-----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, TXCoPBCdjKaHa3BkhOPUDUQcArOjhi4HYmQ4uf1VU4l8tIxYI5ZczUCbAAQBiKaW aZo1kHzgisUGVZTWGmtKqg== 0000912057-97-006881.txt : 19970227 0000912057-97-006881.hdr.sgml : 19970227 ACCESSION NUMBER: 0000912057-97-006881 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970226 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTAR HOTEL CO CENTRAL INDEX KEY: 0001014764 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521979383 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22073 FILM NUMBER: 97543967 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 2029654455 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 FORMER COMPANY: FORMER CONFORMED NAME: CAPSTAR HOTEL INVESTORS INC DATE OF NAME CHANGE: 19960517 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1997 REGISTRATION NO. 333-22073 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- CAPSTAR HOTEL COMPANY (Exact name of registrant as specified in its charter) DELAWARE 7011 52-1979383 (State of (Primary Standard Industrial (I.R.S. Employer incorporation) Classification Code Number) Identification No.)
------------------------------ 1010 WISCONSIN AVENUE, N.W. WASHINGTON, DC 20007 (202) 965-4455 (Address and telephone number of Registrant's principal executive offices) ------------------------------ PAUL W. WHETSELL PRESIDENT AND CHIEF EXECUTIVE OFFICER CAPSTAR HOTEL COMPANY 1010 WISCONSIN AVENUE, N.W. WASHINGTON, DC 20007 (202) 965-4455 (Name, address and telephone number of agent for service) ------------------------------ COPIES TO: RICHARD S. BORISOFF, ESQ. J. WARREN GORRELL, JR., ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON ALAN L. DYE, ESQ. 1285 AVENUE OF THE AMERICAS HOGAN & HARTSON L.L.P. NEW YORK, NEW YORK 10019-6064 555 THIRTEENTH STREET, N.W. (212) 373-3000 WASHINGTON, DC 20004-1109 (202) 637-5600
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 FEBRUARY 26, 1997 PROSPECTUS 5,000,000 SHARES [LOGO] COMMON STOCK ------------------ CapStar Hotel Company ("CapStar" or the "Company") is a hotel management and investment company which acquires, renovates, repositions and manages hotels throughout the United States. CapStar owns and manages 22 upscale, full-service hotels (the "Owned Hotels") which contain 5,981 rooms and manages an additional 31 hotels owned by third parties which contain 5,488 rooms (the "Managed Hotels"). CapStar's portfolio of Owned Hotels and Managed Hotels includes 53 hotels which contain 11,469 rooms (the "Hotels"). The Company has entered into contracts to acquire a portfolio of six hotels which contain 1,358 rooms (the "Highgate Portfolio") and two additional hotels containing 367 rooms (the "Additional Acquisitions"). The Company's business strategy is to identify and acquire hotel properties with the potential for cash flow growth and to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. All of the 5,000,000 shares of common stock, par value $.01 per share (the "Common Stock") offered hereby, are being offered by the Company. The Common Stock is listed on the New York Stock Exchange ("NYSE"), under the symbol "CHO." On February 25, 1997, the last reported sale price of the Common Stock was $24 1/8. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 11. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PUBLIC AND COMMISSIONS(1) COMPANY(2) Per Share.......................... $ $ $ Total(3)........................... $ $ $
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to 750,000 additional shares on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ . See "Underwriting." ------------------- The shares of Common Stock offered by this Prospectus are offered by the several Underwriters, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the shares will be made at the offices of Lehman Brothers Inc., in New York, New York on or about , 1997. ------------------- LEHMAN BROTHERS BT SECURITIES CORPORATION GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. MONTGOMERY SECURITIES SMITH BARNEY INC. ------------------- , 1997. [PHOTOGRAPHS/MAPS AND CAPTIONS] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS WILL NOT BE EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO "CAPSTAR" OR THE "COMPANY" INCLUDE CAPSTAR HOTEL COMPANY AND ITS SUBSIDIARIES (INCLUDING THE COMPANY'S SUBSIDIARY OPERATING PARTNERSHIP, CAPSTAR MANAGEMENT COMPANY, L.P., THROUGH WHICH THE COMPANY OPERATES ALL OF ITS BUSINESSES). THE OFFERING BY THE COMPANY OF 5,000,000 SHARES OF COMMON STOCK IS REFERRED TO HEREIN AS THE "OFFERING." ALL STATISTICS IN THIS PROSPECTUS RELATING TO THE LODGING INDUSTRY GENERALLY (OTHER THAN COMPANY STATISTICS) ARE FROM, OR HAVE BEEN DERIVED FROM, INFORMATION PUBLISHED OR PROVIDED BY SMITH TRAVEL RESEARCH, AN INDEPENDENT INDUSTRY RESEARCH ORGANIZATION. SMITH TRAVEL RESEARCH HAS NOT CONSENTED TO THE USE OF THE DATA PRESENTED IN THIS PROSPECTUS AND HAS NOT PROVIDED ANY FORM OF CONSULTATION, ADVICE OR COUNSEL REGARDING ANY ASPECT OF THE OFFERING. THE COMPANY CapStar is a hotel management and investment company which acquires, renovates, repositions and manages hotels throughout the United States. CapStar owns and manages 22 upscale, full-service hotels (the "Owned Hotels") which contain 5,981 rooms and manages an additional 31 hotels owned by third parties which contain 5,488 rooms (the "Managed Hotels"). CapStar's portfolio of Owned Hotels and Managed Hotels includes 53 hotels which contain 11,469 rooms (the "Hotels"). The Company's business strategy is to acquire hotel properties with the potential for cash flow growth and to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. The Owned Hotels are located in markets which have recently experienced strong economic growth, including Albuquerque, Atlanta, Charlotte, Chicago, Cleveland, Denver, Houston, Los Angeles, Salt Lake City, Seattle and Washington, D.C. The Owned Hotels include hotels operated under nationally recognized brand names such as Hilton-TM-, Sheraton-Registered Trademark-, Westin-TM-, Marriott-Registered Trademark-, Doubletree-TM- and Embassy Suites-Registered Trademark-. For the year ended December 31, 1996, on a pro forma basis, the operating performance of the Owned Hotels (excluding the ten hotels purchased since September 30, 1996) improved significantly, as demonstrated by the following table:
PRO FORMA YEAR ENDED DECEMBER 31, ---------------------- PERCENTAGE 1995 1996 INCREASE ---------- ---------- ------------- Revenues (in thousands)............................... $ 109,798 $ 118,329 7.8% Gross Operating Profit (in thousands)................. $ 30,947 $ 37,909 22.5% Average Occupancy..................................... 72.4% 72.9% 0.7% Average Daily Rate ("ADR")............................ $ 75.25 $ 83.82 11.4% Revenue Per Available Room ("RevPAR")................. $ 54.44 $ 61.11 12.3%
Additionally, the performance of the Owned Hotels compares favorably with that of the industry in general. For the year ended December 31, 1996, RevPAR for the Owned Hotels (excluding the ten hotels purchased since September 30, 1996) increased 12.3%, while RevPAR for all upscale hotels, as reported by Smith Travel Research, increased 5.4%. For the year ended December 31, 1996, RevPAR at all of the Owned Hotels (including the ten hotels purchased since September 30, 1996) increased 10.1%. The Company completed its initial public offering (the "IPO") in August 1996. Since the IPO, the Company has significantly expanded its portfolio by completing the purchase of ten upscale, full-service hotels containing 2,465 rooms for an aggregate total acquisition cost, including estimated closing costs, planned renovations and initial working capital ("Total Acquisition Cost"), of $181.6 million. The Company has also entered into a contract with Highgate Hotels, Inc. and certain affiliated entities ("Highgate Hotels") to acquire a portfolio of six upscale, full-service hotels containing 1,358 rooms (the "Highgate Portfolio") for a Total Acquisition Cost of approximately $104.7 million. See "Recent Developments--The 3 Highgate Portfolio." The Company has also entered into contracts to acquire two additional hotels containing 367 rooms for a Total Acquisition Cost of $26.7 million (the "Additional Acquisitions"). In addition to the acquisition of these hotels, since the IPO the Company has invested in a joint venture which owns the 456-room Holiday Inn Riverfront in St. Louis, Missouri and has entered into three new long-term management agreements. During the year ended December 31, 1996, the Company spent a total of $21.6 million on renovations at the Owned Hotels and intends to spend an additional $21.7 million completing the renovation programs (including approximately $8.4 million to renovate and reposition the Highgate Portfolio and the Additional Acquisitions). See "Special Note Regarding Forward-Looking Statements." As a fully integrated owner and manager, CapStar intends to capitalize on its management experience and expertise by continuing to make opportunistic acquisitions of full-service hotels, securing additional management contracts and improving the operating performance of the Hotels. The Company's senior management team has successfully managed hotels in all segments of the lodging industry, with particular emphasis on upscale, full-service hotels. Senior management has an average of approximately 20 years of experience in the hotel industry. Since the inception of the Company's management business in 1987, the Company has achieved consistent growth, even during periods of relative industry weakness. The Company attributes its management success to its ability (i) to analyze each hotel as a unique property and identify those particular cash flow growth opportunities which each hotel presents, (ii) to create and implement marketing plans that properly position each hotel within its local market, and (iii) to develop management programs that emphasize guest service, labor productivity, revenue yield and cost control. The Company has a distinct management culture that stresses creativity, loyalty and entrepreneurship and was developed to emphasize operations from an owner's perspective. This culture is reinforced by the fact that 33 members of management will hold, directly or indirectly, an aggregate of 5.5% of the Common Stock upon completion of the Offering. See "Principal Stockholders." The Company believes that the upscale, full-service segment of the lodging industry is the most attractive segment in which to acquire, own and manage hotels and further believes that there are currently many attractive opportunities to acquire properties in this segment of the industry at prices below replacement cost. The upscale, full-service segment is attractive for several reasons. First, the Company expects that there will be no significant increases in the supply of upscale, full-service hotels in the next several years because the cost of new construction generally does not justify new hotel development. Second, upscale, full-service hotels appeal to a wide variety of customers, thus reducing the risk of decreasing demand from any particular customer group. Additionally, such hotels have particular appeal to both business executives and upscale leisure travelers, customers who are generally less price sensitive than travelers who use limited-service hotels. Third, because full-service hotels have a higher proportion of fixed costs to variable costs than other segments of the lodging industry, full-service hotels afford greater operating leverage than limited-service hotels, resulting in increasingly higher profit margins as revenues increase. Finally, full-service hotels require a greater depth of management expertise than limited-service hotels, and the Company believes that its superior management skills provide it with a significant competitive advantage in their operation. 4 RECENT DEVELOPMENTS In August 1996, the Company completed its IPO at a price of $18 per share, generating net proceeds of approximately $110 million to the Company. Since completing the IPO, the Company has continued to execute the hotel acquisition and operating strategies that it had pursued prior to the IPO which has resulted in significant growth in the Company's hotel portfolio. The Company's acquisition, financing, and management activities since the IPO are discussed below. POST-IPO ACQUISITIONS At the time of the IPO, the Company owned 12 upscale, full-service hotels, containing 3,516 rooms. Since the IPO, the Company has acquired ten additional upscale, full-service hotels containing 2,465 rooms. These newly acquired hotels are operated under nationally recognized brand names such as Hilton, Doubletree, Embassy Suites and Holiday Inn-Registered Trademark-. The Company expects to improve the operating performance of these newly acquired hotels by implementing the detailed management plans that have been created for each property as part of its operation strategy. The Company believes that all of its post-IPO acquisitions represent attractive investment opportunities because (i) they are located in major metropolitan or growing secondary markets and are well-located within these markets (ii) they were acquired at an average cost of approximately $74,000 per room, which represents more than a 30% discount to replacement cost and (iii) they have attractive current returns and potential for significant revenue and cash flow growth through implementation of the Company's operating strategy. THE HIGHGATE PORTFOLIO The Company has entered into a contract with Highgate Hotels to acquire the Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358 rooms for a Total Acquisition Cost of approximately $104.7 million. The acquisition will be financed with $75.2 million in cash and $29.5 million of units in the Company's subsidiary operating partnership ("OP Units"). See "Recent Developments--The Highgate Portfolio." The Highgate Portfolio hotels are operated under nationally recognized brand names including Sheraton, Doubletree, Radisson-Registered Trademark-, Ramada-Registered Trademark- and Holiday Inn, and are located in Dallas, Indianapolis, Calgary and Vancouver. The Highgate Portfolio enhances the Company's geographic diversity by expanding its portfolio into Canada and, in connection with the acquisition of the Highgate Portfolio, the Company has entered into agreements to manage two additional hotels owned by principals of Highgate Hotels: the 414-room Pontchartrain-Crowne Plaza in Detroit, Michigan and the 393-room Four Points Hotel in suburban Atlanta. The Company believes that the acquisition of the Highgate Portfolio and the establishment of a strategic alliance with Highgate Hotels (one of the principals of which the Company has agreed to nominate to a new seat on its board of directors) will provide significant benefits to its on-going acquisition and corporate development activities. A portion of the net proceeds from the Offering will be used by the Company to consummate the acquisition of the Highgate Portfolio. The Company expects to complete the acquisition of the Highgate Portfolio in April 1997. There can be no assurance, however, that the closing will occur. See "Risk Factors--Risks Associated with Expansion" and "Special Note Regarding Forward-Looking Statements." THE ADDITIONAL ACQUISITIONS The Company has also entered into contracts to acquire the Additional Acquisitions: the 213-room Four Points Hotel in Cherry Hill, New Jersey for a Total Acquisition Cost of $8.2 million and the 154-room Great Valley Sheraton in Frazer, Pennsylvania for a Total Acquisition Cost of $18.5 million. MANAGEMENT AGREEMENTS/JOINT VENTURES In January 1997, the Company invested in a joint venture with Hallmark Investment Corp. which owns the Holiday Inn Riverfront, located in downtown St. Louis at the base of the Gateway Arch. In connection 5 with the joint venture, the Company has signed a long-term agreement to manage the 456-room property. Since August 1996 the Company has entered into significant new long-term management agreements with three other hotel owners. The Company expects to form additional joint ventures and strategic alliances with institutional and private hotel owners to invest in future acquisitions and sale and leaseback transactions, and to secure additional fee management arrangements. See "Special Note Regarding Forward-Looking Statements." FINANCING ACTIVITIES In September 1996, the Company entered into a $225 million revolving credit facility (the "Credit Facility") led by Bankers Trust Company ("Bankers Trust"), as agent, to fund post-IPO acquisitions, to repay outstanding indebtedness and for general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In December 1996, the Company modified the terms of the Credit Facility to increase the Company's permitted nonrecourse indebtedness from $25 million to $50 million and to permit it to incur up to $100 million of subordinated indebtedness. In December 1996, the Company borrowed $50 million of subordinated indebtedness (the "Subordinated Debt") to provide additional funding for acquisitions and for general corporate purposes. 6 THE PROPERTIES The following table sets forth certain information for each of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions for the year ended December 31, 1996:
YEAR ENDED DECEMBER 31, 1996 ------------------------ GUEST AVERAGE HOTEL LOCATION ROOMS ADR OCCUPANCY - ---------------------------------------------------------- ------------------------- ----------- --------- ------------- OWNED HOTELS Orange County Airport Hilton.............................. Irvine, CA 290 $ 78.48 66.0% Hilton Hotel.............................................. Sacramento, CA 326 75.89 71.7 Santa Barbara Inn......................................... Santa Barbara, CA 71 129.86 85.1 Hilton Hotel.............................................. San Pedro, CA 226 67.23 62.3 Holiday Inn............................................... Colorado Springs, CO 201 60.57 72.6 Sheraton Hotel............................................ Colorado Springs, CO 502 65.95 70.1 Embassy Suites Denver..................................... Englewood, CO 236 102.57 74.1 Embassy Row Hilton........................................ Washington, DC 195 111.24 60.8 The Latham Hotel.......................................... Washington, DC 143 108.17 72.0 Westin Atlanta Airport.................................... Atlanta, GA 496 79.44 79.3 Radisson Hotel............................................ Schaumburg, IL 202 75.54 66.1 Hilton Hotel & Towers..................................... Lafayette, LA 328 70.05 74.1 Marriott Hotel............................................ Somerset, NJ 434 104.36 72.4 Doubletree Hotel.......................................... Albuquerque, NM 294 77.12 66.6 Sheraton Airport Plaza.................................... Charlotte, NC 226 83.97 70.8 Holiday Inn............................................... Cleveland, OH 237 70.11 73.1 Hilton Hotel.............................................. Arlington, TX 310 81.03 73.3 Southwest Hilton.......................................... Houston, TX 293 72.17 53.9 Westchase Hilton.......................................... Houston, TX 295 89.87 77.9 Salt Lake Airport Hilton.................................. Salt Lake City, UT 287 79.18 75.5 Hilton Hotel.............................................. Arlington, VA 209 109.21 74.5 Hilton Hotel.............................................. Bellevue, WA 180 91.70 80.8 ----- --------- --- Subtotal/Weighted Average--Owned Hotels................. 5,981 $ 83.02 71.3% HIGHGATE PORTFOLIO Doubletree Guest Suites................................... Indianapolis, IN 137 $ 79.53 73.5% Holiday Inn Select........................................ Dallas, TX 348 59.04 61.7 Radisson Hotel............................................ Dallas, TX 305 60.69 74.6 Holiday Inn Calgary Airport............................... Calgary, Alberta 170 53.09 59.3 Sheraton Hotel............................................ Guildford, B.C. 280 69.17 75.2 Ramada Vancouver Centre................................... Vancouver, B.C. 118 70.40 79.4 ----- --------- --- Subtotal/Weighted Average--Highgate Portfolio........... 1,358 $ 64.35 69.8% ADDITIONAL ACQUISITIONS Four Points Hotel......................................... Cherry Hill, NJ 213 $ 73.40 61.8% Great Valley Sheraton..................................... Frazer, PA 154 88.80 72.0 ----- --------- --- Subtotal/Weighted Average--Additional Acquisitions 367 $ 80.43 66.1% ----- --------- --- Total/Weighted Average.................................. 7,706 $ 79.64 70.8% ----- --------- --- ----- --------- ---
The Company's principal executive offices are located at 1010 Wisconsin Avenue, N.W., Suite 650, Washington, DC 20007, and its telephone number is (202) 965-4455. 7 THE OFFERING Common Stock Offered by the Company........................... 5,000,000 shares Common Stock to be Outstanding after the Offering...................... 17,754,321 shares(1)(2) Use of Proceeds..................... The net proceeds of the Offering will be used to fund the acquisition of the Highgate Portfolio and the Additional Acquisitions, to retire outstanding balances under the Credit Facility and for general corporate purposes. NYSE Symbol......................... "CHO"
- ------------------------ (1) Does not include up to 750,000 shares of Common Stock subject to an over-allotment option granted to the Underwriters. See "Underwriting." (2) Does not include 1,201,680 shares of Common Stock issuable upon the conversion of 809,523 Common OP Units (as defined herein) and 392,157 Preferred OP Units (as defined herein). See "Recent Developments--The Highgate Portfolio." Also does not include 1,740,000 shares of Common Stock reserved for issuance under the Equity Incentive Plan (as defined herein) under which the Company has currently granted 745,254 options to purchase shares of Common Stock. See "Management--Compensation of Directors," "--Stock Option Grants" and "--Compensation Plans." 8 Summary Financial and Other Information Prior to the IPO, the business of the Company was conducted through EquiStar Hotel Investors, L.P. ("EquiStar") and CapStar Management Company, L.P. ("CapStar Management"). CapStar Management has been in the hotel management business since 1987. EquiStar, however, was not formed until January 12, 1995 and the Company did not own any hotels in any prior periods. Therefore, the Company's financial statements prior to 1995 reflect only the management business of CapStar Management. In 1994, the Company began to invest in additional professional staff and incurred related costs in order to position itself to acquire hotel properties. From January 12, 1995 through December 31, 1996, the Company acquired 19 hotels on various dates. Thus, the historical financial statements for the years ended December 31, 1996 and 1995 reflect differing numbers of hotels owned throughout the periods. The unaudited pro forma financial statements for the year ended December 31, 1996 assume 30 hotels owned.
FISCAL YEAR ENDED DECEMBER 31, PRO ---------------------------------------------------------- FORMA 1992 1993 1994 1995 1996 1996(A) ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) OPERATING RESULTS: Revenues: Rooms............................. $ 0 $ 0 $ 0 $ 14,456 $ 68,498 $ 158,293 Food, beverage and other.......... 0 0 0 7,471 36,949 81,543 Management services and other revenues........................ 3,479 4,234 4,418 4,436 4,345 3,169 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues................ 3,479 4,234 4,418 26,363 109,792 243,005 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses: Departmental expenses: Rooms............................. 0 0 0 4,190 17,509 39,732 Food, beverage and other.......... 0 0 0 5,437 27,102 60,496 Undistributed operating expenses: Selling, general and administrative.................. 2,836 4,065 4,508 8,078 20,448 43,450 Property operating costs.......... 0 0 0 3,934 17,151 39,769 Depreciation and amortization..... 12 14 23 2,098 8,248 18,801 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses...... 2,848 4,079 4,531 23,737 90,458 202,248 ---------- ---------- ---------- ---------- ---------- ---------- Operating income/(loss)............. 631 155 (113) 2,626 19,334 40,757 Interest expense, net............... 0 0 0 2,413 12,346 16,843 Minority interest................... 0 0 0 17 39 (1,663) Provision for income taxes(B)....... 0 0 0 0 2,674 8,901 Income/(loss) before extraordinary item.............................. 631 155 (113) 230 4,353 13,350 Extraordinary item(C)............... 0 0 0 (887) (1,956) 0 ---------- ---------- ---------- ---------- ---------- ---------- Net income/(loss)............... 631 155 (113) (657) 2,397 13,350 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings per share before extraordinary item(D)............. $ -- $ -- $ -- $ -- $ 0.31 $ 0.75 Number of shares of common stock and common stock equivalents outstanding....................... -- -- -- -- 12,754,321 18,563,844 OTHER FINANCIAL DATA: EBITDA(E)........................... $ 643 $ 169 $ (90) $ 4,741 $ 27,621 $ 57,895 Net cash provided by (used in) operating activities.............. 87 (101) 66 4,357 13,373 33,164 Net cash used in investing activities........................ (65) (24) (41) (116,573) (225,251) (403,077) Net cash provided by (used in) financing activities.............. (219) 244 0 119,048 226,830 389,514 BALANCE SHEET DATA: Property and equipment, gross....... $ 110 $ 134 $ 176 $ 110,883 $ 343,092 $ 520,657 Total assets........................ 586 1,458 1,232 132,650 379,161 542,749 Long term obligations............... 0 0 0 73,574 200,361 219,470
9 SUMMARY FINANCIAL AND OTHER INFORMATION
FISCAL YEAR ENDED DECEMBER 31, PRO ---------------------------------------------------------- FORMA 1992 1993 1994 1995 1996 1996(A) ---------- ---------- ---------- ---------- ---------- ---------- OPERATING DATA: Owned Hotels: Number of hotels.................. -- -- -- 6 19 30 Number of guest rooms............. -- -- -- 2,101 5,166 7,706 Total revenues (in thousands)..... -- -- -- $ 21,927 $ 105,447 $ 239,836 Average occupancy................. -- -- -- 72.3% 71.6% 70.8% ADR(F)............................ -- -- -- $ 71.58 $ 82.84 $ 79.64 RevPAR(G)......................... -- -- -- $ 51.75 $ 59.31 $ 56.39 All Hotels(H): Number of hotels(I)............... 34 34 39 46 47 -- Number of guest rooms(I).......... 5,918 5,971 5,847 7,895 9,785 -- Total revenues (in thousands)..... $ 109,837 $ 123,124 $ 128,151 $ 170,888 $ 193,092 --
- ------------------------------ (A) The pro forma Operating Results, Other Financial Data and Operating Data for the year ended December 31, 1996 have been prepared as if the Offering and the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had been consummated at the beginning of 1996, and the pro forma Balance Sheet Data as of December 31, 1996 has been prepared as if the Offering and the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had been consummated on such date. (B) No provision for federal income taxes is included in the historical data other than for 1996 because CapStar Management and EquiStar were partnerships and all federal income tax liabilities were passed through to the individual partners. (C) During 1995 and 1996, certain loan facilities were refinanced and the write-offs of deferred costs associated with the prior facilities were recorded as extraordinary losses. (D) Earnings per share before extraordinary item for the historical year ended December 31, 1996 is based on earnings for the period from the IPO on August 20, 1996 through December 31, 1996. (E) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management believes that EBITDA is a useful measure of operating performance because it is industry practice to evaluate hotel properties based on operating income before interest, income taxes, depreciation and amortization, which is generally equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations. (F) Represents total room revenues divided by total number of rooms occupied by hotel guests on a paid basis. (G) Represents total room revenues divided by total available rooms, net of rooms out of service due to significant renovations. (H) Represents operating data for all hotels managed by the Company during all or a portion of the periods presented. (I) As of December 31 for the periods presented. 10 RISK FACTORS An investment in the Common Stock involves material risks. In addition to general investment risk and those factors set forth elsewhere in this Prospectus, prospective investors should carefully consider, among other things, the following risks before making an investment. RISKS ASSOCIATED WITH THE LODGING INDUSTRY OPERATING RISKS. The Company's business is subject to all of the operating risks inherent in the lodging industry. These risks include the following: changes in general and local economic conditions; cyclical overbuilding in the lodging industry; varying levels of demand for rooms and related services; competition from other hotels, motels and recreational properties; changes in travel patterns; the recurring need for renovations, refurbishment and improvements of hotel properties; changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs; and changes in interest rates and the availability of credit. Demographic, geographic or other changes in one or more of the Company's markets could impact the convenience or desirability of the sites of certain hotels, which would in turn affect the operations of those hotels. In addition, due to the level of fixed costs required to operate full-service hotels, certain significant expenditures necessary for the operation of hotels generally cannot be reduced when circumstances cause a reduction in revenue. COMPETITION IN THE LODGING INDUSTRY. The lodging industry is highly competitive. There is no single competitor or small number of competitors of the Company that are dominant in the industry. The Hotels operate in areas that contain numerous competitors, many of which have substantially greater resources than the Company. Competition in the lodging industry is based generally on location, room rates and range and quality of services and guest amenities offered. New or existing competitors could significantly lower rates or offer greater conveniences, services or amenities or significantly expand, improve or introduce new facilities in markets in which the Hotels compete, thereby adversely affecting the Company's operations. SEASONALITY. The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in the revenues of the Company. Quarterly earnings also may be adversely affected by events beyond the Company's control, such as extreme weather conditions, economic factors and other considerations affecting travel. FRANCHISE AGREEMENTS. Upon completion of the Offering, all but two of the Owned Hotels, the Highgate Portfolio hotels and the Additional Acquisitions will be operated pursuant to existing franchise or license agreements (the "Franchise Agreements"). The Franchise Agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. Those limitations may conflict with the Company's philosophy of creating specific business plans tailored to each hotel and to each market. Such standards are often subject to change over time, in some cases at the discretion of the franchisor, and may restrict a franchisee's ability to make improvements or modifications to a hotel without the consent of the franchisor. In addition, compliance with such standards could require a franchisee to incur significant expenses or capital expenditures. In connection with changing the franchise affiliation of an Owned Hotel or a subsequently acquired hotel, the Company may be required to incur significant expenses or capital expenditures. The Franchise Agreements covering the Owned Hotels expire or terminate, without specified renewal rights, at various times and have differing remaining terms. As a condition to renewal, the Franchise Agreements frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel. 11 RISKS ASSOCIATED WITH EXPANSION COMPETITION FOR EXPANSION OPPORTUNITIES. The Company competes for the acquisition of hotels with entities that have substantially greater financial resources than the Company. The Company believes that, as a result of the downturn experienced by the lodging industry from the late 1980s through the early 1990s and the significant number of foreclosures and bankruptcies created thereby, the prices for many hotels have for several years been at historically low levels and often well below the cost to build new hotels. The recent economic recovery in the lodging industry and the resulting increase in funds available for hotel acquisitions may cause additional investors to enter the hotel acquisition market, which may in turn cause hotel acquisition costs to increase and the number of attractive hotel acquisition opportunities to decrease. FAILURE TO CONSUMMATE ACQUISITIONS. The Company has entered into binding contracts to acquire the Highgate Portfolio and the Additional Acquisitions and in the future may enter into contracts to acquire other hotels as well. There can be no assurance that the Company will be able to consummate the acquisition of any such hotels. Failure to consummate such acquisitions could affect the Company's ability to implement its acquisition strategy and could have a material adverse effect on the company's results of operations. INTEGRATION RISKS. To successfully implement its acquisition strategy, the Company must be able to continue to successfully integrate new hotels into its existing operations. The consolidation of functions and integration of departments, systems and procedures of the new hotels with the Company's existing operations presents a significant management challenge, and the failure to integrate new hotels into the Company's management and operating structures could have a material adverse effect on the results of operations and financial condition of the Company. There can be no assurance that the Company will be able to achieve operating results in its new hotels comparable to the historical performance of its hotels. RISKS ASSOCIATED WITH OWNING REAL ESTATE The Company currently owns 22 hotels and has entered into contracts to acquire the Highgate Portfolio and the Additional Acquisitions. Accordingly, the Company will be subject to varying degrees of risk generally incident to the ownership of real estate. These risks include, among other things, changes in national, regional and local economic conditions, changes in local real estate market conditions, changes in interest rates and in the availability, cost and terms of financing, the potential for uninsured casualty and other losses, the impact of present or future environmental legislation and adverse changes in zoning laws and other regulations. Many of these risks are beyond the control of the Company. In addition, real estate investments are relatively illiquid, resulting in a limited ability of the Company to vary its portfolio of hotels in response to changes in economic and other conditions. HOTEL RENOVATION RISKS The renovation of hotels involves risks associated with construction and renovation of real property, including the possibility of construction cost overruns and delays due to various factors (including the inability to obtain regulatory approvals, inclement weather, labor or material shortages and the unavailability of construction and permanent financing) and market or site deterioration after acquisition or renovation. Any unanticipated delays or expenses in connection with the renovation of hotels could have an adverse effect on the results of operations and financial condition of the Company. RISK OF DEBT FINANCING; NO LIMITS ON INDEBTEDNESS Neither the Company's Certificate of Incorporation nor its By-laws limit the amount of indebtedness that the Company may incur. Subject to limitations in its debt instruments, the Company expects to incur additional debt in the future to finance acquisitions and renovations. The Company's continuing substantial indebtedness could increase its vulnerability to general economic and lodging industry conditions (including increases in interest rates) and could impair the Company's ability to obtain additional financing 12 in the future and to take advantage of significant business opportunities that may arise. The Company's indebtedness is, and will likely continue to be, secured by mortgages on all of the Owned Hotels and by the equity of certain subsidiaries of the Company. There can be no assurances that the Company will be able to meet its debt service obligations and, to the extent that it cannot, the Company risks the loss of some or all of its assets, including the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if the Company is in need of capital to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in hotels at times which may not permit realization of the maximum return on such investments. The Credit Facility and the Subordinated Debt contain a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to (i) acquire or dispose of assets or businesses, (ii) incur additional indebtedness, (iii) make capital expenditures, (iv) pay dividends, (v) create liens on assets, (vi) enter into leases, investments or acquisitions, (vii) engage in mergers or consolidations, or (viii) engage in certain transactions with subsidiaries and affiliates, and otherwise restrict corporate activities of the Company (including its ability to acquire additional hotels, hotel businesses or assets, certain changes of control and asset sale transactions) without the consent of the lenders. In addition, the Company will be required to maintain specified financial ratios and comply with tests, including minimum interest coverage ratios, maximum leverage ratios, minimum net worth and minimum equity capitalization requirements. The Company's outstanding indebtedness under the Credit Facility and the Subordinated Debt bears interest at a variable rate. Economic conditions could result in higher interest rates, which could increase debt service requirements on variable rate debt and could reduce the amount of cash available for various corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources." CONTROLLING STOCKHOLDERS Acadia Partners, L.P., a private investment partnership, and related entities ("Acadia Partners"), and certain members of management will beneficially own an aggregate of 19.7% of the issued and outstanding shares of Common Stock upon completion of the Offering. See "Principal Stockholders." So long as Acadia Partners and such members of management beneficially own a substantial interest in the Company, they may have the ability to elect or remove members of the Board of Directors of the Company (the "Board"), and thereby control the management and affairs of the Company, and may have the power to approve or block most actions requiring approval of the stockholders of the Company. See "Principal Stockholders" and "Description of Capital Stock." SUBSTANTIAL RELIANCE ON KEY PERSONNEL The Company will place substantial reliance on the lodging industry knowledge and experience and the continued services of its senior management, led by Paul W. Whetsell and David E. McCaslin. The Company's future success and its ability to manage future growth depend in large part upon the efforts of these persons and on the Company's ability to attract and retain other highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of services of Messrs. Whetsell or McCaslin or the Company's inability to attract and retain other highly qualified personnel may adversely affect the results of operations and financial condition of the Company. The Company currently has employment agreements with Messrs. Whetsell and McCaslin for terms of three years each expiring in December 1999, which contain certain non-compete clauses. See "Management--Employment Agreements." 13 POTENTIAL FOR CONFLICTS OF INTEREST Mr. Whetsell and Mr. McCaslin and entities owned by them own, directly or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in two of the Managed Hotels and (ii) minority equity interests in eight of the Managed Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the entities that own four of these Managed Hotels (the "Affiliated Owners") through their ownership of certain entities which serve as general partners of the Affiliated Owners. Such interests were acquired prior to the formation of EquiStar and CapStar Management. During 1996, the Company received approximately $824,070 in management fees from the eight hotels in which Messrs. Whetsell and McCaslin own an equity interest, including approximately $554,896 in management fees from the Affiliated Owners. Conflicts may arise in the future between the Company and the Affiliated Owners with respect to certain Management Agreements (as defined below) between the Company and such Affiliated Owners. These conflicts may arise in connection with the exercise of any rights or the conduct of any negotiations to extend, renew, terminate or amend such agreements. There can be no assurance that such conflicts will be resolved in favor of the Company. Transactions involving the Company and the Affiliated Owners will be passed on for the Company by a majority of the Independent Directors (as defined herein) of the Board. Although none of the Managed Hotels owned by Affiliated Owners now competes with the Owned Hotels, the Company may in the future acquire a hotel in a market in which a hotel owned by an Affiliated Owner now operates. See "Certain Relationships and Related Transactions--Ownership Interests in Certain Managed Hotels." Under the terms of their employment agreements, Messrs. Whetsell and McCaslin are prohibited from hereafter acquiring any interests in hotels or hotel management companies while they serve as officers of the Company. See "Management--Employment Agreements." TERMINATION OF MANAGEMENT AGREEMENTS The Company operates the 31 Managed Hotels pursuant to third party management agreements (the "Management Agreements") with the owners of such Managed Hotels. The Management Agreements have remaining terms ranging from one month to nine years. Substantially all of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration dates if the applicable hotel is sold, and several of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration date without cause or by reason of the failure of the applicable hotel to obtain specified levels of performance. For 1996, the Company's pro forma revenue from Management Agreements was $3.2 million constituting 1.3% of the Company's total pro forma revenue for such period. No single Management Agreement (or group of Management Agreements for hotels under common ownership or control) currently accounts for more than 0.5% of the total revenue of the Company on a pro forma basis. The early termination of the Management Agreements or the inability of the Company to negotiate renewals of Management Agreements upon the expiration of their stated terms would have an adverse impact on the revenues received by the Company from its management business. ENVIRONMENTAL RISKS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the owner's ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal 14 or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. The operation and removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the ownership and operation of the Hotels, the Company could be held liable for the costs of remedial action with respect to such regulated substances and storage tanks and claims related thereto. Activities have been undertaken to close or remove storage tanks located on the property of two of the Owned Hotels. All of the Owned Hotels have undergone Phase I environmental site assessments ("Phase Is"), which generally provide a physical inspection and database search but not soil or groundwater analyses, by a qualified independent environmental engineer within the last 18 months. The purpose of the Phase Is is to identify potential sources of contamination for which the Owned Hotels may be responsible and to assess the status of environmental regulatory compliance. The Phase Is have not revealed any environmental liability or compliance concerns that the Company believes would have a material adverse effect on the Company's results of operation or financial condition, nor is the Company aware of any such liability or concerns. In addition, the Owned Hotels have been inspected to determine the presence of asbestos. Federal, state and local environmental laws, ordinances and regulations also require abatement or removal of certain asbestos-containing materials ("ACMs") and govern emissions of and exposure to asbestos fibers in the air. Limited quantities of ACMs are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at the Owned Hotels. Operations and maintenance programs for maintaining such ACMs have been or are in the process of being designed and implemented, or the ACMs have been scheduled to be or have been abated, at such hotels. Based on third party environmental assessments and due diligence investigations recently conducted by the Company and its lenders, the Company believes that the presence of ACMs in its Owned Hotels will not have a material adverse effect on the Company's results of operations or financial condition. However, there can be no assurance that this will be the case. Any liability resulting from non-compliance or other claims relating to environmental matters could have a material adverse effect on the Company's results of operations or financial condition. GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels and restaurants, including liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. The Company believes that it is substantially in compliance with these requirements. Managers of hotels are also subject to laws governing their relationship with hotel employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of the Owned Hotels and could otherwise adversely affect the Company's results of operations or financial condition. Under the Americans with Disabilities Act (the "ADA"), all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to the Owned Hotels, a determination that the Company is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The Company is likely to incur additional costs of complying with the ADA; however, such costs are not expected to have a material adverse effect on the Company's results of operations or financial condition. SHARES AVAILABLE FOR FUTURE SALE Sales of substantial amounts of Common Stock (including shares issuable upon the exercise of stock options or the conversion of OP Units), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. See "Management--Stock Option Grants" and 15 "The Operating Partnership." Upon consummation of the Offering, the Company will have outstanding 17,754,321 shares of Common Stock (assuming no exercise of the over-allotment option). 3,504,321 of these shares are "restricted securities" under Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). The Company has granted certain registration rights to the recipients of such restricted securities which were issued in connection with the formation transactions that occurred immediately prior to the closing of the IPO (the "Formation Transactions"). See "Description of Capital Stock--Registration Rights." In connection with the Offering, the Company has agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. ("Lehman"). Certain entities controlled by members of management (who beneficially own an aggregate of 980,010 shares of Common Stock) have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman. There can be no assurance that Lehman will not grant any such consent. See "Shares Available for Future Sale." 16 USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be approximately $ million (approximately $ million if the over-allotment option is exercised in full) after giving effect to estimated underwriting discounts and commissions and offering expenses payable by the Company. The net proceeds are expected to be used as follows: (i) $70.8 million to fund the cash portion of the acquisition of the Highgate Portfolio; (ii) $21.8 million to fund the acquisition of the Additional Acquisitions; and (iii) the remainder will be available to retire outstanding balances under the Credit Facility and for general corporate purposes. PRICE RANGE OF COMMON STOCK The Common Stock has been listed on the NYSE since August 20, 1996 under the symbol "CHO." The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock on the NYSE.
PRICE -------------------- HIGH LOW --------- --------- 1997: First Quarter (through February 25, 1997)................................ $ 24 3/4 $ 19 3/8 1996: Fourth Quarter (ended December 31, 1996)................................. 19 5/8 16 7/8 Third Quarter (ended September 30, 1996)................................. 18 3/8 16 1/2
The last reported sale price of the Common Stock on the NYSE on February 25, 1997 was $24 1/8. As of February 25, 1997, there were approximately 49 holders of record of the Common Stock. DIVIDEND POLICY The Company has not paid any cash dividends on the Common Stock and does not anticipate that it will do so in the foreseeable future. The Company intends to retain earnings to provide funds for the continued growth and development of the Company's business. The Credit Facility and Subordinated Debt restrict the Company's ability to pay dividends on the Common Stock. Any determination to pay cash dividends in the future will be at the discretion of the Board and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board. 17 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of December 31, 1996 and as adjusted to give effect to the acquisition of three Owned Hotels since December 31, 1996, the Highgate Portfolio and the Additional Acquisitions, and the Offering. The information below should be read in conjunction with the consolidated financial statements and notes thereto and the pro forma financial statements and notes thereto contained elsewhere in this Prospectus.
AS OF DECEMBER 31, 1996 ----------------------- HISTORICAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) DEBT: Total long-term debt..................................................................... $ 200,361 $ 219,470 Minority interest........................................................................ 606 30,136 STOCKHOLDERS' EQUITY: Preferred Stock ($.01 par value, 25,000,000 shares authorized, no shares issued or outstanding)........................................................................... -- -- Common Stock ($.01 par value, 49,000,000 shares authorized, 12,754,321 shares issued and outstanding)........................................................................... 128 178 Additional paid-in capital............................................................... 158,533 272,265 Retained earnings........................................................................ 2,054 2,054 ---------- ----------- Total stockholders' equity......................................................... 160,715 274,497 ---------- ----------- Total capitalization............................................................... $ 361,682 $ 524,103 ---------- ----------- ---------- -----------
18 SELECTED FINANCIAL AND OTHER DATA The following table sets forth selected historical and pro forma financial information for the Company. The Balance Sheet Data of the Company as of December 31, 1996, 1995, and 1994, and the Operating Results and Other Financial Data for the years ended December 31, 1996, 1995, 1994, and 1993, have been derived from the audited financial statements which are included elsewhere in this Prospectus. The other comparable data as of, and for the years ended, December 31, 1993 and 1992 have been derived from financial statements that are not required to be included in this Prospectus. The following information should be read in conjunction with the historical consolidated financial statements and notes thereto for the Company, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the unaudited pro forma financial statements and notes thereto included elsewhere in this Prospectus. The pro forma operating data and other data for the year ended December 31, 1996 has been prepared as if the Offering and the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had been consummated at the beginning of 1996, and the pro forma balance sheet data as of December 31, 1996 has been prepared as if the Offering and the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had been consummated on such date. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the year ended December 31, 1996, nor does it purport to represent the Company's future financial position and results of operations.
FISCAL YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) OPERATING RESULTS: Revenues: Rooms................................................ $ 0 $ 0 $ 0 $ 14,456 $ 68,498 Food, beverage and other............................. 0 0 0 7,471 36,949 Management services and other revenues............... 3,479 4,234 4,418 4,436 4,345 ------------ ------------ ------------ ------------ ------------ Total revenues................................... 3,479 4,234 4,418 26,363 109,792 ------------ ------------ ------------ ------------ ------------ Operating expenses: Departmental expenses: Rooms................................................ 0 0 0 4,190 17,509 Food, beverage and other............................. 0 0 0 5,437 27,102 Undistributed operating expenses: Selling, general and administrative.................. 2,836 4,065 4,508 8,078 20,448 Property operating costs............................. 0 0 0 3,934 17,151 Depreciation and amortization........................ 12 14 23 2,098 8,248 ------------ ------------ ------------ ------------ ------------ Total operating expenses......................... 2,848 4,079 4,531 23,737 90,458 ------------ ------------ ------------ ------------ ------------ Operating income/(loss)................................ 631 155 (113) 2,626 19,334 Interest expense, net.................................. 0 0 0 2,413 12,346 Minority interest...................................... 0 0 0 17 39 Provision for income taxes(B).......................... 0 0 0 0 2,674 Income/(loss) before extraordinary item................ 631 155 (113) 230 4,353 Extraordinary item(C).................................. 0 0 0 (887) (1,956) ------------ ------------ ------------ ------------ ------------ Net income/(loss)................................ 631 155 (113) (657) 2,397 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Earnings per share before extraordinary item(D)........ $ -- $ -- $ -- $ -- $ 0.31 Number of shares of common stock and common stock equivalents outstanding.............................. -- -- -- -- 12,754,321 OTHER FINANCIAL DATA: EBITDA(E).............................................. $ 643 $ 169 $ (90) $ 4,741 $ 27,621 Net cash provided by (used in) operating activities.... 87 (101) 66 4,357 13,373 Net cash used in investing activities.................. (65) (24) (41) (116,573) (225,251) Net cash provided by (used in) financing activities.... (219) 244 0 119,048 226,830 BALANCE SHEET DATA: Property and equipment, gross.......................... $ 110 $ 134 $ 176 $ 110,883 343,092 Total assets........................................... 586 1,458 1,232 132,650 379,161 Long term obligations.................................. 0 0 0 73,574 200,361 PRO FORMA 1996(A) ------------ OPERATING RESULTS: Revenues: Rooms................................................ $ 158,293 Food, beverage and other............................. 81,543 Management services and other revenues............... 3,169 ------------ Total revenues................................... 243,005 ------------ Operating expenses: Departmental expenses: Rooms................................................ 39,732 Food, beverage and other............................. 60,496 Undistributed operating expenses: Selling, general and administrative.................. 43,450 Property operating costs............................. 39,769 Depreciation and amortization........................ 18,801 ------------ Total operating expenses......................... 202,248 ------------ Operating income/(loss)................................ 40,757 Interest expense, net.................................. 16,843 Minority interest...................................... (1,663) Provision for income taxes(B).......................... 8,901 Income/(loss) before extraordinary item................ 13,350 Extraordinary item(C).................................. 0 ------------ Net income/(loss)................................ 13,350 ------------ ------------ Earnings per share before extraordinary item(D)........ $ 0.75 Number of shares of common stock and common stock equivalents outstanding.............................. 18,563,844 OTHER FINANCIAL DATA: EBITDA(E).............................................. $ 57,895 Net cash provided by (used in) operating activities.... 33,164 Net cash used in investing activities.................. (403,077) Net cash provided by (used in) financing activities.... 389,514 BALANCE SHEET DATA: Property and equipment, gross.......................... 520,657 Total assets........................................... 542,749 Long term obligations.................................. 219,470
19 SELECTED FINANCIAL AND OTHER DATA
FISCAL YEAR ENDED DECEMBER 31, PRO FORMA ----------------------------------------------------- 1992 1993 1994 1995 1996 1996(A) --------- --------- --------- --------- --------- ----------- OPERATING DATA: Owned Hotels: Number of hotels........................................ -- -- -- 6 19 30 Number of guest rooms................................... -- -- -- 2,101 5,166 7,706 Total revenues (in thousands)........................... -- -- -- $ 21,927 $ 105,447 $ 239,836 Average occupancy....................................... -- -- -- 72.3% 71.6% 70.8% ADR(F).................................................. -- -- -- $ 71.58 $ 82.84 $ 79.64 RevPAR(G)............................................... -- -- -- $ 51.75 $ 59.31 $ 56.39 All Hotels(H): Number of hotels(I)..................................... 34 34 39 46 47 -- Number of guest rooms(I)................................ 5,918 5,971 5,847 7,895 9,785 -- Total revenues (in thousands)........................... $ 109,837 $ 123,124 $ 128,151 $ 170,888 $ 193,092 --
- ------------------------------ (A) The pro forma Operating Results, Other Financial Data and Operating Data for the year ended December 31, 1996 have been prepared as if the Offering and the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had been consummated at the beginning of 1996, and the pro forma Balance Sheet Data as of December 31, 1996 has been prepared as if the Offering and the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had been consummated on such date. (B) No provision for federal income taxes is included in the historical data other than for 1996 because CapStar Management and EquiStar were partnerships and all federal income tax liabilities were passed through to the individual partners. (C) During 1995 and 1996, certain loan facilities were refinanced and the write-offs of deferred costs associated with the prior facilities were recorded as extraordinary losses. (D) Earnings per share before extraordinary item for the historical year ended December 31, 1996 is based on earnings for the period from the IPO on August 20, 1996 through December 31, 1996. (E) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management believes that EBITDA is a useful measure of operating performance because it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization, which is generally equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA does not represent cash flow from operations as defined by GAAP, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations. (F) Represents total room revenues divided by total number of rooms occupied by hotel guests on a paid basis. (G) Represents total room revenues divided by total available rooms, net of rooms out of service due to significant renovations. (H) Represents operating data for all hotels managed by the Company during all or a portion of the periods presented. (I) As of December 31 for the periods presented. 20 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The unaudited Pro Forma Balance Sheet of the Company as of December 31, 1996 is presented assuming: (i) the Offering and the application of the net proceeds had been completed on December 31, 1996; and (ii) the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions were owned on December 31, 1996. The unaudited Pro Forma Statement of Operations of the Company for the year ended December 31, 1996 presents the results of operations of the Company assuming: (i) all of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had been acquired at the beginning of 1996; and (ii) the Offering was completed as of the beginning of 1996. In management's opinion, all material adjustments necessary to reflect the transactions are presented in the pro forma adjustments columns, which are further described in the notes to the unaudited Pro Forma Financial Statements. The unaudited Pro Forma Financial Statements are not necessarily indicative of what the Company's financial position or results of operations actually would have been if all the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions were, in fact, acquired on such date and if the Offering occurred on such date. Additionally, the pro forma information does not purport to project the Company's financial position or results of operations at any future date or for any future period. The unaudited Pro Forma Financial Statements should be read in conjunction with the audited historical consolidated financial statements and related notes thereto of the Company, which are included elsewhere in this Prospectus. 21 CAPSTAR HOTEL COMPANY PRO FORMA BALANCE SHEET DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA AFTER OFFERING, HIGHGATE OFFERING AND PORTFOLIO AND ACQUISITION OWNED ADDITIONAL OF HIGHGATE HOTELS ACQUISITIONS PRO PORTFOLIO AND PRO FORMA FORMA ADDITIONAL HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) ACQUISITIONS ------------- --------------- ------------------ ------------- ASSETS Cash.......................................... $ 21,784 $ (6,189) $ (7,223) $ 8,372 Property and equipment, net Land........................................ 58,127 4,834 12,199 75,160 Building and improvements................... 244,367 45,088 97,596 387,051 Furniture, fixtures and equipment........... 28,066 5,649 12,199 45,914 Construction-in-progress.................... 3,891 -- -- 3,891 ------------- ------- -------- ------------- Total property and equipment, net............. 334,451 55,571 121,994 512,016 Other assets.................................. 22,926 (1,515) 950 22,361 ------------- ------- -------- ------------- Total assets.................................. $ 379,161 $ 47,867 $ 115,721 $ 542,749 ------------- ------- -------- ------------- ------------- ------- -------- ------------- LIABILITIES, MINORITY INTEREST AND EQUITY Other liabilities............................. $ 17,479 $ 367 $ 800 $ 18,646 Long-term debt................................ 200,361 47,500 (28,391)(D) 219,470 ------------- ------- -------- ------------- Total liabilities............................. 217,840 47,867 (27,591) 238,116 Minority interest............................. 606 -- 29,530(E) 30,136 Equity........................................ 160,715 -- 113,782(D) 274,497 ------------- ------- -------- ------------- Total liabilities, minority interest and equity...................................... $ 379,161 $ 47,867 $ 115,721 $ 542,749 ------------- ------- -------- ------------- ------------- ------- -------- -------------
(A) Reflects the historical consolidated balance sheet of the Company as of December 31, 1996. (B) Reflects the Company's cost basis and financing for three Owned Hotels acquired subsequent to December 31, 1996. (C) Reflects the estimated cost basis and financing for the Highgate Portfolio and the Additional Acquisitions. The estimated acquisition cost of the Highgate Portfolio is $100,338 plus $4,350 for renovations. The estimated acquisition cost of the Additional Acquisitions is $22,606 plus $4,094 in renovations and other costs. (D) A reconciliation of gross proceeds from the Offering to net proceeds is as follows:
Gross proceeds at $24.125 per share.................................................... $ 120,625 Underwriting, advisory and other transaction expenses.................................. (6,843) --------- Net cash proceeds from Offering........................................................ $ 113,782 --------- A schedule of sources and uses of funds related to the Offering are as follows: SOURCES Net cash proceeds from Offering........................................................ $ 113,782 Cash on hand........................................................................... 7,223 --------- Total sources.......................................................................... $ 121,005 --------- USES Repayment of outstanding amounts on certain existing debt facilities................... $ (28,391) Purchase of Highgate Portfolio and Additional Acquisitions............................. (92,614) --------- Total uses............................................................................. $(121,005) ---------
The Pro forma balance sheet assumes that the proceeds from the Credit Facility are drawn on December 31, 1996. (E) Represents 809,523 Common OP Units convertible into an equal number of shares of Common Stock and 392,157 Preferred OP Units convertible into an equal number of shares of Common Stock.
22 CAPSTAR HOTEL COMPANY PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA OFFERING, AFTER OFFERING HIGHGATE AND PORTFOLIO AND ACQUISITION OF ADDITIONAL HIGHGATE OWNED HOTELS ACQUISITIONS PORTFOLIO PRO FORMA PRO FORMA AND ADDITIONAL HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) ACQUISITIONS ------------ --------------- ----------------- ----------------- Revenues: Rooms.................................................... $ 68,498 $ 60,370 $ 29,425 $ 158,293 Food and beverage........................................ 30,968 22,889 13,207 67,064 Other revenue............................................ 5,981 3,853 4,645 14,479 Hotel management, accounting and other................... 4,345 (1,040) (136) 3,169 ------------ ------- ------- ----------------- Total Revenue.......................................... 109,792 86,072 47,141 243,005 ------------ ------- ------- ----------------- Hotel operating expenses by department: Rooms.................................................... 17,509 14,954 7,269 39,732 Food and beverage........................................ 24,589 18,518 10,322 53,429 Other operating departments.............................. 2,513 2,124 2,430 7,067 Undistributed operating expenses: Selling, general and administrative...................... 20,448 15,424 7,578 43,450 Property operating costs................................. 12,586 10,270 4,478 27,334 Property taxes, insurance and other...................... 4,565 4,055 3,815 12,435 Depreciation and amortization............................ 8,248 6,361 4,192 18,801 ------------ ------- ------- ----------------- Total operating expenses............................... 90,458 71,706 40,084 202,248 ------------ ------- ------- ----------------- Interest expense, net...................................... 12,346 6,594 (2,097) 16,843 ------------ ------- ------- ----------------- Total expenses............................................. 102,804 78,300 37,987 219,091 ------------ ------- ------- ----------------- Income before minority interest and income taxes............................................. 6,988 7,772 9,154 23,914 Minority interest.......................................... 39 (38) (1,664) (1,663) ------------ ------- ------- ----------------- Income before income taxes................................. 7,027 7,734 7,490 22,251 Income tax provision....................................... 2,674 3,231 2,996 8,901 ------------ ------- ------- ----------------- Net income............................................. $ 4,353 $ 4,503 $ 4,494 $ 13,350 ------------ ------- ------- ----------------- ------------ ------- ------- ----------------- Pro forma earnings per share(D)............................ $ 0.75 Pro forma weighted average shares outstanding.............. 18,563,844
(A) Reflects historical consolidated statement of operations of the Company for the year ended December 31, 1996. Reflects the pre-acquisition operations of the Owned Hotels to provide a full year of hotel operations for (B) the unaudited Pro Forma Statement of Operations. For each Owned Hotel, the 1996 pre-acquisition operations were obtained from the hotel's pre-acquisition financial statements. Also reflects adjustments to (i) include the operations of the Westin Atlanta Airport during the period from January 1, 1996 through February 29, 1996, when this hotel was leased to a third-party operator, (ii) eliminate the related lease revenue earned by the Company during this period (on February 29, 1996, the lease was terminated and the Company assumed management of hotel operations), (iii) eliminate management fee charges for the Owned Hotels for services that were provided by the Company, (iv) reflect federal and state income taxes (assuming a 40% combined effective rate), (v) reflect the estimated incremental general and administrative expenses associated with public ownership (these additional expenses include insurance, additional executive salaries, directors' fees and related expenses, legal expenses, expenses associated with preparing quarterly and annual reports, and other miscellaneous expenses), (vi) reflect the effect of the other pro forma adjustments on the interest of minority owners in pro forma income before minority interest and income taxes for the partnership that owns the Westin Atlanta Airport and (vii) reflect pro forma depreciation and interest expense as if the hotels had been acquired as of the beginning of the period presented as follows: Elimination of depreciation on hotels for pre-acquisition period................................ $ (3,298) Depreciation on hotels for pre-acquisition period based on the Company's cost basis............. 8,529 Amortization of deferred financing costs related to the Credit Facility......................... 1,130 ----------- Net depreciation and amortization adjustment.................................................... $ 6,361 ----------- ----------- Elimination of interest from pre-acquisition operations......................................... $ (5,003) Interest on hotels for pre-acquisition period based on the terms of the Credit Facility......... 11,597 ----------- Net interest adjustment......................................................................... $ 6,594 ----------- -----------
(C) Reflects the historical operations of the Highgate Portfolio and the Additional Acquisitions adjusted for (i) depreciation on the new cost basis, (ii) reduction of interest on debt to be paid with proceeds from the Offering, (iii) minority interest and (iv) income taxes. Also reflects the elimination of management fees earned by the Company for managing one of the Additional Acquisitions in 1996 ($136). Historical operations of the Highgate Portfolio were obtained from the hotels' audited combined financial statements included elsewhere in this Prospectus. (D) In computing earnings per share, net income has been adjusted for certain minority interests.
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS CONTAINED HEREIN AND ELSEWHERE IN THIS PROSPECTUS WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES REFERENCED ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" AND "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." GENERAL Prior to the IPO, the business of the Company was conducted through EquiStar, which owned the Owned Hotels, and CapStar Management, which managed the Hotels. CapStar Management has been in the hotel management business since 1987. EquiStar, however, was not formed until January 12, 1995 and the Company did not own any hotels in any prior periods. Therefore, the Company's financial statements prior to 1995 reflect only the management business of CapStar Management. The economics of the management business are based on fees paid to the Company for management services and the costs related to the performance of these services. The fee management business is labor intensive and requires relatively little capital. Beginning in 1994, the Company began to invest in additional professional staff and incurred related costs in order to position itself to acquire hotel properties. From January 12, 1995 through December 31, 1996, the Company acquired 19 hotels. Thus, the historical financial statements for the year ended December 31, 1996 and 1995 reflect differing numbers of Owned Hotels throughout the periods. The economics associated with the acquisition and ownership of hotels is significantly different from the fee management business in that capital is required to both acquire and maintain hotels. Due to the timing and magnitude of the acquisitions made in 1995 and 1996, it is difficult to compare results of these periods either to each other or to prior years. RESULTS OF OPERATIONS PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 On a pro forma basis, after giving effect to the Offering, the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions, pro forma total revenues increased to $243.0 million for 1996 from $109.8 million for the same historical period. The increase resulted from the recognition of revenue for the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions as if they had been acquired at the beginning of the period. Management services and other revenues are reduced by $1.2 million to reflect the elimination of management fee revenues from certain Owned Hotels prior to their acquisition. The pro forma revenues for the period prior to acquiring each Owned Hotel, the Highgate Portfolio and the Additional Acquisitions reflect the actual revenues of the previous owners. Pro forma expenses reflect the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions, and the Offering. Total pro forma operating expenses increased to $202.2 million for 1996 from $90.5 million for the same historical period. Departmental, selling, general, administrative and other operating expenses of the hotels reflect the actual costs incurred by the previous owners prior to each acquisition and the actual costs incurred by the Company thereafter. Depreciation, amortization, interest and income taxes reflect the expenses that would have been incurred by the Company if the Offering, and the acquisition of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions had taken place at the beginning of the period. Pro forma EBITDA improved to $57.9 million for 1996 from $27.6 million for the same historical period. Pro forma EBITDA as a percentage of revenue decreased to 23.8% for 1996 from 25.2% for the same historical period. Management believes that EBITDA is a useful measure of operating performance because it is industry practice to evaluate hotel properties based on operating income before interest, 24 income taxes, depreciation and amortization, which is generally equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA does not represent cash flow from operations as defined by GAAP, and is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's operating performance. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 Total revenues increased to $109.8 million in 1996 from $26.4 million in 1995. The Company purchased its first hotel in March 1995 and owned five hotels as of the end of 1995. During 1996, the Company purchased an additional 14 hotels. The growth in revenues between 1995 and 1996 reflects this significant growth in the number of hotels owned. Operating costs and expenses increased to $90.5 million in 1996 from $23.7 million in 1995. Departmental expenses, property operating costs, selling, general and administrative costs and depreciation and amortization increased in 1996 over 1995. All of these increases reflect the growth in the number of owned hotels from five to nineteen. The costs related to management of the Managed Hotels remained stable between the periods. Operating income increased to $19.3 million in 1996 from $2.6 million in 1995. The increase from 1995 is due to the operating income generated by additional hotels and to increased efficiencies in the management of the Managed Hotels. Net interest expense of $12.3 million for 1996 increased from $2.4 million in 1995 due to the additional debt incurred related to the hotels acquired in 1996. The extraordinary loss of $2.0 million in 1996 reflects the write-off of deferred financing fees of $3.3 million, net of a deferred tax benefit of $1.3 million. The financing fees written-off were unamortized fees associated with a credit facility which was refinanced prior to maturity. The Company also incurred an extraordinary loss on extinguishment of debt during 1995 from the write-off of deferred financing fees in connection with a refinancing transaction. Net income increased to $2.4 million for 1996 from a net loss of $0.7 million for 1995. The primary reason for the increase is due to increased operating income generated by hotels acquired during 1996 and improvements in operating income from hotels acquired in 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 Total revenues increased to $26.4 million in 1995 from $4.4 million in 1994. Room revenues and food, beverage and other hotel department revenues for 1995 reflect the operating revenues of five Owned Hotels acquired during the period. There were no Owned Hotels acquired during 1994. Operating costs and expenses increased to $23.7 million in 1995 from $4.5 million in 1994. Departmental expenses and property operating costs for 1995 reflect the operations of five Owned Hotels acquired during the period. Selling, general and administrative costs and depreciation expense reflect increases due to the acquisition of five Owned Hotels and the interest in the Westin Atlanta Airport during 1995. The costs related to management of the Managed Hotels remained relatively constant between the periods. Operating income increased to $2.6 million in 1995 from a loss of $0.1 million in 1994. The increase from 1994 is due to the operating income of the Owned Hotels and to increased efficiencies in the management of the Managed Hotels. Net interest expense of $2.4 million for 1995 results from the debt incurred related to the acquisition of the Owned Hotels. 25 The Company incurred an extraordinary loss on extinguishment of debt during 1995 from the write-off of deferred financing fees in connection with a refinancing transaction. The net loss increased to $0.7 million for 1995 from $0.1 million for 1994. The primary reason for the loss was the early extinguishment of debt. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are cash on hand, cash generated from operations and borrowings under credit facilities as well as the proceeds from the Offering. The Company's continuing operations are funded through cash generated from hotel operations. Hotel acquisitions and joint venture investments are financed through a combination of internally generated cash, external borrowings and the issuance of OP Units and/or Common Stock. At December 31, 1996, the Company had $21.8 million in cash and cash equivalents, an increase of $15.0 million from the balance of $6.8 million on December 31, 1995. During the year ended December 31, 1996, the Company invested $21.6 million in capital improvements in connection with renovations of the Owned Hotels. The Company expects to spend an additional $13.3 million to complete the renovation of the Owned Hotels. Renovations for the Highgate Portfolio and the Additional Acquisitions will commence after consummation of their acquisitions and are projected to total $8.4 million. Capital for renovation work has been and will be provided by a combination of internally generated cash and external borrowings. The Company is committed to reinvesting adequate capital on an ongoing basis to maintain the quality of the hotels it owns. Once existing planned renovation programs are complete, the Company expects to spend approximately 4% of revenues on an annual basis for ongoing capital expenditures, including room and facilities refurbishments, renovations and furniture and equipment replacements. The Company believes that these investments will enhance the Company's competitive position. On September 24, 1996, the Company entered into the Credit Facility which provides for a maximum borrowing capacity of $225 million bearing interest at a rate of LIBOR plus 2% per annum. Borrowings under this Credit Facility have been used by the Company to repay previously existing indebtedness, to acquire and renovate upscale, full service hotels and for general corporate purposes. The Company's ability to borrow under the Credit Facility is subject, among other things, to a borrowing base test calculated with reference to the cash flow from hotel properties, the relative contribution to the borrowing base of the values attributable to the different hotel properties, the appraised values of such hotel properties and certain other factors. As of December 31, 1996 approximately $177 million was available for borrowing under the Credit Facility, of which $149 million had been borrowed. The Credit Facility permits the Company to incur an additional $50 million of subordinated indebtedness as of December 31, 1996. The term of the Credit Facility is three years, subject to two one-year extensions upon the satisfaction of certain conditions. Under the Credit Facility, the Company is entitled to borrow additional advances or reborrow during the extension period. The Company was required to pay customary fees in connection with the structuring of the Credit Facility, a commitment fee on the unused portion of the Credit Facility and a fee on outstanding letters of credit under the Credit Facility. The Credit Facility is a direct obligation of CapStar Management and is fully and unconditionally guaranteed by the Company and certain subsidiaries of CapStar Management, including the subsidiaries which own the hotel properties. The Credit Facility is secured by substantially all the real and personal property of CapStar Management and its subsidiaries. The Credit Facility contains convenants that impose certain limitations on the Company in respect of, among other things, (i) the payment of dividends and other distributions, (ii) acquisitions of additional hotel properties, (iii) the creation or incurrence of liens, (iv) the incurrence of indebtedness, lease obligations or contingent liabilities, (v) the acquisition of investments in and securities issued by joint ventures and other entities, (vi) transactions with affiliates, (vii) management or similar agreements 26 delegating to another person substantial authority over the operation or maintenance of its hotel properties, (viii) mergers, acquisitions, divestitures or reorganizations, (ix) the issuance of preferred stock and (x) sale leaseback transactions involving any of its hotel properties. The Credit Facility and the Subordinated Debt also contain covenants that will subject the Company to certain operating requirements and that require the maintenance of certain financial levels, such as consolidated net worth, and certain financial ratios, such as consolidated hotel indebtedness to market equity capitalization and shareholders' equity, consolidated cash flow to interest and consolidated total indebtedness to consolidated cash flow. In February 1997, in accordance with certain of these covenants, the Company entered into interest rate protection agreements. On December 13, 1996, the Company modified the terms of the Credit Facility to increase the Company's permitted nonrecourse indebtedness from $25 million to $50 million and to permit it to incur up to $100 million of subordinated indebtedness. In December 1996, the Company borrowed the Subordinated Debt. The Subordinated Debt was used to finance the acquisition of the five hotels purchased from MBL Life Assurance Corporation and for general corporate purposes. The Subordinated Debt bears interest at a rate of LIBOR plus 4% per annum. The term of the Subordinated Debt is three years, subject to two one year extensions upon satisfaction of certain covenants. The Company was required to pay customary fees in connection with the structuring of this debt. The Subordinated Debt is a direct obligation of CapStar Management and its subsidiaries which own the hotel properties. The Subordinated Debt contains covenants similar to those contained in the Credit Facility. Management believes that the Company will have access to sufficient capital resources to fund its operating and administrative expenses, to continue to service its debt obligations and to acquire additional hotel properties. SEASONALITY Demand at many of the Hotels is affected by recurring seasonal patterns. Demand is lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. Accordingly, the Company's operations are seasonal in nature, with lower revenue, operating profit and cash flow in the first and fourth quarters and higher revenue, operating profit and cash flow in the second and third quarters. INFLATION The rate of inflation has not had a material effect on the revenues or operating results of the Company during the three most recent fiscal years. 27 THE COMPANY CapStar is a hotel management and investment company which acquires, renovates, repositions and manages hotels throughout the United States. CapStar owns and manages 22 upscale, full-service Owned Hotels which contain 5,981 rooms and manages an additional 31 Managed Hotels owned by third parties which contain 5,488 rooms. CapStar's portfolio of Owned Hotels and Managed Hotels includes 53 hotels which contain 11,469 rooms. The Company's business strategy is to acquire hotel properties with the potential for cash flow growth and to renovate, reposition and operate each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. The Owned Hotels are located in markets which have recently experienced strong economic growth, including Albuquerque, Atlanta, Charlotte, Chicago, Cleveland, Denver, Houston, Los Angeles, Salt Lake City, Seattle and Washington, D.C. The Owned Hotels include hotels operated under nationally recognized brand names such as Hilton, Sheraton, Westin, Marriott, Doubletree and Embassy Suites. For the year ended December 31, 1996, on a pro forma basis, the operating performance of the Owned Hotels (excluding the ten hotels purchased since September 30, 1996) improved significantly, as demonstrated by the following table:
PRO FORMA YEAR ENDED DECEMBER 31, ---------------------- PERCENTAGE 1995 1996 INCREASE ---------- ---------- ------------- Revenues (in thousands).............................. $ 109,798 $ 118,329 7.8% Gross Operating Profit (in thousands)................ $ 30,947 $ 37,909 22.5% Average Occupancy.................................... 72.4% 72.9% 0.7% ADR.................................................. $ 75.25 $ 83.82 11.4% RevPAR............................................... $ 54.44 $ 61.11 12.3%
Additionally, the performance of the Owned Hotels compares favorably with that of the industry in general. For the year ended December 31, 1996, RevPAR for the Owned Hotels (excluding the ten hotels purchased since September 30, 1996) increased 12.3%, while RevPAR for all upscale hotels, as reported by Smith Travel Research, increased 5.4%. For the year ended December 31, 1996, RevPAR at all of the Owned Hotels (including the ten hotels purchased since September 30, 1996) increased 10.1%. The Company completed its IPO in August 1996. Since the IPO, the Company has significantly expanded its portfolio by completing the purchase of ten upscale, full-service hotels containing 2,465 rooms for an aggregate Total Acquisition Cost of $181.6 million. The Company has also entered into a contract with Highgate Hotels to acquire a portfolio of six upscale, full-service hotels containing 1,358 rooms for a Total Acquisition Cost of approximately $104.7 million. See "Recent Developments--The Highgate Portfolio." The Company has also entered into contracts to acquire the Additional Acquisitions containing 367 rooms for a Total Acquisition Cost of $26.7 million. In addition to the acquisition of these hotels, the Company has entered into a joint venture to acquire the 456-room Holiday Inn Riverfront in St. Louis, Missouri and has entered into three new long-term management agreements. During the year ended December 31, 1996, the Company spent a total of $21.6 million on renovations at the Owned Hotels and intends to spend an additional $21.7 million completing its renovation programs (including $8.4 million to renovate and reposition the Highgate Portfolio and the Additional Acquisitions). See "Special Note Regarding Forward--Looking Statements." As a fully integrated owner and manager, CapStar intends to capitalize on its management experience and expertise by continuing to make opportunistic acquisitions of full-service hotels, securing additional management contracts and improving the operating performance of the hotels. The Company's senior management team has successfully managed hotels in all segments of the lodging industry, with particular emphasis on upscale, full-service hotels. Senior management has an average of approximately 20 years of experience in the hotel industry. Since the inception of the Company's management business in 1987, the Company has achieved consistent growth, even during periods of relative industry weakness. The Company 28 attributes its management success to its ability (i) to analyze each hotel as a unique property and identify those particular cash flow growth opportunities which each hotel presents, (ii) to create and implement marketing plans that properly position each hotel within its local market, and (iii) to develop management programs that emphasize guest service, labor productivity, revenue yield and cost control. The Company has a distinct management culture that stresses creativity, loyalty and entrepreneurship and was developed to emphasize operations from an owner's perspective. This culture is reinforced by the fact that 33 members of management will hold, directly or indirectly, an aggregate of 5.5% of the Common Stock upon completion of the Offering. See "Principal Stockholders." The Company believes that the upscale, full-service segment of the lodging industry is the most attractive segment in which to acquire, own and manage hotels and further believes that there are currently many attractive opportunities to acquire properties in this segment of the industry at prices below replacement cost. The upscale, full-service segment is attractive for several reasons. First, the Company expects that there will be no significant increases in the supply of upscale, full-service hotels in the next several years because the cost of new construction generally does not justify new hotel development. Second, upscale, full-service hotels appeal to a wide variety of customers, thus reducing the risk of decreasing demand from any particular customer group. Additionally, such hotels have particular appeal to business executives and upscale leisure travelers, customers who are generally less price sensitive than travelers who use limited-service hotels. Third, because full-service hotels have a higher proportion of fixed costs to variable costs than other segments of the lodging industry, full-service hotels afford greater operating leverage than limited-service hotels, resulting in increasingly higher profit margins as revenues increase. Finally, full-service hotels require a greater depth of management expertise than limited-service hotels, and the Company believes that its superior management skills provide it with a significant competitive advantage in their operation. RECENT DEVELOPMENTS In August 1996, the Company completed its IPO at a price of $18 per share, generating net proceeds of approximately $110 million to the Company. Since completing the IPO, the Company has continued to execute the hotel acquisition and operating strategies that it had pursued prior to the IPO which has resulted in significant growth in the Company's hotel portfolio. The Company's acquisition, financing, and management activities since the IPO are discussed below. POST-IPO ACQUISITIONS At the time of the IPO, the Company owned 12 upscale, full-service hotels, containing 3,516 rooms. Since the IPO, the Company has acquired ten additional upscale, full-service Owned Hotels containing 2,465 rooms. These newly acquired hotels are operated under nationally recognized brand names such as Hilton, Doubletree, Embassy Suites and Holiday Inn. The Company expects to improve the operating performance of these newly acquired hotels by implementing the detailed management plans that have been created for each property as part of its operating strategy. The Company believes that all of its post-IPO acquisitions represent attractive investment opportunities because (i) they are located in major metropolitan or growing secondary markets and are well-located within these markets (ii) they were acquired at an average cost of approximately $74,000 per room, which represents a more than a 30% discount to replacement cost and (iii) they have attractive current returns and potential for significant revenue and cash flow growth through implementation of the Company's operating strategy. THE HIGHGATE PORTFOLIO The Company has entered into a contract with Highgate Hotels to acquire the Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358 rooms for a Total Acquisition Cost of approximately $104.7 million. The acquisition will be financed with $75.2 million in cash and $29.5 million of OP Units. The Company will issue to the sellers (i) 809,523 common OP Units ("Common OP Units") which 29 are convertible at the sellers' election into an equal number of shares of Common Stock (or, at the Company's option, cash in an amount equal to the market price of such shares) and (ii) 392,157 preferred OP Units ("Preferred OP Units"), with a 6.5% cumulative annual preferred return and a liquidating preference of $25.50 per OP Unit. The Preferred OP Units are convertible on or after August 23, 1997 at the sellers' election into an equal number of shares of Common Stock (or, at the Company's option, cash in an amount equal to the market price of such shares) and redeemable after three years at the Company's election for an amount equal to $25.50 per Preferred OP Unit (or, at the Company's option, shares of Common Stock bearing a market price equal to such amount). The Highgate Portfolio hotels are operated under nationally recognized brand names including Sheraton, Doubletree, Radisson, Ramada and Holiday Inn, and are located in Dallas, Indianapolis, Calgary and Vancouver. The Highgate Portfolio enhances the Company's geographic diversity by expanding its portfolio into Canada. In connection with the acquisition of the Highgate Portfolio, the Company has entered into agreements to manage two additional hotels owned by Highgate Hotels: the 414-room Pontchartrain-Crowne Plaza in Detroit, Michigan and the 393-room Four Points Hotel in Suburban Atlanta. The Company believes that the acquisition of the Highgate Portfolio and the establishment of a strategic alliance with Highgate Hotels (one of the principals of which the Company has agreed to nominate to a new seat on its board of directors) will provide significant benefits to its on-going acquisition and corporate development activities. A portion of the net proceeds from the Offering will be used to consummate the acquisition of the Highgate Portfolio. The Company expects to complete the acquisition of the Highgate Portfolio by April 1997. There can be no assurance, however, that the closing will occur. See "Risk Factors--Risks Associated with Expansion" and "Special Note Regarding Forward- Looking Statements." THE ADDITIONAL ACQUISITIONS The Company has also entered into contracts to acquire the two Additional Acquisitions: the 213-room Four Points Hotel in Cherry Hill, New Jersey for a Total Acquisition Cost of $8.2 million and the 154-room Great Valley Sheraton in Frazer, Pennsylvania for a Total Acquisition Cost of $18.5 million. MANAGEMENT AGREEMENTS/JOINT VENTURES In January 1997, the Company invested in a joint venture with Hallmark Investment Corp. which owns the Holiday Inn Riverfront, located in downtown St. Louis at the base of the Gateway Arch. In connection with the joint venture, the Company has signed a long-term agreement to manage the 456-room property. Since August 1996 the Company has entered into significant new long-term management agreements with three other hotel owners. The Company expects to form joint ventures and strategic alliances with institutional and private hotel owners to invest in future acquisitions and sale and leaseback transactions, and to secure additional fee management arrangements. See "Special Note Regarding Forward-Looking Statements." FINANCING ACTIVITIES In September 1996, the Company entered into the $225 million Credit Facility led by Bankers Trust, as agent, to fund post-IPO acquisitions, to repay outstanding indebtedness and for general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In December 1996, the Company modified the terms of the Credit Facility to increase the Company's permitted nonrecourse indebtedness from $25 million to $50 million and to permit it to incur up to $100 million of subordinated indebtedness. In December 1996, the Company borrowed the Subordinated Debt to provide additional funding for acquisitions and for general corporate purposes. See "Management's 30 Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." BUSINESS AND PROPERTIES The Company seeks to increase shareholder value by (i) continuing to acquire upscale, full-service hotels at prices below replacement cost in selected markets throughout the United States, (ii) implementing its operating strategy to improve hotel operations and increase cash flow and (iii) expanding its management business. ACQUISITION STRATEGY The Company intends to continue acquiring upscale, full-service hotels. In addition to the direct acquisition of hotels, the Company anticipates that it may make investments in hotels through joint ventures with strategic partners or through equity contributions, sale and leasebacks or secured loans. The Company identifies acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners and operators. Through its extensive due diligence process, the Company chooses those acquisition targets where it believes selective capital improvements and intensive management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management and individual operations teams create detailed plans covering all areas of renovation and operation. These plans serve as the basis for the Company's acquisition decisions and guide subsequent renovation and operating plans. At the Owned Hotels, the Company has been able to implement these plans and apply its system of management to create improvements in revenue and profitability. The Company will seek to acquire and invest in hotels that meet the following criteria: MARKET CRITERIA ECONOMIC GROWTH. The Company focuses on metropolitan areas that are approaching, or have already entered, periods of economic growth. Such areas generally show above average growth in the business community as measured by (i) job formation rates, (ii) population growth rates, (iii) tourism and convention activity, (iv) airport traffic volume, (v) local commercial real estate occupancy, and (vi) retail sales volume. Markets that exhibit these characteristics typically have strong demand for hotel facilities and services. SUPPLY CONSTRAINTS. The Company seeks lodging markets with favorable supply dynamics for hotel owners and operators, including an absence of current new hotel development and barriers to future development such as zoning constraints, the need to undergo lengthy local development approval processes and a limited number of suitable sites. Other factors limiting the supply of new hotels are the current lack of financing available for new development and the inability to generate adequate returns on investment to justify new development. GEOGRAPHIC DIVERSIFICATION. The Company seeks to maintain a geographically diverse portfolio of hotels to offset the effects of regional economic cycles. The Hotels are located in 26 states across the nation and the District of Columbia, with eight Hotels located in California, four in Colorado, three in Georgia, three in Maryland, three in Texas, three in Virginia, three in Washington, D.C., two in Arizona, two in Louisiana, two in Missouri, two in New Jersey, two in New York, two in Pennsylvania and one Hotel each in 14 additional states. 31 HOTEL CRITERIA LOCATION AND MARKET APPEAL. The Company seeks to acquire upscale, full-service hotels that are situated near both business and leisure centers which generate a broad base of demand for hotel accommodations and facilities. These demand generators include (i) business parks, (ii) airports, (iii) shopping centers and other retail areas, (iv) convention centers, (v) sports arenas and stadiums, (vi) major highways, (vii) tourist destinations, (viii) major universities, and (ix) cultural and entertainment centers with nightlife and restaurants. The confluence of nearby business and leisure centers enables the Company to attract both weekday business travelers and weekend leisure guests. Attracting a balanced mix of business, group and leisure guests to the Hotels helps to maintain stable occupancy rates and high ADRs. SIZE AND FACILITIES. The Company seeks to acquire well-constructed hotels that are less than 20 years old, contain 200 to 500 guest rooms and include accommodations and facilities that are, or are capable of being made, attractive to key demand segments such as business, group and leisure travelers. These facilities typically include large, upscale guest rooms, food and beverage facilities, extensive meeting and banquet space, and amenities such as health clubs, swimming pools and adequate parking. POTENTIAL PERFORMANCE IMPROVEMENTS. The Company seeks to acquire underperforming hotels where intensive management and selective capital improvements can increase revenue and cash flow. Underperforming hotels typically serve less than their "fair share" of lodging industry demand (as measured by RevPAR), achieve lower profit margins than the Company believes it can maintain and receive inadequate funding to make needed capital improvements. These hotels represent opportunities where a systematic management approach and targeted renovations should result in improvements in revenue and cash flow. The Company's ability to improve operations is demonstrated by the fact that RevPAR at the Owned Hotels (excluding the ten hotels purchased since September 30, 1996) increased 12.3% from the year ended December 31, 1995 to the year ended December 31, 1996, as compared to an increase of only 5.4% for the upscale, full-service hotel segment as reported by Smith Travel Research over the comparable period. For the year ended December 31, 1996, RevPAR at all of the Owned Hotels (including the ten hotels purchased since September 30, 1996) increased 10.1% The Company expects that its relationships throughout the industry and its acquisition staff located on both coasts of the United States will continue to provide it with a competitive advantage in identifying, evaluating and purchasing hotels which meet its acquisition criteria. The Company has a record of successfully renovating and repositioning hotels, both at the Owned Hotels and at the Managed Hotels (varying in levels of service, room rates and market types). As a public company, the Company believes it has improved access to various debt and equity financing sources to fund acquisitions. In addition, in consummating acquisitions the Company expects that it will benefit from its ability to utilize OP Units or Common Stock as an alternative to cash. The Company currently expects to retain earnings for future acquisitions and the renovation and maintenance of the hotels it owns. OPERATING STRATEGY The Company's principal operating objectives are to generate higher RevPAR and to increase net operating income while providing its hotel guests with high-quality service and value. The Company seeks to achieve these objectives by creating and executing management plans that are specifically tailored for each individual Hotel rather than by implementing an operating strategy that is designed to maintain a uniform corporate image or brand. Management believes that its custom-tailored business plans are the most effective means of addressing the needs of a given hotel or market. The Company believes that skilled management of hotel operations is the most critical element in maximizing revenue and cash flow in full-service hotels. The Company's corporate headquarters carries out financing and acquisition activities and provides services to support as well as monitor the Company's on-site hotel operating executives. Each of the Company's executive departments, including Sales and Marketing, Human Resources and Training, Food 32 and Beverage, Technical Services, Development, and Corporate Finance, is headed by an executive with significant experience in that area. These departments support decentralized decision-making by the hotel operating executives by providing accounting and budgeting services, property management software and other resources which cannot be economically maintained at the individual Hotels. Key elements of the Company's management programs include the following: COMPREHENSIVE BUDGETING AND MONITORING. The Company's operating strategy begins with an integrated budget planning process that is implemented by individual on-site managers and monitored by the Company's corporate staff. Management sets targets for cost and revenue categories at each of the Hotels based on historical operating performance, planned renovations, operational efficiencies and local market conditions. On-site managers coordinate with the central office staff to ensure that such targets are realistic. Through effective and timely use of its comprehensive financial information and reporting systems, the Company can monitor actual performance and rapidly adjust prices, staffing levels and sales efforts to take advantage of changes in the market and to improve yield. TARGETED SALES AND MARKETING. The Company employs a systematic approach toward identifying and targeting segments of demand for each Hotel in order to maximize market penetration. Executives at the Company's corporate headquarters and property-based managers divide such segments into smaller subsegments, typically ten or more for each Hotel, and develop narrowly tailored marketing plans to suit each such segment. The Company supports each Hotel's local sales efforts with corporate sales executives who develop new marketing concepts and monitor and respond to specific market needs and preferences. These executives are active in implementing on-site marketing programs developed in the central management office. The Company employs computerized revenue yield management systems to manage each Hotel's use of the various distribution channels in the lodging industry. Management control over those channels, which include franchisor reservation systems and toll-free numbers, travel agent and airline global distribution systems, corporate travel offices and office managers, and convention and visitor bureaus, enables the Company to maximize revenue yields on a day-to-day basis. Sales teams are recruited locally and receive incentive-based compensation bonuses. All of the Company's sales managers complete a highly developed sales training program. STRATEGIC CAPITAL IMPROVEMENTS. The Company plans renovations primarily to enhance a Hotel's appeal to targeted market segments, thereby attracting new customers and generating increased revenue and cash flow. During the year ended December 31, 1996, the Company spent a total of $21.6 million on renovations at the Owned Hotels and currently intends to spend an additional $21.7 million completing the renovation programs (including approximately $8.4 million to renovate and reposition the Highgate Portfolio and the Additional Acquisitions). For example, at all of the Owned Hotels, the Company has renovated banquet and meeting spaces and upgraded guest rooms with computer ports and comfortable work spaces to better accommodate the needs of business travelers and to increase ADRs. Capital spending decisions are based on both strategic needs and potential rate of return on a given capital investment. SELECTIVE USE OF MULTIPLE BRAND NAMES. The Company believes that the selection of an appropriate franchise brand is essential in positioning a hotel optimally within its local market. The Company selects brands based on local market factors such as local presence of the franchisor, brand recognition, target demographics and efficiencies offered by franchisors. The Company believes that its relationships with many major hotel franchisors, established both as a manager and an owner of hotels operated under their respective franchises, places the Company in a favorable position when dealing with those franchisors and allows it to negotiate favorable franchise agreements with franchisors. The Company believes that its growth through acquisition of additional hotels will further strengthen its relationship with franchisors. 33 The following chart summarizes certain information with respect to the national franchise affiliations of the Hotels, the Highgate Portfolio and the Additional Acquisitions:
OWNED HOTELS, HIGHGATE PORTFOLIO AND ADDITIONAL ACQUISITIONS MANAGED HOTELS ----------------------------------------- --------------------------------------- NUMBER OF NUMBER OF GUEST NUMBER OF % OF GUEST NUMBER OF % OF FRANCHISE ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS - ------------------------------------------ ----------- --------------- ----------- ----------- --------------- --------- Hilton.................................... 2,939 11 38.1% -- -- --% Sheraton.................................. 1,162 4 15.0 -- -- -- Holiday Inn............................... 608 3 7.9 883 4 16.1 Radisson.................................. 507 2 6.6 126 1 2.3 Westin.................................... 496 1 6.4 -- -- -- Marriott.................................. 434 1 5.6 288 1 5.3 Holiday Select-Registered Trademark-...... 348 1 4.5 -- -- -- Doubletree................................ 294 1 3.8 208 1 3.8 Embassy Suites............................ 236 1 3.1 -- -- -- Independent............................... 214 2 2.8 830 6 15.1 Four Points-Registered Trademark-......... 213 1 2.8 589 2 10.7 Doubletree Guest Suites-Registered Trademark-............. 137 1 1.8 -- -- -- Ramada.................................... 118 1 1.5 457 3 8.3 Best Western-Registered Trademark-........ -- -- -- 562 3 10.3 Crowne Plaza-Registered Trademark-........ -- -- -- 414 1 7.5 Days Inn-Registered Trademark-............ -- -- -- 277 2 5.1 Comfort Suites-Registered Trademark-...... -- -- -- 244 2 4.5 Clarion-Registered Trademark-............. -- -- -- 194 1 3.5 Quality Suites-Registered Trademark-...... -- -- -- 177 1 3.2 Residence Inn-Registered Trademark-....... -- -- -- 104 1 1.9 Quality Inn-Registered Trademark-......... -- -- -- 100 1 1.8 Holiday Inn Express-Registered Trademark-............ -- -- -- 35 1 0.6 -- -- ----- ----------- ----- --------- 7,706 30 100.0% 5,488 31 100.0% -- -- -- -- ----- ----------- ----- --------- ----- ----------- ----- ---------
EMPHASIS ON FOOD AND BEVERAGE. Management believes popular food and beverage ideas are a critical component in the overall success of a hotel. The Company utilizes its food and beverage operations to create local awareness of its hotel facilities, to improve the profitability of its hotel operations and to enhance customer satisfaction. The Company is committed to competing for patrons with restaurants and catering establishments by offering high-quality restaurants that garner positive reviews and strong local and/or national reputations. The Company has engaged food and beverage experts to develop several proprietary restaurant concepts. The Owned Hotels contain restaurants ranging from Michel Richard's highly acclaimed CITRONELLE-Registered Trademark-, to Morgan's, a Company-designed concept which offers popular, moderately-priced American cuisine. The Company has also successfully placed national food franchises such as Starbuck's Coffee-Registered Trademark- and "TCBY"-Registered Trademark- Yogurt in casual, delicatessen-style restaurants in several of the Owned Hotels. Popular food concepts have strengthened the Company's ability to attract business travelers and group meetings and improved the name recognition of the Owned Hotels. COMMITMENT TO REINVESTMENT. The Company is committed to reinvesting adequate capital on an ongoing basis to maintain the quality of the hotels it owns. Reinvestment is expected to include room and facilities refurbishments, renovations and furniture and equipment replacements that are designed to maintain attractive accommodations, updated restaurants and modern equipment. The Company believes that these investments will enhance the Company's competitive position. 34 COMPUTERIZED REPORTING SYSTEMS. The Company employs computerized reporting systems at each of the Hotels and at its corporate offices to monitor the financial and operating performance of the Hotels. Management information services have been fully integrated through the installation of Novell and Unix networks. Management also utilizes programs like Data Plus-Registered Trademark- and cc:Mail-Registered Trademark- to facilitate daily communication. Such programs have enabled the Company to create and implement detailed reporting systems at each of the Hotels and its corporate headquarters. Corporate executives utilize information systems that track each Hotel's daily occupancy, ADR, and revenue from rooms, food and beverage. By having the latest hotel operating information available at all times, management is better able to respond to changes in the market of each Hotel. COMMITMENT TO SERVICE AND VALUE. The Company is dedicated to providing exceptional service and value to its customers on a consistent basis. The Company conducts extensive employee training programs to ensure personalized service at the highest levels. Programs such as "Be A Star" have been created and implemented by the Company to ensure the efficacy and uniformity of its employee training. The Company's practice of tracking customer comments, through the recording of guest comment cards and the direct solicitation (during check-in and check-out) of guest opinions regarding specific items, allows investment in services and amenities where they are most effective. The Company's focus on these areas has enabled it to attract lucrative group business. DISTINCT MANAGEMENT CULTURE. The Company has a distinct management culture that stresses creativity, loyalty and entrepreneurship and was developed to emphasize operations from an owner's perspective. Management believes in realistic solutions to problems, and innovation is always encouraged. Incentive programs and awards have been established to encourage individual property managers to seek new ways of increasing revenues and operating cash flow. This creative, entrepreneurial spirit is prevalent from the corporate staff and the general managers down to the operations staff. Individual general managers work closely with the corporate staff and they and their employees are rewarded for achieving target operating and financial goals. THE PROPERTIES The Owned Hotels, the Highgate Portfolio and the Additional Acquisitions feature, or after the Company's renovation programs have been completed will feature, comfortable, modern guest rooms, extensive meeting and convention facilities and full-service restaurant and catering facilities that attract meeting and convention functions from groups and associations, upscale business and vacation travelers as well as banquets and receptions from the local community. 35 The following table sets forth certain information with respect to the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions for the year ended December 31, 1996:
PLANNED OR COMPLETED NUMBER OF RENOVATION GUEST YEAR MONTH EXPENDITURE(1) HOTEL LOCATION ROOMS BUILT ACQUIRED (000'S) - ----------------------------------- -------------------------- ------------- --------- ----------- -------------- OWNED HOTELS Orange County Airport Hilton....... Irvine, CA 290 1976 2/96 $ 2,006 Hilton Hotel....................... Sacramento, CA 326 1983 12/96 750 Santa Barbara Inn.................. Santa Barbara, CA 71 1959 12/96 450 Hilton Hotel....................... San Pedro, CA 226 1989 1/97 1,500 Holiday Inn........................ Colorado Springs, CO 201 1974 12/96 200 Sheraton Hotel..................... Colorado Springs, CO 502 1974 6/95 3,393 Embassy Suites Denver.............. Englewood, CO 236 1986 12/96 500 Embassy Row Hilton................. Washington, DC 195 1969 12/96 2,033 The Latham Hotel................... Washington, DC 143 1981 3/96 802 Westin Atlanta Airport(3).......... Atlanta, GA 496 1982 11/95 7,100 Radisson Hotel..................... Schaumburg, IL 202 1979 6/95 1,652 Hilton Hotel & Towers.............. Lafayette, LA 328 1981 12/96 249 Marriott Hotel..................... Somerset, NJ 434 1978 10/95 3,311 Doubletree Hotel................... Albuquerque, NM 294 1974 1/97 1,500 Sheraton Airport Plaza............. Charlotte, NC 226 1985 2/96 1,529 Holiday Inn........................ Cleveland, OH 237 1978 2/96 2,900 Hilton Hotel....................... Arlington, TX 310 1983 4/96 2,700 Southwest Hilton................... Houston, TX 293 1979 10/96 1,072 Westchase Hilton................... Houston, TX 295 1980 1/97 415 Salt Lake Airport Hilton........... Salt Lake City, UT 287 1980 3/95 1,823 Hilton Hotel....................... Arlington, VA 209 1990 8/96 1,500 Hilton Hotel....................... Bellevue, WA 180 1979 8/95 1,063 ----- ------- Subtotal/Weighted Average--Owned Hotels.................... 5,981 $ 38,448 HIGHGATE PORTFOLIO Doubletree Guest Suites............ Indianapolis, IN 137 1987 4/97 $ 1,000 Holiday Inn Select................. Dallas, TX 348 1974 4/97 300 Radisson Hotel..................... Dallas, TX 305 1972 4/97 1,500 Holiday Inn Calgary Airport........ Calgary, Alberta 170 1981 4/97 350 Sheraton Hotel..................... Guildford, B.C. 280 1992 4/97 700 Ramada Vancouver Centre............ Vancouver, B.C. 118 1968 4/97 500 ----- ------- Subtotal/Weighted Average--Highgate Portfolio.............. 1,358 $ 4,350 ADDITIONAL ACQUISITIONS Four Points Hotel.................. Cherry Hill, NJ 213 1991 3/97 $ 850 Great Valley Sheraton.............. Frazer, PA 154 1971 5/97 3,244 ----- ------- Subtotal/Weighted Average--Additional Acquisitions......... 367 $ 4,094 Total/Weighted Average..................................... 7,706 $ 46,892 ----- ------- ----- ------- YEAR ENDED DECEMBER 31, 1996 ------------------------------------- AVERAGE HOTEL OCCUPANCY ADR REVPAR(2) - ----------------------------------- ------------- --------- ----------- OWNED HOTELS Orange County Airport Hilton....... 66.0% $ 78.48 $ 51.80 Hilton Hotel....................... 71.7 75.89 54.41 Santa Barbara Inn.................. 85.1 129.86 110.51 Hilton Hotel....................... 62.3 67.23 41.88 Holiday Inn........................ 72.6 60.57 43.97 Sheraton Hotel..................... 70.1 65.95 46.23 Embassy Suites Denver.............. 74.1 102.57 76.00 Embassy Row Hilton................. 60.8 111.24 67.63 The Latham Hotel................... 72.0 108.17 77.88 Westin Atlanta Airport(3).......... 79.3 79.44 63.00 Radisson Hotel..................... 66.1 75.54 49.93 Hilton Hotel & Towers.............. 74.1 70.05 51.91 Marriott Hotel..................... 72.4 104.36 75.56 Doubletree Hotel................... 66.6 77.12 51.36 Sheraton Airport Plaza............. 70.8 83.97 59.45 Holiday Inn........................ 73.1 70.11 51.25 Hilton Hotel....................... 73.3 81.03 59.39 Southwest Hilton................... 53.9 72.17 38.90 Westchase Hilton................... 77.9 89.87 70.01 Salt Lake Airport Hilton........... 75.5 79.18 59.78 Hilton Hotel....................... 74.5 109.21 81.36 Hilton Hotel....................... 80.8 91.70 74.09 --- --------- ----------- Subtotal/Weighted Average--Owne 71.3% $ 83.02 $ 59.19 HIGHGATE PORTFOLIO Doubletree Guest Suites............ 73.5% $ 79.53 $ 58.45 Holiday Inn Select................. 61.7 59.04 36.43 Radisson Hotel..................... 74.6 60.69 45.27 Holiday Inn Calgary Airport........ 59.3 53.09 31.48 Sheraton Hotel..................... 75.2 69.17 52.02 Ramada Vancouver Centre............ 79.4 70.40 55.90 --- --------- ----------- Subtotal/Weighted Average--High 69.8% $ 64.35 $ 44.92 ADDITIONAL ACQUISITIONS Four Points Hotel.................. 61.8% $ 73.40 $ 45.36 Great Valley Sheraton.............. 72.0 88.80 63.94 --- --------- ----------- Subtotal/Weighted Average--Addi 66.1% $ 80.43 $ 53.16 Total/Weighted Average......... 70.8% $ 79.64 $ 56.39 --- --------- ----------- --- --------- -----------
- ------------------------------ (1) Represents the total planned or completed capital expenditures at each hotel. For the year ended December 31, 1996, $21.6 million had been spent and an additional $21.7 million was planned. (2) Represents total room revenue divided by total available rooms, net of rooms out of service due to significant renovations. (3) The Westin Atlanta Airport is majority-owned by the Company through a partnership in which the Company holds an 85.2% limited partner interest, 1% general partner interest and a mortgage which together provide the Company a 92% economic interest in the hotel. 36 POST-IPO ACQUISITIONS HILTON HOTEL, SACRAMENTO, CA. Built in 1983, the 326-room hotel is located in suburban Sacramento, near the interchange of Interstate 80 and Route 160 in an area which is well developed with commercial office space, upscale retail and residential uses. The hotel's facilities and amenities feature over 17,000 square feet of banquet and meeting space, an indoor-outdoor pool, volleyball courts, a health and fitness center, a business center, valet services, a gift shop and two restaurants. The greater Sacramento market has experienced strong economic growth during the 1990s. SANTA BARBARA INN, SANTA BARBARA, CA. Built in 1959, the 71-room hotel is located on the Pacific Coast Highway directly across from the Pacific Ocean and a wide, publicly maintained beach. The hotel's facilities and amenities feature the renowned CITRONELLE restaurant, two meeting rooms, an outdoor pool and deck, tennis courts and valet services. The Santa Barbara market is a popular residential and resort area. HILTON HOTEL, SAN PEDRO, CA. Built in 1989, the 226-room hotel is located in Los Angeles County between Long Beach and Palos Verdes, approximately 12 miles south of Los Angeles International Airport. The hotel's facilities and amenities feature over 14,000 square feet of banquet and meeting space, a swimming pool, a spa, two tennis courts and a grill restaurant. San Pedro is located within five miles of the Port of Long Beach and within two miles of the Port of Los Angeles, which together handle nearly two-thirds of the Western United States' cargo. Los Angeles County is currently experiencing increased economic growth as it emerges from the recession of the early- and mid-1990s. Upon acquisition in February 1997, the hotel was reflagged as a Hilton. HOLIDAY INN, COLORADO SPRINGS, CO. Built in 1974 and renovated in 1990, the 201-room hotel is located on Interstate 25, approximately five miles north of downtown Colorado Springs and approximately eight miles north of another Owned Hotel, the Sheraton Hotel, Colorado Springs. The hotel's facilities and amenities feature more than 8,700 square feet of banquet and meeting space, a health club and jogging track, an outdoor pool, tennis courts, a restaurant, a gift shop and valet services. Colorado Springs has experienced strong economic growth in recent years which has led to a major airport expansion program completed in 1995. Such growth is attributable to a number of factors, including the region's low average cost of living and a rapidly expanding, young population. EMBASSY SUITES DENVER, DENVER, CO. Built in 1986, the 236-room hotel is located in South Denver within a concentration of office and industrial parks known as the Denver Tech Center. The hotel's facilities and amenities feature over 5,000 square feet of banquet and meeting space, an indoor pool, an upgraded fitness center, a business center, valet services, a gift shop and a restaurant. Denver has experienced significant development and growth during the 1990s as the economic and cultural center of the rapidly expanding Mountain region. THE EMBASSY ROW HILTON, WASHINGTON, D.C. Built in 1969 and renovated in 1994, the 195-room hotel is located in downtown Washington, D.C. on Massachusetts Avenue, which is known as "Embassy Row" because of the many embassies, chanceries and offices of foreign governments located in the area. The hotel's facilities and amenities feature over 7,500 square feet of banquet and meeting space, a rooftop pool and deck, a health and fitness center, a business center, valet services and a restaurant. A major new convention center is expected to open in downtown within four years. The Company assumed management of the hotel in July 1996. Upon acquisition in December 1996, the hotel was reflagged as a Hilton. HILTON HOTEL & TOWERS, LAFAYETTE, LA. Built in 1981, the 328-room hotel is centrally located on Pinhook Road, a major business artery linking downtown Lafayette with the local airport. The hotel's facilities and amenities feature over 17,000 square feet of banquet and meeting space, an outdoor pool, an exercise room, a business center, valet services, a gift shop and a restaurant. Lafayette serves as a major center for offshore oil drilling and production, and has experienced strong job growth during the 1990s. 37 DOUBLETREE HOTEL, ALBUQUERQUE, NM. Built in 1975, the 294-room hotel is located in downtown Albuquerque, adjacent to the Convention Center and the subterranean Galleria Shopping Center. The hotel's facilities and amenities feature over 10,000 square feet of meeting and banquet space, an outdoor heated pool, an exercise room, a gift shop, an airline desk, two restaurants, two lobbies and a garden foyer. The region has experienced consistent growth throughout the 1990s, in part because of the increased presence of high technology businesses in Albuquerque. The Company plans to spend $1.5 million on renovations at the hotel. SOUTHWEST HILTON, HOUSTON, TX. Built in 1981, the 293-room hotel is located in the Southwest area of Houston on the Southwest Freeway, one of the city's busiest roads. The hotel's facilities and amenities feature over 15,000 square feet of banquet and meeting space, an outdoor pool, a fitness center, a business center, valet services a gift shop and a restaurant. Houston is the nation's fourth largest metro area with a population over 3.8 million and the region is a national leader in economic growth and job growth. The Company plans to spend $1.1 million on renovations at the hotel. WESTCHASE HILTON, HOUSTON, TX. Built in 1981, the 295-room hotel is located within blocks of the freeway to the Houston International Airport and convenient to the commercial and retail concentration known as the Galleria area. The hotel's facilities and amenities feature over 13,000 square feet of banquet and meeting space, a landscaped outdoor pool with a deck and hot tub, a fitness center, a beauty salon, a gift shop and a restaurant. Houston is the nation's fourth largest metro area with a population over 3.8 million and the region is a national leader in economic growth and job growth. THE HIGHGATE PORTFOLIO DOUBLETREE GUEST SUITES, INDIANAPOLIS, IN. Built in 1987, the 137-room hotel is located on busy North Meridian Street on the north side of the suburb of Carmel. The hotel is located within a commercial concentration of insurance companies and national companies such as Lucent Technologies, Thompson Consumer Electronics, GTE, Eli Lilly and Hewlett Packard. The hotel's facilities and amenities feature over 1,000 square feet of banquet and meeting space, an indoor/outdoor pool, a fitness center, a whirlpool, a gift shop and a restaurant. HOLIDAY INN SELECT, DALLAS, TX. Built in 1974 and renovated in 1988 and 1995, the 348-room hotel is located at the intersection of Interstate 35 and Mockingbird Lane, within easy access to the market areas of Las Colinas, Stemmons Corridor/Market Center, Love Field and Central Business District/Convention Center. The hotel's facilities and amenities feature over 13,560 square feet of banquet and meeting space, an outdoor pool and sundeck, a health club, a business center, a gift shop and a restaurant. RADISSON HOTEL, DALLAS, TX. Built in 1972, the 305-room hotel is located on West Mockingbird Lane, within easy access to Interstate 35 and the market areas of Love Field, Stemmons Corridor/Market Center, Parkland/Medical Center and the Central Business District/Convention Center. The hotel's facilities and amenities feature over 16,000 square feet of banquet and meeting space, and outdoor pool, a health club, two racquetball courts, a jogging track, sand volleyball courts, a whirlpool, a sauna, a gift shop and two restaurants. HOLIDAY INN CALGARY AIRPORT, CALGARY, ALBERTA. Built in 1981, the 170-room hotel is located between Calgary's International Airport and central business district, near such tourist attractions as the Calgary Zoo and Prehistoric Park, Devonian Garden, the Saddledome (home of the NHL Calgary Flames), Stampede Park, Canada Olympic Park, the Olympic Hall of fame, Heritage Park, Eau Clair Market and the IMAX theatre. The hotel's facilities and amenities feature over 2,040 square feet of banquet and meeting space, an indoor pool, two saunas, guest privileges at a nearby health club and a restaurant. SHERATON HOTEL, GUILDFORD, B.C. Built in 1992, the 280-room hotel is located in the Guildford Area of the City of Surrey, the geographic center of the Greater Vancouver region. The hotel's facilities and 38 amenities feature over 18,000 square feet of banquet and meeting space, an outdoor pool, an exercise room, a sauna, a gift shop and a restaurant. Surrey has experienced significant expansion in recent years and is a leader in economic growth and job growth within the Province of British Columbia. RAMADA VANCOUVER CENTRE, VANCOUVER, B.C. Built in 1968 and renovated in 1989 and 1994, the 118-room hotel is located on West Broadway, one block from the Vancouver Hospital & Health Science Centre and minutes from downtown Vancouver. Nearby tourist attractions include the Queen Elizabeth Theatre and the Ford Centre for the Performing Arts, Vancouver International Airport, Canada Place/ Convention Centre, B.C. Place, General Motors Place, Granville Island Market, the University of British Columbia, Chinatown and Japantown. THE ADDITIONAL ACQUISITIONS FOUR POINTS HOTEL, CHERRY HILL, NEW JERSEY. Built in 1971, the 213-room hotel is located on Route 70 East, off I-295, nine miles from the Philadelphia Convention Center and near several major corporate office parks in the Cherry Hill/Mount Laurel area. The hotel's facilities and amenities feature 16,288 square feet of banquet and meeting space, a large outdoor courtyard with pool, exercise room, two tennis courts, gift shop, a Morgan's restaurant and a lobby bar. GREAT VALLEY SHERATON, FRAZER, PENNSYLVANIA. Built in 1991, the 154-room hotel is located at the intersection of Route 202 and Lancaster Pike in historic Chester County, Pennsylvania. The hotel's facilities and amenities include 7,852 square feet of meeting and banquet space, an indoor pool, the White Horse Tavern and Chesterfield's Piano Lounge. The "202 Corridor" has experienced significant growth in recent years. THE MANAGED HOTELS The Company operates 31 Managed Hotels owned by third parties containing 5,488 rooms. Of the Managed Hotels, 23 are full-service properties, seven are limited-service properties and one is an extended stay property. Of the Managed Hotels, 25 are operated under nationally-recognized brand names and six are independent properties. The brand names of the Managed Hotels include Sheraton, Clarion, Holiday Inn and Best Western. See "Certain Relationships and Related Transactions" and "Risk Factors--Potential Conflicts of Interest." The Management Agreements have remaining terms ranging from one month to nine years. Substantially all of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration dates if the applicable hotel is sold and several of the Management Agreements permit the owners of the Managed Hotels to terminate such agreements prior to the stated expiration date without cause or by reason of the failure of the applicable hotel to obtain specified levels of performance. For 1996, the Company's pro forma revenue from Management Agreements was $3.2 million constituting 1.3% of the Company's total pro forma revenue for such period. No single Management Agreement (or group of Management Agreements for hotels under common ownership or control) currently accounts for more than 0.5% of the total revenue of the Company on a pro forma basis. See "Risk Factors--Termination of Management Agreements." The Company intends to continue its efforts to add to its portfolio of Managed Hotels by aggressively pursuing new management agreements. The Company believes that, in addition to adding to the Company's revenues and profits, the business of operating hotels for third parties benefits the Company by (i) increasing the Company's operating experience in, and knowledge of, hotel markets throughout the United States, (ii) broadening the Company's relationships with hotel owners and thus enhancing the Company's opportunities to identify, evaluate and negotiate hotel acquisitions prior to the active marketing of a hotel for sale, and (iii) improving the Company's ability to attract, train and retain highly-qualified operating employees by offering them the opportunity to work in a broader variety of hotels and markets. 39 COMPETITION The Company competes primarily in the upscale and mid-priced sectors of the full-service segment of the lodging industry. In each geographic market in which the Hotels are located, there are other full- and limited-service hotels that compete with the Hotels. In addition, the Company's food and beverage operations compete with local free-standing restaurants and bars. Competition in the U.S. lodging industry is based generally on convenience of location, brand affiliation, price, range of services and guest amenities offered and quality of customer service and overall product. EMPLOYEES As of December 31, 1996, the Company employed approximately 6,200 persons, of whom approximately 5,200 were compensated on an hourly basis. Approximately 65 employees work at the corporate headquarters. Employees at five of the Hotels are represented by labor unions. Management believes that labor relations with its employees are good. TRADEMARKS The Company employs a flexible branding strategy based on a particular Hotel's market environment and the Hotel's unique characteristics. Accordingly, the Company uses various national trade names pursuant to licensing arrangements with national franchisors. DOUBLETREE-TM-, EMBASSY SUITES-Registered Trademark-, HILTON-TM- HOLIDAY INN-Registered Trademark-, MARRIOTT-Registered Trademark-, RADISSON-TM-, SHERATON-Registered Trademark- AND WESTIN-TM- ARE REGISTERED TRADEMARKS OF THIRD PARTIES, NONE OF WHICH SHALL BE DEEMED AN ISSUER OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAVE ANY OF SUCH FRANCHISORS ENDORSED OR APPROVED THE OFFERING. SUCH FRANCHISORS HAVE NOT ASSUMED AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER HEREOF. A GRANT OF ANY SUCH FRANCHISE LICENSE FOR CERTAIN OF THE COMPANY'S HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY ANY OF SUCH FRANCHISORS (OR ANY OF THEIR AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising in the normal course of business. The Company believes that the ultimate outcome of these lawsuits will not have a material adverse effect on the Company. GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels and restaurants, including liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. The Company believes that it is substantially in compliance with these requirements. Managers of hotels are also subject to laws governing their relationship with hotel employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of the Owned Hotels and could otherwise adversely affect the Company's operations. 40 Under the ADA, all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to the Owned Hotels, a determination that the Company is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The Company is likely to incur additional costs of complying with the ADA; however, such costs are not expected to have a material adverse effect on the Company's results of operations or financial condition. See "Risk Factors-- Governmental Regulation." For a description of certain environmental regulations to which the Company is subject, see "Risk Factors--Environmental Risks." THE OPERATING PARTNERSHIP THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF CAPSTAR MANAGEMENT'S LIMITED PARTNERSHIP AGREEMENT, A COPY OF WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. Substantially all of the Company's assets are held indirectly by and operated through CapStar Management, the Company's subsidiary operating partnership. The Company is the sole general partner of CapStar Management, and the Company and CapStar LP Corporation, a wholly-owned subsidiary of the Company, are the sole limited partners of CapStar Management. The partnership agreement of CapStar Management gives the general partner full control over the business and affairs of CapStar Management. The general partner is also given the right, in connection with the contribution of property to CapStar Management or otherwise, to issue additional partnership interests in CapStar Management in one or more classes or series, with such designations, preferences and participating or other special rights and powers (including rights and powers senior to those of the existing partners) as the general partner may determine. In connection with the acquisition of the Highgate Portfolio, the Company has agreed to issue limited partnership interests in CapStar Management to Highgate Hotels. Upon the closing of the acquisition of the Highgate Portfolio, the partnership agreement of CapStar Management will be amended to provide for two classes of partnership interests, Common OP Units and Preferred OP Units, and the partners of CapStar Management will own the following numbers of such OP Units: (i) the Company and CapStar LP Corporation--a number of Common OP Units equal to the number of issued and outstanding shares of Common Stock (including those issued in the Offering); and (ii) Highgate Hotels--809,523 Common OP Units and 392,157 Preferred OP Units. The Preferred OP Units will pay a 6.5% cumulative annual preferred return, compounded quarterly to the extent not paid on a current basis, and will be entitled to a liquidation preference of $25.50 per Preferred OP Unit. All net income and capital proceeds earned by CapStar Management, after payment of the annual preferred return and, if applicable, the liquidation preference, will be shared by the holders of the Common OP Units in proportion to the number of Common OP Units owned by each such holder. Each OP Unit held by Highgate Hotels will be convertible by the holder on or after August 23, 1997 for one share of Common Stock of the Company (or, at the Company's option, for cash in an amount equal to the market value of a share of Common Stock). In addition, the Preferred OP Units will be redeemable by CapStar Management at a price of $25.50 per Preferred OP Unit (or, at the Company's option, for a number of shares of Common Stock having a value equal to such redemption price) at any time after the third anniversary of the acquisition of the Highgate Portfolio. 41 MANAGEMENT The following table sets forth certain information with respect to the Company's directors and executive officers as of the date of this Prospectus.
NAME AGE POSITION - ---------------------------------------------------- --- ---------------------------------------------------- Paul W. Whetsell.................................... 46 President, Chief Executive Officer and Chairman of the Board David E. McCaslin................................... 39 Chief Operating Officer and Director William M. Karnes................................... 50 Senior Executive Vice President, Finance and Chief Financial Officer John E. Plunket..................................... 41 Executive Vice President, Finance and Development John Emery.......................................... 32 Treasurer and Secretary Michael T. George................................... 38 Senior Vice President, Operations D. Scott Livchak.................................... 42 Senior Vice President, Operations Robert Gauthier..................................... 43 Senior Vice President, Operations Daniel L. Doctoroff................................. 38 Director Bradford E. Bernstein............................... 30 Director William S. Janes.................................... 43 Director Joseph McCarthy..................................... 64 Director Edward L. Cohen..................................... 51 Director Edwin T. Burton, III................................ 54 Director Edward P. Dowd...................................... 54 Director Mahmood Khimji...................................... 36 Proposed Director
PAUL W. WHETSELL has served as President and Chief Executive Officer of the Company since its founding in 1987. From 1981 to 1986, Mr. Whetsell served as Vice President of Development for Lincoln Hotels in Dallas, Texas. Prior to that, from 1973 to 1981, Mr. Whetsell worked for Quality Inns in various capacities in its franchise division, culminating in Vice President of Franchise. DAVID E. MCCASLIN has served as Chief Operating Officer of the Company since 1994. Mr. McCaslin joined the Company in 1987 as a General Manager and was named Vice President of Operations in 1988. From 1985 to 1987, Mr. McCaslin served as General Manager for Lincoln Hotels. Prior to that, from 1979 to 1985, he worked for Westin Hotels in various capacities, including Assistant General Manager, Rooms Division Manager and Food & Beverage Manager. WILLIAM M. KARNES has served as Senior Executive Vice President, Finance and Chief Financial Officer of the Company since April 1996. From 1994 to April 1996, Mr. Karnes served as Senior Vice President and Chief Financial Officer of Tucker Properties Corporation, a publicly traded real estate investment trust. From 1991 to 1994, Mr. Karnes served as Senior Vice President Finance and Administration for Banyan Management Corp., a company that provides management services for five public real estate investment trusts and three master limited partnerships. Prior to that, from 1989 to 1991, Mr. Karnes served as Chief Operating Officer of Miglin-Beitler, Inc., a private real estate development, management and leasing firm. JOHN E. PLUNKET has served as Executive Vice President, Finance and Development since November 1993. From September 1991 to October 1993, Mr. Plunket served as Vice President and Principal Broker for CIG International, an investment and hotel asset management company. From February 1988 to August 1991, Mr. Plunket served as Managing Director of Cassidy & Pinkard Inc., a commercial real estate services company. From 1985 to 1987, Mr. Plunket served as Senior Vice President for Oxford 42 Development Corporation. Prior to that, from December 1979 to April 1985, Mr. Plunket worked for Marriott Corporation in various capacities, culminating in Director of Project Finance. JOHN EMERY has served as Treasurer and Secretary of the Company since March 1996. From September 1995 to March 1996, he served as Director of Finance of the Company. Prior to that, from January 1987 to September 1995, he worked for Deloitte & Touche LLP in various capacities, culminating with Senior Manager for the hotel and real estate industries. MICHAEL T. GEORGE has served as Senior Vice President, Operations since 1995. From 1990 to 1995, Mr. George served as Vice President of Operations and ultimately as Chief Operating Officer for Devon Hotels Ltd. in Montreal. From 1989 to 1990, Mr. George served as a General Manager and Vice President for Radisson Hotels International, Inc. Prior to that, from 1986 to 1989, Mr. George served in various capacities with Radisson Hotels, Hilton Hotels and Sheraton Hotels. D. SCOTT LIVCHAK has served as Senior Vice President, Operations since 1990. From 1985 to 1989 Mr. Livchak served as a General Manager for The Adam's Mark Hotel in Washington, DC, owned by HBE Corporation. From 1983 to 1985, Mr. Livchak worked for the Sheraton Atlanta Hotel in the capacity of Resident Manager. From 1977 to 1983, Mr. Livchak held various management positions with Sheraton Corporation. ROBERT GAUTHIER has served as Senior Vice President, Operations and General Manager of the Sheraton, Colorado Springs since 1996. From 1993 to 1996, he served as Vice President, Operations for CapStar Management. Prior to that, from 1987 to 1993, Mr. Gauthier served as Area Manager and General Manager for Drexel Burnham Lambert Realty, Inc. DANIEL L. DOCTOROFF has been Managing Director of Oak Hill Partners, Inc. (Acadia Partners' investment advisor) and its predecessor since August 1987; Vice President and Director of Acadia Partners MGP, Inc. since March 1992; Vice President of Keystone, Inc. since March, 1992; and a Managing Partner of Insurance Partners Advisors, L.P. since February 1994. All of such entities are affiliates of Acadia Partners. Mr. Doctoroff is also a Director of Bell & Howell Holdings Company, Kemper Corporation and Specialty Foods Corporation. BRADFORD E. BERNSTEIN has served as a Vice President and an Associate of Oak Hill Partners, Inc. (Acadia Partners' investment advisor) since 1992. From 1991 until 1992, Mr. Bernstein worked at Patricof & Co. Ventures. Prior to that, from 1989 to 1991, he worked at Merrill, Lynch & Co. Mr. Bernstein serves as a director of Pinnacle Brands, Inc., Payroll Transfers, Inc. and Caliber Collision Centers, Inc. WILLIAM S. JANES has served as a Principal and Director of RMB Realty, Inc. since 1990. Prior to that, from 1984 to 1989, Mr. Janes served as Regional General Partner of Lincoln Property Company. Mr. Janes serves as a Director of Paragon Group, Inc., a publicly-traded real estate investment trust, as well as Brazos Asset Management, Brazos Fund, Paragon Property Services, Inc. and Carr Real Estate Services. Mr. Janes maintains professional affiliations as a member of the National Association of Real Estate Investment Trusts, the Society of Industrial and Office Realtors and the Urban Land Institute. JOSEPH MCCARTHY has been retired since 1994. From 1993 to 1994 he has served as Chairman of the Board for Motel 6. From 1985 to 1993, he served as President and Chief Executive Officer for Motel 6. From 1980 to 1985, he served as President and Chief Executive Officer of Lincoln Hotels. From 1976 to 1980, he served as President and Chief Executive Officer of Quality Inns International. Prior to that, from 1971 to 1976, he served as Senior Vice President of the Sheraton Corporation. EDWARD L. COHEN has served as an Executive Officer of Lerner Corporation, a real estate management and leasing company located in Bethesda, Maryland, since 1985. Mr. Cohen is also a Principal of Lerner Enterprises, a real estate development and investment company. Prior to his participation with the Lerner organization, he was a lawyer in private practice in Washington, D.C. 43 EDWIN T. BURTON, III has served as President of Windermere Consulting Company since April 1995 and Trustee of the Commonwealth of Virginia Retirement System since March 1994. From 1994 to April 1995, he served as Managing Director and a member of the Board of Interstate Johnson Lane, Inc. Prior to that, from 1987 to 1993, he was President of Rothschild Financial Services, Inc. Mr. Burton is a Visiting Professor of Economics at the University of Virginia in Charlotesville, Virginia. EDWARD P. DOWD has served as Senior Vice President of John Hancock Real Estate Investment Group of John Hancock Financial Services since 1992. Prior to that, from 1970 to 1992, Mr. Dowd served in various capacities at John Hancock Realty. Mr. Dowd serves as Director of John Hancock Realty Investors, Inc., John Hancock Realty Services Inc. and Maritime Life Assurance Co. MAHMOOD KHIMJI has served as Senior Vice President of Highgate Hotels, Inc., an owner and operator of hotel and commercial properties throughout North America, since 1988. Prior to that, from 1986 to 1988, Mr. Khimji was an associate at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Khimji serves as a Director of the Texas Hotel/Motel Association. EXECUTIVE COMPENSATION The following table sets forth all compensation paid by the Company during 1996 with respect to the Chief Executive Officer and the four most highly compensated executive officers (the "Named Executive Officers").
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------- ------------------------------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION - ----------------------------------------- ---------- --------- ------------- ------------- ------------- Paul W. Whetsell......................... $ 215,081 $ -- $ 2,312 150,000 -- President, Chief Executive Officer and Chairman of the Board David E. McCaslin........................ 179,748 30,000 2,312 87,500 -- Chief Operating Officer and Director William M. Karnes........................ 154,549 30,000 -- 50,000 -- Senior Executive Vice President and Chief Financial Officer John E. Plunket.......................... 185,691 10,000 -- 73,129 -- Executive Vice President, Finance and Development Michael T. George........................ 132,000 13,000 20,500 18,282 -- Senior Vice President, Operations
44 STOCK OPTION GRANTS The following table sets forth certain information with respect to the options granted to the Named Executive Officers during 1996. OPTION GRANTS IN FISCAL YEAR 1996
POTENTIAL VALUE AT ASSUMED ANNUAL RATES NUMBER OF % OF TOTAL OF STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(2) OPTIONS EMPLOYEES IN OR EXPIRATION -------------------------- NAME GRANTED(1) 1996 FISCAL YEAR BASE PRICE DATE 5% 10% - ----------------------- ----------- ----------------- ------------- ------------------ ------------ ------------ Paul W. Whetsell....... 150,000 20.1% $ 18 August 20, 2006 $ 1,698,015 $ 4,303,105 David E. McCaslin...... 87,500 11.7 18 August 20, 2006 990,509 2,510,144 John E. Plunket........ 73,129 9.8 18 August 20, 2006 827,828 2,097,878 William M. Karnes...... 50,000 6.7 18 August 20, 2006 566,005 1,434,368 Michael T. George...... 18,282 2.5 18 August 20, 2006 206,954 524,462
- ------------------------ (1) All of these options vest in equal installments over three years except 10,000 of the options granted to Mr. Plunket which vested immediately upon their grant. (2) In accordance with rules of the Securities and Exchange Commission, these amounts are the hypothetical gains or "option spreads" that would exist for the respective options based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the options were granted over the full option term. COMPENSATION OF DIRECTORS Directors who are not employees of the Company ("Independent Directors") are paid an annual fee of $12,000. In addition, each Independent Director is paid $750 for attendance at each meeting of the Board and $500 for attendance at each meeting of a committee of the Board of which such director is a member. Directors who are employees of the Company do not receive any fees for their service on the Board or a committee thereof. The Company reimburses directors for their out-of-pocket expenses in connection with their service on the Board. In connection with the IPO, each Independent Director was granted options to purchase 5,000 shares of Common Stock at the initial public offering price of $18 per share. On the date of the annual meeting of the Company's shareholders beginning with the annual meeting held in 1997, each Independent Director will be granted options to purchase 5,000 shares of Common Stock at the then current market price. All options granted to directors will vest in equal installments over three years ending in August 1999. Any non-employee director who ceases to be a director will forfeit the right to receive any options not previously vested or granted. COMMITTEES The Board currently has an Audit Committee, a Compensation Committee and an Investment Committee. The Audit Committee consists of three Independent Directors. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, review the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of the Company's internal accounting controls. The Compensation Committee consists of three Independent Directors and determines compensation of the Company's executive officers and administers the Company's Equity Incentive Plan (as defined below). The Investment Committee consists of the Chairman of the Board and 45 three Independent Directors, and reviews and approves investments proposed to be made by the Company. COMPENSATION PLANS MANAGEMENT BONUS PLAN. The Company has established a management bonus plan (the "Management Bonus Plan") under which certain officers and employees of the Company, including the Named Executive Officers, are eligible to receive cash bonuses based upon the achievement of specific goals both for the Company and the individual officer or employee. Bonuses awarded under the Management Bonus Plan may not exceed 66% of the officer or employee's annual base salary. The Management Bonus Plan is administered by the Compensation Committee. STOCK PURCHASE PLAN. Each employee of the Company customarily employed at least 20 hours or more per week by the Company or an affiliate (as defined in the Stock Purchase Plan), other than an employee who owns beneficially 5% or more of the outstanding Common Stock, is eligible to participate in the Company's stock purchase plan (the "Stock Purchase Plan"). Under the Stock Purchase Plan, participating employees may elect to authorize the Company to withhold a minimum of $200 per quarter and a maximum of 8% or $25,000 (whichever is less) of the participating employee's base pay, which amounts will be used to purchase Common Stock from the Company on a monthly basis. The purchase price of Common Stock will equal a designated percentage from 85% to 100% of the closing sales price for Common Stock as reported on the Composite Transactions Tape of the NYSE (except as described below) on the first trading day of the month or on the last trading day of the month, whichever is less. The designated percentage will be established annually by the Compensation Committee which is responsible for the administration of the Stock Purchase Plan. Common Stock purchased under the Stock Purchase Plan is held in custodial accounts until sold or distributed at the participant's request. The custodian may charge a fee for the execution of any such sale or for the delivery of share certificates. The participant may not elect to purchase stock under the Stock Purchase Plan for three months after a withdrawal or sale of Common Stock under the Stock Purchase Plan. Shares purchased under the Stock Purchase Plan may not be sold for six months after their purchase. Any cash dividends paid on Common Stock held in a participant's account will be reinvested in additional Common Stock (at 100% of fair market value). Non-cash distributions on Common Stock held in a participant's account will be distributed to the participant. The Company has reserved 500,000 shares of Common Stock for issuance under the Stock Purchase Plan. Such shares may be from authorized and unissued shares, treasury shares or a combination thereof. The Stock Purchase Plan will remain in effect until terminated by the Board, or until all shares authorized for issuance thereunder have been issued. The Stock Purchase Plan may be amended from time to time by the Board. No amendment will increase the aggregate number of shares of Common Stock that may be issued and sold under the Stock Purchase Plan (except for authorizations pursuant to the anti-dilution provisions of the Stock Purchase Plan) without further approval by the Company's shareholders. EQUITY INCENTIVE PLAN. The Company's Equity Incentive Plan (the "Equity Incentive Plan") is designed to attract and retain qualified directors, officers and other key employees of the Company and its affiliates (as defined in the Equity Incentive Plan). The Equity Incentive Plan authorizes the grant of options to purchase shares of Common Stock ("Options"), stock appreciation rights ("Appreciation Rights") and restricted shares ("Restricted Shares"). The Compensation Committee administers the Equity Incentive Plan and determines to whom Options, Appreciation Rights and Restricted Shares are to be granted and the terms and conditions thereof, including the number of shares relating to each award and the period of exerciseability or restricted period, as the case may be. Notwithstanding the foregoing, the Board may resolve to administer the Equity Incentive Plan itself, in which case the term Compensation Committee shall be deemed to mean the Board. 46 Subject to adjustment as provided in the Equity Incentive Plan, the number of shares of Common Stock that may be issued or transferred and covered by outstanding awards granted under the Equity Incentive Plan may not in the aggregate exceed 1,740,000 shares. To the extent that an award is canceled, terminates, expires or lapses for any reason without the payment of consideration, any shares of Common Stock subject to the award will again be available for the grant of awards. Common Stock subject to Appreciation Rights that are settled in cash will thereafter be available for the grant of awards. Common Stock issued under the Equity Incentive Plan may be from authorized and unissued shares, treasury shares or a combination thereof. Awards may be granted to directors, officers or other key employees of the Company or an affiliate, as determined by the Compensation Committee. In connection with the IPO, the Company granted certain executive officers and other members of management options to purchase up to 745,254 shares of Common Stock at the initial public offering price of $18 per share. Certain of these options were exercisable immediately upon their grant, while the remaining options will become exercisable in three annual installments. The Compensation Committee may grant Options at a per share price equal to, greater than or less than fair market value of the Common Stock on the date of grant. The exercisability of Options may be conditioned on continued service and/or the achievement of specified performance objectives ("Management Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no participant shall be granted awards relating to more than 200,000 shares during any calendar year. The Compensation Committee shall determine the method of exercising options and the form of payment, which may include, without limitation, cash, shares of Common Stock that are already owned by the optionee, other property or "cashless exercise" arrangements. Any grant may provide for automatic "reload option rights", except that the term of any reload options shall not extend beyond the term of the Options originally exercised. The Compensation Committee may specify at the time Options are granted that shares of Common Stock will not be accepted in payment of the option price until they have been owned by the optionee for a specified period; however, the Equity Incentive Plan does not require any such holding period. Options granted under the Equity Incentive Plan may be intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code, or Options that are not intended to so qualify. No incentive stock option may be exercised more than ten years from the date of grant. Each grant must specify the period, if any, of continuous service with the Company or any affiliate that is necessary before the Options will become exercisable and may provide for the earlier exercise of the Options in the event of a change of control of the Company or other event. More than one grant may be made to the same optionee. Appreciation Rights granted under the Equity Incentive Plan may be either free-standing Appreciation Rights or Appreciation Rights that are granted in tandem with Options. An Appreciation Right represents the right to receive from the Company the difference (the "Spread"), or a percentage thereof not in excess of 100%, between the base price per share of Common Stock in the case of a free-standing Appreciation Right, or the option price of the related Option Right in the case of a tandem Appreciation Right, and the market value of the Common Stock on the date of exercise of the Appreciation Right. Tandem Appreciation Rights may only be exercised at a time when the related Option Right is exercisable and the Spread is positive, and the exercise of a tandem Appreciation Right requires the surrender of the related Option Right for cancellation. A free-standing Appreciation Right must specify a base price, which may be equal to, greater than or less than the fair market value of a share of Common Stock on the date of grant, must specify the period of continuous service that is necessary before the Appreciation Right becomes exercisable (except that it may provide for its earlier exercise in the event of a change in control of the Company or other event) and, in the case of an Appreciation Right awarded in tandem with an incentive stock option, may not be exercised more than ten years from the date of grant. Any grant of Appreciation Rights may specify that the amount payable by the Company upon exercise may be paid in cash, Common Stock or a combination thereof. In addition, any grant may specify that an Appreciation Right may be exercised only in the event of a change in control of the Company. The Compensation 47 Committee may condition the award of Appreciation Rights on continued service and/or the achievement of one or more Management Objectives. The Compensation Committee may award Restricted Shares to participants in such amounts and subject to such terms and conditions as may be determined by the Compensation Committee. The participant may be entitled to voting, dividend and other ownership rights prior to the vesting of the shares. The Compensation Committee may condition the vesting of an award on the achievement of specified Management Objectives. No Options, Appreciation Rights or other awards are transferable by a participant except by will or the laws of descent and distribution. Options and Appreciation Rights may not be exercised during a participant's lifetime except by the participant or, in the event of the participant's incapacity, by the participant's guardian or legal representative acting in a fiduciary capacity on behalf of the participant under state law and court supervision. In the event of certain stock dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations, liquidations, issuances of rights or warrants, and similar transactions or events, the Compensation Committee, in its sole discretion, may adjust (i) the maximum number of shares that may be issued or transferred under the Equity Incentive Plan, (ii) the number of shares covered by outstanding awards, (iii) the exercise price of outstanding options and (iv) base prices of outstanding SARs. The Compensation Committee may also, as it determines to be appropriate in order to reflect any such transaction or event, make or provide for such adjustments in the number of shares that may be issued or transferred and covered by outstanding awards granted under the Equity Incentive Plan and the number of shares permitted to be covered by Options and Appreciation Rights granted to any one participant during any calendar year. In connection with its administration of the Equity Incentive Plan, the Compensation Committee is authorized to interpret the Equity Incentive Plan, related agreements and other documents. With the approval of the Board, the Equity Incentive Plan may be amended from time to time by the Compensation Committee but, without further approval by the shareholders of the Company, no such amendment may (i) increase the total number of shares of Common Stock that may be issued under the Equity Incentive Plan (except as otherwise provided in the plan), (ii) modify the Equity Incentive Plan's eligibility requirements or (iii) materially increase the benefits accruing to participants under the Equity Incentive Plan. EMPLOYMENT AGREEMENTS Each of Paul Whetsell, David McCaslin, William Karnes and John Plunket are parties to employment agreements with the Company which will expire on December 31, 1999. Mr. Whetsell's and Mr. McCaslin's agreements provide for automatic one year extensions thereafter unless either the executive or the Company gives notice to the other at least 120 days prior to the end of any such period that he or it, as the case may be, does not wish to extend the agreement for an additional period. The employment agreements provide for annual base salaries of $225,000, in the case of Mr. Whetsell, $215,000, in the case of Mr. McCaslin and Mr. Karnes, and $150,000, in the case of Mr. Plunket, subject, in each such case, to periodic increases. Each executive will be eligible to receive annual bonuses and will be entitled to participate in all existing or future plans for the benefit of the Company's employees and management, on the same basis as other senior executive officers of the Company. Under the employment agreements of Messrs. Whetsell and McCaslin, each is entitled to receive (i) a lump sum payment equal to the product of (a) his total cash compensation for the previous fiscal year and (b) the greater of (1) the number of full and fractional years remaining in the agreement and (2) the number two, if his employment is terminated by the Company without Cause (as defined below) or is terminated by the executive for Good Reason (as defined below), or (ii) a lump sum payment equal to two times his total cash compensation for the previous fiscal year if the Company elects not to extend his contract for an additional year at the end of its initial term (which ends December 31, 1999) or any 48 subsequent term. The events constituting "Good Reason" include the assignment to the executive of duties materially inconsistent with his position and a material breach of the employment agreement by the Company. As used in the employment agreements of Messrs. Whetsell and McCaslin, the term "Cause" includes (i) the executive's willful and intentional failure or refusal to perform or observe any of his material duties set forth in his employment agreement, if such breach is not cured within 30 days of notice from the Company; (ii) any willful and intentional act of the executive involving theft, fraud, embezzlement or dishonesty affecting the Company; and (iii) the executive's conviction of an offense which is a felony in the jurisdiction involved. Messrs. Whetsell's and McCaslin's employment agreements also provide that if (i) the executive elects to terminate his employment within six months of a Change in Control (as defined below) of the Company or (ii) within one year of any such change in control, the executive is terminated without Cause or the executive terminates his employment for Good Reason, the executive is entitled to receive a lump sum payment equal to the product of (a) his total cash compensation for the previous fiscal year and (b) the greater of (1) the number of full and fractional years remaining in the agreement and (2) the number three. As used in the employment agreements of Messrs. Whetsell and McCaslin, the term "Change in Control" means the occurrence of one of the following events: (i) any person or entity other than Acadia Partners becoming beneficial owner of greater than 35% of the Common Stock; (ii) the Company adopts a plan of liquidation; (iii) the Company merges or combines with another company and, immediately thereafter, the stockholders of the Company prior to the merger or combination hold 50% or less of the Common Stock; (iv) the Company sells all or substantially all of its assets; or (v) the Company ceases to act as general partner of CapStar Management. Amounts received by the executive upon termination of employment will increase to compensate the executive for any excise tax payable by him under the Code. These employment agreements prohibit the executives from using or disclosing any confidential information about the Company and its operations for a period of three years after the term of employment and from engaging in any competitive hotel business for a period of one year after the term of employment. Under the employment agreements of Messrs. Karnes and Plunket, each is entitled to receive a lump some payment equal to his annual base salary for the greater of one year or the remaining unexpired term of employment, if his employment is terminated by the Company without Cause (as defined below). Each of these executives will be entitled receive his annual base salary for a period of two years if his employment is terminated by the executive as a result of the occurrence of a Material Adverse Change (as defined below) or likely occurrence of a Material Adverse Change following a Change in Control (as defined below). The events constituting "Cause" under the employment agreements of Messrs. Karnes and Plunket include: (i) the executive's inability to perform his duties under the agreement for more than a 120-day period, whether or not continuous, during any 365-day period; (ii) acts of willful misfeasance or gross negligence in connection with the executive's employment; (iii) the executive's conviction of (or plea of no contest to) an offense which is a felony in the jurisdiction involved; (iv) repeated failure, after written notice thereof, by the executive to perform any of his duties under the employment agreement; and (v) a breach of a specific provision of the employment agreement and, if such breach is curable, failure to cure same within 30 days of written notice thereof. As used in the employment agreements of Messrs. Karnes and Plunket, the term "Change in Control" means: any person or entity, other than Acadia Partners, becoming beneficial owner of greater than 35% of the Common Stock, so long as no Change in Control will be deemed to have occurred if the executive continues to report to Paul W. Whetsell. As used in the employment agreements of Messrs. Karnes and Plunket, the term "Material Adverse Change" means a material reduction or material adverse change in the executive's working conditions if, after such reduction or change, the executive's authority or working conditions are not commensurate with those of executives holding chief financial officer positions at companies comparable to the Company in the lodging industry. 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of Common Stock as of the Offering and as adjusted to reflect the sale of 5,000,000 shares of Common Stock by the Company in the Offering by (i) all persons known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director who is a stockholder, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers as a group.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE OFFERING OWNED AFTER OFFERING -------------------------- -------------------------- NAME & ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE - ----------------------------------------------------------------- --------- --------------- --------- --------------- Acadia Partners, L.P.(1)....................................... 1,426,102 11.2% 1,426,102 8.0% RCM Capital Management, L.L.C.(2).............................. 1,424,500 11.2 1,424,500 8.0 LaSalle Advisors Limited Partnership and ABKB/LaSalle Securities Limited Partnership (3)........................... 1,154,700 9.1 1,154,700 6.5 Franklin Resources, Inc.(4).................................... 987,500 7.7 987,500 5.6 Paul W. Whetsell(5)............................................ 970,503 7.6 970,503 5.5 David E. McCaslin(6)........................................... 472,236 3.7 472,236 2.7 John E. Plunket(6)............................................. 462,729 3.6 462,729 2.6 William M. Karnes(7)........................................... 0 -- 0 -- John Emery(7).................................................. 0 -- 0 -- Michael T. George(7)........................................... 0 -- 0 -- D. Scott Livchak(7)............................................ 0 -- 0 -- Robert Gauthier(7)............................................. 0 -- 0 -- Daniel L. Doctoroff(7)......................................... 0 -- 0 -- Bradford E. Bernstein(7)....................................... 0 -- 0 -- William S. Janes(7)............................................ 0 -- 0 -- Joseph McCarthy(7)............................................. 0 -- 0 -- Edward L. Cohen................................................ 0 -- 0 -- Edwin T. Burton, III........................................... 0 -- 0 -- Edward P. Dowd................................................. 0 -- 0 -- All directors and executive officers as a group (15 persons)... 980,010 7.6% 980,010 5.5%
- -------------------------- (1) The business address of Acadia Partners, L.P. is 201 Main Street, Suite 3100, Fort Worth, TX 76102. Includes 1,373,034 shares owned by Acadia Partners, L.P. and 53,068 shares owned by Cherwell Investors, Inc. ("Cherwell"), a wholly owned subsidiary of Acadia Partners. The general partner of Acadia Partners, L.P. is Acadia FW Partners, L.P., the managing general partner of which is Acadia MGP, Inc. ("Acadia MGP"). J. Taylor Crandall is the sole stockholder of Acadia MGP and may be deemed to beneficially own the shares owned by Acadia Partners, L.P. and Cherwell. In addition, Mr. Crandall is the sole stockholder of each of PTJ, Inc. ("PTJ") and Group 31, Inc. ("Group 31"). PTJ is the managing general partner of PTJ Merchant Banking Partners, L.P., which is the general partner of Penobscot Partners, L.P. ("Penobscot"), which together with MC Investment Corporation ("MC Investment"), Penobscot's wholly owned subsidiary, owns 275,299 shares. Group 31 is the general partner of FWHY Coinvestments VIII Partners, L.P. ("FWHY"), which owns 406,702 shares. As a result of his ownership of PTJ and Group 31, Mr. Crandall may also be deemed to beneficially own the 732,951 shares owned by Penobscot, MC Investment and FWHY, which shares are not included in the number of shares set forth as being owned by Acadia Partners, L.P. in the Principal Stockholders chart, above. The number of shares set forth as being owned by Acadia Partners, L.P. in the Principal Stockholders chart above also excludes 406,701 shares held by OHP EquiStar Partners, L.P. ("OHP") and OHP EquiStar Partners II, L.P. ("OHP II"). Oak Hill Partners, Inc. ("Oak Hill Partners"), which is the investment advisor to Acadia Partners, L.P., is the general partner of each of OHP and OHP II. (2) The business address of RCM Capital Management, L.L.C. ("RCM Capital") is Four Embarcadero Center, Suite 2900, San Francisco, CA 94111. The Managing Agent of RCM Capital is RCM Limited L.P. ("RCM Limited"). The General Partner of RCM Limited is RCM General Corporation ("RCM General"). As such, RCM Limited and RCM General may be deemed to beneficially own such shares within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended ("Rule 13d-3"). In addition, RCM Capital is a wholly-owned subsidiary of Dresdner Bank AG ("Dresdner"). As such, Dresdner Bank also may be deemed to beneficially own the shares held by RCM Limited. (3) The business address of La Salle Advisors Limited Partnership and ABKB/LaSalle Securities Limited Partnership (collectively, the "LaSalle Partnerships") is 11 South LaSalle Street, Chicago, IL 60603. The LaSalle Partnerships are registered investment advisors and may be deemed to beneficially own such shares within the meaning of Rule 13d-3. William K. Morrill, Jr. and Keith R. Pauley are employees of the LaSalle Partnerships and, in such capacity, also may be deemed to beneficially own such shares within the meaning of Rule 13d-3. 50 (4) The business address of Franklin Resources, Inc. ("FRI") is 777 Mariners Island Blvd., San Mateo, CA 94404. Such shares are owned by one or more open or closed-ended investment companies or other managed accounts which are advised by direct or indirect advisory subsidiares of FRI. Such advisory subsidiaries may be deemed to beneficially own such shares within the meaning of Rule 13d-3. Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of FRI and, as such, also may be deemed to own such shares held, directly or indirectly, by FRI within the meaning of Rule 13d-3. (5) Includes shares held by entities over which Mr. Whetsell has beneficial ownership within the meaning of Rule 13d-3. (6) Includes shares held by entities over which Messrs. McCaslin and Plunket have beneficial ownership within the meaning of Rule 13d-3. (7) Such individuals own interests in entities which own shares of Common Stock, but these individuals do not have beneficial ownership of such shares of Common Stock within the meaning of Rule 13d-3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ACQUISITIONS In March 1996, the Company acquired The Latham Hotel in Washington, D.C. for a purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the time of the acquisition, the general partner of LCP was Latham Hotels, Inc. ("LHI"), a corporation owned 80% by Paul W. Whetsell, President and Chief Executive Officer of the Company, and 10% by David E. McCaslin, Chief Operating Officer of the Company. Including their interests in LHI, Mr. Whetsell and Mr. McCaslin owned, directly or indirectly, 9.18% and 0.52%, respectively, of the beneficial interest in LCP and received $763,000 and $42,000, respectively, of the net proceeds of the purchase price paid to LCP. The purchase price for the Latham Georgetown was determined through arm's-length negotiations between the Company, on the one hand, and representatives of the holders of the majority of the beneficial interests in LCP, on the other hand; such representatives are not affiliated with the Company. Since November 1995, the Company has acquired 85.2% of the limited partnership interests in the partnership that owns the Westin Atlanta Airport ("Atlanta Partners"). In November 1995, the Company acquired, for a purchase price of $56,000, the 1% general partnership interest in Atlanta Partners previously held by a corporation in which E. Robert Roskind owned an equity interest ("LHP"). At the time of such acquisition Mr. Roskind was a principal of both CapStar Management and EquiStar. LHP was also paid a fee of $893,000 in connection with the acquisition of the partnership interests in Atlanta Partners, and is entitled to an additional $161,000 upon the ultimate disposition of Atlanta Partners. The LCP Group, L.P., in which Mr. Roskind owns an equity interest is entitled to an annual fee of $30,000 for providing certain administrative services relating to the outside limited partners of the Westin Atlanta Airport. All of the compensation paid or payable to affiliates of Mr. Roskind in connection with the Westin Atlanta Airport transaction was negotiated between Mr. Roskind, on the one hand, and other principals of EquiStar, on the other hand, who believed the compensation to have been at fair market value. Mr. Roskind is no longer associated with the Company. OWNERSHIP INTERESTS IN CERTAIN MANAGED HOTELS Mr. Whetsell and Mr. McCaslin and corporations owned by them own, directly or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in two of the Managed Hotels and (ii) minority equity interests in eight of the Managed Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the Affiliated Owners of four of these Managed Hotels through their ownership of certain entities which serve as general partners of the Affiliated Owners. Such interests were acquired prior to the formation of EquiStar and CapStar Management. During 1996, the Company received approximately $824,070 in management fees from those Managed Hotels in which Messrs. Whetsell and McCaslin own an equity interest, including approximately $554,896 in management fees from the Affiliated Owners. Under the terms of their employment agreements, Messrs. Whetsell and McCaslin are prohibited from hereafter 51 acquiring any interests in hotels or hotel management companies while they serve as officers of the Company. See "Management--Employment Agreements." INDEBTEDNESS OF CERTAIN MEMBERS OF MANAGEMENT In connection with the initial formation and capitalization of EquiStar, CapStar Management made loans to certain directors and executive officers of the Company, which loans were used to make capital contributions to EquiStar. Such loans were made from August 1995 through April 1996 and bore interest at the prime rate through December 31, 1995 and at a rate of 1.5% above the prime rate thereafter. The largest aggregate amounts of the loans to such directors and executive officers outstanding at any time (where such aggregate amount exceeded $60,000) were $300,000 to Mr. Whetsell and $147,500 to Mr. McCaslin. All such loans were repaid in September 1996. SUBORDINATED DEBT One member of the syndicate of lenders of the $50 million Subordinated Debt is Oak Hill Securities Fund, L.P. ("Oak Hill Securities"). The investment advisor to Oak Hill Securities is Oak Hill Advisors, Inc., one of the principal stockholders of which is Daniel L. Doctoroff, a director of the Company. Mr. Doctoroff is also a principal stockholder of Oak Hill Partners which is the investment advisor to Acadia Partners, a principal stockholder of the Company. The Company has borrowed an aggregate of $25 million from Oak Hill Securities. See "Principal Stockholders." SHARES AVAILABLE FOR FUTURE SALE Upon consummation of the Offering (assuming the over-allotment option is not exercised), the Company will have 17,754,321 shares of Common Stock outstanding. 14,250,000 of these shares, will be freely transferable by persons other than "affiliates" of the Company without restriction or limitation under the Securities Act. The remaining 3,504,321 shares are "restricted securities" within the meaning of Rule 144 under the Securities Act (the "Restricted Shares") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemption contained in Rule 144. The Company has granted certain registration rights to the recipients of Restricted Shares issued in connection with the Formation Transactions, which registration rights cover all of the securities issued in connection with the Formation Transactions. See "Description of Capital Stock--Registration Rights." In general, under Rule 144, if one year has elapsed since the later of the date of acquisition of Restricted Shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the Common Stock then outstanding or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of Restricted Shares from the Company or from any "affiliate" of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company has agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Lehman, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock. Certain entities controlled by members of management (who beneficially own an aggregate of 980,010 shares of Common 52 Stock) have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Lehman, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock. There can be no assurance that Lehman will not grant any such consent. The Company has adopted an Equity Incentive Plan and Stock Purchase Plan for the purpose of attracting, retaining and motivating executive officers of the Company, other key employees and directors. The Company has reserved 1,740,000 shares of Common Stock for issuance under such plans. The Board granted options to purchase an aggregate of 745,254 shares of Common Stock at the initial public offering price under the Equity Incentive Plan to certain key personnel. The Company filed a registration statement under the Securities Act to register shares of Common Stock issuable upon the exercise of stock options granted under the Equity Incentive Plan or the Stock Purchase Plan. Shares issued upon exercise of stock options generally will be available for sale in the open market. See "Management--Stock Option Grants." In connection with the acquisition of the Highgate Portfolio, the Company will issue to the sellers 809,523 Common OP Units and 392,157 Preferred OP Units. Within certain limitations, such OP Units are convertible at the sellers' election into an equal number of shares of Common Stock (or, at the Company's election, cash in an amount equal to the market price of such shares). See "Recent Developments--The Highgate Portfolio." The Company can make no predictions as to the effect, if any, that future sales of Restricted Shares, or the availability of such Restricted Shares for sale, or the issuance of shares of Common Stock upon the exercise of options or the conversion of OP Units, or the perception that such sales, exercises or conversions could occur, will have on the market price prevailing from time to time. Sales of substantial amounts of such Common Stock in the public market could have an adverse effect on the market price of the Common Stock. See "Risk Factors--Shares Available for Future Sale." DESCRIPTION OF CAPITAL STOCK THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS, COPIES OF WHICH HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. SEE "ADDITIONAL INFORMATION." The authorized capital stock of the Company consists of 49,000,000 shares of Common Stock, par value $.01 per share, and 25,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"), of which 6,004,321 shares of Common Stock and no shares of Preferred Stock are outstanding. Upon completion of the Offering, 17,754,321 shares of Common Stock and no shares of Preferred Stock will be outstanding. Prior to the Offering, there has been no public market for the Common Stock. See "Risk Factors-- Absence of Prior Public Market." COMMON STOCK VOTING RIGHTS. The Company's Certificate of Incorporation provides that holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. The stockholders are not entitled to vote cumulatively for the election of directors. DIVIDENDS. Each share of Common Stock is entitled to receive dividends if, as and when declared by the Board. Under Delaware law, a corporation may declare and pay dividends out of surplus, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding year. No dividends may be declared, however, if the capital of the corporation has been diminished by depreciation in the value of its property, losses or otherwise to an amount less than the aggregate amount of capital represented by any issued and outstanding stock having a preference on the distribution of assets. See "Dividend Policy." 53 OTHER RIGHTS. Stockholders of the Company have no preemptive or other rights to subscribe for additional shares. Subject to any rights of the holders of any Preferred Stock that may be issued subsequent to the Offering, all holders of Common Stock are entitled to share equally on a share-for-share basis in any assets available for distribution to stockholders on liquidation, dissolution or winding up of the Company. No shares of Common Stock are subject to redemption or a sinking fund. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. PREFERRED STOCK The Company's Board is authorized to issue, without further authorization from stockholders, up to 25,000,000 shares of Preferred Stock in one or more series and to determine, at the time of creating each series, the distinctive designation of, and the number of shares in, the series, its dividend rate, the number of votes, if any, for each share of such series, the price and terms on which such shares may be redeemed, the terms of any applicable sinking fund, the amount payable upon liquidation, dissolution or winding up, the conversion rights, if any, and such other rights, preferences and priorities of such series as the Board may be permitted to fix under the laws of the State of Delaware as in effect at the time such series is created. The issuance of Preferred Stock could adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of Preferred Stock. SECTION 203 OF THE DELAWARE LAW Section 203 of the Delaware General Corporation Law (the "Delaware Law") prohibits publicly held Delaware corporations from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date of the transaction in which the person or entity became an interested stockholder, unless (i) prior to such date, either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder is approved by the Board, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding for this purpose certain shares owned by persons who are directors and also officers of the corporation and by certain employee benefit plans) or (iii) on or after such date the business combination is approved by the Board and by the affirmative vote (and not by written consent) of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. For the purposes of Section 203, a "business combination" is broadly defined to include mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within the immediately preceding three years did own) 15% or more of the corporation's voting stock. REGISTRATION RIGHTS The Company has entered into registration rights agreements with (i) persons receiving shares of Common Stock in connection with the Formation Transactions and (ii) the principals of Highgate Hotels receiving OP Units which, under certain circumstances, may be converted into Common Stock (the "Registration Rights Agreements"), pursuant to which the Company has agreed (with certain limitations) to register for sale any shares of Common Stock that are held by the parties thereto (collectively, the "Registrable Securities"). The Registration Rights Agreements provide that any holder of Registrable Securities may require the Company to register such Registrable Securities for sale (a "Demand Registration"), provided that the total amount of Registrable Securities to be included in the Demand Registration has a market value of at least $10 million and provided that notice is not given prior to six months after the effective date of a previous Demand Registration. If Registrable Securities are going to be registered by the Company pursuant to a Demand Registration, the Company must provide written notice to the other 54 holders of Registrable Securities and permit them to include any or all Registrable Securities that they hold in the Demand Registration, provided that the amount of Registrable Securities requested to be registered may be limited by the underwriters in an underwritten offering based on such underwriters' determination that inclusion of the total amount of Registrable Securities requested for registration would materially and adversely affect the success of the offering. Certain management-controlled entities that received shares in the Formation Transactions have a one-time right to require the Company to register the Registrable Securities that they hold in connection with the distribution of the Registrable Securities to their members or in connection with a resale of such shares. In order to demand any such registration the market value of the securities to be sold by such entities must be at least $2 million. The management-controlled entities will not be entitled to include their Registrable Securities in any such registration prior to one year from the date of the IPO, although a pledgee of such Registrable Securities may, upon a default by a management-controlled entity under a loan secured by the pledge, exercise the management-controlled entity's registration rights during such one-year period. The Registration Rights Agreements also provide that, with certain limited exceptions, in the event the Company proposes to file a registration statement with respect to an offering of any class of equity securities the Company will offer the holders of Registrable Securities the opportunity to register the number of Registrable Securities they request to include (the "Piggyback Registration"), provided that the amount of Registrable Securities requested to be registered may be limited by the underwriters in an underwritten offering based on such underwriters' determination that inclusion of the total amount of Registrable Securities requested for registration would materially and adversely affect the success of the offering. The Company is generally required to pay all of the expenses of Demand Registrations and Piggyback Registrations, other than underwriting discounts and commissions. TRANSFER AGENT AND REGISTRAR The Company has appointed The First National Bank of Boston as the transfer agent and registrar for the Common Stock. 55 UNDERWRITING The Underwriters of the Offering of Common Stock (the "Underwriters"), for whom Lehman, BT Securities Corporation, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Montgomery Securities and Smith Barney Inc. are serving as representatives (the "Representatives") have severally agreed, subject to the terms and conditions of the underwriting agreement, the form of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part (the "Underwriting Agreement"), to purchase from the Company, and the Company has agreed to sell to the Underwriters, the aggregate number of shares of Common Stock set forth opposite their respective names below.
NUMBER UNDERWRITERS OF SHARES - --------------------------------------------------------------------------------- ---------- Lehman Brothers Inc.............................................................. BT Securities Corporation........................................................ Goldman, Sachs & Co.............................................................. Merrill Lynch, Pierce, Fenner & Smith Incorporated........................................................... Montgomery Securities............................................................ Smith Barney Inc................................................................. ---------- Total............................................................................ ---------- ----------
The Underwriting Agreement provides that the obligations of the Underwriters to purchase shares of Common Stock are subject to the approval of certain legal matters by counsel and to certain other conditions and that if any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all the shares of Common Stock agreed to be purchased by the Underwriters pursuant to the Underwriting Agreement, must be so purchased. The Company has been advised that the Underwriters propose to offer shares of Common Stock directly to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain selected dealers (who may include the Underwriters) at such public offering price less a selling concession not to exceed $ per share. The selected dealers may reallow a concession not to exceed $ per share. After the initial offering of the Common Stock, the concession to selected dealers and the reallowance to other dealers may be changed by the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to the payments they may be required to make in respect thereto. The Company has granted to the Underwriters an option to purchase up to an additional 750,000 shares of Common Stock, at the initial public offering price, less the aggregate underwriting discounts and commissions, shown on the cover page of this Prospectus, solely to cover over-allotments, if any. Such option may be exercised at any time within 30 days after the date of the Underwriting Agreement. To the extent the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. In connection with the Offering, the Company has agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman. In addition, certain entities controlled by members of management have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman. Such restriction will not apply to any shares purchased in the Offering or otherwise on the open market. See "Risk Factors--Shares Available for Future Sale." 56 The U.S. Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. In connection with the formation of EquiStar, CapStar Management made loans to certain directors and executive officers of the Company. Lehman has extended loans to these directors and executive officers to repay CapStar Management all amounts previously outstanding under the loans. The loans from Lehman, which currently total approximately $1.1 million, are guaranteed by pledges of Common Stock held by such directors and executive officers. See "Shares Available for Future Sale." An affiliate of Lehman owns a minority equity interest in Acadia Partners. In September 1996, the Company entered into the $225 million Credit Facility led by Bankers Trust, an affiliate of BT Securities Corporation, one of the Representatives. The Credit Facility bears interest at a rate of LIBOR plus 2% per annum. The Company expects that it may use as much as approximately $28.4 million of the proceeds of the Offering to retire a portion of the approximately $183.8 million currently outstanding under the Credit Facility. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, an affiliate of Bankers Trust owns approximately 337,500 shares of Common Stock. Because an affiliate of BT Securities Corporation may receive more than 10% of the net proceeds of the Offering in repayment of outstanding balances under the Credit Facility, the Offering is being conducted in accordance with Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities Dealers, Inc. LEGAL MATTERS The validity of the Common Stock will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain legal matters will be passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C. EXPERTS The financial statements and schedule included herein and in the Registration Statement, to the extent and for the periods indicated therein, have been included in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements under the headings "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "The Company," "Recent Developments," "Business and Properties" and elsewhere in this Prospectus constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performances or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: the ability of the Company to successfully implement its acquisition strategy and operating strategy; the Company's ability to manage rapid expansion; changes in economic cycles; competition from other hospitality companies; and changes in the laws and government regulations applicable to the Company. 57 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained herein concerning the provisions of any documents are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Registration Statement, including exhibits and schedules filed therewith, may be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such site is http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document which is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. The Company will be required to file reports and other information with the Commission pursuant to the Exchange Act. The Company intends to furnish to its stockholders annual reports containing consolidated financial statements certified by its independent accountants and quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. 58 INDEX TO FINANCIAL STATEMENTS CAPSTAR HOTEL COMPANY Independent Auditors' Report......................................................... F-3 Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-4 Consolidated Statements of Operations for the years ended December 31, 1996 and 1995............................................................................... F-5 Consolidated Statements of Stockholders' Equity and Partners' Capital for the years ended December 31, 1996 and 1995................................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995............................................................................... F-7 Notes to the Consolidated Financial Statements....................................... F-8 CAPSTAR MANAGEMENT Independent Auditors' Report......................................................... F-18 Balance Sheet as of December 31, 1994................................................ F-19 Statements of Operations and Changes in Management Operations' Equity for the years ended December 31, 1994 and 1993................................................... F-20 Statements of Cash Flows for the years ended December 31, 1994 and 1993.............. F-21 Notes to Financial Statements........................................................ F-22 HIGHGATE PORTFOLIO Independent Auditors' Report......................................................... F-24 Combined Balance Sheet as of December 31, 1996....................................... F-25 Combined Statement of Operations for the year ended December 31, 1996................ F-26 Combined Statement of Owners' Deficit for the year ended December 31, 1996........... F-27 Combined Statement of Cash Flows for the year ended December 31, 1996................ F-28 Notes to Combined Financial Statements............................................... F-29 ORANGE COUNTY AIRPORT HILTON Independent Auditors' Report......................................................... F-32 Statements of Operations for the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-33 Statements of Cash Flows for the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-34 Notes to Financial Statements........................................................ F-35 GEORGETOWN LATHAM HOTEL Independent Auditors' Report......................................................... F-37 Statements of Operations for the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................................ F-38 Statements of Cash Flows for the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................................ F-39 Notes to Financial Statements........................................................ F-40 CHARLOTTE SHERATON AIRPORT PLAZA Independent Auditors' Report......................................................... F-42 Statements of Operations for the period from January 1, 1996 to February 2, 1996 (date of the acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................... F-43
F-1 Statement of Cash Flows for the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993................................................................ F-44 Notes to Financial Statements........................................................ F-45 ARLINGTON HILTON HOTEL Independent Auditors' Report......................................................... F-47 Statements of Operations for the period from January 1, 1996 to April 17, 1996 and the years ended December 31, 1995, 1994 and 1993................................... F-48 Statements of Cash Flows for the period from January 1, 1996 to April 17, 1996 and the years ended December 31, 1995, 1994 and 1993................................... F-49 Notes to Financial Statements........................................................ F-50 BALLSTON HOTEL LIMITED PARTNERSHIP (HILTON HOTEL, ARLINGTON, VA) Independent Auditors' Report......................................................... F-52 Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994.................... F-53 Statements of Operations for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993................................................... F-54 Statements of Partners' Deficit for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993............................................. F-55 Statements of Cash Flows for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993................................................... F-56 Notes to Financial Statements........................................................ F-57 MUBEN HOTELS Independent Auditors' Report......................................................... F-62 Combined Balance Sheets as of September 30, 1996, December 31, 1995 and 1994......... F-63 Combined Statements of Operations for the nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994......................................... F-64 Combined Statements of Owners' Capital for the nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994..................................... F-65 Combined Statements of Cash Flows for the nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994......................................... F-66 Notes to Combined Financial Statements............................................... F-67
F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors CapStar Hotel Company: We have audited the accompanying consolidated balance sheets of CapStar Hotel Company and subsidiaries (formerly EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P., the "Company") as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and partners' capital, and cash flows for the years then ended, and the supplementary schedule. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CapStar Hotel Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles, and the supplementary schedule, in our opinion, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Washington, D.C. February 14, 1997 F-3 CAPSTAR HOTEL COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1996 1995 ---------- ---------- ASSETS Cash and cash equivalents................................................................. $ 21,784 6,832 Accounts receivable, net of allowance for doubtful accounts of $189 in 1996 and $91 in 1995.................................................................................... 8,109 2,749 Deposits, including restricted deposits of $2,023 in 1995................................. 3,167 3,515 Prepaid expenses and other................................................................ 1,454 265 Inventory................................................................................. 1,321 174 ---------- ---------- Total current assets...................................................................... 35,835 13,535 Property and equipment: Land.................................................................................... 58,127 12,768 Buildings............................................................................... 248,376 84,545 Furniture, fixtures and equipment....................................................... 32,698 11,354 Construction-in-progress................................................................ 3,891 2,216 ---------- ---------- 343,092 110,883 Accumulated depreciation................................................................ (8,641) (1,757) ---------- ---------- Total property and equipment, net......................................................... 334,451 109,126 Deferred costs, net of accumulated amortization of $802 in 1996 and $271 in 1995.......... 8,225 2,638 Investments in partnerships............................................................... 650 -- Restricted cash........................................................................... -- 7,351 ---------- ---------- $ 379,161 132,650 ---------- ---------- ---------- ---------- LIABILITIES, MINORITY INTEREST, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Accounts payable.......................................................................... $ 4,125 2,329 Accrued expenses and other liabilities.................................................... 10,737 4,626 Income tax payable........................................................................ 1,436 -- Long-term debt, current portion........................................................... 498 2,668 ---------- ---------- Total current liabilities................................................................. 16,796 9,623 Deferred tax liability.................................................................... 1,181 -- Long-term debt............................................................................ 199,863 73,574 ---------- ---------- Total liabilities......................................................................... 217,840 83,197 Minority interest......................................................................... 606 815 Partners' capital......................................................................... -- 48,638 Common stock (49,000,000 shares authorized, at $.01 par value, 12,754,321 issued and outstanding at December 31, 1996)....................................................... 128 -- Paid in capital........................................................................... 158,533 -- Retained earnings......................................................................... 2,054 -- ---------- ---------- $ 379,161 132,650 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. F-4 CAPSTAR HOTEL COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1996 1995 ---------- --------- Revenue from hotel operations: Rooms.................................................................................... $ 68,498 14,456 Food and beverage........................................................................ 30,968 5,900 Other operating departments.............................................................. 5,981 1,571 Hotel management and other fees............................................................ 4,345 4,436 ---------- --------- Total revenue.............................................................................. 109,792 26,363 ---------- --------- Hotel operating expenses by department: Rooms.................................................................................... 17,509 4,190 Food and beverage........................................................................ 24,589 4,924 Other operating departments.............................................................. 2,513 513 Undistributed operating expenses: Administrative and general............................................................... 20,448 8,078 Property operating costs................................................................. 12,586 2,624 Property taxes, insurance and other...................................................... 4,565 1,310 Depreciation and amortization............................................................ 8,248 2,097 ---------- --------- Total operating expenses................................................................... 90,458 23,736 ---------- --------- Net operating income....................................................................... 19,334 2,627 Interest expense........................................................................... 12,784 2,673 Interest income............................................................................ (438) (259) ---------- --------- Income before minority interest, income taxes, and extraordinary loss...................... 6,988 213 Minority interest.......................................................................... 39 18 ---------- --------- Income before income taxes and extraordinary loss.......................................... 7,027 231 Income taxes............................................................................... 2,674 -- ---------- --------- Income before extraordinary loss........................................................... 4,353 231 Extraordinary loss on early extinguishment of debt, net of tax benefit of $1,304 for 1996..................................................................................... (1,956) (888) ---------- --------- Net income (loss).......................................................................... $ 2,397 (657) ---------- --------- ---------- --------- Earnings per share: Primary Income before extraordinary loss....................................................... $ 0.31 -- Extraordinary loss..................................................................... (0.15) -- ---------- --------- Net income............................................................................. 0.16 -- ---------- --------- ---------- ---------
See accompanying notes to consolidated financial statements. F-5 CAPSTAR HOTEL COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ADDITIONAL PAID-IN RETAINED GENERAL LIMITED SHARES AMOUNT CAPITAL EARNINGS PARTNERS PARTNERS TOTAL ------------ ----------- ---------- ----------- --------- ---------- ---------- COMMON STOCK $.01 PAR VALUE Initial capital contributions on January 12, 1995.......... -- $ -- -- -- 89 1,684 $ 1,773 Capital contributions.......... -- -- -- -- 2,431 46,194 48,625 Capital distributions.......... -- -- -- -- (1) (115) (116) Net loss for the year ended December 31, 1995............ -- -- -- -- (87) (570) (657) ------------ ----- ---------- ----------- --------- ---------- ---------- -- -- -- -- 2,432 47,193 49,625 Less--notes receivable from management for capital contributions................ -- -- -- -- -- (987) (987) ------------ ----- ---------- ----------- --------- ---------- ---------- Partners' capital at December 31, 1995..................... -- -- -- -- 2,432 46,206 $ 48,638 ------------ ----- ---------- ----------- --------- ---------- ---------- Capital distributions.......... -- -- -- -- (2) (170) (172) Repayment of notes receivable from management.............. -- -- -- -- -- 987 987 Net income for period from January 1, 1996 through August 19, 1996.............. -- -- -- -- 45 298 343 ------------ ----- ---------- ----------- --------- ---------- ---------- Partners' capital at August 19, 1996......................... -- -- -- -- 2,475 47,321 49,796 Shares sold on August 20, 1996......................... 6,750,000 68 110,044 -- -- -- 110,112 Shares issued for partners' capital on August 20, 1996... 6,004,321 60 49,736 -- (2,475) (47,321) -- Deferred tax liability assumed from partners on August 20, 1996......................... -- -- (1,247) -- -- -- (1,247) Net income for period from August 20, 1996 through December 31, 1996............ -- -- -- 2,054 -- -- 2,054 ------------ ----- ---------- ----------- --------- ---------- ---------- Stockholders' equity at December 31, 1996............ 12,754,321 $ 128 158,533 2,054 -- -- $ 160,715 ------------ ----- ---------- ----------- --------- ---------- ---------- ------------ ----- ---------- ----------- --------- ---------- ----------
See accompanying notes to consolidated financial statements. F-6 CAPSTAR HOTEL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
1996 1995 ---------- ---------- Cash flows from operating activities: Net income (loss)....................................................................... $ 2,397 (657) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......................................................... 8,248 2,097 Loss on early extinguishment of debt.................................................. 3,260 618 Minority interest in consolidated subsidiary.......................................... (39) (18) Changes in working capital: Accounts receivable, net............................................................ (5,360) (2,749) Deposits, prepaid expenses and other, and inventory................................. (4,011) (1,889) Accounts payable.................................................................... 1,797 2,329 Accrued expenses and other liabilities.............................................. 5,711 4,626 Income taxes payable................................................................ 1,436 -- Deferred tax liability.............................................................. (66) -- ---------- ---------- Net cash provided by operating activities................................................. 13,373 4,357 ---------- ---------- Cash flows from investing activities: Purchases of property and equipment..................................................... (231,885) (109,223) Purchases of investments in partnerships................................................ (650) -- Purchases of minority interest.......................................................... (67) -- Release of (additions to) restricted cash for capital improvements and other, net....... 7,351 (7,351) ---------- ---------- Net cash used by investing activities..................................................... (225,251) (116,574) ---------- ---------- Cash flows from financing activities: Proceeds from long-term debt............................................................ 372,778 98,058 Payments on long-term debt, line of credit, and capital leases.......................... (248,387) (23,133) Release of (additions to) restricted deposits for hedge agreement....................... 2,559 (2,023) Deferred costs.......................................................................... (10,943) (3,000) Capital contributions................................................................... -- 50,250 Repayments from (loans to) management................................................... 987 (987) Net proceeds from issuance of common stock.............................................. 110,112 -- Capital distributions................................................................... (172) (116) Distributions to minority interests..................................................... (104) -- ---------- ---------- Net cash provided by financing activities................................................. 226,830 119,049 ---------- ---------- Net increase in cash and cash equivalents................................................. 14,952 6,832 Cash and cash equivalents at beginning of year............................................ 6,832 -- ---------- ---------- Cash and cash equivalents at end of year.................................................. $ 21,784 6,832 ---------- ---------- ---------- ---------- Supplemental disclosure of cash flow information: Interest paid........................................................................... $ 12,105 2,383 Income taxes paid....................................................................... 807 -- Capitalized interest costs.............................................................. 461 67 Capital lease additions................................................................. 324 721 Deferred financing fees not yet paid.................................................... -- 596 Prepaid expenses and property contributed by limited partner............................ -- 148 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. F-7 CAPSTAR HOTEL COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. ORGANIZATION The corporate structure of CapStar Hotel Company and its subsidiaries (collectively, the "Company") was formed pursuant to a Formation Agreement, dated June 20, 1996 (the "Formation Agreement"). As a result of the transactions discussed in Note 3, the consolidated financial statements of the Company as of December 31, 1996 and 1995, include the historical results of the Company's predecessor entities, EquiStar Hotel Investors, L.P. and subsidiaries (collectively, "EquiStar") and CapStar Management Company, L.P. ("CapStar Management"). The principal activity of the Company is to acquire, renovate, reposition and manage upscale, full-service hotels. At December 31, 1996, the Company owned nineteen hotels and managed 27 other hotels on the behalf of third party and affiliate owners. At December 31, 1996, the owned hotels consisted of:
ACQUISITION DATE NAME ROOMS - --------------------------------- ------------------------------------------------- ----------- March 3, 1995.................... Salt Lake Airport Hilton, UT 287 June 30, 1995.................... Radisson Hotel, Schaumburg, IL 202 June 30, 1995.................... Sheraton Hotel, Colorado Springs, CO 502 August 4, 1995................... Hilton Hotel, Bellevue, WA 180 October 3, 1995.................. Marriott Hotel, Somerset, NJ 434 November 15, 1995................ Westin Atlanta Airport, GA 496 February 2, 1996................. Sheraton Airport Plaza, Charlotte, NC 226 February 16, 1996................ Holiday Inn, Cleveland, OH 237 February 22, 1996................ Orange County Airport Hilton, Irvine, CA 290 March 8, 1996.................... The Latham Hotel, Washington, DC 143 April 17, 1996................... Hilton Hotel, Arlington, TX 310 August 23, 1996.................. Hilton Hotel, Arlington, VA 209 October 31, 1996................. Southwest Hilton, Houston, TX 293 December 12, 1996................ Embassy Suites, Denver, CO 236 December 17, 1996................ Hilton Hotel, Sacramento, CA 326 December 17, 1996................ Santa Barbara Inn, CA 71 December 17, 1996................ Holiday Inn, Colorado Springs, CO 201 December 17, 1996................ Embassy Row Hilton, Washington, DC 195 December 17, 1996................ Hilton Hotel & Towers, Lafayette, LA 328
Separate wholly-owned limited liability companies ("LLCs") or limited partnerships were established to directly own the above hotels. However, for the Westin Atlanta Airport, LLCs were established to purchase and hold the Company's general and limited partner interest in the partnership that owns the hotel (the "Atlanta Partnership"). At December 31, 1996 and 1995, the Company had a 1% general partner interest and an 85.2% and 84.6% limited partner interest in the Atlanta Partnership, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--All material intercompany transactions and balances have been eliminated in the consolidation of the Company for 1996. The accounts of EquiStar and CapStar Management have been combined in the 1995 financial statements as the Partnerships were under common ownership. All material intercompany transactions and balances are eliminated in the combination for 1995. F-8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS--The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. DEPOSITS--Deposits primarily represent refundable amounts escrowed during the negotiation of potential hotel acquisitions. Additionally, certain amounts held for future hotel renovations and the amount held in escrow related to a hedge agreement (see Note 5) were recorded as deposits at December 31, 1995. INVENTORY--Inventories, which consist primarily of hotel food and beverage stock, are recorded at the lower of cost or market using the first-in, first-out ("FIFO") valuation method. PROPERTY AND EQUIPMENT--Buildings and building improvements are stated at cost and depreciated over 40 years. Furniture, fixtures and equipment purchases are stated at cost and depreciated over estimated useful lives of five to seven years or, for capital leases, the related lease terms. Furniture and equipment contributed is stated at its fair value at the time it was contributed. All property and equipment balances are depreciated using the straight-line method. Management plans to hold all hotel assets long-term. Management evaluates potential permanent impairment of the net carrying value of its hotel assets on a quarterly basis. For each hotel asset, the expected undiscounted future cash flows for the asset are compared to its net carrying value. If the net carrying value of the hotel exceeds the undiscounted cash flows, management estimates the fair value of the assets based on recent appraisals, if available, or by discounting expected future cash flows using prevailing market discount rates. If the net carrying value of the hotel exceeds its fair value, the excess is charged to operations. No impairment losses were recorded during 1996 or 1995. DEFERRED COSTS--Organizational costs incurred in the formation of the Company and its predecessor entities are amortized over five years using the straight-line method. Costs associated with the acquisition of debt are amortized over the lives of the related debt instruments using a method that approximates the interest method. INVESTMENTS IN PARTNERSHIPS--Based on ownership percentages and a lack of significant influence, the Company records its interests in partnerships under the cost method of accounting for investments. RESTRICTED CASH--Prior to the September 30, 1996 debt refinancing (see Note 6), the Company was required to maintain certain levels of restricted cash to comply with the terms of its debt agreements. Restricted cash reserved primarily for future hotel capital improvements was $7,351 at December 31, 1995. INCOME TAXES--Prior to the Formation Transactions (see Note 3), no provision for income taxes was made since the Company's predecessor entities were partnerships, and, therefore, all income, losses, and credits for tax purposes were passed through to the individual partners. Concurrent with the Formation Transactions, the Company implemented Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. MINORITY INTEREST--Minority interest represents the limited partner interests in the Atlanta Partnership which are not owned by the Company. REVENUES--Revenue is earned primarily through the operations and management of the hotel properties and is recognized when earned. During the period from its acquisition until February 29, 1996, the Westin Atlanta Airport hotel was leased to a third-party operator. Related lease revenue is recorded as other operating departments revenue. On February 29, 1996, the Company assumed the operations of the hotel upon termination of the lease. USE OF ESTIMATES--Management has made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these F-9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 3. FORMATION TRANSACTIONS AND INITIAL PUBLIC OFFERING The following transactions (the "Formation Transactions") occurred prior to or on August 20, 1996, the date of the Company's initial public offering (the "IPO"): - a limited partner of CapStar Management contributed its partnership interest in CapStar Management to the Company in exchange for shares of Common Stock; - the Company contributed such partnership interest to CapStar LP Corporation, a wholly-owned subsidiary of the Company ("CapStar Sub"); - the remaining partners of CapStar Management (including its general partner but not including CapStar Sub) and the partners of EquiStar contributed their respective partnership interest in CapStar Management and EquiStar to the Company in exchange for shares of Common Stock; - the Company contributed all the assets of EquiStar to CapStar Management and CapStar Management assumed all of the liabilities of EquiStar; and - the Agreement of Limited Partnership of CapStar Management was amended and restated to reflect the fact that CapStar Management has succeeded the business of EquiStar and the Company became the general partner of CapStar Management. In connection with the Formation Transactions, the Company issued 6,004,321 shares of Common Stock to the partners of EquiStar and CapStar Management. On August 20, 1996, the Company completed its IPO of 9,250,000 shares of common stock at a price of $18 per share. The Company sold 6,750,000 of the initial shares which, after underwriting discounts, commissions and other IPO expenses, produced net proceeds to the Company of $110,112. The remaining 2,500,000 shares were sold by Acadia Partners, L.P. and certain related entities ("Acadia Partners"), which received 100% of the net proceeds from the sale of their shares. The Company used the proceeds of the IPO to repay a portion of the Company's outstanding indebtedness. 4. NOTES RECEIVABLE FROM MANAGEMENT Pursuant to the terms of an agreement dated January 4, 1995, certain members of management borrowed $987 from CapStar Management to fund capital contributions to EquiStar. The notes were secured by the borrowers' interests in EquiStar and were personally guaranteed by the individual note holders. These notes earned interest at the prime rate throughout 1995 and at prime plus 1.5% during 1996 until their repayment on September 13, 1996. 5. HEDGE AGREEMENT In August 1995, the Company entered into an agreement with Salomon Brothers Holding Company Inc. ("Salomon") to hedge against the impact that interest rate fluctuations may have on the Company's various floating rate debt instruments. Gains and losses resulting from this agreement were not recorded in the financial statements until realized. The hedge agreement was a two-year forward swap that was effective June 30, 1997 and was to mature on June 30, 2007. The agreement required the Company to pay a fixed rate of 7.1% and receive a floating interest rate based on the three-month London Interbank Offered Rate ("LIBOR"), on a notional amount of $25,000. The agreement required the Company to make an initial collateral deposit of $1,000 and F-10 5. HEDGE AGREEMENT (CONTINUED) provided for required additions or reductions to the collateral escrow account by the Company and Salomon in $500 increments based on changes in the market value of this agreement. At December 31, 1995, the Company had made required deposits totaling $1,000 to the collateral escrow account which were recorded as restricted deposits. The unrealized loss on this agreement at December 31, 1995 was $1,546. On May 6, 1996, the Company sold its interest in the swap agreement and received a cash payment of $536. This gain on sale has been deferred for financial statement purposes. 6. LONG-TERM DEBT BANKERS TRUST DEBT--On September 30, 1996, the Company entered into a $225,000 Senior Secured Revolving Credit Facility (the "Credit Facility") with a group of lenders led by Bankers Trust Company ("Bankers Trust"). The Credit Facility provides for acquisition loans, working and renovation capital, and letters of credit. The initial proceeds from the Credit Facility were used to refinance virtually all existing indebtedness and to fund hotel renovations. The Credit Facility has an initial term of three years, which can be extended at the Company's option using two additional one-year periods upon the satisfaction of certain conditions. The Credit Facility is collateralized by substantially all of the Company's assets. At December 31, 1996, no letters of credit were outstanding. Interest on the Credit Facility is payable monthly at the Company's election of the Base Rate (lenders' prime rate) plus 1.0% or Eurodollar Option (LIBOR for periods of one, two, three or six months) plus 2.0%. The interest rate for the Credit Facility was 7.6% at December 31, 1996. A commitment fee, which is calculated using an annual rate of 0.25% times the average unutilized balance on the Credit Facility, is due quarterly. Letter of credit fees of 2.0% per annum times the average outstanding balances on letters of credit, if any, are also payable quarterly. The Company incurred $108 in commitment fees, which are recorded as interest expense, and no letter of credit fees during 1996. On December 13, 1996, the Company also entered into a $50,000 unsecured senior subordinated credit facility (the "Subordinated Debt") with Bankers Trust as agent and arranger. The net proceeds from the Subordinated Debt borrowing were used to acquire certain of the hotels and for general corporate purposes. In connection with the closing of the Subordinated Debt, the Credit Facility was amended to, among other things, permit the Company to incur up to $100,000 of subordinated indebtedness. The Subordinated Debt is due on December 31, 1999, and may be extended at the Company's option for two additional one-year periods upon the satisfaction of certain conditions. Interest on the Subordinated Debt is payable monthly and is calculated at the Company's election of the one, two, three, or six month LIBOR plus 4.0%. At December 31, 1996, the interest rate for the Subordinated Debt was 9.6%. Both the Credit Facility and Subordinated Debt agreements contain certain covenants, including maintenance of certain financial ratios, restrictions on payments of dividends, certain reporting requirements and other customary restrictions. The Company's ability to borrow under the Credit Facility is also subject to a borrowing base test calculated with reference to the cash flow from hotel properties, the relative contribution to the borrowing base of the values attributable to the different hotel properties, the appraised value of such hotel properties and certain other factors. As of December 31, 1996, approximately $177,000 was available for borrowing under the Credit Facility, of which $149,000 has been borrowed. Under the Credit Facility, the Company is permitted to incur an additional $50,000 of subordinated indebtedness as of December 31, 1996. LEHMAN DEBT--On December 21, 1995, the Company entered into a $202,500 Master Mortgage Loan Facility Agreement (the "Master Agreement") with Lehman Brothers Holding, Inc. ("Lehman") to facilitate the repayment of the existing $22,690 in debt (see "Salomon Debt" below) and to fund hotel F-11 6. LONG-TERM DEBT (CONTINUED) acquisitions. Under the Master Agreement, 50% of total acquisition capital, not to exceed $125,000, could be funded through a senior loan facility. An additional 27.5% of acquisition capital, not to exceed $75,000, could be borrowed through a mezzanine loan facility. Certain fees incurred by the Company related to these borrowings could also be financed through the Master Agreement, up to a maximum of $2,500. Separate loans were obtained under the Master Agreement for each hotel acquired. The loans were cross-collateralized and cross-defaulted and were secured by first and second liens on the Company's real and personal property. Loans obtained under the senior loan facility bore interest at variable rates that were based on the one-month LIBOR. For the nine months ended September 30, 1996 (the date of refinancing) and the year ended December 31, 1995, interest rates on the loans under the senior facility were between 9.6% and 10%, respectively. Loans obtained under the mezzanine loan facility bore interest at a fixed rate of 16.0%, with monthly interest payments of 10% with the remaining 6% accruing to principal. Under the Master Agreement, the Company was required to pay financing fees upon the repayment of each loan. These deferred financing fees payable, which were included in long-term debt, totaled $596 at December 31, 1995. At December 31, 1995, total borrowings under the Master Agreement were $59,976, of which $55,841 were made from the senior loan facility and $4,135 were made from the mezzanine loan facility. On August 21, 1996, the majority of the outstanding Lehman debt was repaid with a portion of the Company's IPO proceeds. All remaining Lehman indebtedness was repaid with proceeds from the Credit Facility on September 30, 1996. SALOMON DEBT--During 1995, the Company entered into a loan facility with Salomon to fund hotel acquisitions. Interest-only payments were required under this loan facility at a floating rate based on LIBOR. On December 21, 1995, the $22,690 outstanding balance was repaid with proceeds from the Lehman debt facility. WELLS FARGO DEBT--On March 2, 1995, the Company borrowed $9,960 from Wells Fargo Bank, National Association ("Wells Fargo") to finance the purchase of the Salt Lake Airport Hilton. Interest, which was payable monthly, was based on the one-month LIBOR plus 4.25%, as adjusted for certain provisions in the loan agreement. At December 31, 1995, the outstanding balance on this amortizing note was $9,890. The note was repaid in 1996. The Company also entered into an unsecured $5,000 revolving credit facility with Wells Fargo that was used for general corporate purposes. Interest accrued at either LIBOR plus 2.25% or the Prime Rate plus 1%, depending on the nature of the advance. At December 31, 1995, there was $4,181 outstanding under this line. The outstanding balance was repaid in 1996. NOTES PAYABLE--In September 1996, the Company entered into a note agreement to finance a three-year insurance policy. Principal and interest payments are due monthly. The outstanding balance on the note, which bears interest at 6.0%, was $665 at December 31, 1996. During 1995, in order to fund certain loans to management (see Note 4), the Company borrowed $950 from Acadia Partners. In January 1996, the Company borrowed an additional $150 under this note agreement. The note, which bore fixed interest at the Prime Rate plus 1.5%, was repaid on September 13, 1996. To help finance the March 1996 purchase of The Latham Hotel, the Company entered into an unsecured $1,000 note agreement with LCP Hotel Ventures, L.P. ("LCP"), the seller of the hotel and an affiliated entity of the Company (see Note 10). The note, which bore interest at a rate of 10%, was repaid on August 23, 1996. F-12 6. LONG-TERM DEBT (CONTINUED) CAPITAL LEASES--The Company has entered into several capital leases for hotel and office equipment that expire between 1997 and 2001. The total capital lease obligations at December 31, 1996 and 1995, were $696 and $648, respectively, and are included in long-term debt. At December 31, 1996, long-term debt outstanding under the above facilities and agreements consisted of the following:
DECEMBER 31, ------------------------- 1996 1995 ---------- ------------- Senior Secured Revolving Credit Facility........................... $ 149,000 -- Senior Subordinated Credit Facility................................ 50,000 -- Mortgage Debt...................................................... -- 74,048 Notes Payable...................................................... 665 950 Capital Leases..................................................... 696 648 Other.............................................................. -- 596 ---------- ------------- 200,361 76,242 Less Current Portion............................................... (498) (2,668) ---------- ------------- $ 199,863 73,574 ---------- ------------- ---------- -------------
Aggregate maturities of the above obligations are as follows: 1997.......................................................... $ 498 1998.......................................................... 483 1999.......................................................... 199,285 2000.......................................................... 84 2001.......................................................... 11 Thereafter.................................................... -- ----------- $ 200,361 ----------- -----------
Management has determined that the outstanding balance of the Company's long-term debt approximates its fair value by discounting the future cash flows under the debt arrangements using rates currently available for debt with similar terms and maturities. 7. INCOME TAXES Income taxes of the Company are based on pretax income since the Formation Transactions and the associated change in the Company's tax status to a C Corporation on August 20, 1996. Pretax income of the Company from August 20 through December 31, 1996 is $3,424. The Company's effective income tax rate is 40%. Income taxes were allocated as follows for the year ended December 31, 1996:
Income before income taxes and extraordinary loss................... $ 2,674 Extraordinary loss.................................................. (1,304) --------- $ 1,370 --------- ---------
F-13 7. INCOME TAXES (CONTINUED) Income tax expense attributable to income before income taxes and extraordinary loss consists of the following for the year ended December 31, 1996:
CURRENT DEFERRED TOTAL ----------- ------------- --------- U.S. federal..................................................... $ 2,118 (51) 2,067 State and local.................................................. 622 (15) 607 -- ----------- --------- $ 2,740 (66) 2,674 -- -- ----------- --------- ----------- ---------
The "expected" tax expense, based on the U.S. federal statutory rate of 34%, differs from the actual tax expense, calculated at the effective rate of 40%, due to state and local taxes, net of federal tax benefit. Upon formation of the Company, the Company assumed certain deferred tax assets and liabilities from its predecessor entities. The tax effects of temporary differences that give rise to deferred tax assets and liabilites of August 20, 1996, and December 31, 1996, are presented below:
DECEMBER 31, AUGUST 20, 1996 1996 ------------ ----------- Deferred tax assets: Allowance for doubtful accounts, recorded for financial statement purposes only.................................................... $ 75 41 Accrued vacation, recorded for financial statement purposes only... 252 199 Other.............................................................. 7 27 ------------ ----------- Total gross deferred tax assets.................................... 334 267 Deferred tax liability--Difference in accumulated depreciation and amortization for tax purposes and financial statement purposes... (1,515) (1,514) ------------ ----------- Net deferred tax liability......................................... $ (1,181) (1,247) ------------ ----------- ------------ -----------
There is no valuation allowance for deferred tax assets as of August 20, 1996 or as of December 31, 1996, as management believes that it is more likely than not that these deferred tax assets will be fully realized. 8. EXTRAORDINARY LOSS On September 30, 1996, the Company recognized an extraordinary loss from the write-off of deferred financing fees in connection with the refinancing of the Lehman debt. The recorded loss of $1,956 net of a tax benefit of $1,304 reflects the write-off of the unamortized balance of deferred financing fees at the time of the refinancing. On December 21, 1995, an extraordinary loss was recorded to write-off the unamortized deferred financing fees related to the Salomon debt. There is no tax effect on the recorded loss of $888 because the Company's predecessor entities were not subject to income tax. 9. EARNINGS PER SHARE The earnings per share have been calculated using actual income before extraordinary loss, extraordinary loss, and net income amounts for the period from the IPO on August 20, 1996 through December 31, 1996. Earnings per share is not presented for periods prior to the IPO because the Company's predecessor entities were partnerships and were not subject to the provisions of Accounting Principles Board Opinion No. 15. The weighted average number of common shares used in the calculations is 12,754,321. F-14 10. RELATED-PARTY TRANSACTIONS The Company manages hotels that are owned in part by affiliates or officers of the Company. Revenue associated with the management of these hotels was $824 and $1,104 during 1996 and 1995, respectively. At December 31, 1996 and 1995, the amount due from these properties was $304 and $237, respectively. Management believes these contracts are at prevailing market rates. Upon formation of CapStar Management, certain receivables of CapStar Equity Associates, G.P. ("CEA"), a limited partner, were assigned to CapStar Management. Amounts collected under this agreement, which are recorded as a current liability, amounted to $305,077 at December 31, 1995. During 1996, all amounts collected under these receivables were repaid to CEA. On March 8, 1996, the Company acquired The Latham Hotel for a purchase price of $12,000 from LCP (see Note 6). At the time of the acquisition, the general partner of LCP, Latham Hotels, Inc., was wholly-owned by certain members of the Company's management. Directly or indirectly, these members of management owned a 9.7% beneficial interest in LCP and received $806 of the net proceeds of the purchase price paid to LCP. Management believes that the purchase price was determined through arm's-length negotiations between the Company and representatives of the holders of the majority of the beneficial interests in LCP. On November 15, 1995, the Company acquired its 1% general partner interest in the Atlanta Partnership from LHP, a corporation in which an individual who, at the time, was a principal of the Company's predecessor entities, owned an equity interest. LHP was paid a fee of $893 in connection with the Company's acquisition of the general and limited partner interests and is entitled to an additional $161 upon the ultimate disposition of the Atlanta Partnership. Another affiliate of the former principal, LCP Group, L.P., is entitled to an annual fee of $30 to provide certain administrative services related to the outside limited partners. Management believes that these fees were negotiated at arm's-length between the former principal and the other principals of EquiStar. 11. EMPLOYEE BENEFIT PLANS On August 20, 1996, the Company adopted an equity incentive plan (the "Equity Incentive Plan"). Pursuant to the terms of its Equity Incentive Plan, the Company is authorized to issue and award 1,740,000 shares of common stock as options to purchase shares, stock appreciation rights, or restricted shares. Awards may be granted to directors, officers or other key employees of the Company or an affiliate. On August 20, 1996, in connection with the IPO, the Company granted certain executive officers and other members of management 745,254 options to purchase shares of the Company's common stock at the initial public offering price of $18 per share. Of such options, 54,254 were exercisable immediately upon their grant, although no options were exercised during 1996. The remaining options will become exercisable in three annual installments. All shares granted lapse ten years from the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company applies Accounting Principles Board Opinion No. 25 in accounting for the Equity Incentive Plan and therefore no compensation cost has been recognized for the Equity Incentive Plan. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following weighted average assumptions used for the grants in 1996: risk free interest rate of 5.96%; no expected dividend yields; expected lives of 3.11 years; expected volatility of 25%. The Company's 1996 pro forma net income and earnings per share as if the fair value method had been applied, were $2,111 and $0.14, respectively. The effects of applying SFAS No. 123 for disclosing compensation costs may not be representative of the effects on reported net income and earnings per share for future years. During 1996, the Company adopted a 401(k) plan. All employees are eligible to participate in the 401(k) plan after one year of service. The cost of administering the plan was not significant during 1996. F-15 12. COMMITMENTS AND CONTINGENCIES The Company has entered into three operating leases for office space which expire in October 1998. Lease payments will approximate $265 annually through expiration. The Company leases the ground under the Embassy Row Hilton. Annual lease payments are $73. The Company is involved in various litigation through the normal course of business which management believes will not have a material adverse effect on the consolidated financial statements. 13. PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma summary presents information as if all hotels owned at December 31, 1996 had been acquired on January 1, 1995 and does not reflect the repayment of outstanding debt with the proceeds from the IPO. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Company. PRO FORMA INFORMATION (UNAUDITED)
1996 1995 ---------- ---------- Total revenue......................................................... $ 172,653 160,961 ---------- ---------- ---------- ---------- Net income (loss) before extraordinary loss........................... $ 1,958 (10,861) ---------- ---------- ---------- ---------- Net income (loss)..................................................... $ 2 (11,749) ---------- ---------- ---------- ----------
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the Company's quarterly results of operations:
1996 1995 ------------------------------------------------ ------------------------ FIRST SECOND THIRD FOURTH FIRST SECOND QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER --------- ----------- ----------- ----------- ----------- ----------- Total revenue................................ $ 18,033 28,223 30,872 32,664 1,782 3,029 Total operating expenses..................... 15,887 23,742 24,018 26,811 1,605 2,705 Net operating income......................... 2,146 4,481 6,854 5,853 177 324 Income (loss) before extraordinary loss...... (642) 48 2,575 2,372 95 71 Net income (loss)............................ (642) 48 619 2,372 95 71 Earnings (loss) per share.................... $ -- -- (0.03) 0.19 -- -- --------- ----------- ----------- ----------- ----- ----- --------- ----------- ----------- ----------- ----- ----- THIRD FOURTH QUARTER QUARTER ----------- ----------- Total revenue................................ 9,400 12,152 Total operating expenses..................... 7,799 11,627 Net operating income......................... 1,601 525 Income (loss) before extraordinary loss...... 805 (740) Net income (loss)............................ 805 (1,628) Earnings (loss) per share.................... -- -- ----- ----------- ----- -----------
15. SUBSEQUENT EVENTS On January 28, 1997, the Company acquired long-term leasehold rights to the 226-room San Pedro Hilton at Cabrillo Marina in San Pedro, California, from U.S. Bancorp for a purchase price of $7,000. Additionally, the 295 room Westchase Hilton in Houston, Texas, was purchased from Redstone Group on January 31, 1997 for $28,500. In a separate transaction, the Company also purchased the 294 room Doubletree Hotel in Albuquerque, New Mexico, on January 31, 1997 from Merv Griffin Hotels for $19,000. All of these hotel acquisitions were funded through the Credit Facility and existing working capital. In February 1997, the Company entered into a contract to acquire the Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358 rooms for a purchase price of $95,000. In February 1997, the Company also entered into contracts to purchase the 213-room Four Points Hotel Sheraton in Cherry Hill, New Jersey, for $6,900 and the 154-room Great Valley Sheraton in Frazer, Pennsylvania, for $14,355. F-16 CAPSTAR HOTEL COMPANY SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
GROSS AMOUNT AT WHICH CAR- COSTS SUBSEQUENT TO RIED AT CLOSE OF INITIAL COST TO COMPANY ACQUISITION PERIOD --------------------------- ------------------------- ----------- BUILDING AND BUILDING AND DESCRIPTION ENCUMBRANCES(1) LAND IMPROVEMENTS LAND IMPROVEMENTS LAND(2) - -------------------------------------- ----------------- ----------- -------------- --------- -------------- ----------- Hotel Assets: Salt Lake Airport Hilton, UT......... -- 770 12,828 1 797 771 Radisson Hotel, Schaumburg, IL....... -- 1,080 5,131 26 1,090 1,106 Sheraton Hotel, Colorado Springs, CO.................................. -- 1,071 14,592 1 1,953 1,072 Hilton Hotel, Bellevue, WA........... -- 5,211 6,766 4 478 5,215 Marriott Hotel, Somerset, NJ......... -- 1,978 23,001 9 1,643 1,987 Westin Atlanta Airport, Atlanta, GA.................................. 23,609 2,650 15,926 (300) 6,461 2,350 Sheraton Hotel, Charlotte, NC........ -- 4,700 11,057 -- 2,179 4,700 Holiday Inn, Cleveland, OH........... -- 1,330 6,353 2 1,545 1,332 Orange County Airport Hilton, Irvine, CA.................................. -- 9,990 7,993 14 575 10,004 The Latham Hotel, Washington, DC..... 12,000 6,500 5,320 -- 480 6,500 Hilton Hotel, Arlington, TX.......... -- 1,836 14,689 354 1,218 2,190 Hilton Hotel, Arlington, VA.......... 16,210 4,000 15,069 -- 147 4,000 Southwest Hilton, Houston, TX........ -- 2,300 15,665 -- (75) 2,300 Embassy Suites, Englewood, CO........ -- 2,500 20,700 -- 27 2,500 Holiday Inn, Colorado Springs, CO.... -- 1,600 4,232 -- 6 1,600 Embassy Row Hilton, Washington DC.... -- 2,200 13,247 -- 17 2,200 Hilton Hotel, Sacramento, CA......... -- 4,000 16,013 -- 22 4,000 Santa Barbara Inn, Santa Barbara, CA -- 2,600 5,141 -- 9 2,600 Hilton Hotel & Towers, Lafayette, LA.................................. -- 1,700 16,062 -- 19 1,700 ----------------- ----------- -------------- --------- -------------- ----------- 51,819 58,016 229,785 111 18,591 58,127 ----------------- ----------- -------------- --------- -------------- ----------- ----------------- ----------- -------------- --------- -------------- ----------- (1) Listed above are encumbrances incurred by the Company or its subsidiaries under loan facilities which require the collateralization of certain Hotel Assets. At December 31, 1996, the Company also had other borrowings that are secured by the general assets of the Company instead of specific Hotel Assets and that are not included in this schedule. (2) As of December 31, 1996, hotel property and equipment have a cost of $342,366 for federal income tax purposes. Buildings and improvements............ Land Hotel furniture and equipment......... Construction in progress.............. Total hotel property and equipment.... Office furniture and equipment........ Total property and equipment.......... BUILDING AND ACCUMULATED YEAR OF DATE DESCRIPTION IMPROVEMENTS(2) DEPRECIATION CONSTRUCTION ACQUIRED LIFE - -------------------------------------- ----------------- ------------- --------------- ----------- --- Hotel Assets: Salt Lake Airport Hilton, UT......... 13,625 591 1980 03/03/95 40 Radisson Hotel, Schaumburg, IL....... 6,221 195 1974 06/30/95 40 Sheraton Hotel, Colorado Springs, CO.................................. 16,545 562 1979 06/30/95 40 Hilton Hotel, Bellevue, WA........... 7,244 233 1979 08/04/95 40 Marriott Hotel, Somerset, NJ......... 24,644 701 1978 10/03/95 40 Westin Atlanta Airport, Atlanta, GA.................................. 22,387 545 1982 11/15/95 40 Sheraton Hotel, Charlotte, NC........ 13,236 277 1985 02/02/96 40 Holiday Inn, Cleveland, OH........... 7,898 154 1975 02/16/96 40 Orange County Airport Hilton, Irvine, CA.................................. 8,568 176 1976 02/22/96 40 The Latham Hotel, Washington, DC..... 5,800 114 1978 03/08/96 40 Hilton Hotel, Arlington, TX.......... 15,907 231 1983 04/17/96 40 Hilton Hotel, Arlington, VA.......... 15,216 141 1990 8/23/96 40 Southwest Hilton, Houston, TX........ 15,590 68 1979 10/31/96 40 Embassy Suites, Englewood, CO........ 20,727 21 1986 12/12/96 40 Holiday Inn, Colorado Springs, CO.... 4,238 -- 1974 12/17/96 40 Embassy Row Hilton, Washington DC.... 13,264 -- 1969 12/17/96 40 Hilton Hotel, Sacramento, CA......... 16,035 -- 1983 12/17/96 40 Santa Barbara Inn, Santa Barbara, CA 5,150 -- 1959 12/17/96 40 Hilton Hotel & Towers, Lafayette, LA.................................. 16,081 -- 1981 12/17/96 40 ----------------- ------------- 248,376 4,009 ----------------- ------------- ----------------- ------------- (1) Listed above are encumbrances inc require the collateralization of borrowings that are secured by th are not included in this schedule (2) As of December 31, 1996, hotel pr $342,366 for federal income tax pu ACCUMULATED COST DEPRECIATION ----------------- ------------- $ 248,376 4,009 58,127 -- 31,972 4,423 3,891 -- ----------------- ------------- 342,366 8,432 726 209 ----------------- ------------- $ 343,092 8,641 ----------------- ------------- ----------------- -------------
A reconciliation of the Partnerships' investment in hotel property and equipment and related accumulated depreciation is as follows:
1996 -------------- Hotel property and equipment: Balance at beginning of period............................................................................... $ 110,455 Additions during period: Acquisitions............................................................................................... 204,740 Improvements and construction-in-progress.................................................................. 27,171 -------------- Balance at end of period..................................................................................... 342,366 -------------- Accumulated depreciation: Balance at beginning of period............................................................................... 1,743 Additons--depreciation expense............................................................................... 6,689 -------------- 8,432 -------------- Net hotel property and equipment at end of period.............................................................. $ 333,934 -------------- -------------- 1995 -------------- Hotel property and equipment: Balance at beginning of period............................................................................... -- Additions during period: Acquisitions............................................................................................... 104,239 Improvements and construction-in-progress.................................................................. 6,216 -------------- Balance at end of period..................................................................................... 110,455 -------------- Accumulated depreciation: Balance at beginning of period............................................................................... -- Additons--depreciation expense............................................................................... 1,743 -------------- 1,743 -------------- Net hotel property and equipment at end of period.............................................................. 108,712 -------------- --------------
F-17 INDEPENDENT AUDITORS' REPORT The Partners CapStar Management Company, L.P.: We have audited the accompanying balance sheet of CapStar Management Company, L.P. ("CapStar Management") as of December 31, 1994, and the related statements of operations and changes in management operations' equity and cash flows for the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the management of CapStar Management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CapStar Management Company, L.P. as of December 31, 1994, and the results of its operations and its cash flows for the years ended December 31, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. May 7, 1996 F-18 CAPSTAR MANAGEMENT BALANCE SHEET DECEMBER 31, 1994 ASSETS Current assets: Cash.......................................................................... $ 157,151 Accounts receivable........................................................... 946,717 Prepaid expenses.............................................................. 22,157 --------- Total current assets............................................................ 1,126,025 Furniture and equipment, net of accumulated depreciation of $69,804............. 105,772 --------- $1,231,797 --------- --------- LIABILITIES AND MANAGEMENT OPERATIONS' EQUITY Accounts payable and accrued expenses........................................... $ 823,637 Due to affiliates............................................................... 203,140 Management operations' equity................................................... 205,020 --------- $1,231,797 --------- ---------
See accompanying notes to financial statements. F-19 CAPSTAR MANAGEMENT STATEMENTS OF OPERATIONS AND CHANGES IN MANAGEMENT OPERATIONS' EQUITY YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 ------------ ---------- Revenue: Management fees...................................................................... $ 3,823,166 3,918,576 Accounting fees and other income..................................................... 594,756 315,566 ------------ ---------- Total revenue.......................................................................... 4,417,922 4,234,142 ------------ ---------- Expenses: Salaries, wages and benefits......................................................... 2,311,569 1,988,282 Other overhead, general and administrative........................................... 2,196,251 2,076,385 Depreciation......................................................................... 22,639 14,349 ------------ ---------- Total expenses......................................................................... 4,530,459 4,079,016 ------------ ---------- Net income (loss)...................................................................... (112,537) 155,126 Management operations' equity (deficit), beginning of year............................. 317,557 (81,820) Capital contributions.................................................................. -- 244,251 ------------ ---------- Management operations' equity, end of year............................................. $ 205,020 317,557 ------------ ---------- ------------ ----------
See accompanying notes to financial statements. F-20 CAPSTAR MANAGEMENT STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 ----------- ---------- Net income (loss)........................................................................ $ (112,537) 155,126 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation......................................................................... 22,639 14,349 Changes in working capital: Accounts receivable................................................................ 249,284 (738,337) Prepaid expenses................................................................... 20,339 (4,463) Accounts payable................................................................... (114,628) 361,377 Accrued expenses................................................................... 1,213 110,624 ----------- ---------- Cash provided (used) by operating activities............................................. 66,310 (101,324) ----------- ---------- Cash flows from investing activities--purchases of furniture and equipment............... (41,257) (24,475) ----------- ---------- Cash flows from financing activities--capital contributions.............................. -- 244,251 ----------- ---------- Net increase in cash..................................................................... 25,053 118,452 Cash at beginning of year................................................................ 132,098 13,646 ----------- ---------- Cash at end of year...................................................................... $ 157,151 132,098 ----------- ---------- ----------- ----------
See accompanying notes to financial statements. F-21 CAPSTAR MANAGEMENT Notes to Financial Statements December 31, 1994 (1) ORGANIZATION For the period from January 1, 1993 through December 31, 1994, CapStar Hotels, Inc. and subsidiaries ("CHI") provided hotel management services to hotels throughout the continental United States on behalf of third-party and affiliate owners. At December 31, 1994, CHI had contracts to manage 41 hotels. On January 4, 1995, CHI assigned the hotel management contracts and certain assets and liabilities related to its hotel management operations to CapStar Equity Associates, G.P. ("CEA"). On January 12, 1995, CEA, in turn, assigned the same to CapStar Management Company, L.P. For purposes of these financial statements, the hotel management operations accounts are presented as if they were a separate and distinct legal entity (CapStar Management). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION These financial statements have been prepared on the accrual basis of accounting and in accordance with generally accepted accounting principles. REVENUES AND ACCOUNTS RECEIVABLE CapStar Management receives fees for the performance of management, accounting and other services in accordance with the agreements entered into with individual hotels. All revenues are recognized as the related services are performed. Generally, management fees are equal to 2% to 4% of the gross monthly revenue of each hotel. Additional incentive management fees are earned when a hotel's operating performance exceeds levels specified in the management contract. The collectibility of accounts receivable is evaluated periodically during the year. CapStar Management uses the direct write-off method to record bad debt expense for amounts deemed uncollectible. FURNITURE AND EQUIPMENT Furniture and equipment purchases are stated at cost. These assets are depreciated using the straight-line method over an estimated useful life of seven years. USE OF ESTIMATES Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates. INCOME TAXES No provision has been made for income taxes in the financial statements, as any taxable income or loss of CapStar Management is included in the income tax returns of CHI for the years ended December 31, 1994 and 1993. F-22 CAPSTAR MANAGEMENT NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) RELATED-PARTY TRANSACTIONS Certain of the hotels managed are owned by affiliates of CHI. Revenue earned by CapStar Management from these hotels was approximately $2,830,177 in 1994 and $2,812,653 in 1993. Accounts receivable associated with hotels owned by affiliates was $481,561 at December 31, 1994. Due to affiliates primarily represents amounts collected by CapStar Management on behalf of the hotels it manages which have not yet been disbursed to the hotels. F-23 INDEPENDENT AUDITORS' REPORT The Board of Directors Capstar Hotel Company: We have audited the accompanying combined balance sheet of the Highgate Portfolio (the "Hotels") as of December 31, 1996 and the related combined statements of operations, owners' deficit and cash flows for the year then ended. These combined financial statements are the responsibility of the Hotels' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Highgate Portfolio as of December 31, 1996 and the results of their combined operations and their combined cash flows for the year ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. February 7, 1997 F-24 HIGHGATE PORTFOLIO COMBINED BALANCE SHEET DECEMBER 31, 1996
1996 -------------- ASSETS Cash and cash equivalents......................................................................... $ 3,093,582 Escrow accounts................................................................................... 265,695 Accounts receivable............................................................................... 1,911,939 Inventory and other assets........................................................................ 547,449 -------------- Total current assets.............................................................................. 5,818,665 -------------- Property and equipment: Land............................................................................................ 4,852,052 Building........................................................................................ 32,550,978 Furniture, fixtures and equipment............................................................... 16,817,888 -------------- 54,220,918 Less--accumulated depreciation.................................................................. (16,638,646) -------------- Total property and equipment, net................................................................. 37,582,272 Deferred assets, net of accumulated amortization of $983,486...................................... 1,042,224 Advances to related parties....................................................................... 7,297,283 -------------- Total assets...................................................................................... $ 51,740,444 -------------- -------------- LIABILITIES AND OWNERS' DEFICIT Accounts payable and accrued expenses............................................................. $ 5,231,355 Capital lease obligations, current portion........................................................ 202,980 Notes payable, current portion.................................................................... 1,122,000 -------------- Total current liabilities......................................................................... 6,556,335 -------------- Capital lease obligations, long-term.............................................................. 226,977 Advances from related parties..................................................................... 11,902,144 Notes payable, long-term.......................................................................... 45,074,801 -------------- Total liabilities................................................................................. 63,760,257 Owners' deficit................................................................................... (12,019,813) -------------- Total liabilities and owners' deficit............................................................. $ 51,740,444 -------------- --------------
See accompanying notes to combined financial statements. F-25 HIGHGATE PORTFOLIO COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
1996 ------------- Revenue: Rooms............................................................................................ $ 22,285,306 Food and beverage................................................................................ 8,194,218 Other operating departments...................................................................... 3,940,775 ------------- 34,420,299 ------------- Operating expenses: Rooms............................................................................................ 5,498,855 Food and beverage................................................................................ 6,672,434 Other operating departments...................................................................... 2,189,072 Undistributed operating expenses: Administrative and general....................................................................... 2,678,993 Sales and marketing.............................................................................. 2,857,750 Management fees.................................................................................. 1,157,682 Property operating costs......................................................................... 2,870,437 Property taxes, insurance and other.............................................................. 1,973,571 Depreciation and amortization.................................................................... 2,719,401 Interest expense................................................................................. 5,951,317 Foreign currency exchange adjustment............................................................. 1,297 ------------- 34,570,809 ------------- Net loss before income taxes..................................................................... (150,510) Income tax expense............................................................................... 215,700 ------------- Net loss......................................................................................... $ (366,210) ------------- -------------
See accompanying notes to combined financial statements. F-26 HIGHGATE PORTFOLIO COMBINED STATEMENT OF OWNERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1996 Balance, December 31, 1995..................................................... $(11,660,873) Foreign currency translation adjustment........................................ 7,270 Net loss....................................................................... (366,210) ----------- Balance, December 31, 1996..................................................... $(12,019,813) ----------- -----------
See accompanying notes to combined financial statements. F-27 HIGHGATE PORTFOLIO COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996
1996 ------------- Cash flows from operating activities: Net loss......................................................................................... $ (366,210) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................................................................. 2,719,401 Foreign currency translation adjustment........................................................ (7,270) Increase in escrow accounts.................................................................... (78,953) Increase in accounts receivable................................................................ (338,313) Decrease in inventory and other assets......................................................... 79,815 Increase in accounts payable and accrued expenses.............................................. 1,444,744 ------------- Net cash provided by operating activities.......................................................... 3,453,214 ------------- Cash flows from investing activities: Deferred asset additions......................................................................... (50,000) Purchases of building improvements............................................................... (998,350) Net repayments of advances to related parties.................................................... 1,193,230 Purchases of furniture and equipment............................................................. (1,408,204) ------------- Net cash used by investing activities.............................................................. (1,263,324) ------------- Cash flows from financing activities: Repayments of notes payable...................................................................... (409,360) Advances from related parties.................................................................... 15,352 Repayments of capital lease obligations.......................................................... (137,729) ------------- Net cash used by financing activities.............................................................. (531,737) ------------- Net increase in cash and cash equivalents.......................................................... 1,658,153 Cash and cash equivalents at beginning of period................................................... 1,435,429 ------------- Cash and cash equivalents at end of period......................................................... $ 3,093,582 ------------- ------------- Supplemental disclosure of cash flow information: Interest paid...................................................................................... $ 5,011,517 Additions to capital lease obligations............................................................. 377,081 ------------- -------------
See accompanying notes to combined financial statements. F-28 HIGHGATE PORTFOLIO NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996 (1) ORGANIZATION The Highgate Portfolio (the "Hotels") consists of six hotels which are owned by partnerships or corporations affiliated with Highgate Hotels, Inc. ("Highgate Hotels"). Two of the Hotels are located in Dallas (Radisson and Holiday Inn Select), one hotel is located in Indianapolis (Doubletree), one hotel is located in Calgary (Holiday Inn), and two hotels are located in Vancouver (Ramada and Sheraton). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotels are included in the financial records of the respective partnership or corporation that owns each hotel. The accompanying combined financial statements include the accounts of the Hotels only, as if they were a separate legal entity, and have been prepared using the accrual basis of accounting. CASH AND CASH EQUIVALENTS The Hotels consider all highly liquid instruments with an original maturity date of three months or less to be cash equivalents. ESCROW ACCOUNTS Escrow Accounts represent amounts paid into a property tax escrow account. INVENTORIES Inventories, consisting primarily of china, tableware, linens, and food and beverage items are stated at cost, using the first-in, first-out ("FIFO") method of inventory valuation. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed on the buildings and building improvements using the straight-line method over their useful lives of 15 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method over five years. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debts to establish an allowance for doubtful accounts. Write offs occur when management deems a receivable uncollectible. DEFERRED EXPENSES Deferred expenses consist, primarily, of deferred financing costs which are amortized on a basis which approximates the interest method, over the term of the respective loan. REVENUE Revenue is earned primarily through the operations of the Hotels and is recognized when earned. INCOME TAXES Four of the Hotels are owned by partnerships, and therefore, any income taxes are reported by the individual partners. The two remaining hotels are owned by entities incorporated in Canada (the Canadian Corporations). For the purposes of these financial statements, the Hotels have calculated the tax provision for the Canadian Corporations using an effective tax rate of 44%. The Canadian Corporations' deferred tax assets and liabilities are insignificant to these financial statements and are therefore not presented. F-29 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of three hotels, located in Canada, are translated at the rate of exchange at the balance sheet date; revenue and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments to assets and liabilities are recorded in the Combined Statement of Owners' Deficit. Foreign currency translation gains and losses are recorded in the Combined Statements of Operations. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) RELATED-PARTY TRANSACTIONS Five of the Hotels are managed by Hospitality Group, Inc. a related party of Highgate Hotels. The property management agreements provide for management fees of 3% of Gross Revenues, as defined in the management agreement. In addition, the management agreements provide for an incentive fee of 2% of Gross Revenues, as defined in the management agreement, provided that certain net operating income thresholds are met. The five hotels incurred management fees of $1,047,730 in 1996. The Hotels have made advances to various related parties. The total amounts outstanding on the advances to related parties were $7,297,283 at December 31, 1996. The advances are unsecured, bear no interest and have no terms of repayment. The Hotels have received advances from various related parties. The total amounts outstanding on the advances from related parties were $11,902,144 at December 31, 1996. The advances are unsecured, bear no interest and have no terms of repayment. Management does not expect to be required to repay advances during 1997. (4) NOTES PAYABLE Notes Payable consisted of the following on December 31, 1996: RADISSON--DALLAS Note payable to the Equitable Life Assurance of the United States (Equitable), collateralized by a deed of trust on the Hotel. Interest payable monthly at 10% with the balance due November 30, 2000................................... $7,407,205 Note payable to Equitable, with no interest due, collateralized by a deed of trust on the hotel. Balance due November 30, 2000............................ 1,140,020 HOLIDAY INN SELECT--DALLAS Note payable to Allied Capital Commercial Corporation and Business Mortgage Investors, Inc., collateralized by a deed of trust on substantially all assets of the current owner. Principal payments of $25,000 are due monthly with interest at prime plus 5.25% (13.5% at December 31, 1996). Balance is due September 30, 1999....................................................... 7,500,000 Note payable to BancOne Capital Partners III Limited Partnership, collateralized by a pledge and assignment of partnership interests and a stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at 13%, with Participation Payments, as defined, due 30 days after the end of each calendar year. Balance is due September 30, 1999........................ 2,500,000 HOLIDAY INN--CALGARY Note Payable to Hongkong Bank of Canada with interest payable monthly at 5.36%........................................................................ 3,064,575
F-30 (4) NOTES PAYABLE (CONTINUED) DOUBLETREE--INDIANAPOLIS Note payable to Lincoln National Life Insurance, collateralized by a deed of trust on the hotel. Principal payments of $39,935 are due monthly with interest at 10.50%. Balance is due on January 1, 2005........................ 3,874,866 Note payable to BancOne Capital Partners III Limited Partnership, collateralized by a pledge and assignment of partnership interests and a stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at 12%. The balance is due November 30, 2004.................................... 2,430,000 SHERATON HOTEL--VANCOUVER (SURREY) Note payable to Lehman Brothers Holdings, Inc., collateralized by a deed of trust on the hotel. Interest is payable monthly at LIBOR plus 13%. The balance is due September 1, 2000............................................. 11,500,000 RAMADA HOTEL--VANCOUVER Note payable to Canadian Imperial Bank of Commerce (CIBC), secured by a first fixed charge against the hotel. Interest is payable monthly at the CIBC prime rate plus 1.5%. Principal is due monthly, in accordance with the note, with the balance due February 28, 2000............................................ 6,780,135 ---------- Total...................................................................... $46,196,801 ---------- ----------
Aggregate maturities of the above notes payable are as follows:
For the year ended - --------------------------------------------------------------- 1997........................................................... $1,122,000 1998........................................................... 1,144,047 1999........................................................... 10,267,515 2000........................................................... 26,210,678 2001........................................................... 479,220 Thereafter..................................................... 6,973,341 ---------- Total...................................................... $46,196,801 ---------- ----------
(5) CAPITAL LEASE OBLIGATIONS The Hotels lease certain equipment under various capital leases. The leases require monthly payments totaling $16,915 including interest ranging between 10.5% to 15.5% per annum, with the final lease maturing in February 2000. Furniture and equipment includes approximately $430,000 for leases that have been capitalized. (6) MANAGEMENT AGREEMENT Property management for the Doubletree hotel is provided by Double Tree Partners. The management agreement provides for payment of a management fee of 3% of Total Sales, as defined in the management agreement. In addition, the management agreement provides for an incentive management fee equal to 15% of the amount, if any, by which the Net Operating Income, as defined in the management agreement, for any fiscal year exceeds $420,000. Total management fees under this agreement were $109,952 for 1996. See note 3 for management agreements related to the other five hotels. F-31 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Orange County Airport Hilton (the "Hotel") for the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Orange County Airport Hilton's operations and its cash flows for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 20, 1996 F-32 ORANGE COUNTY AIRPORT HILTON STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ------------- ------------- ------------- Revenue: Rooms............................................... $ 854,685 4,564,294 3,479,926 3,137,865 Food and beverage................................... 409,200 2,554,156 2,188,612 2,204,286 Other operating departments......................... 48,828 314,723 239,755 183,980 ------------ ------------- ------------- ------------- 1,312,713 7,433,173 5,908,293 5,526,131 ------------ ------------- ------------- ------------- Operating costs and expenses: Rooms............................................... 254,389 1,302,612 1,009,792 875,825 Food and beverage................................... 346,563 1,882,782 1,617,235 1,543,846 Other operating departments......................... 23,005 147,896 116,224 84,197 Undistributed operating expenses: Administrative and general.......................... 222,566 1,050,388 1,022,104 869,499 Sales and marketing................................. 126,979 692,052 452,070 449,615 Management fees..................................... 35,000 210,000 197,500 150,000 Property operating costs............................ 96,410 763,258 704,873 691,160 Property taxes, insurance and other................. 57,301 342,177 386,464 467,055 Depreciation and amortization....................... 112,129 832,958 798,442 854,566 Interest expense.................................... 608,294 3,510,997 2,688,580 2,193,590 ------------ ------------- ------------- ------------- Total expenses........................................ 1,882,636 10,735,120 8,993,284 8,179,353 ------------ ------------- ------------- ------------- Net loss.............................................. $ (569,923) (3,301,947) (3,084,991) (2,653,222) ------------ ------------- ------------- ------------- ------------ ------------- ------------- -------------
See accompanying notes to financial statements. F-33 ORANGE COUNTY AIRPORT HILTON STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ----------- ----------- ----------- ----------- Cash flows from operating activities: Net loss................................................. $ (569,923) (3,301,947) (3,084,991) (2,653,222) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................ 112,129 832,958 798,442 854,566 Decrease (increase) in accounts receivable........... (56,580) (198,792) (27,765) 203,192 Decrease (increase) in other assets.................. 67,637 (42,736) 26,502 38,421 Increase (decrease) in accounts payable and accrued expenses........................................... 296,914 540,514 11,866 (12,467) Increase in accrued interest......................... 358,294 3,010,996 2,568,580 2,167,618 ----------- ----------- ----------- ----------- Total adjustments........................................ 778,394 4,142,940 3,377,625 3,251,330 ----------- ----------- ----------- ----------- Net cash provided by operating activities.................. 208,471 840,993 292,634 598,108 ----------- ----------- ----------- ----------- Cash flows used by investing activities--additions to hotel.................................................... -- (76,435) (54,925) (17,811) ----------- ----------- ----------- ----------- Cash flows from financing activities: Repayments of note payable............................... -- (30,099) (55,000) -- Capital distributions.................................... (43,445) (896,802) (274,594) (397,073) Increase (decrease) in bank overdrafts................... (165,026) 162,343 91,885 (183,224) ----------- ----------- ----------- ----------- Net cash used by financing activities...................... (208,471) (764,558) (237,709) (580,297) ----------- ----------- ----------- ----------- Net increase in cash....................................... -- -- -- -- Cash at beginning of period................................ -- -- -- -- ----------- ----------- ----------- ----------- Cash at end of period...................................... $ -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Supplemental disclosure of cash flow information: Cash paid for interest................................... $ 250,000 500,000 120,000 25,972 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to financial statements. F-34 ORANGE COUNTY AIRPORT HILTON Notes to Financial Statements For the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Orange County Airport Hilton (the "Hotel") is located near the Orange County Airport in Irvine, California, approximately 45 miles from Los Angeles. The Hotel opened in 1976 and was operated under a franchise agreement with Radisson Hotels International, Inc. during the periods under audit. Since April 1, 1996, the Hotel has been operating as a Hilton. The Hotel has 290 rooms, an outdoor pool and jacuzzi, fitness center and same day valet service. The dining facilities include Mimi's Grill and The Promenade Lounge. The Hotel has approximately 30,000 square feet of meeting space. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of GMY Investment Company ("GMY"), a limited partnership which owned the Hotel until it was sold to EquiStar on February 22, 1996 for $19,200,000. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. DEPRECIATION Depreciation is computed on the cost of hotel property and equipment using the Modified Accelerated Cost Recovery method over 39 and 31.5 years for the building and building improvements and over 5 to 7 years for furniture, fixtures and equipment. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-35 ORANGE COUNTY AIRPORT HILTON NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE GMY entered into a promissory note with an original balance of $19,000,000 in June 1989. Interest accrued at 10% for the first year, and then adjusted to the Bank of America National Trust and Savings Association prime rate as announced from time to time. On December 1, 1991, GMY stopped making scheduled interest and principal payments and the note was in default. From the default date, interest was computed using the prime rate plus four percentage points on the outstanding balance plus any accrued interest. (4) RELATED-PARTY TRANSACTIONS The Hotel incurred management fees of $35,000, $210,000, $197,500 and $150,000 for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively. The management fees were paid to an affiliate of the Hotel. F-36 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Georgetown Latham Hotel (the "Hotel") for the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Georgetown Latham Hotel's operations and its cash flows for the period from January 1, 1996 to March 8, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 12, 1996 F-37 GEORGETOWN LATHAM HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ------------ ------------ ------------ Revenue: Rooms.................................................. $ 612,857 3,790,580 3,764,567 3,784,884 Food and beverage...................................... 628,269 3,699,257 3,448,669 3,192,731 Other operating departments............................ 81,116 360,958 419,968 374,672 ------------ ------------ ------------ ------------ 1,322,242 7,850,795 7,633,204 7,352,287 ------------ ------------ ------------ ------------ Operating costs and expenses: Rooms.................................................. 187,244 1,081,472 1,069,864 1,177,839 Food and beverage...................................... 553,396 3,268,979 3,095,593 3,032,272 Other operating departments............................ 50,228 313,870 272,476 185,028 Undistributed operating expenses: Administrative and general............................. 110,613 996,666 795,642 663,466 Sales and marketing.................................... 94,903 511,975 478,520 606,068 Management fees........................................ 39,581 235,523 248,270 288,779 Property operating costs............................... 105,258 649,576 672,065 585,158 Property taxes, insurance and other.................... 65,278 328,299 244,123 328,451 Depreciation and amortization.......................... 81,782 674,537 637,614 574,751 Interest expense....................................... 87,771 476,901 5,265 -- ------------ ------------ ------------ ------------ 1,376,054 8,537,798 7,519,432 7,441,812 ------------ ------------ ------------ ------------ Net income (loss)........................................ $ (53,812) (687,003) 113,772 (89,525) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to financial statements. F-38 GEORGETOWN LATHAM HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ----------- ----------- ---------- Cash flows from operating activities: Net income (loss)........................................... $ (53,812) (687,003) 113,772 (89,525) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 81,782 674,537 637,614 574,751 Decrease (increase) in accounts receivable.............. (26,055) 43,384 83,943 (305,105) Decrease (increase) in other assets..................... (29,166) 121,568 (311,111) (184,175) Increase (decrease) in accounts payable and accrued expenses.............................................. 165,028 42,727 (384,682) 450,341 Increase in interest payable............................ -- 33,880 5,265 -- ---------- ----------- ----------- ---------- Net cash provided by operating activities..................... 137,777 229,093 144,801 446,287 ---------- ----------- ----------- ---------- Cash flows from investing activities: Purchase of furniture, fixtures and equipment............... (18,907) (262,176) -- (276,520) Proceeds from sale of furniture, fixtures and equipment..... -- -- 91,933 -- ---------- ----------- ----------- ---------- Net cash provided (used) by investing activities.............. (18,907) (262,176) 91,933 (276,520) ---------- ----------- ----------- ---------- Cash flows from financing activities: Principal repayments on capital leases...................... (3,770) (21,857) -- -- Proceeds from note payable.................................. -- -- 4,500,000 -- Principal payments on note payable.......................... (6,849) (35,573) -- -- Advances to affiliate....................................... -- -- (3,825,000) -- Repayments of advances to affiliate......................... -- 3,825,000 -- -- Capital distributions....................................... -- (4,206,759) (593,312) (134,115) ---------- ----------- ----------- ---------- Net cash provided (used) by financing activities.............. (10,619) (439,189) 81,688 (134,115) ---------- ----------- ----------- ---------- Net increase (decrease) in cash............................... 108,251 (472,272) 318,422 35,652 Cash at beginning of year..................................... 32,193 504,465 186,043 150,391 ---------- ----------- ----------- ---------- Cash at end of year........................................... $ 140,444 32,193 504,465 186,043 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest...................................... $ 118,085 443,021 -- -- Additions to capital lease obligations...................... -- -- 71,004 -- ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
See accompanying notes to financial statements. F-39 GEORGETOWN LATHAM HOTEL Notes to Financial Statements For the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Georgetown Latham Hotel (the "Hotel") is located on 3000 M Street in Washington, D.C. It is close to the Smithsonian, embassies, monuments, the Kennedy Center and the downtown business district, and caters mainly to tourists and business travelers. The Hotel has 143 rooms; fine dining in the CITRONELLE restaurant; meeting and banquet facilities; an outdoor pool; business center; limousine rental service; and valet parking. Until 1993, the Hotel was owned by Muben/LCP Hotel Partners, L.P. ("Muben/LCP"), a limited partnership which owned 9 hotels. On October 1, 1993, LCP Hotel Ventures, L.P., a partner in Muben/LCP ("LCP Ventures"), conveyed its 10% interest in Muben/LCP for 100% ownership of the Hotel. The Hotel was sold on March 8, 1996 to EquiStar for a purchase price of $12,000,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of Muben/LCP and then LCP Ventures, as described above, until the Hotel was sold to EquiStar. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. DEPRECIATION Depreciation is computed on the cost of the Hotel property and equipment using the straight-line method over 31.5 years for the building and building improvements and over five years for furniture, fixtures and equipment. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. F-40 GEORGETOWN LATHAM HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INTEREST EXPENSE On December 23, 1994, the Hotel obtained financing from CPC Advisors No. 3, L.L.C. The original note balance was $4,500,000 and had a fixed interest rate of 10.53%. Principal and interest payments were due monthly. The note was scheduled to mature on December 27, 1999. (4) RELATED-PARTY TRANSACTIONS The Hotel was managed by an affiliate of LCP Ventures. For the period from January 1, 1993 through September 30, 1993 the Hotel incurred management fees of 4% of gross revenue, as defined in the management agreement. For the remainder of 1993 through March 8, 1996 the Hotel incurred base management fees of 3% and an incentive management fee equal to 5% of the amount by which the net operating income exceeds the amount of preferred return, as defined in the management agreement. Management fees incurred during 1996, 1995, 1994 and 1993 were $39,581, $235,523, $248,270 and $288,779, respectively. No incentive management fees were earned. F-41 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Charlotte Sheraton Airport Plaza (the "Hotel") for the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Charlotte Sheraton Airport Plaza's operations and its cash flows for the period from January 1, 1996 to February 2, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. March 29, 1996 F-42 CHARLOTTE SHERATON AIRPORT PLAZA STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ---------- ----------- ---------- Revenue: Rooms....................................................... $ 404,646 4,353,741 4,279,608 3,764,540 Food and beverage........................................... 330,471 3,136,701 2,698,709 2,625,091 Other operating departments................................. 21,096 609,342 861,007 779,557 ---------- ---------- ----------- ---------- 756,213 8,099,784 7,839,324 7,169,188 ---------- ---------- ----------- ---------- Operating costs and expenses: Rooms....................................................... 111,163 1,067,053 1,151,114 976,178 Food and beverage........................................... 258,901 2,101,504 1,906,329 1,854,924 Other operating departments................................. 13,740 114,588 82,500 80,354 Undistributed operating expenses: Administrative and general.................................. 73,487 375,920 263,728 254,309 Sales and marketing......................................... 90,546 922,890 927,186 863,274 Management fees............................................. 22,497 269,689 391,966 358,459 Property operating costs.................................... 67,286 618,771 556,634 519,500 Property taxes, insurance and other......................... 41,126 425,563 404,523 356,690 Depreciation and amortization............................... 49,600 595,522 603,543 587,150 Interest expense............................................ -- 689,563 3,378,933 1,466,088 ---------- ---------- ----------- ---------- 728,346 7,181,063 9,666,456 7,316,926 ---------- ---------- ----------- ---------- Net income (loss)............................................. $ 27,867 918,721 (1,827,132) (147,738) ---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
See accompanying notes to financial statements. F-43 CHARLOTTE SHERATON AIRPORT PLAZA STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ----------- ----------- ---------- Cash flows from operating activities: Net income (loss)........................................... $ 27,867 918,721 (1,827,132) (147,738) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization........................... 49,600 595,522 603,543 587,150 Decrease (increase) in accounts receivable.............. 70,128 (86,461) (45,518) (44,970) Increase in intercompany receivable..................... (450,000) (1,444,939) (1,937,634) (263,645) Decrease (increase) in other assets..................... 50,127 87,415 (5,447) 40,469 Increase (decrease) in accounts payable and accrued expenses.............................................. (80,687) 165,657 193,488 75,714 Increase in interest payable............................ -- 689,563 3,378,346 92,000 ---------- ----------- ----------- ---------- Net cash provided (used) by operating activities.............. (332,965) 925,478 359,646 338,980 ---------- ----------- ----------- ---------- Cash flows from investing activities--purchases of furniture, fixtures and equipment...................................... (57,124) (257,302) (346,957) (133,901) ---------- ----------- ----------- ---------- Cash flows from financing activities--principal payments on note payable................................................ -- -- -- (203,839) ---------- ----------- ----------- ---------- Net increase (decrease) in cash............................... (390,089) 668,176 12,689 1,240 Cash at beginning of period................................... 712,894 44,718 32,029 30,789 ---------- ----------- ----------- ---------- Cash at end of period......................................... 322,805 712,894 44,718 32,029 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest...................................... $ -- -- 587 1,374,088 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
See accompanying notes to financial statements. F-44 CHARLOTTE SHERATON AIRPORT PLAZA Notes to Financial Statements For the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Charlotte Sheraton Airport Plaza (the "Hotel") is a 226 room, full-service hotel located near the Charlotte Douglas International Airport. The Hotel was constructed in 1985. The Hotel was owned by Krisch Realty Associates, L.P. ("Krisch Realty") during 1993, 1994 and through March 7, 1995, when it was conveyed to the lender. The Hotel was sold on February 2, 1996 to EquiStar for a purchase price of $18,000,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of Krisch Realty, which owned the Hotel until it was conveyed to the lender. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared on the accrual basis of accounting. DEPRECIATION Depreciation is computed on the cost of hotel property and equipment using the straight-line method over 45 years for the building, 10 years for most building improvements, and five to eight years for furniture, fixtures and equipment. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the Partnership Agreement and the Internal Revenue Code. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-45 CHARLOTTE SHERATON AIRPORT PLAZA NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE For the period from January 1, 1995 to February 2, 1995, and during 1994 and 1993, financing for the Hotel was provided through a two-tier loan. The first tier loan, which had an original principal balance of $12,523,925, had an interest rate of prime plus 1%. Principal and interest payments on the first tier loan were due monthly. The second tier loan, which had an original principal balance of $7,444,062, required interest payments based on the Hotel's cash flow. During January 1994, the owner ceased making payments on the loan and the loan went into default. From that point, the first and second tiers of the loan accrued interest at the default rate of 16% until March 7, 1995, when the Hotel was conveyed to the lender. (4) OTHER RELATED-PARTY TRANSACTIONS Krisch Hotels, Inc. ("Krisch"), an affiliate of the Hotel's owner, managed the Hotel until March 7, 1995, and charged the Hotel base management fees of 3% of gross revenues. The Hotel management agreement also provided for incentive management fees to be paid to Krisch of 10% of net operating income, as defined in the agreement. After March 7, 1995, the Hotel incurred only base management fees of 3% of gross revenues. For the period from January 1, 1996 to February 2, 1996, and for 1995, 1994 and 1993, base and incentive management fees incurred by the Hotel totaled $22,497, $269,689, $391,966 and $358,459, respectively. F-46 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Arlington Hilton Hotel (the "Hotel") for the period from January 1, 1996 to April 17, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Arlington Hilton Hotel's operations and its cash flows for the period from January 1, 1996 to April 17, 1996 and the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. July 18, 1996 F-47 ARLINGTON HILTON HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ---------- ---------- ---------- Revenue: Rooms...................................................... $ 1,907,168 6,309,256 5,875,281 5,453,149 Food and beverage.......................................... 824,816 2,846,102 2,755,550 2,708,330 Other operating departments................................ 195,137 639,420 505,739 553,640 ------------ ---------- ---------- ---------- 2,927,121 9,794,778 9,136,570 8,715,119 ------------ ---------- ---------- ---------- Operating costs and expenses: Rooms...................................................... 420,844 1,526,054 1,361,027 1,342,080 Food and beverage.......................................... 654,451 2,225,510 2,072,864 2,137,821 Other operating departments................................ 115,854 351,577 301,793 276,276 Undistributed operating expenses: Administrative and general................................. 250,896 1,044,680 1,347,488 1,252,493 Sales and marketing........................................ 195,671 646,496 510,261 501,991 Management fees............................................ 87,814 313,579 90,998 86,165 Property operating costs................................... 296,643 1,004,445 871,365 1,006,770 Property taxes, insurance and other........................ 160,884 645,504 479,755 475,144 Depreciation and amortization.............................. 242,528 823,414 794,256 794,600 Interest expense........................................... -- 257,494 927,325 337,114 ------------ ---------- ---------- ---------- 2,425,585 8,838,753 8,757,132 8,210,454 ------------ ---------- ---------- ---------- Net income................................................... $ 501,536 956,025 379,438 504,665 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ----------
See accompanying notes to financial statements. F-48 ARLINGTON HILTON HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ------------ ---------- ----------- Cash flows from operating activities: Net income............................................... $ 501,536 956,025 379,438 504,665 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization........................ 242,528 823,414 794,256 794,600 Interest added to loan payable to General Partner.... -- -- 18,777 13,482 Decrease (increase) in accounts receivable........... (107,923) 41,059 (9,969) 47,634 Decrease (increase) in inventory and other assets.... (90,676) 110,942 (17,697) 6,803 Decrease (increase) in restricted funds.............. -- 215,868 477,431 (44,462) Increase (decrease) in accounts payable and accrued expenses........................................... 120,770 (1,027,915) 284,120 231,758 ------------ ------------ ---------- ----------- Total adjustments........................................ 164,699 163,368 1,546,918 1,049,815 ------------ ------------ ---------- ----------- Net cash provided by operating activities.................. 666,235 1,119,393 1,926,356 1,554,480 ------------ ------------ ---------- ----------- Cash flows used by investing activities--purchase of furniture and equipment.................................. (15,499) (660,359) (232,583) (178,368) ------------ ------------ ---------- ----------- Cash flows from financing activities: Principal payments on capital lease obligations.......... (13,442) (41,262) (36,415) (27,314) Repayments of note payable............................... -- -- (357,390) (1,532,401) Capital distribution..................................... -- (1,232,055) -- -- ------------ ------------ ---------- ----------- Net cash used by financing activities...................... (13,442) (1,273,317) (393,805) (1,559,715) ------------ ------------ ---------- ----------- Net increase (decrease) in cash and cash equivalents....... 637,294 (814,283) 1,299,968 (183,603) Cash and cash equivalents at beginning of period........... 946,895 1,761,178 461,210 644,813 ------------ ------------ ---------- ----------- Cash and cash equivalents at end of period................. $ 1,584,189 946,895 1,761,178 461,210 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Supplemental disclosure of cash flow information: Cash paid for interest................................... $ 2,570 13,612 18,459 337,114 Additions to property and equipment through capital leases................................................. -- -- -- 101,765 Conversion of notes payable to equity.................... -- 19,338,404 -- -- ------------ ------------ ---------- ----------- ------------ ------------ ---------- -----------
See accompanying notes to financial statements. F-49 ARLINGTON HILTON HOTEL Notes to Financial Statements For the period from January 1, 1996 to April 17, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Arlington Hilton Hotel (the "Hotel") is located near the Dallas/Fort Worth Airport, adjacent to Six Flags over Texas theme park. The Hotel opened in 1984. The Hotel has 310 rooms, one restaurant, one nightclub/bar, meeting facilities for up to 400, a business center, an indoor/outdoor pool and a fitness center. Until March 7, 1995, the Hotel was owned by Hotel Associates of Arlington Limited Partnership ("Hotel Associates"). On March 7, 1995, the Hotel was conveyed through bankruptcy to the holders of the note, Arlington Hotel Investors, LTD ("Arlington Investors"). The Hotel was sold on April 17, 1996 to EquiStar for a purchase price of $18,200,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of its various owners until the Hotel was sold to EquiStar. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. DEPRECIATION Depreciation is computed on the cost of the hotel property and equipment using the straight-line method over 25 years for building and building improvements, and five years for furniture and equipment. F-50 ARLINGTON HILTON HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) RELATED-PARTY TRANSACTIONS Prior to March 7, 1995 (the date the lenders took possession of the Hotel), the Hotel was managed by Capitol Hotel Group, Inc. ("CHG"), an affiliate of the owners, for a 1% management fee based on gross revenues. For the period from March 7, 1995 through April 17, 1996 (date of acquisition by EquiStar), the Hotel was managed by DePalma Hotel Corporation, an affiliate of the lenders, for a 3% management fee based on gross revenues. Upon foreclosure on the property, the loan and all related accrued interest payable to the general partner of Hotel Associates was converted to equity in the statement of partners' capital. F-51 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying balance sheets of Ballston Hotel Limited Partnership (the "Partnership") as of June 30, 1996 and December 31, 1995 and 1994, and the related statements of operations, partners' deficit, and cash flows for the six months ended June 30, 1996 and for the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ballston Hotel Limited Partnership as of June 30, 1996 and December 31, 1995 and 1994, and the results of its operations and its cash flows for the six months ended June 30, 1996 and for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in note 4 to the financial statements, the Partnership's note payable to a financial institution is in default and may be called at any time. This raises substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to this matter are also described in note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Washington, D.C. July 11, 1996 F-52 BALLSTON HOTEL LIMITED PARTNERSHIP BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
1996 1995 1994 ------------- ------------ ------------ ASSETS Cash and cash equivalents............................................. $ 271,215 501,433 98,904 Certificate of deposit................................................ -- 101,833 250,000 Hotel inventory, at cost.............................................. 37,481 51,635 52,794 Accounts receivable: Trade............................................................... 293,251 174,833 369,961 Affiliates (note 6)................................................. -- -- 757,624 ------------- ------------ ------------ Total accounts receivable, net........................................ 293,251 174,833 1,127,585 ------------- ------------ ------------ Hotel property (notes 4 and 7): Land................................................................ 2,073,323 2,073,323 2,073,323 Building, net of accumulated depreciation of $2,192,347 in 1996, $2,029,714 in 1995 and $1,704,449 in 1994......................... 10,818,285 10,980,918 11,306,183 Furniture, fixtures and equipment, net of accumulated depreciation of $1,163,947 in 1996, $1,060,156 in 1995 and $854,609 in 1994.... 1,889,117 1,983,728 1,742,714 Initial hotel supplies, net of accumulated amortization of $197,924 in 1996, $183,187 in 1995 and $153,713 in 1994.................... 244,189 258,926 288,400 Conversion costs, net of accumulated amortization of $107,181 in 1996, $98,491 in 1995 and $81,111 in 1994......................... 153,533 162,223 179,603 ------------- ------------ ------------ Total hotel property.................................................. 15,178,447 15,459,118 15,590,223 Investment in partnership (note 5).................................... 2,189,989 2,259,061 2,332,760 Other Assets.......................................................... 77,609 131,409 144,842 ------------- ------------ ------------ $ 18,047,992 18,679,322 19,597,108 ------------- ------------ ------------ ------------- ------------ ------------ LIABILITIES AND PARTNERS' DEFICIT Accounts payable and accrued expenses: Affiliates (note 6)................................................. $ 2,283,784 2,163,011 1,855,114 Trade............................................................... 473,641 338,665 340,846 ------------- ------------ ------------ Total accounts payable and accrued expenses........................... 2,757,425 2,501,676 2,195,960 Notes payable (notes 4 and 6): Financial institution............................................... 17,079,121 17,079,121 17,201,202 Affiliates.......................................................... 1,468,891 2,437,377 3,340,277 ------------- ------------ ------------ Total notes payable................................................... 18,548,012 19,516,498 20,541,479 ------------- ------------ ------------ Total liabilities..................................................... 21,305,437 22,018,174 22,737,439 Partners' deficit (note 3)............................................ (3,257,445) (3,338,852) (3,140,331) ------------- ------------ ------------ Commitments (notes 4 and 7)........................................... $ 18,047,992 18,679,322 19,597,108 ------------- ------------ ------------ ------------- ------------ ------------
See accompanying notes to financial statements. F-53 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ---------- ---------- ---------- Hotel operating revenue: Room rental................................................ $ 3,173,738 5,820,170 5,408,935 5,116,700 Food and beverage sales.................................... 950,778 2,000,110 2,045,750 1,792,965 Telephone and other........................................ 128,037 303,194 260,190 269,030 ------------ ---------- ---------- ---------- Total hotel operating revenue................................ 4,252,553 8,123,474 7,714,875 7,178,695 ------------ ---------- ---------- ---------- Hotel operating expenses: Department expenses........................................ 1,538,843 3,140,757 3,100,077 2,810,690 Energy and engineering..................................... 351,538 602,512 574,578 518,924 Sales and marketing........................................ 327,356 659,284 604,457 629,567 General and administrative (note 6)........................ 458,119 981,849 927,024 907,215 Management fee (note 7).................................... 127,547 243,704 231,446 215,359 Other...................................................... 99,892 138,551 84,534 66,640 ------------ ---------- ---------- ---------- Total hotel operating expenses............................... 2,903,295 5,766,657 5,522,116 5,148,395 ------------ ---------- ---------- ---------- Income from hotel operations................................. 1,349,258 2,356,817 2,192,759 2,030,300 ------------ ---------- ---------- ---------- Fixed charges: Financial costs (note 6)................................... 739,867 1,571,261 1,438,463 1,327,641 Depreciation and amortization.............................. 290,467 611,645 700,566 723,020 Property insurance and taxes............................... 146,248 266,115 249,394 251,608 Parking costs.............................................. 42,733 99,093 103,057 106,833 ------------ ---------- ---------- ---------- Total fixed charges.......................................... 1,219,315 2,548,114 2,491,480 2,409,102 ------------ ---------- ---------- ---------- Other income (expense): Interest income............................................ 8,153 40,169 15,010 12,228 Equity in income of partnership (note 5)................... 15,355 36,510 41,105 31,309 Other...................................................... (72,044) (83,903) (6,908) (80) ------------ ---------- ---------- ---------- Total other income (expense), net............................ (48,536) (7,224) 49,207 43,457 ------------ ---------- ---------- ---------- Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345) ------------ ---------- ---------- ---------- ------------ ---------- ---------- ----------
See accompanying notes to financial statements. F-54 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
GENERAL LIMITED TOTAL PARTNER PARTNERS ------------- --------- ----------- Balance at December 31, 1992............................................... $ (2,555,472) (46,288) (2,509,184) Net loss................................................................. (335,345) (3,353) (331,992) ------------- --------- ----------- Balance at December 31, 1993............................................... $ (2,890,817) (49,641) (2,841,176) Net loss................................................................. (249,514) (2,495) (247,019) ------------- --------- ----------- Balance at December 31, 1994............................................... $ (3,140,331) (52,136) (3,088,195) Net loss................................................................. (198,521) (1,985) (196,536) ------------- --------- ----------- Balance at December 31, 1995............................................... $ (3,338,852) (54,121) (3,284,731) Net income............................................................... 81,407 8,141 73,266 ------------- --------- ----------- Balance at June 30, 1996................................................... $ (3,257,445) (45,980) (3,211,465) ------------- --------- ----------- ------------- --------- -----------
See accompanying notes to financial statements. F-55 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ----------- ----------- ---------- ---------- Cash flows from operating activities: Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345) Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: Depreciation and amortization............................ 290,467 611,645 700,566 723,020 Increase (decrease) in provision for doubtful accounts... 397 (8,072) 11,323 (1,375) Decrease in certificates of deposit...................... 101,833 148,167 -- -- Equity in income of partnership.......................... (15,355) (36,510) (41,105) (31,309) Decrease (increase) in accounts receivable............... (118,815) 960,824 (789,828) (87,582) Decrease (increase) in hotel inventory................... 14,154 1,159 (930) (9,997) Decrease (increase) in other assets...................... 53,800 (20,258) (58,614) 42,031 Increase in accounts payable and accrued expenses........ 255,749 305,716 375,580 320,816 ----------- ----------- ---------- ---------- Total adjustments............................................ 582,230 1,962,671 196,992 955,604 ----------- ----------- ---------- ---------- Net cash provided (used) by operating activities............... 663,637 1,764,150 (52,522) 620,259 ----------- ----------- ---------- ---------- Cash flows from investing activities: Additions to hotel property.................................. (9,796) (446,849) (133,901) (195,323) Distributions from investee partnership...................... 84,427 110,209 120,694 204,761 ----------- ----------- ---------- ---------- Net cash provided (used) by investing activities............... 74,631 (336,640) (13,207) 9,438 ----------- ----------- ---------- ---------- Cash flows from financing activities: Principal payments on notes payable.......................... (968,486) (1,024,981) (110,072) (818,644) Borrowings on notes payable.................................. -- -- -- 20,000 ----------- ----------- ---------- ---------- Net cash used by financing activities.......................... (968,486) (1,024,981) (110,072) (798,644) ----------- ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents........... (230,218) 402,529 (175,801) (168,947) Cash and cash equivalents at beginning of period............... 501,433 98,904 274,705 443,652 ----------- ----------- ---------- ---------- Cash and cash equivalents at end of period..................... $ 271,215 501,433 98,904 274,705 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest....................................... $ 619,094 1,263,364 1,135,123 1,120,853 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
See accompanying notes to financial statements. F-56 BALLSTON HOTEL LIMITED PARTNERSHIP Notes to Financial Statements June 30, 1996 and December 31, 1995 and 1994 (1) ORGANIZATION Ballston Hotel Limited Partnership (the "Partnership") was formed on January 1, 1988 pursuant to the Commonwealth of Virginia Uniform Limited Partnership Act. The principal business activity of the Partnership is the development and operation of a hotel complex as part of the mixed-use Ballston Metro Center project (the "Project") located in Arlington, Virginia. Ballston Condo Limited Partnership ("BCLP") and Ballston Office Limited Partnership ("BOLP"), affiliates of the Partnership, constructed the condominium and office building components of the Project, respectively. The hotel opened on October 5, 1989 and operated as the Arlington Renaissance Hotel at Ballston Metro Center (the "Hotel"). Management intends to operate the hotel under a franchise agreement with Hilton Hotels Corporation to be entered into in August 1996. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING RECORDS AND INCOME TAXES The Partnership maintains its accounting records on the accrual basis for both financial statement and federal income tax reporting purposes. Federal and state income taxes accrue to the individual partners; accordingly, no federal and state income taxes have been provided in the accompanying financial statements. BUILDING AND LAND Contributed land is recorded at the fair value at the date of contribution as agreed to by the partners. Purchased land and building costs are recorded at cost. The building is depreciated over 40 years using the straight-line method. HOTEL FURNITURE, FIXTURES AND EQUIPMENT Hotel furniture, fixtures and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. INITIAL HOTEL SUPPLIES Initial hotel supplies required for the Hotel's operations, such as linens, china, silverware and other expendable supplies, are recorded at cost and are being amortized over 15 years using the straight-line method. Additional purchases of linens, china, silverware and other expendable supplies are expensed when purchased. CONVERSION COSTS Conversion costs were incurred to convert the Ramada Hotel into a Renaissance Hotel. These costs are recorded at cost and are being amortized over 15 years using the straight-line method. INVESTMENT IN PARTNERSHIP Investment in partnership is accounted for under the equity method. Accordingly, the investment is stated at cost and adjusted for the Partnership's share of earnings or loss and distributions of the investee partnership. F-57 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) CASH EQUIVALENTS For financial statement purposes, the Partnership considers investments with an original maturity date of three months or less to be cash equivalents. USE OF ESTIMATES Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosures of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. (3) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES All profits and losses are allocated in proportion to each partner's respective percentage interest in the Partnership as follows: General partner...................................................... 1.0% Limited partners..................................................... 99.0 --------- 100.0% --------- ---------
(4) NOTES PAYABLE Notes payable at June 30, 1996 and December 31, 1995 and 1994 consist of the following:
1996 1995 1994 ------------- ------------- ------------- Financial institution--prime rate plus 1% or a LIBOR/CD rate option note, secured by a first deed of trust on land and improvements of hotel complex and the shared improvements of the condominium constructed by BCLP and an assignment of existing and future revenue derived from the collateral; interest only payable monthly, principal payable annually, based on 30-year amortization, with remaining principal and interest due October 5, 1995.............................................................. $ 17,079,121 17,079,121 17,201,202 Limited partner--prime rate plus 2% unsecured note.................. 1,468,891 2,437,377 3,340,277 ------------- ------------- ------------- $ 18,548,012 19,516,498 20,541,479 ------------- ------------- ------------- ------------- ------------- -------------
Ballston Hotel, Inc., the general partner, and IDI, L.C. (formerly IDI Associates), IDI Financial Associates and Ballston Realty, Inc., affiliates of the Partnership, jointly and severally guarantee the financial institution note payable. The note payable to the financial institution, which matured on October 5, 1995, is in default. The Partnership has been unable thus far to refinance the note but continues to make the regular monthly interest payments. Given the status of the note payable with the financial institution and the nature of the terms of the note payable to the limited partner, management is unable to determine the fair value of the notes payable. F-58 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (5) INVESTMENT IN PARTNERSHIP FINANCIAL STATEMENT SUMMARY The following is a summary of the assets, liabilities and equity of the unconsolidated partnership, Ballston Parking Associates ("BPA") as of June 30, 1996 and December 31, 1995 and 1994, and the results of its operations for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993. The unconsolidated partnership was formed primarily to operate the hotel and office building parking garage of the Project. The Partnership's interest in the unconsolidated partnership was 35.02%, 35.48% and 35.60% as of June 30, 1996 and December 31, 1995 and 1994, respectively. The percentage of the Partnership interest in BPA will decrease in accordance with BPA's partnership agreement based upon the number of parking space easements sold.
CONDENSED BALANCE SHEETS 1996 1995 1994 --------- --------- --------- ASSETS Cash..................................................... $ 1,267 4,263 3,055 Accounts receivable...................................... 29,250 31,200 27,080 Garage property, net of accumulated depreciation......... 4,125,801 4,224,801 4,359,801 Other assets............................................. 4,521 4,521 4,203 --------- --------- --------- $4,160,839 4,264,785 4,394,139 --------- --------- --------- --------- --------- --------- LIABILITIES AND EQUITY Total accounts payable and accrued liabilities........... $ -- 6,121 7,000 Equity: The Partnership........................................ 1,443,210 1,501,136 1,552,543 Other partners......................................... 2,717,629 2,757,528 2,834,596 --------- --------- --------- $4,160,839 4,264,785 4,394,139 --------- --------- --------- --------- --------- ---------
CONDENSED STATEMENTS OF OPERATIONS 1996 1995 1994 1993 --------- --------- --------- --------- Parking revenue........................................ $ 288,562 538,898 520,479 538,047 Loss on sales of parking spaces........................ (9,080) (7,000) (3,329) (20,149) --------- --------- --------- --------- Total income........................................... 279,482 531,898 517,150 517,898 Operating expenses..................................... 187,642 353,490 333,542 333,149 --------- --------- --------- --------- Net income............................................. $ 91,840 178,408 183,608 184,749 --------- --------- --------- --------- --------- --------- --------- --------- Equity in net income: The Partnership...................................... $ 26,501 58,802 63,397 53,601 Other partners....................................... 65,339 119,606 120,211 131,148 --------- --------- --------- --------- $ 91,840 178,408 183,608 184,749 --------- --------- --------- --------- --------- --------- --------- ---------
NOTE TO CONDENSED FINANCIAL STATEMENTS Contributed property is recorded at fair value at the date of contribution as agreed to by the partners. F-59 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (5) INVESTMENT IN PARTNERSHIP--(CONTINUED) RECONCILIATION OF INVESTMENT IN PARTNERSHIP AND EQUITY IN INCOME The following is a reconciliation of the Partnership's investment in partnership as of June 30, 1996 and December 31, 1995 and 1994 and equity in income for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993, as indicated above, to the amounts reported in the accompanying financial statements.
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME ------------------------------------ ------------------------------------------ 1996 1995 1994 1996 1995 1994 1993 ------------ ---------- ---------- --------- --------- --------- --------- Balance per condensed financial statements............................. $ 1,443,210 1,501,136 1,552,543 26,501 58,802 63,397 53,601 Adjustment for costs incurred in excess of agreed-upon basis in property....... 746,779 757,925 780,217 (11,146) (22,292) (22,292) (22,292) ------------ ---------- ---------- --------- --------- --------- --------- $ 2,189,989 2,259,061 2,332,760 15,355 36,510 41,105 31,309 ------------ ---------- ---------- --------- --------- --------- --------- ------------ ---------- ---------- --------- --------- --------- ---------
(6) RELATED-PARTY TRANSACTIONS Interest expense of approximately $121,000 in 1996, $308,000 in 1995, $303,000 in 1994 and $294,000 in 1993 was incurred on note payable to BCA, L.P., the limited partner, and are included in financial costs in the accompanying financial statements. Accrued interest payable of $2,283,784, $2,163,011 and $1,855,114 as of June 30, 1996 and December 31, 1995 and 1994, respectively, is recorded as accounts payable to affiliates in the accompanying financial statements. The Partnership entered into an agreement with IDI Management, Inc., an affiliate of the Partnership, to perform administrative services for the Hotel effective January 1, 1991. The administrative fee is based on 0.5% of the gross revenues of the Partnership except for any distributions from BPA related to parking. The Partnership incurred administrative fees of $21,257 in 1996, $41,952 in 1995, $39,771 in 1994 and $37,103 in 1993. These fees are included in general and administrative expenses in the accompanying financial statements. The Partnership has advanced funds to affiliates. Advances outstanding were $757,624 at December 31, 1994. (7) COMMITMENTS HOTEL MANAGEMENT AGREEMENT The Partnership has entered into a 20-year agreement with Renaissance Hotel Operating Company ("Renaissance") for the management of the Hotel. The Partnership has committed to pay the following management fees: (1) base management fee equal to 3% of the Hotel's gross revenue, as defined in the agreement, payable monthly; (2) reservation and advertising fees equal to 4.5% of the Hotel's gross room revenue, as defined in the agreement, payable monthly; and F-60 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (7) COMMITMENTS--(CONTINUED) (3) incentive management fee equal to 10% of the Hotel's gross operating profit, as defined in the agreement, earned and payable annually if certain cash flow requirements are met. Base management fees of $127,547 in 1996, $243,704 in 1995, $231,446 in 1994 and $215,359 in 1993 and reservation and advertising fees of $142,818 in 1996, $261,908 in 1995, $243,402 in 1994 and $230,252 in 1993 were incurred by the Partnership. No incentive management fees were incurred since none of the cash flow requirements were met. F-61 INDEPENDENT AUDITORS' REPORT Board of Directors CapStar Hotel Company: We have audited the accompanying combined balance sheets of the Muben Hotels (the "Hotels") as of September 30, 1996, December 31, 1995 and 1994 and related combined statements of operations, owners' capital and cash flows for the nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994. These combined financial statements are the responsibility of the Hotels' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Muben Hotels as of September 30, 1996, December 31, 1995 and 1994, and the results of their combined operations and their combined cash flows for the nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick, LLP Washington, D.C. January 10, 1997 F-62 MUBEN HOTELS COMBINED BALANCE SHEETS SEPTEMBER 30, 1996, DECEMBER 31, 1995 AND 1994
1996 1995 1994 -------------- -------------- -------------- ASSETS Cash and cash equivalents........................................ $ 2,540,021 2,100,027 1,795,991 Accounts receivable.............................................. 1,520,016 1,009,479 1,347,062 Inventory and other assets....................................... 1,000,652 1,004,098 1,100,562 -------------- -------------- -------------- Total current assets............................................. 5,060,689 4,113,604 4,243,615 -------------- -------------- -------------- Property and equipment: Land........................................................... 14,454,496 14,454,496 14,454,496 Building....................................................... 49,190,163 48,816,467 48,792,386 Furniture, fixtures and equipment.............................. 19,744,427 19,968,593 18,993,252 -------------- -------------- -------------- 83,389,086 83,239,556 82,240,134 Less -- accumulated depreciation................................. (35,118,050) (32,623,613) (29,307,378) -------------- -------------- -------------- Total net property and equipment................................. 48,271,036 50,615,943 52,932,756 -------------- -------------- -------------- Total assets..................................................... $ 53,331,725 54,729,547 57,176,371 -------------- -------------- -------------- -------------- -------------- -------------- LIABILITIES AND OWNERS' CAPITAL Accounts payable and accrued expenses............................ $ 3,622,343 2,778,452 3,022,008 Advance deposits................................................. 114,175 41,927 45,436 Intercompany income taxes payable (note 4)....................... 2,485,345 995,677 81,080 -------------- -------------- -------------- Total liabilities................................................ 6,221,863 3,816,056 3,148,524 Owners' capital.................................................. 47,109,862 50,913,491 54,027,847 -------------- -------------- -------------- Total liabilities and owners' capital............................ $ 53,331,725 54,729,547 57,176,371 -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes to combined financial statements. F-63 MUBEN HOTELS COMBINED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1996 1995 1994 ------------- ------------- ------------- Revenue: Rooms...................................................... $ 18,337,641 21,925,991 21,147,009 Food and beverage.......................................... 8,117,806 10,442,474 10,513,519 Other operating departments................................ 1,265,677 1,613,934 1,591,255 ------------- ------------- ------------- 27,721,124 33,982,399 33,251,783 ------------- ------------- ------------- Operating costs and expenses: Rooms.................................................... 4,513,632 5,751,406 5,673,951 Food and beverage........................................ 6,874,250 9,198,740 9,407,042 Other operating departments.............................. 669,595 904,143 933,992 Undistributed operating expenses: Administrative and general................................. 2,505,580 3,342,110 3,314,554 Sales and marketing........................................ 1,811,948 2,320,060 2,343,494 Management fees (note 3)................................... 628,182 1,065,175 1,051,710 Property operating costs................................... 3,505,572 4,407,863 4,353,126 Property taxes, insurance and other........................ 993,759 1,390,174 1,519,555 Depreciation and amortization.............................. 2,494,437 3,316,235 4,451,660 ------------- ------------- ------------- 23,996,955 31,695,906 33,049,084 ------------- ------------- ------------- Net income before income taxes............................. 3,724,169 2,286,493 202,699 Income taxes (note 4)...................................... 1,489,668 914,597 81,080 ------------- ------------- ------------- Net income................................................. $ 2,234,501 1,371,896 121,619 ------------- ------------- -------------
See accompanying notes to combined financial statements. F-64 MUBEN HOTELS COMBINED STATEMENTS OF OWNERS' CAPITAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Balance at December 31, 1993................................................... $55,146,114 Contributions................................................................ 1,485,114 Distributions................................................................ (2,725,000) Net income................................................................... 121,619 ---------- Balance at December 31, 1994................................................... 54,027,847 Contributions................................................................ 215,327 Distributions................................................................ (4,701,579) Net income................................................................... 1,371,896 ---------- Balance at December 31, 1995................................................... 50,913,491 Contributions................................................................ 173,601 Distributions................................................................ (6,211,731) Net income................................................................... 2,234,501 ---------- Balance at September 30, 1996.................................................. $47,109,862 ---------- ----------
See accompanying notes to combined financial statements. F-65 MUBEN HOTELS COMBINED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1996 1995 1994 ------------- ----------- ----------- Cash flows from operating activities: Net income........................................................... $ 2,234,501 1,371,896 121,619 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................... 2,494,437 3,316,235 4,451,660 Decrease (increase) in accounts receivable....................... (510,537) 337,583 (77,086) Decrease in inventory and other assets........................... 3,446 96,464 22,741 Decrease in notes receivable..................................... -- -- 100,000 Increase (decrease) in accounts payable and accrued expenses..... 843,891 (243,556) (312,119) Increase (decrease) in advance deposits.......................... 72,248 (3,509) (10,866) Increase in intercompany income taxes payable.................... 1,489,668 914,597 81,080 ------------- ----------- ----------- Total Adjustments.................................................... 4,393,153 4,417,814 4,255,410 ------------- ----------- ----------- Net cash provided by operating activities.............................. 6,627,654 5,789,710 4,377,029 ------------- ----------- ----------- Cash flows from investing activities--purchases of furniture and equipment............................................................ (149,530) (999,422) (2,285,579) ------------- ----------- ----------- Cash flows from financing activities: Capital contributions................................................ 173,601 215,327 1,485,114 Capital distributions................................................ (6,211,731) (4,701,579) (2,725,000) ------------- ----------- ----------- Net cash used by financing activities.................................. (6,038,130) (4,486,252) (1,239,886) ------------- ----------- ----------- Net increase in cash and cash equivalents.............................. 439,994 304,036 851,564 Cash and cash equivalents at beginning of period....................... 2,100,027 1,795,991 944,427 ------------- ----------- ----------- Cash and cash equivalents at end of period............................. $ 2,540,021 2,100,027 1,795,991 ------------- ----------- ----------- ------------- ----------- -----------
See accompanying notes to combined financial statements. F-66 MUBEN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30,1996, DECEMBER 31,1995 AND 1994 (1) ORGANIZATION The combined financial statements consist of five hotels which are part of MBL Life Assurance Corporation. This portfolio of hotels is known as the Muben Hotels (the "Hotels"). Two of the hotels are in California (Sacramento Hilton and Santa Barbara Inn); one is in Louisiana (Lafayette Hilton), one is in Colorado (Holiday Inn) and the other is in Washington, D.C. (Embassy Row). CapStar Hotel Company purchased the Hotels for approximately $68,400,000 on December 17, 1996. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotels are included in the financial records of the MBL Life Assurance Corporation. The accompanying combined financial statements include the accounts of the Hotels only, as if they were a separate legal entity, and have been prepared using the accrual basis of accounting. CASH AND CASH EQUIVALENTS The Hotels consider all highly liquid instruments with an original maturity date of three months or less to be cash equivalents. INVENTORIES Inventories, consisting primarily of china, tableware, linens and food and beverage items, are stated at cost, using the first-in, first-out ("FIFO") method of inventory valuation. PROPERTY AND EQUIPMENT Property and equipment are reflected in the balance sheets at their fair value at the time of contribution. Depreciation is computed on the buildings and building improvements using the straight-line method over their useful lives of 18 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method over five years. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. INCOME TAXES The accounts of the Hotels are included in the financial records of the MBL Life Assurance Corporation and therefore the Hotels were not subject to income taxes on a separate basis. For purposes of these financial statements, the Hotels have calculated their tax provision on the separate return basis to approximate tax expense as if they were a separate legal entity. F-67 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) RELATED-PARTY TRANSACTIONS All of the Hotels, except for Embassy Row, are managed by CapStar Hotel Company. The hotels managed by CapStar Hotel Company paid base management fees based on gross revenue plus incentive management fees if the hotels' operating results exceeded levels specified in the management contract. These four hotels incurred management fees of $563,455 in 1996; $926,737 in 1995; $929,013 in 1994; and $1,008,719 in 1993. CapStar Hotel Company began managing Embassy Row on September 25, 1996. (4) INCOME TAXES The Hotels' income tax expense is comprised of the following:
1996 1995 1994 ------------ --------- --------- Federal........................................................................ $ 1,151,118 706,741 62,653 State and local................................................................ 338,550 207,856 18,427 ------------ --------- --------- $ 1,489,668 914,597 81,080 ------------ --------- --------- ------------ --------- ---------
The "expected" tax expense, based on the U.S. federal statutory rate of 34% for each of the periods above, differs from the actual tax expense, calculated at an effective rate of 40%, due to state and local taxes, net of federal tax benefit. The Hotels' deferred tax assets and liabilities are insignificant to these financial statements and are therefore not presented. F-68 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of an offer to buy, to any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to its date. ------------------------ TABLE OF CONTENTS
PAGE --------- Prospectus Summary.............................. 3 Risk Factors.................................... 11 Use of Proceeds................................. 17 Price Range of Common Stock..................... 17 Dividend Policy................................. 17 Capitalization.................................. 18 Selected Financial and Other Data............... 19 Unaudited Pro Forma Financial Statements........ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 24 The Company..................................... 28 Recent Developments............................. 29 Business and Properties......................... 31 The Operating Partnership....................... 41 Management...................................... 42 Principal Stockholders.......................... 50 Certain Relationships and Related Transactions.................................. 51 Shares Available for Future Sale................ 52 Description of Capital Stock.................... 53 Underwriting.................................... 56 Legal Matters................................... 57 Experts......................................... 57 Special Note Regarding Forward-Looking Statements.................................... 57 Additional Information.......................... 58 Index to Financial Statements................... F-1
5,000,000 Shares [LOGO] Common Stock -------------------- PROSPECTUS , 1997 ---------------------- LEHMAN BROTHERS BT SECURITIES CORPORATION GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. MONTGOMERY SECURITIES SMITH BARNEY INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GRAPHICS APPENDIX INSIDE FRONT COVER PAGE 1 Map depicting location of the Company's Hotels. The Company logo. Photo of the Westchase Hilton, Houston, Texas. INSIDE FRONT COVER PAGE 2 Under the heading "Growth", the following text appears: "The Company believes that the upscale, full-service segment of the lodging industry is the most attractive segment in which to acquire, own and manage hotels and further believes that there are currently many attractive opportunities to acquire properties in this segment of the industry at prices below replacement cost." Under the heading "Operating Strategy," the following text appears: "The Company seeks to achieve its principal operating objectives by creating and executing management plans that are specifically tailored for each individual hotel rather than by implementing an operating strategy that is designed to maintain a uniform corporate image or brand. CapStar believes that skilled management of hotel operations is the most critical element in maximizing revenue and cash flow in full-service hotels." Photos of the Sheraton Hotel Lobby, Colorado Springs, Colorado, the Marriott Hotel, Somerset, New Jersey, Hilton Los Angeles Worldport, Los Angeles, California, and Citronelle Restaurant, The Latham Hotel, Washington, D.C. INSERT FRONT COVER PAGE 3 Under the heading "Acquisition Strategy," the following text appears: "CapStar seeks to increase shareholder value by continuing to acquire upscale, full-service hotels below replacement cost in selected markets throughout the United States and Canada and implementing its operating strategy to improve hotel operations and increase cash flow." Photos of the Hilton Hotel, Arlington, Texas, The Westin Hotel, Atlanta Airport, Atlanta, Georgia, The Sheraton Airport Plaza, Charlotte, North Carolina, and The Westin Hotel (interior), Atlanta Airport, Atlanta, Georgia. INSIDE BACK COVER PAGE 1 Photos of the Radisson Hotel, Dallas, Texas (to be acquired), Orange County Airport Hilton, Irvine, California, The Sheraton Hotel, Vancouver, British Columbia (to be acquired), The Doubletree Hotel, Albuquerque, New Mexico. INSIDE BACK COVER PAGE 2 Before and after photos of the Salt Lake Airport Hilton, Salt Lake City, Utah, and the Hilton Hotel, Bellevue, Washington. INSIDE BACK COVER PAGE 3 Photos of Hilton Hotel, Arlington, Virginia, Embassy Suites, Denver, Colorado, Southwest Hilton, Houston, Texas, Radisson Hotel, Schaumburg, Illinois, Hilton Hotel, Lafayette, Louisiana. PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses payable in connection with the Offering of the Common Stock being registered hereby, other than underwriting discounts and commissions. All the amounts shown are estimates, except the Securities and Exchange Commission registration fee and the NASD filing fee. All of such expenses are being borne by the Company. SEC Registration Fee............................................ $ 41,600 NASD Filing Fee................................................. 14,228 NYSE Listing Fee................................................ 51,300 Blue Sky Fees and Expenses...................................... 25,000 Accounting Fees and Expenses.................................... 200,000 Legal Fees and Expenses......................................... 200,000 Printing and Engraving Expenses................................. 300,000 Registrar and Transfer Agent's Fees............................. 2,500 Miscellaneous Fees and Expenses................................. 165,372 Total....................................................... $1,000,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 102(b)(7) of the Delaware Law permits a provision in the certificate of incorporation of each corporation organized thereunder, eliminating or limiting, with certain exceptions, the personal liability of a director to the corporation or its stockholders for monetary damages for certain breaches of fiduciary duty as a director. The Certificate of Incorporation of the Company eliminates the personal liability of directors to the fullest extent permitted by the Delaware Law. Section 145 of the Delaware Law ("Section 145"), in summary, empowers a Delaware corporation, within certain limitations, to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by them in connection with any suit or proceeding other than by or on behalf of the corporation, if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to a criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. With respect to actions by or on behalf of the corporation, Section 145 permits a corporation to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit, provided such person meets the standard of conduct described in the preceding paragraph, except that no indemnification is permitted in respect of any claim where such person has been found liable to the corporation, unless the Court of Chancery or the court in which such action or suit was brought approves such indemnification and determines that such person is fairly and reasonably entitled to be indemnified. Article Eight of the Certificate of Incorporation of the Company provides for the indemnification of officers and directors and certain other parties (the "Indemnitees") of the Company to the fullest extent permitted under the Delaware Law; provided, that except in the case of proceedings to enforce rights to indemnification, the Company shall indemnify such Indemnitee in connection with a proceeding initiated by such Indemnitee only if such proceeding was authorized by the Board. The Underwriting Agreement provides for indemnification by the Underwriters of the Company, its directors and officers, and persons who control the Company within the meaning of Section 15 of the Securities Act for certain liabilities, including liabilities arising thereunder. II-1 Each of the employment agreements described in "Management--Employment Agreements" contains provisions entitling the executive to indemnification for losses incurred in the course of service to the Company or its subsidiaries, under certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On May 29, 1996, the Company issued 100 shares of Common Stock to Cherwell Investors, Inc., a wholly-owned subsidiary of Acadia Partners, for nominal consideration. The shares were issued without registration under the Securities Act pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. On June 20, 1996, the Company entered into a Formation Agreement pursuant to which it became obligated to issue 3,504,221 shares of Common Stock to the beneficial owners of EquiStar and CapStar Management. In August 1996, in connection with the IPO, the Company issued 3,504,221 shares of Common Stock to such beneficial owners. Such issuances were made without registration under the Securities Act pursuant to exemptions from registration afforded by Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. 1 -- Form of Underwriting Agreement 3.1.1* -- Amended and Restated Certificate of Incorporation of the Company 3.1.2* -- Amendment to Amended and Restated Certificate of Incorporation 3.1.3* -- Second Amendment to Amended and Restated Certificate of Incorporation 3.2* -- By-laws of the Company 4.1* -- Specimen Common Stock certificate 4.2.1** -- Senior Secured Revolving Credit Agreement, dated as of September 24, 1996, among CapStar Management, the Company, the lenders party thereto and Bankers Trust 4.2.2 -- Amendment to Senior Secured Revolving Credit Agreement, dated as of December 13, 1996, among CapStar Management, the Company, the lenders party thereto and Bankers Trust 4.3*** -- Senior Subordinated Credit Agreement, dated December 13, 1996, among CapStar Management, the Company, the lenders party thereto and Bankers Trust 5 -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison 10.1* -- Form of Registration Rights Agreement 10.2 -- Acquisition Agreement, dated as of February 13, 1997, among the Company, CapStar Management, Highgate Hotels and the several other parties thereto 10.3* -- Form of Employment Agreement between the Company and Paul W. Whetsell 10.4* -- Form of Employment Agreement between the Company and David E. McCaslin 10.5* -- Form of Employment Agreement between the Company and William M. Karnes 10.6* -- Form of Employment Agreement between the Company and John E. Plunket 10.7* -- Form of Amended and Restated Agreement of Limited Partnership of CapStar Management 10.8 -- Form of First Amendment to Amended and Restated Agreement of Limited Partnership of CapStar Management 10.9* -- Form of Equity Incentive Plan of the Company 10.10* -- Form of Employee Stock Purchase Plan of the Company 21*** -- List of Subsidiaries of the Company 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5) 23.3*** -- Consent of Mahmood Khimji to be named as proposed director 24*** -- Power of Attorney
II-2 27*** -- Financial Data Schedule
- ------------------------ * Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-6583), filed with the Securities and Exchange Commission on June 21, 1996, as amended ** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996 *** Previously filed (b) Financial Statement Schedules. Schedule 28, Real Estate and Accumulated Depreciation, is set forth on page F-17 of the Prospectus. ITEM 17. UNDERTAKINGS. The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to its Certificate of Incorporation, By-laws, the Underwriting Agreement or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, District of Columbia, on the 26th day of February, 1997. CAPSTAR HOTEL COMPANY By: /s/ PAUL W. WHETSELL ----------------------------------- Name: Paul W. Whetsell Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE - --------------------------------------------------- ------------------------------------------------------------ /s/ PAUL W. WHETSELL President, Chief Executive Officer and Chairman of the Board - ---------------------------------------- (Principal Executive Officer) Paul W. Whetsell * Chief Operating Officer and Director - ---------------------------------------- David E. McCaslin * Senior Executive Vice President, Finance and Chief Financial - ---------------------------------------- Officer (Principal Financial and Accounting Officer) William M. Karnes * Director - ---------------------------------------- Daniel L. Doctoroff * Director - ---------------------------------------- Bradford E. Bernstein * Director - ---------------------------------------- Joseph McCarthy * Director - ---------------------------------------- William S. Janes * Director - ---------------------------------------- Edward L. Cohen * Director - ---------------------------------------- Edwin T. Burton, III * Director - ---------------------------------------- Edward P. Dowd
*By: /s/ PAUL W. WHETSELL ---------------------------------------- Name: Paul W. Whetsell Title: Attorney-in-Fact Dated: February 26, 1997 II-4 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENTS - ----------- ------------------------------------------------------------------------------------------------ 1 -- Form of Underwriting Agreement 3.1.1* -- Amended and Restated Certificate of Incorporation of the Company 3.1.2* -- Amendment to Amended and Restated Certificate of Incorporation 3.1.3* -- Second Amendment to Amended and Restated Certificate of Incorporation 3.2* -- By-laws of the Company 4.1* -- Specimen Common Stock certificate 4.2.1** -- Senior Secured Revolving Credit Agreement, dated as of September 24, 1996, among CapStar Management, the Company, the lenders party thereto and Bankers Trust 4.2.2 -- Amendment to Senior Secured Revolving Credit Agreement, dated as of December 13, 1996, among CapStar Management, the Company, the lenders party thereto and Bankers Trust 4.3*** -- Senior Subordinated Credit Agreement, dated December 13, 1996, among CapStar Management, the Company, the lenders party thereto and Bankers Trust 5 -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison 10.1* -- Form of Registration Rights Agreement 10.2 -- Acquisition Agreement, dated as of February 13, 1997, among the Company, CapStar Management, Highgate Hotels and the several other parties thereto 10.3* -- Form of Employment Agreement between the Company and Paul W. Whetsell 10.4* -- Form of Employment Agreement between the Company and David E. McCaslin 10.5* -- Form of Employment Agreement between the Company and William M. Karnes 10.6* -- Form of Employment Agreement between the Company and John E. Plunket 10.7* -- Form of Amended and Restated Agreement of Limited Partnership of CapStar Management 10.8 -- Form of First Amendment to Amended and Restated Agreement of Limited Partnership of CapStar Management 10.9* -- Form of Equity Incentive Plan of the Company 10.10* -- Form of Employee Stock Purchase Plan of the Company 21*** -- List of Subsidiaries of the Company 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5) 23.3*** -- Consent of Mahmood Khimji to be named as proposed director 24*** -- Power of Attorney 27*** -- Financial Data Schedule
- ------------------------ * Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-6583), filed with the Securities and Exchange Commission on June 21, 1996, as amended ** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996 *** Previously filed EX-1 2 EX-1 FORM OF UNDERWRITING AGREE. EXHIBIT 1 5,000,000 Shares CAPSTAR HOTEL COMPANY Common Stock (Par Value $.01 Per Share) UNDERWRITING AGREEMENT March __, 1997 LEHMAN BROTHERS INC. BT SECURITIES CORPORATION GOLDMAN, SACHS & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED MONTGOMERY SECURITIES SMITH BARNEY INC. As Representatives of the several Underwriters named in Schedule 1, c/o Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Dear Sirs: CapStar Hotel Company, a Delaware corporation (the "Company") proposes to sell an aggregate of 5,000,000 shares (the "Firm Stock") of the Company's Common Stock, par value $.01 per share (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an option to purchase up to an additional 750,000 shares of the Common Stock on the terms and for the purposes set forth in Section 2 (the "Option Stock"). The Firm Stock and the Option Stock, if purchased, are hereinafter collectively called the "Stock." This is to confirm the agreement concerning the purchase of the Stock from the Company by the Underwriters named in Schedule 1 hereto (the "Underwriters"). At or prior to August 23, 1996, the Company completed a series of transactions described under the heading "The Formation Transactions" in that certain prospectus dated August 20, 1996, relating to the initial public offering of 9,250,000 shares of Common Stock of the Company (the "IPO Prospectus"). As part of these transactions, the Company and CapStar LP Corporation ("CapStar Sub") became the sole partners of CapStar Management Company, L.P., as governed by an amended and restated Agreement of Limited Partnership (the "Operating Partnership"), and the Operating Partnership was restructured to own, directly or indirectly, all of the properties and other assets previously owned, directly or indirectly, by EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P. (as constituted as of August 20, 1996, "CapStar Management"), and their respective subsidiaries, including twelve owned hotel properties or interests therein and management agreements with a total of 48 hotels. As used herein the term "Formation Transactions" shall mean the occurrence of all the events described in the IPO Prospectus under the heading "The Formation Transactions," the execution of acquisition agreements for the Additional Hotels (as defined in the IPO Prospectus) and the other transactions related thereto, and the term "Predecessor Entities" shall mean the subsidiaries of EquiStar Hotel Investors, L.P. together with CapStar Management and its subsidiaries for all periods prior to the consummation of the Formation Transactions. 1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE OPERATING PARTNERSHIP. The Company and the Operating Partnership, jointly and severally, represent, warrant and agree that: (a) A registration statement on Form S-1 (333-22073), and amendments thereto, with respect to the Stock has (i) been prepared by the Company in conformity with the requirements of the United States Securities Act of 1933 (the "Securities Act") and the rules and regulations (the "Rules and Regulations") of the United States Securities and Exchange Commission (the "Commission") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act. Copies of such registration statement and the amendments thereto have been delivered by the Company to you as the representatives (the "Representatives") of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means each prospectus included in such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at the Effective Time, including all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5(a) hereof and deemed to be a part of the registration statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and 2 Regulations; and "Prospectus" means such final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. Any registration statement (including any amendment or supplement thereto or information which is deemed part thereof) filed by the Company to register additional shares of Common Stock of the Company under Rule 462(b) of the Securities Act ("Rule 462(b) Registration Statement") shall be deemed a part of the Registration Statement. Any prospectus (including any amendment or supplement thereto or information which is deemed to part thereof) included in a Rule 462(b) Registration Statement and any term sheet as contemplated by Rule 434 of the Rules and Regulations (a "Term Sheet") shall be deemed to be part of the Prospectus. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all material respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. (c) The Company and each of its subsidiaries (as defined in Section 15) and each Predecessor Entity have been duly organized and are validly existing as corporations, general or limited partnerships or limited liability companies, as the case may be, in good standing under the laws of their respective jurisdictions of organization, are duly qualified to do business and are in good standing as foreign corporations, limited partnerships or limited liability companies, as the case may be, in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such 3 qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged; (d) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus; and all of the shares of Common Stock (other than the Stock to be offered and sold by the Company hereunder) that are outstanding or will be issued on or prior to the First Delivery Date were or will be offered and sold in compliance with all applicable laws (including, without limitation, federal and state securities laws); and all of the issued shares of capital stock, partnership interests or limited liability company membership interests, as the case may be, of each subsidiary of the Company have been duly and validly authorized and issued and (except for partnership interests of general partners and except to the extent the limited liability company agreements governing the respective limited liability companies provide otherwise) are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims except for liens in favor of Bankers Trust Company and/or any of its affiliates to secure indebtedness. (e) The unissued shares of the Stock to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein will be duly and validly issued, fully paid and non-assessable; and the Stock will conform to the descriptions thereof contained in the Prospectus. (f) The partnership interests of the Operating Partnership ("Units") transferred to the Company and CapStar Sub in connection with the Formation Transactions, have been duly authorized for issuance by the Operating Partnership, at the closing of the Formation Transactions were the only Units outstanding and are validly issued and fully paid, and, except as otherwise described in the Prospectus, are the only Units outstanding. (g) This Agreement has been duly authorized, executed and delivered by the Company and the Operating Partnership. 4 (h) The execution, delivery and performance of this Agreement by the Company and the Operating Partnership, the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries or any Predecessor Entity is a party or by which the Company or any of its subsidiaries or any Predecessor Entity is bound or to which any of the property or assets of the Company or any of its subsidiaries or any Predecessor Entity is subject, nor will such actions result in any violation of the provisions of the charter, by-laws, partnership agreement or operating agreement of the Company, any of its subsidiaries or any Predecessor Entity or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, any of its subsidiaries or any Predecessor Entity or any of their properties or assets; and except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body or any other person is required for the execution, delivery and performance of this Agreement by the Company or the Operating Partnership, the consummation of the transactions contemplated hereby. (i) Except as set forth in the Prospectus, there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any unissued shares of the Stock to be issued and sold by the Company to the Underwriters hereunder pursuant to the Company's charter or by-laws or any agreement or other instrument; (j) Except as set forth in the Prospectus, there will be no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting of, any of the partnership interests in the Operating Partnership pursuant to the Operating Partnership's Agreement of Limited Partnership, as restated and amended, or any agreement or other instrument to which the Company is a party; 5 (k) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. (l) Except as described in the Prospectus, the Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock options plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (m) None of the Company, any of its subsidiaries or any Predecessor Entity has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, other than as set forth or contemplated in the Prospectus, (i) there has been no material adverse change in the financial condition, results of operation or business of the Company, the Operating Partnership, any subsidiary of the Company or any Predecessor Entity, whether or not arising in the ordinary course of business, (ii) no material casualty loss or material condemnation or other material adverse event with respect to any Property has occurred, (iii) there have been no transactions or acquisition agreements entered into by the Company, the Operating Partnership or any subsidiary of the Company other than those in the ordinary course of business, which are material with respect to such entity, (iv) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock or by the Operating Partnership with respect to its partnership interests and (v) there has been no change in the capital stock of the Company or the partnership interests of the 6 Operating Partnership, or any increase in the indebtedness of the Company, the Operating Partnership or any subsidiary. (n) The financial statements (including the related notes and supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as otherwise stated herein. (o) KPMG Peat Marwick LLP, who have certified certain financial statements of the Company and the Predecessor Entities, whose reports appear in the Prospectus and who have delivered the initial letter referred to in Section 7(f) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations. (p) The Company and each of its subsidiaries have or will have on the First Delivery Date good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and all real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. There shall be issued and outstanding with respect to each of the Owned Hotels (as defined in the Prospectus) an ALTA form of owner's title insurance policy (or local equivalent with respect to those Owned Hotels located in jurisdictions where an ALTA form of owner's title insurance policy is not available) insuring the fee simple estate of the applicable subsidiary of the Company in the Owned Hotel owned by such subsidiary in an amount at least equal to the acquisition price of such Owned Hotel and each 7 such title insurance policy will continue to be in full force and effect immediately following the consummation of the Offering. (q) The Company and each of its subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar businesses in similar industries. (r) Each of the Company, its subsidiaries and the Predecessor Entities possesses such certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, except where the failure to possess such certificates, authorizations or permits would not have a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company and its subsidiaries (a "Material Adverse Effect"), and none of the Company, any of its subsidiaries or any Predecessor Entity has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling, or finding, would have a Material Adverse Effect. (s) The Company, each of its subsidiaries and each Predecessor Entity own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, franchises, copyrights and licenses necessary for the conduct of their respective businesses and have no reason to believe that the conduct of their respective businesses will conflict with, and have not received any notice of any claim of conflict with, any such rights of others. (t) There are no legal or governmental proceedings pending to which the Company, any of its subsidiaries or any Predecessor Entity is a party or of which any property or assets of the Company, any of its subsidiaries or any Predecessor Entity is the subject which could reasonably be expected to have a Material Adverse Effect; and to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. 8 (u) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement. (v) No relationship, direct or indirect, exists between or among the Company, the Operating Partnership, any subsidiary of the Company, or any Predecessor Entity, on the one hand, and the directors, officers, stockholders of the Company, or customers or suppliers of the Company, or customers or suppliers of the Operating Partnership, on the other hand, which is required to be described in the Prospectus which is not so described. (w) There is (i) no material unfair labor practice complaint pending against the Company, its subsidiaries or any Predecessor Entity nor, to the best knowledge of the Company, threatened against any of them before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company, its subsidiaries or any Predecessor Entity or, to the best knowledge of the Company, threatened against any of them, (ii) no material strike, labor dispute, slowdown or stoppage pending against the Company, its subsidiaries or any Predecessor Entity nor, to the best knowledge of the Company, threatened against the Company, its subsidiaries or any Predecessor Entity which might be expected to have a Material Adverse Effect. (x) None of the Company, any subsidiary or any Predecessor Entity has violated any safety or similar law applicable to its business nor any federal, state or local law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws which in each case might result in a Material Adverse Effect. (y) The Company, its subsidiaries and each Predecessor Entity are in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company, any of its subsidiaries or any Predecessor Entity would have any 9 liability; the Company, its subsidiaries and each Predecessor Entity have not incurred and do not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company, any of its subsidiaries or any Predecessor Entity would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (z) The Company, each of its subsidiaries and each Predecessor Entity has filed all federal, state and local income and franchise tax returns required to be filed through the date hereof and has paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company, any of its subsidiaries or any Predecessor Entity which has had (nor does the Company have any knowledge of) any tax deficiency which, if determined adversely to the Company, any of its subsidiaries or any Predecessor Entity, might have a Material Adverse Effect; the amounts currently set up as provisions for taxes or otherwise by the Company and its subsidiaries on their books and records are sufficient for the payment of all their unpaid federal, foreign, state, county and local taxes accrued through the dates as of which they speak, and for which the Company and its subsidiaries may be liable in their own right or as a transferee of the assets of, or as successor to any other corporation, association, partnership, joint venture or other entity. (aa) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company and its subsidiaries have not (i) issued or granted any securities, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (ab) The Company, its subsidiaries, and the Predecessor Entities (i) make and keep accurate books and records and (ii) maintain internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with 10 management's authorization, (B) transactions are recorded as necessary to permit preparation of their financial statements and to maintain accountability for their assets, (C) access to their books, records and accounts is permitted only in accordance with management's authorization and (D) the reported accountability for their assets is compared with existing assets at reasonable intervals. (ac) None of the Company, any of its subsidiaries or any Predecessor Entity is, or will be, (i) in violation of its charter, by-laws, partnership agreement or operating agreement, (ii) in default in any material respect, and no event has or will have occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) in violation of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has or will have failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business, which violation or failure could reasonably be expected to have a Material Adverse Effect. (ad) None of the Company, any of its subsidiaries or any Predecessor Entity, or any director, officer, agent, employee or other person associated with or acting on behalf of the Company, any of its subsidiaries or any Predecessor Entity, has used any corporate, partnership or limited liability company funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (ae) There has been no storage, disposal, generation, manufacture, refinement, installation, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes, petroleum or petroleum products (including crude oil or any fraction thereof), hazardous substances or any other substances which pose a 11 hazard to human health, safety, natural resources, industrial hygiene or the environment or which cause or threaten to cause a nuisance by the Company, any of its subsidiaries, or any Predecessor Entity (or, to the knowledge of the Company, by any of their predecessors in interest or by any other entity) at, upon or from any of the property now or previously owned or leased by the Company, its subsidiaries or any Predecessor Entity except to the extent commonly used in the normal operations of such property, in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require investigation, monitoring, removal action, corrective action, remedial action or other response action ("response action") under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or response action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and response actions, a Material Adverse Effect; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release or threatened release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes, petroleum or petroleum products (including crude oil or any fraction thereof), hazardous substances or any other substances which pose a hazard to human health, safety, natural resources, industrial hygiene or the environment or which cause or threaten to cause a nuisance, except for any such spill, discharge, leak, emission, injection, escape, dumping or release or threatened release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings, releases and threatened releases, a Material Adverse Effect; and the terms "hazardous wastes," "solid wastes," "toxic wastes," "hazardous substances," "petroleum," "petroleum products" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (af) Neither the Company nor any subsidiary is, or will be as a result of the offer and sale of the Stock hereunder, an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 12 2. PURCHASE OF THE STOCK BY THE UNDERWRITERS. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell 5,000,000 shares of the Firm Stock to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set opposite that Underwriter's name in Schedule 1 hereto. Each Underwriter shall be obligated to purchase from the Company that number of shares of the Firm Stock which represents the same proportion of the number of shares of the Firm Stock to be sold by the Company as the number of shares of the Firm Stock set forth opposite the name of such Underwriter in Schedule 1 represents of the total number of shares of the Firm Stock to be purchased by all of the Underwriters pursuant to this Agreement. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine. In addition, the Company grants to the Underwriters an option to purchase up to 750,000 shares of Option Stock. Such option is granted solely for the purpose of covering over-allotments in the sale of Firm Stock and is exercisable as provided in Section 4 hereof. Shares of Option Stock shall be purchased severally for the account of the Underwriters in proportion to the number of shares of Firm Stock set opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of each Underwriter with respect to the Option Stock shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Option Stock other than in 100 share amounts. The price of both the Firm Stock and any Option Stock shall be $____ per share. The Company shall not be obligated to deliver any of the Stock to be delivered on the First Delivery Date or the Second Delivery Date (as hereinafter defined), as the case may be, except upon payment for all the Stock to be purchased on such Delivery Date as provided herein. 3. OFFERING OF STOCK BY THE UNDERWRITERS. Upon authorization by the Representatives of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions set forth in the Prospectus. 4. DELIVERY OF AND PAYMENT FOR THE STOCK. Delivery of and payment for the Firm Stock shall be made at the offices of Lehman Brothers Inc. at 10:00 A.M., New York City time, on the fourth full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the "First Delivery Date." On the First Delivery Date, the Company shall deliver or cause to be delivered certificates representing the Firm Stock to the Representatives for the account of each Underwriter against payment to or upon 13 the order of the Company of the purchase price by wire transfer of federal (same-day) funds to an account or accounts previously designated in writing to Lehman Brothers Inc. by the Company. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in such names and in such denominations as the Representatives shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Stock, the Company shall make the certificates representing the Firm Stock available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. At any time on or before the thirtieth day after the date of this Agreement the option granted in Section 2 may be exercised by written notice being given to the Company by the Representatives. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Representatives, when the shares of Option Stock are to be delivered; provided, however, that this date and time shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. The date and time the shares of Option Stock are delivered are sometimes referred to as the "Second Delivery Date" and the First Delivery Date and the Second Delivery Date are sometimes each referred to as a "Delivery Date". Delivery of and payment for the Option Stock shall be made at the place specified in the first sentence of the first paragraph of this Section 4 (or at such other place as shall be determined by agreement between the Representatives and the Company) at 10:00 A.M., New York City time, on the Second Delivery Date. On the Second Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Stock to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by wire transfer of federal (same-day) funds to an account or accounts previously designated in writing to Lehman Brothers Inc. by the Company. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall be registered in such names and in such denominations as the Representatives shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Stock, the Company shall make the certificates representing the Option Stock available for inspection by the Representatives in 14 New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the Second Delivery Date. 5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (c) To deliver promptly to the Representatives such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement) and (ii) each Preliminary Prospectus, the 15 Prospectus and any amended or supplemented Prospectus; and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Stock or any other securities relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act, to notify the Representatives and, upon their request, to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance. (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission; (e) To the extent practicable, prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, and to the extent not practicable, immediately thereafter, to furnish a copy thereof to the Representatives and counsel for the Underwriters and to consult with the Representatives prior to the filing; (f) As soon as practicable after the Effective Date, but in any event not later than 410 days or, if the fourth quarter following the fiscal quarter that includes the Effective Date is the last fiscal quarter of the Company's fiscal year, 455 days after the end of the Company's current fiscal quarter, to make generally available to the Company's security holders and to deliver to the Representatives an earning statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158); 16 (g) Until the earlier of the expiration of the period of five years following the Effective Date and the date on which the Company ceases to be subject to the reporting requirements of the Exchange Act, to furnish to the Representatives copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Common Stock may be listed pursuant to requirements of or agreements with such exchange or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder; (h) Promptly from time to time to take such action as the Representatives may reasonably request to qualify the Stock for offering and sale under the securities laws of such jurisdictions as the Representatives may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Stock, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (i) Except as described in the Prospectus, for a period of 180 days from the date of the Prospectus, not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (other than the Stock and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants or rights), or sell or grant options, rights or warrants with respect to any shares of Common Stock (other than the grant of options pursuant to option plans existing on the date hereof), without the prior written consent of Lehman Brothers Inc.; and to cause each of CapStar Executive Investors I, L.L.C., CapStar Executive Investors II, L.L.C., CapStar GP Corp., CapStar Hotels, Inc., Latham Hotels, Inc., New CapStar Group I, L.L.C., New CapStar Group II, L.L.C., Paul W. Whetsell, [and] David E. McCaslin [and Daniel A. Burack] to furnish to the Representatives, prior to the First Delivery Date, a letter or letters, in form and substance satisfactory to counsel for the Underwriters, pursuant to which each such person shall agree not to, directly or indirectly, offer for sale, sell or 17 otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock for a period of 180 days from the date of the Prospectus, without the prior written consent of Lehman Brothers Inc.; (j) Prior to the Effective Date, to apply for the listing of the Stock on the New York Stock Exchange, Inc. and to use its best efforts to complete that listing, subject only to official notice of issuance and evidence of satisfactory distribution, prior to the First Delivery Date; (k) To apply the net proceeds from the sale of the Stock being sold by the Company as set forth in the Prospectus; and (l) To take such steps as shall be necessary to ensure that neither the Company nor any subsidiary shall become an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 6. EXPENSES. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Stock and any taxes payable in that connection; (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement; (d) the costs of producing and distributing this Agreement and any other related documents in connection with the offering, purchase, sale and delivery of the stock; (e) the fees (including reasonable attorneys' fees) and expenses incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of sale of the Stock; (f) any applicable listing or other fees; (g) the fees and expenses of qualifying the Stock under the securities laws of the several jurisdictions as provided in Section 5(h) and of preparing, printing and distributing a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters); and (h) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement; provided that, except as provided in this Section 6 and in Section 11 the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters. 18 7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company contained herein, to the performance by the Company of their obligations hereunder, and to each of the following additional terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 7(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Hogan & Hartson L.L.P., counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Paul, Weiss, Rifkind, Wharton and Garrison shall have furnished to the Representatives their written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company and each of its subsidiaries have been duly formed and are validly existing as corporations, limited partnerships or limited liability companies, as the case may be, in good standing under the laws of their respective jurisdictions 19 of organization, are duly qualified to do business and are in good standing as foreign corporations, limited partnerships or limited liability companies, as the case may be, in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses (as set forth in certificates of officers of the Company upon which such counsel is relying without independent investigation) requires such qualification and have all corporate, partnership or limited liability company, as the case may be, power and authority necessary to own or hold their respective properties and conduct the businesses in which they are engaged as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the shares of Stock being delivered on such Delivery Date) have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus; and all of the shares of Common Stock (other than the Stock to be offered and sold by the Company to the Underwriters hereunder) that are outstanding were offered and sold in transactions registered pursuant to or exempt from the registration requirements of the Securities Act and in compliance with all applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware Corporation Law") and all of the issued shares of capital stock, partnership interests or limited liability company membership interests, as the case may be, of each subsidiary of the Company (other than Leperq Atlanta Renaissance Partners, L.P. (the "Atlanta Partnership")) have been duly and validly authorized and issued and (except for partnership interests of general partners and except to the extent the limited liability company agreements governing the respective limited liability companies provide otherwise) are fully paid, non-assessable and are owned directly or indirectly by the Company, to such counsel's knowledge free and clear of all liens, encumbrances, or claims except for liens in favor of Bankers Trust Company and/or any of its affiliates to secure indebtedness; with respect to the general and limited partnership interests of the Atlanta Partnership held by the Company, such interests are owned directly or indirectly by the Company, to such counsel's knowledge free and clear of all liens, encumbrances, or claims except for liens in favor of Lehman Brothers Holdings, Inc. and/or any of its affiliates to secure indebtedness; 20 (iii) Except as set forth in the Prospectus, there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any unissued shares of the Stock to be issued and sold by the Company to the Underwriters hereunder pursuant to the Company's charter or by-laws or any agreement or other instrument known to such counsel; (iv) Except as set forth in the Prospectus, there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the partnership interests in the Operating Partnership pursuant to the Operating Partnership's Agreement of Limited Partnership, as amended, or, to such counsel's knowledge, any agreement or other instrument to which the Company is a party; (v) To the best of such counsel's knowledge, based solely on a review of such counsel's internal litigation docket, and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which could be expected to have a Material Adverse Effect; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vi) The Registration Statement was declared effective under the Securities Act as of the date and time specified in such opinion, the Prospectus was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the Rules and Regulations specified in such opinion on the date specified therein and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose is pending or threatened by the Commission; (vii) The Registration Statement and the Prospectus and any further amendments or supplements thereto made by the Company prior to such Delivery Date (other than the financial statements and related schedules and statistical data therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations; 21 (viii) To the best of such counsel's knowledge, there are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described or filed as exhibits to the Registration Statement; (ix) This Agreement has been duly authorized, executed and delivered by the Company; (x) The amended and restated Agreement of Limited Partnership of the Operating Partnership has been duly authorized, executed and delivered by the Company and CapStar Sub and constitutes the valid and binding agreement of each such party, enforceable against each such party in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or transfer, reorganization, liquidation, moratorium or other similar laws affecting the rights and remedies of creditors generally and except as may be subject to general principles of equity (regardless of whether such agreement is considered in a proceeding in equity or at law), and except as rights to indemnity and contribution thereunder may be limited by applicable law and public policy; [(xi) The Registration Rights Agreements have been duly authorized, executed and delivered by the Company and constitute the valid and binding agreement of the Company, enforceable against the Company in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or transfer, reorganization, liquidation, moratorium or other similar laws affecting the rights and remedies of creditors generally and except as may be subject to general principles of equity (regardless of whether such agreement is considered in a proceeding in equity or at law), and except as rights to indemnity and contribution thereunder may be limited by applicable law and public policy, and except that no opinion is expressed as to the enforceability of the choice of law provisions thereof;] (xii) The issue and sale of the shares of Stock being delivered on such Delivery Date by the Company and the compliance by the Company and the Operating Partnership with all of the provisions of this Agreement and the 22 consummation of the transactions contemplated hereby will not conflict with or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject which breach is reasonably likely to have a Material Adverse Effect, nor will such actions result in any violation of the provisions of the charter, by-laws, limited partnership agreement or operating agreement of the Company or any of its subsidiaries or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body of the United States, the State of New York or established pursuant to the Delaware Corporation Law having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets; except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby; (xiii) Except as set forth in the Prospectus, to the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; (xiv) Neither the Company nor any of its subsidiaries is an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; 23 (xv) The Operating Partnership will be treated as a partnership, and not as an "association" or "publicly traded partnership" taxable as a corporation, for federal income tax purposes; and (xvi) The statements under the captions "Certain Relationships and Related Transactions" and "Description of Capital Stock" in the Prospectus, insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein are correct in all material respects. In rendering such opinion, such counsel may (i) state that their opinion is limited to matters governed by the Federal laws of the United States of America, the laws of the State of New York and the Delaware Corporation Law and that such counsel is not admitted in the State of Delaware; and (ii) in giving the opinions referred to in Section 7(d)(i) (solely with regard to organization and qualification of the Company's subsidiaries), Section 7(d)(ii) (solely with regard to capital stock, partnership interests or limited liability company membership interests, as the case may be, of subsidiaries of the Company being duly and validly authorized and issued and fully paid and non-assessable), state that they are relying on an opinion or opinions of other counsel as to such matters, provided that the Underwriters shall have received such opinion or opinions, in form and substance satisfactory to Underwriter's counsel, of other counsel reasonably acceptable to Underwriters' counsel. Such counsel shall also have furnished to the Representatives a written statement, addressed to the Underwriters and dated such Delivery Date, in form and substance satisfactory to the Representatives, to the effect that (x) in connection with the preparation of the Registration Statement and the Prospectus, such counsel have participated in conferences with certain officers and other representatives of the Company, at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and (y) based on such participation, no facts have come to the attention of such counsel which lead them to believe that the Registration Statement (except for financial statements and schedules and other statistical data included therein or omitted therefrom, as to which such counsel need make no statement), as of the Effective Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not 24 misleading, or that the Prospectus (except for financial statements and schedules and other statistical data included therein or omitted therefrom, as to which such counsel need make no statement) contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The foregoing statement may be qualified by a statement to the effect that such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus except for the statements made in the Prospectus under the caption "Description of Capital Stock," insofar as such statements relate to the Stock and concern legal matters. (e) The Representatives shall have received from Hogan & Hartson L.L.P., counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (f) At the time of execution of this Agreement, the Representatives shall have received from KPMG Peat Marwick a letter, in form and substance satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (g) With respect to the letter of KPMG Peat Marwick referred to in clause (f) hereof and delivered to the Representatives concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the 25 Representatives a letter (the "bring-down letter") of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (h) The Company shall have furnished to the Representatives a certificate, dated such Delivery Date, of its Chairman of the Board, its President or a Vice President and its chief financial officer stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Delivery Date; the Company has complied with all its agreements contained herein; and the conditions set forth in Sections 7(a) and 7(i) have been fulfilled; and (ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion (A) as of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus. (i) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus or (ii) since such date there shall not have been any change in the capital stock or 26 long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (j) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (k) There shall be issued and outstanding with respect to each of the Owned Hotels (as defined in the Prospectus) an ALTA form of owner's title insurance policy (or local equivalent with respect to those Owned Hotels located in jurisdictions where an ALTA form of owner's title insurance is not available) insuring the fee simple estate of the applicable subsidiary of the Company in the Owned Hotel owned by such subsidiary in an amount at least equal to the acquisition price of such Owned Hotel and each 27 such title insurance policy will continue to be in full force and effect immediately following the consummation of the Offering. (l) The New York Stock Exchange, Inc. shall have approved the Stock for listing, subject only to official notice of issuance and evidence of satisfactory distribution. [(m) The Representatives shall have received the written opinion or opinions or other certification in form and substance acceptable to Underwriter's counsel, of other counsel reasonably acceptable to Underwriter's counsel to the effect that the Company, its subsidiaries and the Predecessor Entities hold and after consummation of the Highgate Acquisition (as defined in the Prospectus) will continue to hold all state food, beverage and liquor licenses necessary or required for such corporations, partnerships and limited liability companies to conduct their business as currently conducted in each state.] All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company and the Operating Partnership, jointly and severally, shall indemnify and hold harmless each Underwriter, its officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (B) in any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) specifically for the purpose of qualifying any or all of the Stock under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a "Blue Sky 28 Application"), (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company and the Operating Partnership shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct), and shall reimburse each Underwriter and each such officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company and the Operating Partnership shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, or in any Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. The foregoing indemnity agreement is in addition to any liability which the Company or the Operating Partnership may otherwise have to any Underwriter or to any officer, employee or controlling person of that Underwriter. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers and employees, each of its directors (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company), and each person, if any, who controls the Company within the meaning of the Securities Act, 29 from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, and shall reimburse the Company and any such director, officer or controlling person for any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, employee or controlling person. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate 30 therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representatives shall have the right to employ counsel to represent jointly the Representatives and those other Underwriters and their respective officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company, the Operating Partnership under this Section 8 if, in the reasonable judgment of the Representatives, it is advisable for the Representatives and those Underwriters, officers, employees and controlling persons to be jointly represented by separate counsel, and in that event the fees and expenses of one such separate counsel shall be paid by the Company, the Operating Partnership. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a), 8(b) or 8(c) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, 31 in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Operating Partnership on the one hand and the Underwriters on the other from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Operating Partnership on the one hand and the Underwriters on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Operating Partnership on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company and the Operating Partnership on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, on the other hand, bear to the total gross proceeds from the offering of the shares of the Stock under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company and the Operating Partnership or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. For purposes of the preceding two sentences, the net proceeds deemed to be received by the Company shall be deemed to be also for the benefit of the Operating Partnership and information supplied by the Company shall also be deemed to have been supplied by the Operating Partnership. The Company, the Operating Partnership and the Underwriters further agree that it would not be just and equitable if contributions pursuant to this Section were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount 32 paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section shall be deemed to include, for purposes of this Section 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Stock underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. (e) The Underwriters severally confirm and the Company acknowledges that the statements with respect to the public offering of the Stock by the Underwriters set forth on the cover page of, the legend concerning over-allotments on the inside front cover page of and the concession and reallowance figures appearing under the caption "Underwriting" in, the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. 8. DEFAULTING UNDERWRITERS. If, on either Delivery Date, any Underwriter defaults in the performance of its obligations under this Agreement, the remaining non-defaulting Underwriters shall be obligated to purchase the Stock which the defaulting Underwriter agreed but failed to purchase on such Delivery Date in the respective proportions which the number of shares of the Firm Stock set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm Stock set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto; provided, however, that the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Stock on such Delivery Date if the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed but failed to purchase on such date exceeds 9.09% of the total number of shares of the Stock to be purchased on such Delivery Date, and any remaining non-defaulting 33 Underwriter shall not be obligated to purchase more than 110% of the number of shares of the Stock which it agreed to purchase on such Delivery Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or those other underwriters satisfactory to the Representatives who so agree, shall have the right, but shall not be obligated, to purchase, in such proportion as may be agreed upon among them, all the Stock to be purchased on such Delivery Date. If the remaining Underwriters or other underwriters satisfactory to the Representatives do not elect to purchase the shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the obligation of the Underwriters to purchase, and of the Company to sell, the Option Stock) shall terminate without liability on the part of any non-defaulting Underwriter or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 6 and 11. As used in this Agreement, the term "Underwriter" includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Stock which a defaulting Underwriter agreed but failed to purchase. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other underwriters are obligated or agree to purchase the Stock of a defaulting or withdrawing Underwriter, either the Representatives or the Company may postpone the Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. 10. TERMINATION. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 7(i) or 7(j), shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement. 11. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) the Company shall fail to tender the Stock for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, the Company will reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company shall pay the full amount thereof to the Representatives. If 34 this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 12. NOTICES, ETC. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588), with a copy, in the case of any notice pursuant to Section 11(d), to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285; (b) if to the Company or to the Operating Partnership, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Paul W. Whetsell (Fax: 202-965-4445); provided, however, that any notice to an Underwriter pursuant to Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representatives, which address will be supplied to any other party hereto by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the Representatives. 13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the indemnity agreement of the Underwriters contained in Section 8(b) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 35 14. SURVIVAL. The respective indemnities, representations, warranties and agreements of the Company, the Operating Partnership and the Underwriters contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 15. DEFINITION OF THE TERMS "BUSINESS DAY" AND "SUBSIDIARY." For purposes of this Agreement, (a) "business day" means any day on which York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of New York without regard to the principles of conflicts of laws thereof. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 18. HEADINGS. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 36 If the foregoing correctly sets forth the agreement Operating Partnership among the Company, the Operating Partnership and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, CapStar Hotel Company By: ----------------------------------- Paul W. Whetsell, President and Chief Executive Officer CapStar Management Company, L.P. By: ----------------------------------- CapStar GP Corp., its general partner By: ----------------------------------- Paul W. Whetsell, President Accepted: LEHMAN BROTHERS INC. BT SECURITIES CORPORATION GOLDMAN, SACHS & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED MONTGOMERY SECURITIES SMITH BARNEY INC. For themselves and as Representatives of the several Underwriters named in Schedule 1 hereto By Lehman Brothers Inc. By: ------------------------------ Authorized Representative 37 SCHEDULE 1 Number of Underwriters Shares - ------------- ---------- Lehman Brothers Inc. . . . . . . . . ________ BT Securities Corporation . . . . . ________ Goldman, Sachs & Co. . . . . . . . . ________ Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . ________ Montgomery Securities . . . . . . . ________ Smith Barney Inc. . . . . . . . . . ________ Total ======== 38 EX-4.2(2) 3 EX-4.2.2 AMEND TO SR. SECURED REVOLVING CRDT. AGR. Exhibit 4.2.2 CAPSTAR MANAGEMENT COMPANY, L.P. CAPSTAR HOTEL COMPANY FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as of December 13, 1996 and entered into by and among CapStar Management Company, L.P., a Delaware limited partnership (the "BORROWER"), CapStar Hotel Company, a Delaware corporation ("CAPSTAR"), and Bankers Trust Company, as agent (the "AGENT"), and, for purposes of Section 4 hereof, the Credit Support Parties (as defined in Section 4 hereof) listed on the signature pages hereof, and is made with reference to that certain Senior Secured Revolving Credit Agreement dated as of September 24, 1996 (as amended, restated, supplemented or otherwise modified to the date hereof, the "CREDIT AGREEMENT"), by and among the Borrower, CapStar, the financial institutions party thereto (the "LENDERS") and Agent. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, the Borrower, CapStar and Agent desire to amend the Credit Agreement to, among other things, (i) increase the maximum permitted amount of Pool B Indebtedness, (ii) increase the maximum permitted amount of Subordinated Indebtedness, (iii) modify certain financial covenants as provided herein, (iv) modify certain definitions as provided herein, (v) permit Borrower to guaranty certain lease obligations as provided herein and (vi) make certain other amendments as set forth below: NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 AMENDMENTS TO SECTION 1: PROVISIONS RELATING TO DEFINED TERMS A. The definition of "BORROWING BASE" contained in subsection 1.1 of the Credit Agreement is hereby amended by deleting clause (ii) therefrom in its entirety and substituting the following therefor: "(ii) the amount, if any, by which the sum of the Property Amounts in respect of Designated Pool A Properties referred to in clause (ii) of the 1 definition of Property Amount as of such date of determination otherwise exceeds (a) with respect to the period from the First Amendment Effective Date to and including June 30, 1997, 20%, (b) with respect to the period from July 1, 1997 to and including December 31, 1997, 15% and (c) with respect to the period from January 1, 1998 to and including Maturity Date, 10% of the amount determined pursuant to this definition for such period." B. The definition of "NET INCOME" contained in subsection 1.1 of the Credit Agreement is hereby amended by deleting the phrase "any Asset Sale" therefrom and substituting therefor the phrase "the sale or other disposition of any asset (including the disposition of a Property pursuant to subsection 7.11 but excluding any gain from the sale of inventory in the ordinary course of business)." C. The definition of "NOTES" contained in subsection 1.1 of the Credit Agreement is hereby amended by (i) deleting the reference to "subsection 2.10 (i)" contained therein and substituting "subsection 2.1E(iv)" therefor and (ii) deleting the phrase "the last sentence of subsection 10.1B(i)" therefrom and substituting the phrase "subsection 9.1A" therefor. D. The definition of "NOTICE OF RENOVATION/RESTORATION" contained in subsection 1.1 of the Credit Agreement is hereby amended by deleting the reference to "7.12A" contained therein and substituting "6.12A" therefor. E. The definition of "PROPERTY AMOUNT" contained in subsection 1.1 of the Credit Agreement is hereby amended by deleting the phrase "two Designated Pool A Properties" from clause (ii) of such definition and substituting the phrase "three Designated Pool A Properties (other than the Atlanta Airport Property)" therefor. F. The definition of "PROPERTY EBITDA" contained in subsection 1.1 of the Credit Agreement is hereby amended to add the phrase "or 2.9B, as the case may be," after the phrase "required by subsection 2.9A in clause (w) of the proviso thereto. G. The definition of "TOTAL UTILIZATION" contained in subsection 1.1 of the Credit Agreement is hereby amended by (i) deleting the punctuation "." from the end of clause (vi) of such definition and substituting "; plus" therefor and (ii) adding the following at the end of such definition: "(vi) the aggregate maximum potential liability of the Borrower pursuant to guaranties of lease obligations permitted by subsection 7.4(viii)." H. Subsection 1.1 of the Credit Agreement is hereby amended by inserting the following definitions in such subsection in proper alphabetical order: 2 "'FIRST AMENDMENT' means that certain First Amendment to Credit Agreement dated as of December 13, 1996 by and among Borrower, CapStar, Agent and, for purposes of Section 4 thereof, the Loan Parties named on the signature pages thereof." "'FIRST AMENDMENT EFFECTIVE DATE' means the effective date of Section 1 of the First Amendment as provided in Section 2 of the First Amendment." "'SUBORDINATED CREDIT AGREEMENT' means that certain Senior Subordinated Credit Agreement dated as of December 13, 1996 by and among the Borrower, CapStar, the lenders party thereto and Bankers, as arranger and agent, as such agreement may be amended, restated supplemented or otherwise modified in accordance with the terms thereof and hereof." "'SUBORDINATED GUARANTIES' means, collectively (i) that certain Senior Subordinated CapStar Guaranty dated as of December 13, 1996 executed by CapStar and (ii) that certain Senior Subordinated Affiliated Guaranty dated as of December 13, 1996 executed by the Loan Parties party thereto from time to time, as each guaranty may be amended, restated, supplemented or otherwise modified in accordance with the terms thereof and hereof." "'SUBORDINATED INDEBTEDNESS DOCUMENTS' means, collectively the Subordinated Credit Agreement, the Subordinated Guaranties and each other indenture, agreement, instrument or other document pursuant to which any Subordinated Indebtedness is issued or that is executed in connection with any Subordinated Indebtedness, as each such indenture, agreement, instrument or document may be amended, restated, supplemented or otherwise modified in accordance with the terms thereof and hereof." 1.2 AMENDMENTS TO SECTION 6: AFFIRMATIVE COVENANTS A. Subsection 6.1 of the Credit Agreement is hereby amended by (i) inserting the phrase "of any Event of Default or Potential Event of Default" immediately after the word "existence" in clause (2) of subsection 6.1(v) and (ii) inserting the word "constitute" immediately before the phrase "a default" in clause (c) of subsection 6.1(xi). B. Subsection 6.15D of the Credit Agreement is hereby amended by deleting the date "December 31, 1996" therefrom and substituting "January 31, 1997" therefor. 3 1.3 AMENDMENTS TO SECTION 7: NEGATIVE COVENANTS A. Subsection 7.1 of the Credit Agreement is hereby amended by (i) deleting the number "$25,000,000" from clause (v) thereof and substituting "$50,000,000" therefor and (ii) deleting the number $25,000,000" from clause (vi) thereof and substituting $100,000,000" therefor. The Indebtedness incurred pursuant to the Subordinated Indebtedness Documents is Indebtedness incurred pursuant to subsection 7.1(vi) of the Credit Agreement. B. Subsection 7.2 of the Credit Agreement is hereby amended by (i) deleting the word "and" from the end of clause (iii) of subsection 7.2C and substituting the punctuation "," therefor; (ii) deleting the punctuation "." from the end of clause (iv) of subsection 7.2C and adding "and (v) the Subordinated Credit Agreement" immediately after the phrase "or otherwise" in such subsection and (iii) adding the phrase ", the Subordinated Credit Agreement" immediately after the phrase "this Agreement" in subsection 7.2D. C. Subsection 7.4 of the Credit Agreement is hereby amended by (i) deleting the word "and" from the end of clause (v) thereof, (ii) deleting the punctuation "." from the end of clause (vi) thereof and substituting "," therefor and (iii) adding the following at the end thereof: "(vii) CapStar and each Loan Party party to the Affiliate Guaranty may guaranty the obligations of the Borrower under the Subordinated Credit Agreement pursuant to the Subordinated Guaranties; and (viii) the Borrower may guaranty obligations of Pool B Subsidiaries under leases related to sale and lease-back transactions permitted pursuant to subsection 7.11; provided that the maximum aggregate potential liability of the Borrower pursuant to such guaranties (whether for regularly scheduled lease payments, any amount due in connection with the termination or expiration of any lease or any other amount payable in connection with such leases) shall not exceed $5,000,000 at any time; and provided further, that the Borrower shall have obtained the Agent's prior written approval of (x) the terms of the applicable lease (and each supplement thereto and amendment or modification thereof), (y) the identity of the lessor and (z) the property subject to such sale and lease-back transaction." D. Subsection 7.5 of the Credit Agreement is hereby amended by (i) deleting the word "and" from the end of clause (ii) thereof, (ii) deleting the punctuation "." from the end of the clause (iii) thereof and substituting "; and" therefor and (iii) adding the following at the end of such subsection: 4 "(iv) as long as no Event of Default has occurred and is continuing or would result therefrom (and without regard to the occurrence or continuation of a Potential Event of Default), the Borrower and the other Loan Parties may make scheduled payments of interest on account of the Subordinated Indebtedness and Pool B Indebtedness; provided that, notwithstanding the foregoing, the Borrower and the other Loan Parties may make scheduled payments of interest on the Indebtedness incurred pursuant to the Subordinated Credit Agreement if but only if (a) no default in the payment of any principal, amounts drawn under letters of credit, interest or regularly accruing fees on any Obligations has occurred and is continuing and (b) such payment is not otherwise restricted pursuant to the subordination provisions contained in Section 8 of the Subordinated Credit Agreement, as in effect on the date hereof or as modified in accordance with the terms hereof." E. Subsection 7.6B of the Credit Agreement is hereby amended by (i) deleting the percentage "55%" from clause (i) thereof and substituting the phrase "60% (provided that, if CapStar has an offering of its equity Securities after the Closing Date, such percentage shall thereafter be 55%)" therefor and (ii) deleting the percentage "60%" from clause (ii) thereof and substituting the phrase "65% (provided that, if CapStar has an offering of its equity Securities after the Closing Date, such percentage shall thereafter be 60%)" therefor. F. Subsection 7.6E of the Credit Agreement is hereby amended by deleting the matrix setting forth the maximum ratios of Consolidated Total Indebtedness to Consolidated EBITDA therefrom and substituting the following therefor: 5 ========================================= ====================== "PERIOD MAXIMUM LEVERAGE RATIO - ----------------------------------------- ---------------------- September 30, 1996 to and including the 4.75 to 1.00 First Amendment Effective Date - ----------------------------------------- ---------------------- the First Amendment Effective Date to 5.50 to 1.00 and including March 31, 1997 - ----------------------------------------- ---------------------- April 1, 1997 to and including June 30, 5.50 to 1.00 1997 - ----------------------------------------- ---------------------- July 1, 1997 to and including 5.25 to 1.00 September 29, 1997 - ----------------------------------------- ---------------------- September 30, 1997 to and including 5.00 to 1.00 December 31, 1997 - ----------------------------------------- ---------------------- January 1, 1998 to and including 5.00 to 1.00 March 31, 1998 - ----------------------------------------- ---------------------- April 1, 1998 to and including June 30, 4.75 to 1.00 1998 - ----------------------------------------- ---------------------- July 1, 1998 to and including 4.50 to 1.00 September 29, 1998 - ----------------------------------------- ---------------------- September 30, 1998 to and including 4.25 to 1.00 September 29, 1999 - ----------------------------------------- ---------------------- if applicable, September 30, 1999 to and 4.00 to 1.00 including September 29, 2000 - ----------------------------------------- ---------------------- if applicable, September 30, 2000 to and 3.75 to 1.00" including Maturity Date ========================================= ====================== G. Subsection 7.6F of the Credit Agreement is hereby amended by deleting the matrix setting forth the maximum ratios of Consolidated Total Indebtedness to Consolidated EBITDA-Cap Ex therefrom and substituting the following therefor: 6 ========================================= ====================== "PERIOD MAXIMUM LEVERAGE RATIO - ----------------------------------------- ---------------------- September 30, 1996 to and including the 5.25 to 1.00 First Amendment Effective Date - ----------------------------------------- ---------------------- the First Amendment Effective Date to 6.00 to 1.00 and including March 31, 1997 - ----------------------------------------- ---------------------- April 1, 1997 to and including June 30, 6.00 to 1.00 1997 - ----------------------------------------- ---------------------- July 1, 1997 to and including 5.75 to 1.00 September 29, 1997 - ----------------------------------------- ---------------------- September 30, 1997 to and including 5.25 to 1.00 December 31, 1997 - ----------------------------------------- ---------------------- January 1, 1998 to and including 5.25 to 1.00 March 31, 1998 - ----------------------------------------- ---------------------- April 1, 1998 to and including June 30, 5.00 to 1.00 1998 - ----------------------------------------- ---------------------- July 1, 1998 to and including 4.75 to 1.00 September 29, 1998 - ----------------------------------------- ---------------------- September 30, 1998 to and including 4.50 to 1.00 September 29, 1999 - ----------------------------------------- ---------------------- if applicable, September 30, 1999 to and 4.25 to 1.00 including September 29, 2000 - ----------------------------------------- ---------------------- if applicable, September 30, 2000 to and 4.00 to 1.00" including Maturity Date ========================================= ====================== H. Subsection 7.11 of the Credit Agreement is hereby amended by (i) deleting the phrase "subsection 2.9A" from clause (i) thereof and substituting "subsection 2.9B" therefor and (ii) adding the following at the end of clause (iv) thereof: "provided that the Borrower may guaranty such obligations to the extent permitted by subsection 7.4(viii);" I. Subsection 7.20 of the Credit Agreement is hereby amended by adding the following at the end thereof: 7 "I. SUBORDINATED INDEBTEDNESS DOCUMENTS. Without the prior written approval of the Agent, which approval may be granted, withheld, conditioned or delayed in its sole discretion, the Loan Parties shall not, and shall not permit any of their respective Subsidiaries to, amend, restate, supplement or otherwise modify any provision of any Subordinated Indebtedness Document; provided that the Loan Parties may (i) amend or modify the Subordinated Credit Agreement in order to delete any covenant or agreement of any Loan Party or to make any such covenant or agreement less restrictive on the Loan Parties and (ii) waive any default or event or default thereunder; provided further that no such amendment or waiver shall be adverse to the interests or rights of the Agent or any Lender." 1.4 AMENDMENTS TO SECTION 8: EVENTS OF DEFAULT; REMEDIES. Subsection 8.2A of the Credit Agreement is hereby amended by inserting the phrase "and the other Loan Parties" immediately after the phrase "against the Borrower" in the first sentence of such subsection. SECTION 2. CONDITIONS TO EFFECTIVENESS Section 1 of this Amendment shall become effective only upon the satisfaction of all of the following conditions precedent (the date of satisfaction of such conditions being referred to herein as the "FIRST AMENDMENT EFFECTIVE DATE"): A. EXECUTED COUNTERPARTS OF AMENDMENT. The Borrower, CapStar, each other Credit Support Party and the Agent shall have executed counterparts of this Amendment and the Agent shall have received written or telephone notification of such execution and authorization of delivery thereof. B. AMENDMENT FEE. The Agent shall have received for distribution to Lenders an aggregate amendment fee of $225,000. C. SUBORDINATED INDEBTEDNESS. The Borrower shall have issued Subordinated Indebtedness in an aggregate principal amount of $50,000,000 (the "SPECIFIED SUBORDINATED INDEBTEDNESS") and the Borrower shall have delivered to the Agent complete and correct copies of all documents, instruments and other items executed or delivered in connection with the issuance of the Specified Subordinated Indebtedness, all of which shall be satisfactory in form and substance to Agent. The Specified Subordinated Indebtedness shall have been registered as qualified under the applicable federal or state securities laws or shall be exempt therefrom. In addition, all opinions delivered in connection with the Specified Subordinated Indebtedness shall be addressed to Agent and Lenders or accompanied by a written authorization from the 8 Person delivering such opinion stating that Agent and Lenders may rely on such document as though it were addressed to them. D. LEGAL OPINION. Agent and Lenders and their respective counsel shall have received originally executed copies of one or more favorable written opinions of counsel for the Borrower and CapStar, in form and substance reasonably satisfactory to Agent, dated as of the First Amendment Effective Date. E. COMPLETION OF PROCEEDINGS. On or before the First Amendment Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by the Agent, acting on behalf of the Lenders, and its counsel shall be satisfactory in form and substance to the Agent and such counsel, and the Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as the Agent may reasonably request. SECTION 3. BORROWER'S AND CAPSTAR'S REPRESENTATIONS AND WARRANTIES In order to induce the Agent to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, each of the Borrower and CapStar represents and warrants to the Agent and each Lender that the following statements are true, correct and complete: A. POWER AND AUTHORITY. Each of the Borrower and CapStar has all requisite power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "AMENDED AGREEMENT"). B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all corporate action on the part of each of the Borrower and CapStar. C. NO CONFLICT. The execution and delivery by each of the Borrower and CapStar of this Amendment and the performance by each of the Borrower and CapStar of the Amended Agreement do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to CapStar or any of its Subsidiaries, the Certificate or Articles of Incorporation, Bylaws or other applicable charter document of CapStar or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on CapStar or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of CapStar or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of CapStar or any of its Subsidiaries (other than Liens created 9 under any of the Loan Documents in favor of Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of CapStar or any of its Subsidiaries. D. GOVERNMENTAL CONSENTS. The execution and delivery by each of the Borrower and CapStar of this Amendment and the performance by each of the Borrower and CapStar of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. E. BINDING OBLIGATION. This Amendment and the Amended Agreement have been duly executed and delivered by each of the Borrower and CapStar and are the legally valid and binding obligations of each of the Borrower and CapStar, enforceable against each of the Borrower and CapStar in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or law) and subject to other qualifications, exceptions and assumptions such as are set forth in the various legal opinions delivered to the Agent in connection with such documents or other documents. F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 5 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the First Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default or a Potential Event of Default. SECTION 4. ACKNOWLEDGMENT AND CONSENT The Borrower is a party to the Security Agreement, Trademark Agreement, Omnibus Management and Liquor License Agreement, the Atlanta Collateral Assignment, the Cash Management Letters and the Mortgages pursuant to which the Borrower has pledged and created Liens on certain Collateral to secure the Obligations. CapStar is a party to the CapStar Guaranty, Security Agreement, the Trademark Agreement and the Omnibus Management and Liquor License Agreement pursuant to which CapStar has guaranteed the Obligations and pledged and created Liens on certain Collateral. The Subsidiaries of CapStar (other than Borrower) listed on the signature pages hereof (the "SUBSIDIARY GUARANTORS") are parties to the Affiliate Guaranty, 10 Security Agreement, the Omnibus Management and Liquor License Agreement and the Atlanta Documents, as applicable, pursuant to which such Subsidiary Guarantors have guaranteed the Obligations and pledged and created Liens on certain collateral to secure the Obligations. CapStar, the Borrower and the Subsidiary Guarantors are collectively referred to herein as the "CREDIT SUPPORT PARTIES" and the CapStar Guaranty, the Affiliate Guaranty and the Security Documents are collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS." Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all Guaranties and Security Documents for the obligations guarantied or secured, "Obligations," "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Obligations," "Guarantied Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of the Borrower now or hereafter existing under or in respect of the Amended Agreement and the Notes defined therein. Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Amended Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the First Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Subsidiary Guarantor acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Subsidiary Guarantor is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Subsidiary Guarantor to any future amendments to the Credit Agreement. 11 SECTION 5. MISCELLANEOUS A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (i) On and after the First Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Amended Agreement. (ii) Except as specifically amended by this Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of Agent or any Lender under, the Credit Agreement or any of the other Loan Documents. B. FEES AND EXPENSES. Each of the Borrower and CapStar acknowledges that all costs, fees and expenses as described in subsection 9.2 of the Credit Agreement incurred by Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrower and CapStar. C. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This 12 Amendment (other than the provisions of Section 1 hereof, the effectiveness of which is governed by Section 2 hereof) shall become effective upon the execution of a counterpart hereof by the Borrower, CapStar, each Subsidiary Guarantor and Agent and receipt by the Agent of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 13 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. CAPSTAR MANAGEMENT COMPANY, L.P. By: CAPSTAR HOTEL COMPANY, its general partner By: /s/ WILLIAM M. KARNES ------------------------------------ Title: ------------------------------ CAPSTAR HOTEL COMPANY By: /s/ WILLIAM M. KARNES ------------------------------------ Title: ------------------------------ CAPSTAR HOTEL COMPANY, in its respective capacities on behalf of the entities listed on Annex A-1 hereto (for purposes of Section 4 only), as a Credit Support Party By: /s/ WILLIAM M. KARNES ------------------------------------ Title: ------------------------------ S-1 EQUISTAR ACQUISITION CORPORATION, on its own behalf and in its respective capacities on behalf of the entities listed on Annex A-2 hereto (for purposes of Section 4 only) as a Credit Support Party By: /s/ WILLIAM M. KARNES ------------------------------------- Title: ------------------------------ EQUISTAR SCHAUMBURG BEVERAGE CORPORATION (for purposes of Section 4 only), as a Credit Support Party By: /s/ WILLIAM M. KARNES ------------------------------------- Title: ------------------------------ EQUISTAR TEXAS BEVERAGE CORPORATION (for purposes of Section 4 only), as a Credit Support Party By: /s/ ROBERT GANSFUSS ------------------------------------- Title: President ------------------------------ CMC AIRPORT, INC. (for purposes of Section 4 only), as a Credit Support Party By: /s/ WILLIAM M. KARNES ------------------------------------- Title: ------------------------------ S-2 BANKERS TRUST COMPANY, as Agent By: /s/ GARRETT W. THELANDER ------------------------------------- Title: Vice President ------------------------------ S-3 EX-5 4 PAUL WEISS OPINION PAUL, WEISS, RIFKIND WHARTON & GARRISON 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6064 February 26, 1997 CapStar Hotel Company 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 CapStar Hotel Company Registration Statement on Form S-1 REGISTRATION NO. 333-22073 Ladies and Gentlemen: In connection with the above-captioned Registration Statement, dated February 20, 1997, as amended (the "Registration Statement"), filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations promulgated thereunder (the "Rules"), we have been requested by CapStar Hotel Company (the "Company"), to furnish our opinion as to the legality of 5,750,000 shares (the "Shares") offered by the Company (including up to 750,000 shares issuable by the Company upon exercise of the Underwriters' over-allotment option) of the Company's Common Stock, par value $.01 per share ("Common Stock"), registered for sale thereunder. In connection with the furnishing of this opinion, we have reviewed the Registration Statement (including all amendments thereto), the form of the Underwriting Agreement included as Exhibit 1 to the Registration Statement (the CapStar Hotel Company 2 "Underwriting Agreement"), originals, or copies certified or otherwise identified to our satisfaction, of the Company's Amended and Restated Certificate of Incorporation and By-laws, each as in effect on the date hereof, and records of certain of the Company's corporate proceedings. We have also examined and relied upon representations as to factual matters contained in certificates of officers of the Company, and have made such other investigations of fact and law and have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such documents, records, certificates or other instruments, and upon such factual information otherwise supplied to us, as in our judgment are necessary or appropriate to render the opinion expressed below. In addition, we have assumed, without independent investigation, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity of original documents to all documents submitted to us as certified, photostatic, reproduced or conformed copies, the authenticity of all such latter documents and the legal capacity of all individuals who have executed any of the documents. Based upon the foregoing, we are of the opinion that the Shares, when issued, delivered and paid for as contemplated in the Registration Statement and the Underwriting Agreement, will be duly authorized, validly issued, fully paid and nonassessable. CapStar Hotel Company 3 Our opinion expressed above is limited to the General Corporation Law of the State of Delaware. Please be advised that no member of this firm is admitted to practice in the State of Delaware. Our opinion is rendered only with respect to the laws, and the rules, regulations and orders thereunder, which are currently in effect. We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" contained in the Prospectus included in the Registration Statement. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required by the Act or the Rules. Very truly yours, /s/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON PAUL, WEISS, RIFKIND, WHARTON & GARRISON EX-10.2 5 EX-10.2 ACQUISITION AGREE. DATED 2/13/97 Exhibit 10.2 ACQUISITION AGREEMENT This Acquisition Agreement (the "Agreement") dated as of February 13, 1997, is made by and among Brookriver Hotel Partnership, L.P., a Texas limited partnership ("BROOKRIVER"), Mockingbird Hotel Properties Joint Venture, a Texas general partnership ("MOCKINGBIRD"), GQ Indianapolis Hospitality, Ltd., a Texas limited partnership ("GQ"), 361719 Alberta Limited, an Alberta corporation ("CALGARY"), Centennial Hotel Ltd., a British Columbia corporation ("SURREY") (each of the foregoing parties, a "TRANSFEROR", and collectively, the "TRANSFERORS"), Highgate Hotels, Inc., a Texas corporation ("HIGHGATE"), KFP Dunwoody, Inc., a Texas corporation ("DUNWOODY"), Pontch Limited Partnership, a Delaware limited partnership ("PONTCH"), CapStar Management Company, L.P., a Delaware limited partnership ("CAPSTAR"), and CapStar Hotel Company, a Delaware corporation ("CAPSTAR CORP."). ARTICLE I DEFINITIONS 1.1 DEFINITIONS. For the purposes of this Agreement, the following terms shall have the meanings indicated: (a) "BROOKRIVER" shall mean Brookriver Hotel Partnership, L.P., a Texas limited partnership. (b) "BROOKRIVER CONTRIBUTION AGREEMENT" shall mean that certain Contribution Agreement dated of even date herewith pursuant to which Brookriver agrees to contribute in part, and to sell in part, the Holiday Select to CapStar, and CapStar agrees to acquire the Holiday Select on the terms and subject to the conditions set forth in such contribution agreement. (c) "CALGARY" shall mean 361719 Alberta Limited, an Alberta corporation. (d) "CALGARY CONTRIBUTION AGREEMENT" shall mean that certain Contribution Agreement dated of even date herewith pursuant to which Calgary agrees to contribute in part, and to sell in part, the Holiday Airport to CapStar, and CapStar agrees to acquire the Holiday Airport on the terms and subject to the conditions set forth in such contribution agreement. (e) "CAPSTAR" shall mean CapStar Management Company, L.P., a Delaware limited partnership. 2 (f) "CAPSTAR CORP." shall mean CapStar Hotel Company, a Delaware corporation. (g) "CLOSING" shall mean a meeting at which the actions shall take place and the executed agreements, documents and instruments shall be exchanged as necessary to consummate the transaction contemplated by this Agreement and the Contribution Agreements. (h) "COMMON STOCK" shall mean the common stock, $0.01 par value, of CapStar Corp. (i) "CONTRIBUTION AGREEMENTS" shall mean the Brookriver Contribution Agreement, the Calgary Contribution Agreement, the GQ Contribution Agreement, the Mockingbird Contribution Agreement, the Surrey Contribution Agreement, and the Vancouver Contribution Agreement. (j) "DOUBLETREE" shall mean the 137 room hotel owned by GQ located in Indianapolis, Indiana. (k) "DUNWOODY" shall mean KFP Dunwoody, Inc., a Texas corporation. (l) "FIRST AMENDMENT" shall mean the First Amendment to Amended and Restated Agreement of Limited Partnership of CapStar Management Company, L.P., which amendment shall be in the form of Exhibit "A". (m) "FOUR POINTS" shall mean the 400 room hotel owned by KFP Dunwoody, Inc. located in Dunwoody, Georgia. (n) "FOUR POINTS MANAGEMENT AGREEMENT" shall mean the agreement pursuant to which CapStar will manage the operations of Four Points, which agreement shall be in the form of Exhibit "B". (o) "GQ" shall mean GQ Indianapolis Hospitality, Ltd., a Texas limited partnership. (p) "GQ CONTRIBUTION AGREEMENT" shall mean that certain Contribution Agreement dated of even date herewith pursuant to which GQ agrees to contribute in part, and to sell in part, the Doubletree to CapStar, and CapStar agrees to acquire the Doubletree on the terms and subject to the conditions set forth in such contribution agreement. (q) "HIGHGATE" shall mean Highgate Hotels Inc., a Delaware corporation, and its successors. 3 (r) "HOLIDAY SELECT" shall mean the 348 room hotel owned by Brookriver located in Dallas, Texas. (s) "HOLIDAY AIRPORT" shall mean the 170 room hotel owned by Calgary located in Calgary, Alberta. (t) "MOCKINGBIRD" shall mean Mockingbird Hotel Properties Joint Venture, a Texas general partnership. (u) "MOCKINGBIRD CONTRIBUTION AGREEMENT" shall mean that certain Contribution Agreement dated of even date herewith pursuant to which Mockingbird agrees to contribute in part, and to sell in part, the Radisson to CapStar, and CapStar agrees to acquire the Radisson on the terms and subject to the conditions set forth in such contribution agreement. (v) "PARTNERSHIP AGREEMENT" shall mean the Amended and Restated Partnership Agreement of CapStar Management Company, L.P., dated as of August 23, 1996. (w) "PARTNERSHIP UNIT" shall mean a Partnership Unit, as that term will be defined in the Partnership Agreement as it is to be amended by the First Amendment (other than a Preferred Unit). (x) "PONTCH" shall mean Pontch Limited Partnership, a Delaware limited partnership. (y) "PONTCHARTRAIN" shall mean the 400 room hotel owned by Pontch located in Detroit, Michigan. (z) "PONTCHARTRAIN MANAGEMENT AGREEMENT" shall mean the agreement pursuant to which CapStar shall manage the operations of Pontchartrain, which agreement shall be in the form of Exhibit "C". (aa) "PREFERRED UNIT" shall mean a Preferred Unit, as that term will be defined in the Partnership Agreement as it is to be amended by the First Amendment. (bb) "PROPERTIES" shall mean the Doubletree, Holiday Select, Holiday Airport, Radisson, Ramada, and Sheraton. (cc) "RADISSON" shall mean the 305 room hotel owned by Mockingbird located in Dallas, Texas. 4 (dd) "RAMADA" shall mean the 118 room hotel owned by Surrey located in Surrey, British Columbia. (ee) "SHERATON" shall mean Continental Pacific Interfund, Ltd., a British Columbia corporation. (ff) "SURREY" shall mean Continental Pacific Interfund, Ltd., a British Columbia corporation. (gg) "SURREY CONTRIBUTION AGREEMENT" shall mean that certain Contribution Agreement dated of even date herewith pursuant to which Surrey agrees to contributed in part, and to sell in part, the Sheraton to CapStar, and CapStar agrees to acquire the Sheraton o the terms and subject to the conditions set forth in such contribution agreement. (hh) VANCOUVER shall mean Centennial Hotel Ltd., a British Columbia corporation. (ii) VANCOUVER CONTRIBUTION AGREEMENT shall mean that certain Contribution Agreement dated of even date herewith pursuant to which Vancouver agrees to contribute in part, and to sell in part, the Ramada to CapStar, and CapStar agrees to acquire the Ramada on the terms and subject to the conditions set forth in such contribution agreement. ARTICLE II AGREEMENTS 2.1 TRANSFER OF THE PROPERTIES. At the Closing: (a) each Transferor will convey to CapStar or its designee, on the terms and subject to the conditions contained in the Contribution Agreement to which such Transferor is a party, the Property which is the subject of such Contribution Agreement; (b) Dunwoody will execute and deliver to CapStar the Four Points management Agreement; and (c) Pontch will execute and delivery to CapStar the Pontch Management Agreement. It is understood and agreed by Dunwoody and CapStar that at or prior to the Closing, Dunwoody will cause the existing management agreement relating to the management of the Four Points to be terminated. It is understood and agreed by Pontch and 5 CapStar that at or prior to the Closing, Pontch will cause the existing management agreement relating to the management of the Pontchartrain to be terminated. Notwithstanding the provisions of clause (a) of this Section 2.1, if one or more of Calgary, Surrey, and Vancouver (collectively, the "Canadian Companies") determines that the prospective economic return of the parties would be enhanced if CapStar were to acquire all of the outstanding shares of the capital stock of Calgary, Surrey and/or Vancouver rather than acquiring the Properties owned by such Transferors directly, CapStar and each of the Canadian Companies seeking to restructure this Agreement (the "Subject Company") will negotiate in good faith to modify this Agreement as to such Subject Company to provide that as a part of CapStar's acquisition of the Property owned by such Subject Company, CapStar will acquire from the stockholders of such Company all of the outstanding capital stock of such Subject Company, free and clear of all liens, claims and encumbrances, on the basis of the following principles: (i) Neither (a) the consideration to be received by the Transferors pursuant to Section 2.2 nor (b) CapStar's Canadian tax position shall be affected by the restructuring of any transaction as to any Subject Company; (ii) The Subject Company will have no liabilities or obligations outstanding as of the Closing Date, other than liabilities and obligations that would be Permitted Encumbrances (as defined in the Contribution Agreement to which the Subject Company is a party); (iii) CapStar will be indemnified by parties reasonably acceptable to CapStar for any loss, cost or expense that CapStar incurs in connection with its acquisition and ownership of the capital stock the Subject Company as a result of any condition existing immediately prior to the Closing or any event that has occurred prior to the Closing, other than liabilities and obligations that would be Permitted Encumbrances (as defined in the Contribution Agreement to which the Subject Company is a party); and (iv) The terms and conditions of this Agreement and the Contribution Agreement to which the Subject Company is a party will be modified as necessary to provide for and reflect the restructuring of the transaction as the Subject Company. 2.2 DELIVERY OF CONSIDERATION. In consideration for the transfer of the Properties as described in the Contribution Agreements, the execution and delivery of the Four Points Management Agreement and the Pontch Management Agreement, CapStar agrees: 6 (a) to pay to the Transferors, the existing manager of the Four Points, and the existing manager of the Pontchartrain cash in the aggregate amount of $68,000,000.00; and (b) issue to the Transferors or their respective designees 809,523.81 Partnership Units and 392,156.86 Preferred Units. The cash payable to the Transferors, the existing manager of the Four Points, and the existing manager of the Pontchartrain as set forth in clause (a) of this Section 2.2 be paid in United States dollars in immediately available funds and shall be paid by wire transfer to such accounts as the parties to be paid such cash shall direct CapStar in writing. To the extent that any Property is not transferred to CapStar or its designee in accordance with the Contribution Agreement relating thereto and the remainder of the transactions contemplated hereby and by the remaining Contribution Agreements are consummated, the number of Partnership Units and the Preferred Units and the amount of cash to be issued and paid by CapStar hereunder to the Transferors, the existing manager of the Four Points, and the existing manager of the Pontchartrain shall be reduced by the amounts to be mutually agreed by CapStar and those Transferors who do transfer Properties to CapStar, which amounts shall be negotiated by such parties in good faith. 2.3 ADDITIONAL CONSIDERATION. In connection with the acquisition of the Properties by CapStar and the issuance of the Partnership Units and the Preferred Units to the various Transferors, CapStar and CapStar Corp. also agree as follows: (a) CapStar and CapStar Corp. agree that prior to the Closing, the Partnership Agreement shall be amended, and CapStar Corp. agrees to cause the Partnership Agreement to be amended, by the adoption, execution and delivery by all of the parties in CapStar of the First Amendment. (b) CapStar Corp. agrees to grant to each Transferor receiving Partnership Units and Preferred Units or its designee certain registration rights and enter into a registration rights agreement with each Transferor or its designee setting forth the terms and conditions of such registration rights, which registration rights agreement shall be in the form of Exhibit "D" (the "REGISTRATION RIGHTS AGREEMENT"). (c) CapStar Corp. agrees that in connection with the annual election of directors of CapStar at the annual meeting CapStar Corp. that CapStar Corp. shall: (1) as long as the parties acquiring the Partnership Units and Preferred Units in accordance with this Agreement (the "Holders") continue to hold in the aggregate a number of Partnership Units, Preferred Units and shares of Common Stock equal to at least 50% of 7 the aggregate number of Partnership Units and the Preferred Units issued in accordance with this Agreement, which calculation shall be made as appropriate to take into account any conversions, reclassifications, reorganizations, in-kinds dividends, splits, and reverse splits that may occur with respect to the Partnership Units, Preferred Units and/or shares of Common Stock after the issuance of the Partnership Units and Preferred Units hereunder, CapStar Corp. shall nominate for election as a directors as a part of the management slate, a person designated by Highgate and shall nominate for appointment as an advisory, non-voting director of CapStar Corp. a second person; (2) as long as the Holders to hold in the aggregate a number of Partnership Units, Preferred Units and shares of Common Stock equal to less than 50%, but equal to at least 20% of the aggregate number of Partnership Units and the Preferred Units issued in accordance with this Agreement, which calculation shall be made as appropriate to take into account any conversions, reclassifications, reorganizations, in-kind dividends, splits, and reverse splits that may occur with respect to the Partnership Units, Preferred Units and/or shares of Common Stock after the issuance of the Partnership Units and Preferred Units hereunder, CapStar Corp. shall nominate for election as a director as a part of the management slate, one person designated by Highgate; (3) provide the same type of support for the election of the Highgate designee as a director as CapStar Corp., its affiliates and its management provides to the other persons standing for election as directors of CapStar Corp. as a part of the management slate; and (4) if the Board of Directors of CapStar may, consistent with its certificate of incorporation and its by-laws as in effect on the date of the Closing, applicable law and the terms of CapStar Corp.'s listing agreement with, and the rules for listed companies of, the New York Stock Exchange, elect an additional director of CapStar Corp. by a vote of the existing directors, CapStar Corp. agrees to use its best efforts to cause its existing directors to elect the designee of Highgate as an advisory director of CapStar Corp. promptly after the Closing. If the board of directors of CapStar Corp. cannot elect a director by its vote, a second designee of Highgate will be appointed an advisory director of CapStar Corp. to serve in such position until the next annual meeting of the stockholders of CapStar Corp. Highgate agrees to designate a nominee for election as a director of CapStar Corp. and a person to be appointed as an advisory director for so long as it shall be entitled to have a designee nominated for election pursuant to this Section 2.3. Highgate shall designate its nominees for election as directors and appointment as advisory directors 8 of CapStar Corp. by giving written notice of its designation to the Chief Executive Officer of CapStar Corp. (x) by the Closing Date as to the person to be elected as a director and the person to be appointed as an advisory director by the existing directors of CapStar and (y) by no later than February 15 of each year as to the other elections of directors of CapStar Corp. Such designee shall be one or more of the following persons: Mahmood Khimji, Mehdi Khimji, and any of the persons who are from time to time executive officers of Highgate or any of its affiliates. CapStar Carp. agrees for the benefit of each person who is a designee of Highgate and is elected as a director of CapStar Corp. and each person who is a designee of Highgate and who is appointed as an advisory director of CapStar Corp. to pay each such person the compensation and to provide each such person with all benefits provided to the directors of CapStar Corp. who are not employees of CapStar Corp. or its affiliates. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PARTIES 3.1 REPRESENTATIONS AND WARRANTIES OF CAPSTAR. CapStar represents and warrants to each of the Transferors as follows: (a) CapStar Corp. is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite partnership and other power and authority required to enter into, execute, and deliver this Agreement and each other agreement, instrument and other documents to be entered into, executed and delivered pursuant hereto, and to perform its obligation under this Agreement and under any agreement, instrument and other documentation entered into, executed, and delivered pursuant hereto. (b) The execution and delivery of this Agreement and the other agreements, documents, and other instruments to be executed and delivered by CapStar under this Agreement, and the consummation by CapStar of the transactions contemplated by this Agreement and that will be contemplated by such other agreements, documents, and other instruments, have been duly authorized by all necessary and appropriate partnership and other action of CapStar. (c) No consent, approval, or authorization of, or any filing with, any person, entity, or governmental authority is required to be obtained or made with respect to the execution and delivery by CapStar of this Agreement, the consummation by CapStar of its obligations under this Agreement, or under any other agreement, instrument, or other document entered into, executed, and delivered pursuant hereto except for such consents, approvals, or authorizations, as shall be obtained, or filings which shall have been made, by CapStar prior to Closing. 9 (d) There is no claim, action, litigation, suit, arbitration or other proceeding pending or, to the knowledge of CapStar, threatened against or affecting CapStar, at law or in equity, or before or by any federal, state, municipal or other department, commission, board, bureau, agency or instrumentality that, if determined adversely to CapStar, would have a materially adverse effect on the business, assets, properties, operations or prospects or on the condition, financial or otherwise, of CapStar. (e) The execution and delivery by CapStar of this Agreement and of each agreement, document, and instrument to be executed and delivered by CapStar pursuant to this Agreement, and the consummation of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate the Partnership Agreement as in effect on the date of this Agreement or as the Partnership Agreement will be amended by the First Amendment, (ii) subject to the conflict with or violate any laws, rules, or regulations applicable to CapStar, (iii) subject to the obtaining of the consent, approvals, and authorizations to be obtained as contemplated by clause (c) of this Section 3.1, violate, result in any material breach of, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of CapStar, pursuant to the Partnership Agreement, as in effect on the date of this Agreement or as the Partnership Agreement will be amended by the First Amendment or any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit franchise or other instrument or obligation of CapStar, to which CapStar is a party or by or to which CapStar or its assets are bound or are subject, or (iv) cause CapStar to violate any judgment, order, or decree of any governmental authority by which CapStar or any of its assets is bound. (f) This Agreement and the Contribution Agreements constitute the legal, valid, and binding agreements of CapStar, enforceable against CapStar in accordance with their respective terms. Upon their execution and delivery, all other agreements, documents, and instruments to be executed and delivered by CapStar under this Agreement will constitute the legal, valid and binding agreements of CapStar, enforceable against CapStar in accordance with their respective terms. (g) Except as set forth in CapStar Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed with the Securities and Exchange Commission (the "10-Q"), the information relating to CapStar contained in CapStar Corp.'s Prospectus dated as of August 20, 1996, relating to the offer and sale of 9,250,000 shares of the common stock, $0.01 par value, of CapStar Corp. and each post-effective amendment thereto (the "Prospectus") and the information contained therein based on information relating to CapStar did not contain any misstatement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading as of the date of such prospectus. 10 (h) The information relating to CapStar contained in the 10-Q and the information contained therein based on information relating to CapStar did not contain any misstatement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading as of the date of the 10- Q. (i) Since the date of the 10-Q, there has been no material adverse change in the business, assets, properties, operations or prospects of the condition, financial or otherwise, of CapStar. (j) Upon the issuance of the Partnership Units and the Preferred Units as contemplated by this Agreement and the Contribution Agreements, each of the Transferors will be a limited partner in CapStar, shall have the rights of a limited partner holding the Partnership Units and Preferred Units as set forth in the Partnership Agreement, as it is to be amended by the First Amendment, shall not be subject to any liabilities of CapStar, except to the extent of the capital contributed to CapStar by such Transferor, and shall not have any further obligation to contribute any capital to CapStar, except as may be required by the Delaware Revised Uniform Limited Partnership Act as in effect from time to time. 3.2 REPRESENTATIONS AND WARRANTIES OF CAPSTAR CORP. CapStar Corp. represents and warrants to each of the Transferors as follows: (a) CapStar is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite corporation and other power and authority required to enter into this Agreement and other agreements, documents and instruments it is to enter into, execute and deliver pursuant to this Agreement and to perform its obligation under this Agreement and under any agreement, instrument and other document entered into, executed, and delivered pursuant hereto. (b) The execution and delivery of this Agreement and the other agreements, documents, and other instruments to be executed and delivered by CapStar Corp. under this Agreement, and the consummation by CapStar Corp. of the transactions contemplated by this Agreement and that will be contemplated by such other agreements, documents, and other instruments, have been duly authorized by all necessary and appropriate partnership and other action of CapStar Corp. (c) No consent, approval, or authorization of, or any filing with, any person, entity, or governmental authority is required to be obtained or made with respect to the execution and delivery by CapStar Corp., the consummation by CapStar Corp. of the transactions contemplated thereby, or the performance by CapStar Corp. of its obligations under, this Agreement, or under any other agreement, instrument, or other document entered into, executed, and delivered pursuant hereto except for such 11 consents, approvals, or authorizations, as shall be obtained, or filings which shall have been made, by CapStar Corp. prior to Closing. (d) There is no claim, action, litigation, suit, arbitration or other proceeding pending or, to the knowledge of CapStar Corp., threatened against or affecting CapStar Corp., at law or in equity, or before or by any federal, state, municipal or other department, commission, board, bureau, agency or instrumentality that, if determined adversely to CapStar Corp., would have a materially adverse effect on the business, assets, properties, operations or prospects or on the condition, financial or otherwise, of CapStar Corp. (e) The execution and delivery by CapStar Corp. of this Agreement and of each agreement, documents and instrument to be executed and delivered by CapStar Corp. pursuant to this Agreement, and the consummation of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate the certificate of incorporation or bylaws of CapStar Corp. as in effect on the date of this Agreement, (ii) subject to the conflict with or violate any laws, rules, or regulations applicable to CapStar Corp., (iii) subject to the obtaining of the consent, approvals, and authorizations to be obtained as contemplated by clause (c) of this Section 3.2, violate, result in any material breach of, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of CapStar Corp., pursuant to the certificate of incorporation or bylaws of CapStar Corp., or any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit franchise or other instrument or obligation of CapStar Corp., to which CapStar Corp. is a party or by or to which CapStar Corp. or its assets are bound or are subject, or (iv) cause CapStar Corp. to violate any judgment, order, or decree of any governmental authority by which CapStar Corp. or any of its assets is bound or is subject. (f) This Agreement constitutes the legal, valid, and binding agreements of CapStar Corp., enforceable against CapStar Corp. in accordance with its terms. Upon their execution and delivery, all other agreements, documents, and instruments to be executed and delivered by CapStar Corp. under this Agreement will constitute the legal, valid and binding agreements of CapStar Corp., enforceable against CapStar Corp. in accordance with their respective terms. (g) CapStar Corp. has previously provided the Transferors with a copy of the Prospectus. Except as set forth in the 10-Q, the Prospectus, at the time it became effective, complied in all material respects with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission thereunder as then in effect, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated 12 therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (h) CapStar Corp. has previously provided the Transferors with a copy of the 10-Q. The information contained in the 10-Q did not contain any misstatement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading as of the date of the 10-Q. (i) Since the date of the 10-Q, there has been no material adverse change in the business, assets, properties, operations or prospects of the condition, financial or otherwise, of CapStar Corp. (j) Upon the exchange of the Partnership Units or the Preferred Units for shares of Common Stock upon redemption of the Partnership Units and/or the Preferred Units as contemplated in the Partnership Agreement, as it is to be amended by the First Amendment, (1) each person redeeming Partnership Units and/or Preferred Units will receive good and indefeasible title to that number of shares of Common Stock issuable as provided in the Partnership Agreement, as it is to be amended by the First Amendment and (2) the shares of Common Stock so issued to such person will be validly issued, fully paid, and non-assessable shares of the Common Stock, not issued in violation of any preemptive or other rights of any other stockholder or security holder of CapStar Corp. or any other person, free of any restrictions and encumbrances, except for restrictions on transferability as imposed on such shares of Common Stock by applicable securities laws, and not subject to any agreement or understandings among any persons with respect to the voting or transfer of such shares of Common Stock except as the Transferors may enter into or become parties. (k) CapStar Corp. will reserve and have available authorized, but unissued shares of Common Stock or shares of Common Stock in its treasury as necessary for CapStar to redeem the Partnership Units and the Preferred Units upon the exercise of the rights to exchange the Partnership Units and the Preferred Units for shares of Common Stock in accordance with the terms of the Partnership Agreement as it is to be amended by the First Amendment. 3.3 REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS, DUNWOODY AND PONTCH. Each of the Transferors, Dunwoody, and Pontch, severally, but not jointly, represents and warrants as follows: (a) It is duly organized, validly existing and in good standing and, as applicable, in good standing under the laws of the jurisdiction of domicile, with all requisite corporate partnership power, as the case may be, and other power and authority required to enter into, execute, and deliver this Agreement and each other agreement, instrument and other documents to be entered into, executed, and 13 delivered pursuant hereto, as to perform its obligations under this Agreement and under any agreement, instrument and other document entered into, executed, and delivered pursuant hereto. (b) Its execution and delivery of this Agreement and the other agreements, documents, and other instruments to be executed and delivered by it under this Agreement, and its consummation of the transactions contemplated by this Agreement and that will be contemplated by such other agreements, documents, and other instruments, have been duly authorized by all necessary and appropriate corporate or partnership action, as the case may be, and all other action necessary for it to take. (c) No consent, approval, or authorization of, or any filing with, any person, entity, or governmental authority is required to be obtained or made with respect to its execution and delivery of this Agreement, its consummation of the transactions contemplated by, or its performance of its obligations under this Agreement, or under any other agreement, instrument, or other document entered into, executed, and delivered by it pursuant hereto except for such consents, approvals, or authorizations, as shall be obtained, or filings which shall have been made, by it to Closing. (d) There is no claim, action, litigation, suit, arbitration or other proceeding pending or, to its knowledge, threatened against or affecting it, at law or in equity, or before or by any federal, state, municipal or other department, commission, commission, board, bureau, agency or instrumentality that, if determined adversely to it, would have a materially adverse effect on the business, assets, properties, operations or prospects or on the condition, financial or otherwise. (e) Its execution and delivery of this Agreement and of each agreement, documents and instrument to be executed and delivered by it pursuant to this Agreement, and the consummation of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate its organizational documents as in effect on the date of this Agreement, (ii) conflict with or violate any laws, rules or regulations applicable to it, (iii) subject to the obtaining of the consent, approvals, and authorizations contemplated to be obtained pursuant to clause (c) of this Section 3.3, violate, result in any material breach of, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets, pursuant to its organizational documents or any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit franchise or other instrument or obligation to which it is a party or by or to which it or its assets are bound or are subject, or (iv) cause it to violate any judgment, order, or decree of any governmental authority by which it or any of its assets is bound. 14 (f) This Agreement and any Contribution Agreement to which it is a party constitutes its legal, valid, and binding agreements, enforceable against it in accordance with their respective terms. Upon their execution and delivery, all other agreements, documents, and instruments to be executed and delivered by it under this Agreement will constitute its legal, valid and binding agreements, enforceable against CapStar Corp. in accordance with their respective terms. 3.4 REPRESENTATION OF EACH TRANSFEROR. Each Transferor hereby represents to CapStar and CapStar Corp. that each person exercising the authority to cause the representatives of such Transferor to execute and deliver this Agreement for and on behalf of the Transferor is an "accredited investor" as that term is defined in Rule 501 of the Securities and Exchange Commission promulgated under the Securities Act of 1933, as amended. 3.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and Warranties of each of the parties set forth in this Article III shall service the Closing and the execution and delivery of any document or instrument delivered pursuant to this Agreement or any Contribution Agreement. ARTICLE IV CONDITIONS TO CLOSING 4.1 CONDITIONS PRECEDENT TO CAPSTAR'S AND CAPSTAR CORP.'S OBLIGATIONS. (a) The obligation of CapStar to consummate the transactions contemplated by this Agreement and the obligations of CapStar and CapStar Corp. to perform their respective obligations under this Agreement are subject to the satisfaction or waiver of the following conditions as of the Closing Date: (i) CapStar or the respective Transferor shall not have terminated the Brookriver Contribution Agreement, the Mockingbird Contribution Agreement or the Surrey Contribution Agreement pursuant to a termination right granted in such Contribution Agreement. (ii) Each of Brookriver, Mockingbird, and Surrey shall have delivered all of the items required to be delivered in connection with such Transferors by them as described in Section 5.2(a) of this Agreement. (iii) Each of the representations and warranties of each of Brookriver, Mockingbird, and Surrey set forth in Section 4.3 hereof shall be true, complete, and correct as of the Closing, and each of Brookriver, 15 Mockingbird, and Surrey shall have provided CapStar and CapStar Corp. a certificate certifying that such is the case. (iv) The conditions to the obligation of CapStar to consummate the transactions contemplated by the Brookriver Contribution Agreement, the Mockingbird Contribution Agreement and the Surrey Contribution Agreement as set forth therein shall have been satisfied or waived by CapStar. (v) CapStar and CapStar Corp. shall have made all necessary filings with any governmental authority necessary to be made, and shall have obtained all necessary governmental and other consents, approvals, and authorizations required to be obtained, by CapStar and CapStar Corp. in connection with the consummation of the transactions contemplated by this Agreement with respect to Brookriver, Mockingbird, and Surrey and as contemplated by the Brookriver Contribution Agreement, the Mockingbird Contribution Agreement, and the Surrey Contribution Agreement. If any of the foregoing conditions have not been satisfied or waived by CapStar as of the Closing Date, then CapStar shall be entitled to terminate this Agreement by giving each of the Transferors, Dunwoody, and Pontch written notice that it is terminating this Agreement, and upon such termination CapStar and CapStar Corp. shall have no further obligation hereunder. CapStar and CapStar Corp. shall use their reasonably efforts to make the filings and to obtain the consent, approvals, and authorizations referred to in clause (a)(v) of this Section 4.1. (b) The obligation of CapStar to consummate the transactions contemplated by this Agreement with respect to a particular Property and the Contribution Agreement relating thereto and the obligation of CapStar and CapStar Corp. to perform their respective obligations under this Agreement to the Transferor with respect to such Property and Contribution Agreement are subject to the satisfaction or waiver of the following condition as of the Closing Date: (i) CapStar or such Transferor shall not have terminated such Contribution Agreement pursuant to a termination right granted in such Contribution Agreement. (ii) Such Transferor shall have delivered all of the items are to be delivered in connection with such Transferor as described in SECTION 5.2(A) of this Agreement. (iii) Each of the representations and warranties of such Transferor set forth in Section 4.3 hereof shall be true, complete, and correct as of thee Closing, and such Transferor shall have provided CapStar and CapStar Corp. a certificate certifying that such is the case. 16 (iv) The conditions to the obligation of CapStar to consummate the transactions contemplated by such Contribution Agreement as set forth therein shall have been satisfied or waived by CapStar. (v) CapStar and CapStar Corp. shall have made all necessary filings with any governmental authority necessary to be made, and shall have obtained all necessary governmental and other consents, approvals, and authorizations required to be obtained, by CapStar and CapStar Corp. in connection with the consummation of the transactions contemplated by this Agreement with respect to such Contribution Agreement and such Contribution Agreement. If any of the foregoing conditions have not been satisfied or waived by CapStar as of the Closing Date, then CapStar shall be entitled to terminate this Agreement as to such Transferor, such Property and such Contribution Agreement by giving such Transferor written notice that it is terminating this Agreement as to such Transferor, its Property, and the Contribution Agreement to which such Transferor is a party, and upon such termination CapStar and CapStar Corp. shall have no further obligation hereunder to such Transferor. CapStar and CapStar Corp. shall use their reasonable efforts to make the filings and to obtain the consent, approvals, and authorizations referred to in clause (b)(v) of this Section 4.1. 4.2 CONDITIONS PRECEDENT TO TRANSFERORS' OBLIGATIONS. The obligations of each of the Transferors, Dunwoody, Pontch, and Highgate to consummate the transactions contemplated by this Agreement to be consummated by it and to perform its obligations under this Agreement are conditioned upon the satisfaction of t he following conditions as of the Closing Date: (a) CapStar or the respective Transferor shall not have terminated the Brookriver Contribution Agreement, the Mockingbird Contribution Agreement and the Surrey Contribution Agreement pursuant to a termination right granted in such agreements; (b) CapStar and CapStar Corp. shall have delivered all of the items described in Section 5.2(b) of this Agreement. (c) Each of the representations and warranties of CapStar set forth in Section 4.1 hereof shall be true, complete, and correct as of the Closing, and the General Partner shall have provided each Transferor, Dunwoody, Pontch, and Highgate a certificate certifying that such is the case. (d) Each of the representations and warranties of CapStar Corp. set forth in Section 4.2 hereof shall be true, complete, and correct as of the Closing, and CapStar Corp. shall have provided each Transferor, Dunwoody, and Highgate a certificate certifying that such is the case. 17 (e) Subject to Section 7.10, the Partnership Agreement shall not have been amended, restated or modified prior to the Closing Date, and no class or series of Partnership Units or Preferred Units shall have been established and units thereof issued for less than fair value of such units prior to the Closing Date. (f) Each Transferor, Dunwoody, Pontch, and Highgate shall each have made all necessary filings with any governmental authority necessary to be made by it, and shall have obtained, by i tin connection with the consummation of the transactions contemplated to be entered into by it by this Agreement, and as to each Transferor, by the Contribution Agreement to which it is a party. (g) Specifically as to the obligations of a Transferor with respect to its obligations under this Agreement, the conditions to its obligation to consummate the transactions contemplated by the Contribution Agreement to which it is a party as set forth in such Contribution Agreement shall have been satisfied or waived by such Transferor. If any of the foregoing conditions have not been satisfied or waived by a Transferor, Dunwoody, Pontch, or Highgate, as the case may be, as of the Closing Date with respect to its obligations under this Agreement, and as to each Transferor, the Contribution Agreement to which such Transferor is a party, then such Transferor, Dunwoody, Pontch, or Highgate, as the case may be, shall be entitled to terminate this Agreement as to itself by giving CapStar and CapStar Corp. written notice that it is terminating this Agreement, and upon such termination such Transferor, Dunwoody, Pontch, or Highgate, as the case may be, shall have no further obligation hereunder to CapStar or CapStar Corp. ARTICLE V CLOSING 5.1 CLOSING DATE. The Closing shall be held at the offices of Hughes & Luce, L.L.P., Dallas, Texas on April 14, 1997 or such other place and/or date as Transferors and CapStar shall mutually agree (the "CLOSING DATE"). 5.2 CLOSING DOCUMENTS. (a) At Closing: (i) Dunwoody will execute and deliver to CapStar the Four Points Management Agreement; (ii) Pontch will execute and deliver to CapStar the Pontchartrain Management Agreement; 18 (iii) Dunwoody will deliver to CapStar an appropriate instrument executed by Dunwoody and the current manager of Pontchartrain pursuant to which the existing management agreement for the Four Points is terminated as of the Closing Date; (iv) Pontch will deliver to CapStar an appropriate instrument executed by Pontch and the current manager of Pontchartrain pursuant to which the existing management agreement for the Pontchartrain is terminated as of the Closing Date; (v) Dunwoody and Pontch will deliver a letter agreement to CapStar pursuant to which it will guarantee to CapStar the minimum base management fee of $400,000 in the aggregate under both the Four Points Management Agreement and the Pontchartrain Management Agreement combined payable for the 12 months immediately following the Closing Date; (vi) each Transferor will execute and deliver to CapStar all agreements, instruments and documents that it is required by the Contribution Agreement to which it is a party to execute and deliver to CapStar; (vii) each party to the Partnership Agreement and the First Amendment, other than the partners in CapStar immediately prior to the Closing, shall execute and deliver a counterpart signature page to the First Amendment to CapStar; (viii)each party to the Registration Rights Agreement, other than CapStar Corp., will execute and deliver a counterpart of the Registration Rights Agreement to CapStar Corp.; (ix) each of the Transferors shall deliver to CapStar and CapStar Corp. an executed certificate of the type contemplated by Section 4.1(c); (x) each party who will become a partner in CapStar and hold the Partnership Units and Preferred Units to be issued as provided in Section 2.2 will deliver to CapStar an executed certificate in the form of Exhibit "E"; and (xi) Highgate will execute and deliver to CapStar a counterpart of the development agreement in the form of Exhibit "F". (b) At Closing, CapStar and CapStar Corp. shall deliver or cause to be delivered to each of the Transferors, Dunwoody, Pontch, and Highgate, as appropriate, the following: 19 (i) the Pontchartrain Management Agreement, duly executed by CapStar; (ii) the Four Points Management Agreement, duly executed by CapStar; (iii) a true and complete copy of the Partnership Agreement; (iv) the First Amendment, duly executed by CapStar Corp. as the general partner of CapStar, and each other partner in CapStar; (v) $68,000,000.00 of cash a provided in Section 2.2, which amount of cash shall include the aggregate amount of all earnest money delivered to the Transferors under the terms of the Contribution Agreements; (vi) a legal opinion of Paul, Weiss, Rifkind, Wharton & Garrison or DeCampo, Diamond & Ash, counsel to CapStar and CapStar Corp., addressing such legal matters as are customary in similar transactions and as the Transferors, Dunwoody, and/or Pontch may reasonably request; (vii) a certified copy of such corporate or partnership existence certificates, authorizations, approvals, officers' certificates and incumbencies of CapStar as Transferors shall reasonably require; (viii)an executed certificate of CapStar of the type contemplated by Section 4.2(c); (ix) an executed certificate of CapStar Corp. of the type contemplated by Section 4.2(d); and (x) CapStar will executed and deliver, or, if applicable, cause its wholly-owned subsidiary which purchases the Ramada to execute and deliver, to Highgate a counterpart of the development agreement in the form of Exhibit "F", and, if such a subsidiary is the party to such development agreement, a guaranty of CapStar guaranteeing to Highgate the performance of the obligations of such subsidiary under such development agreement, which guaranty shall be in form and substance reasonably satisfactory to Highgate. ARTICLE VI REMEDIES 6.1 TRANSFERORS' REMEDIES. If CapStar or CapStar Corp. fails to perform its obligations under this Agreement for any reason except (a) as a result of 20 any condition precedent to CapStar's and CapStar Corp.'s obligations under this Agreement not being satisfied or (b) CapStar's or CapStar Corp.'s termination of this Agreement in accordance with its terms, then the Transferors shall be entitled, as their sole and exclusive remedy, to terminate this Agreement as to one or more of the Contribution Agreements and to terminate such Contribution Agreements as to which this Agreement is terminated by giving CapStar written notice of such election prior to or at the Closing Date and the Title Company shall deliver the earnest money under each of the Contribution Agreements as to which this Agreement is terminated to the Transferors. Such amounts shall be paid to the Transferors as liquidated damages and not as a penalty, in full satisfaction of any claims against CapStar and CapStar Corp. Transferors, CapStar and CapStar Corp. agree that Transferors' actual damages resulting from CapStar's and/or CapStar Corp.'s default are difficult to ascertain and the payment of the earnest money amounts to Transferors as described above is a fair estimate of those damages. 6.2 CAPSTAR'S REMEDIES. If any the Transferors, Dunwoody, or Pontch fails to perform its obligations under this Agreement for any reason except (x) as a result of any condition precedent to such Transferor's obligations under this Agreement not being satisfied or (y) such Transferor's termination of this Agreement as to such Transferor in accordance with its terms, then CapStar's and CapStar Corp.'s sole remedies shall be: (a) as to such Transferor, to terminate this Agreement and the Contribution Agreement to which such Transferor is a party by giving such Transferor written notice of such election prior to or at Closing whereupon the Escrow Agent shall promptly return to CapStar the earnest money with respect to under the Contribution Agreement of such Transferor; (b) to waive the default and consummate the transactions with such party; or (c) to enforce specific performance of the obligations of such party under this Agreement. In the event, pursuant to the terms of this Agreement, CapStar is entitled to enforce specific performance of a Transferor's obligations under this Agreement, any lawsuit for specific performance mus be filed within two years after the Closing Date or CapStar shall be deemed to have irrevocably waived such remedy, this Agreement shall terminate and the parties shall have any further rights or obligations hereunder except as expressly provided herein. In order for CapStar to have the right to bring such lawsuit for specific performance, CapStar mus send Transferors notice within 90 days after the Closing Date that CapStar intends to pursue a claim for specific performance. ARTICLE VII MISCELLANEOUS 7.1 ENTIRE AGREEMENT. This Agreement, together with the Contribution Agreements, contain the entire agreement of the parties hereto with respect to the subject hereof. There are no other agreements, oral or written, and this 21 Agreement can be amended only by written agreement signed by the Transferors, CapStar and CapStar Corp. 7.2 BINDING EFFECT. This Agreement shall inure to the benefit of and be binding upon the heirs, personal representatives, successors and assigns of each of the parties to this Agreement. CapStar may assign its rights under this Agreement without Transferor's consent to any partnership or limited liability company in which CapStar or any entity controlling, controlled by or under common control with CapStar is a managing partner, general partner, or limited liability company or to any corporation in which CapStar or any entity controlling, controlled by or under common control with CapStar owns 50% or more of the voting stock. 7.3 NOTICES. Any notice, communication, request, reply or advice (collectively, "NOTICE") provided for or permitted by this Agreement to be made or accepted by either party must be in writing. Notice may, unless otherwise provided herein, be given or served by hand delivery, by delivery by overnight courier or by facsimile transmission. Notice by overnight courier shall be effective one business day after deposit with the courier service. Notice given by hand delivery or by facsimile transmission shall be effective on the business date delivered. For the purposes of Notice, the addresses of the parties shall be: Transferors: Highgate Hotels, Inc. 545 E. John Carpenter Freeway, Suite 1400 Irving, Texas 75062 Fax No. (972) 444-9210 Attn: Mahmood Khimji with a copy to: Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Fax No. (214) 939-6100 Attn: David Newsom CapStar: CapStar Management Company, L.P. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Fax No. (202) 965-4445 Attn: Paul W. Whetsell with a copy to: DeCampo, Diamond & Ash 805 Third Avenue New York, New York 10022 Fax No. (212) 758-1728 Attn: William H. Diamond, Esq. 22 The parties shall have the right from time to time to change their respective addresses for notice by at least five days' written notice to the other party. 7.4 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 7.5 SECTION HEADINGS. The section headings contained in this Agreement are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several sections of this Agreement. 7.6 OBLIGATIONS. To the extent necessary to carry out the terms and provisions of this Agreement, the terms, conditions, representations, obligations, and rights set forth in this Agreement shall not be terminated at the time of Closing, nor will they merge into the various documents executed and delivered at the time of Closing. 7.7 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 7.8 CONFIDENTIALITY. Other than with respect to required governmental disclosure, or with respect to customary financial reporting the in the ordinary course of business, and except as otherwise required by law, neither Transfers nor CapStar shall, without the prior written consent of the other, disclose to any person or party (except the parties hereto, their respective legal counsel, brokers, accountants, lenders or the title company involved in such transaction) the existence of or economic terms of this Agreement or of the contribution agreements or the identities of the parties hereto or thereto. This covenant shall survive the termination of this Agreement. 7.9 SEVERABILITY. If one or more of the provisions contained in this Agreement or in any document delivered pursuant to this Agreement shall for any reason, be held to be invalid, illegal, or unenforceable in any respect in any jurisdiction, such provision shall be ineffective to the extent of such invalidity, illegality, or unenforceability, and such invalidity, illegality, or unenforceability of a provision shall not affect or render invalid, illegal or unenforceable any other provision of this Agreement or any other such document or affect or render invalid, illegal or unenforceable such provisions of this Agreement or any other such document in any other jurisdiction. 7.10 POTENTIAL RESTRUCTURING. The Transferors understand that CapStar Corp. may, in connection with its state and local tax planning, elect to effect a restructuring of CapStar Corp. and its subsidiaries. Such restructuring may include the establishment of a second operating partnership (the "New Operating Partnership") and the transfer to the New Operating Partnership of certain assets owned by CapStar. 23 CapStar Corp. agrees that no restructuring that involves a New Operating Partnership shall be effected prior to the Closing without the prior consent of the Transferors, which consent shall not be withheld unless such restructuring, or the modifications hereinafter referred to, would have a material adverse effect on the Transferors (taking into account, among other relevant factors, the state and local tax savings resulting from such restructuring). In the event such restructuring is effected, the parties shall enter into such modifications to this Agreement and the Contribution Agreements as shall be reasonably necessary to reflect such restructuring (including, without limitation, if requested by CapStar Corp., modifications pursuant to which one or more of the hotels being contributed by the Transferors pursuant to the Contribution Agreements are contributed to the New operating Partnership rather than CapStar). CapStar Corp., CapStar, and the Transferors agree that no modification made to this Agreement and/or any Contribution Agreement or to the terms and conditions on which the transactions contemplated by this Agreement and the Contribution Agreements are consummated made in connection with such restructuring of CapStar Corp. and its subsidiaries will, when considered in the context of all of the benefits of the restructuring to the holders of the Partnership Units, the Preferred Units and shares of the Common Stock and the adverse effects of the restructuring to such holders, result in any reduction or lessening of any of the benefits to be provided to the Transferors or any of their respective designees by this Agreement and the Contribution Agreements. If such restructuring is not effected prior to the Closing, then, at CapStar's election, the first Amendment shall be modified to impose on the partners of CapStar the obligations to agree to, and to implement, such restructuring on terms and conditions consistent with those hereinabove set forth. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 24 IN WITNESS WHEREOF, this Agreement has been duly executed in multiple counterparts by the parties hereto on the date and year first above written. HIGHGATE HOTELS, INC., a Delaware Corporation By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji Authorized Signatory BROOKRIVER HOTEL PARTNERSHIP, L.P., a Texas limited partnership By: Brookriver Hotels, Inc., a Texas corporation, General Partner By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji President MOCKINGBIRD HOTEL PROPERTIES JOINT VENTURE, a Texas joint venture By: Mockingbird Hotel, Inc., a Texas corporation, General Partner By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji President 25 PONTCH LIMITED PARTNERSHIP, a Delaware limited partnership By: Pontch, Inc., a Delaware corporation, General Partner By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji President KFP DUNWOODY, INC., a Texas corporation By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji President CONTINENTAL PACIFIC INTERFUND, LTD., a British Columbia corporation By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji President GQ INDIANAPOLIS ASSOCIATES, LTD., a Texas limited partnership By: GQ Indianapolis Hospitality, Inc., a Texas corporation, General Partner By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji President 26 CENTENNIAL HOTEL LIMITED, a British Columbia corporation By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji Authorized Signatory 361719 ALBERTA LIMITED, an Alberta corporation By: /S/MAHMOOD KHIMJI ----------------------------- Mahmood Khimji Authorized Signatory CAPSTAR: CAPSTAR MANAGEMENT COMPANY, L.P., a Delaware limited partnership By: CapStar Hotel Company, a Delaware corporation, General Partner By: /S/JOHN E. PLUNKET ----------------------------- John E. Plunket Executive Vice President CAPSTAR CORP.: CAPSTAR HOTEL COMPANY, a Delaware corporation By: /S/JOHN E. PLUNKET ----------------------------- John E. Plunket Executive Vice President EX-10.8 6 EX-10.8 FORM OF 1ST. AMENDMENT & RESTATED AGREE. Exhibit 10.8 CAPSTAR MANAGEMENT COMPANY, L.P. First Amendment to Amended and Restated Agreement of Limited Partnership ----------------------------------------- THIS FIRST AMENDMENT ("Amendment") is entered into as of the _____ day of __________, 1997 by and among CapStar Hotel Company, a Delaware corporation, as General Partner, and the Persons listed on Exhibit A annexed hereto, as Limited Partners, for the purpose of amending that certain Amended and Restated Agreement of Limited Partnership of CapStar Management Company, L.P. (the "Partnership") dated as of August 23, 1996 (the "Existing Partnership Agreement"). Capitalized terms used and not otherwise defined herein shall have the respective meanings given such terms in the Existing Partnership Agreement. W I T N E S S E T H : 1. The Persons designated as "Contributors" on Exhibit A annexed hereto are this day making Capital Contributions to the Partnership, which Capital Contributions are more particularly described in Exhibit A annexed hereto. 2. The General Partner wishes, in connection with the making of such Capital Contributions, to admit the Contributors as Additional Limited Partners. 3. The General Partner wishes, pursuant to Section 4.2 of the Existing Partnership Agreement, to cause the Partnership to issue to the Contributors Partnership Interests having the rights, preferences and other privileges hereinafter described. 2 NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Amendments to Existing Partnership Agreement. --------------------------------------------- 1.1 The following changes are hereby made to the definitions set forth in Article 1 of the Existing Partnership Agreement: 1.1.1 The words "or the Carrying Value of such property as determined pursuant to Exhibit B hereof, as the case may be" shall be inserted after the words "704(c) Value of such property" in the definition of "Carrying Value". 1.1.2 The words "or a Limited Partner" are hereby inserted after the words "General Partner" in clauses (i)(A) and (i)(B) of the definition of "Indemnitee". 1.1.3 The language "representing a fractional part of the Partnership Interests of all Partners," contained in the definition of "Limited Partner Interest," is hereby deleted. 1.1.4 The first sentence of the definition of "Partnership Unit" is hereby amended to read as follows: "Partnership Unit" means (i) a fractional undivided share of the Partnership Interests of all Partners (other than the Preferred Units); and (ii) each Preferred Unit. 1.1.5 The following language is hereby inserted after the words "Partnership Units," each time they appear, in the definition of "Percentage Interest": "(other than Preferred Units)". 3 1.1.6 The following definitions are hereby added to Article 1 of the Existing Partnership Agreement: "Effective Tax Rate" means, for any year, the percentage determined by the General Partner to be a reasonable estimate of the combined effective rate of Federal, state and local income tax (giving effect to the deduction of state and local income taxes, as applicable, for Federal and state income tax purposes) that would be applicable to the Partnership if it were a C corporation. "Final Determination" means (i) a decision, judgment, decree or other order by a court of original jurisdiction which has become final (i.e., the time for filing an appeal shall have expired without any appeal having been filed), (ii) a closing agreement made under Section 7121 of the Code or any other settlement agreement entered into in connection with an administrative or judicial proceeding, (iii) the expiration of the time for instituting a claim for refund, or if a claim was filed, the expiration of the time for instituting suit with respect thereto, or (iv) in any case where judicial review shall be unavailable, a decision, judgment, decree or other order of an administrative official or agency which has become final. "Preferred Capital," with respect to each Preferred Unit, means an amount equal to $25.50. "Preferred Return," with respect to each Preferred Unit, means a preferred distribution right at the rate of 6.5% per annum, compounded quarterly to the extent not distributed pursuant to Section 5.1.A(1), on the Preferred Capital with respect to such Preferred Unit. "Preferred Sub-Account," with respect to a Preferred Unitholder, means an account maintained on the same basis as the Partners' Capital Accounts, but taking into account only the aggregate Preferred Capital, allocations of Net Income and Net Loss and distributions with respect to its Preferred Units (including distributions of Preferred Return). "Preferred Unit" means a Partnership Unit having the rights, preferences and privileges assigned to Preferred Units pursuant to the further provisions of this Agreement. The ownership of Preferred Units by the Partners is as set forth in Exhibit A annexed hereto, as such Exhibit may be amended from time to time. "Preferred Unitholder" means a Limited Partner that holds one or more Preferred Units. 4 "Unpaid Preferred Return," with respect to each Preferred Unit, means an amount equal to the excess, if any, of (x) the aggregate Preferred Return on the Preferred Capital with respect to such Preferred Unit over (y) the aggregate of all amounts previously distributed with respect to such Preferred Unit pursuant to Section 5.1.A(1). 1.2 The penultimate sentence of Section 4.1 of the Existing Partnership Agreement is hereby amended to read as follows: A number of Partnership Units held by the General Partner equal to one percent (1%) of all outstanding Partnership Units (other than Preferred Units) shall be the General Partner Interest. 1.3 Section 5.1 of the Existing Partnership Agreement is hereby amended to read as follows: Section 5.1 Requirement and Characterization of Distributions ----------- ------------------------------------------------- A. Distributions shall be made to the Partners as follows and in the following order of priority: (1) First, except to the extent the General Partner, by resolution of its Board of Directors, determines that the Partnership does not have cash available for distribution, to the Preferred Unitholders with respect to their Preferred Units, in proportion to and to the extent of their respective amounts of Unpaid Preferred Return on such Preferred Units at such time; and (2) Thereafter, to the extent that the General Partner determines that the Partnership has cash available for distribution, to the Partners in accordance with their respective Percentage Interests. Distributions made pursuant to clause (1) shall be made on a quarterly basis. B. (1) Notwithstanding the provisions of Section 5.1.A, if it is anticipated that the Partners will recognize taxable income with respect to the Partnership for any year, the General Partner shall make a good faith estimate of the amount of such taxable income to be recognized by each of the Partners (other than any taxable income recognized as a result of the allocations of Net Income pursuant to Sections 6.1.A(1), (2) and (3)), and distributions of Partnership cash shall be made to the Partners, in proportion to their respective Percentage Interests, in an aggregate amount sufficient to permit each of the Partners to pay taxes (calculated at a rate equal to the Effective Tax Rate) on their distributive shares of such taxable income. Distributions 5 required to be made pursuant to this Section 5.1.B(1) shall be made at such times as may be appropriate to permit the Partners to make estimated tax payments. (2) The computation of the amounts required to be distributed pursuant to Section 5.1.B(1) for any year shall be adjusted (i) prior to each distribution for such year, (ii) upon the filing of the Partnership's Federal income tax return for such year, (iii) upon any Final Determination of the Partnership's taxable income for such year and (iv) at any other time when in the good faith judgment of the General Partner it appears that a prior estimate has been incorrect, in each case so as to take into account actual determinations and/or revised estimates of the Partners' shares of taxable income for such year for Federal income tax purposes. Following any such adjustment, the amounts to be distributed pursuant to Section 5.1.B(1) shall be adjusted appropriately, or additional distributions shall be made, so as to give effect to such actual determinations and/or revised estimates. 1.4 Sections 6.1.A and 6.1.B of the Existing Partnership Agreement are hereby amended to read as follows: A. Net Income. After giving effect to the special allocations set ---------- forth in Section 1 of Exhibit C, Net Income shall be allocated as follows and in the following order of priority: (1) First, to the General Partner until the aggregate amount of Net Income allocated to it pursuant to this clause (1) for the current and all prior years equals the aggregate amount of Net Loss previously allocated to it pursuant to the proviso of Section 6.1.B(3); (2) Second, to the Partners, in proportion to and to the extent of any deficit balances in their respective Capital Accounts; (3) Third, to the Preferred Unitholders with respect to their Preferred Units, in proportion to and to the extent of the excess, if any, of (x) each such Preferred Unitholder's aggregate Preferred Capital with respect to such Preferred Units over (y) the balance of such Preferred Unitholder's Preferred Sub-Account; and (4) Thereafter, to the Partners in accordance with their respective Percentage Interests. B. Net Loss. After giving effect to the special allocations set -------- forth in Section 1 of Exhibit C, Net Loss shall be allocated as follows and in the following order of priority: 6 (1) First, to the Partners in proportion to and to the extent of the excess, if any, of (x) each such Partner's Capital Account balance over (y) such Partner's aggregate Preferred Capital with respect to such Partner's Preferred Units (if any); (2) Second, to the Preferred Unitholders, in proportion to and to the extent of their remaining Capital Account balances; and (3) Thereafter, to the Partners in accordance with their respective Percentage Interests; provided that, to the extent any such allocation to a Limited Partner would (after giving effect to the allocations required under Sections 1.A and 1.B of Exhibit C) give such Limited Partner an Adjusted Capital Account Deficit, such amount of Net Loss shall instead be allocated to the General Partner. 1.5 The letters "LP" are hereby inserted after the word "CapStar" in the penultimate sentence of Section 7.5.A of the Existing Partnership Agreement. 1.6 The parties agree that, for purposes of Section 8.6 of the Partnership Agreement, the date before which the Redemption Right may not be exercised shall be August 23, 1997. The following language is hereby added at the end of Section 8.6.A of the Existing Partnership Agreement: Notwithstanding anything to the contrary set forth above, if any Preferred Unitholder shall exercise the Redemption Right with respect to any Preferred Units, the Partnership shall be obligated to pay to such Preferred Unitholder, together with the Cash Amount, the Unpaid Preferred Return attributable to the Preferred Units being redeemed as of the date such payment is made. 1.7 The following language is hereby inserted after the words "Section 8.6" in Section 8.4 of the Existing Partnership Agreement: "(including any such right exercised after the giving of a Mandatory Redemption Notice as provided in Section 8.7)". 7 1.8 Section 8.5(D) of the Existing Partnership Agreement is hereby renumbered Section 8.6(D), and the numeral "180" in said Section is hereby replaced by the numeral "30." 1.9 The following language is inserted at the end of Section 8.6.B of the Existing Partnership Agreement: Notwithstanding anything to the contrary contained in the foregoing or in Section 8.6.A, if the Cash Amount with respect to a redemption of Partnership Units is, pursuant to Section 8.06.D hereof, paid after the Specified Redemption Date, then (i) such redemption shall not occur until the Cash Amount is paid and (ii) the Limited Partner in question (or its Assignee) shall have the right to continue receiving distributions hereunder until the date of such redemption. In addition, notwithstanding anything to the contrary contained in Section 8.6.A, if the General Partner exercises its right to satisfy the Redemption Right pursuant to this Section 8.6.B, then, if the Redeeming Partner is a Preferred Unitholder: (i) the General Partner shall be obligated to pay to such Preferred Unitholder, together with the payment of the Cash Amount or the delivery of CapStar Shares, an amount equal to the Unpaid Preferred Return attributable to such Preferred Units as of the date such payment is made; and (ii) if the General Partner has elected to deliver CapStar Shares to such Preferred Unitholder, the General Partner shall have the right to satisfy its obligation under clause (i) of this sentence by delivering to such Preferred Unitholder a number of CapStar Shares equal to the amount of such Unpaid Preferred Return divided by the Value on the Valuation Date of one CapStar Share (rounded down to the nearest whole number of CapStar Shares if such quotient is not a whole number). 1.10 The following Section 8.6.E is hereby added to the Existing Partnership Agreement: E. Notwithstanding anything to the contrary hereinabove contained, except as provided in Section 8.7.A, no Limited Partner shall be entitled to exercise the Redemption Right with respect to any Preferred Unit as to which the Mandatory Redemption Notice (as hereinafter defined) has been given. 8 1.11 The following Section 8.7 is hereby added to the Existing Partnership Agreement: Section 8.7 Mandatory Redemption. ----------- --------------------- A. Except as otherwise provided in the last sentence of this Section 8.7.A, the Partnership shall have the right ("Mandatory Redemption Right"), at any time on or after the third anniversary of the date of this Amendment, to redeem all or any portion of the Preferred Units at a redemption price equal to $25.50 per Preferred Unit; provided, however, that any such redemption shall be effected on a pro rata basis among all of the Preferred Unitholders. The Mandatory Redemption Right shall be exercised pursuant to a notice (the "Mandatory Redemption Notice") delivered by the Partnership to the Preferred Unitholders whose Preferred Units are being redeemed. If the Mandatory Redemption Notice is given to a Preferred Unitholder, then the redemption of such Preferred Unitholder's Preferred Units shall take place on the tenth Business Date after the giving of such Notice. On such tenth Business Day, the Partnership shall pay to such Preferred Unitholder the redemption price hereinabove provided for, and such Preferred Unitholder shall deliver to the Partnership such instruments of transfer as the Partnership shall reasonably require assigning to the Partnership the Preferred Units being redeemed, free and clear of all liens and encumbrances. Such Preferred Unitholder shall pay any state or local property transfer tax payable in connection with such transfer. Notwithstanding anything to the contrary contained in the foregoing, if, within 5 Business Days after the giving of the Mandatory Redemption Notice, any Preferred Unitholder gives the Redemption Notice with respect to the Preferred Units specified in such Mandatory Redemption Notice, then such Mandatory Redemption Notice shall be deemed null and void and the provisions of Section 8.6 shall apply with respect to such Preferred Units. B. Notwithstanding anything to the contrary contained in Section 8.7.A, the General Partner shall have the right to purchase all or any portion of the Preferred Units in lieu of the Partnership's exercise of its Mandatory Redemption Right. Any such purchase by the General Partner of the Preferred Units shall be on the terms and conditions set forth in Section 8.7.A, with the General Partner performing the obligations of the Partnership under such section; provided, however, that the General Partner shall have the right, in lieu of paying to the Preferred Unitholder in question the redemption price provided for in Section 8.7.A., to deliver to such Preferred Unitholder a number of CapStar Shares equal to (i) the number of Preferred Units being purchased, multiplied by (ii) $25.50, divided by (iii) the Value per CapStar Share on the Valuation Date (which amount shall be rounded down to the nearest whole number if it is not a whole number). For 9 purposes of this Section 8.7, the term "Valuation Date" shall mean the date on which the Mandatory Redemption Notice is delivered to the Preferred Unitholder in question or, if such date is not a Business Day, the first Business Day thereafter. If the General Partner purchases Preferred Units pursuant to this Section 8.7.B, the General Partner shall thereafter be treated for all purposes as the owner of such Preferred Units. C. If the Mandatory Redemption Right is exercised or the General Partner purchases Preferred Units pursuant to Section 8.7.B, then the Partnership or the General Partner, as the case may be, shall be required to pay to the Preferred Unitholder in question, in addition to the payment or the delivery of CapStar Shares hereinabove provided for, an amount equal to the Unpaid Preferred Return (as of the date such payment is made) attributable to the Preferred Units being so redeemed or purchased; provided, however, that if the General Partner has elected to purchase Preferred Units by delivery of CapStar Stock, the General Partner shall have the right, in lieu of paying an amount equal to such Unpaid Preferred Return, to deliver to such Preferred Unitholder a whole number of CapStar Shares equal to the amount of such Unpaid Preferred Return (as of the date such payment is made) divided by the Value on the Valuation Date of one CapStar Share (rounded down to the nearest whole number of CapStar Shares if such quotient is not a whole number). D. Notwithstanding the foregoing, in no event shall the Mandatory Redemption Right be exercisable with respect to any Preferred Unit as to which a Redemption Notice has been given as provided in Section 8.6. 1.12 The words "which has been approved by the requisite Consent of the Partners pursuant to Section 7.3" are hereby deleted from Section 11.2.B of the Existing Partnership Agreement. 1.13 The words "and Section 11.7" are hereby inserted after the words "Section 11.3.F" in Section 11.3.A of the Existing Partnership Agreement. 1.14 The words "or Section 8.7" are hereby inserted after the words "Section 8.6" in Sections 11.6.A, 11.6.B and 11.6.C of the Existing Partnership Agreement. 10 1.15 The words "in connection with" are hereby substituted for the word ", or" in Section 11.2.D of the Existing Partnership Agreement. 1.16 The words "pursuant to Section 5.1.B" are hereby inserted in place of (a) the words "of the Partner Distribution Amount attributable to such Partnership Unit with respect to which the Partnership record date is" and the words "of the Partner Distribution Amount" in the last sentence of Section 11.6.D of the Existing Partnership Agreement, and (b) the words "of the Partner Distribution Amount with respect to which the Partnership Record Date is" and the words "of the Partner Distribution Amount" in the last sentence of Section 12.2.C of the Existing Partnership Agreement. 1.17 The words "but subject to Section 14.1.C" are hereby inserted after the numeral "14.1.A" in Section 14.1.B of the Existing Partnership Agreement. 1.18 The words "Section 11.7 (as to any then existing Limited Partner) or" are hereby inserted after the word "amend" in clause (vi) of Section 14.1.C of the Existing Partnership Agreement. 1.19 The words ", or (vii) amend Section 2 of Exhibit C in a manner adverse to such Partner" are hereby added at the end of Section 14.1.C of the Existing Partnership Agreement. 1.20 A new Section 11.7 is hereby added to the Existing Partnership Agreement: Section 11.7 Pledges of Partnership Interests. Except as provided in Section 11.3.F, no Limited Partner shall pledge, hypothecate or grant a security interest in all or any portion of its Partnership Interest; provided, 11 however that any Limited Partner shall have the right, as security for a borrowing from a bank, insurance company or other commercial lending institution (an "Institutional Lender"), to pledge or hypothecate to such Institutional Lender, or to grant and/or sell to and/or purchase from such Institutional Lender or an Affiliate thereof an option with respect to, or grant to such Institutional Lender a security interest in, all or a portion of its Partnership Units, and any transfer of such pledged Partnership Units to such Institutional Lender (or to its transferee in any public or private sale by such Institutional Lender) pursuant or subsequent to the exercise of rights or remedies in connection with such pledge or option shall be permitted hereunder. 1.21 The words "or Section 11.7" are hereby inserted after the words "Section 11.3.F" in Section 11.3.C of the Existing Partnership Agreement. 1.22 The words "or Section 11.7" are hereby inserted after the words "Section 11.3.F" in Section 11.4.C of the Existing Partnership Agreement. 1.23 The text of Section 13.4 of the Existing Partnership Agreement is hereby deleted in its entirety, and the words "[Intentionally left blank]" are inserted in their place. 1.24 The word "for" is hereby substituted for the words "provisions of" in Section 13.6 of the Existing Partnership Agreement. 1.25 The term "Partnership Interests" is hereby replaced by the term "Percentage Interests" in the first sentence of Section 14.1.A and the first sentence of Section 14.2.A of the Existing Partnership Agreement. 1.26 The following changes are hereby made to Section 14.1.C of the Existing Partnership Agreement: (A) the words "or Mandatory Redemption Right" are inserted after the words "Redemption Right"; and (B) the word "Sections" in clause (iv) is changed to "Section", and the language "or 8.7" is added after the numeral "8.6" in such clause. 12 1.27 The words "Subject to Section 14.1, the" are hereby substituted for the word "The" at the beginning of Section 7.3 of the Existing Partnership Agreement. 1.28 Exhibit A to the Existing Partnership Agreement is hereby deleted in its entirety and replaced with Exhibit A annexed hereto. 1.29 The words "and if the Regulations currently in effect are not modified" are hereby inserted immediately after the words "the Code" in Section 1.C of Exhibit B to the Existing Partnership Agreement. 1.30 The words "and Section 1 of Exhibit C" are hereby inserted immediately after the reference to Section 6.1 in Section 1.D(1) of Exhibit B to the Existing Partnership Agreement. 1.31 The last sentence of Section 1.E of Exhibit B to the Existing Partnership Agreement is hereby deleted in its entirety. 1.32 The first sentence of Section 1.D of Exhibit C to the Existing Partnership Agreement is hereby amended to read as follows: Nonrecourse Deductions for any Partnership Year shall be allocated to the Partners as Net Loss in accordance with Section 6.1.B of the Agreement. 1.33 The following paragraph G is hereby inserted at the end of Section 1 of Exhibit C to the Existing Partnership Agreement: G. Regulatory Allocations. The allocations set forth in Sec tions ---------------------- 1.A through 1.F (the "Regulatory Allocations") shall be taken into account in allocating items of income, gain, loss and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each such Partner if the Regulatory Allocations had not occurred. 13 1.34 The words ", subject to the following, have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners. With respect to the Contributed Property transferred to the Partnership on or about the Effective Date, the Partnership shall" shall be deleted from Section 2.C of Exhibit C to the Existing Partnership Agreement. 1.35 The following paragraph D is hereby inserted at the end of Section 2 of Exhibit C to the Existing Partnership Agreement: D. Any foreign or other tax credits of the Partnership shall be allocated among the Partners in proportion to the allocations of income with respect to which such credits arose. 1.36 Exhibit D to the Existing Partnership Agreement is hereby deleted in its entirety and replaced with Exhibit D annexed hereto. 1.37 All capitalized terms defined in the Existing Partnership Agreement which are no longer used in such Agreement, as amended by this Amendment, are hereby deleted. 2. Admission of Additional Limited Partners. ---------------------------------------- Each of the Contributors is hereby admitted to the Partnership as a Limited Partner pursuant to Section 4.2.A of the Existing Partnership Agreement. Each of the Unitholders has contributed to the Partnership the property described in Exhibit A annexed hereto, and each Contributor shall receive, pursuant to this Amendment, the Partnership Units listed opposite such Contributor in said Exhibit A. Each Contributor hereby agrees to be bound of all of the provisions of the Existing Agreement, as amended hereby. 14 IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. GENERAL PARTNER: CAPSTAR HOTEL COMPANY By: --------------------------- Name: Title: LIMITED PARTNERS: CAPSTAR LP CORPORATION By: --------------------------- Name: Title: [CONTRIBUTORS] EXHIBIT A PARTNERS AND PARTNERSHIP INTERESTS
Name and Address of Partner Partnership Units Partnership Interest - --------------------------- ----------------- -------------------- General Partner: - ---------------- CapStar Hotel Company [1% of total Partnership Units 1% 1010 Wisconsin Avenue, N.W. (other than Preferred Units)] Suite 650 Washington, D.C. 20007 Limited Partners: - ----------------- CapStar Hotel Company [Number of issued and [Number of Partnership 1010 Wisconsin Avenue, N.W. outstanding shares of CapStar Units owned divided by Suite 650 Hotel Company after secondary total number of Washington, D.C. 20007 offering less 200,881 less Partnership Units (other number of Partnership Units than Preferred Units)] held by General Partner] CapStar LP Corporation 200,881 1010 Wisconsin Avenue, N.W. Suite 650 Washington, D.C. 20007 [Contributors] 809,523 Number of Partnership 392,157 Preferred Units Units owned (other than Preferred Units) divided by total number of Partnership Units (other than Preferred Units) Capital Contributions Made by Contributors - -------------------- [As described in Contribution Agreements]
EXHIBIT D VALUE OF CONTRIBUTED PROPERTY Underlying Property 704(c) Value Agreed Value - ------------------- ------------ ------------ [To be agreed upon] ---------------------------- EX-23.1 7 EXHIBIT 23.1 Exhibit 23.1 ACCOUNTANTS' CONSENT The Board of Directors CapStar Hotel Company We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Washington, D.C. February 26, 1997 -----END PRIVACY-ENHANCED MESSAGE-----