-----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, OijXI/B0yW2ewkXu4qKUiEcnHoO01kczyIAKeJL0UQZqShOi7bCI9Uu/j9QpyXtS 5XB+N3eegsw0aOdKeVHpaA== 0000928385-99-000881.txt : 19990323 0000928385-99-000881.hdr.sgml : 19990323 ACCESSION NUMBER: 0000928385-99-000881 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERISTAR HOTELS & RESORTS INC CENTRAL INDEX KEY: 0001059341 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 510379982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14331 FILM NUMBER: 99569982 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 2029654455 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVE N W CITY: WASHINGTON STATE: DC ZIP: 20007 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [_]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-14331 MERISTAR HOTELS & RESORTS, INC. (Exact name of issuer as specified in its charter) Delaware 1010 Wisconsin Avenue, N.W., 52-2101815 (State or other Washington, D.C. 20007 (I.R.S. Employer jurisdiction of Identification Number) (Address of principal executive offices) incorporation or (Zip code) organization) (202) 965-4455 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered: ------------------- ------------------------------------------ Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based on the average sale price at March 17, 1999, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $69,835,000. The number of shares of the Registrant's common stock outstanding as of March 17, 1999 was 25,525,400. DOCUMENTS INCORPORATED BY REFERENCE: Part III--Those portions of the Registrant's definitive proxy statement relating to Registrant's 1999 Annual Meeting of Stockholders which are incorporated into Items 10, 11, 12, and 13. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS THE COMPANY MeriStar Hotels & Resorts, Inc. (the "Company") is the lessee, manager and operator of various hotel assets, including nearly all of the hotel assets owned by MeriStar Hospitality Corporation (the "REIT"). The Company was formed on August 3, 1998 when it was spun off (the "Spin-off") by CapStar Hotel Company ("CapStar"). CapStar transferred or caused to be transferred certain assets and liabilities constituting the hotel management and leasing business operated by CapStar and its subsidiaries to the Company, which was a wholly owned subsidiary of CapStar. CapStar distributed, on a share-for-share basis, to its stockholders of record on August 3, 1998, all of the outstanding capital stock of the Company. After the Spin-Off, pursuant to an Agreement and Plan of Merger, dated as of March 15, 1998 (the "Merger Agreement"), among American General Hospitality Corporation, a Maryland corporation operating as a real estate investment trust ("AGH"), and certain of its affiliates and CapStar and certain of its affiliates, CapStar merged with AGH (the "Merger") creating the REIT. The Company then acquired 100% of the partnership interests in AGH Leasing, Inc. ("AGH Leasing"), the third party lessee of most of the hotels owned by AGH and substantially all of the assets and certain liabilities of American General Hospitality Inc. ("AGHI"), the third-party manager of most of the hotels owned by AGH (the "Acquisitions"). CapStar and AGHI were two of the fastest growing operators of upscale, full-service hotels in North America, based on rooms under management. The Company is the successor-in-interest and has assumed all of the rights and liabilities with respect to hotel management contracts and operating leases of CapStar, AGHI and AGH Leasing. The Company is one of the largest independent hotel management companies in the United States, based on rooms under management. As of December 31, 1998, the Company leased and/or managed 203 hotels (the "MeriStar Hotels") containing 42,466 rooms. Of the MeriStar Hotels, the Company (i) leases and manages 109 REIT owned hotels (the "REIT Owned Hotels"), containing 28,058 rooms, (ii) leases 53 additional hotels containing 7,608 rooms, (the "Leased Hotels") and (iii) manages an additional 41 hotels containing 6,800 rooms (the "Managed Hotels"). The MeriStar Hotels are located throughout the United States and Canada including most major metropolitan areas and rapidly growing secondary cities. The MeriStar Hotels include hotels operated under nationally recognized brand names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R), Doubletree(R), Embassy Suites(R) and Holiday Inn(R). The Company's business strategy is to manage the renovation, repositioning and operations of each hotel according to a business plan specifically tailored to the characteristics of the hotel and its market. The Company has capitalized on its management experience and expertise by continuing to secure additional management contracts and improving the operating performance of the hotels under its management. The Company's senior management team, with an average of more than 20 years of lodging industry experience, has successfully managed hotels in all segments of the lodging industry. Management attributes its management success to its ability to analyze each hotel as a unique property and to identify particular cash flow growth opportunities present at each hotel. The Company's principal operating objectives are to continue to analyze each hotel as a unique property in order to generate higher revenue per available room ("RevPAR"), increase average daily rates ("ADR") and increase net operating incomes while providing its hotel guests with high-quality service and value. In addition to assuming the rights and obligations under all of the operating leases and management agreements of CapStar, AGHI and AGH Leasing, the Company assumed CapStar's interests in two joint ventures. The Company expects to form additional strategic alliances with institutional and private hotel owners and to secure additional management fee arrangements. From time to time, the Company may also acquire certain hotel assets that the REIT could not, or for strategic reasons does not wish to, own. The Company currently operates in various sectors within the hospitality industry. The Company leases and manages properties primarily within the upscale full-service and premium limited-service sectors, and performs 2 third-party management services for owners of both sectors as well. Management believes concentrating on the upscale, full-service and premium limited- service sectors of the lodging industry for leasing and management activities is appropriate because these sectors are among the most attractive available in today's current hospitality market. These sectors are attractive for several reasons. First, these hotels appeal to a wide variety of customers, thus reducing the risk of decreasing demand from any particular customer group. Secondly, such hotels have appeal to both business executives and upscale leisure travelers, customers who are generally less price sensitive than travelers who use non-premium, limited-service hotels. Finally, full- service and premium limited-service hotels require a greater depth of management expertise than non-premium limited-service hotels, and the Company believes that its superior management skills provide it with a significant competitive advantage in their operation. The Company expects to expand into related sectors of the hospitality industry such as leasing and/or managing additional resort properties, time share properties, golf courses and conference centers. The Company believes these parts of the hospitality industry are currently characterized by fragmented, relatively smaller management companies without the broad range of management, operational, and financial resources the Company possesses. By bringing its expertise in other property management activities and these resources to bear, management believes it can realize significant economic benefit for the owners/lessors of such properties through increased profitability of the properties' operations. THE INTERCOMPANY AGREEMENT The Company and the REIT have entered into an intercompany agreement (the "Intercompany Agreement") which aligns the interests of the two companies with the objective of benefiting the shareholders of both Companies. Rights of First Refusal The Intercompany Agreement provides that the Company has a right of first refusal to become the lessee of any real property acquired by the REIT if the REIT determines that, consistent with its status as a real estate investment trust, the REIT is required to enter into a lease; provided that the Company or an entity controlled by the Company is qualified to be the lessee based on experience in the industry and financial and legal qualifications. The Intercompany Agreement provides that the REIT must provide the Company with written notice of a lessee opportunity. During the 30 days following such notice, the Company has a right of first refusal with regard to the offer to become a lessee and the right to negotiate with the REIT on an exclusive basis regarding the terms and conditions of the lease. If after 30 days, the Company and the REIT are unable to agree on the terms of a lease or if the Company indicates that it is not interested in pursuing the opportunity, the REIT may offer the opportunity to other hotel operators for a period of one year thereafter, at a price and on terms and conditions that are not more favorable than the price and terms and conditions proposed to the Company. After this one year period, if the REIT has not leased the property, the REIT must again offer the opportunity to the Company in accordance with the procedures specified above. Each company has established a leasing committee that reviews all hotel leases to be entered into between the companies. Both leasing committees consist of directors that are not directors of the other company. The Company has agreed not to acquire or make (i) investments in real estate or (ii) any other investments that may be made by the REIT under the federal income tax rules governing real estate investment trusts unless they have provided written notice to the REIT of the material terms and conditions of the acquisition or investment opportunity, and the REIT has determined not to pursue such acquisitions or investments either by providing written notice to the Company rejecting the opportunity within 20 days or by allowing such 20- day period to lapse. The Company has also agreed to assist the REIT in structuring and consummating any acquisition or investment that the REIT elects to pursue. 3 The Intercompany Agreement provides the Company and the REIT with a symbiotic relationship so that investors in both companies may enjoy the economic benefit of the entire enterprise. Investors should be aware, however, that because of the independent trading of the shares of the Company and the shares of the REIT, stockholders of each company may develop divergent interests which could lead to conflicts of interest. This divergence of interests could also reduce the anticipated benefits of the relationship between the two companies. Provision of Services The Company provides the REIT with certain services as the REIT may reasonably request from time to time, including administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources, acquisition identification and due diligence, and operational services. The REIT compensates the Company for services provided in an amount determined in good faith by the Company as the amount an unaffiliated third party would charge the REIT for comparable services. Equity Offerings If either the Company or the REIT desires to engage in a securities issuance, such issuing party will give notice to such other party as promptly as practicable of its desire to engage in a securities issuance. Any such notice will include the proposed material terms of such issuance, to the extent determined by the issuing party, including whether such issuance is proposed to be pursuant to a public or private offering, the amount of securities proposed to be issued and the manner of determining the offering price and other terms thereof. The non-issuing party will cooperate with the issuing party in every way to effect any securities issuance of the issuing party by assisting in the preparation of any registration statement or other document required in connection with such issuance and, in connection therewith, providing the issuing party with such information as may be required to be included in such registration statement or other document. Term The Intercompany Agreement will terminate upon the earlier of (a) August 3, 2008, or (b) a change in ownership or control of the Company. Intercompany Loan The REIT may lend the Company up to $75 million for general corporate purposes pursuant to a revolving credit agreement. Amounts outstanding under the facility bear interest at the 30-day London Interbank Offered Rate plus 350 basis points. As of December 31, 1998, the interest rate was 8.56% and the Company had drawn $67 million on the facility. 4 BUSINESS The Company seeks to increase shareholder value by (i) implementing its operating strategy to improve hotel operations and increase cash flow; (ii) expanding its leasing and management business in its three existing operating segments--upscale, full-service hotels, premium limited-service hotels and inns, and resort properties; and (iii) utilizing its property management expertise to expand into related areas such as golf course and conference center management. Segments During 1998, the Company operated within three segments of the hospitality industry: (a) upscale, full-service hotels ("Hotels"), (b) premium limited- service hotels and inns ("Inns") and (c) resort properties ("Resorts"). The Company's has senior executives that specialize in each of these segments and uses its primary strategy of creating and executing management plans that are specifically tailored for each individual property to create and realize each property's full potential. The Company's financial position and results of operations as of and for each of the three years in the three-year period ended December 31, 1998, reflect significantly differing numbers of managed and leased hotels throughout the periods. Consequently, the Company has determined that it is not practicable to present the segment information of the management and leasing operations of CapStar, its predecessor entity, for the years ended December 31, 1997 and December 31, 1996. Also, prior to the Spin-Off, the management and leasing operations of CapStar conducted its business primarily in only one operating segment. Therefore, the segment disclosures presented below are for the period August 3, 1998 through December 31, 1998. The following table summarizes certain segment financial data as of December 31, 1998 and for the period August 3, 1998 through December 31, 1998 (amounts in thousands):
December 31, 1998 ---------------------------------- Total Hotels Inns Resorts Segments -------- ------- ------- -------- Revenues.................................... $322,720 $72,267 $73,878 $468,865 Participating Lease Expense................. $101,423 $29,430 $24,187 $155,040 EBITDA...................................... $ 4,710 $ 172 $ (882) $ 4,000 Total Assets................................ $ 48,264 $42,091 $16,276 $106,631
The Company leased and managed 4 properties in Canada as of December 31, 1998. Revenues for Canadian operations totaled $8,865 for the period August 3, 1998 through December 31, 1998. Expansion Strategy The Company anticipates that it will continue to expand its portfolio of hotels under management and/or lease by securing additional management contracts and/or leases. The Company seeks to expand its management operations into other hospitality-related businesses, such as time share properties, resorts, golf courses and conference centers. The Company attempts to identify properties that are promising management candidates located in markets with economic, demographic and supply dynamics favorable to hotel lessees and operators. Through its extensive due diligence process, the Company selects those expansion targets where it believes selective capital improvements and intensive management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management and individual operations teams create detailed plans covering all areas of renovation and operation. These plans serve as the basis for the Company's expansion decisions and guide subsequent renovation and operating plans. The Company seeks to lease and/or manage hotels that meet the following criteria: 5 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 MeriStar Hotels are located in 32 states across the nation, the District of Columbia, the U.S. Virgin Islands and Canada. See "Properties" for additional information regarding the Hotels. The Company seeks to maintain a geographically diverse portfolio of managed hotels to offset the effects of regional economic cycles. Hotel Criteria Location and Market Appeal. The Company seeks to operate hotels that are situated near both business and leisure centers that generate a broad base of demand for hotel accommodations and facilities. These demand generators include (i) airports, (ii) convention centers, (iii) business parks, (iv) shopping centers and other retail areas, (v) sports arenas and stadiums, (vi) major highways, (vii) tourist destinations, (viii) major universities, and (ix) cultural and entertainment centers with nightlife and restaurants. The confluence of nearby business and leisure centers 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 operate hotels that contain 200 to 500 guest rooms and include accommodations and facilities that are, or are capable of being made, attractive to key demand segments such as business, group and leisure travelers. These facilities typically include large, upscale guest rooms, food and beverage facilities, extensive meeting and banquet space, and amenities such as health clubs, swimming pools and adequate parking. Potential Performance Improvements. The Company seeks to operate underperforming hotels where intensive management and selective capital improvements can increase revenue and cash flow. These hotels represent opportunities where a systematic management approach and targeted renovations should result in improvements in revenue and cash flow. The Company expects that its relationships throughout the industry will continue to provide it with a competitive advantage in identifying, evaluating and managing hotels that meet its criteria. The Company has a record of successfully managing the renovation and repositioning of hotels, in situations with varying levels of service, room rates and market types, and the Company plans to continue to manage such renovation programs as its acquires new leases and management contracts. 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 MeriStar Hotel rather than by implementing an operating strategy that is designed to maintain a uniform corporate image or brand. Management believes that custom-tailored business plans are the most effective means of addressing 6 the needs of a given hotel or market. The Company believes that skilled management of hotel operations is the most critical element in maximizing revenue and cash flow in hotels, especially in upscale, full-service hotels. The Company's corporate headquarters carry out financing and investment activities and provide services to support as well as monitor the Company's on-site hotel operating executives. Each of the Company's executive departments, including Sales and Marketing, Human Resources and Training, Food and Beverage, Technical Services, Development and Corporate Finance, 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 MeriStar 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 MeriStar 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 is able to monitor actual performance and rapidly adjust prices, staffing levels and sales efforts to take advantage of changes in the market and to improve yield. Targeted Sales and Marketing. The Company 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 MeriStar Hotel, and develop narrowly tailored marketing plans to suit each such segment. The Company supports each MeriStar 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 MeriStar 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 and the REIT (through the Intercompany Agreement) and other third-party owners plan renovations primarily to enhance a MeriStar Hotel's appeal to targeted market segments, thereby attracting new customers and generating increased revenue and cash flow. For example, in many of the MeriStar Hotels, the banquet and meeting spaces have been or are intended to be renovated and guest rooms have been upgraded with computer ports and comfortable work spaces to better accommodate the needs of business travelers and to increase ADRs. Capital spending decisions will be based on both strategic needs and potential rate of return on a given capital investment. Owners of the MeriStar Hotels are primarily responsible for funding capital expenditures. Selective Use of Multiple Brand Names. Management believes that the selection of an appropriate franchise brand is essential in positioning a hotel optimally within its local market. The Company selects brands based on local market factors such as local presence of the franchisor, brand recognition, target demographics and efficiencies offered by franchisors. Management believes that its relationships with many major hotel franchisors places the Company in a favorable position when dealing with those franchisors and allows it to negotiate favorable franchise agreements with franchisors. Management believes that its growth in acquiring management contracts will further strengthen its relationship with franchisors. 7 The following chart summarizes certain information with respect to the national franchise affiliations of the MeriStar Hotels:
REIT Owned Hotels and Leased Hotels Managed Hotels ------------------- ------------------ Guest % of Guest % of Franchise Rooms Hotels Rooms Rooms Hotels Rooms - --------- ------ ------ ----- ----- ------ ----- Hilton(R).............................. 6,309 23 17.7% 225 1 3.3% Sheraton(R)............................ 3,501 10 9.8% 167 1 2.4% Radisson(R)............................ 2,988 10 8.4% 569 2 8.4% Holiday Inn(R)......................... 2,936 14 8.2% 1,078 6 15.9% Hampton Inn(R)......................... 2,257 18 6.3% -- -- -- Independent............................ 2,136 13 6.0% 1,017 9 15.0% Doubletree(R).......................... 2,014 6 5.7% 643 3 9.5% Courtyard(R)........................... 1,648 9 4.6% 455 2 6.7% Marriott(R)............................ 1,500 4 4.2% -- -- -- Holiday Inn Select(R).................. 1,488 5 4.2% -- -- -- Comfort Inn(R)......................... 1,293 9 3.6% -- -- -- Westin(R).............................. 1,289 4 3.6% 226 1 3.3% Wyndham(R)............................. 850 3 2.4% -- -- -- Homewood Suites(R)..................... 795 7 2.2% -- -- -- Embassy Suites(R)...................... 728 3 2.0% 248 1 3.6% Crowne Plaza(R)........................ 715 3 2.0% 318 1 4.7% Ramada(R).............................. 660 3 1.9% 309 2 4.5% Hilton Garden Inn(R)................... 474 3 1.3% -- -- -- Holiday Inn Express(R)................. 367 3 1.0% 83 1 1.2% Doubletree Guest Suites(R)............. 292 2 0.8% -- -- -- Comfort Suites(R)...................... 277 2 0.8% 244 2 3.6% Best Western(R)........................ 254 2 0.7% 75 1 1.1% Four Points(R)......................... 213 1 0.6% -- -- -- Quality Suites(R)...................... 168 1 0.5% 281 2 4.1% Residence Inn(R)....................... 168 1 0.5% 223 2 3.3% Hampton Inn & Suites(R)................ 136 1 0.4% -- -- -- Fairfield Inn(R)....................... 110 1 0.3% 200 1 2.9% Howard Johnson(R)...................... 100 1 0.3% -- -- -- Quality Inn(R)......................... -- -- -- 265 2 3.9% Hilton Suites(R)....................... -- -- -- 174 1 2.6% ------ --- ----- ----- --- ----- Total................................ 35,666 162 100.0% 6,800 41 100.0% ====== === ===== ===== === =====
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 REIT Owned Hotels contain restaurants ranging from Michel Richard's highly acclaimed CITRONELLE(R), to Morgan's(R), 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(R) and "TCBY"(R) Yogurt in casual, delicatessen-style restaurants in several of the REIT Owned Hotels. Popular food concepts will strengthen the Company's ability to attract business travelers and group meetings and improve the name recognition of the Hotels. 8 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. Management believes in realistic solutions to problems, and innovation is always encouraged. Incentive programs and awards have been established to encourage individual property managers to seek new ways of increasing revenues and operating cash flow. This creative, entrepreneurial spirit is prevalent from the corporate staff and the general managers down to the operations staff. Individual general managers work closely with the corporate staff and they and their employees are rewarded for achieving target operating and financial goals. Computerized Reporting Systems. The Company employs computerized reporting systems at each of the MeriStar 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 at many of the REIT Owned Hotels. Management also utilizes daily reporting and electronic mail programs to facilitate daily communication between the MeriStar Hotels and the Company's corporate headquarters. Such programs enable the Company to create and implement detailed reporting systems at each of the MeriStar Hotels and its corporate headquarters. Corporate executives utilize information systems that track each MeriStar 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. Competition The Company competes primarily in the following segments of the lodging industry: (a) the upscale full-service segment, (b) the premium limited- service segment and (c) resorts. In each geographic market in which the MeriStar Hotels are located, there are other full- and limited-service hotels and/or resorts that compete with the hotels. 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, 1998, the Company employed approximately 27,000 persons, of whom approximately 24,300 were compensated on an hourly basis. Some of the employees at 22 of the MeriStar Hotels are represented by labor unions. Management believes that labor relations with its employees are generally good. The REIT reimburses the Company for work performed by the Company's employees on behalf of the REIT. During 1998, the REIT reimbursed the Company $781,000 for worked performed by the Company's employees on behalf of the REIT. Franchises 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. 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 9 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 Hotels and could otherwise adversely affect the Company's operations. Americans with Disability Act--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 MeriStar 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. Environmental Laws--Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner's ability to use the property, sell the property or borrow by using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could impose liability for releases of hazardous materials, including asbestos-containing materials ("ACMs"), into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs or other hazardous materials. Phase I environmental site assessments ("ESA") have been conducted at all of the REIT Owned Hotels, and Phase II ESAs have been conducted at some of the REIT Owned Hotels by qualified independent environmental engineers. The purpose of the ESA is to identify potential sources of contamination for which the Hotels may be responsible and to assess the status of environmental regulatory compliance. The ESAs have not revealed any environmental liability or compliance concerns that the Company believes would have a material adverse effect on the Company's business, assets, results of operations or liquidity, nor is the Company aware of any material environmental liability or concerns. Nevertheless, it is possible that these ESAs did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which the Company is currently unaware. In reliance upon the Phase I and Phase II ESAs, the Company believes the REIT Owned Hotels are in material compliance with all federal, state and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters. The Company has not been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in any of the REIT Owned Hotels. 10 THE OPERATING PARTNERSHIP The following summary information is qualified in its entirety by the provisions of the amended and restated agreement of Limited Partnership, as amended, of MeriStar H&R Operating Company, L.P., a copy of which has been filed as an exhibit to this Form 10-K. Substantially all of the Company's assets are held indirectly by MeriStar H&R Operating Company, L.P. (the "Operating Partnership"), the Company's subsidiary operating partnership. The Company is the sole general partner of the Operating Partnership, and the Company, two officers and directors of the Company and approximately 85 independent third-parties are limited partners of the Operating Partnership. The partnership agreement of the Operating Partnership gives the general partner full control over the business and affairs of the Operating Partnership. The general partner is also given the right, in connection with the contribution of property to the Operating Partnership or otherwise, to issue additional partnership interests in the Operating Partnership 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. The Operating Partnership's partnership agreement currently has three classes of partnership interests ("OP Units"): Class A OP Units, Class B OP Units and Preferred OP Units. As of March 17, 1999, the partners of the Operating Partnership own the following aggregate numbers of OP Units: (i) the Company and its wholly-owned subsidiaries own a number of Common OP Units equal to the number of issued and outstanding shares of the Company's common stock, par value $0.01, (the "Common Stock") (ii) the officers and directors of the Company own 1,409,753 Class A OP Units and (ii) independent third parties own 4,366,362 OP Units (consisting of 1,325,753 Class A OP Units, 2,648,452 Class B OP Units and 392,157 Preferred OP Units). No dividend was paid during 1998 and no dividend is expected to be paid during 1999 to the Class A OP Units and Class B OP Units. Preferred OP Units receive a 6.5% cumulative annual preferred return based on an assumed price per Common Share of $3.34, compounded quarterly to the extent not paid on a current basis, and are entitled to a liquidation preference of $3.34 per Preferred OP Unit. All net income and capital proceeds earned by the Operating Partnership, after payment of the annual preferred return and, if applicable, the liquidation preference, will be shared by the holders of the Class A OP Units and Class B OP Units in proportion to the number of OP Units owned by each such holder. Each OP Unit held by the two officers and directors and the independent third-parties is redeemable by the holder for one share of Common Stock (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 may be redeemed by the Operating Partnership at a price of $3.34 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 April 1, 2000 or by the holders of the Preferred OP Units at a price of $3.34 per Preferred OP Unit (in cash or, at the holder's option, for a number of shares of Common Stock having a value equal to the redemption price) at any time after April 1, 2004. FORWARD-LOOKING INFORMATION Certain information both included and incorporated by reference in this annual report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward- looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on the operations and future prospects of our Company include, but are not limited to, changes in: economic conditions generally and the real estate market specifically, 11 legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts), availability of capital, interest rates, competition, supply and demand for hotel rooms in our current and proposed market areas and general accounting principles, policies and guidelines applicable to real estate investment trusts. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in Washington, D.C. with satellite offices in Florida, North Carolina and Texas. The Company leases its offices. The Company leases and/or manages hotel properties throughout the United States and Canada. No one leased or managed hotel property is material to the operation of the Company. A typical full-service MeriStar Hotel has meeting and banquet facilities, food and beverage facilities and guest rooms and suites. The REIT Owned Hotels and Leased Hotels feature, or after contemplated renovation programs have been completed will feature, comfortable, modern guest rooms, extensive meeting and (for Hotels and Resorts) convention facilities and full-service restaurant and catering facilities that attract meeting and convention functions from groups and associations, upscale business and vacation travelers as well as banquets and receptions from the local community. The following table sets forth the 1998 operating information with respect to the REIT Owned Hotels and Leased Hotels:
Guest Type Number of Hotels Rooms ADR Occupancy RevPAR - ---- ---------------- ------ ------ --------- ------ Inns............................ 57 8,299 $72.93 74.2% $54.12 Hotels.......................... 83 22,365 94.28 71.3% 67.22 Resorts......................... 22 5,002 97.44 70.7% 68.89 --- ------ ------ ---- ------ Total/weighted average........ 162 35,666 $90.12 71.8% $64.71 === ====== ====== ==== ======
The following table sets forth the 1998 operating information with respect to the hotels managed by the Company:
Guest Type Number of Hotels Rooms - ---- ---------------- ----- Inns..................................................... 27 3,857 Hotels................................................... 11 2,620 Resorts.................................................. 3 323 --- ----- Total.................................................. 41 6,800 === =====
The Participating Leases Subsidiaries of the Company are the lessees (each, a "Lessee") of 109 of the REIT's 117 hotels. Each lease (a "Participating Lease") provides for an initial term of 12 years. Each Participating Lease provides the Lessee with three renewal options of five years each (except in the case of properties with ground leases having a remaining term of less than 40 years), provided that (a) the Lessee will not have the right to a renewal if a change in the tax law has occurred that would permit the REIT to operate the hotel directly; (b) if the Lessee elects not to renew a Participating Lease for any applicable Hotel, then the REIT has the right to reject the exercise of a renewal right on a Participating Lease of a comparable hotel; and (c) the rent for each renewal term is adjusted to reflect the then fair market rental value of the hotel. If the Lessee and the REIT are unable to agree upon the then fair market rental value of a hotel, the Participating Lease terminates upon the expiration of the then current term and the Lessee then has a right of first refusal to lease the hotel from the REIT on such terms as the REIT may have agreed upon with a third-party lessee. 12 Base Rent; Participating Rent; Additional Charges Each Participating Lease requires the Lessee to pay (i) fixed monthly base rent (the "Base Rent"), (ii) participating rent ("Participating Rent") which is payable monthly and based on certain percentages of room revenue, food and beverage revenue and telephone and other revenue at each hotel in excess of Base Rent, and (iii) certain other amounts, including interest accrued on any late payments or charges ("Additional Charges"). Base Rent and Participating Rent departmental thresholds (departmental revenue on which the rent percentage is based) are increased annually by a percentage equal to the percentage increase in the Consumer Price Index (CPI percentage increase plus 0.75% in the case of the Participating Rent departmental revenue threshold) compared to the prior year. In addition, under certain circumstances, a reduced percentage rate will apply to the revenues attributable to certain "discounted rates" that the Lessee may offer. Base Rent is payable monthly in arrears. Participating Rent is payable in arrears based on a monthly schedule adjusted to reflect the seasonal variations in the hotel's revenue. Other than real estate and personal property taxes and assessments, rent payable under ground leases, casualty insurance, including loss of income insurance, capital impositions and capital replacements and refurbishments (determined in accordance with generally accepted accounting principles), that are obligations of the REIT, the Participating Leases require the Lessee to pay rent, liability insurance, all costs and expenses and all utility and other charges incurred in the operation of the hotels. The Participating Leases also provide for rent reductions and abatements in the event of damage or destruction or a partial taking of any hotel. The Participating Leases also provide for a rental adjustment under certain circumstances in the event of (a) a major renovation of the hotel, or (b) a change in the franchisor of the hotel. Capitalization Requirements of the Company The Participating Leases require the Company, as guarantor of the Participating Leases, to maintain a book net worth of not less than $40 million. Further, commencing January 1, 1999, for so long as the tangible net worth of the Company is less than 17.5% of the aggregate rents payable under the Participating Leases for the prior calendar year, the Company is prohibited from paying dividends or making distributions other than dividends or distributions made for the purpose of permitting the partners of the Operating Partnership to pay taxes on the taxable income of the Operating Partnership attributable to its partners plus any required preferred distributions existing to partners. Termination The REIT has the right to terminate the applicable Participating Lease upon the sale of a hotel to a third party or, upon the REIT's determination not to rebuild after a casualty, upon payment to the Lessee of the fair market value of the leasehold estate (except for properties identified by the Company and the REIT at the Merger as properties slated to be sold). The fair market value of the leasehold estate is determined by discounting to present value at a discount rate of 10% per annum the cash flow for each remaining year of the then current lease term, which cash flow will be deemed to be the cash flow realized by the Lessee under the applicable Participating Lease for the 12- month period preceding the termination date. The REIT will receive as a credit against any such termination payments an amount equal to any outstanding "New Lease Credits," which means the projected cash flow (determined on the same basis as the termination payment) of any new Participating Leases entered into between the Company and the REIT after the Effective Date for the initial term of such new Participating Lease amortized on a straight-line basis over the initial term of the new Participating Lease. Performance Standards The REIT has the right to terminate the applicable Participating Lease if, in any calendar year, the gross revenues from a hotel are less than 95% of the projected gross revenues for such year as set forth in the applicable budget unless (a) the Lessee can reasonably demonstrate that the gross revenue shortfall was caused by general market conditions beyond the Lessee's control or (b) the Lessee "cures" the shortfall by paying to 13 the Company the difference between the rent that would have been paid to the REIT had the property achieved gross revenues of 95% of the budgeted amounts and the rent paid based on actual gross revenues. The Lessee does not have such a cure right for more than two consecutive years. The Participating Leases also require that the Lessee spend in each calendar year at least 95% of the amounts budgeted for marketing expenses and for repair and maintenance expenses. Assignment and Subleasing The Lessees do not have the right to assign a Participating Lease or sublet a hotel without the prior written consent of the REIT. For purposes of the Participating Lease, a change in control of the Company or the Lessees will be deemed an assignment of the Participating Lease and will require the REIT's consent, which may be granted or withheld in its sole discretion. ITEM 3. LEGAL PROCEEDINGS In the course of the Company's normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters have been submitted to a vote of security holders during the fourth quarter of 1998. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "MMH." 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 ------- ------- 1999: First Quarter (through March 17, 1999)....................... $3 3/16 $2 3/8 1998: Fourth Quarter (ended December 31, 1998)..................... 2 11/16 1 15/16 Third Quarter (from Spin-Off on August 3, 1998 through September 30, 1998)......................................... 3 3/4 2
The last reported sale price of the Common Stock on the NYSE on March 17, 1999 was $2 13/16. As of March 17, 1999, there were approximately 149 holders of record of the Common Stock. 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 Company's lease agreements with the REIT restrict the Company's ability to pay dividends on the Common Stock. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. Recent Sales of Unregistered Securities On August 3, 1998, the Company privately issued 3,414,872 Class B OP Units as part of the purchase of 100% of the partnership interests in AGH Leasing and substantially all of the assets and certain liabilities of AGHI. On October 1, 1998, the Company privately issued 916,230 Class A OP Units as part of the purchase of a portfolio of assets from South Seas Properties Company Limited Partnership and its affiliates. 15 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial information for the Company. The selected Operating Results and Balance Sheet Data have been extracted from the consolidated financial statements for each of the periods presented. The following information should be read in conjunction with the consolidated financial statements and notes thereto for the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 ---------- --------- --------- --------- --------- (dollars in thousands, except per share amounts) Operating Results: Revenues: Rooms.................. $ 395,633 $ 9,880 $ -- $ -- $ -- Food, beverage, office rental and other...... 152,276 1,871 -- -- -- Management services and other revenues........ 14,528 12,088 7,050 5,354 4,418 ---------- --------- --------- -------- -------- Total revenues........ 562,437 23,839 7,050 5,354 4,418 ---------- --------- --------- -------- -------- Operating expenses: Departmental expenses: Rooms.................. 95,627 2,533 -- -- -- Food, beverage and other................. 107,860 1,170 -- -- -- Undistributed operating expenses: Administrative and general............... 84,881 10,473 6,140 4,745 4,508 Participating lease expense............... 186,601 4,135 -- -- -- Property and other operating costs....... 76,300 1,917 -- -- -- Depreciation and amortization.......... 3,372 636 349 84 23 ---------- --------- --------- -------- -------- Total operating expenses............. 554,641 20,864 6,489 4,829 4,531 ---------- --------- --------- -------- -------- Net operating income (loss)................. 7,796 2,975 561 525 (113) Interest expense, net... 2,017 56 123 44 -- Minority interest....... 155 103 -- -- -- Provision for income taxes(A)............... 337 -- -- -- -- Equity in earnings of affiliates............. (1,337) 46 -- -- -- ---------- --------- --------- -------- -------- Net income (loss)..... $ 3,950 $ 2,862 $ 438 $ 481 $ (113) ---------- --------- --------- -------- -------- Basic earnings per share(B)............... $ 0.02 -- -- -- -- Diluted earnings per share(B)............... $ 0.02 -- -- -- -- Number of shares of common stock issued and outstanding(C)......... 25,437 -- -- -- -- Other Financial Data: EBITDA(D)............... $ 11,168 $ 3,611 $ 910 $ 609 $ (90) Net cash provided by operating activities... 10,125 11,167 19,069 208 66 Net cash used in investing activities... (102,105) (6,501) (1,826) (61) (41) Net cash provided by financing activities... 76,113 4,208 699 59 -- Balance Sheet Data: Total assets............ $ 247,529 $ 84,419 $ 24,366 $ 2,881 $ 1,232 Debt.................... 67,812 981 885 950 --
- -------- (A) No provision for federal income taxes was included prior to 1998 because the Company's predecessor entities were partnerships and all federal income tax liabilities were passed through to the individual partners. (B) Basic and diluted earnings per share for the year ended December 31, 1998 is based on earnings for the period from August 3, 1998 through December 31, 1998. (C) As of December 31 for the period presented. (D) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management believes that EBITDA is a useful measure of operating performance because (i) it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization and minority interests of common and preferred OP Unit holders, which is generally equivalent to EBITDA, and (ii) EBITDA is unaffected by the debt and equity structure of the entity. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund all cash flow needs, and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations and may not be comparable to other similarly titled measures used by other companies. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On August 3, 1998, the management and leasing operations of CapStar Hotel Company ("CapStar") were spun-off (the "Spin-Off") in a taxable transaction in which CapStar distributed on a share-for-share basis all shares of common stock, par value $0.01 per share, ("Common Stock") of MeriStar Hotels & Resorts, Inc. (the "Company"). The Company thereby became the lessee, manager and operator of various hotel assets, including those which were previously owned, leased and managed by CapStar and certain of its affiliates. On August 3, 1998, CapStar merged (the "Merger") with and into American General Hospitality Corporation ("AGH"), a Maryland corporation operating as a real estate investment trust, to form MeriStar Hospitality Corporation (the "REIT"). Immediately following the Spin-Off and the Merger, the Company acquired 100% of the partnership interests in AGH Leasing, L.P., ("AGH Leasing"), the third- party lessee of most of the hotels owned by AGH, and substantially all of the assets and liabilities of American General Hospitality, Inc. ("AGHI"), the third-party manager of most of the AGH hotels. As a result, the Company became the lessee and manager of most of the hotels owned by the REIT. The purchase price of $95.0 million was paid with a combination of cash and units of limited partnership interest ("OP Units") in the Company's subsidiary operating partnerships. In accordance with generally accepted accounting principles, the acquisitions have been accounted for as a purchase and therefore, the operating results of AGHI and AGH Leasing have been included in the Company's consolidated financial statements since the date of acquisition. The Company's financial statements include the historical results of the Company's predecessor entity, the management and leasing operations of CapStar, for all periods and include the operating results of AGH Leasing and AGHI since August 3, 1998. In addition, prior to August 3, 1998, the Company managed substantially all of the hotels owned by CapStar and received management fee revenues from such hotels. Since August 3, 1998, the Company has leased these hotels from the REIT and therefore records no management fees from such hotels but instead records room, food and beverage and other operating department revenues and expenses from such leases. Therefore, the Company's financial condition and results of operations as of December 31, 1998 and December 31, 1997 and for the periods ended December 31, 1998, 1997 and 1996 reflect significantly differing numbers of managed and leased hotels throughout the periods. The following table outlines the Company's historical portfolio of managed and leased hotels:
REIT CapStar Third Party Other Leased Owned Managed Leased Total ------------- ------------- ------------ ------------ ------------- Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms ------ ------ ------ ------ ------ ----- ------ ----- ------ ------ December 31, 1998....... 109 28,058 -- -- 41 6,800 53 7,608 203 42,466 December 31, 1997....... -- -- 47 12,019 27 4,631 40 5,687 114 22,337 December 31, 1996....... -- -- 19 5,166 28 4,619 -- -- 47 9,785
Financial Condition December 31, 1998 compared with December 31, 1997 Total assets increased by $163.1 million to $247.5 million at December 31, 1998 from $84.4 million at December 31, 1997. Total liabilities increased by $143.4 million to $183.1 million from $39.7 million. The increases in assets and liabilities result primarily from the August 3, 1998 purchase of AGHI and AGH Leasing. Minority interests increased by $15.9 million from $3.8 million to $19.7 million primarily due to the issuance of OP Units in conjunction with the acquisitions of AGHI and AGH Leasing. 17 Results of Operations Year Ended December 31, 1998 compared with the Year Ended December 31, 1997 Total revenue increased by $538.6 million or 2,259% to $562.4 million in 1998 compared to $23.8 million in 1997. This increase results from the increase in the number of hotels leased as described above. Operating expenses increased $533.7 to $554.6 million in 1998 compared to $20.9 million in 1997. The increase reflects the increase in the number of leased and managed hotels, which resulted in and includes the costs of additional personnel and other administrative costs incurred in conjunction with the Company's growth. Net operating income increased $4.8 million, or 162%, to $7.8 million in 1998 compared to $3.0 million in 1997. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased $7.6 million to $11.2 million in 1998 compared to $3.6 million in 1997. These increases resulted primarily from the increase in the number of leased and managed hotels, offset partially by the costs of additional personnel and other administrative costs incurred as described above. EBITDA for the Company's three operating segments for the period August 3, 1998 through December 31, 1998 is as follows:
Total Hotels Inns Resorts Segments ------ ---- ------- -------- EBITDA............................................. $4,710 $172 $(882) $4,000
Year Ended December 31, 1997 compared with the Year Ended December 31, 1996 Total revenue increased by $16.7 million or 235% to $23.8 million 1997 compared to $7.1 million in 1996. This increase results from revenue of $11.8 million from hotel leases acquired in 1997 and an increase of $4.9 million in management fees and other revenue is primarily due to the increase in the number of managed hotels in 1997 and additional fees resulting from improved operations of the managed hotels. Hotel management and other revenue earned by the Company from hotels owned by CapStar were $7.2 million or 30% of total revenue in 1997, and $2.6 million or 37% of total revenue in 1996. Operating expenses increased to $20.9 million in 1997 from $6.5 million in 1996. This increase reflects the increase in the number of managed hotels and the hotel leases acquired in 1997, offset partially by the costs of additional personnel and other administrative costs incurred as described above. Net operating income increased by 430% to $3.0 million in 1997 compared to $0.6 million in 1996 and EBITDA grew to $3.6 million in 1997 from $0.9 million in 1996. The increases resulted primarily from the increase in the number of managed hotels and the leases acquired in 1997, offset partially by the costs of additional personnel and other administrative costs incurred as described above. Liquidity and Capital Resources The Company's continuing operations are funded through cash generated from hotel management and leasing operations. Business acquisitions and investments in affiliates are financed through a combination of internally generated cash, external borrowings and the issuance of OP Units and/or common stock. On August 3, 1998, the Company entered into a three-year, $75.0 million revolving credit facility (the "Credit Facility") with the REIT. The Credit Facility contains certain covenants, including maintenance of financial ratios, reporting requirements and other customary restrictions. Interest on the facility is the 30-day London Interbank Offered Rate plus 350 basis points. As of December 31, 1998, the Company had $67.0 million in outstanding borrowings under the Credit Facility, at an interest rate of 8.56%. The Company incurred interest expense of $2.0 million on this facility during 1998. Operating activities provided $10.1 million of net cash in 1998, mainly due to higher levels of net income, depreciation and amortization, and accrued expenses and other liabilities due to the increase in hotels leased. 18 The Company used $102.1 million of cash in investing activities for 1998, primarily for the purchase of AGHI and AGH Leasing. Net cash provided by financing activities of $76.1 million resulted from borrowings under the Credit Facility and contributions from CapStar. In conjunction with the Spin- Off, the operating assets and liabilities of the hotels leased from the REIT were transferred to the Company, resulting in a payable to the REIT of $7.4 million at December 31, 1998. Under the terms of the participating leases between the Company and its lessors, the lessors will generally be required to fund significant capital expenditures at the hotels leased by the Company. The Company believes cash generated by operations, together with anticipated borrowing capacity under the credit facility, will be sufficient to fund its existing working capital, ongoing capital expenditures, and debt service requirements. In addition, the Company expects to continue to seek acquisitions of hotel management businesses and management contracts. The Company expects to finance these future acquisitions through a combination of anticipated borrowing capacity under its credit facility and the issuance of OP Units and/or Common Stock. The Company believes these sources of capital will be sufficient to provide for the Company's long-term capital needs. Seasonality Demand in the lodging industry is affected by recurring seasonal patterns. Demand is lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. Therefore, the Company's operations are seasonal in nature. Assuming other factors remain constant, the Company has lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. Year 2000 Conversion The Company is in the process of conducting a review of its computer systems to identify the systems that could be affected by the "Year 2000" problem and has initiated an implementation plan to address the problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, this could result in a major systems failure or miscalculations. The Company's leased and managed hotel properties contain various information technology and embedded technology systems. Both types of systems contain microprocessors and microcontrollers that must be assessed for Year 2000 compliance. The Company has developed a comprehensive implementation plan to address the potential Year 2000 problems caused by such systems. This plan involves six stages: increase awareness of issue; assign responsibility for coordinating response to issue; information collection; analysis; modification, repair or replacement; and testing. The Company is currently in its analysis stage, and expects to complete this stage by March 1999. The following stages are expected to be completed as follows: modification, repair or replacement--June 1999; and testing--August 1999. As an additional part of its implementation plan to address the Year 2000 problem, the Company has also initiated communications with third parties with which it has material relationships to determine the extent of potential Year 2000 problems with these parties' services provided to the Company. The most critical of these services involve such items as reservations systems for the Company's hotels. Without such systems, the Company could suffer a material decline in business at many of its properties. The Company expects to complete its communications and assessment of third parties' services by March 1999. Also, the Company expects to develop contingency plans in 1999 to allow for manual or other alternative operation of certain computerized systems, in the event that modification, repair, and replacement efforts are not completed timely. 19 The Company anticipates completing its Year 2000 implementation plan no later than September 30, 1999, which is prior to any anticipated impact on its operating systems. As of December 31, 1998, historical costs incurred to address the Year 2000 problem approximate $0.2 million. The Company expects that essentially all of the future expenditures required to modify, repair, and replace computerized systems at its leased and managed hotel properties will be the financial responsibility of the owners of those properties. The Company has not yet developed a final cost estimate related to fixing Year 2000 issues, but an initial estimate of these remediation costs for all of its leased and managed properties (including those properties leased from the REIT) is $15-25 million. This cost estimate is based on the Company's preliminary assessment, and will be refined and adjusted as the Company continues to complete the stages of its implementation plan to address the potential Year 2000 problems. Based on its preliminary assessment, the Company believes that its risks of Year 2000 non-compliance (that is, its "most reasonably likely worst case scenario"), with modifications to existing software and converting to new software, will not pose significant operational problems for the Company's computer systems as so modified and converted. If, however, such modifications and conversions are not completed timely, the Year 2000 problem could have a material impact on the Company's financial position and operations. The Company's operations are highly dependent upon efficient operating systems at its properties. To the extent that the Year 2000 problems materially affect the conduct of operations at those properties, it is likely that the Company's ability to efficiently manage operations would be materially affected. Also, as discussed above, the vast majority of expenditures related to Year 2000 problems at the Company's leased and managed properties will be the financial responsibility of the owners of those properties. To the extent that those owners are unable or unwilling to modify, repair, and replace systems with potential Year 2000 problems, the Company could suffer material adverse financial consequences. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on its Credit Facility that impacts the fair value of this obligation. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company has not entered into any derivative or interest rate transactions. The table below presents the principal amounts, weighted average interest rates, and fair values by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. All items described are non-trading (in thousands of dollars).
Variable Average Expected Maturity Rate Interest Rate - ----------------- -------- ------------- 1999.................................................... $ -- $-- 2000.................................................... -- -- 2001.................................................... 67,000 8.6% 2002.................................................... -- -- 2003.................................................... -- -- Thereafter.............................................. -- -- ------- ---- Total................................................... $67,000 8.6% ======= ==== Fair Value at 12/31/98.................................. $67,000 8.6% ======= ====
Although the Company conducts business in Canada, the Canadian operations were not material to the Company's consolidated financial position, results of operations or cash flows as of December 31, 1998. Additionally, foreign currency transaction gains and losses were not material to the Company's results of operations for the year ended December 31, 1998. Accordingly, the Company was not subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on the Company's future costs or on future cash flows it would receive from its foreign subsidiaries. To date, the 20 Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. ITEM 8. FINANCIAL STATEMENTS The following Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K: MeriStar Hotels & Resorts, Inc. Independent Auditors' Report.............................................. 22 Consolidated Balance Sheets as of December 31, 1998 and 1997.............. 23 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996...................................................... 24 Consolidated Statements of Stockholders' Equity and Owners' Equity for the Years Ended December 31, 1998, 1997 and 1996............................. 25 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996...................................................... 26 Notes to the Consolidated Financial Statements............................ 27
All Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto. 21 INDEPENDENT AUDITORS' REPORT The Board of Directors MeriStar Hotels & Resorts, Inc.: We have audited the accompanying consolidated balance sheets of MeriStar Hotels & Resorts, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and owners' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of MeriStar Hotels & Resorts, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Washington, D.C. February 1, 1999 22 MERISTAR HOTELS & RESORTS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 INCLUDING PREDECESSOR ENTITY (in thousands, except per share amounts)
1998 1997 -------- ------- Assets Current Assets: Cash and cash equivalents.................................. $ 11,155 $27,022 Accounts receivable, net of allowance for doubtful accounts of $2,285 and $72......................................... 61,987 7,162 Prepaid expenses........................................... 4,193 1,097 Deposits and other......................................... 11,085 2,856 -------- ------- Total current assets........................................ 88,420 38,137 Fixed assets: Furniture, fixtures, and equipment......................... 7,325 2,701 Accumulated depreciation................................... (1,099) (418) -------- ------- Total fixed assets, net..................................... 6,226 2,283 Investments in and advances to affiliates................... 5,495 8,058 Intangible assets, net of accumulated amortization of $3,338 and $719................................................... 146,782 35,941 Restricted cash............................................. 606 -- -------- ------- $247,529 $84,419 ======== ======= Liabilities, Minority Interests, Stockholders' Equity and Owners' Equity Current Liabilities: Accounts payable........................................... $ 28,401 $ 2,082 Accrued expenses and other liabilities..................... 70,016 14,360 Due to affiliates, net..................................... 7,437 22,287 Income taxes payable....................................... 69 -- Long-term debt, current portion............................ 27 392 -------- ------- Total current liabilities................................... 105,950 39,121 Deferred income taxes....................................... 9,367 -- Long-term debt.............................................. 67,785 589 -------- ------- Total liabilities........................................... 183,102 39,710 Minority interests.......................................... 19,693 3,800 Commitments and contingencies Stockholders' equity: Common stock, par value $.01 per share: Authorized--100,000 shares Issued and outstanding--25,437 shares 254 -- Paid-in capital........................................... 43,929 -- Retained earnings......................................... 551 -- -------- ------- Total Stockholders' equity.................................. 44,734 -- -------- ------- Owners' equity.............................................. -- 40,909 -------- ------- $247,529 $84,419 ======== =======
See accompanying notes to consolidated financial statements. 23 MERISTAR HOTELS & RESORTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 INCLUDING PREDECESSOR ENTITY (in thousands, except per share amounts)
1998 1997 1996 -------- ------- ------ Revenue: Rooms................................................ $395,633 $ 9,880 -- Food and beverage.................................... 119,295 1,397 -- Other operating departments.......................... 32,981 474 -- Management and other fees............................ 14,528 12,088 7,050 -------- ------- ------ Total revenue......................................... 562,437 23,839 7,050 -------- ------- ------ Operating expenses by department: Rooms................................................ 95,627 2,533 -- Food and beverage.................................... 90,662 909 -- Other operating expenses............................. 17,198 261 -- Undistributed operating expenses: Administrative and general........................... 84,881 10,473 6,140 Participating lease expense.......................... 186,601 4,135 -- Property operating costs............................. 76,300 1,917 -- Depreciation and amortization........................ 3,372 636 349 -------- ------- ------ Total operating expenses.............................. 554,641 20,864 6,489 -------- ------- ------ Net operating income.................................. 7,796 2,975 561 Interest expense, net................................. 2,017 56 123 Equity in earnings of affiliates...................... (1,337) 46 -- -------- ------- ------ Income before minority interests and income taxes..... 4,442 2,965 438 Minority interests.................................... 155 103 -- Income taxes.......................................... 337 -- -- -------- ------- ------ Net income............................................ $ 3,950 $ 2,862 $ 438 ======== ======= ====== Earnings per share: Basic............................................... $ 0.02 -- -- Diluted............................................. $ 0.02 -- -- ======== ======= ======
See accompanying notes to consolidated financial statements. 24 MERISTAR HOTELS & RESORTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 INCLUDING PREDECESSOR ENTITY (in thousands)
Common Stock Additional ------------- Paid-in Retained Owners' Shares Amount Capital Earnings Equity Total ------ ------ ---------- -------- ------- ------- Balance, January 1, 1996.. -- $-- $ -- $-- $ 763 $ 763 Capital contributions..... -- -- -- -- 1,806 1,806 Net income for the year... -- -- -- -- 438 438 ------ ---- ------- ---- ------- ------- Balance, December 31, 1996..................... -- -- -- -- 3,007 3,007 Capital contributions..... -- -- -- -- 35,040 35,040 Net income for the year... -- -- -- -- 2,862 2,862 ------ ---- ------- ---- ------- ------- Balance, December 31, 1997..................... -- -- -- -- 40,909 40,909 Net income for period January 1, 1998 through August 2, 1998........... -- -- -- -- 3,399 3,399 Spin-Off and Issuances of common stock............. 24,952 249 42,949 -- (44,308) (1,110) Issuances of common stock under Stock Purchase Plan..................... 5 -- 11 -- -- 11 Rights offering........... 480 5 952 -- -- 957 Proceeds from exercise of stock options, net....... -- -- 17 -- -- 17 Net income for period August 3, 1998 through December 31, 1998........ -- -- -- 551 -- 551 ------ ---- ------- ---- ------- ------- Balance, December 31, 1998..................... 25,437 $254 $43,929 $551 $ -- $44,734 ====== ==== ======= ==== ======= =======
See accompanying notes to the consolidated financial statements. 25 MERISTAR HOTELS & RESORTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 INCLUDING PREDECESSOR ENTITY (in thousands)
1998 1997 1996 --------- ------- ------- Operating activities: Net income....................................... $ 3,950 $ 2,862 $ 438 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 3,372 636 349 Equity in earnings of affiliates................ 1,337 (46) -- Minority interests.............................. 155 103 -- Deferred income taxes........................... 267 -- -- Changes in operating assets and liabilities: Accounts receivable, net....................... (54,825) (5,459) (412) Prepaid expenses............................... (3,096) (320) (724) Deposits and other............................. (8,229) (645) (111) Accounts payable............................... 26,319 1,539 276 Due to affiliates, net......................... (14,850) 3,638 18,344 Accrued expenses and other liabilities......... 55,656 8,859 909 Income taxes payable........................... 69 -- -- --------- ------- ------- Net cash provided by operating activities......... 10,125 11,167 19,069 --------- ------- ------- Investing activities: Purchases of fixed assets........................ (4,624) (2,046) (382) Purchases of intangible assets................... (99,438) (924) (824) Investments in and advances to affiliates........ 2,563 (2,078) (150) Distribution from investments in affiliates...... -- 147 30 Additions to notes receivable.................... -- (1,600) (500) Change in escrows and restricted funds........... (606) -- -- --------- ------- ------- Net cash used in investing activities............. (102,105) (6,501) (1,826) --------- ------- ------- Financing activities: Proceeds from long-term debt..................... 67,000 96 662 Principal payments on long-term debt............. (169) 4,112 -- Repayments to affiliate.......................... -- -- (950) Repayments of loans to management................ -- -- 987 Proceeds from issuances of common stock, net..... 974 -- -- Contributions from CapStar....................... 8,383 -- -- Distributions to minority investors.............. (75) -- -- --------- ------- ------- Net cash provided by financing activities......... 76,113 4,208 699 --------- ------- ------- Net increase (decrease) in cash and cash equivalents...................................... (15,867) 8,874 17,942 Cash and cash equivalents, beginning of year...... 27,022 18,148 206 --------- ------- ------- Cash and cash equivalents, end of year............ $ 11,155 $27,022 $18,148 ========= ======= =======
See accompanying notes to consolidated financial statements. 26 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (dollars in thousands, except per share amounts) 1. Organization MeriStar Hotels & Resorts, Inc. (the "Company") was spun off by CapStar Hotel Company ("CapStar") on August 3, 1998 (the "Spin-Off") to become the lessee, manager and operator of various hotel assets, including those which were previously owned, leased and managed by CapStar and certain of its affiliates. CapStar distributed to its stockholders, on a share-for-share basis, all of the outstanding shares of the Company's common stock, par value $0.01 per share ("Common Stock"). On August 3, 1998, CapStar merged (the "Merger") with and into American General Hospitality Corporation ("AGH"), a Maryland corporation operating as a real estate investment trust, to form MeriStar Hospitality Corporation (the "REIT"). Immediately following the Spin-Off and the Merger, the Company acquired 100% of the partnership interests in AGH Leasing L.P. ("AGH Leasing"), the third- party lessee of most of the hotels owned by AGH, and acquired substantially all of the assets and certain liabilities of American General Hospitality, Inc. ("AGHI"), the third-party manager of most of the hotels owned by AGH and certain other hotels. The Company thereby became the lessee, manager and operator of most of the hotels owned by AGH. The purchase price of $95,000 was funded with a combination of cash and units of limited partnership interest ("OP Units") in the Company's subsidiary operating partnership. In accordance with generally accepted accounting principles ("GAAP"), the acquisitions have been accounted for as purchases and, therefore, the operating results of AGHI and AGH Leasing are included in the Company's consolidated financial statements from the date of acquisition. The Company's financial statements include the historical results of the Company's predecessor entity, the management and leasing operations of CapStar, for all periods and include the operating results of AGH Leasing and AGHI since August 3, 1998. In addition, prior to August 3, 1998, the Company managed substantially all of the hotels owned by CapStar and received management fee revenues from such hotels. Since August 3, 1998, the Company has leased these hotels from the REIT and therefore records no management fees from such hotels but instead records room, food and beverage and other operating department revenues and expenses from such leased properties. Therefore, the Company's results of operations for each of the years in the three-year period ended December 31, 1998 reflect significantly differing numbers of managed and leased hotels throughout the periods. The following table outlines the Company's historical portfolio of managed and leased hotels:
REIT CapStar Third Party Other Leased Owned Managed Leased Total ------------- ------------- ------------ ------------ ------------- Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms ------ ------ ------ ------ ------ ----- ------ ----- ------ ------ December 31, 1998....... 109 28,058 -- -- 41 6,800 53 7,608 203 42,466 December 31, 1997....... -- -- 47 12,019 27 4,631 40 5,687 114 22,337 December 31, 1996....... -- -- 19 5,166 28 4,619 -- -- 47 9,785
Pursuant to an intercompany agreement, the Company and the REIT provide each other with, among other things, reciprocal rights to participate in certain transactions entered into by each party. In particular, the Company has a right of first refusal to become the lessee of any real property acquired by the REIT. The Company also provides the REIT with certain services including administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources, acquisition identification and due diligence, and operational services, for which the Company is compensated in an amount that the REIT would be charged by an unaffiliated third party for comparable services. 27 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 2. Summary of Significant Accounting Policies Principles of Consolidation--The consolidated financial statements include the accounts of the Company and all of its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated joint ventures and affiliated companies in which the Company holds a voting interest of 50% or less and exercises significant influence are accounted for using the equity method. The Company uses the cost method to account for its investment in entities in which it does not have the ability to exercise significant influence. Cash Equivalents and Restricted Cash--The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash represents amounts required to be maintained in escrow. Fixed Assets--Fixed assets are recorded at cost and are depreciated using the straight-line method over lives ranging from five to seven years. Intangible Assets--Intangible assets consist of the value of goodwill and lease contracts purchased, franchise costs, and costs incurred to obtain management contracts. Goodwill represents the excess of cost over the fair value of the net assets of the acquired businesses. Intangible assets are amortized on a straight-line basis over the estimated useful lives of the underlying assets ranging from five to 40 years. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of--The carrying values of long-lived intangible assets are evaluated periodically in relation to the operating performance and expected future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of expected future undiscounted net cash flows is less than book value. The impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. No impairment losses were recorded during 1998, 1997 or 1996. Income Taxes--Prior to the Spin-Off, no provision for income taxes was made since the Company's predecessor entities were partnerships and limited liability companies, and, therefore, all income, losses, and credits for tax purposes were passed through to the individual partners. Concurrent with the Spin-Off, the Company implemented Statement of Financial Accounting Standards ("SFAS") 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. Foreign Currency Translation--Results of operations for the Company's Canadian leased and managed hotels are maintained in Canadian dollars and translated using the average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Resulting translation adjustments are reflected in stockholders' equity as a cumulative foreign currency translation adjustment. At December 31, 1998, the translation adjustment was $35. Transaction gains and losses are included in the results of operations as incurred. Stock-Based Compensation--The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock-based plans and therefore no compensation cost has been recognized for these plans. 28 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 Revenue Recognition--Revenue is earned through the operations and management of the hotel properties and is recognized when earned. Participating Lease Agreements--The Company's participating leases have non- cancelable initial terms ranging from 10 to 15 years, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent payable under each participating lease is the greater of base rent or percentage rent, as defined. Percentage rent applicable to room and food and beverage revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index. Percentage rent applicable to other revenues is calculated by multiplying fixed percentages by the total amounts of such revenues. In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods". EITF No. 98-9 affects the recognition of contingent rental expense in interim periods. This pronouncement requires a lessee to recognize contingent rental expense in interim periods prior to the achievement of the specified target that triggers the contingent rental expense, if the achievement of that target by the end of the fiscal year is considered probable. This new accounting pronouncement relates only to the Company's recognition of lease expense in interim periods for financial reporting purposes; it has no effect on the timing of rent payments under the Company's leases or the Company's annual lease expense calculations. The Company adopted EITF No. 98-9 effective July 1, 1998. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications--Certain 1997 and 1996 amounts have been reclassified to conform to 1998 presentation. 3. Investments in and Advances to Affiliates The Company has ownership interests in certain unconsolidated corporate joint ventures and affiliated companies. The Company's net investment in and advances to these corporate joint ventures and affiliated companies are summarized as follows:
December 31, ------------- 1998 1997 ------ ------ CapStar Wyandotte Company LLC................................. $1,837 $3,023 HGI Holdings, LLC............................................. -- 1,895 BoyStar Ventures, L.P. ....................................... 1,367 1,175 Ballston Parking Associates................................... 1,629 1,629 Other......................................................... 662 336 ------ ------ $5,495 $8,058 ====== ======
29 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 Combined summarized financial information of the Company's unconsolidated corporate joint ventures and affiliated companies is as follows:
December 31, ---------------- 1998 1997 ------- ------- Balance sheet data: Current assets............................................. $ 902 $ 1,773 Non-current assets......................................... 18,332 32,766 Current liabilities........................................ 1,082 1,094 Non-current liabilities.................................... 157 7,000 Operating data: Revenue.................................................... $11,159 $ 1,742 Net loss................................................... (933) (110)
4. Intangible Assets Intangible assets consist of the following:
December 31, ----------------- 1998 1997 -------- ------- Goodwill.................................................. $109,213 $27,605 Lease contracts........................................... 33,216 6,576 Management contracts...................................... 2,992 867 Other..................................................... 4,699 1,612 -------- ------- 150,120 36,660 -------- ------- Less accumulated amortization............................. (3,338) (719) $146,782 $35,941 ======== =======
5. Long-Term Debt Long-term debt consists of the following:
December 31, -------------- 1998 1997 ------- ----- Credit Facility.............................................. $67,000 $ -- Other........................................................ 812 981 ------- ----- 67,812 981 Less current portion......................................... (27) (392) ------- ----- $67,785 $ 589 ======= =====
Credit Facility--On August 3, 1998, the Company entered into a three-year, $75,000, unsecured revolving credit facility (the "Credit Facility") with the REIT. The Credit Facility contains certain covenants, including maintenance of financial ratios, reporting requirements and other customary restrictions. Interest on the facility is variable, based on the 30-day London Interbank Offered Rate plus 350 basis points. As of December 31, 1998, the Company had $67,000 in outstanding borrowings under the Credit Facility, at an interest rate of 8.56%. The Company has determined that the fair value of this note payable approximates its carrying value. The Company incurred interest expense of $1,967 on this facility during 1998. 30 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 Future Maturities--Aggregate future maturities of the above obligations are as follows: 1999-$27; 2001-$67,785. 6. Income Taxes Prior to the Spin-Off, the Company's predecessor entity conducted its operations in partnerships and limited liability companies; these operations, therefore, were not subject to income taxes. The Company is taxable as a C Corporation. Accordingly, the Company's 1998 income taxes are based on pretax income since the Spin-Off. Pretax income for the period August 3, 1998 through December 31, 1998 was $887. The Company's effective income tax rate for the period from August 3, 1998 through December 31, 1998 differs from the federal statutory income tax rate as follows: Statutory tax rate.................................................... 35.0% State and local taxes................................................. 4.2 Difference in rates on foreign subsidiaries........................... 2.3 Business meals and entertainment...................................... 5.2 Compensation expense.................................................. (77.8) Valuation allowance................................................... 69.0 ----- 37.9% =====
The components of income tax expense are as follows: Current: Federal............................................................... $-- State................................................................. 27 Foreign............................................................... 42 ---- 69 ---- Deferred: Federal............................................................... 234 State................................................................. 33 Foreign............................................................... -- ---- 267 ---- $336 ====
31 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 The tax effects of the temporary differences and carryforwards that give rise to the Company's net deferred tax liability at December 31, 1998 are as follows: Deferred tax assets: Allowance for doubtful accounts.................................. $ 236 Accrued vacation................................................. 545 Net operating loss............................................... 613 -------- Total gross deferred tax assets.................................. 1,394 Less valuation allowance......................................... (613) -------- Net deferred tax assets.......................................... 781 -------- Deferred tax liabilities: Accrued expenses................................................. (7) OP Units......................................................... (9,100) Amortization expense............................................. (580) Prepaid expenses................................................. (461) -------- Total gross deferred tax liabilities............................. (10,148) -------- Net deferred tax liability........................................ $ (9,367) ========
At December 31, 1998, the Company had potential federal income tax benefits of $613 from a net operating loss carryforward that expires in 2018. For financial reporting purposes, the Company has established a valuation allowance of $613 due to the uncertainty associated with realizing this deferred tax asset. As part of the Spin-Off, the Company received certain assets that CapStar had acquired, in part, through the issuance of OP Units. These assets were acquired by CapStar prior to August 3, 1998. At August 3, 1998 the tax basis of these assets differed from the financial reporting amounts that the Company recorded as part of the Spin-Off. The Company has recorded a deferred income tax liability of $9,100 for the estimated future tax effect of this basis difference. The amount of the basis difference and corresponding deferred income tax liability have been estimated based on information available as of the date of the Spin-Off. The deferred income tax liability may be adjusted upon the final determination of the basis difference. Any such adjustment, however, would be recorded as an increase or decrease to the deferred income tax liability balance, and a corresponding decrease or increase in the capital CapStar contributed to the Company as part of the Spin-Off. 7. Stockholders' Equity and Minority Interests Common Stock--In conjunction with the Spin-Off, CapStar distributed to its stockholders, on a share-for-share basis, all of the 24,948,754 outstanding shares of the Company's Common Stock. In connection with the Spin-Off the Company distributed to holders of the REIT's common stock and the REIT's OP Units, one right for every six shares or units owned. Each right entitled its holder to purchase a share of Common Stock at a subscription price of $2.84 per share, during a subscription period from August 13, 1998 through August 31, 1998. The Rights Offering resulted in the sale of approximately 480,000 shares of Common Stock with net proceeds to the Company of $957. In November 1998, the Company implemented a stock purchase plan that allows eligible employees to purchase the Company's common stock at a discount to market value. The Company has reserved 1,500,000 shares of Common Stock for issuance under this plan. The Company has sold 5,384 shares under this plan in 1998. OP Units--Substantially all of the Company's assets are held indirectly by MeriStar H&R Operating Company, L.P. (the "Operating Partnership"), the Company's subsidiary operating partnership. 32 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 The Operating Partnership's partnership agreement currently has three classes of OP Units: Class A OP Units, Class B OP Units and Preferred OP Units. No dividends were paid during 1998 and no dividends are expected to be paid during 1999 to the Class A OP Unit holders and Class B OP Unit holders. Preferred OP Unit holders receive a 6.5% cumulative annual preferred return based on an assumed price per Common Share of $3.34, compounded quarterly to the extent not paid on a current basis, and are entitled to a liquidation preference of $3.34 per Preferred OP Unit. All net income and capital proceeds earned by the Operating Partnership, after payment of the annual preferred return and, if applicable, the liquidation preference, will be shared by the holders of the Class A OP Units and Class B OP Units in proportion to the number OP Units owned by each such holder. Each Class A and Class B OP Unit is redeemable by the holder for one share of Common Stock (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 may be redeemed by the Operating Partnership at a price of $3.34 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 April 1, 2000 or by the holders of the Preferred OP Units at a price of $3.34 per Preferred OP Unit (in cash or, at the holder's option, for a number of shares of Common Stock having a value equal to the redemption price) at any time after April 1, 2004. In conjunction with the Spin-Off and Merger, the Company issued to holders of CapStar OP Units, 1,083,759 Class A and B OP Units and 392,157 Class C OP Units. Immediately following the Spin-Off and the Merger, the Company acquired 100% of the partnership interests in AGH Leasing and acquired substantially all of the assets and certain liabilities of AGHI. The purchase price of $95,000 was funded with a combination of cash and the issuance of 3,414,872 Class B OP Units. In October 1998, in conjunction with the purchase of certain assets of South Seas Properties Company, L.P., the Company issued 916,230 Class A OP Units. 8. Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for net income for the period August 3, 1998 through December 31, 1998: Basic EPS Computation: Net income.......................................................... $ 551 Weighted average number of shares of Common Stock outstanding....... 25,335 ------- Basic EPS........................................................... $ .02 ======= Diluted EPS Computation: Net income.......................................................... $ 551 Minority interest, net of tax....................................... (90) ------- Adjusted net income................................................. $ 461 ------- Weighted average number of shares of Common Stock outstanding....... 25,335 Common Stock equivalents: Stock options..................................................... 18 OP Units.......................................................... 1,308 ------- Total weighted average number of diluted shares of Common Stock outstanding........................................................ 26,661 ------- Diluted EPS......................................................... $ .02 =======
Certain OP Units were not included in the computation of diluted EPS as their effect was anti-dilutive. 33 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 EPS for 1998 has been calculated using net income amounts for the period from the Spin-Off on August 3, 1998 through December 31, 1998. EPS is not presented for periods prior to the Spin-Off because the Company's predecessor entities were partnerships. 9. Related-Party Transactions Pursuant to an intercompany agreement, the Company and the REIT provide each other with, among other things, reciprocal rights to participate in certain transactions entered into by each party. In particular, the Company has a right of first refusal to become the lessee of any real property acquired by the REIT. The Company also provides the REIT with certain services including administrative, corporate, accounting, finance, insurance, legal, tax, data processing, human resources, acquisition identification and due diligence, and operational services, for which the Company is compensated in an amount that the REIT would be charged by an unaffiliated third party for comparable services. During the year ended December 31, 1998, the Company provided $781 of such services to the REIT. 10. Stock-Based Compensation On August 3, 1998, the Company adopted an equity incentive plan that authorized the Company to issue and award up to 4,000,000 shares of common stock. Awards under the plan may be granted to directors, officers, or other key employees. On August 8, 1998, the Company adopted an equity incentive plan for non- employee directors that authorized the Company to issue and award options for up to 125,000 shares of common stock. These options will vest in three annual installments beginning on the date of grant and on subsequent anniversaries thereof, provided the eligible director continues to serve as a director of the Company on each such anniversary. Options granted under the Plan are exercisable for ten years from the grant date. In November 1998, the Company implemented a stock purchase plan that allows eligible employees to purchase the Company's common stock at a discount to market value. The Company has reserved 1,500,000 shares of Common Stock for issuance under this plan. Stock option activity for 1998 is as follows:
Equity Incentive Plan Directors' Plan ----------------------- ---------------------- Number Average Number Average of Shares Option Price of Shares Option Price --------- ------------ --------- ------------ Balance, August 3, 1998..... -- -- -- $ -- Granted..................... 2,805,955 $3.37 45,000 $3.28 Exercised................... (2,235) -- -- -- Forfeited................... -- -- -- -- --------- ----- ------ ----- Balance, December 31, 1998.. 2,803,720 $3.37 45,000 $3.28 ========= ===== ====== ===== Shares exercisable at December 31, 1998.......... 1,415,044 $3.43 -- $ -- ========= ===== ====== =====
34 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------- -------------------- Weighted Weighted Average Weighted Average Range of Number Remaining Average Number Exercise exercise prices outstanding Contractual Life Exercise Price exercisable Price --------------- ----------- ---------------- -------------- ----------- -------- $2.00 to $2.36.......... 737,892 6.87 $2.36 602,515 $2.36 $2.38 to $3.28.......... 1,115,753 9.55 3.21 39,317 2.72 $3.44 to $3.93.......... 211,750 7.19 3.74 178,217 3.72 $4.06 to $5.01.......... 783,325 8.91 4.45 594,995 4.46 --------- ---- ----- --------- ----- $2.00 to $5.01.......... 2,848,720 8.50 $3.37 1,415,044 $3.43 ========= ==== ===== ========= =====
The Company has adopted the disclosure-only provisions of SFAS 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. Pro forma information regarding net income and EPS is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1998:
1998 ---------- Risk-free interest rate.......................................... 5.51% Dividend rate.................................................... -- Volatility factor................................................ 0.50 Weighted average expected life................................... 6.15 years
The Company's pro forma net loss and basic EPS as if the fair value method had been applied were $(2,324) and $(0.09) for 1998. The effects of applying SFAS No. 123 for disclosing compensation costs may not be representative of the effects on reported net income and EPS for future years. 11. Commitments and Contingencies The Company leases certain hotels under non-cancelable participating leases with initial terms ranging from 10 to 15 years, expiring through 2013. The total amount payable on these participating leases was $11,100 and $5,682 at December 31, 1998 and December 31, 1997, respectively. The Company also leases corporate office space. Future minimum lease payments required under these operating leases as of December 31, 1998 were as follows: 1999.............................................................. $ 254,797 2000.............................................................. 261,648 2001.............................................................. 268,353 2002.............................................................. 275,395 2003.............................................................. 282,651 Thereafter........................................................ 2,217,099 ---------- $3,559,943 ==========
35 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 The Company also leases office equipment under non-cancelable operating leases. These amounts are insignificant to the financial statements. In the course of the Company's normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 12. Segments The Company is organized into three primary operating divisions. Each division is managed separately because of its distinctive products and services offered by the hotel properties within the operating division. These operating divisions are the Company's three reportable operating segments: upscale, full-service hotels ("Hotels"); premium limited-service hotels and inns ("Inns"); and resort properties ("Resorts"). The Company's management evaluates performance of each segment based on earnings before interest taxes, depreciation, and amortization ("EBITDA"). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company's financial condition and results of operations as of December 31, 1998 and December 31, 1997 and for the years ended December 31, 1998, 1997 and 1996 reflect significantly differing numbers of managed and leased hotels throughout the periods. Consequently, the Company has determined that it is not practicable to present the segment information of the management and leasing operations of CapStar, its predecessor entity, for the years ended December 31, 1997 and December 31, 1996. Also, prior to the Spin-Off, the management and leasing operations of CapStar conducted its business primarily in only one operating segment. Therefore, the segment disclosures presented below are for the period August 3, 1998 through December 31, 1998.
Total Hotels Inns Resorts Segments -------- ------- ------- -------- Revenues.................................... $322,720 $72,267 $73,878 $468,865 Participating Lease Expense................. $101,423 $29,430 $24,187 $155,040 EBITDA...................................... $ 4,710 $ 172 $ (882) $ 4,000 Total Assets................................ $ 48,264 $42,091 $16,276 $106,631
The following is a reconciliation of the segment information to the Company's consolidated data:
Participating Lease Revenues Expense EBITDA Assets -------- ------------- ------- -------- Total Segments..................... $468,865 $155,040 $ 4,000 $106,631 Other Items........................ 7,526 -- 1,164 140,898 -------- -------- ------- -------- Total August 3, 1998 through December 31, 1998................. $476,391 $155,040 $ 5,164 $247,529 -------- -------- ------- -------- Total Pre-Spin-Off (January 1, 1998 through August 2, 1998)........... 86,046 31,561 6,004 -- -------- -------- ------- -------- Per Financial Statements........... $562,437 $186,601 $11,168 $247,529 ======== ======== ======= ========
The other items in the table above represent non-operating segment activity and assets. These are primarily unallocated corporate expenses and non-segment activities, and intangible and other miscellaneous assets. 36 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 1998, 1997 AND 1996 Revenues for Canadian operations totaled $8,865 for the period August 3, 1998 through December 31, 1998. 13. Acquisitions Pursuant to the Spin-Off and Merger, the Company acquired 100% of the partnership interests in AGH Leasing, the third-party lessee of most of the hotels owned by AGH, and substantially all of the assets and liabilities of AGHI, the third-party manager of most of the AGH hotels. As a result, the Company became the lessee and manager of most of the hotels owned by the REIT. The purchase price of $95,000 was paid with a combination of cash and OP Units in the Company's subsidiary operating partnerships. The following unaudited pro forma summary presents information if AGH Leasing and AGHI had been acquired, and the Spin-Off had occurred, at the beginning of the periods presented. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Company. PRO FORMA INFORMATION (UNAUDITED)
1998 1997 ---------- -------- Total revenue............................................... $1,083,348 $938,613 Net income.................................................. $ 3,295 $ 3,097 Diluted EPS................................................. $ 0.13 $ 0.12
14. Quarterly Financial Information (Unaudited) The following is a summary of the Company's quarterly results of operations:
1998 1997 --------------------------------- ------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- -------- -------- ------- ------- ------- ------- Total revenue........... $30,130 $41,101 $195,498 $295,708 $1,838 $2,816 $4,794 $14,391 Total operating expenses............... 28,798 38,462 187,890 299,491 1,390 2,129 3,911 13,434 Net operating income (loss)................. 1,332 2,639 7,608 (3,783) 448 687 883 957 Net income (loss)....... 758 2,223 3,605 (2,636) 424 650 861 927 Diluted earnings (loss) per share.............. -- -- $ 0.12 $ (0.10) -- -- -- --
15. Supplemental Cash Flow Information
1998 1997 1996 ------- ------- ---- Cash paid for interest and income taxes: Interest............................................... $ 2,017 $ 56 $138 Income taxes........................................... -- -- -- Non-cash investing and financing activities: OP Units issued in purchase of intangible assets....... $14,022 $ -- $-- Assets contributed by CapStar............................ $ 2,605 $38,844 $-- Liabilities contributed by CapStar....................... (7,549) (4,219) -- Debt contributed by CapStar.............................. (1,116) -- -- ------- ------- ---- Net assets contributed by CapStar........................ $(6,060) $34,625 $-- ======= ======= ====
37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 405 of Regulation S-K with respect to Directors and Executive Officers of the Company is incorporated herein by reference to the sections entitled "Management" and "Principal Stockholders" in the Company's definitive proxy for its 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the sections entitled "Executive Compensation," "Compensation of Directors" and "Stock Option Grants" in the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the section entitled "Principal Stockholders" in the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in the 1999 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. Index to Financial Statements and Financial Statement Schedules 1. Financial Statements The Financial Statements included in the Annual Report on Form 10-K are listed in Item 8. 2. Financial Statement Schedules The Financial Statement Schedules included in the Annual Report on Form 10-K are listed in Item 8. 38 3. Exhibits All Exhibits listed below are filed with this Annual Report on Form 10-K unless specifically stated to be incorporated by reference to other documents previously filed with the Commission.
Exhibit No. Description of Document ----------- ----------------------- 2.1* Acquisition Agreement, dated as of March 15, 1998, among MeriStar H&R Operating Company, L.P., American General Hospitality Corporation, American General Hospitality, Inc., AGHL GP, Inc., the general partner of AGH Leasing, L.P., and the limited partners of AGH Leasing, Inc. 2.2** Form of Contribution, Assumption and Indemnity Agreement between CapStar Hotel Company and MeriStar H&R Operating Company, L.P. 2.3** Agreement and Plan of Merger, dated as of March 15, 1998, among American General Hospitality Corporation, American General Hospitality Operating Partnership, L.P., CapStar Hotel Company, CapStar Management Company, L.P. and CapStar Management Company II, L.P. 2.4*** Amendment No. 1 to the Agreement and Plan of Merger, dated as of June 5, 1998, by and among American General Hospitality Corporation, American General Hospitality Operating Partnership, L.P., CapStar Hotel Company, CapStar Management Company, L.P. and CapStar Management Company II, L.P. 2.5* Form of Dealer-Manager Agreement 3.1* Amended and Restated Certificate of Incorporation of the Company 3.2* By-laws of the Company 4.1* Specimen Common Stock certificate 4.4* Form of Rights Agreement 10.1* Form of Employment Agreement between the Company and Paul W. Whetsell 10.2* Form of Employment Agreement between the Company and Steven D. Jorns 10.3* Form of Employment Agreement between the Company and David E. McCaslin 10.4* Form of Employment Agreement between the Company and James A. Calder 10.5* Form of Employment Agreement between the Company and John E. Plunket 10.6* Form of Equity Incentive Plan of the Company 10.7* Form of Non-Employee Directors' Incentive Plan of the Company 10.8** Form of Intercompany Agreement among MeriStar Hotels & Resorts, Inc., MeriStar H&R Operating Company, L.P., MeriStar Hospitality Corporation and MeriStar Hospitality Operating Partnership, L.P. 10.9 Revolving Credit Agreement, dated as of August 3, 1998 between MeriStar H&R Operating Company, L.P., and MeriStar Hospitality Operating Partnership, L.P. 10.10**** Form of Employee Stock Purchase Plan 10.11 Amended and Restated Agreement of Limited Partnership, Agreement of MeriStar H&R Operating Company, L.P., dated as of August 3, 1998 21 Subsidiaries of the Company 23.1 Consent of KPMG LLP 27 Financial Data Schedule 29 Power of Attorney (see signature page)
- -------- * Incorporated by reference to the Company's Registration Statement on Form S- 1 (File No. 333-49881), filed with the Securities and Exchange Commission on August 12, 1998. ** Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K dated March 17, 1998, No. 1-11903. *** Incorporated by reference to American General Hospitality Corporation's Registration Statement on Form S-4 (File No. 333-49611), filed with the Securities and Exchange Commission on June 22, 1998. **** Incorporated by reference to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on August 18, 1998. B. Reports on Form 8-K: A current report on Form 8-K was filed with the Securities and Exchange Commission on October 16, 1998, as amended, reporting events required to be reported pursuant to Items 5 and 7 of the current report on Form 8-K. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, MeriStar Hotels & Resorts, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERISTAR HOTELS & RESORTS, INC. BY: /s/ Paul W. Whetsell_____________ Paul W. Whetsell Chief Executive Officer and Chairman of the Board Dated: March , 1999 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Paul W. Whetsell and David E. McCaslin, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this report filed pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and things requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report and the foregoing Power of Attorney have been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Paul W. Whetsell Chief Executive Officer March 22, 1999 ______________________________________ and Chairman of the Board Paul W. Whetsell of Directors (Principal Executive Officer) /s/ Steven D. Jorns Vice Chairman of the Board March 22, 1999 ______________________________________ of Directors Steven D. Jorns /s/ David E. McCaslin President and Director March 22, 1999 ______________________________________ David E. McCaslin /s/ James A. Calder Chief Financial Officer March 22, 1999 ______________________________________ (Principal Financial and James A. Calder Accounting Officer) /s/ Daniel L. Doctoroff Director March 22, 1999 ______________________________________ Daniel L. Doctoroff
40
Signature Title Date --------- ----- ---- Director March 22, 1999 ______________________________________ Kent R. Hance /s/ S. Kirk Kinsell Director March 22, 1999 ______________________________________ S. Kirk Kinsell /s/ Joseph McCarthy Director March 22, 1999 ______________________________________ Joseph McCarthy Director March 22, 1999 ______________________________________ James McCurry /s/ James R. Worms Director March 22, 1999 ______________________________________
James R. Worms 41 March 22, 1999 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, DC 20549-1004 Re: MeriStar Hotels & Resorts, Inc.-Form 10-K for the year ended December 31, 1998 Ladies and Gentlemen: We are electronically transmitting herewith for filing with the Securities and Exchange Commission, pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 and Rule 901(d) of Regulation S-T, the Form 10-K of MeriStar Hotels & Resorts, Inc. for the year ended December 31, 1998. One copy of the enclosed Form 10-K has also been sent to the New York Stock Exchange, the only exchange on which the Company's common stock, par value $.01 per share, is listed. Sincerely, /s/ Christopher L. Bennett ------------------------------------- Christopher L. Bennett Secretary 42 EX-10.9 2 REVOLVING CREDIT AGREEMENT U.S. $75,000,000 REVOLVING CREDIT AGREEMENT Dated as of August 3, 1998 between MERISTAR H & R OPERATING COMPANY, L.P., as the Borrower, --------------- and MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., as the Lender ------------- TABLE OF CONTENTS -----------------
Page ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01 Certain Defined Terms 1 Section 1.02 Computation of Time Periods 15 Section 1.03 Accounting Terms; Changes in GAAP 15 Section 1.04 Miscellaneous 16 ARTICLE II ADVANCES Section 2.01 Advances 16 Section 2.02 Method of Borrowing 17 Section 2.03 Reduction of the Commitment 17 Section 2.04 Repayment of Advances 17 Section 2.05 Interest, Late Payment Fee 18 Section 2.06 Prepayments 19 Section 2.07 Payments and Computations 20 Section 2.08 Taxes 21 ARTICLE III CONDITIONS OF LENDING Section 3.01 Conditions Precedent to Initial Advance 22 Section 3.02 Conditions Precedent for Each Borrowing 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Existence; Qualification; Partners; Subsidiaries 23 Section 4.02 Partnership and Corporate Power 23 Section 4.03 Authorization and Approvals 24 Section 4.04 Enforceable Obligations 24 Section 4.05 Financial Statements and Registration Statement 24 Section 4.06 True and Complete Disclosure 24 Section 4.07 Litigation 25 Section 4.08 Use of Proceeds 25 Section 4.09 Investment Company Act 25 Section 4.10 Taxes 25 Section 4.11 Pension Plans 25 Section 4.12 No Burdensome Restrictions; No Defaults 26 Section 4.13 Environmental Condition 26 Section 4.14 Legal Requirements, Zoning, Utilities, Access 27 Section 4.15 Existing Indebtedness 28 Section 4.16 Leases and Management Agreements 28 ARTICLE V AFFIRMATIVE COVENANTS Section 5.01 Compliance with Laws, Etc. 28
Page ---- Section 5.02 Preservation of Existence; Separateness, Etc. 29 Section 5.03 Payment of Taxes, Etc. 29 Section 5.04 Reporting Requirements 29 Section 5.05 Insurance 31 Section 5.06 Material Documents 31 ARTICLE VI NEGATIVE COVENANTS Section 6.01 Liens, Etc. 32 Section 6.02 Indebtedness 32 Section 6.03 Agreements Restricting Distributions From Subsidiaries 33 Section 6.04 Fundamental Changes; Asset Dispositions 33 Section 6.05 Investments, Loans, Future Properties 33 Section 6.06 Affiliate Transactions 33 Section 6.07 Sale or Discount of Receivables 33 Section 6.08 Restricted Payments 33 ARTICLE VII FINANCIAL COVENANTS Section 7.01 Senior Interest Coverage Ratio. 35 Section 7.02 Total Interest Coverage Ratio. 35 Section 7.03 Senior Fixed Charge Ratio. 35 Section 7.04 Total Fixed Charge Ratio. 35 Section 7.05 Senior Indebtedness Leverage Ratio 35 Section 7.06 Leverage Ratio. 35 ARTICLE VIII SUBORDINATION Section 8.01 Agreement to Subordinate. 36 Section 8.02 Liquidation; Dissolution; Bankruptcy. 36 Section 8.03 Default on Financial Institution Senior Indebtedness. 36 Section 8.04 Acceleration of Notes. 38 Section 8.05 When Distribution Must Be Paid Over. 38 Section 8.06 Notice by Borrower. 38 Section 8.07 Subrogation. 38 Section 8.08 Relative Rights. 38 ARTICLE IX EVENTS OF DEFAULT; REMEDIES Section 9.01 Events of Default 38 Section 9.02 Optional Acceleration of Maturity; Other Actions 40 Section 9.03 Automatic Acceleration of Maturity 41 ARTICLE X MISCELLANEOUS Section 10.01 Amendments, Etc. 41 Section 10.02 Notices, Etc. 41 Section 10.03 No Waiver; Remedies 41 Section 10.04 Costs and Expenses 42 Section 10.05 Binding Effect 42
Page ---- Section 10.06 Indemnification 42 Section 10.07 Execution in Counterparts 43 Section 10.08 Survival of Representations, Indemnifications, etc 43 Section 10.09 Severability 43 Section 10.10 Usury Not Intended 44 Section 10.11 GOVERNING LAW 44 Section 10.12 CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL 45 Section 10.13 Knowledge of Borrower 46 Section 10.14 Lender Not in Control 46 Section 10.15 Headings Descriptive 46 Section 10.16 Time is of the Essence 46
EXHIBITS: Exhibit A - Form of Note Exhibit B - Form of Guaranty SCHEDULES: Schedule 1.01 Guarantors Schedule 4.07 Litigation Schedule 4.14 Environmental Condition Schedule 4.15 Legal Requirements; Zoning; Utilities; Access Schedule 4.16 Existing Indebtedness Schedule 4.17 Management Agreements Schedule 9.02 Notice Information REVOLVING CREDIT AGREEMENT THIS REVOLVING CREDIT AGREEMENT, dated as of August 3, 1998, (this "Agreement"), between MERISTAR H & R OPERATING COMPANY, L.P., a Delaware limited partnership, as the Borrower, and MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., as the Lender. PRELIMINARY STATEMENTS: WHEREAS, the Borrower desires that the Lender extend a credit facility, the proceeds of which will be used to provide financing for working capital and general corporate purposes, including the acquisition of management contracts, leases and entities owning such assets; WHEREAS, the Borrower intends to obtain financing (the "Financial Institution Senior Indebtedness") from certain third party financial lending institutions (the "Financial Institution Lenders") and desires that borrowings under this credit facility with Lender be subordinated to borrowings under the Financial Institution Senior Indebtedness; and WHEREAS, the Lender has agreed to extend such credit facility as more specifically described in this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the provisions contained in this Agreement, the parties hereto do hereby agree as follows: ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS Section 1.01 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Advance" means any advance by the Lender to the Borrower pursuant to this Agreement or a continuation of an existing Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term "control" (including the terms "controlled by" or "under common control with") means the 1 possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "AGH OP" means American General Hospitality Operating Partnership, L.P., a Delaware limited partnership. "AGH REIT" means American General Hospitality Corporation, a Maryland corporation. "Agreement" has the meaning given such term in the initial paragraph of this agreement. "Applicable Margin" means 3.5% per annum. "Asset Disposition" means any conveyance, exchange, transfer, or assignment of any Investment or Property by the Borrower or a Guarantor to a Person other than the Borrower or a Guarantor which term shall not include the termination of any Lease or Management Agreement. "Borrower" means MeriStar H & R Operating Company, L.P., a Delaware limited partnership. "Borrowing" means a borrowing consisting of Advances made by the Lender pursuant to Section 2.01. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City and, if the applicable Business Day relates to any Advances, any day other than a Saturday or Sunday or a day on which banking institutions are generally authorized or obligated by law or executive order to close in the City of London, England. "Capital Lease" means, for any Person, any lease of any Property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" means, as to any Person, the capitalized amount of all obligations of such Person or any of its Subsidiaries under Capitalized Leases, as determined on a consolidated basis in conformity with GAAP. "CapStar" means CapStar Hotel Company, a Delaware corporation. "CapStar Hotel I" means CapStar Hotel Operating Company, LLC, a Delaware limited liability company. 2 "CapStar Hotel II" means CapStar Hotel Operating Company II, LLC, a Delaware limited liability company. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, state and local analogs, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect. "Change in Control" means for any Person a change in ownership or control of such Person effected through either of the following transactions: (a) any Person or related group of Persons (other than such Person or an Affiliate of such Person) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of such Person's outstanding securities; or (b) there is a change in the composition of such Person's Board of Directors over a period of thirty-six (36) consecutive months (or less) such that a majority of Board members (rounded up to the nearest whole number) ceases to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election who were elected in compliance with this clause (ii). "Closing Date" means August 3, 1998. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. "Commitment" means $75,000,000. "Compliance Certificate" means a certificate of the Borrower in the form reasonably acceptable to the Lender. "Consolidated" refers to the consolidation of the accounts of the Parent with the Parent's Subsidiaries in accordance with GAAP, including principles of consolidation consistent with those applied in the preparation of the Registration Statement. "Controlled Group" means all members of the controlled group of corporations and all trades (whether or not incorporated) under common control which, 3 together with the Borrower, are treated as a single employer under Section 414 of the Code. "Credit Documents" means this Agreement, the Notes, the Guaranties, and each other agreement, instrument or document executed by the Borrower or any of its Subsidiaries at any time in connection with this Agreement. "Default" means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Dollars" and "$" means lawful money of the United States of America. "EBITDA" means for any Person or Hotel Property, as applicable, for any period for which such amount is being determined, an amount equal to (a) the Net Income for such Person or Hotel Property, as applicable, for such period plus (b) to the extent deducted in determining Net Income, Interest Expense, income taxes, depreciation, amortization, and other non-cash items for such period, as determined on a Consolidated basis in accordance with GAAP. "Effective Date" means the date all of the conditions precedent set forth in Section 3.01 have been satisfied. "Environment" or "Environmental" shall have the meanings set forth in 42 U.S.C. (S) 9601(8), as amended. "Environmental Claim" means any third party (including governmental agencies and employees) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) which seeks to impose liability under any Environmental Law. "Environmental Law" means all Legal Requirements arising from, relating to, or in connection with the Environment, health, or safety, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, medical, infectious, or toxic substances, materials or wastes; (d) the safety or health of employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, medical, infectious, or toxic substances, materials or wastes. 4 "Environmental Permit" means any permit, license, order, approval or other authorization under Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" has the meaning set forth in Section 9.01. "Exchange Act" means the Securities Exchange Act of 1934, 15 U.S.C. (S)78a et. seq. "Facility" means the $75,000,000 revolving credit facility between Borrower and the Lender. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or any of its successors. "Financial Institution Senior Indebtedness" means up to $75,000,000 of Senior Indebtedness obtained by the Borrower subsequent to the execution of this Agreement from a Financial Institution Lender and designated by the Borrower as Financial Institution Senior Indebtedness. "Financial Institution Lender" means a third party financial lending institution which provides the Borrower with Financial Institution Senior Indebtedness. "Fiscal Quarter" means each of the three-month periods ending on March 31, June 30, September 30 and December 31. "Fiscal Year" means the twelve-month period ending on December 31. "Fixed Charges" means, for any Person for the period for which such amount is being determined, the amount (without duplication) for such Person and its Subsidiaries of all scheduled principal payments on Indebtedness (excluding optional prepayments and scheduled principal payments in respect of any such Indebtedness which is payable in a single installment at final maturity), Total or Senior (as applicable) Interest Expense during such period, all payments scheduled to be made in respect of Capital Leases on a Consolidated basis during such period, and all preferred stock dividends paid during such period. "Fund," "Trust Fund," or "Superfund" means the Hazardous Substance Response Trust Fund, established pursuant to 42 U.S.C. (S) 9631 (1988) and the Post-closure Liability Trust Fund, established pursuant to 42 U.S.C. (S) 9641 (1988), which statutory provisions have been amended or repealed by the Superfund Amendments and Reauthorization Act of 1986, and the "Fund," "Trust Fund," or "Superfund" that are now maintained pursuant to 42 U.S.C. (S) 9507. 5 "GAAP" means United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the requirements of Section 1.03. "Governmental Authority" means any foreign governmental authority, the United States of America, any state of the United States of America and any subdivision of any of the foregoing, and any agency, department, commission, board, authority or instrumentality, bureau or court having jurisdiction over the Lender, the Parent, the Borrower, any Subsidiaries of the Borrower or the Parent, an Approved Participating Lessee, a property manager or any of their respective Properties. "Guarantor" means each of the Parent and each Subsidiary of the Borrower and "Guarantors" means all of such Persons. The Guarantors on the Effective Date are identified on Schedule 1.01. "Guaranty" means one or more Guaranty in substantially the form of the attached Exhibit B executed by the Borrower, the Parent and all of the Subsidiaries of the Borrower, evidencing the joint and several guaranty by the signatories thereto of the obligations of Borrower in respect of the Credit Documents, and any future guaranty and contribution agreement executed to secure Advances, as any of such agreements may be amended hereafter in accordance with the terms of such agreements. "Hazardous Substance" means the substances identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radio nuclides, radioactive materials, and medical and infectious waste. "Hazardous Waste" means the substances regulated as such pursuant to any Environmental Law. "Hospitality/Leisure Management Business" shall mean the leasing, management or operation of a full-service and limited-service hotel or resort, executive conference center, condominium rental pool, time share program, an extended stay lodging, or a convention center, and other businesses incidental to, or in support of, such business, including without limitation, (a) leasing, managing or operating lodging facilities, restaurants and other food-service facilities, golf facilities or other entertainment facilities or club, convention or meeting facilities and marketing services or reservation systems related thereto, and (b) leasing, managing or operating real estate ancillary or connected to any lodging facilities, restaurants and other food-service facilities, golf facilities or other entertainment facilities or club, convention or meeting facilities and marketing services or reservation system leased, managed or operated (or proposed to be leased, managed or operated) by the Borrowers, the Guarantors or any of 6 their Subsidiaries at any time (and debt or equity investments in any of the foregoing, which are leased, managed or operated by the Borrower or a Subsidiary). "Hotel Property" for any hotel operated or managed by Borrower or its Subsidiaries means the real property and the personal property for such hotel. "Improvements" for any hotel means all buildings, structures, fixtures, tenant improvements and other improvements of every kind and description now or hereafter located in or on or attached to the Land for such hotel; and all additions and betterments thereto and all renewals, substitutions and replacements thereof. "Indebtedness" means (without duplication), at any time and with respect to any Person, (a) indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services purchased (other than amounts constituting trade payables, accruals or bank drafts arising in the ordinary course of business); (b) indebtedness of others in the amount which such Person has directly or indirectly assumed or guaranteed or otherwise provided credit support therefor or for which such Person is liable as a partner of such Person; (c) indebtedness of others in the amount secured by a Lien on assets of such Person, whether or not such Person shall have assumed such indebtedness; (d) obligations of such Person in respect of letters of credit, acceptance facilities, or drafts or similar instruments issued or accepted by banks and other financial institutions for the account of such Person (other than trade payables or bank drafts arising in the ordinary course); (e) obligations of such Person under Capital Leases; and (f) to the extent required by GAAP, obligations under interest rate swap agreements, interest rate cap agreements, interest rate collar agreements or other similar agreements or arrangements designed to protect against fluctuations in interest rates. "Intercompany Agreement" means the Intercompany Agreement, dated as of August 3, 1998, by and among the Parent, the Borrower, MeriStar, and MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership. "Interest Period" means, for each Advance comprising part of the same Borrowing, the period commencing on the date of such Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.02 and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.02. The duration of each such Interest Period shall be one, two, three or six months, in each case as the Borrower may select, upon notice received by the Lender not later than 11:00 a.m. (New York, New York time) on the second Business Day prior to the first day of such Interest Period, pro vided, however, that: 7 (a) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (b) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; (c) each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; and (d) no Interest Period with respect to any portion of any Advance shall extend beyond the Maturity Date. "Interest Rate Agreements" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement designed to protect the Borrower, the Parent or any of their respective Subsidiaries against fluctuations in interest rates. "Investment" means, with respect to any Person, (a) any loan or advance to any other Person, (b) the ownership, purchase or other acquisition of, (i) any Stock, Stock Equivalents, other equity interest, obligations or other securities of, any other Person, (ii) or all or substantially all of the assets of any other Person, or (iii) all or substantially all of the assets constituting the business of a division, branch or other unit operation of any other Person, or (c) any joint venture or partnership with, or any capital contribution to, or other investment in, any other Person or any real property. "Investment Amount" means for any Investment, the aggregate purchase price paid by the Borrower or its Subsidiary for such Investment (giving effect to any securities used to purchase such Investment at the fair market value of the securities at the time of purchase based upon the price at which such securities could be exchanged into the Parent's common stock assuming such exchange occurred on the date of acquiring such Investment). "Land" for any hotel means the real property upon which the hotel is located, together with all rights, title and interests appurtenant to such real property, including without limitation all rights, title and interests to (a) all strips and gores within or adjoining such property, (b) the streets, roads, sidewalks, alleys, and ways adjacent thereto, (c) all of the tenements, hereditaments, easements, reciprocal easement agreements, rights-of-way and other rights, privileges and appurtenances thereunto 8 belonging or in any way pertaining thereto, (d) all reversions and remainders, (e) all air space rights, and all water, sewer and wastewater rights, (e) all mineral, oil, gas, hydrocarbon substances and other rights to produce or share in the production of anything related to such property, and (f) all other appurtenances appurtenant to such property, including without limitation, any now or hereafter belonging or in any way appertaining thereto. "Lease" means a participating lease by and between a lessor and Borrower or its Subsidiary pursuant to which the lessee operates a Hotel Property. "Legal Requirement" means any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority. "Lender" means MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership. "Leverage Ratio" means the ratio on any date of (a) the Parent's Total Indebtedness on such date to (b) the EBITDA of the Parent and the Parent's Subsidiaries on a Consolidated basis for the Rolling Period immediately preceding such date; provided that if the Borrower or one of its Subsidiary's enters into a Lease or Management Agreement with projected revenue in excess of $100,000, or an Investment with an Investment Amount in excess of $250,000, on or prior to such date, the EBITDA arising from such Lease, Management Agreement or Investment, as applicable, for the applicable Rolling Period, shall be included in the calculation of EBITDA solely for calculation of EBITDA of the Leverage Ratio (adjusted upward or downward to provide for a deemed lease or management fee equal to a two and one-half percent (2.5%) of gross revenues from such Lease, Management Agreement or Investment incurred before the date of acquisition of such Lease, Management Agreement or Investment regardless of the actual lease management fees paid in connection with such Lease, Management Agreement or Investment incurred before the date of acquisition of such Lease, Management Agreement or Investment); and provided further that if such a Lease or Management Agreement with projected revenue in excess of $100,000, or an Investment with an Investment Amount in excess of $250,000, is assigned or sold on or prior to such date, the EBITDA arising from such Lease, Management Agreement or Investment, as applicable, for the applicable Rolling Period, shall be included in the calculation of EBITDA solely for calculation of EBITDA of the Leverage Ratio. "LIBOR" means, for the Interest Period for each Advance comprising part of the same Borrowing, an interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) equal to (A) the rate per annum at which deposits in Dollars are offered to prime banks in the London interbank market at 11:00 a.m. (London time) two Business Days before the first day of such Interest Period as shown on the 9 display designated "British Banker's Association Interest Settlement Rates" on the Telerate System ("Telerate") at Page 3750 or Page 3740, or such other page or pages as may replace such pages on Telerate for purposes of displaying such rate, in an amount substantially equal to the Advance comprising part of such Borrowing and for a period equal to such Interest Period divided by (B) one minus the LIBOR Reserve Requirement; provided, however, that if such rate is not available on Telerate then such offered rate shall be otherwise independently determined by the Lender from an alternate, substantially similar source available to the Lender or shall be calculated by the Lender by a substantially similar methodology as that theretofore used to determine such offered rate in Telerate. It is agreed that for purposes of this definition, Advance made hereunder shall be deemed to constitute Eurocurrency liabilities as defined in Regulation D and to be subject to the reserve requirements of Regulation D. "LIBOR Reserve Requirement" shall mean, on any day, that percentage (expressed as a decimal fraction) which is in effect on such date, as provided by the Federal Reserve System for determining the maximum reserve requirements generally applicable to financial institutions regulated by the Federal Reserve Board (including, without limitation, basic, supplemental, marginal and emergency reserves) under Regulation D with respect to "Eurocurrency liabilities" as currently defined as Regulation D, or under any similar or successor regulation with respect to Eurocurrency liabilities or Eurocurrency funding (or other category of liabilities which includes deposits by reference to which the interest rate on an Advance is determined). Each determination by the Lender of the LIBOR Reserve Requirement, shall, in the absence of manifest error, be conclusive and binding upon the Borrower. "Lien" means any mortgage, lien, pledge, charge, deed of trust, security interest, encumbrance or other type of preferential arrangement to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement). "Management Agreements" means, collectively, all Hotel Property management agreements under which the Borrower or one of its Subsidiaries is named or acts as manager, as any such hotel management agreement may be amended, restated, supplemented or otherwise modified in accordance with the terms thereof. "Material Adverse Change" means a material adverse change in the business, financial condition, or results of operations of the Borrower, the Parent or any Guarantor taken as a whole, in each case since the date of the most recent financial statements of the Borrower or the Parent delivered to the Lender. "Material Subsidiary" means any Subsidiary of the Parent having assets or annual revenues in excess of $5,000,000, and "Material Subsidiaries" means all such Subsidiaries, collectively. 10 "Maturity Date" means three years from the Closing Date. "Maximum Rate" means the maximum nonusurious interest rate under applicable law. "Merger" means the merger of CapStar with and into AGH REIT and the merger of CapStar Hotel I and CapStar Hotel II with and into AGH OP pursuant to the Merger Agreement, and the other related transactions contemplated by the Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger among CapStar, AGH REIT, AGH OP and the other parties specified therein, dated March 15, 1998, as amended. "MeriStar" means MeriStar Hospitality Corporation, a Maryland corporation. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which the Parent, the Borrower or any member of the Controlled Group is making or accruing an obligation to make contributions. "Net Cash Proceeds" means (a) the aggregate cash proceeds received by the Parent, the Borrower or any of their respective Subsidiaries (as applicable) in connection with any Asset Disposition or incurrence of Indebtedness, minus (b) the reasonable expenses (including, without limitation, taxes) of such Person in connection with such Asset Disposition or such incurrence of Indebtedness and (c) any amounts required to be repaid under existing Leases or Indebtedness. "Net Income" means, for any Person or Hotel Property, as applicable, for any period for which such amount is being determined, the net income of such Person or Hotel Property, as applicable (on a Consolidated basis), after taxes, as determined in accordance with GAAP, excluding, however, extraordinary items, including but not limited to (i) any net gain or loss during such period arising from the sale, exchange, or other disposition of capital assets (such term to include all fixed assets and all securities) other than in the ordinary course of business and (ii) any write-up or write-down of assets. "Note" means a promissory note of the Borrower payable to the order of the Lender, in substantially the form of the attached Exhibit A, evidencing indebtedness of the Borrower to the Lender resulting from Advances from the Lender, and "Notes" means all of such promissory notes. "Notice of Borrowing" means a notice of borrowing signed by a Responsible Officer of the Borrower. 11 "Obligations" means all Advances and other amounts payable by the Borrower to the Lender under the Credit Documents. "Parent" means MeriStar Hotels & Resorts, Inc., a Delaware corporation. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Hazardous Substances" means (a) Hazardous Substances, petroleum and petroleum products which are (i) used in the ordinary course of business and in typical quantities for a property operated or managed by the Borrower and its Subsidiaries and (ii) generated, used and disposed of in accordance with all Legal Requirements and good industry practice and (b) non- friable asbestos to the extent (i) that no applicable Legal Requirements require removal of such asbestos from the property on which it is located and (ii) such asbestos is encapsulated in accordance with all applicable Legal Requirements. "Permitted Asset Disposition" means an Asset Disposition which occurs at a time in which no Default has occurred and is continuing and which would not cause a Default to occur upon the consummation of such Asset Disposition. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, limited liability company, joint venture or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Parent, the Borrower or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code. "Property" of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person. "Registration Statement" means the Registration Statement on Form S-4 (Registration No. 333-49611) filed with the Securities and Exchange Commission on April 7, 1998, as amended. "Release" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Repayment Event" means the occurrence of any of the following: 12 (a) the incurrence by the Parent, the Borrower or any of their respective Subsidiaries of any Indebtedness after the date of this Agreement except: (i) the Obligations; and (ii) Indebtedness permitted pursuant to the provisions of Section 6.02. (b) the occurrence of an Asset Disposition after the date of this Agreement except Asset Dispositions for which the aggregate Net Cash Proceeds do not exceed $5,000,000; except for any Asset Disposition included in such calculation the Net Cash Proceeds which have been used to make an Investment in the Hospitality/Leisure Management Business within one year of the date of such Asset Disposition. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA. "Response" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Responsible Officer" means the Chief Executive Officer, Chief Operating Officer, President, Executive Vice President or Chief Financial Officer of any Person. "Restricted Payment" means (a) any direct or indirect payment, prepayment, redemption, purchase, or deposit of funds or Property for the payment (including any sinking fund or defeasance), prepayment, redemption or purchase of Indebtedness not permitted by this Agreement, and (b) the making by any Person of any dividends or other distributions (in cash, property, or otherwise) on, or payment for the purchase, redemption or other acquisition of, any shares of any capital stock, any limited liability company interests or any partnership interests of such Person, other than dividends or distributions payable in such Person's stock, limited liability company interests or any partnership interests. "Rolling Period" means, as of any date, the four Fiscal Quarters ending immediately preceding such date. "Senior Fixed Charge Ratio" means, as of the end of any Rolling Period, a ratio of (a) the Parent's EBITDA for such Rolling Period to (b) Parent's Fixed Charges (which shall include Parent's Senior Interest Expense) for such Rolling Period. "Senior Indebtedness" means Total Indebtedness minus Subordinate Indebtedness. 13 "Senior Indebtedness Leverage Ratio" means the ratio on any date of (a) the Parent's Senior Indebtedness on such date to (b) the Parent's EBITDA on a Consolidated basis for the Rolling Period immediately preceding such date. "Senior Interest Coverage Ratio" means, as of the end of any Rolling Period, a ratio of (a) Parent's EBITDA for the Rolling Period to (b) Parent's Senior Interest Expense for such Rolling Period. "Senior Interest Expense" means for any Person for any period for which such amount is being determined Total Interest Expense minus interest expense on any Subordinate Indebtedness. "Stock" means shares of capital stock, beneficial or partnership interests, participations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting, and includes, without limitation, common stock and preferred stock. "Stock Equivalents" means all securities (other than Stock) convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. "Subordinate Indebtedness" means Indebtedness of the Borrower, the Parent and their respective Subsidiaries which (a) shall not mature, become payable or require the payment of any principal amount thereof (or any amount in lieu thereof) or be mandatorily redeemable, pursuant to a sinking fund or otherwise redeemable at the option of the holder thereof, in any case in whole or in part, before the date that is 91 days after the Maturity Date and (b) shall be junior and subordinate to the Obligations and subject to an intercreditor agreement or subordination provisions which are in accordance with the then prevailing customary market terms and conditions. "Subsidiary" of a Person means any corporation, association, partnership or other business entity of which more than 50% of the outstanding shares of capital stock (or other equivalent interests) having by the terms thereof ordinary voting power under ordinary circumstances to elect a majority of the board of directors or Persons performing similar functions (or, if there are no such directors or Persons, having general voting power) of such entity (irrespective of whether at the time capital stock (or other equivalent interests) of any other class or classes of such entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person. "Termination Event" means (a) the occurrence of a Reportable Event with respect to a Plan, as described in Section 4043 of ERISA and the regulations issued 14 thereunder (other than a Reportable Event not subject to the provision for 30- day notice to the PBGC under such regulations), (b) the withdrawal of the Borrower or any of the Controlled Group from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the giving of a notice of intent to terminate a Plan under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Total Fixed Charge Ratio" means, as of the end of any Rolling Period, a ratio of (a) the Parent's EBITDA for such Rolling Period to (b) Parent's Fixed Charges (which shall include Parent's Total Interest Expense) for such Rolling Period. "Total Indebtedness" of any Person means the sum of the following (without duplication): (a) all Indebtedness of such Person and its Subsidiaries, plus (b) the pro rata share of the Indebtedness of such Person's non- Consolidated Subsidiaries (including non-recourse Indebtedness), plus (c) to the extent not already included in the calculation of either of the preceding clauses (a) or (b), the aggregate amount of letters of credit for which such Person or any of its Subsidiaries would have a direct or contingent obligation to reimburse the issuers of such letters of credit upon a drawing under such letters of credit. "Total Interest Coverage Ratio" means, as of the end of any Rolling Period, a ratio of (a) the Parent's EBITDA for such Rolling Period to (b) Parent's Total Interest Expense for such Rolling Period. "Total Interest Expense" means, for any Person for any period for which such amount is being determined, the total interest expense (including that properly attributable to Capital Leases in accordance with GAAP) and all charges incurred with respect to letters of credit determined on a Consolidated basis in conformity with GAAP, plus (without duplication) capitalized interest of such Person and its Subsidiaries. Section 1.02 Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03 Accounting Terms; Changes in GAAP. 1. All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP applied on a consistent basis. 2. Unless otherwise indicated, all financial statements, all calculations for compliance with covenants in this Agreement, and all calculations of any amounts to 15 be calculated under the definitions in Section 1.01 shall be based upon the Consolidated accounts of Parent and its Subsidiaries (as applicable) in accordance with GAAP. 3. If any changes in accounting principles after June 30, 1998 required by GAAP or the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or similar agencies results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found in this Agreement, then the parties shall enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to equitably reflect such change, with the desired result that the criteria for evaluating the financial condition of the Parent and its Subsidiaries (determined on a Consolidated basis) shall be the same after such change as if such change had not been made. Section 1.04 Miscellaneous. Article, Section, Schedule and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. ARTICLE II. ADVANCES Section 2.01 Advances. The Lender agrees, on the terms and conditions set forth in this Agreement, to make Advances to the Borrower from time to time on any Business Day up to 15 days prior to the Maturity Date in an aggregate amount not to exceed at any time outstanding an amount equal to the Commitment. Within the limits of the Commitment, the Borrower may from time to time prepay pursuant to Section 2.06 and reborrow under this Section 2.01. Advances are permitted under the facility; provided that: a. No Default which has not been cured or waived in writing by the Lender as set forth in Section 9.01 shall have occurred; and b. All representations and warranties are true, both before and after each advance under the Facility. 16 Section 2.02 Method of Borrowing. 1. Notice. Each Borrowing shall be made pursuant to a Notice of Borrowing, given not later than 11:00 a.m. (New York, New York time) on the third Business Day before the date of the proposed Borrowing by the Borrower to the Lender, which shall give the Lender prompt notice on the day of receipt of such timely Notice of Borrowing of such proposed Borrowing by telecopier. Each Notice of Borrowing shall be in writing or by telecopier specifying the requested (i) date of such Borrowing, (ii) aggregate amount of such Borrowing (which, in any case, shall not be less than $1,000,000 or an integral multiple thereof), and (iii) the Interest Period for each such Advance. Upon fulfillment of the applicable conditions set forth in Article III, the Lender will make such funds available to the Borrower. 2. Certain Limitations. Except for Borrowings for the acquisition of new Leases or Management Agreements by the Borrower or its Subsidiary, the Borrower may not request Borrowings on more than four days in any calender month. 3. Notes. The indebtedness of the Borrower to the Lender resulting from Advances owing to the Lender shall be evidenced by a Note of the Borrower payable to the order of the Lender in substantially the form of Exhibit A. Section 2.03 Reduction of the Commitment. 1. Upon the occurrence of a Change in Control, then, in such event the Lender may, at its sole option upon written notice to the Borrower (a "Termination Notice"), declare the obligation of the Lender to make Advances to be terminated, whereupon the same shall forthwith terminate and the Commitment shall reduce to zero. 2. The Borrower may, upon at least two Business Days' prior notice to the Lender, permanently terminate in whole or permanently reduce ratably in part the Commitment of the Lender; provided, however, that (i) each partial reduction shall be in the aggregate amount of not less than $1,000,000 or an integral multiple of $100,000 in excess thereof, and (ii) no such reduction shall result in an overdraft status as provided in Section 2.06(c)(ii). 3. If the Borrower receives a commitment from a Financial Institution Lender for Financial Institution Senior Indebtedness, then, upon the funding of the first advance under such Financial Institution Senior Indebtedness, the Lender may, at its sole discretion, reduce the amount of its Commitment pro rata in an amount equal to the amount of the commitment for Financial Institution Senior Indebtedness received by the Borrower. Section 2.04 Repayment of Advances. The Borrower shall repay the outstanding principal amount of each Advance on the Maturity Date. 17 Section 2.05 Interest, Late Payment Fee. The Borrower shall pay interest on the unpaid principal amount of each Advance made by the Lender from the date of such Advance until such principal amount shall be paid in full, at a rate per annum (computed on the actual number of days elapsed, including the first day and excluding the last, based on a 360 day year) equal at all times during the Interest Period for such Advance to the lesser of (i) the LIBOR for such Interest Period plus the Applicable Margin and (ii) the Maximum Rate, payable in arrears on the last day of such Interest Period, and on the date such Advance shall be paid in full, and, with respect to an Advance having an Interest Period in excess of 30 days, the last day of each calendar month during such Interest Period excluding the month in which such Advance shall be paid in full; provided that during the continuance of an Event of Default, Advances shall bear interest at a rate per annum equal at all times to the lesser of (i) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus three percent (3%) and (ii) the Maximum Rate. 1. Usury Recapture. In the event the rate of interest chargeable under this Agreement or the Notes at any time is greater than the Maximum Rate, the unpaid principal amount of the Notes shall bear interest at the Maximum Rate until the total amount of interest paid or accrued on the Notes equals the amount of interest which would have been paid or accrued on the Notes if the stated rates of interest set forth in this Agreement had at all times been in effect. In the event, upon payment in full of the Notes, the total amount of interest paid or accrued under the terms of this Agreement and the Notes is less than the total amount of interest which would have been paid or accrued if the rates of interest set forth in this Agreement had, at all times, been in effect, then the Borrower shall, to the extent permitted by applicable law, pay the Lender for the account of the Lender an amount equal to the difference between (i) the lesser of (A) the amount of interest which would have been charged on the Notes if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued on the Notes if the rates of interest set forth in this Agreement had at all times been in effect and (ii) the amount of interest actually paid or accrued under this Agreement on the Notes. In the event the Lender ever receives, collects or applies as interest any sum in excess of the Maximum Rate, such excess amount shall, to the extent permitted by law, be applied to the reduction of the principal balance of the Notes, and if no such principal is then outstanding, such excess or part thereof remaining shall be paid to the Borrower. 2. Other Amounts Overdue. If any amount payable under this Agreement other than the Advances is not paid when due and payable, including without limitation, accrued interest, then such overdue amount shall accrue interest hereon due and payable on demand at a rate per annum equal to the LIBOR Rate plus three percent (3%), from the date such amount became due until the date such amount is paid in full. 3. Late Payment Fee. Subject to the provisions of Section 10.10, if any interest payable under this Agreement is not paid when due and payable (after taking into account any applicable grace period), then the Borrower will pay to the Lender 18 contemporaneously with the payment of such past due interest a late payment fee equal to an amount equal to the product of (i) such overdue interest times (ii) three percent (3%). Section 2.06 Prepayments. 1. Right to Prepay. The Borrower shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.06. 2. Optional Prepayments. The Borrower may elect to prepay any of the Advances, after giving by 11:00 a.m. (New York, New York time) at least one Business Days' prior written notice to the Lender stating the proposed date and aggregate principal amount of such prepayment, and if applicable, the relevant Interest Period for the Advances to be prepaid. If any such notice is given, the Borrower shall prepay Advances comprising part of the same Borrowing in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, and shall also pay accrued interest to the date of such prepayment on the principal amount prepaid and amounts, if any, required to be paid pursuant to Section 2.07 as a result of such prepayment being made on such date; provided, however, that each partial prepayment shall be in an aggregate principal amount not less than $500,000. 3. Mandatory Prepayments. a. Change of Control. On the fifth Business Day following the Borrower's receipt of a Termination Notice pursuant to Section 2.03(a) hereof, the Borrower shall be required to prepay all outstanding Advances in full. b. Overdraft. On any date on which the outstanding principal amount of the Advances exceeds the aggregate Commitment, the Borrower agrees to make a prepayment of the Advances in the amount of such excess. c. Repayment Event. Upon the occurrence of any Repayment Event, the Borrower shall prepay Advances on the Business Day the Net Cash Proceeds from such Repayment Event are received by the Borrower or the Parent, as applicable, in an amount equal to the lesser of (A) the amount of the outstanding Advances on such Business Day and (B) 100% of the Net Cash Proceeds of such Repayment Event. If, in connection with an Asset Disposition which qualifies as a Repayment Event for which the Borrower has not used the Net Cash Proceeds to repay the Obligations, the Borrower has failed to make an Investment or Investments in the Hospitality/Leisure Management Business with such Net Cash Proceeds within one year from the date of such Asset Disposition, then the Borrower shall prepay Advances on the first anniversary of the Business Day such Net Cash Proceeds are received by the Borrower or the Parent, as applicable, in the amount equal to the lesser of (A) the amount of the outstanding Advances on such first anniversary and (B) 100% of the Net Cash Proceeds of such 19 Repayment Event which have not been used to make an Investment or investments in the Hospitality/Leisure Management Business. d. Accrued Interest. Each prepayment pursuant to this Section 2.06(c) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.07 as a result of such prepayment being made on such date. 4. Ratable Payments. Each payment of any Advance pursuant to this Section 2.06 or any other provision of this Agreement shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part. 5. Effect of Notice. All notices given pursuant to this Section 2.06 shall be irrevocable and binding upon the Borrower. Section 2.07 Payments and Computations. 1. Payment Procedures. Except if otherwise set forth herein, the Borrower shall make each payment under this Agreement and under the Notes not later than 11:00 a.m. (New York, New York time) on the day when due in Dollars to the Lender at the location referred to in the Notes (or such other location as the Lender shall designate in writing to the Borrower) in same day funds. 2. Computations. All computations of interest based on the LIBOR shall be made by the Lender on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Lender of an interest rate shall be conclusive and binding for all purposes, absent manifest error. 3. Non-Business Day Payments. Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. 4. Application of Payments. Unless otherwise specified in Section 2.06 hereof, whenever any payment received by the Lender under this Agreement is insufficient to pay in full all amounts then due and payable under this Agreement and the Notes, such payment shall be distributed and applied by the Lender in the following order: first, to the payment of expenses due and payable under Section 2.09(c), to the Lender in accordance with the aggregate amount of such payments owed to the Lender; 20 and third, to the payment of all other amounts due and payable under this Agreement and the Notes. Section 2.08 Taxes. 1. No Deduction for Certain Taxes. Any and all payments by the Borrower shall be made, in accordance with Section 2.07, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Lender, taxes imposed on it, by the jurisdiction under the laws of which the Lender is organized or any political subdivision of the jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to the Lender, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.08), the Lender receives an amount equal to the sum it would have received had no such deductions been made; (ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Legal Requirements. 2. Other Taxes. In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Credit Documents (hereinafter referred to as "Other Taxes"). 3. Indemnification. The Borrower indemnifies the Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any Governmental Authority on amounts payable under this Section 2.08) paid by the Lender and any liability (including interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. 4. Evidence of Tax Payments. The Borrower will pay prior to delinquency all Taxes and Other Taxes payable in respect of any payment. Within 30 days after the date of any payment of Taxes, the Borrower will furnish to the Lender, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing payment of such Taxes or Other Taxes. 21 ARTICLE III. CONDITIONS OF LENDING Section 3.01 Conditions Precedent to Initial Advance. The effectiveness of this Agreement and the obligation of the Lender to make any Advance hereunder are subject to the following conditions precedent being satisfied on or prior to August 3, 1998: 1. Documentation. The Lender shall have received counterparts of this Agreement executed by the Borrower, and the following duly executed by all the parties thereto, in form and substance satisfactory to the Lender: a. the Notes and the Guaranties; b. evidence reasonably satisfactory to the Lender that the Merger and the other transactions contemplated by the Merger Agreement and the Registration Statement (including the Lessee-Manager Purchase Agreement described therein) have been consummated in accordance with the terms of the Merger Agreement, all Legal Requirements and all corporate and partnership governance requirements; and c. such other documents, governmental certificates, agreements and lien searches as the Lender may reasonably request. 2. Representations and Warranties. The representations and warranties contained in Article IV hereof and the Guaranties shall be true and correct in all material respects. Section 3.02 Conditions Precedent for Each Borrowing. The obligation of the Lender to fund an Advance on the occasion of each Borrowing shall be subject to the further conditions precedent that on the date of such Borrowing: 1. the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing such statements are true): 2. the representations and warranties contained in Article IV hereof and the Guaranties, as such representations and warranties may change based upon events or activities permitted by this Agreement, are true and correct in all material respects on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds from such Borrowing, as though made on and as of such date; and 22 b. no Default has occurred and is continuing or would result from such Borrowing or from the application of the proceeds therefrom. 2. the Lender shall have received such other approvals, opinions or documents deemed necessary or desirable by the Lender. ARTICLE IV. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows: Section 4.01 Existence; Qualification; Partners; Subsidiaries. 1. The Borrower is a limited partnership duly organized, validly existing, and in good standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the Borrower. 2. Parent is a corporation duly organized, validly existing, and in good standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the Borrower. 3. Each Subsidiary of the Borrower is a corporation, limited partnership, general partnership or limited liability company duly organized, validly existing, and in good standing under the laws of its jurisdiction of formation and in good standing and qualified to do business in each jurisdiction where conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on such Subsidiary. Section 4.02 Partnership and Corporate Power. The execution, delivery, and performance by the Borrower and each Guarantor of the Credit Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby (a) are within such Persons' partnership, limited liability company and corporate powers, as applicable, (b) have been duly authorized by all necessary corporate, limited liability company and partnership action, as applicable, (c) do not contravene (i) such Person's certificate or articles, as the case may be, of incorporation or by-laws, operating agreement or partnership agreement, as applicable, or (ii) any law or any contractual restriction binding on or affecting any such Person, the contravention of which could reasonably be expected to cause a Material Adverse Change, and (d) will not result in or 23 require the creation or imposition of any Lien prohibited by this Agreement. At the time of each Borrowing, such Borrowing and the use of the proceeds of such Borrowing will be within the Borrower's partnership powers, will have been duly authorized by all necessary partnership action, (a) will not contravene (i) the Borrower's partnership agreement or (ii) any law or any contractual restriction binding on or affecting the Borrower, the contravention of which could reasonably be expected to cause a Material Adverse Change, and (b) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. Section 4.03 Authorization and Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Borrower or any Guarantor of the Credit Documents to which it is a party or the consummation of the transactions contemplated thereby. Section 4.04 Enforceable Obligations. This Agreement, the Notes, and the other Credit Documents to which the Borrower is a party have been duly executed and delivered by the Borrower; each Guaranty and the other Credit Documents to which each Guarantor is a party have been duly executed and delivered by such Guarantor. Each Credit Document is the legal, valid, and binding obligation of the Borrower and each Guarantor which is a party to it enforceable against the Borrower and each such Guarantor in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally and by general principles of equity (whether considered in proceeding at law or in equity). Section 4.05 Financial Statements and Registration Statement. The respective Consolidated balance sheets of the Parent and the respective related Consolidated statements of operations, shareholders' equity and cash flows, of the Parent contained in the Registration Statement, and the corresponding pro forma financial statements for the Borrower, fairly present the financial condition and results of operation in all material respects for the periods indicated, and such balance sheets and statements were prepared in accordance with GAAP, subject to year-end adjustments. Since the date of such statements, no Material Adverse Change has occurred. Section 4.06 True and Complete Disclosure. No representation, warranty, or other statement made by the Borrower (or on behalf of the Borrower) in this Agreement or any other Credit Document contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made as of the date of this Agreement. 24 Section 4.07 Litigation. Except as set forth in Schedule 4.07, there is no pending or, to the best knowledge of the Borrower, threatened action or proceeding affecting the Borrower or the Parent or any of their respective Subsidiaries before any court, Governmental Authority or arbitrator in which the amount of the dispute is over $500,000 or, in the Borrower's good faith judgment, the anticipated loss is over $500,000 (provided that with respect to the giving of this representation after the date of this Agreement, the representation shall only be deemed to apply to those matters for which Lender would have been entitled to notice under Section 5.04(f)). Section 4.08 Use of Proceeds. 1. Advances. The proceeds of the Advances shall be used by the Borrower to (i) to make Investments permitted pursuant to the provisions of Section 6.05 and (ii) for general corporate purposes of the Borrower and its Subsidiaries. 2. Regulations. No proceeds of Advances will be used to purchase or carry any margin stock in violation of Regulations G, T, U or X of the Federal Reserve Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Federal Reserve Board). Section 4.09 Investment Company Act. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.10 Taxes. All federal, state, local and foreign tax returns, reports and statements required to be filed (after giving effect to any extension granted in the time for filing) by the Parent, the Borrower or its Subsidiaries, or any member of a Controlled Group have been filed with the appropriate governmental agencies in all jurisdictions in which such returns, reports and statements are required to be filed, and where the failure to file could reasonably be expected to cause a Material Adverse Change, except where contested in good faith and by appropriate proceedings; and all taxes and other impositions due and payable (which are material in amount) have been timely paid prior to the date on which any fine, penalty, interest, late charge or loss (which are material in amount) may be added thereto for non-payment thereof except where contested in good faith and by appropriate proceedings. Proper and accurate amounts have been withheld by the Parent, the Borrower and all members of each Controlled Group from their employees for all periods to comply in all material respects with the tax, social security and unemployment withholding provisions of applicable federal, state, local and foreign law. Timely payment of all material sales and use taxes required by applicable law have been made by the Borrower and all other members of the Controlled Group, the failure to timely pay of which could reasonably be expected to cause a Material Adverse Change. The amounts shown on all tax returns to be due and payable have been paid in full or adequate provision therefor is included on the books of the appropriate member of the applicable Controlled Group. Section 4.11 Pension Plans. All Plans are in compliance in all material respects with all applicable provisions of ERISA. No Termination Event has occurred with respect to any Plan which could reasonably be expected to cause a Material Adverse Change, and each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Code. No "accumulated funding deficiency" (as defined in Section 302 of ERISA) has occurred and there has 25 been no excise tax imposed under Section 4971 of the Code. No Reportable Event has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code. Neither the Borrower, nor any member of a Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any material withdrawal liability. As of the most recent valuation date applicable thereto, neither the Borrower nor any member of a Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization. Section 4.12 No Burdensome Restrictions; No Defaults. 1. Except in connection with Indebtedness which is (i) either permitted pursuant to the provisions of Section 6.02, or (ii) being repaid with the proceeds of the initial Borrowing, neither the Borrower nor any of its Subsidiaries is a party to any indenture, loan or credit agreement. Neither the Borrower, the Parent nor any of their respective Subsidiaries is a party to any agreement or instrument or subject to any charter or corporate restriction or provision of applicable law or governmental regulation which could reasonably be expected to cause a Material Adverse Change. Neither the Borrower, the Parent nor any of their Subsidiaries is in default under or with respect to (i) any contract, agreement, lease or other instrument which could reasonably be expected to cause a Material Adverse Change or (ii) any ground lease, participating lease, franchise agreement, license agreement or management agreement which could reasonably be expected to cause a Material Adverse Change, except as disclosed to the Lender in writing prior to the date such representation is deemed given. Neither the Borrower, the Parent nor any of their Subsidiaries has received any notice of default under any material contract, agreement, lease or other instrument which is continuing and which, if not cured, could reasonably be expected to cause a Material Adverse Change. 2. No Default has occurred and is continuing (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Lender in writing after the date of this Agreement and prior to the date such representation is deemed given). Section 4.13 Environmental Condition. 1. Except as disclosed in Schedule 4.14, to the knowledge of the Borrower, the Borrower and its Subsidiaries (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Lender in writing after the date of this Agreement and prior to the date such representation is deemed given)(i) have obtained all Environmental Permits material for the operation of their respective Properties and the conduct of their respective businesses; (ii) have been and are in material compliance with all terms and conditions of such Environmental Permits and with all other requirements of applicable Environmental Laws; (iii) have not received notice of any violation or alleged violation of any Environmental Law or 26 Environmental Permit; and (iv) are not subject to any actual or contingent Environmental Claim. To the knowledge of the Borrower (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Lender in writing after the date of this Agreement and prior to the date such representation is deemed given), the Borrower and its Subsidiaries are not subject to any actual or contingent Environmental Claim which the Borrower believes in good faith will involve cost or expense to the Borrower or its Subsidiaries in excess of $1,000,000 for any single Environmental Claim, or in excess of $10,000,000 for all such Environmental Claims in the aggregate. 2. Except as disclosed in Schedule 4.14, to the knowledge of Borrower, none of the present or previously owned or operated Property of the Borrower or of any of its present or former Subsidiaries, wherever located, (i) has been placed on or proposed to be placed on the National Priorities List, the Comprehensive Environmental Response Compensation Liability Information System list, or their state or local analogs, or have been otherwise investigated, designated, listed, or identified as a potential site for removal, remediation, cleanup, closure, restoration, reclamation, or other response activity under any Environmental Laws which could reasonably be expected to cause a Material Adverse Change; (ii) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any Property operated by the Borrower or any of its Subsidiaries, wherever located; (iii) has been the site of any Release, use or storage of Hazardous Substances or Hazardous Wastes from present or past operations except for Permitted Hazardous Substances, which Permitted Hazardous Substances have not caused at the site or at any third-party site any condition that has resulted in or could reasonably be expected to result in the need for Response or (iv) none of the Improvements are constructed on land designated by any Governmental Authority having land use jurisdiction as wetlands. Section 4.14 Legal Requirements, Zoning, Utilities, Access. Except as set forth on Schedule 4.15, the use and operation of each Hotel Property as a commercial hotel with related uses constitutes a legal use under applicable zoning regulations (as the same may be modified by special use permits or the granting of variances) and complies in all material respects with all Legal Requirements, and does not violate in any material respect any material approvals, material restrictions of record or any material agreement affecting any Hotel Property (or any portion thereof). The Borrower and its Subsidiaries possess all certificates of public convenience, authorizations, permits, licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights (collectively "Permits") required by Governmental Authority to operate the Hotel Properties, except for those Permits which if not obtained would not cause a Material Adverse Change. The Borrower and its Subsidiaries own and operate their business in material compliance with all applicable Legal Requirements. To the extent necessary for the full utilization of each Hotel Property in accordance with its current use, telephone services, gas, steam, electric power, storm sewers, sanitary sewers and water facilities and all other utility services are available to each Hotel Property, are adequate to serve each 27 such Hotel Property, exist at the boundaries of the Land and are not subject to any conditions, other than normal charges to the utility supplier, which would limit the use of such utilities. All streets and easements necessary for the occupancy and operation of each Hotel Property are available to the boundaries of the Land. Section 4.15 Existing Indebtedness. Except for the Obligations or as reflected in the financial statements contained in the Registration Statement, there is no Indebtedness of the Borrower or any of its Subsidiaries existing as of the Effective Date. No "default" or "event of default", however defined, has occurred and is continuing under any such Indebtedness (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Lender in writing after the date of this Agreement and prior to the date such representation is deemed given). Section 4.16 Leases and Management Agreements. To the knowledge of the Borrower, the Leases and the Management Agreements are in full force and effect and no material defaults exist thereunder (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Lender in writing after the date of this Agreement and prior to the date such representation is deemed given). Copies of all material Leases and Management Agreements of the Borrower and its Subsidiaries have been delivered by the Borrower to the Lender. ARTICLE V. AFFIRMATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, or the Lender shall have any Commitment hereunder, unless the Lender shall otherwise consent in writing, the Borrower agrees to comply with the following covenants. Section 5.01 Compliance with Laws, Etc. The Borrower will comply, and cause the Parent and each of its Subsidiaries to comply, in all material respects with all Legal Requirements. Section 5.02 Preservation of Existence; Separateness, Etc. 1. The Borrower will preserve and maintain, and cause the Parent and each of its Subsidiaries to preserve and maintain, its partnership, limited liability company or corporate (as applicable) existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified, and cause the Parent and each such Subsidiary to qualify and remain qualified, as a foreign partnership or corporation as applicable in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its properties, and, in 28 each case, where failure to qualify or preserve and maintain its rights and franchises could reasonably be expected to cause a Material Adverse Change. 2. The Parent Common Stock shall at all times be duly listed on the New York Stock Exchange, Inc. and (ii) the Parent shall timely file all reports required to be filed by it with the New York Stock Exchange, Inc. and the Securities and Exchange Commission. 3. The Borrower shall hold itself out, and shall continue to hold itself out, to the public and to its creditors as a legal entity, separate and distinct from all other entities, and shall continue to take all steps reasonably necessary to avoid misleading any other Person as to the identity of the entity with which such Person is transacting business. Section 5.03 Payment of Taxes, Etc. The Borrower will pay and discharge, and cause the Parent and each of its Subsidiaries to pay and discharge, before the same shall become delinquent (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by Legal Requirement become a Lien upon its Property; provided, however, that neither the Borrower, the Parent nor any such Subsidiary shall be required to pay or discharge any such tax, assessment, charge, levy, or claim (a) which is being contested in good faith and by appropriate proceedings, (b) with respect to which reserves in conformity with GAAP have been provided, (c) if such charge or claim does not constitute and is not secured by any choate Lien on any portion of any Hotel Property and no portion of any Hotel Property is in jeopardy of being sold, forfeited or lost during or as a result of such contest, (d) if the Lender could not become subject to any civil fine or penalty or criminal fine or penalty, in each case as a result of non-payment of such charge or claim and (e) if such contest does not, and could not reasonably be expected to, result in a Material Adverse Change. Section 5.04 Reporting Requirements. The Borrower will furnish to the Lender: 1. Quarterly Financials. As soon as available and in any event not later than 50 days after the end of each Fiscal Quarter of the Parent, the unaudited Consolidated balance sheets of the Parent and its Subsidiaries as of the end of such quarter and the related unaudited statements of income, shareholders' equity and cash flows of the Parent and its Subsidiaries for such Fiscal quarter and the period commenc ing at the end of the previous year and ending with the end of such Fiscal Quarter, and the corresponding figures as at the end of, and for, the corresponding periods in the preceding Fiscal Year, all duly certified with respect to such statements (subject to year-end audit adjustments) by a Responsible Officer of the Parent as having been prepared in 29 accordance with GAAP, together with a Compliance Certificate duly executed by a Responsible Officer of the Parent. 2. Annual Financials. As soon as available and in any event not later than 95 days after the end of each Fiscal Year of the Parent, a copy of the Consolidated balance sheets of the Parent and its Subsidiaries as of the end of such Fiscal Year and the related Consolidated statements of income, shareholders' equity and cash flows of the Parent and its Subsidiaries for such Fiscal Year, and the corresponding figures as at the end of, and for, the preceding Fiscal Year, and certified by the Company's independent certified public accountants of nationally recognized standing in an opinion, without qualification as to the scope, and including any management letters delivered by such accountants to the Parent in connection with such audit, together with a Compliance Certificate duly executed by a Responsible Officer of the Parent. 3. Securities Law Filings. Promptly and in any event within 15 days after the sending or filing thereof, copies of all proxy material, reports and other information which the Borrower, the Parent or any of their respective Subsidiaries sends to or files with the United States Securities and Exchange Commission or sends to all of the shareholders of the Parent or partners of the Borrower. 4. Defaults. As soon as possible and in any event within five days after the occurrence of each Default known to a Responsible Officer of the Parent, the Borrower or any of their respective Subsidiaries, a statement of an authorized financial officer or Responsible Officer of the Borrower setting forth the details of such Default and the actions which the Borrower has taken and proposes to take with respect thereto. 5. ERISA Notices. As soon as possible and in any event (i) within 30 days after the Parent, the Borrower or any member of a Controlled Group knows to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, (ii) within 10 days after the Parent, the Borrower or any member of a Controlled Group knows that any other Termination Event with respect to any Plan has occurred, a statement of the Chief Financial Officer of the Parent describing such Termination Event and the action, if any, which the Parent, the Borrower or such member of such Controlled Group proposes to take with respect thereto; (iii) within 10 days after receipt thereof by the Parent, the Borrower or any member of a Controlled Group from the PBGC, copies of each notice received by the Parent, the Borrower or any such member of such Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; and (iv) within 10 days after receipt thereof by the Parent, the Borrower or any member of a Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by the Parent, the Borrower or any member of such Controlled Group concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA. 6. Environmental Notices. Promptly upon the knowledge of any Responsible Officer of the Borrower of receipt thereof by the Borrower or any of its 30 Subsidiaries, a copy of any form of notice, summons or citation received from the United States Environmental Protection Agency, or any other Governmental Authority concerning (i) violations or alleged violations of Environmental Laws, which seeks to impose liability therefor, (ii) any action or omission on the part of the Parent or the Borrower or any of their present or former Subsidiaries in connection with Hazardous Waste or Hazardous Substances which, based upon information reasonably available to the Borrower, could reasonably be expected to cause a Material Adverse Change or an Environmental Claim in excess of $10,000,000, (iii) any notice of potential responsibility under CERCLA, or (iv) concerning the filing of a Lien upon, against or in connection with the Parent, Borrower, their present or former Subsidiaries, or any of their leased or owned Property, wherever located. 7. Other Governmental Notices or Actions. Promptly and in any event within five Business Days after receipt thereof by the Parent, Borrower or any of their respective Subsidiaries, (i) a copy of any notice, summons, citation, or proceeding seeking to adversely modify in any material respect, revoke, or suspend any license, permit, or other authorization from any Governmental Authority, which action could reasonably be expected to cause a Material Adverse Change, and (ii) any revocation or involuntary termination of any license, permit or other authorization from any Governmental Authority, which revocation or termination could reasonably be expected to cause a Material Adverse Change. 8. Material Litigation. As soon as possible and in any event within five days of any Responsible Officer of the Borrower, the Parent or any of their respective Subsidiaries having knowledge thereof, notice of any litigation, claim or any other event which could reasonably be expected to cause a Material Adverse Change. 9. Other Information. Such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of the Borrower, the Parent or any of their respective Subsidiaries, as the Lender may from time to time reasonably request. Section 5.05 Insurance. The Borrower will maintain, and cause each of its Subsidiaries to maintain, adequate insurance consistent with commercial practices in the industry. Section 5.06 Material Documents. The Borrower will not, nor will it permit any of its Subsidiaries to (a) amend the Borrower's partnership agreement in any material respect, (b) admit a new general partner to the Borrower, or (c) enter into any termination, material modification or amendment of the Intercompany Agreement and any other material agreement. Any termination, modification or amendment prohibited under this Section 5.06 without the Lender's written consent shall, to the extent permitted by applicable law, be void and of no force and effect. 31 ARTICLE VI. NEGATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid or the Lender shall have any Commitment, the Borrower agrees, unless the Lender shall otherwise consent in writing, to comply with the following covenants: Section 6.01 Liens, Etc. The Borrower, the Parent and their respective Subsidiaries will not create, assume, incur or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrower and its Subsidiaries may create, incur, assume or suffer to exist Liens: 1. securing the Obligations; 2. securing the Financial Institution Senior Indebtedness; 3. for taxes, assessments or governmental charges or levies on Property of the Borrower or any Guarantor to the extent not required to be paid pursuant to Sections 5.03; 4. imposed by law (such as landlords', carriers', warehousemen's and mechanics' liens or otherwise arising from litigation) (i) which are being contested in good faith and by appropriate proceedings, (ii) with respect to which reserves in conformity with GAAP have been provided, (iii) which have not resulted in any Hotel Property being in jeopardy of being sold, forfeited or lost during or as a result of such contest, (iv) neither the Lender nor the Borrower could become subject to any civil fine or penalty or criminal fine or penalty, in each case as a result of non-payment of such charge or claim and (v) such contest does not, and could not reasonably be expected to, result in a Material Adverse Change; 5. on leased personal property to secure solely the lease obligations associated with such property; Section 6.02 Indebtedness. The Borrower, the Parent and their respective Subsidiaries will not incur or permit to exist any Indebtedness other than the Obligations, the Financial Institution Senior Indebtedness and the following: 1. Indebtedness in an amount that does not cause a breach at any time of the covenants contained in Article VII; 2. Capital Leases in an amount in excess of $10,000,000; 32 3. Interest Rate Agreements; provided that (i) such agreements shall be unsecured, (ii) the dollar amount of indebtedness subject to such agreements and the indebtedness subject to Interest Rate Agreements in the aggregate shall not exceed the sum of the amount of the Commitment and the amount of the other Indebtedness of the Borrower or its Affiliates which bears interest at a variable rate, and (iii) the agreements shall be at such interest rates and otherwise in form and substance reasonably acceptable to the Lender. 4. Any of the following Indebtedness incurred by the Parent: a. indemnities for certain acts of malfeasance, misappropriation and misconduct and an environmental indemnity for the lender under Indebtedness permitted under to this Agreement; and b. guaranties of any obligations of the Borrower or its Subsidiaries permitted by this Agreement, including without limitation guaranties of Leases and Management Agreements. 5. extensions, renewals and refinancing of any of the Indebtedness specified in paragraphs (b) - (d) above so long as the principal amount of such Indebtedness is not thereby increased. Section 6.03 Agreements Restricting Distributions From Subsidiaries. Except as required by the Leases, the Borrower will not, nor will it permit any of its Subsidiaries to, enter into any agreement (other than a Credit Document) which limits distributions to or any advance by any of the Borrower's Subsidiaries to the Borrower. Section 6.04 Fundamental Changes; Asset Dispositions. Neither the Parent, the Borrower, nor any of their respective Subsidiaries will, (a) merge or consolidate with or into any other Person, unless (i) a Guarantor is merged into the Borrower and the Borrower is the surviving Person or a Subsidiary is merged into any Subsidiary, and (ii) immediately after giving effect to any such proposed transaction no Default would exist; (b) sell, transfer, or otherwise dispose of all or any of the such Person's material property except for a Permitted Asset Disposition, or dispositions or replacements of personal property in the ordinary course of business; (c) sell or otherwise dispose of any material shares of capital stock, membership interests or partnership interests of any Subsidiary; (d) except for sales of ownership interests permitted under this Agreement and the issuance of limited partnership interests in the Borrower in exchange for ownership interests in Subsidiaries and non- Consolidated Subsidiaries to the extent permitted pursuant to the provisions of Section 6.03, materially alter the corporate, capital or legal structure of any such Person; (e) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) provided that nothing herein shall prohibit the Borrower from dissolving any Subsidiary which has no assets on the date of dissolution or (f) materially alter the character of their respective businesses from that 33 conducted as of the date of this Agreement or otherwise engage in any material business activity outside of the Hospitality/Leisure Management Business. Section 6.05 Investments, Loans, Future Properties. Neither the Parent nor the Borrower shall, or shall permit any of their respective Subsidiaries to, acquire by purchase or otherwise any business, property or fixed assets of any Person or any Hotel Property, make or permit to exist any loans, advances or capital contributions to, or make any Investments in (including without limitation, loans and advances to, and other Investments in, Subsidiaries) or purchase or commit to purchase any evidences of indebtedness of, stock or other securities, partnership interests, member interests or other interests in any Person, except (provided that after giving effect thereto there shall exist no Default) Investments in the Hospitality/Leisure Management Business; provided, however, that the Borrower shall be required to obtain the consent of the Lender prior to making an Investment in the Hospitality/Leisure Management Business in an amount that exceeds $50,000,000. Notwithstanding the foregoing, neither the Borrower, nor the Parent, nor their respective Subsidiaries shall make an Investment which would (a) cause a Default, or (b) cause or result in the Borrower or the Parent failing to comply with any of the financial covenants contained herein. Section 6.06 Affiliate Transactions. Except for the Intercompany Agreement, certain liquor license agreements and the transactions described in Section 6.04(i), the Borrower will not, and will not permit any of its Subsidiaries to, make, directly or indirectly: (a) any transfer, sale, lease, assignment or other disposal of any assets to any Affiliate of the Borrower which is not a Guarantor or any purchase or acquisition of assets from any such Affiliate except for sales of new personal property (i) which in any calendar year do not exceed $10,000,000 in the aggregate and (ii) for which the sales price is the actual cost to the party selling; or (b) any arrangement or other transaction directly or indirectly with or for the benefit of any such Affiliate (including without limitation, guaranties and assumptions of obligations of an Affiliate), other than in the ordinary course of business and at market rates. Section 6.07 Sale or Discount of Receivables. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable. Section 6.08 Restricted Payments. Neither the Parent, nor the Borrower, nor any of their respective Subsidiaries, will make any Restricted Payment; 34 ARTICLE VII. FINANCIAL COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, or the Lender shall have any Commitment hereunder, unless the Lender shall otherwise consent in writing, the Borrower agrees to cause the Parent to comply with the following covenants: Section 7.01 Senior Interest Coverage Ratio. The Parent shall maintain at the end of each Rolling Period (a) for the Rolling Periods ending on September 30, 1998 through September 30, 1999 a Senior Interest Coverage Ratio of not less than 2.5 to 1.0, and (b) for any Rolling Period thereafter, a Senior Interest Coverage Ratio of not less than 2.75 to 1.0. Section 7.02 Total Interest Coverage Ratio. The Parent shall maintain at the end of each Rolling Period (a) for the Rolling Periods ending on September 30, 1998 through December 31, 1999, a Total Interest Coverage Ratio of not less than 2.0 to 1.0 and (b) for any Rolling Period thereafter, a Total Interest Coverage Ratio of not less than 2.5 to 1.0. Section 7.03 Senior Fixed Charge Ratio. The Parent shall maintain at the end of each Rolling Period (a) for the Rolling Periods ending on September 30, 1998 through September 30, 1999 a Senior Fixed Charge Ratio of not less than 2.0 to 1.0, (b) for the Rolling Periods ending on December 31, 1999 through September 30, 2000 a Senior Fixed Charge Ratio of not less than 2.5 to 1.0, and (c) for any Rolling Period thereafter, a Senior Fixed Charge Ratio of not less than 2.25 to 1.0. Section 7.04 Total Fixed Charge Ratio. The Parent shall maintain at the end of each Rolling Period (a) for the Rolling Periods ending on September 30, 1998 to September 30, 1999, a Total Fixed Charge Ratio of not less than 1.75 to 1.0, (b) for the Rolling Periods ending on December 31, 1999 to September 30, 2000, a Total Fixed Charge Ratio of not less than 2.0 to 1.0, and (c) for any Rolling Period thereafter, a Total Fixed Charge Ratio of not less than 2.25 to 1.0. Section 7.05 Senior Indebtedness Leverage Ratio. The Parent shall not on any date permit the Senior Indebtedness Leverage Ratio to exceed (a) for the Rolling Periods ending on September 30, 1998 through September 30, 1999, 4.0 to 1.0, (b) for any Rolling Period thereafter, 3.5 to 1.0. Section 7.06 Leverage Ratio. The Parent shall not on any date permit the Leverage Ratio to exceed (a) prior to December 31, 1998 5.5 to 1, (b) from December 31, 1998 to June 30, 1999, 5.0 to 1.0, (c) from July 1, 1999 to June 30, 2000 4.5 to 1.0, and (d) after June 30, 2000 4.0 to 1.0. 35 ARTICLE VIII. SUBORDINATION Section 8.01 Agreement to Subordinate. The Lender agrees that Indebtedness for Borrowings under this Agreement represented by the Notes shall be subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Financial Institution Senior Indebtedness and that the subordination is for the benefit of the Financial Institution Lenders. Section 8.02 Liquidation; Dissolution; Bankruptcy. Upon any distribution to creditors of the Borrower in a liquidation or dissolution of the Borrower or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Borrower or its Property: (a) the holders of Financial Institution Senior Indebtedness shall be entitled to receive payment in full in cash of the principal of and interest (including interest accruing after the commencement of any such proceeding) to the date of payment on the Financial Institution Senior Indebtedness before the Lender shall be entitled to receive any payment of principal of or interest on the Notes; and (b) until the Financial Institution Senior Indebtedness is paid in full in cash, any distribution to which the Lender would be entitled but for this Article shall be made to the holders of Financial Institution Senior Indebtedness as their interests may appear, except that the Lender may receive securities that are subordinated to Financial Institution Senior Indebtedness to at least the same extent as the Notes. Section 8.03 Default on Financial Institution Senior Indebtedness. The Borrower may not pay principal of or interest on the Notes and may not acquire any securities for cash or property other than capital stock of the Borrower if: (a) a default on Financial Institution Senior Indebtedness occurs and is continuing that permits holders of such Financial Institution Senior Indebtedness to accelerate its maturity; and (b) the default is the subject of judicial proceedings or the Borrower receives a notice of the default. If the Borrower receives any such notice, a similar notice received within nine months thereafter relating to the same default on the same issue of Financial Institution Senior Indebtedness shall not be effective for purposes of this Section. The Borrower may resume payments on the Notes and may acquire them when (1) the default is cured or waived, or (2) 20 days pass after the notice is given if the default is not the subject of judicial proceedings, if this Article otherwise permits the payment or acquisition at that time. 36 Section 8.04 Acceleration of Notes. If payment of the Notes is accelerated because of an Event of Default, the Borrower shall promptly notify holders of Financial Institution Senior Indebtedness of the acceleration. The Borrower may pay the Notes when 120 days pass after the acceleration occurs if this Article permits the payment at that time. Section 8.05 When Distribution Must Be Paid Over. If a distribution is made to the Lender that because of this Article should not have been made to it, the Lender shall hold it in trust for holders of Financial Institution Senior Indebtedness and pay it over to them as their interests may appear. Section 8.06 Notice by Borrower. The Borrower shall promptly notify the Lender of any facts known to the Borrower that would cause a payment of principal of or interest on Notes to violate this Article. Section 8.07 Subrogation. After all Financial Institution Senior Indebtedness is paid in full and until the Notes are paid in full, the Lender shall be subrogated to the rights of holders of Financial Institution Senior Indebtedness to receive distributions applicable to Financial Institution Senior Indebtedness to the extent that distributions otherwise payable to the Lender have been applied to the payment of Financial Institution Senior Indebtedness. A distribution made under this Article to holders of Financial Institution Senior Indebtedness which otherwise would have been made to the Lender is not, as between the Borrower and the Lender, a payment by the Borrower on Financial Institution Senior Indebtedness. Section 8.08 Relative Rights. This Article defines the relative rights of the Lender and holders of Financial Institution Senior Indebtedness. Nothing in this Indenture shall: (a) impair, as between the Borrower and the Lender, the obligation of the Borrower, which is absolute and unconditional, to pay principal of and interest on the Notes in accordance with their terms; (b) affect the relative rights of the Lender and creditors of the Borrower other than holders of Financial Institution Senior Indebtedness; or (c) prevent the Lender from exercising its available remedies upon an Event of Default, subject to the rights of holders of Financial Institution Senior Indebtedness to receive distributions otherwise payable to the Lender. If the Borrower fails because of this Article to pay principal of or interest on a Note on the due date, the failure is still an Event of Default as provided elsewhere herein. 37 ARTICLE IX. EVENTS OF DEFAULT; REMEDIES Section 9.01 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under any Credit Document: 1. Principal Payment. The Borrower or any Guarantor shall fail to pay any principal of any Note when the same becomes due and payable as set forth in this Agreement; 2. Interest or Other Obligation Payment. The Borrower or any Guarantor shall fail to pay any interest on any Note or any other amount payable hereunder or under any other Credit Document when the same becomes due and payable as set forth in this Agreement; provided, however, that the Borrower and the Guarantors will have a grace period of ten days after the payments covered by this Section 9.01(b) becomes due and payable for the first two defaults of such Persons collectively under this Section 9.01(b) in every calendar year; 3. Representation and Warranties. Any representation or warranty made or deemed to be made (i) by the Borrower in this Agreement or in any other Credit Document, (ii) by the Borrower (or any of its officers) in connection with this Agreement or any other Credit Document, or (iii) by the Parent or any Subsidiary in any Credit Document shall prove to have been incorrect in any material respect when made or deemed to be made; 4. Covenant Breaches. (i) The Borrower shall fail to perform or observe any covenant contained in Section 5.02, Article VI or Article VII of this Agree ment or the Borrower shall fail to perform or observe, or shall fail to cause any Guarantor to perform or observe any covenant in any Credit Document beyond any notice and/or cure period for such default expressly provided in such Credit Document or (ii) the Borrower or any Guarantor shall fail to perform or observe any term or covenant set forth in any Credit Document which is not covered by clause (i) above or any other provision of this Section 9.01, in each case if such failure shall remain unremedied for 30 days after the earlier of the date written notice of such default shall have been given to the Borrower or such Guarantor by the Lender or the date a Responsible Officer of the Borrower or any Guarantor has actual knowledge of such default, unless such default in this clause (ii) cannot be cured in such 30 day period and the Borrower is diligently proceeding to cure such default, in which event the cure period shall be extended to 90 days; 38 5. Cross-Defaults. (i) with respect to Indebtedness of the Borrower in excess of $5,000,000 or any amount of Financial Institution Senior Indebtedness (but excluding Indebtedness evidenced by the Notes) which is outstanding: (1) any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (2) the Borrower, the Parent or any of their respective Subsidiaries shall fail to pay any principal of or premium or interest of any of such Indebtedness (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or (3) any other event shall occur or condition shall exist under any agreement or instrument relating to such Indebtedness, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to permit the holders of such Indebtedness to accelerate the maturity of such Indebtedness; 6. Insolvency. The Borrower, the Parent or any of their respective material Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower, the Parent or any of their respective material Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against the Borrower, the Parent or any of their respective material Subsidiaries, either such proceeding shall remain undismissed for a period of 60 days or any of the actions sought in such proceeding shall occur; or the Borrower, the Parent or any of their respective material Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this paragraph (e); 7. ERISA. (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is likely 39 to result in the termination of such Plan for purposes of Title IV of ERISA, unless such Reportable Event, proceedings or appointment are being contested by the Borrower in good faith and by appropriate proceedings, (iv) any Plan shall terminate for purposes of Title IV of ERISA, (v)the Borrower or any member of a Controlled Group shall incur any liability in connection with a withdrawal from a Multiemployer Plan or the insolvency (within the meaning of Section 4245 of ERISA) or reorganization (within the meaning of Section 4241 of ERISA) of a Multiemployer Plan, unless such liability is being contested by the Borrower in good faith and by appropriate proceedings, or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject the Borrower or any Guarantor to any tax, penalty or other liabilities in the aggregate exceeding $10,000,000; 8. Guaranty. Any material provision of any Guaranty shall for any reason cease to be valid and binding on any Guarantor or any Guarantor shall so state in writing; 9. Environmental Condition. The terms and conditions of Section 4.14 of this Agreement shall for any reason cease to be valid and binding on any Person party thereto or any such Person shall so state in writing; or 10. Change in Management. Any of the following occur without the written consent of the Required Lenders: (a) a Change of Control occurs for either the Parent or the Borrower; (b) the Parent, and any wholly-owned Subsidiary of the Parent collectively owns less than 70% of the legal or beneficial interest in the Borrower; or (c) the Parent shall cease to employ either Paul W. Whetsell or Steven D. Jorns as chairman and chief executive officer of the Parent and, within 180 days following such occurrence for any reason, another person acceptable to the Lenders in their sole discretion is not employed as the Chairman and Chief Executive Officer of the Parent. Section 9.02 Optional Acceleration of Maturity; Other Actions. If any Event of Default (other than an Event of Default pursuant to paragraph (f) of Section 9.01) shall have occurred and be continuing, then, and in any such event: 1. the Lender (i) may, by notice to the Borrower, declare the obligation to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) may, by notice to the Borrower, declare the Notes, all interest thereon, and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable in full, without presentment, demand, protest or further notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrower; and 40 2. the Lender may proceed to enforce its rights and remedies under the Credit Documents by appropriate proceedings. Section 9.03 Automatic Acceleration of Maturity. If any Event of Default pursuant to paragraph (f) of Section 9.01 shall occur, the obligation of the Lender to make Advances shall immediately and automatically be terminated and the Notes, all interest on the Notes, and all other amounts payable under this Agreement shall immediately and automatically become and be due and payable in full, without presentment, demand, protest or any notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrower. ARTICLE X. MISCELLANEOUS Section 10.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes, or any other Credit Document, nor consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, as specified in the particular provisions of the Credit Documents, and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given Section 10.02 Notices, Etc. All notices and other communications shall be in writing (including telecopy or telex) and mailed, telecopied, telexed, hand delivered or delivered by a nationally recognized overnight courier, if to the Borrower, at its address at 1010 Wisconsin Avenue, N.W., Suite 650, Washington, D.C. 20007, Attn: Mr. James C. Calder; if to the Lender, at its address at 1010 Wisconsin Avenue, N.W., Suite 650, Washington, D.C. 20007, Attn: Mr. John Emery; or, as to each party, at such other address or teletransmission number as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telexed or hand delivered or delivered by overnight courier, be effective three days after deposited in the mails, when telecopy transmission is completed, when confirmed by telex answer-back or when delivered, respectively, except that notices and communications to the Lender pursuant to Article II or Article VIII shall not be effective until received by the Lender. Section 10.03 No Waiver; Remedies. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in this Agreement and the other Credit Documents are cumulative and not exclusive of any remedies provided by law. 41 Section 10.4 Costs and Expenses. The Borrower agrees to pay on demand all out-of-pocket costs and expenses of the Lender in connection with the preparation, execution, delivery, due diligence, administration, modification and amendment of this Agreement, the Notes and the other Credit Documents of the Obligations including, without limitation, all reasonable out-of-pocket costs and expenses, if any, of the Lender in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement and the other Credit Documents. Section 10.05 Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Lender, and when the Lender shall have, as to the Lender, either received a counterpart hereof executed by the Lender or been notified by the Lender that the Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of the Lender. Section 10.06 Indemnification. The Borrower shall indemnify the Lender and each of its affiliates, directors, officers, employees and agents from, and discharge, release, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from (i) any actual or proposed use by the Borrower or any Affiliate of the Borrower of the proceeds of any Advance, (ii) any breach by the Borrower or any Guarantor of any provision of this Agreement or any other Credit Document, (iii) any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing, or (iv) any Environmental Claim or requirement of Environmental Laws concerning or relating to the present or previously-owned or operated properties, or the operations or business, of the Parent, the Borrower or any of its Subsidiaries, and the Borrower shall reimburse the Lender, each affiliate and their respective directors, officers, employees and agents, upon demand for any reasonable out-of-pocket expenses (including legal fees) incurred in connection with any such investigation, litigation or other proceeding; and expressly including any such losses, liabilities, claims, damages, or expense incurred by reason of the Person being indemnified's own negligence, but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. THE BORROWER ACKNOWLEDGES AND AGREES THAT CERTAIN OF ITS OBLIGATIONS AND INDEMNITIES UNDER THIS AGREEMENT INCLUDE ANY CLAIMS RESULTING FROM THE NEGLIGENCE OR ALLEGED NEGLIGENCE OF THE LENDER, OR ANY OTHER PERSON BEING INDEMNIFIED. 42 Section 10.07 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 10.08 Survival of Representations, Indemnifications, etc. All representations, warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Credit Documents, the making of the Advances and any investigation made by or on behalf of the Lender, none of which investigations shall diminish the Lender's right to rely on such representations and warranties. All obligations of the Borrower provided for in Sections 2.07, 2.10(c) and 9.06 shall survive any termination of this Agreement and repayment in full of the Obligations. Section 10.09 Severability. In case one or more provisions of this Agreement or the other Credit Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby. 43 Section 10.10 Usury Not Intended. It is the intent of the Borrower and the Lender in the execution and performance of this Agreement and the other Credit Documents to contract in strict compliance with applicable usury laws, including conflicts of law concepts, governing the Advances of the Lender including such applicable laws of the State of New York and the United States of America from time to time in effect. In furtherance thereof, the Lender and the Borrower stipulate and agree that none of the terms and provisions contained in this Agreement or the other Credit Documents shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the Maximum Rate and that for purposes hereof "interest" shall include the aggregate of all charges which constitute interest under such laws that are contracted for, charged or received under this Agreement; and in the event that, notwithstanding the foregoing, under any circumstances the aggregate amounts taken, reserved, charged, received or paid on the Advances, include amounts which by applicable law are deemed interest which would exceed the Maximum Rate, then such excess shall be deemed to be a mistake and the Lender shall credit the same on the principal of its Notes (or if such Notes shall have been paid in full, refund said excess to the Borrower). In the event that the maturity of the Notes is accelerated by reason of any election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the Maximum Rate and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the applicable Notes (or, if the applicable Notes shall have been paid in full, refunded to the Borrower). In determining whether or not the interest paid or payable under any specific contingencies exceeds the Maximum Rate, the Borrower and the Lender shall to the maximum extent permitted under applicable law amortize, prorate, allocate and spread in equal parts during the period of the full stated term of the Notes all amounts considered to be interest under applicable law at any time contracted for, charged, received or reserved in connection with the Obligations. The provisions of this Section shall control over all other provisions of this Agreement or the other Credit Documents which may be in apparent conflict herewith. Section 10.11 GOVERNING LAW. ANY DISPUTE BETWEEN THE BORROWER, THE LENDER, OR ANY INDEMNITEE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW YORK. 44 Section 10.12 CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL. (A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION (B), EACH OF THE PARTIES HERETO AGREES THAT ALL DISPUTES AMONG THEM ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED EXCLUSIVELY BY STATE OR FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK, BUT THE PARTIES HERETO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK, NEW YORK. EACH OF THE PARTIES HERETO WAIVES IN ALL DISPUTES BROUGHT PURSUANT TO THIS SUBSECTION (A) ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE. (B) OTHER JURISDICTIONS. THE BORROWER AGREES THAT THE LENDER OR ANY INDEMNITEE SHALL HAVE THE RIGHT TO PROCEED AGAINST THE BORROWER OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE SUCH PERSON TO (1) OBTAIN PERSONAL JURISDICTION OVER THE BORROWER OR (2) ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PERSON. THE BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY SUCH PERSON TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SUCH PERSON. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH SUCH PERSON HAS COMMENCED A PROCEEDING DESCRIBED IN THIS SUBSECTION (B). (C) SERVICE OF PROCESS. THE BORROWER WAIVES PERSONAL SERVICE OF ANY PROCESS UPON IT AND IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY WRITS, PROCESS OR SUMMONSES IN ANY SUIT, ACTION OR PROCEEDING BY THE MAILING THEREOF BY THE LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER ADDRESSED AS PROVIDED HEREIN. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF THE LENDER TO SERVE ANY SUCH WRITS, PROCESS OR SUMMONSES IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR 45 AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE. (D) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. Section 10.13 Knowledge of Borrower. For purposes of this Agreement, "knowledge of the Borrower" means the actual knowledge of any of the executive officers and all other Responsible Officers of the Parent. Section 10.14 Lender Not in Control. None of the covenants or other provisions contained in the Credit Documents shall or shall be deemed to, give the Lender the rights or power to exercise control over the affairs and/or management of the Borrower, any of its Subsidiaries or any Guarantor, the power of the Lender being limited to the right to exercise the remedies provided in the Credit Documents; provided, however, that if the Lender becomes the owner of any stock, or other equity interest in, any Person whether through foreclosure or otherwise, the Lender shall be entitled (subject to requirements of law) to exercise such legal rights as it may have by being owner of such stock, or other equity interest in, such Person. Section 10.15 Headings Descriptive. The headings of the several Sections and paragraphs of the Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 10.16 Time is of the Essence. Time is of the essence under ---------------------------- the Credit Documents. - -------------------- [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -------------------------------------------- 46 EXECUTED as of the date first referenced above. ----------------------------------------------- BORROWER: --------- MERISTAR H & R OPERATING COMPANY, L.P. -------------------------------------- By: MeriStar Hotels & Resorts, Inc., its general --- -------------------------------------------- partner ------- By: ------------------------------------- Name: Title: LENDER: MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. By: MeriStar Hospitality Corporation, its general partner By: ------------------------------------- Name: Title: 47 EX-10.11 3 AMENDED/RESTATED AGREEMENT MERISTAR H & R OPERATING COMPANY, L.P. AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MERISTAR H & R OPERATING COMPANY, L.P. (the "Partnership"), dated as of August 3, 1998, is entered into by and among MeriStar Hotels & Resorts, Inc., a Delaware corporation, as the General Partner, and MeriStar Hotels & Resorts and CapStar Management Company, L.L.C., a Delaware limited liability company, as the Limited Partners, together with any other Persons who become Partners in the Partnership as provided herein. WHEREAS, the Partnership was formed pursuant to an Agreement of Limited Partnership, dated as of March 13, 1998 (the "Initial Agreement"); WHEREAS, prior to the execution of this Agreement, CapStar Management Company L.L.C. and CapStar Management Company II L.L.C., each a Delaware limited liability company, entered into contribution agreements (the "Contribution Agreements"), whereby the assets of each such limited liability company were contributed to the Partnership and MeriStar H & R Operating Company II, L.P., a Delaware limited partnership, in exchange for certain interests in such limited partnerships; WHEREAS, prior to the execution of this Agreement, (i) CapStar Management Company II L.L.C. merged with and into CapStar Management Company L.L.C. and (ii) MeriStar H & R Operating Company II, L.P. merged with and into the Partnership; and WHEREAS, in connection with the foregoing, the parties hereto desire to amend and restate the Initial Agreement in its entirety; NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to amend and restate the Initial Agreement in its entirety as follows: ARTICLE I. DEFINED TERMS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may --- be amended from time to time, and any successor to such statute. "Additional Limited Partner" means a Person admitted to the Partnership as -------------------------- a Limited Partner pursuant to Section 4.2 hereof and who is shown as such on the books and records of the Partnership. "Adjusted Capital Account" means the Capital Account maintained for each ------------------------ Partner as of the end of each Partnership Year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement, or is treated as being obligated to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c), or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1), 1.704-1(i)(5), and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjusted Capital Account Deficit" means, with respect to any Partner, the -------------------------------- deficit balance, if any, in such Partner's Adjusted Capital Account as of the end of the relevant Partnership Year. "Adjusted Property" means any property the Carrying Value of which has been ----------------- adjusted pursuant to Exhibit B hereof. --------- "Affiliate" means, with respect to any Person, (i) any Person directly or --------- indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person, (iii) any Person of which such Person owns or controls ten percent (10%) or more of the voting interests, or (iv) any officer, director, general partner, member, or trustee of such Person or of any Person referred to in clauses (i), (ii), and (iii) above. For the purposes of this definition, "control" when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreed Value" means (i) in the case of any Contributed Property set forth ------------ in Exhibit D and as of the time of its contribution to the Partnership, the --------- Agreed Value of such property as set forth in Exhibit D; (ii) in the case of any --------- Contributed Property not set forth in Exhibit D and as of the time of its --------- contribution to the Partnership, the 704(c) Value of such property, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (iii) in the case of any property distributed to a Partner by the Partnership, the Partnership's Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder. 2 "Agreement" means this Agreement of Limited Partnership, as it may be --------- amended, supplemented or restated from time to time. "Assignee" means a Person to whom one or more Partnership Units have been -------- transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5. "Book-Tax Disparities" means, with respect to any item of Contributed -------------------- Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's Capital Account balance as maintained pursuant to Exhibit B and the hypothetical balance of such Partner's Capital Account --------- computed as if it had been maintained strictly in accordance with federal income tax accounting principles. "Business Day" means any day except a Saturday, Sunday or other day on ------------ which commercial banks in New York, New York are authorized or required by law to close. "Capital Account" means the Capital Account maintained for a Partner --------------- pursuant to Exhibit B hereof. --------- "Capital Contribution" means, with respect to any partner, any cash, cash -------------------- equivalents or the Agreed Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Section 4.2 or 4.3 hereof. The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed by a Partner as the maker of the note shall not be considered a capital contribution until the Partnership makes a taxable disposition of the note or until (and to the extent) principal payments are made on the note, all in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(d)(2). "Carrying Value" means (i) with respect to a Contributed Property or -------------- Adjusted Property, the 704(c) Value of such property, or the Carrying Value of such property as determined pursuant to Exhibit B hereof, as the case may be; reduced (but not below zero) by all Depreciation with respect to such Property charged to the Partners' Capital Accounts following the contribution of or adjustment with respect to such Property, and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B --------- hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. "Cash Amount" means an amount of cash per Partnership Unit equal to the ----------- Value on the Valuation Date of the OPCO Shares Amount. 3 "Certificate" means the Certificate of Limited Partnership relating to the ----------- Partnership filed in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act. "Certificate of Incorporation" means the Amended and Restated Certificate ---------------------------- of Incorporation of the General Partner filed in the State of Delaware on July 22, 1998, as amended or restated from time to time. "Class A MHR Unit" means a Partnership Unit having the rights, preferences ---------------- and privileges assigned to Class A MHR Units pursuant to the further provisions of this Agreement. The ownership of Class A MHR Units is as set forth in Exhibit A annexed hereto, as such Exhibit may be amended from time to time. "Class B MHR Unit" means a Partnership Unit having the rights, preferences ---------------- and privileges assigned to Class B MHR Units pursuant to the further provisions of this Agreement. The ownership of Class B MHR Units is as set forth in Exhibit A annexed hereto, as such Exhibit may be amended from time to time. "Code" means the Internal Revenue Code of 1986, as amended and in effect ---- from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "Consent" means the consent or approval of a proposed action by a Partner ------- given in accordance with Section 14.2 hereof. "Contributed Property" means each property or other asset contributed to -------------------- the Partnership, in such form as may be permitted by the Act, but excluding cash contributed or deemed contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 1.D of Exhibit B hereof, --------- such property shall no longer constitute a Contributed Property for purposes of Exhibit B hereof, but shall be deemed an Adjusted Property for such purposes. - --------- "Contribution Agreements" means the agreements whereby certain assets of ----------------------- CapStar Management LLC and CapStar Management II LLC were contributed to the Partnership and MeriStar H & R Operating Company II, L.P., respectively, in exchange for interests in such limited partnerships. "Conversion Factor" means 1.0; provided that in the event that the General ----------------- -------- Partner (i) declares or pays a dividend on its outstanding OPCO Shares in the form of OPCO Shares or makes a distribution to all holders of its outstanding OPCO Shares in OPCO Shares; (ii) subdivides its outstanding OPCO Shares; or (iii) combines its outstanding OPCO Shares into a smaller number of OPCO Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of OPCO Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and 4 the denominator of which shall be the actual number of OPCO Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, subdivision or combination. Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. "Debt" means, as to any Person, as of any date of determination, (i) all ---- indebtedness of such Person for borrowed money or for the deferred purchase price of property or services; (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person; (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person's interest in such property, even though such Person has not assumed or become liable for the payment thereof; and (iv) lease obligations of such Person which, in accordance with generally accepted accounting principles, should be capitalized. "Depreciation" means, for each Partnership year, an amount equal to the ------------ federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, -------- ------- that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner. "Distribution Amount" means, with respect to any period for which there is ------------------- a Distribution Event, an amount equal to the aggregate amount that the Partnership would have paid in income taxes had it been a C corporation during the period to which the Distribution Event relates. "Distribution Event" means any quarter in which the General Partner incurs ------------------ an income tax liability as a result of its status as the General Partner of the partnership. "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. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time (or any corresponding provisions of succeeding laws). 5 "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. "General Partner" means MeriStar Hotels & Resorts, Inc., a Delaware --------------- corporation, or its successors as general partner of the Partnership. "General Partner Distribution Amount" means an amount necessary to satisfy ----------------------------------- any income tax obligations of the General Partner incurred due to its status as the General Partner of the Partnership. "General Partner Interest" means a Partnership Interest held by the General ------------------------ Partner that is a general partnership interest. A General Partner Interest may be expressed as a number of Partnership Units. "IRS" means the Internal Revenue Service, which administers the internal --- revenue laws of the United States. "Immediate Family" means, with respect to any natural Person, such natural ---------------- Person's spouse and such natural Person's natural or adoptive parents, descendants, nephews, nieces, brothers, and sisters. "Incapacity" or "Incapacitated" means, (i) as to any individual Partner, ---------- ------------- death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership or limited liability company which is a Partner, the dissolution and commencement of winding up of the partnership or limited liability company; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors, (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above, (e) the Partner 6 seeks, consents to or acquiesces in the appointment of a trustee, receive or liquidator for the Partner or for all or any substantial part of the Partner's properties, (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof, (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment, or (h) an appointment referred to in clause (g) which has been stayed is not vacated within ninety (90) days after the expiration of any such stay. "Indemnitee" means (i) any Person made a party to a proceeding by reason of ---------- his status as (A) the General Partner or a Limited Partner, or (B) a director or officer of the Partnership or the General Partner or a Limited Partner, or (C) his or its liability, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to), and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion. "Institutional Lender" has the meaning as defined in Section 11.7 hereof. -------------------- "Limited Partner" means CapStar Management Company, L.L.C., a Delaware --------------- limited liability company and MeriStar Hotels & Resorts, Inc., in its capacity as a Limited Partner, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner in the Partnership. "Limited Partner Distribution Amount" means the Distribution Amount less ----------------------------------- the General Partner Distribution Amount. "Limited Partner Interest" means a Partnership Interest of a Limited ------------------------ Partner in the Partnership and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Units. "Liquidator" has the meaning set forth in Section 13.2. ---------- "Net Income" means, for any taxable period, the excess, if any, of the ---------- Partnership's items of income and gain for such taxable period over the Partnership's items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit B. Once an item of income, gain, loss or deduction that --------- has been included in the initial computation of Net Income is subjected to the special allocation rules in Exhibit C, Net Income or the resulting Net Loss, --------- whichever the case may be, shall be recomputed without regard to such item. 7 "Net Loss" means, for any taxable period, the excess, if any, of the -------- Partnership's items of loss and deduction for such taxable period over the Partnership's items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit B. Once an item of income, gain, loss or deduction that --------- has been included in the initial computation of Net Loss is subjected to the special allocation rules in Exhibit C, Net Loss or the resulting Net Income, --------- whichever the case may be, shall be recomputed without regard to such item. "Nonrecourse Built-in Gain" means, with respect to any Contributed ------------------------- Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such --------- properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration. "Nonrecourse Deductions" has the meaning set forth in Regulations Section ---------------------- 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). "Nonrecourse Liability" has the meaning set forth in Regulations Section --------------------- 1.752-1(a)(2). "Notice of Redemption" means the Notice of Redemption substantially in the -------------------- form of Exhibit E to this Agreement. --------- "OPCO" means MeriStar Hotels & Resorts, Inc., a Delaware corporation. ---- "OPCO Share" means a share of common stock, par value $0.01 per share, of ---------- the General Partner. "OPCO Shares Amount" means a whole number of OPCO Shares equal to the ------------------ product of the number of Partnership Units offered for redemption by a Redeeming Partner, multiplied by the Conversion Factor (rounded down to the nearest whole number in the event such product is not a whole number); provided that in the ------------- event the General Partner at any time issues to all holders of OPCO Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders to subscribe for or purchase OPCO Shares or any other securities or property (collectively, the "rights"), which rights have not expired pursuant to their terms, then the OPCO Shares Amount thereafter shall also include such rights that a holder of that number of OPCO Shares would be entitled to receive. "Ownership Excess" means direct or indirect ownership of an interest of 10 ---------------- percent or more in the assets or net profits of the Partnership, within the meaning of Section 856(d)(2)(B)(ii) of the Code. 8 "Partner" means a General Partner or a Limited Partner, and "Partners" ------- -------- means the General Partner and the Limited Partners. "Partner Minimum Gain" means an amount, with respect to each Partner -------------------- Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Debt" has the meaning set forth in Regulations Section ------------------------ 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Regulations ------------------------------ Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). "Partnership" means the limited partnership formed under the Act and ----------- pursuant to the Initial Agreement and any successor thereto. "Partnership Interest" means an ownership interest in the Partnership and -------------------- includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Units. "Partnership Minimum Gain" has the meaning set forth in Regulations Section ------------------------ 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). "Partnership Record Date" means the record date established by the General ----------------------- Partner for any distribution pursuant to Section 5.1 hereof. "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. The total number of Partnership Units outstanding, including the number of Class A MHR Units and Class B MHR Units, and the Percentage Interests in the Partnership represented by such Partnership Units are set forth in Exhibit A hereto, as such exhibit may be amended from time to time. The ownership of Partnership Units may be evidenced by such form of certificate for units as the General Partner adopts from time to time. "Partnership Year" means the fiscal year of the Partnership, which shall ---------------- end on the Friday nearest December 31. "Percentage Interest" means, as to a Partner, its interest in the ------------------- Partnership as determined by dividing the Partnership Units (other than Preferred Units) owned by 9 such Partner by the total number of Partnership Units (other than Preferred Units) then outstanding. "Person" means an individual or a corporation, partnership, trust, limited ------ liability company, unincorporated organization, association or other entity. "Preferred Capital," with respect to each Preferred Unit, means an amount ----------------- equal to $3.34. "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 and includes any Preferred Return accrued prior to the date of this Agreement. "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. Class A MHR Units and Class B MHR Units shall not constitute Preferred Units. 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. "Recapture Income" means any gain recognized by the Partnership upon the ---------------- disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. "Redeeming Partner" has the meaning set forth in Section 8.6 hereof. ----------------- "Redemption Right" shall have the meaning set forth in Section 8.6 hereof. ---------------- "Regulations" means the Income Tax Regulations promulgated under the Code, ----------- as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Residual Gain" or "Residual Loss" means any item of gain or loss, as the ------------- ------------- case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the 10 extent such item of gain or loss is not allocated pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax Disparities. --------- "Rights Offering" means that certain rights offering by the General Partner --------------- described in the General Partner's Registration Statement on Form S-1 (Registration No. 333-49881) filed with the Securities and Exchange Commission on April 10, 1998, as amended and supplemented through the date hereof. "704(c) Value" of any Contributed Property means the value of such property ------------ as set forth in Exhibit D or if no value is set forth in Exhibit D, the fair --------- --------- market value of such property or other consideration at the time of contribution as determined by the General Partner using such reasonable method of valuation as it may adopt. Subject to Exhibit B hereof, the General Partner shall, in its --------- sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values of contributed Properties in a single or integrated transactions among the separate properties on a basis proportional to their respective fair market values. "Specified Redemption Date" means the tenth (10th) Business Day after ------------------------- receipt by the General Partner of a Notice of Redemption; provided that if the General Partner combines its outstanding OPCO Shares, no Specified Redemption Date shall occur after the record date and prior to the effective date of such combination. "Subsidiary" means, with respect to any Person, any corporation, ---------- partnership, or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person. "Substituted Limited Partner" means a Person who is admitted as a Limited --------------------------- Partner to the Partnership pursuant to Section 11.4. "Terminating Capital Transaction" means any sale or other disposition of ------------------------------- all or substantially all of the assets of the Partnership or its Subsidiaries or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership or its Subsidiaries. "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). "Unrealized Gain" attributable to any item of Partnership property means, --------------- as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit B hereof) as of such date, --------- over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date. --------- 11 "Unrealized Loss" attributable to any item of Partnership property means, --------------- as of any date of determination, the excess, if any, of (i) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B --------- hereof) as of such date, over (ii) the fair market value of such property (as determined under Exhibit B hereof) as of such date. --------- "Valuation Date" means the date of receipt by the General -------------- Partner of a Notice of Redemption or, if such date is not a Business Day, the first Business Day thereafter. "Value" means, with respect to an OPCO Share, the average of the daily ----- market price for the ten (10) consecutive trading days immediately preceding the Valuation Date. The market price for each such trading day shall be: (i) if the OPCO Shares are listed or admitted to trading on any securities exchange or the NASDAQ National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day; (ii) if the OPCO Shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner; or (iii) if the OPCO Shares are not listed or admitted to trading on any securities exchange or the NASDAQ National Market System and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported; provided that if there are no -------- bid and asked prices reported during the ten (10) days prior to the date in question, the Value of the OPCO Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the OPCO Shares Amount includes rights that a holder of OPCO Shares would be entitled to receive, and the General Partner acting in good faith determines that the value of such rights is not reflected in the Value of the OPCO Shares determined as aforesaid, then the Value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. ARTICLE II. ORGANIZATIONAL MATTERS Section 2.1. Organization ------------ The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and conditions set forth herein. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and 12 the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Name ---- The name of the Partnership shall be MeriStar H & R Operating Company, L.P. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners. Section 2.3 Registered Office and Agent; Principal Office --------------------------------------------- The address of the registered office of the Partnership in the State of Delaware is CT Corporation, 1209 Orange Street, Wilmington, Delaware 19801, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be CT Corporation, 1209 Orange Street, Wilmington, Delaware 19801. The principal office of the Partnership shall be 1010 Wisconsin Avenue, N.W., Suite 650, Washington, DC 20007, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. Section 2.4 Power of Attorney ----------------- A. Each Limited Partner and each Assignee who accepts Partnership Units (or any rights, benefits or privileges associated therewith) is deemed to irrevocably constitute and appoint the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all jurisdictions in which the Partnership may or plans to conduct business or own property; (b) all instruments that the General Partner or the Liquidator deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances 13 and other instruments or documents that the General Partner deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13 hereof or the Capital Contribution of any Partner; and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interests; and (2) execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner's or Assignee's Partnership Units and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5. Term ---- The term of the Partnership commenced on March 13, 1998, the date the Certificate was filed in the office of the Secretary of State of Delaware in accordance with the Act and shall continue until December 31, 2095, unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law. 14 ARTICLE III. PURPOSE Section 3.1 Purpose and Business -------------------- (a) The purpose and nature of the business to be conducted by the Partnership, directly or indirectly through subsidiaries (including, without limitation, partnerships for which the Partnership is a general partner), is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act including, without limitation, to engage in the following activities: (i) to acquire, invest in, hold, own, develop, construct, improve, maintain, operate, manage, purchase, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with real and person property of all kinds; (ii) to engage in all phases of the hotel and hotel management business; (iii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing; (iv) to undertake such other activities as may be necessary, advisable, desirable or convenient to the business of the Partnership; and (v) to engage in such other ancillary activities as shall be necessary or desirable to effectuate the foregoing purposes. (b) In connection with the foregoing, but subject to all of the terms, covenants, conditions and limitations contained in this Agreement, the Partnership shall have full power and authority to enter into, perform, and carry out contracts of any kind, to borrow money and to issue evidences of indebtedness, whether or not secured by mortgage, trust deed, pledge or other Lien, and directly or indirectly, to acquire and construct additional properties necessary or useful in connection with its business. Section 3.2 Powers ------ The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership, including, without limitation, full power and authority, directly or through its ownership interest in other entities, to enter into, perform and carry out contracts of any kind, borrow money and issue evidences of indebtedness, whether or not secured by mortgage, deed of trust, pledge or other lien, acquire and develop real property, and manage, lease, sell, transfer and dispose of real property. 15 ARTICLE IV. CAPITAL CONTRIBUTIONS Section 4.1 Capital Contributions of the Partners ------------------------------------- The Partners have made: (i) certain Capital Contributions to the Partnership; and (ii) certain capital contributions to MeriStar H & R Operating Company II, L.P. (which capital contributions shall be deemed to be Capital Contributions for purposes of this Agreement). To the extent the Partnership acquires any property by the merger of any person into the Partnership, Persons who receive Partnership Interests in exchange for their interests in the Person merging into the Partnership shall become Partners and shall be deemed to have made Capital Contributions as provided in the applicable merger agreement and as set forth in Exhibit A, as amended to reflect such deemed Capital Contributions. The Partners shall own Partnership Units as set forth in Exhibit A and shall have Percentage Interests in the Partnership as set forth in Exhibit A, which Percentage Interests shall be adjusted from time to time by the General Partner to the extent necessary to accurately reflect redemptions, Capital Contributions, the issuance of additional Partnership Units, or similar events having an effect on a Partner's Percentage Interest. 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. Except as provided in Sections 4.2 and 10.5, the Partners shall have no obligation to make Capital Contributions or loans to the Partnership. Section 4.2 Issuances of Additional Interests --------------------------------- A. The General Partner is hereby authorized to cause the Partnership from time to time to issue to the Partners (including the General Partner) or other persons (including, without limitation, in connection with the contribution of property to the Partnership) additional Partnership Units or other Partnership Interests in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partnership Interests, all as shall be determined by the General Partner in its sole and absolute discretion subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; provided that no such additional Partnership ------------- Units or other Partnership Interests shall be issued to the General Partner unless either (a)(1) the additional Partnership Interests are issued in connection with the grant, award, or issuance of shares of the General Partner, which shares have designations, preferences and other rights (except for voting rights) such that the economic interests attributable to such shares are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner in accordance with this Section 4.2.A, and (2) the General Partner shall make a Capital Contribution to the Partnership in an amount equal to the proceeds, if any, raised 16 in connection with the issuance of such shares of the General Partner, or (b) the additional Partnership Interests are issued to all Partners in proportion to their respective Percentage Interests. B. After the date hereof, the General Partner shall not grant, award, or issue any additional OPCO Shares (other than OPCO Shares issued pursuant to Sections 8.6 or 8.7), or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase OPCO Shares (collectively "New Securities"), other than to all holders of OPCO Shares unless (i) the General Partner shall cause the Partnership to issue to the General Partner Partnership Interests or rights, options, warrants or convertible or exchangeable securities of the Partnership having designations, preferences and other rights, all such that the economic interests are substantially the same as those of the New Securities, and (ii) the General Partner contributes the net proceeds from the grant, award or issuance of such New Securities and from the exercise of rights contained in such New Securities to the Partnership. Without limiting the foregoing, the General Partner is expressly authorized to issue New Securities for less than fair market value, and to cause the Partnership to issue to the General Partner corresponding Partnership Interests, so long as (x) the General Partner concludes in good faith that such issuance is in the interests of the General Partner and the Partnership (for example, and not by way of limitation, the issuance of OPCO Shares and corresponding Partnership Units pursuant to an employee stock purchase plan providing for employee purchases of OPCO Shares at a discount from fair market value or employee stock options that have an exercise price that is less than the fair market value of the OPCO Shares, either at the time of issuance or at the time of exercise), and (y) the General Partner contributes all proceeds from such issuance and exercise to the Partnership. Section 4.3 Contribution of Proceeds of Issuance of OPCO Shares --------------------------------------------------- In connection with any grant, award, or issuance of OPCO Shares or rights, options, warrants, or convertible or exchangeable securities pursuant to Section 4.2, and to the extent the proceeds in each case are required to be contributed to the Partnership as provided in Section 4.2.B hereof, the General Partner shall make a Capital Contribution to the Partnership of the proceeds raised in connection with such grant, award, or issuance; provided that if the proceeds actually received by the General Partner are less than the gross proceeds of such grant, award, or issuance as a result of any underwriter's discount, commission, or fee or other expenses paid or incurred in connection with such grant, award, or issuance, then the General Partner shall be deemed to have made a Capital Contribution to the Partnership in the amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have reimbursed the General Partner pursuant to Section 7.4.C for the amount of such underwriter's discount or other expenses. Section 4.4 No Preemptive Rights -------------------- 17 No existing Limited Partner shall have any preemptive, preferential or other similar right with respect to (i) additional Capital Contributions or loans to the Partnership; or (ii) issuance or sale of any Partnership Units or other Partnership Interests. Section 4.5 No Interest on Capital ---------------------- No Partner shall be entitled to interest on its Capital Contribution or its Capital Account. ARTICLE V. DISTRIBUTIONS 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.l.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; provided, however, that if, as a result of the remedial allocations of taxable income to the holders of Class B MHR Units as required by Section 2.C of Exhibit C, the amounts otherwise distributable to the holders of Class B MHR Units pursuant to this sentence with respect to any year ending on or prior to December 31, 2000 would be insufficient to permit the holders of Class B MHR Units to pay taxes, calculated using a rate determined in the same manner as the Effective Tax Rate but using the highest marginal tax rates applicable to individuals rather than the tax applicable to C corporations, on 18 their respective distributive shares of the Partnership's taxable income for such year, the amounts otherwise distributable to the holders of Class B MHR Units pursuant to this sentence shall be increased as necessary to permit the holders of Class B MHR Units to pay such taxes. Distributions 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; provided that if any Partner has its Partnership Units redeemed pursuant to Section 8.6 or 8.7, the fact that such Partner may no longer hold any Partnership Units after such redemption shall not affect such Partner's right to receive any distributions required pursuant to this Section 5.1.B(1) with respect to the applicable taxable income allocated to such Partnership Unit up to and including the date of such redemption. (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 of 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. Section 5.2. Amounts Withheld ---------------- All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.5 hereof with respect to any allocation, payment or distribution to the General Partner, the Limited Partners or Assignees shall be treated as amounts distributed to the General Partner, Limited Partners, or Assignees pursuant to Section 5.1 for all purposes under this Agreement. Section 5.3 Distributions Upon Liquidation ------------------------------ Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership, shall be distributed to the Partners in accordance with Section 13.2. ARTICLE VI. ALLOCATIONS Section 6.1 Allocations For Capital Account Purposes ---------------------------------------- 19 For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership's items of income, gain, loss and deduction (computed in accordance with Exhibit B hereof) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below. 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: (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. 20 C. Allocation of Nonrecourse Debt. For purposes of Regulations ------------------------------ Section 1.752-3(a), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (i) the amount of Partnership Minimum Gain and (ii) the total amount of Nonrecourse Built-in Gain shall be allocated among the Partners in accordance with their respective Percentage Interests. D. Recapture Income. Any gain allocated to the Partners upon the ---------------- sale or other taxable disposition of any Partnership asset shall to the extent possible, after taking into account other required allocations of gain pursuant to Exhibit C, be characterized as Recapture Income in the same proportions and --------- to the same extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income (including deductions taken by any Partner with respect to Contributed Property prior to the time such Property was contributed to the Partnership). E. Allocations to Reflect Issuance of Additional Partnership --------------------------------------------------------- Interests. In the event that the Partnership issues additional Partnership - --------- Interests to the General Partner or any Additional Limited Partner under Section 4.2 hereof, the General Partner shall make such revisions to Sections 6.1.A and B above as it determines are necessary to reflect the issuance of such additional Partnership Interests. ARTICLE VII. MANAGEMENT AND OPERATIONS OF BUSINESS Section . Management ---------- 7.1 Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 7.3 hereof, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation: (1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by deed to secure debt, mortgage, deed of trust or other lien or encumbrance on the 21 Partnership's assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership; (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership; (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity; (4) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct of the operations of the General Partner, the Partnership or any of the Partnership's Subsidiaries, the lending of funds to other Persons (including, without limitation, the Partnership's Subsidiaries) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment and the making of capital contributions to its Subsidiaries; (5) the management, operation, leasing, landscaping, repair, alteration, demolition or improvement of any real property or improvements owned by the General Partner, the Partnership or any of the Partnership's Subsidiaries; (6) the negotiation, execution, and performance of any contracts, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement, including contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership's assets; (7) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement; (8) holding, managing, investing and reinvesting cash and other assets of the Partnership; 22 (9) the collection and receipt of revenues and income of the Partnership; (10) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership, any division of the Partnership, or the General Partner (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer" of the Partnership, any division of the Partnership, or the General Partner), and agents, outside attorneys, accountants, consultants and contractors of the General Partner, the Partnership or any division of the Partnership, and the determination of their compensation and other terms of employment or hiring; (11) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate; (12) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity investment from time to time); (13) the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of any claim, cause of action, liability, debt or damages due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law; (14) the undertaking of any action in connection with the Partnership's direct or indirect investment in its Subsidiaries or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons); (15) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as it may adopt; 23 (16) the exercise, directly or indirectly through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person; (18) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person; (19) the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate in the judgment of the General Partner for the accomplishment of any of the powers of the General Partner; and (20) the distribution of cash to acquire Partnership Units held by a Limited Partner in connection with a Limited Partner's exercise of its Redemption Right under Section 8.6 or the exercise by the General Partner of its rights under Section 8.7. B. Each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, to the fullest extent permitted under the Act or other applicable law. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. C. At all times from and after the date hereof, the General Partner at the expense of the Partnership, may or may not cause the Partnership to obtain and maintain (i) casualty, liability and other insurance on the properties of the Partnership and (ii) liability insurance for the Indemnitees hereunder. D. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain at any and all times working capital 24 accounts and other cash or similar balances in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. E. Notwithstanding anything to the contrary contained in this Agreement, any agreement of merger or consolidation of the Partnership entered into in accordance with the provisions of this Agreement may, as provided in Section 17-211(g) of the Delaware Revised Uniform Limited Partnership Act, (1) effect any amendment to this Agreement or (2) effect the adoption of a new partnership agreement for the Partnership if it is the surviving or resulting limited partnership in the merger or consolidation (provided that no such amendment shall be so effected if it would, under Section 14.1.C hereof, require the consent of the Limited Partners (unless the requisite consent or consents shall be obtained), and no provision shall be included in any such new partnership agreement if such provision would, under Section 14.1.C hereof, require the consent of the Limited Partners if it were being incorporated in this Agreement by amendment (unless the requisite consent shall be obtained)). Section 7.2 Certificate of Limited Partnership ---------------------------------- The Partnership has previously filed the Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. Section 7.3 Restrictions on General Partner's Authority ------------------------------------------- Subject to Section 14.1, the General Partner may not take any action in contravention of an express prohibition or limitation of this Agreement without the written Consent of a majority in interest of the Limited Partners (including Limited Partnership Interests held by the General Partner) (or such lower percentage of the Limited Partners as may be specifically provided for under a provision of this Agreement or the Act). Section 7.4 Reimbursement of the General Partner ------------------------------------ A. Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, 25 payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. B. The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all expenses it incurs relating to the ownership and operation of, or for the benefit of, the Partnership; provided that the amount of any such ------------- reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it on behalf of the Partnership as permitted in Section 7.5.A. The Limited Partners acknowledge that, for purposes of this Section 7.4.B, all of the General Partner's expenses (including without limitation, costs and expenses associated with compliance with the periodic reporting requirements and all other rules and regulations of the Securities and Exchange Commission or any other federal, state or local regulatory body, salaries payable to officers and employees of the General Partner, fees and expenses payable to directors of the General Partner, and all other operating or administrative costs of the General Partner) are deemed incurred for the benefit of the Partnership and shall be paid by or reimbursed by the Partnership as provided in this Section 7.4.B. Such reimbursements shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 7.7 hereof. All payments and reimbursements hereunder will be characterized for federal income tax purposes as expenses of the Partnership incurred on its behalf, and not expenses of the General Partner. C. The General Partner shall also be reimbursed for all expenses it incurs relating to the organization and/or reorganization of the Partnership and the General Partner, the Rights Offering and any issuance of additional Partnership Interests, OPCO Shares, New Securities, or rights, options, warrants, or convertible or exchangeable securities pursuant to Section 4.2 hereof (including, without limitation, all costs, expenses, damages, and other payments resulting from or arising in connection with litigation related to any of the foregoing). D. In the event that the General Partner shall elect to purchase from its shareholders OPCO Shares for the purpose of delivering such shares to satisfy an obligation under any dividend reinvestment program adopted by the General Partner, any employee stock purchase plan adopted by the General Partner, or any similar obligation or arrangement undertaken by the General Partner in the future, the purchase price paid by the General Partner for such OPCO Shares and any other expenses incurred by the General Partner in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the General Partner by the Partnership, subject to the condition that: (i) if such OPCO Shares subsequently are to be sold by the General Partner, the General Partner shall pay to the Partnership any proceeds received by the General Partner for such OPCO Shares (provided that a transfer of OPCO Shares for Partnership Units pursuant to Section 8.6 or Section 8.7 shall not be considered a sale for such purposes); and (ii) if such OPCO Shares are not retransferred by the General Partner within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel a number of Partnership Units (rounded to the nearest whole Partnership Unit) held by the General Partner equal to the product obtained by multiplying the number of 26 such OPCO Shares by a fraction, the numerator of which is one and the denominator of which is the Conversion Factor. Section 7.5 Outside Activities of the General Partner ----------------------------------------- A. The General Partner shall not directly or indirectly enter into or conduct any business, other than in connection with the ownership, acquisition and disposition, directly or indirectly, of interests in the Partnership, the management of the businesses of the Partnership and such activities as are incidental thereto. The General Partner shall not incur any debts other than (i) debt of the Partnership for which it may be liable in its capacity as General Partner of the Partnership or as guarantor or co-borrower, and (ii) indebtedness for borrowed money the proceeds from which borrowing are loaned to the Partnership on the same terms and conditions as the borrowing by the General Partner. The General Partner shall not hold any assets other than the partnership interests herein above referred to or such bank accounts or similar instruments or accounts as it deems necessary to carry out its responsibilities contemplated under this Agreement and the General Partner's organizational documents and other activities consistent with the foregoing provisions of this Section 7.5.A. The General Partner and any Affiliates of the General Partner may acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests. B. The General Partner may, from time to time, purchase and/or redeem OPCO Shares (including, without limitation, in connection with a stock repurchase or similar program), if the General Partner determines that it is in the interest of the Partnership for the General Partner to purchase and/or redeem OPCO Shares. In the event that the General Partner purchases and/or redeems OPCO Shares, then the General Partner shall cause the Partnership to purchase from the General Partner, concurrently with the OPCO Share purchase or redemption, Partnership Units for the same consideration (including any fees, concessions and expenses payable by the General Partner in connection therewith) and on the same terms as those applicable to the purchase or redemption by the General Partner of the related OPCO Shares. Section 7.6. Contracts with Affiliates ------------------------- A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment, and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. B. The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable. 27 C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable and no less favorable to the Partnership than would be obtained from an unaffiliated third party. D. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt on behalf of the Partnership employee benefit plans, stock option plans, and similar plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the General Partner, or any of the Partnership's Subsidiaries. E. The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a right of first opportunity arrangement and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable. Section 7.7 Indemnification --------------- A. The Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the Partnership in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, unless it is established that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding, by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.7.A . The termination of any proceeding by conviction of an Indemnitee or upon a plea of nolo contendere or its equivalent by an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, creates a rebuttable presumption that such Indemnitee acted in a 28 manner contrary to that specified in this Section 7.7.A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership or otherwise provide funds to enable the Partnership to fund its obligations under this Section 7.7. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding may be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 7.7.A has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. C. The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitee is indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of Section 7.7; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. 29 H. The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Partnership's liability to any Indemnitee under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.8 Liability of the General Partner -------------------------------- A. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the General Partner acted in good faith. B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the General Partner's shareholders collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners or Assignees) in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable to the Partnership or to any Partner for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. C. Subject to its obligations and duties as General Partner set forth in Section 7.1.A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith. D. Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.9 Other Matters Concerning the General Partner -------------------------------------------- A. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, 30 report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. Section 7.10 Title to Partnership Assets --------------------------- Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the -------- ------- General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. Section 7.11 Reliance by Third Parties ------------------------- Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any 31 action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE VIII. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS Section 8.1 Limitation of Liability ----------------------- The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Section 10.5 hereof, or under the Act. Section 8.2 Management of Business ---------------------- No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. Section 8.3 Outside Activities of Limited Partners -------------------------------------- Subject to Section 7.5 hereof and any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or a Subsidiary, any Limited Partner and any officer, director, employee, agent, trustee, member, Affiliate or shareholder of any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. None of the Limited Partners nor any other Person shall have any 32 rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person (other than the General Partner to the extent expressly provided herein) and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person. Section 8.4 Return of Capital ----------------- Except pursuant to the right of redemption set forth in Section 8.6 (including any such right exercised after the giving of a Mandatory Redemption Notice as provided in Section 8.7), no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Nothing in this Section 8.4 shall be interpreted as limiting the Partnership's right to redeem all or a portion of the Partnership Units held by a Limited Partner, with the consent of such Limited Partner, on such terms and for such consideration as determined by the General Partner to be in the interests of the Partnership. Except to the extent provided by Exhibit C hereof or as permitted by Section 4.2 (relating to preferred --------- interests issued subsequent to the date hereof), or otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions or as to profits, losses or distributions. Section 8.5 Rights of Limited Partners Relating to the Partnership ------------------------------------------------------ A. In addition to other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.C hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense (including such copying and administrative charges as the General Partner may establish from time to time): (1) to obtain a copy of the most recent annual and quarterly reports filed with the Securities and Exchange Commission by the General Partner pursuant to the Securities Exchange Act of 1934; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership Year; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and 33 (5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner. B. The Partnership shall notify each Limited Partner, upon request, of the then current Conversion Factor and any change therein. C. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential. Section 8.6 Redemption Right ---------------- A. Subject to Section 8.6.B, each Limited Partner, other than the General Partner, shall have the right (the "Redemption Right"), on or after the date specified in Exhibit A, as amended from time to time, to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Partnership Units that are allocable to such Limited Partner at a redemption price equal to and in the form of the Cash Amount to be paid by the Partnership. The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the Partnership (with a copy to the General Partner) by the Limited Partner who is exercising the redemption right (the "Redeeming Partner"). A Limited Partner may not exercise the Redemption Right for less than one thousand (1,000) Partnership Units or, if such Limited Partner holds less than one thousand (1,000) Partnership Units, all of the Partnership Units that are allocable to such Partner. The Assignee of any Limited Partner may exercise the rights of such Limited Partner pursuant to this Section 8.6, and such Limited Partner shall be deemed to have assigned such rights to such Assignee and shall be bound by the exercise of such rights by such Limited Partner's Assignee. In connection with any exercise of such rights by such Assignee on behalf of such Limited Partner, the Cash Amount shall be paid by the Partnership directly to such Assignee and not to such Limited Partner. Except as otherwise provided herein, neither the Redeeming Partner nor any Assignee of any Limited Partner shall have any right with respect to any Partnership Units so redeemed to receive any distributions if the record date for such distribution is after the Specified Redemption Date. 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. 34 B. Notwithstanding the provisions of Section 8.6.A, in the event a Limited Partner elects to exercise the Redemption Right, the General Partner may, in its sole and absolute discretion, elect to assume directly and satisfy a Redemption Right by paying to the Redeeming Partner either the Cash Amount or the OPCO Shares Amount, as elected by the General Partner (in its sole and absolute discretion) on the Specified Redemption Date, whereupon the General Partner shall acquire the Partnership Units offered for redemption by the Redeeming Partner and shall be treated for all purposes of this Agreement as the owner of such Partnership Units. Unless the General Partner (in its sole and absolute discretion) shall exercise its right to assume directly and satisfy the Redemption Right, the General Partner itself shall have no obligation to the Redeeming Partner or to the Partnership with respect to the Redeeming Partner's exercise of the Redemption Right. In the event the General Partner shall exercise its right to satisfy the Redemption Right in the manner described in the first sentence of this Section 8.6.B, the Partnership shall have no obligation to pay any amount to the Redeeming Partner with respect to such Redeeming Partner's exercise of the Redemption Right, and each of the Redeeming Partner, the Partnership, and the General Partner shall treat the transaction between the General Partner and the Redeeming Partner for federal income tax purposes as a sale of the Redeeming Partner's Partnership Units to the General Partner. Each Redeeming Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of OPCO Shares upon exercise of the Redemption Right. If the Redemption Right is satisfied by the delivery of OPCO Shares, the Redeeming Partner shall be deemed to become a holder of OPCO Shares as of the close of business on the Specified Redemption Date. 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 8.6.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 or as otherwise provided in Section 5.1.B(1). 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 OPCO 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 OPCO 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 OPCO Shares equal to the amount of such Unpaid Preferred Return divided by the Value on the Valuation Date of one OPCO Share (rounded down to the nearest whole number of OPCO Shares if such quotient is not a whole number). C. Each Limited Partner covenants and agrees with the General Partner that all Partnership Units delivered for redemption shall be delivered to the Partnership or the General Partner, as the case may be, free and clear of all liens and, notwithstanding anything herein contained to the contrary, neither the General Partner nor 35 the Partnership shall be under any obligation to acquire Partnership Units which are or may be subject to any liens. Each Limited Partner further agrees that, in the event any state or local property transfer tax is payable as a result of the transfer of its Partnership Units to the Partnership or the General Partner, such Limited Partner shall assume and pay such transfer tax. D. Any Cash Amount to be paid to a Redeeming Partner pursuant to this Section 8.6 shall be paid within 60 days after the initial date of receipt by the Partnership of the Notice of Redemption relating to the Partnership Units to be redeemed; provided, however, that such 60-day period may be extended for up -------- ------- to an additional 30-day period to the extent required for the Partnership to cause additional OPCO Shares to be issued to provide financing to be used to make such payment of the Cash Amount. Notwithstanding the foregoing, the Partnership and the General Partner agree to use their best efforts to cause the closing of the acquisition of redeemed Partnership Units hereunder to occur as quickly as reasonably possible. 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. F. In addition to the right of redemption provided for in this Section 8.6, the Preferred Unitholders shall have the right, on one occasion only on or after April 1, 2004, to require the Partnership to redeem all of their Preferred Units then outstanding at a redemption price equal to $3.34 per Preferred Unit. If such right is exercised, then, for purposes of this Agreement but subject to the further provisions of this Section 8.6.F, (i) such exercise shall be deemed to constitute, as to each Preferred Unitholder, the exercise of the Redemption Right, (ii) each such Preferred Unitholder shall be deemed a Redeeming Partner and (iii) such redemption shall, except as provided above and except as hereinafter provided, be treated in the same manner as a redemption pursuant to Section 8.6.A hereof; provided that (A) the Notice of Redemption shall be signed by all such Preferred Unitholders, (B) each Notice of Redemption shall state specifically that it is being given under this Section 8.6.F and (C) such Preferred Unitholders shall be entitled to elect (which election shall be indicated in the Notice of Redemption) whether to be paid the Cash Amount (which term, for purposes of this Section 8.6.F, shall mean the redemption price provided for above) or to receive OPCO Shares in exchange for their Preferred Units (the number of OPCO Shares so to be delivered to such Preferred Unitholders to be computed in accordance with Section 8.7.B hereof). In the event such Preferred Unitholders elect to receive OPCO Shares in exchange for their Preferred Units, the provisions of Section 8.6.B shall apply (except that references therein to the General Partner's election to deliver OPCO Shares to the Redeeming Partners shall instead be deemed references to the election of the Preferred Unitholders to receive OPCO Shares). 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 36 any time on or after April 1, 2000, to redeem all or any portion of the Preferred Units at a redemption price equal to $3.34 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 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. (i) Notwithstanding anything to the contrary contained in Section 8.7.A, the General Partner shall have the right (the "Share Exchange 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 OPCO Shares equal to (i) the number of Preferred Units being purchased, multiplied by (ii) $3.34, divided by (iii) the Value per OPCO Share on the Valuation Date (which amount shall be rounded down to the nearest whole number if it is not a whole number). For 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. (ii) Notwithstanding anything to the contrary contained in clause (i) this Section 8.7.B, if the General Partner shall exercise the Share Exchange Right with respect to a Preferred Unitholder on or after April 1, 2000, such Preferred Unitholder shall have the right, by notice given to the General Partner within five Business Days after the giving of the Mandatory Redemption Notice, to receive cash for its Preferred Units in lieu of accepting delivery of OPCO Shares therefor. If any Preferred Unitholder shall exercise such right, then the Partnership or the General Partner shall pay to such Preferred Unitholder the redemption price for the Preferred Units being redeemed as provided in Section 8.7.A or clause (i) of this Section 8.7.B, as applicable. 37 In addition to the foregoing, if the General Partner shall exercise the Mandatory Redemption Right on or after April 1, 2000, and shall not exercise the Share Exchange Right as to a Preferred Unitholder, such Preferred Unitholder shall have the right, by notice given to the General Partner within five Business Days after the giving of the Mandatory Redemption Notice, to require the General Partner to deliver OPCO Shares to such Preferred Unitholder in exchange for such Preferred Unitholder's Preferred Units. If any Preferred Unitholder shall exercise such right, then the General Partner shall so deliver such OPCO Shares on the terms and conditions set forth in clause (i) of this Section 8.7.B. 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 OPCO 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 OPCO Shares and a Preferred Unitholder has not elected pursuant to Section 8.7.B, to receive cash in lieu of such OPCO Shares, or if a Preferred Unitholder has elected to Section 8.7.B to receive OPCO Shares in exchange for its Preferred Units, 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 OPCO 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 OPCO Share (rounded ---------- down to the nearest whole number of OPCO 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. Section 8.8. Special Rights of Class B MHR Units ----------------------------------- Notwithstanding anything to the contrary contained in this Agreement: A. In the event a holder of Class B MHR Units exercises the Redemption Right with respect to all or a portion of its Partnership Units and the Partnership fails to redeem such Partnership Units as required under Section 8.6, the General Partner shall assume and satisfy said Redemption Right as provided in Section 8.6(B) (except that such assumption and satisfaction shall be mandatory rather than elective as provided in said Section). B. In the event a holder of Class B MHR Units exercises the Redemption Right and the General Partner elects to satisfy the Redemption Right as provided in Section 8.6(B), it shall so advise such holder within 5 Business Days after receipt by the Partnership of the Notice of Redemption and, in addition, shall advise such holder within such 5 Business-Day period as to whether it will pay such holder the Cash Amount or the OPCO Shares Amount in satisfaction of the Redemption Right. 38 C. At the request of any holder of Class B MHR Units, the General Partner shall notify such holder of the then current Conversion Factor. In addition, the General Partner shall, promptly after any adjustment of the Conversion Factor pursuant to the provisions of this Agreement, notify the holders of Class B MHR Units of such adjustment and of the Conversion Factor as so adjusted. D. In the event the General Partner wishes to effect a Transaction (as defined in Section 11.2.B), the General Partner shall give notice of such Transaction to the holders of Class B MHR Units simultaneously with the giving of any such notice to the shareholders of the General Partner. Such notice to the holders of Class B MHR Units shall contain substantially the same information with respect to such Transaction as the notice to the General Partner's shareholders. E. The holders of Class B MHR Units shall have the right to transfer or pledge all or any portion of their Partnership Units without the consent of the General Partner; provided, however, that (i) no such transfer or pledge shall be made unless such holders deliver to the General Partner a certificate, the form of which is attached hereto as Exhibit F, (ii) the General Partner shall have the right to prohibit any such transfer pursuant to Section 11.3.E and (iii) the provisions of Section 11.3.D shall apply with respect to any such transfer. Any transferee of Partnership Units pursuant to a transfer permitted hereunder shall have the right to be admitted as a Substituted Limited Partner, provided that such transferee complies with the provisions of Section 11.4.B. F. If the General Partner intends either (i) to liquidate the Partnership or (ii) to declare or pay a dividend or other distribution on its OPCO Shares (other than (a) ordinary cash dividends or (b) dividends payable in OPCO Shares that give rise to an adjustment in the Conversion Factor pursuant to the provisions of this Agreement), then the General Partner shall notify the holders of Class B MHR Units of such action, dividend or distributions at least 10 days in advance of the record date for determining the holders of OPCO Shares entitled to participate in the same and the holders of Class B MHR Units shall thereupon have the right to exercise the Redemption Right notwithstanding that the applicable period referred to in Section 8.9 hereof may not have elapsed. Notwithstanding anything to the contrary contained in this Agreement, in the event a holder of Class B MHR Units so exercises the Redemption Right within 5 Business Days after such notification, the Partnership and the General Partner shall take such actions as are necessary in order that the Partnership Units in question may be redeemed on or prior to such record date. 39 G. If a Bankruptcy Event shall occur with respect to the Partnership, the holders of Class B MHR Units shall have the right to exercise the Redemption Right notwithstanding that the applicable period referred to in Section 8.9 hereof may not have elapsed. As used herein, the term "Bankruptcy Event" shall mean any of the following events: (i) A court having proper jurisdiction shall enter a decree or order for relief in respect of the Partnership in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law nor or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against the Partnership under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law nor or hereafter in effect; or a decree or order of a court having proper jurisdiction for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over the Partnership, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of the Partnership for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of the Partnership, and any such event described in this clause (ii) shall continue for 60 days unless dismissed, bonded or discharged; or (iii) the Partnership shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or (iv) the Partnership shall make any assignment for the benefit of creditors; or (v) the Partnership shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due. The General Partner shall promptly notify the holders of Class B MHR Units of the occurrence of any Bankruptcy Event with respect to the Partnership. Section 8.9 Redemption Date --------------- Notwithstanding anything to the contrary contained in Section 8.6.A, the respective dates before which the Redemption Right may not be exercised by those Partners who are Limited Partners are as set forth in Exhibit A annexed hereto. ARTICLE IX. BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting ---------------------- 40 The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micro graphics or any other information storage device, provided that the records so maintained are convertible into ------------- clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or other such basis as the General Partner determines to be necessary or appropriate. Section 9.2 Fiscal Year ----------- The fiscal year of the Partnership shall end on the Friday nearest December 31 of each calendar year. Section 9.3 Reports ------- A. As soon as practicable, but in no event later than one hundred five (105) days after the close of each Partnership Year, the General Partner shall cause to be mailed to each Limited Partner as of the close of the Partnership Year, an annual report containing financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, for such Partnership Year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner. B. As soon as practicable, but in no event later than one hundred five (105) days after the close of each calendar quarter (except the last calendar quarter of each year), the General Partner shall cause to be mailed to each Limited Partner as of the last day of the calendar quarter, a report containing unaudited financial statements of the Partnership, or of the General Partner, if such statements are prepared solely on a consolidated basis with the General Partner, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate. ARTICLE X. TAX MATTERS Section 10.1. Preparation of Tax Returns -------------------------- The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the 41 Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes. Section 10.2 Tax Elections ------------- Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided, however, that the General Partner shall make the -------- election under Section 754 of the Code in accordance with applicable regulations thereunder effective for the first calendar year following the date hereof. The General Partner shall have the right to seek to revoke any such election (including, without limitation, the election under Section 754 of the Code) upon the General Partner's determination in its sole and absolute discretion that such revocation is in the best interests of the Partners. Section 10.3 Tax Matters Partner ------------------- A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address, taxpayer identification number, and profit interest of each of the Limited Partners and the Assignees; provided, -------- however, that such information is provided to the Partnership by the Limited Partners and the Assignees. B. The tax matters partner is authorized, but not required: (1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the Code) or a member of a "notice group" (as defined in Section 6223(b)(2) of the Code); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, 42 including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Partnership's principal place of business is located; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (4) to file a request for an administrative adjustment with the IRS and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners of the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.7 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting or legal firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. Section 10.4 Organizational Expenses ----------------------- The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a sixty (60) month period as provided in Section 709 of the Code. Section 10.5 Withholding ----------- Each Limited Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Limited Partner any amount of federal, state, 43 local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner's Partnership Interest to secure such Limited Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amounts payable by a Limited Partner hereunder shall bear interest at the lesser of (A) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, ------------------- plus four (4) percentage points, or (B) the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. ARTICLE XI. TRANSFERS AND WITHDRAWALS Section 11.1 Transfer -------- A. The term "transfer," when used in this Article 11 with respect to a Partnership Interest or Partnership Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, 44 encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term "transfer" when used in this Article 11 does not include any redemption of Partnership Units by a Limited Partner or acquisition of Partnership Units from a Limited Partner by the General Partner pursuant to Section 8.6 or Section 8.7. B. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void. Section 11.2 Transfer of General Partner's Partnership Interest -------------------------------------------------- A. The General Partner may not transfer any of its General Partner Interest or withdraw as General Partner except in connection with a transaction described in Section 11.2.B, 11.2.C or 11.2.D. B. Except as otherwise provided in Section 11.2.C or 11.2.D, the General Partner shall not engage in any merger, consolidation or other combination with or into another Person or sale of all or substantially all of its assets, or any reclassification, or recapitalization or change of outstanding OPCO Shares (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination as described in the definition of "Conversion Factor") ("Transaction"), unless the Transaction also includes a merger of the Partnership or sale of substantially all of the assets of the Partnership and as a result of which all Limited Partners will receive for each Partnership Unit an amount of cash, securities, or other property equal to the product of the Conversion Factor and the greatest amount of cash, securities or other property paid to a holder of one OPCO Share in consideration of one OPCO Share at any time during the period from and after the date on which the Transaction is consummated. C. Notwithstanding anything to the contrary contained in Section 11.2.B, the General Partner may merge with another entity if immediately after such merger substantially all of the assets of the surviving entity other than Partnership Units held by the General Partner (whether such Partnership Units constitute the General Partner Interest or a Limited Partner Interest), are contributed to the Partnership as a Capital Contribution in exchange for Class A MHR Units having a fair market value, as reasonably determined by the General Partner, equal to the 704(c) Value of the assets so contributed to the Partnership. D. Notwithstanding Sections 11.2.A and 11.2.B, the General Partner may pledge its General Partner Interest, in connection with any borrowing of the Partnership which is guaranteed by or otherwise recourse to the General Partner, and any transfer of the General Partner Interest (or of such rights) pursuant or subsequent to the exercise of rights or remedies in connection with such pledge shall be permitted hereunder. Section 11.3 Limited Partners' Rights to Transfer ------------------------------------ 45 A. Subject to the provisions of Section 11.3.F and Section 11.7 and except as otherwise provided in Section 8.8.E, no Limited Partner shall have the right to transfer all or any portion of his Partnership Interest, or any of such Limited Partner's rights as a Limited Partner, without the prior written consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. Any purported transfer of a Partnership Interest by a Limited Partner in violation of this Section 11.3.A shall be void ab initio and shall not be given effect for any purpose by the Partnership. B. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. C. The General Partner may prohibit any transfer by a Limited Partner of his Partnership Units otherwise permitted under Section 11.3.F or Section 11.7 if, in the opinion of legal counsel to the Partnership, such transfer would require filing of a registration statement under the Securities Act of 1933 or would otherwise violate any federal, state or foreign securities laws or regulations applicable to the Partnership or the Partnership Unit. D. Subject to the provisions of Section 11.3.F, no transfer by a Limited Partner of his Partnership Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes, or would result in a termination of the Partnership for federal income tax purposes or (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code. E. Subject to the provisions of Section 11.3.F, no transfer of any Partnership Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership if, in either case, such loan constitutes a Nonrecourse Liability, without the consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion, provided that as a condition to such consent being granted the lender will be required to enter into an arrangement with the Partnership and the General Partner to exchange or redeem for the OPCO Shares Amount any Partnership Units in which a security interest is held simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. F. Notwithstanding the foregoing provisions of this Section 11.3, a Limited Partner may pledge its Partnership Interest, or any of such Limited Partner's rights as a Limited Partner, in connection with any borrowing of the Partnership which is 46 guaranteed by or otherwise recourse to such Limited Partner, and any transfer of such Partnership Interest (or of such rights) pursuant or subsequent to the exercise of rights or remedies in connection with such pledge shall be permitted hereunder. G. No transfer by a Limited Partner of its Partnership Units may be made to any Person if: (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes; (ii) such transfer would cause the Partnership to become, with respect to any employee benefit subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the Code); (iii) such transfer would, in the opinion of legal counsel for the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (iv) such transfer would subject the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; (v) without the consent of the General Partner, which consent may be withheld in its sole and absolute discretion, such transfer is a sale or exchange, and such sale or exchange would, when aggregated with all other sales and exchanges during the 12-month period ending on the date of the proposed transfer, result in 50% or more of the interests in Partnership capital and profits being sold or exchanged during such 12-month period; or (vi) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code. H. Notwithstanding the other provisions of this Article 11, no transfer by a Limited Partner of its Partnership Units may be made to any Person if such transfer would result in an Ownership Excess by such transferee. If an Ownership Excess results from the acquisition of OPCO Shares by any Person, the Partnership shall have the right to redeem a number of Partnership Units sufficient to cause such Ownership Excess not to exist, for an amount of cash per Partnership Unit equal to the Value of an OPCO Share on the date of acquisition by such Person divided by the Conversion Factor. Section 11.4 Substituted Partners -------------------- A. Except as provided in Section 11.4.C hereof, no Limited Partner shall have the right to substitute a transferee as a Limited Partner in his place. The General Partner shall, however, have the right to consent to the admission of a transferee of the interest of a Limited Partner pursuant to this Section 11.4 as a Substituted Limited Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. The admission of any transferee as a Substituted Limited Partner shall be subject to the 47 transferee executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement (including, without limitation, the provisions of Section 2.4) and such other documents or instruments as may be required to effect the admission. C. Any transferee by way of an exercise of the rights and remedies in connection with the pledge of a General Partner Interest pursuant to Section 11.2.D shall have the right, at the election of such transferee, to be admitted as a substituted General Partner, and (ii) any transferee of a Limited Partner Interest pursuant to Section 11.3.F or Section 11.7 shall have the right, at the election of such transferee, to be admitted as a Substituted Limited Partner. Section 11.5 Assignees --------- If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.3 as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items of gain, loss, deduction and credit of the Partnership attributable to the Partnership Units assigned to such transferee, but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units in any matter presented to the Limited Partners for a vote (such Partnership Units being deemed to have been voted on such matter in the same proportion as all other Partnership Units held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units. Section 11.6 General Provisions ------------------ A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all of such Limited Partner's Partnership Units in accordance with this Article 11 or pursuant to redemption of all of its Partnership Units under Section 8.6 or Section 8.7. B. Any Limited Partner who shall transfer all of his Partnership Units in a transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such Partnership Units as Substitute Limited Partners. Similarly, any Limited Partner who shall transfer all of his Partnership Units pursuant to a redemption of all of his Partnership Units under Section 8.6 or Section 8.7 shall cease to be a Limited Partner. C. Transfers (other than transfers pursuant to a redemption of Partnership Units under Section 8.6 or 8.7) pursuant to this Article 11 may only be made 48 on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees. D. If any Partnership Interest is transferred or assigned in compliance with the provisions of this Article 11 or redeemed or transferred pursuant to Section 8.6 or Section 8.7, on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the fiscal year in accordance with Section 706(d) of the Code, using the interim closing of the books method (unless the General Partner, in its sole and absolute discretion, elects to adopt a daily, weekly or monthly proration method, in which event Net Income, Net Losses and each item thereof for such Partnership Year shall be prorated based upon the applicable period selected by the General Partner). Solely for purposes of making such allocations, each of such items for the calendar month in which the transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which a redemption occurs shall be allocated to the Redeeming Partner. Without derogating from the provisions of Section 5.1.B, all distributions attributable to such Partnership Unit with respect to which the Partnership Record Date is before the date of such transfer, assignment or redemption shall be made to the transferor Partner or the Redeeming Partner or the Partner whose Preferred Units are being redeemed pursuant to Section 8.7, as the case may be. 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, 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 to the exercise of rights or remedies in connection with such pledge or option shall be permitted hereunder. ARTICLE XII. ADMISSION OF PARTNERS Section 12.1 Admission of Successor General Partner -------------------------------------- A successor to all of the General Partner Interest (i) pursuant to Section 11.2.D hereof shall be admitted to the Partnership as a successor General Partner in accordance with the provisions of Section 11.4.C, and (ii) pursuant to Section 11.2.C hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective upon such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to 49 the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6.D hereof. Section 12.2 Admission of Additional Limited Partners ---------------------------------------- A. A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement or who exercises an option to receive Partnership Units shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all the Partners and Assignees including such Additional Limited Partner. All distributions pursuant to Section 5.1.B before the date of such admission shall be made solely to Partners and Assignees other than the Additional Limited Partner, and all distributions pursuant to Section 5.1.B thereafter shall be made to all the Partners and Assignees including such Additional Limited Partner. Section 12.3 Amendment of Agreement and Certificate of Limited Partnership ------------------------------------------------------------- For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement and, if required by law, shall prepare and file an amendment to the Certificate 50 and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. ARTICLE XIII. DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution ----------- Except as set forth in this Article 13, no Partner shall have the right to dissolve the Partnership. The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; B. (i) a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to the entry of such order or judgment all of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General Partner, or (ii) any other event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless, within ninety (90) days after such event of withdrawal all the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner; C. on or after December 31, 2015, an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion; D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; or E. the sale of all or substantially all of the assets and properties of the Partnership. Section 13.2. Winding Up ---------- A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the 51 winding up of the Partnership's business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by a majority in interest of the Limited Partners (the General Partner or such other Person being referred to herein as the "Liquidator") shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of stock in the General Partner) shall be applied and distributed in the following order: (1) First, to the payment and discharge of all of the Partnership's debts and liabilities to creditors other than the Partners; (2) Second, to the payment and discharge of all of the Partnership's debts and liabilities to the General Partner; (3) Third, to the payment and discharge of all of the Partnership's debts and liabilities to the other Partners; and (4) The balance, if any, to the General Partner and Limited Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. B. Notwithstanding the provisions of Section 13.2.A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2.A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. C. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be: 52 1. distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of Liquidator, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or 2. withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2.A as soon as practicable. Section 13.3. Compliance with Timing Requirements of Regulations -------------------------------------------------- In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in his Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever. Section 13.4 Rights of Limited Partners -------------------------- Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its Capital Contributions, distributions, or allocations. Section 13.5 Notice of Dissolution --------------------- In the event a Liquidating Event occurs or an event occurs that would, but for an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners. 53 Section 13.6 Termination of Partnership and Cancellation of Certificate of ------------------------------------------------------------- Limited Partnership ------------------- Upon the completion of the liquidation of the Partnership cash and property as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. Section 13.7. Reasonable Time for Winding-Up ------------------------------ A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. Section 13.8 Waiver of Partition ------------------- Each Partner hereby waives any right to partition of the Partnership property. Section 13.9 Liability of the Liquidator --------------------------- The Liquidator shall be indemnified and held harmless by the Partnership from and against any and all claims, demands, liabilities, costs, damages and cause of action of any nature whatsoever arising out of or incidental to the Liquidator's taking of any action authorized under or within the scope of this Agreement; provided, however, that the Liquidator shall not be entitled to -------- ------- indemnification, and shall not be held harmless, where the claim, demand, liability, cost, damage or cause of action at issue arises out of: (i) a matter entirely unrelated to the Liquidator's action or conduct pursuant to the provisions of this Agreement; or (ii) the proven willful misconduct or gross negligence of the Liquidator. ARTICLE XIV. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS Section 14.1 Amendments ---------- A. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners holding twenty-five percent (25%) or more of the Percentage Interests. Following such proposal, the General Partner shall submit any 54 proposed amendment to the Limited Partners. Subject to Section 14.2.B, the General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner's recommendation with respect to the proposal. Except as provided in Section 14.1.B, 14.1.C or 14.1.D, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Partners holding a majority of the Percentage Interests of the Limited Partners (including Limited Partner Interests held by the General Partner). B. Notwithstanding Section 14.1.A but subject to Section 14.1.C, the General Partner shall have the power, without the consent of the Limited Partners, to amend this Agreement (i) as permitted under Section 7.1(F) or (ii) as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to set forth the designations, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.2.A hereof; (4) to reflect a change that does not adversely affect any of the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; and (5) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law. The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1.B is taken. C. Notwithstanding Section 14.1.A and 14.1.B hereof, this Agreement shall not be amended without the Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a general partner interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner, including an amendment that would impose on such Limited Partner any obligation to make capital contributions in the Partnership; (iii) alter rights of 55 the Partner to receive distributions pursuant to Article 5, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.2 and Section 14.1.B(3) hereof) in a manner adverse to such Partner; (iv) alter or modify the Redemption Right or Mandatory Redemption Right and OPCO Shares Amount as set forth in Section 8.6 or 8.7, and related definitions hereof; (v) cause the termination of the Partnership prior to the time set forth in Sections 2.5 or 13.1; (vi) amend Section 11.7 (as to any then existing Limited Partner) or this Section 14.1.C; (vii) amend Section 2 of Exhibit C in a manner adverse to such Partner; or (viii) alter or modify in any material respect the definition of "Conversion Factor." Further, no amendment may alter the restrictions on the General Partner's authority set forth in Section 7.3 without the Consent specified in that section. D. Notwithstanding Section 14.1.A or Section 14.1.B hereof, the General Partner shall not amend Sections 4.2.A, 7.5, 7.6, 11.2 or 14.2 without the Consent of a majority of the Percentage Interests of the Limited Partners excluding Limited Partnership Interests held directly or indirectly by the General Partner. Section 14.2 Meetings of the Partners ------------------------ A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a request by Limited Partners holding twenty-five percent (25%) or more of the Percentage Interests. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of the Partners or may be given in accordance with the procedure prescribed in Section 14.1.A hereof. Except as otherwise expressly provided in this Agreement, the Consent of holders of a majority of the Percentage Interests held by Limited Partners (including Limited Partnership Interests held by the General Partner) shall control. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement) such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited 56 Partner executing it, such revocation to be effective upon the Partnership's receipt of written notice of such revocation from the Limited Partner executing such proxy. D. Each meeting of Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate in its sole discretion. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the shareholders of the General Partner and may be held at the same time as, and as part of, meetings of the shareholders of the General Partner. ARTICLE XV. GENERAL PROVISIONS Section 15.1 Addresses and Notice -------------------- Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee. Such communications shall be deemed sufficiently given, served, sent or received for all purposes at such time as delivered to the addressee (with the return receipt or delivery receipt being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. Section 15.2 Titles and Captions ------------------- All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 15.3 Pronouns and Plurals -------------------- Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Section 15.4 Further Action -------------- The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.5 Binding Effect -------------- 57 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.6 Creditors --------- Other than as expressly set forth herein with respect to the Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. Section 15.7 Waiver ------ No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. Section 15.8 Counterparts ------------ This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on an the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 15.9 Applicable Law -------------- This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. Section 15.10 Invalidity of Provisions ------------------------ If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. Section 15.11 Entire Agreement ---------------- This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto. Section 15.12 No Rights as Shareholders ------------------------- Nothing contained in this Agreement shall be construed as conferring upon the holders of the Partnership Units any rights whatsoever as shareholders of the General Partner, including without limitation any right to receive dividends or other 58 distributions made to shareholders of the General Partner or to vote or to consent or to receive notice as shareholders in respect of any meeting of shareholders for the election of directors of the General Partner or any other matter. 59 IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first written above. AS GENERAL PARTNER: MERISTAR HOTELS & RESORTS, INC. By: ---------------------------- Name: Title: AS LIMITED PARTNERS: MERISTAR HOTELS & RESORTS, INC. By: ---------------------------- Name: Title: CAPSTAR MANAGEMENT COMPANY, L.L.C By: MeriStar Hotels & Resorts, Inc., Its Manager By: ---------------------------- Name: Title: 60 EX-21 4 SUBSIDIARIES OF THE COMPANY
NAME JURISDICTION OF INCORPORATION OR ORGANIZATION AGH Leasing, L.P. Delaware Ballston Parking Associates, L.P. Delaware CapStar BK Company, L.L.C. Delaware CapStar California Beverage Corporation California CapStar Dallas Beverage Corporation Texas CapStar KC Company II, L.L.C. Delaware CapStar Management Company, L.L.C. Delaware CapStar Metro Beverage Corporation Texas CapStar New Mexico Beverage Corporation New Mexico CapStar Winston Beverage Corporation Texas CapStar Winston Company, L.L.C. Delaware CMC Airport, Inc. Delaware EquiStar Schaumburg Beverage Company Illinois EquiStar Texas Beverage Corporation Texas MeriStar AGH Company, L.L.C. Delaware MeriStar H&R Operating Company, L.P. Delaware MeriStar Louisiana Beverage Corporation Louisiana MeriStar Management Company, L.L.C. Delaware Riverside Beverage Corporation Louisiana S.D. Bridgeworks, L.L.C. Delaware
EX-23.1 5 CONSENT OF KPMG LLP ACCOUNTANTS' CONSENT -------------------- The Board of Directors MeriStar Hotels & Resorts, Inc.: We consent to incorporation by reference in the registration statement (No. 333-60545) on Form S-8 (for the Non-Employee Directors' Incentive Plan), the registration statement (No. 333-60539) on Form S-8 (for the Incentive Plan), and the registration statement (No. 333-61731) on Form S-8 (for the Employee Stock Purchase Plan) of MeriStar Hotels & Resorts, Inc. of our report dated February 1, 1999 relating to the consolidated balance sheets of MeriStar Hotels & Resorts, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and owners' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of MeriStar Hotel & Resorts, Inc. KPMG LLP Washington, D.C. March 22, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 11,155 0 64,272 2,285 0 88,420 7,325 1,099 247,529 105,950 67,812 0 0 254 44,480 247,529 0 562,437 0 203,487 351,154 0 2,017 4,287 337 3,950 0 0 0 3,950 .02 .02
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