wright was entitled to receive an amount equal to his then base salary for the remainder of the then current term. In addition, in the event ESA Development did not grant to Mr. Wright, during each twelve month period from June 1 through May 31 of the term of the agreement, options to purchase shares of common stock of ESA Development in an amount equal to 2 1/2 times his then base salary at the fair market value per share on the date of grant, Mr. Wright could declare his employment terminated other than for cause. In June 1995, Mr. Wright also entered into a stock option agreement with ESA Development which was also terminated in March 1996 and all options granted thereunder terminated. Pursuant to the stock option agreement, ESA Development granted to Mr. Wright non-qualified options to purchase a total of 1,437.5 shares of the common stock of ESA Development. The options were to vest ratably on each of the next four anniversaries of the date of the option grant. With respect to options underlying 437.5 shares, the exercise price per share was $1,000 and the term of the options was ten years. With respect to options underlying the remaining 1,000 shares, the exercise price per share was $1,000 plus interest accrued at 10% per year, compounded annually, from the date of the option grant through the date of exercise of the option, and the term of the options was five years. In March 1996, Mr. Wright and ESA Development entered into a new employment agreement for the period commencing on March 18, 1996 and ending on June 30, 1999. Pursuant to this employment agreement, Mr. Wright is to act as the President of ESA Development and is entitled to receive a minimum annual base salary of $175,000. ESA Development also agreed to pay Mr. Wright additional compensation equal to $15,000 for each site upon which ESA Development or its subsidiaries has commenced construction of an extended stay lodging facility during the term of the agreement. This additional compensation shall apply only to the first 40 sites for 1996, 1997, and 1998 and the first 20 sites for 1999 and may be paid by delivering shares of the Company's Common Stock with a fair market value equal to the amount due. In addition, pursuant to this employment agreement, the Company granted to Mr. Wright, under the 1996 Plan, ten-year options to purchase 600,000 shares of the Company's Common Stock at an exercise price per share of $21.00 (the fair market value on the date of grant), which options vest as to one-fourth of the grant on September 19, 1996 and June 1 of each of 1997, 1998, and 1999, respectively. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Until August 1995, Mr. George D. Johnson, Jr., the Company's Chief Executive Officer, approved the terms of the compensation of the Company's executive officers. In August 1995, the Company's Board of Directors formed a Compensation Committee, which is currently composed of Messrs. Flynn and Melk, which determines the compensation of the Company's executive officers. STOCK OPTION PLANS 1995 PLAN The Board of Directors of the Company adopted in August 1995, and the shareholders of the Company have approved, the Amended and Restated 1995 Employee Stock Option Plan (the "1995 Plan") which will 33 be administered by the Compensation Committee of the Board of Directors, which consists solely of non-employee directors. The Compensation Committee has authority to determine the persons to be granted options under the 1995 Plan, the number of shares subject to each option, the time or times at which options will be granted, the option price of the shares subject to each option (which price shall not be less than the fair market value of the shares at the date of grant), and the time or times when each option becomes exercisable and the duration of the exercise period. Except for specific situations, such as a change in control of the Company, options which have been granted become exercisable as to one-fourth of the grant on each of the first, second, third, and fourth anniversary of the date of grant. Options may be granted under the 1995 Plan to key employees and consultants, (other than members of the Compensation Committee) of the Company. Options may be granted with respect to a total of not more than 1,677,060 shares of Common Stock under the 1995 Plan, subject to antidilution and other adjustment provisions. No options may be granted to a single optionee under the 1995 Plan in excess of 50% of the total number of shares authorized for issuance under the 1995 Plan. No options may be granted under the 1995 Plan after August 18, 2005. If an option expires or is terminated or canceled unexercised as to any shares, such released shares may again be optioned (including a grant in substitution for a canceled option). The Compensation Committee has granted, under the 1995 Plan, ten-year options to purchase 150,000 shares and 200,000 shares of Common Stock to Messrs. Huizenga and George D. Johnson, Jr., respectively, at an exercise price per share equal to $13.00 and ten year options to purchase Common Stock at an exercise price per share equal to $4.76 to the other Named Executive Officers, among others, for the following number of shares: Mr. Brannon, 301,875; Mr. Beck, 21,000; and Mr. Oakes, 21,000. In January 1996, the Compensation Committee granted additional ten-year options to purchase 500,281 shares of Common Stock to employees at exercise prices per share ranging from $26.75 to $29.625, including grants to Named Executive Officers for the following number of shares: Mr. Brannon, 39,252; Mr. Beck, 28,037; Mr. Oakes, 28,037; and Mr. Wright, 39,252. As of March 31, 1996, options to purchase an aggregate of 1,676,873 shares of Common Stock had been granted under the 1995 Stock Option Plan. 1996 PLAN The Board of Directors of the Company adopted in January 1996, and the shareholders of the Company have approved, the Amended and Restated 1996 Employee Stock Option Plan (the "1996 Plan"). The 1996 Plan will be administered by the Compensation Committee of the Board of Directors and the terms of the 1996 Plan are substantially identical to those of the 1995 Plan. Options may be granted with respect to a total of not more than 2,500,000 shares of Common Stock under the 1996 Plan, subject to antidilution and other adjustment provisions. No options may be granted under the 1996 Plan after January 24, 2006. As of March 31, 1996, options to purchase 679,385 shares of Common Stock had been granted under the 1996 Plan, including ten-year options to purchase 600,000 shares of Common Stock granted to Mr. Wright at an exercise price per share equal to $21.00. DIRECTORS' PLAN The Board of Directors of the Company adopted in November 1995, and the shareholders of the Company have approved, a 1995 Stock Option Plan for Non- Employee Directors (the "Directors' Plan"). The Directors' Plan is administered by the Board of Directors. Options shall be granted under the Directors' Plan only to non-employee directors of the Company. Options may be granted with respect to a total of not more than 240,000 shares of Common Stock under the Directors' Plan, subject to antidilution and other adjustment provisions. If an option expires or is terminated or canceled unexercised as to any shares, such released shares may again be optioned. A one-time option covering 20,000 shares of Common Stock is automatically granted to each non-employee director of the Company effective upon initial election to the Board of Directors of the Company. During the four-year period following the initial election of a non-employee director to the Board of 34 Directors, an additional option covering 5,000 shares of Common Stock shall be granted to such non-employee director on each anniversary of the initial grant; provided that such non-employee director remains a director and that not more than four such additional options shall be granted to any one non-employee director. The option price for all options granted under the Directors' Plan shall be the fair market value of a share of Common Stock on the date of grant. Each option granted under the Directors' Plan is for a term of ten years, subject to earlier termination if the optionee's service as a director terminates. Each option granted under the Directors' Plan becomes exercisable with respect to all of the shares subject to the option six months after the date of its grant. Options to purchase 20,000 shares of Common Stock at an exercise price per share of $13.00 were automatically granted under the Directors' Plan on the closing of the IPO on December 19, 1995 to each of Messrs. Flynn, Stewart H. Johnson, Melk, and Pedersen. 35 CERTAIN TRANSACTIONS In order to finance the construction of the Company's Spartanburg, South Carolina facility and the Company's initial operations, George D. Johnson, Jr., the Company's President and Chief Executive Officer, and H. Wayne Huizenga, the Chairman of the Board of Directors of the Company, loaned an aggregate of approximately $6.1 million at various times between February 1995 and July 1995. Those loans accrued interest at an annual rate of 8.75% and were repaid in full in August 1995 with the proceeds from the subscriptions of the Company's shareholders described below. In connection with the formation of the Company in January 1995, Mr. George D. Johnson, Jr. purchased 1,677,060 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock for an aggregate purchase price of $2,000. In August 1995, the Company entered into Subscription Agreements pursuant to which certain investors, including H. Wayne Huizenga, George D. Johnson, Jr., Donald F. Flynn, Stewart H. Johnson, John J. Melk, Peer Pedersen, and Robert A. Brannon, contributed $55.8 million to the capital of the Company in exchange for 11,718,000 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock ($4.76 per share). Approximately one-half of such amount was contributed in August 1995 and the balance in October 1995. As consideration for the commitment to provide a mortgage loan facility (the "DLJ Mortgage Facility"), the Company issued 750,540 shares of Common Stock, with a then estimated fair market value of approximately $3.6 million, to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), one of the representatives of the underwriters of the Prior Offerings. In connection therewith, DLJ Capital Corporation, an affiliate of DLJ, also purchased 500,430 shares of Common Stock for a purchase price of $2.4 million. See "Financing." In the Concurrent Offering, the Company sold to its then existing shareholders (other than DLJ and its affiliates), on a pro-rata basis, for $25 million, 2,067,825 shares of Common Stock for $12.09 per share, such price being the IPO price per share less underwriting discounts and commissions. These shareholders included the Company's directors and certain of its officers. The amounts paid by the Company's directors and certain of its officers in the Concurrent Offering were as follows: Mr. H. Wayne Huizenga, $7,253,456; Mr. George D. Johnson, Jr., $3,048,747; Mr. Stewart H. Johnson, $954,396; Mr. Robert A. Brannon, $381,765; Mr. Donald F. Flynn, $381,765; Mr. John J. Melk, $1,145,285; and Mr. Peer Pedersen, $1,145,285. In addition, the amounts paid by trusts for the benefit of various members of the immediate family of George D. Johnson, Jr. was an aggregate of $5,726,429 and the amounts paid by trusts for the benefit of various members of the immediate family of Stewart H. Johnson was an aggregate of $381,754. The Company has airplane leasing arrangements with companies owned by George D. Johnson, Jr., Stewart Johnson, and certain of their family members. In connection therewith, the Company incurred aggregate charges of approximately $412,000 during the year ended December 31, 1995. The Company believes that the terms of its use of the planes are at least as favorable to the Company as those it could have obtained from an unaffiliated party. In April 1995, the Company acquired a parcel of real estate in Spartanburg, South Carolina for approximately $562,000 from a limited partnership controlled by George D. Johnson, Jr. and Stewart H. Johnson. The Company believes that the terms of the acquisition were as favorable to it as it could have obtained from an unaffiliated party. In 1996 the Company entered into (i) a 10-year lease for a suite at Joe Robbie Stadium for a base rental of $115,000 per year, subject to certain additional charges and periodic escalation, and (ii) a 3-year lease for a suite at Homestead Motor Sports Complex for a base rental of $53,250 per year, subject to certain additional charges. Mr. Huizenga owns Joe Robbie Stadium and has an approximately 50% ownership interest in Homestead Motor Sports Complex. The Company believes that the terms of these leases are comparable to those charged to other persons. 36 PRINCIPAL SHAREHOLDERS The following table sets forth, as of June 26, 1996, certain information regarding the beneficial ownership of the Company's Common Stock by each person known by the Company to be the beneficial owner of 5% or more of the outstanding Common Stock, by each of the Company's directors and Named Executive Officers, and by all directors and executive officers of the Company as a group.
SHARES BENEFICIALLY OWNED ------------------ NAME(1) NUMBER PERCENT George D. Johnson, Jr.(2).............................. 5,552,881 16.9% H. Wayne Huizenga...................................... 4,589,955 14.0 Stewart H. Johnson(3).................................. 724,729 2.2 Robert A. Brannon...................................... 241,577 * Michael R. Beck........................................ 18,000 * Corry W. Oakes......................................... 16,425 * Harold E. Wright....................................... 2,904 * Donald F. Flynn(4)..................................... 241,577 * John J. Melk(5)........................................ 944,730 2.9 Peer Pedersen.......................................... 724,730 2.2 All directors and executive officers as a group (15 persons)(2)(3)(4)(5).............................. 13,072,738 39.9%
- --------------------- * Represents less than 1% of the outstanding Common Stock. (1) Unless otherwise indicated, the address of such person is c/o Extended Stay America, Inc., 500 E. Broward Boulevard, Ft. Lauderdale, Florida 33394. (2) Includes 3,623,650 shares of Common Stock held in various trusts for the benefit of members of Mr. Johnson's immediate family, of which Mr. Johnson's brother, Stewart H. Johnson, is a trustee and does not include 120,788 shares held in various trusts for the benefit of members of Stewart H. Johnson's immediate family and with respect to which Mr. Johnson is trustee, all of which shares Mr. Johnson may be deemed to beneficially own. (3) Includes 120,788 shares Common Stock held in various trusts for the benefit of members of Stewart H. Johnson's immediate family, of which George D. Johnson, Jr. is trustee, but does not include 3,623,650 shares of Common Stock held in various trusts for the benefit of members of George D. Johnson, Jr.'s immediate family, of which Stewart H. Johnson is a trustee, and 120,788 shares of Common Stock held in a trust of which Stewart H. Johnson is a trustee, all of which shares Stewart H. Johnson may be deemed to beneficially own. (4) Represents 241,577 shares of Common Stock held in a trust, of which Mr. Flynn is a trustee and beneficiary. (5) Includes 724,730 shares of Common Stock beneficially owned by M Group Investment IV, L.P., of which Mr. Melk is a general partner. 37 FINANCING EQUITY The Company was initially capitalized with approximately $60 million of equity from a group of private investors, a number of whom constitute part of the Company's management team. On December 19, 1995, the Company completed the December 1995 Offerings from which it received aggregate net proceeds of approximately $85 million. The Company received aggregate net proceeds of approximately $290 million from the June 1996 Offering. MORTGAGE FACILITIES DLJ MORTGAGE FACILITY The Company has a mortgage facility with DLJ Mortgage Capital, Inc., an affiliate of DLJ, providing for up to $100 million in mortgage financing (which was reduced by the Company from $200 million in connection with the establishment of the CSFB Mortgage Facility described below), subject to certain conditions (the "DLJ Mortgage Facility"). Under the DLJ Mortgage Facility, each extended stay lodging facility financed thereby will, upon obtaining a certificate of occupancy, receive funding of 60% of the lesser of the total development cost or the approved budget thereof. In addition, the funding for each facility may be increased to not more than 75% of the lesser of its cost or its appraised value within the first 15 months of operation, with the amount of such additional funding depending upon the lodging facility meeting certain debt service coverage ratios. Interest on each loan will be payable monthly at a fixed rate equal to the rate of 10-year U.S. Treasury securities on the date of funding plus 4.0%. Principal amortization based on a 25-year term will begin not later than 15 months after the initial funding and will continue through various maturity dates from December 31, 2006 through December 31, 2008. Prepayments of loans may be made without penalty within five years of their respective maturity dates. Amounts borrowed under the DLJ Mortgage Facility will be secured by, among other things, a first mortgage encumbering each lodging facility and assignment of the revenues and profits from the respective facility. Funding under the DLJ Mortgage Facility is subject to, among other things, the funding by the Company of certain escrow accounts and prior approval by the lender of the construction and operating budgets. The DLJ Mortgage Facility requires the Company to maintain consolidated tangible net worth (as defined therein) of at least $40 million. In addition, the DLJ Mortgage Facility contains certain affirmative and negative covenants, including without limitation, limitations on any sale, mortgaging, granting of options or other transfer of any legal or beneficial interest in any property financed; making of dividends, share repurchases, or other restricted payments by the Company other than dividends by the Company not exceeding 50% of the excess of its net income for any period over its cumulative losses not previously applied in computing the limitation; financing new properties without first submitting such property for approval by the lender for financing under the DLJ Mortgage Facility; affiliated party transactions; making certain investments; and engaging in businesses other than the ownership, management, and operation of extended stay lodging facilities. All or any portion of the amounts outstanding under the DLJ Mortgage Facility may at any time become immediately due and payable, at the option of the lender, if an event of default occurs, including, among other things, (i) any payment of principal or interest or any payment of any fee or other amount due under the DLJ Mortgage Facility is not paid when the same becomes due and payable; (ii) the Company fails to perform any obligation or observe any agreement or covenant under the DLJ Mortgage Facility or related loan, collateral, or other documentation (collectively, the "Loan Documents") and such failure remains unremedied past the applicable grace period, if any; (iii) any material representation made or deemed to be made by the Company in the Loan Documents shall prove to have been incorrect in any material respect when made or deemed made; (iv) a default occurs and is continuing with respect to any indebtedness of the Company and (in the case of a default other than a payment default) such default permits the acceleration of indebtedness or any such indebtedness is declared due and payable prior to its stated maturity; (v) certain events of bankruptcy, insolvency or reorganization occur with respect to the Company or any of its 38 subsidiaries; (vi) any material provision of collateral documentation relating to a loan ceases to be valid and binding on the Company or fails to create a valid perfected and first priority lien on any of the collateral covered thereby; (vii) a material adverse change, or an event which is reasonably likely to have a material adverse change, occurs in the Company, in the ability of the parties to the Loan Documents to perform their respective obligations, or the legality, validity, or enforceability of the Loan Documents or the rights and remedies of the lender thereunder; or (viii) the current members of the Company's Board of Directors cease to constitute a majority of the Board. CSFB MORTGAGE FACILITY The Company also has a mortgage facility (the "CSFB Mortgage Facility") from CS First Boston Mortgage Capital Corporation (an affiliate of CS First Boston Corporation, one of the representatives of the underwriters of the June 1996 Offering) which provides up to $300 million in mortgage financing, subject to certain conditions and limitations, for completed facilities. Under the CSFB Mortgage Facility, each extended stay lodging facility financed thereby will, upon obtaining a certificate of occupancy, receive funding of 65% of the lesser of the total development cost, the approved budget, or the appraised value, subject to limitations based on projected debt service coverage ratios. The Company may choose either a fixed rate loan or a floating rate loan at the time the loan is to be funded, subject, however, to a requirement that a minimum of $50 million of loans must be made under the chosen rate program before the other rate program can be selected. Interest on each loan will be payable monthly at either (i) a fixed rate equal to the rate of 7-year U.S. Treasury securities on the date of funding plus from 3.55% to 3.85%, depending upon the aggregate amount of fixed rate loans, or (ii) a floating rate equal to the 30-day LIBOR rate plus 3%. Principal amortization will generally be based on a 15-year term for fixed rate loans and based on a 20-year term with an assumed 9.9% interest rate for floating rate loans. Fixed rate loans will mature on the earlier of 7 years and 3 months from the date that the first such loan is funded or May 2004. All floating rate loans will mature three years from the execution of a credit facility agreement. Prepayments of fixed rate loans may be made after five years, subject to certain penalties. Prepayments of floating rate loans may be made after one year without penalty. Amounts borrowed under the CSFB Mortgage Facility will be secured by, among other things, a first mortgage encumbering each lodging facility so financed and an assignment of the revenues and profits from such facilities. Funding under the CSFB Mortgage Facility is subject to, among other things, market capitalization of the Company of at least $300 million, maintenance of certain debt service coverage ratios, maintenance of the ratio of debt to total book capitalization of not more than 70%, maintenance of unrestricted and unpledged cash of not less than $20 million, the funding by the Company of certain escrow accounts, and prior approval by the lender of the construction and operating budgets. The CSFB Mortgage Facility also contains certain affirmative and negative covenants similar to those contained in the DLJ Mortgage Facility. The Company may, however, finance new properties through other lenders without first submitting such property for approval by the lender for financing under the CSFB Mortgage Facility. However, in the event that the Company finances more than $175 million of secured facility debt (other than construction financing and certain other financings) with another lender prior to May 1999, without having financed at least $100 million of such debt under the CSFB Mortgage Facility, the lender may terminate its obligation to fund additional facilities under the CSFB Mortgage Facility. All or any portion of the amounts outstanding under the CSFB Mortgage Facility will become due and payable, at the option of the lender, if an event of default occurs, including, among other things, (i) a declared default or acceleration under other indebtedness of the Company; (ii) certain events of bankruptcy with respect to the Company or any of its subsidiaries; (iii) the Company's tangible net worth ceases to exceed $50 million; (iv) a dividend payout by the Company in excess of 50% of the excess of its net income for any period over its cumulative losses not previously applied in computing the limitation; (v) the current members of the Company's Board of Directors cease to constitute a majority of the Board; or (vi) Mr. Huizenga or Mr. George D. Johnson, Jr. cease to be Board members to the extent that they are living and have not been declared judicially incompetent. 39 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 200 million shares of Common Stock, $.01 par value per share, and 10 million shares of preferred stock, $.01 par value per share (the "Preferred Stock"). As of June 26, 1996, 32,628,092 shares of Common Stock were issued and outstanding and none of the Preferred Stock was outstanding. The following description is a summary and is qualified in its entirety by reference to the provisions of the Company's Restated Certificate of Incorporation, as amended (the "Certificate"), and its Bylaws (the "Bylaws"), copies of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Holders of a majority of the shares of Common Stock represented at a meeting can elect all of the directors. Holders of Common Stock are not permitted to act by written consent. Shareholders must follow an advance notification procedure for certain shareholder nominations of candidates for the Board of Directors and for certain other business to be conducted at any meeting of shareholders. Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution, or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and have no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without further action by the shareholders, to issue up to 10 million shares of Preferred Stock in one or more series and to fix the voting powers, designations, preferences, and relative, participating, optional, or other special rights, and qualifications, limitations, and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, and the number of shares constituting any series. Because the Board of Directors has the power to establish the preferences and rights of the shares of any such series of Preferred Stock, it may afford holders of any Preferred Stock preferences, powers, and rights (including voting rights), senior to the rights of holders of Common Stock, which could adversely affect the rights of holders of Common Stock and could have the effect of delaying, deferring, or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. DELAWARE GENERAL CORPORATION LAW The Company was incorporated in 1995 as a Delaware corporation and will be subject to Section 203 of the Delaware General Corporation Law ("Section 203"). Pursuant to Section 203, with certain exceptions, a Delaware corporation may not engage in any of a broad range of business combinations, such as mergers, consolidations, and sales of assets, with an "interested shareholder" for a period of three years from the date that such person became an interested shareholder unless (i) the transaction that results in the person's becoming an interested shareholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested shareholder, (ii) upon consummation of the transaction which results in the shareholder becoming an interested shareholder, the interested shareholder owns 85% or more of the voting stock of the corporation outstanding at the time the transaction commenced (other than certain excluded shares), or (iii) on or after the date the person becomes an interested shareholder, the business combination is approved by the corporation's board of directors and by holders of at least two-thirds of the corporation's outstanding voting stock, excluding shares owned by the interested shareholder, at a 40 meeting of shareholders. Under Section 203, an "interested shareholder" is defined as any person, other than the corporation and any direct or indirect majority-owned subsidiaries of the corporation, that is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested shareholder. The Company has approved Messrs. George D. Johnson, Jr., Stewart H. Johnson, and H. Wayne Huizenga as "interested shareholders." Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested shareholder" to effect various business combinations with a corporation for a three-year period. The provisions of Section 203 may encourage persons interested in acquiring the Company to negotiate in advance with the Company's Board of Directors because the shareholder approval requirement would be avoided if a majority of the Company's directors then in office approve either the business combination or the transaction which results in the person becoming an interested shareholder. Such provisions also may have the effect of preventing changes in management of the Company. It is possible that such provisions could make it more difficult to accomplish transactions that shareholders may otherwise deem to be in their best interests. TRANSFER AGENT The transfer agent and registrar for the Common Stock is Harris Trust and Savings Bank (Chicago). 41 SHARES ELIGIBLE FOR FUTURE SALE As of June 26, 1996, the Company had 32,628,092 shares of Common Stock outstanding, 17,625,062 of which were freely tradable (other than by an "affiliate" of the Company as such term is defined in the Securities Act) without restriction or registration under the Securities Act. The remaining 15,003,030 outstanding shares of Common Stock originally subscribed for and purchased by the initial shareholders of the Company (the "Initial Shareholders") were issued and sold by the Company in private transactions ("Restricted Shares") and may not be sold unless registered under the Securities Act (which registration is described below) or sold in accordance with an exemption therefrom, such as Rule 144 or Rule 144A thereunder. In connection with the June 1996 Offering, the holders of approximately 13.3 million shares of Common Stock (including all shares beneficially owned by the Company's directors and executive officers) agreed that they would not sell any shares of Common Stock prior to August 28, 1996, without the consent of DLJ, subject to certain exceptions, including pursuant to a foreclosure by a lender on a loan for which shares of Common Stock have been pledged as collateral. In general, under Rule 144 as currently in effect, a holder of Restricted Shares who beneficially owns shares that were not acquired from the Company or an affiliate of the Company within the previous two years would be entitled to sell in the public market within any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. The Initial Shareholders will be able to sell shares of Common Stock acquired pursuant to the Subscription Agreements in accordance with such provision on and after August 18, 1997. Sales pursuant to Rule 144 are also subject to certain other requirements relating to manner of sale, notice, and the availability of current public information about the Company. A person who is deemed not to have been an affiliate of the Company at any time during the three months immediately preceding a sale and who beneficially owns shares that were not acquired from the Company or an affiliate of the Company within the past three years is entitled to sell such shares under Rule 144(k) without regard to the foregoing limitations. Rule 144A under the Securities Act permits the immediate sale by the holders of Restricted Shares issued prior to completion of the IPO of all or a portion of their shares to certain "qualified institutional buyers" as defined in Rule 144A. The Company has registered under the Securities Act all of the 15,003,030 shares of Common Stock owned by the Initial Shareholders so that such Initial Shareholders may make resales in the public market of their Common Stock upon expiration of their lock-up agreements described above. The Company also intends to register under the Securities Act all shares reserved for issuance under the 1995 Plan, the 1996 Plan, and the Directors' Plan. All shares purchased in the future under such plans will be available for resale in the public market without restriction, except that affiliates must comply with the provisions of Rule 144 other than the holding period requirement. Shares registered pursuant to any of these registration statements could be sold in the public market. In addition, the Company has also issued additional shares of Common Stock pursuant to this Prospectus in connection with various acquisitions of businesses, some of which shares may be resold in the public market pursuant to this Prospectus or otherwise. See "Recent Developments." 42 EXPERTS The consolidated balance sheet of Extended Stay America, Inc. and subsidiaries as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the period from January 9, 1995 (inception) through December 31, 1995, the statements of operations, partners' deficit, and cash flows of Welcome Inn America 89-1, L.P. for each of the two years in the period ended December 31, 1994 and the period from January 1, 1995 through August 18, 1995, the balance sheets of Apartment/Inn, L.P. as of December 31, 1994 and 1995 and the related statements of operations and partners' deficit and cash flows for each of the two years in the period ended December 31, 1995, the combined balance sheets of Hometown Inn I, LTD and Hometown Inn II, LTD as of December 31, 1994 and 1995 and the related combined statements of operations and partners' capital and cash flows for each of the three years in the period ended December 31, 1995, the balance sheet of Kipling Hospitality Enterprise Corporation as of December 31, 1995 and the related statements of operation and retained earnings and cash flows for the year then ended, the balance sheet of Apartment Inn Partners/Gwinnett, L.P. as of December 31, 1995 and the related statements of operations and partners' capital and cash flows for the year then ended, and the combined balance sheets of the M&M Facilities as of December 31, 1994 and 1995 and the related combined statements of operations and equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995, included in this Prospectus, have been included herein in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 43 INDEX TO FINANCIAL STATEMENTS
PAGE PRO FORMA FINANCIAL STATEMENTS OF EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES Pro Forma Consolidated Statement of Operations for the period from January 9, 1995 (inception) through December 31, 1995 (unaudited) and the three months ended March 31, 1996 (unaudited)....................... F-2 Pro Forma Consolidated Balance Sheet as of March 31, 1996 (unaudited).... F-4 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES Report of Independent Accountants........................................ F-5 Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited)............................................................. F-6 Consolidated Statements of Operations for the period from January 9, 1995 (inception) through December 31, 1995, for the period from January 9, 1995 (inception) through March 31, 1995 (unaudited) and for the three months ended March 31, 1996 (unaudited) ................................ F-7 Consolidated Statements of Shareholders' Equity for the period from January 9, 1995 (inception) through December 31, 1995 and for the three months ended March 31, 1996 (unaudited) ................................ F-8 Consolidated Statements of Cash Flows for the period from January 9, 1995 (inception) through December 31, 1995, for the period from January 9, 1995 (inception) through March 31, 1995 (unaudited) and for the three months ended March 31, 1996 (unaudited)................................. F-9 Notes to Consolidated Financial Statements............................... F-10 WELCOME INN AMERICA 89-1, L.P. Report of Independent Accountants........................................ F-18 Statements of Operations for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995......... F-19 Statements of Partners' Deficit for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995.... F-20 Statements of Cash Flows for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995......... F-21 Notes to Financial Statements............................................ F-22 APARTMENT/INN, L.P. Report of Independent Accountants........................................ F-23 Balance Sheets as of December 31, 1994 and 1995.......................... F-24 Statements of Operations and Partners' Deficit for the two years ended December 31, 1994 and 1995.............................................. F-25 Statements of Cash Flows for the two years ended December 31, 1994 and 1995.................................................................... F-26 Notes to Financial Statements............................................ F-27 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD Report of Independent Accountants........................................ F-29 Combined Balance Sheets as of December 31, 1994 and 1995................. F-30 Combined Statement of Operations and Partners' Capital for the three years ended December 31, 1993, 1994, and 1995........................... F-31 Combined Statement of Cash Flows for the three years ended December 31, 1993, 1994, and 1995.................................................... F-32 Notes to Combined Financial Statements................................... F-33 KIPLING HOSPITALITY ENTERPRISE CORPORATION Report of Independent Accountants........................................ F-35 Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).... F-36 Statements of Operations and Retained Earnings for the year ended December 31, 1995 and the three months ended March 31, 1995 and 1996 (unaudited)............................................................. F-37 Statements of Cash Flows for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996 (unaudited).................. F-38 Notes to Financial Statements............................................ F-39 APARTMENT INN PARTNERS/GWINNETT, L.P. Report of Independent Accountants........................................ F-42 Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).... F-43 Statements of Operations and Partners' Capital for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)............................................................. F-44 Statements of Cash Flows for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996 (unaudited).................. F-45 Notes to Financial Statements............................................ F-46 M & M FACILITIES Report of Independent Accountants........................................ F-48 Combined Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)........................................................ F-49 Combined Statements of Operations and Equity (Deficit) for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)..................................... F-50 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)............................................................. F-51 Notes to Combined Financial Statements................................... F-52
F-1 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES These unaudited pro forma consolidated statements of operations are presented as if the acquisitions of the Acquired Facilities and the proposed acquisitions of the KHEC Facility and the M & M Facilities and the related issuances of shares of common stock had occurred at the beginning of the relevant period. For the year ended December 31, 1995, the statement also reflects the acquisition of the Marietta Facility and estimated incremental expenses to operate as a publicly held company as if it were publicly held on the date of inception. Such pro forma information is based in part upon the consolidated statements of operations of Extended Stay America, Inc. and subsidiaries and the statements of operations of Welcome, Apartment/Inn, Hometown Inn, KHEC, Gwinnett, and the M & M Facilities. They should be read in conjunction with the financial statements listed in the index on page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The acquisition of the lodging facility from AATI has not been included in these unaudited statements of operations because the purchase price and the unaudited results of operations for the periods, when measured in relation to the Company, did not meet certain materiality standards and can be excluded as permitted by the rules and regulations of the Securities and Exchange Commission. These unaudited pro forma consolidated statements of operations are not necessarily indicative of what the actual results of operations of the Company would have been assuming such transactions had been completed as of the beginning of the period, nor do they purport to represent the results of operations for any future periods. Results of operations and the related earnings or loss per share for future periods will be affected by a number of factors, including but not limited to, the number of facilities opened and the operating results therefrom, interest costs incurred on indebtedness (including the amortization of the fees paid in cash and common stock to DLJ), corporate operating and property management expenses, site selection costs and the number of future shares issued. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 9, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 (UNAUDITED)
PRO FORMA COMPLETED COMPLETED PROPOSED ACTUAL ACQUISITIONS ADJUSTMENTS ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA Revenue: Room revenue........... $ 817,133 $5,957,989 $ (135,614)(1) $6,639,508 $6,940,992 $ (152,131)(1) $13,428,369 Management fees........ 17,775 (17,775)(2) Other revenue.......... 42,977 277,596 (6,398)(1) 314,175 431,323 (9,453)(1) 736,045 ----------- ---------- ---------- ---------- ---------- ---------- ----------- Total revenue........ 877,885 6,235,585 (159,787) 6,953,683 7,372,315 (161,584) 14,164,414 ----------- ---------- ---------- ---------- ---------- ---------- ----------- Costs and expenses: Property operating expenses.............. 332,523 2,655,610 (61,941)(1) 2,908,417 3,045,884 (66,759)(1) 5,887,542 (17,775)(2) Corporate operating and property management expenses... 2,042,039 391,114 800,000 (3) 3,233,153 543,464 (58,093)(2) 3,718,524 Site selection costs... 512,529 512,529 512,529 Depreciation and amortization.......... 146,726 623,721 263,067 (4) 1,033,514 737,220 422,780 (4) 2,193,514 ----------- ---------- ---------- ---------- ---------- ---------- ----------- Total costs and expenses............ 3,033,817 3,670,445 983,351 7,687,613 4,326,568 297,928 12,312,109 ----------- ---------- ---------- ---------- ---------- ---------- ----------- Income (loss) from operations.......... (2,155,932) 2,565,140 (1,143,138) (733,930) 3,045,747 (459,512) 1,852,305 Interest income (expense).............. 848,510 (1,104,633) 1,104,633 (5) 848,510 (1,733,591) 1,689,591 (5) 804,510 ----------- ---------- ---------- ---------- ---------- ---------- ----------- Income (loss) before income taxes.......... (1,307,422) 1,460,507 (38,505) $ 114,580 $1,312,156 $1,230,079 $ 2,656,815 Provision for income taxes................. (45,000)(6) (45,000) (991,000)(6) (1,036,000) ----------- ---------- ---------- ---------- ---------- ---------- ----------- Net income (loss)...... $(1,307,422) $1,460,507 $ (83,505) $ 69,580 $1,312,156 $ 239,079 $ 1,620,815 =========== ========== ========== ========== ========== ========== =========== Net income (loss) per common share(7)....... $ (0.10) $ 0.01 $ 0.11 =========== ========== =========== Weighted average number of common and equivalent shares outstanding during the period(7)......... 12,652,110 13,849,898 15,260,204 =========== ========== ===========
F-2 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
PRO FORMA COMPLETED COMPLETED PROPOSED ACTUAL ACQUISITIONS ADJUSTMENTS ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA Revenue: Room revenue........... $ 1,137,841 $778,821 $ $ 1,916,662 $1,827,570 $ $ 3,744,232 Other revenue.......... 32,988 30,016 63,004 97,123 160,127 ----------- -------- ------- ----------- ---------- --------- ----------- Total revenue........ 1,170,829 808,837 1,979,666 1,924,693 3,904,359 Costs and expenses: Property operating expenses.............. 442,540 288,123 730,663 790,051 1,520,714 Corporate operating and property management expenses... 1,580,655 58,937 1,639,592 145,739 (11,260)(2) 1,774,071 Site selection costs... 823,733 823,733 823,733 Depreciation and amortization.......... 203,343 73,199 20,238 (4) 296,780 186,215 103,785 (4) 586,780 ----------- -------- ------- ----------- ---------- --------- ----------- Total costs and expenses............ 3,050,271 420,259 20,238 3,490,768 1,122,005 92,525 4,705,298 Income (loss) from operations.......... (1,879,442) 388,578 (20,238) (1,511,102) 802,688 (92,525) (800,939) Interest income (expense).............. 1,450,132 (64,151) 64,151 (5) 1,450,132 (424,570) 399,570 (5) 1,425,132 ----------- -------- ------- ----------- ---------- --------- ----------- Income (loss) before income taxes........... (429,310) 324,427 43,913 (60,970) 378,118 307,045 624,193 Provision for income taxes.................. (243,000)(6) (243,000) ----------- -------- ------- ----------- ---------- --------- ----------- Net income (loss)....... $ (429,310) $324,427 $43,913 $ (60,970) $ 378,118 $ 64,045 $ 381,193 =========== ======== ======= =========== ========== ========= =========== Net loss per common share(7)............... $ (0.02) $ (0.00) $ 0.02 =========== =========== =========== Weighted average number of common and equivalent shares outstanding during the period(7).............. 22,467,393 23,025,192 24,785,595 =========== =========== ===========
- --------------------- (1) To eliminate the estimated revenues and expenses for the Acquired Facilities, the Marietta Facility, the KHEC Facility, and the M & M Facilities for the period January 1, 1995 through January 8, 1995 in order to present a period comparable to the historical period for the Company. (2) To eliminate in consolidation management fees charged to the Marietta Facility prior to being acquired by the Company and franchise fees incurred by KHEC. (3) Reflects estimated increases in: (i) salaries and benefits--$238,000; (ii) state capital-based taxes--$150,000; (iii) audit and tax fees--$75,000; (iv) legal expenses--$37,000; (v) directors' and officers' insurance-- $150,000; (vi) additional expenses--$150,000, as if the Company had been a public company on the date of inception. (4) To adjust depreciation and amortization expense to reflect the expense based on the purchase price paid and to be paid by the Company for the Acquired Facilities, the Marietta Facility, the KHEC Facility, and the M & M Facilities for any period prior to acquisition. (5) To eliminate non-continuing interest expense paid by the Acquired Facilities, the Marietta Facility, the KHEC Facility, and the M & M Facilities prior to acquisition, net of interest income earned by the Company on the amount of cash used in the acquisitions. (6) To provide for estimated income tax expense. (7) See notes 2, 5 and 14 to the Company's consolidated financial statements. F-3 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 (UNAUDITED) This unaudited pro forma consolidated balance sheet is presented as if the June 1996 Offering had been completed and the acquisition of the Gwinnett Facility and the proposed acquisitions of the KHEC Facility and the M&M Facilities had occurred on March 31, 1996. Such pro forma information is based upon the consolidated balance sheet of the Company and the balance sheets of Gwinnett, KHEC, and the M&M Facilities as of March 31, 1996. It should be read in conjunction with the financial statements listed in the index on page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. This unaudited pro forma consolidated balance sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of March 31, 1996, nor does it purport to represent the future financial position of the Company.
ACQUISITIONS SUBSEQUENT TO MARCH 31, 1996 AND PROPOSED ACTUAL ACQUISITIONS ADJUSTMENTS PRO FORMA ASSETS Current assets: Cash and cash equivalents.......... $104,010,918 $ 628,882 $ (3,098,882)(1) $391,358,418 289,817,500 (2) Refundable deposits... 621,654 621,654 Supply inventories.... 291,266 88,050 281,950 (1) 661,266 Prepaid expenses...... 366,142 2,198 (2,198)(1) 366,142 Other current assets.. 56,768 180,808 (180,808)(1) 56,768 ------------ ----------- ------------ ------------ Total current assets............. 105,346,748 899,938 286,817,562 393,064,248 ------------ ----------- ------------ ------------ Property and equipment, net.................... 51,658,313 20,257,229 20,347,771 (1) 92,263,313 Site deposits and preacquisition costs... 3,913,811 3,913,811 Deferred loan costs..... 5,294,114 8,327 (8,327)(1) 5,294,114 Other assets............ 156,741 102,532 (102,532)(1) 156,741 ------------ ----------- ------------ ------------ $166,369,727 $21,268,026 $307,054,474 $494,692,227 ============ =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable...... $ 925,504 $ 136,042 $ (136,042)(1) $ 925,504 Accrued salaries and related expenses..... 67,855 22,177 (22,177)(1) 67,855 Due to related parties.............. 71,845 211,334 (211,334)(1) 71,845 Other accrued expenses............. 440,612 311,636 (891)(1) 751,357 Deferred revenue...... 330,856 19,087 (19,087)(1) 330,856 Current maturities of long-term debt....... 6,335,578 (6,335,578)(1) ------------ ----------- ------------ ------------ Total current liabilities........ 1,836,672 7,035,854 (6,725,109) 2,147,417 ------------ ----------- ------------ ------------ Long-term debt.......... 13,564,248 (13,564,248)(1) Shareholders' Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued or outstanding.......... Common stock, $.01 par value, 200,000,000 shares authorized, 22,853,092 and 34,039,192 shares issued and outstanding for Actual and Pro Forma, respectively......... 228,531 226,733 (212,622)(1) 340,392 97,750 (2) Additional paid in capital.............. 166,041,256 30,270 38,149,874 (1) 493,941,150 289,719,750 (2) Due from affiliated companies and prepaid services............. (521,395) 521,395 (1) Accumulated (deficit)/retained earnings............. (1,736,732) 932,316 (932,316)(1) (1,736,732) ------------ ----------- ------------ ------------ Total shareholders' equity............. 164,533,055 667,924 327,343,831 492,544,810 ------------ ----------- ------------ ------------ $166,369,727 $21,268,026 $307,054,474 $494,692,227 ============ =========== ============ ============
- --------------------- (1) To reflect the purchase adjustments relating to the acquisition of the Gwinnett Facility for 172,100 shares of Common Stock and the proposed acquisitions of the KHEC Facility and the M&M Facilities assuming the acquisitions are completed through the issuance of approximately 101,000 and 1,138,000 shares, respectively, of Common Stock and to reflect the use of $2,000,000 of the Company's cash representing the estimated costs to remodel and to convert the KHEC property to an extended stay lodging facility and the use of $470,000 of the Company's cash to retire debt of the M&M Facilities assumed by the Company. (2) To reflect the estimated net proceeds of the June 1996 Offering. F-4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying consolidated balance sheet of Extended Stay America, Inc. and subsidiaries (the "Company") as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the period from January 9, 1995 (inception) through December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Extended Stay America, Inc. and subsidiaries as of December 31, 1995 and the consolidated results of their operations and their cash flows for the period from January 9, 1995 (inception) through December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina January 26, 1996 F-5 EXTENDED STAY AMERICA, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, 1995 1996 ASSETS ------------ ------------ (UNAUDITED) Current assets: Cash and cash equivalents (including securities purchased under agreements to resell of $122,904,142 at December 31, 1995).............. $123,357,510 $104,010,918 Refundable deposits.............................. 344,064 621,654 Supply inventories............................... 92,817 291,266 Prepaid expenses................................. 318,541 366,142 Other current assets............................. 20,758 56,768 ------------ ------------ Total current assets........................... 124,133,690 105,346,748 ------------ ------------ Property and equipment, net........................ 18,205,537 51,658,313 Site deposits and preacquisition costs............. 1,931,215 3,913,811 Deferred loan costs................................ 5,293,119 5,294,114 Other assets....................................... 55,088 156,741 ------------ ------------ $149,618,649 $166,369,727 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................. $ 670,708 $ 925,504 Accrued salaries and related expenses............ 271,230 67,855 Due to related parties........................... 133,149 71,845 Other accrued expenses........................... 691,117 440,612 Deferred revenue................................. 330,856 Note payable..................................... 630,200 ------------ ------------ Total current liabilities...................... 2,396,404 1,836,672 ------------ ------------ Commitments Shareholders' Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued and outstanding..................................... Common stock, $.01 par value, 200,000,000 shares authorized, 22,130,855 and 22,853,092 shares issued and outstanding, respectively............ 221,309 228,531 Additional paid in capital....................... 148,308,358 166,041,256 Accumulated deficit.............................. (1,307,422) (1,736,732) ------------ ------------ Total shareholders' equity..................... 147,222,245 164,533,055 ------------ ------------ $149,618,649 $166,369,727 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-6 EXTENDED STAY AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE PERIOD FROM PERIOD FROM JANUARY 9, JANUARY 9, 1995 1995 FOR THE (INCEPTION) (INCEPTION) THREE MONTHS THROUGH THROUGH ENDED DECEMBER MARCH 31, MARCH 31, 31, 1995 1995 1996 ----------- ----------- ------------ (UNAUDITED) (UNAUDITED) Revenue: Room revenue........................... $ 817,133 $ $1,137,841 Management fees........................ 17,775 Other revenue.......................... 42,977 32,988 ----------- ---------- Total revenue........................ 877,885 1,170,829 ----------- ---------- Costs and expenses: Property operating expenses............ 332,523 442,540 Corporate operating and property management expenses (including $386,000 to related parties for the period ending December 31, 1995)...... 2,042,039 195,823 1,580,655 Site selection costs................... 512,529 52,778 823,733 Depreciation and amortization.......... 146,726 203,343 ----------- ---------- ---------- Total costs and expenses............. 3,033,817 248,601 3,050,271 ----------- ---------- ---------- Loss from operations................. (2,155,932) (248,601) (1,879,442) Interest income.......................... 848,510 1,450,132 ----------- ---------- ---------- Net loss............................. $(1,307,422) $ (248,601) $ (429,310) =========== ========== ========== Net loss per common share............ $ (0.10) $ (0.02) $ (0.02) =========== ========== ========== Weighted average number of common and equivalent shares outstanding during the period.......................... 12,652,110 11,489,017 22,467,393 =========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-7 EXTENDED STAY AMERICA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 9, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
ADDITIONAL COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT Issuance of common stock, net of issuance costs of $5,709,337... 22,130,855 $221,309 $148,308,358 Net loss........................ $(1,307,422) ---------- -------- ------------ ----------- Balances, December 31, 1995..... 22,130,855 221,309 148,308,358 (1,307,422) Issuance of common stock (unaudited).................... 722,237 7,222 17,845,642 Additional payouts of initial public offering costs (unaudited).................... (112,744) Net loss (unaudited)............ (429,310) ---------- -------- ------------ ----------- Balances, March 31, 1996 (unaudited).................... 22,853,092 $228,531 $166,041,256 $(1,736,732) ========== ======== ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. F-8 EXTENDED STAY AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM FOR THE JANUARY 9, 1995 PERIOD FROM (INCEPTION) JANUARY 9, 1995 THROUGH (INCEPTION) FOR THE THREE DECEMBER 31, THROUGH MARCH 31, MONTHS ENDED 1995 1995 MARCH 31, 1996 --------------- ----------------- -------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss..................... $ (1,307,422) $(248,601) $ (429,310) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization.............. 146,726 203,343 Write-off of site deposits and preacquisition costs.. 288,655 187,418 Change in: Refundable deposits....... (45,516) (3,371) (117,590) Supply inventories........ (92,817) (24,930) Prepaid expenses.......... (318,541) (5,345) (51,154) Other current assets...... (26,284) (36,010) Accounts payable.......... 65,504 205,361 Accrued expenses.......... 355,397 89,537 224,915 Due to related parties.... 133,149 54,857 (133,149) Deferred revenue.......... 330,856 ------------ --------- ------------ Net cash (used in) provided by operating activities.............. (801,149) (112,923) 359,750 ------------ --------- ------------ Cash flows from investing activities: Acquisition of extended stay properties.................. (2,342,346) (355,579) Additions to property and equipment................... (13,230,022) (281,301) (15,356,090) Payments for site deposits and preacquisition costs.... (2,579,667) (120,086) (2,738,578) Refunds of deposits on property sites.............. 191,666 240,000 Payments for other assets.... (65,436) (60,746) ------------ --------- ------------ Net cash used in investing activities.... (18,025,805) (401,387) (18,270,993) ------------ --------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock................ 143,882,880 Additions to deferred loan costs....................... (1,698,416) (21,698) Additions to prepaid registration costs.......... (52,035) Proceeds from related party loans....................... 6,135,462 521,031 Payments on related party loans....................... (6,135,462) Payment of note payable...... (630,200) Payments of initial public offering costs.............. (731,416) ------------ --------- ------------ Net cash provided by (used in) financing activities.............. 142,184,464 521,031 (1,435,349) ------------ --------- ------------ Increase (decrease) in cash.................... 123,357,510 6,721 (19,346,592) Cash and cash equivalents at beginning of period.......... 123,357,510 ------------ --------- ------------ Cash and cash equivalents at end of period................ $123,357,510 $ 6,721 $104,010,918 ============ ========= ============ Noncash investing and financing transactions: Issuance of common stock for acquisition of extended stay properties.................. $ 1,700,000 $ 17,852,864 ============ ============ Capitalized or deferred items included in accounts payable and accrued liabilities..... $ 1,212,154 $ 454,178 $ 654,639 ============ ========= ============ Note payable for purchase of property site............... $ 630,200 ============ Issuance of common stock for deferred loan costs......... $ 3,574,000 ============
The accompanying notes are an integral part of the consolidated financial statements. F-9 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Extended Stay America, Inc. (the "Company") was incorporated on January 9, 1995 as a Delaware corporation to develop, own, and operate extended stay lodging facilities designed to appeal to value-conscious guests. Operations of the Company's first extended stay facility commenced on August 1, 1995. The Company acquired a second extended stay facility on August 18, 1995 (Note 5). The Company's current operating subsidiaries are ESA Development, Inc. and ESA Properties, Inc., which acquire and develop properties, and ESA Management, Inc., which provides management services for all of the lodging facilities owned by the Company and its subsidiaries. The Company expects that each lodging facility will be owned by a separate single-purpose subsidiary formed for such purpose. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Pervasiveness 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. The Company maintained deposits totaling $123,357,510 at December 31, 1995, with one bank. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. The Company invests excess funds in an overnight sweep account with NationsBank which invests in short-term, interest-bearing reverse repurchase agreements. On December 31, 1995, the Company had invested $122,904,142 in U.S. Government securities under agreements to resell. Due to the short-term nature of these investments, the Company did not take possession of the securities, which were instead held by the bank. The market value of the securities held pursuant to the agreements approximates the carrying amount. Supply Inventories. Supply inventories consist principally of linen, cleaning and other room supplies and are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Property and Equipment. Property and equipment is stated at cost. The Company capitalizes interest, salaries and related costs for site selection, design and construction supervision. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Buildings and improvements...................................... 40 years Furniture, fixtures and equipment............................... 3-7 years
For the period from January 9, 1995 through December 31, 1995 the Company incurred interest of $98,217 all of which was capitalized and included in the cost of buildings and improvements. F-10 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Preacquisition Costs. The Company incurs costs related to the acquisition of property sites. These costs are capitalized when it is probable that a site will be acquired. These costs are reclassified to property and equipment upon acquisition. In the event the acquisition is not consummated, the costs are charged to site selection costs. All other site selection costs are expensed as incurred. Deferred Loan Costs. The Company has incurred costs in obtaining financing. These costs have been deferred and will be amortized over the life of the respective loans using the effective yield method. Preopening Costs. The Company capitalizes compensation and other training- related costs incurred prior to the opening of a property. Included in other current assets at December 31, 1995 are costs of $7,736, net of accumulated amortization of $5,526, which are being amortized over a period of twelve months. Organization Costs. Organization costs at December 31, 1995 of $41,388 are included in other assets, net of accumulated amortization of $10,348, and are being amortized over sixty months using the straight-line method. Income Taxes. Income taxes for the Company are determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use of a liability method in which deferred income taxes are provided for temporary differences between the financial reporting and income tax basis of assets and liabilities using the income tax rates, under existing legislation, expected to be in effect at the date such temporary differences are expected to reverse. Revenue Recognition. Room revenue and other income are recognized when earned. Management fees of $17,775 were recognized as earned and represent fees charged to Welcome Inn America 89-1, L.P. for the management of its extended stay property for the period May 1, 1995 through August 18, 1995 prior to the acquisition of such property by the Company (Note 5). Business Segment. The Company operates principally in one business segment which is to develop, own, and operate extended stay lodging facilities. Net Loss Per Common Share. The net loss per common share amount in the statement of operations for the three months ended March 31, 1996 has been computed in accordance with Accounting Principles Board Opinion (APB) No. 15. The net loss per common share amount for the year ended December 31, 1995 and for the three months ended March 31, 1995 has been computed in accordance with a Staff Accounting Bulletin (SAB) of the Securities and Exchange Commission. According to the SAB, equity securities, including stock, warrants, options and other potentially dilutive securities, issued within a twelve-month period prior to an initial public offering of common stock must be treated as common stock equivalents when computing earnings per share for all periods presented if the issue price of the common stock or the exercise price of the warrants, options or other potentially dilutive securities is substantially less than the proposed initial public offering price, including loss years where the impact of the incremental shares is anti-dilutive. As permitted by the SAB, the treasury stock method has been used in determining the weighted average number of shares of common stock outstanding during the periods presented. On October 19, 1995, the Board of Directors of the Company declared a 210- for-1 stock split effected in the form of a dividend. Accordingly, all shares and per share amounts have been adjusted retroactively to reflect this event. Unaudited Interim Financial Statements. The unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles applicable to interim financial statements and include all adjustments which are, in the F-11 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three months ended March 31, 1995 and 1996 are not necessarily indicative of results to be expected for a full year. All data at March 31, 1995 and 1996 and for each of the three-month periods then ended are unaudited. NOTE 3--PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 1995 Land and improvements, including land under current development................................................ $ 9,074,172 Buildings and improvements.................................. 5,350,107 Furniture, fixtures and equipment........................... 1,197,481 Construction in progress.................................... 2,714,629 ----------- 18,336,389 Less accumulated depreciation............................... 130,852 ----------- Total property and equipment............................ $18,205,537 ===========
The Company had commitments to construct additional extended stay properties totaling approximately $23,000,000 at December 31, 1995. NOTE 4--OPTIONS TO PURCHASE PROPERTY SITES As of December 31, 1995, the Company had options to purchase parcels of real estate at 32 locations in 14 states. The Company has paid $710,000 in connection with these options. If for any reason the Company does not acquire these parcels, the amounts paid in connection with the options are generally refundable. These amounts are included in site deposits and preacquisition costs. NOTE 5--ACQUISITION OF EXTENDED STAY PROPERTIES On August 18, 1995 the Company acquired an existing extended stay property from Welcome Inn America 89-1, L.P. for $4,042,346 which was paid for by the issuance of 357,000 shares of common stock valued at $1,700,000 and payment of $2,342,346 in cash. On January 26, 1996, the Company acquired an existing extended stay property from Apartment/Inn, L.P. for approximately $8,324,000 which was paid for by the issuance of 293,629 shares of common stock plus the payment of related expenses of approximately $106,000 in cash. On February 23, 1996, the Company acquired two existing extended stay properties from Hometown Inn I, LTD and Hometown Inn II, LTD for approximately $9,603,000 which was paid for by the issuance of 428,608 shares of common stock and $75,000 in cash plus the payment of related expenses of $175,000 in cash. (Unaudited) These acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of operations of the properties are included in the Consolidated Statement of Operations from the dates of acquisition. F-12 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following unaudited pro forma condensed statements of operations of the Company have been updated to include all acquisitions occurring through March 31, 1996, as discussed above, and the issuance of shares to acquire and to fund the cash portion of the purchase prices as if the acquisitions had occurred on January 9, 1995 (the date of inception of the Company). Accordingly, the unaudited pro forma statement of operations for the period January 9, 1995 through December 31, 1995 differs from the statement included in the Company's 1995 annual report to shareholders. This statement also reflects estimated incremental expenses to operate as a publicly held company as if the Company were publicly held on the date of inception. This pro forma condensed statement of operations is not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed as of January 9, 1995, nor does it purport to represent the results of operations for future periods.
PRO FORMA FOR THE PERIOD FROM PRO FORMA FOR THE PERIOD FROM PRO FORMA FOR THE JANUARY 9, 1995 JANUARY 9, 1995 THREE MONTHS (INCEPTION) THROUGH (INCEPTION) THROUGH ENDED DECEMBER 31, 1995 MARCH 31, 1995 MARCH 31, 1996 (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenue: Room revenue.......... $ 5,434,720 $1,128,223 $1,595,909 Other revenue......... 253,351 57,791 48,954 ----------- ---------- ---------- Total revenue....... 5,688,071 1,186,014 1,644,863 ----------- ---------- ---------- Costs and expenses: Property operating expenses............. 2,332,561 522,856 595,344 Corporate operating and property management expenses.. 3,144,491 473,658 1,619,616 Site selection costs.. 512,529 52,778 823,733 Depreciation and amortization......... 881,514 213,486 258,780 ----------- ---------- ---------- Total costs and expenses........... 6,871,095 1,262,778 3,297,473 ----------- ---------- ---------- Loss from operations......... (1,183,024) (76,763) (1,652,610) Interest income....... 848,510 1,450,132 ----------- ---------- ---------- Net loss............ $ (334,514) $ (76,763) $ (202,478) =========== ========== ========== Net loss per common share and equivalent......... $ (0.02) $ (0.01) $ (0.01) =========== ========== ========== Weighted average number of common and equivalent shares outstanding during the period.. 13,589,464 12,493,366 22,853,092 =========== ========== ==========
NOTE 6--NOTE PAYABLE In conjunction with the acquisition of a property site, the Company issued a note payable to the seller in the amount of $630,200. The note bore interest at a rate of three percent per year and was paid on January 2, 1996. The note was collateralized by a deed of trust on the property. NOTE 7--PREFERRED STOCK Shares of preferred stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. Prior to issuance of shares of each series, the Board will designate for each such series, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption, as are permitted by law. No shares of preferred stock are outstanding and the Company has no present plans to issue any shares of preferred stock. F-13 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--STOCK OPTION PLANS The Company has adopted the 1995 Employee Stock Option Plan to attract and retain employees and consultants. Under the plan, options may be granted with respect to a total of not more than 1,677,060 shares of common stock, subject to antidilution and other adjustment provisions. No options may be granted under the plan after August 18, 2005. The options vest over a four-year period. During the period January 9, 1995 through December 31, 1995, the compensation committee granted, under the plan, 1,132,501 ten-year options to purchase common stock at exercise prices per share ranging from $4.76 to $13.00. The option price is equal to the fair market value of the stock on the date of grant, as determined by the Board of Directors. No options to purchase common stock under the plan are currently exercisable. During the period January 1, 1996 through March 31, 1996, the compensation committee granted under the 1995 plan 544,372 additional options to purchase common stock at exercise prices per share ranging from $21.00 to $30.25. (Unaudited) Pursuant to an agreement with an officer of ESA Development, Inc. ("ESA Development"), such officer was granted options in June 1995 to purchase a total of 1,437.5 shares of ESA Development common stock. In March 1996, the agreement and options were terminated. (Unaudited) The Company has adopted the 1995 Stock Option Plan for Non-Employee Directors. Under the plan, options may be granted with respect to a total of not more than 240,000 shares of common stock of the Company subject to the antidilution and other adjustment provisions. Each option shall be for a term of ten years and shall become exercisable six months after the date of its grant. Options to purchase an aggregate of 80,000 shares of the Company's common stock were granted to non-employee directors of the Company effective upon the Company's initial public offering of its common stock on December 13, 1995 at an exercise price per share of $13.00 (the initial public offering price). Pursuant to the plan, subsequent non-employee directors of the Company will be granted a one-time option to purchase 20,000 shares of the Company's common stock upon their initial election to the Board of Directors of the Company at a price equal to the fair market value of the stock on the date of grant. During the four-year period following the initial election of a non- employee director to the Board of Directors, an additional option covering 5,000 shares of common stock of the Company shall be granted to such non- employee director on each anniversary of such non-employee director's initial option grant, provided that not more than four such additional options shall be granted to any one non-employee director. No options may be granted under the plan after November 17, 2005. As of December 31, 1995, no options to purchase common stock under the plan were exercisable. Effective January 24, 1996, the Company has adopted (subject to shareholder approval) the 1996 Employee Stock Option Plan to attract and retain employees and consultants. Under the plan, options may be granted with respect to a total of not more than 2,500,000 shares of common stock, subject to antidilution and other adjustment provisions. No options may be granted under the plan after January 24, 2006. The options vest over a four-year period. During the period January 1, 1996 through March 31, 1996, the compensation committee granted under the 1996 plan 679,385 options to purchase common stock at exercise prices per share ranging from $21.00 to $25.88 under this plan. (Unaudited) NOTE 9--MORTGAGE FACILITY On October 31, 1995, the Company executed a mortgage facility (the "Mortgage Facility") for up to $200 million to be used to finance, on a long-term basis, newly constructed extended stay lodging facilities. F-14 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Mortgage Facility provides that after the first $100 million of borrowings, the availability of the next $60 million is contingent upon (1) the Company's operating facilities meeting certain debt coverage ratios, and (2) the successful completion of an initial public offering of the Company's common stock which was completed on December 19, 1995. An additional $40 million will become available at the option of the Company, subject to the Company having at least 10 facilities which meet certain debt coverage ratios. Draws under the Mortgage Facility will be made on an individual property basis in amounts ranging from 50% to 75% of construction costs, depending on the operating results of the individual property. The Mortgage Facility provides for the following fees to be paid by the Company: (1) a commitment fee, $1,600,000 of which was paid pursuant to the execution of the Mortgage Facility $400,000 of which will be paid if the availability under the Mortgage Facility is increased; (2) a drawdown fee of 1% of the funds loaned under the Mortgage Facility; and (3) a fee paid by the issuance of 750,540 shares of common stock of the Company at the time the Mortgage Facility was executed. These fees, which include the estimated fair market value of the common stock issued to the lender, will be amortized over the life of the Mortgage Facility using the effective yield method, thus increasing the effective interest rate above the stated interest rate discussed below. Additionally, the lender was provided the right, which it has exercised, to purchase 500,430 shares of common stock at a price of $4.76 per share upon the execution of the Mortgage Facility. The Mortgage Facility also provides for additional fees in the event of termination or nonusage of amounts in excess of $100 million of up to 2.0% of the portion of the facility so terminated or unused. All amounts borrowed under the Mortgage Facility will be fully guaranteed by the Company and will be collateralized by, among other things, first mortgages on the properties financed and assignment of leases, rents and security deposits related to each property. The amounts drawn under the Mortgage Facility will bear interest at a base rate equal to the ten-year U.S. Treasury securities rate plus 4.0% at the times the loans are made. Advances under the Mortgage Facility will be provided on an interest only basis for a pre-stabilization period and will be amortized based on a 25-year schedule thereafter with a final maturity on the December 31 following the tenth anniversary of the date that the loan begins to amortize. Prepayment of mortgage loans may be made subject to specified penalties provided certain conditions are met. Such prepayments may be made without penalty within five years of their respective final maturity dates. The Mortgage Facility provides that the Company must maintain a tangible net worth of not less than $40,000,000 and amounts due under the Mortgage Facility may at any time become immediately due and payable if the current members of the Board of Directors cease to constitute a majority of the board. The Company must place $22,500,000 in an escrow account in the name of the lender prior to obtaining the first loan and an additional $22,500,000 once the loan amount exceeds $33,750,000. Funds deposited in the escrow account will be classified as noncurrent and will be used to acquire and construct extended stay lodging facilities. The loan also requires the Company to fund certain other escrow accounts. The Company's dividends cannot exceed 50% of the excess of its net income for any period over its cumulative losses not previously applied in computing the limitation. The Company believes that there is no material difference in the carrying amount (including the terms and conditions outlined above) and estimated fair value of the Company's Mortgage Facility. NOTE 10--RELATED PARTY TRANSACTIONS During the period ended December 31, 1995, the Company borrowed under an informal revolving loan agreement from shareholders and their affiliates, which was paid on August 18, 1995. The maximum amount outstanding during the period was approximately $4,476,000. Interest payments of approximately $92,000 were made on the loans from shareholders and their affiliates, all of which were capitalized and included in the cost of buildings and improvements. F-15 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company leases office space on a month-to-month basis from a company on whose board the Chief Executive Officer of the Company serves. The Company recognized rent expense of $18,000 through December 31, 1995 related to this lease. In addition, the Company leases office space on a month-to-month basis from a company owned by the Chairman of the Board of the Company. The Company recognized rent expense of $15,000 through December 31, 1995 related to this lease. During 1995, the Company incurred charges of approximately $412,000 from a company controlled by a shareholder for the use of airplanes, including $133,000 in amounts due to related parties at December 31, 1995. Approximately $70,000 of such charges were incurred in connection with the Company's initial public offering and approximately $342,000 is included in corporate operating and property management expenses. Approximately $126,000 in charges were incurred from a law firm, one of the partners of which is a director of the Company. Substantially all of such charges were incurred in connection with the Company's organization, initial public offering and obtaining the Mortgage Facility. The Company acquired a property site for approximately $562,000 in cash from a partnership in which certain shareholders are partners during 1995. NOTE 11--INCOME TAXES The Company adopted SFAS 109 upon inception. Under the provisions of SFAS 109, there was no income tax expense on the net loss for the period ended December 31, 1995. Accordingly, there is no current nor deferred federal or state income tax expense in the initial period. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 are presented below: Deferred tax assets: Start up expenses capitalized for tax......................... $242,000 Net operating loss carryforward............................... 155,000 Other......................................................... 78,000 -------- Total gross deferred tax asset.............................. 475,000 Less valuation allowance........................................ (453,000) -------- Net deferred tax asset...................................... 22,000 -------- Deferred tax liability: Fixed assets, due to differences in depreciation.............. (22,000) -------- Net deferred tax liability.................................. $ -0- ========
A valuation allowance of $453,000 was established in the Company's initial period. The Company believes the reversal of existing taxable temporary differences will be sufficient to recognize the remaining deferred tax assets. At December 31, 1995, the Company has net operating loss carryforwards for federal income tax purposes of approximately $450,000, which are available to offset future federal taxable income, if any, through 2010. No income taxes were paid during the period January 9, 1995 through December 31, 1995. NOTE 12--INITIAL PUBLIC OFFERING On December 19, 1995, the Company closed an initial public offering of 5,060,000 shares of its common stock at a public offering price of $13.00 per share and a concurrent offering to existing shareholders of F-16 2,067,825 shares of common stock at an offering price of $12.09 per share, being the initial public offering price per share less the underwriting discounts and commissions. The proceeds to the Company of such offerings were approximately $85,275,000, net of estimated offering expenses. NOTE 13--EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement requires the Company to identify properties for which it has committed to an exit plan or which may be otherwise impaired. The fixed assets for such properties must be written down to fair market value. The Company anticipates that the adoption of SFAS 121, required for fiscal years beginning after December 15, 1995, will not result in a reduction of net fixed assets or an increase in expenses in the fiscal year 1996 statement of operations. The FASB has also issued Statement No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995. Under SFAS 123, companies are encouraged but not required to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value accounting rules. Companies that choose not to record compensation expense under the new rules will be required to disclose pro forma net income and earnings per share under the new method. The Company has not yet determined the financial statement impact of SFAS 123 and has elected not to recognize the impact of this pronouncement in its fiscal 1995 statement of operations, but will disclose as required in the fiscal 1996 financial statements on a comparative basis the effect of SFAS 123 on net income and earnings per share. NOTE 14--SUBSEQUENT EVENTS (UNAUDITED) On May 1, 1996, the Company entered into an agreement to acquire a traditional lodging facility, which the Company intends to remodel, for a purchase price of approximately $3.0 million. The Company expects to pay the purchase price by delivering shares of Common Stock. Consummation of the proposed acquisition is subject to a number of conditions. On May 9, 1996, the Board of Directors of the Company declared a dividend of one additional share of Common Stock for each share issued as of the close of business on July 5, 1996, to be distributed on July 19, 1996, thereby effecting a 2-for-1 stock split. The accompanying financial statements have not been retroactively restated. Net loss per common share for the periods presented on the statements of operations would be one-half of the amounts currently reflected. On May 10, 1996, the Company acquired a 59-room extended stay lodging facility and adjacent land for a purchase price of approximately $3.3 million in cash. This acquisition was accounted for using the purchase method of accounting. On May 17, 1996, the Company entered into a credit facility agreement which provides up to $300 million in mortgage financing, subject to certain conditions and limitations, for completed facilities. On May 24, 1996, the Company reduced the size of an existing mortgage facility from $200 million to $100 million. On June 25, 1996, the Company acquired for 172,100 shares of Common Stock and approximately $23,000 in cash, an extended stay lodging facility. This acquisition was accounted for using the purchase method of accounting. On June 26, 1996, the Company entered into agreements to acquire four extended stay lodging facilities. In addition to assuming liability for certain leases of personal property, the Company expects to issue 1,138,000 shares of Common Stock as consideration for these acquisitions. Consummation of these acquisitions is subject to a number of conditions. The Company entered into (i) a 10-year lease for a suite at Joe Robbie Stadium for a base rental of $115,000 per year, subject to certain additional charges and periodic escalation, and (ii) a three-year lease for a suite at Homestead Motor Sports Complex for a base rental of $53,250 per year, subject to certain additional charges. The Chairman of the Company's Board of Directors owns Joe Robbie Stadium and has an approximately 50% interest in Homestead Motor Sports Complex. F-17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying statements of operations, partners' deficit and cash flows of Welcome Inn America 89-1, L.P. for each of the two years ended December 31, 1994 and the period from January 1, 1995 through August 18, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of Welcome Inn America 89-1, L.P. operations and its cash flows for each of the two years in the period ended December 31, 1994 and the period from January 1, 1995 through August 18, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina October 16, 1995 F-18 WELCOME INN AMERICA 89-1, L.P. STATEMENTS OF OPERATIONS
FOR THE FOR THE YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1995 -------------------- THROUGH 1993 1994 AUGUST 18, 1995 Revenue: Room revenue............................. $927,593 $1,009,872 $670,954 Other, net............................... 71,778 69,415 41,883 -------- ---------- -------- Total revenue.......................... 999,371 1,079,287 712,837 -------- ---------- -------- Costs and expenses: Property operating expenses.............. 452,951 495,182 322,337 Property management fees to partners..... 104,051 66,564 44,880 Depreciation and amortization............ 138,987 141,362 95,546 -------- ---------- -------- Total costs and expenses............... 695,989 703,108 462,763 -------- ---------- -------- Income from operations................. 303,382 376,179 250,074 Interest expense: Bank..................................... 185,518 211,607 184,226 Partners................................. 196,788 149,032 87,926 -------- ---------- -------- Total interest expense................. 382,306 360,639 272,152 -------- ---------- -------- Net income (loss)...................... $(78,924) $ 15,540 $(22,078) ======== ========== ========
The accompanying notes are an integral part of the financial statements. F-19 WELCOME INN AMERICA 89-1, L.P. STATEMENTS OF PARTNERS' DEFICIT FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1994 AND THE PERIOD FROM JANUARY 1, 1995 THROUGH AUGUST 18, 1995 Balance, January 1, 1993............................................ $(611,817) Net loss............................................................ (78,924) --------- Balance, December 31, 1993.......................................... (690,741) Net income.......................................................... 15,540 --------- Balance, December 31, 1994.......................................... (675,201) Net loss............................................................ (22,078) --------- Balance, August 18, 1995............................................ $(697,279) =========
The accompanying notes are an integral part of the financial statements. F-20 WELCOME INN AMERICA 89-1, L.P. STATEMENTS OF CASH FLOWS
FOR THE FOR THE YEAR ENDED DECEMBER PERIOD FROM 31, JANUARY 1, 1995 ---------------------- THROUGH 1993 1994 AUGUST 18, 1995 Cash flows from operating activities: Net income (loss)..................... $ (78,924) $ 15,540 $(22,078) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation......................... 126,110 127,456 86,760 Amortization......................... 12,877 13,906 8,786 Change in: Accounts receivable................. 106 (7,115) 117 Other current assets................ (496) (2,851) 5,672 Accounts payable.................... 3,737 (3,801) 43,481 Accrued expenses.................... 8,361 (1,483) (17,350) Accrued interest.................... (68,493) (112,629) 79,628 Accrued salaries.................... (1,625) 496 (10,338) --------- ----------- -------- Net cash provided by operating activities............................ 1,653 29,519 174,678 --------- ----------- -------- Cash flows from investing activities: Expenditures for buildings and improvements......................... (30,547) (660) Purchases of furniture, fixtures and equipment............................ (5,052) (31,921) --------- ----------- -------- Net cash used in investing activities.. (35,599) (660) (31,921) --------- ----------- -------- Cash flows from financing activities: Proceeds from long-term debt.......... 2,500,000 Proceeds from notes payable to partners............................. 260,000 Principal payments on long-term debt.. (209,333) (1,874,667) (96,000) Principal payments on notes payable to partners............................. (693,781) Additions to deferred loan costs...... (18,000) --------- ----------- -------- Net cash provided by (used in) financing activities.................. 32,667 (68,448) (96,000) --------- ----------- -------- Net increase (decrease) in cash........ (1,279) (39,589) 46,757 Cash at beginning of periods........... 123,676 122,397 82,808 --------- ----------- -------- Cash at end of periods................. $ 122,397 $ 82,808 $129,565 ========= =========== ======== Supplemental cash flow disclosure, interest paid......................... $ 450,799 $ 473,268 $192,524 ========= =========== ========
The accompanying notes are an integral part of the financial statements. F-21 WELCOME INN AMERICA 89-1, L.P. NOTES TO FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Welcome Inn America 89-1, L.P. (the "Partnership") is a Georgia limited partnership that operates an extended stay facility (formerly known as the "Welcome Inn") in Marietta, Georgia. On August 18, 1995, the Partnership's extended stay facility was acquired by Extended Stay America, Inc. (the "Company"). In order to present comparable results of operations and cash flows of the Partnership, the accompanying financial statements represent the historical results of operations and cash flows of the Partnership through August 18, 1995, immediately prior to the acquisition by the Company. Accordingly, any gain or loss on the sale of assets to the Company has not been recognized in the accompanying financial statements. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Buildings and improvements....................................... 40 years Furniture, fixtures and equipment................................ 7 years
Deferred Loan Costs. The Partnership has incurred costs in obtaining financing. These costs have been deferred and are being amortized over the life of the respective loans using the effective yield method. Income Taxes. Any income taxes related to income earned by the Partnership are paid by the partners. Revenue Recognition. Room revenue and other income are recognized when earned. NOTE 3--LONG-TERM DEBT Interest expense related to long-term debt consisting of mortgages held by various banks and partners. Certain notes have variable rates of interest tied to various commonly used indices. The following is a summary of long-term debt on which interest expense was incurred:
1993 1994 Note payable to a bank paid in August 1995............ $2,416,000 Note payable to a bank paid in 1994................... $1,790,667 Note payable to a partner, bearing interest at twelve percent per year...................................... 1,716,191 1,022,410 ---------- ---------- $3,506,858 $3,438,410 ========== ==========
NOTE 4--RELATED PARTY TRANSACTIONS Management fees and interest charged by partners are as follows:
MANAGEMENT INTEREST FEES EXPENSE 1993.................................................... $104,051 $196,788 1994.................................................... 66,564 149,032 Period from January 1, 1995 to August 18, 1995.......... 44,880 87,926
Management fees in 1993 included a one time bonus payment to a partner of approximately $42,000. F-22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying balance sheets of Apartment/Inn, L.P. as of December 31, 1994 and 1995, and the related statements of operations and partners' deficit and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Apartment/Inn, L.P. at December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina January 26, 1996 F-23 APARTMENT/INN, L.P. BALANCE SHEETS
DECEMBER 31, ---------------------- 1994 1995 ASSETS Current assets: Cash and cash equivalents............................. $ 379,272 $ 73,407 Accounts receivable: Trade, net of allowance for doubtful accounts of $10,933 in 1994 and $14,627 in 1995................ 19,268 25,448 Related parties..................................... 16,568 68,826 Refundable property taxes............................. 20,062 Other current assets.................................. 3,937 3,142 ---------- ---------- Total current assets.............................. 419,045 190,885 ---------- ---------- Property and equipment, net............................. 2,855,407 2,718,312 Other assets............................................ 13,845 9,502 ---------- ---------- $3,288,297 $2,918,699 ========== ========== LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Accounts payable...................................... $ 27,982 $ 18,292 Accrued salaries...................................... 4,023 5,216 Accrued interest...................................... 26,800 26,800 Other accrued expenses................................ 28,552 17,272 Current maturities of long-term debt.................. 224,773 163,475 ---------- ---------- Total current liabilities......................... 312,130 231,055 ---------- ---------- Long-term debt.......................................... 3,230,201 3,022,197 ---------- ---------- Total liabilities..................................... 3,542,331 3,253,252 ---------- ---------- Partners' deficit....................................... (254,034) (334,553) ---------- ---------- $3,288,297 $2,918,699 ========== ==========
The accompanying notes are an integral part of the financial statements. F-24 APARTMENT/INN, L.P. STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1994 1995 Revenue: Room revenue......................................... $1,696,763 $1,820,680 Other, net........................................... 77,735 76,909 ---------- ---------- Total revenue...................................... 1,774,498 1,897,589 ---------- ---------- Costs and expenses: Property operating expenses.......................... 745,434 755,176 Property management fees to partners................. 106,059 113,215 Depreciation and amortization........................ 202,568 173,936 ---------- ---------- Total costs and expenses........................... 1,054,061 1,042,327 ---------- ---------- Income from operations............................... 720,437 855,262 Interest expense....................................... 418,758 394,413 ---------- ---------- Net income........................................... 301,679 460,849 Partners' deficit, beginning of year................... (467,793) (254,034) Distributions........................................ (87,920) (541,368) ---------- ---------- Partners' deficit, end of year......................... $ (254,034) $ (334,553) ========== ==========
The accompanying notes are an integral part of the financial statements. F-25 APARTMENT/INN, L.P. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ------------------ 1994 1995 Cash flows from operating activities: Net income................................................ $301,679 $460,849 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................. 163,775 169,593 Amortization............................................. 38,793 4,343 Change in: Accounts receivable..................................... (4,433) (58,438) Refundable property taxes............................... (20,062) Other current assets.................................... 10,755 795 Accounts payable........................................ 11,621 (9,690) Accrued expenses........................................ 11,109 (11,280) Accrued salaries........................................ 55 1,193 -------- -------- Net cash provided by operating activities.............. 533,354 537,303 -------- -------- Cash flows from investing activities: Purchase of property and equipment........................ (29,333) (32,498) -------- -------- Net cash used in investing activities.................. (29,333) (32,498) -------- -------- Cash flows from financing activities: Principal payments on long-term debt...................... (130,778) (269,302) Payments of deferred loan costs........................... (5,234) Distributions to partners................................. (87,920) (541,368) -------- -------- Net cash used in financing activities.................. (223,932) (810,670) -------- -------- Net increase (decrease) in cash............................ 280,089 (305,865) -------- -------- Cash at beginning of periods............................... 99,183 379,272 -------- -------- Cash at end of periods..................................... $379,272 $ 73,407 ======== ======== Supplemental cash flow disclosure, interest paid........... $418,758 $394,413 ======== ========
The accompanying notes are an integral part of the financial statements. F-26 APARTMENT/INN, L.P. NOTES TO FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Apartment/Inn, L.P. (the "Partnership") is a Georgia limited partnership that operates an extended stay facility (known as the "Apartment Inn") in Norcross, Georgia. On January 26, 1996, the Partnership's extended stay facility was acquired by Extended Stay America, Inc. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Pervasiveness 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. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Buildings and improvements....................................... 40 years Furniture, fixtures and equipment................................ 7 years
Deferred Loan Costs. The Partnership has incurred costs in obtaining financing. These costs have been deferred and are being amortized over the life of the respective loans using the effective yield method. Deferred loan costs are included in other assets. Income Taxes. Any income taxes related to income earned by the Partnership are paid by the partners. Revenue Recognition. Room revenue and other income are recognized when earned. NOTE 3--PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
1994 1995 Land............................................... $ 635,639 $ 635,639 Building and improvements.......................... 2,492,855 2,509,540 Furniture and fixtures............................. 671,287 687,100 ---------- ---------- 3,799,781 3,832,279 Less accumulated depreciation...................... 944,374 1,113,967 ---------- ---------- $2,855,407 $2,718,312 ========== ==========
F-27 APARTMENT/INN, L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--LONG-TERM DEBT
Long-term debt consists of the following as of December 31: 1994 1995 Mortgage loan, principal and interest payable $44,529 monthly with a final balloon payment due June 1997, interest at 12%....................................... $3,322,879 $3,137,376 Mortgage loan, principal and interest payable $6,000 monthly through August 1996, interest at 18%.......... 111,462 45,145 Other.................................................. 20,633 3,151 ---------- ---------- 3,454,974 3,185,672 Less current maturities................................ (224,773) (163,475) ---------- ---------- Long term debt, net of current maturities.............. $3,230,201 $3,022,197 ========== ==========
The mortgage loans are collateralized by substantially all of the Partnership's property and equipment. Aggregate maturities of long term debt are as follows: 1996--$163,475; 1997--$3,022,197. The Partnership believes that there is no material difference in the carrying amount and estimated fair value of the Partnership's long-term debt, since all of it matures on or prior to June 1997. NOTE 5--RELATED PARTY TRANSACTIONS Management fees charged by and room revenue charged to a company controlled by a partner are as follows:
MANAGEMENT ROOM FEES REVENUE 1994................................................... $106,059 $ -- 1995................................................... 113,215 45,607
F-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying combined balance sheets of Hometown Inn I, LTD and Hometown Inn II, LTD (the "Partnerships") as of December 31, 1994 and 1995, and the related combined statements of operations and partners' capital and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Hometown Inn I, LTD and Hometown Inn II, LTD at December 31, 1994 and 1995 and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina February 23, 1996 F-29 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD COMBINED BALANCE SHEETS
DECEMBER 31, --------------------- ASSETS 1994 1995 Current assets: Cash and cash equivalents............................... $ 177,079 $ 362,357 Accounts receivable, net of allowance for doubtful accounts of $3,813 in 1994 and $7,686 in 1995.......... 3,751 32,260 Supply inventories...................................... 26,660 26,660 Advance to affiliate.................................... 91,938 Other current assets.................................... 2,913 ---------- ---------- Total current assets.................................. 207,490 516,128 Property and equipment, net............................... 4,966,202 4,964,094 Other assets.............................................. 7,000 17,733 ---------- ---------- $5,180,692 $5,497,955 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable........................................ $ 15,801 $ 29,912 Accrued expenses........................................ 75,304 60,274 Deposits................................................ 19,660 161,970 Advances from affiliates................................ 159,120 204,120 Current maturities of long-term debt.................... 117,903 185,949 ---------- ---------- Total current liabilities............................. 387,788 642,225 Long-term debt............................................ 1,483,324 1,529,874 ---------- ---------- Total liabilities..................................... 1,871,112 2,172,099 Partners' capital......................................... 3,309,580 3,325,856 ---------- ---------- $5,180,692 $5,497,955 ========== ==========
The accompanying notes are an integral part of the combined financial statements. F-30 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 Revenue: Room revenue............................. $1,802,707 $2,123,589 $2,234,569 Other, net............................... 84,679 99,719 96,617 ---------- ---------- ---------- Total revenue.......................... 1,887,386 2,223,308 2,331,186 ---------- ---------- ---------- Costs and expenses: Property operating expenses.............. 1,074,103 1,143,716 989,337 Property management fees to related party................................... 105,600 105,600 144,357 Depreciation and amortization............ 229,142 232,632 244,603 ---------- ---------- ---------- Total costs and expenses............... 1,408,845 1,481,948 1,378,297 ---------- ---------- ---------- Income from operations..................... 478,541 741,360 952,889 Interest expense........................... 131,848 137,532 170,232 ---------- ---------- ---------- Net income............................. 346,693 603,828 782,657 Partners' capital, beginning of year....... 3,538,770 3,455,553 3,309,580 Distributions............................ (429,910) (749,801) (766,381) ---------- ---------- ---------- Partners' capital, end of year............. $3,455,553 $3,309,580 $3,325,856 ========== ========== ==========
The accompanying notes are an integral part of the combined financial statements. F-31 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 Cash flows from operating activities: Net income.................................. $ 346,693 $ 603,828 $ 782,657 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................. 229,142 232,632 243,056 Amortization.............................. 1,547 Change in: Accounts receivable..................... 9,271 37,488 (28,509) Other assets............................ (1,377) 1,377 (2,913) Accounts payable........................ 944 (26,506) 14,111 Deposits................................ 3,927 8,833 142,310 Accrued expenses........................ (10,763) 11,346 (15,030) --------- --------- --------- Net cash provided by operating activities... 577,837 868,998 1,137,229 --------- --------- --------- Cash flows from investing activities, purchases of property and equipment.......... (34,818) (41,384) (240,948) --------- --------- --------- Cash flows from financing activities: Payments of deferred loan costs............. (12,280) Advances to affiliates...................... (91,938) Advances from affiliates.................... 73,650 85,470 45,000 Principal payments on long-term debt........ (97,549) (130,956) (130,404) Proceeds from issuance of long-term debt.... 245,000 Distributions to partners................... (429,910) (749,801) (766,381) --------- --------- --------- Net cash used in financing activities. (453,809) (795,287) (711,003) --------- --------- --------- Net increase in cash.......................... 89,210 32,327 185,278 Cash at beginning of periods.................. 55,542 144,752 177,079 --------- --------- --------- Cash at end of periods........................ $ 144,752 $ 177,079 $ 362,357 ========= ========= ========= Supplemental cash flow disclosure, interest paid......................................... $ 125,141 $ 136,809 $ 170,227 ========= ========= =========
The accompanying notes are an integral part of the combined financial statements. F-32 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation. The combined financial statements include the assets, liabilities, capital and results of operations of two limited partnerships, Hometown Inn I, LTD and Hometown Inn II, LTD. Where referred to herein, the "Partnerships" include the two entities listed above. All significant intercompany accounts and transactions have been eliminated. Description of Business. The Partnerships operate two extended stay facilities in Norcross, Georgia and Riverdale, Georgia. On February 23, 1996, the Partnerships' extended stay facilities were acquired by Extended Stay America, Inc. Pervasiveness 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 disclosures 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. The Partnerships maintained deposits totalling $362,357 at December 31, 1995 with one bank. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. Cash and cash equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Supply Inventory. Supply inventories consist primarily of linen, cleaning and other room supplies and are stated at the lower of cost or market. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The estimated useful lives on the assets are as follows: Buildings and improvements...................................... 40 years Furniture, fixtures and equipment............................... 5-7 years
Deferred Loan Costs. The Partnerships have incurred costs in obtaining financing. These costs have been deferred and are being amortized over the life of the respective loan using the effective yield method. Deferred loan costs are included in other assets. Income Taxes. Any income taxes related to income earned by the Partnerships are paid by the partners. Revenue Recognition. Room revenue and other income are recognized when earned. Prepayments and deposits are recorded as unearned revenue. 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31:
1994 1995 Land............................................ $ 646,007 $ 646,007 Building and improvements....................... 4,893,161 4,893,161 Furniture and fixtures.......................... 785,355 1,006,213 ----------- ----------- 6,324,523 6,545,381 Less accumulated depreciation................... (1,358,321) (1,581,287) ----------- ----------- $ 4,966,202 $ 4,964,094 =========== ===========
F-33 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 3. LONG-TERM DEBT:
1994 1995 Long-term debt consists of the following as of December 31: Mortgage loan, principal and interest payable monthly at approximately $23,000 through January 1997, interest at prime plus 1%........................................... $1,601,227 $1,483,325 Mortgage loan principal and interest payable monthly at approximately $5,300 through August 2000, interest at 11%..................................................... 232,498 ---------- ---------- 1,601,227 1,715,823 Less current maturities.................................. 117,903 185,949 ---------- ---------- Long-term debt, net of current maturities................ $1,483,324 $1,529,874 ========== ==========
The mortgage loans are collateralized by substantially all of the Partnerships' property and equipment. Aggregate maturities of long term debt are as follows: 1996--$185,949; 1997--$1,382,719; 1998--$50,217; 1999--$56,028; 2000--$40,910. The Partnerships believe that there is no material difference in the carrying amount and estimated fair value of the long-term debt. 4. RELATED PARTY TRANSACTIONS: Management fees are charged by a related entity controlled by the partners and advances are made to and taken by the related entity from the Partnerships as follows:
MANAGEMENT ADVANCES TO ADVANCES FROM FEES RELATED ENTITY RELATED ENTITY 1993............................. $105,600 $ $ 73,650 1994............................. 105,600 159,120 1995............................. 144,357 91,938 204,120
F-34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying balance sheet of Kipling Hospitality Enterprise Corporation as of December 31, 1995 and the related statements of operations and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit 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 Kipling Hospitality Enterprise Corporation at December 31, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina May 4, 1996 F-35 KIPLING HOSPITALITY ENTERPRISE CORPORATION BALANCE SHEETS
DECEMBER 31, MARCH 31, 1995 1996 ASSETS ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents........................... $ 37,728 $ 40,136 Accounts receivable................................. 24,058 21,255 Supply inventories.................................. 40,338 40,338 Prepaid and other current assets.................... 32,425 5,314 ---------- ---------- Total current assets.............................. 134,549 107,043 ---------- ---------- Property and equipment, net........................... 1,468,171 1,454,178 Deferred loan costs, net.............................. 9,797 8,327 ---------- ---------- $1,612,517 $1,569,548 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable.................................... $ 40,758 $ 15,730 Accrued salaries and related expenses............... 16,152 15,537 Accrued property taxes.............................. 31,350 39,475 Accrued expenses.................................... 14,136 7,406 Deferred revenue.................................... 7,062 9,499 Note payable to related party....................... 33,486 33,486 Note payable to former shareholder.................. 80,000 80,000 Current maturities of long-term debt................ 63,437 64,454 ---------- ---------- Total current liabilities......................... 286,381 265,587 ---------- ---------- Long-term debt........................................ 1,116,934 1,105,358 ---------- ---------- Total liabilities................................. 1,403,315 1,370,945 ---------- ---------- Shareholder's Equity: Common stock, $2 par value, 100,000 shares authorized, 87,000 shares issued and outstanding... 174,000 174,000 Additional paid in capital.......................... 30,270 30,270 Due from affiliated companies and prepaid services.. (515,053) (521,395) Retained earnings................................... 519,985 515,728 ---------- ---------- 209,202 198,603 ---------- ---------- $1,612,517 $1,569,548 ========== ==========
The accompanying notes are an integral part of the financial statements. F-36 KIPLING HOSPITALITY ENTERPRISE CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE FOR THE FOR THE THREE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, MARCH 31, MARCH 31, 1995 1995 1996 ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Revenue: Room revenue.......................... $1,255,118 $273,374 $231,426 Telephone income...................... 47,426 11,740 7,595 Other, net............................ 22,075 5,592 5,702 ---------- -------- -------- Total revenue....................... 1,324,619 290,706 244,723 ---------- -------- -------- Costs and expenses: Property operating expenses........... 736,994 165,893 167,465 Management salaries................... 53,269 11,013 6,787 Franchise expense..................... 58,093 12,348 11,260 Depreciation and amortization......... 89,018 16,634 18,132 ---------- -------- -------- Total costs and expenses............ 937,374 205,888 203,644 ---------- -------- -------- Income from operations.................. 387,245 84,818 41,079 Other income (expense): Loss on sale of property and equipment............................ (20,774) Interest income....................... 20,287 66 76 Interest expense...................... (139,298) (34,788) (31,912) ---------- -------- -------- Net income.......................... 247,460 50,096 9,243 Retained earnings, beginning of period.. 374,996 374,996 519,985 Dividends............................. (102,471) (13,500) ---------- -------- -------- Retained earnings, end of period........ $ 519,985 $425,092 $515,728 ========== ======== ========
The accompanying notes are an integral part of the financial statements. F-37 KIPLING HOSPITALITY ENTERPRISE CORPORATION STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, MARCH 31, 1995 1995 1996 ------------ ------------------ ------------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income................ $247,460 $ 50,096 $ 9,243 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............ 74,140 15,164 16,662 Amortization............ 14,878 1,470 1,470 Loss on sale of property and equipment.......... 20,744 Change in: Accounts receivable..... 6,398 4,021 2,804 Prepaid and other current assets......... (31,709) 1 27,111 Accounts payable........ 8,996 (15,584) (25,028) Accrued expenses........ (1,259) 28,159 3,217 -------- -------- -------- Net cash provided by operating activities. 339,648 83,327 35,479 -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment................ (72,240) (41,216) (2,670) Proceeds from sale of property and equipment... 13,779 -------- -------- -------- Net cash used in investing activities. (58,461) (41,216) (2,670) -------- -------- -------- Cash flows from financing activities: Advances to affiliated companies................ (46,434) (6,342) Advances from affiliated companies................ 4,988 Principal payments on long-term debt........... (124,345) (9,693) (10,559) Proceeds from issuance of long-term debt........... 10,065 Dividends................. (102,471) (13,500) -------- -------- -------- Net cash used in financing activities. (263,185) (4,705) (30,401) -------- -------- -------- Net increase in cash........ 18,002 37,406 2,408 Cash at beginning of period. 19,726 19,726 37,728 -------- -------- -------- Cash at end of period....... $ 37,728 $ 57,132 $ 40,136 ======== ======== ======== Noncash financing transaction, prepaid services to former shareholder................ $ 80,000 ======== Supplemental cash flow disclosure, interest paid.. $149,804 $ 34,995 $ 37,612 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-38 KIPLING HOSPITALITY ENTERPRISE CORPORATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of Business. Kipling Hospitality Enterprise Corporation (the "Company") operates a franchise hospitality property in Lakewood, Colorado. In 1996, the Company entered into an agreement to sell its hospitality property and equipment to Extended Stay America, Inc. Pervasiveness 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 disclosures 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. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Supply Inventory. Supply inventories consist primarily of linen, cleaning and other room supplies and are stated at the lower of cost or market. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Building and improvements........................................ 40 years Furniture, fixtures and equipment................................ 7 years
Franchise Fee. Franchise fee is stated at cost and is amortized on a straight-line basis over the period of the franchise agreement. Income Taxes. The Company's shareholder elected that the Company be subject to S Corporation regulations under the Internal Revenue Code. As such, the shareholder is liable for federal and state income taxes. Deferred Loan Costs. The Company has incurred costs in obtaining financing. The costs have been deferred and are being amortized on a straight-line basis over the life of the respective loans. Revenue Recognition. Room revenue and other income are recognized when earned. Unaudited Interim Financial Statements. The unaudited interim financial statements have been prepared pursuant to generally accepted accounting principles applicable to interim financial statements and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three months ended March 31, 1995 and 1996 are not necessarily indicative of results to be expected for a full year. All data at March 31, 1995 and 1996 and for each of the three-month periods then ended are unaudited. F-39 KIPLING HOSPITALITY ENTERPRISE CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31, 1995: Land.......................................................... $ 539,000 Building and improvements..................................... 990,132 Furniture and fixtures........................................ 214,997 Transportation equipment...................................... 38,708 ---------- 1,782,837 Less accumulated depreciation................................. 314,666 ---------- $1,468,171 ==========
3. LONG-TERM DEBT: Long-term debt consists of the following as of December 31, 1995: Mortgage loan, principal and interest payable at approximately $13,450 monthly through September 1997, interest at the bank's base rate (base rate was 9.75% at December 31, 1995) plus 2%...................................................... $1,172,664 Other......................................................... 7,707 ---------- 1,180,371 Less current maturities....................................... 63,437 ---------- Long-term debt, net of current maturities..................... $1,116,934 ==========
The mortgage loan is collateralized by substantially all of the Company's property and equipment. Aggregate maturities of long-term debt are as follows: 1996--$63,437; 1997--$1,116,934. The Company believes that there is no material difference in the carrying amount and estimated fair value of the long-term debt. 4. NOTE PAYABLE TO FORMER SHAREHOLDER: The Company entered into a note payable agreement on September 15, 1995 to pay a former shareholder $100,000 to perform consulting, accounting, and bookkeeping services over a five year period. The note bears interest at 7% and is payable in five annual installments commencing on September 15, 1995. 5. RELATED PARTY TRANSACTIONS: Certain members of the Company's management provide management services to companies owned by the shareholder. The Company allocated approximately $45,000 of expenses to the affiliated companies in 1995 for providing these services. Due from affiliated companies and prepaid services at December 31, 1995 consists of: Advances to affiliated companies................................ $326,000 Prepaid services to former shareholder (Note 4)................. 80,000 Receivable for allocated management services.................... 109,053 -------- $515,053 ========
F-40 KIPLING HOSPITALITY ENTERPRISE CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) 6. LITIGATION From time to time, the Company has been involved in various legal proceedings. Management believes that all such litigation is routine in nature and incidental to the conduct of its business, and that none of such litigation, if determined adversely to the Company, would have a material adverse effect on the financial condition. F-41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying balance sheet of Apartment Inn Partners/Gwinnett, L.P. as of December 31, 1995 and the related statements of operations and partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Apartment Inn Partners/Gwinnett, L.P. at December 31, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina June 25, 1996 F-42 APARTMENT INN PARTNERS/GWINNETT, L.P. BALANCE SHEETS
DECEMBER 31, MARCH 31, 1995 1996 ASSETS ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents. $ 238,871 $ 308,635 Accounts receivable....... 14,560 28,556 Supply inventories........ 32,950 32,950 Prepaid expenses.......... 2,198 ---------- ---------- Total current assets.... 286,381 372,339 ---------- ---------- Property and equipment, net. 2,651,717 2,631,082 Other assets................ 10,575 10,575 ---------- ---------- $2,948,673 $3,013,996 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable.......... $ 5,666 $ 17,927 Accrued salaries and related expenses......... 3,933 6,640 Other accrued expenses.... 24,601 28,496 Deferred revenue.......... 7,872 9,588 Current maturities of long-term debt--related party.................... 194,451 199,352 ---------- ---------- Total current liabilities............ 236,523 262,003 ---------- ---------- Long-term debt--related party...................... 2,387,119 2,335,405 ---------- ---------- Total liabilities....... 2,623,642 2,597,408 ---------- ---------- Partners' capital........... 325,031 416,588 ---------- ---------- $2,948,673 $3,013,996 ========== ==========
The accompanying notes are an integral part of the financial statements. F-43 APARTMENT INN PARTNERS/GWINNETT, L.P. STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
FOR THE FOR THE FOR THE YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, MARCH 31, 1995 1995 1996 ------------ ------------------ ------------------ (UNAUDITED) (UNAUDITED) Revenue: Room revenue.............. $1,231,786 $296,835 $320,753 Other revenue............. 62,187 18,465 14,050 ---------- -------- -------- Total revenue........... 1,293,973 315,300 334,803 ---------- -------- -------- Costs and expenses: Property operating expenses................. 588,760 143,286 135,319 Management fees expense... 88,662 9,439 19,976 Depreciation and amortization............. 109,636 25,971 23,800 ---------- -------- -------- Total costs and expenses............... 787,058 178,696 179,095 ---------- -------- -------- Income from operations...... 506,915 136,604 155,708 Other expense: Interest expense--related party.................... 267,836 68,589 64,151 ---------- -------- -------- Net income.............. 239,079 68,015 91,557 Partners' capital, beginning of period.................. 85,952 85,952 325,031 ---------- -------- -------- Partners' capital, end of period..................... $ 325,031 $153,967 $416,588 ========== ======== ========
The accompanying notes are an integral part of the financial statements. F-44 APARTMENT INN PARTNERS/GWINNETT, L.P. STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, MARCH 31, 1995 1995 1996 ------------ ------------------ ------------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income................ $239,079 $ 68,015 $ 91,557 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 109,636 25,971 23,800 Change in: Accounts receivable.... (2,391) (11,560) (13,996) Prepaid and other current assets........ 1,216 (569) (2,198) Accounts payable....... (1,724) 9,975 12,261 Accrued expenses....... (5,844) 12,175 8,318 -------- -------- -------- Net cash provided by operating activities. 339,972 104,007 119,742 -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment................ (8,577) (2,451) (3,165) -------- -------- -------- Net cash used in investing activities. (8,577) (2,451) (3,165) -------- -------- -------- Cash flows from financing activities: Principal payments on long-term debt--related party.................... (176,019) (42,535) (46,813) -------- -------- -------- Net cash used in financing activities. (176,019) (42,535) (46,813) -------- -------- -------- Net increase in cash........ 155,376 59,021 69,764 Cash at beginning of period. 83,495 83,495 238,871 -------- -------- -------- Cash at end of period....... $238,871 $142,516 $308,635 ======== ======== ======== Supplemental cash flow disclosure, interest paid.. $267,836 $ 68,589 $ 64,151 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-45 APARTMENT INN PARTNERS/GWINNETT, L.P. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of Business. Apartment Inn Partners/Gwinnett, L.P. (the "Partnership") is a Georgia limited partnership that operates an extended stay facility (known as the "Apartment Inn") in Lawrenceville, Georgia. On June 25, 1996, the Partnership's extended stay facility was acquired by Extended Stay America, Inc. Pervasiveness 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 disclosures 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. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Supply Inventories. Supply inventories consist primarily of linen, cleaning and other room supplies and are stated at the lower of cost or market. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Building and improvements........................................ 39 years Furniture, fixtures and equipment................................ 7 years
Income Taxes. Any income taxes relating to income earned by the Partnership are paid by the partners. Revenue Recognition. Room revenue and other income are recognized when earned. Unaudited Interim Financial Statements. The unaudited interim financial statements have been prepared pursuant to generally accepted accounting principles applicable to interim financial statements and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three months ended March 31, 1995 and 1996 are not necessarily indicative of results to be expected for a full year. All data at March 31, 1996 and for each of the three-month periods ended March 31, 1995 and 1996 are unaudited. F-46 APARTMENT INN PARTNERS/GWINNETT, L.P. NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31, 1995: Land.......................................................... $ 451,800 Building and improvements..................................... 2,144,300 Furniture, fixtures and equipment............................. 192,627 ---------- 2,788,727 Less accumulated depreciation................................. 137,010 ---------- $2,651,717 ==========
3. LONG-TERM DEBT: Long-term debt consists of the following as of December 31, 1995: Note payable, principal and interest payable to the general partner of the Partnership at $36,988 monthly through September 2004, interest at 10%.............................. $2,581,570 Less current maturities....................................... 194,451 ---------- Long-term debt, net of current maturities..................... $2,387,119 ==========
The note payable is collateralized by substantially all of the Partnership's property and equipment. Aggregate maturities of long-term debt are as follows: 1996--$194,451; 1997--$214,812; 1998--$237,305; 1999--$262,154; 2000--$289,606; thereafter $1,383,242. The Partnership believes that there is no material difference in the carrying amount and estimated fair value of the long-term debt. 4. LITIGATION: From time to time, the Partnership has been involved in various legal proceedings. Management believes that all such litigation is routine in nature and incidental to the conduct of its business, and that none of such litigation, if determined adversely to the Partnership, would have a material adverse effect on its financial condition. F-47 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying combined balance sheets of Boulder Manor, Inc., Melrose Suites, Inc., Nicolle Manor and St. Louis Manor, Inc. (the "M & M Facilities") as of December 31, 1994 and 1995, and the related combined statements of operations and equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the M & M Facilities' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the M & M Facilities at December 31, 1994 and 1995 and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina June 27, 1996 F-48 M & M FACILITIES COMBINED BALANCE SHEETS
(UNAUDITED) MARCH 31, DECEMBER 31, 1996 ------------------------ ----------- ASSETS 1994 1995 Current assets: Cash and cash equivalents............. $ 277,626 $ 307,376 $ 280,111 Accounts receivable................... 53,191 63,729 Supply inventories.................... 14,762 14,762 Other current assets.................. 9,592 15,112 61,954 ----------- ----------- ----------- Total current assets................ 287,218 390,441 420,556 ----------- ----------- ----------- Property and equipment, net............. 9,721,327 16,195,066 16,171,969 Other assets............................ 153,437 85,462 91,957 ----------- ----------- ----------- $10,161,982 $16,670,969 $16,684,482 =========== =========== =========== LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Accounts payable...................... $ 107,733 $ 119,915 $ 102,385 Accrued expenses...................... 12,276 47,627 79,760 Deposits.............................. 46,500 60,812 14,858 Accrued interest expense.............. 87,346 122,698 141,641 Accounts payable to affiliated company.............................. 108,546 97,848 Current maturities of long-term debt and notes payable to shareholders.... 464,967 1,014,720 6,071,772 ----------- ----------- ----------- Total current liabilities........... 718,822 1,474,318 6,508,264 Long-term debt.......................... 4,318,218 10,139,340 8,301,363 Notes payable to shareholders........... 5,736,898 5,263,995 1,822,122 ----------- ----------- ----------- Total liabilities................... 10,773,938 16,877,653 16,631,749 Equity (deficit)........................ (214,235) 377,284 628,318 Advances to shareholders................ (397,721) (583,968) (575,585) ----------- ----------- ----------- $10,161,982 $16,670,969 $16,684,482 =========== =========== ===========
The accompanying notes are an integral part of the combined financial statements. F-49 M & M FACILITIES COMBINED STATEMENTS OF OPERATIONS AND EQUITY (DEFICIT)
(UNAUDITED) FOR THE THREE MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------- ---------------------- 1993 1994 1995 1995 1996 Revenue: Room revenue.......... $3,410,258 $ 3,712,548 $5,685,874 $1,336,776 $1,596,144 Other, net............ 204,638 280,626 361,822 75,998 83,826 ---------- ----------- ---------- ---------- ---------- Total revenue....... 3,614,896 3,993,174 6,047,696 1,412,774 1,679,970 ---------- ----------- ---------- ---------- ---------- Costs and expenses: Property operating expenses............. 1,341,583 1,389,265 2,288,116 505,235 622,586 Property management fees to related party................ 314,327 323,429 432,102 106,942 127,692 Depreciation and amortization......... 585,918 448,277 648,202 170,102 168,083 ---------- ----------- ---------- ---------- ---------- Total costs and expenses........... 2,241,828 2,160,971 3,368,420 782,279 918,361 ---------- ----------- ---------- ---------- ---------- Income from operations.. 1,373,068 1,832,203 2,679,276 630,495 761,609 Other income............ 168,503 Interest expense........ 1,027,305 1,016,868 1,614,580 413,769 392,734 ---------- ----------- ---------- ---------- ---------- Net income.......... 345,763 983,838 1,064,696 216,726 368,875 Equity (deficit), beginning of period.... 574,410 416,751 (214,235) (214,235) 377,284 Distributions......... (503,422) (1,614,824) (473,177) (130,168) (117,841) ---------- ----------- ---------- ---------- ---------- Equity (deficit), end of period................. $ 416,751 $ (214,235) $ 377,284 $ (127,677) $ 628,318 ========== =========== ========== ========== ==========
The accompanying notes are an integral part of the combined financial statements. F-50 M & M FACILITIES COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE THREE MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------- --------------------- 1993 1994 1995 1995 1996 Cash flows from operating activities: Net income............ $ 345,763 $ 983,838 $1,064,696 $ 216,726 $ 368,875 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........ 306,920 310,933 577,679 152,742 150,453 Amortization........ 278,998 137,344 70,523 17,360 17,630 Change in: Supply inventories...... (14,762) (15,000) Accounts receivable....... (53,191) (32,448) (10,538) Other current assets........... (13,273) 3,904 (5,520) (45,347) (46,842) Accounts payable.. 12,663 (12,339) 12,182 (21,109) (17,530) Deposits.......... 14,312 (22,584) (45,954) Accrued interest.. (2,476) 3,823 35,352 150,585 18,943 Accounts payable to affiliated company.......... 108,546 61,567 (10,698) Accrued expenses.. 2,848 240 35,351 41,323 32,133 ---------- ----------- ---------- ---------- --------- Net cash provided by operating activities. 931,443 1,427,743 1,845,168 503,815 456,472 ---------- ----------- ---------- ---------- --------- Cash flows from investing activities, Purchases of property and equipment.......... (46,502) (109,354) (7,051,417) (6,906,546) (127,356) ---------- ----------- ---------- ---------- --------- Cash flows from financing activities: Payments of deferred loan costs........... (78,497) (86,269) (2,549) (748) (24,125) Collections from (advances to) shareholders......... 41,269 (15,419) (186,247) (64,880) 8,383 Principal payments on long-term debt....... (18,487) (20,797) (165,539) (41,385) (43,563) Principal payments on notes payable to shareholders......... (354,243) (400,452) (778,869) (193,552) (179,235) Proceeds from issuance of long-term debt.... 59,931 840,409 6,189,034 6,189,034 Proceeds from notes payable to shareholders......... 653,346 653,346 Distributions......... (503,422) (1,614,824) (473,177) (130,168) (117,841) ---------- ----------- ---------- ---------- --------- Net cash (used in) provided by financing activities..... (853,449) (1,297,352) 5,235,999 6,411,647 (356,381) ---------- ----------- ---------- ---------- --------- Net increase (decrease) in cash................ 31,492 21,037 29,750 8,916 (27,265) Cash at beginning of periods................ 225,097 256,589 277,626 277,626 307,376 ---------- ----------- ---------- ---------- --------- Cash at end of periods.. $ 256,589 $ 277,626 $ 307,376 $ 286,542 $ 280,111 ========== =========== ========== ========== ========= Supplemental cash flow disclosure, interest paid................... $1,020,889 $ 1,005,894 $1,538,714 $ 253,178 $ 366,135 ========== =========== ========== ========== =========
The accompanying notes are an integral part of the combined financial statements. F-51 M & M FACILITIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation. The combined financial statements include the assets, liabilities, equity and results of operations of three S-Corporations, (Boulder Manor, Inc., Melrose Suites, Inc. and St. Louis Manor, Inc.), and of a partnership, (Nicolle Manor) which are under common ownership and control. Where referred to herein, the "M & M Facilities" include the four entities listed above. All significant intercompany accounts and transactions have been eliminated. Description of Business. The M & M Facilities operate four extended stay facilities in Las Vegas, Nevada. On June 26, 1996, an agreement was reached to sell the property and equipment of the M & M Facilities to Extended Stay America, Inc. Pervasiveness 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 disclosures 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. The M & M Facilities maintained deposits totalling $127,496 at December 31, 1995 with one bank. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. Cash and cash equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Supply Inventory. Supply inventories consist primarily of linen, cleaning and other room supplies and are stated at the lower of cost or market. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The estimated useful lives on the assets are as follows: Buildings and improvements...................................... 40 years Furniture, fixtures and equipment............................... 5-7 years
Deferred Loan Costs. The M & M Facilities have incurred costs in obtaining financing. These costs have been deferred and are being amortized over the life of the respective loan using the effective yield method. Deferred loan costs are included in other assets. Income Taxes. Any income taxes related to income earned by the M & M Facilities are paid by the shareholders and partners. Revenue Recognition. Room revenue and other income are recognized when earned. Prepayments and deposits are recorded as unearned revenue. Unaudited Interim Financial Statements. The unaudited interim financial statements have been prepared pursuant to generally accepted accounting principles applicable to interim financial statements and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of F-52 M & M FACILITIES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) operations for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three months ended March 31, 1995 and 1996 are not necessarily indicative of results to be expected for a full year. All data at March 31, 1995 and 1996 and for each of the three-month periods then ended are unaudited. 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31:
1994 1995 Land............................................. $ 1,775,107 $ 2,525,107 Buildings and improvements....................... 8,493,697 13,689,568 Furniture and fixtures........................... 795,334 1,900,881 ----------- ----------- 11,064,138 18,115,556 Less accumulated depreciation.................... 1,342,811 1,920,490 ----------- ----------- $ 9,721,327 $16,195,066 =========== ===========
3. LONG-TERM DEBT AND NOTES PAYABLE TO SHAREHOLDERS:
1994 1995 Long-term debt and notes payable to shareholders consist of the following as of December 31: Mortgage loan, principal and interest payable monthly at approximately $34,550 through June 1, 2019, interest at 9.75%..................................... $4,179,775 $4,136,257 Mortgage loan principal and interest payable monthly at approximately $47,230 through July 1, 2002 with a final payment of approximately $5,240,000 in July 2002, interest at 8.134% in 1995 and thereafter at the bank's current index rate (based on cost of funds of Federal Home Loan Bank of San Francisco) plus 3.25%... 5,869,141 Note payable to shareholders, principal and interest payable at approximately $52,260 through December 1996, with a final payment of $3,019,487 on January 1, 1997, interest at 10%................................. 3,875,260 3,609,222 Note payable to shareholders, principal and interest payable at approximately $32,700 through December 1996, with a final payment of $1,940,348 on January 1, 1997, interest at 10%................................. 2,301,051 2,127,676 Other related party note payable....................... 313,890 Other.................................................. 163,997 361,869 ----------- ----------- 10,520,083 16,418,055 Less current maturities................................ 464,967 1,014,720 ----------- ----------- Long-term debt, net of current maturities.............. $10,055,116 $15,403,335 =========== ===========
The notes payable to shareholders are collateralized by real property at two of the entended stay facilities. The shareholders have related loans with a financial institution collateralized by these properties. These loans with the financial institutions total approximately $8,675,000 at December 31, 1995. The mortgage loans are collateralized by substantially all of the M & M Facilities property and equipment. Aggregate maturities of long term debt are as follows: 1996--$1,014,720; 1997--$5,477,558; 1998--$217,487; 1999--$241,077; 2000--$212,019; thereafter--$9,255,194. The M & M Facilities believe that there is no material difference in the carrying amount and estimated fair value of the long-term debt. F-53 M & M FACILITIES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 4. RELATED PARTY TRANSACTIONS: Management fees charged by a related entity controlled by the shareholders/partners and interest charged on notes payable to shareholders/partners are as follows:
MANAGEMENT INTEREST FEES EXPENSE 1993.................................................. $314,327 $668,754 1994.................................................. 323,429 630,263 1995.................................................. 432,102 598,482
The M & M Facilities purchased substantially all the property and equipment from an affiliated company which constructed the extended stay facilities. 5. LITIGATION: From time to time, the M & M Facilities have been involved in various legal proceedings. Management believes that all such litigation is routine in nature and incidental to the conduct of its business, and that none of such litigation, if determined adversely to the M & M Facilities, would have a material adverse effect on their financial condition. F-54 This Prospectus may be used by John W. Baker and Apartment/Inn, L.P., a Georgia limited partnership controlled by Mr. Baker, in connection with reoffers and resales of up to 163,629 shares of Common Stock acquired pursuant to this Prospectus in connection with the acquisition by the Company in January 1996 of the extended stay lodging facility owned by Apartment/Inn. See "Recent Developments." Such shares constitute all of the shares of Common Stock currently owned by Mr. Baker and Apartment/Inn and represent less than 1% of the outstanding Common Stock as of the date hereof. This Prospectus may be used by Hometown Inn I, LTD and Hometown Inn II, LTD, and their transferees and assignees, in connection with reoffers and resales of up to 198,608 shares of Common Stock acquired by them pursuant to this Prospectus in connection with the acquisition by the Company in February 1996 of the extended stay lodging facilities owned by Hometown Inn. See "Recent Developments." Such shares constitute all of the shares of Common Stock currently owned by Hometown Inn I, LTD and Hometown Inn II, LTD and represent less than 1% of the outstanding Common Stock as of the date hereof. This Prospectus may be used by Melrose Suites, Inc., St. Louis Manor, Inc., Boulder Manor, Inc., Michael J. Mona, Jr., and Dean O'Bannon, and their respective transferees and assignees, in connection with reoffers and resales of up to an aggregate of approximately 1,138,000 shares of Common Stock to be acquired by them pursuant to this Prospectus in connection with the acquisition by the Company of the M & M Facilities. See "Recent Developments." Such shares constitute all of the shares of Common Stock owned or to be owned by Melrose Suites, Inc., St. Louis Manor, Inc., Boulder Manor, Inc., Michael J. Mona, Jr., and Dean O'Bannon, and represent in the aggregate approximately 3.5% of the outstanding Common Stock as of the date hereof. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses to be borne by the Company in connection with the registration, issuance, and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimates except the SEC registration fee. Securities and Exchange Commission registration fee............. $ 34,656 Blue Sky fees and expenses...................................... 10,000 Printing and engraving expenses................................. 20,000 Legal fees and expenses......................................... 50,000 Accounting fees and expenses.................................... 130,000 Miscellaneous................................................... 5,344 -------- Total....................................................... $250,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of Delaware authorizes the Company to indemnify its directors and officers under specified circumstances. The Restated Certificate of Incorporation and Bylaws of the Company provide that the Company shall indemnify, to the extent permitted by Delaware law, its directors and officers (and may indemnify its employees and agents) against liabilities (including expenses, judgments, and settlements) incurred by them in connection with any actual or threatened action, suit, or proceeding to which they are or may become parties and which arises out of their status as directors, officers, or employees. The Company's Restated Certificate of Incorporation and Bylaws eliminate, to the fullest extent permitted by Delaware law, liability of a director to the Company or its stockholders for monetary damages for a breach of such director's fiduciary duty of care except for liability where a director (a) breaches his or her duty of loyalty to the Company or its stockholders, (b) fails to act in good faith or engages in intentional misconduct or knowing violation of law, (c) authorizes payment of an illegal dividend or stock repurchase, or (d) obtains in improper personal benefit. While liability for monetary damages has been eliminated, equitable remedies such as injunctive relief or rescission remain available. In addition, a director is not relieved of his responsibilities under any other law, including the federal securities laws. The directors and officers of the Company are insured within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of actions, suits, or proceedings and certain liabilities which might be imposed as a result of such actions, suits, or proceedings, to which they are parties by reason of being or having been such directors or officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In January 1995, the Company issued 1,677,060 shares of Common Stock to its initial stockholder for a $2,000 contribution to the capital of the Company. Such securities were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. In August 1995, pursuant to subscription agreements, the Company issued to approximately 30 accredited investors 11,718,000 shares of Common Stock in exchange for a $55,800,000 contribution to the capital of the Company made in August and October of 1995. The above-referenced shares were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. II-1 In August 1995, pursuant to a Contribution Agreement dated August 18, 1995 between the Company and Welcome Inn America 89-1, L.P. the Company issued 357,000 shares of Common Stock in exchange for certain assets and real property. The above-referenced shares were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. Pursuant to a commitment agreement dated August 31, 1995, the Company issued shares of Common Stock to DLJ and one of its affiliates as described under "Financing." The above-referenced shares were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE ------- ---------------------- ---- 2.1 Contribution Agreement, dated August 18, 1995, between the Company and Welcome Inn America 89-1, L.P. (incorpo- rated by reference to the corresponding exhibit to the Company's Registration Statement on Form S-1, Registra- tion No. 33-98452 (the "IPO S-1")) 2.2* Agreement to Purchase Hotel and related agreements dated January 24, 1996 between the Company and John W. Baker and Apartment/Inn, L.P. 2.3* Agreement to Purchase Hotel and related agreements dated February 23, 1996 among ESA 0992, Inc., ESA 0993, Inc., Hometown Inn I, LTD, and Hometown Inn II, LTD. 2.4 Agreement to Purchase Hotel dated May 1, 1996 and related agreements among ESA Properties, Inc., Kipling Hospital- ity Enterprise Corporation, and J. Craig McBride. (incor- porated by reference to the corresponding exhibit to the Company's Report on Form 10-Q for the quarter ended March 31, 1996 (the "1996 10-Q1")) 2.5 Agreement to Purchase Hotel dated as of June 24, 1996 and related agreements among the Company, ESA 0996, Inc., Apartment Inn Partners/Gwinnett, L.P., and Rosa Dziewienski Pajonk 2.6 Agreements to Purchase Hotels dated as of June 25, 1996 and related agreements between the Company and ESA Prop- erties, Inc. and Boulder Manor, Inc., Melrose Suites, Inc., St. Louis Manor, Inc., and Michael J. Mona, Jr. and Dean O'Bannon 3.1 Restated Certificate of Incorporation of the Company (in- corporated by reference to the corresponding exhibit to the IPO S-1) 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to the corresponding exhibit to the IPO S-1) 4.1 Specimen certificate representing shares of Common Stock (incorporated by reference to the corresponding exhibit to the IPO S-1) 5.1* Opinion of Bell, Boyd & Lloyd as to the legality of the Common Stock 10.1 Form of Subscription Agreement and related Demand Note and Stockholders Agreement between the Company and ap- proximately 30 investors entered into in August 1995 (in- corporated by reference to the corresponding exhibit to the IPO S-1) 10.2(a) Commitment for Mortgage Facility between the Company and DLJ Mortgage Capital, Inc. ("DLJMC") (incorporated by reference to the corresponding exhibit to the IPO S-1)
II-2
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE+ ------- ---------------------- ----- 10.2(b) Mortgage Facility, dated October 31, 1995, between the Company and DLJMC (incorporated by reference to the cor- responding exhibit to the IPO S-1) 10.3 Amended and Restated 1995 Employee Stock Option Plan of the Company (incorporated by reference to the corre- sponding exhibit to the 1996 10-Q1) 10.4 Employment Agreement, dated as of June 1, 1995, between ESA Development, Inc. and Harold E. Wright (incorporated by reference to the corresponding exhibit to the IPO S- 1) 10.5 Stock Option Agreement, dated as of June 1, 1995, be- tween ESA Development, Inc. and Harold E. Wright (incor- porated by reference to the corresponding exhibit to the IPO S-1) 10.6 1995 Stock Option Plan for Non-Employee Directors of the Company (incorporated by reference to the corresponding exhibit to the 1996 10-Q1) 10.7 Contract to Buy and Sell Real Property, dated April 20, 1995, between the Company and North Town Associates, L.P. (incorporated by reference to the corresponding ex- hibit to the IPO S-1) 10.8 Aircraft Dry Lease, dated June 12, 1995, between Wyoming Associates, Inc. and the Company (incorporated by refer- ence to the corresponding exhibit to the IPO S-1) 10.9 Aircraft Dry Lease, dated June 12, 1995, between Wyoming Associates, Inc. and the Company (incorporated by refer- ence to the corresponding exhibit to the IPO S-1) 10.10 Amended and Restated 1996 Employee Stock Option Plan of the Company (incorporated by reference to the corre- sponding exhibit to the 1996 10-Q1) 10.11 Employment Agreement, dated as of March 18, 1996, be- tween ESA Development, and Harold E. Wright (incorpo- rated by reference to the corresponding exhibit to the 1996 10-Q1) 10.12 Aircraft Dry Lease, dated April 5, 1996, between Morgan Corp. and the Company (incorporated by reference to the corresponding exhibit to the Company's Registration Statement on Form S-1, Registration No. 333-03373) 10.13 Homestead Motorsports Complex Executive Suite License Agreement, dated February 14, 1996, among The Homestead Motorsports Joint Venture, Miami Motorsports Joint Ven- ture, and the Company (incorporated by reference to the corresponding exhibit to the 1996 10-Q1) 10.14 Joe Robbie Stadium Executive Suite License Agreement, dated March 18, 1996, between Robbie Stadium Corporation and the Company (incorporated by reference to the corre- sponding exhibit to the 1996 10-Q1) 10.15(a) Commitment letter for mortgage facility between the Com- pany and CS First Boston Mortgage Capital Corporation ("CSFBMC") (incorporated by reference to the correspond- ing exhibit to the 1996 10-Q1) 10.15(b) Credit facility Agreement, dated May 24, 1996, between the Company and CSFBMC (incorporated by reference to the corresponding exhibit to the Company's Registration Statement on Form S-1, Registration No. 333-03373) 11.1* Revised Statement re: Computation of Per Share Loss 21.1* Revised list of subsidiaries of the Company 23.1 Consent of Coopers & Lybrand LLP (included in Part II of this registration statement)
II-3
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE+ ------- ---------------------- ----- 23.2* Consent of Bell, Boyd & Lloyd (included in Exhibit 5.1) 24.1* Powers of Attorney (included on the signature page of this registration statement) 27.1 Financial Data Schedule (for EDGAR filings only) (incor- porated by reference to the corresponding exhibit to the Company's Registration Statement on Form S-1, Registra- tion No. 333-03373)
- --------------------- *Previously filed. (b) FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the information has been provided in the consolidated financial statements or the notes thereto. ITEM 17. UNDERTAKINGS 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 the volume of securities offered (if the total dollar value of 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 a 20 percent 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. (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. 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 the provisions described under Item 14 above 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 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 against the Company 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 Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF FT. LAUDERDALE, STATE OF FLORIDA, ON JULY 2, 1996. Extended Stay America, Inc. /s/ Robert A. Brannon By:__________________________________ Robert A. Brannon Senior Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON JULY 2, 1996.
SIGNATURE TITLE --------- ----- PRINCIPAL EXECUTIVE OFFICER: George D. Johnson, Jr.* President and Chief Executive Officer PRINCIPAL FINANCIAL OFFICER: /s/ Robert A. Brannon Senior Vice President, Chief Financial ___________________________________________ Officer, Secretary, and Treasurer Robert A. Brannon PRINCIPAL ACCOUNTING OFFICER: Gregory R. Moxley* Vice President and Controller A MAJORITY OF THE DIRECTORS: H. Wayne Huizenga* Director George D. Johnson, Jr.* Director Stewart H. Johnson* Director John J. Melk* Director Peer Pedersen* Director Director ___________________________________________ Donald F. Flynn
/s/ Robert A. Brannon *By: ________________________________ Robert A. Brannon Attorney-in-fact II-5 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated January 26, 1996, on our audit of the consolidated financial statements of Extended Stay America, Inc., our report dated January 26, 1996 on our audits of the financial statements of Apartment/Inn, L.P., our report dated February 23, 1996 on our audits of the combined financial statements of Hometown Inn I, LTD and Hometown Inn II, LTD, our report dated October 16, 1995 on our audits of the financial statements of Welcome Inn America 89-1, L.P., our report dated May 4, 1996 on our audit of the financial statements of Kipling Hospitality Enterprise Corporation, our report dated June 25, 1996 on our audit of the financial statements of Apartment Inn Partners/Gwinnett, L.P., and our report dated June 27, 1996 on our audits of the combined financial statements of Boulder Manor, Inc., Melrose Suites, Inc., Nicolle Manor and St. Louis Manor, Inc. (the "M & M Facilities"). We also consent to the references to our firm under the captions "Experts" and "Selected Financial Data." Coopers & Lybrand L.L.P. Spartanburg, South Carolina July 2, 1996 II-6 EX-2.5 2 AGREEMENT TO PURCHASE HOTEL DATED AS OF 6/21/96 AGREEMENT TO PURCHASE HOTEL by and among APARTMENT INN PARTNERS/GWINNETT, L.P., ROSA DZIEWIENSKI PAJONK and ESA 0996, INC. THE APARTMENT INN LAWRENCEVILLE, GEORGIA June 21, 1996 AGREEMENT TO PURCHASE HOTEL TABLE OF CONTENTS I DEFINITIONS AND REFERENCES............................................1 1.1 Definitions.....................................................1 1.2 References......................................................5 II SALE AND PURCHASE.....................................................5 2.1 Sale and Purchase...............................................5 III PURCHASE PRICE........................................................5 3.1 Purchase Price; Allocation Thereof..............................5 3.2 Deposit.........................................................6 3.3 No Assumption of Seller's Obligations...........................6 3.4 Payment of the Note.............................................7 IV INSPECTION PERIOD.....................................................7 4.1 Inspection Period...............................................7 4.2 Submittals to Purchaser.........................................7 4.3 Review and Inspection...........................................8 4.4 Purchaser's Acceptance or Rejection.............................8 V REPRESENTATIONS AND WARRANTIES........................................9 5.1 Representations and Warranties of Seller and Rosa...............9 5.2 Representations and Warranties of Purchaser....................14 5.3 Duration of Representations and Warranties.....................15 VI CLOSING MATTERS......................................................15 6.1 Closing........................................................15 6.2 Manner of Closing..............................................15 VII CLOSING DELIVERIES...................................................16 7.1 Seller's Deliveries............................................16 7.2 Purchaser's Deliveries.........................................17 7.3 Concurrent Transactions........................................18 7.4 Further Assurances.............................................18 7.5 Possession.....................................................18 VIII ADJUSTMENTS AND PRORATIONS...........................................18 8.1 Adjustments and Prorations.....................................18 8.2 Receivables....................................................19 8.3 Proration Schedule.............................................19 IX CONDITIONS TO SELLER'S OBLIGATIONS...................................20 9.1 Conditions.....................................................20 9.2 Failure of Conditions..........................................21 X CONDITIONS TO PURCHASER'S OBLIGATIONS................................21 10.1 Conditions.....................................................21 10.2 Failure of Conditions..........................................22
XI ACTIONS AND OPERATIONS PENDING CLOSING...............................23 11.1 Actions and Operations Pending Closing.........................23 XII CASUALTIES AND TAKINGS...............................................24 12.1 Casualties.....................................................24 12.2 Takings........................................................24 XIII EMPLOYEES............................................................24 13.1 Employees, Compensation and Indemnification....................24 XIV INDEMNITIES..........................................................25 14.1 Seller's Indemnity.............................................25 14.2 Purchaser's Indemnity..........................................25 14.3 Notice of Claims...............................................25 XV SECURITIES LAW MATTERS...............................................26 XVI NOTICES..............................................................26 XVII ADDITIONAL COVENANTS.................................................27 17.1 Additional Covenants...........................................27
Exhibit A: Land Exhibit B: Excluded Assets Exhibit C: Permitted Exceptions Exhibit D: Submitted Financial Statements Exhibit E: Allocation of Purchase Price Exhibit F: Permits Exhibit G: Hotel Contracts and Commissions Exhibit H: Employee and Employment Contracts Exhibit I: Bookings Exhibit J: Space Leases and Commissions Exhibit J-1: Spaces Lessee Estoppel Letter Exhibit K: Notes and Violations Exhibit L: Pending or Threatened Litigation Exhibit M: Documents Exhibit N: Impositions Exhibit O: Hotel Names Exhibit P: Employee Benefit Plans Exhibit Q: FIRPTA Certificate Exhibit R: Form of Agreement Exhibit S: List of Employees AGREEMENT TO PURCHASE HOTEL --------------------------- THIS AGREEMENT is made this 20th day of June, 1996, by and among Apartment Inn Partners/Gwinnett, L.P., a Georgia limited partnership ("Seller"), Rosa Dziewienski Pajonk ("Rosa"), and ESA 0996, Inc., a Georgia corporation ("Purchaser"). R E C I T A L S: A. Seller is the fee owner of that certain parcel of land (and the improvements and buildings located thereon) legally described in Exhibit A and --------- commonly referred to as The Apartment Inn, 474 West Pike Street, Lawrenceville, Georgia 30245 (the "Hotel") and the owner of the Fixtures and Tangible Personal Property, Operating Equipment, Consumables, and Miscellaneous Hotel Assets (all as hereinafter defined). B. The Hotel's facilities include guest and public facilities consisting of 126 rooms, administrative offices, and service areas. C. Seller desires to sell, and Purchaser desires to purchase, the Property upon and subject to the terms and conditions hereinafter set forth. A G R E E M E N T S NOW, THEREFORE, in consideration of the foregoing premises and the respective representations, warranties, agreements, covenants and conditions herein contained, and other good and valuable consideration, Seller and Purchaser agree as follows: ARTICLE I DEFINITIONS AND REFERENCES 1.1 Definitions. As used herein, the following terms shall have the ----------- respective meanings indicated below: Affiliate: With respect to a specific entity, any natural person or any --------- firm, corporation, partnership, association, trust or other entity which, directly or indirectly, controls, or is under common control with, the subject entity, and with respect to any specific entity or person, any firm, corporation, partnership, association, trust or other entity which is controlled by the subject entity or person. For purposes hereof, the term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any such entity or the power to veto major policy decision of any such entity, whether through the ownership of voting securities, by contract, or otherwise. Agreement: This Agreement to Purchase Hotel, including the Exhibits. --------- Bookings: Contracts for the use or occupancy of guest rooms of the Hotel. -------- Closing: As defined in Section 6.1. ------- Compensation: The direct salaries and wages paid to, or accrued for the ------------ benefit of, any Employee, incentive compensation, vacation pay, severance pay, employer's contributions under F.I.C.A., unemployment compensation, workmen's compensation, or other employment taxes, and payments under Employee Benefit Plans (as hereinafter defined). Consumables: All food and beverages (alcoholic, to the extent transferable ----------- under applicable law, and non-alcoholic); engineering, maintenance and housekeeping supplies, including soap, cleaning materials and matches; stationery and printing; and other supplies of all kinds, in each case whether partially used, unused, or held in reserve storage for future use in connection with the maintenance and operation of the Hotel, which are on hand (including off-site storage) on the date hereof, subject to such depletion and restocking as shall occur and be made in the normal course of business but in accordance with present standards, excluding, however, (i) Operating Equipment and (ii) all items of personal property owned by Space Lessees, guests, employees, or persons (other than Seller or any Affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing food or services to the Hotel. Cut-off Time: 12:01 A.M. on the Closing Date. ------------ Department: Georgia Department of Revenue. ---------- Deposit: As defined in Section 3.2. ------- Documents: Reproducible copies of all plans, specifications, drawings, --------- blueprints, surveys, environmental reports and other documents which Seller has in its possession, or has a right to, as the same relate to the Real Property, including, but not limited to those relating to any prior or ongoing construction or rehabilitation of the Real Property. Employee(s): All persons employed by Seller and/or an Affiliate pursuant ----------- to Employment Contracts. Employee Benefit Plans: All employee benefit plans, as that term is ---------------------- defined in Section 3(2)(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including "multi-employer pension plans" as defined in Section 3(37) of ERISA, and each other employee benefit plan or program (including welfare benefit plans as defined in Section 3(1) of ERISA) to which Seller contributes on behalf of any of the Employees. Employment Contract(s): Those contracts and agreements, oral or written, ---------------------- with all or any of the executives, staff and employees of Seller and/or an Affiliate for work in or in connection with the Hotel including, but not limited to, individual employment agreements, union agreements, employee handbooks, group health insurance plans, life insurance plans and disability insurance plans (other than Employee Benefit Plans). Environmental Laws: As defined in Section 5.1(u). ------------------ Environmental Study: As defined in Section 4.3. ------------------- Excluded Assets: The following: (i) those assets, if any, listed on --------------- Exhibit B hereto owned and to be retained by Seller or Affiliates of Seller; - --------- (ii) receivables; (iii) the name "Apartment Inn"; and (iv) except as provided to the contrary in Section 17.1(f) hereof, all records, files and proprietary operating manuals in the Hotel. Excluded Permits: Permits and licenses required for the ownership and ---------------- operation of the Hotel which, under applicable law, are nontransferable. -2- Fixtures and Tangible Personal Property: All fixtures, furniture, --------------------------------------- furnishings, fittings, equipment, cars, trucks, machinery, apparatus, signage, appliances, draperies, carpeting, and other articles of personal property now located on the Real Property, or held in storage for future use at the Hotel, and used or usable in connection with any part of the Hotel, subject to such depletions, resupplies, substitutions and replacements as shall occur and be made in the normal course of business but in accordance with present standards excluding, however: (i) Consumables; (ii) Operating Equipment; (iii) equipment and property leased pursuant to Hotel Contracts; (iv) property owned by Space Lessees, guests, employees or other persons (other than Seller or any affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing goods or services to the Hotel; and (v) Improvements. FIRPTA Certificate: As defined in Section 17.1(m). ------------------ Hazardous Material: As defined in Section 5.1(u). ------------------ Hotel: The hotel referred to in the Recitals. ----- Hotel Contracts: All management, service, maintenance, purchase orders, --------------- leases and other contracts or agreements, including equipment leases capitalized for accounting purposes, and any amendments thereto, with respect to the ownership, maintenance, operation, provisioning, or equipping of the Hotel, or any of the Property, as well as written warranties and guaranties relating thereto, if any, including, but not limited to, those relating to heating and cooling equipment and/or mechanical equipment, but exclusive, however, of (i) insurance policies, (ii) the Bookings, (iii) the Space Leases, (iv) the Employment Contracts, and (v) the Employee Benefit Plans. Hotel Names: All names or other identifications used in connection with ----------- the operation of Hotel. Impositions: All taxes and other governmental charges of any kind ----------- whatsoever that may at any time be assessed or levied against or with respect to the Property, or any part thereof or any interest therein, including, without limitation, all general and special real estate taxes and assessments or taxes assessed specifically in whole or in part in substitution of general real estate taxes or assessments; any taxes levied upon or with respect to the revenue, income or profits of Seller from all or any part of the Property which, if not paid, will become a lien on all or any part of the Property, or a lien or charge on the rents, revenues or receipts therefrom; all assessed ad valorem taxes; all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Property and all assessments and other charges made by any governmental agency for improvements that may be secured by a lien on the Property. Improvements: The buildings, structures (surface and sub-surface) and ------------ other improvements, including such fixtures as shall constitute real property, located on the Land. Inspection Period: As defined in Section 4.1. ----------------- Land: The parcel of real estate legally described in Exhibit A hereto, ---- --------- together with all rights, title and interest, if any, of Seller in and to all land lying in any street, alley, road or avenue, open or proposed, in front of or adjoining said Land, to the centerline thereof, and all right, title and interest of Seller in and to any easements benefitting such land, any award made or to be made in lieu thereof and in and to any unpaid award for the damage to said Land by reason of change of grade of any street. -3- Legal Requirements: All laws, statutes, codes, acts, ordinances, orders, ------------------ judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and governmental authorities having jurisdiction of the Hotel (including, for purposes hereof, any local Board of Fire Underwriters), and the operation thereof. Material Contracts: All Hotel Contracts which cannot be canceled by 30 ------------------ days' or less notice without penalty or premium payment. Miscellaneous Hotel Assets: All contract rights, leases, concessions, -------------------------- copyrights, assignable warranties and other items of intangible personal property of Seller relating to the ownership or operation of Hotel, but such term shall not include (i) Bookings; (ii) Hotel Contracts; (iii) Space Leases; (iv) Permits; (v) cash or other funds, whether in petty cash or house banks, or on deposit in bank accounts or in transit for deposit; (vi) books and records (except as provided in Section 17.1(f); (vii) refunds, rebates, or other claims, or any interest thereon, for periods or events occurring prior to the Cut-off Time; (viii) utility and similar deposits; (ix) prepaid insurance or other prepaid items; and (x) prepaid license and permit fees; except to the extent that Seller receives a credit as of Closing for any such item or matter. Operating Equipment: All china, glassware, linens, silverware and ------------------- uniforms, whether in use or held in reserve storage for future use, in connection with the operation of the Hotel, which are on hand (including off- site storage) on the date hereof, subject to such depletion and restocking as shall be made in the normal course of business but in accordance with present standards. Parent: Extended Stay America, Inc., a Delaware corporation. ------ Permits: All licenses, franchises and permits, certificates of occupancy, ------- authorizations and approvals used in or relating to the ownership, occupancy or operation of any part of the Hotel. Permitted Exceptions: Any liens, encumbrances, restrictions, exceptions -------------------- and other matters specified in Exhibit C to which title to the Property may be --------- subject on the Closing Date. Personal Property: All of the Property other than the Real Property. ----------------- Property: (i) The Real Property; (ii) the Fixtures and Tangible Personal -------- Property; (iii) the Operating Equipment; (iv) the Consumables; (v) the transferable right, title and interest of Seller in, to and under the Hotel Contracts and Space Leases; (vi) the Bookings; (vii) the Permits (other than Excluded Permits); (viii) the Hotel Names; (ix) the Documents; and (x) all other Miscellaneous Hotel Assets, provided, however, that Property shall not include the Excluded Assets. Purchase Price: As defined in Section 3.1. -------------- Real Property: The Land together with the Improvements located on the ------------- Land. Searches: As defined in Section 6.3(a). -------- Section 1445: As defined in Section 17.1(m). ------------ -4- Software Program: The software programs used by Seller in connection with ---------------- the operation of the Hotel. Space Leases: All leases, licenses, concessions and other occupancy ------------ agreements, and any amendments thereto, whether or not of record, for the use or occupancy of any portion of the Real Property excluding, however, Bookings. Space Lessee: Any person or entity entitled to occupancy of any portion of ------------ the Real Property under a Space Lease. Submittals: As defined in Section 4.1. ---------- Submitted Financial Statements: Those financial statements of the Hotel ------------------------------ identified in Exhibit D hereto. --------- Title Company: First American Title Insurance Company. ------------- Title Defect: A lien, claim, charge, security interest or encumbrance ------------ other than a Permitted Exception. Title Policy: As defined in Section 10.1(i). ------------ UCC: The Uniform Commercial Code in effect in the State of Georgia. --- Violation: Any condition with respect to the Property which constitutes a --------- violation of any Legal Requirements. 1.2 References. Except as otherwise specifically indicated, all ---------- references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "hereby," "hereof," "herein," "hereto," "hereunder," "hereinafter," and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof. The word "hereafter" shall mean after, and the term "heretofore" shall mean before, the date of this Agreement. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. ARTICLE II SALE AND PURCHASE 2.1 Sale and Purchase. Seller hereby agrees to sell (or to cause to be ----------------- sold) to Purchaser, and Purchaser hereby agrees to purchase from Seller, the Property on the terms and subject to the conditions of this Agreement. ARTICLE III PURCHASE PRICE 3.1 Purchase Price; Allocation Thereof. The aggregate consideration ---------------------------------- ("Purchase Price") for the Property and the other agreements described herein (the "Other Agreements") shall be: -5- (a) Intentionally omitted (b) A Note from Extended Stay America, Inc. to Seller in the form attached hereto as Exhibit D-1 in the original principal amount of $4,100,000, ----------- with a maturity date of July 15, 1996, which shall be paid in either cash or additional Common Stock ("Additional Shares") if the Approved Sales occur as contemplated by Section 3.4. The Purchase Price shall be allocated in accordance with the values reasonably attributable to the components of the Property and the other agreements as set forth on Exhibit E hereto. --------- 3.2 INTENTIONALLY OMITTED. ---------------------- 3.3 No Assumption of Seller's Obligations. Except as specifically ------------------------------------- provided herein to the contrary, Purchaser shall not assume, or become obligated with respect to, any obligation of Seller, including, but not limited to, the following: (a) Obligations of Seller now existing or which may arise prior to the Cut-off Time with respect to any accounts payable or other payables; (b) Obligations prior to the Closing Date of any term, covenant or provision of any Employee Benefit Plan, Employment Contract, Hotel Contract or Space Lease; (c) Obligations of Seller now existing or which may hereafter exist by reason of or in connection with any alleged misfeasance or malfeasance by Seller in the conduct of its business, and with respect to any tort liability; (d) Obligations to Employees with respect to any Compensation (or pursuant to any Employment Contract or Employee Benefit Plan); and (e) Obligations of Seller incurred in connection with or relating to the transfer of the Property pursuant to this Agreement, including without limitation, any Federal, state or local income, sales, transfer or other tax incurred by reason of said transfer, all of which shall be the sole responsibility of Seller. 3.4 Payment of the Note. Purchaser shall satisfy the obligations of -------------------- Extended Stay America, Inc. under the Note by delivering Additional Shares and/or cash to Seller, as the case may be, on or before the Note's maturity date specified in the Note, subject to the following: (a) Purchaser and Seller acknowledge that Seller intends to sell the Additional Shares which are delivered by Purchaser in satisfaction of the Note and the net proceeds realized by Seller shall be deducted from the balance of the Note. Seller agrees that it shall attempt to sell such Additional Shares only in bona fide private placements which are approved by Purchaser in its reasonable discretion to a person or persons not affiliated with, related to, or associated with Seller ("Approved Sales"). Purchaser shall deliver to Seller that number of Additional Shares equal to the number of Additional Shares which are sold pursuant to Approved Sales and such delivery shall be accomplished so as to allow the Approved Sales to be consummated on a timely basis. -6- (b) If the proceeds from Approved Sales are less than the amount due under the Note, Purchaser shall also deliver cash to Seller prior to the maturity date of the Note having a value equal to the difference between the amount due under the Note and the proceeds from Approved Sales. In the event no Approved Sales occur prior to the maturity date of the Note, the Note shall be payable in cash on or before its stated maturity date. Seller shall use the proceeds from Approved Sales first to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property. Notwithstanding the above, if proceeds received from Approved Sales are insufficient to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property, Purchaser shall set off against amounts due under the Note an amount equal to such insufficiency and Purchaser shall apply such amount to satisfy and release such liens. (c) Purchaser shall indemnify, defend, and hold Seller harmless against and with respect to all losses, damages, liabilities, costs, and expenses to which Seller may become subject under the Securities Act of 1933, as amended, or otherwise in connection with or arising out of Approved Sales. ARTICLE IV INSPECTION PERIOD 4.1 Inspection Period. The "Inspection Period" shall be the period from ----------------- the date hereof to the Closing Date. 4.2 Submittals to Purchaser. Seller, at its expense, shall deliver to ----------------------- Purchaser on or before June 24, 1996, true and correct copies of the following: (a) the Permits, Hotel Contracts, Employment Contracts, Employee Benefit Plans, Space Leases and notices of Violations (if any); (b) a list of Bookings and a descriptive summary of the manner in which all Bookings are made, whether oral or written, with or without deposits or firm or contingent commitments for reservations, along with a copy of the written agreements or confirmation letters used in connection with the Bookings; (c) a descriptive summary of all pending or threatened litigation which would or does materially impact the Property listed on Exhibit L; --------- (d) the most recent real estate and personal property tax statements for the Property; (e) all Documents listed in Exhibit M, including, but not limited --------- to, the plans and specifications; (f) copies of all financial reports prepared for Seller for the 1995 and 1996 fiscal years of Seller ("Submitted Financial Statements"); and (g) information reflecting the insurance loss history of the Property for the period from January 1, 1995 to the present. -7- 4.3 Review and Inspection. During the Inspection Period, Purchaser shall --------------------- review the Submittals and shall have the right to enter upon the Real Property to inspect the Property and to conduct tests and investigations at its sole cost and expense, except as provided herein. Seller shall cooperate with Purchaser, or its agents, in arranging such inspections. Without limitation of the foregoing, Purchaser or Purchaser's accountants or both may review the Submitted Financial Statements and, in connection therewith, Seller shall supply such documentation as Purchaser or Purchaser's accountants may reasonably request to facilitate such review. Purchaser shall conduct all such inspections and reviews in confidence and so as not to interfere unreasonably with the operation of the Hotel. During the Inspection Period, Purchaser may order an environmental report, at Purchaser's sole cost and expense, to be conducted by an environmental engineering firm selected by Purchaser (the "Environmental Study"). All materials and data of any and all nature made available to Purchaser shall be kept confidential by Purchaser, and in the event the transaction contemplated by this Agreement shall not be consummated for any reason, all such materials and data in Purchaser's possession shall be returned to Seller. Purchaser hereby agrees to indemnify, defend and holder Seller harmless from and against all claims, liability and cost arising in connection with Purchaser and its agents performing the above-mentioned inspections and examinations on the Real Property. 4.4 Purchaser's Acceptance or Rejection. If, in its sole and absolute ----------------------------------- discretion, Purchaser accepts the Submittals and the condition of the Property, it shall give Seller written notice of such acceptance before expiration of the Inspection Period. If Purchaser shall give Seller a notice of disapproval before expiration of the Inspection Period or fails to give such notice, then, without the necessity of further documentation, this Agreement shall be deemed terminated and the Deposit shall be returned to Purchaser. Purchaser shall pay to Seller the sum of $100.00 as fixed and liquidated compensation for such termination, and neither party shall have any further obligation or liability to the other party hereunder. The parties hereto acknowledge that Purchaser has incurred substantial costs in connection with the negotiation and execution of this Agreement, will incur additional substantial costs in conducting the inspections contemplated by Section 4.3 and would not have entered into this Agreement without the availability of the Inspection Period. Therefore, the parties agree that adequate consideration exists to support the obligations of the parties hereunder, even before expiration of the Inspection Period. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties of Seller and Rosa. Seller and Rosa ------------------------------------------------- hereby represent and warrant, jointly and severally, the following to Purchaser: (a) Due Organization, etc. Seller is a Georgia limited partnership --------------------- duly formed and validly existing in good standing under the laws of its state of formation and has full power and authority (i) to own or lease its properties and to carry on its business as it is now being conducted, (ii) to enter into this Agreement and to sell, convey, transfer, assign, and deliver the Property to Purchaser as provided herein, and (iii) to carry out the other transactions and agreements contemplated hereby. This Agreement has been duly authorized by all requisite action on the part of Seller. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, except as otherwise provided herein, do not require the consent or approval of any governmental authority, nor shall such execution and delivery result in a breach or Violation of any Legal Requirement, or constitute a default (or an -8- event which with notice and passage of time or both will constitute a default) under any contract or agreement to which Seller or an Affiliate is a party or by which it or the Property is bound. (b) Title to Real Property. Seller's interest in the Real Property ---------------------- is good and marketable title in fee simple, free and clear of all mortgages, options, liens, charges, easements, agreements, claims, restrictions or other encumbrances of any kind or nature except for the Permitted Exceptions. (c) Title to Personal Property. Seller has good and marketable -------------------------- title to the Personal Property, subject only to the Permitted Exceptions. All items of Personal Property have been fully paid for to the extent that normal business practice permits, except those items which are subject to installment payments and with respect to which there are no installments due which are delinquent. Without limiting the generality of the foregoing, at Closing Seller shall have good and marketable title to all telephone and television equipment located on the Property. (d) Permits. (i) Exhibit F identifies all existing Permits and is ------- --------- complete and correct in all material respects; (ii) such Permits constitute all of the Permits currently necessary for the ownership and operation of the Hotel; (iii) to Seller's knowledge, no default has occurred in the due observance or condition of any Permit which has not been heretofore corrected; (iv) to Seller's best knowledge, no Space Lessee has received any notice from any source to the effect that there is lacking any Permit needed in connection with the operation of the Hotel or any other operation connected therewith; and (v) all Permits (except those Permits which are designated Excluded Permits on Exhibit ------- F) are assignable to Purchaser. (e) Hotel Contracts. Exhibit G identifies all Hotel Contracts and --------------- --------- the information noted therein is complete and correct in all material respects. Except as disclosed in Exhibit G, there is no default under any Hotel Contract. --------- Seller has provided (or will provide during the Inspection Period) true and correct copies of all Hotel Contracts to Purchaser. Each Hotel Contract (other than the Hotel Contracts designated as Material Contracts on Exhibit G may be ---------- canceled upon 30 days' or less notice without penalty or premium payment. (f) Hotel Names. Exhibit O hereto identifies all Hotel Names and is ----------- --------- complete and correct in all respects. Seller has not received any notice that the use of any thereof infringes on the rights of a third party. (g) Space Leases. Exhibit J identifies all Space Leases and is ------------ --------- complete and correct in all material respects. Except as disclosed in Exhibit ------- J, there is no default under any Space Lease. Seller has given (or will give, during the Inspection Period) to Purchaser true and correct copies of all Space Leases. Seller owns all right, title and interest of the lessor under each Space Lease. (h) Commissions, etc. Except as may be disclosed on Exhibits G or J ---------------- ---------- - and other than in the ordinary course of business in connection with Bookings, there are no commissions or referral fees relating to the Hotel currently outstanding, nor will there be any such commissions or referral fees outstanding, on or before the Closing Date. Seller has not entered into any agreements with any referral organization or booking agent which contain any obligations that extend beyond the Closing Date. (i) Impositions. ----------- (i) Except as described on Exhibit N hereto, Seller has timely --------- filed all returns and reports for sales, use and property taxes required to be filed by it with respect -9- to the operation of the Property and has paid in full or made adequate provision by the establishment of reserves for Impositions which have become due with respect to the operation of the Property. There is no sales, use or property tax deficiency proposed or threatened against Seller with respect to the operation of the Property. There are no tax liens upon any property or assets of Seller. Seller has made all payments of sales, use and property taxes when due in amounts sufficient to avoid the imposition of any penalty with respect to the Property. (ii) Impositions which Seller was required by law to withhold or to collect with respect to the Property have been duly withheld and collected, and have been paid over to the proper governmental entity or are being held by Seller for such payment, and all such withholdings and collections and all other payments due in connection therewith as of the date of the Submitted Financial Statements are duly reflected on the Submitted Financial Statements. (iii) Seller is not currently being audited by, and has not received any notice of intention to audit from, any federal, state or local sales, use or property taxing authority. (j) Fixtures, Tangible Personal Property, etc. To the best of ----------------------------------------- Seller's knowledge, except for such guest rooms as have been combined as two- room suites (each of which contain such furniture and furnishings as is appropriate), each guest room contains a complete set of furniture and furnishings appropriate for a guest room of an extended-stay lodging hotel with in-room kitchenette. The quantities of Fixtures and Tangible Personal Property, Consumables and Operating Equipment in the Hotel, including physical reserves, are sufficient for the proper and efficient operation of the Hotel in accordance with the standards of operation heretofore maintained by Seller. Seller shall continue to maintain the same at a level consistent with the average maintenance for the 12 months preceding the date hereof. (k) Submitted Financial Statements. To the best of Seller's ------------------------------ knowledge, the Submitted Financial Statements for the Hotel (which shall include the income of restaurants, bars, retail rental space and garage portions of the Hotel, if any) fairly present the results of operation of the Hotel for the periods indicated, and were prepared in accordance with generally accepted accounting principles, on a consistent basis, and there has been no material adverse change in the results of the operations of the Hotel since the statement dated for the period ended December 31, 1995. (l) Bookings. Exhibit I identifies all Bookings for periods from -------- --------- and after the date hereof. (m) Pending Litigation. Except as described in Exhibit L, there are ------------------ --------- no actions, suits, or proceedings, pending or threatened against Seller or affecting any of Seller's rights, in each case, with respect to the Property, at law or in equity, or before any federal, state, municipal, or other governmental agency or instrumentality, which might result in any order, injunction, decree or judgment having an adverse effect on the Hotel or the Property, nor is Seller aware of any facts which to its knowledge might result in any action, suit or proceedings. Except as noted in Exhibit K, to the best of Seller's knowledge, --------- the Hotel complies with all Legal Requirements. Except as noted in Exhibit K, --------- Seller has not received any notice of any Violation of a Legal Requirement which has not been heretofore corrected. Prior to the Closing Date, any uncured Violations listed in Exhibit K and any other Violations that arise shall be --------- cured by Seller at its sole expense. -10- (n) Condemnation. There are no pending, or, to the knowledge of ------------ Seller, threatened, condemnation proceedings or condemnation actions against the Real Property or any of the rights-of-way located adjacent thereto. (o) Zoning. The Land is currently zoned for its present use. ------ (p) Assessments. No governmental assessment for sewer, sidewalk, ----------- water, paving, electrical, power or other improvements is pending or threatened, except as may be set forth on Exhibit C. --------- (q) Labor Disputes. During the three (3) years preceding the date -------------- hereof, Seller has not experienced any labor disputes or labor trouble other than routine grievances or organizational efforts, none of which have had a material adverse effect on the operations of the Property. (r) Employees. Exhibit H is a complete list of all Employees with --------- --------- their salaries, position and terms of employment; and (i) except as set forth on Exhibit H, Seller is not a party to any Employment Contract and no union is - --------- presently serving as collective bargaining agent for any Employees; (ii) to the best of Seller's knowledge, no union presently is conducting or planning to conduct an organizational campaign for any Employees; and (iii) with the exception of the Employee Benefit Plans listed on Exhibit P, there is no --------- pension, profit-sharing, bonus or other employee benefit plan relating to current or past Employees. (s) Utilities. All utility equipment and facilities required for --------- the operation and use of the Hotel are located on the Property and all agreements for providing utilities are with direct providers. (t) Material Changes. There are no facts or circumstances ---------------- specifically related to the Hotel and the operation thereof not disclosed to Purchaser of which Seller has knowledge (and Purchaser does not), which have or could have a material adverse effect upon the Hotel or its operation. Seller agrees to notify Purchaser immediately of such facts or circumstances if it becomes aware of the same prior to Closing. (u) Environmental Matters. --------------------- (i) To the best of Seller's knowledge, Seller has not transported, stored, treated, or disposed of, nor has it allowed or arranged for any third parties to transport, store, handle, treat, or dispose (as hereinafter defined) of Hazardous Substances or other waste to or at any location other than a site lawfully permitted to receive such Hazardous Substances or other waste for such purposes, nor has it performed, arranged for, or allowed by any method or procedure such transportation, storage, treatment, or disposal in contravention of any laws or regulations or in a manner giving rise to any liability whatsoever. Seller has not stored, handled, treated, or disposed of, nor allowed or arranged for any third parties to store, handle, treat, or dispose of Hazardous Substances or other waste upon property owned or leased by it, except as permitted by law. For purposes of this Section 5.1(u), the term "Hazardous Substances" shall include, without limitation, any material or substance that is one or more of the following: (i) defined as a conventional, hazardous, toxic, regulated or solid pollutant, contaminant, substance or waste pursuant to any Environmental Law (as hereinafter defined), (ii) petroleum, (iii) asbestos, (iv) corrosive, toxic, flammable, explosive, reactive, mutagenic, carcinogenic, infectious or radioactive, (v) materials mixed with, containing or derived from any of the foregoing or (xvii) any material which is or -11- becomes regulated by any Environmental Law which is released (as hereinafter defined) at or from the Real Property or which has migrated to or from the Real Property or is found on the Real Property or any other site affected by such release at, to, on or from the Real Property. The terms release(d), transport(ed), store(d), treat(ed), handle(d), arrange(d), dispose(d) and disposal shall have the meanings assigned by the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.A. Section 9601 et seq. ("CERCLA") or the Resource Conservation and Recovery Act, 42 U.S.C.A. Section 6901 et seq. (42 U.S.C.A. Section 6903 ("RCRA"). (ii) To the best of Seller's knowledge, there has not occurred during Seller's occupancy nor is there currently occurring, a release of any Hazardous Substance to, from, on, into, or beneath the surface of the Land. (iii) To the best of Seller's knowledge, the Seller has not shipped, transported, or disposed of, nor has it allowed or arranged, by contract, agreement, or otherwise, for any third parties to ship, transport, or dispose of, any Hazardous Substance or other waste to or at a site which, pursuant to CERCLA or any similar state law, (i) has been placed on the National Priorities List or its state equivalent, or (ii) the Environmental Protection Agency or the relevant state agency has proposed or is proposing to place on the National Priorities List or its state equivalent. Seller has not received written notice, nor does it have knowledge of any facts which could give rise to any written notice, that Seller is a potentially responsible party for a federal or state environmental cleanup site or for corrective action under CERCLA or any other applicable law or regulation. Seller has not submitted nor was it required to submit any notice pursuant to Section 103(c) of CERCLA, or pursuant to any federal, state or local requirement for notification of a release with respect to the Real Property. Seller has not received any written request for information from any federal, state or local governmental authority in connection with any release. Seller has not been required to or has not undertaken any response, investigation, monitoring, or remedial actions or clean-up actions of any kind at the request of any federal, state, or local governmental entity, or at the request of any other person or entity. (iv) Seller does not use, and has not used, any Underground Storage Tanks, and there are not now nor to the best of Seller's knowledge have there ever been any Underground Storage Tanks on the Land. For purposes of this Section 5.1(u)(iv), the term "Underground Storage Tanks" shall have the meaning given it in the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). (v) To the best of Seller's knowledge, there is no asbestos in or on the Real Property. (vi) Seller has not received written notice of any violation, noncompliance or breach of any environmental or worker safety laws or regulations which require any work, repairs, construction, or capital expenditures with respect to the assets or properties of Seller. (vii) Seller has delivered to Purchaser, if any exist: (i) all environmental audits, assessments, or occupational health studies undertaken by Seller or its respective agents or known to have been undertaken by or at the order or request of governmental agencies; (ii) the results of any ground, water, soil, air, or asbestos monitoring or investigation undertaken with respect to the Real Property; (iii) all written communications between Seller and any environmental -12- agencies; and (iv) all citations issued under the Occupational Safety and Health Act (29 U.S.C. Sections 651 et seq.). (viii) Seller's Environmental Indemnity. (a) Indemnification. Seller and Rosa shall defend, --------------- indemnify and hold harmless Purchaser, its nominees, officers, directors, agents, employees, successors, lenders, assigns, affiliates, subsidiaries, parent companies (if any), shareholders, lenders, representatives and the successors and assigns of all of the foregoing from and against, any breach of any of representations and warranties of Seller set out herein at Section 5.1(u)(i) through 5.1(u)(vii). (b) Discharge of Environmental Claims. In the event --------------------------------- that Purchaser notifies Seller of any claim that may be subject to an indemnification obligation under this Section 5.1(u), Seller shall, within thirty (30) days from the date of receipt of notice, acknowledge and assume the liability asserted. During such thirty (30) day period, Purchaser shall not take any action or incur any expense with respect to the claim, except to the extent that such action or expense is legally required or reasonably necessary under the circumstances. Seller shall have the right and obligation to control, manage and direct all discussions, proceedings and activities regarding the satisfaction or discharge of any claim which is assumed by Seller or any liability or obligation that such a claim seeks to impose on Seller. Purchaser shall have the right, at its own expense, to consult with Seller, through counsel or otherwise, with respect to all meetings and proceedings with adverse parties or governmental authorities regarding any Environmental Claim and with respect to all activities pertaining to that matter. Prior to initiating or participating in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, Seller shall consult with Purchaser. This right of consultation shall not apply to confidential meetings or documents in cases where Seller or Purchaser are disputing or litigating claims against each other in a judicial or administrative proceeding. Seller shall promptly notify Purchaser in writing before Seller initiates or participates in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, including without limitation decisions or discussions concerning matters not covered by this Agreement. Purchaser shall have the right, but not the obligation, to participate in such meetings or proceedings. (c) Remedies. If Seller fails to perform its -------- obligations under this Section 5.1(u), Purchaser may, at its option (1) bring an action for injunction or specific performance of this Section 5.1(u) or this Agreement, and in such action, recover damages suffered by Purchaser as a result of Seller's breach or delay in performing its obligations, or (2) bring an action for damages for Seller's breach of its obligations, or (3) bring an action for response costs or other relief under federal or state environmental laws or regulations, or (4) any combination of the above. In the event that Purchaser prevails in such an action, it shall be entitled to recover from Seller the costs and expenses of bringing the action, including reasonable attorneys' fees. No delay or omission in the exercise of any right or remedy accruing to Purchaser upon any breach by Seller under this Agreement shall impair any such -13- right or remedy or be construed as a waiver of such breach theretofore or thereafter occurring. The waiver by Purchaser of any condition or of any breach of any term, covenant or condition contained in this Agreement shall not be deemed to be a waiver of any other condition or of any subsequent breach of the same or of any other term, covenant or condition of this Agreement. All rights, powers, options or remedies afforded to Purchaser either under this Section 5.1(u) or this Agreement or by law or by equity, shall be cumulative and not alternative and the exercise of any right, power, privilege or remedy shall not bar other rights, powers, privileges or remedies. (v) Documents. Exhibit M is a list of all of the Documents; Seller --------- --------- knows of no other document or instrument relating to the Hotel, or the ownership or operation thereof. (w) Seller's Knowledge. For the purposes of this Section 5.1, the ------------------ phrases "to the best of Seller's knowledge," "to Seller's knowledge" and similar phrases shall imply a reasonable investigation by Seller and its agents. (x) Third Party Property. Seller is not in possession of any -------------------- property owned by third parties other than (i) property leased by Seller pursuant to leases disclosed to Purchaser pursuant to this Agreement; (ii) baggage of current guests which has been checked with or left in the care of Seller; and (iii) contents in safe deposit boxes deposited by current guests. (y) Investment Representations. Seller represents and warrants that -------------------------- each of it and its partners either (i) is an "accredited investor" as defined in 17 C.F.R. 230.501(a); or (ii) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Shares as contemplated by this Agreement. Seller represents that they have received a prospectus of Parent dated as of the date of this Agreement. 5.2 Representations and Warranties of Purchaser. Purchaser hereby ------------------------------------------- represents and warrants the following to Seller: (a) Authority. Purchaser has all requisite power and authority to --------- execute and deliver this Agreement and to consummate the transactions contemplated hereby pursuant to the terms and conditions hereof. (b) No Conflict. The execution and delivery of this Agreement and ----------- the consummation of the transactions contemplated hereby will not conflict with, breach, result in a default under, or violate any commitment, document or instrument to which Purchaser is a party or by which it is bound. (c) Parent Shares. The Shares have been registered by the Parent ------------- pursuant to a registration statement filed with the Securities and Exchange Commission (the "SEC"), a so-called "shelf" registration statement (the "Registration Statement"), in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"). Upon the issuance and delivery of the Shares to the Seller in accordance with this Agreement, such shares will constitute legally and validly authorized and issued, fully paid, and nonassessable shares of Common Stock. The Registration Statement has been declared effective under the 1933 Act. The Parent is in compliance with the undertakings contained in the Registration Statement and to the knowledge of the Purchaser, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act. (d) Rule 145. Purchaser covenants that it will file the reports -------- required to be filed -14- by it under the Securities Act of 1933, as amended (the "Act") and the Securities Exchange Act of 1934, as amended and the rules and regulations adopted by the Securities and Exchange Commission thereunder, to the extent required from time to time to enable Seller to sell the shares of Common Stock delivered to Seller pursuant to this Agreement without registration under the Act within the limitation of the exemptions provided by Rule 145(d) under the Act. 5.3 Duration of Representations and Warranties. All representations and ------------------------------------------ warranties contained in Sections 5.1 and 5.2 shall be deemed restated on and as of the Closing Date. ARTICLE VI CLOSING MATTERS 6.1 Closing. The closing of the transaction contemplated hereby (the ------- "Closing") shall take place at the offices of the Title Company on or before June 24, 1996 (the "Closing Date") or such other date and/or place as may be mutually agreed by the parties. 6.2 Manner of Closing. The transaction shall be closed with the ----------------- concurrent delivery of the documents of title, transfer of interests, delivery of the title policy described in Section 10.1(i) and the payment of the Purchase Price. Seller shall provide and pay for any undertaking (the "Gap Undertaking") to the Title Company necessary for the Closing to occur. (a) Searches. Seller shall deliver to buyer, not less than three -------- (3) days prior to the Closing Date, UCC, judgment and tax lien searches on the names of the Seller covering a date not earlier than seven (7) days prior to the date hereof (the "Searches") showing no Title Defect as to the Property unless the same is to be paid by Seller and released at or prior to Closing. (b) Defects. With respect to the survey and title commitment ------- obtained by Purchaser and the Searches delivered to Purchaser by Seller, if the same shall reflect any facts that would result in a Title Defect, Seller shall have thirty (30) days from the expiration of the Inspection Period within which to cure or remove the Title Defect. Seller shall be obligated to remove mortgages, deeds of trust and other liens or encumbrances of a definite and ascertainable amount, which the parties agree may be removed by the use of the proceeds of sale at Closing as provided in Section 6.3(c) below. In the alternative, Seller may make arrangements satisfactory to the Title Company for the cure (including insurance over) or removal of record of any such Title Defect. If any such Title Defect is not cured or otherwise provided for as aforesaid on or prior to the thirtieth (30th) day, the Purchaser shall either: (i) terminate this Agreement, in which event (hereinafter referred to as "Election No. 1") the Deposit shall be returned to Purchaser and the parties shall have no further obligation or liability to each other hereunder; or (ii) accept the title commitment, survey, or Searches as is, with the right, however, to deduct the amount of Title Defects represented by liens or encumbrances of a definite or ascertainable amount from the Purchase Price payable at Closing (hereinafter referred to as "Election No. 2"). Title Defects which are acceptable as part of Election No. 2 shall thereupon be deemed to be Permitted Exceptions and Exhibit C shall be amended, if necessary, to include such --------- additional Permitted Exceptions. Election No. 2 shall be made by the Purchaser giving Seller written notice thereof within five (5) days after notice of Seller's inability to cure or remove the Title Defect and in the absence of notice of Election No. 2 within such five (5) day period, Purchaser shall be deemed to have elected Election No. 1. In the event Purchaser elects Election No. 1 and a Title Defect was created or suffered by Seller, Purchaser shall be paid by Seller the actual costs of Purchaser's investigation not to exceed $10,000.00 in addition to recovery of the Deposit. -15- (c) Removal of Liens, etc. If on the Closing Date there shall be --------------------- any Title Defect which is capable of satisfaction by the payment of money, then Seller shall either (a) use a portion of the Purchase Price to satisfy the same, provided Seller shall simultaneously either deliver to Purchaser at Closing instruments, in recordable form, sufficient to satisfy such Title Defect of record, together with the cost of recording or filing said instrument; or (b) in the alternative, make arrangements with the Title Company, in advance of Closing, whereby Seller will deposit with the Title Company sufficient monies, acceptable to the Title Company to induce the Title Company to issue the Title Policy to Purchaser, either free of any such Title Defect or with insurance which "insures over" such Title Defect. Purchaser agrees to provide at Closing separate certified checks as requested, to facilitate the satisfaction of any such Title Defects, if request is made within a reasonable time prior to the Closing Date. The existence of any Title Defects capable of satisfaction by the payment of money shall not be deemed to be Title Defects for the purposes of cure periods, as discussed supra in Section 6.3(b), if Seller shall comply with ----- the foregoing requirements. ARTICLE VII CLOSING DELIVERIES 7.1 Seller's Deliveries. At Closing, Seller shall deliver, or cause to ------------------- be delivered to Purchaser, the following, each of which shall be in form and substance acceptable to counsel for Purchaser and, in the case of documents of transfer or conveyance, shall be accepted or consented to by all parties required to make such transfer or conveyance effective: (a) a recordable limited warranty deed from Seller to Purchaser subject only to the Permitted Exceptions; (b) a Bill of Sale, with special covenants of title, transferring to Purchaser all of Seller's right, title and interest in and to each and every item of Fixtures and Tangible Personal Property, Documents, Consumables and Operating Equipment to be transferred hereunder subject only to Permitted Exceptions, and with respect to any vehicles included therein, such separate forms of assignment as are required to be filed with any governmental agency to effect such change in registration of ownership; (c) all of the Bookings, Hotel Contracts, Space Leases, Permits and other tangible Miscellaneous Hotel Assets, together with an Assignment conveying and transferring to Purchaser all of Seller's right, title and interest in, to and under the Bookings, Hotel Contracts, Space Leases, Permits (other than Excluded Permits) and all other Miscellaneous Hotel Assets; (d) the certificate referred to in Section 10.1(b) hereof; (e) the Noncompete Agreements, in the form attached hereto as Exhibit R, executed by Tempo Real Estate Corporation, the sole general partner - --------- of Seller, and Rosa. (f) a FIRPTA Certificate; (g) estoppel letters from all of the Space Lessees in the form of Exhibit J-1 and any estoppel certificates for Hotel Contracts which may be - ----------- required pursuant to Section 10.1(f); (h) Affidavit of Title for the Real Property, in customary form; -16- (i) notices to Space Lessees of change in ownership of the Hotel, if requested by Purchaser; (j) the opinion of Seller's counsel as provided by Section 10.1(c); (k) State of Georgia and County of Gwinnett transfer stamp declarations; (l) evidence acceptable to Purchaser and the Title Company of the authority of the general partners of Seller to convey the Property on behalf of the Seller, and resolutions of the directors of the general partner of Seller authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; (m) a certificate of the secretary of the general partner of Seller, dated as of the Closing Date, certifying the incumbency of the officer(s) of the general partner of Seller executing the documents delivered by Seller pursuant to this Agreement; (n) evidence satisfactory to Purchaser of termination of the management agreement between Seller and A/I Development, Inc., a Georgia corporation. 7.2 Purchaser's Deliveries. At the Closing, Purchaser shall cause to be ---------------------- delivered to Seller: (a) the stock certificates described in Section 3.1(a), registered in the name of Seller; (b) the Note described in Section 3.1(b); (c) the certificate referred to in Section 9.1(b) hereof; (d) the opinion of Purchaser's counsel as provided by Section 9.1(c); and (e) State of Georgia and County of Gwinnett transfer stamp declarations. 7.3 Concurrent Transactions. All documents or other deliveries required ----------------------- to be made by Purchaser or Seller at Closing, and all transactions required to be consummated concurrently with Closing, shall be deemed to have been delivered and to have been consummated simultaneously with all other transactions and all other deliveries, and no delivery shall be deemed to have been made, and no transaction shall be deemed to have been consummated, until all deliveries required by Purchaser, or its designee, and Seller shall have been made, and all concurrent or other transactions shall have been consummated. 7.4 Further Assurances. Seller and Purchaser will, at the Closing, or at ------------------ any time or from time to time thereafter, upon request of either party, execute such additional instruments, documents or certificates as either party deems reasonably necessary in order to convey, assign and transfer the Property to Purchaser, hereunder. 7.5 Possession. Possession of the Property shall be delivered at Closing. Subject to the provisions of Section 17.1(f), Excluded Assets (other than any thereof under leases to be assumed by Purchaser) shall be removed from the Hotel by Seller, at its expense, on or before the Closing Date. Seller, at its expense shall make all repairs necessitated by such removal but shall have no obligation to replace any Excluded Asset so removed. -17- ARTICLE VIII ADJUSTMENTS AND PRORATIONS 8.1 Adjustments and Prorations. The following matters and items shall be -------------------------- apportioned between the parties hereto or, where appropriate, credited in total to a particular party, as of the Cut-off Time as provided below: (a) Down Payments for Reservations. Any pre-closing down payments ------------------------------ made to Seller on confirmed reservations for dates after the Closing Date will be credited to Purchaser as of the Closing. Any post-closing down payments made to Seller on confirmed reservations for dates after the Closing Date will be forwarded to Purchaser upon receipt. (b) Taxes and Assessments. All ad valorem taxes, special or general --------------------- assessments, personal property taxes, attorneys' fees directly related to the reduction of taxes or assessments, water and sewer rents, rates and charges, vault charges, canopy permit fees, and other municipal permit fees. If the amount of any such item is not ascertainable on the date the proration schedule is completed pursuant to Section 8.3, the credit therefor shall be based on one hundred percent (100%) of the most recent available bill and shall be reprorated upon receipt of the actual tax bill. Notwithstanding the above, special real property tax assessments for which the work is substantially completed as of the Closing Date shall be paid by Seller. (c) Utility Contracts. Telephone and telex contracts and contracts ----------------- for the supply of heat, steam, electric power, gas, lighting and any other utility service, with Seller receiving a credit for each deposit, if any, made by Seller as security under any such public service contracts if the same is transferable and provided such deposit remains on deposit for the benefit of Purchaser. Where possible, cut-off readings will be secured for all utilities on the Closing Date. (d) Hotel Contracts and Space Leases. Any amounts prepaid or -------------------------------- payable under any Hotel Contracts and Space Leases shall be apportioned between the parties. Any percentage rentals under Space Leases shall be prorated on the basis of the ratio of the number of days expired before Closing to the number of days after Closing, for the current percentage rent period of the Space Lease. All security deposits held by Seller shall be transferred to Purchaser and all obligations with respect to such security deposits shall be assumed by Purchaser. (e) License Fees. Fees paid or payable for Permits (other than ------------ Excluded Permits) shall be apportioned between the parties. (f) Hotel Matters. ------------- (i) Advance payments, if any, under Bookings for Hotel facilities which shall include prepaid amounts by current guests; (ii) Coin machine, telephone, washroom and checkroom income; and (iii) Commissions to credit and referral organizations. (g) Insurance. Prepaid premiums for policies of insurance which are --------- assigned to Purchaser. Seller shall assign such of its policies of insurance for the Property which has been designated by Purchaser to be assigned to Purchaser as of the Closing Date. -18- (h) Employment Contracts. Seller shall be responsible for, and -------------------- shall pay when due, all Compensation of Employees, until the Cut-off Time. Purchaser assumes no Employment Contracts and assumes no obligation with respect to any Employee Benefits all of which shall be the responsibility of Seller. (i) Consumable Items. The cost of any Consumables or Operating ---------------- Equipment which are at a level below the level required to be maintained under this Agreement shall be credited to Purchaser. (j) Other. Such other items as are provided for in this Agreement ----- or as are normally prorated and adjusted in the sale of a hotel, including without limitation, all petty cash funds and cash in house banks, and all deposits and prepaid items which inure to the benefit of the Purchaser. 8.2 Receivables. Purchaser is not purchasing any of the receivables of ----------- the Hotel and Seller shall be solely responsible for the collection of accounts receivable arising prior to the Closing Date. If Purchaser shall receive any payment made on any unpurchased accounts receivable within ninety (90) days after the Closing Date, it shall promptly remit such payment to Seller. With regard to any collection made from any person or entity who is indebted to the Hotel both with respect to accounts receivable accruing prior to the Closing Date and to the accounts receivable accruing subsequent to the Closing Date, such collection shall be applied as designated by the payor, but if there is no designation, then any such collections received within ninety (90) days after the Closing Date shall be applied first to the indebtedness accrued prior to the Closing Date, but thereafter, any such collections shall be applied first to the payment in full of any amounts due to Purchaser on accounts accruing subsequent to the Closing Date. 8.3 Proration Schedule. ------------------ (a) A schedule setting forth the adjustments and prorations to be made pursuant to Section 8.1 above shall be prepared by Purchaser and forwarded to Seller within sixty (60) days after the Closing Date. Seller shall be afforded the opportunity to review all work papers and computations used by Purchaser in the preparation of the adjustments and prorations. The schedule as delivered shall be deemed accepted by Seller except to the extent, if any, that Seller, within ten (10) days after the date of delivery thereof to Seller, has delivered a written notice to Purchaser stating any exceptions Seller may have to such schedule. If within such period Seller shall give written notice to Purchaser of any exceptions to the schedule as delivered by Purchaser, the parties shall attempt to resolve all of the exceptions. To the extent that any such exceptions are not resolved within fifteen (15) days after the delivery to Purchaser of Seller's exceptions to the schedule, such differences shall be submitted as soon as practicable thereafter to such "Big Six" accounting firm upon which the parties shall agree, for final determination thereof. If the parties are not able to agree upon an accounting firm, each shall designate a "Big Six" accounting firm and give written notice to the other of the name and address of the firm so designated. The two firms shall consult with each other and, if possible, determine the exceptions in question by mutual agreement, and their determination so agreed upon, if certified to the parties prior to their reaching agreement independently of arbitration, shall be final and conclusive. If the two firms are not able to agree upon the exceptions in question, they jointly shall designate a third firm whose determination concerning the exceptions shall be final and conclusive, if certified to the parties prior to their reaching agreement independent of arbitration. Any determination by such accounting firm(s) as to the proper determination of any such item submitted to it for determination shall be conclusive and binding upon the parties for purposes of this Agreement. Seller and Purchaser shall each pay one-half of such fees charged by such accounting firm(s) in connection with any matter submitted to it hereunder. -19- (b) The net amount due pursuant to the adjustments and prorations made as required by this Section 8.3 shall be paid by cash or bank cashier's check payable in immediately available funds in United States currency to the order of the party to whom the same shall be due upon final determination of the adjustments and prorations required hereunder. (c) Period for Recalculation. Notwithstanding the foregoing, if at ------------------------ any time within six (6) months following the Closing Date, either party discovers any items which should have been included in the prorations but were omitted therefrom, then such items shall be adjusted in the same manner as if their existence had been known at the time of the preparation of the prorations. The foregoing limitations shall not apply to any items which, by their nature, cannot be finally determined within the periods specified. ARTICLE IX CONDITIONS TO SELLER'S OBLIGATIONS 9.1 Conditions. Seller's obligation to close hereunder shall be subject ---------- to the occurrence of each of the following conditions, any one or more of which may be waived by Seller in writing: (a) Purchaser's Compliance with Obligations. Purchaser shall have --------------------------------------- complied with all obligations required by this Agreement to be complied with by Purchaser. (b) Truth of Purchaser's Representations and Warranties. The --------------------------------------------------- representations and warranties of Purchaser contained in Section 5.2 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Seller shall have received a certificate to that effect signed by an authorized agent of Purchaser. (c) Opinion of Purchaser's Counsel. Purchaser shall have delivered ------------------------------ to Seller a favorable written opinion of Pedersen & Houpt in connection with this transaction, dated the Closing Date, as to (i) the power and authority of Purchaser to execute and deliver this Agreement, (ii) the due authorization, execution and delivery by Purchaser of this Agreement, and (iii) the legality, validity and, as to Purchaser, the binding effect of this Agreement (subject to the effect of bankruptcy and similar laws affecting the enforcement of creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). 9.2 Failure of Conditions. If any of the conditions enumerated in --------------------- Section 9.1 are not fulfilled and, as a consequence thereof, Seller elects to terminate this Agreement, such failure shall be deemed a default by Purchaser hereunder and the consequences thereof shall be governed by the provisions of Section 3.2. ARTICLE X CONDITIONS TO PURCHASER'S OBLIGATIONS 10.1 Conditions. Purchaser's obligation to close hereunder shall be ---------- subject to the occurrence of each of the following conditions, any one or more of which may be waived by Purchaser in writing: (a) Seller's Compliance with Obligations. Seller shall have ------------------------------------ complied with all obligations required by this Agreement to be complied with by Seller. -20- (b) Truth of Seller's Representations and Warranties. The ------------------------------------------------ representations and warranties of Seller contained in Section 5.1 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Purchaser shall have received a certificate to that effect signed by an authorized agent of Seller. (c) Opinion of Seller's Counsel. There shall have been delivered to --------------------------- Purchaser a favorable opinion of DeVille & Milhollin, counsel to Seller in connection with this transaction, dated the Closing Date as to (i) the power and authority of Seller to execute and deliver this Agreement; (ii) the due authorization, execution and delivery by Seller of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof; and (iii) the legality, validity and, as to Seller, the binding effect of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof (subject in each case to the effect of bankruptcy and similar laws affecting creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Obtaining of Excluded Permits. Purchaser shall have obtained ----------------------------- (or otherwise assured itself of the availability of), in its own or its designee's name, all Permits of the type designated as Excluded Permits on Exhibit F, except liquor licenses and permits, necessary for the operation of - --------- the Hotel. Purchaser agrees to use commercially reasonable efforts (and Seller, at Purchaser's expense, agrees to cooperate fully with Purchaser in such regard) to obtain all such Excluded Permits. (e) Governmental Approvals. Except as provided to the contrary in ---------------------- subsection (d) above, if this transaction, or any part or parts hereof, or the consummation of any of the transactions herein contemplated, shall require authorization or approval of any governmental agency having jurisdiction, all such authorizations and approvals shall have been obtained and shall be in full force and effect on and as of the Closing Date. Seller agrees to use its commercially reasonable efforts and all due diligence to cause such authorizations or approvals to be obtained, and Purchaser agrees to cooperate with Seller in all reasonable respects with respect thereto, but at the sole cost and expense of Seller. If such authorizations and approvals shall not have been obtained on or prior to the last day for Closing hereinabove provided, the Closing Date may be deferred, at the election of Purchaser, for an additional period of time, not to exceed thirty (30) days, as shall be necessary to obtain any authorizations or approvals not then obtained. (f) Estoppel Certificates--Hotel Contracts. Purchaser shall notify -------------------------------------- Seller, in writing at least thirty (30) days prior to the Closing Date, of the Material Contracts for which Purchaser requires estoppel certificates. Each of said estoppel certificates shall be in writing from the parties to such Material Contract stating that such Material Contract is in full force and effect, has not been amended or modified except as therein indicated, that such party consents to the assignment to Purchaser and that no party is then in default under such Material Contract (or if any default is known to exist, or would arise with the giving of notice or the passage of time, stating the nature of such default). The estoppel certificates herein referred to shall be in form and substance reasonably satisfactory to Purchaser and dated not more than thirty (30) days prior to the Closing Date. (g) No Pending Adverse Litigation. On the Closing Date, there shall ----------------------------- not then be pending or, to the knowledge of either Purchaser or Seller, threatened, any litigation, administrative proceeding, investigation or other form of governmental enforcement, or executive or legislative proceeding which, if determined adversely, would restrain the consummation of any of the transactions herein referred to, declare illegal, invalid or non-binding any of the covenants or obligations of the parties herein, or have a material and adverse effect on the operations or cash flow -21- of the Hotel, or materially and adversely affect the value of the Property or the ability of Purchaser, after the Closing, to operate the Hotel in the manner contemplated hereby, other than those matters previously disclosed and approved by Purchaser. (h) Securities Laws. Parent shall have received all necessary --------------- permits and otherwise complied with any state blue sky or other securities laws applicable to the issuance of shares of Parent's common stock in connection with the transaction contemplated hereby and Purchaser agrees to use its best efforts to cause Parent to accomplish the foregoing. (i) Title Policy. Purchaser shall have received contemporaneously ------------ upon Closing, an ALTA Owner's Insurance Policy issued by the Title Company in the amount of the Purchase Price, showing good and marketable fee simple title in the Real Property to be vested in Purchaser, which waives the general exceptions, and subject only to the Permitted Exceptions (the "Title Policy"), with such endorsements as Purchaser shall request. (j) Service Mark. Purchaser shall have received, pursuant to an ------------- agreement in form acceptable to Purchaser, the perpetual right to use the name "Apartment Inn" to identify the Hotel. 10.2 Failure of Conditions. If any of the conditions enumerated in --------------------- subsections (d), (e), (f), (g), (i) and (j) of Section 10.1 are not fulfilled, then the sole remedy of Purchaser shall be to terminate this Agreement (whereupon the Deposit shall be returned to Purchaser and neither party shall have any further obligations or liability hereunder), unless the failure to fulfill such condition constitutes, or results from, either (i) a material breach of an express representation or warranty made by Seller hereunder, or (ii) a material default of an express covenant made by Seller hereunder, in which event Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. If any of the conditions enumerated in subsections (a), (b) and (c) of Section 10.1 are not fulfilled and, as a consequence thereof, Purchaser elects to terminate this Agreement, such failure shall be deemed a default by Seller hereunder, the Deposit referred to in Section 3.2 shall be promptly returned to Purchaser, and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. ARTICLE XI ACTIONS AND OPERATIONS PENDING CLOSING 11.1 Actions and Operations Pending Closing. Seller agrees that after the -------------------------------------- expiration of the Inspection Period and until the Closing Date: (a) The Hotel will continue to be operated and maintained substantially in accordance with present standards. (b) Seller will not enter into any new Material Contract or Space Lease, or cancel, modify or renew any existing Material Contract or Space Lease, without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. If Purchaser fails to respond to a request for consent within 15 business days after receipt of such request, such consent shall be deemed given. (c) Seller shall have the right, without notice to or consent of Purchaser, to make Bookings in the ordinary course of business, at no less than the Hotel's standard rates including customary discounted rates. Additionally, Seller agrees to entertain in good faith Purchaser's -22- suggestions relating to the policy of the Hotel with respect to future Bookings and extension of credit. (d) Seller shall use commercially reasonable efforts to preserve in force all existing Permits and to cause all those expiring to be renewed prior to the Closing Date. If any such Permit shall be suspended or revoked, Seller shall promptly so notify Purchaser and shall take all measures necessary to cause the reinstatement of such Permit without any additional limitation or condition. (e) Seller shall notify Purchaser promptly if Seller becomes aware of any transaction or occurrence prior to the Closing Date which would make any of the representations or warranties of Seller contained in Section 5.1 not true in any material respect. (f) Seller will maintain in effect, all policies of casualty and liability insurance, or similar policies of insurance, with the same limits of coverage which it now carries with respect to the Hotel. (g) Seller will not dispose of any of the Property, except in the ordinary course of business and in accordance with this Agreement. (h) Seller shall allow Purchaser and its agents or representatives to inspect the Property, and all books and records relating thereto, at such times as Purchaser may reasonably request, provided such inspection does not unreasonably interfere with the continued operation of the Hotel in the ordinary course of business. Purchaser shall also have the right to have, and Seller shall provide accommodations for, a full-time on-site representative to observe the operations of the Hotel. Such accommodations shall be rent-free except for those nights when all other guest rooms at the Hotel are fully occupied, in which event Purchaser shall reimburse Seller for such nights at the Hotel's lowest corporate rate for such accommodations. Purchaser agrees that the results of all such observations will be treated as confidential, and Purchaser shall not disclose the same to any other person or entity except for Purchaser's counsel, accountants, and other agents or representatives consulted in connection with the acquisition of the Hotel. In the event that the sale is not consummated, any and all reports, financial and operating information obtained by Purchaser or its representatives shall be returned to the Seller. ARTICLE XII CASUALTIES AND TAKINGS 12.1 Casualties. ---------- (a) If any damage to the Property shall occur prior to the Closing Date by reason of fire, windstorm, hail, explosion or other casualty, and if, in Purchaser's reasonable judgment, the cost of repairing such damage will exceed Fifty Thousand Dollars ($50,000.00), Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller in which event, the Deposit shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds) relating to such damage and acquire the Property without any adjustment in the purchase price provided that, in such latter event, Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. -23- (b) If, in the reasonable business judgment of the insurance adjuster or other representative of the insurer of the Property, the cost of repairing such damage will not exceed Fifty Thousand Dollars ($50,000.00), and such damage is covered by Seller's insurance policies, the transactions contemplated hereby shall close without any adjustment in the Purchase Price, Purchaser shall receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds), and Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. 12.2 Takings. In the event of the actual or threatened taking (either ------- temporary or permanent) in any condemnation proceedings by exercise of right of eminent domain, of all or any part of the Real Property, between the date hereof and the Closing Date, and if, in Purchaser's reasonable judgment, such taking will result in the inability to conduct the operations of the Hotel substantially in accordance with the present standards, Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller, in which event the Deposit shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any condemnation award relating to such taking and acquire the Property without any adjustment in the Purchase Price. ARTICLE XIII EMPLOYEES 13.1 Employees, Compensation and Indemnification. Seller shall terminate ------------------------------------------- its employer-employee relationship with all Employees as of the Cut-off Time. Seller shall be solely responsible for all Compensation and other liabilities with respect to Employees and liabilities and obligations to Employees pursuant to any Employment Contract. Purchaser shall not be responsible for any such liability or obligations and Seller agrees to indemnify and hold Purchaser harmless from and against any such liability or obligations. All Compensation, obligations, liabilities and claims (including any under the Fair Labor Standards Act) to or by any Employee of Seller arising or occurring prior to the Cut-off Time shall be the responsibility of Seller. Purchaser shall not be responsible for any Compensation thereof and Seller agrees to indemnify and hold Purchaser harmless from and against same. Purchaser shall not assume or be liable upon any Employment Contract of Seller. ARTICLE XIV INDEMNITIES 14.1 Seller's Indemnity. Seller and Rosa agree, jointly and severally, to ------------------ indemnify, defend (with Purchaser having the right to retain counsel for the purpose of participating in such defense, at its sole cost and expense) and hold Purchaser harmless against and with respect to the following: (a) any and all obligations, liabilities, claims, accounts, demands, liens or encumbrances, whether direct or contingent and no matter how arising, in any way related to the Property and arising or accruing on or before the Closing Date or in any way related to or arising from any act, conduct, omission, contract or commitment of Seller or any predecessor in interest of Seller, at any time or times on or before the Closing Date (including, but not limited to, any damage to property or injury to or death of any person; without limitation on the generality of the foregoing, Seller and Rosa shall indemnify Purchaser from any claim or judgment under any lawsuit or proceeding filed or pending prior to the Closing Date against the Property, or any part thereof, and -24- any costs or expenses (including reasonable attorneys' fees) heretofore or hereafter incurred in connection with any such lawsuit or proceeding; (b) any loss or damage to Purchaser resulting from any inaccuracy in or breach of any representation or warranty of Seller or resulting from any breach or default by Seller of any obligation of Seller under this Agreement; and (c) all costs and expenses, including reasonable attorneys' fees, related to any actions, suits or judgments incident to any of the foregoing. 14.2 Purchaser's Indemnity. Purchaser agrees to indemnify, defend (with --------------------- Seller having the right to retain counsel for the purpose of participating in such defense, at its sole cost and expense), and hold Seller harmless against and with respect to the following: (a) any loss or damage to Seller, subsequent to the Closing Date, resulting from any inaccuracy in or breach of any representation or warranty of Purchaser under this Agreement; (b) any injury to person or property causing any loss or damage to Seller resulting from or arising out of the inspections by Purchaser pursuant to Section 4.3 hereof; (c) any and all damage to Seller resulting from or arising out of Purchaser's operation of the Property after the Closing Date; (d) all losses, damages, liabilities, costs, and expenses to which Seller may become subject under the Securities Act of 1933, as amended, or otherwise in connection or arising out of Guarantee Share Sales; and (e) all costs and expenses, including reasonable attorney's fees, related to any actions, suits or judgments incident to any of the foregoing. 14.3 Notice of Claims. Seller, Rosa, and Purchaser, as applicable, shall ---------------- promptly notify the other in the event any claim is made against Seller or Purchaser as to which the other party has agreed to indemnify and the indemnitor shall thereupon undertake to defend and hold the indemnitee saved and harmless therefrom. ARTICLE XV SECURITIES LAW MATTERS 15.1 Disposition of Shares. Seller represents and warrants that the --------------------- Shares are being acquired and will be acquired for its own account and will not be sold or otherwise disposed of except pursuant to (i) the provisions of Rule 145(d) under the 1933 Act, as in effect at the time of sale, (ii) some other exemption or exclusion from the registration requirements under the 1933 Act, which does not require the filing by the Parent with the SEC of any registration statement, offering circular, or other document, in which case Seller shall first supply to the Parent an opinion of counsel (which opinion and counsel shall be satisfactory to the Parent) that such exemption or exclusion is available, or (iii) a registration statement filed by the Parent with the SEC under the 1933 Act (which the Seller acknowledges the Parent has no obligation to file). -25- 15.2 Acknowledgment of Restrictions. Seller acknowledges that, under ------------------------------ current SEC interpretations of Rule 145, Seller is subject to restrictions on transfer of the Shares for a period of two years following the Closing Date and that an exemption from the requirement to register the Shares for public resale is provided by Rule 145(d). 15.3 Evidence of Compliance. Seller further covenants and agrees that ---------------------- Parent will be supplied with such written evidence of compliance by it and its broker with Rule 145(d) as in effect at the time of any sale by it pursuant thereto, as the Parent may reasonably request. 15.4 Legend. Seller agrees that the certificates for the Shares received ------ shall bear the following legend: The Shares represented by this certificate are subject to the provisions of Rule 145(d) promulgated under the Securities Act of 1933, and may not be transferred or disposed of by the holder without compliance with said Rule unless registered under said Act or pursuant to another applicable exemption from the requirements of said Act. and that Parent may place stop transfer orders with its transfer agents with respect to such certificates. The appropriate portions of the legend will be removed at such time or times as Seller may reasonably request if at the time of such request Seller is not an Affiliate (as defined in the 1933 Act) of Parent, upon the expiration of the two-year holding period provided in Rule 145(d). ARTICLE XVI NOTICES 16.1 Notices. Except as otherwise provided in this Agreement, all notices, ------- demands, requests, consents, approvals and other communications (herein collectively called "Notices") required or permitted to be given hereunder, or which are to be given with respect to this Agreement, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by overnight express courier, postage prepaid, addressed to the party to be so notified as follows: If intended for Seller, to: Apartment Inn Partners/ Gwinnett, L.P. 1538 Chantilly Drive Building "C" Atlanta, GA 30324 Attention: Rosa Dziewienski-Pajonk Copies to: DeVille & Milhollin Village Trace, Suite 200 Marietta, Georgia 30067 Attn: Roman DeVille If intended for Extended Stay America, Inc. Purchaser, to: 200 South Andrews Ft. Lauderdale, Florida 33301 Attn: Robert A. Brannon Copies to: Pedersen & Houpt 161 North Clark, Suite 3100 Chicago, Illinois 60601 Attn: Michael W. Black -26- Notice mailed by registered or certified mail shall be deemed received by the addressee three (3) days after mailing thereof. Notice personally delivered shall be deemed received when delivered. Notice mailed by overnight express courier shall be deemed received by the addressee two (2) days after mailing thereof. Either party may at any time change the address for notice to such party by mailing a Notice as aforesaid. ARTICLE XVII ADDITIONAL COVENANTS 17.1 Additional Covenants. In addition, the parties agree as follows: -------------------- (a) Expenses. Seller shall be responsible for the payment of all -------- sales, use and the State of Georgia and County of Gwinnett transfer taxes and fifty percent (50%) of all escrow fees and closing charges, if any, but not to exceed $1,000.00. Purchaser shall be responsible for the payment of all title insurance premiums and costs of any survey of the Real Property performed at Purchaser's request, recording fees, and fifty percent (50%) of all escrow fees and closing charges. The fees and expenses of Seller's designated representatives, accountants and attorneys shall be borne by Seller, and the fees and expenses of Purchaser's designated representatives, accountants and attorneys shall be borne by Purchaser. (b) Brokerage. Seller and Purchaser each hereby represent and --------- warrant to the other that neither has dealt with any broker or finder in connection with the transaction contemplated hereby, and each hereby agrees to indemnify, defend and hold the other harmless against and from any and all manner of claims, liabilities, loss, damage, attorneys' fees and expenses, incurred by either party and arising out of, or resulting from, any claim by any such broker or finder in contravention of its representation and warranty herein contained. (c) Guest Baggage. All baggage of guests who are still in the Hotel ------------- on the Closing Date, which has been checked with or left in the care of Seller shall be inventoried, sealed, and tagged jointly by Seller and Purchaser on the Closing Date. Purchaser hereby indemnifies Seller against any claims, losses or liabilities in connection with such baggage arising out of the acts or omissions of Purchaser after the Closing Date. Seller hereby indemnifies Purchaser against any claim, losses or liabilities with respect to such baggage arising out of the acts or omissions of Seller prior to the Closing Date. (d) Safe Deposits. Immediately after the Closing, Seller shall send ------------- written notice to guests or tenants or other persons who have safe deposit boxes, advising of the sale of the Hotel to Purchaser and requesting immediate removal of the contents thereof or the removal thereof and concurrent re-deposit of such contents pursuant to new safe deposit agreements with Purchaser. Seller, at its own expense, shall have a representative present when the boxes are opened, in the presence of a representative of the Purchaser. Purchaser shall not be liable or responsible for any items claimed to have been in such boxes unless such items are so removed and re-deposited, and Seller agrees to indemnify and hold harmless Purchaser from and against any such liability or responsibility. (e) Tax Appeal Proceedings. Seller shall be entitled to receive and ---------------------- retain the proceeds from any tax appeals or protests for tax fiscal years prior to the tax fiscal year in which the -27- Closing Date occurs. In the event an application to reduce real estate taxes is filed for the period during which Seller was the owner of the Real Property, Seller shall be entitled to a reproration of real estate taxes upon receipt of and based upon the reduction. Purchaser shall pay its pro rata share of the attorneys' fees directly related to the reduction as and when due. Seller shall continue to process any pending appeals or protests with respect to the tax fiscal year in which the Closing Date occurs, and the net proceeds from any such proceedings, after payment of attorneys' fees, will be prorated between the parties, when received, as of the Closing Date. (f) Books and Records. The transaction contemplated hereby includes ----------------- the books and records of Seller (except those relating to performance of employees) pertaining strictly to the business of the Hotel. Purchaser covenants and agrees that such books and records will remain in the Hotel for examination and audit by Seller and its agents after the Closing as provided in this clause (f). Books and records not pertaining strictly to the business of the Hotel may be removed by Seller within a reasonable time after the Closing Date. Purchaser agrees to preserve all books and records, files and correspondence, for at least five (5) years after the Closing Date, and not to destroy or dispose of the same, for at least five (5) years after the Closing Date. Purchaser agrees to provide access to Seller and its representatives, to such books, records, files and correspondence at all reasonable times. (g) Hart-Scott-Rodino Act. If it shall be determined that the --------------------- within transaction is subject to the reporting requirements of the Hart-Scott- Rodino Antitrust Improvements Act of 1976, 15 U.S.C. (S)18(a) (1976) (the "Act"), then notwithstanding anything to the contrary contained in Section 10.1(e) hereof, each party shall forthwith proceed to make the necessary filings, and take all other actions necessary to comply with the Act and the rules and regulations thereunder. If such requirements have not been fulfilled by the Closing Date, then the Closing Date shall be adjourned until such requirements have been fulfilled, but not more than sixty (60) days. If such requirements have not been fulfilled prior to the expiration of such sixty (60) day period, Seller or Purchaser, by notice to the other, may terminate this Agreement in which event the Deposit shall be returned to Purchaser and neither party shall have any further obligation or liability to the other party hereunder. (h) Survival of Covenants, etc. The representations, warranties, --------------------------- obligations, covenants, agreements, undertakings and indemnifications of Seller and Rosa, and Purchaser contained herein shall survive the Closing for a period of two (2) years except that (i) the representation made by Seller and Rosa in Section 5.1(i) shall expire at the time the period of limitations (including any extensions thereof pursuant to the delivery of waivers of the applicable period of limitations) expires for the assessment by the taxing authority of additional taxes with respect to which the representation and warranty relate; and (ii) the indemnification obligation of Purchaser set forth in Section 14.2(d) shall expire at the time the latest period of limitations expires for the enforcement by an applicable governmental authority of any remedy with respect to such matters as to which the indemnity relates. (i) Purchaser's Investigation and Inspections. Any investigation or ----------------------------------------- inspection conducted by Purchaser, or any agent or representative of Purchaser, pursuant to this Agreement, in order to verify independently Seller's satisfaction of any conditions precedent to Purchaser's obligations hereunder or to determine whether Seller's warranties are true and accurate, shall not affect (or constitute a waiver by Purchaser of) any of Seller's obligations hereunder or Purchaser's reliance thereon. (j) Construction. This Agreement shall not be construed more ------------ strictly against one party than against the other, merely by virtue of the fact that it may have been prepared primarily by counsel for one of the parties, it being recognized that both Purchaser and Seller have contributed substantially and materially to the preparation of this Agreement. -28- (k) Publicity. All notice to third parties and all other publicity --------- concerning the transactions contemplated hereby shall be jointly planned and coordinated by and between Purchaser and Seller. None of the parties shall act unilaterally in this regard without the prior written approval of the other; however, this approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Purchaser may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its publicly traded securities. (l) General. This Agreement may be executed in any number of ------- counterparts, each of which shall constitute an original but all of which, taken together, shall constitute but one and the same instrument. This Agreement (including all exhibits hereto) contains the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior understandings, if any, with respect thereto and may not be amended, supplemented or terminated, nor shall any obligation hereunder or condition hereof be deemed waived, except by a written instrument to such effect signed by the party to be charged. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia. The warranties, representations, agreements and undertakings contained herein shall not be deemed to have been made for the benefit of any person or entity, other than the parties hereto and their permitted successors and assigns. Seller has no right to assign its rights or to delegate its duties hereunder. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. (m) FIRPTA. Seller agrees to furnish Purchaser with an executed ------ Certification in the form attached hereto as Exhibit R ("FIRPTA Certificate"), --------- and such other evidence as Purchaser may reasonably request, to establish that Seller is not a foreign person for the purpose of Section 1445 of the Internal Revenue Code of 1986, as amended ("Section 1445"). In the event that Seller does not furnish such Certification or a qualifying statement for the U.S. Treasury Department that the transaction is exempt from the withholding requirements of Section 1445, Seller agrees that Purchaser shall be directed to pay such amount required by law to the Internal Revenue Service in accordance with the laws and regulations regarding the withholding requirements of Section 1445. -29- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. APARTMENT INN PARTNERS/GWINNETT, L.P. By Tempo Real Estate Corporation, its general partner By /s/ Rosa Dziewienski Pajonk ------------------------------------ Its President --------------------------------- /s/ Rosa Dziewienski Pajonk -------------------------------------- Rosa Dziewienski Pajonk ESA 0996, INC. By________________________________ Its_____________________________ The undersigned hereby guarantees the Purchaser's obligations under Section 14.2 of this Agreement. EXTENDED STAY AMERICA, INC. By______________________________________ Robert A. Brannon Senior Vice President -30- PROMISSORY NOTE --------------- $4,100,000 June 24, 1996 FOR VALUE RECEIVED, the undersigned, Extended Stay America, Inc. ( the "Maker"), hereby promises to pay to Apartment Inn Partners/Gwinett, L.P., a Georgia limited partnership (the "Payee"), the principal sum of FOUR MILLION ONE HUNDRED DOLLARS ($4,100,000) with interest thereon from the date hereof at the rate of ten percent (10%) per annum. All principal and accrued interest thereon shall be payable on or before July 15, 1996 (the "Maturity Date") to Payee at such address as Payee shall specify in writing. The principal amount hereof not paid on or before the Maturity Date shall bear interest at twelve percent (12%) per annum. All payments made on account of the indebtedness evidenced by this Note shall be made in accordance with the terms of Section 3.4 of the certain Agreement to Purchase Hotel dated June 21, 1996, by and between Maker and Payee. All parties hereto severally waive presentment for payment, notice of dishonor, protest and notice of protest. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Maker agrees that this instrument and the rights and obligations of all parties hereunder shall be governed by and construed under the substantive laws of the State of Georgia. The undersigned shall pay all expenses incurred by Payee in collecting this Note, including, without limitation, the reasonable fees and expenses of any attorney to whom this Note may be referred for such collection. Time is of the essence hereof. IN WITNESS WHEREOF, the undersigned has executed this Promissory Note as of the day and year first above written. EXTENDED STAY AMERICA, INC., a Delaware corporation By /s/ Robert A. Brannon ----------------------------------------- Robert A. Brannon, Senior Vice President Attest Robert A. Brannon ------------------------------------- Robert A. Brannon, Secretary COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the 24th day of June, 1996, is delivered by Tempo Real Estate Corporation ("Tempo") to ESA 0996, Inc., a Georgia corporation (the "Company"). R E C I T A L S: - - - - - - - - A. Tempo has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as The Apartment Inn located in Lawrenceville, Georgia (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Tempo execute and deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Tempo agrees as follows: 1. No Solicitation of Employees. Tempo agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Tempo nor any person or enterprise controlled by Tempo will knowingly solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. The Tempo agrees that during the Term of ----------------------- this Agreement, neither Tempo nor any person or enterprise controlled by Tempo will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engaged directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term except that certain existing extended-stay lodging facility commonly known as the "Corporate Apartment Community" located in Atlanta, Georgia and other substantially identical facilities operating under the name "Corporate Apartment Community". The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended-stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended-stay lodging facility. Upon commencement of the Agreement, the Company shall deliver to Tempo a description of the location of each facility and parcel of real property referred to in the proceeding sentence which is attached hereto as Exhibit A. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce of the covenant contained in Sections 1 and 2, then the enforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenant to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. The Tempo acknowledges that any material breach of its covenant contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law. This Agreement shall be governed and construed in ------------- accordance with the laws of the State of Georgia. IN WITNESS WHEREOF, Tempo has executed this Agreement as of the day and year first above written. TEMPO REAL ESTATE CORPORATION By:/s/ Roza Dziewienski Pajonk ----------------------------- Its: President ------------------------- -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the 24th day of June, 1996, is delivered by Rosa Dziewienski Pajonk ("Rosa") to ESA 0996, Inc., a Georgia corporation (the "Company"). R E C I T A L S: - - - - - - - - A. Rosa has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as The Apartment Inn located in Lawrenceville, Georgia (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Rosa execute and deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Rosa agrees as follows: 1. No Solicitation of Employees. Rosa agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Rosa nor any person or enterprise controlled by Rosa will knowingly solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. The Rosa agrees that during the Term of ----------------------- this Agreement, neither Rosa nor any person or enterprise controlled by Rosa will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engaged directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term except that certain existing extended-stay lodging facility commonly known as the "Corporate Apartment Community" located in Atlanta, Georgia and other substantially identical facilities operating under the name "Corporate Apartment Community". The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended-stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended-stay lodging facility. Upon commencement of the Agreement, the Company shall deliver to Rosa a description of the location of each facility and parcel of real property referred to in the proceeding sentence which is attached hereto as Exhibit A. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce of the covenant contained in Sections 1 and 2, then the enforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenant to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Rosa acknowledges that any material breach of its covenant contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law. This Agreement shall be governed and construed in ------------- accordance with the laws of the State of Georgia. IN WITNESS WHEREOF, Rosa has executed this Agreement as of the day and year first above written. /s/ Rosa Dziewienski Pajonk --------------------------- Roza Dziewienski Pajonk -2- AGREEMENT --------- THIS AGREEMENT made and entered into this 24th day of June, 1996, by and between APARTMENT/INN, L.P., a Georgia limited partnership (the "Partnership"), ESA 0996, a Georgia corporation ("ESA"), and JOHN W. BAKER ("Baker"). W I T N E S S E T H T H A T: WHEREAS, through agreements with Baker an his successors (the owner of the Service Mark "The Apartment Inn") (the "Mark"), Partnership has the right to sub-assign, convey and sell the Mark; WHEREAS, ESA as "Purchaser" and Apartment/Inn Partners Gwinnett, L.P. as "Seller" have executed an Agreement to Purchase Hotel of even date herewith with respect to an accommodation facility (the "Facility") located at 474 West Pike Street, Lawrenceville, Georgia 30245 (the Purchase Agreement"); WHEREAS, as a part of the purchase of the Facility pursuant to the Purchase Agreement, ESA desires to acquire from the Partnership an assigned right to use the Mark for use at the Facility, and certain other related rights, all as more particularly set forth below, and the Partnership is willing to assign rights to use the Mark upon the terms and conditions set forth below; NOW, THEREFORE, for and in consideration of the premises and the sum of Ten and No/100 Dollars ($10.00) and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties do hereby covenant and agree as follows: 1. ASSIGNMENT OF MARK. The Partnership agrees to assign, convey and sell ------------------- to ESA the perpetual right to use the Mark at the Facility and ESA agrees to compensate the Partnership for such assignment, as aforesaid, upon the terms and conditions set forth below. Further, Baker agrees to acknowledge the Partnership's right to assign, convey and sell ESA the right to use the Mark in connection with the operation of the Facility. Notwithstanding anything to the contrary, ESA shall have no obligation to purchase the Mark unless and until the "Closing" under the Purchase Agreement occurs (it being intended and agreed that the consummation of the transactions contemplated hereby shall occur simultaneously with the Closing). 2. CLOSING. The consummation of the transactions contemplated hereby (the ------- "Servicemark Closing") shall occur concurrently with the "Closing" of the purchase and sale of the Facility under the Purchase Agreement. At the Servicemark Closing, the Partnership and ESA shall (a) execute and deliver the Assignment of Service Mark Agreement attached hereto as Exhibit "A" and ----------- incorporated herein by this reference; and (b) execute and deliver any other appropriate conveyance instruments requested by ESA to assign, convey and sell from the Partnership to ESA, without recourse or warranty, the use of the Mark in the operation of the Facility, including client and customer relationships of the Facility associated with the use of the Mark at the Facility. 3. PURCHASE PRICE. As consideration and payment for the aforesaid -------------- assignment of the Mark and related rights, (i) ESA shall deliver to the Partnership at the Servicemark Closing 0 shares (said 0 shares being referred - - to as the "Retained Shares") of common stock, par value of $.01 per share of Extended Stay America, Inc., a Delaware corporation (the "Parent") ("Shares"); and (ii) ESA shall cause Extended Stay America, Inc. to execute and deliver a Promissory Note to the Partnership in the form and terms identical to EXHIBIT ------- "B" attached hereto and incorporated herein by this reference (with blanks - --- appropriately completed), which Note shall be paid by Extended Stay America, Inc. in cash or additional Shares as provided in Paragraph 4 below. 4. PAYMENT OF THE NOTE. Extended Stay America, Inc. shall satisfy its ------------------- obligations under the Note by delivering additional Shares and/or cash to the Partnership, as the case may be, on or before the Note's maturity date specified in the Note, subject to the following: (a) The Partnership and ESA acknowledge that the Partnership intends to sell the Shares which are delivered by Extended Stay America, Inc. to the Partnership in satisfaction of the Note and the net proceeds realized by the Partnership shall be applied to the balance of the Note. The Partnership agrees that it shall sell such Shares only in bona fide private placements which are approved by Extended Stay America, Inc. in its absolute discretion to a person or persons not affiliated with, related to, or associated with the Partnership ---------- ("Approved Sales"). Extended Stay America, Inc. shall deliver to the Partnership that number of Shares equal to the number of Shares which are sold pursuant to Approved Sales and such delivery shall be accomplished so as to allow the Approved Sales to be consummated on a timely basis. (b) If the proceeds from Approved Sales are less than the amount due under the Note, ESA shall also deliver prior to the maturity date of the Note cash to the Partnership having a value equal to the difference between the amount due under the Note and the proceeds from Approved Sales. In the event no Approved Sales occur, the Note shall be payable in full in cash on or before its stated maturity date. ---- (c) ESA shall indemnify, defend and hold the Partnership harmless against and with respect to all losses, damages, liabilities, costs, and expenses to which Seller may become subject under the Securities Act of 1933, as amended, or otherwise in connection with or arising out of Approved Sales. 5. WARRANTIES OF THE PARTNERSHIP. The Partnership hereby warrants and ----------------------------- represents to ESA that the Partnership is a Georgia limited partnership duly formed and validly existing in good standing under the laws of its state of formation and has full power and authority (i) to carry on its business as it is now being conducted, (ii) to enter into this Agreement and to assign, convey and sell the Mark to ESA as provided herein, and (iii) to carry out the other transactions and agreements contemplated hereby. This Agreement has been duly authorized by all requisite action on the part of Seller. The execution and delivery of this Agreement, and the 2 consummation of the transactions contemplated hereby, except as otherwise provided herein, do not require the consent or approval of any governmental authority, or constitute a default (or an event which with notice and passage of time or both will constitute a default) under any contract or agreement to which the Partnership is a party or by which it or the Mark is bound. 6. WARRANTIES OF ESA. ESA hereby represents and warrants the following ----------------- to the Partnership: (a) ESA has all requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby pursuant to the terms and conditions hereof. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with, breach, result in a default under, or violate any commitment, document or instrument to which ESA is a party or by which it is bound. (c) The Shares have been registered by the Parent pursuant to a registration statement field with the Securities and Exchange Commission (the "SEC"), a so-called "shelf" registration statement (the "Registration Statement"), in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"). Upon the issuance and delivery of the Shares to the Partnership in accordance with this Agreement, such shares will constitute legally and validly authorized and issued, fully paid, and nonassessable shares of Common Stock. The Registration Statement has been declared effective under the 1933 Act. The Parent is in compliance with the undertakings contained in the Registration Statement and to the knowledge of ESA, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act. (d) ESA covenants that it will file the reports required to be filed by it under the Securities Act of 1933, as amended (the "Act") and the Securities Exchange Act of 1934, as amended and the rules and regulations adopted by the Securities and Exchange Commission thereunder, to the extend required from time to time to enable the Partnership to sell the shares of Common Stock delivered to the Partnership pursuant to this Agreement without registration under the Act within the limitation of the exemptions provided by Rule 145(d) under the Act. 7. DURATION OF REPRESENTATIONS AND WARRANTIES. All representations and ------------------------------------------ warranties contained in Paragraphs 5 and 6 shall be deemed restated on and as of the Closing Date and shall survive the Servicemark Closing. 8. DISPOSITION OF SHARES. The Partnership represents and warrants that --------------------- the Retained Shares are being acquired and will be acquired for its own account and will not be sold or otherwise disposed of except pursuant to (i) the provisions of Rule 145(d) under the 1933 Act, as in effect at the time of sale, (ii) some other exemption or exclusion from the registration requirements under the 1933 Act, which does not require the filing by the Parent with the SEC of any registration statement, offering circular, or other document, in which case the Partnership 3 shall first supply to the Parent an opinion of counsel (which opinion and counsel shall be satisfactory to the Parent) that such exemption or exclusion is available, or (iii) a registration statement filed by the Parent with the SEC under the 1933 Act (which the Partnership acknowledges the Parent has no obligation to file). 9. ACKNOWLEDGMENT OF RESTRICTIONS. The Partnership acknowledges that, ------------------------------ under current SEC interpretations of Rule 145, the Partnership is subject to restrictions on transfer of the Shares for a period of two years following the date of the Servicemark Closing and that an exemption from the requirement to register the Shares for public resale is provided by Rule 145(d). 10. EVIDENCE OF COMPLIANCE. The Partnership further covenants and agrees ---------------------- that the Parent will be supplied with such written evidence of compliance by it and its broker with Rule 145(d) as in effect at the time of any sale by it pursuant thereto, as the Parent may reasonably request. 11. LEGEND. The Partnership agrees that the certificates for the Shares ------ received shall bear the following legend: The Shares represented by this certificate are subject to the provisions of Rule 145(d) promulgated under the Securities Act of 1933, and may not be transferred or disposed of by the holder without compliance with said Rule unless registered under said Act or pursuant to another applicable exemption from the requirements of said Act. and that the Parent may place stop transfer orders with its transfer agents with respect to such certificates. The appropriate portions of the legend will be removed at such time or times as the Partnership may reasonably request if at the time of such request the Partnership is not an Affiliate (as defined in the 1933 Act) of the Parent, upon the expiration of the two year holding period provided in Rule 145(d). 12. BINDING EFFECT. This Agreement shall be binding upon and inure to the -------------- benefit of the parties hereto and their respective successors and assigns. Time is of the essence of this Agreement. In the event of a default hereunder by either of the Partnership, ESA or Baker, the non-defaulting party shall have all rights and remedies available at law and equity including, without limitation, a right of specific performance. 4 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. "PARTNERSHIP" Acknowledged before me as APARTMENT/INN, L.P., a of this 24th day of Georgia limited partnership June, 1996. By: A/I NORCROSS, INC., a Georgia corporation _______________________________ By:___________________________ Notary Public Title:__________________________ My Commission expires: [CORPORATE SEAL] _______________________________ [NOTARY SEAL] "ESA" Acknowledged before me as ESA 0996, INC., of this 24th day of a Georgia corporation June, 1996. ________________________________ By:__________________________________ Notary Public Title:_______________________________ My Commission expires: [CORPORATE SEAL] ________________________________ [NOTARY SEAL] "BAKER" Acknowledged before me as of this 24th day of June, 1996. ________________________________ _____________________________(SEAL) Notary Public JOHN W. BAKER My Commission expires: ________________________________ 5 [NOTARY SEAL] 6 EXHIBIT "A" TO AGREEMENT ------------------------ ASSIGNMENT OF SERVICE MARK AGREEMENT ------------------------------------ THIS LICENSE OF SERVICE MARK AGREEMENT (the "Agreement") is made and entered this ____ day of ______________, 1996, into by and between APARTMENT/INN, L.P., a Georgia limited partnership ("Partnership"), ESA 0996, INC., a Georgia corporation, having an address of 500 East Broward Boulevard, Suite 950, Fort Lauderdale, Florida 33394, Attention: Robert A. Brannon ("ESA"), and JOHN W. BAKER ("Baker"). W I T N E S S E T H T H A T: WHEREAS, through an agreement with Baker, the owner of all right and title in and to the Service Mark "The Apartment Inn" (the "Mark"), which Mark is registered with the United States Patent and Trademark Office, Registration No. 1,588,399; WHEREAS, the Partnership desires to assign ESA the right to use the Mark upon the terms and conditions set forth below, and Baker is executing this Agreement to agree to be bound by the terms hereof as the owner of the Mark; NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars ($10.00) and other good and valuable consideration in hand, the parties agree as follows: 1. The Partnership hereby grants to ESA the right to use the Mark in perpetuity from and after the date hereof to be used only in connection with the ownership and operation of the existing accommodation facility of ESA (the "Facility") located at 474 West Pike Street, Lawrenceville, Georgia 30245 and at no other facility. ESA shall have no right to sub-assign the Mark in any manner whatsoever but shall have the right to assign its rights to use the Mark hereunder in connection with a sale of the Facility. 2. During the term hereof, the Partnership agrees to not grant to any third party the right to use the Mark at any lodging facility located within a five (5) mile radius of the Facility. 3. The Partnership and ESA acknowledge and agree concurrently with the execution hereof that ESA has made payment in full for the right to use the Mark during the term hereof and no payments are due from ESA to the Partnership subsequent to the date hereof with respect to the use of the Mark. 4. The Partnership warrants and represents that the Partnership has the power and right to assign the right to use the Mark and the full, power and authority to enter into this Agreement. 5. Baker hereby acknowledges Baker's prior assignment of the Mark to Partnership and grant to Partnership of the right to sub-assign the use of the Mark. Accordingly, Baker hereby acknowledges the validity of Partnership's sub- assignment to ESA to use the Mark in connection with the operation of the Facility. 6. This Agreement shall be binding upon and inure to the benefit of the Partnership, ESA and their respective successors and assigns subject to the foregoing restrictions. IN WITNESS WHEREOF, the parties have executed this Assignment of Service Mark Agreement the day and year first above written. "PARTNERSHIP" Acknowledge before me as APARTMENT/INN, L.P., a of this 24 day Georgia limited partnership of June, 1996. By: A/I NORCROSS, INC., a Georgia corporation By:_________________________ _______________________ Notary Public Title: _____________________ My Commission expires: [CORPORATE SEAL] __________________________ [NOTARY SEAL] "ESA" Acknowledge before me as ESA 0996, INC., of this 24th day of a Georgia corporation June, 1996. __________________________ By: ___________________________ Notary Public Title: ________________________ My Commission expires: [CORPORATE SEAL] __________________________ 8 [NOTARY SEAL] "BAKER" Acknowledge before me as of this 24th day of June, 1996. _________________________ _________________________(SEAL) Notary Public JOHN W. BAKER My Commission expires: __________________________ [NOTARY SEAL] 9 EX-2.6 3 AGREEMENTS TO PURCHASE HOTELS DATED AS OF 6/26/96 AGREEMENT TO PURCHASE HOTEL by and between BOULDER MANOR, INC. and ESA PROPERTIES, INC. JUNE 25, 1996 Exhibit A: Land Exhibit B: Excluded Assets Exhibit C: Permitted Exceptions Exhibit D: Submitted Financial Statements Exhibit E: Allocation of Purchase Price Exhibit F: Permits Exhibit G: Hotel Contracts and Commissions Exhibit H: Employee and Employment Arrangements Exhibit I: Bookings Exhibit J: Space Leases and Commissions Exhibit J-1: Spaces Lessee Estoppel Letter Exhibit K: Notices of Violations Exhibit L: Pending or Threatened Litigation Exhibit M: Documents Exhibit N: Impositions Exhibit O: Hotel Names Exhibit P: Employee Benefit Plans Exhibit Q: FIRPTA Certificate Exhibit R: Non-Compete Agreement Exhibit S: Note Exhibit T: Escrow Agreement Exhibit U: Environmental Matters AGREEMENT TO PURCHASE HOTEL --------------------------- THIS AGREEMENT is made this 25th day of June, 1996, by and between Boulder Manor, Inc., a Nevada corporation ("Seller"), and ESA Properties, Inc., a Delaware corporation ("Purchaser"). R E C I T A L S: A. Seller is the fee owner of that certain parcel of land (and the improvements and buildings located thereon) legally described in Exhibit A and commonly referred to as the Boulder Manor, 4823 Boulder Highway, Las Vegas, Nevada (the "Hotel") and the owner of the Fixtures and Tangible Personal Property, Operating Equipment, Consumables, and Miscellaneous Hotel Assets (all as hereinafter defined). B. The Hotel's facilities include guest and public facilities consisting of 211 rooms, administrative offices, and service areas. C. Seller desires to sell, and Purchaser desires to purchase, the Property upon and subject to the terms and conditions hereinafter set forth. A G R E E M E N T S NOW, THEREFORE, in consideration of the foregoing premises and the respective representations, warranties, agreements, covenants and conditions herein contained, and other good and valuable consideration, Seller and Purchaser agree as follows: ARTICLE I DEFINITIONS AND REFERENCES 1.1 Definitions. As used herein, the following terms shall have the ----------- respective meanings indicated below: Affiliate: With respect to a specific entity, any natural person or any --------- firm, corporation, partnership, association, trust or other entity which, directly or indirectly, controls, or is under common control with, the subject entity, and with respect to any specific entity or person, any firm, corporation, partnership, association, trust or other entity which is controlled by the subject entity or person. For purposes hereof, the term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any such entity or the power to veto major policy decision of any such entity, whether through the ownership of voting securities, by contract, or otherwise. Agreement: This Agreement to Purchase Hotel, including the Exhibits. --------- Bookings: Contracts for the use or occupancy of guest rooms of the Hotel. -------- Closing: As defined in Section 6.1. ------- Compensation: The direct salaries and wages paid to, or accrued for the ------------ benefit of, any Employee, incentive compensation, vacation pay, severance pay, employer's contributions under F.I.C.A., unemployment compensation, workmen's compensation, or other employment taxes, and payments under Employee Benefit Plans (as hereinafter defined). Consumables: All food and beverages (alcoholic, to the extent transferable ----------- under applicable law, and non-alcoholic); engineering, maintenance and housekeeping supplies, including soap, cleaning materials and matches; stationery and printing; and other supplies of all kinds, in each case whether partially used, unused, or held in reserve storage for future use in connection with the maintenance and operation of the Hotel, which are on hand (which shall include off-site storage) on the date hereof, subject to such depletion and restocking as shall occur and be made in the normal course of business but in accordance with present standards, excluding, however, (i) Operating Equipment and (ii) all items of personal property owned by Space Lessees, guests, employees, or persons (other than Seller or any Affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing food or services to the Hotel. Cut-off Time: 12:01 A.M. on the Closing Date. ------------ Department: Nevada Department of Revenue. ---------- Deposit: As defined in Section 3.2. ------- Documents: Reproducible copies of all plans, specifications, drawings, --------- blueprints, surveys, environmental reports and other similar documents which Seller has in its possession, or has a right to, as the same relate to the Real Property, including, but not limited to those relating to any prior or ongoing construction or rehabilitation of the Real Property. Employee(s): All persons employed by Seller pursuant to Employment ----------- Arrangements. Employee Benefit Plans: All employee benefit plans, as that term is ---------------------- defined in Section 3(2)(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including "multi-employer pension plans" as defined in Section 3(37) of ERISA, and each other employee benefit plan or program (including welfare benefit plans as defined in Section 3(1) of ERISA) to -2- which Seller contributes on behalf of any of the Employees. Employment Arrangement(s): Those agreements, oral or written, with all or ------------------------- any of the executives, staff and employees of Seller for work in or in connection with the Hotel including, but not limited to, individual employment agreements, union agreements, employee handbooks, group health insurance plans, life insurance plans and disability insurance plans (other than Employee Benefit Plans). Environmental Laws: As defined in Section 5.1(u). ------------------ Environmental Study: As defined in Section 4.3. ------------------- Excluded Assets: The following: (i) those assets, if any, listed on --------------- Exhibit B hereto owned and to be retained by Seller; (ii) receivables; and (iii) except as provided to the contrary in Section 17.1(e) hereof, all records, files and proprietary operating manuals in the Hotel. Excluded Permits: Permits and licenses required for the ownership and ---------------- operation of the Hotel which, under applicable law, are nontransferable. Fixtures and Tangible Personal Property: All fixtures, furniture, --------------------------------------- furnishings, fittings, equipment, cars, trucks, machinery, apparatus, signage, appliances, draperies, carpeting, and other articles of personal property now located on the Real Property or held in storage for future use at the Hotel and used or usable in connection with any part of the Hotel, subject to such depletions, resupplies, substitutions and replacements as shall occur and be made in the normal course of business but in accordance with present standards excluding, however: (i) Consumables; (ii) Operating Equipment; (iii) equipment and property leased pursuant to Hotel Contracts; (iv) property owned by Space Lessees, guests, employees or other persons (other than Seller or any affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing goods or services to the Hotel; and (v) Improvements. FIRPTA Certificate: As defined in Section 17.1(l). ------------------ Hazardous Material: As defined in Section 5.1(u). ------------------ Hotel: The hotel referred to in the Recitals. ----- Hotel Contracts: All management, service, maintenance, material purchase --------------- orders, leases and other contracts or agreements, including equipment leases capitalized for accounting purposes, and any amendments thereto, with respect to the ownership, maintenance, operation, provisioning, or equipping of the Hotel, or any of the Property, as well as written warranties and guaranties relating thereto, if any, including, but not limited to, those relating to heating and cooling equipment and/or mechanical equipment, but exclusive, however, of (i) insurance policies, (ii) the Bookings, (iii) the -3- Space Leases, (iv) the Employment Arrangements, and (v) the Employee Benefit Plans. Hotel Names: All names or other identifications used in connection with ----------- the operation of Hotel. Impositions: All taxes and other governmental charges of any kind ----------- whatsoever that may at any time be assessed or levied against or with respect to the Property, or any part thereof or any interest therein, including, without limitation, all general and special real estate taxes and assessments or taxes assessed specifically in whole or in part in substitution of general real estate taxes or assessments; any taxes levied upon or with respect to the revenue, income or profits of Seller from all or any part of the Property which, if not paid, will become a lien on all or any part of the Property, or a lien or charge on the rents, revenues or receipts therefrom; all assessed ad valorem taxes; all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Property and all assessments and other charges made by any governmental agency for improvements that may be secured by a lien on the Property. Improvements: The buildings, structures (surface and sub-surface) and ------------ other improvements, including such fixtures as shall constitute real property, located on the Land. Inspection Period: As defined in Section 4.1. ----------------- Land: The parcel of real estate described in Exhibit A hereto, together ---- with all rights, title and interest, if any, of Seller in and to all land lying in any street, alley, road or avenue, open or proposed, in front of or adjoining said Land, to the centerline thereof, and all right, title and interest of Seller in and to any award made or to be made in lieu thereof and in and to any unpaid award for the damage to said Land by reason of change of grade of any street. Legal Requirements: All laws, statutes, codes, acts, ordinances, orders, ------------------ judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and governmental authorities having jurisdiction of the Hotel (including, for purposes hereof, any local Board of Fire Underwriters), and the operation thereof. Material Bookings: All Bookings for meetings and banquet facilities and, ----------------- with respect to guest rooms, any contract for seven (7) or more room nights. Material Contracts: All Hotel Contracts which cannot be cancelled by 30 ------------------ days' or less notice without penalty or premium payment. Miscellaneous Hotel Assets: All contract rights, leases, concessions, -------------------------- trademarks, logos, copyrights, assignable warranties and other items of intangible personal property relating to the ownership or operation of Hotel, but such term shall not include (i) Bookings; (ii) Hotel Contracts; (iii) Space Leases; (iv) Permits; (v) cash or other funds, whether in petty cash or house banks, or on -4- deposit in bank accounts or in transit for deposit; (vi) books and records (except as provided in Section 17.1(e); (vii) refunds, rebates, or other claims, or any interest thereon, for periods or events occurring prior to the Cut-off Time; (viii) utility and similar deposits; (ix) prepaid insurance or other prepaid items; or (x) prepaid license and permit fees; except to the extent that Seller receives a credit at Closing for any such item or matter. Non-Compete Agreements: The Non-Compete Agreements delivered by Seller to ---------------------- Purchaser pursuant to the terms of Section 7.1 hereof. Obligations: All payments required to be made and all representations, ----------- warranties, covenants, agreements and commitments required to be performed under the provisions of this Agreement by Seller or Purchaser, as applicable. Operating Equipment: All china, glassware, linens, silverware and ------------------- uniforms, whether in use or held in reserve storage for future use, in connection with the operation of the Hotel, which are on hand (including off- site storage) on the date hereof, subject to such depletion and restocking as shall be made in the normal course of business but in accordance with present standards. Parent: Extended Stay America, Inc., a Delaware corporation. ------ Permits: All licenses, franchises and permits, certificates of occupancy, ------- authorizations and approvals used in or relating to the ownership, occupancy or operation of any part of the Hotel. Permitted Exceptions: Any liens, encumbrances, restrictions, exceptions -------------------- and other matters specified in Exhibit C to which title to the Property may be subject on the Closing Date. Personal Property: All of the Property other than the Real Property. ----------------- Property: (i) The Real Property; (ii) the Fixtures and Tangible Personal -------- Property; (iii) the Operating Equipment; (iv) the Consumables; (v) the transferable right, title and interest of Seller in, to and under the Hotel Contracts and Space Leases; (vi) the Bookings; (vii) the Permits (other than Excluded Permits); (viii) the Hotel Names; (ix) the Documents; and (x) all other Miscellaneous Hotel Assets, provided, however, that Property shall not include the Excluded Assets. Proratable Compensation: Compensation exclusive of severance pay and ----------------------- Employee Benefit Plans. Purchase Price: As defined in Section 3.1. -------------- Real Property: The Land together with the Improvements located on the ------------- Land. Searches: As defined in Section 6.3(c). -------- -5- Section 1445: As defined in Section 17.1(l). ------------ Space Leases: All leases, licenses, concessions and other occupancy ------------ agreements, and any amendments thereto, whether or not of record, for the use or occupancy of any portion of the Real Property excluding, however, Bookings. Space Lessee: Any person or entity entitled to occupancy of any portion of ------------ the Real Property under a Space Lease. Submittals: As defined in Section 4.2. ---------- Submitted Financial Statements: Those financial statements of the Hotel ------------------------------ identified in Exhibit D hereto. Survey: The survey for the Property prepared in accordance with Section ------ 6.3(a). Title Commitment: The commitment for title insurance issued in accordance ---------------- with Section 6.3(b). Title Company: United Title of Nevada. ------------- Title Defect: A lien, claim, charge, security interest or encumbrance ------------ other than a Permitted Exception. Title Documents: As defined in Section 6.3. --------------- Title Papers: As defined in Section 6.3(b). ------------ Title Policy: As defined in Section 10.1(g). ------------ UCC: The Uniform Commercial Code in effect in Nevada. --- Violation: Any condition with respect to the Property which constitutes a --------- violation of any Legal Requirements. 1.2 References. Except as otherwise specifically indicated, all ---------- references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "hereby," "hereof," "herein," "hereto," "hereunder," "hereinafter," and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof. The word "hereafter" shall mean after, and the term "heretofore" shall mean before, the date of this Agreement. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. -6- ARTICLE II SALE AND PURCHASE 2.1 Sale and Purchase. Seller hereby agrees to sell (or to cause to be ----------------- sold) to Purchaser, and Purchaser hereby agrees to purchase from Seller, the Property on the terms and subject to the conditions of this Agreement. ARTICLE III PURCHASE PRICE 3.1 Purchase Price; Allocation Thereof. The purchase price ("Purchase ---------------------------------- Price") for the Property and the Non-Compete Agreements shall be Nine Million One Hundred Thousand Dollars ($9,100,000.00) payable by delivery of a Note from Purchaser to Seller in the form attached hereto as Exhibit S. The Purchase Price shall be allocated in accordance with the values reasonably attributable to the components of the Property and the Non-Compete Agreements as set forth on Exhibit E hereto. 3.2 Deposit. Concurrently herewith, Purchaser is depositing the sum of ------- $50,000.00 (the "Deposit") with Title Company to secure performance of Purchaser's obligations hereunder. The Deposit and interest earned thereon shall be held in an interest bearing account until the Closing Date (except as otherwise provided herein) at which time the Deposit shall be paid as a credit against the Purchase Price. Except as hereinafter provided, if the transaction contemplated hereby does not close because of a default by Purchaser hereunder, the parties agree that the Deposit and interest earned thereon shall be delivered to Seller as Seller's sole and exclusive liquidated damages, which amount the parties agree is a reasonable sum considering all of the circumstances existing on the date of this Agreement, including, without limitation, the relationship of such sum to the amount of harm to Seller that reasonably could be anticipated, Seller's anticipated use of the proceeds of sale, and the fact that proof of actual damages would be impossible to determine. Notwithstanding the foregoing, if the transaction contemplated hereby does not close and Purchaser shall not have defaulted hereunder, the Deposit and all interest earned thereon shall be returned promptly to Purchaser and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. 3.3 No Assumption of Seller's Obligations. Except as specifically ------------------------------------- provided herein to the contrary, Purchaser shall not assume, or become obligated with respect to, any obligation of Seller, including, but not limited to, the following: -7- (a) Obligations of Seller now existing or which may arise prior to the Cut-off Time with respect to any accounts payable or other payables; (b) Obligations prior to the Closing Date of any term, covenant or provision of any Employee Benefit Plan, Employment Contract, Hotel Contract or Space Lease; (c) Obligations of Seller now existing or which may hereafter exist by reason of or in connection with any alleged misfeasance or malfeasance by Seller in the conduct of its business, and with respect to any tort liability; (d) Obligations to Employees with respect to any Compensation (or pursuant to any Employment Contract or Employee Benefit Plan); and (e) Obligations of Seller incurred in connection with or relating to the transfer of the Property pursuant to this Agreement, including without limitation, any Federal, state or local income, sales, transfer or other tax incurred by reason of said transfer, all of which shall be the sole responsibility of Seller. 3.4 Payment of the Note. Purchaser shall satisfy its obligations under -------------------- the Note by delivering shares ("Shares") of common stock, par value $.01 per share, of Parent, and/or cash to Seller, as the case may be, on or before the Note's maturity date specified in the Note, subject to the following: (a) Purchaser and Seller acknowledge that Purchaser shall deliver Shares to Seller only if such Shares are the subject of Approved Sales (defined below). The net proceeds realized by Seller from the sale of the Shares shall be deducted from the balance of the Note. Seller agrees that it shall sell such Shares only in bona fide private placements which are approved by Purchaser in its absolute discretion to a person or persons not affiliated with, related to, or associated with Seller ("Approved Sales"). Purchaser shall deliver to Seller that number of Shares equal to the number of Shares which are sold pursuant to Approved Sales and such delivery shall be accomplished so as to allow the Approved Sales to be consummated on a timely basis. (b) If the net proceeds actually received from Approved Sales are less than the amount due under the Note, Purchaser shall also deliver cash to Seller prior to the maturity date of the Note having a value equal to the difference between the amount due under the Note and the net proceeds received from Approved Sales. In the event no Approved Sales occur prior to the maturity date of the Note, the Note shall be payable in cash on or before its stated maturity date. Seller shall use the net proceeds received from Approved Sales first to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property. Notwithstanding the above, if net proceeds received from Approved Sales are insufficient to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property, Purchaser shall set off against amounts due under the Note an amount equal to such insufficiency and Purchaser shall apply such amount to satisfy and release such liens. -8- (c) The Note shall be paid pursuant to an escrow agreement to be entered into between Purchaser, Seller and an escrow agent mutually agreed upon by Purchaser and Seller, the form of which is attached hereto as Exhibit T. All costs of such escrow shall be borne by Purchaser. (d) Purchaser shall indemnify, defend, and hold Seller harmless against and with respect to all losses, damages, liabilities, costs, and expenses to which Seller may become subject under the Securities Act of 1933, as amended, or otherwise in connection with or arising out of Approved Sales. ARTICLE IV INSPECTION PERIOD 4.1 Inspection Period. The "Inspection Period" shall be the period from ----------------- the date hereof to 11:59 P.M. on June 30, 1996 (provided that such period shall be extended on a day-for-day basis in the event Purchaser does not receive the survey referenced in Section 6.3(a) hereof on or before June 23, 1996). 4.2 Submittals to Purchaser. Seller, at its expense, shall deliver (if ----------------------- such are within Seller's possession or are reasonably available to Seller) to Purchaser on or before June 26, 1996, true and correct copies of the following: (a) the Permits, Hotel Contracts, Employment Arrangements, Employee Benefit Plans, a summary of the amounts, dates, and credit information of Material Bookings (whether for periods before or after the Closing Date), Space Leases and notices of Violations (if any); (b) a descriptive summary of the manner in which all Bookings are made, whether oral or written, with or without deposits or firm or contingent commitments for reservations, along with a copy of the written agreements or confirmation letters used in connection with the Bookings; (c) a descriptive summary of all pending or threatened litigation listed on Exhibit L; (d) the most recent real estate and personal property tax statements for the Property; (e) all Documents, including, but not limited to, the plans and specifications; (f) the most current inventory of all Fixtures and Tangible Personal Property, Operating Equipment and Consumables; -9- (g) all other documents or instruments of record or otherwise relating to the Property available to Seller; (h) copies of all financial reports prepared by the accountant for Seller for the fiscal year of Seller for the three (3) years preceding the date hereof ("Submitted Financial Statements"); and (i) information reflecting the insurance loss history of the Property for the period from January 1, 1994 to the present and copies of all insurance policies relating to the Property. 4.3 Review and Inspection. During the Inspection Period, Purchaser shall --------------------- review the Submittals and shall have the right to enter upon the Real Property to inspect the Property and to conduct tests and investigations at its sole cost and expense, except as provided herein. Seller shall cooperate with Purchaser, or its agents, in arranging such inspections. Without limitation of the foregoing, Purchaser or Purchaser's accountants or both may review the Submitted Financial Statements and, in connection therewith, Seller shall supply such documentation as Purchaser or Purchaser's accountants may reasonably request to facilitate such review. Purchaser shall conduct all such inspections and reviews in confidence and so as not to interfere unreasonably with the operation of the Hotel. During the Inspection Period, Purchaser may order an environmental report, at Purchaser's sole cost and expense, to be conducted by an environmental engineering firm selected by Purchaser (the "Environmental Study"). 4.4 Purchaser's Acceptance or Rejection. If, in its sole and absolute ----------------------------------- discretion, Purchaser accepts the condition of the Property and the Submittals, it shall give Seller written notice of such acceptance before expiration of the Inspection Period. If Purchaser shall give Seller a notice of disapproval before expiration of the Inspection Period or fails to give such notice, then, without the necessity of further documentation, this Agreement shall be deemed terminated and the Deposit and all interest earned thereon shall be returned to Purchaser. Purchaser shall pay to Seller the sum of $100.00 as fixed and liquidated compensation for such termination, and neither party shall have any further obligation or liability to the other party hereunder. The parties hereto acknowledge that Purchaser has incurred substantial costs in connection with the negotiation and execution of this Agreement, will incur additional substantial costs in conducting the inspections contemplated by Section 4.3 and would not have entered into this Agreement without the availability of the Inspection Period. Therefore, the parties agree that adequate consideration exists to support the obligations of the parties hereunder, even before expiration of the Inspection Period. Notwithstanding the above, if the Inspection Period is extended due to Purchaser's receipt of the survey after June 23, 1996, Purchaser may terminate this Agreement pursuant to the terms of this Section 4.4 after June 30, 1996, only due to matters raised on such survey. 4.5 Extension of Inspection Period. Purchaser shall have the option to ------------------------------- extend the Inspection Period to July 15, 1996, subject to the following provisions: -10- (a) Purchaser shall notify Seller on or before June 30, 1996 of Purchaser's exercise of its option to extend the Inspection Period; and (b) Purchaser shall deliver to Seller $25,000.00 which shall be earned by Seller but treated as an additional Deposit provided, however, that such additional Deposit shall not be subject to return to Purchaser pursuant to the terms of Section 4.4 hereof. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties of Seller. Seller hereby represents ----------------------------------------- and warrants the following to Purchaser: (a) Due Organization, etc. Seller is a Nevada corporation duly --------------------- formed and validly existing in good standing under the laws of its state of formation and has full power and authority (i) to own or lease its properties and to carry on its business as it is now being conducted, (ii) to enter into this Agreement and to sell, convey, transfer, assign, and deliver the Property to Purchaser as provided herein, and (iii) to carry out the other transactions and agreements contemplated hereby. This Agreement has been duly authorized by all requisite action on the part of Seller. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby (other than the issuance and sale of Shares pursuant to the Note), except as otherwise provided herein, do not require the consent or approval of any governmental authority, nor shall such execution and delivery result in a breach or Violation of any Legal Requirement, or constitute a default (or an event which with notice and passage of time or both will constitute a default) under any contract or agreement to which Seller is a party or by which it or the Property is bound. (b) Intentionally Omitted. (c) Title to Personal Property. Seller has good and marketable title -------------------------- to the Personal Property, subject only to the Permitted Exceptions. All items of Personal Property have been fully paid for to the extent that normal business practice permits, except those items which are subject to installment payments and with respect to which there are no installments due which are delinquent. (d) Permits. To Seller's knowledge, (i) Exhibit F identifies all ------- existing Permits and is complete and correct in all material respects; (ii) such Permits constitute all of the Permits currently necessary for the ownership and operation of the Hotel; (iii) no default has occurred in the due observance or condition of any Permit which has not been heretofore corrected; and (iv) no Space Lessee has received any notice from any source to the effect that there is lacking any Permit needed in connection with the operation of the Hotel or any other operation connected therewith. -11- (e) Hotel Contracts. Exhibit G identifies all material Hotel --------------- Contracts and the information noted therein is complete and correct in all material respects. Except as disclosed in Exhibit G, there is no default under any Hotel Contract. Seller has provided (or will provide during the Inspection Period) true and correct copies of all Hotel Contracts to Purchaser. Each Hotel Contract (other than the Hotel Contracts designated as Material Contracts on Exhibit G) may be cancelled upon 30 days' or less notice without penalty or premium payment. (f) Hotel Names. Exhibit O hereto identifies all Hotel Names and is ----------- complete and correct in all respects. Seller has not received any notice that the use of any thereof infringes on the rights of a third party. (g) Space Leases. Exhibit J identifies all Space Leases and is ------------ complete and correct in all material respects. Except as disclosed in Exhibit J, there is no default, under any Space Lease. Seller has given (or will give, during the Inspection Period) to Purchaser true and correct copies of all Space Leases. Seller owns all right, title and interest of the lessor under each Space Lease. (h) Commissions, etc. Except as may be disclosed on Exhibits G or J ---------------- and other than in the ordinary course of business in connection with Bookings, there are no commissions or referral fees relating to the Hotel currently outstanding, nor will there be any such commissions or referral fees outstanding, on or before the Closing Date. Seller has not entered into any agreements with any referral organization or booking agent which contain any obligations that extend beyond the Closing Date. (i) Impositions. ----------- (i) Except as described on Exhibit N hereto, Seller has timely filed all returns and reports for sales, use and property taxes required to be filed by it with respect to the operation of the Property and has paid in full or made adequate provision by the establishment of reserves for Impositions which have become due with respect to the operation of the Property. There is no sales, use or property tax deficiency proposed or threatened against Seller with respect to the operation of the Property. There are no tax liens upon any property or assets of Seller. Seller has made all payments of sales, use and property taxes when due in amounts sufficient to avoid the imposition of any penalty with respect to the Property. (ii) Impositions which Seller was required by law to withhold or to collect with respect to the Property have been duly withheld and collected, and have been paid over to the proper governmental entity or are being held by Seller for such payment, and all such withholdings and collections and all other payments due in connection therewith as of the date of the Submitted Financial Statements are duly reflected on the Submitted Financial Statements. -12- (iii) Seller is not currently being audited by, and has not received any notice of intention to audit from, any federal, state or local sales, use or property taxing authority. (j) Fixtures, Tangible Personal Property, etc. Each guest room ----------------------------------------- contains furniture and furnishings consistent with Seller's historical furnishing of such guest rooms. The quantities of Fixtures and Tangible Personal Property, Consumables and Operating Equipment in the Hotel, including physical reserves, are sufficient for the proper and efficient operation of the Hotel in accordance with the standards of operation heretofore maintained by Seller. Seller shall continue to maintain the same at a level consistent with the average maintenance for the 12 months preceding the date hereof until the Cut-off Time. (k) Submitted Financial Statements. The Submitted Financial ------------------------------ Statements for the Hotel (which shall include the income of restaurants, bars, retail rental space and garage portions of the Hotel, if any) fairly present the results of operation of the Hotel for the periods indicated, and, except as set forth as Exhibit D, were prepared in accordance with generally accepted accounting principles, on a consistent basis, and there has been no material adverse change in the results of the operations of the Hotel since the statement dated for the period ended December 31, 1995. (l) Bookings. Exhibit I identifies all Bookings for periods from and -------- after the date hereof. (m) Pending Litigation. Except as described in Exhibit L, there are ------------------ no actions, suits, or proceedings, pending or to Seller's knowledge threatened against Seller or affecting any of Seller's rights, in each case, with respect to the Property, at law or in equity, or before any federal, state, municipal, or other governmental agency or instrumentality, which might result in any order, injunction, decree or judgment having a material adverse effect on the Hotel or the Property, nor is Seller aware of any facts which to its knowledge might result in any action, suit or proceedings. Except as noted in Exhibit K, to Seller's knowledge the Hotel complies with all Legal Requirements. Except as noted in Exhibit K, Seller has not received any notice of any Violation of a Legal Requirement which has not been heretofore corrected. Prior to the Closing Date, any uncured Violations listed in Exhibit K and any other Violations that arise shall be cured by Seller at its sole expense. (n) Condemnation. To the knowledge of Seller, there are no pending, ------------ or, threatened, condemnation proceedings or condemnation actions against the Real Property or any of the rights-of-way located adjacent thereto. (o) Intentionally Omitted. (p) Assessments. To Seller's knowledge, no governmental assessment ----------- for sewer, sidewalk, water, paving, electrical, power or other improvements is pending or threatened, except as may be set forth on Exhibit C. -13- (q) Labor Disputes. During the three (3) years preceding the date -------------- hereof, Seller has not experienced any labor disputes or labor trouble other than routine grievances or organizational efforts, none of which have had a material adverse effect on the operations of the Property. (r) Employees. Exhibit H is a complete list of all Employees with --------- their salaries, position and terms of employment; and (i) except as set forth on Exhibit H, Seller is not a party to any Employment Arrangement and no union is presently serving as collective bargaining agent for any Employees; (ii) to the best of Seller's knowledge, no union presently is conducting or planning to conduct an organizational campaign for any Employees; and (iii) with the exception of the Employee Benefit Plans listed on Exhibit P, there is no pension, profit-sharing, bonus or other employee benefit plan relating to current or past Employees. (s) Utilities. All utility equipment and facilities required for the --------- operation and use of the Hotel are located on the Property and all agreements for providing utilities are with direct providers. (t) Material Changes. There are no facts or circumstances having ---------------- specific application to the Hotel (other than general economic or industry conditions) not disclosed to Purchaser of which Seller has knowledge, which have or could have a material adverse effect upon the Hotel. Seller agrees to notify Purchaser immediately of such facts or circumstances if it becomes aware of the same prior to the Closing Date. (u) Environmental Matters. --------------------- (i) Seller has not transported, stored, treated, or disposed of, nor has it allowed or arranged for any third parties to transport, store, handle, treat, or dispose (as hereinafter defined) of Hazardous Substances or other waste to or at any location other than a site lawfully permitted to receive such Hazardous Substances or other waste for such purposes, nor has it performed, arranged for, or allowed by any method or procedure such transportation, storage, treatment, or disposal in contravention of any laws or regulations or in a manner giving rise to any liability whatsoever. Seller has not stored, handled, treated, or disposed of, nor allowed or arranged for any third parties to store, handle, treat, or dispose of Hazardous Substances or other waste upon property owned or leased by it, except as permitted by law. For purposes of this Section 5.1(u), the term "Hazardous Substances" shall include, without limitation, any material or substance that is one or more of the following: (i) defined as a conventional, hazardous, toxic, regulated or solid pollutant, contaminant, substance or waste pursuant to any Environmental Law (as hereinafter defined), (ii) petroleum, (iii) asbestos, (iv) corrosive, toxic, flammable, explosive, reactive, mutagenic, carcinogenic, infectious or radioactive, (v) materials mixed with, containing or derived from any of the foregoing or (xvii) any material -14- which is or becomes regulated by any Environmental Law which is released (as hereinafter defined) at or from the Real Property or which has migrated to or from the Real Property or is found on the Real Property or any other site affected by such release at, to, on or from the Real Property. The terms release(d), transport(ed), store(d), treat(ed), handle(d), arrange(d), dispose(d) and disposal shall have the meanings assigned by the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.A. Section 9601 et seq. ("CERCLA") or the Resource Conservation and Recovery Act, 42 U.S.C.A. Section 6901 et seq. (42 U.S.C.A. Section 6903 ("RCRA"). (ii) To Seller's knowledge, there has not occurred during Seller's occupancy nor is there currently occurring, a release of any Hazardous Substance to, from, on, into, or beneath the surface of the Land. (iii) The Seller has not shipped, transported, or disposed of, nor has it allowed or arranged, by contract, agreement, or otherwise, for any third parties to ship, transport, or dispose of, any Hazardous Substance or other waste to or at a site which, pursuant to CERCLA or any similar state law, (i) has been placed on the National Priorities List or its state equivalent, or (ii) the Environmental Protection Agency or the relevant state agency has proposed or is proposing to place on the National Priorities List or its state equivalent. Seller has not received written notice, nor does it have knowledge of any facts which could give rise to any written notice, that Seller is a potentially responsible party for a federal or state environmental cleanup site or for corrective action under CERCLA or any other applicable law or regulation. Seller has not submitted nor was it required to submit any notice pursuant to Section 103(c) of CERCLA, or pursuant to any federal, state or local requirement for notification of a release with respect to the Real Property. Seller has not received any written request for information from any federal, state or local governmental authority in connection with any release. Seller has not been required to or has not undertaken any response, investigation, monitoring, or remedial actions or clean-up actions of any kind at the request of any federal, state, or local governmental entity, or at the request of any other person or entity. (iv) Seller does not use, and has not used, any Underground Storage Tanks, and there are not now nor to Seller's knowledge have there ever been any Underground Storage Tanks on the Land. For purposes of this Section 5.1(u)(iv), the term "Underground Storage Tanks" shall have the meaning given it in the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). (v) There is no asbestos in or on the Real Property. -15- (vi) Seller has not received written notice of any violation, noncompliance or breach of any environmental or worker safety laws or regulations which require any work, repairs, construction, or capital expenditures with respect to the assets or properties of Seller. (vii) Exhibit U identifies: (i) all environmental audits, assessments, or occupational health studies undertaken by Seller or its respective agents or known to have been undertaken by or at the order or request of governmental agencies; (ii) the results of any ground, water, soil, air, or asbestos monitoring or investigation undertaken with respect to the Real Property; (iii) all written communications between Seller and any environmental agencies; and (iv) all citations issued under the Occupational Safety and Health Act (29 U.S.C. Sections 651 et seq.). (viii) Seller's Environmental Indemnity. (a) Definitions. Notwithstanding anything contained in ----------- this Agreement to the contrary, for purposes of this Agreement the following terms shall have the following meanings: "Environmental Claim" means any written claim, demand, ------------------- notice of violation, injunction or order for personal injury, including sickness, disease or death, tangible or intangible property damage, environmental stigma, lost profits or other business losses, impaired financial value, damage to the environment, nuisance, pollution, contamination or reimbursement of cleanup costs or other adverse effects on the environment, or for fines, penalties or restrictions, arising or resulting from, based on, caused by or related to the existence or the continuation of the existence of Hazardous Substances made, asserted or prosecuted by or on behalf of any third party. Environmental Claim shall include, without limitation, any costs or expenses incurred to investigate, contain, remove, remedy, treat, or monitor any Hazardous Substances and any media, including soil and groundwater, impacted by Hazardous Substances, as required by any Environmental Law or by regulatory enforcement officials acting under or pursuant to any Environmental Law, or by federal or state courts, lost profits, loss of use, diminution in value, liens against the Real Property relating to Hazardous Substances and any failure or defect in title to the Real Property occasioned by the migration from or presence of Hazardous Substances or Seller's failure to comply with any Environmental Law. -16- "Environmental Law" means any federal, state, or local ----------------- statute, ordinance, rule, regulation, order, consent decree, judgment or common law doctrine, or interpretation thereof, as amended, and provisions and conditions of permits, licenses and other operating authorizations, as amended, related to protection, remediation or restoration of the environment, including natural resources, or protection of human health, worker safety, industrial, agricultural or silvicultural chemicals, pesticides, insecticides, fungicides, rodenticides, fertilizers, toxic substances, surface, subsurface or drinking water, food, drugs, or cosmetics or related to cleanup, fines, orders, injunctions, penalties, notification, contribution, cost recovery, losses or injuries to person or property resulting from contamination or pollution or hazards to human health or welfare or the environment which are now or may hereafter become in effect including, without limitation, CERCLA and RCRA, (collectively, as amended and together with all regulations promulgated thereunder, "Environmental Laws"). (b) Indemnification. Seller shall defend, indemnify and --------------- hold harmless Purchaser, its nominees, officers, directors, agents, employees, successors, lenders, assigns, affiliates, subsidiaries, parent companies (if any), shareholders, lenders, representatives and the successors and assigns of all of the foregoing from and against: 1. Environmental Claims; and 2. Fines and penalties imposed on Purchaser, its successors, assigns, parents, subsidiaries, officers, directors, shareholders, agents, employees, lenders and representatives and the successors and assigns of all of the foregoing as a result of a violation by Seller of any Environmental Law arising from or related to any Hazardous Substances; and/or 3. Any breach of any of representations and warranties of Seller set out herein at Section 5.1(u)(i) through 5.1(u)(vii). (c) Discharge of Environmental Claims. In the event that --------------------------------- Purchaser notifies Seller of any claim that may be subject to an indemnification obligation under this Section 5.1(u), Seller shall, within thirty (30) days from the date of receipt of notice, acknowledge and assume the liability asserted. During such thirty -17- (30) day period, Purchaser shall not take any action or incur any expense with respect to the claim, except to the extent that such action or expense is legally required or reasonably necessary under the circumstances. Seller shall have the right and obligation to control, manage and direct all discussions, proceedings and activities regarding the satisfaction or discharge of any claim which is assumed by Seller or any liability or obligation that such a claim seeks to impose on Seller. Purchaser shall have the right, at its own expense, to consult with Seller, through counsel or otherwise, with respect to all meetings and proceedings with adverse parties or governmental authorities regarding any Environmental Claim and with respect to all activities pertaining to that matter. Prior to initiating or participating in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, Seller shall consult with Purchaser. This right of consultation shall not apply to confidential meetings or documents in cases where Seller or Purchaser are disputing or litigating claims against each other in a judicial or administrative proceeding. Seller shall promptly notify Purchaser in writing before Seller initiates or participates in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, including without limitation decisions or discussions concerning matters not covered by this Agreement. Purchaser shall have the right, but not the obligation, to participate in such meetings or proceedings. (d) Remedies. If Seller fails to perform its obligations -------- under this Section 5.1(u), Purchaser may, at its option (1) bring an action for injunction or specific performance of this Section 5.1(u) or this Agreement, and in such action, recover damages suffered by Purchaser as a result of Seller's breach or delay in performing its obligations, or (2) bring an action for damages for Seller's breach of its obligations, or (3) bring an action for response costs or other relief under federal or state environmental laws or regulations, or (4) any combination of the above. In the event that Purchaser prevails in such an action, it shall be entitled to recover from Seller the costs and expenses of bringing the action, including reasonable attorneys' fees. No delay or omission in the exercise of any right or remedy accruing to Purchaser upon any breach by Seller -18- under this Agreement shall impair any such right or remedy or be construed as a waiver of such breach theretofore or thereafter occurring. The waiver by Purchaser of any condition or of any breach of any term, covenant or condition contained in this Agreement shall not be deemed to be a waiver of any other condition or of any subsequent breach of the same or of any other term, covenant or condition of this Agreement. All rights, powers, options or remedies afforded to Purchaser either under this Section 5.1(u) or this Agreement or by law or by equity, shall be cumulative and not alternative and the exercise of any right, power, privilege or remedy shall not bar other rights, powers, privileges or remedies. (e) Survival. Seller's obligations under this -------- Section 5.1(u) shall survive (i) the closing of the sale that is the subject of this Agreement for a period of two (2) years and (ii) the termination of this Agreement. All claims for indemnification pursuant to this Section 5.1(u) must be made within two (2) years from the Closing Date. (v) Intentionally Omitted. (w) Documents. Seller has made available to Purchaser all of the --------- Documents; Seller knows of no other document or instrument relating to the Hotel, or the ownership or operation thereof. (x) Seller's Knowledge. For the purposes of this Section 5.1, the ------------------ phrases "to the best of Seller's knowledge," "to Seller's knowledge" and similar phrases shall imply a reasonable inquiry by Seller of its employees (but shall not require Seller to hire third party consultants). (y) Third Party Property. Seller is not in possession of any -------------------- property owned by third parties other than (i) property leased by Seller pursuant to leases disclosed to Purchaser pursuant to this Agreement; (ii) baggage of current guests which has been checked with or left in the care of Seller; and (iii) contents in safe deposit boxes deposited by current guests. (z) Investment Representations. Seller represents that it and its -------------------------- shareholders have received a prospectus of Parent dated June 17, 1996. (aa) Notices. No filing is required with any state or local taxing -------- authority as a result of the bulk sale of Seller's business assets. 5.2 Representations and Warranties of Purchaser. Purchaser hereby ------------------------------------------- represents and warrants the following to Seller: -19- (a) Authority. Purchaser has all requisite power and authority to --------- execute and deliver this Agreement and to consummate the transactions contemplated hereby pursuant to the terms and conditions hereof. (b) No Conflict. The execution and delivery of this Agreement and ----------- the consummation of the transactions contemplated hereby will not conflict with, breach, result in a default under, or violate any commitment, document or instrument to which Purchaser is a party or by which it is bound. (c) Parent Shares. The Shares have been registered by the Parent ------------- pursuant to a registration statement filed with the Securities and Exchange Commission (the "SEC"), a so-called "shelf" registration statement (the "Registration Statement"), in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"). Upon the issuance and delivery of the Shares to the Seller in accordance with this Agreement, such shares will constitute legally and validly authorized and issued, fully paid, and nonassessable shares of Common Stock. At Closing, the Registration Statement shall have been declared effective under the 1933 Act and the Parent shall be in compliance with the undertakings contained in the Registration Statement. 5.3 Duration of Representations and Warranties. All representations and ------------------------------------------ warranties contained in Sections 5.1 and 5.2 shall be deemed restated on and as of the Closing Date. ARTICLE VI CLOSING MATTERS 6.1 Closing. The closing of the transaction contemplated hereby (the ------- "Closing") shall take place at the offices of the Title Company on July 15, 1996 (the "Closing Date") unless Purchaser extended the Inspection Period pursuant to Section 4.5 hereof, in which event the Closing Date shall be July 31, 1996, or such other date as may be mutually agreed by the parties. 6.2 Manner of Closing. The transaction shall be closed with the ----------------- concurrent delivery of the documents of title, transfer of interests, delivery of the title policy described in Section 7.1(e) and the payment of the Purchase Price. 6.3 Survey, Title Commitment and Searches. ------------------------------------- (a) Survey. Purchaser intends to obtain a plat of survey ("Survey") ------ of the Property prepared by a surveyor licensed by the State of Nevada, in conformity with Class A minimum detail requirements and the current standards for Land Title Surveys of the American Title Association and American Congress on Surveying and Mapping and such standards as are required -20- by the Title Insurer as a condition to the removal of any survey exceptions from the Title Commitment, certified to Purchaser, Parent, its lender, if any, and the Title Insurer after the date hereof, showing, without limitation of the foregoing requirements, the following information with respect to the Property: (i) the legal description and boundaries thereof; (ii) the location and street and common addresses of all improvements situated thereon; (iii) the location, course and recording numbers, if applicable, of all water, gas, electric, sewer line and other easements, either visible or recorded, and party walls; (iv) public and private streets, roads, alleys and highways and their common or official names; (v) record and physical access to and from a public road or way; (vi) no encroachments thereon or by any Improvements located thereon on adjacent property; (vii) the amount of gross square feet and net square feet (that is, after deducting the area of that portion of the Property, if any, lying in the existing or proposed right-of-way of a public street or road) contained in the Real Property; (viii) building lines or other restrictions affecting the Property; and (ix) whether any portion of the Property is located in an area designated as being subject to flood hazards or flood risks or wetlands by any agency of the United States of America. (b) Title Commitment. Seller shall deliver to Purchaser, on or ---------------- before June 23, 1996, a title commitment for an ALTA Owner's Insurance Policy issued by the Title Company ("Title Commitment") showing title to the Real Property in the Seller, subject only to the Permitted Exceptions, containing full extended coverage over all general exceptions, a 3.1 zoning endorsement (amended to include parking), location, survey and contiguity endorsements, an endorsement that the real estate tax bills for the Property do not include taxes pertaining to other real estate, and such other endorsements as may be reasonably requested by Purchaser, and dated after the date hereof. Seller shall also deliver full and legible copies of all documents ("Title Papers") referred to in the Title Commitment. -21- (c) Defects. If the Survey, Title Commitment, or UCC, judgment, and ------- tax lien searches on the names of Seller (collectively, "Title Documents") shall reflect any facts that would result in a Title Defect, Seller shall have thirty (30) days from the expiration of the Inspection Period within which to cure or remove the Title Defect. Seller shall be obligated to remove mortgages, deeds of trust and other liens or encumbrances for the payment of money of a definite and ascertainable amount, which the parties agree may be removed by the use of the proceeds of sale at Closing as provided in Section 6.3(d) below. In the alternative, Seller may make arrangements satisfactory to the Title Company for the cure (including insurance over) or removal of record of any such Title Defect. If any such Title Defect is not cured or otherwise provided for as aforesaid on or prior to the thirtieth (30th) day, the Purchaser shall either: (i) terminate this Agreement, in which event (hereinafter referred to as "Election No. 1") the Deposit and all interest earned thereon shall be returned to Purchaser and the parties shall have no further obligation or liability to each other hereunder; or (ii) accept the Title Commitment, Survey, or Searches as is, with the right, however, to deduct the amount of Title Defects represented by liens or encumbrances for the payment of money of a definite or ascertainable amount from the Purchase Price payable at Closing (hereinafter referred to as "Election No. 2"). Title Defects which are acceptable as part of Election No. 2 shall thereupon be deemed to be Permitted Exceptions and Exhibit C shall be amended, if necessary, to include such additional Permitted Exceptions. Election No. 2 shall be made by the Purchaser giving Seller written notice thereof within five (5) days after notice of Seller's inability to cure or remove the Title Defect and in the absence of notice of Election No. 2 within such five (5) day period, Purchaser shall be deemed to have elected Election No. 1. In the event Purchaser elects Election No. 1 and a Title Defect was created or consented to by Seller, Purchaser shall be paid by Seller the actual costs of Purchaser's investigation not to exceed $25,000.00 in addition to recovery of the Deposit. (d) Removal of Liens, etc. If on the Closing Date there shall be any --------------------- Title Defect created to secure the payment of money, then Seller shall either (a) use a portion of the Purchase Price to satisfy the same, provided Seller shall simultaneously either deliver to Purchaser at Closing instruments, in recordable form, sufficient to satisfy such Title Defect of record, together with the cost of recording or filing said instrument; or (b) in the alternative, make arrangements with the Title Company, in advance of Closing, whereby Seller will deposit with the Title Company sufficient monies, acceptable to the Title Company to induce the Title Company to issue the Title Policy to Purchaser, either free of any such Title Defect or with insurance which "insures over" such Title Defect. Purchaser agrees to provide at Closing separate certified checks as requested, to facilitate the satisfaction of any such Title Defects, if request is made within a reasonable time prior to the Closing Date. The existence of any Title Defects capable of satisfaction by the payment of money shall not be deemed to be Title Defects for the purposes of cure periods, as discussed supra in Section 6.3(c), if Seller shall comply with the foregoing ----- requirements. -22- ARTICLE VII CLOSING DELIVERIES 7.1 Seller's Deliveries. At Closing, Seller shall deliver, or cause ------------------- to be delivered to Purchaser, the following, each of which shall be in form and substance reasonbly acceptable to counsel for Purchaser and, in the case of documents of transfer or conveyance, shall be accepted or consented to by all parties required to make such transfer or conveyance effective: (a) a recordable grant, bargain, and sale deed from Seller to Purchaser subject only to the Permitted Exceptions; (b) a Bill of Sale, with special covenants of title, transferring to Purchaser all of Seller's right, title and interest in and to each and every item of Fixtures and Tangible Personal Property, Documents, Consumables and Operating Equipment to be transferred hereunder subject only to Permitted Exceptions, and with respect to any vehicles included therein, such separate forms of assignment as are required to be filed with any governmental agency to effect such change in registration of ownership; (c) all of the Bookings, Hotel Contracts, Space Leases, Permits and other tangible Miscellaneous Hotel Assets, together with an Assignment conveying and transferring to Purchaser all of Seller's right, title and interest in, to and under the Bookings, Hotel Contracts, Space Leases, Permits (other than Excluded Permits) and all other Miscellaneous Hotel Assets; (d) the certificates referred to in Section 10.1(b) hereof; (e) a FIRPTA Certificate; (f) evidence of termination of the Employees; (g) the opinion of Seller's counsel as provided by Section 10.1(c); (h) certified copies of resolutions of the shareholders and directors of Seller authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; (i) a certificate of the secretary of Seller, dated as of the Closing Date, certifying the incumbency of the officer(s) of Seller executing the documents delivered by Seller pursuant to this Agreement; (j) a Non-Compete Agreement substantially in the form of Exhibit R executed by Michael J. Mona, Jr. and Rhonda H. Mona; and -23- (k) evidence, satisfactory to Purchaser, of the termination of all management agreements and other management arrangements with respect to the Hotel. 7.2 Purchaser's Deliveries. At the Closing, Purchaser shall cause to be ---------------------- delivered to Seller: (a) the Note; (b) the certificate referred to in Section 9.1(b) hereof; (c) the opinion of Purchaser's counsel as provided by Section 9.1(c); and (d) the written undertaking of Purchaser as provided by Section 9.1(d). 7.3 Concurrent Transactions. All documents or other deliveries required ----------------------- to be made by Purchaser or Seller at Closing, and all transactions required to be consummated concurrently with Closing, shall be deemed to have been delivered and to have been consummated simultaneously with all other transactions and all other deliveries, and no delivery shall be deemed to have been made, and no transaction shall be deemed to have been consummated, until all deliveries required by Purchaser, or its designee, and Seller shall have been made, and all concurrent or other transactions shall have been consummated. 7.4 Further Assurances. Seller and Purchaser will, at the Closing, or at ------------------ any time or from time to time thereafter, upon request of either party, execute such additional instruments, documents or certificates as either party deems reasonably necessary in order to convey, assign and transfer the Property to Purchaser, hereunder. 7.5 Possession. Possession of the Property shall be delivered at Closing. ---------- Subject to the provisions of Section 17.1(e), Excluded Assets (other than any thereof under leases to be assumed by Purchaser) shall be removed from the Hotel by Seller, at its expense, on or before the Closing Date. Seller, at its expense shall make all repairs necessitated by such removal but shall have no obligation to replace any Excluded Asset so removed. ARTICLE VIII ADJUSTMENTS AND PRORATIONS 8.1 Adjustments and Prorations. The following matters and items -------------------------- shall be apportioned between the parties hereto or, where appropriate, credited in total to a particular party, as of the Cut-off Time as provided below: -24- (a) Down Payments for Reservations. Any pre-closing down payments ------------------------------ made to Seller on confirmed reservations for dates after the Closing Date will be credited to Purchaser as of the Closing. Any post-closing down payments made to Seller on confirmed reservations for dates after the Closing Date will be forwarded to Purchaser upon receipt. (b) Taxes and Assessments. All ad valorem taxes, special or general --------------------- assessments, personal property taxes, attorneys' fees directly related to the reduction of taxes or assessments, water and sewer rents, rates and charges, vault charges, canopy permit fees, and other municipal permit fees. If the amount of any such item is not ascertainable on the date the proration schedule is completed pursuant to Section 8.3, the credit therefor shall be based on one hundred percent (100%) of the most recent available bill and shall be reprorated upon receipt of the actual tax bill. Notwithstanding the above, special real property tax assessments for which the work is substantially completed as of the Closing Date shall be paid by Seller. (c) Utility Contracts. Telephone and telex contracts and contracts ----------------- for the supply of heat, steam, electric power, gas, lighting and any other utility service, with Seller receiving a credit for each deposit, if any, made by Seller as security under any such public service contracts if the same is transferable and provided such deposit remains on deposit for the benefit of Purchaser. Where possible, cut-off readings will be secured for all utilities on the Closing Date. (d) Hotel Contracts and Space Leases. Any amounts prepaid or payable -------------------------------- under any Hotel Contracts and Space Leases shall be apportioned between the parties. Any percentage rentals under Space Leases shall be prorated on the basis of the ratio of the number of days expired before Closing to the number of days after Closing, for the current percentage rent period of the Space Lease. All security deposits held by Seller shall be transferred to Purchaser and all obligations with respect to such security deposits shall be assumed by Purchaser. (e) License Fees. Fees paid or payable for Permits (other than ------------ Excluded Permits) shall be apportioned between the parties. (f) Hotel Matters. ------------- (i) Advance payments, if any, under Bookings for Hotel facilities (which shall include prepaid amounts by current guests); (ii) Coin machine, telephone, washroom and checkroom income; and (iii) Commissions to credit and referral organizations. (g) Employment Arrangements. Seller shall be responsible for, and ----------------------- shall pay when due, all Compensation of Employees. Purchaser assumes no Employment Arrangements or -25- other obligation with respect to any Employee Benefits, all of which, together with any sums due any Employee as a consequence of the termination of his employment, shall be the responsibility of Seller. (h) Consumable Items. The cost of any Consumables or Operating ---------------- Equipment which are at a level below the level required to be maintained under this Agreement shall be credited to Purchaser. (i) Other. Such other items as are provided for in this Agreement or ----- as are normally prorated and adjusted in the sale of a hotel, including without limitation, all petty cash funds and cash in house banks, and all deposits and prepaid items which inure to the benefit of the Purchaser. 8.2 Receivables. Purchaser is not purchasing any of the receivables of ----------- the Hotel and Seller shall be solely responsible for the collection of accounts receivable arising prior to the Closing Date. If Purchaser shall receive any payment made on any unpurchased accounts receivable within ninety (90) days after the Closing Date, it shall promptly remit such payment to Seller. With regard to any collection made from any person or entity who is indebted to the Hotel both with respect to accounts receivable accruing prior to the Closing Date and to the accounts receivable accruing subsequent to the Closing Date, such collection shall be applied as designated by the payor, but if there is no designation, then any such collections received within ninety (90) days after the Closing Date shall be applied first to the indebtedness accrued prior to the Closing Date, but thereafter, any such collections shall be applied first to the payment in full of any amounts due to Purchaser on accounts accruing subsequent to the Closing Date. 8.3 Proration Schedule. ------------------ (a) Preparation and Review. A schedule setting forth the adjustments ---------------------- and prorations to be made pursuant to Section 8.1 above shall be prepared by Purchaser and forwarded to Seller within thirty (30) days after the Closing Date. Seller shall be afforded the opportunity to review all work papers and computations used by Purchaser in the preparation of the adjustments and prorations. The schedule as delivered shall be deemed accepted by Seller except to the extent, if any, that Seller, within ten (10) days after the date of delivery thereof to Seller, has delivered a written notice to Purchaser stating any exceptions Seller may have to such schedule. If within such period Seller shall give written notice to Purchaser of any exceptions to the schedule as delivered by Purchaser, the parties shall attempt to resolve all of the exceptions. To the extent that any such exceptions are not resolved within fifteen (15) days after the delivery to Purchaser of Seller's exceptions to the schedule, such differences shall be submitted as soon as practicable thereafter to such "Big Six" accounting firm upon which the parties shall agree, for final determination thereof. If the parties are not able to agree upon an accounting firm, each shall designate a "Big Six" accounting firm and give written notice to the other of the name and address of the firm so -26- designated. The two firms shall consult with each other and, if possible, determine the exceptions in question by mutual agreement, and their determination so agreed upon, if certified to the parties prior to their reaching agreement independently of arbitration, shall be final and conclusive. If the two firms are not able to agree upon the exceptions in question, they jointly shall designate a third firm whose determination concerning the exceptions shall be final and conclusive, if certified to the parties prior to their reaching agreement independent of arbitration. Any determination by such accounting firm(s) as to the proper determination of any such item submitted to it for determination shall be conclusive and binding upon the parties for purposes of this Agreement. Seller and Purchaser shall each pay one-half of such fees charged by such accounting firm(s) in connection with any matter submitted to it hereunder. (b) Payment of Adjustments. The net amount due pursuant to the ---------------------- adjustments and prorations made as required by this Section 8.3 shall be paid by cash or bank cashier's check payable in immediately available funds in United States currency to the order of the party to whom the same shall be due upon final determination of the adjustments and prorations required hereunder. Seller agrees that prior to the time that payment is made pursuant to Section 8.3(b), it shall not make final liquidating distributions. (c) Period for Recalculation. Notwithstanding the foregoing, if at ------------------------ any time within six (6) months following the Closing Date, either party discovers any items which should have been included in the prorations but were omitted therefrom, then such items shall be adjusted in the same manner as if their existence had been known at the time of the preparation of the prorations. The foregoing limitations shall not apply to any items which, by their nature, cannot be finally determined within the periods specified. ARTICLE IX CONDITIONS TO SELLER'S OBLIGATIONS 9.1 Conditions. Seller's obligation to close hereunder shall be subject ---------- to the occurrence of each of the following conditions, any one or more of which may be waived by Seller in writing: (a) Purchaser's Compliance with Obligations. Purchaser shall have --------------------------------------- complied with all obligations required by this Agreement to be complied with by Purchaser. (b) Truth of Purchaser's Representations and Warranties. The --------------------------------------------------- representations and warranties of Purchaser contained in Section 5.2 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Seller shall have received a certificate to that effect signed by an authorized agent of Purchaser. -27- (c) Opinion of Purchaser's Counsel. Purchaser shall have delivered ------------------------------ to Seller a favorable written opinion of Pedersen & Houpt in connection with this transaction, dated the Closing Date, as to (i) the power and authority of Purchaser to execute and deliver this Agreement, (ii) the due authorization, execution and delivery by Purchaser of this Agreement, and (iii) the legality, validity and, as to Purchaser, the binding effect of this Agreement (subject to the effect of bankruptcy and similar laws affecting the enforcement of creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Opinion of Purchaser's Securities Counsel. Purchaser shall have ----------------------------------------- delivered to Seller the written undertaking of Purchaser to provide to Seller the favorable written opinion of Bell, Boyd & Lloyd, dated at the time of each Approved Sale, that such Approved Sale complies or will comply with the requirements of this Agreement, the 1933 Act and any state blue sky or other securities laws applicable to the Approved Sale. (e) Delivery of Current Prospectus. Seller shall have received ------------------------------ Parent's current, effective prospectus that does not reflect any material adverse change from the prospectus of Parent dated June 17, 1996. 9.2 Failure of Conditions. If any of the conditions enumerated in Section --------------------- 9.1 are not fulfilled and, as a consequence thereof, Seller elects to terminate this Agreement, such failure shall be deemed a default by Purchaser hereunder and the consequences thereof shall be governed by the provisions of Section 3.2. ARTICLE X CONDITIONS TO PURCHASER'S OBLIGATIONS 10.1 Conditions. Purchaser's obligation to close hereunder shall be ---------- subject to the occurrence of each of the following conditions, any one or more of which may be waived by Purchaser in writing: (a) Seller's Compliance with Obligations. Seller shall have complied ------------------------------------ with all obligations required by this Agreement to be complied with by Seller. (b) Truth of Seller's Representations and Warranties. The ------------------------------------------------ representations and warranties of Seller contained in Section 5.1 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Purchaser shall have received a certificate to that effect signed by an authorized agent of Seller. (c) Opinion of Seller's Counsel. There shall have been delivered to --------------------------- Purchaser a favorable opinion of Jones, Jones, Close & Brown, counsel to Seller in connection with this -28- transaction, dated the Closing Date as to (i) the power and authority of Seller to execute and deliver this Agreement; (ii) the due authorization, execution and delivery by Seller of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof; and (iii) the legality, validity and, as to Seller, the binding effect of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof (subject in each case to the effect of bankruptcy and similar laws affecting creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Estoppel Certificates--Hotel Contracts. Purchaser shall notify -------------------------------------- Seller, in writing at least thirty (30) days prior to the Closing Date, of the Material Contracts for which Purchaser requires estoppel certificates. Each of said estoppel certificates shall be in writing from the parties to such Material Contract stating that such Material Contract is in full force and effect, has not been amended or modified except as therein indicated, that such party consents to the assignment to Purchaser and that no party is then in default under such Material Contract (or if any default is known to exist, or would arise with the giving of notice or the passage of time, stating the nature of such default). The estoppel certificates herein referred to shall be in form and substance reasonably satisfactory to Purchaser and dated not more than thirty (30) days prior to the Closing Date. (e) No Pending Adverse Litigation. On the Closing Date, there shall ----------------------------- not then be pending or, to the knowledge of either Purchaser or Seller, threatened, any litigation, administrative proceeding, investigation or other form of governmental enforcement, or executive or legislative proceeding which, if determined adversely, would restrain the consummation of any of the transactions herein referred to, declare illegal, invalid or non-binding any of the covenants or obligations of the parties herein, or have a material and adverse effect on the operations or cash flow of the Hotel, or materially and adversely affect the value of the Property or the ability of Purchaser, after the Closing, to operate the Hotel in the manner contemplated hereby, other than those matters previously disclosed and approved by Purchaser. (f) Related Transactions. The transactions contemplated by (i) the -------------------- certain Agreement to Purchase Hotel of even date herewith by and between St. Louis Manor, Inc. and ESA Properties, Inc., (ii) the certain Agreement to Purchase Hotel of even date herewith by and between Melrose Suites, Inc. and ESA Properties, Inc., and (iii) the certain Agreement to Purchase Hotel of even date herewith by and between Santa Fe Springs Partners and ESA Properties, Inc., shall have been consummated. (g) Title Policy. Purchaser shall have received an ALTA Owner's ------------ Insurance Policy issued by the Title Company in exact conformity with the Title Commitment in favor of Purchaser, in the amount of the Purchase Price, showing good and marketable fee simple title in the Real Property to be vested in Purchaser, subject only to Permitted Exceptions (the "Title Policy"). 10.2 Failure of Conditions. If any of the conditions enumerated in --------------------- subsections (d) -29- and (e), of Section 10.1 are not fulfilled, then the sole remedy of Purchaser shall be to terminate this Agreement (whereupon the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability hereunder), unless the failure to fulfill such condition constitutes, or results from, either (i) a material breach of an express representation or warranty made by Seller hereunder, or (ii) a material default of an express covenant made by Seller hereunder, in which event Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. If any of the conditions enumerated in subsections (a), (b) and (c) of Section 10.1 are not fulfilled and, as a consequence thereof, Purchaser elects to terminate this Agreement, such failure shall be deemed a default by Seller hereunder, the Deposit and all interest earned thereon referred to in Section 3.2 shall be promptly returned to Purchaser, and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. ARTICLE XI ACTIONS AND OPERATIONS PENDING CLOSING 11.1 Actions and Operations Pending Closing. Seller agrees that after the -------------------------------------- expiration of the Inspection Period and until the Closing Date: (a) The Hotel will continue to be operated and maintained substantially in accordance with present standards. (b) Seller will not enter into any new Material Contract or Space Lease, or cancel, modify or renew any existing Material Contract or Space Lease, without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. If Purchaser fails to respond to a request for consent within 15 business days after receipt of such request, such consent shall be deemed given. (c) Seller shall have the right, without notice to or consent of Purchaser, to make Bookings in the ordinary course of business, at no less than the Hotel's standard rates including customary discounted rates. Additionally, Seller agrees to entertain in good faith Purchaser's suggestions relating to the policy of the Hotel with respect to future Bookings and extension of credit. (d) Seller shall use commercially reasonable efforts to preserve in force all existing Permits and to cause all those expiring to be renewed prior to the Closing Date. If any such Permit shall be suspended or revoked, Seller shall promptly so notify Purchaser and shall take all measures necessary to cause the reinstatement of such Permit without any additional limitation or condition. (e) Seller shall notify Purchaser promptly if Seller becomes aware of any -30- transaction or occurrence prior to the Closing Date which would make any of the representations or warranties of Seller contained in Section 5.1 not true in any material respect. (f) Seller will maintain in effect, all policies of casualty and liability insurance, or similar policies of insurance, with the same limits of coverage which it now carries with respect to the Hotel. (g) Seller will not dispose of any of the Property, except in the ordinary course of business and in accordance with this Agreement. (h) Seller shall allow Purchaser and its agents or representatives to inspect the Property, and all books and records relating thereto, at such times as Purchaser may reasonably request, provided such inspection does not unreasonably interfere with the continued operation of the Hotel in the ordinary course of business. Purchaser shall also have the right to have, and Seller shall provide accommodations for, a full-time on-site representative to observe the operations of the Hotel. Such accommodations shall be rent-free except for those nights when all other guest rooms at the Hotel are fully occupied, in which event Purchaser shall reimburse Seller for such nights at the Hotel's lowest corporate rate for such accommodations. Purchaser agrees that the results of all such observations will be treated as confidential, and Purchaser shall not disclose the same to any other person or entity except for Purchaser's counsel, accountants, and other agents or representatives consulted in connection with the acquisition of the Hotel. In the event that the sale is not consummated, any and all Documents, reports, financial and operating information obtained by Purchaser or its representatives shall be returned to the Seller. ARTICLE XII CASUALTIES AND TAKINGS 12.1 Casualties. ---------- (a) If any damage to the Property shall occur prior to the Closing Date by reason of fire, windstorm, hail, explosion or other casualty, and if, in Purchaser's reasonable judgment, the cost of repairing such damage will exceed Fifty Thousand Dollars ($50,000.00), Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds) relating to such damage and acquire the Property without any adjustment in the purchase price provided that, in such latter event, Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. -31- (b) If, in the reasonable business judgment of the insurance adjuster or other representative of the insurer of the Property, the cost of repairing such damage will not exceed Fifty Thousand Dollars ($50,000.00), the transactions contemplated hereby shall close without any adjustment in the Purchase Price, Purchaser shall receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds), and Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. 12.2 Takings. In the event of the actual or threatened taking (either ------- temporary or permanent) in any condemnation proceedings by exercise of right of eminent domain, of all or any part of the Real Property, between the date hereof and the Closing Date, and if, in Purchaser's reasonable judgment, such taking will result in the inability to conduct the operations of the Hotel substantially in accordance with the present standards, Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller, in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any condemnation award relating to such taking and acquire the Property without any adjustment in the Purchase Price. ARTICLE XIII EMPLOYEES 13.1 Employees, Compensation and Indemnification. Purchaser shall have the ------------------------------------------- continuing right to review all employment records and files of, and to interview, Employees. Seller shall terminate its employer-employee relationship with all Employees as of the Cut-off Time. Seller shall be solely responsible for all Compensation and other liabilities with respect to Employees and liabilities and obligations to Employees pursuant to any Employment Arrangement. Purchaser shall not be responsible for any such liability or obligations and Seller agrees to indemnify and hold Purchaser harmless from and against any such liability or obligations. All Compensation, obligations, liabilities and claims (including any under the Fair Labor Standards Act) to or by any Employee of Seller arising or occurring prior to the Cut-off Time shall be the responsibility of Seller. Purchaser shall not be responsible for any Compensation thereof and Seller agrees to indemnify and hold Purchaser harmless from and against same. Purchaser shall not assume or be liable upon any Employment Arrangement of Seller. ARTICLE XIV INDEMNITIES 14.1 Seller's Indemnity. Seller agrees to indemnify, defend (with ------------------ Purchaser having the -32- right to retain counsel for the purpose of participating in such defense, at its sole cost and expense) and hold Purchaser harmless against and with respect to the following: (a) any and all obligations, liabilities, claims, accounts, demands, liens or encumbrances, whether direct or contingent and no matter how arising ("Indemnifiable Damages"), in any way related to the Property and arising or accruing on or before the Closing Date (including, but not limited to, any damage to property or injury to or death of any person); without limitation on the generality of the foregoing, Seller indemnifies Purchaser from any claim or judgment under any lawsuit or proceeding filed or pending prior to the Closing Date against the Property, or any part thereof, and any costs or expenses (including reasonable attorneys' fees) heretofore or hereafter incurred in connection with any such lawsuit or proceeding; (b) any loss or damage to Purchaser resulting from any inaccuracy in or breach of any representation or warranty of Seller or resulting from any breach or default by Seller of any obligation of Seller under this Agreement; and (c) all costs and expenses, including reasonable attorneys' fees, related to any actions, suits or judgments incident to any of the foregoing. 14.2 Purchaser's Indemnity. Purchaser agrees to indemnify, defend (with --------------------- Seller having the right to retain counsel for the purpose of participating in such defense, at its sole cost and expense), and hold Seller harmless against and with respect to the following: (a) any loss or damage to Seller, subsequent to the Closing Date, resulting from any inaccuracy in or breach of any representation or warranty of Purchaser under this Agreement; (b) any injury to person or property causing any loss or damage to Seller resulting from or arising out of work performed by Purchaser pursuant to Section 11.1(h) hereof; (c) any and all Indemnifiable Damages in any way related to the Property and arising or accruing after the Closing Date (including, but not limited to, any damage to property or injury to or death of any person); and (d) all costs and expenses, including reasonable attorney's fees, related to any actions, suits or judgments incident to any of the foregoing. 14.3 Notice of Claims. Seller and Purchaser, as applicable, shall promptly ---------------- notify the other in the event any claim is made against Seller or Purchaser as to which the other party has agreed to indemnify and the indemnitor shall thereupon undertake to defend and hold the indemnitee saved and harmless therefrom. ARTICLE XV -33- ARTICLE XV SECURITIES LAW MATTERS 15.1 Disposition of Shares. The Seller represents and warrants that --------------------- the Shares are being acquired and will be acquired for its own account and will not be sold or otherwise disposed of except pursuant to (i) the provisions of Rule 145(d) under the 1933 Act, as in effect at the time of sale, (ii) some other exemption or exclusion from the registration requirements under the 1933 Act, which does not require the filing by the Parent with the SEC of any registration statement, offering circular, or other document, in which case the Seller shall first supply to the Parent an opinion of counsel (which opinion and counsel shall be satisfactory to the Parent) that such exemption or exclusion is available, or (iii) the Registration Statement provided that (a) sales pursuant to the Registration Statement are made to or through a broker, dealer, or market maker, (b) in connection with such sales, the Seller delivers a copy of a current Prospectus forming a part of the Registration Statement which prospectus identifies the Seller as being able to use such Prospectus to make resales in the public market of Shares acquired pursuant to this Agreement, and (c) the Seller notifies the Parent in writing at least five business days prior to the first day the Seller intends to execute a sale transaction of the Shares pursuant to the Registration Statement and the Parent consents in writing to such sale. The Seller hereby acknowledges that the Parent is entitled in its absolute discretion to withhold such consent if, and for such period of time as, in the opinion of the management of the Parent, (i) securities laws applicable to such sale of Shares by the Seller pursuant to the Registration Statement would require the Parent to disclose material non-public information, or (ii) such sale would occur during (a) the measurement period for determining the amount of Common Stock or other consideration, the amount of which will be based on the price of the Common Stock, to be paid in connection with the acquisition of a business or assets to which the Parent or any of its subsidiaries is a party or (b) the marketing period of an offering of securities of the Parent. 15.2 Acknowledgment of Restrictions. The Seller acknowledges that, under ------------------------------ current SEC interpretations of Rule 145, the Seller is subject to restrictions on transfer of the Shares for a period of two years following the Closing Date and that an exemption from the requirement to register the Shares for public resale is provided by Rule 145(d). 15.3 Evidence of Compliance. The Seller further covenants and agrees that ---------------------- the Parent will be supplied with such written evidence of compliance by it and its broker with Rule 145(d) as in effect at the time of any sale by it pursuant thereto, as the Parent may reasonably request. 15.4 Legend. The Seller agrees that the certificates for the Shares ------ received shall bear the following legend: The Shares represented by this certificate are subject to the provisions of Rule 145(d) promulgated under the Securities Act of 1933, and may not be transferred or disposed of by the holder without compliance with said Rule unless registered under said Act or pursuant to another applicable exemption from the requirements of said Act. -34- and that the Parent may place stop transfer orders with its transfer agents with respect to such certificates. The appropriate portions of the legend will be removed at such time or times as the Seller may reasonably request if at the time of such request the Seller is not an Affiliate (as defined in the 1933 Act) of the Parent, upon the expiration of the two-year holding period provided in Rule 145(d). ARTICLE XVI NOTICES 16.1 Notices. Except as otherwise provided in this Agreement, all notices, ------- demands, requests, consents, approvals and other communications (herein collectively called "Notices") required or permitted to be given hereunder, or which are to be given with respect to this Agreement, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by overnight express courier, postage prepaid, addressed to the party to be so notified as follows: If intended for Seller, to: Mr. Michael J. Mona, Jr. M&M Development 1785 E. Sahara, Suite 315 Las Vegas, Nevada 89104 Copies to: Jones, Jones, Close & Brown 3773 Howard Hughes Parkway Third Floor South Las Vegas, Nevada 89109 Attn: Ms. Jodi R. Goodheart If intended for Extended Stay America, Inc. Purchaser, to: 500 East Broward Blvd., #950 Ft. Lauderdale, Florida 33394 Attn: Mr. Robert A. Brannon Copies to: Pedersen & Houpt 161 North Clark, Suite 3100 Chicago, Illinois 60601 Attn: Mr. Michael W. Black Notice mailed by registered or certified mail shall be deemed received by the addressee three (3) days after mailing thereof. Notice personally delivered shall be deemed received when delivered. -35- after mailing thereof. Either party may at any time change the address for notice to such party by mailing a Notice as aforesaid. ARTICLE XVII ADDITIONAL COVENANTS 17.1 Additional Covenants. In addition, the parties agree as follows: -------------------- (a) Expenses. Seller shall be responsible for the payment of all -------- sales and use taxes and fifty percent (50%) of all transfer taxes. Purchaser shall be responsible for the payment of all recording fees, fifty percent (50%) of all transfer taxes, all escrow fees, all costs of the Survey, all title insurance premiums and charges for the issuance of the Title Policy and all other closing charges. The fees and expenses of Seller's designated representatives, accountants and attorneys shall be borne by Seller, and the fees and expenses of Purchaser's designated representatives, accountants and attorneys shall be borne by Purchaser. (b) Brokerage. Seller and Purchaser each hereby represent and --------- warrant to the other that neither has dealt with any broker or finder in connection with the transaction contemplated hereby, and each hereby agrees to indemnify, defend and hold the other harmless against and from any and all manner of claims, liabilities, loss, damage, attorneys' fees and expenses, incurred by either party and arising out of, or resulting from, any claim by any such broker or finder in contravention of its representation and warranty herein contained. (c) Guest Baggage. All baggage of guests who are still in the Hotel ------------- on the Closing Date, which has been checked with or left in the care of Seller shall be inventoried, sealed, and tagged jointly by Seller and Purchaser on the Closing Date. Purchaser hereby indemnifies Seller against any claims, losses or liabilities in connection with such baggage arising out of the acts or omissions of Purchaser after the Closing Date. Seller hereby indemnifies Purchaser against any claim, losses or liabilities with respect to such baggage arising out of the acts or omissions of Seller prior to the Closing Date. (d) Safe Deposits. Immediately after the Closing, Seller shall send ------------- written notice to guests or tenants or other persons who have safe deposit boxes, advising of the sale of the Hotel to Purchaser and requesting immediate removal of the contents thereof or the removal thereof and concurrent re-deposit of such contents pursuant to new safe deposit agreements with Purchaser. Seller, at its own expense, shall have a representative present when the boxes are opened, in the presence of a representative of the Purchaser. Purchaser shall not be liable or responsible for any items claimed to have been in such boxes unless such items are so removed and re-deposited, and Seller agrees to indemnify and hold harmless Purchaser from and against any such liability or responsibility. -36- (e) Books and Records. The transaction contemplated hereby shall not ----------------- include the books and records of Seller pertaining strictly to the business of the Hotel. Seller covenants and agrees that such books and records will remain in the control of M&M Development for examination and audit by Purchaser and its agents after the Closing as provided in this clause (e). Seller agrees to preserve all books and records, files and correspondence, for at least five (5) years after the Closing Date, and not to destroy or dispose of the same, for at least five (5) years after the Closing Date. Seller agrees to provide access to Purchaser and its representatives, to such books, records, files and correspondence at all reasonable times. (f) Hart-Scott-Rodino Act. If it shall be determined that the within --------------------- transaction is subject to the reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. (S)18(a) (1976) (the "Act"), then notwithstanding anything to the contrary contained in Section 10.1(e) hereof, each party shall forthwith proceed to make the necessary filings, and take all other actions necessary to comply with the Act and the rules and regulations thereunder. If such requirements have not been fulfilled by the Closing Date, then the Closing Date shall be adjourned until such requirements have been fulfilled, but not more than sixty (60) days. If such requirements have not been fulfilled prior to the expiration of such sixty (60) day period, Seller or Purchaser, by notice to the other, may terminate this Agreement in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability to the other party hereunder. (g) Survival of Covenants, etc. The representations, warranties, --------------------------- obligations, covenants, agreements, undertakings and indemnifications of Seller and Purchaser contained herein shall survive the Closing for a period of two (2) years except that (i) the representation and warranty made by Seller in Section 5.1(i) shall expire at the time the period of limitations (including any extensions thereof pursuant to the delivery of waivers of the applicable period of limitations) expires for the assessment by the taxing authority of additional taxes with respect to which the representation and warranty relate; and (ii) the representation and warranty made by Purchaser in Section 3.4(d) shall not expire. All claims for indemnification must be made within the aforementioned periods. (h) Purchaser's Investigation and Inspections. Any investigation or ----------------------------------------- inspection conducted by Purchaser, or any agent or representative of Purchaser, pursuant to this Agreement, in order to verify independently Seller's satisfaction of any conditions precedent to Purchaser's obligations hereunder or to determine whether Seller's warranties are true and accurate, shall not or constitute a waiver by Purchaser of any of Seller's obligations hereunder or Purchaser's reliance thereon. (i) Construction. This Agreement shall not be construed more ------------ strictly against one party than against the other, merely by virtue of the fact that it may have been prepared primarily by counsel for one of the parties, it being recognized that both Purchaser and Seller have contributed substantially and materially to the preparation of this Agreement. -37- (j) Publicity. All notice to third parties and all other publicity --------- concerning the transactions contemplated hereby shall be jointly planned and coordinated by and between Purchaser and Seller. None of the parties shall act unilaterally in this regard without the prior written approval of the other; however, this approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Purchaser (or Parent) may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning Parent's publicly traded securities; Purchaser agrees to give Seller notice of any such public disclosure. (k) General. This Agreement may be executed in any number of ------- counterparts, each of which shall constitute an original but all of which, taken together, shall constitute but one and the same instrument. This Agreement (including all exhibits hereto) contains the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior understandings, if any, with respect thereto and may not be amended, supplemented or terminated, nor shall any obligation hereunder or condition hereof be deemed waived, except by a written instrument to such effect signed by the party to be charged. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. The warranties, representations, agreements and undertakings contained herein shall not be deemed to have been made for the benefit of any person or entity, other than the parties hereto and their permitted successors and assigns. Seller has no right to assign its rights (except as set forth in (m) below) or to delegate its duties hereunder. Purchaser may assign its rights and duties under this Agreement to any of its Affiliates. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. (l) FIRPTA. Seller agrees to furnish Purchaser with an executed ------- Certification in the form attached hereto as Exhibit Q ("FIRPTA Certificate"), and such other evidence as Purchaser may reasonably request, to establish that Seller is not a foreign person for the purpose of Section 1445 of the Internal Revenue Code of 1986, as amended ("Section 1445"). In the event that Seller does not furnish such Certification or a qualifying statement for the U.S. Treasury Department that the transaction is exempt from the withholding requirements of Section 1445, Seller agrees that Purchaser shall be directed to pay such amount required by law to the Internal Revenue Service in accordance with the laws and regulations regarding the withholding requirements of Section 1445. (m) Like-Kind Exchange. Seller shall have the right, at Seller's ------------------ option, to sell the Property to Purchaser through a transaction that is structured to qualify as a like-kind exchange of property within the meaning of Section 1031 of the Internal Revenue Code of 1986 ("Code"). Purchaser agrees to reasonably cooperate with Seller in effecting a qualifying like-kind exchange through a trust, escrow or other means as determined by Seller, provided, however, Purchaser shall not be required to incur any obligation or liability to a third party as a part of the exchange. In any event Seller shall have the right to assign its rights under this contract, in whole or in part, to a qualified intermediary (as defined under current Code regulations governing like-kind exchanges) or as otherwise necessary or appropriate to effectuate a like-kind exchange, provided that Seller shall remain liable for its obligations hereunder (and that Michael J. Mona, Jr. shall remain liable pursuant -38- to his guaranty as hereinafter set forth) and Seller (and Michael J. Mona) shall execute such additional documentation as Purchaser may reasonably request to evidence such continuing liability. Seller shall bear the additional transaction costs and all costs and expenses incurred by Purchaser and attributable to exchange procedures in this transaction that are requested or implemented by Seller. Seller shall be solely responsible for assuring the effectiveness of the exchange for Seller's tax purposes. In no event shall any like-kind exchange contemplated by this provision cause an extension of the date of closing set forth herein nor shall Purchaser be required to take title to any property other than the Property. (n) Jurisdiction. Any action or proceeding seeking to enforce any ------------ provision of, or based on any right arising out of, this Agreement shall be brought against any of the parties in the courts of the State of Nevada, County of Clark, or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. -39- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: BOULDER MANOR, INC., a Nevada corporation By:/s/ Michael J. Mona, Jr --------------------------------------- Michael J. Mona, Jr., President Attest:___________________________________ Its:______________________________________ PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By:________________________________________ Attest:____________________________________ Its:_______________________________________ The undersigned hereby guaranties the collection by Purchaser of all amounts due from Seller pursuant to the terms hereof. /s/ Michael J. Mona, Jr. ------------------------------------------- Michael J. Mona, Jr. -40- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: BOULDER MANOR, INC., a Nevada corporation By:________________________________________ Michael J. Mona, Jr., President Attest:___________________________________ Its:______________________________________ PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By:/s/ Robert A. Brannon ---------------------------------------- Robert A. Brannon, Vice President Attest: Robert Brannon ------------------------------------ Its: Secretary --------------------------------------- The undersigned hereby guaranties the collection by Purchaser of all amounts due from Seller pursuant to the terms hereof. ___________________________________________ Michael J. Mona, Jr. -40- AGREEMENT TO PURCHASE HOTEL by and between MELROSE SUITES, INC. and ESA PROPERTIES, INC. JUNE 25, 1996 EXHIBIT A LAND EXHIBIT B EXCLUDED ASSETS EXHIBIT C PERMITTED EXCEPTIONS EXHIBIT D SUBMITTED FINANCIAL STATEMENTS EXHIBIT E ALLOCATION OF PURCHASE PRICE EXHIBIT F PERMITS EXHIBIT G HOTEL CONTRACTS AND COMMISSIONS EXHIBIT H EMPLOYEE AND EMPLOYMENT ARRANGEMENTS EXHIBIT I BOOKINGS EXHIBIT J SPACE LEASES AND COMMISSIONS EXHIBIT J-1 SPACE LESSEE ESTOPPEL LETTER EXHIBIT K NOTICES OF VIOLATIONS EXHIBIT L PENDING OR THREATENED LITIGATION EXHIBIT M DOCUMENTS EXHIBIT N IMPOSITIONS EXHIBIT O HOTEL NAMES EXHIBIT P EMPLOYEE BENEFIT PLANS EXHIBIT Q FIRPTA CERTIFICATE EXHIBIT R NON-COMPETE AGREEMENT EXHIBIT S NOTE EXHIBIT T ESCROW AGREEMENT EXHIBIT U ENVIRONMENTAL MATTERS AGREEMENT TO PURCHASE HOTEL --------------------------- THIS AGREEMENT is made this 25th day of June, 1996, by and between Melrose Suites, Inc., a Nevada corporation ("Seller"), and ESA Properties, Inc., a Delaware corporation ("Purchaser"). R E C I T A L S: A. Seller is the fee owner of that certain parcel of land (and the improvements and buildings located thereon) legally described in Exhibit A and commonly referred to as the Melrose Suites, 4270 South Valley View Boulevard, Las Vegas, Nevada (the "Hotel") and the owner of the Fixtures and Tangible Personal Property, Operating Equipment, Consumables, and Miscellaneous Hotel Assets (all as hereinafter defined). B. The Hotel's facilities include guest and public facilities consisting of 177 rooms, administrative offices, and service areas. C. Seller desires to sell, and Purchaser desires to purchase, the Property upon and subject to the terms and conditions hereinafter set forth. A G R E E M E N T S NOW, THEREFORE, in consideration of the foregoing premises and the respective representations, warranties, agreements, covenants and conditions herein contained, and other good and valuable consideration, Seller and Purchaser agree as follows: ARTICLE I DEFINITIONS AND REFERENCES 1.1 Definitions. As used herein, the following terms shall have the ----------- respective meanings indicated below: Affiliate: With respect to a specific entity, any natural person or any --------- firm, corporation, partnership, association, trust or other entity which, directly or indirectly, controls, or is under common control with, the subject entity, and with respect to any specific entity or person, any firm, corporation, partnership, association, trust or other entity which is controlled by the subject entity or person. For purposes hereof, the term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any such entity or the power to veto major policy decision of any such entity, whether through the ownership of voting securities, by contract, or otherwise. Agreement: This Agreement to Purchase Hotel, including the Exhibits. --------- Bookings: Contracts for the use or occupancy of guest rooms of the Hotel. -------- Closing: As defined in Section 6.1. ------- Compensation: The direct salaries and wages paid to, or accrued for the ------------ benefit of, any Employee, incentive compensation, vacation pay, severance pay, employer's contributions under F.I.C.A., unemployment compensation, workmen's compensation, or other employment taxes, and payments under Employee Benefit Plans (as hereinafter defined). Consumables: All food and beverages (alcoholic, to the extent transferable ----------- under applicable law, and non-alcoholic); engineering, maintenance and housekeeping supplies, including soap, cleaning materials and matches; stationery and printing; and other supplies of all kinds, in each case whether partially used, unused, or held in reserve storage for future use in connection with the maintenance and operation of the Hotel, which are on hand (which shall include off-site storage) on the date hereof, subject to such depletion and restocking as shall occur and be made in the normal course of business but in accordance with present standards, excluding, however, (i) Operating Equipment and (ii) all items of personal property owned by Space Lessees, guests, employees, or persons (other than Seller or any Affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing food or services to the Hotel. Cut-off Time: 12:01 A.M. on the Closing Date. ------------ Department: Nevada Department of Revenue. ---------- Deposit: As defined in Section 3.2. ------- Documents: Reproducible copies of all plans, specifications, drawings, --------- blueprints, surveys, environmental reports and other similar documents which Seller has in its possession, or has a right to, as the same relate to the Real Property, including, but not limited to those relating to any prior or ongoing construction or rehabilitation of the Real Property. Employee(s): All persons employed by Seller pursuant to Employment ----------- Arrangements. Employee Benefit Plans: All employee benefit plans, as that term is ---------------------- defined in Section 3(2)(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including "multi-employer pension plans" as defined in Section 3(37) of ERISA, and each other employee benefit plan or program (including welfare benefit plans as defined in Section 3(1) of ERISA) to -2- which Seller contributes on behalf of any of the Employees. Employment Arrangement(s): Those agreements, oral or written, with all or ------------------------- any of the executives, staff and employees of Seller for work in or in connection with the Hotel including, but not limited to, individual employment agreements, union agreements, employee handbooks, group health insurance plans, life insurance plans and disability insurance plans (other than Employee Benefit Plans). Environmental Laws: As defined in Section 5.1(u). ------------------ Environmental Study: As defined in Section 4.3. ------------------- Excluded Assets: The following: (i) those assets, if any, listed on --------------- Exhibit B hereto owned and to be retained by Seller; (ii) receivables; and (iii) except as provided to the contrary in Section 17.1(e) hereof, all records, files and proprietary operating manuals in the Hotel. Excluded Permits: Permits and licenses required for the ownership and ---------------- operation of the Hotel which, under applicable law, are nontransferable. Fixtures and Tangible Personal Property: All fixtures, furniture, --------------------------------------- furnishings, fittings, equipment, cars, trucks, machinery, apparatus, signage, appliances, draperies, carpeting, and other articles of personal property now located on the Real Property or held in storage for future use at the Hotel and used or usable in connection with any part of the Hotel, subject to such depletions, resupplies, substitutions and replacements as shall occur and be made in the normal course of business but in accordance with present standards excluding, however: (i) Consumables; (ii) Operating Equipment; (iii) equipment and property leased pursuant to Hotel Contracts; (iv) property owned by Space Lessees, guests, employees or other persons (other than Seller or any affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing goods or services to the Hotel; and (v) Improvements. FIRPTA Certificate: As defined in Section 17.1(l). ------------------ Hazardous Material: As defined in Section 5.1(u). ------------------ Hotel: The hotel referred to in the Recitals. ----- Hotel Contracts: All management, service, maintenance, material purchase --------------- orders, leases and other contracts or agreements, including equipment leases capitalized for accounting purposes, and any amendments thereto, with respect to the ownership, maintenance, operation, provisioning, or equipping of the Hotel, or any of the Property, as well as written warranties and guaranties relating thereto, if any, including, but not limited to, those relating to heating and cooling equipment and/or mechanical equipment, but exclusive, however, of (i) insurance policies, (ii) the Bookings, (iii) the -3- Space Leases, (iv) the Employment Arrangements, and (v) the Employee Benefit Plans. Hotel Names: All names or other identifications used in connection with ----------- the operation of Hotel. Impositions: All taxes and other governmental charges of any kind ----------- whatsoever that may at any time be assessed or levied against or with respect to the Property, or any part thereof or any interest therein, including, without limitation, all general and special real estate taxes and assessments or taxes assessed specifically in whole or in part in substitution of general real estate taxes or assessments; any taxes levied upon or with respect to the revenue, income or profits of Seller from all or any part of the Property which, if not paid, will become a lien on all or any part of the Property, or a lien or charge on the rents, revenues or receipts therefrom; all assessed ad valorem taxes; all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Property and all assessments and other charges made by any governmental agency for improvements that may be secured by a lien on the Property. Improvements: The buildings, structures (surface and sub-surface) and ------------ other improvements, including such fixtures as shall constitute real property, located on the Land. Inspection Period: As defined in Section 4.1. ----------------- Land: The parcel of real estate described in Exhibit A hereto, together ---- with all rights, title and interest, if any, of Seller in and to all land lying in any street, alley, road or avenue, open or proposed, in front of or adjoining said Land, to the centerline thereof, and all right, title and interest of Seller in and to any award made or to be made in lieu thereof and in and to any unpaid award for the damage to said Land by reason of change of grade of any street. Legal Requirements: All laws, statutes, codes, acts, ordinances, orders, ------------------ judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and governmental authorities having jurisdiction of the Hotel (including, for purposes hereof, any local Board of Fire Underwriters), and the operation thereof. Material Bookings: All Bookings for meetings and banquet facilities and, ----------------- with respect to guest rooms, any contract for seven (7) or more room nights. Material Contracts: All Hotel Contracts which cannot be cancelled by 30 ------------------ days' or less notice without penalty or premium payment. Miscellaneous Hotel Assets: All contract rights, leases, concessions, -------------------------- trademarks, logos, copyrights, assignable warranties and other items of intangible personal property relating to the ownership or operation of Hotel, but such term shall not include (i) Bookings; (ii) Hotel Contracts; (iii) Space Leases; (iv) Permits; (v) cash or other funds, whether in petty cash or house banks, or on -4- deposit in bank accounts or in transit for deposit; (vi) books and records (except as provided in Section 17.1(e); (vii) refunds, rebates, or other claims, or any interest thereon, for periods or events occurring prior to the Cut-off Time; (viii) utility and similar deposits; (ix) prepaid insurance or other prepaid items; or (x) prepaid license and permit fees; except to the extent that Seller receives a credit at Closing for any such item or matter. Non-Compete Agreements: The Non-Compete Agreements delivered by Seller to ---------------------- Purchaser pursuant to the terms of Section 7.1 hereof. Obligations: All payments required to be made and all representations, ----------- warranties, covenants, agreements and commitments required to be performed under the provisions of this Agreement by Seller or Purchaser, as applicable. Operating Equipment: All china, glassware, linens, silverware and ------------------- uniforms, whether in use or held in reserve storage for future use, in connection with the operation of the Hotel, which are on hand (including off- site storage) on the date hereof, subject to such depletion and restocking as shall be made in the normal course of business but in accordance with present standards. Parent: Extended Stay America, Inc., a Delaware corporation. ------ Permits: All licenses, franchises and permits, certificates of occupancy, ------- authorizations and approvals used in or relating to the ownership, occupancy or operation of any part of the Hotel. Permitted Exceptions: Any liens, encumbrances, restrictions, exceptions -------------------- and other matters specified in Exhibit C to which title to the Property may be subject on the Closing Date. Personal Property: All of the Property other than the Real Property. ----------------- Property: (i) The Real Property; (ii) the Fixtures and Tangible Personal -------- Property; (iii) the Operating Equipment; (iv) the Consumables; (v) the transferable right, title and interest of Seller in, to and under the Hotel Contracts and Space Leases; (vi) the Bookings; (vii) the Permits (other than Excluded Permits); (viii) the Hotel Names; (ix) the Documents; and (x) all other Miscellaneous Hotel Assets, provided, however, that Property shall not include the Excluded Assets. Proratable Compensation: Compensation exclusive of severance pay and ----------------------- Employee Benefit Plans. Purchase Price: As defined in Section 3.1. -------------- Real Property: The Land together with the Improvements located on the ------------- Land. Searches: As defined in Section 6.3(c). -------- -5- Section 1445: As defined in Section 17.1(l). ------------ Space Leases: All leases, licenses, concessions and other occupancy ------------ agreements, and any amendments thereto, whether or not of record, for the use or occupancy of any portion of the Real Property excluding, however, Bookings. Space Lessee: Any person or entity entitled to occupancy of any portion of ------------ the Real Property under a Space Lease. Submittals: As defined in Section 4.2. ---------- Submitted Financial Statements: Those financial statements of the Hotel ------------------------------ identified in Exhibit D hereto. Survey: The survey for the Property prepared in accordance with Section ------ 6.3(a). Title Commitment: The commitment for title insurance issued in accordance ---------------- with Section 6.3(b). Title Company: United Title of Nevada. ------------- Title Defect: A lien, claim, charge, security interest or encumbrance ------------ other than a Permitted Exception. Title Documents: As defined in Section 6.3. --------------- Title Papers: As defined in Section 6.3(b). ------------ Title Policy: As defined in Section 10.1(g). ------------ UCC: The Uniform Commercial Code in effect in Nevada. --- Violation: Any condition with respect to the Property which constitutes a --------- violation of any Legal Requirements. 1.2 References. Except as otherwise specifically indicated, all ---------- references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "hereby," "hereof," "herein," "hereto," "hereunder," "hereinafter," and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof. The word "hereafter" shall mean after, and the term "heretofore" shall mean before, the date of this Agreement. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. -6- ARTICLE II SALE AND PURCHASE 2.1 Sale and Purchase. Seller hereby agrees to sell (or to cause to be ----------------- sold) to Purchaser, and Purchaser hereby agrees to purchase from Seller, the Property on the terms and subject to the conditions of this Agreement. ARTICLE III PURCHASE PRICE 3.1 Purchase Price; Allocation Thereof. The purchase price ("Purchase ---------------------------------- Price") for the Property and the Non-Compete Agreements shall be Fourteen Million Dollars ($14,000,000.00) payable by delivery of a Note from Purchaser to Seller in the form attached hereto as Exhibit S. The Purchase Price shall be allocated in accordance with the values reasonably attributable to the components of the Property and the Non-Compete Agreements as set forth on Exhibit E hereto. 3.2 Deposit. Concurrently herewith, Purchaser is depositing the sum of ------- $50,000.00 (the "Deposit") with Title Company to secure performance of Purchaser's obligations hereunder. The Deposit and interest earned thereon shall be held in an interest bearing account until the Closing Date (except as otherwise provided herein) at which time the Deposit shall be paid as a credit against the Purchase Price. Except as hereinafter provided, if the transaction contemplated hereby does not close because of a default by Purchaser hereunder, the parties agree that the Deposit and interest earned thereon shall be delivered to Seller as Seller's sole and exclusive liquidated damages, which amount the parties agree is a reasonable sum considering all of the circumstances existing on the date of this Agreement, including, without limitation, the relationship of such sum to the amount of harm to Seller that reasonably could be anticipated, Seller's anticipated use of the proceeds of sale, and the fact that proof of actual damages would be impossible to determine. Notwithstanding the foregoing, if the transaction contemplated hereby does not close and Purchaser shall not have defaulted hereunder, the Deposit and all interest earned thereon shall be returned promptly to Purchaser and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. 3.3 No Assumption of Seller's Obligations. Except as specifically ------------------------------------- provided herein to the contrary, Purchaser shall not assume, or become obligated with respect to, any obligation of Seller, including, but not limited to, the following: -7- (a) Obligations of Seller now existing or which may arise prior to the Cut-off Time with respect to any accounts payable or other payables; (b) Obligations prior to the Closing Date of any term, covenant or provision of any Employee Benefit Plan, Employment Contract, Hotel Contract or Space Lease; (c) Obligations of Seller now existing or which may hereafter exist by reason of or in connection with any alleged misfeasance or malfeasance by Seller in the conduct of its business, and with respect to any tort liability; (d) Obligations to Employees with respect to any Compensation (or pursuant to any Employment Contract or Employee Benefit Plan); and (e) Obligations of Seller incurred in connection with or relating to the transfer of the Property pursuant to this Agreement, including without limitation, any Federal, state or local income, sales, transfer or other tax incurred by reason of said transfer, all of which shall be the sole responsibility of Seller. 3.4 Payment of the Note. Purchaser shall satisfy its obligations under -------------------- the Note by delivering shares ("Shares") of common stock, par value $.01 per share, of Parent, and/or cash to Seller, as the case may be, on or before the Note's maturity date specified in the Note, subject to the following: (a) Purchaser and Seller acknowledge that Purchaser shall deliver Shares to Seller only if such Shares are the subject of Approved Sales (defined below). The net proceeds realized by Seller from the sale of the Shares shall be deducted from the balance of the Note. Seller agrees that it shall sell such Shares only in bona fide private placements which are approved by Purchaser in its absolute discretion to a person or persons not affiliated with, related to, or associated with Seller ("Approved Sales"). Purchaser shall deliver to Seller that number of Shares equal to the number of Shares which are sold pursuant to Approved Sales and such delivery shall be accomplished so as to allow the Approved Sales to be consummated on a timely basis. (b) If the net proceeds actually received from Approved Sales are less than the amount due under the Note, Purchaser shall also deliver cash to Seller prior to the maturity date of the Note having a value equal to the difference between the amount due under the Note and the net proceeds received from Approved Sales. In the event no Approved Sales occur prior to the maturity date of the Note, the Note shall be payable in cash on or before its stated maturity date. Seller shall use the net proceeds received from Approved Sales first to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property. Notwithstanding the above, if net proceeds received from Approved Sales are insufficient to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property, Purchaser shall set off against amounts due under the Note an amount equal to such insufficiency and Purchaser shall apply such amount to satisfy and release such liens. -8- (c) The Note shall be paid pursuant to an escrow agreement to be entered into between Purchaser, Seller and an escrow agent mutually agreed upon by Purchaser and Seller, the form of which is attached hereto as Exhibit T. All costs of such escrow shall be borne by Purchaser. (d) Purchaser shall indemnify, defend, and hold Seller harmless against and with respect to all losses, damages, liabilities, costs, and expenses to which Seller may become subject under the Securities Act of 1933, as amended, or otherwise in connection with or arising out of Approved Sales. ARTICLE IV INSPECTION PERIOD 4.1 Inspection Period. The "Inspection Period" shall be the period from ----------------- the date hereof to 11:59 P.M. on June 30, 1996 (provided that such period shall be extended on a day-for-day basis in the event Purchaser does not receive the survey referenced in Section 6.3(a) hereof on or before June 23, 1996). 4.2 Submittals to Purchaser. Seller, at its expense, shall deliver (if ----------------------- such are within Seller's possession or are reasonably available to Seller) to Purchaser on or before June 26, 1996, true and correct copies of the following: (a) the Permits, Hotel Contracts, Employment Arrangements, Employee Benefit Plans, a summary of the amounts, dates, and credit information of Material Bookings (whether for periods before or after the Closing Date), Space Leases and notices of Violations (if any); (b) a descriptive summary of the manner in which all Bookings are made, whether oral or written, with or without deposits or firm or contingent commitments for reservations, along with a copy of the written agreements or confirmation letters used in connection with the Bookings; (c) a descriptive summary of all pending or threatened litigation listed on Exhibit L; (d) the most recent real estate and personal property tax statements for the Property; (e) all Documents, including, but not limited to, the plans and specifications; (f) the most current inventory of all Fixtures and Tangible Personal Property, Operating Equipment and Consumables; -9- (g) all other documents or instruments of record or otherwise relating to the Property available to Seller; (h) copies of all financial reports prepared by the accountant for Seller for the fiscal year of Seller for the three (3) years preceding the date hereof ("Submitted Financial Statements"); and (i) information reflecting the insurance loss history of the Property for the period from January 1, 1994 to the present and copies of all insurance policies relating to the Property. 4.3 Review and Inspection. During the Inspection Period, Purchaser shall --------------------- review the Submittals and shall have the right to enter upon the Real Property to inspect the Property and to conduct tests and investigations at its sole cost and expense, except as provided herein. Seller shall cooperate with Purchaser, or its agents, in arranging such inspections. Without limitation of the foregoing, Purchaser or Purchaser's accountants or both may review the Submitted Financial Statements and, in connection therewith, Seller shall supply such documentation as Purchaser or Purchaser's accountants may reasonably request to facilitate such review. Purchaser shall conduct all such inspections and reviews in confidence and so as not to interfere unreasonably with the operation of the Hotel. During the Inspection Period, Purchaser may order an environmental report, at Purchaser's sole cost and expense, to be conducted by an environmental engineering firm selected by Purchaser (the "Environmental Study"). 4.4 Purchaser's Acceptance or Rejection. If, in its sole and absolute ----------------------------------- discretion, Purchaser accepts the condition of the Property and the Submittals, it shall give Seller written notice of such acceptance before expiration of the Inspection Period. If Purchaser shall give Seller a notice of disapproval before expiration of the Inspection Period or fails to give such notice, then, without the necessity of further documentation, this Agreement shall be deemed terminated and the Deposit and all interest earned thereon shall be returned to Purchaser. Purchaser shall pay to Seller the sum of $100.00 as fixed and liquidated compensation for such termination, and neither party shall have any further obligation or liability to the other party hereunder. The parties hereto acknowledge that Purchaser has incurred substantial costs in connection with the negotiation and execution of this Agreement, will incur additional substantial costs in conducting the inspections contemplated by Section 4.3 and would not have entered into this Agreement without the availability of the Inspection Period. Therefore, the parties agree that adequate consideration exists to support the obligations of the parties hereunder, even before expiration of the Inspection Period. Notwithstanding the above, if the Inspection Period is extended due to Purchaser's receipt of the survey after June 23, 1996, Purchaser may terminate this Agreement pursuant to the terms of this Section 4.4 after June 30, 1996, only due to matters raised on such survey. 4.5 Extension of Inspection Period. Purchaser shall have the option to ------------------------------- extend the Inspection Period to July 15, 1996, subject to the following provisions: -10- (a) Purchaser shall notify Seller on or before June 30, 1996 of Purchaser's exercise of its option to extend the Inspection Period; and (b) Purchaser shall deliver to Seller $25,000.00 which shall be earned by Seller but treated as an additional Deposit provided, however, that such additional Deposit shall not be subject to return to Purchaser pursuant to the terms of Section 4.4 hereof. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties of Seller. Seller hereby represents ----------------------------------------- and warrants the following to Purchaser: (a) Due Organization, etc. Seller is a Nevada corporation duly formed --------------------- and validly existing in good standing under the laws of its state of formation and has full power and authority (i) to own or lease its properties and to carry on its business as it is now being conducted, (ii) to enter into this Agreement and to sell, convey, transfer, assign, and deliver the Property to Purchaser as provided herein, and (iii) to carry out the other transactions and agreements contemplated hereby. This Agreement has been duly authorized by all requisite action on the part of Seller. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby (other than the issuance and sale of Shares pursuant to the Note), except as otherwise provided herein, do not require the consent or approval of any governmental authority, nor shall such execution and delivery result in a breach or Violation of any Legal Requirement, or constitute a default (or an event which with notice and passage of time or both will constitute a default) under any contract or agreement to which Seller is a party or by which it or the Property is bound. (b) Intentionally Omitted. (c) Title to Personal Property. Seller has good and marketable title -------------------------- to the Personal Property, subject only to the Permitted Exceptions. All items of Personal Property have been fully paid for to the extent that normal business practice permits, except those items which are subject to installment payments and with respect to which there are no installments due which are delinquent. (d) Permits. To Seller's knowledge, (i) Exhibit F identifies all ------- existing Permits and is complete and correct in all material respects; (ii) such Permits constitute all of the Permits currently necessary for the ownership and operation of the Hotel; (iii) no default has occurred in the due observance or condition of any Permit which has not been heretofore corrected; and (iv) no Space Lessee has received any notice from any source to the effect that there is lacking any Permit needed in connection with the operation of the Hotel or any other operation connected therewith. -11- (e) Hotel Contracts. Exhibit G identifies all material Hotel --------------- Contracts and the information noted therein is complete and correct in all material respects. Except as disclosed in Exhibit G, there is no default under any Hotel Contract. Seller has provided (or will provide during the Inspection Period) true and correct copies of all Hotel Contracts to Purchaser. Each Hotel Contract (other than the Hotel Contracts designated as Material Contracts on Exhibit G) may be cancelled upon 30 days' or less notice without penalty or premium payment. (f) Hotel Names. Exhibit O hereto identifies all Hotel Names and is ----------- complete and correct in all respects. Seller has not received any notice that the use of any thereof infringes on the rights of a third party. (g) Space Leases. Exhibit J identifies all Space Leases and is ------------ complete and correct in all material respects. Except as disclosed in Exhibit J, there is no default, under any Space Lease. Seller has given (or will give, during the Inspection Period) to Purchaser true and correct copies of all Space Leases. Seller owns all right, title and interest of the lessor under each Space Lease. (h) Commissions, etc. Except as may be disclosed on Exhibits G or J ---------------- and other than in the ordinary course of business in connection with Bookings, there are no commissions or referral fees relating to the Hotel currently outstanding, nor will there be any such commissions or referral fees outstanding, on or before the Closing Date. Seller has not entered into any agreements with any referral organization or booking agent which contain any obligations that extend beyond the Closing Date. (i) Impositions. ----------- (i) Except as described on Exhibit N hereto, Seller has timely filed all returns and reports for sales, use and property taxes required to be filed by it with respect to the operation of the Property and has paid in full or made adequate provision by the establishment of reserves for Impositions which have become due with respect to the operation of the Property. There is no sales, use or property tax deficiency proposed or threatened against Seller with respect to the operation of the Property. There are no tax liens upon any property or assets of Seller. Seller has made all payments of sales, use and property taxes when due in amounts sufficient to avoid the imposition of any penalty with respect to the Property. (ii) Impositions which Seller was required by law to withhold or to collect with respect to the Property have been duly withheld and collected, and have been paid over to the proper governmental entity or are being held by Seller for such payment, and all such withholdings and collections and all other payments due in connection therewith as of the date of the Submitted Financial Statements are duly reflected on the Submitted Financial Statements. -12- (iii) Seller is not currently being audited by, and has not received any notice of intention to audit from, any federal, state or local sales, use or property taxing authority. (j) Fixtures, Tangible Personal Property, etc. Each guest room ----------------------------------------- contains furniture and furnishings consistent with Seller's historical furnishing of such guest rooms. The quantities of Fixtures and Tangible Personal Property, Consumables and Operating Equipment in the Hotel, including physical reserves, are sufficient for the proper and efficient operation of the Hotel in accordance with the standards of operation heretofore maintained by Seller. Seller shall continue to maintain the same at a level consistent with the average maintenance for the 12 months preceding the date hereof until the Cut-off Time. (k) Submitted Financial Statements. The Submitted Financial ------------------------------ Statements for the Hotel (which shall include the income of restaurants, bars, retail rental space and garage portions of the Hotel, if any) fairly present the results of operation of the Hotel for the periods indicated, and, except as set forth as Exhibit D, were prepared in accordance with generally accepted accounting principles, on a consistent basis, and there has been no material adverse change in the results of the operations of the Hotel since the statement dated for the period ended December 31, 1995. (l) Bookings. Exhibit I identifies all Bookings for periods from and -------- after the date hereof. (m) Pending Litigation. Except as described in Exhibit L, there are ------------------ no actions, suits, or proceedings, pending or to Seller's knowledge threatened against Seller or affecting any of Seller's rights, in each case, with respect to the Property, at law or in equity, or before any federal, state, municipal, or other governmental agency or instrumentality, which might result in any order, injunction, decree or judgment having a material adverse effect on the Hotel or the Property, nor is Seller aware of any facts which to its knowledge might result in any action, suit or proceedings. Except as noted in Exhibit K, to Seller's knowledge the Hotel complies with all Legal Requirements. Except as noted in Exhibit K, Seller has not received any notice of any Violation of a Legal Requirement which has not been heretofore corrected. Prior to the Closing Date, any uncured Violations listed in Exhibit K and any other Violations that arise shall be cured by Seller at its sole expense. (n) Condemnation. To the knowledge of Seller, there are no pending, ------------ or, threatened, condemnation proceedings or condemnation actions against the Real Property or any of the rights-of-way located adjacent thereto. (o) Intentionally Omitted. (p) Assessments. To Seller's knowledge, no governmental assessment ----------- for sewer, sidewalk, water, paving, electrical, power or other improvements is pending or threatened, except as may be set forth on Exhibit C. -13- (q) Labor Disputes. During the three (3) years preceding the date -------------- hereof, Seller has not experienced any labor disputes or labor trouble other than routine grievances or organizational efforts, none of which have had a material adverse effect on the operations of the Property. (r) Employees. Exhibit H is a complete list of all Employees with --------- their salaries, position and terms of employment; and (i) except as set forth on Exhibit H, Seller is not a party to any Employment Arrangement and no union is presently serving as collective bargaining agent for any Employees; (ii) to the best of Seller's knowledge, no union presently is conducting or planning to conduct an organizational campaign for any Employees; and (iii) with the exception of the Employee Benefit Plans listed on Exhibit P, there is no pension, profit-sharing, bonus or other employee benefit plan relating to current or past Employees. (s) Utilities. All utility equipment and facilities required for the --------- operation and use of the Hotel are located on the Property and all agreements for providing utilities are with direct providers. (t) Material Changes. There are no facts or circumstances having ---------------- specific application to the Hotel (other than general economic or industry conditions) not disclosed to Purchaser of which Seller has knowledge, which have or could have a material adverse effect upon the Hotel. Seller agrees to notify Purchaser immediately of such facts or circumstances if it becomes aware of the same prior to the Closing Date. (u) Environmental Matters. --------------------- (i) Seller has not transported, stored, treated, or disposed of, nor has it allowed or arranged for any third parties to transport, store, handle, treat, or dispose (as hereinafter defined) of Hazardous Substances or other waste to or at any location other than a site lawfully permitted to receive such Hazardous Substances or other waste for such purposes, nor has it performed, arranged for, or allowed by any method or procedure such transportation, storage, treatment, or disposal in contravention of any laws or regulations or in a manner giving rise to any liability whatsoever. Seller has not stored, handled, treated, or disposed of, nor allowed or arranged for any third parties to store, handle, treat, or dispose of Hazardous Substances or other waste upon property owned or leased by it, except as permitted by law. For purposes of this Section 5.1(u), the term "Hazardous Substances" shall include, without limitation, any material or substance that is one or more of the following: (i) defined as a conventional, hazardous, toxic, regulated or solid pollutant, contaminant, substance or waste pursuant to any Environmental Law (as hereinafter defined), (ii) petroleum, (iii) asbestos, (iv) corrosive, toxic, flammable, explosive, reactive, mutagenic, carcinogenic, infectious or radioactive, (v) materials mixed with, containing or derived from any of the foregoing or (xvii) any material -14- which is or becomes regulated by any Environmental Law which is released (as hereinafter defined) at or from the Real Property or which has migrated to or from the Real Property or is found on the Real Property or any other site affected by such release at, to, on or from the Real Property. The terms release(d), transport(ed), store(d), treat(ed), handle(d), arrange(d), dispose(d) and disposal shall have the meanings assigned by the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.A. Section 9601 et seq. ("CERCLA") or the Resource Conservation and Recovery Act, 42 U.S.C.A. Section 6901 et seq. (42 U.S.C.A. Section 6903 ("RCRA"). (ii) To Seller's knowledge, there has not occurred during Seller's occupancy nor is there currently occurring, a release of any Hazardous Substance to, from, on, into, or beneath the surface of the Land. (iii) The Seller has not shipped, transported, or disposed of, nor has it allowed or arranged, by contract, agreement, or otherwise, for any third parties to ship, transport, or dispose of, any Hazardous Substance or other waste to or at a site which, pursuant to CERCLA or any similar state law, (i) has been placed on the National Priorities List or its state equivalent, or (ii) the Environmental Protection Agency or the relevant state agency has proposed or is proposing to place on the National Priorities List or its state equivalent. Seller has not received written notice, nor does it have knowledge of any facts which could give rise to any written notice, that Seller is a potentially responsible party for a federal or state environmental cleanup site or for corrective action under CERCLA or any other applicable law or regulation. Seller has not submitted nor was it required to submit any notice pursuant to Section 103(c) of CERCLA, or pursuant to any federal, state or local requirement for notification of a release with respect to the Real Property. Seller has not received any written request for information from any federal, state or local governmental authority in connection with any release. Seller has not been required to or has not undertaken any response, investigation, monitoring, or remedial actions or clean-up actions of any kind at the request of any federal, state, or local governmental entity, or at the request of any other person or entity. (iv) Seller does not use, and has not used, any Underground Storage Tanks, and there are not now nor to Seller's knowledge have there ever been any Underground Storage Tanks on the Land. For purposes of this Section 5.1(u)(iv), the term "Underground Storage Tanks" shall have the meaning given it in the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). (v) There is no asbestos in or on the Real Property. -15- (vi) Seller has not received written notice of any violation, noncompliance or breach of any environmental or worker safety laws or regulations which require any work, repairs, construction, or capital expenditures with respect to the assets or properties of Seller. (vii) Exhibit U identifies: (i) all environmental audits, assessments, or occupational health studies undertaken by Seller or its respective agents or known to have been undertaken by or at the order or request of governmental agencies; (ii) the results of any ground, water, soil, air, or asbestos monitoring or investigation undertaken with respect to the Real Property; (iii) all written communications between Seller and any environmental agencies; and (iv) all citations issued under the Occupational Safety and Health Act (29 U.S.C. Sections 651 et seq.). (viii) Seller's Environmental Indemnity. (a) Definitions. Notwithstanding anything ----------- contained in this Agreement to the contrary, for purposes of this Agreement the following terms shall have the following meanings: "Environmental Claim" means any written claim, ------------------- demand, notice of violation, injunction or order for personal injury, including sickness, disease or death, tangible or intangible property damage, environmental stigma, lost profits or other business losses, impaired financial value, damage to the environment, nuisance, pollution, contamination or reimbursement of cleanup costs or other adverse effects on the environment, or for fines, penalties or restrictions, arising or resulting from, based on, caused by or related to the existence or the continuation of the existence of Hazardous Substances made, asserted or prosecuted by or on behalf of any third party. Environmental Claim shall include, without limitation, any costs or expenses incurred to investigate, contain, remove, remedy, treat, or monitor any Hazardous Substances and any media, including soil and groundwater, impacted by Hazardous Substances, as required by any Environmental Law or by regulatory enforcement officials acting under or pursuant to any Environmental Law, or by federal or state courts, lost profits, loss of use, diminution in value, liens against the Real Property relating to Hazardous Substances and any failure or defect in title to the Real Property occasioned by the migration from or presence of Hazardous Substances or Seller's failure to comply with any Environmental Law. -16- "Environmental Law" means any federal, state, ----------------- or local statute, ordinance, rule, regulation, order, consent decree, judgment or common law doctrine, or interpretation thereof, as amended, and provisions and conditions of permits, licenses and other operating authorizations, as amended, related to protection, remediation or restoration of the environment, including natural resources, or protection of human health, worker safety, industrial, agricultural or silvicultural chemicals, pesticides, insecticides, fungicides, rodenticides, fertilizers, toxic substances, surface, subsurface or drinking water, food, drugs, or cosmetics or related to cleanup, fines, orders, injunctions, penalties, notification, contribution, cost recovery, losses or injuries to person or property resulting from contamination or pollution or hazards to human health or welfare or the environment which are now or may hereafter become in effect including, without limitation, CERCLA and RCRA, (collectively, as amended and together with all regulations promulgated thereunder, "Environmental Laws"). (b) Indemnification. Seller shall defend, --------------- indemnify and hold harmless Purchaser, its nominees, officers, directors, agents, employees, successors, lenders, assigns, affiliates, subsidiaries, parent companies (if any), shareholders, lenders, representatives and the successors an d assigns of all of the foregoing from and against: 1. Environmental Claims; and 2. Fines and penalties imposed on Purchaser, its successors, assigns, parents, subsidiaries, officers, directors, shareholders, agents, employees, lenders and representatives and the successors and assigns of all of the foregoing as a result of a violation by Seller of any Environmental Law arising from or related to any Hazardous Substances; and/or 3. Any breach of any of representations and warranties of Seller set out herein at Section 5.1(u)(i) through 5.1(u)(vii). (c) Discharge of Environmental Claims. In the --------------------------------- event that Purchaser notifies Seller of any claim that may be subject to an indemnification obligation under this Section 5.1(u), Seller shall, within thirty (30) days from the date of receipt of notice, acknowledge and assume the liability asserted. During such thirty -17- (30) day period, Purchaser shall not take any action or incur any expense with respect to the claim, except to the extent that such action or expense is legally required or reasonably necessary under the circumstances. Seller shall have the right and obligation to control, manage and direct all discussions, proceedings and activities regarding the satisfaction or discharge of any claim which is assumed by Seller or any liability or obligation that such a claim seeks to impose on Seller. Purchaser shall have the right, at its own expense, to consult with Seller, through counsel or otherwise, with respect to all meetings and proceedings with adverse parties or governmental authorities regarding any Environmental Claim and with respect to all activities pertaining to that matter. Prior to initiating or participating in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, Seller shall consult with Purchaser. This right of consultation shall not apply to confidential meetings or documents in cases where Seller or Purchaser are disputing or litigating claims against each other in a judicial or administrative proceeding. Seller shall promptly notify Purchaser in writing before Seller initiates or participates in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, including without limitation decisions or discussions concerning matters not covered by this Agreement. Purchaser shall have the right, but not the obligation, to participate in such meetings or proceedings. (d) Remedies. If Seller fails to perform its -------- obligations under this Section 5.1(u), Purchaser may, at its option (1) bring an action for injunction or specific performance of this Section 5.1(u) or this Agreement, and in such action, recover damages suffered by Purchaser as a result of Seller's breach or delay in performing its obligations, or (2) bring an action for damages for Seller's breach of its obligations, or (3) bring an action for response costs or other relief under federal or state environmental laws or regulations, or (4) any combination of the above. In the event that Purchaser prevails in such an action, it shall be entitled to recover from Seller the costs and expenses of bringing the action, including reasonable attorneys' fees. No delay or omission in the exercise of any right or remedy accruing to Purchaser upon any breach by Seller -18- under this Agreement shall impair any such right or remedy or be construed as a waiver of such breach theretofore or thereafter occurring. The waiver by Purchaser of any condition or of any breach of any term, covenant or condition contained in this Agreement shall not be deemed to be a waiver of any other condition or of any subsequent breach of the same or of any other term, covenant or condition of this Agreement. All rights, powers, options or remedies afforded to Purchaser either under this Section 5.1(u) or this Agreement or by law or by equity, shall be cumulative and not alternative and the exercise of any right, power, privilege or remedy shall not bar other rights, powers, privileges or remedies. (e) Survival. Seller's obligations under this -------- Section 5.1(u) shall survive (i) the closing of the sale that is the subject of this Agreement for a period of two (2) years and (ii) the termination of this Agreement. All claims for indemnification pursuant to this Section 5.1(u) must be made within two (2) years from the Closing Date. (v) Intentionally Omitted. (w) Documents. Seller has made available to Purchaser all of the --------- Documents; Seller knows of no other document or instrument relating to the Hotel, or the ownership or operation thereof. (x) Seller's Knowledge. For the purposes of this Section 5.1, the ------------------ phrases "to the best of Seller's knowledge," "to Seller's knowledge" and similar phrases shall imply a reasonable inquiry by Seller of its employees (but shall not require Seller to hire third party consultants). (y) Third Party Property. Seller is not in possession of any -------------------- property owned by third parties other than (i) property leased by Seller pursuant to leases disclosed to Purchaser pursuant to this Agreement; (ii) baggage of current guests which has been checked with or left in the care of Seller; and (iii) contents in safe deposit boxes deposited by current guests. (z) Investment Representations. Seller represents that it and its -------------------------- shareholders have received a prospectus of Parent dated June 17, 1996. (aa) Notices. No filing is required with any state or local taxing -------- authority as a result of the bulk sale of Seller's business assets. 5.2 Representations and Warranties of Purchaser. Purchaser hereby ------------------------------------------- represents and warrants the following to Seller: -19- (a) Authority. Purchaser has all requisite power and authority to --------- execute and deliver this Agreement and to consummate the transactions contemplated hereby pursuant to the terms and conditions hereof. (b) No Conflict. The execution and delivery of this Agreement and the ----------- consummation of the transactions contemplated hereby will not conflict with, breach, result in a default under, or violate any commitment, document or instrument to which Purchaser is a party or by which it is bound. (c) Parent Shares. The Shares have been registered by the Parent ------------- pursuant to a registration statement filed with the Securities and Exchange Commission (the "SEC"), a so-called "shelf" registration statement (the "Registration Statement"), in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"). Upon the issuance and delivery of the Shares to the Seller in accordance with this Agreement, such shares will constitute legally and validly authorized and issued, fully paid, and nonassessable shares of Common Stock. At Closing, the Registration Statement shall have been declared effective under the 1933 Act and the Parent shall be in compliance with the undertakings contained in the Registration Statement 5.3 Duration of Representations and Warranties. All representations and ------------------------------------------ warranties contained in Sections 5.1 and 5.2 shall be deemed restated on and as of the Closing Date. ARTICLE VI CLOSING MATTERS 6.1 Closing. The closing of the transaction contemplated hereby (the ------- "Closing") shall take place at the offices of the Title Company on July 15, 1996 (the "Closing Date") unless Purchaser extended the Inspection Period pursuant to Section 4.5 hereof, in which event the Closing Date shall be July 31, 1996, or such other date as may be mutually agreed by the parties. 6.2 Manner of Closing. The transaction shall be closed with the ----------------- concurrent delivery of the documents of title, transfer of interests, delivery of the title policy described in Section 7.1(e) and the payment of the Purchase Price. 6.3 Survey, Title Commitment and Searches. ------------------------------------- (a) Survey. Purchaser intends to obtain a plat of survey ("Survey") ------ of the Property prepared by a surveyor licensed by the State of Nevada, in conformity with Class A minimum detail requirements and the current standards for Land Title Surveys of the American Title -20- Association and American Congress on Surveying and Mapping and such standards as are required by the Title Insurer as a condition to the removal of any survey exceptions from the Title Commitment, certified to Purchaser, Parent, its lender, if any, and the Title Insurer after the date hereof, showing, without limitation of the foregoing requirements, the following information with respect to the Property: (i) the legal description and boundaries thereof; (ii) the location and street and common addresses of all improvements situated thereon; (iii) the location, course and recording numbers, if applicable, of all water, gas, electric, sewer line and other easements, either visible or recorded, and party walls; (iv) public and private streets, roads, alleys and highways and their common or official names; (v) record and physical access to and from a public road or way; (vi) no encroachments thereon or by any Improvements located thereon on adjacent property; (vii) the amount of gross square feet and net square feet (that is, after deducting the area of that portion of the Property, if any, lying in the existing or proposed right-of-way of a public street or road) contained in the Real Property; (viii) building lines or other restrictions affecting the Property; and (ix) whether any portion of the Property is located in an area designated as being subject to flood hazards or flood risks or wetlands by any agency of the United States of America. (b) Title Commitment. Seller shall deliver to Purchaser, on or ---------------- before June 23, 1996, a title commitment for an ALTA Owner's Insurance Policy issued by the Title Company ("Title Commitment") showing title to the Real Property in the Seller, subject only to the Permitted Exceptions, containing full extended coverage over all general exceptions, a 3.1 zoning endorsement (amended to include parking), location, survey and contiguity endorsements, an endorsement that the real estate tax bills for the Property do not include taxes pertaining to other real estate, and such other endorsements as may be reasonably requested by Purchaser, and dated after the date hereof. Seller shall also deliver full and legible copies of all documents ("Title Papers") referred to in the Title Commitment. -21- (c) Defects. If the Survey, Title Commitment, or UCC, judgment, and ------- tax lien searches on the names of Seller (collectively, "Title Documents") shall reflect any facts that would result in a Title Defect, Seller shall have thirty (30) days from the expiration of the Inspection Period within which to cure or remove the Title Defect. Seller shall be obligated to remove mortgages, deeds of trust and other liens or encumbrances for the payment of money of a definite and ascertainable amount, which the parties agree may be removed by the use of the proceeds of sale at Closing as provided in Section 6.3(d) below. In the alternative, Seller may make arrangements satisfactory to the Title Company for the cure (including insurance over) or removal of record of any such Title Defect. If any such Title Defect is not cured or otherwise provided for as aforesaid on or prior to the thirtieth (30th) day, the Purchaser shall either: (i) terminate this Agreement, in which event (hereinafter referred to as "Election No. 1") the Deposit and all interest earned thereon shall be returned to Purchaser and the parties shall have no further obligation or liability to each other hereunder; or (ii) accept the Title Commitment, Survey, or Searches as is, with the right, however, to deduct the amount of Title Defects represented by liens or encumbrances for the payment of money of a definite or ascertainable amount from the Purchase Price payable at Closing (hereinafter referred to as "Election No. 2"). Title Defects which are acceptable as part of Election No. 2 shall thereupon be deemed to be Permitted Exceptions and Exhibit C shall be amended, if necessary, to include such additional Permitted Exceptions. Election No. 2 shall be made by the Purchaser giving Seller written notice thereof within five (5) days after notice of Seller's inability to cure or remove the Title Defect and in the absence of notice of Election No. 2 within such five (5) day period, Purchaser shall be deemed to have elected Election No. 1. In the event Purchaser elects Election No. 1 and a Title Defect was created or consented to by Seller, Purchaser shall be paid by Seller the actual costs of Purchaser's investigation not to exceed $25,000.00 in addition to recovery of the Deposit. (d) Removal of Liens, etc. If on the Closing Date there shall be any --------------------- Title Defect created to secure the payment of money, then Seller shall either (a) use a portion of the Purchase Price to satisfy the same, provided Seller shall simultaneously either deliver to Purchaser at Closing instruments, in recordable form, sufficient to satisfy such Title Defect of record, together with the cost of recording or filing said instrument; or (b) in the alternative, make arrangements with the Title Company, in advance of Closing, whereby Seller will deposit with the Title Company sufficient monies, acceptable to the Title Company to induce the Title Company to issue the Title Policy to Purchaser, either free of any such Title Defect or with insurance which "insures over" such Title Defect. Purchaser agrees to provide at Closing separate certified checks as requested, to facilitate the satisfaction of any such Title Defects, if request is made within a reasonable time prior to the Closing Date. The existence of any Title Defects capable of satisfaction by the payment of money shall not be deemed to be Title Defects for the purposes of cure periods, as discussed supra in Section 6.3(c), if Seller shall comply with the foregoing ----- requirements. -22- ARTICLE VII CLOSING DELIVERIES 7.1 Seller's Deliveries. At Closing, Seller shall deliver, or cause to be ------------------- delivered to Purchaser, the following, each of which shall be in form and substance reasonably acceptable to counsel for Purchaser and, in the case of documents of transfer or conveyance, shall be accepted or consented to by all parties required to make such transfer or conveyance effective: (a) a recordable grant, bargain, and sale deed from Seller to Purchaser subject only to the Permitted Exceptions; (b) a Bill of Sale, with special covenants of title, transferring to Purchaser all of Seller's right, title and interest in and to each and every item of Fixtures and Tangible Personal Property, Documents, Consumables and Operating Equipment to be transferred hereunder subject only to Permitted Exceptions, and with respect to any vehicles included therein, such separate forms of assignment as are required to be filed with any governmental agency to effect such change in registration of ownership; (c) all of the Bookings, Hotel Contracts, Space Leases, Permits and other tangible Miscellaneous Hotel Assets, together with an Assignment conveying and transferring to Purchaser all of Seller's right, title and interest in, to and under the Bookings, Hotel Contracts, Space Leases, Permits (other than Excluded Permits) and all other Miscellaneous Hotel Assets; (d) the certificates referred to in Section 10.1(b) hereof; (e) a FIRPTA Certificate; (f) evidence of termination of the Employees; (g) the opinion of Seller's counsel as provided by Section 10.1(c); (h) certified copies of resolutions of the shareholders and directors of Seller authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; (i) a certificate of the secretary of Seller, dated as of the Closing Date, certifying the incumbency of the officer(s) of Seller executing the documents delivered by Seller pursuant to this Agreement; (j) a Non-Compete Agreement substantially in the form of Exhibit R executed by Michael J. Mona, Jr. and Rhonda H. Mona; and -23- (k) evidence, satisfactory to Purchaser, of the termination of all management agreements and other management arrangements with respect to the Hotel. 7.2 Purchaser's Deliveries. At the Closing, Purchaser shall cause to be ---------------------- delivered to Seller: (a) the Note; (b) the certificate referred to in Section 9.1(b) hereof; (c) the opinion of Purchaser's counsel as provided by Section 9.1(c); and (d) the written undertaking of Purchaser as provided by Section 9.1(d). 7.3 Concurrent Transactions. All documents or other deliveries required ----------------------- to be made by Purchaser or Seller at Closing, and all transactions required to be consummated concurrently with Closing, shall be deemed to have been delivered and to have been consummated simultaneously with all other transactions and all other deliveries, and no delivery shall be deemed to have been made, and no transaction shall be deemed to have been consummated, until all deliveries required by Purchaser, or its designee, and Seller shall have been made, and all concurrent or other transactions shall have been consummated. 7.4 Further Assurances. Seller and Purchaser will, at the Closing, or at ------------------ any time or from time to time thereafter, upon request of either party, execute such additional instruments, documents or certificates as either party deems reasonably necessary in order to convey, assign and transfer the Property to Purchaser, hereunder. 7.5 Possession. Possession of the Property shall be delivered at Closing. ---------- Subject to the provisions of Section 17.1(e), Excluded Assets (other than any thereof under leases to be assumed by Purchaser) shall be removed from the Hotel by Seller, at its expense, on or before the Closing Date. Seller, at its expense shall make all repairs necessitated by such removal but shall have no obligation to replace any Excluded Asset so removed. ARTICLE VIII ADJUSTMENTS AND PRORATIONS 8.1 Adjustments and Prorations. The following matters and items shall be -------------------------- apportioned between the parties hereto or, where appropriate, credited in total to a particular party, as of the Cut-off Time as provided below: -24- (a) Down Payments for Reservations. Any pre-closing down payments ------------------------------ made to Seller on confirmed reservations for dates after the Closing Date will be credited to Purchaser as of the Closing. Any post-closing down payments made to Seller on confirmed reservations for dates after the Closing Date will be forwarded to Purchaser upon receipt. (b) Taxes and Assessments. All ad valorem taxes, special or general --------------------- assessments, personal property taxes, attorneys' fees directly related to the reduction of taxes or assessments, water and sewer rents, rates and charges, vault charges, canopy permit fees, and other municipal permit fees. If the amount of any such item is not ascertainable on the date the proration schedule is completed pursuant to Section 8.3, the credit therefor shall be based on one hundred percent (100%) of the most recent available bill and shall be reprorated upon receipt of the actual tax bill. Notwithstanding the above, special real property tax assessments for which the work is substantially completed as of the Closing Date shall be paid by Seller. (c) Utility Contracts. Telephone and telex contracts and contracts ----------------- for the supply of heat, steam, electric power, gas, lighting and any other utility service, with Seller receiving a credit for each deposit, if any, made by Seller as security under any such public service contracts if the same is transferable and provided such deposit remains on deposit for the benefit of Purchaser. Where possible, cut-off readings will be secured for all utilities on the Closing Date. (d) Hotel Contracts and Space Leases. Any amounts prepaid or payable -------------------------------- under any Hotel Contracts and Space Leases shall be apportioned between the parties. Any percentage rentals under Space Leases shall be prorated on the basis of the ratio of the number of days expired before Closing to the number of days after Closing, for the current percentage rent period of the Space Lease. All security deposits held by Seller shall be transferred to Purchaser and all obligations with respect to such security deposits shall be assumed by Purchaser. (e) License Fees. Fees paid or payable for Permits (other than ------------ Excluded Permits) shall be apportioned between the parties. (f) Hotel Matters. ------------- (i) Advance payments, if any, under Bookings for Hotel facilities (which shall include prepaid amounts by current guests); (ii) Coin machine, telephone, washroom and checkroom income; and (iii) Commissions to credit and referral organizations. (g) Employment Arrangements. Seller shall be responsible for, and ----------------------- shall pay when due, all Compensation of Employees. Purchaser assumes no Employment Arrangements or -25- other obligation with respect to any Employee Benefits, all of which, together with any sums due any Employee as a consequence of the termination of his employment, shall be the responsibility of Seller. (h) Consumable Items. The cost of any Consumables or Operating ---------------- Equipment which are at a level below the level required to be maintained under this Agreement shall be credited to Purchaser. (i) Other. Such other items as are provided for in this Agreement or ----- as are normally prorated and adjusted in the sale of a hotel, including without limitation, all petty cash funds and cash in house banks, and all deposits and prepaid items which inure to the benefit of the Purchaser. 8.2 Receivables. Purchaser is not purchasing any of the receivables of ----------- the Hotel and Seller shall be solely responsible for the collection of accounts receivable arising prior to the Closing Date. If Purchaser shall receive any payment made on any unpurchased accounts receivable within ninety (90) days after the Closing Date, it shall promptly remit such payment to Seller. With regard to any collection made from any person or entity who is indebted to the Hotel both with respect to accounts receivable accruing prior to the Closing Date and to the accounts receivable accruing subsequent to the Closing Date, such collection shall be applied as designated by the payor, but if there is no designation, then any such collections received within ninety (90) days after the Closing Date shall be applied first to the indebtedness accrued prior to the Closing Date, but thereafter, any such collections shall be applied first to the payment in full of any amounts due to Purchaser on accounts accruing subsequent to the Closing Date. 8.3 Proration Schedule. ------------------ (a) Preparation and Review. A schedule setting forth the adjustments ---------------------- and prorations to be made pursuant to Section 8.1 above shall be prepared by Purchaser and forwarded to Seller within thirty (30) days after the Closing Date. Seller shall be afforded the opportunity to review all work papers and computations used by Purchaser in the preparation of the adjustments and prorations. The schedule as delivered shall be deemed accepted by Seller except to the extent, if any, that Seller, within ten (10) days after the date of delivery thereof to Seller, has delivered a written notice to Purchaser stating any exceptions Seller may have to such schedule. If within such period Seller shall give written notice to Purchaser of any exceptions to the schedule as delivered by Purchaser, the parties shall attempt to resolve all of the exceptions. To the extent that any such exceptions are not resolved within fifteen (15) days after the delivery to Purchaser of Seller's exceptions to the schedule, such differences shall be submitted as soon as practicable thereafter to such "Big Six" accounting firm upon which the parties shall agree, for final determination thereof. If the parties are not able to agree upon an accounting firm, each shall designate a "Big Six" accounting firm and give written notice to the other of the name and address of the firm so designated. The two firms shall consult with each other and, if possible, determine the exceptions -26- in question by mutual agreement, and their determination so agreed upon, if certified to the parties prior to their reaching agreement independently of arbitration, shall be final and conclusive. If the two firms are not able to agree upon the exceptions in question, they jointly shall designate a third firm whose determination concerning the exceptions shall be final and conclusive, if certified to the parties prior to their reaching agreement independent of arbitration. Any determination by such accounting firm(s) as to the proper determination of any such item submitted to it for determination shall be conclusive and binding upon the parties for purposes of this Agreement. Seller and Purchaser shall each pay one-half of such fees charged by such accounting firm(s) in connection with any matter submitted to it hereunder. (b) Payment of Adjustments. The net amount due pursuant to the ---------------------- adjustments and prorations made as required by this Section 8.3 shall be paid by cash or bank cashier's check payable in immediately available funds in United States currency to the order of the party to whom the same shall be due upon final determination of the adjustments and prorations required hereunder. Seller agrees that prior to the time that payment is made pursuant to Section 8.3(b), it shall not make final liquidating distributions. (c) Period for Recalculation. Notwithstanding the foregoing, if at ------------------------ any time within six (6) months following the Closing Date, either party discovers any items which should have been included in the prorations but were omitted therefrom, then such items shall be adjusted in the same manner as if their existence had been known at the time of the preparation of the prorations. The foregoing limitations shall not apply to any items which, by their nature, cannot be finally determined within the periods specified. ARTICLE IX CONDITIONS TO SELLER'S OBLIGATIONS 9.1 Conditions. Seller's obligation to close hereunder shall be subject ---------- to the occurrence of each of the following conditions, any one or more of which may be waived by Seller in writing: (a) Purchaser's Compliance with Obligations. Purchaser shall have --------------------------------------- complied with all obligations required by this Agreement to be complied with by Purchaser. (b) Truth of Purchaser's Representations and Warranties. The --------------------------------------------------- representations and warranties of Purchaser contained in Section 5.2 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Seller shall have received a certificate to that effect signed by an authorized agent of Purchaser. -27- (c) Opinion of Purchaser's Counsel. Purchaser shall have delivered to ------------------------------ Seller a favorable written opinion of Pedersen & Houpt in connection with this transaction, dated the Closing Date, as to (i) the power and authority of Purchaser to execute and deliver this Agreement, (ii) the due authorization, execution and delivery by Purchaser of this Agreement, and (iii) the legality, validity and, as to Purchaser, the binding effect of this Agreement (subject to the effect of bankruptcy and similar laws affecting the enforcement of creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Opinion of Purchaser's Securities Counsel. Purchaser shall have ----------------------------------------- delivered to Seller the written undertaking of Purchaser to provide to Seller the favorable written opinion of Bell, Boyd & Lloyd, dated at the time of each Approved Sale, that such Approved Sale complies or will comply with the requirements of this Agreement, the 1933 Act and any state blue sky or other securities laws applicable to the Approved Sale. (e) Delivery of Current Prospectus. Seller shall have received ------------------------------ Parent's current, effective prospectus that does not reflect any material adverse change from the prospectus of Parent dated June 17, 1996. 9.2 Failure of Conditions. If any of the conditions enumerated in Section --------------------- 9.1 are not fulfilled and, as a consequence thereof, Seller elects to terminate this Agreement, such failure shall be deemed a default by Purchaser hereunder and the consequences thereof shall be governed by the provisions of Section 3.2. ARTICLE X CONDITIONS TO PURCHASER'S OBLIGATIONS 10.1 Conditions. Purchaser's obligation to close hereunder shall be ---------- subject to the occurrence of each of the following conditions, any one or more of which may be waived by Purchaser in writing: (a) Seller's Compliance with Obligations. Seller shall have complied ------------------------------------ with all obligations required by this Agreement to be complied with by Seller. (b) Truth of Seller's Representations and Warranties. The ------------------------------------------------ representations and warranties of Seller contained in Section 5.1 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Purchaser shall have received a certificate to that effect signed by an authorized agent of Seller. (c) Opinion of Seller's Counsel. There shall have been delivered to --------------------------- Purchaser a favorable opinion of Jones, Jones, Close & Brown, counsel to Seller in connection with this -28- transaction, dated the Closing Date as to (i) the power and authority of Seller to execute and deliver this Agreement; (ii) the due authorization, execution and delivery by Seller of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof; and (iii) the legality, validity and, as to Seller, the binding effect of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof (subject in each case to the effect of bankruptcy and similar laws affecting creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Estoppel Certificates--Hotel Contracts. Purchaser shall notify -------------------------------------- Seller, in writing at least thirty (30) days prior to the Closing Date, of the Material Contracts for which Purchaser requires estoppel certificates. Each of said estoppel certificates shall be in writing from the parties to such Material Contract stating that such Material Contract is in full force and effect, has not been amended or modified except as therein indicated, that such party consents to the assignment to Purchaser and that no party is then in default under such Material Contract (or if any default is known to exist, or would arise with the giving of notice or the passage of time, stating the nature of such default). The estoppel certificates herein referred to shall be in form and substance reasonably satisfactory to Purchaser and dated not more than thirty (30) days prior to the Closing Date. (e) No Pending Adverse Litigation. On the Closing Date, there shall ----------------------------- not then be pending or, to the knowledge of either Purchaser or Seller, threatened, any litigation, administrative proceeding, investigation or other form of governmental enforcement, or executive or legislative proceeding which, if determined adversely, would restrain the consummation of any of the transactions herein referred to, declare illegal, invalid or non-binding any of the covenants or obligations of the parties herein, or have a material and adverse effect on the operations or cash flow of the Hotel, or materially and adversely affect the value of the Property or the ability of Purchaser, after the Closing, to operate the Hotel in the manner contemplated hereby, other than those matters previously disclosed and approved by Purchaser. (f) Related Transactions. The transactions contemplated by (i) the -------------------- certain Agreement to Purchase Hotel of even date herewith by and between Boulder Manor, Inc. and ESA Properties, Inc., (ii) the certain Agreement to Purchase Hotel of even date herewith by and between St. Louis Manor, Inc. and ESA Properties, Inc., and (iii) the certain Agreement to Purchase Hotel of even date herewith by and between Santa Fe Springs Partners and ESA Properties, Inc., shall have been consummated. (g) Title Policy. Purchaser shall have received an ALTA Owner's ------------ Insurance Policy issued by the Title Company in exact conformity with the Title Commitment in favor of Purchaser, in the amount of the Purchase Price, showing good and marketable fee simple title in the Real Property to be vested in Purchaser, subject only to Permitted Exceptions (the "Title Policy"). 10.2 Failure of Conditions. If any of the conditions enumerated --------------------- in subsections (d) -29- and (e), of Section 10.1 are not fulfilled, then the sole remedy of Purchaser shall be to terminate this Agreement (whereupon the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability hereunder), unless the failure to fulfill such condition constitutes, or results from, either (i) a material breach of an express representation or warranty made by Seller hereunder, or (ii) a material default of an express covenant made by Seller hereunder, in which event Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. If any of the conditions enumerated in subsections (a), (b) and (c) of Section 10.1 are not fulfilled and, as a consequence thereof, Purchaser elects to terminate this Agreement, such failure shall be deemed a default by Seller hereunder, the Deposit and all interest earned thereon referred to in Section 3.2 shall be promptly returned to Purchaser, and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. ARTICLE XI ACTIONS AND OPERATIONS PENDING CLOSING 11.1 Actions and Operations Pending Closing. Seller agrees that after the -------------------------------------- expiration of the Inspection Period and until the Closing Date: (a) The Hotel will continue to be operated and maintained substantially in accordance with present standards. (b) Seller will not enter into any new Material Contract or Space Lease, or cancel, modify or renew any existing Material Contract or Space Lease, without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. If Purchaser fails to respond to a request for consent within 15 business days after receipt of such request, such consent shall be deemed given. (c) Seller shall have the right, without notice to or consent of Purchaser, to make Bookings in the ordinary course of business, at no less than the Hotel's standard rates including customary discounted rates. Additionally, Seller agrees to entertain in good faith Purchaser's suggestions relating to the policy of the Hotel with respect to future Bookings and extension of credit. (d) Seller shall use commercially reasonable efforts to preserve in force all existing Permits and to cause all those expiring to be renewed prior to the Closing Date. If any such Permit shall be suspended or revoked, Seller shall promptly so notify Purchaser and shall take all measures necessary to cause the reinstatement of such Permit without any additional limitation or condition. (e) Seller shall notify Purchaser promptly if Seller becomes aware of any -30- transaction or occurrence prior to the Closing Date which would make any of the representations or warranties of Seller contained in Section 5.1 not true in any material respect. (f) Seller will maintain in effect, all policies of casualty and liability insurance, or similar policies of insurance, with the same limits of coverage which it now carries with respect to the Hotel. (g) Seller will not dispose of any of the Property, except in the ordinary course of business and in accordance with this Agreement. (h) Seller shall allow Purchaser and its agents or representatives to inspect the Property, and all books and records relating thereto, at such times as Purchaser may reasonably request, provided such inspection does not unreasonably interfere with the continued operation of the Hotel in the ordinary course of business. Purchaser shall also have the right to have, and Seller shall provide accommodations for, a full-time on-site representative to observe the operations of the Hotel. Such accommodations shall be rent-free except for those nights when all other guest rooms at the Hotel are fully occupied, in which event Purchaser shall reimburse Seller for such nights at the Hotel's lowest corporate rate for such accommodations. Purchaser agrees that the results of all such observations will be treated as confidential, and Purchaser shall not disclose the same to any other person or entity except for Purchaser's counsel, accountants, and other agents or representatives consulted in connection with the acquisition of the Hotel. In the event that the sale is not consummated, any and all Documents, reports, financial and operating information obtained by Purchaser or its representatives shall be returned to the Seller. ARTICLE XII CASUALTIES AND TAKINGS 12.1 Casualties. ---------- (a) If any damage to the Property shall occur prior to the Closing Date by reason of fire, windstorm, hail, explosion or other casualty, and if, in Purchaser's reasonable judgment, the cost of repairing such damage will exceed Fifty Thousand Dollars ($50,000.00), Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds) relating to such damage and acquire the Property without any adjustment in the purchase price provided that, in such latter event, Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. -31- (b) If, in the reasonable business judgment of the insurance adjuster or other representative of the insurer of the Property, the cost of repairing such damage will not exceed Fifty Thousand Dollars ($50,000.00), the transactions contemplated hereby shall close without any adjustment in the Purchase Price, Purchaser shall receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds), and Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. 12.2 Takings. In the event of the actual or threatened taking (either ------- temporary or permanent) in any condemnation proceedings by exercise of right of eminent domain, of all or any part of the Real Property, between the date hereof and the Closing Date, and if, in Purchaser's reasonable judgment, such taking will result in the inability to conduct the operations of the Hotel substantially in accordance with the present standards, Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller, in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any condemnation award relating to such taking and acquire the Property without any adjustment in the Purchase Price. ARTICLE XIII EMPLOYEES 13.1 Employees, Compensation and Indemnification. Purchaser shall have the ------------------------------------------- continuing right to review all employment records and files of, and to interview, Employees. Seller shall terminate its employer-employee relationship with all Employees as of the Cut-off Time. Seller shall be solely responsible for all Compensation and other liabilities with respect to Employees and liabilities and obligations to Employees pursuant to any Employment Arrangement. Purchaser shall not be responsible for any such liability or obligations and Seller agrees to indemnify and hold Purchaser harmless from and against any such liability or obligations. All Compensation, obligations, liabilities and claims (including any under the Fair Labor Standards Act) to or by any Employee of Seller arising or occurring prior to the Cut-off Time shall be the responsibility of Seller. Purchaser shall not be responsible for any Compensation thereof and Seller agrees to indemnify and hold Purchaser harmless from and against same. Purchaser shall not assume or be liable upon any Employment Arrangement of Seller. ARTICLE XIV INDEMNITIES 14.1 Seller's Indemnity. Seller agrees to indemnify, defend (with ------------------ Purchaser having the -32- right to retain counsel for the purpose of participating in such defense, at its sole cost and expense) and hold Purchaser harmless against and with respect to the following: (a) any and all obligations, liabilities, claims, accounts, demands, liens or encumbrances, whether direct or contingent and no matter how arising ("Indemnifiable Damages"), in any way related to the Property and arising or accruing on or before the Closing Date (including, but not limited to, any damage to property or injury to or death of any person); without limitation on the generality of the foregoing, Seller indemnifies Purchaser from any claim or judgment under any lawsuit or proceeding filed or pending prior to the Closing Date against the Property, or any part thereof, and any costs or expenses (including reasonable attorneys' fees) heretofore or hereafter incurred in connection with any such lawsuit or proceeding; (b) any loss or damage to Purchaser resulting from any inaccuracy in or breach of any representation or warranty of Seller or resulting from any breach or default by Seller of any obligation of Seller under this Agreement; and (c) all costs and expenses, including reasonable attorneys' fees, related to any actions, suits or judgments incident to any of the foregoing. 14.2 Purchaser's Indemnity. Purchaser agrees to indemnify, defend (with --------------------- Seller having the right to retain counsel for the purpose of participating in such defense, at its sole cost and expense), and hold Seller harmless against and with respect to the following: (a) any loss or damage to Seller, subsequent to the Closing Date, resulting from any inaccuracy in or breach of any representation or warranty of Purchaser under this Agreement; (b) any injury to person or property causing any loss or damage to Seller resulting from or arising out of work performed by Purchaser pursuant to Section 11.1(h) hereof; (c) any and all Indemnifiable Damages in any way related to the Property and arising or accruing after the Closing Date (including, but not limited to, any damage to property or injury to or death of any person); and (d) all costs and expenses, including reasonable attorney's fees, related to any actions, suits or judgments incident to any of the foregoing. 14.3 Notice of Claims. Seller and Purchaser, as applicable, shall ---------------- promptly notify the other in the event any claim is made against Seller or Purchaser as to which the other party has agreed to indemnify and the indemnitor shall thereupon undertake to defend and hold the indemnitee saved and harmless therefrom. -33- ARTICLE XV SECURITIES LAW MATTERS 15.1 Disposition of Shares. The Seller represents and warrants that the --------------------- Shares are being acquired and will be acquired for its own account and will not be sold or otherwise disposed of except pursuant to (i) the provisions of Rule 145(d) under the 1933 Act, as in effect at the time of sale, (ii) some other exemption or exclusion from the registration requirements under the 1933 Act, which does not require the filing by the Parent with the SEC of any registration statement, offering circular, or other document, in which case the Seller shall first supply to the Parent an opinion of counsel (which opinion and counsel shall be satisfactory to the Parent) that such exemption or exclusion is available, or (iii) the Registration Statement provided that (a) sales pursuant to the Registration Statement are made to or through a broker, dealer, or market maker, (b) in connection with such sales, the Seller delivers a copy of a current Prospectus forming a part of the Registration Statement which prospectus identifies the Seller as being able to use such Prospectus to make resales in the public market of Shares acquired pursuant to this Agreement, and (c) the Seller notifies the Parent in writing at least five business days prior to the first day the Seller intends to execute a sale transaction of the Shares pursuant to the Registration Statement and the Parent consents in writing to such sale. The Seller hereby acknowledges that the Parent is entitled in its absolute discretion to withhold such consent if, and for such period of time as, in the opinion of the management of the Parent, (i) securities laws applicable to such sale of Shares by the Seller pursuant to the Registration Statement would require the Parent to disclose material non-public information, or (ii) such sale would occur during (a) the measurement period for determining the amount of Common Stock or other consideration, the amount of which will be based on the price of the Common Stock, to be paid in connection with the acquisition of a business or assets to which the Parent or any of its subsidiaries is a party or (b) the marketing period of an offering of securities of the Parent. 15.2 Acknowledgment of Restrictions. The Seller acknowledges that, under ------------------------------ current SEC interpretations of Rule 145, the Seller is subject to restrictions on transfer of the Shares for a period of two years following the Closing Date and that an exemption from the requirement to register the Shares for public resale is provided by Rule 145(d). 15.3 Evidence of Compliance. The Seller further covenants and agrees that ---------------------- the Parent will be supplied with such written evidence of compliance by it and its broker with Rule 145(d) as in effect at the time of any sale by it pursuant thereto, as the Parent may reasonably request. 15.4 Legend. The Seller agrees that the certificates for the Shares ------ received shall bear the following legend: The Shares represented by this certificate are subject to the provisions of Rule 145(d) promulgated under the Securities Act of 1933, and may not be transferred or disposed of by the holder without compliance with said Rule unless registered under said Act or pursuant to another applicable exemption from the requirements of said Act. -34- and that the Parent may place stop transfer orders with its transfer agents with respect to such certificates. The appropriate portions of the legend will be removed at such time or times as the Seller may reasonably request if at the time of such request the Seller is not an Affiliate (as defined in the 1933 Act) of the Parent, upon the expiration of the two-year holding period provided in Rule 145(d). ARTICLE XVI NOTICES 16.1 Notices. Except as otherwise provided in this Agreement, all notices, ------- demands, requests, consents, approvals and other communications (herein collectively called "Notices") required or permitted to be given hereunder, or which are to be given with respect to this Agreement, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by overnight express courier, postage prepaid, addressed to the party to be so notified as follows: If intended for Seller, to: Mr. Michael J. Mona, Jr. M&M Development 1785 E. Sahara, Suite 315 Las Vegas, Nevada 89104 Copies to: Jones, Jones, Close & Brown 3773 Howard Hughes Parkway Third Floor South Las Vegas, Nevada 89109 Attn: Ms. Jodi R. Goodheart If intended for Extended Stay America, Inc. Purchaser, to: 500 East Broward Blvd., #950 Ft. Lauderdale, Florida 33394 Attn: Mr. Robert A. Brannon Copies to: Pedersen & Houpt 161 North Clark, Suite 3100 Chicago, Illinois 60601 Attn: Mr. Michael W. Black Notice mailed by registered or certified mail shall be deemed received by the addressee three (3) days after mailing thereof. Notice personally delivered shall be deemed received when delivered. -35- Notice mailed by overnight express courier shall be deemed received by the addressee two (2) days after mailing thereof. Either party may at any time change the address for notice to such party by mailing a Notice as aforesaid. ARTICLE XVII ADDITIONAL COVENANTS 17.1 Additional Covenants. In addition, the parties agree as follows: -------------------- (a) Expenses. Seller shall be responsible for the payment of all -------- sales and use taxes and fifty percent (50%) of all transfer taxes. Purchaser shall be responsible for the payment of all recording fees, fifty percent (50%) of all transfer taxes, all escrow fees, all costs of the Survey, all title insurance premiums and charges for the issuance of the Title Policy and all other closing charges. The fees and expenses of Seller's designated representatives, accountants and attorneys shall be borne by Seller, and the fees and expenses of Purchaser's designated representatives, accountants and attorneys shall be borne by Purchaser. (b) Brokerage. Seller and Purchaser each hereby represent and warrant --------- to the other that neither has dealt with any broker or finder in connection with the transaction contemplated hereby, and each hereby agrees to indemnify, defend and hold the other harmless against and from any and all manner of claims, liabilities, loss, damage, attorneys' fees and expenses, incurred by either party and arising out of, or resulting from, any claim by any such broker or finder in contravention of its representation and warranty herein contained. (c) Guest Baggage. All baggage of guests who are still in the Hotel ------------- on the Closing Date, which has been checked with or left in the care of Seller shall be inventoried, sealed, and tagged jointly by Seller and Purchaser on the Closing Date. Purchaser hereby indemnifies Seller against any claims, losses or liabilities in connection with such baggage arising out of the acts or omissions of Purchaser after the Closing Date. Seller hereby indemnifies Purchaser against any claim, losses or liabilities with respect to such baggage arising out of the acts or omissions of Seller prior to the Closing Date. (d) Safe Deposits. Immediately after the Closing, Seller shall send ------------- written notice to guests or tenants or other persons who have safe deposit boxes, advising of the sale of the Hotel to Purchaser and requesting immediate removal of the contents thereof or the removal thereof and concurrent re-deposit of such contents pursuant to new safe deposit agreements with Purchaser. Seller, at its own expense, shall have a representative present when the boxes are opened, in the presence of a representative of the Purchaser. Purchaser shall not be liable or responsible for any items claimed to have been in such boxes unless such items are so removed and re-deposited, and -36- Seller agrees to indemnify and hold harmless Purchaser from and against any such liability or responsibility. (e) Books and Records. The transaction contemplated hereby shall not ----------------- include the books and records of Seller pertaining strictly to the business of the Hotel. Seller covenants and agrees that such books and records will remain in the control of M&M Development for examination and audit by Purchaser and its agents after the Closing as provided in this clause (e). Seller agrees to preserve all books and records, files and correspondence, for at least five (5) years after the Closing Date, and not to destroy or dispose of the same, for at least five (5) years after the Closing Date. Seller agrees to provide access to Purchaser and its representatives, to such books, records, files and correspondence at all reasonable times. (f) Hart-Scott-Rodino Act. If it shall be determined that the within --------------------- transaction is subject to the reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. (S)18(a) (1976) (the "Act"), then notwithstanding anything to the contrary contained in Section 10.1(e) hereof, each party shall forthwith proceed to make the necessary filings, and take all other actions necessary to comply with the Act and the rules and regulations thereunder. If such requirements have not been fulfilled by the Closing Date, then the Closing Date shall be adjourned until such requirements have been fulfilled, but not more than sixty (60) days. If such requirements have not been fulfilled prior to the expiration of such sixty (60) day period, Seller or Purchaser, by notice to the other, may terminate this Agreement in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability to the other party hereunder. (g) Survival of Covenants, etc. The representations, warranties, --------------------------- obligations, covenants, agreements, undertakings and indemnifications of Seller and Purchaser contained herein shall survive the Closing for a period of two (2) years except that (i) the representation and warranty made by Seller in Section 5.1(i) shall expire at the time the period of limitations (including any extensions thereof pursuant to the delivery of waivers of the applicable period of limitations) expires for the assessment by the taxing authority of additional taxes with respect to which the representation and warranty relate; and (ii) the representation and warranty made by Purchaser in Section 3.4(d) shall not expire. All claims for indemnification must be made within the aforementioned periods. (h) Purchaser's Investigation and Inspections. Any investigation or ----------------------------------------- inspection conducted by Purchaser, or any agent or representative of Purchaser, pursuant to this Agreement, in order to verify independently Seller's satisfaction of any conditions precedent to Purchaser's obligations hereunder or to determine whether Seller's warranties are true and accurate, shall not or constitute a waiver by Purchaser of any of Seller's obligations hereunder or Purchaser's reliance thereon. (i) Construction. This Agreement shall not be construed more strictly ------------ against one party than against the other, merely by virtue of the fact that it may have been prepared primarily -37- by counsel for one of the parties, it being recognized that both Purchaser and Seller have contributed substantially and materially to the preparation of this Agreement. (j) Publicity. All notice to third parties and all other publicity --------- concerning the transactions contemplated hereby shall be jointly planned and coordinated by and between Purchaser and Seller. None of the parties shall act unilaterally in this regard without the prior written approval of the other; however, this approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Purchaser (or Parent) may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning Parent's publicly traded securities; Purchaser agrees to give Seller notice of any such public disclosure. (k) General. This Agreement may be executed in any number of ------- counterparts, each of which shall constitute an original but all of which, taken together, shall constitute but one and the same instrument. This Agreement (including all exhibits hereto) contains the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior understandings, if any, with respect thereto and may not be amended, supplemented or terminated, nor shall any obligation hereunder or condition hereof be deemed waived, except by a written instrument to such effect signed by the party to be charged. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. The warranties, representations, agreements and undertakings contained herein shall not be deemed to have been made for the benefit of any person or entity, other than the parties hereto and their permitted successors and assigns. Seller has no right to assign its rights (except as set forth in (m) below) or to delegate its duties hereunder. Purchaser may assign its rights and duties under this Agreement to any of its Affiliates. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. (l) FIRPTA. Seller agrees to furnish Purchaser with an executed ------- Certification in the form attached hereto as Exhibit Q ("FIRPTA Certificate"), and such other evidence as Purchaser may reasonably request, to establish that Seller is not a foreign person for the purpose of Section 1445 of the Internal Revenue Code of 1986, as amended ("Section 1445"). In the event that Seller does not furnish such Certification or a qualifying statement for the U.S. Treasury Department that the transaction is exempt from the withholding requirements of Section 1445, Seller agrees that Purchaser shall be directed to pay such amount required by law to the Internal Revenue Service in accordance with the laws and regulations regarding the withholding requirements of Section 1445. (m) Like-Kind Exchange. Seller shall have the right, at Seller's ------------------ option, to sell the Property to Purchaser through a transaction that is structured to qualify as a like-kind exchange of property within the meaning of Section 1031 of the Internal Revenue Code of 1986 ("Code"). Purchaser agrees to reasonably cooperate with Seller in effecting a qualifying like-kind exchange through a trust, escrow or other means as determined by Seller, provided, however, Purchaser shall not be required to incur any obligation or liability to a third party as a part of the exchange. In any event Seller shall have the right to assign its rights under this contract, in whole or in part, to a -38- qualified intermediary (as defined under current Code regulations governing like-kind exchanges) or as otherwise necessary or appropriate to effectuate a like-kind exchange, provided that Seller shall remain liable for its obligations hereunder (and that Michael J. Mona, Jr. shall remain liable pursuant to his guaranty as hereinafter set forth) and Seller (and Michael J. Mona) shall execute such additional documentation as Purchaser may reasonably request to evidence such continuing liability. Seller shall bear the additional transaction costs and all costs and expenses incurred by Purchaser and attributable to exchange procedures in this transaction that are requested or implemented by Seller. Seller shall be solely responsible for assuring the effectiveness of the exchange for Seller's tax purposes. In no event shall any like-kind exchange contemplated by this provision cause an extension of the date of closing set forth herein nor shall Purchaser be required to take title to any property other than the Property. (n) Jurisdiction. Any action or proceeding seeking to enforce any ------------ provision of, or based on any right arising out of, this Agreement shall be brought against any of the parties in the courts of the State of Nevada, County of Clark, or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. -39- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: MELROSE SUITES, INC., a Nevada corporation By:/s/ Michael J. Mona Jr. ----------------------------------------- Michael J. Mona, Jr., President Attest:_____________________________________ Its:________________________________________ PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By:_________________________________________ Robert A. Brannon, Vice President Attest:_____________________________________ Its:________________________________________ The undersigned hereby guaranties the collection by Purchaser of all amounts due from Seller pursuant to the terms hereof. /s/ Michael J. Mona Jr. -------------------------------------------- Michael J. Mona, Jr. -40- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: MELROSE SUITES, INC., a Nevada corporation By:_________________________________________ Michael J. Mona, Jr., President Attest:_____________________________________ Its:________________________________________ PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By: /s/Robert A. Brannon ---------------------------------------- Robert A. Brannon, Vice President Attest: /s/Robert Brannon ------------------------------------- Its: Secretary --------------------------------------- The undersigned hereby guaranties the collection by Purchaser of all amounts due from Seller pursuant to the terms hereof. ____________________________________________ Michael J. Mona, Jr. -40- AGREEMENT TO PURCHASE HOTEL by and between ST. LOUIS MANOR, INC. and ESA PROPERTIES, INC. JUNE 25, 1996 AGREEMENT TO PURCHASE HOTEL TABLE OF CONTENTS
Page ---- I DEFINITIONS AND REFERENCES................................. 1 1.1 Definitions........................................ 1 ----------- 1.2 References......................................... 6 ---------- II SALE AND PURCHASE...........................................7 2.1 Sale and Purchase...................................7 ----------------- III PURCHASE PRICE..............................................7 3.1 Purchase Price; Allocation Thereof..................7 ---------------------------------- 3.2 Deposit.............................................7 ------- 3.3 No Assumption of Seller's Obligations...............7 ------------------------------------- IV INSPECTION PERIOD...........................................9 4.1 Inspection Period...................................9 ----------------- 4.2 Submittals to Purchaser.............................9 ----------------------- 4.3 Review and Inspection..............................10 --------------------- 4.4 Purchaser's Acceptance or Rejection................10 ----------------------------------- V REPRESENTATIONS AND WARRANTIES.............................11 5.1 Representations and Warranties of Seller...........11 ---------------------------------------- 5.2 Representations and Warranties of Purchaser........19 ------------------------------------------- 5.3 Duration of Representations and Warranties.........20 ------------------------------------------- VI CLOSING MATTERS............................................20 6.1 Closing............................................20 ------- 6.2 Manner of Closing..................................20 ----------------- 6.3 Survey, Title Commitment and Searches..............20 ------------------------------------- VII CLOSING DELIVERIES.........................................23 7.1 Seller's Deliveries................................23 ------------------- 7.2 Purchaser's Deliveries.............................24 ---------------------- 7.3 Concurrent Transactions............................24 ----------------------- 7.4 Further Assurances.................................24 ------------------ 7.5 Possession.........................................24 ----------
Page ---- VIII ADJUSTMENTS AND PRORATIONS.................................24 8.1 Adjustments and Prorations.........................24 -------------------------- 8.2 Receivables........................................26 ----------- 8.3 Proration Schedule.................................26 ------------------ IX CONDITIONS TO SELLER'S OBLIGATIONS.........................27 9.1 Conditions.........................................27 ---------- 9.2 Failure of Conditions..............................28 --------------------- X CONDITIONS TO PURCHASER'S OBLIGATIONS......................28 10.1 Conditions.........................................28 ---------- 10.2 Failure of Conditions..............................29 --------------------- XI ACTIONS AND OPERATIONS PENDING CLOSING.....................30 11.1 Actions and Operations Pending Closing.............30 -------------------------------------- XII CASUALTIES AND TAKINGS.....................................31 12.1 Casualties.........................................31 ---------- 12.2 Takings............................................32 ------- XIII EMPLOYEES..................................................32 13.1 Employees, Compensation and Indemnification........32 ------------------------------------------- XIV INDEMNITIES................................................32 14.1 Seller's Indemnity.................................32 ------------------ 14.2 Purchaser's Indemnity..............................33 --------------------- 14.3 Notice of Claims...................................33 ---------------- XV SECURITIES LAW MATTERS.....................................33 15.1 Disposition of Shares..............................34 --------------------- 15.2 Acknowledgment of Restrictions.....................34 ------------------------------ 15.3 Evidence of Compliance.............................34 ---------------------- 15.4 Legend.............................................34 ------ XVI NOTICES....................................................35 16.1 Notices............................................35 ------- XVII ADDITIONAL COVENANTS.......................................36 17.1 Additional Covenants...............................36 --------------------
Exhibit A: Land Exhibit B: Excluded Assets Exhibit C: Permitted Exceptions Exhibit D: Submitted Financial Statements Exhibit E: Allocation of Purchase Price Exhibit F: Permits Exhibit G: Hotel Contracts and Commissions Exhibit H: Employee and Employment Arrangements Exhibit I: Bookings Exhibit J: Space Leases and Commissions Exhibit J-1: Spaces Lessee Estoppel Letter Exhibit K: Notices of Violations Exhibit L: Pending or Threatened Litigation Exhibit M: Documents Exhibit N: Impositions Exhibit O: Hotel Names Exhibit P: Employee Benefit Plans Exhibit Q: FIRPTA Certificate Exhibit R: Non-Compete Agreement Exhibit S: Note Exhibit T: Escrow Agreement Exhibit U: Environmental Matters AGREEMENT TO PURCHASE HOTEL --------------------------- THIS AGREEMENT is made this 25th day of June, 1996, by and between St. Louis Manor, Inc., a Nevada corporation ("Seller"), and ESA Properties, Inc., a Delaware corporation ("Purchaser"). R E C I T A L S: A. Seller is the fee owner of that certain parcel of land (and the improvements and buildings located thereon) legally described in Exhibit A and commonly referred to as the St. Louis Manor, 2000 Paradise Road, Las Vegas, Nevada (the "Hotel") and the owner of the Fixtures and Tangible Personal Property, Operating Equipment, Consumables, and Miscellaneous Hotel Assets (all as hereinafter defined). B. The Hotel's facilities include guest and public facilities consisting of 125 rooms, administrative offices, and service areas. C. Seller desires to sell, and Purchaser desires to purchase, the Property upon and subject to the terms and conditions hereinafter set forth. A G R E E M E N T S NOW, THEREFORE, in consideration of the foregoing premises and the respective representations, warranties, agreements, covenants and conditions herein contained, and other good and valuable consideration, Seller and Purchaser agree as follows: ARTICLE DEFINITIONS AND REFERENCES 1.1 Definitions. As used herein, the following terms shall have the ----------- respective meanings indicated below: Affiliate: With respect to a specific entity, any natural person or any --------- firm, corporation, partnership, association, trust or other entity which, directly or indirectly, controls, or is under common control with, the subject entity, and with respect to any specific entity or person, any firm, corporation, partnership, association, trust or other entity which is controlled by the subject entity or person. For purposes hereof, the term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any such entity or the power to veto major policy decision of any such entity, whether through the ownership of voting securities, by contract, or otherwise. Agreement: This Agreement to Purchase Hotel, including the Exhibits. --------- Bookings: Contracts for the use or occupancy of guest rooms of the Hotel. -------- Closing: As defined in Section 6.1. ------- Compensation: The direct salaries and wages paid to, or accrued for the ------------ benefit of, any Employee, incentive compensation, vacation pay, severance pay, employer's contributions under F.I.C.A., unemployment compensation, workmen's compensation, or other employment taxes, and payments under Employee Benefit Plans (as hereinafter defined). Consumables: All food and beverages (alcoholic, to the extent transferable ----------- under applicable law, and non-alcoholic); engineering, maintenance and housekeeping supplies, including soap, cleaning materials and matches; stationery and printing; and other supplies of all kinds, in each case whether partially used, unused, or held in reserve storage for future use in connection with the maintenance and operation of the Hotel, which are on hand (which shall include off-site storage) on the date hereof, subject to such depletion and restocking as shall occur and be made in the normal course of business but in accordance with present standards, excluding, however, (i) Operating Equipment and (ii) all items of personal property owned by Space Lessees, guests, employees, or persons (other than Seller or any Affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing food or services to the Hotel. Cut-off Time: 12:01 A.M. on the Closing Date. ------------ Department: Nevada Department of Revenue. ---------- Deposit: As defined in Section 3.2. ------- Documents: Reproducible copies of all plans, specifications, drawings, --------- blueprints, surveys, environmental reports and other similar documents which Seller has in its possession, or has a right to, as the same relate to the Real Property, including, but not limited to those relating to any prior or ongoing construction or rehabilitation of the Real Property. Employee(s): All persons employed by Seller pursuant to Employment ----------- Arrangements. Employee Benefit Plans: All employee benefit plans, as that term is ---------------------- defined in Section 3(2)(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including "multi-employer pension plans" as defined in Section 3(37) of ERISA, and each other employee benefit plan or program (including welfare benefit plans as defined in Section 3(1) of ERISA) to -2- which Seller contributes on behalf of any of the Employees. Employment Arrangement(s): Those agreements, oral or written, with all or ------------------------- any of the executives, staff and employees of Seller for work in or in connection with the Hotel including, but not limited to, individual employment agreements, union agreements, employee handbooks, group health insurance plans, life insurance plans and disability insurance plans (other than Employee Benefit Plans). Environmental Laws: As defined in Section 5.1(u). ------------------ Environmental Study: As defined in Section 4.3. ------------------- Excluded Assets: The following: (i) those assets, if any, listed on --------------- Exhibit B hereto owned and to be retained by Seller; (ii) receivables; and (iii) except as provided to the contrary in Section 17.1(e) hereof, all records, files and proprietary operating manuals in the Hotel. Excluded Permits: Permits and licenses required for the ownership and ---------------- operation of the Hotel which, under applicable law, are nontransferable. Fixtures and Tangible Personal Property: All fixtures, furniture, --------------------------------------- furnishings, fittings, equipment, cars, trucks, machinery, apparatus, signage, appliances, draperies, carpeting, and other articles of personal property now located on the Real Property or held in storage for future use at the Hotel and used or usable in connection with any part of the Hotel, subject to such depletions, resupplies, substitutions and replacements as shall occur and be made in the normal course of business but in accordance with present standards excluding, however: (i) Consumables; (ii) Operating Equipment; (iii) equipment and property leased pursuant to Hotel Contracts; (iv) property owned by Space Lessees, guests, employees or other persons (other than Seller or any affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing goods or services to the Hotel; and (v) Improvements. FIRPTA Certificate: As defined in Section 17.1(l). ------------------ Hazardous Material: As defined in Section 5.1(u). ------------------ Hotel: The hotel referred to in the Recitals. ----- Hotel Contracts: All management, service, maintenance, material purchase --------------- orders, leases and other contracts or agreements, including equipment leases capitalized for accounting purposes, and any amendments thereto, with respect to the ownership, maintenance, operation, provisioning, or equipping of the Hotel, or any of the Property, as well as written warranties and guaranties relating thereto, if any, including, but not limited to, those relating to heating and cooling equipment and/or mechanical equipment, but exclusive, however, of (i) insurance policies, (ii) the Bookings, (iii) the -3- Space Leases, (iv) the Employment Arrangements, and (v) the Employee Benefit Plans. Hotel Names: All names or other identifications used in connection with ----------- the operation of Hotel. Impositions: All taxes and other governmental charges of any kind ----------- whatsoever that may at any time be assessed or levied against or with respect to the Property, or any part thereof or any interest therein, including, without limitation, all general and special real estate taxes and assessments or taxes assessed specifically in whole or in part in substitution of general real estate taxes or assessments; any taxes levied upon or with respect to the revenue, income or profits of Seller from all or any part of the Property which, if not paid, will become a lien on all or any part of the Property, or a lien or charge on the rents, revenues or receipts therefrom; all assessed ad valorem taxes; all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Property and all assessments and other charges made by any governmental agency for improvements that may be secured by a lien on the Property. Improvements: The buildings, structures (surface and sub-surface) and ------------ other improvements, including such fixtures as shall constitute real property, located on the Land. Inspection Period: As defined in Section 4.1. ----------------- Land: The parcel of real estate described in Exhibit A hereto, together ---- with all rights, title and interest, if any, of Seller in and to all land lying in any street, alley, road or avenue, open or proposed, in front of or adjoining said Land, to the centerline thereof, and all right, title and interest of Seller in and to any award made or to be made in lieu thereof and in and to any unpaid award for the damage to said Land by reason of change of grade of any street. Legal Requirements: All laws, statutes, codes, acts, ordinances, orders, ------------------ judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and governmental authorities having jurisdiction of the Hotel (including, for purposes hereof, any local Board of Fire Underwriters), and the operation thereof. Material Bookings: All Bookings for meetings and banquet facilities and, ----------------- with respect to guest rooms, any contract for seven (7) or more room nights. Material Contracts: All Hotel Contracts which cannot be cancelled by 30 ------------------ days' or less notice without penalty or premium payment. Miscellaneous Hotel Assets: All contract rights, leases, concessions, -------------------------- trademarks, logos, copyrights, assignable warranties and other items of intangible personal property relating to the ownership or operation of Hotel, but such term shall not include (i) Bookings; (ii) Hotel Contracts; (iii) Space Leases; (iv) Permits; (v) cash or other funds, whether in petty cash or house banks, or on -4- deposit in bank accounts or in transit for deposit; (vi) books and records (except as provided in Section 17.1(e); (vii) refunds, rebates, or other claims, or any interest thereon, for periods or events occurring prior to the Cut-off Time; (viii) utility and similar deposits; (ix) prepaid insurance or other prepaid items; or (x) prepaid license and permit fees; except to the extent that Seller receives a credit at Closing for any such item or matter. Non-Compete Agreements: The Non-Compete Agreements delivered by Seller to ---------------------- Purchaser pursuant to the terms of Section 7.1 hereof. Obligations: All payments required to be made and all representations, ----------- warranties, covenants, agreements and commitments required to be performed under the provisions of this Agreement by Seller or Purchaser, as applicable. Operating Equipment: All china, glassware, linens, silverware and ------------------- uniforms, whether in use or held in reserve storage for future use, in connection with the operation of the Hotel, which are on hand (including off- site storage) on the date hereof, subject to such depletion and restocking as shall be made in the normal course of business but in accordance with present standards. Parent: Extended Stay America, Inc., a Delaware corporation. ------ Permits: All licenses, franchises and permits, certificates of occupancy, ------- authorizations and approvals used in or relating to the ownership, occupancy or operation of any part of the Hotel. Permitted Exceptions: Any liens, encumbrances, restrictions, exceptions -------------------- and other matters specified in Exhibit C to which title to the Property may be subject on the Closing Date. Personal Property: All of the Property other than the Real Property. ----------------- Property: (i) The Real Property; (ii) the Fixtures and Tangible Personal -------- Property; (iii) the Operating Equipment; (iv) the Consumables; (v) the transferable right, title and interest of Seller in, to and under the Hotel Contracts and Space Leases; (vi) the Bookings; (vii) the Permits (other than Excluded Permits); (viii) the Hotel Names; (ix) the Documents; and (x) all other Miscellaneous Hotel Assets, provided, however, that Property shall not include the Excluded Assets. Proratable Compensation: Compensation exclusive of severance pay and ----------------------- Employee Benefit Plans. Purchase Price: As defined in Section 3.1. -------------- Real Property: The Land together with the Improvements located on the ------------- Land. Searches: As defined in Section 6.3(c). -------- -5- Section 1445: As defined in Section 17.1(l). ------------ Space Leases: All leases, licenses, concessions and other occupancy ------------ agreements, and any amendments thereto, whether or not of record, for the use or occupancy of any portion of the Real Property excluding, however, Bookings. Space Lessee: Any person or entity entitled to occupancy of any portion of ------------ the Real Property under a Space Lease. Submittals: As defined in Section 4.2. ---------- Submitted Financial Statements: Those financial statements of the Hotel ------------------------------ identified in Exhibit D hereto. Survey: The survey for the Property prepared in accordance with Section ------ 6.3(a). Title Commitment: The commitment for title insurance issued in accordance ---------------- with Section 6.3(b). Title Company: United Title of Nevada. ------------- Title Defect: A lien, claim, charge, security interest or encumbrance ------------ other than a Permitted Exception. Title Documents: As defined in Section 6.3. --------------- Title Papers: As defined in Section 6.3(b). ------------ Title Policy: As defined in Section 10.1(g). ------------ UCC: The Uniform Commercial Code in effect in Nevada. --- Violation: Any condition with respect to the Property which constitutes a --------- violation of any Legal Requirements. 1.2 References. Except as otherwise specifically indicated, all ---------- references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "hereby," "hereof," "herein," "hereto," "hereunder," "hereinafter," and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof. The word "hereafter" shall mean after, and the term "heretofore" shall mean before, the date of this Agreement. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. -6- ARTICLE II SALE AND PURCHASE 2.1 Sale and Purchase. Seller hereby agrees to sell (or to cause to be ----------------- sold) to Purchaser, and Purchaser hereby agrees to purchase from Seller, the Property on the terms and subject to the conditions of this Agreement. ARTICLE III PURCHASE PRICE 3.1 Purchase Price; Allocation Thereof. The purchase price ("Purchase ---------------------------------- Price") for the Property and the Non-Compete Agreements shall be Five Million Four Hundred Thousand Dollars ($5,400,000.00) payable by delivery of a Note from Purchaser to Seller in the form attached hereto as Exhibit S. The Purchase Price shall be allocated in accordance with the values reasonably attributable to the components of the Property and the Non-Compete Agreements as set forth on Exhibit E hereto. 3.2 Deposit. Concurrently herewith, Purchaser is depositing the sum of ------- $50,000.00 (the "Deposit") with Title Company to secure performance of Purchaser's obligations hereunder. The Deposit and interest earned thereon shall be held in an interest bearing account until the Closing Date (except as otherwise provided herein) at which time the Deposit shall be paid as a credit against the Purchase Price. Except as hereinafter provided, if the transaction contemplated hereby does not close because of a default by Purchaser hereunder, the parties agree that the Deposit and interest earned thereon shall be delivered to Seller as Seller's sole and exclusive liquidated damages, which amount the parties agree is a reasonable sum considering all of the circumstances existing on the date of this Agreement, including, without limitation, the relationship of such sum to the amount of harm to Seller that reasonably could be anticipated, Seller's anticipated use of the proceeds of sale, and the fact that proof of actual damages would be impossible to determine. Notwithstanding the foregoing, if the transaction contemplated hereby does not close and Purchaser shall not have defaulted hereunder, the Deposit and all interest earned thereon shall be returned promptly to Purchaser and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. 3.3 No Assumption of Seller's Obligations. Except as specifically ------------------------------------- provided herein to the contrary, Purchaser shall not assume, or become obligated with respect to, any obligation of Seller, including, but not limited to, the following: -7- (a) Obligations of Seller now existing or which may arise prior to the Cut-off Time with respect to any accounts payable or other payables; (b) Obligations prior to the Closing Date of any term, covenant or provision of any Employee Benefit Plan, Employment Contract, Hotel Contract or Space Lease; (c) Obligations of Seller now existing or which hereafter exist by reason of or in connection with any alleged misfeasance or malfeasance by Seller in the conduct of its business, and with respect to any tort liability; (d) Obligations to Employees with respect to any Compensation (or pursuant to any Employment Contract or Employee Benefit Plan); and (e) Obligations of Seller incurred in connection with or relating to the transfer of the Property pursuant to this Agreement, including without limitation, any Federal, state or local income, sales, transfer or other tax incurred by reason of said transfer, all of which shall be the sole responsibility of Seller. 3.4 Payment of the Note. Purchaser shall satisfy its obligations under -------------------- the Note by delivering shares ("Shares") of common stock, par value $.01 per share, of Parent, and/or cash to Seller, as the case may be, on or before the Note's maturity date specified in the Note, subject to the following: (a) Purchaser and Seller acknowledge that Purchaser shall deliver Shares to Seller only if such Shares are the subject of Approved Sales (defined below). The net proceeds realized by Seller from the sale of the Shares shall be deducted from the balance of the Note. Seller agrees that it shall sell such Shares only in bona fide private placements which are approved by Purchaser in its absolute discretion to a person or persons not affiliated with, related to, or associated with Seller ("Approved Sales"). Purchaser shall deliver to Seller that number of Shares equal to the number of Shares which are sold pursuant to Approved Sales and such delivery shall be accomplished so as to allow the Approved Sales to be consummated on a timely basis. (b) If the net proceeds actually received from Approved Sales are less than the amount due under the Note, Purchaser shall also deliver cash to Seller prior to the maturity date of the Note having a value equal to the difference between the amount due under the Note and the net proceeds received from Approved Sales. In the event no Approved Sales occur prior to the maturity date of the Note, the Note shall be payable in cash on or before its stated maturity date. Seller shall use the net proceeds received from Approved Sales first to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property. Notwithstanding the above, if net proceeds received from Approved Sales are insufficient to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property, Purchaser shall set off against amounts due under the Note an amount equal to such insufficiency and Purchaser shall apply such amount to satisfy and release such liens. -8- (c) The Note shall be paid pursuant to an escrow agreement to be entered into between Purchaser, Seller and an escrow agent mutually agreed upon by Purchaser and Seller, the form of which is attached hereto as Exhibit T. All costs of such escrow shall be borne by Purchaser. (d) Purchaser shall indemnify, defend, and hold Seller harmless against and with respect to all losses, damages, liabilities, costs, and expenses to which Seller may become subject under the Securities Act of 1933, as amended, or otherwise in connection with or arising out of Approved Sales. ARTICLE IV INSPECTION PERIOD 4.1 Inspection Period. The "Inspection Period" shall be the period from ----------------- the date hereof to 11:59 P.M. on June 30, 1996 (provided that such period shall be extended on a day-for-day basis in the event Purchaser does not receive the survey referenced in Section 6.3(a) hereof on or before June 23, 1996). 4.2 Submittals to Purchaser. Seller, at its expense, shall deliver (if ----------------------- such are within Seller's possession or are reasonably available to Seller) to Purchaser on or before June 26, 1996, true and correct copies of the following: (a) the Permits, Hotel Contracts, Employment Arrangements, Employee Benefit Plans, a summary of the amounts, dates, and credit information of Material Bookings (whether for periods before or after the Closing Date), Space Leases and notices of Violations (if any); (b) a descriptive summary of the manner in which all Bookings are made, whether oral or written, with or without deposits or firm or contingent commitments for reservations, along with a copy of the written agreements or confirmation letters used in connection with the Bookings; (c) a descriptive summary of all pending or threatened litigation listed on Exhibit L; (d) the most recent real estate and personal property tax statements for the Property; (e) all Documents, including, but not limited to, the plans and specifications; (f) the most current inventory of all Fixtures and Tangible Personal Property, Operating Equipment and Consumables; -9- (g) all other documents or instruments of record or otherwise relating to the Property available to Seller; (h) copies of all financial reports prepared by the accountant for Seller for the fiscal year of Seller for the three (3) years preceding the date hereof ("Submitted Financial Statements"); and (i) information reflecting the insurance loss history of the Property for the period from January 1, 1994 to the present and copies of all insurance policies relating to the Property. 4.3 Review and Inspection. During the Inspection Period, Purchaser shall --------------------- review the Submittals and shall have the right to enter upon the Real Property to inspect the Property and to conduct tests and investigations at its sole cost and expense, except as provided herein. Seller shall cooperate with Purchaser, or its agents, in arranging such inspections. Without limitation of the foregoing, Purchaser or Purchaser's accountants or both may review the Submitted Financial Statements and, in connection therewith, Seller shall supply such documentation as Purchaser or Purchaser's accountants may reasonably request to facilitate such review. Purchaser shall conduct all such inspections and reviews in confidence and so as not to interfere unreasonably with the operation of the Hotel. During the Inspection Period, Purchaser may order an environmental report, at Purchaser's sole cost and expense, to be conducted by an environmental engineering firm selected by Purchaser (the "Environmental Study"). 4.4 Purchaser's Acceptance or Rejection. If, in its sole and absolute ----------------------------------- discretion, Purchaser accepts the condition of the Property and the Submittals, it shall give Seller written notice of such acceptance before expiration of the Inspection Period. If Purchaser shall give Seller a notice of disapproval before expiration of the Inspection Period or fails to give such notice, then, without the necessity of further documentation, this Agreement shall be deemed terminated and the Deposit and all interest earned thereon shall be returned to Purchaser. Purchaser shall pay to Seller the sum of $100.00 as fixed and liquidated compensation for such termination, and neither party shall have any further obligation or liability to the other party hereunder. The parties hereto acknowledge that Purchaser has incurred substantial costs in connection with the negotiation and execution of this Agreement, will incur additional substantial costs in conducting the inspections contemplated by Section 4.3 and would not have entered into this Agreement without the availability of the Inspection Period. Therefore, the parties agree that adequate consideration exists to support the obligations of the parties hereunder, even before expiration of the Inspection Period. Notwithstanding the above, if the Inspection Period is extended due to Purchaser's receipt of the survey after June 23, 1996, Purchaser may terminate this Agreement pursuant to the terms of this Section 4.4 after June 30, 1996, only due to matters raised on such survey. 4.5 Extension of Inspection Period. Purchaser shall have the option to ------------------------------- extend the Inspection Period to July 15, 1996, subject to the following provisions: -10- (a) Purchaser shall notify Seller on or before June 30, 1996 of Purchaser's exercise of its option to extend the Inspection Period; and (b) Purchaser shall deliver to Seller $25,000.00 which shall be earned by Seller but treated as an additional Deposit provided, however, that such additional Deposit shall not be subject to return to Purchaser pursuant to the terms of Section 4.4 hereof. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties of Seller. Seller hereby represents ----------------------------------------- and warrants the following to Purchaser: (a) Due Organization, etc. Seller is a Nevada corporation duly formed --------------------- and validly existing in good standing under the laws of its state of formation and has full power and authority (i) to own or lease its properties and to carry on its business as it is now being conducted, (ii) to enter into this Agreement and to sell, convey, transfer, assign, and deliver the Property to Purchaser as provided herein, and (iii) to carry out the other transactions and agreements contemplated hereby. This Agreement has been duly authorized by all requisite action on the part of Seller. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby (other than the issuance and sale of Shares pursuant to the Note), except as otherwise provided herein, do not require the consent or approval of any governmental authority, nor shall such execution and delivery result in a breach or Violation of any Legal Requirement, or constitute a default (or an event which with notice and passage of time or both will constitute a default) under any contract or agreement to which Seller is a party or by which it or the Property is bound. (b) Intentionally Omitted. (c) Title to Personal Property. Seller has good and marketable title -------------------------- to the Personal Property, subject only to the Permitted Exceptions. All items of Personal Property have been fully paid for to the extent that normal business practice permits, except those items which are subject to installment payments and with respect to which there are no installments due which are delinquent. (d) Permits. To Seller's knowledge, (i) Exhibit F identifies all ------- existing Permits and is complete and correct in all material respects; (ii) such Permits constitute all of the Permits currently necessary for the ownership and operation of the Hotel; (iii) no default has occurred in the due observance or condition of any Permit which has not been heretofore corrected; and (iv) no Space Lessee has received any notice from any source to the effect that there is lacking any Permit needed in connection with the operation of the Hotel or any other operation connected therewith. -11- (e) Hotel Contracts. Exhibit G identifies all material Hotel --------------- Contracts and the information noted therein is complete and correct in all material respects. Except as disclosed in Exhibit G, there is no default under any Hotel Contract. Seller has provided (or will provide during the Inspection Period) true and correct copies of all Hotel Contracts to Purchaser. Each Hotel Contract (other than the Hotel Contracts designated as Material Contracts on Exhibit G) may be cancelled upon 30 days' or less notice without penalty or premium payment. (f) Hotel Names. Exhibit O hereto identifies all Hotel Names and is ----------- complete and correct in all respects. Seller has not received any notice that the use of any thereof infringes on the rights of a third party. (g) Space Leases. Exhibit J identifies all Space Leases and is ------------ complete and correct in all material respects. Except as disclosed in Exhibit J, there is no default, under any Space Lease. Seller has given (or will give, during the Inspection Period) to Purchaser true and correct copies of all Space Leases. Seller owns all right, title and interest of the lessor under each Space Lease. (h) Commissions, etc. Except as may be disclosed on Exhibits G or J ---------------- and other than in the ordinary course of business in connection with Bookings, there are no commissions or referral fees relating to the Hotel currently outstanding, nor will there be any such commissions or referral fees outstanding, on or before the Closing Date. Seller has not entered into any agreements with any referral organization or booking agent which contain any obligations that extend beyond the Closing Date. (i) Impositions. ----------- (i) Except as described on Exhibit N hereto, Seller has timely filed all returns and reports for sales, use and property taxes required to be filed by it with respect to the operation of the Property and has paid in full or made adequate provision by the establishment of reserves for Impositions which have become due with respect to the operation of the Property. There is no sales, use or property tax deficiency proposed or threatened against Seller with respect to the operation of the Property. There are no tax liens upon any property or assets of Seller. Seller has made all payments of sales, use and property taxes when due in amounts sufficient to avoid the imposition of any penalty with respect to the Property. (ii) Impositions which Seller was required by law to withhold or to collect with respect to the Property have been duly withheld and collected, and have been paid over to the proper governmental entity or are being held by Seller for such payment, and all such withholdings and collections and all other payments due in connection therewith as of the date of the Submitted Financial Statements are duly reflected on the Submitted Financial Statements. -12- (iii) Seller is not currently being audited by, and has not received any notice of intention to audit from, any federal, state or local sales, use or property taxing authority. (j) Fixtures, Tangible Personal Property, etc. Each guest room ----------------------------------------- contains furniture and furnishings consistent with Seller's historical furnishing of such guest rooms. The quantities of Fixtures and Tangible Personal Property, Consumables and Operating Equipment in the Hotel, including physical reserves, are sufficient for the proper and efficient operation of the Hotel in accordance with the standards of operation heretofore maintained by Seller. Seller shall continue to maintain the same at a level consistent with the average maintenance for the 12 months preceding the date hereof until the Cut-off Time. (k) Submitted Financial Statements. The Submitted Financial ------------------------------ Statements for the Hotel (which shall include the income of restaurants, bars, retail rental space and garage portions of the Hotel, if any) fairly present the results of operation of the Hotel for the periods indicated, and, except as set forth as Exhibit D, were prepared in accordance with generally accepted accounting principles, on a consistent basis, and there has been no material adverse change in the results of the operations of the Hotel since the statement dated for the period ended December 31, 1995. (l) Bookings. Exhibit I identifies all Bookings for periods from and -------- after the date hereof. (m) Pending Litigation. Except as described in Exhibit L, there are ------------------ no actions, suits, or proceedings, pending or to Seller's knowledge threatened against Seller or affecting any of Seller's rights, in each case, with respect to the Property, at law or in equity, or before any federal, state, municipal, or other governmental agency or instrumentality, which might result in any order, injunction, decree or judgment having a material adverse effect on the Hotel or the Property, nor is Seller aware of any facts which to its knowledge might result in any action, suit or proceedings. Except as noted in Exhibit K, to Seller's knowledge the Hotel complies with all Legal Requirements. Except as noted in Exhibit K, Seller has not received any notice of any Violation of a Legal Requirement which has not been heretofore corrected. Prior to the Closing Date, any uncured Violations listed in Exhibit K and any other Violations that arise shall be cured by Seller at its sole expense. (n) Condemnation. To the knowledge of Seller, there are no pending, ------------ or, threatened, condemnation proceedings or condemnation actions against the Real Property or any of the rights-of-way located adjacent thereto. (o) Intentionally Omitted. (p) Assessments. To Seller's knowledge, no governmental assessment ----------- for sewer, sidewalk, water, paving, electrical, power or other improvements is pending or threatened, except as may be set forth on Exhibit C. -13- (q) Labor Disputes. During the three (3) years preceding the date -------------- hereof, Seller has not experienced any labor disputes or labor trouble other than routine grievances or organizational efforts, none of which have had a material adverse effect on the operations of the Property. (r) Employees. Exhibit H is a complete list of all Employees with --------- their salaries, position and terms of employment; and (i) except as set forth on Exhibit H, Seller is not a party to any Employment Arrangement and no union is presently serving as collective bargaining agent for any Employees; (ii) to the best of Seller's knowledge, no union presently is conducting or planning to conduct an organizational campaign for any Employees; and (iii) with the exception of the Employee Benefit Plans listed on Exhibit P, there is no pension, profit-sharing, bonus or other employee benefit plan relating to current or past Employees. (s) Utilities. All utility equipment and facilities required for the --------- operation and use of the Hotel are located on the Property and all agreements for providing utilities are with direct providers. (t) Material Changes. There are no facts or circumstances having ---------------- specific application to the Hotel (other than general economic or industry conditions) not disclosed to Purchaser of which Seller has knowledge, which have or could have a material adverse effect upon the Hotel. Seller agrees to notify Purchaser immediately of such facts or circumstances if it becomes aware of the same prior to the Closing Date. (u) Environmental Matters. --------------------- (i) Seller has not transported, stored, treated, or disposed of, nor has it allowed or arranged for any third parties to transport, store, handle, treat, or dispose (as hereinafter defined) of Hazardous Substances or other waste to or at any location other than a site lawfully permitted to receive such Hazardous Substances or other waste for such purposes, nor has it performed, arranged for, or allowed by any method or procedure such transportation, storage, treatment, or disposal in contravention of any laws or regulations or in a manner giving rise to any liability whatsoever. Seller has not stored, handled, treated, or disposed of, nor allowed or arranged for any third parties to store, handle, treat, or dispose of Hazardous Substances or other waste upon property owned or leased by it, except as permitted by law. For purposes of this Section 5.1(u), the term "Hazardous Substances" shall include, without limitation, any material or substance that is one or more of the following: (i) defined as a conventional, hazardous, toxic, regulated or solid pollutant, contaminant, substance or waste pursuant to any Environmental Law (as hereinafter defined), (ii) petroleum, (iii) asbestos, (iv) corrosive, toxic, flammable, explosive, reactive, mutagenic, carcinogenic, infectious or radioactive, (v) materials mixed with, containing or derived from any of the foregoing or (xvii) any material -14- which is or becomes regulated by any Environmental Law which is released (as hereinafter defined) at or from the Real Property or which has migrated to or from the Real Property or is found on the Real Property or any other site affected by such release at, to, on or from the Real Property. The terms release(d), transport(ed), store(d), treat(ed), handle(d), arrange(d), dispose(d) and disposal shall have the meanings assigned by the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.A. Section 9601 et seq. ("CERCLA") or the Resource Conservation and Recovery Act, 42 U.S.C.A. Section 6901 et seq. (42 U.S.C.A. Section 6903 ("RCRA"). (ii) To Seller's knowledge, there has not occurred during Seller's occupancy nor is there currently occurring, a release of any Hazardous Substance to, from, on, into, or beneath the surface of the Land. (iii) The Seller has not shipped, transported, or disposed of, nor has it allowed or arranged, by contract, agreement, or otherwise, for any third parties to ship, transport, or dispose of, any Hazardous Substance or other waste to or at a site which, pursuant to CERCLA or any similar state law, (i) has been placed on the National Priorities List or its state equivalent, or (ii) the Environmental Protection Agency or the relevant state agency has proposed or is proposing to place on the National Priorities List or its state equivalent. Seller has not received written notice, nor does it have knowledge of any facts which could give rise to any written notice, that Seller is a potentially responsible party for a federal or state environmental cleanup site or for corrective action under CERCLA or any other applicable law or regulation. Seller has not submitted nor was it required to submit any notice pursuant to Section 103(c) of CERCLA, or pursuant to any federal, state or local requirement for notification of a release with respect to the Real Property. Seller has not received any written request for information from any federal, state or local governmental authority in connection with any release. Seller has not been required to or has not undertaken any response, investigation, monitoring, or remedial actions or clean-up actions of any kind at the request of any federal, state, or local governmental entity, or at the request of any other person or entity. (iv) Seller does not use, and has not used, any Underground Storage Tanks, and there are not now nor to Seller's knowledge have there ever been any Underground Storage Tanks on the Land. For purposes of this Section 5.1(u)(iv), the term "Underground Storage Tanks" shall have the meaning given it in the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). (v) There is no asbestos in or on the Real Property. -15- (vi) Seller has not received written notice of any violation, noncompliance or breach of any environmental or worker safety laws or regulations which require any work, repairs, construction, or capital expenditures with respect to the assets or properties of Seller. (vii) Exhibit U identifies: (i) all environmental audits, assessments, or occupational health studies undertaken by Seller or its respective agents or known to have been undertaken by or at the order or request of governmental agencies; (ii) the results of any ground, water, soil, air, or asbestos monitoring or investigation undertaken with respect to the Real Property; (iii) all written communications between Seller and any environmental agencies; and (iv) all citations issued under the Occupational Safety and Health Act (29 U.S.C. Sections 651 et seq.). (viii) Seller's Environmental Indemnity. (a) Definitions. Notwithstanding anything ----------- contained in this Agreement to the contrary, for purposes of this Agreement the following terms shall have the following meanings: "Environmental Claim" means any written claim, ------------------- demand, notice of violation, injunction or order for personal injury, including sickness, disease or death, tangible or intangible property damage, environmental stigma, lost profits or other business losses, impaired financial value, damage to the environment, nuisance, pollution, contamination or reimbursement of cleanup costs or other adverse effects on the environment, or for fines, penalties or restrictions, arising or resulting from, based on, caused by or related to the existence or the continuation of the existence of Hazardous Substances made, asserted or prosecuted by or on behalf of any third party. Environmental Claim shall include, without limitation, any costs or expenses incurred to investigate, contain, remove, remedy, treat, or monitor any Hazardous Substances and any media, including soil and groundwater, impacted by Hazardous Substances, as required by any Environmental Law or by regulatory enforcement officials acting under or pursuant to any Environmental Law, or by federal or state courts, lost profits, loss of use, diminution in value, liens against the Real Property relating to Hazardous Substances and any failure or defect in title to the Real Property occasioned by the migration from or presence of Hazardous Substances or Seller's failure to comply with any Environmental Law. -16- "Environmental Law" means any federal, state, or ----------------- local statute, ordinance, rule, regulation, order, consent decree, judgment or common law doctrine, or interpretation thereof, as amended, and provisions and conditions of permits, licenses and other operating authorizations, as amended, related to protection, remediation or restoration of the environment, including natural resources, or protection of human health, worker safety, industrial, agricultural or silvicultural chemicals, pesticides, insecticides, fungicides, rodenticides, fertilizers, toxic substances, surface, subsurface or drinking water, food, drugs, or cosmetics or related to cleanup, fines, orders, injunctions, penalties, notification, contribution, cost recovery, losses or injuries to person or property resulting from contamination or pollution or hazards to human health or welfare or the environment which are now or may hereafter become in effect including, without limitation, CERCLA and RCRA, (collectively, as amended and together with all regulations promulgated thereunder, "Environmental Laws"). (b) Indemnification. Seller shall defend, --------------- indemnify and hold harmless Purchaser, its nominees, officers, directors, agents, employees, successors, lenders, assigns, affiliates, subsidiaries, parent companies (if any), shareholders, lenders, representatives and the successors and assigns of all of the foregoing from and against: 1. Environmental Claims; and 2. Fines and penalties imposed on Purchaser, its successors, assigns, parents, subsidiaries, officers, directors, shareholders, agents, employees, lenders and representatives and the successors and assigns of all of the foregoing as a result of a violation by Seller of any Environmental Law arising from or related to any Hazardous Substances; and/or 3. Any breach of any of representations and warranties of Seller set out herein at Section 5.1(u)(i) through 5.1(u)(vii). (c) Discharge of Environmental Claims. In the --------------------------------- event that Purchaser notifies Seller of any claim that may be subject to an indemnification obligation under this Section 5.1(u), Seller shall, within thirty (30) days from the date of receipt of notice, acknowledge and assume the liability asserted. During such thirty -17- (30) day period, Purchaser shall not take any action or incur any expense with respect to the claim, except to the extent that such action or expense is legally required or reasonably necessary under the circumstances. Seller shall have the right and obligation to control, manage and direct all discussions, proceedings and activities regarding the satisfaction or discharge of any claim which is assumed by Seller or any liability or obligation that such a claim seeks to impose on Seller. Purchaser shall have the right, at its own expense, to consult with Seller, through counsel or otherwise, with respect to all meetings and proceedings with adverse parties or governmental authorities regarding any Environmental Claim and with respect to all activities pertaining to that matter. Prior to initiating or participating in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, Seller shall consult with Purchaser. This right of consultation shall not apply to confidential meetings or documents in cases where Seller or Purchaser are disputing or litigating claims against each other in a judicial or administrative proceeding. Seller shall promptly notify Purchaser in writing before Seller initiates or participates in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, including without limitation decisions or discussions concerning matters not covered by this Agreement. Purchaser shall have the right, but not the obligation, to participate in such meetings or proceedings. (d) Remedies. If Seller fails to perform its -------- obligations under this Section 5.1(u), Purchaser may, at its option (1) bring an action for injunction or specific performance of this Section 5.1(u) or this Agreement, and in such action, recover damages suffered by Purchaser as a result of Seller's breach or delay in performing its obligations, or (2) bring an action for damages for Seller's breach of its obligations, or (3) bring an action for response costs or other relief under federal or state environmental laws or regulations, or (4) any combination of the above. In the event that Purchaser prevails in such an action, it shall be entitled to recover from Seller the costs and expenses of bringing the action, including reasonable attorneys' fees. No delay or omission in the exercise of any right or remedy accruing to Purchaser upon any breach by Seller -18- under this Agreement shall impair any such right or remedy or be construed as a waiver of such breach theretofore or thereafter occurring. The waiver by Purchaser of any condition or of any breach of any term, covenant or condition contained in this Agreement shall not be deemed to be a waiver of any other condition or of any subsequent breach of the same or of any other term, covenant or condition of this Agreement. All rights, powers, options or remedies afforded to Purchaser either under this Section 5.1(u) or this Agreement or by law or by equity, shall be cumulative and not alternative and the exercise of any right, power, privilege or remedy shall not bar other rights, powers, privileges or remedies. (e) Survival. Seller's obligations under this -------- Section 5.1(u) shall survive (i) the closing of the sale that is the subject of this Agreement for a period of two (2) years and (ii) the termination of this Agreement. All claims for indemnification pursuant to this Section 5.1(u) must be made within two (2) years from the Closing Date. (v) Intentionally Omitted. (w) Documents. Seller has made available to Purchaser all of the --------- Documents; Seller knows of no other document or instrument relating to the Hotel, or the ownership or operation thereof. (x) Seller's Knowledge. For the purposes of this Section 5.1, the ------------------ phrases "to the best of Seller's knowledge," "to Seller's knowledge" and similar phrases shall imply a reasonable inquiry by Seller of its employees (but shall not require Seller to hire third party consultants). (y) Third Party Property. Seller is not in possession of any property -------------------- owned by third parties other than (i) property leased by Seller pursuant to leases disclosed to Purchaser pursuant to this Agreement; (ii) baggage of current guests which has been checked with or left in the care of Seller; and (iii) contents in safe deposit boxes deposited by current guests. (z) Investment Representations. Seller represents that it and its -------------------------- shareholders have received a prospectus of Parent dated June 17, 1996. (aa) Notices. No filing is required with any state or local taxing ------- authority as a result of the bulk sale of Seller's business assets. 5.2 Representations and Warranties of Purchaser. Purchaser hereby ------------------------------------------- represents and warrants the following to Seller: -19- (a) Authority. Purchaser has all requisite power and authority to --------- execute and deliver this Agreement and to consummate the transactions contemplated hereby pursuant to the terms and conditions hereof. (b) No Conflict. The execution and delivery of this Agreement and the ----------- consummation of the transactions contemplated hereby will not conflict with, breach, result in a default under, or violate any commitment, document or instrument to which Purchaser is a party or by which it is bound. (c) Parent Shares. The Shares have been registered by the Parent ------------- pursuant to a registration statement filed with the Securities and Exchange Commission (the "SEC"), a so-called "shelf" registration statement (the "Registration Statement"), in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"). Upon the issuance and delivery of the Shares to the Seller in accordance with this Agreement, such shares will constitute legally and validly authorized and issued, fully paid, and nonassessable shares of Common Stock. At Closing, the Registration Statement shall have been declared effective under the 1933 Act and the Parent shall be in compliance with the undertakings contained in the Registration Statement. 5.3 Duration of Representations and Warranties. All representations and ------------------------------------------ warranties contained in Sections 5.1 and 5.2 shall be deemed restated on and as of the Closing Date. ARTICLE VI CLOSING MATTERS 6.1 Closing. The closing of the transaction contemplated hereby (the ------- "Closing") shall take place at the offices of the Title Company on July 15, 1996 (the "Closing Date") unless Purchaser extended the Inspection Period pursuant to Section 4.5 hereof, in which event the Closing Date shall be July 31, 1996, or such other date as may be mutually agreed by the parties. 6.2 Manner of Closing. The transaction shall be closed with the ----------------- concurrent delivery of the documents of title, transfer of interests, delivery of the title policy described in Section 7.1(e) and the payment of the Purchase Price. 6.3 Survey, Title Commitment and Searches. ------------------------------------- (a) Survey. Purchaser intends to obtain a plat of survey ("Survey") ------ of the Property prepared by a surveyor licensed by the State of Nevada, in conformity with Class A minimum detail requirements and the current standards for Land Title Surveys of the American Title Association and American Congress on Surveying and Mapping and such standards as are required -20- by the Title Insurer as a condition to the removal of any survey exceptions from the Title Commitment, certified to Purchaser, Parent, its lender, if any, and the Title Insurer after the date hereof, showing, without limitation of the foregoing requirements, the following information with respect to the Property: (i) the legal description and boundaries thereof; (ii) the location and street and common addresses of all improvements situated thereon; (iii) the location, course and recording numbers, if applicable, of all water, gas, electric, sewer line and other easements, either visible or recorded, and party walls; (iv) public and private streets, roads, alleys and highways and their common or official names; (v) record and physical access to and from a public road or way; (vi) no encroachments thereon or by any Improvements located thereon on adjacent property; (vii) the amount of gross square feet and net square feet (that is, after deducting the area of that portion of the Property, if any, lying in the existing or proposed right-of-way of a public street or road) contained in the Real Property; (viii) building lines or other restrictions affecting the Property; and (ix) whether any portion of the Property is located in an area designated as being subject to flood hazards or flood risks or wetlands by any agency of the United States of America. (b) Title Commitment. Seller shall deliver to Purchaser, on or before ---------------- June 23, 1996, a title commitment for an ALTA Owner's Insurance Policy issued by the Title Company ("Title Commitment") showing title to the Real Property in the Seller, subject only to the Permitted Exceptions, containing full extended coverage over all general exceptions, a 3.1 zoning endorsement (amended to include parking), location, survey and contiguity endorsements, an endorsement that the real estate tax bills for the Property do not include taxes pertaining to other real estate, and such other endorsements as may be reasonably requested by Purchaser, and dated after the date hereof. Seller shall also deliver full and legible copies of all documents ("Title Papers") referred to in the Title Commitment. -21- (c) Defects. If the Survey, Title Commitment, or UCC, judgment, and ------- tax lien searches on the names of Seller (collectively, "Title Documents") shall reflect any facts that would result in a Title Defect, Seller shall have thirty (30) days from the expiration of the Inspection Period within which to cure or remove the Title Defect. Seller shall be obligated to remove mortgages, deeds of trust and other liens or encumbrances for the payment of money of a definite and ascertainable amount, which the parties agree may be removed by the use of the proceeds of sale at Closing as provided in Section 6.3(d) below. In the alternative, Seller may make arrangements satisfactory to the Title Company for the cure (including insurance over) or removal of record of any such Title Defect. If any such Title Defect is not cured or otherwise provided for as aforesaid on or prior to the thirtieth (30th) day, the Purchaser shall either: (i) terminate this Agreement, in which event (hereinafter referred to as "Election No. 1") the Deposit and all interest earned thereon shall be returned to Purchaser and the parties shall have no further obligation or liability to each other hereunder; or (ii) accept the Title Commitment, Survey, or Searches as is, with the right, however, to deduct the amount of Title Defects represented by liens or encumbrances for the payment of money of a definite or ascertainable amount from the Purchase Price payable at Closing (hereinafter referred to as "Election No. 2"). Title Defects which are acceptable as part of Election No. 2 shall thereupon be deemed to be Permitted Exceptions and Exhibit C shall be amended, if necessary, to include such additional Permitted Exceptions. Election No. 2 shall be made by the Purchaser giving Seller written notice thereof within five (5) days after notice of Seller's inability to cure or remove the Title Defect and in the absence of notice of Election No. 2 within such five (5) day period, Purchaser shall be deemed to have elected Election No. 1. In the event Purchaser elects Election No. 1 and a Title Defect was created or consented to by Seller, Purchaser shall be paid by Seller the actual costs of Purchaser's investigation not to exceed $25,000.00 in addition to recovery of the Deposit. (d) Removal of Liens, etc. If on the Closing Date there shall be any --------------------- Title Defect created to secure the payment of money, then Seller shall either (a) use a portion of the Purchase Price to satisfy the same, provided Seller shall simultaneously either deliver to Purchaser at Closing instruments, in recordable form, sufficient to satisfy such Title Defect of record, together with the cost of recording or filing said instrument; or (b) in the alternative, make arrangements with the Title Company, in advance of Closing, whereby Seller will deposit with the Title Company sufficient monies, acceptable to the Title Company to induce the Title Company to issue the Title Policy to Purchaser, either free of any such Title Defect or with insurance which "insures over" such Title Defect. Purchaser agrees to provide at Closing separate certified checks as requested, to facilitate the satisfaction of any such Title Defects, if request is made within a reasonable time prior to the Closing Date. The existence of any Title Defects capable of satisfaction by the payment of money shall not be deemed to be Title Defects for the purposes of cure periods, as discussed supra in Section 6.3(c), if Seller shall comply with the foregoing ----- requirements. -22- ARTICLE VII CLOSING DELIVERIES 7.1 Seller's Deliveries. At Closing, Seller shall deliver, or cause to be ------------------- delivered to Purchaser, the following, each of which shall be in form and substance reasonably acceptable to counsel for Purchaser and, in the case of documents of transfer or conveyance, shall be accepted or consented to by all parties required to make such transfer or conveyance effective: (a) a recordable grant, bargain, and sale deed from Seller to Purchaser subject only to the Permitted Exceptions; (b) a Bill of Sale, with special covenants of title, transferring to Purchaser all of Seller's right, title and interest in and to each and every item of Fixtures and Tangible Personal Property, Documents, Consumables and Operating Equipment to be transferred hereunder subject only to Permitted Exceptions, and with respect to any vehicles included therein, such separate forms of assignment as are required to be filed with any governmental agency to effect such change in registration of ownership; (c) all of the Bookings, Hotel Contracts, Space Leases, Permits and other tangible Miscellaneous Hotel Assets, together with an Assignment conveying and transferring to Purchaser all of Seller's right, title and interest in, to and under the Bookings, Hotel Contracts, Space Leases, Permits (other than Excluded Permits) and all other Miscellaneous Hotel Assets; (d) the certificates referred to in Section 10.1(b) hereof; (e) a FIRPTA Certificate; (f) evidence of termination of the Employees; (g) the opinion of Seller's counsel as provided by Section 10.1(c); (h) certified copies of resolutions of the shareholders and directors of Seller authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; (i) a certificate of the secretary of Seller, dated as of the Closing Date, certifying the incumbency of the officer(s) of Seller executing the documents delivered by Seller pursuant to this Agreement; (j) a Non-Compete Agreement substantially in the form of Exhibit R executed by Michael J. Mona, Jr., Rhonda H. Mona, and Bertha Elizabeth Mona; and -23- (k) evidence, satisfactory to Purchaser, of the termination of all management agreements and other management arrangements with respect to the Hotel. 7.2 Purchaser's Deliveries. At the Closing, Purchaser shall cause to be ---------------------- delivered to Seller: (a) the Note; (b) the certificate referred to in Section 9.1(b) hereof; (c) the opinion of Purchaser's counsel as provided by Section 9.1(c); and (d) the written undertaking of Purchaser as provided by Section 9.1(d). 7.3 Concurrent Transactions. All documents or other deliveries required ----------------------- to be made by Purchaser or Seller at Closing, and all transactions required to be consummated concurrently with Closing, shall be deemed to have been delivered and to have been consummated simultaneously with all other transactions and all other deliveries, and no delivery shall be deemed to have been made, and no transaction shall be deemed to have been consummated, until all deliveries required by Purchaser, or its designee, and Seller shall have been made, and all concurrent or other transactions shall have been consummated. 7.4 Further Assurances. Seller and Purchaser will, at the Closing, or at ------------------ any time or from time to time thereafter, upon request of either party, execute such additional instruments, documents or certificates as either party deems reasonably necessary in order to convey, assign and transfer the Property to Purchaser, hereunder. 7.5 Possession. Possession of the Property shall be delivered at Closing. ---------- Subject to the provisions of Section 17.1(e), Excluded Assets (other than any thereof under leases to be assumed by Purchaser) shall be removed from the Hotel by Seller, at its expense, on or before the Closing Date. Seller, at its expense shall make all repairs necessitated by such removal but shall have no obligation to replace any Excluded Asset so removed. ARTICLE VIII ADJUSTMENTS AND PRORATIONS 8.1 Adjustments and Prorations. The following matters and items shall be -------------------------- apportioned between the parties hereto or, where appropriate, credited in total to a particular party, as of the Cut-off Time as provided below: -24- (a) Down Payments for Reservations. Any pre-closing down payments ------------------------------ made to Seller on confirmed reservations for dates after the Closing Date will be credited to Purchaser as of the Closing. Any post-closing down payments made to Seller on confirmed reservations for dates after the Closing Date will be forwarded to Purchaser upon receipt. (b) Taxes and Assessments. All ad valorem taxes, special or general --------------------- assessments, personal property taxes, attorneys' fees directly related to the reduction of taxes or assessments, water and sewer rents, rates and charges, vault charges, canopy permit fees, and other municipal permit fees. If the amount of any such item is not ascertainable on the date the proration schedule is completed pursuant to Section 8.3, the credit therefor shall be based on one hundred percent (100%) of the most recent available bill and shall be reprorated upon receipt of the actual tax bill. Notwithstanding the above, special real property tax assessments for which the work is substantially completed as of the Closing Date shall be paid by Seller. (c) Utility Contracts. Telephone and telex contracts and contracts ----------------- for the supply of heat, steam, electric power, gas, lighting and any other utility service, with Seller receiving a credit for each deposit, if any, made by Seller as security under any such public service contracts if the same is transferable and provided such deposit remains on deposit for the benefit of Purchaser. Where possible, cut-off readings will be secured for all utilities on the Closing Date. (d) Hotel Contracts and Space Leases. Any amounts prepaid or payable -------------------------------- under any Hotel Contracts and Space Leases shall be apportioned between the parties. Any percentage rentals under Space Leases shall be prorated on the basis of the ratio of the number of days expired before Closing to the number of days after Closing, for the current percentage rent period of the Space Lease. All security deposits held by Seller shall be transferred to Purchaser and all obligations with respect to such security deposits shall be assumed by Purchaser. (e) License Fees. Fees paid or payable for Permits (other than ------------ Excluded Permits) shall be apportioned between the parties. (f) Hotel Matters. ------------- (i) Advance payments, if any, under Bookings for Hotel facilities (which shall include prepaid amounts by current guests); (ii) Coin machine, telephone, washroom and checkroom income; and (iii) Commissions to credit and referral organizations. -25- (g) Employment Arrangements. Seller shall be responsible for, and ----------------------- shall pay when due, all Compensation of Employees. Purchaser assumes no Employment Arrangements or other obligation with respect to any Employee Benefits, all of which, together with any sums due any Employee as a consequence of the termination of his employment, shall be the responsibility of Seller. (h) Consumable Items. The cost of any Consumables or Operating ---------------- Equipment which are at a level below the level required to be maintained under this Agreement shall be credited to Purchaser. (i) Other. Such other items as are provided for in this Agreement or ----- as are normally prorated and adjusted in the sale of a hotel, including without limitation, all petty cash funds and cash in house banks, and all deposits and prepaid items which inure to the benefit of the Purchaser. 8.2 Receivables. Purchaser is not purchasing any of the receivables of ----------- the Hotel and Seller shall be solely responsible for the collection of accounts receivable arising prior to the Closing Date. If Purchaser shall receive any payment made on any unpurchased accounts receivable within ninety (90) days after the Closing Date, it shall promptly remit such payment to Seller. With regard to any collection made from any person or entity who is indebted to the Hotel both with respect to accounts receivable accruing prior to the Closing Date and to the accounts receivable accruing subsequent to the Closing Date, such collection shall be applied as designated by the payor, but if there is no designation, then any such collections received within ninety (90) days after the Closing Date shall be applied first to the indebtedness accrued prior to the Closing Date, but thereafter, any such collections shall be applied first to the payment in full of any amounts due to Purchaser on accounts accruing subsequent to the Closing Date. 8.3 Proration Schedule. ------------------ (a) Preparation and Review. A schedule setting forth the adjustments ---------------------- and prorations to be made pursuant to Section 8.1 above shall be prepared by Purchaser and forwarded to Seller within thirty (30) days after the Closing Date. Seller shall be afforded the opportunity to review all work papers and computations used by Purchaser in the preparation of the adjustments and prorations. The schedule as delivered shall be deemed accepted by Seller except to the extent, if any, that Seller, within ten (10) days after the date of delivery thereof to Seller, has delivered a written notice to Purchaser stating any exceptions Seller may have to such schedule. If within such period Seller shall give written notice to Purchaser of any exceptions to the schedule as delivered by Purchaser, the parties shall attempt to resolve all of the exceptions. To the extent that any such exceptions are not resolved within fifteen (15) days after the delivery to Purchaser of Seller's exceptions to the schedule, such differences shall be submitted as soon as practicable thereafter to such "Big Six" -26- accounting firm upon which the parties shall agree, for final determination thereof. If the parties are not able to agree upon an accounting firm, each shall designate a "Big Six" accounting firm and give written notice to the other of the name and address of the firm so designated. The two firms shall consult with each other and, if possible, determine the exceptions in question by mutual agreement, and their determination so agreed upon, if certified to the parties prior to their reaching agreement independently of arbitration, shall be final and conclusive. If the two firms are not able to agree upon the exceptions in question, they jointly shall designate a third firm whose determination concerning the exceptions shall be final and conclusive, if certified to the parties prior to their reaching agreement independent of arbitration. Any determination by such accounting firm(s) as to the proper determination of any such item submitted to it for determination shall be conclusive and binding upon the parties for purposes of this Agreement. Seller and Purchaser shall each pay one-half of such fees charged by such accounting firm(s) in connection with any matter submitted to it hereunder. (b) Payment of Adjustments. The net amount due pursuant to the ---------------------- adjustments and prorations made as required by this Section 8.3 shall be paid by cash or bank cashier's check payable in immediately available funds in United States currency to the order of the party to whom the same shall be due upon final determination of the adjustments and prorations required hereunder. Seller agrees that prior to the time that payment is made pursuant to Section 8.3(b), it shall not make final liquidating distributions. (c) Period for Recalculation. Notwithstanding the foregoing, if at ------------------------ any time within six (6) months following the Closing Date, either party discovers any items which should have been included in the prorations but were omitted therefrom, then such items shall be adjusted in the same manner as if their existence had been known at the time of the preparation of the prorations. The foregoing limitations shall not apply to any items which, by their nature, cannot be finally determined within the periods specified. ARTICLE IX CONDITIONS TO SELLER'S OBLIGATIONS 9.1 Conditions. Seller's obligation to close hereunder shall be subject ---------- to the occurrence of each of the following conditions, any one or more of which may be waived by Seller in writing: (a) Purchaser's Compliance with Obligations. Purchaser shall have --------------------------------------- complied with all obligations required by this Agreement to be complied with by Purchaser. (b) Truth of Purchaser's Representations and Warranties. The --------------------------------------------------- representations and warranties of Purchaser contained in Section 5.2 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Seller shall have received a certificate to that effect signed by an authorized agent of Purchaser. -27- (c) Opinion of Purchaser's Counsel. Purchaser shall have delivered to ------------------------------ Seller a favorable written opinion of Pedersen & Houpt in connection with this transaction, dated the Closing Date, as to (i) the power and authority of Purchaser to execute and deliver this Agreement, (ii) the due authorization, execution and delivery by Purchaser of this Agreement, and (iii) the legality, validity and, as to Purchaser, the binding effect of this Agreement (subject to the effect of bankruptcy and similar laws affecting the enforcement of creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Opinion of Purchaser's Securities Counsel. Purchaser shall have ----------------------------------------- delivered to Seller the written undertaking of Purchaser to provide to Seller the favorable written opinion of Bell, Boyd & Lloyd, dated at the time of each Approved Sale, that such Approved Sale complies or will comply with the requirements of this Agreement, the 1933 Act and any state blue sky or other securities laws applicable to the Approved Sale. (e) Delivery of Current Prospectus. Seller shall have received ------------------------------ Parent's current, effective prospectus that does not reflect any material adverse change from the prospectus of Parent dated June 17, 1996. 9.2 Failure of Conditions. If any of the conditions enumerated in Section --------------------- 9.1 are not fulfilled and, as a consequence thereof, Seller elects to terminate this Agreement, such failure shall be deemed a default by Purchaser hereunder and the consequences thereof shall be governed by the provisions of Section 3.2. ARTICLE X CONDITIONS TO PURCHASER'S OBLIGATIONS 10.1 Conditions. Purchaser's obligation to close hereunder shall be ---------- subject to the occurrence of each of the following conditions, any one or more of which may be waived by Purchaser in writing: (a) Seller's Compliance with Obligations. Seller shall have complied ------------------------------------ with all obligations required by this Agreement to be complied with by Seller. (b) Truth of Seller's Representations and Warranties. The ------------------------------------------------ representations and warranties of Seller contained in Section 5.1 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Purchaser shall have received a certificate to that effect signed by an authorized agent of Seller. (c) Opinion of Seller's Counsel. There shall have been delivered to --------------------------- Purchaser a favorable opinion of Jones, Jones, Close & Brown, counsel to Seller in connection with this -28- transaction, dated the Closing Date as to (i) the power and authority of Seller to execute and deliver this Agreement; (ii) the due authorization, execution and delivery by Seller of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof; and (iii) the legality, validity and, as to Seller, the binding effect of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof (subject in each case to the effect of bankruptcy and similar laws affecting creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Estoppel Certificates--Hotel Contracts. Purchaser shall notify -------------------------------------- Seller, in writing at least thirty (30) days prior to the Closing Date, of the Material Contracts for which Purchaser requires estoppel certificates. Each of said estoppel certificates shall be in writing from the parties to such Material Contract stating that such Material Contract is in full force and effect, has not been amended or modified except as therein indicated, that such party consents to the assignment to Purchaser and that no party is then in default under such Material Contract (or if any default is known to exist, or would arise with the giving of notice or the passage of time, stating the nature of such default). The estoppel certificates herein referred to shall be in form and substance reasonably satisfactory to Purchaser and dated not more than thirty (30) days prior to the Closing Date. (e) No Pending Adverse Litigation. On the Closing Date, there shall ----------------------------- not then be pending or, to the knowledge of either Purchaser or Seller, threatened, any litigation, administrative proceeding, investigation or other form of governmental enforcement, or executive or legislative proceeding which, if determined adversely, would restrain the consummation of any of the transactions herein referred to, declare illegal, invalid or non-binding any of the covenants or obligations of the parties herein, or have a material and adverse effect on the operations or cash flow of the Hotel, or materially and adversely affect the value of the Property or the ability of Purchaser, after the Closing, to operate the Hotel in the manner contemplated hereby, other than those matters previously disclosed and approved by Purchaser. (f) Related Transactions. The transactions contemplated by (i) the -------------------- certain Agreement to Purchase Hotel of even date herewith by and between Boulder Manor, Inc. and ESA Properties, Inc., (ii) the certain Agreement to Purchase Hotel of even date herewith by and between Melrose Suites, Inc. and ESA Properties, Inc., and (iii) the certain Agreement to Purchase Hotel of even date herewith by and between Santa Fe Springs Partners and ESA Properties, Inc., shall have been consummated. (g) Title Policy. Purchaser shall have received an ALTA Owner's ------------ Insurance Policy issued by the Title Company in exact conformity with the Title Commitment in favor of Purchaser, in the amount of the Purchase Price, showing good and marketable fee simple title in the Real Property to be vested in Purchaser, subject only to Permitted Exceptions (the "Title Policy"). 10.2 Failure of Conditions. If any of the conditions enumerated in --------------------- subsections (d) -29- and (e), of Section 10.1 are not fulfilled, then the sole remedy of Purchaser shall be to terminate this Agreement (whereupon the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability hereunder), unless the failure to fulfill such condition constitutes, or results from, either (i) a material breach of an express representation or warranty made by Seller hereunder, or (ii) a material default of an express covenant made by Seller hereunder, in which event Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. If any of the conditions enumerated in subsections (a), (b) and (c) of Section 10.1 are not fulfilled and, as a consequence thereof, Purchaser elects to terminate this Agreement, such failure shall be deemed a default by Seller hereunder, the Deposit and all interest earned thereon referred to in Section 3.2 shall be promptly returned to Purchaser, and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. ARTICLE XI ACTIONS AND OPERATIONS PENDING CLOSING 11.1 Actions and Operations Pending Closing. Seller agrees that after the -------------------------------------- expiration of the Inspection Period and until the Closing Date: (a) The Hotel will continue to be operated and maintained substantially in accordance with present standards. (b) Seller will not enter into any new Material Contract or Space Lease, or cancel, modify or renew any existing Material Contract or Space Lease, without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. If Purchaser fails to respond to a request for consent within 15 business days after receipt of such request, such consent shall be deemed given. (c) Seller shall have the right, without notice to or consent of Purchaser, to make Bookings in the ordinary course of business, at no less than the Hotel's standard rates including customary discounted rates. Additionally, Seller agrees to entertain in good faith Purchaser's suggestions relating to the policy of the Hotel with respect to future Bookings and extension of credit. (d) Seller shall use commercially reasonable efforts to preserve in force all existing Permits and to cause all those expiring to be renewed prior to the Closing Date. If any such Permit shall be suspended or revoked, Seller shall promptly so notify Purchaser and shall take all measures necessary to cause the reinstatement of such Permit without any additional limitation or condition. (e) Seller shall notify Purchaser promptly if Seller becomes aware of any -30- transaction or occurrence prior to the Closing Date which would make any of the representations or warranties of Seller contained in Section 5.1 not true in any material respect. (f) Seller will maintain in effect, all policies of casualty and liability insurance, or similar policies of insurance, with the same limits of coverage which it now carries with respect to the Hotel. (g) Seller will not dispose of any of the Property, except in the ordinary course of business and in accordance with this Agreement. (h) Seller shall allow Purchaser and its agents or representatives to inspect the Property, and all books and records relating thereto, at such times as Purchaser may reasonably request, provided such inspection does not unreasonably interfere with the continued operation of the Hotel in the ordinary course of business. Purchaser shall also have the right to have, and Seller shall provide accommodations for, a full-time on-site representative to observe the operations of the Hotel. Such accommodations shall be rent-free except for those nights when all other guest rooms at the Hotel are fully occupied, in which event Purchaser shall reimburse Seller for such nights at the Hotel's lowest corporate rate for such accommodations. Purchaser agrees that the results of all such observations will be treated as confidential, and Purchaser shall not disclose the same to any other person or entity except for Purchaser's counsel, accountants, and other agents or representatives consulted in connection with the acquisition of the Hotel. In the event that the sale is not consummated, any and all Documents, reports, financial and operating information obtained by Purchaser or its representatives shall be returned to the Seller. ARTICLE XII CASUALTIES AND TAKINGS 12.1 Casualties. ---------- (a) If any damage to the Property shall occur prior to the Closing Date by reason of fire, windstorm, hail, explosion or other casualty, and if, in Purchaser's reasonable judgment, the cost of repairing such damage will exceed Fifty Thousand Dollars ($50,000.00), Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds) relating to such damage and acquire the Property without any adjustment in the purchase price provided that, in such latter event, Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. -31- (b) If, in the reasonable business judgment of the insurance adjuster or other representative of the insurer of the Property, the cost of repairing such damage will not exceed Fifty Thousand Dollars ($50,000.00), the transactions contemplated hereby shall close without any adjustment in the Purchase Price, Purchaser shall receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds), and Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. 12.2 Takings. In the event of the actual or threatened taking (either ------- temporary or permanent) in any condemnation proceedings by exercise of right of eminent domain, of all or any part of the Real Property, between the date hereof and the Closing Date, and if, in Purchaser's reasonable judgment, such taking will result in the inability to conduct the operations of the Hotel substantially in accordance with the present standards, Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller, in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any condemnation award relating to such taking and acquire the Property without any adjustment in the Purchase Price. ARTICLE XIII EMPLOYEES 13.1 Employees, Compensation and Indemnification. Purchaser shall have the ------------------------------------------- continuing right to review all employment records and files of, and to interview, Employees. Seller shall terminate its employer-employee relationship with all Employees as of the Cut-off Time. Seller shall be solely responsible for all Compensation and other liabilities with respect to Employees and liabilities and obligations to Employees pursuant to any Employment Arrangement. Purchaser shall not be responsible for any such liability or obligations and Seller agrees to indemnify and hold Purchaser harmless from and against any such liability or obligations. All Compensation, obligations, liabilities and claims (including any under the Fair Labor Standards Act) to or by any Employee of Seller arising or occurring prior to the Cut-off Time shall be the responsibility of Seller. Purchaser shall not be responsible for any Compensation thereof and Seller agrees to indemnify and hold Purchaser harmless from and against same. Purchaser shall not assume or be liable upon any Employment Arrangement of Seller. ARTICLE XIV INDEMNITIES 14.1 Seller's Indemnity. Seller agrees to indemnify, defend (with ------------------ Purchaser having the -32- right to retain counsel for the purpose of participating in such defense, at its sole cost and expense) and hold Purchaser harmless against and with respect to the following: (a) any and all obligations, liabilities, claims, accounts, demands, liens or encumbrances, whether direct or contingent and no matter how arising ("Indemnifiable Damages"), in any way related to the Property and arising or accruing on or before the Closing Date (including, but not limited to, any damage to property or injury to or death of any person); without limitation on the generality of the foregoing, Seller indemnifies Purchaser from any claim or judgment under any lawsuit or proceeding filed or pending prior to the Closing Date against the Property, or any part thereof, and any costs or expenses (including reasonable attorneys' fees) heretofore or hereafter incurred in connection with any such lawsuit or proceeding; (b) any loss or damage to Purchaser resulting from any inaccuracy in or breach of any representation or warranty of Seller or resulting from any breach or default by Seller of any obligation of Seller under this Agreement; and (c) all costs and expenses, including reasonable attorneys' fees, related to any actions, suits or judgments incident to any of the foregoing. 14.2 Purchaser's Indemnity. Purchaser agrees to indemnify, defend (with --------------------- Seller having the right to retain counsel for the purpose of participating in such defense, at its sole cost and expense), and hold Seller harmless against and with respect to the following: (a) any loss or damage to Seller, subsequent to the Closing Date, resulting from any inaccuracy in or breach of any representation or warranty of Purchaser under this Agreement; (b) any injury to person or property causing any loss or damage to Seller resulting from or arising out of work performed by Purchaser pursuant to Section 11.1(h) hereof; (c) any and all Indemnifiable Damages in any way related to the Property and arising or accruing after the Closing Date (including, but not limited to, any damage to property or injury to or death of any person); and (d) all costs and expenses, including reasonable attorney's fees, related to any actions, suits or judgments incident to any of the foregoing. 14.3 Notice of Claims. Seller and Purchaser, as applicable, shall promptly ---------------- notify the other in the event any claim is made against Seller or Purchaser as to which the other party has agreed to indemnify and the indemnitor shall thereupon undertake to defend and hold the indemnitee saved and harmless therefrom. -33- ARTICLE XV SECURITIES LAW MATTERS 15.1 Disposition of Shares. The Seller represents and warrants that the --------------------- Shares are being acquired and will be acquired for its own account and will not be sold or otherwise disposed of except pursuant to (i) the provisions of Rule 145(d) under the 1933 Act, as in effect at the time of sale, (ii) some other exemption or exclusion from the registration requirements under the 1933 Act, which does not require the filing by the Parent with the SEC of any registration statement, offering circular, or other document, in which case the Seller shall first supply to the Parent an opinion of counsel (which opinion and counsel shall be satisfactory to the Parent) that such exemption or exclusion is available, or (iii) the Registration Statement provided that (a) sales pursuant to the Registration Statement are made to or through a broker, dealer, or market maker, (b) in connection with such sales, the Seller delivers a copy of a current Prospectus forming a part of the Registration Statement which prospectus identifies the Seller as being able to use such Prospectus to make resales in the public market of Shares acquired pursuant to this Agreement, and (c) the Seller notifies the Parent in writing at least five business days prior to the first day the Seller intends to execute a sale transaction of the Shares pursuant to the Registration Statement and the Parent consents in writing to such sale. The Seller hereby acknowledges that the Parent is entitled in its absolute discretion to withhold such consent if, and for such period of time as, in the opinion of the management of the Parent, (i) securities laws applicable to such sale of Shares by the Seller pursuant to the Registration Statement would require the Parent to disclose material non-public information, or (ii) such sale would occur during (a) the measurement period for determining the amount of Common Stock or other consideration, the amount of which will be based on the price of the Common Stock, to be paid in connection with the acquisition of a business or assets to which the Parent or any of its subsidiaries is a party or (b) the marketing period of an offering of securities of the Parent. 15.2 Acknowledgment of Restrictions. The Seller acknowledges that, under ------------------------------ current SEC interpretations of Rule 145, the Seller is subject to restrictions on transfer of the Shares for a period of two years following the Closing Date and that an exemption from the requirement to register the Shares for public resale is provided by Rule 145(d). 15.3 Evidence of Compliance. The Seller further covenants and agrees that ---------------------- the Parent will be supplied with such written evidence of compliance by it and its broker with Rule 145(d) as in effect at the time of any sale by it pursuant thereto, as the Parent may reasonably request. 15.4 Legend. The Seller agrees that the certificates for the Shares ------ received shall bear the following legend: The Shares represented by this certificate are subject to the provisions of Rule 145(d) promulgated under the Securities Act of 1933, and may not be transferred or disposed of by the holder without compliance with said Rule unless registered under said Act or pursuant to another applicable exemption from the requirements of said Act. -34- and that the Parent may place stop transfer orders with its transfer agents with respect to such certificates. The appropriate portions of the legend will be removed at such time or times as the Seller may reasonably request if at the time of such request the Seller is not an Affiliate (as defined in the 1933 Act) of the Parent, upon the expiration of the two-year holding period provided in Rule 145(d). ARTICLE XVI NOTICES 16.1 Notices. Except as otherwise provided in this Agreement, all notices, ------- demands, requests, consents, approvals and other communications (herein collectively called "Notices") required or permitted to be given hereunder, or which are to be given with respect to this Agreement, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by overnight express courier, postage prepaid, addressed to the party to be so notified as follows: If intended for Seller, to: Mr. Michael J. Mona, Jr. M&M Development 1785 E. Sahara, Suite 315 Las Vegas, Nevada 89104 Copies to: Jones, Jones, Close & Brown 3773 Howard Hughes Parkway Third Floor South Las Vegas, Nevada 89109 Attn: Ms. Jodi R. Goodheart If intended for Extended Stay America, Inc. Purchaser, to: 500 East Broward Blvd., #950 Ft. Lauderdale, Florida 33394 Attn: Mr. Robert A. Brannon Copies to: Pedersen & Houpt 161 North Clark, Suite 3100 Chicago, Illinois 60601 Attn: Mr. Michael W. Black Notice mailed by registered or certified mail shall be deemed received by the addressee three (3) days after mailing thereof. Notice personally delivered shall be deemed received when delivered. Notice mailed by overnight express courier shall be deemed received by the addressee two (2) days -35- after mailing thereof. Either party may at any time change the address for notice to such party by mailing a Notice as aforesaid. ARTICLE XVII ADDITIONAL COVENANTS 17.1 Additional Covenants. In addition, the parties agree as follows: -------------------- (a) Expenses. Seller shall be responsible for the payment of all -------- sales and use taxes and fifty percent (50%) of all transfer taxes. Purchaser shall be responsible for the payment of all recording fees, fifty percent (50%) of all transfer taxes, all escrow fees, all costs of the Survey, all title insurance premiums and charges for the issuance of the Title Policy and all other closing charges. The fees and expenses of Seller's designated representatives, accountants and attorneys shall be borne by Seller, and the fees and expenses of Purchaser's designated representatives, accountants and attorneys shall be borne by Purchaser. (b) Brokerage. Seller and Purchaser each hereby represent and warrant --------- to the other that neither has dealt with any broker or finder in connection with the transaction contemplated hereby, and each hereby agrees to indemnify, defend and hold the other harmless against and from any and all manner of claims, liabilities, loss, damage, attorneys' fees and expenses, incurred by either party and arising out of, or resulting from, any claim by any such broker or finder in contravention of its representation and warranty herein contained. (c) Guest Baggage. All baggage of guests who are still in the Hotel ------------- on the Closing Date, which has been checked with or left in the care of Seller shall be inventoried, sealed, and tagged jointly by Seller and Purchaser on the Closing Date. Purchaser hereby indemnifies Seller against any claims, losses or liabilities in connection with such baggage arising out of the acts or omissions of Purchaser after the Closing Date. Seller hereby indemnifies Purchaser against any claim, losses or liabilities with respect to such baggage arising out of the acts or omissions of Seller prior to the Closing Date. (d) Safe Deposits. Immediately after the Closing, Seller shall send ------------- written notice to guests or tenants or other persons who have safe deposit boxes, advising of the sale of the Hotel to Purchaser and requesting immediate removal of the contents thereof or the removal thereof and concurrent re-deposit of such contents pursuant to new safe deposit agreements with Purchaser. Seller, at its own expense, shall have a representative present when the boxes are opened, in the presence of a representative of the Purchaser. Purchaser shall not be liable or responsible for any items claimed to have been in such boxes unless such items are so removed and re-deposited, and Seller agrees to indemnify and hold harmless Purchaser from and against any such liability or responsibility. -36- (e) Books and Records. The transaction contemplated hereby shall not ----------------- include the books and records of Seller pertaining strictly to the business of the Hotel. Seller covenants and agrees that such books and records will remain in the control of M&M Development for examination and audit by Purchaser and its agents after the Closing as provided in this clause (e). Seller agrees to preserve all books and records, files and correspondence, for at least five (5) years after the Closing Date, and not to destroy or dispose of the same, for at least five (5) years after the Closing Date. Seller agrees to provide access to Purchaser and its representatives, to such books, records, files and correspondence at all reasonable times. (f) Hart-Scott-Rodino Act. If it shall be determined that the within --------------------- transaction is subject to the reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. (S)18(a) (1976) (the "Act"), then notwithstanding anything to the contrary contained in Section 10.1(e) hereof, each party shall forthwith proceed to make the necessary filings, and take all other actions necessary to comply with the Act and the rules and regulations thereunder. If such requirements have not been fulfilled by the Closing Date, then the Closing Date shall be adjourned until such requirements have been fulfilled, but not more than sixty (60) days. If such requirements have not been fulfilled prior to the expiration of such sixty (60) day period, Seller or Purchaser, by notice to the other, may terminate this Agreement in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability to the other party hereunder. (g) Survival of Covenants, etc. The representations, warranties, --------------------------- obligations, covenants, agreements, undertakings and indemnifications of Seller and Purchaser contained herein shall survive the Closing for a period of two (2) years except that (i) the representation and warranty made by Seller in Section 5.1(i) shall expire at the time the period of limitations (including any extensions thereof pursuant to the delivery of waivers of the applicable period of limitations) expires for the assessment by the taxing authority of additional taxes with respect to which the representation and warranty relate; and (ii) the representation and warranty made by Purchaser in Section 3.4(d) shall not expire. All claims for indemnification must be made within the aforementioned periods. (h) Purchaser's Investigation and Inspections. Any investigation or ----------------------------------------- inspection conducted by Purchaser, or any agent or representative of Purchaser, pursuant to this Agreement, in order to verify independently Seller's satisfaction of any conditions precedent to Purchaser's obligations hereunder or to determine whether Seller's warranties are true and accurate, shall not or constitute a waiver by Purchaser of any of Seller's obligations hereunder or Purchaser's reliance thereon. (i) Construction. This Agreement shall not be construed more strictly ------------ against one party than against the other, merely by virtue of the fact that it may have been prepared primarily by counsel for one of the parties, it being recognized that both Purchaser and Seller have contributed substantially and materially to the preparation of this Agreement. -37- (j) Publicity. All notice to third parties and all other publicity --------- concerning the transactions contemplated hereby shall be jointly planned and coordinated by and between Purchaser and Seller. None of the parties shall act unilaterally in this regard without the prior written approval of the other; however, this approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Purchaser (or Parent) may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning Parent's publicly traded securities; Purchaser agrees to give Seller notice of any such public disclosure. (k) General. This Agreement may be executed in any number of ------- counterparts, each of which shall constitute an original but all of which, taken together, shall constitute but one and the same instrument. This Agreement (including all exhibits hereto) contains the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior understandings, if any, with respect thereto and may not be amended, supplemented or terminated, nor shall any obligation hereunder or condition hereof be deemed waived, except by a written instrument to such effect signed by the party to be charged. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. The warranties, representations, agreements and undertakings contained herein shall not be deemed to have been made for the benefit of any person or entity, other than the parties hereto and their permitted successors and assigns. Seller has no right to assign its rights (except as set forth in (m) below) or to delegate its duties hereunder. Purchaser may assign its rights and duties under this Agreement to any of its Affiliates. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. (l) FIRPTA. Seller agrees to furnish Purchaser with an executed ------- Certification in the form attached hereto as Exhibit Q ("FIRPTA Certificate"), and such other evidence as Purchaser may reasonably request, to establish that Seller is not a foreign person for the purpose of Section 1445 of the Internal Revenue Code of 1986, as amended ("Section 1445"). In the event that Seller does not furnish such Certification or a qualifying statement for the U.S. Treasury Department that the transaction is exempt from the withholding requirements of Section 1445, Seller agrees that Purchaser shall be directed to pay such amount required by law to the Internal Revenue Service in accordance with the laws and regulations regarding the withholding requirements of Section 1445. (m) Like-Kind Exchange. Seller shall have the right, at Seller's ------------------ option, to sell the Property to Purchaser through a transaction that is structured to qualify as a like-kind exchange of property within the meaning of Section 1031 of the Internal Revenue Code of 1986 ("Code"). Purchaser agrees to reasonably cooperate with Seller in effecting a qualifying like-kind exchange through a trust, escrow or other means as determined by Seller, provided, however, Purchaser shall not be required to incur any obligation or liability to a third party as a part of the exchange. In any event Seller shall have the right to assign its rights under this contract, in whole or in part, to a qualified intermediary (as defined under current Code regulations governing like-kind exchanges) or as otherwise necessary or appropriate to effectuate a like-kind exchange, provided that Seller shall remain liable for its obligations hereunder (and that Michael J. Mona, Jr. shall remain liable pursuant -38- to his guaranty as hereinafter set forth) and Seller (and Michael J. Mona) shall execute such additional documentation as Purchaser may reasonably request to evidence such continuing liability. Seller shall bear the additional transaction costs and all costs and expenses incurred by Purchaser and attributable to exchange procedures in this transaction that are requested or implemented by Seller. Seller shall be solely responsible for assuring the effectiveness of the exchange for Seller's tax purposes. In no event shall any like-kind exchange contemplated by this provision cause an extension of the date of closing set forth herein nor shall Purchaser be required to take title to any property other than the Property. (n) Jurisdiction. Any action or proceeding seeking to enforce any ------------ provision of, or based on any right arising out of, this Agreement shall be brought against any of the parties in the courts of the State of Nevada, County of Clark, or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. -39- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: ST. LOUIS MANOR, INC., a Nevada corporation By:__________________________________________ Michael J. Mona, Jr., President Attest:______________________________________ Its:_________________________________________ PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By:__________________________________________ Robert A. Brannon, Vice President Attest:______________________________________ Its:_________________________________________ The undersigned hereby guaranties the collection by Purchaser of all amounts due from Seller pursuant to the terms hereof. /s/ Michael J. Mona, Jr. --------------------------------------------- Michael J. Mona, Jr. President -40- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: ST. LOUIS MANOR, INC., a Nevada corporation By:__________________________________________ Michael J. Mona, Jr., President Attest:______________________________________ Its:_________________________________________ PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By:/s/ Robert Brannon ------------------------------------------ Robert A. Brannon, Vice President Attest: Robert Brannon -------------------------------------- Its: Secretary ----------------------------------------- The undersigned hereby guaranties the collection by Purchaser of all amounts due from Seller pursuant to the terms hereof. /s/ Michael J. Mona, Jr. --------------------------------------------- Michael J. Mona, Jr. President -40- AGREEMENT TO PURCHASE HOTEL by and among MICHAEL J. MONA, JR., DEAN O'BANNON and ESA PROPERTIES, INC. June 25, 1996 AGREEMENT TO PURCHASE HOTEL TABLE OF CONTENTS
Page I DEFINITIONS AND REFERENCES ............................................1 1.1 Definitions ...................................................1 ----------- 1.2 References ....................................................6 ---------- II SALE AND PURCHASE .....................................................7 2.1 Sale and Purchase..............................................7 III PURCHASE PRICE ........................................................7 3.1 Purchase Price; Allocation Thereof.............................7 ---------------------------------- 3.2 Deposit .......................................................7 ------- 3.3 No Assumption of Seller's Obligations..........................7 ------------------------------------- IV INSPECTION PERIOD .....................................................9 4.1 Inspection Period .............................................9 ----------------- 4.2 Submittals to Purchaser .......................................9 ----------------------- 4.3 Review and Inspection ........................................10 --------------------- 4.4 Purchaser's Acceptance or Rejection ..........................10 ----------------------------------- V REPRESENTATIONS AND WARRANTIES........................................11 5.1 Representations and Warranties of Seller......................11 ---------------------------------------- 5.2 Representations and Warranties of Purchaser...................20 ------------------------------------------- 5.3 Duration of Representations and Warranties....................20 ------------------------------------------- VI CLOSING MATTERS ......................................................20 6.1 Closing ......................................................20 ------- 6.2 Manner of Closing.............................................21 ----------------- 6.3 Survey, Title Commitment and Searches.........................21 ------------------------------------- VII CLOSING DELIVERIES....................................................23 7.1 Seller's Deliveries...........................................23 ------------------- 7.2 Purchaser's Deliveries .......................................24 ---------------------- 7.3 Concurrent Transactions ......................................24 ----------------------- 7.4 Further Assurances ...........................................24 ------------------ 7.5 Possession ...................................................24 ----------
Page ---- VIII ADJUSTMENTS AND PRORATIONS ...........................................24 8.1 Adjustments and Prorations ...................................24 -------------------------- 8.2 Receivables ..................................................26 ----------- 8.3 Proration Schedule............................................26 ------------------ IX CONDITIONS TO SELLER'S OBLIGATIONS....................................27 9.1 Conditions ...................................................27 ---------- 9.2 Failure of Conditions.........................................28 --------------------- X CONDITIONS TO PURCHASER'S OBLIGATIONS.................................28 10.1 Conditions....................................................28 ---------- 10.2 Failure of Conditions.........................................29 --------------------- XI ACTIONS AND OPERATIONS PENDING CLOSING................................30 11.1 Actions and Operations Pending Closing........................30 -------------------------------------- XII CASUALTIES AND TAKINGS................................................31 12.1 Casualties....................................................31 ---------- 12.2 Takings.......................................................32 ------- XIII EMPLOYEES.............................................................32 13.1 Employees, Compensation and Indemnification...................32 ------------------------------------------- XIV INDEMNITIES...........................................................32 14.1 Seller's Indemnity............................................32 ------------------ 14.2 Purchaser's Indemnity.........................................33 --------------------- 14.3 Notice of Claims..............................................33 ---------------- XV SECURITIES LAW MATTERS................................................33 15.1 Disposition of Shares.........................................33 --------------------- 15.2 Acknowledgment of Restrictions................................34 ------------------------------ 15.3 Evidence of Compliance........................................34 ---------------------- 15.4 Legend........................................................34 ------ XVI NOTICES...............................................................35 16.1 Notices.......................................................35 ------- XVII ADDITIONAL COVENANT ..................................................35 17.1 Additional Covenants...........................................36 --------------------
Exhibit A: Land Exhibit B: Excluded Assets Exhibit C: Permitted Exceptions Exhibit D: Submitted Financial Statements Exhibit E: Allocation of Purchase Price Exhibit F: Permits Exhibit G: Hotel Contracts and Commissions Exhibit H: Employee and Employment Arrangements Exhibit I: Bookings Exhibit J: Space Leases and Commissions Exhibit J-1: Spaces Lessee Estoppel Letter Exhibit K: Notices of Violations Exhibit L: Pending or Threatened Litigation Exhibit M: Documents Exhibit N: Impositions Exhibit O: Hotel Names Exhibit P: Employee Benefit Plans Exhibit Q: FIRPTA Certificate Exhibit R: Non-Compete Agreement Exhibit S: Note Exhibit T: Escrow Agreement Exhibit U: Environmental Matters AGREEMENT TO PURCHASE HOTEL --------------------------- THIS AGREEMENT is made this 25th day of June, 1996, by and between Michael J. Mona, Jr. ("Mona"), Dean O'Bannon ("O'Bannon") (Mona and O'Bannon are sometimes hereinafter referred to, collectively as well as individually, as "Seller"), and ESA Properties, Inc., a Delaware corporation ("Purchaser"). R E C I T A L S: A. Mona and O'Bannon (each owning an undivided 50% interest, as tenants in common) are the fee owners of that certain parcel of land (and the improvements and buildings located thereon) legally described in Exhibit A and commonly referred to as the Nicolle Manor, 4240 Boulder Highway, Las Vegas, Nevada (the "Hotel") and the owner of the Fixtures and Tangible Personal Property, Operating Equipment, Consumables, and Miscellaneous Hotel Assets (all as hereinafter defined). B. The Hotel's facilities include guest and public facilities consisting of 123 rooms, administrative offices, and service areas. C. Seller desires to sell, and Purchaser desires to purchase, the Property upon and subject to the terms and conditions hereinafter set forth. A G R E E M E N T S NOW, THEREFORE, in consideration of the foregoing premises and the respective representations, warranties, agreements, covenants and conditions herein contained, and other good and valuable consideration, Seller and Purchaser agree as follows: ARTICLE DEFINITIONS AND REFERENCES 1.1 Definitions. As used herein, the following terms shall have the ----------- respective meanings indicated below: Affiliate: With respect to a specific entity, any natural person or any --------- firm, corporation, partnership, association, trust or other entity which, directly or indirectly, controls, or is under common control with, the subject entity, and with respect to any specific entity or person, any firm, corporation, partnership, association, trust or other entity which is controlled by the subject entity or person. For purposes hereof, the term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any such entity or the power to veto major policy decision of any such entity, whether through the ownership of voting securities, by contract, or otherwise. Agreement: This Agreement to Purchase Hotel, including the Exhibits. --------- Bookings: Contracts for the use or occupancy of guest rooms of the Hotel. -------- Closing: As defined in Section 6.1. ------- Compensation: The direct salaries and wages paid to, or accrued for the ------------ benefit of, any Employee, incentive compensation, vacation pay, severance pay, employer's contributions under F.I.C.A., unemployment compensation, workmen's compensation, or other employment taxes, and payments under Employee Benefit Plans (as hereinafter defined). Consumables: All food and beverages (alcoholic, to the extent transferable ----------- under applicable law, and non-alcoholic); engineering, maintenance and housekeeping supplies, including soap, cleaning materials and matches; stationery and printing; and other supplies of all kinds, in each case whether partially used, unused, or held in reserve storage for future use in connection with the maintenance and operation of the Hotel, which are on hand (which shall include off-site storage) on the date hereof, subject to such depletion and restocking as shall occur and be made in the normal course of business but in accordance with present standards, excluding, however, (i) Operating Equipment and (ii) all items of personal property owned by Space Lessees, guests, employees, or persons (other than Seller or any Affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing food or services to the Hotel. Cut-off Time: 12:01 A.M. on the Closing Date. ------------ Department: Nevada Department of Revenue. ---------- Deposit: As defined in Section 3.2. ------- Documents: Reproducible copies of all plans, specifications, drawings, --------- blueprints, surveys, environmental reports and other similar documents which Seller has in its possession, or has a right to, as the same relate to the Real Property, including, but not limited to those relating to any prior or ongoing construction or rehabilitation of the Real Property. Employee(s): All persons employed by Seller pursuant to Employment ----------- Arrangements. Employee Benefit Plans: All employee benefit plans, as that term is ---------------------- defined in Section 3(2)(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including "multi-employer pension plans" as defined in Section 3(37) of ERISA, and each other employee benefit plan or program (including welfare benefit plans as defined in Section 3(1) of ERISA) to - 2 - which Seller contributes on behalf of any of the Employees. Employment Arrangement(s): Those agreements, oral or written, with all or ------------------------- any of the executives, staff and employees of Seller for work in or in connection with the Hotel including, but not limited to, individual employment agreements, union agreements, employee handbooks, group health insurance plans, life insurance plans and disability insurance plans (other than Employee Benefit Plans). Environmental Laws: As defined in Section 5.1(u). ------------------ Environmental Study: As defined in Section 4.3. ------------------- Excluded Assets: The following: (i) those assets, if any, listed on --------------- Exhibit B hereto owned and to be retained by Seller; (ii) receivables; and (iii) except as provided to the contrary in Section 17.1(e) hereof, all records, files and proprietary operating manuals in the Hotel. Excluded Permits: Permits and licenses required for the ownership and ---------------- operation of the Hotel which, under applicable law, are nontransferable. Fixtures and Tangible Personal Property: All fixtures, furniture, --------------------------------------- furnishings, fittings, equipment, cars, trucks, machinery, apparatus, signage, appliances, draperies, carpeting, and other articles of personal property now located on the Real Property or held in storage for future use at the Hotel and used or usable in connection with any part of the Hotel, subject to such depletions, resupplies, substitutions and replacements as shall occur and be made in the normal course of business but in accordance with present standards excluding, however: (i) Consumables; (ii) Operating Equipment; (iii) equipment and property leased pursuant to Hotel Contracts; (iv) property owned by Space Lessees, guests, employees or other persons (other than Seller or any affiliate of Seller, unless denominated as an Excluded Asset hereunder) furnishing goods or services to the Hotel; and (v) Improvements. FIRPTA Certificate: As defined in Section 17.1(l). ------------------ Hazardous Material: As defined in Section 5.1(u). ------------------ Hotel: The hotel referred to in the Recitals. ----- Hotel Contracts: All management, service, maintenance, material purchase --------------- orders, leases and other contracts or agreements, including equipment leases capitalized for accounting purposes, and any amendments thereto, with respect to the ownership, maintenance, operation, provisioning, or equipping of the Hotel, or any of the Property, as well as written warranties and guaranties relating thereto, if any, including, but not limited to, those relating to heating and cooling equipment and/or mechanical equipment, but exclusive, however, of (i) insurance policies, (ii) the Bookings, (iii) the - 3 - Space Leases, (iv) the Employment Arrangements, and (v) the Employee Benefit Plans. Hotel Names: All names or other identifications used in connection with ----------- the operation of Hotel. Impositions: All taxes and other governmental charges of any kind ----------- whatsoever that may at any time be assessed or levied against or with respect to the Property, or any part thereof or any interest therein, including, without limitation, all general and special real estate taxes and assessments or taxes assessed specifically in whole or in part in substitution of general real estate taxes or assessments; any taxes levied upon or with respect to the revenue, income or profits of Seller from all or any part of the Property which, if not paid, will become a lien on all or any part of the Property, or a lien or charge on the rents, revenues or receipts therefrom; all assessed ad valorem taxes; all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Property and all assessments and other charges made by any governmental agency for improvements that may be secured by a lien on the Property. Improvements: The buildings, structures (surface and sub-surface) and ------------ other improvements, including such fixtures as shall constitute real property, located on the Land. Inspection Period: As defined in Section 4.1. ----------------- Land: The parcel of real estate described in Exhibit A hereto, together ---- with all rights, title and interest, if any, of Seller in and to all land lying in any street, alley, road or avenue, open or proposed, in front of or adjoining said Land, to the centerline thereof, and all right, title and interest of Seller in and to any award made or to be made in lieu thereof and in and to any unpaid award for the damage to said Land by reason of change of grade of any street. Legal Requirements: All laws, statutes, codes, acts, ordinances, orders, ------------------ judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and governmental authorities having jurisdiction of the Hotel (including, for purposes hereof, any local Board of Fire Underwriters), and the operation thereof. Material Bookings: All Bookings for meetings and banquet facilities and, ----------------- with respect to guest rooms, any contract for seven (7) or more room nights. Material Contracts: All Hotel Contracts which cannot be cancelled by 30 ------------------ days' or less notice without penalty or premium payment. Miscellaneous Hotel Assets: All contract rights, leases, concessions, -------------------------- trademarks, logos, copyrights, assignable warranties and other items of intangible personal property relating to the ownership or operation of Hotel, but such term shall not include (i) Bookings; (ii) Hotel Contracts; (iii) Space Leases; (iv) Permits; (v) cash or other funds, whether in petty cash or house banks, or on - 4 - deposit in bank accounts or in transit for deposit; (vi) books and records (except as provided in Section 17.1(e); (vii) refunds, rebates, or other claims, or any interest thereon, for periods or events occurring prior to the Cut-off Time; (viii) utility and similar deposits; (ix) prepaid insurance or other prepaid items; or (x) prepaid license and permit fees; except to the extent that Seller receives a credit at Closing for any such item or matter. Non-Compete Agreements: The Non-Compete Agreements delivered by Seller to ---------------------- Purchaser pursuant to the terms of Section 7.1 hereof. Obligations: All payments required to be made and all representations, ----------- warranties, covenants, agreements and commitments required to be performed under the provisions of this Agreement by Seller or Purchaser, as applicable. Operating Equipment: All china, glassware, linens, silverware and ------------------- uniforms, whether in use or held in reserve storage for future use, in connection with the operation of the Hotel, which are on hand (including off- site storage) on the date hereof, subject to such depletion and restocking as shall be made in the normal course of business but in accordance with present standards. Parent: Extended Stay America, Inc., a Delaware corporation. ------ Permits: All licenses, franchises and permits, certificates of occupancy, ------- authorizations and approvals used in or relating to the ownership, occupancy or operation of any part of the Hotel. Permitted Exceptions: Any liens, encumbrances, restrictions, exceptions -------------------- and other matters specified in Exhibit C to which title to the Property may be subject on the Closing Date. Personal Property: All of the Property other than the Real Property. ----------------- Property: (i) The Real Property; (ii) the Fixtures and Tangible Personal -------- Property; (iii) the Operating Equipment; (iv) the Consumables; (v) the transferable right, title and interest of Seller in, to and under the Hotel Contracts and Space Leases; (vi) the Bookings; (vii) the Permits (other than Excluded Permits); (viii) the Hotel Names; (ix) the Documents; and (x) all other Miscellaneous Hotel Assets, provided, however, that Property shall not include the Excluded Assets. Proratable Compensation: Compensation exclusive of severance pay and ----------------------- Employee Benefit Plans. Purchase Price: As defined in Section 3.1. -------------- Real Property: The Land together with the Improvements located on the ------------- Land. Searches: As defined in Section 6.3(c). -------- - 5 - Section 1445: As defined in Section 17.1(l). ------------ Space Leases: All leases, licenses, concessions and other occupancy ------------ agreements, and any amendments thereto, whether or not of record, for the use or occupancy of any portion of the Real Property excluding, however, Bookings. Space Lessee: Any person or entity entitled to occupancy of any portion of ------------ the Real Property under a Space Lease. Submittals: As defined in Section 4.2. ---------- Submitted Financial Statements: Those financial statements of the Hotel ------------------------------ identified in Exhibit D hereto. Survey: The survey for the Property prepared in accordance with Section ------ 6.3(a). Title Commitment: The commitment for title insurance issued in accordance ---------------- with Section 6.3(b). Title Company: United Title of Nevada. ------------- Title Defect: A lien, claim, charge, security interest or encumbrance ------------ other than a Permitted Exception. Title Documents: As defined in Section 6.3. --------------- Title Papers: As defined in Section 6.3(b). ------------ Title Policy: As defined in Section 10.1(g). ------------ UCC: The Uniform Commercial Code in effect in Nevada. --- Violation: Any condition with respect to the Property which constitutes a --------- violation of any Legal Requirements. 1.2 References. Except as otherwise specifically indicated, all ---------- references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "hereby," "hereof," "herein," "hereto," "hereunder," "hereinafter," and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof. The word "hereafter" shall mean after, and the term "heretofore" shall mean before, the date of this Agreement. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. - 6 - ARTICLE II SALE AND PURCHASE 2.1 Sale and Purchase. Seller hereby agrees to sell (or to cause to be ----------------- sold) to Purchaser, and Purchaser hereby agrees to purchase from Seller, the Property on the terms and subject to the conditions of this Agreement. ARTICLE PURCHASE PRICE 3.1 Purchase Price; Allocation Thereof. The purchase price ("Purchase ---------------------------------- Price") for the Property and the Non-Compete Agreements shall be Five Million Five Hundred Thousand Dollars ($5,500,000.00) payable by delivery of a Note from Purchaser to Seller in the form attached hereto as Exhibit S. The Purchase Price shall be allocated in accordance with the values reasonably attributable to the components of the Property and the Non-Compete Agreements as set forth on Exhibit E hereto. 3.2 Deposit. Concurrently herewith, Purchaser is depositing the sum of ------- $50,000.00 (the "Deposit") with Title Company to secure performance of Purchaser's obligations hereunder. The Deposit and interest earned thereon shall be held in an interest bearing account until the Closing Date (except as otherwise provided herein) at which time the Deposit shall be paid as a credit against the Purchase Price. Except as hereinafter provided, if the transaction contemplated hereby does not close because of a default by Purchaser hereunder, the parties agree that the Deposit and interest earned thereon shall be delivered to Seller as Seller's sole and exclusive liquidated damages, which amount the parties agree is a reasonable sum considering all of the circumstances existing on the date of this Agreement, including, without limitation, the relationship of such sum to the amount of harm to Seller that reasonably could be anticipated, Seller's anticipated use of the proceeds of sale, and the fact that proof of actual damages would be impossible to determine. Notwithstanding the foregoing, if the transaction contemplated hereby does not close and Purchaser shall not have defaulted hereunder, the Deposit and all interest earned thereon shall be returned promptly to Purchaser and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity, provided, however, that Seller shall have no liability for any reduction in the market price of Parent's publicly traded stock as a result of such default. 3.3 No Assumption of Seller's Obligations. Except as specifically ------------------------------------- provided herein to the contrary, Purchaser shall not assume, or become obligated with respect to, any obligation of Seller, including, but not limited to, the following: - 7 - (a) Obligations of Seller now existing or which may arise prior to the Cut-off Time with respect to any accounts payable or other payables; (b) Obligations prior to the Closing Date of any term, covenant or provision of any Employee Benefit Plan, Employment Contract, Hotel Contract or Space Lease; (c) Obligations of Seller now existing or which may hereafter exist by reason of or in connection with any alleged misfeasance or malfeasance by Seller in the conduct of its business, and with respect to any tort liability; (d) Obligations to Employees with respect to any Compensation (or pursuant to any Employment Contract or Employee Benefit Plan); and (e) Obligations of Seller incurred in connection with or relating to the transfer of the Property pursuant to this Agreement, including without limitation, any Federal, state or local income, sales, transfer or other tax incurred by reason of said transfer, all of which shall be the sole responsibility of Seller. 3.4 Payment of the Note. Purchaser shall satisfy its obligations under -------------------- the Note by delivering shares ("Shares") of common stock, par value $.01 per share, of Parent, and/or cash to Seller, as the case may be, on or before the Note's maturity date specified in the Note, subject to the following: (a) Purchaser and Seller acknowledge that Purchaser shall deliver Shares to Seller only if such Shares are the subject of Approved Sales (defined below). The net proceeds realized by Seller from the sale of the Shares shall be deducted from the balance of the Note. Seller agrees that it shall sell such Shares only in bona fide private placements which are approved by Purchaser in its absolute discretion to a person or persons not affiliated with, related to, or associated with Seller ("Approved Sales"). Purchaser shall deliver to Seller that number of Shares equal to the number of Shares which are sold pursuant to Approved Sales and such delivery shall be accomplished so as to allow the Approved Sales to be consummated on a timely basis. (b) If the net proceeds actually received from Approved Sales are less than the amount due under the Note, Purchaser shall also deliver cash to Seller prior to the maturity date of the Note having a value equal to the difference between the amount due under the Note and the net proceeds received from Approved Sales. In the event no Approved Sales occur prior to the maturity date of the Note, the Note shall be payable in cash on or before its stated maturity date. Seller shall use the net proceeds received from Approved Sales first to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property. Notwithstanding the above, if net proceeds received from Approved Sales are insufficient to satisfy any mortgages or deeds of trust created or suffered by Seller which are a lien on the Property, Purchaser shall set off against amounts due under the Note an amount equal to such insufficiency and Purchaser shall apply such amount to satisfy and release such liens. - 8 - (c) The Note shall be paid pursuant to an escrow agreement to be entered into between Purchaser, Seller and an escrow agent mutually agreed upon by Purchaser and Seller, the form of which is attached hereto as Exhibit T. All costs of such escrow shall be borne by Purchaser. (d) Purchaser shall indemnify, defend, and hold Seller harmless against and with respect to all losses, damages, liabilities, costs, and expenses to which Seller may become subject under the Securities Act of 1933, as amended, or otherwise in connection with or arising out of Approved Sales. ARTICLE INSPECTION PERIOD 4.1 Inspection Period. The "Inspection Period" shall be the period from ----------------- the date hereof to 11:59 P.M. on June 30, 1996 (provided that such period shall be extended on a day-for-day basis in the event Purchaser does not receive the survey referenced in Section 6.3(a) hereof on or before June 23, 1996). 4.2 Submittals to Purchaser. Seller, at its expense, shall deliver (if ----------------------- such are within Seller's possession or are reasonably available to Seller) to Purchaser on or before June 26, 1996, true and correct copies of the following: (a) the Permits, Hotel Contracts, Employment Arrangements, Employee Benefit Plans, a summary of the amounts, dates, and credit information of Material Bookings (whether for periods before or after the Closing Date), Space Leases and notices of Violations (if any); (b) a descriptive summary of the manner in which all Bookings are made, whether oral or written, with or without deposits or firm or contingent commitments for reservations, along with a copy of the written agreements or confirmation letters used in connection with the Bookings; (c) a descriptive summary of all pending or threatened litigation listed on Exhibit L; (d) the most recent real estate and personal property tax statements for the Property; (e) all Documents, including, but not limited to, the plans and specifications; (f) the most current inventory of all Fixtures and Tangible Personal Property, Operating Equipment and Consumables; - 9 - (g) all other documents or instruments of record or otherwise relating to the Property available to Seller; (h) copies of all financial reports prepared by the accountant for Seller for the fiscal year of Seller for the three (3) years preceding the date hereof ("Submitted Financial Statements"); and (i) information reflecting the insurance loss history of the Property for the period from January 1, 1994 to the present and copies of all insurance policies relating to the Property. 4.3 Review and Inspection. During the Inspection Period, Purchaser shall --------------------- review the Submittals and shall have the right to enter upon the Real Property to inspect the Property and to conduct tests and investigations at its sole cost and expense, except as provided herein. Seller shall cooperate with Purchaser, or its agents, in arranging such inspections. Without limitation of the foregoing, Purchaser or Purchaser's accountants or both may review the Submitted Financial Statements and, in connection therewith, Seller shall supply such documentation as Purchaser or Purchaser's accountants may reasonably request to facilitate such review. Purchaser shall conduct all such inspections and reviews in confidence and so as not to interfere unreasonably with the operation of the Hotel. During the Inspection Period, Purchaser may order an environmental report, at Purchaser's sole cost and expense, to be conducted by an environmental engineering firm selected by Purchaser (the "Environmental Study"). 4.4 Purchaser's Acceptance or Rejection. If, in its sole and absolute ----------------------------------- discretion, Purchaser accepts the condition of the Property and the Submittals, it shall give Seller written notice of such acceptance before expiration of the Inspection Period. If Purchaser shall give Seller a notice of disapproval before expiration of the Inspection Period or fails to give such notice, then, without the necessity of further documentation, this Agreement shall be deemed terminated and the Deposit and all interest earned thereon shall be returned to Purchaser. Purchaser shall pay to Seller the sum of $100.00 as fixed and liquidated compensation for such termination, and neither party shall have any further obligation or liability to the other party hereunder. The parties hereto acknowledge that Purchaser has incurred substantial costs in connection with the negotiation and execution of this Agreement, will incur additional substantial costs in conducting the inspections contemplated by Section 4.3 and would not have entered into this Agreement without the availability of the Inspection Period. Therefore, the parties agree that adequate consideration exists to support the obligations of the parties hereunder, even before expiration of the Inspection Period. Notwithstanding the above, if the Inspection Period is extended due to Purchaser's receipt of the survey after June 23, 1996, Purchaser may terminate this Agreement pursuant to the terms of this Section 4.4 after June 30, 1996, only due to matters raised on such survey. - 10 - 4.5 Extension of Inspection Period. Purchaser shall have the option to ------------------------------- extend the Inspection Period to July 15, 1996, subject to the following provisions: (a) Purchaser shall notify Seller on or before June 30, 1996 of Purchaser's exercise of its option to extend the Inspection Period; and (b) Purchaser shall deliver to Seller $25,000.00 which shall be earned by Seller but treated as an additional Deposit provided, however, that such additional Deposit shall not be subject to return to Purchaser pursuant to the terms of Section 4.4 hereof. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties of Seller. Mona and O'Bannon, jointly ----------------------------------------- and severally, hereby represent and warrant the following to Purchaser: (a) Due Organization, etc. Seller has full power and authority (i) to --------------------- own or lease its properties and to carry on its business as it is now being conducted, (ii) to enter into this Agreement and to sell, convey, transfer, assign, and deliver the Property to Purchaser as provided herein, and (iii) to carry out the other transactions and agreements contemplated hereby. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby (other than the issuance and sale of Shares pursuant to the Note), except as otherwise provided herein, do not require the consent or approval of any governmental authority, nor shall such execution and delivery result in a breach or Violation of any Legal Requirement, or constitute a default (or an event which with notice and passage of time or both will constitute a default) under any contract or agreement to which Seller is a party or by which it or the Property is bound. (b) Intentionally Omitted. (c) Title to Personal Property. Seller has good and marketable title -------------------------- to the Personal Property, subject only to the Permitted Exceptions. All items of Personal Property have been fully paid for to the extent that normal business practice permits, except those items which are subject to installment payments and with respect to which there are no installments due which are delinquent. (d) Permits. To Seller's knowledge, (i) Exhibit F identifies all ------- existing Permits and is complete and correct in all material respects; (ii) such Permits constitute all of the Permits -11- currently necessary for the ownership and operation of the Hotel; (iii) no default has occurred in the due observance or condition of any Permit which has not been heretofore corrected; and (iv) no Space Lessee has received any notice from any source to the effect that there is lacking any Permit needed in connection with the operation of the Hotel or any other operation connected therewith. (e) Hotel Contracts. Exhibit G identifies all material Hotel --------------- Contracts and the information noted therein is complete and correct in all material respects. Except as disclosed in Exhibit G, there is no default under any Hotel Contract. Seller has provided (or will provide during the Inspection Period) true and correct copies of all Hotel Contracts to Purchaser. Each Hotel Contract (other than the Hotel Contracts designated as Material Contracts on Exhibit G) may be cancelled upon 30 days' or less notice without penalty or premium payment. (f) Hotel Names. Exhibit O hereto identifies all Hotel Names and is ----------- complete and correct in all respects. Seller has not received any notice that the use of any thereof infringes on the rights of a third party. (g) Space Leases. Exhibit J identifies all Space Leases and is ------------ complete and correct in all material respects. Except as disclosed in Exhibit J, there is no default, under any Space Lease. Seller has given (or will give, during the Inspection Period) to Purchaser true and correct copies of all Space Leases. Seller owns all right, title and interest of the lessor under each Space Lease. (h) Commissions, etc. Except as may be disclosed on Exhibits G or J ---------------- and other than in the ordinary course of business in connection with Bookings, there are no commissions or referral fees relating to the Hotel currently outstanding, nor will there be any such commissions or referral fees outstanding, on or before the Closing Date. Seller has not entered into any agreements with any referral organization or booking agent which contain any obligations that extend beyond the Closing Date. (i) Impositions. ----------- (i) Except as described on Exhibit N hereto, Seller has timely filed all returns and reports for sales, use and property taxes required to be filed by it with respect to the operation of the Property and has paid in full or made adequate provision by the establishment of reserves for Impositions which have become due with respect to the operation of the Property. There is no sales, use or property tax deficiency proposed or threatened against Seller with respect to the operation of the Property. There are no tax liens upon any property or assets of Seller. Seller has made all payments of sales, use and property taxes when due in amounts sufficient to avoid the imposition of any penalty with respect to the Property. -12- (ii) Impositions which Seller was required by law to withhold or to collect with respect to the Property have been duly withheld and collected, and have been paid over to the proper governmental entity or are being held by Seller for such payment, and all such withholdings and collections and all other payments due in connection therewith as of the date of the Submitted Financial Statements are duly reflected on the Submitted Financial Statements. (iii) Seller is not currently being audited by, and has not received any notice of intention to audit from, any federal, state or local sales, use or property taxing authority. (j) Fixtures, Tangible Personal Property, etc. Each guest room ----------------------------------------- contains furniture and furnishings consistent with Seller's historical furnishing of such guest rooms. The quantities of Fixtures and Tangible Personal Property, Consumables and Operating Equipment in the Hotel, including physical reserves, are sufficient for the proper and efficient operation of the Hotel in accordance with the standards of operation heretofore maintained by Seller. Seller shall continue to maintain the same at a level consistent with the average maintenance for the 12 months preceding the date hereof until the Cut-off Time. (k) Submitted Financial Statements. The Submitted Financial ------------------------------ Statements for the Hotel (which shall include the income of restaurants, bars, retail rental space and garage portions of the Hotel, if any) fairly present the results of operation of the Hotel for the periods indicated, and, except as set forth as Exhibit D, were prepared in accordance with generally accepted accounting principles, on a consistent basis, and there has been no material adverse change in the results of the operations of the Hotel since the statement dated for the period ended December 31, 1995. (l) Bookings. Exhibit I identifies all Bookings for periods from and -------- after the date hereof. (m) Pending Litigation. Except as described in Exhibit L, there are ------------------ no actions, suits, or proceedings, pending or to Seller's knowledge threatened against Seller or affecting any of Seller's rights, in each case, with respect to the Property, at law or in equity, or before any federal, state, municipal, or other governmental agency or instrumentality, which might result in any order, injunction, decree or judgment having a material adverse effect on the Hotel or the Property, nor is Seller aware of any facts which to its knowledge might result in any action, suit or proceedings. Except as noted in Exhibit K, to Seller's knowledge the Hotel complies with all Legal Requirements. Except as noted in Exhibit K, Seller has not received any notice of any Violation of a Legal Requirement which has not been heretofore corrected. Prior to the Closing Date, any uncured Violations listed in Exhibit K and any other Violations that arise shall be cured by Seller at its sole expense. -13- (n) Condemnation. To the knowledge of Seller, there are no pending, ------------ or, threatened, condemnation proceedings or condemnation actions against the Real Property or any of the rights-of-way located adjacent thereto. (o) Intentionally Omitted. (p) Assessments. To Seller's knowledge, no governmental assessment ----------- for sewer, sidewalk, water, paving, electrical, power or other improvements is pending or threatened, except as may be set forth on Exhibit C. (q) Labor Disputes. During the three (3) years preceding the date -------------- hereof, Seller has not experienced any labor disputes or labor trouble other than routine grievances or organizational efforts, none of which have had a material adverse effect on the operations of the Property. (r) Employees. Exhibit H is a complete list of all Employees with --------- their salaries, position and terms of employment; and (i) except as set forth on Exhibit H, Seller is not a party to any Employment Arrangement and no union is presently serving as collective bargaining agent for any Employees; (ii) to the best of Seller's knowledge, no union presently is conducting or planning to conduct an organizational campaign for any Employees; and (iii) with the exception of the Employee Benefit Plans listed on Exhibit P, there is no pension, profit-sharing, bonus or other employee benefit plan relating to current or past Employees. (s) Utilities. All utility equipment and facilities required for the --------- operation and use of the Hotel are located on the Property and all agreements for providing utilities are with direct providers. (t) Material Changes. There are no facts or circumstances having ---------------- specific application to the Hotel (other than general economic or industry conditions) not disclosed to Purchaser of which Seller has knowledge, which have or could have a material adverse effect upon the Hotel. Seller agrees to notify Purchaser immediately of such facts or circumstances if it becomes aware of the same prior to the Closing Date. (u) Environmental Matters. --------------------- (i) Seller has not transported, stored, treated, or disposed of, nor has it allowed or arranged for any third parties to transport, store, handle, treat, or dispose (as hereinafter defined) of Hazardous Substances or other waste to or at any location other than a site lawfully permitted to receive such Hazardous Substances or other waste for such purposes, nor has it performed, arranged for, or allowed by any method or procedure such transportation, storage, treatment, or disposal in contravention of any laws or regulations or in a manner giving rise to any liability -14- whatsoever. Seller has not stored, handled, treated, or disposed of, nor allowed or arranged for any third parties to store, handle, treat, or dispose of Hazardous Substances or other waste upon property owned or leased by it, except as permitted by law. For purposes of this Section 5.1(u), the term "Hazardous Substances" shall include, without limitation, any material or substance that is one or more of the following: (i) defined as a conventional, hazardous, toxic, regulated or solid pollutant, contaminant, substance or waste pursuant to any Environmental Law (as hereinafter defined), (ii) petroleum, (iii) asbestos, (iv) corrosive, toxic, flammable, explosive, reactive, mutagenic, carcinogenic, infectious or radioactive, (v) materials mixed with, containing or derived from any of the foregoing or (xvii) any material which is or becomes regulated by any Environmental Law which is released (as hereinafter defined) at or from the Real Property or which has migrated to or from the Real Property or is found on the Real Property or any other site affected by such release at, to, on or from the Real Property. The terms release(d), transport(ed), store(d), treat(ed), handle(d), arrange(d), dispose(d) and disposal shall have the meanings assigned by the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.A. Section 9601 et seq. ("CERCLA") or the Resource Conservation and Recovery Act, 42 U.S.C.A. Section 6901 et seq. (42 U.S.C.A. Section 6903 ("RCRA"). (ii) To Seller's knowledge, there has not occurred during Seller's occupancy nor is there currently occurring, a release of any Hazardous Substance to, from, on, into, or beneath the surface of the Land. (iii) The Seller has not shipped, transported, or disposed of, nor has it allowed or arranged, by contract, agreement, or otherwise, for any third parties to ship, transport, or dispose of, any Hazardous Substance or other waste to or at a site which, pursuant to CERCLA or any similar state law, (i) has been placed on the National Priorities List or its state equivalent, or (ii) the Environmental Protection Agency or the relevant state agency has proposed or is proposing to place on the National Priorities List or its state equivalent. Seller has not received written notice, nor does it have knowledge of any facts which could give rise to any written notice, that Seller is a potentially responsible party for a federal or state environmental cleanup site or for corrective action under CERCLA or any other applicable law or regulation. Seller has not submitted nor was it required to submit any notice pursuant to Section 103(c) of CERCLA, or pursuant to any federal, state or local requirement for notification of a release with respect to the Real Property. Seller has not received any written request for information from any federal, state or local governmental authority in connection with any release. Seller has not been required to or has not undertaken any response, investigation, monitoring, or remedial actions or clean-up actions of any kind at the request of any federal, state, or local governmental entity, or at the request of any other person or entity. -15- (iv) Seller does not use, and has not used, any Underground Storage Tanks, and there are not now nor to Seller's knowledge have there ever been any Underground Storage Tanks on the Land. For purposes of this Section 5.1(u)(iv), the term "Underground Storage Tanks" shall have the meaning given it in the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). (v) There is no asbestos in or on the Real Property. (vi) Seller has not received written notice of any violation, noncompliance or breach of any environmental or worker safety laws or regulations which require any work, repairs, construction, or capital expenditures with respect to the assets or properties of Seller. (vii) Exhibit U identifies: (i) all environmental audits, assessments, or occupational health studies undertaken by Seller or its respective agents or known to have been undertaken by or at the order or request of governmental agencies; (ii) the results of any ground, water, soil, air, or asbestos monitoring or investigation undertaken with respect to the Real Property; (iii) all written communications between Seller and any environmental agencies; and (iv) all citations issued under the Occupational Safety and Health Act (29 U.S.C. Sections 651 et seq.). (viii) Seller's Environmental Indemnity. (a) Definitions. Notwithstanding anything ----------- contained in this Agreement to the contrary, for purposes of this Agreement the following terms shall have the following meanings: "Environmental Claim" means any written ------------------- claim, demand, notice of violation, injunction or order for personal injury, including sickness, disease or death, tangible or intangible property damage, environmental stigma, lost profits or other business losses, impaired financial value, damage to the environment, nuisance, pollution, contamination or reimbursement of cleanup costs or other adverse effects on the environment, or for fines, penalties or restrictions, arising or resulting from, based on, caused by or related to the existence or the continuation of the existence of Hazardous Substances made, asserted or prosecuted by or on behalf of any third party. Environmental Claim shall include, without limitation, any costs or expenses incurred to investigate, contain, remove, remedy, treat, or monitor any Hazardous Substances and any media, including soil and groundwater, impacted by Hazardous Substances, as required -16- by any Environmental Law or by regulatory enforcement officials acting under or pursuant to any Environmental Law, or by federal or state courts, lost profits, loss of use, diminution in value, liens against the Real Property relating to Hazardous Substances and any failure or defect in title to the Real Property occasioned by the migration from or presence of Hazardous Substances or Seller's failure to comply with any Environmental Law. "Environmental Law" means any federal, state, ----------------- or local statute, ordinance, rule, regulation, order, consent decree, judgment or common law doctrine, or interpretation thereof, as amended, and provisions and conditions of permits, licenses and other operating authorizations, as amended, related to protection, remediation or restoration of the environment, including natural resources, or protection of human health, worker safety, industrial, agricultural or silvicultural chemicals, pesticides, insecticides, fungicides, rodenticides, fertilizers, toxic substances, surface, subsurface or drinking water, food, drugs, or cosmetics or related to cleanup, fines, orders, injunctions, penalties, notification, contribution, cost recovery, losses or injuries to person or property resulting from contamination or pollution or hazards to human health or welfare or the environment which are now or may hereafter become in effect including, without limitation, CERCLA and RCRA, (collectively, as amended and together with all regulations promulgated thereunder, "Environmental Laws"). (b) Indemnification. Seller shall defend, --------------- indemnify and hold harmless Purchaser, its nominees, officers, directors, agents, employees, successors, lenders, assigns, affiliates, subsidiaries, parent companies (if any), shareholders, lenders, representatives and the successors and assigns of all of the foregoing from and against: 1. Environmental Claims; and 2. Fines and penalties imposed on Purchaser, its successors, assigns, parents, subsidiaries, officers, directors, shareholders, agents, employees, lenders and representatives and the successors and assigns of all of the foregoing as a result of a violation by Seller of any Environmental Law arising from or related to any Hazardous Substances; and/or -17- 3. Any breach of any of representations and warranties of Seller set out herein at Section 5.1(u)(i) through 5.1(u)(vii). (c) Discharge of Environmental Claims. In --------------------------------- the event that Purchaser notifies Seller of any claim that may be subject to an indemnification obligation under this Section 5.1(u), Seller shall, within thirty (30) days from the date of receipt of notice, acknowledge and assume the liability asserted. During such thirty (30) day period, Purchaser shall not take any action or incur any expense with respect to the claim, except to the extent that such action or expense is legally required or reasonably necessary under the circumstances. Seller shall have the right and obligation to control, manage and direct all discussions, proceedings and activities regarding the satisfaction or discharge of any claim which is assumed by Seller or any liability or obligation that such a claim seeks to impose on Seller. Purchaser shall have the right, at its own expense, to consult with Seller, through counsel or otherwise, with respect to all meetings and proceedings with adverse parties or governmental authorities regarding any Environmental Claim and with respect to all activities pertaining to that matter. Prior to initiating or participating in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, Seller shall consult with Purchaser. This right of consultation shall not apply to confidential meetings or documents in cases where Seller or Purchaser are disputing or litigating claims against each other in a judicial or administrative proceeding. Seller shall promptly notify Purchaser in writing before Seller initiates or participates in any meeting or proceeding in which decisions or discussions adverse to Purchaser may be made, including without limitation decisions or discussions concerning matters not covered by this Agreement. Purchaser shall have the right, but not the obligation, to participate in such meetings or proceedings. (d) Remedies. If Seller fails to perform its -------- obligations under this Section 5.1(u), Purchaser may, at its option (1) bring an action for injunction or specific performance of this Section 5.1(u) or this Agreement, and in such action, recover damages -18- suffered by Purchaser as a result of Seller's breach or delay in performing its obligations, or (2) bring an action for damages for Seller's breach of its obligations, or (3) bring an action for response costs or other relief under federal or state environmental laws or regulations, or (4) any combination of the above. In the event that Purchaser prevails in such an action, it shall be entitled to recover from Seller the costs and expenses of bringing the action, including reasonable attorneys' fees. No delay or omission in the exercise of any right or remedy accruing to Purchaser upon any breach by Seller under this Agreement shall impair any such right or remedy or be construed as a waiver of such breach theretofore or thereafter occurring. The waiver by Purchaser of any condition or of any breach of any term, covenant or condition contained in this Agreement shall not be deemed to be a waiver of any other condition or of any subsequent breach of the same or of any other term, covenant or condition of this Agreement. All rights, powers, options or remedies afforded to Purchaser either under this Section 5.1(u) or this Agreement or by law or by equity, shall be cumulative and not alternative and the exercise of any right, power, privilege or remedy shall not bar other rights, powers, privileges or remedies. (e) Survival. Seller's obligations under -------- this Section 5.1(u) shall survive (i) the closing of the sale that is the subject of this Agreement for a period of two (2) years and (ii) the termination of this Agreement. All claims for indemnification pursuant to this Section 5.1(u) must be made within two (2) years from the Closing Date. (v) Intentionally Omitted. (w) Documents. Seller has made available to Purchaser all of the --------- Documents; Seller knows of no other document or instrument relating to the Hotel, or the ownership or operation thereof. (x) Seller's Knowledge. For the purposes of this Section 5.1, the ------------------ phrases "to the best of Seller's knowledge," "to Seller's knowledge" and similar phrases shall imply a reasonable inquiry by Seller of its employees (but shall not require Seller to hire third party consultants). (y) Third Party Property. Seller is not in possession of any property -------------------- owned by third parties other than (i) property leased by Seller pursuant to leases disclosed to Purchaser pursuant to this Agreement; (ii) baggage of current guests which has been checked with or left in the care of Seller; and (iii) contents in safe deposit boxes deposited by current guests. -19- (z) Investment Representations. Seller represents that it and its -------------------------- partners have received a prospectus of Parent dated June 17, 1996. (aa) Notices. No filing is required with any state or local taxing -------- authority as a result of the bulk sale of Seller's business assets. (bb) Seller's Predecessor. Any representation or warranty herein -------------------- which is limited to Seller's ownership, occupancy or operation of the Property shall include the period that the Property was owned, occupied, or operated by Santa Fe Springs Partners, a Nevada general partnership. 5.2 Representations and Warranties of Purchaser. Purchaser hereby ------------------------------------------- represents and warrants the following to Seller: (a) Authority. Purchaser has all requisite power and authority to --------- execute and deliver this Agreement and to consummate the transactions contemplated hereby pursuant to the terms and conditions hereof. (b) No Conflict. The execution and delivery of this Agreement and the ----------- consummation of the transactions contemplated hereby will not conflict with, breach, result in a default under, or violate any commitment, document or instrument to which Purchaser is a party or by which it is bound. (c) Parent Shares. The Shares have been registered by the Parent ------------- pursuant to a registration statement filed with the Securities and Exchange Commission (the "SEC"), a so-called "shelf" registration statement (the "Registration Statement"), in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"). Upon the issuance and delivery of the Shares to the Seller in accordance with this Agreement, such shares will constitute legally and validly authorized and issued, fully paid, and nonassessable shares of Common Stock. At Closing, the Registration Statement shall have been declared effective under the 1933 Act and the Parent shall be in compliance with the undertakings contained in the Registration Statement. 5.3 Duration of Representations and Warranties. All representations and ------------------------------------------ warranties contained in Sections 5.1 and 5.2 shall be deemed restated on and as of the Closing Date. ARTICLE VI CLOSING MATTERS 6.1 Closing. The closing of the transaction contemplated hereby (the ------- "Closing") shall take place at the offices of the Title Company on July 15, 1996 (the "Closing Date") unless Purchaser extended the Inspection Period pursuant to Section 4.5 hereof, in which event the Closing Date shall be July 31, 1996, or such other date as may be mutually agreed by the parties. -20- 6.2 Manner of Closing. The transaction shall be closed with the ----------------- concurrent delivery of the documents of title, transfer of interests, delivery of the title policy described in Section 7.1(e) and the payment of the Purchase Price. 6.3 Survey, Title Commitment and Searches. ------------------------------------- (a) Survey. Purchaser intends to obtain a plat of survey ("Survey") ------ of the Property prepared by a surveyor licensed by the State of Nevada, in conformity with Class A minimum detail requirements and the current standards for Land Title Surveys of the American Title Association and American Congress on Surveying and Mapping and such standards as are required by the Title Insurer as a condition to the removal of any survey exceptions from the Title Commitment, certified to Purchaser, Parent, its lender, if any, and the Title Insurer after the date hereof, showing, without limitation of the foregoing requirements, the following information with respect to the Property: (i) the legal description and boundaries thereof; (ii) the location and street and common addresses of all improvements situated thereon; (iii) the location, course and recording numbers, if applicable, of all water, gas, electric, sewer line and other easements, either visible or recorded, and party walls; (iv) public and private streets, roads, alleys and highways and their common or official names; (v) record and physical access to and from a public road or way; (vi) no encroachments thereon or by any Improvements located thereon on adjacent property; (vii) the amount of gross square feet and net square feet (that is, after deducting the area of that portion of the Property, if any, lying in the existing or proposed right-of-way of a public street or road) contained in the Real Property; (viii) building lines or other restrictions affecting the Property; and (ix) whether any portion of the Property is located in an area designated as being subject to flood hazards or flood risks or wetlands by any agency of the United States of America. -21- (b) Title Commitment. Seller shall deliver to Purchaser, on or before ---------------- June 23, 1996, a title commitment for an ALTA Owner's Insurance Policy issued by the Title Company ("Title Commitment") showing title to the Real Property in the Seller, subject only to the Permitted Exceptions, containing full extended coverage over all general exceptions, a 3.1 zoning endorsement (amended to include parking), location, survey and contiguity endorsements, an endorsement that the real estate tax bills for the Property do not include taxes pertaining to other real estate, and such other endorsements as may be reasonably requested by Purchaser, and dated after the date hereof. Seller shall also deliver full and legible copies of all documents ("Title Papers") referred to in the Title Commitment. (c) Defects. If the Survey, Title Commitment, or UCC, judgment, and ------- tax lien searches on the names of Seller (collectively, "Title Documents") shall reflect any facts that would result in a Title Defect, Seller shall have thirty (30) days from the expiration of the Inspection Period within which to cure or remove the Title Defect. Seller shall be obligated to remove mortgages, deeds of trust and other liens or encumbrances for the payment of money of a definite and ascertainable amount, which the parties agree may be removed by the use of the proceeds of sale at Closing as provided in Section 6.3(d) below. In the alternative, Seller may make arrangements satisfactory to the Title Company for the cure (including insurance over) or removal of record of any such Title Defect. If any such Title Defect is not cured or otherwise provided for as aforesaid on or prior to the thirtieth (30th) day, the Purchaser shall either: (i) terminate this Agreement, in which event (hereinafter referred to as "Election No. 1") the Deposit and all interest earned thereon shall be returned to Purchaser and the parties shall have no further obligation or liability to each other hereunder; or (ii) accept the Title Commitment, Survey, or Searches as is, with the right, however, to deduct the amount of Title Defects represented by liens or encumbrances for the payment of money of a definite or ascertainable amount from the Purchase Price payable at Closing (hereinafter referred to as "Election No. 2"). Title Defects which are acceptable as part of Election No. 2 shall thereupon be deemed to be Permitted Exceptions and Exhibit C shall be amended, if necessary, to include such additional Permitted Exceptions. Election No. 2 shall be made by the Purchaser giving Seller written notice thereof within five (5) days after notice of Seller's inability to cure or remove the Title Defect and in the absence of notice of Election No. 2 within such five (5) day period, Purchaser shall be deemed to have elected Election No. 1. In the event Purchaser elects Election No. 1 and a Title Defect was created or consented to by Seller, Purchaser shall be paid by Seller the actual costs of Purchaser's investigation not to exceed $25,000.00 in addition to recovery of the Deposit. (d) Removal of Liens, etc. If on the Closing Date there shall be any --------------------- Title Defect created to secure the payment of money, then Seller shall either (a) use a portion of the Purchase Price to satisfy the same, provided Seller shall simultaneously either deliver to Purchaser at Closing instruments, in recordable form, sufficient to satisfy such Title Defect of record, together with the cost of recording or filing said instrument; or (b) in the alternative, make arrangements with the Title Company, in advance of Closing, whereby Seller will deposit with the Title Company sufficient monies, acceptable to the Title Company to induce the Title Company to issue the Title Policy to -22- Purchaser, either free of any such Title Defect or with insurance which "insures over" such Title Defect. Purchaser agrees to provide at Closing separate certified checks as requested, to facilitate the satisfaction of any such Title Defects, if request is made within a reasonable time prior to the Closing Date. The existence of any Title Defects capable of satisfaction by the payment of money shall not be deemed to be Title Defects for the purposes of cure periods, as discussed supra in Section 6.3(c), if Seller shall comply with the foregoing ----- requirements. ARTICLE VII CLOSING DELIVERIES 7.1 Seller's Deliveries. At Closing, Seller shall deliver, or cause to be ------------------- delivered to Purchaser, the following, each of which shall be in form and substance reasonably acceptable to counsel for Purchaser and, in the case of documents of transfer or conveyance, shall be accepted or consented to by all parties required to make such transfer or conveyance effective: (a) a recordable grant, bargain, and sale deed from Seller to Purchaser subject only to the Permitted Exceptions; (b) a Bill of Sale, with special covenants of title, transferring to Purchaser all of Seller's right, title and interest in and to each and every item of Fixtures and Tangible Personal Property, Documents, Consumables and Operating Equipment to be transferred hereunder subject only to Permitted Exceptions, and with respect to any vehicles included therein, such separate forms of assignment as are required to be filed with any governmental agency to effect such change in registration of ownership; (c) all of the Bookings, Hotel Contracts, Space Leases, Permits and other tangible Miscellaneous Hotel Assets, together with an Assignment conveying and transferring to Purchaser all of Seller's right, title and interest in, to and under the Bookings, Hotel Contracts, Space Leases, Permits (other than Excluded Permits) and all other Miscellaneous Hotel Assets; (d) the certificates referred to in Section 10.1(b) hereof; (e) a FIRPTA Certificate; (f) evidence of termination of the Employees; (g) the opinion of Seller's counsel as provided by Section 10.1(c); (h) a Non-Compete Agreement substantially in the form of Exhibit R executed by Michael J. Mona, Jr. and Dean O'Bannon; and -23- (i) evidence, satisfactory to Purchaser, of the termination of all management agreements and other management arrangements with respect to the Hotel. 7.2 Purchaser's Deliveries. At the Closing, Purchaser shall cause to be ---------------------- delivered to Seller: (a) the Note; (b) the certificate referred to in Section 9.1(b) hereof; (c) the opinion of Purchaser's counsel as provided by Section 9.1(c); and (d) the written undertaking of Purchaser as provided by Section 9.1(d). 7.3 Concurrent Transactions. All documents or other deliveries required ----------------------- to be made by Purchaser or Seller at Closing, and all transactions required to be consummated concurrently with Closing, shall be deemed to have been delivered and to have been consummated simultaneously with all other transactions and all other deliveries, and no delivery shall be deemed to have been made, and no transaction shall be deemed to have been consummated, until all deliveries required by Purchaser, or its designee, and Seller shall have been made, and all concurrent or other transactions shall have been consummated. 7.4 Further Assurances. Seller and Purchaser will, at the Closing, or at ------------------ any time or from time to time thereafter, upon request of either party, execute such additional instruments, documents or certificates as either party deems reasonably necessary in order to convey, assign and transfer the Property to Purchaser, hereunder. 7.5 Possession. Possession of the Property shall be delivered at Closing. ---------- Subject to the provisions of Section 17.1(e), Excluded Assets (other than any thereof under leases to be assumed by Purchaser) shall be removed from the Hotel by Seller, at its expense, on or before the Closing Date. Seller, at its expense shall make all repairs necessitated by such removal but shall have no obligation to replace any Excluded Asset so removed. ARTICLE VIII ADJUSTMENTS AND PRORATIONS 8.1 Adjustments and Prorations. The following matters and items shall be -------------------------- apportioned between the parties hereto or, where appropriate, credited in total to a particular party, as of the Cut-off Time as provided below: -24- (a) Down Payments for Reservations. Any pre-closing down payments ------------------------------ made to Seller on confirmed reservations for dates after the Closing Date will be credited to Purchaser as of the Closing. Any post-closing down payments made to Seller on confirmed reservations for dates after the Closing Date will be forwarded to Purchaser upon receipt. (b) Taxes and Assessments. All ad valorem taxes, special or general --------------------- assessments, personal property taxes, attorneys' fees directly related to the reduction of taxes or assessments, water and sewer rents, rates and charges, vault charges, canopy permit fees, and other municipal permit fees. If the amount of any such item is not ascertainable on the date the proration schedule is completed pursuant to Section 8.3, the credit therefor shall be based on one hundred percent (100%) of the most recent available bill and shall be reprorated upon receipt of the actual tax bill. Notwithstanding the above, special real property tax assessments for which the work is substantially completed as of the Closing Date shall be paid by Seller. (c) Utility Contracts. Telephone and telex contracts and contracts ----------------- for the supply of heat, steam, electric power, gas, lighting and any other utility service, with Seller receiving a credit for each deposit, if any, made by Seller as security under any such public service contracts if the same is transferable and provided such deposit remains on deposit for the benefit of Purchaser. Where possible, cut-off readings will be secured for all utilities on the Closing Date. (d) Hotel Contracts and Space Leases. Any amounts prepaid or payable -------------------------------- under any Hotel Contracts and Space Leases shall be apportioned between the parties. Any percentage rentals under Space Leases shall be prorated on the basis of the ratio of the number of days expired before Closing to the number of days after Closing, for the current percentage rent period of the Space Lease. All security deposits held by Seller shall be transferred to Purchaser and all obligations with respect to such security deposits shall be assumed by Purchaser. (e) License Fees. Fees paid or payable for Permits (other than ------------ Excluded Permits) shall be apportioned between the parties. (f) Hotel Matters. ------------- (i) Advance payments, if any, under Bookings for Hotel facilities (which shall include prepaid amounts by current guests); (ii) Coin machine, telephone, washroom and checkroom income; and (iii) Commissions to credit and referral organizations. -25- (g) Employment Arrangements. Seller shall be responsible for, and ----------------------- shall pay when due, all Compensation of Employees. Purchaser assumes no Employment Arrangements or other obligation with respect to any Employee Benefits, all of which, together with any sums due any Employee as a consequence of the termination of his employment, shall be the responsibility of Seller. (h) Consumable Items. The cost of any Consumables or Operating ---------------- Equipment which are at a level below the level required to be maintained under this Agreement shall be credited to Purchaser. (i) Other. Such other items as are provided for in this Agreement or ----- as are normally prorated and adjusted in the sale of a hotel, including without limitation, all petty cash funds and cash in house banks, and all deposits and prepaid items which inure to the benefit of the Purchaser. 8.2 Receivables. Purchaser is not purchasing any of the receivables of ----------- the Hotel and Seller shall be solely responsible for the collection of accounts receivable arising prior to the Closing Date. If Purchaser shall receive any payment made on any unpurchased accounts receivable within ninety (90) days after the Closing Date, it shall promptly remit such payment to Seller. With regard to any collection made from any person or entity who is indebted to the Hotel both with respect to accounts receivable accruing prior to the Closing Date and to the accounts receivable accruing subsequent to the Closing Date, such collection shall be applied as designated by the payor, but if there is no designation, then any such collections received within ninety (90) days after the Closing Date shall be applied first to the indebtedness accrued prior to the Closing Date, but thereafter, any such collections shall be applied first to the payment in full of any amounts due to Purchaser on accounts accruing subsequent to the Closing Date. 8.3 Proration Schedule. ------------------ (a) Preparation and Review. A schedule setting forth the adjustments ---------------------- and prorations to be made pursuant to Section 8.1 above shall be prepared by Purchaser and forwarded to Seller within thirty (30) days after the Closing Date. Seller shall be afforded the opportunity to review all work papers and computations used by Purchaser in the preparation of the adjustments and prorations. The schedule as delivered shall be deemed accepted by Seller except to the extent, if any, that Seller, within ten (10) days after the date of delivery thereof to Seller, has delivered a written notice to Purchaser stating any exceptions Seller may have to such schedule. If within such period Seller shall give written notice to Purchaser of any exceptions to the schedule as delivered by Purchaser, the parties shall attempt to resolve all of the exceptions. To the extent that any such exceptions are not resolved within fifteen (15) days after the delivery to Purchaser of Seller's exceptions to the schedule, such differences shall be submitted as soon as practicable thereafter to such "Big Six" accounting firm upon which the parties shall agree, for final determination thereof. If the parties are not able to agree upon an accounting firm, each shall designate a "Big Six" -26- accounting firm and give written notice to the other of the name and address of the firm so designated. The two firms shall consult with each other and, if possible, determine the exceptions in question by mutual agreement, and their determination so agreed upon, if certified to the parties prior to their reaching agreement independently of arbitration, shall be final and conclusive. If the two firms are not able to agree upon the exceptions in question, they jointly shall designate a third firm whose determination concerning the exceptions shall be final and conclusive, if certified to the parties prior to their reaching agreement independent of arbitration. Any determination by such accounting firm(s) as to the proper determination of any such item submitted to it for determination shall be conclusive and binding upon the parties for purposes of this Agreement. Seller and Purchaser shall each pay one-half of such fees charged by such accounting firm(s) in connection with any matter submitted to it hereunder. (b) Payment of Adjustments. The net amount due pursuant to the ---------------------- adjustments and prorations made as required by this Section 8.3 shall be paid by cash or bank cashier's check payable in immediately available funds in United States currency to the order of the party to whom the same shall be due upon final determination of the adjustments and prorations required hereunder. Seller agrees that prior to the time that payment is made pursuant to Section 8.3(b), it shall not make final liquidating distributions. (c) Period for Recalculation. Notwithstanding the foregoing, if at ------------------------ any time within six (6) months following the Closing Date, either party discovers any items which should have been included in the prorations but were omitted therefrom, then such items shall be adjusted in the same manner as if their existence had been known at the time of the preparation of the prorations. The foregoing limitations shall not apply to any items which, by their nature, cannot be finally determined within the periods specified. ARTICLE IX CONDITIONS TO SELLER'S OBLIGATIONS 9.1 Conditions. Seller's obligation to close hereunder shall be subject ---------- to the occurrence of each of the following conditions, any one or more of which may be waived by Seller in writing: (a) Purchaser's Compliance with Obligations. Purchaser shall have --------------------------------------- complied with all obligations required by this Agreement to be complied with by Purchaser. (b) Truth of Purchaser's Representations and Warranties. The --------------------------------------------------- representations and warranties of Purchaser contained in Section 5.2 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Seller shall have received a certificate to that effect signed by an authorized agent of Purchaser. -27- (c) Opinion of Purchaser's Counsel. Purchaser shall have delivered to ------------------------------ Seller a favorable written opinion of Pedersen & Houpt in connection with this transaction, dated the Closing Date, as to (i) the power and authority of Purchaser to execute and deliver this Agreement, (ii) the due authorization, execution and delivery by Purchaser of this Agreement, and (iii) the legality, validity and, as to Purchaser, the binding effect of this Agreement (subject to the effect of bankruptcy and similar laws affecting the enforcement of creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Opinion of Purchaser's Securities Counsel. Purchaser shall have ----------------------------------------- delivered to Seller the written undertaking of Purchaser to provide to Seller the favorable written opinion of Bell, Boyd & Lloyd, dated at the time of each Approved Sale, that such Approved Sale complies or will comply with the requirements of this Agreement, the 1933 Act and any state blue sky or other securities laws applicable to the Approved Sale. (e) Delivery of Current Prospectus. Seller shall have received ------------------------------ Parent's current, effective prospectus that does not reflect any material adverse change from the prospectus of Parent dated June 17, 1996. 9.2 Failure of Conditions. If any of the conditions enumerated in Section --------------------- 9.1 are not fulfilled and, as a consequence thereof, Seller elects to terminate this Agreement, such failure shall be deemed a default by Purchaser hereunder and the consequences thereof shall be governed by the provisions of Section 3.2. ARTICLE X CONDITIONS TO PURCHASER'S OBLIGATIONS 10.1 Conditions. Purchaser's obligation to close hereunder shall be ---------- subject to the occurrence of each of the following conditions, any one or more of which may be waived by Purchaser in writing: (a) Seller's Compliance with Obligations. Seller shall have complied ------------------------------------ with all obligations required by this Agreement to be complied with by Seller. (b) Truth of Seller's Representations and Warranties. The ------------------------------------------------ representations and warranties of Seller contained in Section 5.1 were true in all material respects when made, and are true in all material respects on the Closing Date (or any deferred Closing Date), and Purchaser shall have received a certificate to that effect signed by an authorized agent of Seller. (c) Opinion of Seller's Counsel. There shall have been delivered to --------------------------- Purchaser a favorable opinion of Jones, Jones, Close & Brown, counsel to Seller in connection with this transaction, dated the Closing Date as to (i) the power and authority of Seller to execute and deliver -28- this Agreement; (ii) the due authorization, execution and delivery by Seller of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof; and (iii) the legality, validity and, as to Seller, the binding effect of this Agreement and all other documents required to be executed and delivered by Seller pursuant to Section 7.1 hereof (subject in each case to the effect of bankruptcy and similar laws affecting creditors' rights generally and to the discretion of a court of equity to enforce equitable remedies). (d) Estoppel Certificates--Hotel Contracts. Purchaser shall notify -------------------------------------- Seller, in writing at least thirty (30) days prior to the Closing Date, of the Material Contracts for which Purchaser requires estoppel certificates. Each of said estoppel certificates shall be in writing from the parties to such Material Contract stating that such Material Contract is in full force and effect, has not been amended or modified except as therein indicated, that such party consents to the assignment to Purchaser and that no party is then in default under such Material Contract (or if any default is known to exist, or would arise with the giving of notice or the passage of time, stating the nature of such default). The estoppel certificates herein referred to shall be in form and substance reasonably satisfactory to Purchaser and dated not more than thirty (30) days prior to the Closing Date. (e) No Pending Adverse Litigation. On the Closing Date, there shall ----------------------------- not then be pending or, to the knowledge of either Purchaser or Seller, threatened, any litigation, administrative proceeding, investigation or other form of governmental enforcement, or executive or legislative proceeding which, if determined adversely, would restrain the consummation of any of the transactions herein referred to, declare illegal, invalid or non-binding any of the covenants or obligations of the parties herein, or have a material and adverse effect on the operations or cash flow of the Hotel, or materially and adversely affect the value of the Property or the ability of Purchaser, after the Closing, to operate the Hotel in the manner contemplated hereby, other than those matters previously disclosed and approved by Purchaser. (f) Related Transaction. The transactions contemplated by the certain ------------------- Agreement to Purchase Hotel of even date herewith by and between St. Louis Manor, Inc. and ESA Properties, Inc. shall have been consummated. (g) Title Policy. Purchaser shall have received an ALTA Owner's ------------ Insurance Policy issued by the Title Company in exact conformity with the Title Commitment in favor of Purchaser, in the amount of the Purchase Price, showing good and marketable fee simple title in the Real Property to be vested in Purchaser, subject only to Permitted Exceptions (the "Title Policy"). 10.2 Failure of Conditions. If any of the conditions enumerated in --------------------- subsections (d) and (e), of Section 10.1 are not fulfilled, then the sole remedy of Purchaser shall be to terminate this Agreement (whereupon the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability hereunder), unless the failure to fulfill such condition constitutes, or results from, either (i) a material breach of an express representation or -29- warranty made by Seller hereunder, or (ii) a material default of an express covenant made by Seller hereunder, in which event Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. If any of the conditions enumerated in subsections (a), (b) and (c) of Section 10.1 are not fulfilled and, as a consequence thereof, Purchaser elects to terminate this Agreement, such failure shall be deemed a default by Seller hereunder, the Deposit and all interest earned thereon referred to in Section 3.2 shall be promptly returned to Purchaser, and Purchaser shall be entitled to pursue against Seller any and all remedies available to Purchaser, at law or in equity. ARTICLE XI ACTIONS AND OPERATIONS PENDING CLOSING 11.1 Actions and Operations Pending Closing. Seller agrees that after the -------------------------------------- expiration of the Inspection Period and until the Closing Date: (a) The Hotel will continue to be operated and maintained substantially in accordance with present standards. (b) Seller will not enter into any new Material Contract or Space Lease, or cancel, modify or renew any existing Material Contract or Space Lease, without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. If Purchaser fails to respond to a request for consent within 15 business days after receipt of such request, such consent shall be deemed given. (c) Seller shall have the right, without notice to or consent of Purchaser, to make Bookings in the ordinary course of business, at no less than the Hotel's standard rates including customary discounted rates. Additionally, Seller agrees to entertain in good faith Purchaser's suggestions relating to the policy of the Hotel with respect to future Bookings and extension of credit. (d) Seller shall use commercially reasonable efforts to preserve in force all existing Permits and to cause all those expiring to be renewed prior to the Closing Date. If any such Permit shall be suspended or revoked, Seller shall promptly so notify Purchaser and shall take all measures necessary to cause the reinstatement of such Permit without any additional limitation or condition. (e) Seller shall notify Purchaser promptly if Seller becomes aware of any transaction or occurrence prior to the Closing Date which would make any of the representations or warranties of Seller contained in Section 5.1 not true in any material respect. (f) Seller will maintain in effect, all policies of casualty and liability insurance, -30- or similar policies of insurance, with the same limits of coverage which it now carries with respect to the Hotel. (g) Seller will not dispose of any of the Property, except in the ordinary course of business and in accordance with this Agreement. (h) Seller shall allow Purchaser and its agents or representatives to inspect the Property, and all books and records relating thereto, at such times as Purchaser may reasonably request, provided such inspection does not unreasonably interfere with the continued operation of the Hotel in the ordinary course of business. Purchaser shall also have the right to have, and Seller shall provide accommodations for, a full-time on-site representative to observe the operations of the Hotel. Such accommodations shall be rent-free except for those nights when all other guest rooms at the Hotel are fully occupied, in which event Purchaser shall reimburse Seller for such nights at the Hotel's lowest corporate rate for such accommodations. Purchaser agrees that the results of all such observations will be treated as confidential, and Purchaser shall not disclose the same to any other person or entity except for Purchaser's counsel, accountants, and other agents or representatives consulted in connection with the acquisition of the Hotel. In the event that the sale is not consummated, any and all Documents, reports, financial and operating information obtained by Purchaser or its representatives shall be returned to the Seller. ARTICLE XII CASUALTIES AND TAKINGS 12.1 Casualties. ---------- (a) If any damage to the Property shall occur prior to the Closing Date by reason of fire, windstorm, hail, explosion or other casualty, and if, in Purchaser's reasonable judgment, the cost of repairing such damage will exceed Fifty Thousand Dollars ($50,000.00), Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any insurance proceeds (including business interruption proceeds) relating to such damage and acquire the Property without any adjustment in the purchase price provided that, in such latter event, Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. (b) If, in the reasonable business judgment of the insurance adjuster or other representative of the insurer of the Property, the cost of repairing such damage will not exceed Fifty Thousand Dollars ($50,000.00), the transactions contemplated hereby shall close without any adjustment in the Purchase Price, Purchaser shall receive an assignment of all of Seller's rights to -31- any insurance proceeds (including business interruption proceeds), and Seller shall pay to Purchaser the amount of any deductible under applicable insurance policies. 12.2 Takings. In the event of the actual or threatened taking (either ------- temporary or permanent) in any condemnation proceedings by exercise of right of eminent domain, of all or any part of the Real Property, between the date hereof and the Closing Date, and if, in Purchaser's reasonable judgment, such taking will result in the inability to conduct the operations of the Hotel substantially in accordance with the present standards, Purchaser may elect to: (i) terminate this Agreement by giving written notice to Seller, in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligations or liability whatsoever to the other hereunder or (ii) receive an assignment of all of Seller's rights to any condemnation award relating to such taking and acquire the Property without any adjustment in the Purchase Price. ARTICLE XIII EMPLOYEES 13.1 Employees, Compensation and Indemnification. Purchaser shall have the ------------------------------------------- continuing right to review all employment records and files of, and to interview, Employees. Seller shall terminate its employer-employee relationship with all Employees as of the Cut-off Time. Seller shall be solely responsible for all Compensation and other liabilities with respect to Employees and liabilities and obligations to Employees pursuant to any Employment Arrangement. Purchaser shall not be responsible for any such liability or obligations and Seller agrees to indemnify and hold Purchaser harmless from and against any such liability or obligations. All Compensation, obligations, liabilities and claims (including any under the Fair Labor Standards Act) to or by any Employee of Seller arising or occurring prior to the Cut-off Time shall be the responsibility of Seller. Purchaser shall not be responsible for any Compensation thereof and Seller agrees to indemnify and hold Purchaser harmless from and against same. Purchaser shall not assume or be liable upon any Employment Arrangement of Seller. ARTICLE XIV INDEMNITIES 14.1 Seller's Indemnity. Mona and O'Bannon agree jointly and severally, to ------------------ indemnify, defend (with Purchaser having the right to retain counsel for the purpose of participating in such defense, at its sole cost and expense) and hold Purchaser harmless against and with respect to the following: (a) any and all obligations, liabilities, claims, accounts, demands, liens or encumbrances, whether direct or contingent and no matter how arising ("Indemnifiable Damages"), in any way related to the Property and arising or accruing on or before the Closing Date (including, -32- but not limited to, any damage to property or injury to or death of any person); without limitation on the generality of the foregoing, Mona and O'Bannon indemnify Purchaser from any claim or judgment under any lawsuit or proceeding filed or pending prior to the Closing Date against the Property, or any part thereof, and any costs or expenses (including reasonable attorneys' fees) heretofore or hereafter incurred in connection with any such lawsuit or proceeding; (b) any loss or damage to Purchaser resulting from any inaccuracy in or breach of any representation or warranty of Seller or resulting from any breach or default by Seller of any obligation of Seller under this Agreement; and (c) all costs and expenses, including reasonable attorneys' fees, related to any actions, suits or judgments incident to any of the foregoing. 14.2 Purchaser's Indemnity. Purchaser agrees to indemnify, defend (with --------------------- Seller having the right to retain counsel for the purpose of participating in such defense, at its sole cost and expense), and hold Seller harmless against and with respect to the following: (a) any loss or damage to Seller, subsequent to the Closing Date, resulting from any inaccuracy in or breach of any representation or warranty of Purchaser under this Agreement; (b) any injury to person or property causing any loss or damage to Seller resulting from or arising out of work performed by Purchaser pursuant to Section 11.1(h) hereof; (c) any and all Indemnifiable Damages in any way related to the Property and arising or accruing after the Closing Date (including, but not limited to, any damage to property or injury to or death of any person); and (d) all costs and expenses, including reasonable attorney's fees, related to any actions, suits or judgments incident to any of the foregoing. 14.3 Notice of Claims. Seller and Purchaser, as applicable, shall promptly ---------------- notify the other in the event any claim is made against Seller or Purchaser as to which the other party has agreed to indemnify and the indemnitor shall thereupon undertake to defend and hold the indemnitee saved and harmless therefrom. ARTICLE XV SECURITIES LAW MATTERS 15.1 Disposition of Shares. The Seller represents and warrants that the --------------------- Shares are being acquired and will be acquired for its own account and will not be sold or otherwise disposed of except pursuant to (i) the provisions of Rule 145(d) under the 1933 Act, as in effect at the time of sale, (ii) some other exemption or exclusion from the registration requirements under the 1933 Act, -33- which does not require the filing by the Parent with the SEC of any registration statement, offering circular, or other document, in which case the Seller shall first supply to the Parent an opinion of counsel (which opinion and counsel shall be satisfactory to the Parent) that such exemption or exclusion is available, or (iii) the Registration Statement provided that (a) sales pursuant to the Registration Statement are made to or through a broker, dealer, or market maker, (b) in connection with such sales, the Seller delivers a copy of a current Prospectus forming a part of the Registration Statement which prospectus identifies the Seller as being able to use such Prospectus to make resales in the public market of Shares acquired pursuant to this Agreement, and (c) the Seller notifies the Parent in writing at least five business days prior to the first day the Seller intends to execute a sale transaction of the Shares pursuant to the Registration Statement and the Parent consents in writing to such sale. The Seller hereby acknowledges that the Parent is entitled in its absolute discretion to withhold such consent if, and for such period of time as, in the opinion of the management of the Parent, (i) securities laws applicable to such sale of Shares by the Seller pursuant to the Registration Statement would require the Parent to disclose material non-public information, or (ii) such sale would occur during (a) the measurement period for determining the amount of Common Stock or other consideration, the amount of which will be based on the price of the Common Stock, to be paid in connection with the acquisition of a business or assets to which the Parent or any of its subsidiaries is a party or (b) the marketing period of an offering of securities of the Parent. 15.2 Acknowledgment of Restrictions. The Seller acknowledges that, under ------------------------------ current SEC interpretations of Rule 145, the Seller is subject to restrictions on transfer of the Shares for a period of two years following the Closing Date and that an exemption from the requirement to register the Shares for public resale is provided by Rule 145(d). 15.3 Evidence of Compliance. The Seller further covenants and agrees that ---------------------- the Parent will be supplied with such written evidence of compliance by it and its broker with Rule 145(d) as in effect at the time of any sale by it pursuant thereto, as the Parent may reasonably request. 15.4 Legend. The Seller agrees that the certificates for the Shares ------ received shall bear the following legend: The Shares represented by this certificate are subject to the provisions of Rule 145(d) promulgated under the Securities Act of 1933, and may not be transferred or disposed of by the holder without compliance with said Rule unless registered under said Act or pursuant to another applicable exemption from the requirements of said Act. and that the Parent may place stop transfer orders with its transfer agents with respect to such certificates. The appropriate portions of the legend will be removed at such time or times as the Seller may reasonably request if at the time of such request the Seller is not an Affiliate (as defined in the 1933 Act) of the Parent, upon the expiration of the two-year holding period provided in Rule 145(d). -34- ARTICLE XVI NOTICES 16.1 Notices. Except as otherwise provided in this Agreement, all notices, ------- demands, requests, consents, approvals and other communications (herein collectively called "Notices") required or permitted to be given hereunder, or which are to be given with respect to this Agreement, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by overnight express courier, postage prepaid, addressed to the party to be so notified as follows: If intended for Seller, to: Mr. Michael J. Mona, Jr. M&M Development 1785 E. Sahara, Suite 315 Las Vegas, Nevada 89104 Copies to: Jones, Jones, Close & Brown 3773 Howard Hughes Parkway Third Floor South Las Vegas, Nevada 89109 Attn: Ms. Jodi R. Goodheart If intended for Extended Stay America, Inc. Purchaser, to: 500 East Broward Blvd., #950 Ft. Lauderdale, Florida 33394 Attn: Mr. Robert A. Brannon Copies to: Pedersen & Houpt 161 North Clark, Suite 3100 Chicago, Illinois 60601 Attn: Mr. Michael W. Black Notice mailed by registered or certified mail shall be deemed received by the addressee three (3) days after mailing thereof. Notice personally delivered shall be deemed received when delivered. Notice mailed by overnight express courier shall be deemed received by the addressee two (2) days after mailing thereof. Either party may at any time change the address for notice to such party by mailing a Notice as aforesaid. -35- ARTICLE XVII ADDITIONAL COVENANTS 17.1 Additional Covenants. In addition, the parties agree as follows: -------------------- (a) Expenses. Seller shall be responsible for the payment of all -------- sales and use taxes and fifty percent (50%) of all transfer taxes. Purchaser shall be responsible for the payment of all recording fees, fifty percent (50%) of all transfer taxes, all escrow fees, all costs of the Survey, and all title insurance premiums and charges for the issuance of the Title Policy and all other closing charges. The fees and expenses of Seller's designated representatives, accountants and attorneys shall be borne by Seller, and the fees and expenses of Purchaser's designated representatives, accountants and attorneys shall be borne by Purchaser. (b) Brokerage. Seller and Purchaser each hereby represent and warrant --------- to the other that neither has dealt with any broker or finder in connection with the transaction contemplated hereby, and each hereby agrees to indemnify, defend and hold the other harmless against and from any and all manner of claims, liabilities, loss, damage, attorneys' fees and expenses, incurred by either party and arising out of, or resulting from, any claim by any such broker or finder in contravention of its representation and warranty herein contained. (c) Guest Baggage. All baggage of guests who are still in the Hotel ------------- on the Closing Date, which has been checked with or left in the care of Seller shall be inventoried, sealed, and tagged jointly by Seller and Purchaser on the Closing Date. Purchaser hereby indemnifies Seller against any claims, losses or liabilities in connection with such baggage arising out of the acts or omissions of Purchaser after the Closing Date. Seller hereby indemnifies Purchaser against any claim, losses or liabilities with respect to such baggage arising out of the acts or omissions of Seller prior to the Closing Date. (d) Safe Deposits. Immediately after the Closing, Seller shall send ------------- written notice to guests or tenants or other persons who have safe deposit boxes, advising of the sale of the Hotel to Purchaser and requesting immediate removal of the contents thereof or the removal thereof and concurrent re-deposit of such contents pursuant to new safe deposit agreements with Purchaser. Seller, at its own expense, shall have a representative present when the boxes are opened, in the presence of a representative of the Purchaser. Purchaser shall not be liable or responsible for any items claimed to have been in such boxes unless such items are so removed and re-deposited, and Seller agrees to indemnify and hold harmless Purchaser from and against any such liability or responsibility. (e) Books and Records. The transaction contemplated hereby shall not ----------------- include the books and records of Seller pertaining strictly to the business of the Hotel. Seller covenants and agrees that such books and records will remain in the control of M&M Development for examination -36- and audit by Purchaser and its agents after the Closing as provided in this clause (e). Seller agrees to preserve all books and records, files and correspondence, for at least five (5) years after the Closing Date, and not to destroy or dispose of the same, for at least five (5) years after the Closing Date. Seller agrees to provide access to Purchaser and its representatives, to such books, records, files and correspondence at all reasonable times. (f) Hart-Scott-Rodino Act. If it shall be determined that the within --------------------- transaction is subject to the reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. (S)18(a) (1976) (the "Act"), then notwithstanding anything to the contrary contained in Section 10.1(e) hereof, each party shall forthwith proceed to make the necessary filings, and take all other actions necessary to comply with the Act and the rules and regulations thereunder. If such requirements have not been fulfilled by the Closing Date, then the Closing Date shall be adjourned until such requirements have been fulfilled, but not more than sixty (60) days. If such requirements have not been fulfilled prior to the expiration of such sixty (60) day period, Seller or Purchaser, by notice to the other, may terminate this Agreement in which event the Deposit and all interest earned thereon shall be returned to Purchaser and neither party shall have any further obligation or liability to the other party hereunder. (g) Survival of Covenants, etc. The representations, warranties, --------------------------- obligations, covenants, agreements, undertakings and indemnifications of Seller and Purchaser contained herein shall survive the Closing for a period of two (2) years except that (i) the representation and warranty made by Seller in Section 5.1(i) shall expire at the time the period of limitations (including any extensions thereof pursuant to the delivery of waivers of the applicable period of limitations) expires for the assessment by the taxing authority of additional taxes with respect to which the representation and warranty relate; and (ii) the representation and warranty made by Purchaser in Section 3.4(d) shall not expire. All claims for indemnification must be made within the aforementioned periods. (h) Purchaser's Investigation and Inspections. Any investigation or ----------------------------------------- inspection conducted by Purchaser, or any agent or representative of Purchaser, pursuant to this Agreement, in order to verify independently Seller's satisfaction of any conditions precedent to Purchaser's obligations hereunder or to determine whether Seller's warranties are true and accurate, shall not or constitute a waiver by Purchaser of any of Seller's obligations hereunder or Purchaser's reliance thereon. (i) Construction. This Agreement shall not be construed more strictly ------------ against one party than against the other, merely by virtue of the fact that it may have been prepared primarily by counsel for one of the parties, it being recognized that both Purchaser and Seller have contributed substantially and materially to the preparation of this Agreement. (j) Publicity. All notice to third parties and all other publicity --------- concerning the transactions contemplated hereby shall be jointly planned and coordinated by and between Purchaser and Seller. None of the parties shall act unilaterally in this regard without the prior written approval -37- of the other; however, this approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Purchaser (or Parent) may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning Parent's publicly traded securities; Purchaser agrees to give Seller notice of any such public disclosure. (k) General. This Agreement may be executed in any number of ------- counterparts, each of which shall constitute an original but all of which, taken together, shall constitute but one and the same instrument. This Agreement (including all exhibits hereto) contains the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior understandings, if any, with respect thereto and may not be amended, supplemented or terminated, nor shall any obligation hereunder or condition hereof be deemed waived, except by a written instrument to such effect signed by the party to be charged. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. The warranties, representations, agreements and undertakings contained herein shall not be deemed to have been made for the benefit of any person or entity, other than the parties hereto and their permitted successors and assigns. Seller has no right to assign its rights (except as set forth in (m) below) or to delegate its duties hereunder. Purchaser may assign its rights and duties under this Agreement to any of its Affiliates. Captions used herein are for convenience only and shall not be used to construe the meaning of any part of this Agreement. (l) FIRPTA. Seller agrees to furnish Purchaser with an executed ------- Certification in the form attached hereto as Exhibit Q ("FIRPTA Certificate"), and such other evidence as Purchaser may reasonably request, to establish that Seller is not a foreign person for the purpose of Section 1445 of the Internal Revenue Code of 1986, as amended ("Section 1445"). In the event that Seller does not furnish such Certification or a qualifying statement for the U.S. Treasury Department that the transaction is exempt from the withholding requirements of Section 1445, Seller agrees that Purchaser shall be directed to pay such amount required by law to the Internal Revenue Service in accordance with the laws and regulations regarding the withholding requirements of Section 1445. (m) Like-Kind Exchange. Seller shall have the right, at Seller's ------------------ option, to sell the Property to Purchaser through a transaction that is structured to qualify as a like-kind exchange of property within the meaning of Section 1031 of the Internal Revenue Code of 1986 ("Code"). Purchaser agrees to reasonably cooperate with Seller in effecting a qualifying like-kind exchange through a trust, escrow or other means as determined by Seller, provided, however, Purchaser shall not be required to incur any obligation or liability to a third party as a part of the exchange. In any event Seller shall have the right to assign its rights under this contract, in whole or in part, to a qualified intermediary (as defined under current Code regulations governing like-kind exchanges) or as otherwise necessary or appropriate to effectuate a like-kind exchange, provided that Seller shall remain liable for its obligations hereunder (and that Michael J. Mona, Jr. shall remain liable pursuant to his guaranty as hereinafter set forth) and Seller (and Michael J. Mona) shall execute such additional documentation as Purchaser may reasonably request to evidence such continuing liability. Seller shall bear the additional transaction costs and all costs and expenses incurred by Purchaser and attributable to -38- exchange procedures in this transaction that are requested or implemented by Seller. Seller shall be solely responsible for assuring the effectiveness of the exchange for Seller's tax purposes. In no event shall any like-kind exchange contemplated by this provision cause an extension of the date of closing set forth herein nor shall Purchaser be required to take title to any property other than the Property. (n) Jurisdiction. Any action or proceeding seeking to enforce any ------------ provision of, or based on any right arising out of, this Agreement shall be brought against any of the parties in the courts of the State of Nevada, County of Clark, or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. -39- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: /s/ Michael J. Mona, Jr. ----------------------------------------------- Michael J. Mona, Jr. /s/ Dean O'Bannon ----------------------------------------------- Dean O'Bannon PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By:____________________________________________ Robert A. Brannon, Vice President Attest:________________________________________ Its:___________________________________________ -40- IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. SELLER: ST. LOUIS MANOR, INC., a Nevade corporation By:__________________________________________ Michael J. Mona, Jr., President Attest:______________________________________ Its:_________________________________________ PURCHASER: ESA PROPERTIES, INC., a Delaware corporation By:/s/ Robert A. Brannon ------------------------------------------ Robert A. Brannon, Vice President Attest:/s/ Robert A. Brannon --------------------------------------------- Its: Secretary ----------------------------------------- The under hereby guaranties the collection by Purchaser of all amounts due from seller pursuant to the terms hereof. /s/ Michael J. Mona, Jr. --------------------------------------------- Michael J. Mona, Jr. President -40- SECURED PROMISSORY NOTE $9,100,000 JULY 1, 1996 FOR VALUE RECEIVED, the undersigned, EXTENDED STAY AMERICA, INC., a Delaware corporation (the "MAKER"), hereby promises to pay to the order of Southwest Exchange Corporation, a Nevada corporation, under Exchange Agreement dated 6/28/96, Account Number 96-333-TRF (the "PAYEE"), the principal sum of Nine Million One Hundred Thousand Dollars ($9,100,000.00), with interest thereon from the date hereof accruing at the rate of ten percent (10%) per annum. The principal amount plus interest shall be due and payable on or before July 23, 1996 (the "MATURITY DATE") to Payee in the lawful money of the United States at 2920 North Green Valley Parkway, Suite 814, Henderson, Nevada 89014, or such other place as Payee may direct. This Note is executed and delivered in connection with and is subject to the terms and conditions of a certain Agreement to Purchase Hotel by and between Maker's affiliate, ESA 0859, Inc., a Nevada corporation (by assignment from ESA properties, Inc.) and Boulder Manor, Inc., a Nevada corporation (the "CORPORATION"), dated as of June 25, 1996 (the "AGREEMENT"), with respect to the purchase and sale of all of the Corporation's right, title and interest in and to the Property (as defined in the Agreement). This Note is secured by a Security Agreement executed by Maker, as Debtor, in favor of Payee, as Secured Party, of even date herewith (the "SECURITY AGREEMENT") and given in connection with the indebtedness evidenced hereby. An event of default hereunder shall be the failure of Maker to pay principal when due, or to timely perform any other obligation of Maker hereunder or under the Security Agreement or any other agreement or document which secures this Note. In the event of default under this Note, interest shall be payable on the whole of the sum outstanding at the rate of fifteen percent (15%) per annum for the duration of such default, whether or not the Payee has exercised its option to accelerate the maturity of this Note and declare the entire unpaid principal indebtedness due and payable. Maker and all others who may become liable for the payment of the obligations described herein do hereby severally waive presentment for payments, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the Payee hereof, without in any way affecting the liability of each. Maker agrees that the Payee hereof may release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Maker promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof, including, but not limited to, reasonable attorneys' fees, and, in the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable. If any term, provision, covenant or condition of this Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall not in any way be affected, impaired or invalidated thereby. 1 The laws of the State of Nevada shall govern the validity, performance and enforcement of this Note. In any action brought under or arising out of this Note, each obligor hereby consents to the application of Nevada law, to the jurisdiction of any competent court within the State of Nevada, and to service of process by any means authorized by Nevada law. Time is of the essence hereof. IN WITNESS WHEREOF, the undersigned has executed this Secured Promissory Note as of the day and year first above written. EXTENDED STAY AMERICA, INC., a Delaware corporation By:__________________________________________ Robert A. Brannon, Vice President 2 SECURED PROMISSORY NOTE $14,000,000 JULY 1, 1996 FOR VALUE RECEIVED, the undersigned, EXTENDED STAY AMERICA, INC., a Delaware corporation (the "MAKER"), hereby promises to pay to the order of Southwest Exchange Corporation, a Nevada corporation, under Exchange Agreement dated 6/28/96, Account Number 96-336-TRF (the "PAYEE"), the principal sum of Fourteen Million Dollars ($14,000,000.00), with interest thereon from the date hereof accruing at the rate of ten percent (10%) per annum. The principal amount plus interest shall be due and payable on or before July 23, 1996 (the "MATURITY DATE") to Payee in the lawful money of the United States at 2920 North Green Valley Parkway, Suite 814, Henderson, Nevada 89014, or such other place as Payee may direct. This Note is executed and delivered in connection with and is subject to the terms and conditions of a certain Agreement to Purchase Hotel by and between Maker's affiliate, ESA 0860, Inc., a Nevada corporation (by assignment from ESA Properties, Inc.) and Melrose Suites, Inc., a Nevada corporation (the "CORPORATION"), dated as of June 25, 1996 (the "AGREEMENT"), with respect to the purchase and sale of all of the Corporation's right, title and interest in and to the Property (as defined in the Agreement). This Note is secured by a Security Agreement executed by Maker, as Debtor, in favor of Payee, as Secured Party, of even date herewith (the "SECURITY AGREEMENT") and given in connection with the indebtedness evidenced hereby. An event of default hereunder shall be the failure of Maker to pay principal when due, or to timely perform any other obligation of Maker hereunder or under the Security Agreement or any other agreement or document which secures this Note. In the event of default under this Note, interest shall be payable on the whole of the sum outstanding at the rate of fifteen percent (15%) per annum for the duration of such default, whether or not the Payee has exercised its option to accelerate the maturity of this Note and declare the entire unpaid principal indebtedness due and payable. Maker and all others who may become liable for the payment of the obligations described herein do hereby severally waive presentment for payment, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the Payee hereof, without in any way affecting the liability of each. Maker agrees that the Payee hereof may release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Maker promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof, including, but not limited to, reasonable attorneys' fees, and, in the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable. If any term, provision, covenant or condition of this Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall not in any way be affected, impaired or invalidated thereby. 1 The laws of the State of Nevada shall govern the validity, performance and enforcement of this Note. In any action brought under or arising out of this Note, each obligor hereby consents to the application of Nevada law, to the jurisdiction of any competent court within the State of Nevada, and to service of process by any means authorized by Nevada law. Time is of the essence hereof. IN WITNESS WHEREOF, the undersigned has executed this Secured Promissory Note as of the day and year first above written. EXTENDED STAY AMERICA, INC., a Delaware corporation By:___________________________________________ Robert A. Brannon, Vice President 2 SECURED PROMISSORY NOTE $5,400,000 JULY 1, 1996 FOR VALUE RECEIVED, the undersigned, EXTENDED STAY AMERICA, INC., a Delaware corporation (the "MAKER"), hereby promises to pay to the order of Southwest Exchange Corporation, a Nevada corporation, under Exchange Agreement dated 6/28/96, Account Number 96-335-TRF (the "PAYEE"), the principal sum of Five Million Four Hundred Thousand Dollars ($5,400,000.00), with interest thereon from the date hereof accruing at the rate of ten percent (10%) per annum. The principal amount plus interest shall be due and payable on or before July 23, 1996 (the "MATURITY DATE") to Payee in the lawful money of the United States at 2920 North Green Valley parkway, Suite 814, Henderson, Nevada 89014, or such other place as Payee may direct. This Note is executed and delivered in connection with and is subject to the terms and conditions of a certain Agreement to Purchase Hotel by and between Maker's affiliate, ESA 0858, Inc., a Nevada corporation (by assignment from ESA Properties, Inc.) and St. Louis Manor, Inc., a Nevada corporation (the "CORPORATION"), dated as of June 25, 1996 (the "AGREEMENT"), with respect to the purchase and sale of all of the Corporation's right, title and interest in and to the Property (as defined in the Agreement). This Note is secured by a Security Agreement executed by Maker, as Debtor, in favor of Payee, as Secured Party, of even date herewith (the "SECURITY AGREEMENT") and given in connection with the indebtedness evidenced hereby. An event of default hereunder shall be the failure of Maker to pay principal when due, or to timely perform any other obligation of Maker hereunder or under the Security Agreement or any other agreement or document which secures this Note. In the event of default under this Note, interest shall be payable on the whole of the sum outstanding at the rate of fifteen percent (15%) per annum for the duration of such default, whether or not the Payee has exercised its option to accelerate the maturity of this Note and declare the entire unpaid principal indebtedness due and payable. Maker and all others who may become liable for the payment of the obligations described herein do hereby severally waive presentment for payments, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the Payee hereof, without in any way affecting the liability of each. Maker agrees that the Payee hereof may release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Maker promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof, including, but not limited to, reasonable attorneys' fees, and, in the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable. If any term, provision, covenant or condition of this Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall not in any way be affected, impaired or invalidated thereby. 1 The laws of the State of Nevada shall govern the validity, performance and enforcement of this Note. In any action brought under or arising out of this Note, each obligor hereby consents to the application of Nevada law, to the jurisdiction of any competent court within the State of Nevada, and to service of process by any means authorized by Nevada law. Time is of the essence hereof. IN WITNESS WHEREOF, the undersigned has executed this Secured Promissory Note as of the day and year first above written. EXTENDED STAY AMERICA, INC., a Delaware corporation By:___________________________________________ Robert A. Brannon, Vice President 2 SECURED PROMISSORY NOTE $2,750,000 JULY 1, 1996 FOR VALUE RECEIVED, the undersigned, EXTENDED STAY AMERICA, INC., a Delaware corporation (the "MAKER"), hereby promises to pay to the order of Southwest Exchange Corporation, a Nevada corporation, under Exchange Agreement dated 6/28/96, Account Number 96-340-KLK (the "PAYEE"), the principal sum of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000.00), with interest thereon from the date hereof accruing at the rate of ten percent (10%) per annum. The principal amount plus interest shall be due and payable on or before July 23, 1996 (the "MATURITY DATE") to Payee in the lawful money of the United States at 2920 North Green Valley Parkway, Suite 814, Henderson, Nevada 89014. This Note is executed and delivered in connection with and is subject to the terms and conditions of a certain Agreement to Purchase Hotel by and between Maker's affiliate, ESA 0861, Inc., a Nevada corporation (by assignment from ESA properties, Inc.) and Michael J. Mona, Jr. and Dean O'Bannon, (collectively, "SELLER") dated as of June 25, 1996 (the "AGREEMENT"), with respect to the purchase and sale of all of Seller's right, title and interest in and to the Property (as defined in the Agreement). This Note is secured by a Security Agreement executed by Maker, as Debtor, in favor of Payee, as Secured Party, of even date herewith (the "SECURITY AGREEMENT") and given in connection with the indebtedness evidenced hereby. An event of default hereunder shall be the failure of Maker to pay principal when due, or to timely perform any other obligation of Maker hereunder or under the Security Agreement or any other agreement or document which secures this Note. In the event of default under this Note, interest shall be payable on the whole of the sum outstanding at the rate of fifteen percent (15%) per annum for the duration of such default, whether or not the Payee has exercised its option to accelerate the maturity of this Note and declare the entire unpaid principal indebtedness due and payable. Maker and all others who may become liable for the payment of the obligations described herein do hereby severally waive presentment for payments, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the Payee hereof, without in any way affecting the liability of each. Maker agrees that the Payee hereof may release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Maker promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof, including, but not limited to, reasonable attorneys' fees, and, in the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable. If any term, provision, covenant or condition of this Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall not in any way be affected, impaired or invalidated thereby. 1 The laws of the State of Nevada shall govern the validity, performance and enforcement of this Note. In any action brought under or arising out of this Note, each obligor hereby consents to the application of Nevada law, to the jurisdiction of any competent court within the State of Nevada, and to service of process by any means authorized by Nevada law. Time is of the essence hereof. IN WITNESS WHEREOF, the undersigned has executed this Secured Promissory Note as of the day and year first above written. EXTENDED STAY AMERICA, INC., a Delaware corporation By:___________________________________________ Robert A. Brannon, Vice President 2 SECURED PROMISSORY NOTE $2,750,000 JULY 1, 1996 FOR VALUE RECEIVED, the undersigned, EXTENDED STAY AMERICA, INC., a Delaware corporation (the "MAKER"), hereby promises to pay to the order of Southwest Exchange Corporation, a Nevada corporation, under Exchange Agreement dated 6/28/96, Account Number 96-334-TRF (the "PAYEE"), the principal sum of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000.00), with interest thereon from the date hereof accruing at the rate of ten percent (10%) per annum. The principal amount plus interest shall be due and payable on or before July 23, 1996 (the "MATURITY DATE") to Payee in the lawful money of the United States at 2920 North Green Valley Parkway, Suite 814, Henderson, Nevada 89014. This Note is executed and delivered in connection with and is subject to the terms and conditions of a certain Agreement to Purchase Hotel by and between Maker's affiliate, ESA 0861, Inc., a Nevada corporation (by assignment from ESA properties, Inc.) and Michael J. Mona, Jr. and Dean O'Bannon, (collectively, "SELLER") dated as of June 25, 1996 (the "AGREEMENT"), with respect to the purchase and sale of all of Seller's right, title and interest in and to the Property (as defined in the Agreement). This Note is secured by a Security Agreement executed by Maker, as Debtor, in favor of Payee, as Secured Party, of even date herewith (the "SECURITY AGREEMENT") and given in connection with the indebtedness evidenced hereby. An event of default hereunder shall be the failure of Maker to pay principal when due, or to timely perform any other obligation of Maker hereunder or under the Security Agreement or any other agreement or document which secures this Note. In the event of default under this Note, interest shall be payable on the whole of the sum outstanding at the rate of fifteen percent (15%) per annum for the duration of such default, whether or not the Payee has exercised its option to accelerate the maturity of this Note and declare the entire unpaid principal indebtedness due and payable. Maker and all others who may become liable for the payment of the obligations described herein do hereby severally waive presentment for payments, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the Payee hereof, without in any way affecting the liability of each. Maker agrees that the Payee hereof may release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Maker promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof, including, but not limited to, reasonable attorneys' fees, and, in the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable. If any term, provision, covenant or condition of this Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall not in any way be affected, impaired or invalidated thereby. 1 The laws of the State of Nevada shall govern the validity, performance and enforcement of this Note. In any action brought under or arising out of this Note, each obligor hereby consents to the application of Nevada law, to the jurisdiction of any competent court within the State of Nevada, and to service of process by any means authorized by Nevada law. Time is of the essence hereof. IN WITNESS WHEREOF, the undersigned has executed this Secured Promissory Note as of the day and year first above written. EXTENDED STAY AMERICA, INC., a Delaware corporation By:___________________________________________ Robert A. Brannon, Vice President 2 SECURITY AGREEMENT ------------------ This Security Agreement ("Security Agreement"), dated as of ______________, 1996, is executed by EXTENDED STAY AMERICA, INC., a Delaware corporation, as debtor (the "Debtor"), in favor of Southwest Exchange Corporation, a Nevada corporation, under that certain Exchange Agreement dated as of June 28, 1996, Account Number 96-333-TRF ("Secured Party"), in connection with that certain Agreement to Purchase Hotel (the "Purchase Agreement") dated as of June 25, 1996 among Debtor's affiliate, as Purchaser, and BOULDER MANOR, INC., a Nevada corporation, as Seller ("Seller"), and that certain Escrow Agreement whereby the Debtor, on the Closing Date, will deposit a sum equal to the principal balance of the Note (as hereinafter defined) into an escrow account with United Title of Nevada, Inc., a Nevada corporation, 4100 West Flamingo, Suite 1000, Las Vegas, Nevada 89103 (the "Escrow Agent"), Escrow No. 96100848 Attn: S. Coleman (the "Escrow Account"). This Security Agreement is executed to secure the payment of that certain promissory note in the amount of Nine Million One Hundred Thousand Dollars ($9,100,000.00) of even date herewith delivered to Secured Party (the "Note"). Pursuant to the Escrow Agreement, the Escrow Agent will deposit cash received by it from Debtor in the principal amount of the Note into a California bank account with Bank of America, San Francisco, Account No. 14993-04396 (the "Account"). Debtor's affiliate has entered into those certain Agreements to Purchase Hotel, each dated as of June 25, 1996, with Seller's affiliates, St. Louis Manor, Inc., Melrose Suites, Inc., and Michael J. Mona, Jr. and Dean O'Bannon (collectively, "Seller's Affiliates"), each of which has a security interest in the Account (the "Affiliates Interests"). Capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Purchase Agreement. 1. Assignment; Security Interest. For valuable consideration, Debtor hereby assigns to Secured Party and grants to Secured Party, pursuant to Article 9 of the California Uniform Commercial Code (the "UCC"), a security interest in and to, and a lien upon, all of Debtor's right, title and interest, whether now existing or hereafter arising, in and to the Escrow Account and the Account and all interest earned thereon (collectively, the "Collateral"), as security for the prompt payment and performance of each of the obligations described in Section 2 below (collectively, the "Secured Obligations"). 2. Obligations Secured. This Security Agreement secures the prompt payment and performance of each of the following Secured Obligations: 2.1 The indebtedness evidenced by the Note. 2.2 Debtor's affiliates' obligations to Secured Party under the Purchase Agreement (by assignment), Escrow Agreement and all other documents in connection with the purchase of the Property. 2.3 Debtor's obligations hereunder. 2.4 Any and all amendments, extensions and other modifications of any of the foregoing, including without limitation amendments, extensions and other modifications that are evidenced by new or additional documents or that change the rate of interest on any Secured Obligation. 3. Representations and Warranties. Debtor hereby represents and warrants that: 1 3.1 Debtor has good and marketable title to the Collateral, and, to the best of Debtor's knowledge, no other person, entity or governmental agency (whether federal, state or local) has or purports to have any right, title, encumbrance or adverse claim or lien in or to any of the Collateral, save and except Seller's Affiliates as to the Affiliates' Interests. 3.2 Debtor's principal place of business and chief executive and accounting offices are located at 500 E. Broward Boulevard, Suite 590, Fort Lauderdale, Florida 33394-3073. 3.3 Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. 3.4 Debtor has the power and authority to enter into this Agreement and any person or party signing on Debtor's behalf has been duly authorized to sign on Debtor's behalf. 3.5 Except for the financing statements executed by Debtor to perfect the security interest in the Collateral in favor of Secured Party, at the time of granting the security interest described herein, no financing statement covering the Collateral or any portion thereof will be on file in any public office and, Debtor agrees not to execute or authorize the filing of any such additional financing statement in favor of any person, entity or governmental agency (whether federal, state or local) other than Secured Party and Seller's Affiliates as long as any portion of the indebtedness evidenced by the Note remains unpaid. 4. Covenants by Debtor. Debtor hereby agrees that: 4.1 Prior to or simultaneously with the execution of this Security Agreement by Debtor, Debtor will execute and cause to be filed in accordance with the California Uniform Commercial Code, financing statements in form and substance satisfactory to Secured Party. Thereafter at any time and from time to time, upon demand of Secured Party, Debtor shall give, execute, acknowledge, file and record any notice, financing statement, continuation statement, assignment, instrument, document or agreement that Secured Party reasonably deems necessary or desirable to create, preserve, continue, perfect or validate any security interest intended to be created hereunder or to enable Secured Party to enforce its rights with respect to any such security interest. 4.2 Debtor shall notify Secured Party prior to changing its principal place of business and chief executive and accounting offices from the location set forth in Section 3.2 of this Security Agreement. 4.3 Debtor shall keep the Collateral free of all liens, claims, security interests and encumbrances, (save and except the Affiliates' Interests). 4.4 Debtor shall, at Debtor's own cost, defend any and all actions, proceedings and claims affecting any material portion of the Collateral, including without limitation actions, proceedings and claims challenging Debtor's title to the Collateral or the validity or priority of Secured Party's security interest hereunder. 2 4.5 Debtor shall promptly pay all taxes, assessments and other charges levied or assessed against any Collateral. 4.6 As soon as practicable, and in any event within two (2) days, Debtor shall notify Secured Party of: (a) Any attachment or other legal process levied against any material portion of the Collateral; and (b) Any information received by Debtor which may in any manner materially and adversely affect the value of the Collateral or the rights and remedies of Secured Party with respect thereto. Any notice delivered pursuant to this Section 4.6 shall set forth the nature of such event and the action which Debtor proposes to take with respect thereto. 5. Events of Default. The occurrence of any of the following shall constitute an "Event of Default" hereunder: 5.1 Debtor fails to perform any obligation to pay money which arises under the Note; or 5.2 Debtor fails to perform any obligation arising under this Security Agreement. 6. Remedies. Upon the occurrence of an Event of Default hereunder, Secured Party shall have all of the following rights and remedies, each of which may be exercised with or without further notice to Debtor: 6.1 To notify Escrow Agent that an Event of Default has occurred that all monies deposited pursuant to the Escrow Account or in the Account are to be released directly to Secured Party; 6.2 To enforce payment and prosecute any action or proceeding with respect to any and all the Collateral; 6.3 To foreclose the liens and security interests created under this Security Agreement or under any other agreement relating to any Collateral by any available judicial procedure or without judicial process; 6.4 To declare all Secured Obligations immediately due and payable; and 6.5 To exercise any and all other rights and remedies that Secured Party may have in any jurisdiction where enforcement of this Security Agreement is sought, including without limitation all rights and remedies of a secured party under any applicable Uniform Commercial Code. Secured Party shall have the right to enforce one or more of its remedies successively or concurrently, and such action shall neither estop nor prevent Secured Party 3 from pursuing any and all further remedies that it may have. In the event Debtor fails to perform any obligation set forth herein, Secured Party may, but shall not be obligated to, perform the same, and the cost thereof shall be payable by Debtor to Secured Party on demand and shall bear interest at the default rate of interest set forth in the Note ("Default Rate"). No failure on the part of Secured Party to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof or of any default or Event of Default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 7. Application of Proceeds. The net cash proceeds resulting from any collection of the Collateral by Secured Party shall be applied first to the expenses (including reasonable attorneys' fees) of retaking, processing, collecting and the like, and then to the satisfaction of other Secured Obligations then due, application as to particular obligations or against principal or interest to be in Secured Party's sole discretion, and then to Debtor or such other person as may be lawfully entitled thereto. 8. Secured Party's Costs and Expenses. Debtor shall reimburse Secured Party on demand for all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with the enforcement of this Security Agreement, regardless of whether any suit is filed, including without limitation all reasonable costs and expenses incurred in checking, retaking, holding or otherwise collecting of any and all Collateral. Such reimbursement obligations shall bear interest from the date of demand at the Default Rate. 9. Miscellaneous Waivers. Presentment, protest, notice of protest, notice of dishonor and notice of nonpayment are waived with respect to any proceeds to which Secured Party is entitled hereunder. 10. Successors and Assigns. This Security Agreement shall bind, and shall inure to the benefit of, the respective successors and assigns of Debtor and Secured Party. 11. Attorney-in-Fact. Debtor hereby constitutes and appoints Secured Party as its attorney-in-fact for the purposes of (a) carrying out the provisions of this Security Agreement; and (b) taking any and all actions and executing any and all instruments that Secured Party reasonably deems necessary or advisable to accomplish the purposes of this Security Agreement and/or to protect Secured Party's interests with respect to the Collateral. 12. Notices. All notices or communications herein required or permitted to be given shall be in writing and shall be governed in all respects by the notice provisions of the Purchase Agreement. For purposes of this Agreement: The address of Secured Party is: Southwest Exchange Corporation 2920 North Green Valley Parkway, Suite 814 Henderson, Nevada 89014 The address of Debtor is: Extended Stay America, Inc. 500 E. Broward Blvd., Suite 950 Fort Lauderdale, Florida 33394 4 13. Entire Agreement; Amendment; Waiver. This Security Agreement, together with any and all other documents referred to herein, constitutes the entire agreement between Debtor and Secured Party pertaining to the subject matter contained herein. This Security Agreement may not be amended, changed, modified, altered or terminated except by a written instrument signed by Secured Party and Debtor. Neither Secured Party nor Debtor may waive any right hereunder except by a signed written instrument. 14. Severability. In the event any provision of this Security Agreement is held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. 15. Section Headings. The subject headings and the sections and subsections of this Security Agreement are included for convenience only and shall not affect the construction or interpretation of any provision. 16. Governing Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of California. 17. Definitions. Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be duly executed as of the date first written above. DEBTOR: EXTENDED STAY AMERICA, INC., a Delaware corporation By:_____________________________________________ Robert A. Brannon, Vice President 5 SECURITY AGREEMENT ------------------ This Security Agreement ("Security Agreement"), dated as of ______________, 1996, is executed by EXTENDED STAY AMERICA, INC., a Delaware corporation, as debtor (the "Debtor"), in favor of Southwest Exchange Corporation, a Nevada corporation, under that certain Exchange Agreement dated June 28, 1996, Account Number 96-336-TRF ("Secured Party"), in connection with that certain Agreement to Purchase Hotel (the "Purchase Agreement") dated as of June 25, 1996 among Debtor's affiliate, as Purchaser, and MELROSE SUITES, INC., a Nevada corporation, as Seller, ("Seller") and that certain Escrow Agreement whereby the Debtor, on the Closing Date, will deposit a sum equal to the principal balance of the Note (as hereinafter defined) into an escrow account with United Title of Nevada, Inc., a Nevada corporation, 4100 West Flamingo, Suite 1000, Las Vegas, Nevada 89103 (the "Escrow Agent"), Escrow No. 96100846 Attn: S. Coleman (the "Escrow Account"). This Security Agreement is executed to secure the payment of that certain promissory note in the amount of Fourteen Million Dollars ($14,000,000.00) of even date herewith delivered to Secured Party (the "Note"). Pursuant to the Escrow Agreement, the Escrow Agent will deposit cash received by it from Debtor in the principal amount of the Note into a California bank account with Bank of America, San Francisco, Account No. 14993-04396 (the "Account"). Debtor's affiliate has entered into those certain Agreements to Purchase Hotel, each dated as of June 25, 1996, with Seller's affiliates, St. Louis Manor, Inc., Boulder Manor, Inc., and Michael J. Mona, Jr. and Dean O'Bannon (collectively, "Seller's Affiliates"), each of which has a security interest in the Account (the "Affiliates Interests"). Capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Purchase Agreement. 1. Assignment; Security Interest. For valuable consideration, Debtor hereby assigns to Secured Party and grants to Secured Party, pursuant to Article 9 of the California Uniform Commercial Code (the "UCC"), a security interest in and to, and a lien upon, all of Debtor's right, title and interest, whether now existing or hereafter arising, in and to the Escrow Account and the Account and all interest earned thereon (collectively, the "Collateral"), as security for the prompt payment and performance of each of the obligations described in Section 2 below (collectively, the "Secured Obligations"). 2. Obligations Secured. This Security Agreement secures the prompt payment and performance of each of the following Secured Obligations: 2.1 The indebtedness evidenced by the Note. 2.2 Debtor's affiliates' obligations to Secured Party under the Purchase Agreement (by assignment), Escrow Agreement and all other documents in connection with the purchase of the Property. 2.3 Debtor's obligations hereunder. 2.4 Any and all amendments, extensions and other modifications of any of the foregoing, including without limitation amendments, extensions and other modifications that are evidenced by new or additional documents or that change the rate of interest on any Secured Obligation. 3. Representations and Warranties. Debtor hereby represents and warrants that: 1 3.1 Debtor has good and marketable title to the Collateral, and, to the best of Debtor's knowledge, no other person, entity or governmental agency (whether federal, state or local) has or purports to have any right, title, encumbrance or adverse claim or lien in or to any of the Collateral, save and except Seller's Affiliates as to the Affiliates' Interests. 3.2 Debtor's principal place of business and chief executive and accounting offices are located at 500 E. Broward Boulevard, Suite 590, Fort Lauderdale, Florida 33394-3073. 3.3 Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. 3.4 Debtor has the power and authority to enter into this Agreement and any person or party signing on Debtor's behalf has been duly authorized to sign on Debtor's behalf. 3.5 Except for the financing statements executed by Debtor to perfect the security interest in the Collateral in favor of Secured Party, at the time of granting the security interest described herein, no financing statement covering the Collateral or any portion thereof will be on file in any public office and, Debtor agrees not to execute or authorize the filing of any such additional financing statement in favor of any person, entity or governmental agency (whether federal, state or local) other than Secured Party and Seller's Affiliates as long as any portion of the indebtedness evidenced by the Note remains unpaid. 4. Covenants by Debtor. Debtor hereby agrees that: 4.1 Prior to or simultaneously with the execution of this Security Agreement by Debtor, Debtor will execute and cause to be filed in accordance with the California Uniform Commercial Code, financing statements in form and substance satisfactory to Secured Party. Thereafter at any time and from time to time, upon demand of Secured Party, Debtor shall give, execute, acknowledge, file and record any notice, financing statement, continuation statement, assignment, instrument, document or agreement that Secured Party reasonably deems necessary or desirable to create, preserve, continue, perfect or validate any security interest intended to be created hereunder or to enable Secured Party to enforce its rights with respect to any such security interest. 4.2 Debtor shall notify Secured Party prior to changing its principal place of business and chief executive and accounting offices from the location set forth in Section 3.2 of this Security Agreement. 4.3 Debtor shall keep the Collateral free of all liens, claims, security interests and encumbrances, 4.4 Debtor shall, at Debtor's own cost, defend any and all actions, proceedings and claims affecting any material portion of the Collateral, including without limitation actions, proceedings and claims challenging Debtor's title to the Collateral or the validity or priority of Secured Party's security interest hereunder. 2 4.5 Debtor shall promptly pay all taxes, assessments and other charges levied or assessed against any Collateral. 4.6 As soon as practicable, and in any event within two (2) days, Debtor shall notify Secured Party of: (a) Any attachment or other legal process levied against any material portion of the Collateral; and (b) Any information received by Debtor which may in any manner materially and adversely affect the value of the Collateral or the rights and remedies of Secured Party with respect thereto. Any notice delivered pursuant to this Section 4.6 shall set forth the nature of such event and the action which Debtor proposes to take with respect thereto. 5. Events of Default. The occurrence of any of the following shall constitute an "Event of Default" hereunder: 5.1 Debtor fails to perform any obligation to pay money which arises under the Note; or 5.2 Debtor fails to perform any obligation arising under this Security Agreement. 6. Remedies. Upon the occurrence of an Event of Default hereunder, Secured Party shall have all of the following rights and remedies, each of which may be exercised with or without further notice to Debtor: 6.1 To notify Escrow Agent that an Event of Default has occurred that all monies deposited pursuant to the Escrow Account or in the Account are to be released directly to Secured Party; 6.2 To enforce payment and prosecute any action or proceeding with respect to any and all the Collateral; 6.3 To foreclose the liens and security interests created under this Security Agreement or under any other agreement relating to any Collateral by any available judicial procedure or without judicial process; 6.4 To declare all Secured Obligations immediately due and payable; and 6.5 To exercise any and all other rights and remedies that Secured Party may have in any jurisdiction where enforcement of this Security Agreement is sought, including without limitation all rights and remedies of a secured party under any applicable Uniform Commercial Code. Secured Party shall have the right to enforce one or more of its remedies successively or concurrently, and such action shall neither estop nor prevent Secured Party 3 from pursuing any and all further remedies that it may have. In the event Debtor fails to perform any obligation set forth herein, Secured Party may, but shall not be obligated to, perform the same, and the cost thereof shall be payable by Debtor to Secured Party on demand and shall bear interest at the default rate of interest set forth in the Note ("Default Rate"). No failure on the part of Secured Party to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof or of any default or Event of Default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 7. Application of Proceeds. The net cash proceeds resulting from any collection of the Collateral by Secured Party shall be applied first to the expenses (including reasonable attorneys' fees) of retaking, processing, collecting and the like, and then to the satisfaction of other Secured Obligations then due, application as to particular obligations or against principal or interest to be in Secured Party's sole discretion, and then to Debtor or such other person as may be lawfully entitled thereto. 8. Secured Party's Costs and Expenses. Debtor shall reimburse Secured Party on demand for all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with the enforcement of this Security Agreement, regardless of whether any suit is filed, including without limitation all reasonable costs and expenses incurred in checking, retaking, holding or otherwise collecting of any and all Collateral. Such reimbursement obligations shall bear interest from the date of demand at the Default Rate. 9. Miscellaneous Waivers. Presentment, protest, notice of protest, notice of dishonor and notice of nonpayment are waived with respect to any proceeds to which Secured Party is entitled hereunder. 10. Successors and Assigns. This Security Agreement shall bind, and shall inure to the benefit of, the respective successors and assigns of Debtor and Secured Party. 11. Attorney-in-Fact. Debtor hereby constitutes and appoints Secured Party as its attorney-in-fact for the purposes of (a) carrying out the provisions of this Security Agreement; and (b) taking any and all actions and executing any and all instruments that Secured Party reasonably deems necessary or advisable to accomplish the purposes of this Security Agreement and/or to protect Secured Party's interests with respect to the Collateral. 12. Notices. All notices or communications herein required or permitted to be given shall be in writing and shall be governed in all respects by the notice provisions of the Purchase Agreement. For purposes of this Agreement: The address of Secured Party is: Southwest Exchange Corporation 2920 North Green Valley Parkway, Suite 814 Henderson, Nevada 89014 The address of Debtor is: Extended Stay America, Inc. 500 E. Broward Blvd., Suite 950 Fort Lauderdale, Florida 33394 4 13. Entire Agreement; Amendment; Waiver. This Security Agreement, together with any and all other documents referred to herein, constitutes the entire agreement between Debtor and Secured Party pertaining to the subject matter contained herein. This Security Agreement may not be amended, changed, modified, altered or terminated except by a written instrument signed by Secured Party and Debtor. Neither Secured Party nor Debtor may waive any right hereunder except by a signed written instrument. 14. Severability. In the event any provision of this Security Agreement is held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. 15. Section Headings. The subject headings and the sections and subsections of this Security Agreement are included for convenience only and shall not affect the construction or interpretation of any provision. 16. Governing Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of California. 17. Definitions. Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be duly executed as of the date first written above. DEBTOR: EXTENDED STAY AMERICA, INC., a Delaware corporation By:_____________________________________ Robert A. Brannon, Vice President 5 SECURITY AGREEMENT ------------------ This Security Agreement ("Security Agreement"), dated as of ______________, 1996, is executed by EXTENDED STAY AMERICA, INC., a Delaware corporation, as debtor (the "Debtor"), in favor of Southwest Exchange Corporation, a Nevada corporation, under that certain Exchange Agreement dated June 28, 1996, Account Number 96-335-TRF ("Secured Party"), in connection with that certain Agreement to Purchase Hotel (the "Purchase Agreement") dated as of June 25, 1996 among Debtor's affiliate, as Purchaser, and ST. LOUIS MANOR, INC., a Nevada corporation, as Seller, ("Seller") and that certain Escrow Agreement whereby the Debtor, on the Closing Date, will deposit a sum equal to the principal balance of the Note (as hereinafter defined) into an escrow account with United Title of Nevada, Inc., a Nevada corporation, 4100 West Flamingo, Suite 1000, Las Vegas, Nevada 89103 (the "Escrow Agent"), Escrow No. 96100849 Attn: S. Coleman (the "Escrow Account"). This Security Agreement is executed to secure the payment of that certain promissory note in the amount of Five Million Four Hundred Thousand Dollars ($5,400,000.00) of even date herewith delivered to Secured Party (the "Note"). Pursuant to the Escrow Agreement, the Escrow Agent will deposit cash received by it from Debtor in the principal amount of the Note into a California bank account with Bank of America, San Francisco, Account No. 14993-04396 (the "Account"). Debtor's affiliate has entered into those certain Agreements to Purchase Hotel, each dated as of June 25, 1996, with Seller's affiliates, Boulder Manor, Inc., Melrose Suites, Inc., and Michael J. Mona, Jr. and Dean O'Bannon (collectively, "Seller's Affiliates"), each of which has a security interest in the Account (the "Affiliates Interests"). Capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Purchase Agreement. 1. Assignment; Security Interest. For valuable consideration, Debtor hereby assigns to Secured Party and grants to Secured Party, pursuant to Article 9 of the California Uniform Commercial Code (the "UCC"), a security interest in and to, and a lien upon, all of Debtor's right, title and interest, whether now existing or hereafter arising, in and to the Escrow Account and the Account and all interest earned thereon (collectively, the "Collateral"), as security for the prompt payment and performance of each of the obligations described in Section 2 below (collectively, the "Secured Obligations"). 2. Obligations Secured. This Security Agreement secures the prompt payment and performance of each of the following Secured Obligations: 2.1 The indebtedness evidenced by the Note. 2.2 Debtor's affiliates' obligations to Secured Party under the Purchase Agreement (by assignment), Escrow Agreement and all other documents in connection with the purchase of the Property. 2.3 Debtor's obligations hereunder. 2.4 Any and all amendments, extensions and other modifications of any of the foregoing, including without limitation amendments, extensions and other modifications that are evidenced by new or additional documents or that change the rate of interest on any Secured Obligation. 3. Representations and Warranties. Debtor hereby represents and warrants that: 1 3.1 Debtor has good and marketable title to the Collateral, and, to the best of Debtor's knowledge, no other person, entity or governmental agency (whether federal, state or local) has or purports to have any right, title, encumbrance or adverse claim or lien in or to any of the Collateral, save and except Seller's Affiliates as to the Affiliates' Interests. 3.2 Debtor's principal place of business and chief executive and accounting offices are located at 500 E. Broward Boulevard, Suite 590, Fort Lauderdale, Florida 33394-3073. 3.3 Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. 3.4 Debtor has the power and authority to enter into this Agreement and any person or party signing on Debtor's behalf has been duly authorized to sign on Debtor's behalf. 3.5 Except for the financing statements executed by Debtor to perfect the security interest in the Collateral in favor of Secured Party, at the time of granting the security interest described herein, no financing statement covering the Collateral or any portion thereof will be on file in any public office and, Debtor agrees not to execute or authorize the filing of any such additional financing statement in favor of any person, entity or governmental agency (whether federal, state or local) other than Secured Party and Seller's Affiliates as long as any portion of the indebtedness evidenced by the Note remains unpaid. 4. Covenants by Debtor. Debtor hereby agrees that: 4.1 Prior to or simultaneously with the execution of this Security Agreement by Debtor, Debtor will execute and cause to be filed in accordance with the California Uniform Commercial Code, financing statements in form and substance satisfactory to Secured Party. Thereafter at any time and from time to time, upon demand of Secured Party, Debtor shall give, execute, acknowledge, file and record any notice, financing statement, continuation statement, assignment, instrument, document or agreement that Secured Party reasonably deems necessary or desirable to create, preserve, continue, perfect or validate any security interest intended to be created hereunder or to enable Secured Party to enforce its rights with respect to any such security interest. 4.2 Debtor shall notify Secured Party prior to changing its principal place of business and chief executive and accounting offices from the location set forth in Section 3.2 of this Security Agreement. 4.3 Debtor shall keep the Collateral free of all liens, claims, security interests and encumbrances, (save and except the Affiliates' Interests). 4.4 Debtor shall, at Debtor's own cost, defend any and all actions, proceedings and claims affecting any material portion of the Collateral, including without limitation actions, proceedings and claims challenging Debtor's title to the Collateral or the validity or priority of Secured Party's security interest hereunder. 2 4.5 Debtor shall promptly pay all taxes, assessments and other charges levied or assessed against any Collateral. 4.6 As soon as practicable, and in any event within two (2) days, Debtor shall notify Secured Party of: (a) Any attachment or other legal process levied against any material portion of the Collateral; and (b) Any information received by Debtor which may in any manner materially and adversely affect the value of the Collateral or the rights and remedies of Secured Party with respect thereto. Any notice delivered pursuant to this Section 4.6 shall set forth the nature of such event and the action which Debtor proposes to take with respect thereto. 5. Events of Default. The occurrence of any of the following shall constitute an "Event of Default" hereunder: 5.1 Debtor fails to perform any obligation to pay money which arises under the Note; or 5.2 Debtor fails to perform any obligation arising under this Security Agreement. 6. Remedies. Upon the occurrence of an Event of Default hereunder, Secured Party shall have all of the following rights and remedies, each of which may be exercised with or without further notice to Debtor: 6.1 To notify Escrow Agent that an Event of Default has occurred that all monies deposited pursuant to the Escrow Account or in the Account are to be released directly to Secured Party; 6.2 To enforce payment and prosecute any action or proceeding with respect to any and all the Collateral; 6.3 To foreclose the liens and security interests created under this Security Agreement or under any other agreement relating to any Collateral by any available judicial procedure or without judicial process; 6.4 To declare all Secured Obligations immediately due and payable; and 6.5 To exercise any and all other rights and remedies that Secured Party may have in any jurisdiction where enforcement of this Security Agreement is sought, including without limitation all rights and remedies of a secured party under any applicable Uniform Commercial Code. Secured Party shall have the right to enforce one or more of its remedies successively or concurrently, and such action shall neither estop nor prevent Secured Party 3 from pursuing any and all further remedies that it may have. In the event Debtor fails to perform any obligation set forth herein, Secured Party may, but shall not be obligated to, perform the same, and the cost thereof shall be payable by Debtor to Secured Party on demand and shall bear interest at the default rate of interest set forth in the Note ("Default Rate"). No failure on the part of Secured Party to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof or of any default or Event of Default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 7. Application of Proceeds. The net cash proceeds resulting from any collection of the Collateral by Secured Party shall be applied first to the expenses (including reasonable attorneys' fees) of retaking, processing, collecting and the like, and then to the satisfaction of other Secured Obligations then due, application as to particular obligations or against principal or interest to be in Secured Party's sole discretion, and then to Debtor or such other person as may be lawfully entitled thereto. 8. Secured Party's Costs and Expenses. Debtor shall reimburse Secured Party on demand for all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with the enforcement of this Security Agreement, regardless of whether any suit is filed, including without limitation all reasonable costs and expenses incurred in checking, retaking, holding or otherwise collecting of any and all Collateral. Such reimbursement obligations shall bear interest from the date of demand at the Default Rate. 9. Miscellaneous Waivers. Presentment, protest, notice of protest, notice of dishonor and notice of nonpayment are waived with respect to any proceeds to which Secured Party is entitled hereunder. 10. Successors and Assigns. This Security Agreement shall bind, and shall inure to the benefit of, the respective successors and assigns of Debtor and Secured Party. 11. Attorney-in-Fact. Debtor hereby constitutes and appoints Secured Party as its attorney-in-fact for the purposes of (a) carrying out the provisions of this Security Agreement; and (b) taking any and all actions and executing any and all instruments that Secured Party reasonably deems necessary or advisable to accomplish the purposes of this Security Agreement and/or to protect Secured Party's interests with respect to the Collateral. 12. Notices. All notices or communications herein required or permitted to be given shall be in writing and shall be governed in all respects by the notice provisions of the Purchase Agreement. For purposes of this Agreement: The address of Secured Party is: Southwest Exchange Corporation 2920 North Green Valley Parkway, Suite 814 Henderson, Nevada 89014 The address of Debtor is: Extended Stay America, Inc. 500 E. Broward Blvd., Suite 950 Fort Lauderdale, Florida 33394 4 13. Entire Agreement; Amendment; Waiver. This Security Agreement, together with any and all other documents referred to herein, constitutes the entire agreement between Debtor and Secured Party pertaining to the subject matter contained herein. This Security Agreement may not be amended, changed, modified, altered or terminated except by a written instrument signed by Secured Party and Debtor. Neither Secured Party nor Debtor may waive any right hereunder except by a signed written instrument. 14. Severability. In the event any provision of this Security Agreement is held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. 15. Section Headings. The subject headings and the sections and subsections of this Security Agreement are included for convenience only and shall not affect the construction or interpretation of any provision. 16. Governing Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of California. 17. Definitions. Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be duly executed as of the date first written above. DEBTOR: EXTENDED STAY AMERICA, INC., a Delaware corporation By:________________________________________ Robert A. Brannon, Vice President SECURITY AGREEMENT ------------------ This Security Agreement ("Security Agreement"), dated as of ______________, 1996, is executed by EXTENDED STAY AMERICA, INC., a Delaware corporation, as debtor (the "Debtor") in favor of Southwest Exchange Corporation, a Nevada corporation, under that certain Exchange Agreement dated June 28, 1996, Account Number 96-340-KLK and Account Number 96-334-TRF ("Secured Party"), in connection with that certain Agreement to Purchase Hotel (the "Purchase Agreement") dated as of June 25, 1996 among Debtor's affiliate, as Purchaser, and MICHAEL J. MONA, JR. and DEAN O'BANNON, each as to a 50% interest, as Sellers, ("Sellers") and that certain Escrow Agreement whereby the Debtor, on the Closing Date, will deposit a sum equal to the principal balance of the Notes (as hereinafter defined) into an escrow account with United Title of Nevada, Inc., a Nevada corporation, 4100 West Flamingo, Suite 1000, Las Vegas, Nevada 89103 (the "Escrow Agent"), Escrow No. 96100847 Attn: S. Coleman (the "Escrow Account"). This Security Agreement is executed to secure the payment of those two (2) certain promissory notes in the amount of Two Million Seven Hundred Fifty Thousand Dollars each ($2,750,000.00) for a total amount of Five Million Five Hundred Thousand Dollars ($5,500,000.00) of even date herewith delivered to Secured Party (collectively, the "Notes"). Pursuant to the Escrow Agreement, the Escrow Agent will deposit cash received by it from Debtor in the principal amount of the Notes into a California bank account with Bank of America, San Francisco, Account No. 14993-04396 (the "Account"). Debtor's affiliate has entered into those certain Agreements to Purchase Hotel, each dated as of June 25, 1996, with Seller's affiliates, St. Louis Manor, Inc., Melrose Suites, Inc., and Boulder Manor, Inc. (collectively, "Seller's Affiliates"), each of which has a security interest in the Account (the "Affiliates Interests"). Capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Purchase Agreement. 1. Assignment; Security Interest. For valuable consideration, Debtor hereby assigns to Secured Party and grants to Secured Party, pursuant to Article 9 of the California Uniform Commercial Code (the "UCC"), a security interest in and to, and a lien upon, all of Debtor's right, title and interest, whether now existing or hereafter arising, in and to the Escrow Account and the Account and all interest earned thereon (collectively, the "Collateral"), as security for the prompt payment and performance of each of the obligations described in Section 2 below (collectively, the "Secured Obligations"). 2. Obligations Secured. This Security Agreement secures the prompt payment and performance of each of the following Secured Obligations: 2.1 The indebtedness evidenced by the Notes. 2.2 Debtor's affiliates' obligations to Secured Party under the Purchase Agreement (by assignment), Escrow Agreement and all other documents in connection with the purchase of the Property. 2.3 Debtor's obligations hereunder. 2.4 Any and all amendments, extensions and other modifications of any of the foregoing, including without limitation amendments, extensions and other modifications that are evidenced by new or additional documents or that change the rate of interest on any Secured Obligation. 1 3. Representations and Warranties. Debtor hereby represents and warrants that: 3.1 Debtor has good and marketable title to the Collateral, and, to the best of Debtor's knowledge, no other person, entity or governmental agency (whether federal, state or local) has or purports to have any right, title, encumbrance or adverse claim or lien in or to any of the Collateral, save and except Seller's Affiliates as to the Affiliates' Interests. 3.2 Debtor's principal place of business and chief executive and accounting offices are located at 500 E. Broward Boulevard, Suite 590, Fort Lauderdale, Florida 33394-3073. 3.3 Debtor is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. 3.4 Debtor has the power and authority to enter into this Agreement and any person or party signing on Debtor's behalf has been duly authorized to sign on Debtor's behalf. 3.5 Except for the financing statements executed by Debtor to perfect the security interest in the Collateral in favor of Secured Party, at the time of granting the security interest described herein, no financing statement covering the Collateral or any portion thereof will be on file in any public office and, Debtor agrees not to execute or authorize the filing of any such additional financing statement in favor of any person, entity or governmental agency (whether federal, state or local) other than Secured Party and Seller's Affiliates as long as any portion of the indebtedness evidenced by the Notes remains unpaid. 4. Covenants by Debtor. Debtor hereby agrees that: 4.1 Prior to or simultaneously with the execution of this Security Agreement by Debtor, Debtor will execute and cause to be filed in accordance with the California Uniform Commercial Code, financing statements in form and substance satisfactory to Secured Party. Thereafter at any time and from time to time, upon demand of Secured Party, Debtor shall give, execute, acknowledge, file and record any notice, financing statement, continuation statement, assignment, instrument, document or agreement that Secured Party reasonably deems necessary or desirable to create, preserve, continue, perfect or validate any security interest intended to be created hereunder or to enable Secured Party to enforce its rights with respect to any such security interest. 4.2 Debtor shall notify Secured Party prior to changing its principal place of business and chief executive and accounting offices from the location set forth in Section 3.2 of this Security Agreement. 4.3 Debtor shall keep the Collateral free of all liens, claims, security interests and encumbrances, (save and except the Affiliates' Interests). 4.4 Debtor shall, at Debtor's own cost, defend any and all actions, proceedings and claims affecting any material portion of the Collateral, including without 2 limitation actions, proceedings and claims challenging Debtor's title to the Collateral or the validity or priority of Secured Party's security interest hereunder. 4.5 Debtor shall promptly pay all taxes, assessments and other charges levied or assessed against any Collateral. 4.6 As soon as practicable, and in any event within two (2) days, Debtor shall notify Secured Party of: (a) Any attachment or other legal process levied against any material portion of the Collateral; and (b) Any information received by Debtor which may in any manner materially and adversely affect the value of the Collateral or the rights and remedies of Secured Party with respect thereto. Any notice delivered pursuant to this Section 4.6 shall set forth the nature of such event and the action which Debtor proposes to take with respect thereto. 5. Events of Default. The occurrence of any of the following shall constitute an "Event of Default" hereunder: 5.1 Debtor fails to perform any obligation to pay money which arises under the Notes; or 5.2 Debtor fails to perform any obligation arising under this Security Agreement. 6. Remedies. Upon the occurrence of an Event of Default hereunder, Secured Party shall have all of the following rights and remedies, each of which may be exercised with or without further notice to Debtor: 6.1 To notify Escrow Agent that an Event of Default has occurred that all monies deposited pursuant to the Escrow Account or in the Account are to be released directly to Secured Party; 6.2 To enforce payment and prosecute any action or proceeding with respect to any and all the Collateral; 6.3 To foreclose the liens and security interests created under this Security Agreement or under any other agreement relating to any Collateral by any available judicial procedure or without judicial process; 6.4 To declare all Secured Obligations immediately due and payable; and 6.5 To exercise any and all other rights and remedies that Secured Party may have in any jurisdiction where enforcement of this Security Agreement is sought, including 3 without limitation all rights and remedies of a secured party under any applicable Uniform Commercial Code. Secured Party shall have the right to enforce one or more of its remedies successively or concurrently, and such action shall neither estop nor prevent Secured Party from pursuing any and all further remedies that it may have. In the event Debtor fails to perform any obligation set forth herein, Secured Party may, but shall not be obligated to, perform the same, and the cost thereof shall be payable by Debtor to Secured Party on demand and shall bear interest at the default rate of interest set forth in the Notes ("Default Rate"). No failure on the part of Secured Party to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof or of any default or Event of Default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 7. Application of Proceeds. The net cash proceeds resulting from any collection of the Collateral by Secured Party shall be applied first to the expenses (including reasonable attorneys' fees) of retaking, processing, collecting and the like, and then to the satisfaction of other Secured Obligations then due, application as to particular obligations or against principal or interest to be in Secured Party's sole discretion, and then to Debtor or such other person as may be lawfully entitled thereto. 8. Secured Party's Costs and Expenses. Debtor shall reimburse Secured Party on demand for all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with the enforcement of this Security Agreement, regardless of whether any suit is filed, including without limitation all reasonable costs and expenses incurred in checking, retaking, holding or otherwise collecting of any and all Collateral. Such reimbursement obligations shall bear interest from the date of demand at the Default Rate. 9. Miscellaneous Waivers. Presentment, protest, notice of protest, notice of dishonor and notice of nonpayment are waived with respect to any proceeds to which Secured Party is entitled hereunder. 10. Successors and Assigns. This Security Agreement shall bind, and shall inure to the benefit of, the respective successors and assigns of Debtor and Secured Party. 11. Attorney-in-Fact. Debtor hereby constitutes and appoints Secured Party as its attorney-in-fact for the purposes of (a) carrying out the provisions of this Security Agreement; and (b) taking any and all actions and executing any and all instruments that Secured Party reasonably deems necessary or advisable to accomplish the purposes of this Security Agreement and/or to protect Secured Party's interests with respect to the Collateral. 12. Notices. All notices or communications herein required or permitted to be given shall be in writing and shall be governed in all respects by the notice provisions of the Purchase Agreement. For purposes of this Agreement: The address of Secured Party is: Southwest Exchange Corporation 2920 North Green Valley Parkway, Suite 814 Henderson, Nevada 89014 The address of Debtor is: Extended Stay America, Inc. 500 E. Broward Blvd., Suite 950 Fort Lauderdale, Florida 33394 13. Entire Agreement; Amendment; Waiver. This Security Agreement, together with any and all other documents referred to herein, constitutes the entire agreement between Debtor and Secured Party pertaining to the subject matter contained herein. This Security Agreement may not be amended, changed, modified, altered or terminated except by a written instrument signed by Secured Party and Debtor. Neither Secured Party nor Debtor may waive any right hereunder except by a signed written instrument. 14. Severability. In the event any provision of this Security Agreement is held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. 15. Section Headings. The subject headings and the sections and subsections of this Security Agreement are included for convenience only and shall not affect the construction or interpretation of any provision. 16. Governing Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of California. 17. Definitions. Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be duly executed as of the date first written above. DEBTOR: EXTENDED STAY AMERICA, INC., a Delaware corporation By:__________________________________________ Robert A. Brannon, Vice President COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Melrose Suites, Inc., a Nevada corporation ("Seller"), to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Seller has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as Melrose Suites located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller execute and deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller agrees as follows: 1. No Solicitation of Employees. Seller agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Seller nor any person or enterprise controlled by Seller will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Seller agrees that during the Term of ----------------------- this Agreement, neither Seller nor any person or enterprise controlled by Seller will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. The Seller acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Seller has executed this Agreement as of the day and year first above written. MELROSE SUITES, INC. By:____________________________ Its:___________________________ -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Michael J. Mona, Jr. ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Melrose Suites, Inc., a Nevada corporation ("Seller"), has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as Melrose Suites located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this ----------------------- Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. ------------------------------------ MICHAEL J. MONA, JR. -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Rhonda H. Mona ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Melrose Suites, Inc., a Nevada corporation ("Seller"), has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as Melrose Suites located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this ----------------------- Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. ------------------------- RHONDA H. MONA -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Bertha Elizabeth Mona ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. St. Louis Manor, Inc., a Nevada corporation ("Seller"), has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as Nicolle Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. ------------------------------- BERTHA ELIZABETH MONA -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of June, 1996, is delivered by Dean O'Bannon ("O'Bannon") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. O'Bannon has entered into an agreement (the "Purchase Agreement") with an affiliate of the Company to sell his undivided 50% interest in the certain hotel known as Nicolle Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that O'Bannon deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, O'Bannon agrees as follows: 1. No Solicitation of Employees. O'Bannon agrees that from the date ---------------------------- of this Agreement and continuing for a period of two years (the "Term"), neither O'Bannon nor any person or enterprise controlled by O'Bannon will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. O'Bannon agrees that during the Term of ----------------------- this Agreement, neither O'Bannon nor any person or enterprise controlled by O'Bannon will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over- the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management or operation of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended-stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended-stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. O'Bannon acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, O'Bannon has executed this Agreement as of the day and year first above written. ------------------------------------ DEAN O'BANNON -2- EXHIBIT A --------- 4350 Boulder Highway Las Vegas, Nevada Sunrise Suites 4575 Boulder Highway Las Vegas, Nevada -3- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Michael J. Mona, Jr. ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Mona has entered into an agreement (the "Purchase Agreement") with an affiliate of the Company to sell his undivided 50% interest in the certain hotel known as Nicolle Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Mona deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this ----------------------- Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. ----------------------------------- MICHAEL J. MONA, JR. -2- EXHIBIT A --------- Sunrise Suites 4575 Boulder Highway Las Vegas, Nevada -3- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Michael J. Mona, Jr. ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. St. Louis Manor, Inc., a Nevada corporation ("Seller"), has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as St. Louis Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this ----------------------- Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. _______________________________ MICHAEL J. MONA, JR. -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Rhonda H. Mona ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. St. Louis Manor, Inc., a Nevada corporation ("Seller"), has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as St. Louis Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this ----------------------- Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. ----------------------------- RHONDA H. MONA -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by St. Louis Manor, Inc., a Nevada corporation ("Seller"), to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Seller has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as St. Louis Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller execute and deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller agrees as follows: 1. No Solicitation of Employees. Seller agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Seller nor any person or enterprise controlled by Seller will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Seller agrees that during the Term of ----------------------- this Agreement, neither Seller nor any person or enterprise controlled by Seller will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. The Seller acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Seller has executed this Agreement as of the day and year first above written. ST. LOUIS MANOR, INC. By:_______________________ Its:______________________ -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Rhonda H. Mona ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Boulder Manor, Inc., a Nevada corporation ("Seller"), has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as Boulder Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this ----------------------- Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. ________________________________________ RHONDA H. MONA. -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Michael J. Mona, Jr. ("Mona") to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Boulder Manor, Inc., a Nevada corporation ("Seller"), has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as Boulder Manor located in Las Vegas, Nevada (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mona agrees as follows: 1. No Solicitation of Employees. Mona agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Mona nor any person or enterprise controlled by Mona will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Mona agrees that during the Term of this ----------------------- Agreement, neither Mona nor any person or enterprise controlled by Mona will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. Mona acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Mona has executed this Agreement as of the day and year first above written. ________________________________________ MICHAEL J. MONA, JR. -2- COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (the "Agreement") dated as of the ___ day of July, 1996, is delivered by Boulder Manor, Inc., a Nevada corporation ("Seller"), to Extended Stay America, Inc., a Delaware corporation (the "Company"). R E C I T A L S: --------------- A. Seller has entered into an agreement (the "Purchase Agreement") with the Company to sell the certain hotel known as Boulder Manor (the "Hotel"). B. It is a condition to the execution of the Purchase Agreement by the Company that Seller execute and deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller agrees as follows: 1. No Solicitation of Employees. Seller agrees that from the date of ---------------------------- this Agreement and continuing for a period of two years (the "Term"), neither Seller nor any person or enterprise controlled by Seller will solicit for employment any person employed by the Company or any of its affiliates. 2. Covenant Not to Compete. Seller agrees that during the Term of ----------------------- this Agreement, neither Seller nor any person or enterprise controlled by Seller will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (as defined below) in the Prohibited Area (as defined below); provided, however, that the foregoing shall not prohibit (a) the ownership or operation of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, which shares are regularly traded on a national securities exchange or in any over-the-counter market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date hereof, any area within 25 miles of (i) any extended- stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates intends to develop an extended- stay lodging facility. 3. Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in Sections 1 and 2, then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. The Seller acknowledges that any material breach of its covenants contained in Sections 1 and 2 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive or preclude the Company from any other remedy at law or equity. 4. Governing Law and Jurisdiction. This Agreement shall be governed ------------------------------ and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. IN WITNESS WHEREOF, Seller has executed this Agreement as of the day and year first above written. BOULDER MANOR, INC. By: __________________________ Its:__________________________ -2- ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT ("Agreement") is made this ____ day of ________, 1996, by and among, (a) Southwest Exchange Corporation, a Nevada corporation, under Exchange Agreements dated June 28, 1996, Account No. 96-335-TRF ("St. Louis"), Account No. 96-333-TRF ("Boulder"), and Account No. 96-336-TRF ("Melrose")("Southwest"), (b) Extended Stay America, Inc., a Delaware corporation ("ESA"), (c) ESA 0858, Inc., a Nevada corporation ("ESA 0858"), (d) ESA 0859, Inc., a Nevada corporation ("ESA 0859"), (e) ESA 0860, Inc., a Nevada corporation ("ESA 0860"; ESA 0858, ESA 0859, and ESA 0860 are hereinafter referred to collectively as the "ESA Affiliates"), and (f) United Title of Nevada ("Escrow Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, St. Louis Manor, Inc., Boulder Manor, Inc. and Melrose Suites, Inc. (collectively the "Sellers") and the ESA Affiliates have each entered into a certain Agreement to Purchase Hotel, dated June 25, 1996 (the "Purchase Agreements"); and WHEREAS, pursuant to the Purchase Agreements, the ESA Affiliates have delivered promissory notes (the "Notes"), copies of which are attached hereto as Exhibit A; and WHEREAS, to secure ESA Affiliate's obligations under the Notes, Southwest and the ESA Affiliates desire Escrow Agent to hold certain monies and to take such actions in accordance with the terms hereof or as otherwise directed jointly by Southwest and ESA. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Escrow Agent is appointed as the entity responsible for holding, investing and disbursing the Cash Deposit and Proceeds (as those terms are hereinafter defined) and Escrow Agent accepts such appointment, all subject to the terms and conditions of this Agreement. 2. ESA has deposited with Escrow Agent the amount of $28,500,000.00 (the "Cash Deposit") which shall be invested together with the Proceeds, if any, as ESA directs or, if Escrow Agent receives no such direction, then in an interest bearing money market account or other account (the "Investment"). Escrow Agent is authorized to file appropriate or necessary reports or returns of interest earned on the Investment with the United States Treasury Department, Internal Revenue Service, and any applicable State or local taxing authority, in aid of which ESA's Federal Taxpayer Identification Number is 36-3996573. Escrow Agent shall have no liability or responsibility for any loss or cost which may be suffered by ESA, the ESA Affiliates, or Southwest as a result of the failure or insolvency of any financial instruction, or the loss of any interest in which the Investment may be made, unless caused by Escrow Agent's conversion of funds to its own account. 57 3. Escrow Agent shall receive the proceeds ("Proceeds") from the sale of such shares of common stock delivered pursuant to the Agreements and shall disburse such Proceeds as follows: a. First, pari passu to the Sellers' lenders (the "Lenders") in ---- ----- accordance with the payoff letters attached hereto as Exhibit B; b. Second, when the indebtedness of the Lenders is paid in full pursuant to such payoff letters, the balance, if any, as directed by Southwest, up to the remaining balance of the Notes which shall be reduced dollar for dollar by the amount paid to the Lenders; c. Third, undisbursed Proceeds shall be invested as the Cash Deposit is invested until contrary instructions are received from ESA and Southwest, pending payment in full to the Lenders and Southwest; and d. Fourth, when payment in full has been made to the Lenders and to Southwest, the balance of the Investment shall be paid to ESA or as directed by ESA, whereupon this Agreement shall terminate for all purposes. 4. In the event the aggregate Proceeds received and disbursed by Escrow Agent on or before _______, 1996 do not equal or exceed the amount due from the ESA Affiliates under the Notes, Escrow Agent shall disburse the Cash Deposit as follows: a. First, pari passu to the Lenders in accordance with the payoff ---- ----- letters attached hereto as Exhibit B; b. Second, to Southwest, in an amount equal to the remaining balance due from ESA under the Notes, giving credit for the amount paid to the Lenders; and c. Third, the balance of the Investment, if any, to ESA or as directed by ESA, whereupon this Agreement shall terminate for all purposes. 5. Escrow Agent shall not be liable for any loss, costs or damage which either ESA, the ESA Affiliates, or Southwest may suffer or incur as a result of Escrow Agent's act, omission or performance under this Agreement unless caused by Escrow Agent's willful misconduct or gross negligence. In performing its duties hereunder, Escrow Agent shall be held to the standard of an ordinary man. 6. In performing its duties hereunder, Escrow Agent shall have no duty to inquire (unless Escrow Agent has actual notice of the need for inquiry) upon the authenticity of signatures and of the authority of any person or persons acting or purporting to act on behalf of either Southwest or ESA. -2- 7. In the event any dispute should arise or exist as between ESA, the ESA Affiliates, the Sellers or Southwest as to the distribution and disbursement of the Cash Deposit or Proceeds, or interest earned thereon (in any case, or any combination of circumstances, a "Dispute"), or in the event Escrow Agent reasonably believes in good faith that a Dispute exists, Escrow Agent shall have the right to file an action in interpleader, naming ESA, the ESA Affiliates, the Sellers, and Southwest in either: (a) the courts of the State of Nevada, County of Clark, or (b) the United States District Court for the District of Nevada (ESA, the ESA Affiliates, and Southwest, and each of them, hereby evidencing their consent to the venue and jurisdiction of either of the foregoing courts, subject only to satisfaction of the requirements for federal jurisdiction, if that is the forum selected by Escrow Agent) and to deposit the balance of the Cash Deposit, the Proceeds and interest thereon into the registry thereof, after first deducting Escrow Agent's reasonable and actual costs of filing the action, including, without limitation, attorneys' fees, court costs and costs incurred in consulting legal counsel of Escrow Agent's selection prior to filing the interpleader action. Concurrently with such filing, Escrow Agent shall be dismissed from such action, whereupon this Agreement shall terminate, all liability, obligation and responsibility of Escrow Agent hereunder shall be released, discharged and accounted for, absolutely and forever, as shall also be the case upon any full disbursements of the Investment and/or Proceeds and interest thereon, under and by virtue of Paragraphs 3 or 4 or Paragraph 9(b) hereof. 8. As a matter which shall survive any termination of this Agreement, ESA shall indemnify and hold harmless Escrow Agent from and against any and all loss, cost, claim, expense, damage or demand including, but not limited to, court costs and reasonable, actual attorneys' fees, which Escrow Agent may suffer, incur or be threatened with and which arise from, and in connection with, or may in any manner whatsoever be derivative of, Escrow Agent's performance of its duties and responsibilities hereunder. In order for Escrow Agent to invoke the benefit of this indemnity, it shall only be necessary for Escrow Agent to give notice to ESA of the issue involved under this Paragraph 8 and, from and after the date of such notice, Escrow Agent shall be fully and completely reimbursed for all costs and, if necessary, defended by legal counsel approved by Escrow Agent against all claims. 9. (a) Except by operation of law, or by virtue of a corporate reorganization or merger of Escrow Agent, or as expressly provided herein, Escrow Agent shall not have the right to assign this Agreement or Escrow Agent's duties and responsibilities hereunder, nor transfer the Cash Deposit and/or Proceeds and interest to another person or entity. In the event of any such transfer or assignment as is contemplated by the first sentence of this Paragraph 9(a), Escrow Agent shall cause to be delivered to ESA, the ESA Affiliates, and to Southwest an assumption agreement in writing whereby Escrow Agent's successor (who shall become "Escrow Agent" hereunder) assumes all duties and responsibilities of Escrow Agent existing under and by virtue of this Agreement and in respect of the Cash Deposit, Certificates, and Proceeds and which contains then-current information regarding notice. Neither Escrow Agent nor any successor under this Paragraph 9(a) shall be relieved of liability to ESA, the ESA Affiliates, and Southwest by reason of any transfer and assignment of Escrow Agent's duties effected pursuant to this Paragraph 9(a). -3- (b) ESA and Southwest, acting jointly, only, and with or without cause, may terminate Escrow Agent's duties and obligations under this Agreement at any time upon prior written notice to Escrow Agent to such effect, which notice shall specify the person or entity to whom the Investment, and all interest thereon, shall be disbursed. Upon such disbursement, all duties, liabilities and obligations of Escrow Agent under this Agreement shall terminate. 10. All notices or directions required, necessary or desired to be given in respect of this Agreement shall be in writing, executed by ESA and Southwest, or Escrow Agent, or their designated representatives, shall be deemed given and effective when hand delivered against receipt by any means to the party for whom such notice is intended, or on the third (3rd) business day (where the term "business day" means a day upon which the Clark County, Nevada Recorder's office is open for business of receiving and recording real property instruments in the Official Records) following the day upon which such notice is deposited, postage prepaid, certified mail, return receipt requested, to the United States Postal Service (or successor thereto) and, in all cases, hand delivered, by facsimile transmission, or mailed, addressed as follows: a) If to the Southwest: Southwest Exchange Corporation 2920 N. Green Valley Pkwy. Henderson, Nevada 89014 Telephone No. (702) 454-1031 Facsimile No. (702) 454-7262 Designated Representative: Betty Kincaid Signature of Designated Representative__________ With a copy to: M&M Development 1785 E. Sahara, Suite 345 Las Vegas, Nevada 89104 Attn: Michael J. Mona, Jr. Telephone No. (702) 369-9977 Facsimile No. (702) 731-2347 Designated Representative(s): Michael J. Mona, Jr. Signature of Designated Representative___________ b) If to ESA or c/o Extended Stay America, Inc. the ESA Affiliates: 500 East Broward Boulevard, #950 Ft. Lauderdale, Florida 33394 Attn: Robert A. Brannon Telephone No. (954) 713-1600 Facsimile No. (954) 713-1655 Designated Representative(s): Robert A. Brannon Signature of Designated Representative___________ b) If to Escrow Agent: United Title of Nevada 4100 West Flamingo, Suite 1000 -4- Las Vegas, Nevada 89103 Attn: Susan Coleman Telephone No. (702) 362-6500 Facsimile No. (702) ___-____________ Designated Representative(s):___________________________ Signature of Designated Representative:_________________ or to such other address or attention as may be directed by proper notice. 11. Except as may be otherwise expressly provided herein, this Agreement and the terms, covenants and conditions hereof, shall be binding upon and shall inure to the benefit of ESA, the ESA Affiliates, Southwest, and Escrow Agent and their respective or permitted successors or assigns. As used herein, the terms "ESA", "Southwest" and "Escrow Agent" mean and include the persons or entities signatory hereto and their respective successors, assigns and legal representatives. 12. This Agreement is a contract for performance of escrow services and is to be governed, interpreted, construed and enforced under and by reference to the substantive (but not the conflicts) laws of the State of Nevada. 13. It is not intended that any provision of this Agreement, now or hereafter contained, shall constitute, or be deemed or construed so as to constitute, a commitment or undertaking by Escrow Agent with respect to title, examination or certification of title, the status of title, or the insurance of title to the any property. No practice or conduct of the parties under and in respect of this Agreement and the rights, duties, obligations and activities hereof shall produce a continuing result or be deemed or construed to produce, a contrary result to this express intention of the parties, in any manner whatsoever. 14. This Agreement may not be altered, modified or amended in any manner other than in writing, executed by each party hereto. 15. This Agreement may be executed in one or more counterparts, provided that any aggregate number of counterparts having at least one original execution of each party affixed, shall constitute one and the same Agreement. -5- IN WITNESS WHEREOF, ESA, the ESA Affiliates, Southwest and Escrow Agent, have executed this Agreement as of the day and year first above written. SOUTHWEST EXCHANGE CORPORATION, a Nevada Corporation Under Exchange Agreement dated June 28, 1996, Account No. 96-335-TRF(St. Louis),Account No. 96-333-TRF (Boulder), and Account No. 96-336- TRF (Melrose) By________________________________________ Betty Kincaid, President EXTENDED STAY OF AMERICA, INC. By:________________________________________ Robert A. Brannon, Senior Vice President ESA 0858, INC., a Nevada corporation By:_________________________________________ Robert A. Brannon, Vice President ESA 0859, INC., a Nevada corporation By:________________________________________ Robert A. Brannon, Vice President ESA 0860, INC., a Nevada corporation By:________________________________________ Robert A. Brannon, Vice President UNITED TITLE OF NEVADA By:________________________________________ (Type Name):_______________________________ Its:_______________________________________ (Type Title):______________________________ -6- ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT ("Agreement") is made this ____ day of ________, 1996, by and among Southwest Exchange Corporation, a Nevada corporation, under Exchange Agreements dated June 28, 1996, Account No. 96-334-TRF ("Mona") and Account No. 96-340-KLK ("O'Bannon") ("Southwest"), Extended Stay America, Inc., a Delaware corporation ("ESA"), ESA 0861, Inc., a Nevada corporation ("ESA 0861"), and United Title of Nevada ("Escrow Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Michael J. Mona and Dean O'Bannon (collectively the "Seller") and ESA 0861 (successor in interest to ESA Properties, Inc.) have entered into a certain Agreement to Purchase Hotel, dated June 25, 1996 (the "Purchase Agreement"); and WHEREAS, pursuant to the Purchase Agreement, ESA has delivered promissory notes (the "Notes"), a copy of each of which is attached hereto as Exhibit A; and WHEREAS, to secure ESA's obligations under the Notes, Southwest and ESA desire Escrow Agent to hold certain monies and to take such actions in accordance with the terms hereof or as otherwise directed jointly by Southwest and ESA. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Escrow Agent is appointed as the entity responsible for holding, investing and disbursing the Cash Deposit and Proceeds (as those terms are hereinafter defined) and Escrow Agent accepts such appointment, all subject to the terms and conditions of this Agreement. 2. ESA has deposited with Escrow Agent the amount of $5,500,000.00 (the "Cash Deposit") which shall be invested together with the Proceeds, if any, as ESA directs or, if Escrow Agent receives no such direction, then in an interest bearing money market account or other account (the "Investment"). Escrow Agent is authorized to file appropriate or necessary reports or returns of interest earned on the Investment with the United States Treasury Department, Internal Revenue Service, and any applicable State or local taxing authority, in aid of which ESA's Federal Taxpayer Identification Number is 36-3996573. Escrow Agent shall have no liability or responsibility for any loss or cost which may be suffered by ESA, ESA 0861, or Southwest as a result of the failure or insolvency of any financial instruction, or the loss of any interest in which the Investment may be made, unless caused by Escrow Agent's conversion of funds to its own account. 3. Escrow Agent shall receive the proceeds ("Proceeds") from the sale of such shares of common stock delivered pursuant to the Agreements and shall disburse such Proceeds as follows: a. First, pari passu to the Seller's lenders (the "Lenders") in ---- ----- accordance with the payoff letters attached hereto as Exhibit B; b. Second, when the indebtedness of the Lenders is paid in full pursuant to such payoff letters, the balance, if any, as directed by Southwest, up to the remaining balance of the Note which shall be reduced dollar for dollar by the amount paid to the Lenders; c. Third, undisbursed Proceeds shall be invested as the Cash Deposit is invested until contrary instructions are received from ESA and Southwest, pending payment in full to the Lenders and Southwest; and d. Fourth, when payment in full has been made to the Lenders and to Southwest, the balance of the Investment shall be paid to ESA or as directed by ESA, whereupon this Agreement shall terminate for all purposes. 4. In the event the aggregate Proceeds received and disbursed by Escrow Agent on or before _______, 1996 do not equal or exceed the amount due from ESA under the Note, Escrow Agent shall disburse the Cash Deposit as follows: a. First, pari passu to the Lenders in accordance with the payoff ---- ----- letters attached hereto as Exhibit B; b. Second, to Southwest, in an amount equal to the remaining balance due from ESA under the Note, giving credit for the amount paid to the Lenders; and c. Third, the balance of the Investment, if any, to ESA or as directed by ESA, whereupon this Agreement shall terminate for all purposes. 5. Escrow Agent shall not be liable for any loss, costs or damage which either ESA, ESA 0861, or Southwest may suffer or incur as a result of Escrow Agent's act, omission or performance under this Agreement unless caused by Escrow Agent's willful misconduct or gross negligence. In performing its duties hereunder, Escrow Agent shall be held to the standard of an ordinary man. 6. In performing its duties hereunder, Escrow Agent shall have no duty to inquire (unless Escrow Agent has actual notice of the need for inquiry) upon the authenticity of signatures and of the authority of any person or persons acting or purporting to act on behalf of either Southwest or ESA. 7. In the event any dispute should arise or exist as between ESA, ESA 0861, the Seller or Southwest as to the distribution and disbursement of the Cash Deposit or Proceeds, or interest earned thereon (in any case, or any combination of circumstances, a "Dispute"), or in the -2- event Escrow Agent reasonably believes in good faith that a Dispute exists, Escrow Agent shall have the right to file an action in interpleader, naming ESA, ESA 0861, the Seller and Southwest, in either: (a) the courts of the State of Nevada, County of Clark, or (b) the United States District Court for the District of Nevada (ESA, ESA 0861, and Southwest and each of them, hereby evidencing their consent to the venue and jurisdiction of either of the foregoing courts, subject only to satisfaction of the requirements for federal jurisdiction, if that is the forum selected by Escrow Agent) and to deposit the balance of the Cash Deposit, the Proceeds and interest thereon into the registry thereof, after first deducting Escrow Agent's reasonable and actual costs of filing the action, including, without limitation, attorneys' fees, court costs and costs incurred in consulting legal counsel of Escrow Agent's selection prior to filing the interpleader action. Concurrently with such filing, Escrow Agent shall be dismissed from such action, whereupon this Agreement shall terminate, all liability, obligation and responsibility of Escrow Agent hereunder shall be released, discharged and accounted for, absolutely and forever, as shall also be the case upon any full disbursements of the Investment and/or Proceeds and interest thereon, under and by virtue of Paragraphs 3 or 4 or Paragraph 9(b) hereof. 8. As a matter which shall survive any termination of this Agreement, ESA shall indemnify and hold harmless Escrow Agent from and against any and all loss, cost, claim, expense, damage or demand including, but not limited to, court costs and reasonable, actual attorneys' fees, which Escrow Agent may suffer, incur or be threatened with and which arise from, and in connection with, or may in any manner whatsoever be derivative of, Escrow Agent's performance of its duties and responsibilities hereunder. In order for Escrow Agent to invoke the benefit of this indemnity, it shall only be necessary for Escrow Agent to give notice to ESA of the issue involved under this Paragraph 8 and, from and after the date of such notice, Escrow Agent shall be fully and completely reimbursed for all costs and, if necessary, defended by legal counsel approved by Escrow Agent against all claims. 9. (a) Except by operation of law, or by virtue of a corporate reorganization or merger of Escrow Agent, or as expressly provided herein, Escrow Agent shall not have the right to assign this Agreement or Escrow Agent's duties and responsibilities hereunder, nor transfer the Cash Deposit and/or Proceeds and interest to another person or entity. In the event of any such transfer or assignment as is contemplated by the first sentence of this Paragraph 9(a), Escrow Agent shall cause to be delivered to ESA, ESA 0861, and to Southwest an assumption agreement in writing whereby Escrow Agent's successor (who shall become "Escrow Agent" hereunder) assumes all duties and responsibilities of Escrow Agent existing under and by virtue of this Agreement and in respect of the Cash Deposit, Certificates, and Proceeds and which contains then-current information regarding notice. Neither Escrow Agent nor any successor under this Paragraph 9(a) shall be relieved of liability to ESA, ESA 0861, and Southwest by reason of any transfer and assignment of Escrow Agent's duties effected pursuant to this Paragraph 9(a). (b) ESA and Southwest, acting jointly, only, and with or without cause, may terminate Escrow Agent's duties and obligations under this Agreement at any time upon prior written notice to Escrow Agent to such effect, which notice shall specify the person or entity to whom the Investment, and all interest thereon, shall be disbursed. Upon such disbursement, all duties, liabilities and obligations of Escrow Agent under this Agreement shall terminate. -3- 10. All notices or directions required, necessary or desired to be given in respect of this Agreement shall be in writing, executed by ESA and Southwest, or Escrow Agent, or their designated representatives, shall be deemed given and effective when hand delivered against receipt by any means to the party for whom such notice is intended, or on the third (3rd) business day (where the term "business day" means a day upon which the Clark County, Nevada Recorder's office is open for business of receiving and recording real property instruments in the Official Records) following the day upon which such notice is deposited, postage prepaid, certified mail, return receipt requested, to the United States Postal Service (or successor thereto) and, in all cases, hand delivered, by facsimile transmission, or mailed, addressed as follows: a) If to the Southwest: Southwest Exchange Corporation 2920 N. Green Valley Pkwy. Henderson, Nevada 89014 Telephone No. (702) 454-1031 Facsimile No. (702) 454-7262 Designated Representative: Betty Kincaid Signature of Designated Representative__________ With a copy to: M&M Development 1785 E. Sahara, Suite 345 Las Vegas, Nevada 89104 Attention: Michael J. Mona Designated Representative(s): Michael J. Mona, Jr. Signature of Designated Representative____________ b) If to ESA or c/o Extended Stay America, Inc. ESA 0861: 500 East Broward Boulevard, #950 Ft. Lauderdale, Florida 33394 Attn: Robert A. Brannon Telephone No. (954) 713-1600 Facsimile No. (954) 713-1655 Designated Representative(s): Robert A. Brannon Signature of Designated Representative____________ b) If to Escrow Agent: United Title of Nevada 4100 West Flamingo, Suite 1000 Las Vegas, Nevada 89103 Attn: Susan Coleman Telephone No. (702) 362-6500 Facsimile No. (702) ___-____________ Designated Representative(s):_____________________ Signature of Designated Representative:___________ -4- or to such other address or attention as may be directed by proper notice. 11. Except as may be otherwise expressly provided herein, this Agreement and the terms, covenants and conditions hereof, shall be binding upon and shall inure to the benefit of ESA, ESA 0861, Southwest, and Escrow Agent and their respective or permitted successors or assigns. As used herein, the terms "ESA", "Southwest" and "Escrow Agent" mean and include the persons or entities signatory hereto and their respective successors, assigns and legal representatives. 12. This Agreement is a contract for performance of escrow services and is to be governed, interpreted, construed and enforced under and by reference to the substantive (but not the conflicts) laws of the State of Nevada. 13. It is not intended that any provision of this Agreement, now or hereafter contained, shall constitute, or be deemed or construed so as to constitute, a commitment or undertaking by Escrow Agent with respect to title, examination or certification of title, the status of title, or the insurance of title to the any property. No practice or conduct of the parties under and in respect of this Agreement and the rights, duties, obligations and activities hereof shall produce a continuing result or be deemed or construed to produce, a contrary result to this express intention of the parties, in any manner whatsoever. 14. This Agreement may not be altered, modified or amended in any manner other than in writing, executed by each party hereto. 15. This Agreement may be executed in one or more counterparts, provided that any aggregate number of counterparts having at least one original execution of each party affixed, shall constitute one and the same Agreement. -5- IN WITNESS WHEREOF, ESA, ESA 0861, Southwest and Escrow Agent, have executed this Agreement as of the day and year first above written. SOUTHWEST EXCHANGE CORPORATION, a Nevada Corporation Under Exchange Agreement dated June 28, 1996, Account No. 96-340-KLK (O'Bannon) and Account No. 96-334-TRF (Mona) By___________________________________________ Betty Kincaid, President EXTENDED STAY OF AMERICA, INC. By:__________________________________________ Robert A. Brannon, Senior Vice President ESA 0861, INC., a Nevada corporation By:__________________________________________ Robert A. Brannon, Vice President UNITED TITLE OF NEVADA By:__________________________________________ (Type Name):_________________________________ Its:_________________________________________ (Type Title):________________________________ -6- CONSULTING AGREEMENT -------------------- THIS CONSULTING AGREEMENT (this "Agreement") is made and entered into this___ day of July, 1996, by and between Extended Stay America, Inc. (the "Company") and M&M Development, a Nevada corporation (the "Consultant"). Recitals -------- A. Consultant has valuable knowledge and experience in operating certain lodging facilities in the Las Vegas, Nevada area. B. The Company desires to utilize the knowledge and experience of Consultant in the conduct of its business operations, all upon the terms and conditions provided for in this Agreement. NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows: 1. Recitals. The recitals to this Agreement are hereby incorporated -------- herein as part of this Agreement. 2. Term. The term of this Agreement (the "Term") shall commence on the ---- date hereof and shall terminate on the second anniversary of the date hereof. 3. Duties. Consultant's duties shall include such consulting and ------ advisory services pertaining to the business of the Company as are requested by the Chairman or President of the Company. Consultant shall perform its services to the best of its ability in the performance of such services. Consultant shall not be required to spend greater than ten (10) hours in any month during the term on a non-cumulative basis in the performance of its duties hereunder and shall not be required to travel outside the Las Vegas, Nevada area. Consultant's duties hereunder may be performed by Michael J. Mona, Jr. or E. Joy McLauchlin or another employee of Consultant with knowledge of operation of lodging facilities in Las Vegas, Nevada. 4. Compensation. ------------ (a) The Company shall pay Consultant a consulting fee of $10,000 per month, payable on the first day of each month during the term. (b) Consultant shall be reimbursed for reasonable travel expenses necessarily and reasonably incurred by Consultant in connection with the performance of its duties hereunder upon presentation of proper receipts or other proof of expenditure. 5. Confidential Information and Covenant Not to Compete. All payments and ---------------------------------------------------- benefits to Consultant under the Agreement shall be subject to Consultant's compliance with the provisions of this Section 5. (a) Confidential Information. Consultant acknowledges that in its ------------------------ capacity as Consultant it is or will be making use of, acquiring or adding to the Company's confidential information which includes, but is not limited to, memoranda and other materials or records of a proprietary nature; technical information regarding the operations of the Company; and records and policy matters relating to finance, personnel, management, and operations. Therefore, in order to protect the Company's confidential information and to protect other employees who depend on the Company for regular employment, Consultant agrees that it will not in any way utilize any of said confidential information except in connection with the business of the Company and (i) will not copy, reproduce, or take with it the original or any copies of said confidential information, and (ii) will not directly or indirectly divulge any of said confidential information to anyone without the prior written consent of the Company. (b) Litigation Support. Consultant shall, upon reasonable notice, ------------------ furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which the Company or any of its subsidiaries or affiliates is, or may become a party. Consultant's reasonable expenses (including travel and reasonable attorneys fees) incurred in complying with this covenant shall be promptly reimbursed. Notwithstanding the foregoing, Consultant shall not be required to travel outside the Las Vegas, Nevada area. (c) No Solicitation of Employees. Consultant and the Company each ---------------------------- agree that during the Term of this Agreement and continuing for a period of two years after the termination of this Agreement, neither they nor any person or enterprise controlling or controlled by them will solicit for employment any person employed by the other or any of the others' affiliates. (d) Covenant Not to Compete. Consultant agrees that during the Term ----------------------- of this Agreement, neither it nor any person or enterprise controlling or controlled by it will become a stockholder, director, officer, agent, consultant or employee of a business, whether or not incorporated, or have any financial stake of any nature in any of the foregoing or otherwise engage directly or indirectly in any enterprise which is a Competing Business (defined below) in the Prohibited Area (defined below); provided, however, that the foregoing shall not prohibit (a) the ownership of those properties described on Exhibit A attached hereto; or (b) the ownership of less than 5% of the outstanding shares of stock of any corporation engaged in any business, -2- which shares are regularly traded on a national securities exchange or in any over-the-market. The term "Competing Business" shall mean any business, person, or entity which is engaged in the ownership, management, operation, or development of extended-stay lodging facilities generally similar to those owned or operated by the Company or its affiliates during the Term. The term "Prohibited Area" shall mean, on the date of the termination of this Agreement, any area within 25 miles of (i) any extended-stay lodging facilities owned or operated by the Company or any of its affiliates; and (ii) any real property owned, leased, or under contract for purchase by the Company or any of its affiliates where the Company or any of its affiliates intends to develop an extended-stay lodging facility. (e) Remedies for Breach of Covenants. In the event that a covenant -------------------------------- included in this Agreement shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly; provided, however, that in the event that any court shall refuse to enforce any of the covenants contained in subsections 5(a) through (d), then the unenforceable covenant shall be deemed eliminated from the provisions of this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced so that the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. If Consultant violates any of the covenants contained in this Section 5, then the Company's obligation to make any payments to Consultant otherwise due it under this Agreement shall immediately cease. In addition, Consultant acknowledges that any material breach of its covenants contained in this Section 5 will cause irreparable harm to the Company, which will be difficult if not impossible to ascertain, and the Company shall be entitled to equitable relief, including injunctive relief, against any actual or threatened breach hereof, without bond and without liability should such relief be denied, modified or vacated. Neither the right to obtain such relief or the obtaining of such relief shall be exclusive of or preclude the Company from any other remedy. In the event Company fails to pay any amount due to Consultant pursuant to Section 4 hereof within five (5) days of its due date, and such failure has not been cured within ten (10) days after Company's receipt of written notice from Consultant of Company's breach, Consultant's obligations under this Section 5 shall terminate. 6. Applicable Law and Jurisdiction. The terms and conditions of this ------------------------------- Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought in the courts of the State of Nevada, County of Clark, or, if it can acquire jurisdiction, in the United States District Court for the District of Nevada. 7. Independent Contractor. This Agreement does not constitute the ---------------------- Consultant as an agent, partner, joint venturer, employee or legal representative of Company for any purpose -3- whatsoever, it being understood by the parties hereto that Consultant is and will be at all times an independent contractor. Neither party hereto shall have the right to bind the other, or transact any business in the other's name or on its behalf, in any form or manner, or to make any promises or representations on behalf of the other. 8. Assignment. The rights and benefits of Consultant hereunder are not ---------- assignable whether by voluntary or involuntary assignment or transfer. This Agreement shall be binding upon and inure to the benefit of the successors of the Company and shall be assignable by the Company to any entity acquiring substantially all of the assets of the Company. 9. Amendments. It is mutually understood and agreed that this Agreement ---------- sets forth the entire agreement and understanding between the parties hereto with respect to the subject matter hereof, and that this Agreement shall not be supplemented, modified or amended except by a written instrument signed by a duly authorized officer of the Company and Consultant, and that no other person shall have the authority to supplement, modify or amend this Agreement in any other manner. 10. Validity. If any provision in this Agreement shall be held to be -------- invalid, illegal or unenforceable in any respect, such invalid, illegal or unenforceable provision shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 11. Non-Waiver. Continuation of the performance of this Agreement is not ---------- to be construed as a waiver of an alleged breach, and such continuation is done at all times with a reservation of all rights under this Agreement. 12. Notices. All notices herein provided for or which may be given in ------- connection with this Agreement shall be in writing and shall be personally delivered or sent by certified or registered mail with postage prepaid and return receipt requested, or sent by overnight express courier, postage prepaid, addressed to the party to be so notified as follows: if to Company: Extended Stay America, Inc. 500 East Broward Boulevard Suite 950 Ft. Lauderdale, Florida 33394 Attention: Robert A. Brannon -4- with a copy to: Pedersen & Houpt 161 North Clark Street Suite 3100 Chicago, Illinois 60601-3224 Attention: Michael W. Black and if to Consultant: M&M Development 1785 E. Sahara, Suite 345 Las Vegas, Nevada 89104 Attention: Michael J. Mona, Jr. with a copy to: Jones, Jones, Close & Brown 3773 Howard Hughes Parkway, Third Floor South Las Vegas, Nevada 89109 Attention: Jodi R. Goodheart Notices mailed by registered or certified mail shall be deemed received by the addressee three (3) days after mailing thereof. Notice personally delivered shall be deemed received when delivered. Notice mailed by overnight express courier shall be deemed received by the addressee two (2) days after mailing thereof. Either party may at any time change the address for notice to such party by delivering a notice as aforesaid. -5- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date above written. EXTENDED STAY AMERICA, INC. By_________________________ Its________________________ M&M DEVELOPMENT By_________________________ Its________________________ -6- -----END PRIVACY-ENHANCED MESSAGE-----